SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1995
Commission File No. 0-5128
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
State of Incorporation: Colorado
I.R.S. Employer Identification No. 84-0920811
Indicate by checkmark whether the registrant (i) 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 (ii) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
The Registrant had 9,889,996 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on April 14, 1995.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Income (Unaudited)
<CAPTION>
Three Months Ended
March 31,
1995 1994
-----------------------
<S> <C> <C>
Revenues:
Net sales $14,448,300 $13,074,400
Other income 175,500 16,100
----------------------
14,623,800 13,090,500
Costs and Expenses:
Cost of sales 4,048,600 3,615,000
Advertising 6,563,800 4,604,800
Selling 2,264,600 2,047,900
General and administrative 1,522,600 1,393,700
Interest 175,300 83,000
----------------------
14,574,900 11,744,400
----------------------
Income from operations 48,900 1,346,100
Provision for income taxes 18,800 532,000
----------------------
NET INCOME $ 30,100 $ 814,100
======================
Net income per common share (Note 2) $ - $ .08
======================
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
Three Months
Ended
March 31,
Increase (Decrease) in Cash and Cash Equivalents 1995 1994
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30,100 $ 814,100
-----------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 214,200 196,300
Provision for doubtful accounts receivable 71,400 41,500
Compensation expense of employee stock plans 143,800 100,000
Change in assets and liabilities:
Receivables (427,600) (1,718,100)
Inventories (211,300) (174,200)
Prepaid expenses (117,800) (62,600)
Other assets (170,900) -
Accounts payable and accrued expenses 2,093,900 1,902,800
------------------------
Total adjustments to net income 1,595,700 285,700
------------------------
Net Cash Provided by Operating Activities 1,625,800 1,099,800
------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,823,800) (227,900)
------------------------
Net Cash Used by Investing Activities (3,823,800) (227,900)
------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 61,300 148,000
Proceeds from short-term borrowings 154,700 103,300
Principal payments on short-term borrowings (42,200) (34,500)
Principal payments on long-term borrowings (8,600) (269,700)
Decrease in restricted cash 3,045,900 -
Dividends paid - (954,600)
------------------------
Net Cash Provided (Used) by Financing Activities 3,211,100 (1,007,500)
------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,013,100 (135,600)
Cash and Cash Equivalents, beginning of period 3,754,900 2,828,800
------------------------
Cash and Cash Equivalents, end of period $ 4,768,000 $ 2,693,200
========================
Supplemental disclosures:
Cash paid during the period for:
Interest (net of $134,500 capitalized
in 1995) $ 81,400 $ 84,400
Income taxes $ 540,000 $ 595,500
Noncash investing and financing activities:
Dividends accrued $ 989,000 $ -
Construction commitments $ 2,700,000 $ -
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Balance Sheet
March 31, 1995 (Unaudited) and December 31, 1994
<CAPTION>
<S> <C> <C>
ASSETS
1995 1994
----------------------------
Current Assets:
Cash $4,768,000 $3,754,900
Trade receivables (Note 3): 5,102,800 4,746,600
Inventories:
Finished goods 2,971,500 2,714,000
Raw materials 2,033,300 2,079,500
Prepaid expenses 771,800 654,000
Deferred tax assets 367,800 367,800
----------------------------
Total current assets 16,015,200 14,316,800
Property, plant and equipment
at cost 22,363,900 18,540,100
Less accumulated
depreciation 7,871,600 7,678,800
----------------------------
14,492,300 10,861,300
Restricted cash 3,116,800 6,162,700
Other assets 3,639,400 789,900
----------------------------
$37,263,700 $32,130,700
============================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES & SHAREHOLDERS' EQUITY
1995 1994
----------------------------
<S> <C> <C>
Current liabilities:
Notes payable $ 112,500 $ -
Accounts payable 5,204,300 2,008,600
Accrued expenses 5,358,800 2,771,600
Current maturities of
long-term debt 1,035,700 1,035,700
----------------------------
Total current liabilities 11,711,300 5,815,900
Long-term debt 11,458,000 11,466,600
Deferred income taxes 512,000 512,000
============================
23,681,300 17,794,500
Shareholders' equity (Note 2):
Common stock 989,000 976,400
Capital in excess of par 4,499,800 4,307,300
Retained Earnings 8,093,600 9,052,500
----------------------------
Shareholders' equity 13,582,400 14,336,200
----------------------------
$37,263,700 $32,130,700
============================
See Accompanying Notes to Consolidated Financial Statement
</TABLE>
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1
In the opinion of management, the financial information in this report
reflects all adjustments necessary for a fair presentation of the results for
the interim periods.
NOTE 2
Per share data for 1995 and 1994 were determined by using the weighted
average number of common and common equivalent shares outstanding, using the
treasury stock method.
Average shares outstanding used in the above computations were 10,280,900
for 1995 and 10,164,200 for 1994.
At March 31, 1995 there were 20,000,000 shares of the Company's $.10 par
value common stock authorized.
NOTE 3
Allowances for doubtful accounts at March 31, 1995 and December 31, 1994
were $403,900 and $345,900 respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company manufactures and markets household chemical products, skin care
products and cigarette filters. In early 1992, the Company entered into the
cosmetics business, introducing a new line of skin care products, `Alpha
Hydrox', which is sold throughout the United States.
Sales of the cosmetics line were $5.9 million in 1992, $15.8 million in
1993, and $30.6 million in 1994. As a result, the Company experienced record
revenues and profits in both 1993 and 1994. In late 1994, the Company
introduced a line of men's after shave lotion, and, in early 1995, began to
market a line of body wash products. Heavy advertising during the most recent
three months, as is explained below, was responsible for break-even operating
results during the first quarter of 1995.
RESULTS OF OPERATIONS
<TABLE>
Summary of Results as a Percentage of Net Sales
<CAPTION>
(Audited) (Unaudited)
3 Months Ended
Year Ended March 31,
December 31, 1994 1995 1994
<S> <C> <C> <C>
Net Sales
Scott's Liquid Gold household products 40.7% 38.3% 42.6%
Neoteric Cosmetics 57.3% 61.7% 55.0%
Aquafilters 2.0% 2.0% 2.4%
----------------------------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 25.8% 28.0% 27.7%
----------------------------------
Gross profit 74.4% 72.0% 72.3%
Other revenue 0.4% 1.2% 0.1%
----------------------------------
74.8% 73.2% 72.4%
----------------------------------
Operating expenses 55.5% 71.7% 61.5%
Interest 1.2% 1.2% 0.6%
----------------------------------
56.7% 72.9% 62.1%
----------------------------------
Income before income taxes 18.1% 0.3% 10.3%
==================================
</TABLE>
THREE MONTHS ENDED MARCH 31, 1995
COMPARED TO THREE MONTHS ENDED MARCH 31, 1994
Consolidated net sales for the first quarter of 1995 were $14,448,300 as
compared to $13,074,400 for the first three months of 1994, an increase of
$1,373,900 or about 10.5%. Included in the aggregate sales increase is
$178,000 attributable to higher average selling prices, prices of household
chemical products being up by $224,700 (all of which related to Scott's Liquid
Gold wood care products), offset by a decrease in average selling prices of
cosmetics products which were down by $46,700, essentially due to product mix.
During the first quarter of 1995, net sales of cosmetics products accounted
for 61.7% of consolidated net sales compared to 55.0% for the first quarter of
1994. Net sales of these products for those periods were $8,915,800 in 1995
compared to $7,196,800 in 1994, an increase of $1,719,000 or 23.9%. The
Company attributes such increase to several factors: effective and extensive
advertising of the Company's cosmetics line, competitive pricing, the addition
of twelve new products subsequent to the end of the first quarter of 1994, and
the efficacy of the Company's products. During 1994, the number of competitive
skin care products containing alpha hydroxy acids increased significantly and,
to a lesser extent, has done so in 1995 and may continue to do so in the
future. In the Company's 1994 Annual Report, management stated that `...it
may be unduly optimistic to expect 1995 sales of the Company's skin care
products to increase at the rate experienced in 1994'. That was certainly the
case in the first quarter of this year.
Sales of household chemical products for the first quarter of 1995 accounted
for 36.3% of consolidated net sales compared to 42.6% for the same quarter of
1994. These products are comprised of `Scott's Liquid Gold for Wood,'' a
wood cleaner which preserves as it cleans, and `Touch of Scent'', a room air
freshener. During the three months ended March 31, 1995, sales of household
chemical products were $5,251,200, compared to $5,566,700 for the first three
months of 1994, a decrease of $315,500 or 5.7%. Sales of `Scott's Liquid
Gold''for wood were up by $51,800, an increase of 2.0%, but sales of ``Touch
of Scent''were down by $367,300 or 12.2%.
Net sales of ``Aquafilters'', a disposable cigarette filter, represented
2.0% of consolidated net sales during the first quarter of 1995 compared to
2.4% for the comparable quarter of 1994. Such sales were lower in 1995 than in
1994 by $29,600, a decrease of 9.5%. Over the last several years, sales of
`Aquafilters'' have declined. For this reason, the Company is actively
attempting to sell Aquafilter's land and building. The Company expends no
moneys in advertising this product.
Cost of goods sold on a consolidated basis were $4,048,600 during the first
quarter of 1995 compared to $3,615,000 for the same quarter of 1994, an
increase of 12.0%. For the most part, this increase is the result of the
Company's increase in sales volume. As a percentage of consolidated net sales,
cost of goods sold was essentially the same in 1995 as it was in 1994. An
addition of plant facilities and equipment, as is described below under
`Liquidity and Capital Resources'' will increase depreciation expense from
the time of completion by approximately $125,000 per year, which is expected
to have little effect on gross margins.
Advertising expenses for the first three months of 1995 were $6,563,800
compared to $4,604,800 for the comparable three months of 1994, an increase of
$1,959,000 or 42.5%. Such increase was due, in large measure, to an increase
in advertising rates during the first quarter of this year. Of this increase,
$2,716,400 pertained to cosmetics products, offset by a decrease of $757,400
which pertained to household chemical products. During the remaining three
quarters of 1995, the Company intends to spend significant amounts for
advertising of its products, particularly for its cosmetics products, but at a
reduced rate. The Company believes that it must continue to advertise
aggressively for the following reasons: (i) it assesses its penetration of the
skin care market, thus far, to have been modest and believes that future
growth is, therefore, possible; (ii) without advertising to educate the
consuming public as to the merits of `Alpha Hydrox'', future growth, although
not assured by advertising, will be severely restricted; (iii) a direct
correlation exists between dollars expended on advertising and sales dollars;
and (iv) competitive products continue to enter the marketplace and,
accordingly, the `Alpha Hydrox'' name needs be kept in front of current
consumers. Additionally, the Company believes that advertising is essential to
maintain or increase sales levels of the Company's household chemical
products. Irrespective of the foregoing, the Company recognizes that
sustaining its advertising program is highly dependent upon sales of its skin
care products.
Selling expenses for the first quarter of 1995 were $2,264,600 compared to
$2,047,900 for the comparable quarter of 1994, an increase of $216,700 or
10.6%. Of that increase, $113,500 was attributable to an increase in shipping
expenses and sales commissions (which vary with sales volume), $92,500 related
to increased salaries, fringe benefits and travel expenses of field personnel,
$83,900 pertained to increased costs of promotional goods and $42,700
pertained to increases in a variety of other selling expenses, none of which,
by itself, was material; all offset by decreased couponing and slotting
expenses of $115,900.
Administrative expenses for the first three months of 1995 were $1,522,600
compared to $1,393,700 for the same months of 1994, an increase of $128,900 or
9.3%. Of that increase, $221,900 pertained to an increase in salaries, wages
and fringe benefits, $57,600 pertained to an increase in expenses pertaining
to shareholder relations, $179,000 pertained to a decrease in the Company's
accrual of profit sharing and bonuses which is based upon pre-tax profits, and
$28,400 pertained to increases in a variety of other expenses, none of which,
by itself, was material. It is noted that, while legal expenses did not
increase during the first quarter of 1995, such expenses may be expected to
increase during the balance of 1995 and perhaps thereafter as a result of a
lawsuit (described below) which was filed against the Company in September of
1994. The construction of the Company's expanded office facilities as
described below is anticipated to increase depreciation expense related to
administrative functions by $75,000 per quarter for the first 15 years after
completion of the project, commencing in June of 1995.
Interest expense for the first quarter of 1995 was greater than that of the
comparable quarter of 1994 by $92,300, an increase of 111.2%, which was due to
higher borrowings and interest rates. Interest expense will continue to
increase during 1995 and thereafter due to the issuance by the Company in July
of 1994 of 10% First Mortgage Bonds, the proceeds of which are being used to
finance the Company's physical expansion as is described below under Liquidity
and Capital Resources. During the construction phase of this expansion, a
portion of the amount of interest to be paid is being capitalized ($134,500 in
the first quarter of 1995). Partially offsetting the 1995 increase in
interest expense over 1994 was $173,400 of interest earned, an increase over
1993 of $159,300, the major portion of which resulted from investing the
proceeds of the bond issue in short-term Treasury Bills and similar paper.
During the first quarter of 1995, expenditures for research and development
were not material (under 1% of revenues).
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1994, the Company consummated a $12 million bond issuance to
finance the expansion of the Company's Denver facilities. This expansion,
necessitated by the growth of the Company's wholly-owned subsidiary, Neoteric
Cosmetics, Inc., manufacturer of `Alpha Hydrox'' skin care products, includes
construction of a 77,000 square foot office building, replacing a smaller,
existing office structure; and an additional 52,000 square feet of
manufacturing and warehouse space at an aggregate cost of approximately $12.9
million, including the cost of fixtures and equipment. Construction of the
project began in August of 1994.
At March 31, 1995, there remained approximately $2.7 million to be paid from
Company funds to complete the aforementioned construction project, including
the cost of machinery, equipment, furniture, fixtures, and a portion of
construction costs. Because, for the most part, the Company has
contractually obligated itself for the payment of such amount, the Company has
recorded $2.7 million as an accrued expense (a current liability), and $2.7
million which appears as a non-current asset in its balance sheet under Other
Assets.
Interest on the $12 million bond issue is payable semi-annually beginning on
January 1, 1995 at the rate of 10% per annum. (The January 1995 interest
payment was made in a timely manner. There is no reason to believe that the
interest payment due on July 1, 1995 will not be made as is required by the
Bond Indenture.) A sinking fund payment of $1 million is required annually,
with a first payment in 1995. Currently, the Company is voluntarily paying
$183,333 each month to the Trustee to cover future interest and sinking fund
payments. The Trustee, at the Company's request, holds such moneys in
accounts to which the Company has no access. At March 31, 1995, the Trustee
was holding $202,000 towards the interest payment of $600,000 due in July and
$503,500 against the $1 million sinking fund payment due by the end of 1995.
Among other covenants, the Bond Indenture requires that the Company maintain
a current ratio of at least 1.0:1 while the bonds are outstanding, and further
requires that the Company maintain a ratio of consolidated funded debt to
consolidated net worth of not more than 1.5:1. Both of the foregoing
requirements were met at March 31, 1995. The Bond Indenture also prohibits the
declaration or payment by the Company of a dividend or distribution on its
equity securities, purchase or other acquisition of any of its equity
securities, or the incurrence of additional funded debt if, after giving
effect to the action, the ratio of consolidated funded debt to consolidated
net worth would exceed 1.30 to 1 during 1995 or 1.25 to 1 on January 1, 1996
and thereafter. (For purposes of these calculations, the amount of
consolidated funded debt is reduced by amounts required to be paid within one
year into the bond sinking fund.)
During the first quarter of 1995, the Company's working capital decreased by
$4,197,000, and concomitantly, its current ratio (current assets divided by
current liabilities) decreased from 2.46:1 at December 31, 1994 to 1.37:1 at
March 31, 1995. This decrease in working capital is attributable to net
income of $30,100, contributions to the Company's ESOP and exercise of
incentive stock options of $205,100, and a decrease in restricted cash of
$3,045,900; all offset by an increase in other assets of $2,849,500 (including
the accrual of $2.7 million for contractual obligations incurred for the
construction project), capital expenditures in excess of depreciation of
$3,631,000, the declaration in March of 1995 of a dividend of $989,000, and a
decrease in long-term debt of $8,600. At March 31, 1995, the ratio of
consolidated funded debt to consolidated net worth was .84:1.
Restricted cash at March 31, 1995 was $3,045,900 less than at December 31,
1994 due to progress payments made by the Trustee of the Company's Bond
Indenture to the general contractor for the construction project. Other assets
were $2,849,500 greater than those at December 31, 1994 primarily for reasons
explained above. Likewise, the increase of $2,587,200 in accrued expenses at
March 31, 1995 compared to December 31, 1994, was primarily the result of the
$2.7 million accrual described above. Accounts payable were up at March 31,
1995 over December 31, 1994 due to an increase in advertising payables.
On March 7, 1995, the Company's Board of Directors declared and accrued a
cash dividend of $0.10 a share to shareholders of record on March 24, 1995.
This dividend, which amounted to approximately $989,000, was paid on April 7,
1995.
OTHER
Certain regulations adopted by the California Air Resources Board (``CARB'')
limit the amount of volatile organic compounds (`VOCs'') that can be
contained in single phase air fresheners, including `Touch of Scent'', and in
non-aerosol forms of furniture maintenance products. As reported previously,
the Company has made excellent progress in reformulating `Touch of Scent''
without changing the product's characteristics. The cost to produce the
reformulated product is expected to be higher than that of the `Touch of
Scent''product currently produced, but such increased cost has not as yet
been quantified. The CARB regulations which affect `Touch of Scent'' are not
effective until January 1, 1996. The regulations which affect `Scott's Liquid
Gold''for wood became effective on January 1, 1994. These regulations do not
affect the sale of `Scott's Liquid Gold'' in aerosol form.
In March 1995, in accordance with the Clean Air Act, the Environmental
Protection Agency (`EPA'') published a list of consumer and commercial
products identified for possible regulation and a schedule for promulgating
those regulations. The listed products were determined by the EPA to account
for at least 80% of the total volatile organic compound emissions from
consumer and commercial products, which contribute to ground-level ozone. The
EPA noted that industry representatives referred the EPA to emission
requirements of California for a group of consumer products. Consumer products
within 24 categories, including air fresheners and furniture maintenance
products, are scheduled for regulation by the EPA in 1997.
As described in the Company's 1994 Annual Report, on September 8, 1994, the
United States Justice Department, on behalf of the United States Army, filed
an environmental lawsuit against the Company, alleging that the Company is a
contributor to contamination in a groundwater aquifer underlying a portion of
the Rocky Mountain Arsenal (a Superfund Site contaminated by the United States
Army and a major chemical company over many years) and, therefore, that the
Company should contribute to the existing and future costs incurred by the
Army in connection with the remediation of that groundwater. The Company is
waiting for the results of certain Army-conducted groundwater testing in the
area before proceeding with further discovery. The Company strongly believes
that the lawsuit is unjustified and is mounting a vigorous defense.
Since 1988, when the Company itself discovered small amounts of certain
chemicals in its soil and groundwater, it has worked closely with the Colorado
Department of Health (CDH), which kept the United States Environmental
Protection Agency (`EPA'') informed, to implement a remedial action plan,
including the removal of all underground tanks, the construction, above
ground, of a new, self-contained tank farm, and the treatment of groundwater
at the Company's site. In April of 1995, the CDH informed the Company that the
CDH considered the Company's remedial action with respect to the Company's
site to be complete and that no further monitoring of groundwater at such site
is required.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see "Other" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations in Registrant's First
Quarter Report for the Three Months Ended March 31, 1995," which
information describes developments in certain legal proceedings.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports were filed by the Company on Form 8-K for the first
quarter of 1995.
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.
SCOTT'S LIQUID GOLD-INC.
Registrant
May 2, 1995 /s/ Mark E. Goldstein
Date Mark. E. Goldstein
President
May 2, 1995 /s/ Barry Shepard
Date Barry Shepard
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Scott's
Liquid Gold-Inc. 1995 First Quarter 10-Q report and is qualified in
its entirety by reference to such 10-Q filing.
</LEGEND>
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<PERIOD-TYPE> 3-MOS
<CASH> 4,768,000
<SECURITIES> 0
<RECEIVABLES> 5,102,800
<ALLOWANCES> 403,900
<INVENTORY> 5,004,800
<CURRENT-ASSETS> 16,015,200
<PP&E> 22,363,900
<DEPRECIATION> 7,871,600
<TOTAL-ASSETS> 37,263,700
<CURRENT-LIABILITIES> 11,711,300
<BONDS> 12,000,000
<COMMON> 989,000
0
0
<OTHER-SE> 12,593,400
<TOTAL-LIABILITY-AND-EQUITY> 37,263,700
<SALES> 14,448,300
<TOTAL-REVENUES> 14,623,800
<CGS> 4,048,600
<TOTAL-COSTS> 14,574,900
<OTHER-EXPENSES> 10,351,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,300
<INCOME-PRETAX> 48,900
<INCOME-TAX> 18,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,100
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
