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, 1999
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 10,103,100 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on April 30, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of
Operations (Unaudited)
<TABLE>
Three Months Ended
March 31,
1999 1998
--------- -------
<S> <C> <C>
Revenues :
Net sales $10,089,100 $12,557,00
Other income 203,700 194,300
10,292,800 12,751,300
Costs and Expenses:
Cost of sales 3,400,700 3,860,300
Advertising 4,707,100 6,094,100
Selling 1,943,300 2,302,300
General and administrative 1,259,900 1,799,800
Interest 301,100 300,400
11,612,100 14,356,900
Loss before income taxes (1,319,300) (1,605,600)
Income tax expense (benefit) (488,100) (594,200)
Net loss ($831,200) ($1,011,400)
Net loss per common share (Note 3) ($0.08) ($0.10)
Diluted net loss per common share ($0.08) ($0.10)
(Note 3)
Weighted average number of common 10,103,100 10,092,400
shares outstanding
Diluted weighted average number of 10,103,100 10,092,400
common shares outstanding
</TABLE>
See Notes to Consolidated Financial Statements
<TABLE>
ASSETS
1999 1998
Current assets:
<S> <C> <C>
Cash and cash $ 3,650,000 $5,421,400
equivalents
Trade receivables 3,019,200 1,976,500
(Note 2)
Other receivables 1,917,600 1,818,900
Inventories:
Finished goods 1,653,200 1,739,100
Raw materials 1,730,300 1,450,600
Prepaid expenses 323,100 383,700
Deferred tax asset 752,000 752,000
Total current assets 13,045,400 13,542,200
Property, plant and
equipment at cost 26,926,600 26,833,000
Less accumulated 8,818,700 8,608,700
depreciation
18,107,900 18,224,300
Other assets 83,500 105,100
---------- ----------
$ 31,236,800 $ 31,871,600
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
1999 1998
<S> <C> <C>
Current liabilities:
Notes payable $ 69,300 $ --
Accounts payable 3,126,400 2,815,000
Accrued expenses 1,847,800 1,787,000
Current maturities of 1,000,000 1,000,000
long-term debt
6,043,500 5,602,000
Total current
liabilities 6,735,500 6,980,600
Long-term debt
1,175,000 1,175,000
Deferred income taxes
13,954,000 13,757,600
Shareholders' equity
(Note 3):
Common stock 1,010,300 1,010,300
Capital in excess of par 4,829,500 4,829,500
Retained earnings 11,443,000 12,274,200
Shareholders' equity 17,282,800 18,114,000
$31,236,800 $31,871,600
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
Cash flows from 1999 1998
operating activities:
<S> <C> <C>
Net loss $ (831,200) $ (1,011,400)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 356,200 295,000
Provision for doubtful accountsreceivable 43,900 43,900
Change in assets and liabilities:
Accounts and other receivables (1,185,300) 1,637,800
Inventory (193,800) 79,200
Prepaid expenses (54,800) 189,300
Accounts payable and accrued 372,200 (575,300)
expenses
Total adjustments to net loss (661,600) 1,669,900
Net Cash Provided (Used) by
Operating Activities (1,492,800) 658,500
Cash flows from investing activities:
Purchase of property,plant & (102,800) (68,500)
equipment
Net Cash Used by Investing (102,800) (68,500)
Activities
Cash flows from financing activities:
Proceeds from exercise of stock - 5,000
options
Proceeds from short-term borrowings 110,500 -
Principal payments on short-term (41,200) -
borrowings
Increase in bond sinking fund (245,100) (342,100)
Dividends paid - (1,009,200)
Net Cash Used by Financing (175,800) (1,356,500)
Activities
Net Decrease in Cash and Cash (1,771,400) (766,500)
Equivalents
Cash and Cash Equivalents, 5,421,400 8,201,900
beginning of period
Cash and Cash Equivalents, end of $ 3,650,000 $7,435,400
period
Supplemental disclosures:
Cash paid during the period for:
Interest $ 289,300 $ 303,900
Income taxes $ 200 $1,719,600
</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.
Allowance for doubtful accounts at March 31,1999 and December 31, 1998 were
$723,500 and $679,200 respectively.
Note 3.
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
1999 and 1998). As of March 31, 1999 and 1998, the Company had 893,300
and 925,500 stock options outstanding respectively.
A reconciliation of the weighted average number of
common shares outstanding follows:
<TABLE>
1999 1998
<S> <C> <C>
Common shares outstanding,
beginning of the year 10,103,100 10,089,400
Stock options exercised - 3,000
----------- ---------
Weighted average number of
common shares outstanding 10,103,100 10,092,400
Diluted weighted average
number of common shares 10,103,100 10,092,400
outstanding
</TABLE>
At March 31, 1999 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 4.
The following provides information on the Company's segments for the three
months ended March 31, 1999 and 1998.
<TABLE>
1999 1998
Household Skin Care Household Skin Care
Products Products Products Products
<S> <C> <C> <C> <C>
Net sales to external customers 3,321,200 6,767,900 $4,400,900 $8,156,100
Income (loss) before profit
sharing, bonuses and
income taxes 623,800 (1,943,100) (1,418,000) (135,400)
The following is a reconciliation of segment information to consolidated
information for the three months ended 1999 and 1998:
</TABLE>
<TABLE>
1999 1998
<S> <C> <C>
Net sales to external $ 10,089,100 $12,557,000
customers
Other income 203,700 194,300
Consolidated revenues $ 10,292,800 $12,751,300
Loss before profit sharing, bonuses and
income taxes for
reportable segments $ (1,319,300) $(1,553,400)
Corporate activities - (52,200)
Consolidated loss before income taxes (1,319,300) (1,605,600) $ $
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Results of Operations
Summary of Results as a Percentage of Net Sales
<TABLE>
Three Months
Year Ended Ended
31-Dec-98 March 31, 1999
(Audited 1999 1998
<S> <C> <C> <C>
Net Sales
Scott's Liquid
Gold
household 36.7% 32.9% 35.0%
products
Neoteric 63.3% 67.1% 65.0%
Cosmetics
Total net sales 100.0% 100.0% 100.0%
Cost of sales 33.4% 33.7% 30.7%
Gross profit 66.6% 66.3% 69.3%
Other revenue 1.5% 2.0% 1.5%
68.3% 70.8%
68.1%
Operating expenses 76.3% 78.4% 81.2%
Interest 3.0% 3.0% 2.4%
81.4% 83.6% 79.3%
Loss before (11.2%) (13.1%) (12.8%)
income taxes
Three Months Ended March 31,1999
Compared to Three Months Ended March 30,1998
Consolidated net sales for the first quarter of 1999 were $10,089,100 vs.
$12,557,000 for the first three months of 1998, a decrease of $2,467,900 or
about 19.7%. Average selling prices for the first three months of 1999 were up
slightly (by $140,700) over those of the comparable period of 1998, prices of
household products being up by $211,200 (about 75% of which related to Touch of
Scent and 25% to Liquid Gold), while average selling prices of skin care
products were down by $70,500.
During the first quarter of 1999, net sales of skin care products accounted for
67.1% of consolidated net sales compared to 65% for the same quarter of 1998.
Net sales of these products for those periods were $6,767,900 in 1999 compared
to $8,156,100 in 1998, a decrease of $1,388,200 or 17.0%. Almost all of that
sales decrease resulted from reduced unit sales of the Company's line of alpha
hydroxy acid products and other skin care products related to that line. The
Company attributes that reduction to the maturation of the alpha hydroxy acid
category and to the proliferation of non-alpha hydroxy acid products, including
those of the Company, whose skin care claims are similar to those made by
producers of alpha hydroxy acid products. Were it not for the recent
introduction by the Company of certain new skin care products, its sales for the
first quarter of 1999 compared to those of the same period of 1998 would have
been lower by an additional $2.1 million. Information available to the Company
indicates that most producers of alpha hydroxy acid skin care products are
experiencing decreases in sales of those products. During the third and fourth
quarters of 1998, the Company's subsidiary, Neoteric Cosmetics, Inc., introduced
two new lines of skin care products. One, the Belleza Latina line, is designed
for the Hispanic market, and the second, Alpha Hydrox Retinol Night ResQ, is a
retinol-based product currently manufactured for Neoteric Cosmetics by a third
party. Additionally, during the first quarter of 1999, the Company introduced
(and began to ship) a new line of skin care products designed to aid persons
with diabetes to cope with cuts, bruises, and dry skin problems.
Sales of household products for the first quarter of 1999 accounted for 32.9% of
consolidated net sales compared to 35% for the same period of 1998. 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
quarter ended March 31, 1999, sales of household products were $3,321,200
compared to $4,400,900 for the same quarter of 1998, a decrease of $1,079,700,
or 24.5%. Sales of "Scott's Liquid Gold" for wood were down by $748,600, a
decrease of 24.4%, which was a result of decreased television advertising during
the first quarter of 1999 compared to 1998, while sales of "Touch of Scent" were
down by $331,100 or 24.8%. As noted in previous reports to shareholders,
efforts in recent years to revitalize Touch of Scent have produced less than
satisfactory results.
On a consolidated basis, cost of goods sold was $3,400,700 during the first
three months of 1999 compared to $3,860,300 for the same period of 1998, a
decrease of $459,600 (11.9%, but on a decrease in sales of 19.7%). As a
percentage of consolidated net sales for the first quarter of 1999, cost of
goods sold was 33.7% compared to 30.7% in 1998, an increase of less than 10%
which was essentially due to spreading on-going (fixed) manufacturing costs over
lower unit production in the first quarter of 1999 than in 1998.
Advertising expenses for the first three months of 1999 were $4,707,100 compared
to $6,094,100 for the comparable quarter of 1998, a decrease of $1,387,000 or
22.8%. Advertising expenses applicable to household products decreased by
$1,575,200 (78.0%) during the first quarter of 1999, whereas, advertising
expenses for Alpha Hydrox products increased for the comparative three month
period by $188,200 (4.6%). With respect to advertising expenses for household
products, the amount expended to advertise Scott's Liquid Gold for wood
decreased by $1,766,700, while expenditures to advertise Touch of Scent
increased by $191,500. Advertising expenses during the second quarter of 1999
are expected to approximate those of the first quarter.
Regardless of year to year or quarter to quarter changes in such expenditures,
the Company has made clear in previous reports 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 skin care 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 its cosmetic and household
products. Sustaining the Company's advertising program is highly dependent upon
sales of its skin care products.
Selling expenses for the first quarter of 1999 were $1,943,300 compared to
$2,302,300 for the comparable three months of 1998, a decrease of $359,000 or
15.6%. That decrease was comprised of a decrease of $211,200 in brokerage
commissions and freight (which vary with sales volume), a decrease in couponing
costs and slotting allowances of $197,800, a decrease in travel expenses of
$44,800 and a net decrease in a variety of other expenses, none of which, by
itself, was material, of $19,500; all offset by an increase in depreciation and
amortization of $114,300, all of which pertained to a license agreement
regarding the Company's retinol product.
Administrative expenses for the first three months of 1999 were $1,259,900
compared to $1,799,800 for the comparable period of 1998, a decrease of $539,900
or 30%. Such decrease was attributable to the recovery, through insurance, of
$550,000 in legal and professional fees which were expensed in prior periods,
offset by net increases in other administrative expenses, none of which, by
itself, was material, of $10,100.
Interest expense for the first quarter of 1999 was $301,100, approximately equal
to an expense of $300,400 for the comparable quarter of 1998. Other income for
the three months ended March 31, 1999 was $203,700 compared to $194,300 for the
same period of 1998, an increase of 4.8%. Other income essentially consists of
interest earned on the Company's cash reserves and on its bond sinking fund.
During the first quarter of 1999 and of 1998, expenditures for research and
development were not material (under 2% of revenues).
The Company has now experienced five consecutive loss quarters. Based upon year-
to-date sales, including sales for April of 1999, management believes that the
Company will most likely report a loss for 1999. The loss is anticipated to
result primarily from decreases in sales of alpha hydroxy acid and related
products and from on-going expenses which include advertising of the Company's
product lines and fixed operating costs and expenses. Despite this potential
loss, the Company expects its available cash and cash flows from operating
activities will fund the next twelve months cash requirements.
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, 1999 interest payment was made in a timely
manner, as were all other required payments. There is no reason to believe that
the interest payment due on July 1, 1999 will not be made in conformity with the
Bond Indenture.) A sinking fund payment of $1 million is required annually.
Sinking fund payments for 1995 through 1998 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 1999, the Company's working capital decreased by
$938,300, and concomitantly, its current ratio (current assets divided by
current liabilities) decreased from 2.4:1 at December 31, 1998 to 2.2:1 at March
31, 1999. This decrease in working capital is attributable to a net loss in the
first three months of 1999 of $831,200, and a reduction in long-term debt of
$245,100, both offset by depreciation in excess of capital additions of $116,400
and a decrease in other assets of $21,600. At March 31, 1999, the ratio of
consolidated funded debt to consolidated net worth was .39:1.
At March 31, 1999, trade accounts receivable were $1,042,700 greater than at
year end, largely because sales in March of 1999 were greater than those of
December of 1998. Subsequent to March 31, 1999, the Company received
approximately $1,500,000 for the income tax receivable from 1998 which is
included in other receivables.
Legal Proceedings
The Company's Annual Reports from 1996 forward describe a patent infringement
suit filed against Neoteric Cosmetics, Inc. (and others) in May of 1996 in the
United States District Court for the District of Delaware by TriStrata
Technology, Inc. Neoteric Cosmetics is a wholly owned subsidiary of the Company
which manufactures and sells skin care products under the name Alpha Hydrox. The
plaintiff in the lawsuit, among other things, alleges that Neoteric Cosmetics
contributes to and/or induces infringement of patents owned by the plaintiff by
promoting and selling Neoteric skin care products for the purpose of visibly
reducing a human skin wrinkle and/or fine lines. 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. Certain
defendants in this lawsuit, including the Company, are cooperating with one
another in matters of common interest to defend against this action. A hearing
was held in November of 1998 at which the plaintiff and the defendants were
given the opportunity to present their interpretations regarding the scope of
plaintiff's patents. Although the Company had expected an early Court ruling in
this matter, none has come down as of this date.
On July 24, 1998, a jury unanimously found in favor of Scott's Liquid Gold-
Inc., Neoteric Cosmetics, Inc., and the Company's Chairman, Jerome J. Goldstein,
in a lawsuit filed in the United States District Court for the District of
Colorado by Leslee Brooks (a daughter of Mr. Goldstein), her husband, Dr. Norman
Brooks (a California dermatologist), and a related corporation. The lawsuit
involved a claim for compensation relating to Alpha Hydrox products. The jury
found that there was no liability as to each claim of the plaintiffs. The
plaintiffs had asked the jury to award $21 million at the trial. Subsequent to
the plaintiffs' filing of an appeal in this case, in January 1999, the
defendants, including the Company, paid $225,000 to the plaintiffs in a final
settlement of this litigation. Following such settlement, the Company's
Directors and Officers Liability insurer paid the Company $550,000 in final
settlement of the Company's claims under its insurance policy.
Year 2000 ("Y2K") Issues
The Company has in process a corporate-wide program to address Year 2000 (also
known as "Y2K") issues.
With respect to its central computer, changes to the Company's programs over the
last several years have fully prepared the Company and its subsidiaries to
process data in the forthcoming millennium. With regard to PC's (personal
computers) used throughout the Company for various purposes, the Company's
central computer is armed with emulation software so that a PC used to enter any
information into that computer is treated as if it were a "dumb" terminal.
Therefore, whether or not the PC is Y2K compliant is moot. The Company is in
the process of acquiring new UPS/RPS software for installation during the second
quarter of 1999.
The Company notes that any Y2K issues which may affect it will be caused either
(1) by a lack of preparedness on the part of companies with whom the Company
does business, including customers, or (2) by some unforeseen circumstance which
prevents the Company from completing, prior to January 1, 2000, its part of
necessary Electronic Data Interchange ("EDI") re-documentation to maintain
existing connections with customers and to establish future EDI connections with
other customers. Approximately 80% of dollar sales volume derives from orders
sent to the Company via EDI. The Company considers the scenario set forth in
(2) above to be unlikely in that the Company already has on hand the additional
manpower capable of performing the necessary documentation functions. The
Company expects the cooperation of its customers in completing all required re-
documentation. Even if there is non-compliance on the part of certain customers,
the Company has developed software to convert a non-compliant EDI version
submitted by a customer after January 1, 2000 by re-mapping it to comply with
the new (4010), generally accepted version, and, thereafter, supplying whatever
special documentation may be required by the Company's customer.
Excluding an upgrade of the Company's central computer which would have taken
place as a matter of routine, the Company's incremental costs for handling Y2K
issues have been approximately $100,000 in 1998 and will probably exceed that
amount in 1999, especially if the services of other EDP personnel are required
to address such issues next year. Y2K issues are discussed in more detail in the
Company's 1998 Annual Report to Shareholders.
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; the degree of success of any new product
or product line introduction by the Company; competitive factors; the need for
effective advertising of the Company's products; limited resources available for
such advertising; new competitive products and/or 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; Year 2000 issues; and other matters discussed in the
Company's periodic filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to changes in financial and commodity market prices and
rates were reported in Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, which incorporated by reference "Management
Discussion and Analysis of Financial Condition and Results of Operation - Market
Risks" in the Company's 1998 Annual Report to shareholders. There has been no
change in these market risks since the end of the 1998 year.
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. Each of the two legal
proceedins described in that Item have been previously reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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
The following Reports were filed by the Company on Form 8-K
during the First Quarter of 1999:
a. A current report on Form 8-K dated January 21, 1999 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.
April 30, 1999 BY: _________________________________
Date Mark E. Goldstein, President
April 30, 1999 BY: _________________________________
Date Barry Shepard, Treasurer
Principal Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,650,000
<SECURITIES> 0
<RECEIVABLES> 5,660,300
<ALLOWANCES> 723,500
<INVENTORY> 3,383,500
<CURRENT-ASSETS> 13,045,400
<PP&E> 26,926,600
<DEPRECIATION> 8,818,700
<TOTAL-ASSETS> 31,236,800
<CURRENT-LIABILITIES> 6,043,500
<BONDS> 12,000,000
0
0
<COMMON> 1,010,300
<OTHER-SE> 16,272,500
<TOTAL-LIABILITY-AND-EQUITY> 31,236,800
<SALES> 10,089,100
<TOTAL-REVENUES> 10,292,800
<CGS> 3,400,700
<TOTAL-COSTS> 11,311,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,100
<INCOME-PRETAX> (1,319,300)
<INCOME-TAX> ( 488,100)
<INCOME-CONTINUING> ( 831,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ( 831,200)
<EPS-PRIMARY> ( .08)
<EPS-DILUTED> ( .08)
</TABLE>
