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
JUNE 30, 1996
Commission File No. 0-5128
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
- ---------------------- ------------------
State of Incorporation I.R.S. Employer Identification No.
Indicate by check mark 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 10,030,900 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on August 2, 1996.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Operations (Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 10,086,900 $ 14,615,600 $23,086,700 $29,063,900
Other income 54,700 122,800 122,500 298,300
-------------------------------------------------------------
10,141,600 14,738,400 23,209,200 29,362,200
Costs and Expenses:
Cost of sales 3,471,700 4,213,200 7,875,600 8,261,800
Advertising 3,923,600 6,498,700 9,273,000 13,062,500
Selling 1,850,100 1,920,200 3,945,000 4,184,800
General and
administrative 1,549,500 1,417,100 3,124,400 2,939,700
Interest 315,100 99,700 598,800 275,000
--------------------------------------------------------------
11,110,000 14,148,900 24,816,800 28,723,800
-------------------------------------------------------------
Income (loss)
from operations (968,400) 589,500 (1,607,600) 638,400
Income tax
expense (benefit) (400,000) 227,200 (400,000) 246,000
---------------------------------------------------------------
Net income (loss) $ (568,400) $ 362,300 $(1,207,600) $392,400
---------------------------------------------------------------
Net income (loss) per
common share (Note 2) $ (.06) $ .04 $ (.12) $ .04
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents 1996 1995
Cash flows from operating activities:
Net income (loss) $(1,207,600) $ 392,400
----------------------------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 560,200 428,300
Provision for doubtful
accounts receivable 135,500 129,000
Compensation expense of
employee stock plans - 255,700
Change in assets and liabilities:
Receivables (825,100) (1,458,900)
Inventories 1,113,900 343,900
Prepaid expenses (44,000) (8,100)
Other assets 371,000 4,572,200
Accounts payable
and accrued expenses (412,300) 2,566,400
--------------------------
Total adjustments to
net income (loss) 899,200 6,828,500
--------------------------
Net Cash Provided (Used)
by Operating Activities (308,400) 7,220,900
--------------------------
Cash flows from investing activities:
Purchase of property,
plant and equipment (813,800) (6,613,800)
Net Cash Used by
Investing Activities (813,800) (6,613,800)
-------------------------
Cash flows from financing activities:
Proceeds from exercise of
stock options - 172,300
Proceeds from short-term borrowings 150,700 154,700
Principal payments on
short-term borrowings (90,000) (84,400)
Proceeds from long-term borrowings 7,400 -
Principal payments on long-term
borrowings (34,900) (17,400)
Increase in bond sinking fund (438,800) -
Dividends paid - (989,000)
------------------------
Net Cash Used by
Financing Activities (405,600) (763,800)
Net Decrease in Cash and
Cash Equivalents (1,527,800) (156,700)
Cash and Cash Equivalents,
beginning of period 4,761,500 3,754,900
-------------------------
Cash and Cash Equivalents,
end of period $3,233,700 $ 3,598,200
--------------------------
Supplemental disclosures:
Cash paid during the period for:
Interest (net of $30,300 and
$351,300 capitalized in 1996
and 1995 respectively) $ 576,700 $ 240,200
Income taxes $ 713,200 $ 577,500
Noncash investing and
financing activities:
Construction commitments $ - $ 2,196,000
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
Consolidated Balance Sheets
June 30, 1996 (Unaudited) and December 31, 1995
ASSETS
<S> <C> <C>
1996 1995
Current Assets:
Cash $ 3,233,700 $4,761,500
Trade receivables (Note 3): 3,766,100 3,076,500
Inventories:
Finished goods 2,231,500 3,402,100
Raw materials 2,226,700 2,170,000
Prepaid expenses 475,000 431,000
Deferred tax assets 503,500 503,500
-------------------------
Total current assets 12,436,500 14,344,600
Property, plant and equipment
at cost 29,637,000 28,825,400
Less accumulated depreciation 8,761,300 8,249,900
---------------------------
20,875,700 20,575,500
Other assets 323,500 741,100
------------------------
$ 33,635,700 $35,661,200
LIABILITIES & SHAREHOLDERS' EQUITY
1996 1995
Current liabilities:
Notes payable $ 60,700 $ -
Accounts payable 5,042,400 3,347,100
Accrued expenses 1,318,700 3,426,300
Current maturities of
long-term debt 1,074,600 1,074,600
--------------------------
Total current liabilities 7,496,400 7,848,000
Long-term debt 10,008,000 10,474,300
Deferred income taxes 729,900 729,900
------------------------
18,234,300 19,052,200
Shareholders' equity (Note 2):
Common stock 1,003,100 1,003,100
Capital in excess of par 4,719,000 4,719,000
Retained Earnings 9,679,300 10,886,900
-------------------------
Shareholders' equity 15,401,400 16,609,000
---------------------------
$33,635,700 $35,661,200
</TABLE>
See Notes to Consolidated Financial Statements
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 1996 was determined by using the weighted average number
of common shares outstanding during the period. Common equivalent shares were
not considered because their inclusion would have been anti-dilutive.
Per share data for 1995 was 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 10,030,900
for the three and six months ended June 30, 1996, and 10,276,400 and 10,282,700
respectively for the three and six months ended June 30, 1995.
At June 30, 1996 there were authorized 50,000,000 shares of the Company's
$.10 par value common stock and 20,000,000 shares of preferred stock issuable in
one or more series.
NOTE 3
Allowance for doubtful accounts at June 30, 1996 and December 31, 1995 were
$447,400 and $501,100 respectively.
Market Information
The high and low prices or bid quotations of Scott's Liquid Gold-Inc. common
stock as traded on the New York Stock Exchange commencing November 23, 1994, and
prior to that date on Nasdaq or Nasdaq National Market, were as follows:
High Low
Three Months Ended Bid Bid
September 30, 1994 7-3/8 3-3/4
December 31, 1994 6-11/16 3-7/8
March 31, 1995 6 5-1/8
June 30, 1995 5-5/8 3-3/4
September 30, 1995 4-3/4 3-1/4
December 31, 1995 3-5/8 2-1/2
March 31, 1996 3 2-1/2
June 30, 1996 3 1-3/4
The above quotations prior to November 23, 1994 represent prices between
dealers, and do not include retail mark-up or commissions; nor do they represent
actual transactions.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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
$15.8 million in 1993, $30.6 million in 1994 and $31.6 million in 1995. As a
result, net income increased from $373,800 in 1992 to $2,928,700 in 1993, and to
$5,851,500 in 1994. In 1995, net income declined to $2,823,400 due to heavy
advertising of cosmetics products and a decline of 12.3% in sales of the
Company's household chemical products. For a variety of reasons which are
explained below, the Company experienced a decrease in sales and an operating
loss during the first half of 1996.
Results of Operations
<TABLE>
Summary of Results as a Percentage of Net Sales
(Audited)
Year Six Months
Ended Ended
December 31, June 30,
1995 1996 1995
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold household products 36.8% 37.1% 35.2%
Neoteric Cosmetics 61.1% 60.6% 62.9%
Aquafilters 2.1% 2.3% 1.9%
------------------------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 28.2% 34.1% 28.4%
-------------------------------
Gross profit 71.8% 65.9% 71.6%
Other revenue 1.0% 0.5% 1.0%
-------------------------------
72.8% 66.4% 72.6%
-------------------------------
Operating expenses 62.4% 70.8% 69.5%
Interest 1.6% 2.6% 0.9%
-------------------------------
64.0% 73.4% 70.4%
-------------------------------
Income (loss) before income taxes 8.8% (7.0%) 2.2%
-------------------------------
</TABLE>
Six Months Ended June 30, 1996
Compared to Six Months Ended June 30, 1995
Consolidated net sales for the first half of 1996 were $23,086,700 vs.
$29,063,900 for the first six months of 1995, a decrease of $5,977,200 or about
20.6%. Average selling prices for the first six months of 1996 were higher than
those of the first half of 1995 by $31,300, prices of household chemical
products being up by $174,400 (most of which related to Touch of Scent), offset
by a decrease in average selling prices of cosmetics products of $143,100.
During the first half of 1996, net sales of cosmetics products accounted
for 60.6% of consolidated net sales compared to 62.9% for the first half of
1995. Net sales of these products for those periods were $13,990,000 in 1996
compared to $18,285,400 in 1995, a decrease of $4,295,400 or 23.5%. Of that
decrease, nearly $1,550,000 pertained to sales of Men's After Shave Lotion, a
product discontinued by the Company in late 1995 due to a lack of consumer
interest, and about $1,275,000 pertained to a decrease in sales of the Company's
body wash products which are subject to intense price competition. The Company
believes, based upon data available to it, that sales of skin care products
containing alpha hydroxy acids began to flatten in 1995 and have continued to do
so in 1996. Sales of the Company's Alpha Hydrox product line have now declined
for three consecutive quarters, a circumstance which Management is endeavoring
to improve over a reasonable time period. Such improvement would rely, for the
most part, upon the development and introduction of new products (some are
currently being introduced) and the Company's ability to promote such products
through advertising. In addition to decreases in sales of Men's After Shave
Lotion and Body Wash products, the Company attributes declines in sales of its
basic alpha hydroxy acid products to increased competition, particularly to
competition from private label products containing alpha hydroxy acids and to a
reduction in its advertising expenditures during 1996.
Sales of household chemical products for the first six months of 1996
accounted for 37.1% of consolidated net sales compared to 35.2% for the same
period of 1995. 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 first half of 1996, sales of household chemical products
were $8,576,100 compared to $10,239,900 for the first six months of 1995, a
decrease of $1,663,800 or 16.3%. During those two six month periods, sales of
"Scott's Liquid Gold" for wood decreased from $5,475,000 to $4,967,500 (down by
$507,500 or 9.3%), and sales of "Touch of Scent" decreased from $4,764,900 to
$3,608,600 (down by $1,156,300 or 24.3%). Touch of Scent sales have now declined
for eight consecutive quarters. In an effort to increase sales of its air
fresheners, the Company is currently test marketing a new variety of decorative
fixtures to dispense new, concentrated formulae now contained in its refill
units.
Net sales of "Aquafilters", a disposable cigarette filter, represented
2.3% of consolidated net sales during the first six months of 1996 compared to
1.9% for the comparable half of 1995. Such sales were lower in 1996 than in
1995 by $18,000, a decrease of 3.3%. Over the last several years, sales of
Aquafilters have declined. For this reason, the Company has, from time to time,
actively attempted to sell Aquafilter's land and building. Currently, such
property is not listed for sale. The Company expends very little money to
advertise this product.
On a consolidated basis, cost of goods sold was $7,875,600 during the first
half of 1996 compared to $8,261,800 for the comparable period of 1995, a
decrease of 4.7% (on a decrease in sales of 20.6%). As a percentage of
consolidated net sales, cost of goods sold was 34.1% in 1996 vs. 28.4% in 1995,
an increase of 20.0%. For simplicity, the explanation which follows assumes
that, for the first half of 1995, identical products and quantities thereof were
sold as were sold in the first half of 1996.
During the first half of 1996, costs of raw materials were greater than
those of the first half of 1995 by $789,200. Raw material costs increased by
$620,500 for Touch of Scent, $47,400 for Scott's Liquid Gold, and $121,300 for
Alpha Hydrox. The increase in the cost of raw materials for Touch of Scent was
primarily attributable to the reformulation of refill units to meet regulatory
requirements, particularly those of the State of California.
Due to the addition of a new plant facility, including machinery and
equipment, depreciation and property taxes increased during the first half of
1996, as did the Company's laboratory expenses and other items classified by the
Company as factory overhead. Such increases (over the first half of 1995),
including production variances, particularly in regard to under-absorbed
overhead caused by lower production, amounted to $601,500. Direct labor for the
first half of 1996 was greater than that of the first six months of 1995 by
$21,200.
In total, the cost of producing the products sold in 1996 was higher than
that of 1995 by $1,411,900. Were it not for this increase in production costs,
the gross profit percentage for the first six months of 1996, calculated with
sales reduced by the 1996 average price increase, would have been about the same
as it was for the first half of 1995.
Advertising expenses for the first six months of 1996 were $9,273,000
compared to $13,062,500 for the comparable six months of 1995, a decrease of
$3,789,500 or 29.0%. Such decrease was a part of the Company's planned reduction
in advertising expenditures for 1996. Of this decrease, $3,512,600 pertained to
cosmetics products and $277,600 pertained to household chemical products, both
offset by an increase in advertising expenses for Aquafilter Corporation of
$700. During the last half of 1996, the Company intends to advertise its
products at a substantially reduced rate. However, as a matter of sound business
judgment, the Company believes that, whenever it is fiscally responsible to do
so, it must continue to advertise aggressively because (i) the market for skin
care products is highly competitive and, accordingly, the Alpha Hydrox name
needs to be kept in front of current consumers; and (ii) advertising is
essential to maintain or increase sales levels of both the Company's cosmetics
and household chemical products. The Company recognizes that sustaining its
advertising program is highly dependent upon sales of its skin care products.
Selling expenses for the first half of 1996 were $3,945,000 compared to
$4,184,800 for the comparable period of 1995, a decrease of $239,800 or 5.7%. Of
that decrease, $311,000 is attributable to a decrease in shipping expenses and
sales commissions (which vary with sales volume), and $122,300 relates to
decreased costs of slotting and couponing; all offset by an increase in expenses
for promotional goods of $104,700 and a net increase of $88,800 in a variety of
other selling expenses, none of which, by itself, was material.
Administrative expenses were higher in the first half of 1996 than those of
the first six months of 1995 by $184,700, an increase of 6.3%. Of that increase,
$193,600 pertains to increased salaries, wages, and fringe benefits, $95,900 to
increased property taxes and depreciation, and $7,800 pertains to an increase in
a variety of other expenses, none of which was significant; all offset by a
decrease in legal and professional fees of $112,600.
Interest expense for the first half of 1996 was greater than that of the
comparable period of 1995 by $323,800, an increase of 117.8%, which was due to a
decrease in the amount of interest capitalized during the construction of the
Company's physical facilities. (See Liquidity and Capital Resources below.)
Other income decreased by $175,800 during the first half of 1996 compared to the
same six months of 1995 when a portion of the net proceeds of the Company's bond
issue was available for short-term investment (see Liquidity and Capital
Resources below).
During the first half of 1996 and 1995, expenditures for research and
development were not material (under 1% of revenues).
Three Months Ended June 30, 1996
Compared to Three Months Ended June 30, 1995
Consolidated net sales for the second quarter of 1996 were $10,086,900 vs.
$14,615,600 for the second quarter of 1995, a decrease of $4,528,700 or about
31.0%. Average selling prices for the three months ended June 30, 1996 were
lower than those of the second quarter of 1995 by $137,300, prices of household
chemical products being up by $263,700 (most of which related to Touch of
Scent), offset by a decrease in average selling prices of cosmetics products of
$401,000.
During the second quarter of 1996, net sales of cosmetics products
accounted for 60.1% of consolidated net sales compared to 64.1% for the second
quarter of 1995. Net sales of these products for those periods were $6,058,300
in 1996 compared to $9,369,600 in 1995, a decrease of $3,311,300 or 35.3%. Of
that decrease, about $825,000 pertained to sales of Men's After Shave Lotion, a
product discontinued by the Company in late 1995 due to a lack of consumer
interest, and about $975,000 pertained to a decrease in sales of the Company's
body wash products which are subject to intense price competition. The Company
believes, based upon data available to it, that sales of skin care products
containing alpha hydroxy acids began to flatten in 1995 and have continued to do
so in 1996. Sales of the Company's Alpha Hydrox product line have now declined
for three consecutive quarters, a circumstance which Management is endeavoring
to improve over a reasonable time period. Such improvement would rely, for the
most part, upon the development and introduction of new products (some are
currently being introduced) and the Company's ability to promote such products
through advertising. In addition to the decreases in sales of specific Alpha
Hydrox products described above, the Company believes that the decline in sales
of its basic alpha hydroxy acid products is due, at least in part, to increased
competition, particularly to competition from private label products containing
alpha hydroxy acids.
Sales of household chemical products for the second quarter of 1996
accounted for 37.2% of consolidated net sales compared to 34.1% for the same
period of 1995. 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 second three months of 1996, sales of household chemical
products were $3,751,100 compared to $4,988,700 for the second quarter of 1995,
a decrease of $1,237,600 or 24.8%. During those two three month periods, sales
of "Scott's Liquid Gold" for wood decreased from $2,856,100 to $2,402,200 (down
by $453,900 or 15.9%), and sales of "Touch of Scent" decreased from $2,132,600
to $1,348,900 (down by $783,700 or 36.7%). Touch of Scent sales have now
declined for eight consecutive quarters. In an effort to increase sales of its
air fresheners, the Company is currently test marketing a new variety of
decorative fixtures to dispense new, concentrated formulae now contained in its
refill units.
Net sales of "Aquafilters", a disposable cigarette filter, represented
2.7% of consolidated net sales during the second quarter of 1996 compared to
1.8% for the comparable quarter of 1995. Such sales, for the quarter, were
higher in 1996 than in 1995 by $20,200, an increase of 7.9%. Irrespective of
that increase, sales of Aquafilters have declined over the past several years.
For this reason, the Company has, from time to time, actively attempted to sell
Aquafilter's land and building. Currently, such property is not listed for
sale. The Company expends very little money to advertise this product.
On a consolidated basis, cost of goods sold was $3,471,700 during the
second quarter of 1996 compared to $4,213,200 for the comparable quarter of
1995, a decrease of 17.6% (on a decrease in sales of 31.0%). As a percentage of
consolidated net sales, cost of goods sold was 34.4% in 1996 vs. 28.8% in 1995,
an increase of 19.0%. For simplicity, the explanation which follows assumes
that, for the second quarter of 1995, identical products and quantities thereof
were sold as were sold in the second quarter of 1996.
During the three months ended June 30, 1996, costs of raw materials were
greater than those of the second quarter of 1995 by $411,900. Raw material costs
increased by $210,400 for Touch of Scent, $15,900 for Scott's Liquid Gold, and
$185,600 for Alpha Hydrox. The increase in the cost of raw materials for Touch
of Scent was primarily attributable to the reformulation of refill units to meet
regulatory requirements, particularly those of the State of California. As noted
in the first paragraph of the discussion of the second quarter, price increases
for Touch of Scent more than offset the increase in raw materials costs during
the second quarter of 1996. A substantial portion of the increase in material
costs of Alpha Hydrox products related to repackaging of the Men's After Shave
Lotion, a product discontinued by the Company.
Due to the addition of a new plant facility, including machinery and
equipment, depreciation and property taxes increased during the second quarter
of 1996 over the same quarter of 1995, as did the Company's laboratory expenses
and other items classified by the Company as factory overhead. Such increases,
including production variances, amounted to $204,300. Direct labor for the
second quarter of 1996 was less than that of 1995 by $4,600.
In total, the cost of producing the products sold in the second quarter of
1996 was higher than that of the same quarter of 1995 by $611,600. Were it not
for this increase in production costs, the gross profit percentage for the
second quarter of 1996, calculated with sales increased by the 1996 average
price decrease, would have been about the same as it was for the second quarter
of 1995.
Advertising expenses for the second quarter of 1996 were $3,923,600
compared to $6,498,700 for the comparable quarter of 1995, a decrease of
$2,575,100 or 39.6%. Such decrease was a part of the Company's planned reduction
in advertising expenditures for 1996. Of this decrease, $2,957,000 pertained to
cosmetics products, offset by an increase in advertising expenses of $381,200
for household chemical products and $700 for Aquafilters. During the last half
of 1996, the Company intends to advertise its products at a substantially
reduced rate. However, as a matter of sound business judgment, the Company
believes that, whenever it is fiscally responsible to do so, it must continue to
advertise aggressively because: (i) the market for skin care products is highly
competitive and, accordingly, the Alpha Hydrox name needs to be kept in front of
current consumers; and (ii) advertising is essential to maintain or increase
sales levels of both the Company's cosmetics and household chemical products.
The Company recognizes that sustaining its advertising program is highly
dependent upon sales of its skin care products.
Selling expenses for the quarter ended June 30, 1996 were $1,850,100
compared to $1,920,200 for the comparable quarter of 1995, a decrease of $70,100
or 3.6%. Administrative expenses for the second quarter of 1996 were $1,549,500
compared to $1,417,100 for the same quarter of 1995, an increase of $132,400 or
9.3%. Most of that increase ($112,900) pertained to increased salaries, wages,
and fringe benefits.
Interest expense for the second quarter of 1996 was greater than that of
the comparable period of 1995 by $215,400, an increase of 216.0%, which was due
to a decrease in the amount of interest capitalized during the construction of
the Company's physical facilities. (See Liquidity and Capital Resources below.)
Other income decreased by $68,100 during the second quarter of 1996 compared to
the same quarter of 1995 because, in 1995, a portion of the net proceeds of the
Company's bond issue remained available for short-term investment (see Liquidity
and Capital Resources below).
During both the second quarters of 1996 and 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,
prompted by the growth of the Company's wholly-owned subsidiary, Neoteric
Cosmetics, Inc., manufacturer of Alpha Hydrox skin care products, included
construction of a 74,600 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 $13.65 million,
including the cost of furniture, fixtures and equipment. Construction of the
project began in August of 1994 and was completed in January, 1996.
After expenses (including an underwriter's commission) and repayments of
certain indebtedness, the net proceeds of the bond issue available for
construction of the expanded facilities was $8,861,300. Such amount was
disbursed over the construction period to cover building costs as such costs
were incurred and certified by the project's architect. Because the cost of the
construction project, including machinery and office furnishings, was
approximately $13.65 million, the Company needed to generate, prior to the
completion of the project, approximately $4.8 million from operations to pay for
the entire project. All bond proceeds had been paid out prior to December 31,
1995. Also, at this time, all moneys required to be paid out of Company funds,
with minor exceptions, has been paid.
Interest on the $12 million bond issue is payable semi-annually beginning
on January 1, 1995 at the rate of 10% per annum. (The July 1, 1996 interest
payment was made in a timely manner. There is no reason to believe that the
interest payment due on January 1, 1997 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. That requirement was fulfilled prior to the end of
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.
Among other things, 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 (reduced
by any amount held in the bond sinking fund) to consolidated net worth of not
more than 1.5:1. Both of the foregoing requirements were met at June 30, 1996.
The Bond Indenture also states that the Company may not declare or pay any
dividend or distribution on its equity securities, purchase or otherwise
acquire securities of the Company, or incur any additional consolidated funded
debt if, after giving effect to the action, the ratio of consolidated funded
debt (reduced by amounts held in the bond sinking fund) to consolidated net
worth would exceed 1.25 to 1 on January 1, 1996 and thereafter. The bonds are
secured by a first deed of trust on the Company's Denver land and buildings,
including new structures financed by the bond issuance.
During the first six months of 1996, the Company's working capital
decreased by $1,556,500, and concomitantly, its current ratio (current assets
divided by current liabilities) decreased from 1.83:1 at December 31, 1995 to
1.66:1 at June 30, 1996. This decrease in working capital is attributable to a
net loss in the first half of 1996 of $1,207,600, capital expenditures in excess
of depreciation of $300,200, and reductions of long-term debt of $466,300; all
offset by a decrease in other assets of $417,600. At June 30, 1996, the ratio of
consolidated funded debt to consolidated net worth was .65:1.
Inventories were down at June 30, 1996 from year end by about $1,114,000 of
which $995,000 pertained to Alpha Hydrox. Such reduction was intentional to aid
cash flow for the period. Other assets were $417,600 less than those at December
31, 1995 primarily due to the completion of the Company's construction project.
Contract commitments at the end of 1995 were estimated and recorded on the
Company's books as an other asset offset by a current liability included, at
year end, in accounts payable. There were no such commitments at June 30, 1996.
Other
As previously reported, the Company is a defendant in an environmental
lawsuit brought by the United States Justice Department at the request of the
United States Army, alleging contribution by the Company to contamination in a
groundwater aquifer underlying a portion of the Rocky Mountain Arsenal, a
Superfund Site. Discovery in the case was completed in April of 1996 and trial
has been set for September 30, 1996. The Company continues to believe strongly
that the lawsuit is unjustified and is mounting a vigorous defense.
In May, 1996, a lawsuit was commenced against Neoteric Cosmetics, Inc., an
individual, and three other cosmetics manufacturers alleging infringement of
certain patents. Neoteric Cosmetics is the Company's wholly-owned subsidiary
which manufactures and sells skin care products under the name Alpha Hydrox. The
lawsuit was brought by TriStrata Technology, Inc. in the United States District
Court for the District of Delaware. The plaintiff claims to be the assignee of
four patents relating to the use of alpha hydroxy acids to treat or reduce
cosmetic conditions, particularly wrinkles or fine lines. Three of the patents
were issued in 1995; and one, which was issued in 1992, was the subject of a re-
examination completed in 1995. The individuals to whom the patents were issued
are involved with the plaintiff and were also claimants in a lawsuit filed
against the Company in May, 1992 which concerned other patents and which was
settled on confidential terms having no material effect on the Company.
The plaintiff in the lawsuit alleges that Neoteric Cosmetics contributes to
and/or induces infringement of three of the four patents by selling and
promoting Neoteric Cosmetics products for the purpose of visibly reducing a
human skin wrinkle and/or fine lines and for the purpose of treating and/or
preventing cosmetic conditions and dermatologic disorders of the human skin such
as wrinkles and fine lines. The plaintiff requests damages to compensate the
plaintiff for any infringement, an injunction against further infringement and
treble damages because of an alleged willful and deliberate nature of
infringement. In 1995, after the issuance of one of the patents involved in the
lawsuit, the Company changed its advertising and packaging to remove references
to wrinkles and fine lines. The Company denies the allegations of the plaintiff
and intends to mount a vigorous defense.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see "Other" in Item 2 of Part 1 of this Report which information is
incorporated herein by this reference. Such information concerns 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) The following document is filed as an exhibit to this
Report:
3. Restated Articles of Incorporation, as
amended and restated through May 1,1996.
(b) No reports were filed by the Company on Form 8-K for the
Second Quarter of 1996.
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.
Date: August 12, 1996 BY: /s/ Mark E. Goldstein
Mark. E. Goldstein,
President
Date: August 12, 1996 BY: /s/ Barry Shepard
Barry Shepard, Treasurer
Principal Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT DOCUMENT
------- --------
3.1 Restated Articles of Incorporation,
as amended and restated through
May 1, 1996.
EXHIBIT 3.1
- -----------
RESTATED ARTICLES OF INCORPORATION
OF
SCOTT'S LIQUID GOLD-INC.
KNOW ALL MEN BY THESE PRESENTS, That we,
JEROME J. GOLDSTEIN
IVAN L. GOLDSTEIN, and
MAX T. GOLDSTEIN
all residents of the City and County of Denver, State of Colorado, have
associated ourselves together as a corporation, under the name and style of
SCOTT'S LIQUID GOLD-INC., for the purpose of becoming a body corporate and
politic under and by virtue of the laws of the State of Colorado, and in
accordance with the provisions of the law of said State, we do hereby execute
and acknowledge in triplicate this Certificate in writing of our intention so to
become a body corporate under and by virtue of said laws.
The name and style of our company shall be SCOTT'S LIQUID GOLD-INC.
The purpose for which this corporation is organized is to engage in the
business of manufacturing, distributing, selling and promoting chemical products
including a liquid wood preservative and to engage in and do any lawful act
concerning any or all lawful business for which corporations may be organized
under the laws of Colorado, now or hereafter in effect.
The corporation shall have the authority to issue 50,000,000 shares of
common stock, each having a par value of $0.10 per share, which shall have
unlimited voting rights and shall be entitled to receive net assets of the
corporation upon dissolution.
In addition, the corporation shall have the authority to issue 20,000,000
shares of preferred stock, without par value. Such preferred stock may be
issued in series. Notwithstanding the rights of common stock stated above, the
entitlement of the Company's common stock to receive net assets of the
corporation upon dissolution, and the voting rights of common stock of the
Company, shall be subject to the voting and other rights, if any, provided to
the holders of preferred stock by these Articles of Incorporation. Except for
and subject to those rights expressly granted to the holders of the preferred
stock, or except as may be provided by law, the holders of common stock shall
have exclusively all other rights of shareholders.
This corporation's Board of Directors shall have the authority, without
shareholder action, to determine the preferences, limitations and relative
rights of any preferred stock (whether in a series or as a class), including
without limitation the following: (i) the designation of any series or class of
preferred stock; (ii) the number of shares constituting the series or class;
(iii) voting rights, if any, complying with the limitations on voting rights
stated in this Article III for preferred stock, except that no condition,
limitation, or prohibition on voting shall eliminate any right to vote required
by Colorado law; (iv) any redemption rights and, if provided, the terms and
conditions of such redemption, including without limitation the date or dates
upon or after which any preferred stock shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; (v) any sinking fund for the
redemption or purchase of shares of a series or class, and, if provided, the
terms and amount of such sinking fund; (vi) conversion rights and, if provided,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(vii) distribution rights, including without limitation a dividend rate and the
determination of whether such rights are cumulative, noncumulative or partially
cumulative; and (viii) preference rights over any other class or series of
shares with respect to distributions, including without limitation any priority
as to dividends and as to distributions upon the dissolution of the corporation.
The preferred stock of the corporation shall have no voting rights except
(i) the preferred stock shall have voting rights required by applicable law
(which required voting rights may be set forth in the preferences, limitations
and relative rights of a class or series), (ii) any preferred stock of a class
or series may have voting rights with respect to any amendment, alteration or
repeal of any provisions of the corporation's Articles of Incorporation which
adversely affects any right, preference or limitation of the class or series,
and (iii) any preferred stock of a class or series may have voting rights to
elect a certain number of directors of the corporation in the event of the
corporation's failure to pay dividends on the class or series for a period of
time or to make a mandatory redemption payment when due for the class or series.
The Board of Directors shall, in accordance with the authority granted to Board
of Directors in this Article III, determine whether any such voting rights, not
required by applicable law, shall exist and shall also determine the terms,
conditions and limitations of any such voting rights, including without
limitation the number of and time period for any such failures to pay dividends
necessary for voting rights to occur and the number of directors to be elected
by a class or series after such an event."
Our said Company is to have perpetual existence.
The number of directors to be elected at the annual meeting of shareholders
or at a special meeting called for the election of directors shall not be less
than three or more than nine, the exact number to be fixed by the By-Laws.
No shareholder shall have the pre-emptive right to acquire unissued or
treasury shares of the corporation.
Cumulative voting shall not be allowed in this corporation.
All lawful restrictions on the sale or other disposition of shares may be
placed upon all or a portion or portions of the certificates evidencing the
corporation's shares.
The officers, directors and other members of management of this corporation
shall be subject to the doctrine of corporate opportunities only insofar as it
applies to business opportunities in which this corporation has expressed an
interest as determined from time to time by the corporation's Board of Directors
as evidenced by resolutions appearing in the corporation's Minutes. When such
areas of interest are delineated, all such business opportunities within such
areas of interest which come to the attention of the officers, directors and
other members of management of this company shall be disclosed promptly to this
corporation and made available to it. The Board of Directors may reject any
business opportunity presented to it and thereafter any officer, director or
other member of management may avail himself of such opportunity. Until such
time as this corporation, through its Board of Directors, has designated an area
of interest, the officers, directors and other members of management of this
corporation shall be free to engage in such areas of interest on their own and
this doctrine shall not limit the rights of any officer, director or other
member of management of this corporation to continue a business existing prior
to the time that such area of interest is designated by this corporation. This
provision shall not be construed to release any employee of the corporation
(other than an officer, director of member of management) from any duties which
he may have to the corporation.
No action of the corporation shall be in any way affected or invalidated by
reason of any of the directors, officers or other members of management of this
corporation being pecuniarily or otherwise interested either in their individual
capacities or as a director, officer or other member of management of another
corporation or association which is so interested, provided only that the fact
of such interest is known or disclosed to the Board of Directors of this
corporation at the time such action is taken. Any member of the Board of
Directors of this corporation who is so interested in a proposed action, in
either capacity, may be counted in determining the existence of a quorum at any
meeting of the Board of Directors of this corporation at which the proposed
action is considered, and may vote at such meeting to authorize the action, with
like force and effect as if he were not so interested.
The Board of Directors of this corporation is authorized to adopt, confirm,
ratify, alter, amend, rescind and repeal By-Laws or any portion thereof from
time to time.
A director of the corporation shall not be liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such elimination of liability is not permitted under the
Colorado Corporation Code as the same exists or may hereafter be amended. Any
repeal or modification of the foregoing provisions of this Article by the
shareholders of the corporation shall not affect adversely any elimination of
liability, right or protection of a director of the corporation with respect to
any breach, act, omission or transaction of such director occurring prior to the
time of such repeal or modification.
IN TESTIMONY WHEREOF, we have hereunto set our hands and seals this 4th day
of November, A.D. 1953.
______________________________(SEAL)
JEROME J. GOLDSTEIN
______________________________(SEAL)
IVAN L. GOLDSTEIN
______________________________(SEAL)
MAX T. GOLDSTEIN
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Scott's
Liquid Gold-Inc.'s 1996 Second Quarter 10-Q and is qualified in its entirety by
reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,233,700
<SECURITIES> 0
<RECEIVABLES> 4,213,500
<ALLOWANCES> 447,400
<INVENTORY> 4,458,200
<CURRENT-ASSETS> 12,436,500
<PP&E> 29,637,000
<DEPRECIATION> 8,761,300
<TOTAL-ASSETS> 33,635,700
<CURRENT-LIABILITIES> 7,496,400
<BONDS> 12,000,000
<COMMON> 1,003,100
0
0
<OTHER-SE> 14,398,300
<TOTAL-LIABILITY-AND-EQUITY> 33,635,700
<SALES> 10,086,900
<TOTAL-REVENUES> 10,141,600
<CGS> 3,471,700
<TOTAL-COSTS> 11,110,000
<OTHER-EXPENSES> 7,638,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 315,100
<INCOME-PRETAX> ( 968,400)
<INCOME-TAX> ( 400,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 568,400)
<EPS-PRIMARY> ( .06)
<EPS-DILUTED> ( .06)
</TABLE>
