THE QUIGLEY CORPORATION
KELLS BUILDING
621 SHADY RETREAT ROAD
DOYLESTOWN, PENNSYLVANIA 18901
TEL. 215-345-0919
FAX 215-345-5920
August 29, 2005
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549-601
Attention: Jim B. Rosenberg
Re: The Quigley Corporation ("TQC")
Form 10-K for the fiscal year ended December 31, 2004
File No. 000-21617
-----------------------------------------------------
Ladies and Gentlemen:
We acknowledge receipt of the letter of comment dated August 4, 2005 from the
Securities and Exchange Commission (the "Commission Letter"). We have reviewed
the letter with our auditors and the following reflect our responses to the
Commission Letter. The section and page number references below refer to our
annual report on Form 10-K for the fiscal year ended December 31, 2004 filed
with the Securities and Exchange Commission on March 31, 2005. The responses are
numbered to coincide with the numbering of the comments in the Commission
Letter.
CRITICAL ACCOUNTING POLICIES, PAGE 18
1. WE ACKNOWLEDGE YOUR REVENUE RECOGNITION POLICY AS NOTED HEREIN AND WITHIN
YOUR "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" IN THE ACCOMPANYING NOTES
TO YOUR CONSOLIDATED FINANCIAL STATEMENTS. WE BELIEVE THAT YOUR DISCLOSURE
RELATED TO ESTIMATES OF ITEMS THAT REDUCE YOUR GROSS REVENUE, SUCH AS SALES
RETURNS AND ALLOWANCES, COULD BE DEFINED AND IMPROVED. PLEASE PROVIDE US
WITH THE FOLLOWING INFORMATION IN A DISCLOSURE-TYPE FORMAT:
a.) THE TYPE AND AMOUNT OF EACH ACCRUAL AT THE BALANCE SHEET DATES AND THE
EFFECT THAT COULD RESULT FROM USING OTHER REASONABLY LIKELY ASSUMPTION
THAN THOSE UPON WHICH YOU CURRENTLY RELY. FOR EXAMPLE, PLEASE PROVIDE
A RANGE OF REASONABLY LIKELY AMOUNTS OR ANOTHER TYPE OF SENSITIVITY
ANALYSIS.
TQC RESPONSE
Sales returns and allowances, cash discounts and reductions for cooperative
advertising are the types of accruals provided for in the period that the
related sales are recorded. Provisions for these reserves are based on
historical experience and the monitoring of current occurrences and developments
that could affect the expected sales returns or other adjustments within the
industry that the products are sold. Specific events, such as the
discontinuation of a product, would be added to the normal provisions for any
fiscal periods presented.
Using the only other reasonable assumption for a sensitivity analysis, such as
the use of average industry standards for such adjustments, instead of the
foregoing method to estimate sales returns and allowances and cash discounts
(there is no variation for cash discounts in the sensitivity analysis), but
excluding reductions for cooperative advertising, related to the sales would
increase net sales by approximately $432,000, $241,000 and $572,000 for the
fiscal years ended December 31, 2004, 2003 and 2002, respectively, and,
accordingly, reduce related balance sheet accruals at December 31, 2004 and
2003, respectively. A 1% increase or decrease variation for cooperative
advertising in cold remedy products would thereby change net sales approximately
$279,000, $241,000 and $175,000 for the fiscal years ended December 31, 2004,
2003 and 2002, respectively, and, accordingly, change related balance sheet
accruals at December 31, 2004 and 2003, respectively.
The Cold Remedy Segment includes a provision to reduce accounts receivable for
sales returns and allowances and cash discounts or is included in current
liabilities for cooperative advertising at December 31, 2004 and 2003. These
provisions were for sales returns and allowances, including the specific
provision of $626,000 related to the discontinuation of the Cold-Eeze(R) Cold
Remedy Nasal Spray product in 2004, of $1,048,000 and $343,000, respectively;
cash discounts of $92,000 and $115,000, respectively; and cooperative
advertising of $743,000 and $1,295,000, respectively.
The Health and Wellness Segment includes a provision to reduce accounts
receivable at December 31, 2004 and 2003 for returns and adjustments of $61,000
and $61,000, respectively.
b.) THE FACTORS THAT YOU CONSIDER IN ESTIMATING EACH ACCRUAL, SUCH AS
HISTORICAL PRODUCT RETURNS, LEVELS OF INVENTORY IN YOUR DISTRIBUTION
CHANNELS; ESTIMATED REMAINING PRODUCT SHELF LIVES; PRICE CHANGES FROM
COMPETITORS AND INTRODUCTIONS OF NEW PRODUCTS.
TQC RESPONSE
The cold remedy product, Cold-Eeze, which is offered in a lozenge, gum and
tablet form, has been clinically proven in two double-blind studies to reduce
the severity and duration of common cold symptoms. Accordingly, Cold-Eeze offers
a significant advantage over many of its competitors in the over-the-counter
cold-remedy market. Therefore, additional factors considered in estimating each
accrual for this product are as stated in TQC RESPONSE to 1. (a) AND (c) and
since Cold-Eeze is a "one-of-a-kind" unique item with very limited
inconsequential competitors whereby competitive price reductions, promotions,
new items and remaining shelf life, as the product has no expiration date, are
not factors that TQC needs to consider when estimating sales allowance
provisions. However, TQC does consider inventory levels at major customers and
third-party consumption data, such as Information Resources, Inc. ("IRI") and/or
Nielsen when estimating sales allowance provisions.
The health and wellness product line factors considered in estimating each
accrual for this product are as stated in TQC RESPONSE to 1. (a) AND (c) and the
particular methodology of marketing, which is direct selling of proprietary
products through independent representatives, adds to the unique nature of such
products. Currently, pursuant to this methodology, returns are generally
permitted within sixty days of the sale, and other requirements of the
agreements with the independent representatives, which leads to provisions that
represent actual returns and adjustments that are not subject to variations that
could arise with a greater time for sales returns or that are common to other
products or industries.
c.) TO THE EXTENT THAT THE INFORMATION YOU CONSIDER IN B. IS QUANTIFIABLE,
DISCUSS BOTH QUANTITATIVE AND QUALITATIVE FACTORS AND THE EXTENT OF
AVAILABILITY AND YOUR USE OF INFORMATION FROM EXTERNAL SOURCES; FOR
EXAMPLE, END-CUSTOMER DEMAND DATA COMPARED TO INVENTORY LEVELS. IN
DISCUSSING YOUR ESTIMATE OF PRODUCT RETURNS, PROVIDE ADDITIONAL
INFORMATION, PREFERABLY BY PRODUCT AND IN TABULAR FORMAT, REGARDING
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THE TOTAL AMOUNT OF PRODUCT IN SALES DOLLARS THAT COULD POTENTIALLY BE
RETURNED AS THE MOST RECENT BALANCE SHEET DATE, DISAGGREGATED BY
EXPIRATION PERIOD.
TQC RESPONSE
The qualitative and quantitative factors considered for any product returns and
adjustments are indicated in TQC RESPONSE to 1.a) AND b).
A tabular format delineation by specific product for the Cold Remedy Segment is
not provided since Cold-Eeze, which is sold in a lozenge, gum and tablet form is
only one product and represents in excess of 99% of products categorized in this
segment. A tabular format delineation by specific product for the Health and
Wellness Segment is not provided due to the nature of the proprietary products,
the limited time for returns and requirements as stated in the agreements with
the independent representative of the Health and Wellness Segment along with the
inability to delineate the various product returns and or adjustments as returns
or adjustments are not quantified or recorded by specific product category.
d.) IF APPLICABLE, DISCUSS ANY SHIPMENTS MADE AS A RESULT OF INCENTIVES
AND/OR IN EXCESS OF YOUR CUSTOMERS' INVENTORY LEVELS IN THE ORDINARY
COURSE OF BUSINESS. PLEASE ALSO DISCUSS YOUR REVENUE RECOGNITION
POLICY FOR SUCH SHIPMENTS.
TQC RESPONSE
In both the Cold Remedy and Health and Wellness Segments, shipments are not made
as a result of incentives in the ordinary course of business. Occasionally, a
new customer in the Cold Remedy Segment will be given an extended term of
payment to 60 days from 31 days for only the initial stocking order.
Additionally, as the Cold Remedy Segment is seasonal with the majority of
revenues occurring in the fourth quarter, customers will start to build
inventories, based on their prior experiences, modified by published data on the
timing and quantities of expected incidence of colds by specific locations,
which is also reviewed as part of the normal procedures in order fulfillment by
the Company. As the foregoing is not consequential or material, it is not
specifically considered for sales returns and allowances provisions.
e.) A ROLL-FORWARD OF THE LIABILITY FOR EACH ESTIMATE FOR THE PERIODS
PRESENTED, SHOWING THE FOLLOWING:
o BEGINNING BALANCE;
o CURRENT PROVISION RELATED TO SALES MADE IN CURRENT PERIOD;
o CURRENT PROVISION RELATED TO SALES MADE IN PRIOR PERIODS;
o ACTUAL RETURNS OR CREDITS IN CURRENT PERIOD RELATED TO SALES
MADE IN CURRENT PERIOD;
o ACTUAL RETURNS OR CREDITS IN CURRENT PERIOD RELATED TO SALES
MADE IN PRIOR PERIODS; AND
o ENDING BALANCE.
TQC RESPONSE
ACCOUNT - SALES RETURNS & ALLOWANCES 2004 2003
- -------------------------------------------------------------------------------- ------------ ----------
Beginning balance $403,850 $426,557
Current provision related to sales made in current period* 1,414,796 937,738
Current provision related to discontinuation of Cold-Eeze nasal spray 625,756
Current provision related to sales made in prior periods*
Actual returns-credits in current period related to sales made in current period* (1,335,231) (960,445)
Actual returns-credits in current period related to sales made in prior period*
---------- --------
Ending balance $1,109,171 $403,850
========== ========
* AMOUNTS FOR EACH LINE CATEGORY ARE NOT SPECIFICALLY AVAILABLE
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ACCOUNT - CASH DISCOUNTS 2004 2003
- -------------------------------------------------------------------------------- ------------ ----------
Beginning balance $114,580 $96,961
Current provision related to sales made in current period* 541,290 471,781
Current provision related to sales made in prior periods*
Actual returns-credits in current period related to sales made in current period* (563,413) (454,162)
Actual returns-credits in current period related to sales made in prior period*
---------- --------
Ending balance $92,457 $114,580
========== ========
* AMOUNTS FOR EACH LINE CATEGORY ARE NOT SPECIFICALLY AVAILABLE
ACCOUNT - COOPERATIVE ADVERTISING 2004 2003
- -------------------------------------------------------------------------------- ------------ ----------
Beginning balance $1,294,927 $754,813
Current provision related to sales made in current period* 2,203,179 2,642,128
Current provision related to sales made in prior periods*
Actual returns-credits in current period related to sales made in current period* (2,754,724) (2,102,014)
Actual returns-credits in current period related to sales made in prior period*
---------- --------
Ending balance $743,382 $1,294,927
========== ========
* AMOUNTS FOR EACH LINE CATEGORY ARE NOT SPECIFICALLY AVAILABLE
f.) FINALLY, INCLUDE INFORMATION REGARDING THE AMOUNT OF AND REASON FOR
FLUCTUATIONS WITH RESPECT TO EACH ITEM/ESTIMATE THAT REDUCED GROSS
REVENUE. PLEASE ADDRESS THE EFFECT THAT CHANGES IN YOUR ESTIMATES WITH
RESPECT TO EACH ITEM HAD ON YOUR REVENUES AND OPERATIONS FOR THE
APPLICABLE PERIODS.
TQC RESPONSE
There have been no significant fluctuations to estimates when comparing such
items as a relative percentage of that years sales with respect to each item
that reduced gross revenues in the past except for the results for the fiscal
year ended December 31, 2004, which include a returns provision of approximately
$626,000 in the event of future product returns following the discontinuation of
the Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
2. WE NOTE THAT YOUR ACCOUNTING POLICY WITH RESPECT TO COMMISSION EXPENSE PAID
TO DISTRIBUTORS/BROKERS OF YOUR PRODUCTS VARIES DEPENDING ON THE NATURE OF
THE UNDERLYING AGREEMENT; THAT IS, YOU CLASSIFY CERTAIN COMMISSIONS PAID AS
A COST OF SALES VERSUS ADMINISTRATIVE EXPENSE. PLEASE PROVIDE US, IN A
DISCLOSURE-TYPE FORMAT, MORE ABOUT THE NATURE OF THE UNDERLYING AGREEMENT
THAT DETERMINES YOUR COMMISSION CLASSIFICATION. IN ADDITION, PLEASE TELL US
WHY YOU BELIEVE THAT YOUR CLASSIFICATIONS ARE APPROPRIATE UNDER U.S. GAAP,
REFERENCING THE AUTHORITATIVE LITERATURE THAT SUPPORTS YOUR TREATMENT.
TQC RESPONSE
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The following discussion and citations of U.S. GAAP use correlations to relate
meaningful costs that would be comparative to other industries and that are
relative to sales or relative to other operating expenses for the two operating
segments of TQC that use different methodologies for the marketing of its
products. FAS89, paragraph 17 states "The current cost of inventory owned by an
enterprise is the CURRENT COST OF PURCHASING THE GOODS CONCERNED OR THE CURRENT
COST OF THE RESOURCES REQUIRED TO PRODUCE THE GOODS CONCERNED (including an
allowance for the current overhead costs according to the allocation bases used
under generally accepted accounting principles), whichever would be applicable
in the circumstance of the enterprise.
ARB43, paragraph 12-4, statement 3 states "the primary basis of accounting for
inventories is cost, which has been identified generally as the price paid or
consideration given to acquire an asset. As applied to inventories, COST MEANS
IN PRINCIPLE THE SUM OF ALL APPLICABLE EXPENDITURES AND CHARGES DIRECTLY OR
INDIRECTLY incurred in bringing an article to its existing condition and
location."
In following these principles, including Regulation S-X, Regulation Section
210.5-03(b) 2, the Company includes royalties and founders' commissions
incurred, which are for the right to sell the product in the Cold Remedy
segment, and commissions of independent representatives incurred, which
primarily relate to the sales to, and/or purchases by, other independent
representatives and the product purchases of new independent representatives
related to expand the cycle for these products in the Health and Wellness
segment as cost of sales as the nature of these agreements or specific industry
are that these are current direct applicable costs of the resources required to
produce or acquire the goods concerned that are ultimately sold and are in order
to arrive at meaningful financial statements when comparing TQC with other
companies in the same industries.
CON6, paragraphs 80 and 81 indicate that the CHARACTERISTICS OF EXPENSES MAY BE
OF VARIOUS KINDS, such as, "units of product delivered or produced, employees
services used," and "expenses themselves are in many forms and are called by
various names-for example, cost of goods sold, cost of services provided,
depreciation, interest, rent, and salaries and wages-depending on the kinds of
operations involved and the way expenses are recognized."
In following this principle, including Regulation S-X, Regulation Section
210.5-03(b) 2, the Company includes payments for the exclusive sale of the
product formulations, consulting, confidentiality and non-compete agreements
with such expense being expensed as incurred for the Health and Wellness segment
in administration expense. Also, following these principles, sales commission
expense related to independent brokers associated with the cold remedy and
contract manufacturing segments are included in administrative selling expenses
as the nature of these expenses relate to the direct selling efforts of the
sales brokerage firms that market these products to retailers and are not for
the acquisition of the goods concerned that are ultimately sold and are
different from the other aforementioned commissions.
3. WE NOTE THAT YOU ACCOUNT FOR COOPERATIVE ADVERTISING EXPENSE AS A DEDUCTION
FROM SALES, AS OPPOSED TO "BONUS PRODUCT," WHICH YOU ACCOUNT FOR AS COST OF
SALES. PLEASE TELL US WHY YOU BELIEVE YOUR ACCOUNTING TREATMENT FOR EACH
FORM OF ADVERTISING COMPLIES WITH U.S. GAAP INCLUDING EITF 01-9,
PARTICULARLY PARAGRAPH 9.
TQC RESPONSE
EITF 01-9, particularly paragraphs 9 and 11, presumes that cash consideration
given by a vendor to a customer to be a reduction of the selling prices of the
vendors products. The Cold Remedy Segment's customers are offered an allowance
for such items as a percentage on all direct purchases during the fiscal
calendar year. The customers then deducts from their payments to the Company
mutually agreed upon charges for advertisements, displays, temporary price
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reductions, slotting fees, and other merchandising activities dedicated to
enhance the sale of products. The Company records such costs as a reduction to
gross sales predicated on historical spending for customer merchandising support
since the Company is unable to determine the identifiable benefit received or to
be received or could not have entered into an exchange transaction with any
other party other than a purchaser of its products in exchange for the
consideration.
Paragraph 10 of EITF 01-9 requires cooperative advertising in the form of free
product "BOGO" or Buy-One-Get-One" or bonus product program to be treated as an
expense, particularly as cost of sales. The Company records such costs as cost
of sales, predicated on historical experience for this particular customer
merchandising support.
Generally, the Health and Wellness and Contract Manufacturing segments do not
offer any cooperative advertising incentives.
CONSOLIDATED FINANCIAL STATEMENTS, PAGE 23
CONSOLIDATED STATEMENTS OF CASH FLOWS, PAGE F-4
4. PLEASE PROVIDE US WITH ADDITIONAL INFORMATION, IN A DISCLOSURE-TYPE FORMAT,
REGARDING THE ADJUSTMENT TO YOUR NET INCOME FROM OPERATIONS OF $497,048
RELATED TO YOUR ALLOWANCE FOR DOUBTFUL ACCOUNTS EXPENSE FOR THE YEAR ENDED
DECEMBER 31, 2004. TELL US THE AMOUNT OF YOUR BAD DEBT EXPENSE IN 2004 AND
SEPARATELY THE AMOUNT OF ANY REDUCTION IN YOUR ALLOWANCE THAT YOU RECORDED
TO THE STATEMENT OF OPERATIONS WITH FULL EXPLANATION. PROVIDE US, IN
DISCLOSURE-TYPE FORMAT, THE EFFECT THAT THESE AMOUNTS HAD ON YOUR
OPERATIONS IN 2004. ALSO, PROVIDE US SCHEDULE II AS PRESCRIBED BY RULE 5-04
OF REGULATION S-X AND TELL US WHY YOU HAVE NOT INCLUDED THIS SCHEDULE IN
YOUR FILING.
TQC RESPONSE
The adjustment to net income from operations in the consolidated statements of
cash flows of $497,048 reflects the net change in the allowance for doubtful
accounts from December 31, 2004 of $311,764 as compared to December 31, 2003 of
$808,812. This net change for 2004 includes a current provision of $25,000, the
actual bad debt expense, which flowed through the statement of operations in
2004 and a reduction for the actual write-offs during 2004 totaling $522,000.
In accordance Regulation S-X, Regulation Sections 210.4-02 and 210.12-09,
footnote 1, schedule II is permitted to be excluded from the filing since such
amounts are not individually significant, immaterial or are stated in other
disclosures within the filing. These additional disclosures are contained in the
balance sheet for allowance for doubtful accounts, page F-1, critical accounting
policies, page 18, for significant returns and allowances for the
discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in September
2004 and, notes to financial statements, page F-19 for income tax valuation
allowances.
SCHEDULE II
ACCOUNT - ALLOWANCE FOR DOUBTFUL ACCOUNTS 2004 2003
- ------------------------------------------------- ------------ -----------
Balance beginning of period $808,812 $737,782
Charged to costs and expense 25,289 71,030
Charged to other accounts
Deductions (522,337)
-------- --------
Balance end of period $311,764 $808,812
======== ========
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ACCOUNT - SALES RETURNS AND ALLOWANCES 2004 2003
- --------------------------------------------------------------------------- -------------- --------------
Balance beginning of period $403,850 $426,557
Charged to costs and expense
Charged to other accounts - (reduction of sales) includes $625,756 related 2,040,552 937,738
to discontinuation of Cold-Eeze nasal spray in 2004
Deductions (1,335,231) (960,445)
---------- --------
Ending balance $1,109,171 $403,850
========== ========
ACCOUNT - DEFERRED TAX VALUATION ALLOWANCE 2004 2003
- --------------------------------------------------------------------------- -------------- --------------
Balance beginning of period $6,027,480 $5,180,098
Charged to costs and expense (480,720) 847,382
Charged to other accounts
Deductions
---------- --------
Ending balance $5,546,760 $6,027,480
========== ========
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS, PAGE F-5
NOTE2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE F-7
5. WE NOTE THAT YOU RECORD EXPENSE RELATED TO OPTIONS GRANTED TO NON-EMPLOYEES
BASED ON EITHER "THE FAIR VALUES AGREED UPON WITH THE GRANTEES" OR FAIR
VALUE AS DETERMINED BY THE BLACK-SCHOLES PRICING MODEL. PLEASE TELL US HOW
YOUR POLICY CORRELATES TO THE ACCOUNTING TREATMENT PRESCRIBED BY SFAS NO.
123, PARTICULARLY PARAGRAPHS 8 AND 9.
TQC RESPONSE
SFAS No. 123, particularly paragraphs 8 and 9, allow for "the fair value of
goods or services received from suppliers other than employees frequently is
reliably measurable and therefore indicates fair value of the equity instruments
issued."
The statement in NOTE2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PAGE F-7
"Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants" should not
have included the phrase, "fair values agreed upon with the grantees or" as
costs for options (warrants) issued in 2002 and 2003 to non-employees were
determined by the Black-Scholes pricing model as the fair value for the services
to be provided could not be reasonably ascertained by other methods as specified
in SFAS No. 123, which was due to the circumstances relating to the performance
of services for the specific grants.
IN CONNECTION WITH RESPONDING TO OUR COMMENTS, PLEASE PROVIDE, IN YOUR LETTER, A
STATEMENT FROM THE COMPANY ACKNOWLEDGING THAT:
o THE COMPANY IS RESPONSIBLE FOR THE ADEQUACY AND ACCURACY OF THE
DISCLOSURE IN THE FILING:
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o STAFF COMMENTS OR CHANGES TO DISCLOSURES IN RESPONSE TO STAFF COMMENTS
DO NOT FORECLOSE THE COMMISSION FROM TAKING ANY ACTION WITH RESPECT TO
THE FILING; AND
o THE COMPANY MAY NOT ASSERT STAFF COMMENTS AS A DEFENSE IN ANY
PROCEEDING INITIATED BY THE COMMISSION OR ANY PERSON UNDER THE FEDERAL
SECURITIES LAWS OF THE UNITED STATES.
TQC RESPONSE
As stated in the Responsibility for Financial Statements on page F-24, "the
management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances."
Additionally, the Company acknowledges that staff comments or changes to
disclosures in response to staff comments do not foreclose the Commission from
taking any action with respect to the filing and the Company will not assert
staff comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
Sincerely,
/s/ George J. Longo
- -------------------------------------------
George J. Longo
Vice President and Chief Financial Officer
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