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, 1997
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 10,084,358 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on October 27, 1997.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Operations (Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Net sales $12,821,700 $10,568,600 $39,000,300 $33,134,700
Other income 114,400 68,200 368,200 185,800
________________________________________________________
12,936,100 10,636,800 39,368,500 33,320,500
Costs and Expenses:
Cost of sales 3,635,300 3,339,500 10,837,700 10,927,600
Advertising 3,643,000 3,451,300 13,411,500 12,723,500
Selling 1,962,000 1,726,200 5,966,700 5,600,300
General and
Administrative 1,726,700 1,636,600 4,985,000 4,208,600
Interest 332,200 304,400 994,800 880,800
________________________________________________________
11,299,200 10,458,000 36,195,700 34,340,800
________________________________________________________
Income (loss)
from operations 1,636,900 178,800 3,172,800 (1,020,300)
Other:
Lawsuit settlement (296,000) 3,153,900 (272,500) 3,587,900
________________________________________________________
Income (loss) from
continuing operations
before income taxes 1,932,900 (2,975,100) 3,445,300 (4,608,200)
Income tax
expense (benefit) 715,200 (1,308,100) 1,274,700 (1,716,800)
________________________________________________________
Income (loss)
from continuing
operations 1,217,700 (1,667,000) 2,170,600 (2,891,400)
Discontinued operations:
Income (loss) from
operations, net
of income taxes - (25,000) - (8,200)
Gain on disposal,
net of income taxes - 59,700 - 59,700
________________________________________________________
Net income (loss) $ 1,217,700 $(1,632,300) $ 2,170,600 (2,839,900)
Net income (loss)
per common share (Note 2)
Income (loss) from
continuing operations $ .12 $ (.17) $ .21 $ (.29)
Income from
discontinued operations - - - .01
________________________________________________________
Net income (loss) per
common share $ .12 $ (.17) $ .21 $ (.28)
Weighted average
number of common
shares outstanding 10,244,200 10,030,900 10,168,700 10,030,900
See Notes to Consolidated Financial Statements
</TABLE>
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
Nine Months Ended September 30,
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net income (loss) $2,170,600 $(2,839,900)
________________________________
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 849,800 819,400
Provision for doubtful accounts receivable 118,500 203,200
Gain on sale of discontinued operations - (59,700)
Compensation expense of employee stock plans 81,300 -
Change in assets and liabilities,
net of discontinued operations:
Accounts and other receivables (1,686,700) (5,429,200)
Inventories 36,400 1,855,100
Prepaid expenses 1,100 230,100
Other assets - 371,000
Accounts payable and accrued expenses 1,590,000 4,164,400
________________________________
Total adjustments to net income (loss) 990,400 2,154,300
________________________________
Net Cash Provided (Used) by
Operating Activities 3,161,000 (685,600)
________________________________
Cash flows from investing activities:
Purchase of property, plant and equipment (194,600) (1,006,500)
Proceeds from sale of discontinued operations - 500,000
Net change in assets of discontinued
Operations 31,300 (287,200)
________________________________
Net Cash Used by Investing Activities (163,300) (793,700)
________________________________
Cash flows from financing activities:
Proceeds from exercise of stock options 5,400 -
Proceeds from short-term borrowings 135,200 150,600
Principal payments on short-term borrowings (121,700) (134,900)
Proceeds from long-term borrowings - 2,007,400
Principal payments on long-term borrowings (33,000) (28,400)
Increase in bond sinking fund (909,700) (810,400)
________________________________
Net Cash Provided (Used) by
Financing Activities (923,800) 1,184,300
________________________________
Net Increase (Decrease) in
Cash and Cash Equivalents 2,073,900 (295,000)
Cash and Cash Equivalents,
beginning of period 4,749,200 4,720,200
________________________________
Cash and Cash Equivalents,
end of period $ 6,823,100 $ 4,425,200
Supplemental disclosures:
Cash paid during the period for:
Interest (net of $30,300
capitalized in 1996) $ 919,300 $ 875,000
Interest paid by discontinued operations $ 30,200 $ 32,000
Income taxes $ 859,800 $ 715,700
Noncash investing activities:
Note receivable on sale of
discontinued operations $ - $ 300,000
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
ASSETS
1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,823,100 $ 4,749,200
Trade receivables (Note 3) 5,451,900 3,362,100
Other receivables 160,200 681,800
Inventories:
Finished goods 1,637,000 2,244,900
Raw materials 2,455,800 1,884,300
Prepaid expenses 264,600 265,700
Deferred tax assets 761,400 761,400
_________________________________
Total current assets 17,554,000 13,949,400
Property, plant and equipment
at cost 27,045,500 26,850,900
Less accumulated depreciation 7,774,100 6,989,100
_________________________________
19,271,400 19,861,800
Other assets 213,100 277,900
Net assets of
discontinued operations 343,500 374,800
_________________________________
$37,382,000 $34,463,900
LIABILITIES & SHAREHOLDERS' EQUITY
1997 1996
Current liabilities:
Notes payable $ 13,500 $ -
Accounts payable 4,869,000 3,723,600
Accrued expenses 3,183,400 2,738,800
Current maturities of
long-term debt 1,289,600 1,289,600
_________________________________
Total current liabilities 9,355,500 7,752,000
Long-term debt 9,834,000 10,776,700
Deferred income taxes 237,100 237,100
_________________________________
19,426,600 18,765,800
_________________________________
Shareholders' equity (Note 2):
Common stock 1,008,400 1,003,100
Capital in excess of par 4,800,400 4,719,000
Retained earnings 12,146,600 9,976,000
________________________________
Shareholders' equity 17,955,400 15,698,100
_________________________________
$37,382,000 $34,463,900
</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 1997 was determined by using the weighted average number of
common and common equivalent shares outstanding, using the treasury stock
method.
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.
Average shares outstanding used in the above computations were 10,244,200 and
10,168,700 for the three and nine months ended September 30, 1997 respectively,
and 10,030,900 for the three and nine months ended September 30, 1996.
At September 30, 1997 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
Allowances for doubtful accounts at September 30, 1997 and December 31, 1996
were $704,100 and $580,400 respectively.
NOTE 4
On October 14,1997, the Company completed the sale of its land and building in
Fort Lauderdale, Florida, which property was owned by the Company's wholly owned
subsidiary, Aquafilter Corporation. The gain from that sale (approximately
$700,000 net of taxes) will be recognized in the last quarter of this year.
Market Information
The high and low prices of Scott's Liquid Gold-Inc. common stock as traded on
the New York Stock Exchange were as follows:
<TABLE>
Three Months Ended High Low
<S> <C> <C>
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
December 31, 1996 1-7/8 1-1/4
March 31, 1997 2-7/8 1-3/8
June 30, 1997 2-7/8 1-1/2
September 30, 1997 4-1/16 2
</TABLE>
NYSE Symbol: SGD
Current stock quotes, SEC filings, quarterly earnings and press releases can be
found at: http://www.businesswire.com/cnn/sgd.htm
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Summary of Results as a Percentage of Net Sales
<TABLE>
(Audited)
Year Nine Months
Ended Ended
December 31, September 30,
<S> <C> <C> <C>
1996 1997 1996
Net sales
Scott's Liquid Gold
household products 39.9% 30.0% 38.2%
Neoteric Cosmetics 60.1% 70.0% 61.8%
_______________________________
Total net sales 100.0% 100.0% 100.0%
Cost of sales 32.1% 27.8% 33.0%
_______________________________
Gross profit 67.9% 72.2% 67.0%
Other revenue 0.7% 1.0% 0.6%
_______________________________
68.6% 73.2% 67.6%
_______________________________
Operating expenses 61.1% 62.5% 68.0%
Interest 2.7% 2.6% 2.7%
_______________________________
63.8% 65.1% 70.7%
_______________________________
Income (loss) before income taxes 4.8% 8.1% (3.1%)
</TABLE>
General
The Company manufactures and markets household chemical and skin care products;
and, until 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 line of skin care products, Alpha Hydrox,
which is sold throughout the United States and Canada, and which has recently
been introduced in Argentina and Uruguay. Sales of the cosmetics line were $15.8
million in 1993, $30.6 million in 1994 and $31.6 million in 1995; but, for a
variety of reasons which are set forth in the Company's most recent Annual
Report, sales of the Company's skin care products decreased to $26.6 million in
1996. Largely as a result of the Company's entry into the skin care business,
net income (excluding income from discontinued operations), increased from
approximately $288,000 in 1992 to $2,841,000 in 1993, and to $5,818,000 in 1994.
However, in 1995, net income declined to about $2,784,000 due to heavy
advertising of cosmetics products and a decline of 12.3% in sales of the
Company's household chemical products; and, in 1996, the Company posted a net
loss (after a charge of $3,588,000 attributable to the settlement of an
environmental lawsuit) of $934,000. During the first three quarters of 1997, the
Company's net sales were $39,000,300 compared to $33,134,700 for the same period
of 1996, an increase of 17.7%; and its income from operations (a result which
does not consider a credit in 1997 of $272,500 and a charge in 1996 of
$3,587,900, both related to the environmental lawsuit settlement, nor income
taxes or net income from discontinued operations) was $3,172,800 for the first
nine months of 1997 compared to a loss of $1,020,300 for the first three
quarters of 1996.
Nine Months Ended September 30, 1997
Compared to Nine Months Ended September 30, 1996
Consolidated net sales for the first nine months of 1997 were $39,000,300 vs.
$33,134,700 for the first three quarters of 1996, an increase of $5,865,600 or
17.7%. Average selling prices for the first nine months of 1997 were higher than
those of the same period of 1996 by $2,629,200, prices of household chemical
products being up by $1,275,000 (all of which related to Touch of Scent), while
average selling prices of cosmetics products increased, predominantly in the
third quarter, by $1,354,200.
During the first three quarters of 1997, net sales of cosmetics products
accounted for 70% of consolidated net sales compared to 61.8% for the first nine
months of 1996. Net sales of these products for those periods were $27,285,900
in 1997 compared to $20,488,000 in 1996, an increase of $6,797,900 or 33.2%.
That increase was the result of higher average selling prices and increases in
sales of the Company's basic skin care products, Alpha Hydrox cremes, lotions
and face wash. Further, for the nine months ended September 30, 1996, sales of
Alpha Hydrox were adversely affected by a discontinuance of an unsuccessful
product and customer returns of that product. The Company also attributes the
increase in sales of Alpha Hydrox products to an improved advertising schedule,
which resulted in a substantial decrease in expenditures for advertising of the
Company's skin care products, and to the effectiveness of that advertising,
including the airing of several new television commercials which, apparently,
have been well received by the viewing public. Competition continues to be keen
in the skin care category in which the Company participates and is expected to
remain so for the foreseeable future. While the Company is pleased with its
Alpha Hydrox sales results for the first nine months of 1997, no assurance can
be given that such results will continue into the future, even for the short
run. As indicated below, the Company typically decreases advertising
expenditures in its fourth quarter.
Sales of household chemical products for the first nine months of 1997 accounted
for 30% of consolidated net sales compared to 38.2% for the same period of 1996.
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 nine months ended September 30, 1996, sales of household chemical products
were $12,646,700 compared to $11,714,400 for the first nine months of 1997, a
decrease of $932,300 or 7.4%. Sales of 'Scott's Liquid Gold' for wood were down
by $813,500, a decrease of 11.4%, while sales of 'Touch of Scent' were down by
$118,800 or 2.2%. The Company believes that its expenditures to advertise
Scott's Liquid Gold for wood (which expenditures were lower than those of the
first nine months of 1996 by $230,900) were adequate to maintain the product's
market presence, but were inadequate to increase sales of that product and,
apparently, inadequate to prevent the 7.4% drop in sales volume. As was reported
previously, Touch of Scent sales had declined over an extended period of time
and, therefore, in an effort to increase sales of its air fresheners, in
December of 1996, the Company introduced a new line of highly decorative
fixtures to dispense new, concentrated formulae now contained in its refill
units. The Company's experience, thus far, with its new line of fixtures is less
than satisfactory. The Company had hoped that its new fixtures would be the
catalyst to revitalize its line of air fresheners. So far, that has not been so.
As noted above, during the first nine months of 1997, sales of Touch of Scent
decreased by 2.2% compared to 1996; but, case sales of that product for the
first nine months of 1997 compared to 1996 decreased by about 25%, while, at the
same time, expenditures to advertise that product line increased from $303,000
to $2,689,500. The Company has re-examined its allocation of budgeted
advertising dollars to its various product lines and intends to adjust that
allocation in 1998.
On a consolidated basis, cost of goods sold was $10,837,700 during the first
three quarters of 1997 compared to $10,927,600 for the same period of 1996, a
decrease of $89,900 or less than 1.0% (on an increase in sales of 17.7%). As a
percentage of consolidated net sales, cost of goods sold was 27.8% in 1997 vs.
33.0% in 1996, a decrease of about 15.8%. The decrease in cost of goods sold for
the nine months ended September 30, 1997, during a period which saw sales
increase by 17.7%, is primarily the result of an increase in average selling
prices during this period, and a significant change in the mix of products sold.
Alpha Hydrox products are less costly to produce relative to their sales price
than are household chemical products. Alpha Hydrox products accounted for 70% of
consolidated net sales in the most recent nine months, compared to 61.8% for the
same period last year.
Advertising expenses for the first nine months of 1997 were $13,411,500 compared
to $12,723,500 for the comparable period of 1996, an increase of $688,000 or 5.4
%. Advertising expenses applicable to household chemicals were higher during the
first three quarters of 1997 than those of the comparable period of 1996, by
$2,155,600, an increase of 84.4%. Advertising expenses for Liquid Gold decreased
by $230,900 whereas expenses to advertise Touch of Scent increased by
$2,386,500. Advertising expenses for Alpha Hydrox were $1,467,600 lower during
the first nine months of 1997 than in the comparable period of 1996. During the
last quarter of 1997, the Company intends to spend little to advertise its
products. Nonetheless, the Company continues to believe that, as a matter of
sound business judgment, it must continue to advertise aggressively whenever it
is fiscally responsible to do so, 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 over the long run. Sustaining the Company's advertising program is
highly dependent upon sales of its skin care products.
Selling expenses for the first nine months of 1997 were $5,966,700 compared to
$5,600,300 for the comparable period of 1996, an increase of $366,400 or 6.5%.
Brokerage commissions and freight out (which vary with sales volume) were up by
$167,500; costs of couponing and slotting allowances were up by $336,400,
whereas the costs of promotional goods decreased by $123,300 and other selling
expenses decreased by $14,200.
Administrative expenses were higher in the first nine months of 1997 than those
of the first three quarters of 1996 by $776,400, ($4,985,000 vs. $4,208,600), an
increase of 18.5%. Of that increase, $416,300 relates to an increase in accruals
for bonus and profit sharing plans (there were no such accruals during the first
nine months of 1996), $381,100 pertains to an increase in legal and professional
expenses, and $63,700 pertains to a net increase in other administrative
expenses; all offset by a decrease of $84,700 in bad debt expense. The increase
in legal and professional fees was primarily the result of the reclassification,
in 1996, of professional fees which pertained to an environmental lawsuit.
Interest expense for the first nine months of 1997 was greater than that of the
comparable three quarters of 1996 by $114,000, an increase of 12.9%, which was
due to increased debt and the capitalization of approximately $30,000 of
interest expense during the first quarter of 1996, the final quarter of the
Company's construction period. (See Liquidity and Capital Resources below.)
Other income increased by $182,400 during the nine months ended September 30,
1997 compared to the same period of 1996 due to an increase in interest rates
applicable to cash reserves and an increase in the cash reserves themselves.
During the first nine months of both 1997 and 1996, expenditures for research
and development were not material (under 1% of revenues).
Three Months Ended September 30, 1997
Compared to Three Months Ended September 30, 1996
Consolidated net sales for the third quarter of 1997 were $12,821,700 vs.
$10,568,600 for the three months ended September 30, 1996, an increase of
$2,253,100 or 21.3%. Average selling prices for the third quarter of 1997 were
higher than those of the third quarter of 1996 by $1,495,800, prices of
household chemical products being down by $59,100 while average selling prices
of cosmetics products were up by $1,554,900.
During the third quarter of 1997, net sales of cosmetics products accounted for
73.7% of consolidated net sales compared to 61.5% for the third quarter of 1996.
Net sales of these products for those periods were $9,450,600 in 1997 compared
to $6,498,000 in 1996, an increase of $2,952,600 or 45.4%. About half of that
increase resulted from increases in average selling prices and most of the
balance to increases in sales of the Company's basic products, Alpha Hydrox
cremes and lotions and face wash. Explanations of the increase in sales of Alpha
Hydrox products set forth in the discussion for the nine months ended September
30, 1997 and 1996 are equally applicable to the third quarters then ended.
Sales of household chemical products for the third quarter of 1997 accounted for
26.3% of consolidated net sales compared to 38.5% for the same quarter of 1996.
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 September 30, 1997, sales of household chemical products
were $3,371,100 compared to $4,070,600 for the third quarter of 1996, a decrease
of $699,500 or 17.2%. Sales of 'Scott's Liquid Gold' for wood were down by
$335,700, a decrease of 15.4%, even though the Company spent $308,800 more
during the third quarter of 1997 vs. the third quarter of 1996 to advertise that
product; and sales of 'Touch of Scent' were down by $363,800 or 19.3% with
advertising expenditures being about the same for the third quarter of 1997 and
1996. With regard to 'Touch of Scent' and advertising of individual product
lines, see discussion for the nine months ended September 30, 1997 and 1996.
On a consolidated basis, cost of goods sold was $3,635,300 for the third quarter
of 1997 compared to $3,339,500 for the same quarter of 1996, an increase of
$295,800 or about 8.9% (on an increase in sales of 21.3%). As a percentage of
consolidated net sales, cost of goods sold was 28.4% for the third quarter of
1997 vs. 31.6% for the same quarter of 1996, a decrease of about 10%. But for
the increase in average selling prices in the third quarter of 1997 vs. 1996,
cost of goods sold for the most recent quarter would have been 32.1%, about
equal to last year.
Advertising expenses for the three months ended September 30, 1997 were
$3,643,000 compared to $3,451,300 for the comparable three months of 1996, an
increase of $191,700 or 5.6%. Advertising expenses applicable to household
chemicals increased during the third quarter of 1997 compared to the same
quarter of 1996 by $340,000 or 19.3%. Advertising expenses for Liquid Gold for
wood increased by $308,800 while expenses to advertise Touch of Scent increased
by $31,200. Advertising expenses for Alpha Hydrox were $148,300 lower during the
quarter ended September 30, 1997 than in the comparable quarter of 1996, a
decrease of 5.6%. See discussion of the nine months ended September 30, 1997 and
1996 for the Company's philosophy regarding advertising.
Selling expenses for the third quarter of 1997 were $1,962,000 compared to
$1,726,200 for the comparable quarter of 1996, an increase of $235,800 or 13.7%.
That increase resulted primarily from an increase of $188,300 in couponing and
slotting costs and an increase of $137,700 in freight and brokerage expenses
(which vary with sales volume); both offset by a decrease of $90,200 in other
selling expenses, none of which, by itself, was material.
Administrative expenses were higher in the third quarter of 1997 than those of
the comparable quarter of 1996 by $90,100, an increase of 5.5%. Of that
increase, $237,200 pertains to accruals for profit sharing and bonus plans
(there were no such accruals for the quarter ended September 30, 1996) and
$26,300 pertains to a net increase in a variety of other administrative
expenses; both offset by a decrease in legal expenses of $173,400 which resulted
primarily from the reclassification of l996 expenses in connection with an
environmental lawsuit.
Interest expense for the third quarter of 1997 was greater than that of the
comparable quarter of 1996 by $27,800, an increase of 9.1%, which was due to
increased debt. Other income increased by $46,200 during the quarter ended
September 30, 1997 compared to the same quarter of 1996 due to an increase in
interest rates applicable to cash reserves and an increase in the cash reserves
themselves.
During the third quarter of both 1997 and 1996, 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 in sales of the Company's Alpha Hydrox skin care products, had an
aggregate cost of approximately $13.65 million. Construction of the project
began in August of 1994 and was completed in January of 1996.
Interest on the $12 million bond issue is payable semi- annually at the rate of
10% per annum. (The July 1, 1997 interest payment was made in a timely manner.
There is no reason to believe that the interest payment due on January 1, 1998
will not be made as is required by the Bond Indenture.) A sinking fund payment
of $1 million is required annually. Sinking fund payments through 1996 were made
as required. Currently, the Company is voluntarily paying $183,300 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,
1997. 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. That provision
continued to be satisfied at September 30, 1997. 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 issue. The bonds are callable, in whole or in
part, at the Company's option, beginning July 1, 1997. The Company has not
reached a decision at this time as to whether it will redeem any of its
outstanding bonds.
During the first three quarters of 1997, the Company's working capital increased
by $2,001,100, but the Company's current ratio (current assets divided by
current liabilities) remained about the same as it was at year end, 1.88:1 at
September 30, 1997 vs. 1.80:1 at December 31, 1996. This increase in working
capital is attributable to a net profit in the first nine months of $2,170,600,
contributions of $81,300 of corporate stock to the Company ESOP, depreciation in
excess of capital additions of $590,400, stock option exercises of $5,400 and a
decrease in other assets of $64,800 and in the net assets of discontinued
operations of $31,300; all offset by a reduction in long-term debt of $942,700.
At September 30, 1997, the ratio of consolidated funded debt to consolidated net
worth was .57:1.
During the first nine months of 1997, trade accounts receivable increased by
$2,089,800 primarily because sales of September of 1997 exceeded those of
December of 1996. The Company's average collection period remains at under 30
days. Other receivables decreased during the first nine months of the year by
$521,600, essentially due to the collection of a December 31, 1996 receivable of
$600,000 from an insurance carrier which was involved in the Company's
environmental lawsuit with the United States Army; offset by approximately
$130,000 for an amount collectible under a stop loss, health insurance contract,
plus certain miscellaneous items. Accounts payable at September 30, 1997 were
$1,145,400 greater than those at December 31, 1996, primarily due to an increase
in advertising payables.
Other
As previously reported, the Company had 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
was approved by the Court on November 6, 1996, requires the payment to the
United States of $6 million, of which $3 million was paid by the Company's
insurers and $1 million was paid by the Company. The additional $2 million is to
be paid by the Company in equal annual installments of $250,000 over eight
years, beginning on October 31, 1997, together with interest approximating the
Treasury Bill rate. Due to income tax considerations, the Company intends to
liquidate its entire indebtedness to the Army by the end of 1997. The Company
filed lawsuits against three insurers (which did not participate in the
settlement) to recover at least the $3 million paid and/or payable by the
Company, plus punitive damages and attorneys' fees. In July of 1997, a
settlement agreement was reached with one of the three insurance companies which
the Company had engaged in litigation. The terms of such settlement are
confidential.
The Company's 1996 Annual Report describes a patent infringement suit which was
filed against Neoteric Cosmetics, Inc., the Company's wholly-owned subsidiary
which manufactures and sells skin care products under the name Alpha Hydrox.
There has been no change in the status of that suit from the date of the
Company's 1996 Annual Report to the date of the issuance of this report.
In June of 1997, a lawsuit was filed against the Company by Leslee Brooks, her
husband, and a related corporation. Other defendants include the Company's
wholly-owned subsidiary, Neoteric Cosmetics, Inc., Jerome J. Goldstein, and the
Goldstein Family Limited Partnership. Leslee Brooks is a daughter of Mr. and
Mrs. Jerome J. Goldstein and a sister of Mark E. Goldstein (see list of Officers
and Directors on last page of this Report). The Goldstein Family Limited
Partnership was established in November, 1996 by Mr. and Mrs. Jerome J.
Goldstein and received common stock of the Company previously held by Mr. and
Mrs. Goldstein. The plaintiffs claim that their disclosure to the Company in
1991 of the concept of an alpha hydroxy acid based product, as well as their
assistance in developing the Company's Alpha Hydrox products, entitles the
plaintiffs under a doctrine of unjust enrichment to compensation in an amount
equal to at least one-third of the income from the product since its inception.
The plaintiffs also request punitive damages. In related claims against Jerome
J. Goldstein individually, the plaintiffs allege a breach of fiduciary duty,
fraudulent inducement to disclose the product concept and to assist the Company,
and resulting damages at least equal to one-third of the income from the
product. The plaintiffs further claim that there should be a 'constructive
trust' imposed on the stock transferred to the Goldstein Family Limited
Partnership.
The Company unequivocally believes that there was no agreement, written or oral,
to provide any compensation to the plaintiffs beyond consulting fees paid by the
Company to Dr. Brooks, that there was no expectation of such compensation, and
that the compensation already paid to Dr. Brooks for consulting services was
fair and reasonable. The Company views the lawsuit as groundless and is
vigorously defending itself. Discovery is underway in this litigation. The trial
in the Brooks case is tentatively scheduled to commence in February, 1998,
although the trial date may be changed to a later time.
On October 14, 1997, the Company completed the sale of its land and building in
Fort Lauderdale, Florida, which property was owned by the Company's wholly-owned
subsidiary, Aquafilter Corporation. The gain from that sale (approximately
$700,000 net of taxes) will be recognized in the last quarter of this year. The
net cash proceeds to the Company from this sale amounted to approximately
$1,450,000.
The Company's Annual Report described a tentative report of the Cosmetic
Ingredient Review Expert Panel ('CIR') sponsored by the cosmetic industry on its
findings on the safety of cosmetics containing alpha hydroxy acids. The final
report was issued in June, 1997 and contains the same conclusion that glycolic
acid is safe for use in retail domestic products at concentrations of up to 10%,
with a pH level of no less than 3.5, when the directions for use include the
daily use of sun protection. The Company's cosmetic products meet the CIR's
current criteria.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, the Company had 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
was approved by the Court on November 6, 1996, requires the payment to the
United States of $6 million, of which $3 million was paid by the Company's
insurers and $1 million was paid by the Company. The additional $2 million is to
be paid by the Company in equal annual installments of $250,000 over eight
years, beginning on October 31, 1997, together with interest approximating the
Treasury Bill rate. Due to income tax considerations, the Company intends to
liquidate its entire indebtedness to the Army by the end of 1997. The Company
filed lawsuits against three insurers (which did not participate in the
settlement) to recover at least the $3 million paid and/or payable by the
Company, plus punitive damages and attorneys' fees. In July of 1997, a
settlement agreement was reached with one of the three insurance companies which
the Company had engaged in litigation. The terms of such settlement are
confidential. The lawsuit was commenced on December 10, 1996, is pending in the
United States District Court for the District of Colorado and was also
previously reported in the Company's quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997 and June 30, 1997.
The Company's 1996 Annual Report describes a patent infringement suit which was
filed against Neoteric Cosmetics, Inc., the Company's wholly-owned subsidiary
which manufactures and sells skin care products under the name Alpha Hydrox.
There has been no change in the status of that suit from the date of the
Company's 1996 Annual Report to the date of the issuance of this report. This
lawsuit was also mentioned in the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1997 and June 30, 1997.
In June of 1997, a lawsuit was filed against the Company by Leslee Brooks, her
husband, and a related corporation. Other defendants include the Company's
wholly-owned subsidiary, Neoteric Cosmetics, Inc., Jerome J. Goldstein, and the
Goldstein Family Limited Partnership. Leslee Brooks is a daughter of Mr. and
Mrs. Jerome J. Goldstein and a sister of Mark E. Goldstein (see list of Officers
and Directors on last page of this Report). The Goldstein Family Limited
Partnership was established in November, 1996 by Mr. and Mrs. Jerome J.
Goldstein and received common stock of the Company previously held by Mr. and
Mrs. Goldstein. The plaintiffs claim that their disclosure to the Company in
1991 of the concept of an alpha hydroxy acid based product, as well as their
assistance in developing the Company's Alpha Hydrox products, entitles the
plaintiffs under a doctrine of unjust enrichment to compensation in an amount
equal to at least one-third of the income from the product since its inception.
The plaintiffs also request punitive damages. In related claims against Jerome
J. Goldstein individually, the plaintiffs allege a breach of fiduciary duty,
fraudulent inducement to disclose the product concept and to assist the Company,
and resulting damages at least equal to one-third of the income from the
product. The plaintiffs further claim that there should be a 'constructive
trust' imposed on the stock transferred to the Goldstein Family Limited
Partnership.
The Company unequivocally believes that there was no agreement, written or oral,
to provide any compensation to the plaintiffs beyond consulting fees paid by the
Company to Dr. Brooks, that there was no expectation of such compensation, and
that the compensation already paid to Dr. Brooks for consulting services was
fair and reasonable. The Company views the lawsuit as groundless and is
vigorously defending itself. Discovery is underway in this litigation. The trial
in the Brooks case is tentatively scheduled to commence in February, 1998,
although the trial date may be changed to a later time. The lawsuit by the
Brooks was brought in the United States District Court for the District of
Colorado and was previously reported in the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and in its 8-K Report dated June 6,
1997.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Not Applicable
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, 1997 BY: /s/ Mark E. Goldstein
Date Mark E. Goldstein, President
November 6, 1997 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. 1997 Third Quarter 10-Q and is qualified in its entirety by
reference to such 10-Q filing.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
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0
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