SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1998
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 10,092,358 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on May 1,1998.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Revenues:
Net sales $12,557,000 $14,324,800
Other income 194,300 109,600
12,751,300 14,434,400
Costs and Expenses:
Cost of sales 3,860,300 3,838,200
Advertising 6,094,100 5,091,500
Selling 2,302,300 2,089,800
General and administrative 1,799,800 1,766,100
Interest 300,400 332,100
14,356,900 13,117,700
Income (loss) before
income taxes (1,605,600) 1,316,700
Income tax expense (benefit) (594,200) 500,300
Net income (loss) $ (1,011,400) $ 816,400
Net income (loss) per
common share (Note 2) $ (0.10) $ 0.08
Diluted net income
(loss) per common
share (Note 2) $ (0.10) $ 0.08
Weighted average number
of common shares
outstanding 10,092,400 10,030,900
Diluted weighted average
number of common
shares outstanding 10,092,400 10,084,500
</TABLE>
See Notes to Consolidated Financial Statements
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,011,400) $ 816,400
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 295,000 279,500
Provision for doubtful accounts receivable 43,900 49,500
Change in assets and liabilities:
Accounts and other receivables 1,637,800 (61,300)
Inventory 79,200 (85,900)
Prepaid expenses 189,300 (52,500)
Accounts payable and accrued expenses (575,300) 156,300
Total adjustments to net income (loss) 1,669,900 285,600
Net Cash Provided by Operating Activities 658,500 1,102,000
Cash flows from investing activities:
Purchase of property, plant and equipment (68,500) (68,100)
Proceeds from sale of discontinued operations - 100,000
Net change in assets of discontinued operations - (54,600)
Net Cash Used by Investing Activities (68,500) (22,700)
Cash flows from financing activities:
Proceeds from exercise of stock options 5,000 -
Proceeds from short-term borrowings - 135,300
Principal payments on short-term borrowings - (54,100)
Principal payments on long-term borrowings (10,200) (13,200)
Increase in bond sinking fund (342,100) (318,600)
Dividends paid (1,009,200) -
Net Cash Used by Financing Activities (1,356,500) (250,600)
Net Increase (Decrease) in Cash
and Cash Equivalents (766,500) 828,700
Cash and Cash Equivalents,
beginning of period 8,201,900 4,749,200
Cash and Cash Equivalents,
end of period $ 7,435,400 $ 5,577,900
Supplemental disclosures:
Cash paid during the period for:
Interest $ 303,900 $ 306,900
Interest paid by discontinued operations $ - $ 10,300
Income taxes $ 1,719,600 $ 134,600
Noncash investing activities:
Note receivable on discontinued operations $ - $ 100,000
</TABLE>
See Notes to Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997
<TABLE>
ASSETS
1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,435,400 $ 8,201,900
Trade receivables (Note 3) 3,430,800 2,610,100
Other receivables 102,500 2,604,900
Inventories:
Finished goods 1,612,500 1,828,700
Raw materials 2,141,200 2,004,200
Prepaid expenses 348,200 537,500
Deferred tax assets 540,400 540,400
Total current assets 15,611,000 18,327,700
Property, plant and
equipment at cost 27,073,500 27,005,000
Less accumulated
depreciation 8,205,400 7,932,000
18,868,100 19,073,000
Other assets 169,900 191,500
$34,649,000 $37,592,200
See Notes to Consolidated Financial Statements
LIABILITIES & SHAREHOLDERS' EQUITY
1998 1997
Current liabilities:
Accounts payable $ 3,734,400 $ 1,681,100
Accrued expenses 1,346,800 3,975,400
Current maturities of
long-term debt 1,030,000 1,040,200
Total current liabilities 6,111,200 6,696,700
Long-term debt 7,635,700 7,977,800
Deferred income taxes 1,043,100 1,043,100
14,790,000 15,717,600
Shareholders' equity (Note 2):
Common stock 1,009,200 1,008,900
Capital in excess of par 4,812,900 4,808,200
Retained earnings 14,036,900 16,057,500
Shareholders' equity 19,859,000 21,874,600
$34,649,000 $37,592,200
</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 was determined by using the weighted average number of common
shares outstanding. Common equivalent shares are considered only for diluted
earnings per share, unless considered anti-dilutive (as in 1998). Common
equivalent shares, determined using the treasury stock method, result from stock
options with exercise prices that are below the average market price of the
common stock.
A reconciliation of the weighted average number of common shares outstanding
follows:
<TABLE>
1998 1997
<S> <C> <C>
Common shares outstanding,
beginning of the year 10,089,400 10,030,900
Stock options exercised 3,000 -
Weighted average number of
common shares outstanding 10,092,400 10,030,900
Incremental common
equivalent shares - 53,600
Diluted weighted average number of
common shares outstanding 10,092,400 10,084,500
</TABLE>
At March 31, 1998 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 March 31, 1998 and December 31, 1997 were
$679,600 and $635,700 respectively.
Note 4
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. For
the three months ended March 31, 1998 and 1997, the Company's net income (loss)
equaled its comprehensive income (loss) for those periods. Therefore, the
adoption of this statement had no impact on the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial
Condition And Results Of Operations
General
The Company manufactures and markets household chemical products and skincare
products; and, until it discontinued the operations of one of its subsidiaries
in September of 1996, also produced and marketed cigarette filters. In early
1992, the Company entered into the cosmetics business, introducing a new line of
skincare products, Alpha Hydrox, which is now sold throughout the United States
and Canada, and, on a modest level, in certain South American countries, Asia
and eastern Europe. Sales of cosmetics products, which account for the greatest
portion of the Company's business, were $31.6 million in 1995, $26.6 million in
1996, and $34.5 million in 1997. The Company's annual, after-tax income from
continuing operations averaged $2,393,700 over the most recent three years,
equal to an average for the three years of 24-cents a share.
Results of Operations
Summary of Results as a Percentage of Net Sales
<TABLE>
(Audited) Three Months
Year Ended
Ended March 31,
31-Dec-97 1998 1997
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold
household products 31.1% 35.0% 30.8%
Neoteric Cosmetics 68.9% 65.0% 69.2%
Total net sales 100.0% 100.0% 100.0%
Cost of sales 28.2% 30.7% 26.8%
Gross profit 71.8% 69.3% 73.2%
Other revenue 0.9% 1.5% 0.8%
72.7% 70.8% 74.0%
Operating expenses 53.1% 81.2% 62.5%
Interest 2.6% 2.4% 2.3%
55.7% 83.6% 64.8%
Income (loss) from operations 17.0% (12.8%) 9.2%
</TABLE>
Three Months Ended March 31, 1998
Compared to Three Months Ended March 31, 1997
Consolidated net sales for the first quarter of 1998 were $12,557,000 vs.
$14,324,800 for the first three months of 1997, a decrease of $1,767,800 or
about 12.3%. Average selling prices for the first quarter of 1998 were lower
than those of the first quarter of 1997 by $1,350,300, prices of household
chemical products being down by $834,000 (all of which related to Touch of
Scent), while average selling prices of cosmetics products were down by
$516,300.
During the first quarter of 1998, net sales of cosmetics products accounted for
65.0% of consolidated net sales compared to 69.2% for the first quarter of
1997.Net sales of these products for those periods were $8,156,100 in 1998
compared to $9,917,500 in 1997, a decrease of $1,761,400 or 17.8%, which
occurred irrespective of a substantial increase in advertising during the first
quarter of 1998 compared to 1997. A portion of the sales decrease (23.3%)
resulted from reduced average selling prices, primarily attributable to
promotions, and the balance (60.7%) was the result of a decrease in the number
of units sold. The Company notes that the foregoing comparisons pit an average
first quarter in 1998 against an exceptional first quarter for skincare products
in 1997.
Sales of household chemical products for the first quarter of 1998 accounted for
35.0% of consolidated net sales compared to 30.8% for the same quarter of 1997.
These products are comprised of "Scott's Liquid Gold" for wood, a wood cleaner
which preserves as it cleans, and "Touch of Scent", a room air freshener. During
the three months ended March 31, 1998, sales of household chemical products were
$4,400,900 compared to $4,407,300 for the first three months of 1997, a decrease
of only $6,400. Sales of "Scott's Liquid Gold" for wood were up by $943,200, an
increase of 44.5%, a result of increased television advertising, while sales of
"Touch of Scent" were down by $949,600 (41.5%), principally due to reduced
average selling prices. As noted in the Company's most recent Annual Report,
efforts to revitalize Touch of Scent during 1997 were less than satisfactory.
Notwithstanding the Company's introduction, near the end of 1996, of a new line
of highly decorative fixtures to dispense new, concentrated formulae contained
in its refill units, and the Company's more recent offers of price incentives
for its Touch of Scent product, the downtrend in sales of this product line has
continued into 1998.
On a consolidated basis, cost of goods sold was $3,860,300 during the first
quarter of 1998 compared to $3,838,200 for the same quarter of 1997, an increase
of $22,100 (less than 1.0%, but on a decrease in sales of 12.3%). As a
percentage of consolidated net sales for the first quarter of 1998, cost of
goods sold was 30.7% compared to 26.8% in 1997, an increase of about 14.6%. But
for the decrease in average selling prices, the increase in cost of goods sold
for the first quarter of 1998 would have been 27.8% instead of 30.7%. The
balance of the cost increase was essentially due to changes in the mix of
products sold, household chemical products being more costly to produce relative
to their selling prices than the Company's skincare products.
Advertising expenses for the first three months of 1998 were $6,094,100 compared
to $5,091,500 for the comparable three months of 1997, an increase of $1,002,600
or 19.7%. Advertising expenses applicable to household chemicals decreased
during the first quarter of 1998 compared to the first quarter of 1997 by
$269,500, or 11.8%. Advertising expenses for Liquid Gold increased by
$1,681,700, whereas expenses to advertise Touch of Scent decreased by
$1,951,200. Advertising expenses for Alpha Hydrox were $1,272,100 higher during
the quarter ended March 31, 1998 than in the comparable quarter of 1997, an
increase of 45.4%. During each of the remaining three quarters of 1998, the
Company intends to spend significant amounts to advertise its products, but less
than it spent during the first quarter of the year. Regardless of year to year
or quarter to quarter changes in expenditures to advertise its products, the
Company has, in the past, made clear 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 markets for skincare products, furniture
polish, and air fresheners are highly competitive and, accordingly, the
Company's brand names, particularly Alpha Hydrox and Scott's Liquid Gold, need
to be kept in front of the consuming public; and (ii) television advertising
currently is the best option available to the Company in its on-going attempt to
increase the sales levels of both the Company's cosmetic and household chemical
products. It is noted that sustaining the Company's advertising program is
highly dependent upon sales of its skin care products.
Selling expenses for the first quarter of 1998 were $2,302,300 compared to
$2,089,800 for the comparable quarter of 1997, an increase of $212,500 or 10.2%.
Coupon costs, offset by lower slotting allowances, accounted for $209,900 of the
increase in selling expenses.
Administrative expenses for the first quarter of 1998 were only 1.9% higher than
those of the first quarter of 1997. Interest expense for the first quarter of
1998 was lower than that of the comparable quarter of 1997 by $31,700, a
decrease of 9.5%, which essentially was due to the payment at the end of 1997 of
$2 million then owed to the U.S. Army. Other income increased by $84,700 during
the quarter ended March 31, 1998 compared to the same quarter of 1997, an
increase of 77.3%, due to a slight increase in interest earned on the Company's
cash reserves and an increase in the cash reserves themselves.
During the first quarter of 1998 and 1997, 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. Interest on the $12 million
bond issue is payable semi-annually beginning on January 1, 1995 at the rate of
10% per annum. (The January 1, 1998 interest payment was made in a timely
manner. There is no reason to believe that the interest payment due on July 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 for 1995
through 1997 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.
During the first quarter of 1998, the Company's working capital decreased by
$2,131,200, and concomitantly, its current ratio (current assets divided by
current liabilities) decreased from 2.7:1 at December 31, 1997 to 2.6:1 at March
31, 1998. This decrease in working capital is attributable to a net loss in the
first quarter of $1,011,400, a reduction in long-term debt of $342,100, and a
dividend payment of $1,009,200 (equal to $0.10 a share, paid in March, 1998);
all offset by depreciation in excess of capital additions of $204,900, a
decrease in other assets of $21,600, and exercises of stock options of $5,000.
At March 31, 1998, the ratio of consolidated funded debt to consolidated net
worth was .38:1.
During the first quarter of 1998, trade accounts receivable increased by
$820,700 primarily because sales of March 1998 exceeded those of December 1997.
The Company's average collection period remained at under 30 days. The decrease
in other receivables during the quarter ended March 31, 1998 primarily relates
to a previous settlement of the Company's environmental lawsuit with the United
States Army. Accounts payable increased from the end of 1997 through March of
1998 by $2,053,300 largely due to the existence of advertising payables at the
end of the quarter whereas none existed at the end of last year. Accrued
expenses decreased from year end through March 31, 1998 by $2,628,600 primarily
due to the payment of 1997 income taxes and accrued profit sharing and bonus
expenses.
Legal Proceedings
The Company's 1997 Annual Report describes a patent infringement suit which was
filed in May of 1996 in the United States District Court for the District of
Delaware against Neoteric Cosmetics, Inc. (and others) by TriStrata Technology,
Inc. Neoteric Cosmetics is the Company's wholly-owned subsidiary which
manufactures and sells skincare products under the name Alpha Hydrox. Certain
defendants in this lawsuit, including the Company, have joined together to
defend against this action. The Company expects that, in or about the third
quarter of this year, the Court will determine whether to adopt the defendants'
interpretations or those of the plaintiff regarding the scope of the claims of
the patents involved in the case.
In June of 1997, a lawsuit was filed in the United States District Court for the
District of Colorado against the Company by Leslee Brooks, her husband, Dr.
Norman Brooks (a California dermatologist), and a corporation related to Dr.
Brooks. 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 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 of
1996 by Mr. and Mrs. Jerome J. Goldstein and was the recipient of common stock
of the Company previously held by Mr. and Mrs. Goldstein. As described in the
Company's 1997 Annual Report, this lawsuit involves a claim for compensation
relating to Alpha Hydrox products. Discovery is complete. The court has changed
the trial date in the Brooks case to June 15, 1998, although that date may be
again changed, over the Company's objections, to a later time. A trial in this
matter is expected to last approximately two weeks.
Forward-Looking Statements
This report may contain "forward-looking statements" within the meaning of U.S.
federal securities laws. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements and the Company's performance inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, continued acceptance of the
Company's products in the marketplace; competitive factors, the need for
effective advertising of the Company's products; limited resources available for
such advertising, new products and technological changes, dependence upon third
party vendors and upon sales to major customers; changes in the regulation of
the Company's products, including applicable environmental regulations; adverse
developments in pending litigation; the loss of any executive officer; and other
matters discussed in this Report and in the Company's other periodic filings
with the Securities and Exchange Commission.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Please see "Legal Proceedings" in Item 2 of Part I of this Report
which information is incorporated herein by this reference.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
tem 6. Exhibits and Reports on Form 8-K
The following Reports were filed by the Company on Form 8-K
during the First Quarter of 1998:
a. A current report on Form 8-K dated January 6, 1998 reporting an
event under Item 5, Other Events.
b. A current report on Form 8-K dated January 21, 1998 reporting an
event under Item 5, Other Events.
c. A current report on Form 8-K dated February 27, 1998 reporting an
event under Item 5, Other Events.
d. A current report on Form 8-K dated March 31, 1998 reporting an
event 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.
May 4, 1998 BY: Mark E. Goldstein, President
Date
May 4, 1998 BY: Barry Shepard, Treasurer
Date Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Scott's
Liquid Gold-Inc. 1998 First Quarter 10-Q and is qualified in its entirety by
reference to such 10-Q filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,435,400
<SECURITIES> 0
<RECEIVABLES> 4,212,900
<ALLOWANCES> 679,600
<INVENTORY> 3,753,700
<CURRENT-ASSETS> 15,611,000
<PP&E> 27,073,500
<DEPRECIATION> 8,205,400
<TOTAL-ASSETS> 34,649,000
<CURRENT-LIABILITIES> 6,111,200
<BONDS> 12,000,000
0
0
<COMMON> 1,009,200
<OTHER-SE> 18,849,800
<TOTAL-LIABILITY-AND-EQUITY> 34,649,000
<SALES> 12,557,000
<TOTAL-REVENUES> 12,751,300
<CGS> 3,860,300
<TOTAL-COSTS> 14,056,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300,400
<INCOME-PRETAX> ( 1,605,600)
<INCOME-TAX> ( 594,200)
<INCOME-CONTINUING> ( 1,011,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 1,011,400)
<EPS-PRIMARY> ( .10)
<EPS-DILUTED> ( .10)
</TABLE>
