<PAGE>
UNITED STATES
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, 2000
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 preceeding 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 October 31, 2000.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues :
Net sales $ 7,266,500 $ 8,382,300 $ 22,041,100 $ 25,907,800
Other income 214,800 95,900 652,100 532,700
------------ ------------ ------------ ------------
7,481,300 8,478,200 22,693,200 26,440,500
Costs and Expenses:
Cost of sales 2,620,100 3,017,400 8,071,800 9,323,000
Advertising 1,270,900 1,930,500 6,597,000 10,066,600
Selling 1,354,400 1,479,500 4,296,700 4,615,000
General and administrative 1,333,100 1,405,100 4,383,500 4,352,700
Interest 301,500 302,800 909,400 903,900
------------ ------------ ------------ ------------
6,880,000 8,135,300 24,258,400 29,261,200
------------ ------------ ------------ ------------
Income (loss) before income taxes 601,300 342,900 (1,565,200) (2,820,700)
Income tax expense (benefit) 736,600 116,600 -- (846,500)
------------ ------------ ------------ ------------
Net income (loss) $ (135,300) $ 226,300 $ (1,565,200) $ (1,974,200)
============ ============ ============ ============
Net income (loss) per common share (Note 3):
Basic $ (0.01) $ 0.02 $ (0.15) $ (0.20)
============ ============ ============ ============
Diluted $ (0.01) $ 0.02 $ (0.15) $ (0.20)
============ ============ ============ ============
Weighted average shares outstanding:
Basic 10,103,100 10,103,100 10,103,100 10,103,100
============ ============ ============ ============
Diluted 10,103,100 10,116,700 10,103,100 10,103,100
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 5,820,100 $ 5,008,600
Trade receivables (Note 3) 1,243,000 2,212,700
Other receivables 46,300 408,300
Inventories:
Finished goods 1,605,300 1,404,300
Raw materials 1,190,100 1,362,000
Prepaid expenses 141,500 216,000
Deferred tax asset 713,700 713,700
----------- -----------
Total current assets 10,760,000 11,325,600
Property, plant and equipment
at cost 27,175,500 27,108,100
Less accumulated depreciation 10,119,100 9,477,300
----------- -----------
17,056,400 17,630,800
Other assets 1,900 18,700
----------- -----------
TOTAL ASSETS $27,818,300 $28,975,100
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,045,600 $ 1,420,600
Accrued expenses 2,406,700 1,924,600
Current maturities of long-term debt (Note 4) 1,970,000 1,000,000
----------- -----------
Total current liabilities 6,422,300 4,345,200
Long-term debt (Note 4) 4,197,200 5,865,900
Deferred income taxes 1,154,500 1,154,500
----------- -----------
11,774,000 11,365,600
Shareholders' equity (Note 5):
Common stock 1,010,300 1,010,300
Capital in excess of par 4,829,500 4,829,500
Retained earnings 10,204,500 11,769,700
----------- -----------
Shareholders' equity 16,044,300 17,609,500
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $27,818,300 $28,975,100
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,565,200) $(1,974,200)
Adjustments to reconcile net income(loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 660,900 1,039,500
Provision for doubtful accounts receivable 117,000 131,600
Change in assets and liabilities:
Receivables 1,214,700 781,300
Inventories (29,100) 301,100
Prepaid expenses 74,500 38,100
Accounts payable and accrued expenses 1,107,100 118,900
----------- -----------
Total adjustments to net income (loss) 3,145,100 2,410,500
----------- -----------
Net Cash Provided (Used) by Operating Activities 1,579,900 436,300
----------- -----------
Cash flows from investing activities:
Purchase of property, plant & equipment (69,700) (268,100)
----------- -----------
Net Cash Used by Investing Activitiess (69,700) (268,100)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings -- 110,500
Principal payments on short-term borrowings -- (100,200)
Increase in bond sinking fund (698,700) (1,036,100)
----------- -----------
Net Cash Used by Financing Activities (698,700) (1,025,800)
----------- -----------
Net Increase(decrease) in Cash and Cash Equivalents 811,500 (857,600)
Cash and Cash Equivalents, beginning of period 5,008,600 4,563,800
----------- -----------
Cash and Cash Equivalents, end of period $ 5,820,100 $ 3,706,200
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 919,500 $ 897,800
=========== ===========
Income taxes $ -- $ 2,400
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
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.
Pursuant to Emerging Issue Task Force Issue 00-14 "Accounting for Certain
Sales Incentives", coupon related costs previously reflected as a component
of Selling expenses are now reflected as a reduction to Net Sales. Results
for the three and nine months ended September 30, 2000 and 1999 presented
herein have been restated to reflect this change.
Note 3.
Allowance for doubtful accounts at September 30, 2000 and December 31, 1999
were $749,900 and $645,500, respectively.
Note 4.
In November 2000, the Company received a commitment for a seven-year term
loan in the amount of $4.6 million with a commercial bank at an initial
interest rate of 9.5%, to be adjusted annually on the anniversary date to
the bank's then current prime rate, principal and interest payable monthly.
The loan agreement with the Company's bank will contain affirmative and
negative covenants. The proceeds of the loan along with the existing bond
sinking fund and cash on hand will be used to pay-off the Company's $12
million bond indebtedness. The Company's bond indebtedness is due on July
1, 2001, however the Company has sent out a notice for the redemption of
the bonds on November 27, 2000. The financial statements reflect the
maturities of the new agreement. Below are the balance sheets as they would
appear under various circumstances at September 30, 2000:
<TABLE>
<CAPTION>
If refinancing
Prior to New terms had taken place
Refinancing as presented on 9/30/00
----------- ----------- ---------------
<S> <C> <C> <C>
Current Assets $10,760,000 $10,760,000 $ 9,267,000
Other Assets 17,058,300 17,058,300 17,108,100
----------- ----------- -----------
Total Assets $27,818,300 $27,818,300 $26,375,100
=========== =========== ===========
Current Liabilities $10,619,500* $ 6,422,300 $ 5,062,300
Long-term & Other Liabilities 1,154,500 5,351,700 5,268,500
Shareholders' Equity 16,044,300 16,044,300 16,044,300
----------- ----------- -----------
Total Liabilities & Equity $27,818,300 $27,818,300 $26,375,100
=========== =========== ===========
</TABLE>
* The current liabilities include the principal amount of the Company's
bond indebtedness, less the amount in the bond sinking fund, for a
total of $6,167,200.
<PAGE>
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
Note 5.
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 of September 30, 2000 and 1999, the Company had 863,400 and 893,300
stock options outstanding, respectively.
A reconciliation of the weighted average number of common shares
outstanding follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common shares outstanding,
beginning of period 10,103,100 10,103,100 10,103,100 10,103,100
---------- ---------- ---------- ----------
Weighted average number of
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 10,103,100 10,116,700 10,103,100 10,103,100
========== ========== ========== ==========
</TABLE>
At September 30, 2000, there were authorized 50,000,000 shares of the
Company's $0.10 par value common stock and 20,000,000 shares of preferred
stock issuable in one or more series.
Note 6.
The following provides information on the Company's segments for the three
and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months ended September 30,
-----------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nets sales to external customers $ 3,031,100 $ 4,235,400 $ 3,159,200 $ 5,223,100
=========== =========== =========== ===========
Income (loss) before profit sharing,
bonuses and income taxes $ 258,000 $ 343,300 $ 415,600 $ (72,700)
=========== =========== =========== ===========
</TABLE>
<PAGE>
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
Note 6. (continued)
<TABLE>
<CAPTION>
Nine Months ended September 30,
-----------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Household Skin Care Household Skin Care
Products Products Products Products
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Nets sales to external customers $ 9,348,100 $ 12,693,000 $ 9,498,400 $ 16,409,400
============ ============ ============ ============
Income (loss) before profit sharing,
bonuses and income taxes $ (16,500) $ (1,548,700) $ 1,272,200 $ (4,092,900)
============ ============ ============ ============
</TABLE>
The following is a reconciliation of segment information to consolidated
information for the three and nine months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales to external customers $ 7,266,500 $ 8,382,300 $ 22,041,100 $ 25,907,800
Other income 214,800 95,900 652,100 532,700
------------ ------------ ------------ ------------
Consolidated revenues $ 7,481,300 $ 8,478,200 $ 22,693,200 $ 26,440,500
============ ============ ============ ============
Income (loss) before profit sharing,
bonuses and income taxes for
reportable segments $ 601,300 $ 342,900 $ (1,565,200) $ (2,820,700)
Corporate activities -- -- -- --
------------ ------------ ------------ ------------
Consolidated income (loss) before
Income taxes $ 601,300 $ 342,900 $ (1,565,200) $ (2,820,700)
============ ============ ============ ============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Summary of Results as a Percentage of Net Sales
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, ---------------------
1999 2000 1999
------------ ---- ----
(Audited) (Unaudited)
<S> <C> <C> <C>
Net sales
Scott's Liquid Gold household products 37.7% 42.4% 36.7%
Neoteric Cosmetics 62.3% 57.6% 63.3%
----- ----- -----
Total net sales 100.0% 100.0% 100.0%
Cost of sales 35.2% 36.6% 36.0%
----- ----- -----
Gross profit 64.8% 63.4% 64.0%
Other revenue 1.8% 3.0% 2.1%
----- ----- -----
66.6% 66.4% 66.1%
----- ----- -----
Operating expenses 65.4% 69.3% 73.5%
Interest 3.6% 4.1% 3.5%
----- ----- -----
69.0% 73.4% 77.0%
----- ----- -----
Loss before income taxes (2.4%) (7.0%) (10.9%)
===== ===== =====
</TABLE>
Nine Months Ended September 30, 2000
Compared to Nine Months Ended September 30,1999
Consolidated net sales for the first three quarters of 2000 were
$22,041,100 vs $25,907,800 for the first nine months of 1999, a decrease of
$3,866,700 or about 14.9%. Product volumes declined while average selling prices
for the nine months of the year 2000 were up by $1,188,300 over those of the
comparable period of 1999, prices of household products being up by $475,100,
while average selling prices of skin care products were up by $713,200.
During the first nine months of 2000, net sales of skincare products
accounted for 57.6% of consolidated net sales compared to 63.3% for the
comparable period of 1999. Net sales of these products for those periods were
$12,693,000 in 2000 compared to $16,409,400 in 1999, a decrease of $3,716,400 or
22.6%. Almost all of that sales decrease resulted from reduced unit sales of the
Company's line of alpha hydroxy acid products and its other skin care products,
including certain items introduced to the marketplace during the most recent two
years. The Company believes that its skin care sales were adversely affected by
the Company's emphasis on retinol products in allocating its advertising dollars
during 1999, and by intense competition from producers of similar or alternative
products, many of whom are considerably larger than Neoteric Cosmetics, Inc, the
Company's skin care subsidiary. In the year 2000, the Company implemented a
revised approach to its television advertising, emphasizing short advertising
spots on various television channels. The Company continues to address the
decrease in sales of products in the alpha hydroxy acid category of skin care
products through the introduction of new products which target "niche" market
opportunities. However, sales of such new products have not been sufficient to
offset declining shipments of alpha hydroxy acid-based products. During the
second half of the year 2000, the Company introduced a new Alpha Hydrox Facial
Moisturizing Cleanser and a new Alpha Hydrox Under Eye Renewal treatment.
Products planned for shipment early in 2001 include a line of skin care products
specifically designed for problems common to mature women called Alpha Radiance
and a unique topical analgesic,
<PAGE>
RubOut, which helps fade the discoloration of bruises and eases the pain from
muscle sprains and bruises.
During the first half of 1999, the Company's subsidiary, Neoteric
Cosmetics, Inc., introduced Neoteric Diabetic Skin Care, a healing creme and a
therapeutic moisturizer developed by the Company to address skin conditions of
diabetics which are caused by poor blood circulation. More recently, the Company
announced its development of Alpha Hydrox Fade Creme, which was designed to
lighten age spots and skin discoloration caused by sun exposure and other
factors, and Alpha Hydrox Oxygenated Oil Moisturizer, the Company's second skin
care product based upon a patented oxygenated oil technology. Sales of these two
new products and of the diabetic products have been satisfactory. The Company
has discontinued its Belleza Latina product line which was introduced during the
second half of 1998.
Sales of household products for the first nine months of 2000 accounted for
42.4% of consolidated net sales compared to 36.7% for the same period of 1999.
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 2000, sales of household products were $9,348,100
compared to $9,498,400 for the same period of 1999, a decrease of $150,300 or
1.6%. Sales of "Scott's Liquid Gold" for wood were down by $255,600, a decrease
of 3.8%, while sales of "Touch of Scent" were up by $105,300 or 3.7%. As noted
in previous reports to shareholders, efforts in recent years to revitalize Touch
of Scent have produced less than satisfactory results. Although the Company
continues to seek products to replace or augment Touch of Scent, particularly
products which would increase the utilization of the Company's manufacturing
facilities, it believes that a consolidation of purchasing activities by certain
customers may continue to help to improve Touch of Scent sales during 2000.
On a consolidated basis, cost of goods sold was $8,071,800 during the first
three quarters of 2000 compared to $9,323,000 for the same period of 1999, a
decrease of $1,251,200 or 13.4%, but on a decrease in sales of 14.9%. As a
percentage of consolidated net sales for 2000 through September, cost of goods
sold was 36.6% compared to 36.0% in 1999, an increase of 1.7% which as
essentially due to a change in product mix and to the spreading of fixed
manufacturing costs over lower unit production in the first three quarters of
2000 than in 1999.
Operating expenses, comprised primarily of advertising, selling and
administrative expenses, decreased 19.7% as a percentage of sales in first three
quarters of 2000, when compared to the first three quarters of 1999, largely
because of the decline in advertising expenses and cost cutting measures
initiated during the second half of 1999. The various components of operating
expenses are discussed below.
Advertising expenses for the first three quarters of 2000 were $6,597,000
compared to $10,066,600 for the comparable period of 1999, a decrease of
$3,469,600 or 34.5%. Compared to the first nine months of 1999, advertising
expenses applicable to household products increased by $626,000 (105.1%), while
advertising expenses for Alpha Hydrox products, decreased by $4,095,600 (43.2%).
With respect to household products, the amount expended to advertise Scott's
Liquid Gold for wood increased by $635,200 while expenditures to advertise Touch
of Scent decreased by $9,200.
The Company's management believes that the Company's ability to create and
broadcast on television effective advertising is a key element in sales of the
Company's products. Regardless of year to year or quarter to quarter changes in
advertising expenditures, the Company must continue to advertise aggressively
whenever it is fiscally responsible to do so because (i) the markets for
skincare
<PAGE>
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, 2000 were
$4,296,700 compared to $4,615,000 for the comparable nine months of 1999, a
decrease of $318,300 or 6.9%. That decrease was comprised of reduced brokerage
commissions and freight expense (which vary with sales volume) of $117,600, a
reduction (a part of the Company's cost reduction program) in field salaries and
fringe benefits of $106,100, a decrease in depreciation and amortization of
$304,900 all of which pertained to a license agreement regarding the Company's
retinol product which expired in August of 1999, and a net decrease in a variety
of other expenses, none of which, by itself, was material, of $38,100; all
offset by an increase in the cost of promotional merchandise of $144,500, and an
increase in slotting allowances of $103,900.
Administrative expenses for the first nine months of 2000 were $4,383,500
compared to $4,352,700 for the comparable period of 1999, an increase of $30,800
or .7%. Such increase 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 $49,800, a reduction in salaries and
fringe benefits of $508,900 (also a part of the Company's cost reduction
program), all offset by net increases in other administrative expenses, none of
which, by itself, was material, of $39,500.
Interest expense for the first three quarters of 2000 was $909,400
approximately equal to an expense of $903,900 for the first nine months of 1999.
Other income for the nine months ended September 30, 2000 was $652,100 compared
to $532,700 for the same period of 1999. 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 2000 and of 1999, expenditures for research
and development were not material (under 2% of revenues).
Three Months Ended September 30, 2000
Compared to Three Months Ended September 30,1999
Consolidated net sales for the third quarter of 2000 were $7,266,500 vs.
$8,382,300 for the comparable quarter of 1999, a decrease of $1,115,800 or about
13.3%. Average selling prices for the third quarter of 2000 were higher by
$522,500 than those of the comparable period of 1999, with prices of household
products up by $102,000 (about 32% of which related to Touch of Scent and 68% to
Liquid Gold), while average selling prices of skincare products were up by
$420,500.
During the third quarter of 2000, net sales of skincare products accounted
for 58.3% of consolidated net sales compared to 62.3% for the third quarter of
1999. Net sales of these products for those periods were $4,235,400 in 2000
compared to $5,223,100 in 1999, a decrease of $987,700 or 18.9%. Almost all of
that sales decrease resulted from reduced unit sales of the Company's line of
alpha hydroxy acid products and its other skin care products, including certain
items introduced to the marketplace during the most recent two years. The
Company believes that its skin care sales were adversely affected by the
Company's emphasis on retinol products in allocating its advertising dollars
during 1999, and by intense competition from producers of similar or alternative
products, many of whom are considerably larger than Neoteric Cosmetics, Inc, the
Company's skin care subsidiary. Please see the discussion above for the first
nine months of 2000 regarding sales of alpha hydroxy acid products.
<PAGE>
During the first half of 1999, the Company's subsidiary, Neoteric
Cosmetics, Inc., introduced Neoteric Diabetic Skin Care, a healing creme and a
therapeutic moisturizer developed by the Company to address skin conditions of
diabetics which are caused by poor blood circulation. More recently, the Company
announced its development of Alpha Hydrox Fade Creme, which was designed to
lighten age spots and skin discoloration caused by sun exposure and other
factors, and Alpha Hydrox Oxygenated Oil Moisturizer, the Company's second skin
care product based upon a patented oxygenated oil technology. Sales of these two
new products and of the diabetic products have been satisfactory.
Sales of household products for the third quarter of 2000 accounted for
41.7% of consolidated net sales compared to 37.7% for the same period of 1999.
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 2000, sales of household products were $3,031,100 compared
to $3,159,200 for the same three months of 1999, a decrease of $128,100 or 4.1%.
Sales of "Scott's Liquid Gold" for wood were down by $85,000, a decrease of
3.9%, while sales of "Touch of Scent" were down by $43,100 or 4.4%. 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 $2,620,100 during the third
quarter of 2000 compared to $3,017,400 for the same quarter of 1999, a decrease
of $397,300 or 13.2%, which was close to the sales decrease of 13.3% for the
quarter. As a percentage of consolidated net sales for the third quarter of
2000, cost of goods sold was 36.1% compared to 36.0% in 1999.
Advertising expenses for the three months ended September 30, 2000 were
$1,270,900 compared to $1,930,500 for the comparable period of 1999, a decrease
of $659,600 or 34.2%. Compared to the third quarter of 1999, advertising
expenses applicable to household products, increased by $105,300, whereas
advertising expenses for Alpha Hydrox products decreased by $764,900 (about
40.9%). With respect to household products, the amount expended to advertise
Scott's Liquid Gold for wood increased by $113,800 while expenditures to
advertise Touch of Scent decreased by $8,500.
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, 2000 were
$1,354,400 compared to $1,479,500 for the comparable three months of 1999, a
decrease of $125,100 or 8.5%. That decrease was comprised of a decrease of
$87,800 in brokerage commissions and freight (which vary with sales volume), a
decrease in salaries and fringe benefits of $42,000, a decrease in depreciation
and amortization of $76,000 all of which pertained to a license agreement
regarding the Company's retinol product which expired in August of 1999, all
offset by an increase in the cost of promotional merchandise of $37,500, and a
net increase in a variety of other expenses, none of which, by itself, was
material, of $43,200.
<PAGE>
Administrative expenses for the third quarter of 2000 were $1,333,100
compared to $1,405,100 for the comparable quarter of 1999, a decrease of $72,000
or 5.1%. Such decrease was attributable to a reduction in salaries and fringe
benefits of $123,000, offset by a increase of $44,400 in legal and professional
fees, and by a net increase in other administrative expenses, none of which, by
itself, was material, of $6,600.
Interest expense for the third quarter of 2000 was $301,500 approximately
the same as it was for the third quarter of 1999. Other income for the three
months ended September 30, 2000 was $214,800 compared to $95,900 for the same
period of 1999, an increase of $118,900, or 124%. This difference is
attributable to an accounting change at the end of the third quarter of 1999 by
which interest earned was changed from a cash received basis to an accrual
basis. On a year-to date basis (September 30, 2000 and 1999), 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 2000 and of 1999, 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, 2000 interest payments were
made in a timely manner. A sinking fund payment of $1 million is required
annually. Sinking fund payments for 1995 through 1999 were made as required. The
Company, at its request, has no access to any funds paid to the Trustee in
excess of those payments required by the Indenture. In early November of 2000,
the Company received a commitment from a bank for a loan of approximately
$4,600,000 which will be used along with its sinking fund balance and part of
the Company's available cash to redeem all of the $12 million bonds outstanding.
This new borrowing will be for seven years at the prime rate (currently 9.5%),
adjustable yearly, with principal and interest payable monthly. The funding of
this new loan and concurrent redemption of the outstanding bonds will take place
in late November 2000.
The Company has no significant capital expenditures planned for the balance
of 2000 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 2000, the Company's working capital
decreased by $2,642,700 and concomitantly, its current ratio (current assets
divided by current liabilities) decreased from 2.6:1 at December 31, 1999 to
1.7:1 at September 30, 2000. This decrease in working capital is attributable to
a net loss in the first nine months of 2000 of $1,565,200 and a reduction in
long-term debt of $1,668,700 both offset by depreciation in excess of capital
additions of $574,400 and a decrease in other assets of $16,800.
At September 30, 2000, trade accounts receivable were $969,700 lower than
at year end, largely because sales in September of 2000 were less than those of
December of 1999. At September 30, 2000, other receivables were lower than they
were at December 31, 1999 by $362,000 primarily due to the receipt by the
Company of a federal income tax refund for 1999. Accounts payable increased from
the end of 1999 through September of 2000 by $625,000 primarily due to the
existence of advertising payables at the end of the quarter whereas none existed
at the end of last year. The increase in accrued expense at September 30, 2000
from December 31, 1999 is attributable to accrued payroll, fringe benefits and
accrued legal expenses.
<PAGE>
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 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. The
Company continues to mount a vigorous defense in this case. The Company cannot
predict the potential outcome of this lawsuit or the ultimate impact on the
Company's financial position or results of operations.
Market Risks
Market risk represents the risk of loss due to adverse changes in financial
and commodity market prices and rates. Through October 31, 2000, the Company has
not been materially exposed to market risks regarding interest rates because the
Company's bonds had a fixed interest rate. As indicated above, the Company's
borrowings to redeem the bonds in late November, 2000 have an interest rate
which is adjusted annually and is equal to the prime rate of the lending bank.
Further, the Company does not use foreign currencies in its business. Currently,
it receives payments for sales to parties in foreign countries through letters
of credit in U.S. dollars. Additionally, the Company does not use derivative
instruments or engage in hedging activities. As a result, the Company does not
believe that near-term changes in market risks will have a material effect on
its results of operations, financial position or cash flows of the Company
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; 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
Please see "Market Risks" in Item 2 of Part I of this Report which
information is incorporated herein by this reference.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Please see "Legal Proceedings" in Item 2 of Part I of this Report which
information is incorporated herein by this reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The following report was filed by the Company on Form 8-K during the third
quarter of 2000: A current report on Form 8-K dated August 21, 2000
reporting the election of a new director under Item 5, Other Events.
SIGNATURES
Pursuant to the requirements of the Securities and 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 13, 2000 BY: /s/ Mark E. Goldstein
------------------------------
Mark E. Goldstein
President and Chief Executive Officer
/s/ Jeffry B. Johnson
-------------------------------
Jeffry B. Johnson
Chief Financial Officer and Treasurer
