Use these links to rapidly review the document
SCOTT'S LIQUID GOLD-INC. Table of Contents
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, 2001
Commission File No. 0-5128
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
| Colorado State of Incorporation | 84-0920811 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 October 26, 2001.
SCOTT'S LIQUID GOLD-INC.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
| | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2001 | 2000 | ||||||||||
| Revenues: | ||||||||||||||
| Net sales | $ | 5,398,900 | $ | 7,266,500 | $ | 20,523,000 | $ | 22,041,100 | ||||||
| Other Income | 88,500 | 214,800 | 237,100 | 652,100 | ||||||||||
| 5,487,400 | 7,481,300 | 20,760,100 | 22,693,200 | |||||||||||
| Costs and Expenses: | ||||||||||||||
| Cost of sales | 2,404,800 | 2,620,100 | 8,572,200 | 8,071,800 | ||||||||||
| Advertising | 781,500 | 1,270,900 | 4,184,800 | 6,597,000 | ||||||||||
| Selling | 1,656,600 | 1,354,400 | 4,948,700 | 4,296,700 | ||||||||||
| General and administrative | 1,163,900 | 1,333,100 | 3,954,400 | 4,383,500 | ||||||||||
| Interest | 138,000 | 301,500 | 423,600 | 909,400 | ||||||||||
| 6,144,800 | 6,880,000 | 22,083,700 | 24,258,400 | |||||||||||
| Income (loss) before income taxes | (657,400 | ) | 601,300 | (1,323,600 | ) | (1,565,200 | ) | |||||||
| Income tax expense (benefit) | — | 736,600 | — | — | ||||||||||
| Net loss | $ | (657,400 | ) | $ | (135,300 | ) | $ | (1,323,600 | ) | $ | (1,565,200 | ) | ||
| Net loss per common share (Note 3): | ||||||||||||||
| Basic | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.15 | ) | ||
| Diluted | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.15 | ) | ||
| Weighted average shares outstanding: | ||||||||||||||
| Basic | 10,103,100 | 10,103,100 | 10,103,100 | 10,103,100 | ||||||||||
| Diluted | 10,103,100 | 10,103,100 | 10,103,100 | 10,103,100 | ||||||||||
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
| | September 30, 2001 | December 31, 2000 | ||||||
|---|---|---|---|---|---|---|---|---|
| | (Unaudited) | | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,119,800 | $ | 5,485,000 | ||||
| Trade receivables, net (Note 2) | 463,000 | 772,300 | ||||||
| Other receivables | 24,000 | 59,000 | ||||||
| Inventories: | ||||||||
| Finished goods | 3,252,700 | 1,745,000 | ||||||
| Raw materials | 1,237,900 | 1,042,400 | ||||||
| Prepaid expenses | 7,800 | 88,500 | ||||||
| Deferred tax asset | 754,400 | 754,400 | ||||||
| Total current assets | 9,859,600 | 9,946,600 | ||||||
| Property, plant and equipment at cost | 27,148,624 | 27,062,800 | ||||||
| Less accumulated depreciation | 10,723,224 | 10,138,200 | ||||||
| 16,425,400 | 16,924,600 | |||||||
| Other assets | 57,700 | 65,800 | ||||||
| TOTAL ASSETS | $ | 26,342,700 | $ | 26,937,000 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,830,400 | $ | 2,706,800 | ||||
| Accrued expenses | 2,819,800 | 1,742,900 | ||||||
| Current maturities of long-term debt | 684,000 | 640,000 | ||||||
| Total current liabilities | 6,334,200 | 5,089,700 | ||||||
| Long-term debt | 4,793,800 | 5,309,000 | ||||||
| Deferred income taxes | 1,189,700 | 1,189,700 | ||||||
| 12,317,700 | 11,588,400 | |||||||
| 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 | 8,185,200 | 9,508,800 | ||||||
| Shareholders' equity | 14,025,000 | 15,348,600 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 26,342,700 | $ | 26,937,000 | ||||
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
| | Nine Months Ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | ||||||||
| Cash flows from operating activities: | ||||||||||
| Net loss | $ | (1,323,600 | ) | $ | (1,565,200 | ) | ||||
| Adjustments to reconcile net loss to net cash (used) provided by operating activities: | ||||||||||
| Depreciation and amortization | 612,900 | 660,900 | ||||||||
| Provision for doubtful accounts receivable | 103,500 | 117,000 | ||||||||
| Change in assets and liabilities: | ||||||||||
| Accounts and other receivables | 240,800 | 1,214,700 | ||||||||
| Inventories | (1,703,200 | ) | (29,100 | ) | ||||||
| Prepaid expenses | 80,700 | 74,500 | ||||||||
| Accounts payable and accrued expenses | 1,200,500 | 1,107,100 | ||||||||
| Total adjustments to net loss | 535,200 | 3,145,100 | ||||||||
| Net Cash (Used) Provided by Operating Activities | (788,400 | ) | 1,579,900 | |||||||
| Cash flows from investing activities: | ||||||||||
| Purchase of property, plant & equipment | (105,600 | ) | (69,700 | ) | ||||||
| Net Cash Used by Investing Activities | (105,600 | ) | (69,700 | ) | ||||||
| Cash flows from financing activities: | ||||||||||
| Principal payments on long-term borrowings | (471,200 | ) | — | |||||||
| Increase in bond sinking fund | — | (698,700 | ) | |||||||
| Net Cash Used by Financing Activities | (471,200 | ) | (698,700 | ) | ||||||
| Net (Decrease) Increase in Cash and Cash Equivalents | (1,365,200 | ) | 811,500 | |||||||
| Cash and Cash Equivalents, beginning of period | 5,485,000 | 5,008,600 | ||||||||
| Cash and Cash Equivalents, end of period | $ | 4,119,800 | $ | 5,820,100 | ||||||
| Supplemental disclosures: | ||||||||||
| Cash paid during period for: | ||||||||||
| Interest | $ | 426,600 | $ | 919,500 | ||||||
| Income taxes | $ | 1,100 | $ | — | ||||||
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1.
Basis of Preparation of Financial Statements
These unaudited interim consolidated financial statements of Scott's Liquid Gold-Inc. and subsidiaries (collectively, the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles as long as the statements are not misleading. In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal recurring nature. These interim financial statements should be read in conjunction with the financial statements of the Company included in its 2000 Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements
In April 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", which requires consideration paid by vendors to the purchaser of the vendor's products to be classified as a reduction of revenue in the consolidated statement of operations, unless certain conditions can be met, as defined. The effective date of EITF Issue 00-25 is for quarters beginning after December 15, 2001, with prior financial statements restated, if practicable. Earlier adoption is encouraged. The Company will apply this issue in its year-end financial statements. Management estimates that adoption of this issue may reduce revenues and selling expenses by less than 10%.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.141 "Business Combinations" which addresses financial accounting and reporting for business combinations and applies to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company adopted SFAS No. 141 in the third quarter of 2001. The adoption did not have a material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" which addresses financial accounting and reporting for acquired goodwill and other intangible assets and also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. Management believes adoption will not have a material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management believes adoption will not have a material impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The provisions of this statement are generally to be applied prospectively. Management believes adoption will not have a material impact on the Company's financial statements.
The allowances for doubtful accounts at September 30, 2001 and December 31, 2000 were $687,300 and $595,000, 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 of September 30, 2001 and 2000, the Company had 1,184,200 and 829,400 stock options outstanding, respectively.
A reconciliation of the weighted average number of common shares outstanding follows:
| | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2001 | 2000 | ||||
| Common shares outstanding, beginning of period | 10,103,100 | 10,103,100 | 10,103,100 | 10,103,100 | ||||
| Stock options exercised | — | — | — | — | ||||
| Weighted average number of shares outstanding | 10,103,100 | 10,103,100 | 10,103,100 | 10,103,100 | ||||
| Diluted weighted average number of common shares outstanding | 10,103,100 | 10,103,100 | 10,103,100 | 10,103,100 | ||||
At September 30, 2001, 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.
On February 22, 2001, the Company's Board of Directors adopted a shareholder rights plan for its common stock. One right was issued for each share of common stock issued and outstanding on March 2, 2001 and will also be issued for each share of common stock that is issued or sold after that date and prior to the "Distribution Date." The Distribution Date means generally a date which is ten days after a person becomes an "Acquiring Person" or the commencement of a tender offer that would make a person a beneficial owner of 15% or more of the Company's common stock. An Acquiring Person means generally a person or group owning beneficially 15% or more of the outstanding shares of common stock, with certain exceptions.
Each right entitles shareholders to buy one share of the Company's common stock at an exercise price of $8.00 per share, subject to adjustments; however, the rights are not exercisable until the Distribution Date. The rights will expire on February 21, 2011 or upon earlier redemption of the rights. If any person becomes an Acquiring Person, or certain other events relating to an Acquired Person occur, the right will entitle each holder to receive shares of common stock (or stock of the acquiring party after a merger or business combination) having a market value of two times the exercise price of the right. The Board of Directors may redeem the rights at a redemption price of $.01 per right at any time prior to a Distribution Date or the expiration date of the rights on February 21, 2011.
The following provides information on the Company's segments for the three and nine months ended September 30, 2001 and 2000:
| | Three Months Ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | ||||||||||
| | Household Products | Skin Care Products | Household Products | Skin Care Products | ||||||||
| Net sales to external customers | $ | 2,900,700 | $ | 2,498,200 | $ | 3,031,100 | $ | 4,235,400 | ||||
| Income (loss) before profit sharing, bonuses and income taxes | $ | 118,300 | $ | (775,700 | ) | $ | 258,000 | $ | 343,300 | |||
| | Nine Months Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | |||||||||||
| | Household Products | Skin Care Products | Household Products | Skin Care Products | |||||||||
| Net sales to external customers | $ | 8,744,700 | $ | 11,778,300 | $ | 9,348,100 | $ | 12,693,000 | |||||
| Loss before profit sharing, bonuses and income taxes | $ | (258,800 | ) | $ | (1,064,800 | ) | $ | (16,500 | ) | $ | (1,548,700 | ) | |
The following is a reconciliation of segment information to consolidated information for the three and nine months ended September 30, 2001 and 2000:
| | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2001 | 2000 | ||||||||||
| Net sales to external customers | $ | 5,398,900 | $ | 7,266,500 | $ | 20,523,000 | $ | 22,041,100 | ||||||
| Other income | 88,500 | 214,800 | 237,100 | 652,100 | ||||||||||
| Consolidated revenues | $ | 5,487,400 | $ | 7,481,300 | $ | 20,760,100 | $ | 22,693,200 | ||||||
| Income (loss) before profit sharing, bonuses and income taxes for reportable segments | $ | (657,400 | ) | $ | 601,300 | $ | (1,323,600 | ) | $ | (1,565,200 | ) | |||
| Corporate activities | — | — | — | — | ||||||||||
| Consolidated income (loss) before income taxes | $ | (657,400 | ) | $ | 601,300 | $ | (1,323,600 | ) | $ | (1,565,200 | ) | |||
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
| | Nine Months Ended September 30, | Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|---|
| | 2001 | 2000 | 2000 | |||||
| | (Unaudited) | (Unaudited) | (Audited) | |||||
| Net sales | ||||||||
| Scott's Liquid Gold household products | 42.6 | % | 42.4 | % | 42.9 | % | ||
| Neoteric Cosmetics | 57.4 | % | 57.6 | % | 57.1 | % | ||
| Total Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Cost of Sales | 41.8 | % | 36.6 | % | 36.4 | % | ||
| Gross profit | 58.2 | % | 63.4 | % | 63.6 | % | ||
| Other revenue | 1.2 | % | 3.0 | % | 3.1 | % | ||
| 59.4 | % | 66.4 | % | 66.7 | % | |||
| Operating Expenses | 63.8 | % | 69.3 | % | 70.7 | % | ||
| Interest | 2.1 | % | 4.1 | % | 3.9 | % | ||
| 65.9 | % | 73.4 | % | 74.6 | % | |||
| Loss before Income taxes | (6.5 | %) | (7.0 | %) | (7.9 | %) | ||
Nine Months Ended September 30, 2001
Compared to Nine Months Ended September 30, 2000
Consolidated net sales for the first three quarters of 2001 were $20,523,000 vs $22,041,100 for the first nine months of 2000, a decrease of $1,518,100 or about 6.9%. Product volumes declined while average selling prices for the nine months of the year 2001 were up by $350,000 over those of the comparable period of 2000, prices of household products being up by $19,600, while average selling prices of skin care products were up by $330,400.
During the first nine months of 2001, net sales of skincare products accounted for 57.4% of consolidated net sales compared to 57.6% for the comparable period of 2000. Net sales of these products for those periods were $11,778,300 in 2001 compared to $12,693,000 in 2000, a decrease of $914,700 or 7.2%.
The Company has continued to experience a drop in unit sales of the Company's earlier developed alpha hydroxy acid products due at least in part to maturing in the market for alpha hydroxy acid-based skin care products and intense competition from producers of similar or alternative products, many of whom are considerably larger than Neoteric Cosmetics, Inc. Sales of the Company's alpha hydroxy acid-based products in 2001 have also been affected by a decrease in distribution of those products at retail stores, including the Company's largest customer having reduced the number of those products carried on its shelves. 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 and by the distribution and sale of products purchased from Montagne Jeunesse as described below. In the nine months of 2001, the sales of the new products, primarily Montagne Jeunesse, were not sufficient to offset the declining shipments of the alpha hydroxy acid-based products. The Company believes that its future success is highly dependent on the favorable acceptance in the marketplace of its new products and the sales of its Alpha Hydrox 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. Sales of these products
and of the diabetic products have been satisfactory. New products for 2001 include a line of skin care products specifically designed for problems common to mature women and a unique topical analgesic which helps fade the discoloration of bruises and eases the pain from muscle sprains and bruises. These products began shipping in early 2001.
In 2001, the Company commenced purchases of skin care sachets from Montagne Jeunesse under a distributorship agreement. Montagne Jeunesse is the sole supplier of these products. The Company made its first sale of these products in April of 2001. Montagne Jeunesse is a trading division of Medical Express (UK) Ltd., a company located in England. The distributor agreement is dated as of December 1, 2000 and was entered into during April, 2001. Under the agreement, Montagne Jeunesse appointed the Company as a distributor of Montagne Jeunesse skin care sachets in the United States, the Caribbean and Puerto Rico. The agreement may be terminated by either party upon three months written notice and also in certain other events, including if minimum sales levels are not met. The agreement requires the Company to expend a certain amount on advertising if a minimum sales level is achieved in the first calendar year.
Sales of household products for the first nine months of 2001 accounted for 42.6% of consolidated net sales compared to 42.4% for the same period of 2000. 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 2001, sales of household products were $8,744,700 compared to $9,348,100 for the same period of 2000, a decrease of $603,400 or 6.5%. Sales of "Scott's Liquid Gold" for wood were down by $160,100, a decrease of 2.5%, while sales of "Touch of Scent" were down by $443,300 or 15.0%. As noted in previous reports to shareholders, efforts in recent years to revitalize Touch of Scent have produced less than satisfactory results. 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.
On a consolidated basis, cost of goods sold was $8,572,200 during the first three quarters of 2001 compared to $8,071,800 for the same period of 2000, a increase of $500,400 or 6.2%, but on a decrease in sales of 6.9%. As a percentage of consolidated net sales for 2001 through September, cost of goods sold was 41.8% compared to 36.6% in 2000, an increase of 14.1% which was essentially due to a change in product mix (the cost for Montagne Jeunesse is higher than products manufactured by the Company, and some products are more costly to produce than others) and to the spreading of fixed manufacturing costs over lower unit production in the first three quarters of 2001 than in 2000.
Operating expenses, comprised primarily of advertising, selling and administrative expenses, decreased 14.3% in first three quarters of 2001, when compared to the first three quarters of 2000, largely because of the decline in advertising expenses. The various components of operating expenses are discussed below.
Advertising expenses for the first three quarters of 2001 were $4,184,800 compared to $6,597,000 for the comparable period of 2000, a decrease of $2,412,200 or 36.6%. Compared to the first nine months of 2000, advertising expenses applicable to household products decreased by $133,500 (10.9%), while advertising expenses for Alpha Hydrox products, decreased by $2,278,700 (42.4%). With respect to household products, the amount expended to advertise Scott's Liquid Gold for wood decreased by $30,000 while expenditures to advertise Touch of Scent decreased by $103,500. The Company's management currently believes that temporary sales increases that seem attributable to television advertising in 2001 have not been sufficient to incur expenses of television advertisements for the Company's products above relatively low budgeted amounts for 2001.
In 2000, the Company implemented a revised approach to its television advertising, emphasizing short advertising spots on various television channels. Further, as a result of the license agreement entered into with TriStrata Technology Inc. in the fourth quarter of 2000, the Company has revised its advertisements for the Alpha Hydrox products with alpha hydroxy acid to include that the products reduce or diminish fine lines and wrinkles. The Company is also in the process of producing new television advertisements for its Alpha Hydrox products. Irrespective of year to year changes in
expenditures to advertise its products, the Company recognizes that, whenever it is fiscally responsible to do so, it must seek to advertise both effectively and aggressively because the markets for skin care products, furniture polish and air fresheners are highly competitive and, accordingly, the Company's brand names need to be kept in front of current and potential consumers. Sustaining the Company's advertising program is highly dependent upon sales of its skin care products.
Selling expenses for the nine months ended September 30, 2001 were $4,948,700 compared to $4,296,700 for the comparable nine months of 2000, an increase of $652,000 or 15.2%. That increase was comprised of an increase of $146,700 in freight costs, an increase in travel expenses of $213,600, an increase in depreciation and royalty expense of $187,400, an increase in promotional expenses of $278,600, and a net increase in a variety of other expenses, none of which, by itself, was material, of $7,000 all offset by a decrease in brokerage commissions of $88,100, and a decrease in slotting allowances of $93,200.
Administrative expenses for the first nine months of 2001 were $3,954,400 compared to $4,383,500 for the comparable period of 2000, a decrease of $429,100 or 9.8%. That decrease is made up of a decrease in salary and fringe benefits costs of $252,200, a decrease in professional fees of $128,300 and a net decrease in other administrative expenses, none of which, by itself, was material, of $48,600.
As a result of the Company having refinanced its 10% bonds with a long-term loan bearing interest at the prime rate and because the Company no longer has the sinking fund relating to the bonds, both interest expense and income have decreased in 2001. Interest expense for the first nine months of 2001 was $423,600 versus $909,400 for the comparable period of 2000. Other income for the nine months ended September 30, 2001 was $237,100 compared to $652,100 for the same period of 2000. Other income essentially consists of interest earned on the Company's cash reserves in 2001 and also cash deposits into its bond sinking fund in 2000.
During the first three quarters of 2001 and of 2000, expenditures for research and development were not material (under 2% of revenues).
Three Months Ended September 30, 2001
Compared to Three Months Ended September 30, 2000
Consolidated net sales for the third quarter of 2001 were $5,398,900 vs. $7,266,500 for the comparable quarter of 2000, a decrease of $1,867,600 or about 25.7%. Average selling prices for the third quarter of 2001 were higher by $137,900 than those of the comparable period of 2000, with prices of household products down by $24,600, while average selling prices of skincare products were up by $162,500.
During the third quarter of 2001, net sales of skincare products accounted for 46.3% of consolidated net sales compared to 58.3% for the third quarter of 2000. Net sales of these products for those periods were $2,498,200 in 2001 compared to $4,235,400 in 2000, a decrease of $1,737,200 or 41.0%. Please see the discussion above for the first nine months of 2001 for additional information regarding sales of skin care products, which is also applicable to sales of skin care products in the third quarter.
Sales of household products for the third quarter of 2001 accounted for 53.7% of consolidated net sales compared to 41.7% for the same period of 2000. 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 2001, sales of household products were $2,900,700 compared to $3,031,100 for the same three months of 2000, a decrease of $130,400 or 4.3%. Sales of "Scott's Liquid Gold" for wood were down by $39,200, a decrease of 1.9%, while sales of "Touch of Scent" were down by $91,200 or 9.8%. As noted in previous reports to shareholders, efforts in recent years to revitalize Touch of Scent have produced less than satisfactory results.
On a consolidated basis, cost of goods sold was $2,404,800 during the third quarter of 2001 compared to $2,620,100 for the same quarter of 2000, a decrease of $215,300 or 8.2%, on a sales
decrease of 25.7% for the quarter. As a percentage of consolidated net sales for the third quarter of 2001, cost of goods sold was 44.5% compared to 36.1% in 2000, an increase of 23.3%, which was essentially due to a change in product mix (some products are more costly to produce than others) and to the spreading of fixed manufacturing costs over lower unit production in the first three quarters of 2001 than in 2000.
Operating expenses, comprised primarily of advertising, selling and administrative expenses, decreased 9.0% in third quarter of 2001, when compared to the third quarter of 2000, largely because of the decline in advertising expenses. The various components of operating expenses are discussed below.
Advertising expenses for the three months ended September 30, 2001 were $781,500 compared to $1,270,900 for the comparable period of 2000, a decrease of $489,400 or 38.5%. Compared to the third quarter of 2000, advertising expenses applicable to household products, decreased by $6,700, whereas advertising expenses for Alpha Hydrox products decreased by $482,700 (43.7%).
In 2000, the Company implemented a revised approach to its television advertising, emphasizing short advertising spots on various television channels. Further, as a result of the license agreement entered into with TriStrata Technology Inc. in the fourth quarter of 2000, the Company has revised its advertisements for the Alpha Hydrox products with alpha hydroxy acid to include that the products reduce or diminish fine lines and wrinkles. The Company is also in the process of producing new television advertisements for its Alpha Hydrox products. Irrespective of year to year changes in expenditures to advertise its products, the Company recognizes that, whenever it is fiscally responsible to do so, it must seek to advertise both effectively and aggressively because the markets for skin care products, furniture polish and air fresheners are highly competitive and, accordingly, the Company's brand names need to be kept in front of current and potential consumers. Sustaining the Company's advertising program is highly dependent upon sales of its skin care products.
Selling expenses for the three months ended September 30, 2001 were $1,656,600 compared to $1,354,400 for the comparable three months of 2000, an increase of $302,200 or 22.3%. That increase was comprised of an increase of $244,200 in promotional expenses, an increase in travel expenses of $53,600, an increase in depreciation and royalty expense of $62,500, all offset by a decrease in slotting expenses of $66,900 and a net increase in a variety of other expenses, none of which, by itself, was material of $8,800.
Administrative expenses for the third quarter of 2001 were $1,163,900 compared to $1,333,100 for the comparable quarter of 2000, a decrease of $169,200 or 12.7%. Such decrease was attributable to a reduction in salaries and fringe benefits of $65,100, a decrease of $30,400 in legal and professional fees, and by a net decrease in other administrative expenses, none of which, by itself, was material, of $73,700.
As a result of the Company having refinanced its 10% bonds with a long-term loan bearing interest at the prime rate and because the Company no longer has the sinking fund relating to the bonds, both interest expense and income have decreased in 2001. Interest expense for the third quarter of 2001 was $138,000 versus $301,500 for the comparable period of 2000. Other income for the three months ended September 30, 2001 was $88,500 compared to $214,800 for the same period of 2000. Other income essentially consists of interest earned on the Company's cash reserves in 2001 and also cash deposits into its bond sinking fund in 2000.
During the third quarter of 2001 and of 2000, expenditures for research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On November 21, 2000, the Company redeemed the entire 1994 $12 million bond issue and entered into a seven-year bank loan at the prime rate (9.5% at that time and on December 31, 2000), adjustable yearly, secured by the Company's land and buildings, with principal and interest payable
monthly. The loan agreement with the bank contains a number of covenants, including the requirement for maintaining a current ratio of at least 1:1 and a ratio of consolidated long-term debt to consolidated net worth of not more than 1:1. The Company may not declare any dividends that would result in a violation of either of these covenants. The foregoing requirements were met at September 30, 2001.
During the first three quarters of 2001, the Company's working capital decreased by $1,331,500, and concomitantly, its current ratio (current assets divided by current liabilities) decreased from 1.95:1 at December 31, 2000 to 1.56:1 at September 30, 2001. This decrease in working capital is attributable to a net loss in the first nine months of 2001 of $1,323,600 and a reduction in long-term debt of $515,200, both offset by depreciation in excess of capital additions of $499,200 and a decrease in other assets of $8,100. The Company has cash and cash equivalents of approximately $4.1 million at September 30, 2001. Cash used by operating activities for the nine months ended September 30, 2001 amounted to $788,400 and the Company spent $105,600 on new equipment. At September, 2001, the ratio of consolidated funded debt to consolidated net worth was .34:1.
At September 30, 2001, trade accounts receivable were $309,300 lower than at year end, largely because sales in September of 2001 were less than those of December of 2000. Accounts payable increased from the end of 2000 through September of 2001 by $123,600 primarily due to the increase in advertising payables at the end of the third quarter versus at the end of last year. At September 30, 2001, inventories were $1,703,200 greater than at December 31, 2000, largely due to the purchase of products to support our new distribution agreement with Montagne Jeunesse. Accrued expenses increased by $1,076,900 from December 31, 2000 to September 30, 2001 primarily from an increase in accrued advertising of $483,000, an increase in accrued salaries and related items of $262,100, an increase in accrued professional fees of $311,100 and a net increase in other accruals of $20,700.
The Company does not anticipate any significant capital expenditures during the remainder of the year and expects that its cash and cash equivalents plus available cash flows from operating activities will fund the next twelve months' cash requirements.
Market Risks
Market risk represents the risk of loss due to adverse changes in financial and commodity market prices and rates. The Company is not materially exposed to market risks regarding interest rates because the Company's outstanding debt is at the prime rate, adjusted yearly. 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; continuation of the Company's distributorship agreement with Montagne Jeunesse; the need for effective advertising of the Company's products; limited resources available for such advertising; new competitive products and/or technological changes by others; 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. By making these forward-looking statements the Company undertakes no obligation to update these statements for revisions or changes after the date the statements are made.
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.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On October 23, 2001, the Company issued a stock certificate for 50,000 shares of its common stock to a party which was designated by Montagne Jeunesse and which the Company believes to be related to Montagne Jeunesse. These shares, which are 100% vested, were granted by the Company without any proceeds being received for their issuance. The Company initiated this grant as a means to enhance the common goals of Montagne Jeunesse and the Company in their relationship. There was no underwriter involved in this grant. Montagne Jeunesse and the party receiving the shares are located outside of the United States and are not U.S. persons; the party receiving the shares agreed to receive the shares as restricted securities under the federal securities laws; and the Company believes that Montagne Jeunesse, which is a manufacturer of skin care products and has a distributorship agreement with the Company, and the party receiving the shares are capable of evaluating the merits and risks of an investment in the Company's common stock. This grant was only offered to Montagne Jeunesse and the party designated by Montagne Jeunesse. The Company did not register the shares under the Securities Act of 1933 because the grant is not a sale under the 1933 Act and because the grant was also made in reliance upon exemptions from registration under Regulation S, Rules 505 and 506, and Section 4(2) of the 1933 Act.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
- (a)
- Reports on Form 8-K
- (b)
- Exhibits
There were no reports filed by the Company on Form 8-K during the third quarter of 2001.
| Exhibit No. | Document | |
|---|---|---|
| 10.1 | Amendment dated August 15, 2001 between Montagne Jeunesse, a trading division of Medical Express (UK) Ltd., and the Company. |
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 8, 2001 | By: | /s/ MARK E. GOLDSTEIN Mark E. Goldstein President and Chief Executive Officer | |
November 8, 2001 | By: | /s/ JEFFRY B. JOHNSON Jeffry B. Johnson Treasurer, Chief Financial Officer, and Assistant Corporate Secretary | |
| Exhibit No. | Document | |
|---|---|---|
| 10.1 | Amendment dated August 15, 2001 between Montagne Jeunesse, a trading division of Medical Express (UK) Ltd., and the Company. |