April 12, 2005
Mr. Rufus Decker
Accounting Branch Chief
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 0510
Washington, DC 20549
Re: Scott's Liquid Gold-Inc.
Form 10-K for the fiscal year ended December 31, 2004
File No. 1-13458
Dear Mr. Decker:
This letter responds to the comments of the staff of the
Securities and Exchange Commission in its letter dated April 4, 2005
with respect to the Form 10-K Report listed above. The text of the
staff's comments is set forth below in bold followed in each case
by the response.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Comment applicable to your overall filing
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response
what the revisions will look like.
Response: We have followed this approach in responding to the
comments.
Financial Statements
Note 1. Summary of Significant Policies
2. Please disclose the types of expenses that you include in the
cost of sales line item and the types of expenses that you include in
the selling and general and administrative expenses line items.
Please tell us whether you include inbound freight charges,
purchasing and receiving costs, inspection costs, warehousing
costs, internal transfer costs, and the other costs of your
distribution network in the cost of sales line item. With the
exception of warehousing costs, if you currently exclude a portion
of these costs from cost of sales, please disclose:
. in a footnote the line items that these excluded costs are
included in and the amounts included in each line item for each
period presented, and
. in MD&A that your gross margins may not be comparable to
those of other entities, since some entities include all of the
costs related to their distribution network in cost of sales and
others like you exclude a portion of them from gross margin,
including them instead in a line item, such as selling or general
and administrative expenses.
Response: In regards to financial disclosure, Item (o) to
Note 1 on Significant Accounting Policies will be changed to read as
follows:
(o) Operating Costs and Expenses Classification
Cost of sales include costs associated with manufacturing and
distribution including labor, materials, freight-in, purchasing
and receiving, quality control, internal transfer costs, repairs,
maintenance and other indirect costs, as well as warehousing and
distribution costs. The Company classifies shipping and handling
costs comprised primarily of freight-out and nominal outside
warehousing costs as a component of selling expense on the
accompanying Consolidated Statement of Operations. Shipping and
handling costs totaled $1,544,100, $1,503,000, and $1,239,000 for
the years ended December 31, 2003, 2003, and 2002, respectively.
Selling expenses consist primarily of shipping and handling costs,
wages and benefits for sales and sales support personnel, travel,
brokerage commissions, promotional costs, as well as other indirect
costs.
General and administrative expenses consist primarily of wages and
benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses and other general support costs.
Response: We will also add to our cost of sales MD&A disclosure:
The Company's gross margins may not be comparable to those of other
entities, since some entities include all of the costs related to
their distribution network in cost of sales and others, like us,
exclude a portion of them (freight out to customers and nominal
outside warehouse costs) from gross margin, including them instead
in the selling expense line item. Also, see Note 1.(o), Operating
Costs and Expenses Classification
(g) Property, Plant and Equipment, page 29
3. Please separately disclose the range of useful lives for each
category presented in Note 3. For categories that still have very
broad useful lives, you should separately discuss the types of
assets that fall in each part of the range.
Response: We have rewritten the Note 3. to the December 31, 2004
financial statements to read as follows:
Note 3. Property, Plant and Equipment
Property, plant and equipment at December 31, were comprised of the
following:
Estimated
2004 2003 Useful Life
----------- ----------- -------------
Land $ 1,091,500 $ 1,091,500
Buildings (a) 16,283,000 16,257,300 3 to 45 years
Production equipment (b) 7,530,000 7,502,800 3 to 20 years
Office furniture and
equipment (c) 1,920,000 1,880,100 3 to 20 years
Other (d) 182,000 182,000 5 to 10 years
----------- -----------
27,006,500 26,913,700
12,656,900 12,004,400
----------- -----------
$14,349,600 $14,909,300
=========== ===========
Depreciation expense for the years ended December 31, 2004, 2003, and
2002 was $673,000, $693,400, and $721,500, respectively.
(a) Includes building structures with estimated useful lives of 35
to 45 year useful lives, and building improvements with estimated
useful lives of useful lives of 3 to 20 years.
(b) Includes production equipment with estimated useful lives of
15 to 20 years and production support equipment with estimated
useful lives of 3 to 10 years.
(c) Includes office furniture with estimated useful lives of 10
to 20 years, and office machines with estimated useful lives of 3
to 5 years.
(d) Includes carpeting, drapes and company vehicles with estimated
useful lives of 5 to 10 years.
Note 5. Income Taxes, page 33
4. In light of your history of losses, please help us
understand how you determined a full valuation allowance was not
necessary for your deferred tax assets as of December 31, 2004.
Refer to paragraphs 23 to 25 of SFAS 109. In doing so, please
provide us with your analysis separately for each tax jurisdiction.
Response: As presently appears in the financial statements,
the Deferred Tax Assets ("DTA") (net of the existing valuation
allowance) are equal to the Deferred Tax Liability ("DTL").
Thus, when DTL is netted against DTA, there is neither an asset,
nor a liability.
. The DTL is comprised entirely of accelerated tax
depreciation expense which reverses over the next 30 years
(approximately 38% reverses within the next 12 years) if all
current fixed assets are held for their entire useful lives.
Reversal will occur in a shorter time frame to the extent fixed
assets are either sold, retired or otherwise disposed of.
. The DTA includes approximately (a) $1.19 million related
to federal and Colorado NOL's which expire between 16 and 20 years
from 12/31/04; (b) employee vacation accruals with a DTA value of
approximately $262K which represent less than a 2 year accrual;
and (c) inventory reserves with a DTA value of approximately
$115K which will likely process through Cost of Goods Sold within
the next 2 to 3 years.
. Colorado, the state in which the Company's operations
are based, represents approximately 95% of all state tax exposure.
The Company presently has in excess of $9 million in Colorado
NOL's available to carryover to the next 16 to 20 years. The few
remaining states in which the Company has income tax nexus do
not represent a material exposure to the Company's assets and/or
operations and have not been factored into the either the DTA or
DTL. All such states allow for NOL carryover and potential net
liability is believed to be immaterial to these financial
statements.
Based upon these facts and circumstances, we believe that our
DTA will be realized over the normal course of business. If the
worst case were to occur and the Company were unable to overcome
its recent loss pattern and cease operations, the excess
depreciation would become subject to tax recapture resulting in
taxable income. This scenario would immediately trigger the
utilization of Federal income tax NOL carryovers, Federal R&D tax
credit carryovers and all other DTA with the effect of negating any
resulting taxable income. Consequently, the DTA would likely be
realized at least to the extent of the DTL. As a result, we have
established a valuation allowance only to the extent the DTA
exceeds the DTL.
Note 8. Segment Information, page 36
5. Please disclose what identifiable assets are included in
Corporate assets as of each balance sheet date. See paragraph 32
of SFAS 131.
Response: In regards to financial disclosure, the following
will be added to Note 8:
Corporate assets noted above are comprised primarily of cash
and investments, deferred income tax assets and property and
equipment not directly associated with the manufacturing,
warehousing, shipping and receiving activities of the Company.
Note 11. Transactions with Related Parties, page 38
6. You state that Montagne Jeunesse waived the minimum sales
requirements for 2003 and 2004. You also state that there is the
ability to terminate the distributorship agreement upon three
months' notice for not meeting certain minimum sales. Given
that approximately 44% of your net sales for the year ended
December 31, 2004 were for the sale of their products, please
disclose the minimum sales requirements per the distributorship
agreement and address whether you believe you will be able to
meet these requirements. Please also discuss the expected impact
on your future results of operations if you do not expect to meet
the minimum sales requirements.
Response: The Company will revise the first paragraph of
Note 11 to read as follows:
In 2001, the Company commenced purchases of the skin care
sachets from Montagne Jeunesse under a distribution agreement
covering the United States. Montagne Jeunesse is the sole supplier
of that product. Sales of these products represent a significant
source of the Company's revenues. The distribution agreement for
Montagne Jeunesse products is for an indefinite term; however, each
party has the right to terminate the agreement upon three months'
written notice. The distribution agreement may also be terminated
by either party with 30 days' notice if certain other events occur,
including the Company's net sales, of Montagne Jeunesse product,
falling below $28,000,000 in 2005. This minimum net sales amount
has been lower in previous years (for example, $22,000,000 in
2004), and Montagne Jeunesse has waived the minimum sales
provision for each of the years 2001 through 2004. There is no
minimum sales level stated for years after 2005. The Company
anticipates that it will not meet the minimum sales level in 2005
and will again request a waiver of that provision. If the Montagne
Jeunesse distribution agreement were to be terminated, it would
significantly reduce the Company's revenues, would have a material
adverse effect on the Company's operating results and cash flow
and, absent other developments, would result in the need for
substantial reductions in the Company's expenses. The principal
and controlling owner of Montagne Jeunesse is, to the knowledge
of the Company, the beneficial owner at December 31, 2004 of
approximately 10% of the Company's outstanding common stock.
Scott's Liquid Gold-Inc. acknowledges the following matters
which you requested in your April 4, 2005 letter.
. The Company is responsible for the adequacy and accuracy
of the disclosure in their filings;
. Staff comments or changes to disclosure in response to
staff comments do not foreclose the Commission from taking any
action respect to the filing; and
. The Company may not assert staff comments as a defense
in any proceeding initiated by the Commission or any person
under the federal securities laws of the United States.
If you have any questions or comments regarding the
foregoing, please contact Mark R. Levy (303-295-8073) or Amy Bowler
(303-295-8337) at Holland & Hart LLP, our attorneys. Thank you.
Very truly yours,
SCOTT'S LIQUID GOLD-INC.
By: /s/ Jeffry B. Johnson
Jeffry B. Johnson
Treasurer and Chief Financial Officer