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
SEPTEMBER 30, 1996
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 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 November 1, 1996.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Scott's Liquid Gold-Inc. & SubsidiariesConsolidated Statements of
Operations (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 10,568,600 $ 12,303,200 $33,134,700 40,828,500
Other income 68,200 76,900 185,800 370,600
________________________________________________________________________________
10,636,800 12,380,100 33,320,500 41,199,100
Costs and Expenses:
Cost of sales 3,339,500 3,805,800 10,927,600 11,767,300
Advertising 3,451,300 3,509,100 12,723,500 16,571,600
Selling 1,726,200 1,845,400 5,600,300 5,958,400
General and
administrative 1,636,600 1,557,000 4,208,600 4,223,700
Interest 304,400 282,100 880,800 533,000
________________________________________________________________________________
10,458,000 10,999,400 34,340,800 39,054,000
________________________________________________________________________________
Income (loss)
from operations 178,800 1,380,700 (1,020,300) 2,145,100
Other: lawsuit
settlement (Note 4) 3,153,900 22,200 3,587,900 179,700
________________________________________________________________________________
Income (loss) from
continuing operations
before income taxes (2,975,100) 1,358,500 (4,608,200) 1,965,400
Income tax
expense (benefit) (1,308,100) 522,700 (1,716,800) 758,100
________________________________________________________________________________
Income (loss)
from continuing
operations (1,667,000) 835,800 (2,891,400) 1,207,300
Discontinued operations
(Note 5):
Income (loss) from
operations, net of
income taxes (25,000) 8,000 (8,200) 28,800
Gain on disposal,
net of income taxes 59,700 - 59,700 -
________________________________________________________________________________
Net income (loss) $ (1,632,300) $ 843,800 $(2,839,900) $1,236,100
________________________________________________________________________________
Net income (loss) per common
share (Note 2):
Income (loss) from
continuing operations $ (.17) $ .08 $ (.29) $ .12
Income (loss)
from discontinued
operations - - .01 -
Net income (loss) per
common share $ (.17) $ .08 $ (.28) $ .12
</TABLE>
<TABLE>
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
<S> <C> <S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
Cash flows from operating activities:
Net income (loss) $(2,839,900) $ 1,236,100
____________________________
Adjustments to reconcile net income (loss)
to net cash provided (used)
by operating activities:
Depreciation and amortization 819,400 659,000
Provision for doubtful accounts receivable 203,200 193,500
Gain on sale of discontinued operations (59,700) -
Compensation expense of employee stock plans - 255,700
Change in assets and liabilities,
net of discontinued operations:
Receivables (5,429,200) (561,500)
Inventories 1,855,100 550,900
Prepaid expenses 230,100 254,000
Other assets 371,000 4,899,100
Accounts payable and accrued expenses 4,164,400 2,790,300
___________________________
Total adjustments to net income (loss) 2,154,300 9,041,000
___________________________
Net Cash Provided (Used) by
Operating Activities (685,600) 10,277,100
___________________________
Cash flows from investing activities:
Purchase of property, plant and equipment (1,006,500) (8,098,500)
Proceeds from sale of discontinued operations 500,000 -
Net change in assets of discontinued operations (287,200) (22,100)
___________________________
Net Cash Used by Investing Activities (793,700) (8,120,600)
___________________________
Cash flows from financing activities:
Proceeds from exercise of stock options - 175,100
Proceeds from short-term borrowings 150,600 154,700
Principal payments on short-term borrowings (134,900) (126,600)
Proceeds from long-term borrowings 2,007,400 -
Principal payments on long-term borrowings (28,400) -
Increase in bond sinking fund (810,400) -
Dividends paid - (989,000)
___________________________
Net Cash Provided (Used) by
Financing Activities 1,184,300 (785,800)
___________________________
Net Increase (Decrease) in Cash
and Cash Equivalents (295,000) 1,370,700
Cash and Cash Equivalents, beginning of period 4,720,200 3,712,600
___________________________
Cash and Cash Equivalents, end of period $ 4,425,200 $ 5,083,300
===========================
Supplemental disclosures:
Cash paid during the period for:
Interest (net of $30,300 and $374,800
capitalized in 1996
and 1995 respectively) $ 875,000 $ 522,300
Interest from discontinued operations $ 32,000 $ 35,900
Income taxes $ 715,700 $ 645,500
Noncash investing and financing activities:
Construction commitments - $ 2,496,000
Note receivable on sale of
discontinued operations $ 300,000 -
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
Consolidated Balance Sheets
September 30, 1996 (Unaudited) and December 31, 1995
ASSETS
<S> <C> <C>
1996 1995
Current assets:
Cash $ 4,425,200 $ 4,720,200
Trade receivables (Note 3) 3,534,000 2,993,100
Other receivables (Note 4) 4,685,100 -
Inventories:
Finished goods 1,806,800 3,329,100
Raw materials 1,768,600 2,101,400
Prepaid expenses 193,100 423,200
Deferred tax assets 503,500 503,500
_______________________________________________________________________
Total current assets 16,916,300 14,070,500
_______________________________________________________________________
Property, plant and equipment
at cost 27,672,100 26,665,600
Less accumulated depreciation 7,596,200 6,846,200
_______________________________________________________________________
20,075,900 19,819,400
Other assets 300,700 741,100
Net assets of discontinued
operations (Note 5) 341,700 494,800
_______________________________________________________________________
$ 37,634,600 $ 35,125,800
LIABILITIES & SHAREHOLDERS' EQUITY
1996 1995
Current liabilities:
Notes payable $ 15,700 $ -
Accounts payable (Note 4) 6,192,100 3,323,900
Accrued expenses (Note 4) 4,676,900 3,380,700
Current maturities of
long-term debt 1,285,300 1,035,300
_______________________________________________________________________
Total current liabilities 12,170,000 7,739,900
Long-term debt (Note 4) 10,965,600 10,047,000
Deferred income taxes 729,900 729,900
_______________________________________________________________________
23,865,500 18,516,800
_______________________________________________________________________
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 8,047,000 10,886,900
_______________________________________________________________________
Shareholders' equity 13,769,100 16,609,000
_______________________________________________________________________
$ 37,634,600 $ 35,125,800
______________________________________________________________________
See Notes to Consolidated Financial Statements
</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. Certain reclassifications have been made in the 1995 interim periods on
the Consolidated Statements of Income and the December 31,1995 Consolidated
Balance Sheet to conform to the classifications used in the current periods.
NOTE 2
Per share data for 1996 was determined by using the weighted average number of
common shares outstanding during the periods. 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 nine months ended September 30, 1996 and 10,250,400 and 10,272,000
for the three and nine months ended September 30, 1995 respectively.
At September 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 September 30, 1996 and December 31, 1995 were
$511,000 and $494,200 respectively.
NOTE 4
In October of 1996, the Company settled the environmental lawsuit brought
against it by the United States on behalf of the U.S. Army. Under the terms of
the settlement, the Company will pay, during the fourth quarter of 1996,
$1,000,000 to the Army and, over a period of eight years, will pay an additional
$2,000,000 in equal annual installments, together with interest at a variable
rate (currently 5.7%). The $2,000,000 is evidenced by a promissory note secured
by the Company's claims against certain insurers which did not participate in
the settlement. An additional $3,000,000 will be paid, of which $2.4 million was
paid in November 1996, to the Army by insurance carriers which did participate
in the settlement.
During the quarter ended September 30, 1996, the Company charged operations for
both the $1,000,000 payment due in 1996 (paid in November 1996) and the
$2,000,000 payable over the eight year period. At September 30, 1996, the $1
million is carried in the balance sheet as accounts payable, the $2 million is
carried as a long-term debt, with the first of eight installments classified as
current portion of long-term debt and the additional $3 million is included in
accrued liabilities and other receivables. The Company's legal fees related to
the lawsuit, net of insurance recoveries, (a net of $357,000) is included in the
Income Statement under "Other--Lawsuit Settlement".
The Company has also accrued, as of September 30, 1996, $230,000 to cover a
settlement reached with the South Adams County Water and Sanitation District
(whose wells are affected by area ground water contamination relating to the
Rocky Mountain Arsenal).
Certain insurers, which provided substantial liability coverage during the
period covered by the lawsuit, did not contribute to the Company's settlement
with the Army. The Company intends to pursue recovery from those carriers to the
full extent of its coverages during the years in question.
NOTE 5
Effective September 20, 1996, the Company's wholly owned subsidiary, Aquafilter
Corporation ("Aquafilter"), sold its manufacturing equipment, inventories,
patents, trade names and goodwill to Lee Pharmaceuticals, Inc. for $800,000. The
Company received $500,000 cash and a note for $300,000 payable through April 1,
1997 at an interest rate of 8.25%. The gain from the sale of this discontinued
operation ($59,700, net of income taxes of $37,000) includes additional
estimated costs of approximately $200,000 related to the shutdown of Aquafilter.
The Company plans to liquidate the balance of the subsidiary's net assets
(primarily accounts receivable and real property less certain liabilities,
principally the mortgage loan applicable to Aquafilter's land and building) by
June of 1997.
Aquafilter's operating loss, net of income taxes, for the three and nine months
ended September 30, 1996 was $25,000 (net of income tax benefits of $14,000)
and $8,200 (net of income tax benefits of $5,300) respectively; and, for the
same periods of 1995, operating income was $8,000 (net of income taxes of
$4,300) and $28,800 (net of income taxes of $14,900). The 1995 results have been
restated to conform to the 1996 presentation.
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 as of November 23, 1994, and
prior to that date on Nasdaq or Nasdaq National Market, were as follows:
High Low
Three Months Ended Bid Bid
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
September 30, 1996 2-1/8 1-1/2
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
General
The Company manufactures and markets household chemical
products and skin care products; and, until late September
of 1996, also produced and marketed cigarette filters
through a wholly-owned subsidiary. 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 and in Canada. The Company
plans to begin to market its skin care products in certain
South American countries in the near future. 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 three quarters of
1996. During the third quarter of 1996, as is more fully
discussed below, the Company recognized a non-recurring loss
attributable to the settlement, in October of 1996, of a
lawsuit brought against the Company by the U.S. Army. That
lawsuit sought a contribution from the Company to
remediation expenses incurred by the Army in connection with
its clean-up of contamination in a groundwater aquifer at
the Rocky Mountain Arsenal, a Superfund site. The non-
recurring loss is net of $3.0 million in insurance proceeds,
of which $2.4 million was received in October 1996, from
certain of the Company's insurers. The Company intends to
pursue recovery of the full amounts paid by the Company from
certain other insurers who did not participate in the
settlement with the Army.
Results of Operations
<TABLE>
Summary of Results as a Percentage of Net Sales
(Audited) Nine Months Ended
Year Ended September 30
December 31, 1995 1996 1995
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold
household products 37.6% 38.2% 36.5%
Neoteric Cosmetics 62.4% 61.8% 63.5%
____________________________________________________________
Total net sales 100.0% 100.0% 100.0%
Cost of sales 27.6% 33.0% 28.8%
____________________________________________________________
Gross profit 72.4% 67.0% 71.2%
Other revenue 1.0% 0.6% 0.9%
____________________________________________________________
73.4% 67.6% 72.1%
____________________________________________________________
Operating expenses 62.5% 68.0% 65.5%
Interest 1.5% 2.7% 1.3%
____________________________________________________________
64.0% 70.7% 66.8%
____________________________________________________________
Income (loss) before
income taxes 9.4% (3.1%) 5.3%
</TABLE>
Note: During the third quarter of 1996, the Company sold
certain assets of Aquafilter Corporation, a wholly-owned
subsidiary. The assets sold included the subsidiary's
manufacturing equipment, patents, inventories, trade name
and goodwill. Accordingly, the figures set forth above no
longer reflect operations of Aquafilter Corporation which
are now set forth in the Company's financial statements
under the caption "Discontinued operations". Please see Note
5 to Financial Statements.
Nine Months Ended September 30, 1996
Compared to Nine Months Ended September 30, 1995
Consolidated net sales for the first three quarters of 1996
were $33,134,700 vs. $40,828,500 for the same period of
1995, a decrease of $7,693,800 or about 18.8%. Average
selling prices for the first nine months of 1996 were higher
than those of the first three quarters of 1995 by $172,300,
prices of household chemical products being up by $454,500
(most of which related to Touch of Scent), offset by a
decrease in average selling prices of cosmetics products of
$282,200.
During the first three quarters of 1996, net sales of
cosmetics products accounted for 61.8% of consolidated net
sales compared to 63.5% for the first nine months of 1995.
Net sales of these products for those periods were
$20,488,000 in 1996 compared to $25,933,200 in 1995, a
decrease of $5,445,200 or 21.0%. Of that decrease, nearly
$1.6 million pertained to sales of Men's After Shave Lotion,
a product phased out by the Company in late 1995 due to a
lack of consumer interest, and about $2.0 million 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 four 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 (several
were introduced during 1996) and the Company's ability to
promote such products through advertising. Notwithstanding
the foregoing, the Company believes that sales of its skin
care products in 1996 will be lower than those of 1995. 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 nine
months of 1996 accounted for 38.2% of consolidated net sales
compared to 36.5% 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 three
quarters of 1996, sales of household chemical products were
$12,646,700 compared to $14,895,300 for the first nine
months of 1995, a decrease of $2,248,600 or 15.1%. During
those periods, sales of "Scott's Liquid Gold" for wood
decreased from $7,506,400 in 1995 to $7,149,800 in 1996
(down by $356,600 or 4.8%), and sales of "Touch of Scent"
decreased from $7,388,900 in 1995 to $5,496,900 in 1996
(down by $1,892,000 or 25.6%). Touch of Scent sales have now
declined for nine consecutive quarters. In an effort to
increase sales of its air fresheners, the Company has tested
and is currently introducing a new line of decorative
fixtures to dispense new, concentrated formulae now
contained in its refill units.
On a consolidated basis, cost of goods sold was $10,927,600
for the first nine months of 1996 compared to $11,767,300
for the comparable period of 1995, a decrease of 7.1% (on a
decrease in sales of 18.8%). As a percentage of consolidated
net sales, cost of goods sold was 33.0% in 1996 vs. 28.8% in
1995, an increase of 14.6%. For simplicity, the explanation
which follows assumes that, for the first nine months of
1995, identical products and quantities thereof were sold as
were sold in the same period of 1996.
During the first three quarters of 1996, costs of raw
materials were greater than those of the same period of 1995
by $1,229,100. Raw material costs increased by $1,008,500
for Touch of Scent, $87,600 for Scott's Liquid Gold, and
$133,000 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 nine months of 1996, as did the
Company's laboratory expenses and other items classified by
the Company as factory overhead. Such increases in 1996
(over the first nine months of 1995), including production
variances, particularly in regard to under-absorbed overhead
caused by lower production, amounted to $802,700. Direct
labor for the first three quarters of 1996 was lower than
that of the comparable period of 1995 by $7,600.
In total, the cost of producing the products sold in 1996
was higher than that of 1995 by $2,039,400. Were it not for
this increase in production costs, the gross profit
percentage for the first nine months of 1996, calculated
with sales reduced by the 1996 average price increase, would
have been just slightly higher than it was for the first
three quarters of 1995.
Advertising expenses for the first nine months of 1996 were
$12,723,500 compared to $16,571,600 for the comparable nine
months of 1995, a decrease of $3,848,100 or 23.2 %. Such
decrease was a part of the Company's planned reduction in
advertising expenditures for 1996. Of this decrease,
$4,032,500 pertained to a decrease in advertising of
cosmetics products and $184,400 pertained to an increase in
advertising of household chemical products. During the last
quarter of 1996, the Company intends to spend minimally to
advertise its products. However, as a matter of sound
business judgment, the Company recognizes 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 further that
sustaining its advertising program is highly dependent upon
sales of its skin care products.
Selling expenses for the first three quarters of 1996 were
$5,600,300 compared to $5,958,400 for the comparable period
of 1995, a decrease of $358,100 or 6.0%. Of that decrease,
$501,200 is attributable to a decrease in shipping expenses
and sales commissions (which vary with sales volume), and
$177,100 relates to decreased costs of slotting and
couponing; all offset by an increase in expenses for
promotional goods of $162,100, an increase in expenses for
insurance, depreciation, property taxes and utilities of
$144,900 and a net increase of $13,200 in a variety of other
selling expenses, none of which, by itself, was material.
Administrative expenses were lower in the first nine months
of 1996 than those of the same nine months of 1995 by
$194,800, a decrease of 4.4%. During the third quarter of
1996, certain legal and other professional expenses incurred
earlier during 1996 (in connection with a lawsuit brought by
the U.S. Army against the Company) were removed from general
and administrative expenses and reclassified as lawsuit
settlement.
Interest expense for the first nine months of 1996 was
greater than that of the comparable period of 1995 by
$347,800, an increase of 65.2%, which was due to a decrease
in the amount of interest capitalized during the
construction of the Company's physical facilities during
1995. (See Liquidity and Capital Resources below.) Other
income decreased by $184,800 during the first three quarters
of 1996 compared to the same period 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 September 30, 1996
Compared to Three Months Ended September 30, 1995
Consolidated net sales for the third quarter of 1996 were
$10,568,600 vs. $12,303,200 for the third quarter of 1995, a
decrease of $1,734,600 or about 14.1%. Average selling
prices for the three months ended September 30, 1996 were
higher than those of the third quarter of 1995 by $141,100,
prices of household chemical products being up by $280,100
(most of which related to Touch of Scent), and average
selling prices of cosmetics products being down by $139,100.
During the third quarter of 1996, net sales of cosmetics
products accounted for 61.5 % of consolidated net sales
compared to 62.2% for the third quarter of 1995. Net sales
of these products for those periods were $6,498,000 in 1996
compared to $7,647,800 in 1995, a decrease of $1,149,800 or
15.0%. Of that decrease, about $900,000 pertained to a
decrease in sales of the Company's body wash products which
are subject to intense price competition. For additional
information regarding the decrease and steps to improve
results, see the discussion for the nine months ended
September 30, 1996.
Sales of household chemical products for the third quarter
of 1996 accounted for 38.5% of consolidated net sales
compared to 37.8% for the same quarter of 1995. During the
three months ended September 30, 1996, sales of household
chemical products were $4,070,600 compared to $4,655,400
for the same quarter of 1995, a decrease of $584,800 or
12.6%. During the three months ended September 30, 1996,
sales of "Scott's Liquid Gold" for wood increased from
$2,031,400 to $2,182,300 (up $150,900 or 7.4%), and sales of
"Touch of Scent" decreased from $2,624,000 to $1,888,300
(down $735,700 or 28.0%). See the discussion regarding
Touch of Scent for the nine months ended September 30, 1996.
On a consolidated basis, cost of goods sold was $3,339,500
during the third quarter of 1996 compared to $3,805,800 for
the comparable quarter of 1995, a decrease of $466,300 or
12.3% (on a decrease in sales of 14.1%). As a percentage of
consolidated net sales, cost of goods sold was 31.6% in 1996
vs. 30.9% in 1995. The Company continues to experience under-
absorbed overhead caused by lower production.
Advertising expenses for the third quarter of 1996 were
$3,451,300 compared to $3,509,100 for the comparable quarter
of 1995, a decrease of $57,800 or 1.7%. For information on
advertising expenditures, see the discussion for the nine
months ended September 30, 1996.
Selling expenses for the quarter ended September 30, 1996
were $1,726,200 compared to $1,845,400 for the comparable
quarter of 1995, a decrease of $119,200 or 6.5%. This
decrease related primarily to decreases in brokerage
commissions and shipping expenses which vary with sales
volume. Administrative expenses for the third quarter of
1996 were $1,636,600 compared to $1,579,200 for the same
quarter of 1995, an increase of $57,400 or 3.6%.
Interest expense for the third quarter of 1996 was greater
than that of the comparable period of 1995 by $22,300, an
increase of 7.9%, which was due to the capitalization of a
portion of the Company's interest expense during 1995 during
the final phase of the construction of the Company's new
physical facilities. (See Liquidity and Capital Resources
below.) Other income decreased by $8,700 during the third
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 third 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 and, at this time, all moneys required to
be paid out of Company funds have 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 September 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 nine months of 1996, the Company's working
capital decreased by $1,584,300, and concomitantly, its
current ratio (current assets divided by current
liabilities) decreased from 1.82:1 at December 31, 1995 to
1.39:1 at September 30, 1996. This decrease in working
capital is attributable to (1) an operating loss in the
first nine months ($1,020,300) and expenses of and
settlement of an environmental lawsuit ($3,587,900), both
offset by a gain on discontinued operations ($51,500, net of
taxes) and refundable income taxes of $1,716,800, resulting
in a net decrease for the nine months of $2,839,900; and (2)
capital expenditures in excess of depreciation of $256,500;
both offset by (3) an increase in long-term debt of
$918,600; (4) a decrease in other assets of $440,400, and
(5) a decrease in net assets of a discontinued operation
($153,100). At September 30, 1996, the ratio of consolidated
funded debt to consolidated net worth was .83:1.
Other receivables increased by $4,685,100 during the nine
months ended September 30, 1996. This increase includes $3
million payable to the United States Army from certain
insurers of the Company (see OOtherO below) and $1,685,100
attributable to income tax benefits for losses incurred in
1996. Inventories were down at September 30, 1996 from last
year's end by about $1,855,100 of which $1,165,600 pertained
to Alpha Hydrox. Such reduction was intentional to aid cash
flow for the period. Other assets were $440,400 less than
those at December 31, 1995 primarily due to the payment of
$371,000 to complete the Company's construction project
($371,000 was set up at year end as both an asset and a
liability) and the amortization of $69,400 of deferred
expenses related to the Company's bond issue.
Trade accounts payable at September 30, 1996 were $6,192,100
compared to $3,323,900 at December 31, 1995, an increase of
$2,868,200. Of that increase, $2,412,500 is applicable to
advertising which occurred during the third quarter of 1996,
whereas advertising was essentially non-existent during the
last quarter of 1995; $1,230,000 pertains to the current
amount due from the Company upon settlement of an
environmental lawsuit; and $774,300 represents a decrease in
trade payables, excluding advertising. Accrued expenses at
September 30, 1996 were $4,676,900 compared to $3,380,700 at
December 31, 1995, an increase of $1,296,200. The major
contributor to this increase was $3 million due to the
United States Army from certain insurance companies (see
below), offset by (1) a decrease in accrued income taxes
($815,700), (2) a decrease of $650,000 which related to
construction commitments, and (3) a decrease in accrued
payrolls of $267,200.
Other
As previously reported, the Company has been 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. In October of 1996, the Company and the
United States, on behalf of the Department of the Army,
negotiated a settlement of this dispute and submitted a
Settlement Agreement and Order to the United States District
Court for the District of Colorado. The Agreement, which
admits no wrong doing by the Company and which is expected
to be approved by the Court on November 6, 1996, requires
the payment to the United States of $6 million of which $3
million is to be paid at once by certain of the Company's
insurers and $1 million is to be paid by the Company. The
additional $2 million, which the Company will attempt to
recover from insurers which did not participate in the
settlement with the Army, is to be paid by the Company in
equal installments of $250,000 over eight years, beginning
on October 1, 1997, together with interest at a rate
approximately equal to the 52-week Treasury Bill rate,
adjusted annually. The Company intends to pursue recovery of
the amounts paid by it to the Army from certain insurers who
did not participate in the settlement.
In May, 1996, a lawsuit was commenced against Neoteric
Cosmetics, Inc. (and others not related to the Company)
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 and who are
involved in the plaintiff 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 is mounting a
vigorous defense.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see "Other" in Item 2 of Part I of this Report which
information is incorporated herein by this reference. Such
information concerns certain legal proceedings. The lawsuit entitled
"United States of America v. Scott's Liquid Gold-Inc., in the United
States District Court for the District of Colorado, regarding the
Rocky Mountain Arsenal, was dismissed on November 6, 1996.
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) There are no exhibits to this Report
(b) The following reports were filed by the Company on
Form 8-K for the Third Quarter of 1996:
A Current Report on Form 8-K concerning an event occurring on
September 20, 1996, and reported under Item 6, Other Events.
A Current Report on Form 8-K concerning an event on September 30,
1996, and reported under Item 5, Other Events.
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.
November 6, 1996 BY: /s/ Mark E. Goldstein
Date Mark. E. Goldstein, President
November 6, 1996 BY: /s/Barry Shepard
Date Barry Shepard, Treasurer
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Scott's
Liquid Gold-Inc.'s 1996 Third Quarter 10-Q and is qualified in its entirety by
reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,425,200
<SECURITIES> 0
<RECEIVABLES> 8,730,100
<ALLOWANCES> 511,000
<INVENTORY> 3,575,400
<CURRENT-ASSETS> 16,916,300
<PP&E> 27,672,100
<DEPRECIATION> 7,596,200
<TOTAL-ASSETS> 37,634,600
<CURRENT-LIABILITIES> 12,170,000
<BONDS> 12,000,000
<COMMON> 1,003,100
0
0
<OTHER-SE> 12,766,000
<TOTAL-LIABILITY-AND-EQUITY> 37,634,600
<SALES> 33,134,700
<TOTAL-REVENUES> 33,320,500
<CGS> 10,927,600
<TOTAL-COSTS> 33,460,000
<OTHER-EXPENSES> 3,587,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 880,800
<INCOME-PRETAX> (4,608,200)
<INCOME-TAX> (1,716,800)
<INCOME-CONTINUING> (2,891,400)
<DISCONTINUED> 51,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,839,900)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
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