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, 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 10,116,700 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on October 20, 1999.
PART I. FINANCIAL INFORMATION
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
Revenues:
Net sales $8,639,600 $9,240,200 $26,732,600 31,816,300
Other income 95,900 197,800 532,700 544,100
----------- ----------- ----------- -----------
8,735,500 9,438,000 27,265,300 32,360,400
Costs and Expenses:
Cost of sales 3,017,400 3,292,000 9,323,000 10,426,100
Advertising 1,930,500 2,662,500 10,066,600 13,511,900
Selling 1,736,800 1,871,300 5,439,800 6,363,700
General and administrative 1,405,100 1,855,900 4,352,700 5,455,600
Interest 302,800 300,200 903,900 900,900
----------- ----------- ----------- -----------
8,392,600 9,981,900 30,086,000 36,658,200
----------- ----------- ----------- -----------
Income (loss) before income taxes 342,900 (543,900) (2,820,700) (4,297,800)
Income tax expense (benefit) 116,600 (201,300) (846,500) (1,590,300)
----------- ----------- ----------- -----------
Net income (loss) 226,300 (342,600) (1,974,200) (2,707,500)
=========== =========== =========== ===========
Net income (loss)
per common share (Note 3) $0.02 $(0.03) $(0.20) $(0.27)
========= ========= ========= =========
Diluted net income (loss)
per common share (Note 3) $0.02 $(0.03) $(0.20) $(0.27)
========= ========= ========= =========
Weighted average number of
common shares outstanding 10,103,100 10,103,100 10,103,100 10,103,100
Diluted weighted average
number of common shares
outstanding 10,116,700 10,103,100 10,103,100 10,103,100
</TABLE>
See Notes to Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31,1998
<TABLE>
ASSETS
1999 1998
<S> <C> <C>
--------- ---------
Current assets:
Cash $4,563,800 $5,421,400
Trade receivables (Note 2) 1,978,400 1,976,500
Other receivables 904,100 1,818,900
Inventories:
Finished goods 1,251,800 1,739,100
Raw materials 1,636,800 1,450,600
Prepaid expenses 161,600 507,400
Deferred tax asset 752,000 752,000
---------- ----------
Total current assets 11,248,500 13,665,900
Property, plant and equipment
at cost 27,091,900 26,833,000
Less accumulated depreciation 9,266,500 8,608,700
---------- ----------
17,825,400 18,224,300
Other assets 40,300 105,100
---------- ----------
$29,114,200 $31,995,300
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
1999 1998
<S> <C> <C>
--------- ---------
Current liabilities:
Notes payable $10,300 $ -
Accounts payable 2,412,000 2,815,000
Accrued expenses 2,432,600 1,910,700
Current maturities of long-term debt 1,000,000 1,000,000
---------- ----------
Total current liabilities 5,854,900 5,725,700
Long-term debt 5,944,500 6,980,600
Deferred income taxes 1,175,000 1,175,000
---------- ----------
12,974,400 13,881,300
---------- ----------
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 10,300,000 12,274,200
---------- ----------
Shareholders' equity 16,139,800 18,114,000
---------- ----------
$29,114,200 $31,995,300
========== ==========
</TABLE>
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
Nine Months Ended September 30,
-------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1999 1998
<S> <C> <C>
--------- ----------
Cash flows from operating activities:
Net loss $(1,974,200) $(2,707,500)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,039,500 891,600
Provision for doubtful accounts receivable 131,600 131,600
Change in assets and liabilities:
Receivables 781,300 237,900
Inventories 301,100 10,100
Prepaid expenses 38,100 136,900
Accounts payable and accrued expenses 118,900 321,100
--------- ------
Total adjustments to net loss 2,410,500 1,729,200
--------- ------
Net Cash Provided (Used) by Operating Activities 436,300 (978,300)
--------- ------
Cash flows from investing activities:
Purchase of property,plant & equipment (268,100) (179,200)
--------- ------
Net Cash Used by Investing Activities (268,100) (179,200)
--------- ------
Cash flows from financing activities:
Proceeds from exercise of stock options - 22,700
Proceeds from short-term borrowings 110,500 -
Principal payments on short-term borrowings (100,200) -
Principal payments on long-term borrowings - (31,000)
Increase in bond sinking fund (1,036,100) (884,300)
Dividends paid - (1,009,200)
--------- ------
Net Cash Used by Financing Activities (1,025,800) (1,901,800)
--------- ------
Net Decrease in Cash and Cash Equivalents (857,600) (3,059,300)
Cash and Cash Equivalents, beginning of period 5,421,400 8,201,900
--------- ------
Cash and Cash Equivalents, end of period $4,563,800 $5,142,600
====== ======
Supplemental disclosures:
Cash paid during the period for:
Interest $897,800 $911,200
Income taxes $2,400 $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 all adjustments necessary for a fair presentation of the results for the
interim periods.
Certain reclassifications have been made in the 1998 Consolidated Financial
Statements to conform to the classifications used in the current year.
Note 2.
Allowance for doubtful accounts at September 30,1999 and December 31, 1998
were $779,200 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 for diluted earnings
per share only, unless considered anti-dilutive, as in the three months ended
September 30, 1998 and the nine months ended September 30, 1999 and 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. As of September 30, 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>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Common shares outstanding,
beginning of period 10,103,100 10,097,400 10,103,100 10,089,400
ESOP shares contributed - - - -
Stock options exercised - 5,700 - 13,700
Weighted average number
of common shares
outstanding 10,103,100 10,103,100 10,103,100 10,103,100
Incremental common
equivalent shares 13,600 - - -
Diluted weighted average
number of common shares
outstanding 10,116,700 10,103,100 10,103,100 10,103,100
</TABLE>
At September 30, 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 4.
The following provides information on the Company's segments for the three
and nine months ended September 30, 1999 and 1998:
<TABLE>
Three Months Ended September 30,
1999 1998
Household Skin Care Household Skin Care
Products Products Products Products
<S> <C> <C> <C> <C>
Net sales to external
customers $3,179,700 $5,459,900 $3,267,400 $5,972,800
Income (loss) before
income taxes 415,600 (72,700) (19,800) (461,900)
</TABLE>
<TABLE>
Nine Months Ended September 30,
1999 1998
Household Skin Care Household Skin Care
Products Products Products Products
<S> <C> <C> <C> <C>
Net sales to external
customers $9,599,500 $17,133,100 $11,380,800 $20,435,500
Income (loss) before
income taxes 1,272,200 (4,092,900) (2,557,700) (1,593,400)
</TABLE>
The following is a reconciliation of segment information to consolidated
information for the three and six months ended June 30, 1999 and 1998:
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales to external customers $8,639,600 $9,240,200 $26,732,600 $31,816,300
Other income 95,900 197,800 532,700 544,100
Consolidated revenues $8,735,500 $9,438,000 $27,265,300 $32,360,400
Loss before profit sharing,
bonuses and income taxes
for reportable segments $342,900 $(481,700) $(2,820,700) $(4,151,100)
Corporate activities - (62,200) - (146,700)
Consolidated loss
before income taxes $342,900 $(543,900) $(2,820,700) $(4,297,800)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Summary of Results as a Percentage of Net Sales
<TABLE>
Year Ended Nine Months
December 31, Ended
1998 September 30,
(Audited) 1999 1998
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold
household products 36.7% 35.9% 35.8%
Neoteric Cosmetics 63.3% 64.1% 64.2%
Total net sales 100.0% 100.0% 100.0%
Cost of sales 33.4% 34.9% 32.8%
Gross profit 66.6% 65.1% 67.2%
Other revenue 1.5% 2.0% 1.7%
68.1% 67.1% 68.9%
Operating expenses 76.3% 74.3% 79.6%
Interest 3.0% 3.4% 2.8%
79.3% 77.7% 82.4%
Loss before income taxes (11.2%) (10.6%) (13.5%)
</TABLE>
Nine Months Ended September 30,1999
Compared to Nine Months Ended
September 30,1998
Consolidated net sales for the first three quarters of 1999 were $26,732,600 vs
$31,816,300 for the first nine months of 1998, a decrease of $5,083,700 or about
16.0%. Average selling prices for the three quarters ended September 30, 1999
were nearly identical to those of the comparable period of 1998, although prices
of household products were up by $537,300 (about $331,700 of which related to
Touch of Scent and $205,600 to Liquid Gold), while
average selling prices of skincare products were down by $334,700.
During the first nine months of 1999, net sales of skincare products accounted
for 64.1% of consolidated net sales compared to 64.2% for the comparable period
of 1998. Net sales of these products for those periods were $17,133,100 in 1999
compared to $20,435,500 in 1998, a decrease of $3,302,400 or 16.1%. As noted
above, a small portion of that decrease resulted from a decrease in average
selling prices. The balance of the sales decrease resulted from reduced unit
sales of the Company's alpha hydroxy acid and other related skincare products, a
decrease which was partially offset by sales of the Company's more recently
introduced product lines. The Company attributes its decrease in sales of
skincare products to the maturation of the alpha hydroxy acid category, to the
Company's dedication, through the third quarter of 1999, of its advertising
dollars to its retinol product (to the detriment of its alpha hydroxy acid
products), and to the proliferation in the industry of retinol and other
skincare products, some of which make claims similar to those of producers of
skincare products which contain alpha hydroxy acids. Although some brands of
alpha hydroxy acid skincare products experienced an increase over the last
several months, available information indicates that sales of all brands of such
products have been relatively flat during that time.
During the second half of 1998, the Company's subsidiary, Neoteric
Cosmetics,Inc., introduced two new lines of skincare 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 skincare products
designed to aid persons with diabetes to cope with cuts, bruises and dry skin
problems. Were it not for the introduction by the Company of the foregoing new
skincare products, sales for the first nine months of 1999 compared to those of
the same period of 1998 would have been lower by an additional $4.2 million.
Sales of household products for the first nine months of 1999 accounted for
35.9% of consolidated net sales compared to 35.8% 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. For
the first three quarters of 1999, sales of household products were $9,599,500
compared to $11,380,800 for the same period of 1998, a decrease of $1,781,300 or
15.7%. Sales of "Scott's Liquid Gold" for wood were down by $870,300, a decrease
of 11.5%, which management believes was a result of decreased television
advertising during 1999 compared to 1998, while sales of "Touch of Scent" were
down by $911,000 or 23.9%. 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 $9,323,000 during the first
three quarters of 1999 compared to $10,426,100 for the same period of 1998, a
decrease of $1,103,100 (10.6%, but on
a decrease in sales of 16.0%). As a percentage of consolidated net sales for
1999 through September, cost of goods sold was 34.9% compared to 32.8% in 1998,
mostly due to the need to spread factory overhead over lower unit production in
1999 than in 1998.
Advertising expenses for the first three quarters of 1999 were $10,066,600
compared to $13,511,900 for the comparable period of 1998, a decrease of
$3,445,300 or 25.5%. Compared to the first nine months of 1998, advertising
expenses applicable to household products decreased by $2,989,300 (83.4%), while
advertising expenses for Alpha Hydrox products, including the new Retinol Night
ResQ product, decreased by $456,000 (4.6%). With respect to household products,
the amount expended to advertise Scott's Liquid Gold for wood decreased by
$3,107,900 while expenditures to advertise Touch of Scent increased by $118,600.
Advertising expenses during the fourth quarter of 1999 are expected to be lower
than those of the third quarter.
Regardless of year to year or quarter to quarter changes in advertising
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 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 its cosmetic and household
products. Sustaining the Company's advertising program is highly dependent upon
sales of its skincare products.
Selling expenses for the nine months ended September 30, 1999 were $5,439,800
compared to $6,363,700 for the comparable nine months of 1998, a decrease of
$923,900 or 14.5%. That decrease was comprised of reduced brokerage commissions
and freight expense (which vary with sales volume) of $472,100, a reduction (a
part of the Company's cost reduction program) in field salaries and fringe
benefits of $101,500, a decrease in couponing costs and slotting allowances of
$88,200, a decrease in the cost of promotional merchandise of $202,300, in
telephone expense of $94,500, in travel expenses of $119,500 and a net decrease
in a variety of other expenses, none of which, by itself, was material, of
$73,300; all offset by an increase in depreciation and amortization of $227,500
most of which pertained to a license agreement regarding the Company's retinol
product.
Administrative expenses for the first nine months of 1999 were $4,352,700
compared to $5,455,600 for the comparable period of 1998, a decrease of
$1,102,900 or 20.2%. Such decrease was attributable to the 1999 recovery,
through insurance, of $550,000 in legal and professional fees which were
expensed in prior periods, a decrease in other legal expenses of $372,600, a
reduction in salaries and fringe benefits of $76,500 (also a part of the
Company's cost reduction program), a decrease in depreciation expense of
$110,500, all offset by net increases in other administrative expenses, none of
which, by itself, was material, of $6,700.
Interest expense for the first three quarters of 1999 was $903,900 approximately
equal to an expense of $900,900 for the first nine months of 1998. Other income
for the nine months ended September 30, 1999 was $532,700 compared to $544,100
for the same period of 1998. Other income essentially consists of interest
earned on the Company's cash reserves and on its bond sinking fund.
During the first three quarters of 1999 and of 1998, expenditures for research
and development were not material (under 2% of revenues).
Irrespective of the Company's return to profitability during the quarter just
ended, management expects that the Company will report a loss for 1999. The loss
is anticipated to result primarily from decreases in sales of alpha hydroxy acid
and related products, from extensive advertising of the Company's product lines
during the first half of 1999, and from on-going (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.
Three Months Ended September 30,1999
Compared to Three Months Ended
September 30,1998
Consolidated net sales for the third quarter of 1999 were $8,639,600 vs.
$9,240,200 for the comparable quarter of 1998, a decrease of $600,600 or about
6.5%. Average selling prices for the third quarter of 1999 were higher by
$229,300 than those of the comparable period of 1998, with prices of household
products up by $177,900 (about 67% of which related to Touch of Scent and 33% to
Liquid Gold), while average selling prices of skincare products were up by
$51,400.
During the third quarter of 1999, net sales of
skincare products accounted for 63.2% of consolidated net sales compared to
64.6% for the third quarter of 1998. Net sales of these products for those
periods were $5,459,900 in 1999 compared to $5,972,800 in 1998, a decrease of
$512,900 or 8.6%. The Company attributes its decrease in sales of skincare
products to the maturation of the alpha hydroxy acid skincare category, to the
Company's dedication, through the third quarter of 1999, of its advertising
dollars to its retinol product (to the detriment of its alpha hydroxy acid
products), and to the proliferation in the industry of retinol and other
skincare products, some of which make claims similar to those of producers of
skincare products which contain alpha hydroxy acids. Please see the discussion
above for the first nine months of 1999 regarding sales of alpha hydroxy acid
products.
During the second half of 1998, the Company's subsidiary, Neoteric Cosmetics,
Inc., introduced two new lines of skincare 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 skincare products designed
to aid persons with diabetes to cope with cuts, bruises and dry skin problems.
Were it not for the recent introduction by the Company of certain new skincare
products, sales for the third quarter of 1999 compared to those of the same
period of 1998 would have been lower by an additional $700,000.
Sales of household products for the third quarter of 1999 accounted for 36.8% of
consolidated net sales compared to 35.4% 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
third quarter of 1999, sales of household products were $3,179,700 compared to
$3,267,400 for the same three months of 1998, a decrease of $87,700 or 2.7%.
Sales of "Scott's Liquid Gold" for wood were up by $243,900, an increase of
12.5%, while sales of "Touch of Scent" were down by $331,600 or 25.1%. 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 $3,017,400 during the third
quarter of 1999 compared to $3,292,000 for the same quarter of 1998, a decrease
of $274,600 (8.3%, which was close to the sales decrease of 6.5% for the
quarter). As a percentage of consolidated net sales for the third quarter of
1999, cost of goods sold was 34.9% compared to 35.6% in 1998, a decrease of
about 2.0%.
Advertising expenses for the three months ended September 30, 1999 were
$1,930,500 compared to $2,662,500 for the comparable period of 1998, a decrease
of $732,000 or 27.5%. Compared to the third quarter of 1998 advertising expenses
applicable to household products, decreased by $48,000, whereas advertising
expenses for Alpha Hydrox products decreased by $684,000 (about 27.0%). With
respect to household products, the amount expended to advertise Scott's Liquid
Gold for wood decreased by $59,600 while expenditures to advertise Touch of
Scent increased by $11,600. Advertising expenses during the last quarter of 1999
are expected to be significantly lower than those of the most recent 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 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 ongoing
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 skincare products.
Selling expenses for the three months ended September 30,1999 were $1,736,800
compared to $1,871,300 for the comparable three months of 1998, a decrease of
$134,500 or 7.2%. That decrease was comprised of a decrease of $45,800 in
brokerage commissions and freight (which vary with sales volume), a decrease in
travel expenses of $60,500, a decrease in the cost of promotional merchandise of
$99,300, a decrease in telephone expense of $13,500, a decrease in salaries and
fringe benefits of $70,400, and a net decrease in a variety of other expenses,
none of which, by itself, was material, of $26,400; all offset by an increase in
couponing costs and slotting allowances of $181,400.
Administrative expenses for the third quarter of 1999 were $1,405,100 compared
to $1,855,900 for the comparable quarter of 1998, a decrease of $450,800 or
24.3%. Such decrease was attributable to a reduction of $347,900 in legal and
professional fees, a decrease in salaries and fringe benefits of $79,600, a
decrease in depreciation expense of $32,500; all offset by a net increase in
other administrative expenses, none of which, by itself, was material, of
$9,200.
Interest expense for the third quarter of 1999 was $302,800, approximately the
same as it was for the third quarter of 1998. Other income for the three months
ended September 30, 1999 was $95,900 compared to $197,800 for the same period of
1998, a decrease of $101,900, or 51.5%. This difference is attributable to an
accounting change at the end of the third quarter of 1998 by which interest
earned was changed from a cash received basis to an accrual basis. On a year-to
date basis (September 30, 1999 and 1998), other income is reported herein on a
comparable basis. Other income essentially consists of interest earned on the
Company's cash reserves and on its bond sinking fund.
During the third quarter of 1999 and of 1998, expenditures for research and
development were not material (under 2% 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 and July 1, 1999 interest payments were made in a
timely manner. There is no reason to believe that the interest payment due on
January 1, 2000 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. Due to the Company's voluntary
payments to the Trustee for future interest and sinking fund payments, the
Sinking Fund balance at September 30, 1999 was greater than the Bond Indenture
requires it to be at December 31, 1999. The Company, at its request, has no
access to any funds paid to the Trustee in excess of those payments required by
the Indenture.
Should the Company's bonds remain outstanding through their maturity on July 1,
2001, the Company will then be required to pay $6 million to redeem its bonds in
addition to the $6 million it expects to have accumulated in the sinking fund at
that time. As of this date, in anticipation of improved operating results, which
are by no means a certainty, the Company has postponed, until early 2000, the
pursuit of capital to refund any or all of its bond debt or to increase the
Company's capitalization through borrowings or other means. The Company has no
significant capital expenditures planned for the balance of 1999 and expects
that its available cash and cash flows from operating activities will be
adequate to fund the Company's cash requirements for the next twelve months.
During the first three quarters of 1999, the Company's working capital decreased
by $2,546,600 and concomitantly, its current ratio (current assets divided by
current liabilities) decreased from 2.4:1 at December 31, 1998 to 1.9:1 at
September 30, 1999. This decrease in working capital is attributable to a net
loss in the first nine months of 1999 of $1,974,200 and a reduction in long-term
debt of $1,036,100 both offset by depreciation in excess of capital additions of
$398,900 and a decrease in other assets of $64,800. At September 30, 1999, the
ratio of consolidated funded debt to consolidated net worth was .37:1.
At September 30, 1999, "Other receivables" were lower than they were at December
31, 1998 by $914,800 primarily due to the receipt by the Company of a federal
income tax refund for 1998, offset by the recording of an estimated income tax
refund based upon operating results for the first nine months of 1999.
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 skincare 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 skincare 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. In late July, 1999, the Court issued a decision which
construed broadly the plaintiff's patent claims. The Company continues to
believe that it has not induced or contributed to the infringement of the
plaintiff's patents. The Company also believes that the Court's recent decision
makes more relevant prior uses of alpha hydroxy acid for treating aging skin,
including wrinkles, and reinforces the Company's view that the plaintiff's
patents are invalid. The Company will continue to mount a vigorous defense in
this case.
Year 2000 ("Y2K") Issues
The Company has previously reported on its progress in implementing a corporate
wide program to address Year 2000 (also known as "Y2K") issues. In early
October, it reported that its final testing of its Y2K preparedness had been
completed and that such testing revealed no problems with the Company's
information or operational systems.
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. During the third quarter of 1999,
the Company installed a second computer, smaller than its central computer, to
test all of its preparations over the past several years in anticipation of Y2K.
All tests, as noted above, were successful. 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. Also, the Company
previously reported that it had acquired and installed new UPS/RPS software that
the Company believes to be Year 2000 compliant. The Company believes 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 re-documentation to maintain existing connections
with customers and to establish future EDI connections with other customers.
Approximately 80% of the Company's 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 ofthe Company's central computer which would have taken place as a
matter of routine, the Company's incremental costs for handling Y2K issues were
approximately $100,000 in 1998 and will probably exceed that amount this year,
especially if the services of other EDP personnel are required to address such
issues. Y2K issues are also discussed 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. The legal proceeding
described in that Item has 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 report was filed by the Company on Form 8-K during the
third quarter of 1999: A current report on Form 8-K dated August 31,
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.
November 10, 1999 BY: Mark E. Goldstein, President
Date
November 10, 1999 BY: Barry Shepard, Treasurer
Date Principal Financial Officer
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