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 SEPTEMBER 30, 2001
-------------------
OR
( ) THE TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to ______________
Commission File Number 01-21617
THE QUIGLEY CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 23-2577138
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PA 18901
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(Address of principle executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 345-0919
------------------------------------------------------------------
(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 October
26, 2001, was 10,675,153 all of one class of $.0005 par value Common Stock.
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a
Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2001 December 31,
(unaudited) 2000
----------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,585,400 $ 11,365,843
Accounts receivable (less doubtful accounts of $463,560 and $536,297) 4,916,909 4,062,703
Inventory 7,005,870 6,917,889
Prepaid expenses and other current assets 1,463,547 1,123,275
------------ ------------
TOTAL CURRENT ASSETS 20,971,726 23,469,710
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 2,255,464 2,139,727
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization 43,881 109,702
Excess of cost over net assets acquired 435,074 329,166
Other assets 23,367 7,296
------------ ------------
TOTAL OTHER ASSETS 502,322 446,164
------------ ------------
TOTAL ASSETS $ 23,729,512 $ 26,055,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 482,153 $ 763,527
Accrued royalties and sales commissions 1,719,253 1,449,642
Accrued advertising 450,376 1,737,873
Other current liabilities 811,093 896,541
------------ ------------
TOTAL CURRENT LIABILITIES 3,462,875 4,847,583
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED AFFILIATES 52,062 237,326
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 15,321,206 and 15,271,206 shares 7,661 7,636
Additional paid-in-capital 28,915,613 28,871,887
Retained earnings 16,479,460 17,249,197
Less: Treasury stock, 4,646,053 and 4,616,053 shares, at cost (25,188,159) (25,158,028)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,214,575 20,970,692
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,729,512 $ 26,055,601
============ ============
See accompanying notes to financial statements
3
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
SALES:
Sales $ 7,175,724 $ 3,765,229 $ 15,756,212 $ 11,680,125
Co-operative advertising promotions 588,931 293,405 1,025,694 1,981,267
------------ ------------ ------------ ------------
NET SALES 6,586,793 3,471,824 14,730,518 9,698,858
SETTLED LITIGATION 136,364 -- 1,410,228 --
------------ ------------ ------------ ------------
TOTAL REVENUE 6,723,157 3,471,824 16,140,746 9,698,858
------------ ------------ ------------ ------------
COST OF SALES 2,846,789 1,193,910 6,364,070 3,878,065
------------ ------------ ------------ ------------
GROSS PROFIT 3,876,368 2,277,914 9,776,676 5,820,793
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,627,168 861,896 4,262,160 6,756,965
Administration 1,680,061 1,282,619 5,848,927 4,348,732
Research and development 447,543 195,483 970,575 685,897
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,754,772 2,339,998 11,081,662 11,791,594
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 121,596 (62,084) (1,304,986) (5,970,801)
INTEREST AND OTHER INCOME 78,507 145,471 349,985 478,459
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES 200,103 83,387 (955,001) (5,492,342)
------------ ------------ ------------ ------------
INCOME TAXES EXPENSE (BENEFIT) -- -- -- --
MINORITY INTEREST IN LOSS
OF CONSOLIDATED AFFILIATE 113,512 31,014 185,264 31,014
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ 313,615 $ 114,401 ($ 769,737) ($ 5,461,328)
============ ============ ============ ============
PER COMMON SHARE:
Basic $ 0.03 $ 0.01 ($ 0.07) ($ 0.52)
============ ============ ============ ============
Diluted $ 0.03 $ 0.01 ($ 0.07) ($ 0.52)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 10,675,153 10,642,946 10,675,153 10,516,319
============ ============ ============ ============
Diluted 10,740,400 10,669,738 10,675,153 10,516,319
============ ============ ============ ============
See accompanying notes to financial statements
4
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, 2000 September 30, 2001
------------------ ------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES ($ 3,296,430) ($ 3,403,851)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (320,544) (369,809)
Net cost of assets acquired (133,338) (174,683)
------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (453,882) (544,492)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants -- 65,000
Repurchase of Common Stock (30,131) --
------------ ------------
NET CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES (30,131) 65,000
------------ ------------
NET DECREASE IN CASH (3,780,443) (3,883,343)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 11,365,843 13,990,475
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 7,585,400 $ 10,107,132
============ ============
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
contribute the majority of revenues.
Darius International Inc., a wholly owned subsidiary of The Quigley Corporation
was formed in January 2000 to introduce new products to the marketplace through
a network of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products, which commenced
shipping product to customers in the third quarter of 2000.
Effective July 1, 2000, The Quigley Corporation acquired a 60% ownership
position of Caribbean Pacific Natural Products, Inc. an Orlando, Florida-based
company. Caribbean Pacific Natural Products, Inc. is a leading developer and
marketer of all-natural sun and skincare products for luxury resorts, theme
parks and spas.
The formation of Darius International Inc., and the majority ownership in
Caribbean Pacific Natural Products, Inc., provide diversification to the Company
in both the method of product distribution and the broader range of products
available to the marketplace.
In January 2001, the Company formed an Ethical Pharmaceutical Unit under the
direction of Quigley Pharma Inc.'s Executive Vice President and chairman of its
Medical Advisory Committee. The launch of Quigley Pharma Inc., follows the
Patent Office of The United States Commerce Department confirming the assignment
to the Company of a Patent Application filing for the "Method and Composition
for the Topical Treatment of Diabetic Neuropathy". Establishing a dedicated
pharmaceutical subsidiary will enable the Company to diversify into the
prescription drug market and to ensure safe and effective distribution of this
important new product for the relief of diabetes-related pain.
Cold Remedy Products
--------------------
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is sold in
lozenge, bubble gum and sugar-free tablet forms. In May 1992, the Company
entered into an exclusive agreement for worldwide representation, manufacturing,
marketing and distribution rights to a zinc gluconate glycine lozenge
formulation which was patented in the United States, United Kingdom, Sweden,
France, Italy, Canada, Germany, and pending in Japan. This product is presently
being marketed by the Company and also through independent brokers and marketers
in the United States under the trade names Cold-Eeze(R), Cold-Eeze(R) Sugar
Free, and Cold-Eeze(R) Bubble Gum and in Canada under the trade name
Zigg-Eeze(TM).
In 1996, the Company also acquired exclusive license for a United States ZINC
GLUCONATE USE PATENT NUMBER RI 33,465 from the patent holder. This use patent
gives the Company exclusive rights to both the USE and FORMULATION patents on
zinc gluconate for reducing the duration and severity of common cold symptoms.
In two double blind studies Cold-Eeze(R) has been shown to reduce the severity
and duration of common cold symptoms by nearly half. The results of the latest
randomized double-blind placebo-controlled study of the common cold were
published in 1996 in the ANNALS OF INTERNAL MEDICINE - VOL. 125 NO 2. Research
is continuing on this product in order to maximize its full potential use by the
general public.
In the last half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake. Late in the fourth quarter of 1998, the Company launched a
bubble gum version of Cold-Eeze(R).
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold remedy
products arena. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now, or in the immediate
6
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.
Health And Wellness Products
----------------------------
At the very end of 1998, the first product of the Bodymate(TM) line was launched
in a test market to enter the nutrition and weight management industry. The
unique proprietary delivery system and naturalness of this product, with the
main ingredients of garcinia cambogia and chromium polynicotinate, offers
instant satisfaction and gratification to those attempting to lose weight. It is
believed that the ingredients in this product may block an enzyme necessary for
the formation of fats from carbohydrates, and affects the appetite to bring
about a feeling of fullness.
Darius International, Inc., a wholly owned subsidiary, was formed in January
2000 for the purpose of introducing new products to the marketplace through a
network of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products. The products marketed
and sold by Darius International are designed to improve the human condition, be
it in the area of joint health, immunity, energy, pain, weight loss or the
common cold. The products currently available from Darius include: Bodymate(TM)
Metabolizer, Bodymate(TM) Gluco-Eeze, Ultra-Eeze, Vita-Eeze, Beta-Eeze,
Cold-Eezer(R) Plus, Cold-Eezer(R) Cinnamon Gum, Dermaloe first aid antiseptic,
Pain Goes pain spray, Ardor dietary supplement and a wide array of food
supplements and vitamins.
Sun-care and Skincare Products
------------------------------
Caribbean Pacific Natural Products, Inc., is a leading developer and marketer of
all-natural sun and skincare products for luxury resorts, theme parks and spas.
These products are all-natural, eco-safe, and organic, meaning that the need for
petro-chemical, synthetic, and chemical additives used by most competitors has
been eliminated. All-natural ingredients such as aloe vera, rose hip oil,
squalane, Vitamin E, tea tree oil and other natural oils and extracts are used
instead of many synthetic preservatives, fillers and softeners which may have
side-effects.
Caribbean Pacific currently has three distinct product lines: Virgin Sol, Coral
Sol and Sport Sol and is currently developing a spa line called Sabate and a
dry-grip golf product.
Caribbean Pacific markets a line of natural protectors, or "Sol Cremes" that
provide dual protection against the damaging effects of the sun. This product is
available in differing Sun Protection Factors (SPF). Caribbean Pacific also
markets a sunscreen product called "Karibbean Kidz" especially for children,
again containing all natural ingredients found in nature.
Additionally, Caribbean Pacific markets various products rich in essential
nutrients and vitamins necessary for the skin. Products available in this
category are: Black Pearl Ultra Oil, Diamond Rose Dry Tanning Oil and Emerald
Rose Tanning Oil.
Caribbean Pacific has developed an effective combination of natural ingredients
for moisture that include the Aloe Rose Body Creme, a moisturizing lotion, and
the Tea Tree Burn Relief, which cools the skin to 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.
7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated Balance Sheet at September 30, 2001, the consolidated
Statements of Operations for the three and nine-months periods ended September
30, 2001 and 2000, and the consolidated Statements of Cash Flows for the
nine-months periods ended September 30, 2001 and 2000, have been prepared
without audit. In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, consolidated results of
operations and consolidated cash flows, for the periods indicated, have been
made.
Darius International Inc., a wholly owned subsidiary of The Quigley Corporation,
was formed in January 2000 to implement alternative methods of marketing and
distribution for existing and new product lines.
During July 2000, the Company acquired a 60 percent ownership position of
Caribbean Pacific Natural Products, Inc., a leading developer and marketer of
all-natural sun and skincare products for luxury resorts, theme parks and spas.
This acquisition is accounted for by the purchase method of accounting and
accordingly, the operating results have been included in the Company's
consolidated Statements of Operations from the date of acquisition. This
majority ownership position required a cash investment that approximated
$812,000 and the provision for a $1 million line of credit, secured by
inventory, accounts receivable and all other assets of Caribbean Pacific Natural
Products, Inc. The net assets of Caribbean Pacific Natural Products, Inc., at
the acquisition date principally consisted of a product license and distribution
rights with no recorded value, inventory and fixed assets of $312,915 and
$510,000 of working capital with a contribution to minority interest of
$329,166.
The 40 percent ownership position representing the minority interest of
Caribbean Pacific Natural Products, Inc., is reflected in the consolidated
Statements of Operations for their portion of losses, and the consolidated
Balance Sheet for their ownership portion of accumulated losses, share of net
assets and capital stock at acquisition date.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company involved in the direct marketing and
distribution of health and wellness products. This acquisition required cash
payments that will approximate $242,000 and 50,000 shares of the Company's stock
issued to the former owners of the assets acquired. These cash payments require
an initial payment of $100,000, with the balance to be paid as percent of sales
attained until the total price of $242,000 is accomplished. The net assets
acquired at acquisition principally consisted of intangibles with no recorded
value, inventory and fixed assets of $421,000 and liabilities assumed
approximating $299,000. Also required are continuous payments for the use of
product formulations; consulting; confidentiality and non-compete fees that
total up to 12% on net sales collected until $540,000 is paid, when such fees
become 5% on net sales collected for the continuous applications of these
arrangements. This acquisition is accounted for by the purchase method of
accounting and accordingly, the operating results have been included in the
Company's consolidated Statements of Operations from the date of acquisition.
The excess of cost over net assets acquired is being amortized on a
straight-line basis over a period of 15 years.
All inter-company transactions and balances have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and accompanying notes for
the fiscal year ended December 31, 2000, in the Company's Form 10-K.
Revenues for 2000 have been re-classed to reflect the changes required by the
Emerging Issues Task Force ("EITF") that issued EITF No. 00-14, "Accounting for
Coupons, Rebates and Discounts" that addressed accounting for sales incentives.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with three major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
8
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. The Bodymate(TM) product and
the Cold-Eeze(R) lozenge are manufactured by a third party manufacturer that
produces exclusively for the Company. The majority of the Company's revenues are
currently generated from the sale of the Cold-Eeze(R) lozenge product. The other
forms are manufactured by third parties that produce a variety of other products
for other customers. Should these relationships terminate or discontinue for any
reason, the Company has formulated a contingency plan in order to prevent such
discontinuance from materially affecting the Company's operations. Any such
termination may, however, result in a temporary delay in production until the
replacement facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
COUPONS, REBATES AND DISCOUNTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives, a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of 2001.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
ADVERTISING
Advertising costs are generally expensed within the period to which they relate.
Advertising costs incurred for the nine months ended September 30, 2001 and 2000
were $2,090,852 and $6,939,927, respectively. Included in prepaid expenses and
other current assets were $456,500 and $419,000 at September 30, 2001 and
December 31, 2000 respectively, relating to prepaid advertising and promotion
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the nine months ended September 30, 2001 and 2000 were $970,575
and $685,897, respectively. Included in Research and Development is the expenses
incurred as part of the costs related to the application for a pharmacy drug
license in the United Kingdom.
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See Note 5 for disclosure related to this Standard.
BUSINESS SEGMENTS AND RELATED INFORMATION
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information," requires public companies to
report certain information about operating segments within their financial
statements. See Note 3 for disclosure related to this Standard.
NOTE 3 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The primary difference relates to presentation of
partially-owned operations, which are presented as if owned 100% in the
operating segments. The adjustment to ownership basis is included in Corporate
& Other. In the third quarter of 2000, the Company qualified for
9
the Financial Accounting Standard Board Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information" which establishes standards
for reporting information about a company's operating segments.
The Company has divided its operations into three reportable segments: The
Quigley Corporation, whose main product is Cold-Eeze(R), a proprietary zinc
gluconate glycine lozenge in the OTC cold remedy category; Darius International,
Inc., whose business is the sale and direct marketing of a range of health and
wellness products and Caribbean Pacific Natural Products, Inc., a leading
developer and marketer of all-natural sun and skin care products for luxury
resorts, theme parks and spas.
Financial information by business segment follows:
-------------------------------------------------------------------------------------------------------------------
OTC Direct
As of and for the three Cold Marketing Sun and
months ended Remedy Health and Skincare Corporate
September 30, 2001 Products Wellness Products and Other Total
-------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $ 4,411,612 $ 1,664,391 $ 510,790 -- $ 6,586,793
Inter-segment -- -- -- -- --
Settled litigation 136,364 -- -- -- 136,364
Segment operating profit (loss) $ 452,240 ($ 45,685) ($ 290,506) $ 5,547 $ 121,596
-------------------------------------------------------------------------------------------------------------------
OTC Direct
As of and for the three Cold Marketing Sun and
months ended Remedy Health and Skincare Corporate
September 30, 2001 Products Wellness Products and Other Total
-------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $ 8,802,738 $ 4,025,370 $ 1,902,410 -- $ 14,730,518
Inter-segment (116,385) 176,412 -- ($ 60,027) --
Settled litigation 1,410,228 -- -- -- 1,410,228
Segment operating profit (loss) (565,679) (252,248) (491,533) 4,474 (1,304,986)
Total Assets $ 24,539,453 $ 1,051,312 $ 1,173,396 ($ 3,034,649) $ 23,729,512
-------------------------------------------------------------------------------------------------------------------
OTC Direct
As of and for the three Cold Marketing Sun and
months ended Remedy Health and Skincare Corporate
September 30, 2000 Products Wellness Products and Other Total
-------------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 3,088,817 $ 39,489 $ 343,518 -- $ 3,471,824
Inter-segment 269,410 -- -- ($ 269,410) --
Segment operating profit (loss) $ 600,347 ($ 480,265) ($ 77,535) ($ 104,631) ($ 62,084)
-------------------------------------------------------------------------------------------------------------------
OTC Direct
As of and for the three Cold Marketing Sun and
months ended Remedy Health and Skincare Corporate
September 30, 2000 Products Wellness Products and Other Total
-------------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 9,315,851 $ 39,489 $ 343,518 -- $ 9,698,858
Inter-segment 317,137 -- -- ($ 317,137) --
Segment operating profit (loss) (5,006,344) (763,198) (77,535) (123,724) (5,970,801)
Total Assets $ 25,520,798 $ 425,598 $ 1,124,782 ($ 1,823,560) $ 25,247,618
-------------------------------------------------------------------------------------------------------------------
10
NOTE 4 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Since the inception of the stock buy-back program in January 1998, the Board
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan,
4,159,191 shares have been repurchased at a cost of $24,042,801 or an average
cost of $5.78 per share. There were 30,000 shares repurchase during the first
three months of 2001.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
At September 30, 2001, there were 4,041,400 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 during various periods, resulted in reductions
to taxes currently payable and a corresponding increase to
additional-paid-in-capital totaling $14,660,288 for the years ended December 31,
1999, 1998, and 1997. The tax benefit effect of option and warrant exercises
during 1999, 2000 and 2001 to date was $928,206, however, this benefit is being
deferred because of a net operating loss carry-forward for tax purposes ("NOLs")
that occurred during the fourth quarter of 1999 from a cumulative effect of
deducting a total value of $42,800,364 attributed to these options, warrants and
unrestricted stock deductions from taxable income during the tax years 1997 and
1998. The net operating loss carry-forwards arising from the option, warrant and
stock activities approximate $9.5 million for federal purposes, of which $3.5
million will expire in 2019, $6.0 million in 2020 and $13.7 million for state
purposes, of which $9.7 million will expire in 2009, $4.0 million in 2010. The
nine months periods ended September 30, 2001 and 2000 losses are reflected at
39% for both the increase in deferred taxes and the valuation allowance. The
overall effective tax rate for 2001 and 2000 was 0% since profits for tax
purposes are not available.
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to Common Stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of Common
Stock that then shared in the earnings of the entity. Diluted EPS also utilizes
the treasury stock method that prescribes a theoretical buy-back of shares from
the theoretical proceeds of all options and warrants outstanding during the
period. Since there is a large number of options and warrants outstanding,
fluctuations in the actual market price can have a varying of results for each
period presented. For the periods presented that reflect losses, no effect was
given for options and warrants because the result would be anti-dilutive.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001 September 30, 2000 September 30, 2000
Income Shares EPS Loss Shares EPS Income Shares EPS Loss Shares EPS
--------------------------------------------------------------------------------------------------
Basic EPS $ 0.3 10.7 $ 0.03 ($ 0.8) 10.7 ($ 0.07)$ 0.1 10.6 $ 0.01 ($ 5.5) 10.5 ($ 0.52)
Dilutives:
Options/Warrants -- 0.1 -- -- -- 0.1 -- --
--------------------------------------------------------------------------------------------------
Diluted EPS $ 0.3 10.8 $ 0.03 ($ 0.8) 10.7 ($ 0.07)$ 0.1 10.7 $ 0.01 ($ 5.5) 10.5 ($ 0.52)
==================================================================================================
11
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 $171,000 and $237,000, respectively, for the nine-months periods
ended September 30, 2001 and 2000.
The Company is in the process of acquiring licenses in certain countries through
related party entities. For the nine-months periods ended September 30, 2001 and
2000, fees amounting to $219,000 and $183,000, respectively, have been paid to a
related entity to assist with the regulatory aspects of obtaining such licenses.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company maintains certain royalty and founders commission agreements with
the developers, licensors, founders, and consultants for the Cold-Eeze(R)
products. These payments are 13% of sales collected less certain deductions. Of
this percentage, a three percent royalty on sales collected less certain
deductions is payable to the patent holder whose agreement expires in 2002, a
three percent royalty of sales collected less certain deductions is payable to
the developer of the product formulation together with a two percent consulting
fee based on an agreement that expires in 2007. Additionally, a founders'
commission is payable totaling 5% of sales collected less certain deductions,
which is shared by two of the officers whose agreements expire in 2005.
Also, required for the acquisition of certain assets of a privately held company
involved in the direct marketing and distribution of health and wellness
products are continuous payments for the use of product formulations;
consulting; confidentiality and non-compete fees that total up to 12% on net
sales collected until $540,000 is paid, after which such fees become 5% on net
sales collected for the continuous applications of these arrangements.
The Company has remaining contractual commitments for advertising and other
purchases amounting to approximately $72,000.
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.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 141
In July 2001, the Financial Accounting Standards Board issued SFAS 141, BUSINESS
COMBINATIONS, which is required for all business combinations initiated after
June 30, 2001. The standard eliminates the use of the pooling-of-interest method
and improves the accounting and reporting for business combinations. The Company
does not expect that the new standard will have a material effect on the results
of operations or cash flows.
SFAS 142
Also in July 2001, the FASB issued SFAS 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. This standard requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. This change is expected to provide
investors with greater information regarding the economic value of goodwill and
its impact on earnings. The Company will be required to adopt this standard in
fiscal 2003, however early adoption in fiscal 2002 will be permitted. The
Company has not yet determined the impact to its financial statements of
adoption of this standard.
12
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 nine months periods ended September 30, 2001 were
$6,723,157 and $16,140,746 as compared to $3,471,824 and $9,698,858 for the
comparable 2000 periods. Revenues for the nine months ended September 30, 2001
include an amount of $1,410,228 in 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 will 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 is 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. In addition, Gum Tech has guaranteed to pay Quigley a minimum
of $500,000 in ongoing royalties regardless of sales through March 5, 2002.
Legal and other expenses associated with this lawsuit in the nine months period
ended September 30, 2001 approximated $700,000.
Darius International, Inc., and Caribbean Pacific Natural Products, Inc.,
contributed combined revenues of $2,175,181 and $5,927,780 for the three and
nine months periods ended September 30, 2001 with $383,007 in 2000, all arising
in the third quarter. Darius International commenced shipments to customers
during the third quarter of 2000 and the Company acquired a 60% ownership in
Caribbean Pacific Natural Products, Inc., effective July 1, 2000.
The results of the third quarter 2001 reflect an improvement in Cold-Eeze(R)
with 2001 sales exceeding those of the comparable 2000 reporting period by
$1,322,796. Recent months have experienced a slow down in industry
consolidations and indications are that inventory levels at the drug chains,
mass merchandisers and other retail outlets were at a level where reordering was
more aggressive than last year. Additionally, during 2001 the Company has
implemented changes to its selling organization allowing the Company to manage
its customers more successfully.
The Company continues to support Cold-Eeze(R) through advertising partnerships
with our customers, which allows Cold-Eeze(R) considerable retail visibility as
the only clinically proven zinc product on the market. Up to the end of the
first quarter of 2000, the Company invested substantially in the radio and
television media in order to inform the consumer of the benefits of
Cold-Eeze(R), since then the Company has altered its advertising focus to
promote the Cold-Eeze(R) brand and inform the consumer primarily through
consumer promotions at store level.
The advertising cost approximated $2.1 million for the nine months ended
September 30, 2001 as compared with approximately $6.9 million for the
comparable period in 2000, substantially contributing to the loss of
($5,461,328) for the nine months ended September 30, 2000. The loss for the nine
months periods ended September 30, 2001 and 2000 are not tax effected for the
potential benefit, which cannot be reflected until the Company returns to
sustained profitability.
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.
The Company continues to use the resources of a contract manufacturer 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
13
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.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
TIME-BASED AND VOLUME-BASED SALES INCENTIVE OFFERS
In March 2001, the Emerging Issues Task Force reached a final consensus on Issue
No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" that addresses, among other issues, the accounting requirements
of a vendor for an offer to a customer to rebate or refund a specified amount of
cash that is redeemable only if the customer completes a specified cumulative
level of revenue transactions or remains a customer for a specified period of
time. This Issue was effective for quarters ending after February 15, 2001. The
adoption of this Issue did not have any impact on the Company's financial
position or results of operations.
SFAS 141
In July 2001, the Financial Accounting Standards Board issued SFAS 141, BUSINESS
COMBINATIONS, which is required for all business combinations initiated after
June 30, 2001. The standard eliminates the use of the pooling-of-interest method
and improves the accounting and reporting for business combinations. The Company
does not expect that the new standard will have a material effect on the results
of operations or cash flows.
SFAS 142
Also in July 2001, the FASB issued SFAS 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. This standard requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. This change is expected to provide
investors with greater information regarding the economic value of goodwill and
its impact on earnings. The Company will be required to adopt this standard in
fiscal 2003, however early adoption in fiscal 2002 will be permitted. The
Company has not yet determined the impact to its financial statements of
adoption of this standard.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared to three months ended September
30, 2000
For the three months ended September 30, 2001, the Company reported revenues of
$6,723,157 and a net income of $313,615 as compared to revenues of $3,471,824
and a net income of $114,401, for the comparable period ended September 30,
2000. Revenues for the 2001 period includes an amount of $136,364 in 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 will 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 is 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. In addition, Gum Tech has
guaranteed to pay Quigley a minimum of $500,000 in ongoing royalties regardless
of sales through March 5, 2002.
Cold Eeze(R) sales in the third quarter of 2001 exceeded those of the comparable
2000 period by $1,322,796. Contributing to this increase in sales would be
industry consolidations that appear to have abated, customer inventories seem to
be low and product demand by the consumer for the fourth quarter is expected to
be greater than that of last year.
As a result of the acquisition of a 60% position in Caribbean Pacific Natural
Products, Inc., effective July 1, 2000 and the commencement of product shipments
from Darius International, Inc., in July 2000, these two entities contributed
$2,175,181 to revenues for the third quarter ended September 30, 2001, compared
14
to $383,007 in the comparable 2000 period, all arising in the third quarter.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the three months ended September 30, 2001 was 39.7% compared to
31.7% for the comparable period ended September 30, 2000. The increase in the
cost of sales percentage in 2001 is as a result of the significantly higher cost
of sales associated with the Darius segment of the business. During the third
quarter of 2001, Darius sales contributed 23% to consolidated sales.
For the three months ended September 30, 2001, total operating expenses were
$3,754,772 compared to $2,339,998 for the comparable period ended September 30,
2000. The increased expenditure in 2001 reflects the costs associated with
Caribbean Pacific Natural Products and Darius International, totaling
$1,201,121. Additionally, legal and other expenses associated with the Gum Tech,
LLC lawsuit in the three month period were approximately $235,000.
The advertising cost approximated $900,000 for the three months ended September
30, 2001 as compared with approximately $300,000 for the comparable period in
2000.
During the three months ended September 30, 2001, the major operating expenses
of delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for $2,905,243 (77%) of total operating costs. The remaining
items for this period were of a semi-fixed nature in that they do not strictly
follow sales trends. These expense categories for the comparable period in 2000
accounted for $1,479,890 (63%) of total operating costs.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
For the nine months ended September 30, 2001, the Company reported revenues of
$16,140,746 and a net loss of ($769,737) as compared to revenues of $9,698,858
and a net loss of ($5,461,328), for the comparable period ended September 30,
2000. The Cold-Eeze(R) product shows a decrease of $1,468,687 in sales,
exclusive of co-operative advertising expense, in the nine month period ended
September 30, 2001 when compared to the same period in 2000. However, the third
quarter sales performance by Cold-Eeze(R) in 2001 show an improvement over the
third quarter 2000 sales by $1,322,795. It is believed that this increase was
affected by the decrease in consolidations within the industry, inventory levels
of our customers are low and that product demand by the consumer for the fourth
quarter is expected to be greater than that of last year. Additionally, during
2001 the Company has implemented changes to its selling organization allowing
the Company to manage its customers more successfully.
Revenues for the first nine months of 2001 include an amount of $1,410,228 in
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 will 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 is 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. In addition, Gum Tech has
guaranteed to pay Quigley a minimum of $500,000 in ongoing royalties regardless
of sales through March 5, 2002. Legal and other costs associated with this
lawsuit to date in 2001 are approximately $700,000.
As a result of the acquisition of a 60% position in Caribbean Pacific Natural
Products, Inc., effective July 1, 2000 and the commencement of product shipments
from Darius International, Inc., in July 2000, these two entities contributed
$5,927,780 to revenues for the nine months ended September 30, 2001, compared to
$383,007 in the comparable 2000 period, all arising in the third quarter.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the nine months ended September 30, 2001 was 40.4% compared to
33.2% for the comparable period ended September 30, 2000. The increase in the
cost of sales percentage in 2001 is as a result of the significantly higher cost
of sale associated with the Darius segment of the business. During the nine
months period ended September 30, 2001 Darius sales contributed 25.6% to
consolidated sales.
For the nine months ended September 30, 2001, total operating expenses were
$11,081,662 compared to $11,791,594 for the comparable period ended September
30, 2000. The movement in expenditure between the years reflects the increased
costs in 2001 associated with Caribbean Pacific Natural Products and Darius
International, totaling $2,748,432. The Company acquired a 60% ownership
position in Caribbean Pacific Natural Products on July 1, 2000 and in January
2001 the Company acquired certain assets and assumed certain liabilities of a
privately held company, now named Darius Marketing Inc. Due to the change in the
way the Company now advertises and promotes its product, advertising costs have
decreased in 2001 to date by approximately $4,800,000. Additionally, legal and
other expenses associated with the Gum Tech, LLC lawsuit in the nine months
period ended September 30, 2001 were approximately $700,000.
15
The advertising cost approximated $2.1 million, for the nine months ended
September 30, 2001 as compared with approximately $6.9 million for the
comparable period in 2000, substantially contributing to the loss of
($5,461,328) for the nine months ended September 30, 2000.
During the nine months ended September 30, 2001, the major operating expenses of
delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for $7,593,621 (69%) of total operating costs. The remaining
items for this period were of a semi-fixed nature in that they do not strictly
follow sales trends. These expense categories for the comparable period in 2000
accounted for $8,729,081 (74%) of total operating costs.
LIQUIDITY AND CAPITAL RESOURCES
The total assets of the Company at September 30, 2001 and December 31, 2000 were
$23,729,512 and $26,055,601, respectively. Working capital decreased to
$17,508,851 from $18,622,127 during the period. The significant movement within
total assets represents the increase in accounts receivable of $854,206, cash
and cash equivalents decreased by $3,780,443, prepaid expenses and other current
assets increased by $340,272, inventory increased by $87,981. From a working
capital perspective, accounts payable decreased by $281,374 and accrued
royalties and sales commissions increased over the period by $269,611 while the
advertising accrual decreased by $1,287,497. Total cash balances at September
30, 2001 were $7,585,400, as compared to $11,365,843 at December 31, 2000.
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, further growth in international sales together with
its current working capital should provide an internal source of capital to fund
the Company's business operations. In addition to anticipated funding from
operations, the Company may raise capital through the issuance of equity
securities to finance anticipated growth.
Notwithstanding current period negative cash flows from operations, management
believes amounts of cash on hand as well as those current assets readily
convertible to cash will provide adequate liquidity to support future
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
CAPITAL EXPENDITURES
Since the Company's and its subsidiary's products of Darius International, Inc.,
and Caribbean Pacific Natural Products, Inc., are manufactured for the Company
by outside sources, capital expenditures during the remainder of 2001 are not
anticipated to be material.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
16
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter ended
September 30, 2001.
17
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: October 30, 2001
18