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, 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 October
15, 1999, was 10,349,731 all of one class of $.0005 par value Common Stock.
<PAGE>
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 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
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
(unaudited)
------------ ------------
<S> ...................................................... <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 13,408,167 $ 28,331,765
Accounts receivable, net ............................... 3,354,954 7,575,366
Inventory .............................................. 7,129,724 6,522,612
Prepaid income taxes ................................... 2,571,234 2,565,321
Prepaid expenses and other current assets .............. 1,736,630 1,635,099
Deferred income taxes .................................. 614,604 397,489
------------ ------------
TOTAL CURRENT ASSETS ................................. 28,815,313 47,027,652
------------ ------------
PROPERTY, PLANT AND EQUIPMENT -
Less accumulated depreciation ....................... 1,403,496 1,041,386
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization .......... 219,403 285,224
Other assets ........................................... 395,971 256,382
------------ ------------
TOTAL OTHER ASSETS .................................. 615,374 541,606
------------ ------------
TOTAL ASSETS ............................................. $ 30,834,183 $ 48,610,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 197,128 $ 758,033
Accrued royalties and sales commissions ................ 931,378 2,085,446
Accrued advertising .................................... 1,139,466 561,266
Other current liabilities .............................. 564,095 598,422
------------ ------------
TOTAL CURRENT LIABILITIES ............................ 2,832,067 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: 14,831,384 and 14,409,058 shares ............. 7,415 7,205
Additional paid-in capital ............................. 29,330,340 28,207,208
Retained earnings ...................................... 23,708,945 26,649,455
Less: Treasury stock, 4,481,653 and
1,665,022 shares, at cost ............................ (25,044,584) (10,256,391)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................... 28,002,116 44,607,477
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 30,834,183 $ 48,610,644
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> .................................... <C> <C> <C> <C>
NET SALES .............................. $ 4,103,965 $ 10,747,978 $ 12,304,186 $ 19,337,669
------------ ------------ ------------ ------------
COST OF SALES .......................... 1,360,735 3,175,106 4,076,367 5,784,743
------------ ------------ ------------ ------------
GROSS PROFIT ........................... 2,743,230 7,572,872 8,227,819 13,552,926
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing ................ 1,540,800 2,052,893 9,525,362 4,971,885
Administration ..................... 1,334,758 936,770 4,239,139 2,695,864
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ............... 2,875,558 2,989,663 13,764,501 7,667,749
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS .......... (132,328) 4,583,209 (5,536,682) 5,885,177
INTEREST and OTHER INCOME .............. 162,382 357,867 716,173 1,134,863
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ............. 30,054 4,941,076 (4,820,509) 7,020,040
------------ ------------ ------------ ------------
INCOME TAXES EXPENSE (BENEFIT).......... 11,721 1,927,020 (1,879,999) 2,737,816
------------ ------------ ------------ ------------
NET INCOME (LOSS) ...................... $ 18,333 $ 3,014,056 ($ 2,940,510) $ 4,282,224
============ ============ ============ ============
Earnings per common share:
Basic........................... $0.00 $0.22 ($0.25) $0.32
============ ============ ============ ============
Diluted......................... $0.00 $0.20 ($0.25) $0.28
============ ============ ============ ============
Weighted average common shares outstanding:
Basic............................ 11,325,651 13,454,029 11,686,036 13,432,157
============ ============ ============ ============
Diluted.......................... 12,331,505 14,928,391 11,686,036 15,121,344
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> ......................................................... <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES .................... ($ 660,019) $ 2,096,522
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ..................................... (460,502) (253,732)
Patent rights and other assets ........................... (139,589) (60,453)
------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES .............. (600,091) (314,185)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefits from stock options, warrants and Common stock 697,206 3,452,361
Proceeds from exercises of options and warrants .......... 427,499 614,475
Repurchase of Common stock ............................... (14,788,193) (4,656,559)
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES ................. (13,663,488) (589,723)
------------ ------------
NET INCREASE (DECREASE) IN CASH .......................... (14,923,598) 1,192,614
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 28,331,765 25,498,359
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD ...................... $ 13,408,167 $ 26,690,973
============ ============
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
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 September 30, 1999, the Statements of Income for the
three and nine months periods ended September 30, 1999 and 1998, and the
Statements of Cash Flows for the nine months periods ended September 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
<PAGE>
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 are 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," requires 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 relating to which 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 recent 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 October 15, 1999,
2,816,631 shares have been repurchased at a cost of $14,788,193 or an average
cost of $5.25 per share.
At September 30, 1999, there were 4,279,400 unexercised options and warrants
of the Company's stock.
7
<PAGE>
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 $614,604 consists of the tax
effects for contract termination costs and miscellaneous items. Certain
exercises of options and warrants during the nine month period ended September
30, 1999, resulted in reductions to taxes currently payable and a
corresponding increase to additional paid-in-capital totaling $697,206.
For the nine months ended September 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):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS
--------- -------- ---------- -------- -------- --------- --------- -------- ----- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $0 11.2 $0.00 $3.0 13.5 $0.22 ($2.9) 11.7 ($0.25) $4.3 13.4 $0.32
Dilutives:
Options/Warrants - 1.0 - 1.4 - - - 1.7
--------- -------- ---------- -------- ------- ---------- --------- ------- ------ --------- -------- -------
Diluted EPS $0 12.2 $0.00 $3.0 14.9 $0.20 ($2.9) 11.7 ($0.25) $4.3 15.1 $0.28
========= ======== ========== ======== ======= ========== ========= ======= ====== ========= ======== =======
</TABLE>
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 $191,000 and $107,000, respectively, for the nine month period
ended September 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 September 30, 1999 and
December 31, 1998 were approximately $8,500 and $11,000, respectively.
The Company is in the process of acquiring licenses in certain countries
through affiliated entities. For the nine month period ended September 30,
1999 and 1998, fees have been paid to a related entity to obtain such licenses
amounting to $77,000 and $25,000, respectively.
8
<PAGE>
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 is accrued totaling 5% of sales collected less certain
deductions, which is shared by two of the officers whose agreements expire in
2005.
The Company has remaining contractual commitments for advertising amounting to
approximately $10,600,000 up to March 31, 2000.
The Company has a revolving line of credit with a commercial bank for $10
million to be used for general corporate purposes. This facility is
collateralized by accounts receivable and inventory, and renews in May 2000,
with interest accruing at the Wall Street Journal prime rate, or 225 basis
points above the Eurodollar Rate, each to move with the respective base rate.
There were no borrowings under this line during the nine-month period ended
September 30, 1999.
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
<PAGE>
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 month periods ended September 30, 1999 were
$4,103,965 and $12,304,186 as compared to $10,747,978 and $19,337,669 for the
comparative periods in 1998. Fiscal year 1999 to date has seen unique seasonal
activity along with changes in the competition within the cough/cold
marketplace. Revenue has been adversely affected by the unusually high
inventory levels being held by our customers, however, recent indications are
that these overstocks may have been drastically reduced. Fiscal year 1999 has
also seen large numbers of competitors leaving the zinc market, even though
these products do not have the efficacy of Cold-Eeze(R), they have been
mistakenly perceived as being clinically equivalent to Cold-Eeze(R). While the
exit from the market of these other zinc products will benefit Cold-Eeze(R) in
the long term, the immediate effect is that a lot of product is being sold at
severely reduced prices in the marketplace leading to consumer confusion. The
sales performance of Cold-Eeze(R), in general, is affected by imitation zinc
products, insofar as once consumers try them and find them to be ineffective
they may be reluctant to try clinically proven Cold-Eeze(R).
In conjunction with the foregoing consumer misconception and the low consumer
use of Cold-Eeze(R) (approximately 4% of US household population), a
substantial investment in advertising initiated in 1998 has continued during
the first nine months 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 $8,500,000 for the nine months ended September
30, 1999 as compared with approximately $4,400,000 for the comparable period
in 1998, substantially contributing to the net loss of ($2,940,510) for the
nine months ended September 30, 1999 as compared to a profit of $4,282,224 for
the nine months ended September 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 made a significant contribution to the total revenues for the
nine months ended September 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 sugar free 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.
10
<PAGE>
Results of Operations
- ---------------------
Three months ended September 30, 1999 compared to three months ended
- --------------------------------------------------------------------
September 30, 1998
- ------------------
For the three months ended September 30, 1999, the Company reported revenues
of $4,103,965 and a net income of $18,333 as compared to revenue of
$10,747,978 and net income of $3,014,056 for the comparable period ended
September 30, 1998. The third quarter results have been adversely affected by
the larger than usual inventory levels being held by our customers,
indications are that these overstocks may now be significantly diminished. The
quarter sales have been helped by the sales resulting from the bubble gum,
sugar free and Bodymate(TM) products that which were launched in late 1998.
Cost of Sales as a percentage of net sales for the three months ended
September 30, 1999 was 33.2% compared to 29.5% for the comparable period ended
September 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 sugar free
and bubble gum form and Bodymate(TM), which were introduced in the latter part
of 1998.
For the three months ended September 30, 1999, total operating expenses were
$2,875,558 compared to $2,989,663 for the comparable period ended September
30, 1998. The operating expenses have remained high despite less spending on
sales and marketing in the third quarter, however, these savings have been
offset by extra costs in administration in 1999 compared to 1998.
During the three months ended September 30, 1999, the major operating expenses
of delivery, salaries, brokerage commissions, promotion, advertising, and
legal costs accounted for $2,193,482 (76%) 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 $2,701,607 (90%) of total operating costs. As a
percentage of sales, the 1999 third quarter operating expenses assume a higher
percentage to sales compared to the same period in 1998 due to the lower 1999
sales.
Nine months ended September 30, 1999 compared to nine months ended
- -------------------------------------------------------------------
September 30, 1998
- ------------------
For the nine months ended September 30, 1999, the Company reported revenues of
$12,304,186 and a net loss of ($2,940,510), as compared to revenue of
$19,337,669 and net income of $4,282,224 for the comparable period ended
September 30, 1998. The shortfall in revenue has been influenced by the larger
than usual inventories being held by our customers, however indications are
that these overstocks may have been significantly reduced. This sales
reduction 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 bubble gum and sugar free versions.
Additionally 1999 has seen a more prolonged demand for Cold-Eeze(R) beyond the
peak cold season. Fiscal year 1999 has seen some considerable competitive
shifts in terms of the number of competing zinc products exiting the
marketplace. This will be beneficial to Cold-Eeze(R) in the long term, however
currently these discontinued products are being sold at severely reduced
prices in the marketplace resulting in consumer confusion. The result is more
intense competition for Cold-Eeze(R) notwithstanding that these zinc products
have neither the efficacy nor clinical credibility of Cold-Eeze(R). The
advertising programs continue to stress the unique nature of Cold-Eeze(R) so
as that consumers can distinguish between Cold-Eeze(R) and the many zinc
imitation products that are ineffective in treating the symptoms of the common
cold. In addition, 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 have affected
the growth of Cold-Eeze(R) during this period.
Cost of Sales as a percentage of net sales for the nine months ended September
30, 1999 was 33.1% compared to 29.9% for the comparable period ended September
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 sugar free
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
higher cost of goods associated with international sales is a contributor to
the higher 1999 percentage.
For the nine months ended September 30, 1999, total operating expenses were
$13,764,501 compared to $7,667,749 for the comparable period ended September
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.
11
<PAGE>
During the nine months ended September 30, 1999, the major operating expenses
of delivery, salaries, brokerage commissions, promotion, advertising, and
legal costs accounted for $11,631,980 (85%) 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 $6,716,749 (88%) of total operating costs. However, the
1999 total operating costs assume a higher percentage of sales 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
$8,500,000 for the nine months ended September 30, 1999 as compared to
approximately $4,400,000 for the comparable period in 1998, and contributed to
the Company's net loss of ($2,940,510) for the nine months ended September 30,
1999, as compared to a profit of $4,282,224 for the nine months ended
September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The total assets of the Company at September 30, 1999 and December 31, 1998
were $30,834,183 and $48,610,644, respectively. Working capital decreased to
$25,983,246 from $43,024,485 during the period. The significant movement
within total assets represents the reduction in accounts receivable of
$4,220,412, cash and cash equivalents decreasing by $14,923,598, prepaid
income taxes increasing by $5,913, prepaid expenses and other current assets
increasing by $101,531 and inventory increasing by $607,112. From a working
capital perspective, accounts payable, accrued royalties and sales commissions
were reduced over the period by $560,905 and $1,154,068 respectively while the
advertising accrual increased by $578,200. Total cash balances at September
30, 1999 were $13,408,167, 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, the Company has a revolving line
of credit with a commercial bank for $10 million to be used for general
corporate purposes. This facility is collateralized by accounts receivable and
inventory, and renews in May 2000, with interest accruing at the Wall Street
Journal prime rate, or 225 basis points above the Eurodollar Rate, each to
move with the respective base rate. There were no borrowings under this line
during the nine-month period ended September 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 $500,000 in order to complete the renovation
of a Company-owned corporate office building.
Year 2000 Compliance
- --------------------
The Year 2000 issue relates to the way 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.
12
<PAGE>
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.
All four phases have now been completed. The Company has completed all 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 now complete. With respect to key business partners, the
assessment and strategy 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 $43,000 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 is now complete. 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 operations 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
13
<PAGE>
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
- -------------------------
Marjorie Durst
In October 1999, the Company reached a settlement in a lawsuit by an
individual named Marjorie Durst that resolved all matters between the
Plaintiff and the Company. This legal proceeding was previously reported in
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999. The resolution of this dispute is not material to the Company's
financial position, results of operations or liquidity.
There have been no other material changes in any of the legal proceedings
discussed in the Company's Form 10-Q for the quarter ended June 30, 1999.
The Company is subject to other 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 Company's financial position,
results of operations or liquidity.
Item 2. Changes in Securities
- -----------------------------
None
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
A Special Meeting of Stockholders of the Company was held on October 15, 1999
with 10,337,820 shares eligible to vote. The presence of a quorum was reached
and the following proposal was approved by the stockholders:
To (a) ratify all actions previously taken by officers, directors and
agents of the Company relating to: the 1 for 2.74 reverse split of shares
of its Common Stock effected by the Company between June 1990 and August
1991 (the "1990 Reverse Split"), (ii) the 1 for 10 reverse split of
shares of its Common Stock effected by the Company on January 11, 1996
("the 1996 Reverse Split"), and (iii) the 2 for 1 forward split of shares
of its Common Stock effected by the Company on January 23, 1997 (the
"1997 Forward Split"); and (b) approve an amendment to Article IV of the
Company's Articles of Incorporation required to, among other things,
complete and memorialize the 1990 Reverse Split, the 1996 Reverse Split
and the 1997 Forward Split.
The votes were cast as follows: For 5,572,850
Against 106,529
Abstentions 54,207
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 September 30, 1999.
14
<PAGE>
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: November 12, 1999
15
<PAGE>
<PAGE>
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