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
June 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 10,103,100 common shares, $0.10 par value, its only
class of common stock, issued and outstanding on July 30, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Net sales $8,003,900 $10,019,100 $18,093,000 $22,576,100
Other income 233,100 152,000 436,800 346,300
----------- ----------- ----------- ----------
8,237,000 10,171,100 18,529,800 22,922,400
Costs and Expenses:
Cost of sales 2,904,900 3,273,800 6,305,600 7,134,100
Advertising 3,429,000 4,755,300 8,136,100 10,849,400
Selling 1,759,700 2,190,100 3,703,000 4,492,400
General and administrative 1,687,700 1,799,900 2,947,600 3,599,700
Interest 300,000 300,300 601,100 600,700
----------- ----------- ----------- -----------
10,081,300 12,319,400 21,693,400 26,676,300
----------- ----------- ----------- -----------
Loss before income taxes (1,844,300) (2,148,300) (3,163,600) (3,753,900)
Income tax expense (benefit) (475,000) (794,800) (963,100) (1,389,000)
----------- ----------- ----------- -----------
Net loss $(1,369,300) $(1,353,500) $(2,200,500) $(2,364,900)
======== ======== ======== ========
Net loss per common share (Note 3) $(0.14) $(0.13) $(0.22) $(0.23)
=========== =========== =========== ===========
Diluted net loss per common
share (Note 3) $(0.14) $(0.13) $(0.22) $(0.23)
=========== =========== =========== ==========
Weighted average number
of common shares outstanding 10,103,100 10,097,400 10,103,100 10,097,400
Diluted weighted average
number of common shares outstanding 10,103,100 10,097,400 10,103,100 10,097,400
See Notes to Consolidated Financial Statements
</TABLE>
Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31,1998
<TABLE>
ASSETS
1999 1998
<S> <C> <C>
--------- ---------
Current assets:
Cash and cash equivalents $3,992,200 $5,421,400
Trade receivables (Note 2) 923,000 1,976,500
Other receivables 1,017,300 1,818,900
Inventories:
Finished goods 1,793,400 1,739,100
Raw materials 1,907,500 1,450,600
Prepaid expenses 41,000 383,700
Deferred tax assets 752,000 752,000
---------- ----------
Total current assets 10,426,400 13,542,200
Property, plant and equipment
at cost 26,975,800 26,833,000
Less accumulated depreciation 9,037,900 8,608,700
---------- ----------
17,937,900 18,224,300
Other assets 61,900 105,100
---------- ----------
$28,426,200 $31,871,600
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
1999 1998
--------- ---------
Current liabilities:
Notes payable $ 38,400 $ --
Accounts payable 1,996,400 2,815,000
Accrued expenses 1,995,200 1,787,000
Current maturities of long-term debt 1,000,000 1,000,000
---------- ----------
Total current liabilities 5,030,000 5,602,000
Long-term debt 6,307,700 6,980,600
Deferred income taxes 1,175,000 1,175,000
---------- ----------
12,512,700 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 10,073,700 12,274,200
---------- ----------
Shareholders' equity 15,913,500 18,114,000
---------- ----------
$28,426,200 $31,871,600
</TABLE>
See Notes to Consolidated Financial Statements
Scott's Liquid Gold-Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
Six Months Ended
June 30,
-----------------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,200,500) $(2,364,900)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 712,400 590,100
Provision for doubtful accounts receivable 87,800 87,800
Change in assets and liabilities:
Receivables 1,767,300 2,545,100
Inventories (511,200) 138,300
Prepaid expenses 111,900 133,700
Accounts payable and accrued expenses (610,400) (1,073,000)
------ ------
Total adjustments to net loss 1,557,800 2,422,000
------ -----
Net Cash Provided (Used) by Operating Activities (642,700) 57,100
----- -----
Cash flows from investing activities:
Purchase of property,plant & equipment (152,000) (135,900)
------ ------
Net Cash Used by Investing Activities (152,000) (135,900)
------ ------
Cash flows from financing activities:
Proceeds from exercise of stock options - 13,200
Proceeds from short-term borrowings 110,500 -
Principal payments on short-term borrowings (72,100) -
Principal payments on long-term borrowings - (20,600)
Increase in bond sinking fund (672,900) (522,400)
Dividends paid - (1,009,200)
------ ------
Net Cash Used by Financing Activities (634,500) (1,539,000)
------ ------
Net Decrease in Cash and Cash Equivalents (1,429,200) (1,617,800)
Cash and Cash Equivalents, beginning of period 5,421,400 8,201,900
------ ------
Cash and Cash Equivalents, end of period $3,992,200 $6,584,100
====== ======
Supplemental disclosures:
Cash paid during the period for:
Interest $ 592,700 $ 593,000
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 adjustments necessary for a fair presentation of the results for
the interim periods.
Note 2.
Allowance for doubtful accounts at June 30,1999 and December 31, 1998
were $744,700 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 June 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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Common shares outstanding,
beginning of the period 10,103,100 10,092,400 10,103,100 10,089,400
ESOP shares contributed - - - -
Stock options exercised - 5,000 - 8,000
Weighted average number of
common shares outstanding 10,103,100 10,097,400 10,103,100 10,097,400
Diluted weighted average number of
common shares outstanding 10,103,100 10,097,400 10,103,100 10,097,400
</TABLE>
At June 30, 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
and six months ended June 30, 1999 and 1998:
<TABLE>
Three Months Ended June 30,
1999 1998
Household Skin Care Household Skin Care
Products Products Products Products
<S> <C> <C> <C> <C>
Net sales to external customers $3,098,600 $4,905,300 $3,712,500 $6,306,600
Income (loss) before income taxes 232,800 (2,077,100) (1,119,900) (996,100)
Six Months Ended June 30,
1999 1998
Household Skin Care Household Skin Care
Products Products Products Products
Net sales to external customers $6,419,800 $11,673,200 $8,113,400 $14,462,700
Income (loss) before income taxes 856,600 (4,020,200) (2,537,900) (1,131,500)
</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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales to external customers $8,003,900 $10,019,100 $18,093,000 $22,576,100
Other income 233,100 152,000 436,800 346,300
Consolidated revenues $8,237,000 $10,171,100 $18,529,800 $22,922,400
Loss before income taxes
for reportable segments $(1,844,300) $(2,116,000) $(3,163,600) $(3,669,400)
Corporate activities - (32,300) - (84,500)
Consolidated loss before
income taxes $(1,844,300) $(2,148,300) $(3,163,600) $(3,753,900)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
<TABLE>
Results of Operations
Summary of Results as a Percentage of Net Sales
Year Ended
December 31, Six Months Ended
1998 June 30,
(Audited) 1999 1998
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold
household products 36.7% 35.5% 35.9%
Neoteric Cosmetics 63.3% 64.5% 64.1%
Total net sales 100.0% 100.0% 100.0%
Cost of sales 33.4% 34.9% 31.6%
Gross profit 66.6% 65.1% 68.4%
Other revenue 1.5% 2.4% 1.5%
68.1% 67.5% 69.9%
Operating expenses 76.3% 81.7% 83.9%
Interest 3.0% 3.3% 2.6%
79.3% 85.0% 86.5%
Loss
before income taxes (11.2 %) (17.5%) (16.6%)
</TABLE>
Six Months Ended June 30,1999
Compared to Six Months Ended June 30,1998
Consolidated net sales for the first half of 1999 were $18,093,000 vs.
$22,576,100 for the first six months of 1998, a decrease of $4,483,100 or about
19.9%. Average selling prices for the first half of 1999 were nearly identical
to those of the comparable period of 1998, although prices of household products
were up by $359,400 (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
$386,100.
During the first half of 1999, net sales of skin care products accounted for
64.5% of consolidated net sales compared to 64.1% for the first six months of
1998. Net sales of these products for those periods were $11,673,200 in 1999
compared to $14,462,700 in 1998, a decrease of $2,789,500 or 19.3%. 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. Available information indicates
that sales of alpha hydroxy acid skin care products have been relatively flat
over the past several months, with some companies, including ours, experiencing
decreases in sales of those products while other companies enjoyed increases
in such sales.
During the second half 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.
Were it not for the introduction by the Company of the foregoing new skin care
products, sales for the first half of 1999 compared to those of the same period
of 1998 would have been lower by an additional $3.5 million.
Sales of household products for the first half of 1999 accounted for 35.5% of
consolidated net sales compared to 35.9% 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
first half of 1999, sales of household products were $6,419,800 compared to
$8,113,400 for the same six months of 1998, a decrease of $1,693,600, or 20.9%.
Sales of "Scott's Liquid Gold" for wood were down by $1,114,200, a decrease of
19.8%, which management believes was a result of decreased television
advertising during the first half of 1999 compared to 1998, while sales of
"Touch of Scent" were down by $579,400 or 23.2%. 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 $6,305,600 during the first six
months of 1999 compared to $7,134,100 for the same period of 1998, a decrease of
$828,500 (11.6%, but on a decrease in sales of 19.9%). As a percentage of
consolidated net sales for the first half of 1999, cost of goods sold was 34.9%
compared to 31.6% in 1998, an increase of about 11%, generally attributable to
spreading on-going (fixed) manufacturing costs over lower unit production in the
first half of 1999 than in the first half of 1998.
Advertising expenses for the first half of 1999 were $8,136,100 compared to
$10,849,400 for the comparable period of 1998, a decrease of $2,713,300 or
25.0%. Compared to the first six months of 1998, advertising expenses
applicable to household products decreased by $2,941,300 (84.6%), whereas,
advertising expenses for Alpha Hydrox products, including the new Retinol Night
ResQ product, increased by $228,000 (3.1%). With respect to household products,
the amount expended to advertise Scott's Liquid Gold for wood decreased by
$3,048,300 while expenditures to advertise Touch of Scent increased by $107,000.
Advertising expenses during the third quarter of 1999 are expected to be
significantly lower than those of the second 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 six months ended June 30,1999 were $3,703,000 compared
to $4,492,400 for the comparable six months of 1998, a decrease of $789,400 or
17.6%. That decrease was comprised of a decrease of $426,300 in brokerage
commissions and freight (which vary with sales volume), a decrease in couponing
costs and slotting allowances of $269,600, a decrease in the cost of promotional
merchandise of $103,000, in telephone expense of $81,000, in travel expenses of
$59,000 and a net decrease in a variety of other expenses, none of which, by
itself, was material, of $79,100; all offset by an increase in depreciation and
amortization of $228,600, all of which pertained to a license agreement
regarding the Company's retinol product.
Administrative expenses for the first six months of 1999 were $2,947,600
compared to $3,599,700 for the comparable period of 1998, a decrease of $652,100
or 18%. Such decrease was attributable to the recovery, through insurance, of
$550,000 in legal and professional fees which were expensed in prior periods, a
decrease in depreciation expense of $78,000, and net decreases in other
administrative expenses, none of which, by itself, was material, of $24,100.
Interest expense for the first half of 1999 was $601,100, approximately equal to
an expense of $600,700 for the first half of 1998. Other income for the six
months ended June 30, 1999 was $436,800 compared to $346,300 for the same period
of 1998, an increase of 26.1%. Other income essentially consists of interest
earned on the Company's cash reserves and on its bond sinking fund.
During the first six months of 1999 and of 1998, expenditures for research and
development were not material (under 2% of revenues).
The Company has now experienced six consecutive loss quarters. Irrespective of
certain remedial steps being taken by the Company, as are described in the
President's letter contained in this Report, 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, from 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 June 30,1999
Compared to Three Months Ended June 30,1998
Consolidated net sales for the second quarter of 1999 were $8,003,900 vs.
$10,019,100 for the comparable quarter of 1998, a decrease of $2,015,200 or
about 20.1%. Average selling prices for the second quarter of 1999 were lower by
$167,400 than those of the comparable period of 1998, although prices of
household products were up by $148,200 (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 $315,600.
During the second quarter of 1999, net sales of skin care products accounted for
61.3% of consolidated net sales compared to 62.9% for the second quarter 1998.
Net sales of these products for those periods were $4,905,300 in 1999 compared
to $6,306,600 in 1998, a decrease of $1,401,300 or 22.2%. 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. Please see the discussion above for
the first half of 1999 for additional information 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 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.
Were it not for the recent introduction by the Company of certain new skin care
products, sales for the second quarter of 1999 compared to those of the same
period of 1998 would have been lower by an additional $1,425,000.
Sales of household products for the second quarter of 1999 accounted for 38.7%
of consolidated net sales compared to 37.1% 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
second quarter of 1999, sales of household products were $3,098,600 compared to
$3,712,500 for the same three months of 1998, a decrease of $613,900, or 16.5%.
Sales of "Scott's Liquid Gold" for wood were down by $365,600, a decrease of
14.3%, which management believes was a result of decreased television
advertising during the second three months of 1999 compared to 1998, while sales
of "Touch of Scent" were down by $248,300 or 21.4%. 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 $2,904,900 during the second
quarter of 1999 compared to $3,273,800 for the same period of 1998, a decrease
of $368,900 (11.3%, but on a decrease in sales of 20.1%). As a percentage of
consolidated net sales for the second quarter of 1999, cost of goods sold was
36.3% compared to 32.7% in 1998, an increase of about 11.3%, generally
attributable to spreading on-going (fixed) manufacturing costs over lower unit
production in the second quarter of 1999 than in the second quarter of 1998.
Advertising expenses for the second three months of 1999 were $3,429,000
compared to $4,755,300 for the comparable period of 1998, a decrease of
$1,326,300 or 27.9%. Compared to the second quarter of 1998, advertising
expenses applicable to household products decreased by $1,366,100 (93.8%),
whereas, advertising expenses for Alpha Hydrox products increased by $39,800
(1.2%). With respect to household products, the amount expended to advertise
Scott's Liquid Gold for wood decreased by $1,281,600 while expenditures to
advertise Touch of Scent decreased by $84,500. Advertising expenses during the
third quarter of 1999 are expected to be significantly lower than those of the
second 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 three months ended June 30,1999 were $1,759,700
compared to $2,190,100 for the comparable three months of 1998, a decrease of
$430,400 or 19.7%. That decrease was comprised of a decrease of $215,100 in
brokerage commissions and freight (which vary with sales volume), a decrease in
couponing costs and slotting allowances of $71,800, a decrease in the cost of
promotional merchandise of $109,100, a decrease in telephone expense of $66,300,
a decrease in salaries and fringe benefits of $26,700, and a net decrease in a
variety of other expenses, none of which, by itself, was material, of $55,700;
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 second quarter of 1999 were $1,687,700 compared
to $1,799,900 for the comparable period of 1998, a decrease of $112,200 or 6.2%.
Such decrease was attributable to a decrease of $47,700 in legal and
professional fees, a decrease in salaries and fringe benefits of $38,800, a
decrease in depreciation expense of $39,000, and net increases in other
administrative expenses, none of which, by itself, was material, of $13,300.
Interest expense for the second quarter of 1999 was $300,000, approximately
equal to an expense of $300,300 for the second three months of 1998. Other
income for the three months ended June 30, 1999 was $233,100 compared to
$152,000 for the same period of 1998, an increase of 81,100 or 53.4%. Other
income essentially consists of interest earned on the Company's cash reserves
and on its bond sinking fund.
During the second 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. 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.
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. To date, in anticipation of improved operating results, which, by no
means is a certainty, the Company has postponed 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 fund the Company's cash requirements
through the end of 1999 and into the year 2000.
During the first half of 1999, the Company's working capital decreased by
$2,543,800, and concomitantly, its current ratio (current assets divided by
current liabilities) decreased from 2.4:1 at December 31, 1998 to 2.1:1 at June
30, 1999. This decrease in working capital is attributable to a net loss in the
first six months of 1999 of $2,200,500 and a reduction in long-term debt of
$672,900, both offset by depreciation in excess of capital additions of $286,400
and a decrease in other assets of $43,200. At June 30, 1999, the ratio of
consolidated funded debt to consolidated net worth was .4:1.
At June 30, 1999, trade accounts receivable were lower by $1,053,500 than at the
end of last year, largely because sales of June 1999 were more than $1 million
less than those of December of 1998. Other receivables were lower at June 30,
1999 than they were at December 31, 1998 by $801,600 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 six
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 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. 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 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 millenium. During the third quarter of 1999, the
Company plans to use a second computer, smaller than its central computer, to
test all of its preparations over the past several years in anticipation of Y2K.
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. During the second quarter of 1999, the Company 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 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. 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.
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. Submission of Matters to a Vote of Security Holders
On May 5, 1999, the Company held its 1999 Annual Meeting of
Shareholders. At that meeting, the seven existing directors were
nominated and re-elected as directors of the Company. These seven
persons constitute all members of the Board of Directors of the
Company. These directors and the votes for and withheld for each of
them were as follows:
For Withheld
Jerome J. Goldstein 8,756,868 347,144
Mark E. Goldstein 8,787,081 316,931
Carolyn J. Anderson 8,792,081 311,981
Barry Shepard 8,790,281 313,731
Dennis H. Field 8,789,981 314,031
James F. Keane 8,791,981 312,031
Michael J. Sheets 8,790,981 313,031
In addition, at the 1999 Annual Meeting, the Company's shareholders
approved and ratified the Company's 1998 Stock Option Plan. The votes
at the 1999 Annual Meeting with respect to such Plan were as follows:
For Against Abstain Broker Non-Votes
8,493,776 558,862 51,374 -0-
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
There were no Reports were filed by the Company on Form 8-K
during the Second Quarter of 1999.
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.
August 3, 1999 BY: _________________________________
Date Mark E. Goldstein, President
August 3, 1999 BY: _________________________________
Date Barry Shepard, Treasurer
Principal Financial Officer
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