THE QUIGLEY CORPORATION
KELLS BUILDING
621 SHADY RETREAT ROAD
DOYLESTOWN, PENNSYLVANIA 18901
TEL. 215-345-0919
FAX 215-345-5920
October 17, 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:
Pursuant to a discussion with Ms. Amy C. Bruckner, Staff Accountant, Division of
Corporation Finance, with the Securities and Exchange Commission (the
"Commission") on October 11, 2005, we are providing additional commentary to
supplement and not replace our response to the letter of comment dated August 4,
2005 from the Commission (the "Commission Letter") filed on August 29, 2005 with
the Commission. We have reviewed the additional commentary with our auditors and
the following reflect our further 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 Commission on March
31, 2005. The additional commentary to supplement our previous 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 (ADDITIONAL COMMENTARY)
Sales returns, 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 applied or matched to the current sales for
the period presented and are based on historical experience, which is tested and
tracked at the specific customer level, along with the monitoring of current
occurrences and developments by customer and market conditions that could affect
the expected sales returns, cash discounts and cooperative advertising costs
within the cold remedy segment for any period presented.
We have a specific returns policy, for all periods presented, that states the
only acceptable returns are for damaged or improperly manufactured merchandise,
or if we discontinue a product. All returns require a "Returns Authorization" to
be accepted at our warehouse locations or destroyed at a reclamation center,
with verified proof of product destroyed.
Cash discount terms have not changed for the periods presented and are taken by
virtually all customers.
Cooperative advertising arrangements are specific agreements with each customer,
by specific year, and as such, provisions made to such reserves are made on the
current year's sales relative to the specific terms with each specific customer
for the fiscal period presented.
Specific events, such as the discontinuation of a product, would be added to the
normal provisions for any reserve account for the fiscal periods presented. As
the cold remedy products do not have an expiration date, and following the
aforementioned methodologies provides assurances that such reserves are
consistent and fairly presented.
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 (ADDITIONAL COMMENTARY)
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 APPLICABLE AS PROVISIONS TO SUCH
ACCOUNT PRINCIPALLY RELATES TO THE CURRENT YEAR.
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 APPLICABLE AS PROVISIONS TO SUCH
ACCOUNT PRINCIPALLY RELATES TO THE CURRENT YEAR.
2
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 APPLICABLE AS PROVISIONS TO SUCH
ACCOUNT PRINCIPALLY RELATES TO THE CURRENT YEAR.
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 (ADDITIONAL COMMENTARY)
COLD REMEDY SEGMENT
Cost of Sales:
In accordance with contact terms, royalties payable to the patent holder of the
Cold-Eeze formulation and commissions payable to the corporation founders and
developers of the final saleable Cold-Eeze product are costs directly related
for the right to manufacture, market and develop the Cold-Eeze product.
According to GAAP and as presented in the financial statements, such costs are
classified as cost of sales since these costs are part of the "CURRENT COST OF
PURCHASING THE GOODS CONCERNED OR THE CURRENT COST OF THE RESOURCES REQUIRED TO
PRODUCE THE GOODS CONCERNED."
Operating expenses, selling, general and administrative:
Agreements with Acosta, a major national sales brokerage firm, are for this firm
to sell and market the Cold-Eeze product to our customers, among which include
the largest food, drug and mass merchandisers of the country. In this capacity,
Acosta supplements our sales management team and as such are presented in the
financial statements as selling expenses, as the nature of these expenses relate
to the direct selling of the product and not the acquisition of the goods
concerned that are ultimately sold.
HEALTH AND WELLNESS SEGMENT
Cost of Sales:
Agreements with Independent Representatives ("IR's") and in accordance with our
policy and procedures for IR's, among other factors, are related to expand the
cycle of additional IR's, which can be correlated as a direct cost relative to
the "CURRENT COST OF PURCHASING THE GOODS CONCERNED OR THE CURRENT COST OF THE
RESOURCES REQUIRED TO PRODUCE THE GOODS CONCERNED." Accordingly, commissions
incurred are presented in the financial statements as cost of sales for the
periods presented.
In reviewing other publicly owned "multilevel marketing companies" ("MLM's"),
such as Mannetech, Incorporated (Nasdaq "MTEX") and Nature's Sunshine Products,
Inc. (Nasdaq "NATR"), such MLM's present such costs as a separate line after
cost of sales, as either part of gross profit, or stated separately, but these
costs are not part of operating expenses. However, such MLM's are in the direct
marketing business only and in order to be comparable with other MLM companies,
separately present IR's commissions.
3
As the Company is principally a pharmaceutical health care company, even though
the direct marketing segment currently comprises approximately 50% of the
revenues, financial presentations of the Company are more meaningful for the
investment community to be presented in a methodology that are comparable to
other pharmaceutical health care companies, whose stock price is predicated on
the future discounted cash flows related to their mission statement of being in
a pharmaceutical business.
Operating expenses, selling, general and administrative:
The Company includes payments in accordance with agreements with the former
owner of its acquired proprietary products, for its continued exclusivity,
consulting, marketing presentations, confidentiality and non-compete agreements
with such expense being expensed as administration expense in the financial
statements for the periods presented.
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 (ADDITIONAL COMMENTARY)
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.
As agreed, the Consolidated Statement of Cash Flows should have reflected the
following for 2004 and will be adjusted with the next annual filing with the
Commission:
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS:
Bad debts provision 25,289
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 1,460,615
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