10-Q 1 0001.txt FOR THE PERIOD ENDING SEPTEMBER 30, 2000 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, 2000 ------------------------------------------------- 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 (IRS Employer of incorporation or organization) Identification No.) (MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.) Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901 ------------------------------------------------------------ (Address of principle executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 345-0919 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's class of Common Stock, as of the latest practicable date. The number of shares outstanding of each of the registrant's classes of Common Stock, as of October 15, 2000, was 10,789,553 all of one class of $.0005 par value Common Stock. TABLE OF CONTENTS Page No PART I - Financial information Item 1. Consolidated Financial Statements 3-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-13 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 PART II - Other Information Item 1. Legal Proceedings 13-14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 EDGAR Exhibit 27 16 -2- THE QUIGLEY CORPORATION CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31, 2000 1999 (unaudited) ----------- ------------ ............................................ CURRENT ASSETS: Cash and cash equivalents ....................... $10,107,132 $13,990,475 Accounts receivable (less doubtful accounts of $434,935 and $239,065)................... 3,832,374 6,639,687 Inventory ....................................... 7,025,606 6,170,005 Prepaid income taxes ............................ - 2,485,247 Prepaid expenses and other current assets ....... 1,259,834 1,390,702 ----------- ----------- TOTAL CURRENT ASSETS ......................... 22,224,946 30,676,116 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT - net................. 2,186,939 1,943,313 ----------- ----------- OTHER ASSETS: Patent rights - Less accumulated amortization.... 131,642 197,463 Excess of cost over net assets acquired.......... 369,657 - Other assets..................................... 334,434 454,164 ----------- ----------- TOTAL OTHER ASSETS............................ 835,733 651,627 ----------- ----------- TOTAL ASSETS........................................ $25,247,618 $33,271,056 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ................................ $490,127 $395,778 Accrued royalties and sales commissions ......... 1,164,806 1,722,715 Accrued advertising ............................. 1,519,705 4,523,901 Other current liabilities ....................... 915,054 413,053 ----------- ----------- TOTAL CURRENT LIABILITIES ................... 4,089,692 7,055,447 ----------- ----------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST IN CONSOLIDATED AFFILIATES ....... 338,643 - ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $.0005 par value;authorized 50,000,000; Issued: 15,271,206 and 14,831,384 shares...... 7,636 7,415 Additional paid-in-capital....................... 28,871,888 28,807,108 Retained earnings................................ 16,984,343 22,445,670 Less: Treasury stock, 4,481,653 shares, at cost.. (25,044,584) (25,044,584) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY................... 20,819,283 26,215,609 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $25,247,618 $33,271,056 =========== ===========
See accompanying notes to financial statements -3-
THE QUIGLEY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 -------------- ------------- ------------- ------------- NET SALES $3,765,229 $4,103,965 $11,680,125 $12,304,186 ---------- ----------- ------------ ----------- COST OF SALES 1,193,910 1,360,735 3,878,065 4,076,367 ---------- ----------- ------------ ----------- GROSS PROFIT 2,571,319 2,743,230 7,802,060 8,227,819 ---------- ----------- ------------ ----------- OPERATING EXPENSES: Sales and marketing 1,155,301 1,540,800 8,738,232 9,525,362 Administration 1,478,102 1,334,758 5,034,629 4,239,139 ---------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 2,633,403 2,875,558 13,772,861 13,764,501 ---------- ----------- ----------- ----------- LOSS FROM OPERATIONS (62,084) (132,328) (5,970,801) (5,536,682) INTEREST and OTHER INCOME 145,471 162,382 478,459 716,173 ---------- ----------- ----------- ----------- INCOME (LOSS) BEFORE TAXES 83,387 30,054 (5,492,342) (4,820,509) ---------- ----------- ----------- ----------- INCOME TAX EXPENSE (BENEFIT) - 11,721 - (1,879,999) MINORITY INTEREST IN LOSS OF CONSOLIDATED AFFILIATE 31,014 - 31,014 - ---------- ----------- ----------- ----------- NET INCOME (LOSS) $114,401 $18,333 ($5,461,328) ($2,940,510) =========== =========== ============ ============ Earnings per common share: Basic $0.01 $0.00 ($0.52) ($0.25) =========== =========== ============ ============ Diluted $0.01 $0.00 ($0.52) ($0.25) =========== =========== ============ ============ Weighted average common shares outstanding: Basic 10,642,946 11,325,651 10,516,319 11,686,036 ============ =========== ============ ============ Diluted 10,669,738 12,331,505 10,516,319 11,686,036 ============ =========== ============ ============
See accompanying notes to financial statements -4- THE QUIGLEY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, September 30, 2000 1999 ------------- ------------- NET CASH FLOWS USED IN OPERATING ACTIVITIES ($3,403,851) ($660,019) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (369,809) (460,502) Net cost of assets acquired (174,683) - Patent rights and other assets - (139,589) ------------ ------------ NET CASH FLOWS FROM INVESTING ACTIVITIES (544,492) (600,091) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Tax benefits from stock options, warrants and common stock - 697,206 Proceeds from exercises of options and warrants 65,000 427,499 Repurchase of Common Stock - (14,788,193) ------------ ------------ NET CASH FLOWS USED IN FINANCING ACTIVITIES 65,000 (13,663,488) ------------ ------------ NET DECREASE IN CASH (3,883,343) (14,923,598) CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 13,990,475 28,331,765 ------------ ------------ CASH & CASH EQUIVALENTS, END OF PERIOD $10,107,132 $13,408,167 ============ ============ 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 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 a dietary supplement product. 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. Darius International Inc., a new wholly owned subsidiary of The Quigley Corporation, has recently been launched 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. The Company 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., a leading developer and marketer of all-natural sun and skin care products for luxury resorts, theme parks and spas. Caribbean Pacific Natural Products, Inc., is headquartered in Orlando, Florida. -6- 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated Balance Sheet at September 30, 2000, the consolidated Statements of Income for the three-month and nine-month periods ended September 30, 2000 and 1999, and the consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2000 and 1999, 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 new 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 skin care products for luxury resorts, theme parks and spas. This acquisition, accounted for by the purchase method of accounting and accordingly, the operating results have been included in the Company's consolidated Statements of Income from the date of acquisition. This majority ownership position required a cash investment that approximated $920,000 and the provision for a $1 million line of credit, secured by inventory, accounts receivable and all other assets of Caribbean Pacific Natural Products. The net assets of Caribbean Pacific Natural Products, Inc., at the acquisition date principally consisted of a product license and distribution rights with no recorded value, inventory and fixed assets of $414,143 and $510,000 of working capital with a contribution to minority interest of $369,657. The 40 percent ownership position representing the minority interest of Caribbean Pacific Natural Products, Inc., is reflected in the consolidated Statements of Income 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. 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, 1999, in the Company's Form 10-K. 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. -7- 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. See Note 3 for disclosure related to this Standard. NOTE 3 - SEGMENT INFORMATION The basis for presenting segment results generally is consistent with overall Company reporting. The primary difference relates to presentation of partially-owned operations, which are presented as if owned 100% in the operating segments. The adjustment to ownership basis is included in Corporate & Other. In the third quarter of 2000, the Company qualified for the Financial Accounting Standard Board Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information" which establishes standards for reporting information about a company's operating segments. The Company has divided its operations into three reportable segments: The Quigley Corporation, whose main product is Cold-Eeze(R), a proprietary zinc gluconate glycine lozenge for the common cold; Darius International, Inc., whose business is the sale and direct marketing of a range of health and wellness products and Caribbean Pacific Natural Products, Inc., a leading developer and marketer of all-natural sun and skin care products for luxury resorts, theme parks and spas. Financial information by business segment follows:
----------------------------------------------------------------------------------------------------- Caribean As of and for The Darius Pacific the three months Quigley International Natural Corporate ended September 30, 2000 Corporation Inc. Products, Inc. and Other Total ------------------------------------------------------------------------------------------------------ ........................... Revenues Customers ................... $3,382,222 $39,489 $343,518 - $3,765,229 Inter-segment ............... 269,410 - - ($269,410) - Segment operating profit (loss) 600,347 (480,265) (77,535) (104,631) (62,084) Total Assets .................. $25,520,798 $425,598 $1,124,782 ($1,823,560) $25,247,618 ------------------------------------------------------------------------------------------------------ Caribean As of and for The Darius Pacific the nine months Quigley International Natural Corporate ended September 30, 2000 Corporation Inc. Products, Inc. and Other Total ------------------------------------------------------------------------------------------------------ ........................... Revenues Customers ................... $11,297,118 $39,489 $343,518 - $11,680,125 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
-8- 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 four occasions, 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. From the initiation of the plan, 3,994,791 shares have been repurchased at a cost of $23,899,226 or an average cost of $5.98 per share. There were no buy-backs during the first nine months of 2000. At September 30, 2000, there were 3,672,400 unexercised and vested options and warrants of the Company's stock available for exercise with an additional 75,000 options awarded which are subject to vesting requirements. NOTE 5 - INCOME TAXES Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted during various periods, resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital totaling $14,660,288 for the years ended December 31, 1999, 1998, and 1997. The tax benefit effect of option and warrant exercises during 1999 and 2000 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 $9.0 million for federal purposes, which will expire in 2019 and $15.2 million for state purposes, which will expire in 2009. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a deferred tax asset of $4,717,930 equaling the valuation allowance is being provided. The nine months period ended September 30, 2000 losses are reflected at 39% for both the increase in Deferred taxes and the Valuation Allowance. Until profits become available, the overall effective tax rate for 2000 will be 0% as compared to the previous effective tax rate of 39%. NOTE 6 - EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to Common Stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method that prescribes a theoretical buy-back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Since there is a large number of options and warrants outstanding, fluctuations in the actual market price can have a varying of results for each period presented. For the periods presented that reflect losses, no effect was given for options and warrants because the result would be anti-dilutive. A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (millions, except earnings per share amounts):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS --------- -------- ---------- -------- -------- --------- --------- -------- ----- --------- -------- ------- Basic EPS $0.1 10.6 $0.01 $0.0 11.3 $0.00 ($5.5) 10.5 ($0.52) ($2.9) 11.7 ($0.25) Dilutives: Options/Warrants - 0.1 - 1.0 - - - - --------- -------- ---------- -------- ------- ---------- --------- ------- ------ --------- -------- ------- Diluted EPS $0.1 10.7 $0.01 $0.0 12.3 $0.00 ($5.5) 10.5 ($0.52) ($2.9) 11.7 ($0.25) ========= ======== ========== ======== ======= ========== ========= ======= ====== ========= ======== =======
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 $237,000 and $191,000, respectively, for the nine-month periods ended September 30, 2000 and 1999. -9- In April 2000, the Company loaned Charles A. Phillips, an officer, director and major stockholder of the Company $250,000, at 9% interest, payable on or before December 31, 2000, which is secured by his ownership of the Company's stock. This loan has a current principal and interest balance of $56,682, and is included in prepaid expenses and other current assets at September 30, 2000. The Company is in the process of acquiring licenses in certain countries through related party entities. For the nine-month periods ended September 30, 2000 and 1999, fees amounting to $183,000 and $77,000, 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. The Company has remaining contractual commitments for advertising and other purchases amounting to approximately $1.1 million. The Company had a revolving line of credit with a commercial bank for $10 million that was to be used for general corporate purposes with interest accruing at the Prime Rate, or 225 basis points above the Eurodollar Rate, each to move with the respective base rate. This facility was collateralized by accounts receivable and inventory, and was not renewed in May 2000, its expiration date. There were no borrowings under this line during the entire term of this revolving line of credit. 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. -10- 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, 2000 were $3,765,229 and $11,680,125 as compared to $4,103,965 and $12,304,186 for the comparable 1999 periods. Indications are that previous overstocking by our customers has been considerably reduced. The first nine months also reflect the fact that the Company was not in a position to supply product to the allergy market due to the FTC's contention that the results of the Cold-Eeze(R) cold symptoms studies were inconclusive regarding allergy symptoms. Darius International, Inc., and Caribbean Pacific Natural Products, Inc., contributed revenues of $383,007 during the third quarter and year to date periods ended September 30, 2000. As a result of many zinc products exiting the marketplace during 2000, Cold-Eeze(R) now has more visibility as the original clinically proven zinc product on the market, effective in reducing the severity and duration of symptoms of the common cold. Throughout 2000 to date, the Company has attempted to counteract the efforts by the media and all other sources to discredit Cold-Eeze(R). In conjunction with the foregoing consumer misconception and the low consumer use of Cold-Eeze(R), a substantial investment in advertising initiated in 1998 continued until the end of the first quarter of 2000. This investment was necessary to establish brand awareness for Cold-Eeze(R) and also to promote new product introductions of Cold-Eeze(R) sugar free, Cold-Eeze(R) bubble gum and Bodymate(TM). The advertising program also involved substantial retail support in the product sell-through to the consumer during the first quarter of 2000. The advertising cost approximated $6,900,000 for the nine months ended September 30, 2000 as compared with approximately $8,500,000 for the comparable period in 1999, substantially contributing to the loss of ($5,461,328) for the nine months ended September 30, 2000 as compared to a net loss of ($2,940,510) for the nine months ended September 30, 1999. The loss for the nine month period ended September 30, 2000 is not tax effected for the potential benefit, which cannot be reflected until the Company returns to profitability. Therefore, consistent comparisons for the periods reflect a loss, before income tax benefit, of ($5,461,328) for the nine month period ended September 30, 2000 and a loss, before income tax benefit, of ($4,820,509) 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. Currently, Caribbean Pacific Natural Products, Inc., utilizes one independent contract manufacturer to produce their complete range of products, with Darius International products being manufactured by various independent source locations. -11- Results of Operations --------------------- Three months ended September 30, 2000 compared to three months ended September ------------------------------------------------------------------------------ 30, 1999 -------- For the three months ended September 30, 2000, the Company reported revenues of $3,765,229 and a profit of $114,401 as compared to revenue of $4,103,965 and a net income of $18,333, for the comparable period ended September 30, 1999. Revenues for the third quarter were adversely affected by the fact that the Company was not in a position to supply product to the allergy market due to the FTC's contention that the results of the Cold-Eeze(R) cold symptoms studies were inconclusive regarding allergy symptoms. As a result of the acquisition of a 60% position in Caribbean Pacific Natural Products, Inc., effective July 1, 2000 and the commencement of product shipments from Darius International, Inc., in July 2000, these two entities contributed $383,007 to revenues for the third quarter ended September 30, 2000. Cost of Sales as a percentage of net sales for the three months ended September 30, 2000 was 31.7% compared to 33.2% for the comparable period ended September 30, 1999. The cost of sales in 2000 reflects greater sales activity relating to Cold-Eeze(R) bubble gum and Cold-Eeze(R) sugar free products when compared to the comparable 1999 period. Both of these products have a higher cost of sales than the lozenge product. However, the addition of the Caribbean Pacific Natural Products, Inc. activity in the quarter, with its associated lower product costs helped to reduce the overall cost of sales for the quarter ended September 30, 2000, effectively offsetting the higher costs related to Cold-Eeze(R) bubble gum and sugar free. For the three months ended September 30, 2000, total operating expenses were $2,633,003 compared to $2,875,558 for the comparable period ended September 30, 1999. The 1999 expenses reflect the advertising expenditure associated with the post launch promotional support of Bodymate(TM). The 2000 operating costs also reflect operating costs associated with Darius International, Inc., and Caribbean Pacific Natural Products, Inc., totaling $546,918. During the three months ended September 30, 2000, the major operating expenses of delivery, salaries, brokerage commissions, promotion, advertising, and legal costs accounted for $1,479,890 (56%) 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 1999 accounted for $2,193,482 (76%) of total operating costs. Nine months ended September 30, 2000 compared to nine months ended September ------------------------------------------------------------------------------ 30,1999 ------- For the nine months ended September 30, 2000, the Company reported revenues of $11,680,125 and a loss of ($5,461,328), as compared to revenue of $12,304,186 and a net loss of ($2,940,510) for the comparable period ended September 30, 1999. The first nine months of 2000 reflect benefits resulting from indications that prior overstocking by our customers had been significantly reduced. However, offsetting this was the negative affect to the Company of not being in a position to supply product to the allergy market due to the FTC's contention that the results of the Cold-Eeze(R) cold symptom studies were inconclusive regarding allergy symptoms. As a result of the acquisition of a 60% position in Caribbean Pacific Natural Products, Inc., effective July 1, 2000 and the commencement of product shipments from Darius International, Inc., in July 2000, these two entities contributed $383,007 to revenues for the nine months ended September 30, 2000. Cost of Sales as a percentage of net sales for the nine months ended September 30, 2000 was 33.2% compared to 33.1% for the comparable period ended September 30, 1999. Higher cost of sales associated with sales of the bubble gum and sugar free versions and larger international sales during 2000 as compared to the same period of 1999, have been reduced by the presence of sales from Caribbean Pacific Natural Products, Inc., which have a considerably lower cost of sales. For the nine months ended September 30, 2000, total operating expenses were $13,772,861 compared to $13,764,501 for the comparable period ended September 30, 1999. The 2000 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 concluding part of the 1999-2000 cold season. The 2000 operating costs also reflect operating costs associated with Darius International, Inc., and Caribbean Pacific Natural Products, Inc., totaling $829,547. During the nine months ended September 30, 2000, the major operating expenses of delivery, salaries, brokerage commissions, promotion, advertising, and legal costs accounted for $10,541,335 (77%) of total operating costs. All remaining costs for this period were of a semi-fixed nature in that they do not strictly follow sales trends. These same expense categories for the comparable period in 1999 accounted for $11,631,980 (85%) of total operating costs. The advertising cost approximates $6,900,000 for the nine months ended September 30, 2000 as compared with $8,500,000 for the comparable -12- period in 1999 and resulted in a loss to the Company of ($5,461,328) for the nine months ended September 30, 2000 as compared to a net loss of ($2,940,510) for the nine months ended September 30, 1999. Liquidity and Capital Resources ------------------------------- The total assets of the Company at September 30, 2000 and December 31, 1999 were $25,247,618 and $33,271,056, respectively. Working capital decreased to $18,135,254 from $23,620,669 during the period. The significant movement within total assets represents the reduction in accounts receivable of $2,807,313, cash and cash equivalents decreasing by $3,883,343, prepaid expenses and other current assets decreasing by $130,868, inventory increasing by $855,601 and prepaid taxes decreased by approximately $2,500,000 as a result of a tax refund. From a working capital perspective, accounts payable has increased by $94,349 and accrued royalties and sales commissions have decreased over the period by $557,909 while the advertising accrual decreased by $3,004,196. Total cash balances at September 30, 2000 were $10,107,132, as compared to $13,990,475 at December 31, 1999. The Company believes that its increased marketing efforts and increased national publicity concerning the Cold-Eeze(R) products, the Company's increased 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 Cold-Eeze(R) and Bodymate(TM) products and those of Darius International, Inc., and Caribbean Pacific Natural Products, Inc., are manufactured for the Company by an outside source, capital expenditures during the remainder of 2000 are not anticipated to be material. Item 3: Quantitative and Qualitative Disclosures about Market Risk Not Applicable Part II. Other Information -------------------------- Item 1. Legal Proceedings TESAURO AND ELEY ---------------- In September, 2000, the Company was sued by two individuals (Jason Tesauro and Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of "similarly situated individuals", in the Court of Common Pleas of Philadelphia County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased certain Cold-Eeze products between August, 1996, and November, 1999, based upon cable television, radio and internet advertisements which allegedly misrepresented the qualities and benefits of the Company's products. The Complaint requests an unspecified amount of damages for violations of Pennsylvania's consumer protection law, breach of warranty and unjust enrichment, as well as a judicial determination that the action be maintained as a class action. In October, 2000, the Company filed Preliminary Objections to the Complaint seeking dismissal of the action. The Company is vigorously defending this lawsuit; although the Company believes that the action lacks merit and is not suitable for class action certification. The company believes that the plaintiffs' claims are without merit but certain pre-trial motions and discovery remains incomplete and no prediction can be made as to the outcome of this case. -13- GOLDBLUM AND WAYNE ------------------ As previously reported in the Form 10-Q filed for the quarter ending September 30, 1999, a Special Meeting of the Quigley stockholders was held on October 15, 1999, at which a majority of the shares entitled to vote adopted a Corrective Action Proposal (initially reported in the Company's Form 10-Q for the quarter ending June 30, 1999) to ratify actions previously taken by the Company relating to the 1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse Splits") and the 1997 1 for 2 forward split (the "Forward Split"). As further noted in the Form 10-Q filed for the period ending June 30, 1999 and the Proxy Statement for the October 15, 1999 Special Meeting, the Company authorized the filing of the declaratory judgment action in Nevada to determine the effectiveness of the Corrective Action. In August 2000, the District Court of Clark County, Nevada, held that it had jurisdiction to decide the Company's declaratory judgment action filed in April, 2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in which the Company seeks a judicial declaration that, based on stockholder approval of the Corrective Action Proposal, the Reverse Splits and Forward Split satisfy and/or comply with Nevada law and that the capitalization of Quigley evidenced by the issued and outstanding shares of common stock and common stock warrants is as reflected on Quigley's stock transfer ledger on September 10, 1999, the record date of the Special Meeting. This action is in the early stages of litigation, and no prediction can be made as to the outcome of this case. As previously reported, an underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of Montgomery County, Pennsylvania, alleged that the plaintiffs became owners of 500,000 shares each of the Company's common stock in or about 1990 and requested damages in excess of $100,000 for breach of contract and conversion. The Company is vigorously defending this lawsuit and has denied any liability to the plaintiffs. The Company also believes that the plaintiffs' claims are barred by the applicable statutes of limitations, and that the plaintiffs' claims are, in any event, limited to claims for approximately 36,000 shares. The Company continues to believe that the plaintiffs' claims are without merit but certain pre-trial discovery remains incomplete and no prediction can be made as to the outcome of this case. 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 None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended September 30, 2000. -14- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE QUIGLEY CORPORATION By: /s/ George J. Longo ---------------------- George J. Longo Vice President, Chief Financial Officer Date: November 13, 2000 -15-