THE QUIGLEY CORPORATION
KELLS BUILDING
621 SHADY RETREAT ROAD
DOYLESTOWN, PENNSYLVANIA 18901
TEL. 215-345-0919
FAX 215-345-5920
November 7, 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 discussions with Ms. Amy C. Bruckner, Staff Accountant, Division of
Corporation Finance, with the Securities and Exchange Commission (the
"Commission") on October 11 and 25, 2005, we are providing ADDITIONAL COMMENTARY
TO SUPPLEMENT, WHICH SHOULD BE CONSIDERED AS PART OF AN ENTIRE RESPONSE, AND NOT
REPLACE OUR PREVIOUS RESPONSES to the letter of comment dated August 4, 2005
from the Commission (the "Commission Letter") filed on August 29, 2005 and
additional commentary filed on October 17, 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 NO. 2)
The Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative advertising costs, each segment applies a uniform
and consistent method for making certain assumptions for estimating these
provisions that are applicable to that specific segment. Traditionally, these
provisions are not material to reported revenues in the Health and Wellness and
Contract Manufacturing segments and the Ethical Pharmaceutical segment does not
have any revenues.
Provisions to these reserves within the cold remedy segment include the use of
such estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on customer tracking and an overall
historical experience to obtain an applicable effective rate. Estimates for
sales returns are tracked at the specific customer level and are tested on an
annual historical basis as is the estimate for cooperative advertising costs.
Cash discounts follow the terms of sales and are taken by virtually all
customers. Additionally, the monitoring of current occurrences, developments by
customer, market conditions and any other occurrences that could affect the
expected provisions for any future returns or allowances, cash discounts and
cooperative advertising costs relative to net sales for the period presented are
also performed.
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.
A one percent deviation for these consolidated reserve provisions for the fiscal
years presented December 31, 2004, 2003 and 2002 would affect net sales by
approximately $481,000, $455,000 and $331,000, respectively for sales returns
and $275,000, $241,000 and $175,000, respectively for cooperative advertising
costs.
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 NO. 2)
As currently and previously stated in 1.a through 1.d, the roll-forward of the
liability for each reserve account includes adequate provisions based on
specific customer tracking and an overall historical experience to obtain an
applicable effective rate. Management believes there are no material unaccrued
charges in the current year period related to sales in a prior period.
ACCOUNT - SALES RETURNS & ALLOWANCES 2004 2003
- ----------------------------------------------------------------------------------- ---------------- --------------
Beginning balance $403,850 $426,557
Provision made for future charges relative to sales for each period presented 1,414,796 937,738
Current provision related to discontinuation of Cold-Eeze nasal spray 625,756 -
Actual returns & allowances recorded in the current period presented (1,335,231) (960,445)
---------------- --------------
Ending balance $1,109,171 $403,850
================ ==============
ACCOUNT - COOPERATIVE ADVERTISING 2004 2003
- ----------------------------------------------------------------------------------- ---------------- --------------
Beginning balance $1,294,927 $754,813
Provision made for future charges relative to sales for each period presented 2,203,179 2,642,128
Actual cooperative costs accepted in the current period presented (2,754,724) (2,102,014)
---------------- --------------
Ending balance $743,382 $1,294,927
================ ==============
2
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 NO. 2)
As previously stated, the Company is organized into four different although
related business segments, Cold-Remedy, Health and Wellness, Contract
Manufacturing and Ethical Pharmaceutical, and as such, a uniform and consistent
method of classifying expenses is utilized that are applicable to that specific
segment, which are then consolidated as one entity.
COLD REMEDY SEGMENT
Cost of Sales:
In accordance with contract terms, which require payments to be calculated based
upon net sales collected to the patent holder of the Cold-Eeze formulation and
payments to the corporation founders and developers of the final saleable
Cold-Eeze product are by their nature 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 incurred in order to be able to PREPARE AND
MANUFACTURE the Cold-Eeze product, since without such rights, no Cold-Eeze
product could ever be made or available for sale.
Operating expenses:
Agreements with Acosta, a major national sales brokerage firm, are for this firm
to sell the manufactured Cold-Eeze product to our customers, which require
payments to be calculated based upon net sales collected. 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 preparation or manufacture of
the Cold-Eeze product.
HEALTH AND WELLNESS SEGMENT
Cost of Sales:
Agreements with Independent Distributor Representatives ("IR's") require
payments to them to be calculated based upon net sales collected and in
accordance with our policy and procedures for IR's, among other factors, and
such payments are related to the primary function of the IR's that includes, but
is not limited to, the expansion cycle of additional IR's, which is correlated
to be a direct cost relative to the "RESOURCES REQUIRED TO PRODUCE THE GOODS
CONCERNED." Additionally, by their nature, these costs are for maintaining the
distribution and delivery channel for this segment's products. Accordingly, and
in compliance with GAAP, requires such distribution payments incurred to be
presented in the financial statements as cost of sales for the periods
presented.
Operating expenses:
The Company includes payments in accordance with agreements with the former
owner of its acquired proprietary products, be calculated based upon net sales
3
collected. These agreements provide for exclusivity, consulting, marketing
presentations, confidentiality and non-compete arrangements with such payments
being classified as administration expense in the financial statements for the
periods presented as these costs by their nature are relative to the overall
administrative operations of this segment.
In consideration of the foregoing discussion, the disclosure for "Critical
Accounting Policies" as presented on page 18 that was included in our annual
report on Form 10-K for the fiscal year ended December 31, 2004 filed with the
Commission on March 31, 2005 can be expanded with the next annual filing with
the Commission to reflect disclosures as follows:
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. As previously described, the Company is
engaged in the development, manufacturing, and marketing of health and
homeopathic products that are being offered to the general public and is also
involved in the research and development of potential prescription products.
REVENUE
Provisions to reserves to reduce revenues for cold remedy products that do not
have an expiration date, include the use of estimates, which are applied or
matched to the current sales for the period presented. These estimates are based
on specific customer tracking and an overall historical experience to obtain an
effective applicable rate. Additionally, the monitoring of current occurrences,
developments by customer, market conditions and any other occurrences that could
affect the expected provisions relative to net sales for the period presented
are also performed. A one percent deviation for sales returns and cooperative
advertising costs reserve provisions in 2004 could affect net sales by
approximately $481,000 and $275,000, respectively.
The 2004 results 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.
INCOME TAXES
The Company has recorded a valuation allowance against its net deferred tax
assets. Management believes that this allowance is required due to the
uncertainty of realizing these tax benefits in the future. The uncertainty
arises because the Company may incur substantial research and development costs
in its Ethical Pharmaceutical segment.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COST OF SALES
For the Cold Remedy Segment, in accordance with contract terms, payments
calculated based upon net sales collected to the patent holder of the Cold-Eeze
formulation and payments to the corporation founders and developers of the final
saleable Cold-Eeze product amounting to $2,052,746, $1,805,294 and $1,421,475,
respectively, at December 31, 2004, 2003 and 2002 are presented in the financial
statements as cost of sales .
In the Health and Wellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net sales collected and in accordance with our policy and procedures for IR's,
among other factors, are related to expand the cycle of additional IR's and are
4
for maintaining the distribution channel for this segment's products.
Accordingly, such distribution payments amounting to $9,053,612, $9,439,100 and
$6,813,114, respectively, at December 31, 2004, 2003 and 2002 are presented in
the financial statements as cost of sales.
OPERATING EXPENSES
Agreements relating to the Cold Remedy segment with a major national sales
brokerage firm are for this firm to sell the manufactured Cold-Eeze product to
our customers. Such related costs are presented in the financial statements as
selling expenses.
In the Health and Wellness Segment, the Company includes payments in accordance
with agreements with the former owner of its acquired proprietary products, to
be calculated based upon net sales collected. These agreements provide for
exclusivity, consulting, marketing presentations, confidentiality and
non-compete arrangements with such payments being classified as administration
expense.
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
5