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
June 30, 2005
Commission File No. 001-13458
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: (1) 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 (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
As of June 30, 2005, the Registrant had 10,471,000 shares of
its $0.10 par value common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 5,724,800 $ 5,307,900 $11,247,300 $10,516,900
Operating costs
and expenses:
Cost of sales 3,131,400 2,970,000 6,238,900 5,720,600
Advertising 202,000 173,400 478,500 637,100
Selling 1,491,000 1,457,500 2,966,300 2,781,400
General and
administrative 999,200 950,200 2,022,000 1,936,700
----------- ----------- ----------- -----------
5,823,600 5,551,100 11,705,700 11,075,800
----------- ----------- ----------- -----------
Loss from operations (98,800) (243,200) (458,400) (558,900)
Interest income 7,800 9,900 20,400 20,500
Interest expense (47,500) (42,600) (95,400) (88,300)
----------- ----------- ----------- -----------
(138,500) (275,900) (533,400) (626,700)
Income tax
expense (benefit) - - - -
----------- ----------- ----------- -----------
Net loss $ (138,500) $ (275,900) $ (533,400) $ (626,700)
=========== =========== =========== ===========
Net loss per common
share (Note 3):
Basic $ (0.01) $ (0.03) $ (0.05) $ (0.06)
=========== =========== =========== ===========
Diluted $ (0.01) $ (0.03) $ (0.05) $ (0.06)
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic 10,471,000 10,361,900 10,471,000 10,359,000
=========== =========== =========== ===========
Diluted 10,471,000 10,361,900 10,471,000 10,359,000
=========== =========== =========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2005 2004
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,637,700 $ 3,354,600
Investment securities 53,400 54,200
Trade receivables, net of allowance
for doubtful accounts of $135,400
and $83,000, respectively 658,400 1,419,700
Other receivables 62,300 56,900
Inventories 5,979,300 2,940,300
Prepaid expenses 422,700 489,600
Deferred tax assets 317,500 339,400
----------- -----------
Total current assets 9,131,300 8,654,700
Property, plant and equipment, net 14,005,200 14,349,600
Other assets 17,200 22,600
----------- -----------
TOTAL ASSETS $23,153,700 $23,026,900
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of Credit $ 860,000 $ 790,000
Accounts payable 2,753,500 1,795,700
Accrued payroll and benefits 1,218,700 1,050,500
Other accrued expenses 353,500 413,700
Current maturities of
long-term debt 941,000 917,000
----------- -----------
Total current liabilities 6,126,700 4,966,900
Long-term debt, net of current maturities 1,416,100 1,893,000
Deferred tax liabilities 317,500 339,400
----------- -----------
Total liabilities 7,860,300 7,199,300
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,471,000 shares 1,047,100 1,047,100
Capital in excess of par 4,979,200 4,979,200
Accumulated comprehensive income 3,400 4,200
Retained earnings 9,263,700 9,797,100
----------- -----------
Shareholders' equity 15,293,400 15,827,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $23,153,700 $23,026,900
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $ (533,400) $ (626,700)
----------- -----------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 371,300 369,200
Stock issued to ESOP - 11,400
Changes in assets and liabilities:
Trade and other receivables, net 755,900 (286,900)
Inventories (3,039,100) (81,500)
Prepaid expenses and
other assets 58,800 (28,200)
Accounts payable and
accrued expenses 1,065,800 387,500
----------- -----------
Total adjustments to net loss (787,300) 371,500
----------- -----------
Net Cash Used by
Operating Activities (1,320,700) (255,200)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities (248,400) -
Proceeds from sale or maturity of
investment securities 250,000 -
Purchase of property,
plant & equipment (15,000) (66,800)
----------- -----------
Net Cash Used by
Investing Activities (13,400) (66,800)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term
borrowings 200,000 -
Payments on short-term
borrowings (130,000) -
Principal payments on long-term
borrowings (452,800) (432,500)
----------- -----------
Net Cash Used
Financing Activities (382,800) (432,500)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (1,716,900) (754,500)
Cash and Cash Equivalents,
beginning of period 3,354,600 3,498,600
----------- -----------
Cash and Cash Equivalents,
end of period $ 1,637,700 $ 2,744,100
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 93,000 $ 88,900
=========== ===========
Income taxes $ 600 $ 100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
(a) Company Background
Scott's Liquid Gold-Inc. (a Colorado corporation) was
incorporated on February 15, 1954. Scott's Liquid Gold-Inc. and
its wholly owned subsidiaries (collectively, "we" or "our")
manufacture and market quality household and skin care products.
Since the first quarter of 2001, we have acted as a distributor
in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse.
Our business is comprised of two segments, household products and
skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts
and our subsidiaries. All intercompany accounts and transactions
have been eliminated.
(c) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include, but are not
limited to, realizability of deferred tax assets, reserves for slow
moving and obsolete inventory, customer returns and allowances, and
bad debts. Actual results could differ from those estimates.
(d) Cash Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be
cash equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", which requires that we classify investments in
marketable securities according to management's intended use of
such investments. We invest our excess cash and have established
guidelines relative to diversification and maturities in an effort
to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates. We consider all investments as available for use
in our current operations and, therefore, classify them as
short-term, available-for-sale investments. Available-for-sale
investments are stated at fair value, with unrealized gains and
losses, if any, reported net of tax, as a separate component of
shareholders' equity and comprehensive income (loss). The cost
of the securities sold is based on the specific identification
method. Investments in corporate and government securities as of
June 30, 2005, are scheduled to mature within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and
are stated at the lower of cost (first-in, first out method) or
market. We record a reserve for slow moving and obsolete products
and raw materials.
Inventories were comprised of the following at:
June 30, 2005 December 31, 2004
- ----------------------------------------------------------------------
Finished goods $ 4,667,200 $ 2,256,100
Raw materials 1,621,100 993,200
Inventory valuation
in reserve (309,000) (309,000)
- ----------------------------------------------------------------------
$ 5,979,300 $ 2,940,300
======================================================================
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost.
Depreciation is provided using the straight-line method over
estimated useful lives of the assets ranging from three to
forty-five years. Building structures and building improvements
are estimated to have useful lives of 35 to 45 years and 3 to 20
years, respectively. Production equipment and production support
equipment are estimated to have useful lives of 15 to 20 years and
3 to 10 years, respectively. Office furniture and office machines
are estimated to have useful lives 10 to 20 and 3 to 5 years,
respectively. Carpeting, drapes and company vehicles are estimated
to have useful lives of 5 to 10 years. Maintenance and repairs are
expensed as incurred. Improvements that extend the useful lives of
the assets or provide improved efficiency are capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits
with financial institutions that management believes are
creditworthy. We establish an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific
customers, historical trends and other information. We have no
significant financial instruments with off-balance sheet risk of
accounting loss, such as foreign exchange contracts, option
contracts or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents,
receivables, other current assets, and accounts payable and
accrued expenses approximate fair value due to the short-term
nature of these financial instruments. The fair value of investments
in marketable securities is based upon quoted market value. Our
long-term debt bears interest at a variable rate, the lender's base
rate, which approximates the prime rate. The carrying value of
long-term debt approximates fair value as of June 30, 2005 and
December 31, 2004.
i) Long-Lived Assets
We account for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value
less costs to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and
their respective tax bases. A valuation allowance is provided when
it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled.
(k) Revenue Recognition
Revenue is generally recognized upon delivery of products
to customers, which is when title passes. Reserves for estimated
market development support, pricing allowances and returns are
provided in the period of sale as a reduction of revenue.
Reserves for returns and allowances are maintained at a level that
management believes is appropriate to account for amounts
applicable to existing sales. Reserves for coupons and certain
other promotional activities are recorded as a reduction of revenue
at the later of the date at which the related revenue is recognized
or the date at which the sales incentive is offered. At June 30,
2005 and December 31, 2004 approximately $811,000 and $862,600,
respectively, had been reserved as a reduction of accounts
receivable, and approximately $70,000 and $90,000, respectively,
had been reserved as current liabilities. Co-op advertising,
marketing funds, slotting fees and coupons are deducted from gross
sales and total $855,500 and $921,800 for the six months ended at
June 30, 2005 and June 30, 2004, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
We have elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for our employee stock
options. Under APB No. 25, employee stock options are accounted
for based upon the intrinsic value, which is the difference between
the exercise price and fair value of the underlying common stock.
Generally, if the exercise price of employee stock options equals
the market price of the underlying stock on the date of the grant,
no compensation expense is recorded. We have adopted the disclosure
only provisions of SFAS No. 123, "Accounting for Stock-based
Compensation".
We granted 455,000 options for shares of our common stock
during the six months ended June 30, 2005 with an average exercise
price equal to $0.55. Had compensation cost been recorded based on
the fair value of options granted by us, our pro-forma net loss and
net loss per share would have been as follows:
Three Months Ended June 30,
--------------------------------------------------------
2005 2004
-------------------------- --------------------------
As Reported Pro Forma As Reported Pro-Forma
----------- ----------- ----------- ------------
Net loss $ (138,500) $ (227,600) $ (275,900) $ (275,900)
Basic loss
per share $ (0.01) $ (0.02) $ (0.03) $ (0.03)
Diluted loss
per share $ (0.01) $ (0.02) $ (0.03) $ (0.03)
Six Months Ended June 30,
------------------------------------------------------
2005 2004
------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
Net loss $ (533,400) $ (624,500) $ (626,700) $ (643,000)
Basic loss
per share $ (0.05) $ (0.06) $ (0.06) $ (0.06)
Diluted loss
per share $ (0.05) $ (0.06) $ (0.06) $ (0.06)
The fair value of options granted has been estimated as of
the date of grant using the following assumptions as of:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Dividend rate $ - $ - $ - $ -
Expected volatility 65% 169% 65% 169%
Risk-free
interest rate 3.80% 3.04% 3.80% 3.04%
Expected life
(in years) 4.5 4.5 4.5 4.5
(n) Comprehensive Income
We follow SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and displaying
comprehensive income and its components. Comprehensive income
includes all changes in equity during a period from non-owner
sources.
The following table is a reconciliation of our net loss to
its total comprehensive loss for the three months and six months
ended June 30, 2005 and 2004:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss $ (138,500) $ (275,900) $ (533,400) $ (626,700)
Unrealized gain
(loss) on investment
securities 700 (3,000) (800) (2,500)
----------- ----------- ----------- -----------
Comprehensive loss $ (137,800) $ (278,900) $ (534,200) $ (629,200)
=========== =========== =========== ===========
(o) Operating Costs and Expenses Classification
Cost of sales includes 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. We classify 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 $760,100 and $690,500 for the six months ended June 30,
2005 and 2004, 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 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.
(p) Recently Issued Accounting Pronouncements
The FASB has issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs - an amendment of ARB No. 43,
Chapter 4" (SFAS No. 151). The provisions of SFAS 151 are
intended to eliminate narrow differences between the existing
accounting standards of the FASB and the International Accounting
Standards Board (IASB) related to inventory costs, in particular,
the treatment of abnormal idle facility expense, freight, handling
costs, and spoilage. SFAS No. 151 requires that theses costs be
recognized as current period charges regardless of the extent to
which they are considered abnormal. The provisions of SFAS 151 are
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of SFAS 151 is not expected to
have a material impact on our operations, financial position or
liquidity.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123, (revised 2004) "Share-Based Payment"
("SFAS 123(R)"). This statement is a revision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" as amended ("SFAS 123"), and requires entities to
measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of
the award. The cost will be recognized over the period during which
an employee is required to provide services in exchange for the
award (usually the vesting period). SFAS 123(R) covers various
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. SFAS 123(R)
eliminates the ability to use the intrinsic value method of
accounting for share options, as provided in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). SFAS 123(R) is effective beginning January 1, 2006,
with early adoption encouraged. We are currently evaluating the
statement's transition methods and do not expect this statement
to have an effect materially different than that of the pro forma
SFAS 123 disclosures provided in Note 1 to the our Consolidated
Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" in our 2004 Annual Report on Form 10-K and in
Note 1 above.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 153, "Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29" ("SFAS 153"). This Statement
amends APB Opinion No. 29 to permit the exchange of nonmonetary
assets to be recorded on a carry over basis when the nonmonetary
assets do not have commercial substance. This is an exception to
the basic measurement principal of measuring a nonmonetary asset
exchange at fair value. A nonmonetary asset exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. We have not entered into
exchanges of nonmonetary assets in the past and do not expect to
enter into any nonmonetary assets exchanges in the foreseeable
future; however, if we enter into significant nonmonetary asset
exchanges in the future, SFAS 153 could have a material effect on
our consolidated financial position, results of operations or
cash flows.
(q) Reclassifications
Certain reclassifications have been made to the December 31,
2004 balance sheet to conform to the current period presentation.
Note 2. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated
financial statements 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 our financial statements included in our 2004
Annual Report on Form 10-K.
Note 3.
Per share data was determined by using the weighted average
number of common shares outstanding. Potentially dilutive
securities, including stock options, are considered only for
diluted earnings per share, unless considered anti-dilutive.
The potentially dilutive securities, which are comprised of
outstanding stock options of 1,560,500 and 1,134,000 at June 30,
2005 and 2004, respectively, were excluded from the computation
of weighted average shares outstanding due to the anti-dilutive
effect.
A reconciliation of the weighted average number of common
shares outstanding for the three and six months ended June 30,
2005 follows:
Total
Three Months Six Months Shares
------------ ------------ ------------
Common shares outstanding,
beginning of the period 10,471,000 10,471,000 10,471,000
Stock options exercised - - -
---------- ---------- ----------
Weighted average number
of common shares
outstanding 10,471,000 10,471,000 10,471,000
Dilutive effect of common
share equivalents - - -
---------- ---------- ----------
Diluted weighted average
number of common shares
outstanding 10,471,000 10,471,000 10,471,000
========== ========== ==========
At June 30, 2005, there were authorized 50,000,000 shares
of our $0.10 par value common stock and 20,000,000 shares of
preferred stock issuable in one or more series. None of the
preferred stock was issued or outstanding at June 30, 2005.
Note 4. Segment Information
We operate in two different segments: household products and
skin care products. Our products are sold in the United States and
internationally (primarily Canada), directly and through independent
brokers, to mass merchandisers, drug stores, supermarkets,
wholesale distributors and other retail outlets. Our Management has
chosen to organize our business around these segments based on
differences in the products sold. The household products segment
includes "Scott's Liquid Gold" for wood, a wood cleaner which
preserves as it cleans, and "Touch of Scent," a room air
freshener. The skin care segment includes: "Alpha Hydrox," alpha
hydroxy acid cleansers and lotions; a retinol product; "Diabetic
Skin Care," a healing cream and moisturizer developed to address
skin conditions of diabetics; and skin care and other sachets of
Montagne Jeunesse distributed by us.
The following provides information on our segments for the
three and six months ended June 30:
Three Months ended June 30,
----------------------------------------------
2005 2004
---------------------- ----------------------
Household Skin Care Household Skin Care
Products Products Products Products
---------- ---------- ---------- -----------
Net sales to
external customers $2,061,300 $3,663,500 $2,452,100 $2,855,800
========== ========== ========== ==========
Income(loss) before
Profit sharing,
bonuses and
income taxes $ (333,300) $ 194,800 $ (43,600) $ (232,300)
========== ========== ========== ==========
Identifiable assets $3,802,200 $8,417,200 $3,851,500 $6,433,400
========== ========== ========== ==========
Six Months ended June 30,
----------------------------------------------
2005 2004
---------------------- ----------------------
Household Skin Care Household Skin Care
Products Products Products Products
---------- ---------- ---------- ----------
Net sales to
external customers $4,153,500 $7,093,800 $4,755,400 $5,761,500
========== ========== ========== ==========
Income(loss) before
profit sharing,
bonuses and
income taxes $ (754,600) $ 221,200 $ (434,400) $ (192,300)
========== ========== ========== ==========
Identifiable assets $3,802,200 $8,417,200 $3,851,500 $6,433,400
========== ========== ========== ==========
The following is a reconciliation of segment information to
consolidated information for the three and six months ended June 30:
Three Months ended June 30, Six Months ended June 30,
--------------------------- --------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Net sales to
external
customers $ 5,724,800 $ 5,307,900 $11,247,300 $10,516,900
=========== =========== =========== ===========
Loss before
profit
sharing,
bonuses and
income taxes $ (138,500) $ (275,900) $ (533,400) $ (626,700)
=========== =========== =========== ===========
Identifiable
assets $12,219,400 $10,284,900 $12,219,400 $10,284,900
Corporate
assets 10,934,300 13,473,900 10,934,300 13,473,900
----------- ----------- ----------- -----------
Consolidated
total assets $23,153,700 $23,758,800 $23,153,700 $23,758,800
=========== =========== =========== ===========
Corporate assets noted above are comprised primarily of our
cash and investments, deferred income tax assets and property and
equipment not directly associated with the manufacturing,
warehousing, shipping and receiving activities.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
During the first half of 2005 we experienced increases in
sales of our Montagne Jeunesse line of skin care products and an
increase in sales of our other skin care products because of the
introductions of new Alpha Hydrox products and additional Montagne
Jeunesse sachets, while experiencing a decrease in our line of
household products. Our net loss for the first half of 2005 was
$533,400 versus a loss of $626,700 in the first half of 2004. The
loss for 2005 was primarily due to a lower profit margin on the
sales increase of our Montagne Jeunesse products and to the
household products sales decrease, coupled with higher raw material
costs for both segments.
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
------------ ------------------
2004 2005 2004
------- ------- -------
Net sales
Scott's Liquid Gold
household products 41.3% 36.9% 45.2%
Neoteric Cosmetics 58.7% 63.1% 54.8%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 57.0% 55.5% 54.4%
------ ------ ------
Gross profit 43.0% 44.5% 45.6%
Other revenue 0.2% 0.2% 0.2%
------ ------ ------
43.2% 44.7% 45.8%
------ ------ ------
Operating expenses 46.4% 48.6% 50.9%
Interest 0.8% 0.8% 0.9%
------ ------ ------
47.2% 49.4% 51.8%
------ ------ ------
Loss before income taxes (4.0%) (4.7%) (6.0%)
====== ====== ======
Our 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. See Note 1(o), Operating Costs
and Expenses Classification, to the Consolidated Financial
Statements in this Report.
Comparative Net Sales
Percentage
Increase
2005 2004 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold $ 3,248,600 $ 3,414,600 (4.9%)
Touch of Scent 904,900 1,340,700 (32.5%)
----------- ----------- ------
Total household
products 4,153,500 4,755,300 (12.7%)
----------- ----------- ------
Alpha Hydrox and
other skin care 2,400,800 2,150,900 11.6%
Montagne Jeunesse
skin care 4,693,000 3,610,700 30.0%
----------- ----------- ------
Total skin care
products 7,093,800 5,761,600 23.1%
----------- ----------- ------
Total Net
Sales $11,247,300 $10,516,900 6.9%
=========== =========== ======
Six Months Ended June 30, 2005
Compared to Six Months Ended June 30, 2004
Consolidated net sales for the first half of the current year
were $11,247,300 vs. $10,516,900 for the first six months of 2004,
an increase of $730,400 or about 6.9%. Average selling prices for
the first six months of the year 2005 were up by $64,800 over those
of the comparable period of 2004, prices of household products
being up by $219,100, while average selling prices of skin care
products were down by $154,300. This decrease was primarily due
to price promotions on selected cosmetic products. Co-op
advertising, marketing funds, slotting fees and coupon expenses
paid to retailers were subtracted from gross sales in accordance
with current accounting policies totaling $855,500 in the first
half of 2005 versus $921,800 in the same period in 2004, a
decrease of $66,300 or 7.2%.
During the first half of the year, net sales of skin care
products accounted for 63.1% compared to 54.8% for the same period
of 2004. Net sales of these products for those periods were
$7,093,800 in 2005 compared to $5,761,600 in 2004, an increase of
$1,332,200 or 23.1%. We have continued to experience a drop in unit
sales of our earlier-established alpha hydroxy acid products due
primarily to maturing in the market for alpha hydroxy acid-based
skin care products, intense competition from producers of similar
or alternative products, many of which are considerably larger than
Neoteric Cosmetics, Inc. and reduced distribution of these products
at retail stores in prior periods. During the first quarter of 2005
we began introduction of four new items in our Alpha Hydrox line of
cosmetic products. Because of this, our sales of Alpha Hydrox
products (with and without alpha hydroxy acid) have increased during
the first half of 2005. Although we are optimistic that this trend
will continue, it is still too early to tell the acceptance of these
products over time. For the first half of 2005, the sales of our
Alpha Hydrox products accounted for 23.3% of net sales of skin care
products and 14.7% of total net sales, compared to 25.2% of net
sales of skin products and 13.8% of total net sales in the first
half of 2004.
For 2005, sales of Montagne Jeunesse products comprised a
majority of net sales of our skin care products. Net sales of
Montagne Jeunesse were approximately $4,693,000 in 2005 compared
to $3,610,700 in 2004. We believe that this increase in sales of
Montagne Jeunesse is attributable primarily to an increase in the
number and type of Montagne Jeunesse sachets on retailers' shelves
in the first half of 2005 versus 2004. We also believe that there
were fewer units of products left over from holiday sales at the
end of 2004 versus 2003 thus creating a need to replenish retailer
inventory in the following year.
In 2001, we 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. On May 4, 2005, we entered into a new distribution
agreement with Montagne Jeunesse International Ltd., which replaces
the distribution agreement previously in effect. Sales of these
products represent a significant source of our revenues. If the
Montagne Jeunesse distribution agreement were to be terminated, it
would significantly reduce our revenues, would have a material
adverse effect on our operating results and cash flow and, absent
other developments, would result in the need for substantial
reductions in our expenses. The principal and controlling owner
of Montagne Jeunesse is, to the knowledge of the Company, the
beneficial owner at March 15, 2005 of approximately 10% of our
outstanding common stock.
Sales of household products for the first half of this year
accounted for 36.9% of consolidated net sales compared to 45.2% for
the same period of 2004. 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 six months
ended June 30, 2005, sales of household products were $4,153,500,
as compared to sales of $4,755,300 for the same six months of 2004.
Sales of "Scott's Liquid Gold" for wood were down by $166,000, a
decrease of 4.9%. This decrease was due to decreased distribution
at retail stores. Sales of "Touch of Scent" were down by $435,800
or 32.5% primarily due to a decrease in distribution. In the
second quarter, we began introducing a wood wash under the
Scott's Liquid Gold product line; sales have been minimal to date.
As sales of a consumer product decline, there is the risk that
retail stores will stop carrying the product. The loss of any
significant customer for any Alpha Hydrox products, "Scott's Liquid
Gold" for wood or "Touch of Scent", could have a significant adverse
impact on our revenues and operating results. We believe that our
future success is highly dependent on favorable acceptance in the
marketplace of Montagne Jeunesse products and the sales of our
Alpha Hydrox products and "Scott's Liquid Gold" for wood.
On a consolidated basis, cost of goods sold was $6,238,900
during the first six months of 2005 compared to $5,720,600 for the
same period of 2004, an increase of $518,300 (9.1%, on a sales
increase of 6.9%). As a percentage of consolidated net sales for
the first half of 2005, cost of goods sold was 55.5% compared to
54.4% in 2004, an increase of 2.0%, which was essentially due to
greater sales of Montagne Jeunesse products at a higher cost per
unit, along with the increased cost of steel cans and the increase
in the cost of petroleum based raw materials used in many of our
products, offset somewhat by a lower cost of sales (as a percentage
of sales) on our new Alpha Hydrox products.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2005 2004 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 478,500 $ 637,100 (24.9%)
Selling 2,966,300 2,781,400 6.6%
General &
Administrative 2,022,000 1,936,700 4.4%
----------- ----------- ------
Total operating
expenses $ 5,466,800 5,355,200 2.1%
=========== =========== ======
Interest Income $ 20,400 $ 20,500 (0.1%)
Interest Expense $ 95,400 $ 88,300 8.0%
Operating expenses, comprised primarily of advertising,
selling and general and administrative expenses, increased $111,600
in the first half of 2005, when compared to the first half of 2004.
The various components of operating expenses are discussed below.
Advertising expenses for the first six months of 2005 were
$478,500 compared to $637,100 for the comparable six months of
2004, a decrease of $158,600 or 24.9%. That decrease was entirely
due to a decrease in advertising expenses applicable to household
products.
Selling expenses for the first half of 2005 were $2,966,300
compared to $2,781,400 for the comparable six months of 2004, an
increase of $184,900 or 6.6%. That increase was comprised of an
increase in freight and brokerage expenses of $49,600, an increase
in salaries and fringe benefits and related travel expense of
$141,500 primarily because of an increase in personnel in 2005
versus 2004, offset by a net decrease in other selling expenses,
none of which by itself is significant, of $6,200.
General and administrative expenses for the first six months
of 2005 were $2,022,000 compared to $1,936,700 for the comparable
period of 2004, an increase of $85,300 or 4.4%. Such increase was
attributable to an increase in bad debt expense $43,200, an
increase in professional fees of $24,000, and a net increase in
other administrative expenses, none of which by itself is
significant, of $18,100.
Interest expense for the first six months of 2005 was
$95,400 versus $88,300 for the comparable period of 2004.
Interest expense increased because of higher interest rates and
borrowing levels under our line of credit. Interest income for
the six months ended June 30, 2005 was $20,400 compared to $20,500
for the same period of 2004, which consists of interest earned on
the Company's cash reserves in 2005 and 2004.
During the first six months of 2005 and 2004, expenditures
for research and development were not material (under 2% of
revenues).
Three Months Ended June 30, 2005
Compared to Three Months Ended June 30, 2004
Consolidated net sales for the second quarter of the current
year were $5,724,800 versus $5,307,900 for the comparable quarter
of 2004, an increase of $416,900 or about 7.9%. Average selling
prices for the second quarter of 2005 were up by $123,800 over those
of the comparable period of 2004, prices of household products being
up by $181,300, while average selling prices of skin care products
were down by $57,500. Co-op advertising, marketing funds, slotting
fees and coupon expenses paid to retailers were subtracted from
gross sales in accordance with current accounting policies totaling
$491,500 in the second quarter of 2005 versus $406,700 in the same
period in 2004, an increase of $84,800 or 20.9%. Because of the
introduction of our new products, we are likely to see a similar
increase in these expenses in subsequent quarters this year. This
increase consisted of an increase in coupon expenses of $55,500,
an increase in slotting of $78,300, offset by a decrease in co-op
advertising of $49,000.
During the second quarter of 2005, net sales of skin care
products accounted for 64.0% of consolidated net sales compared to
53.8% for the second quarter of 2004. Net sales of these products
for those periods were $3,663,500 in 2005 compared to $2,855,800 in
2004, an increase of $807,700 or 28.3%. The increase was almost
entirely due to the introduction of four new items in our Alpha
Hydrox line of products. Net sales of Montagne Jeunesse were
approximately $1,943,900 in the second quarter of 2005 compared to
$1,946,500 in the second quarter of 2004.
Sales of household products for the second quarter of this
year accounted for 36.0% of consolidated net sales compared to
46.2% for the same period of 2004. 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 2005, sales of household products were
$2,061,300, as compared to sales of $2,452,100 for the same three
months of 2004. Sales of "Scott's Liquid Gold" for wood were down
by $61,600, a decrease of 3.5%. Sales of "Touch of Scent" were
down by $329,200 or 47.2%. Please see the discussion above for the
first half of 2005 for additional information regarding sales of
household products, which is also applicable to sales of household
products in the second quarter of 2005.
On a consolidated basis, cost of goods sold was $3,131,400
during the second quarter of 2005 compared to $2,970,000 for the
same period of 2004, an increase of $161,400 (5.4%, on a sales
increase of 7.9%). As a percentage of consolidated net sales for
the second quarter of 2005, cost of goods sold was 54.7% compared
to 56.0% in 2004, a decrease of 2.2%. This percentage decrease was
essentially due to greater sales of our Alpha Hydrox products at a
lower cost per unit offset by increased cost of steel cans and the
increase in the cost of petroleum based raw materials used in many
of our products.
Operating expenses, comprised primarily of advertising,
selling and general and administrative expenses, increased $111,100
in the second quarter of 2005, when compared to the same period
during 2004. The various components of operating expenses are
discussed below.
Advertising expenses for the second quarter of 2005 were
$202,000 compared to $173,400 for the comparable quarter of 2004,
an increase of $28,600 or 16.5%. Advertising expenses applicable
to household products increased by $9,100 (11.0%) during the second
quarter of 2005, and advertising expenses for Alpha Hydrox products
increased for the comparative three-month period by $19,500 (21.5%).
Selling expenses for the three months ended June 30, 2005 were
$1,491,000 compared to $1,457,500 for the comparable three months of
2004, an increase of $33,500 or 2.3%. That increase was primarily
because of an increase in salaries and fringe benefits and related
travel expense of $40,300 resulting from an increase in personnel in
2005 versus 2004, offset by a net decrease in other selling expenses,
none of which by itself is significant, of $6,800.
General and administrative expenses for the second quarter of
2005 were $999,200 compared to $950,200 for the comparable period of
2004, an increase of $49,000 or 5.2%. Such increase was primarily
attributable to an increase in bad debt expense ($16,200), an increase
in professional fees of $12,100, and a net increase in other
administrative expenses, none of which by itself is significant, of
$20,700.
Interest expense for the second quarter of 2005 was $47,500
versus $42,600 for the comparable period of 2004. Interest expense
increased because of higher interest rates and borrowing levels under
our line of credit. Interest income for the three months ended
June 30, 2005 was $7,800 compared to $9,900 for the same period
of 2004.
During the second quarter of 2005 and of 2004, expenditures
for research and development were not material (under 2% of revenues).
Liquidity and Capital Resources
On August 8, 2005 we obtained a new $1,800,000 line of
Credit with Citywide Banks of Aurora, Colorado. This line replaced
the $1,500,000 line of credit dated August 8, 2004, from the same
bank. Initially the original line of credit was to assist with
inventory for the 2004 holiday sales; we continue to use the line
of credit for inventory and other working capital purposes. The
line of credit bears interest at a rate of .5% over the bank's base
rate (6.0% at June 30, 2005) and matures on August 8, 2006. The
line of credit is secured by inventory and accounts receivable.
Under its terms, events of default include a material adverse
change in our financial condition. The covenants remain the
same as the bank loan described below.
We have a bank loan for approximately $2.6 million at the
bank's base rate, adjustable annually each November (5.00% at
November 2004), secured by our land and buildings, with principal
and interest payable monthly through November 2007. The loan
agreement 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. We may not declare any dividends that would result in a
violation of either of these covenants. The foregoing requirements
were met at the end of the first half of 2005.
During the first half of 2005, our working capital decreased
by $683,200, and concomitantly, our current ratio (current assets
divided by current liabilities) decreased from 1.74 at December 31,
2004 to 1.49 at June 30, 2005. This decrease in working capital is
attributable to a net loss in the first six months of 2005 of
$533,400, a reduction in long-term debt of $476,900, a decrease in
deferred tax liabilities of $21,900, and a decrease in accumulated
comprehensive income of $800, offset by depreciation in excess of
capital additions of $344,400, and a decrease in other assets
of $5,400.
At June 30, 2005, trade accounts receivable were $658,400
versus $1,419,700 at year-end, largely because sales in December
of 2004 were greater than those of June of 2005. Accounts payable
increased from the end of 2004 through June of 2005 by $957,800
corresponding primarily with the increase in inventory over that
period. At June 30, 2005 inventories were $3,039,000 more than
at December 31, 2004, due to the increase in inventories of
Montagne Jeunesse, Alpha Hydrox, and household products to
support sales of these products in the upcoming quarters.
Accrued payroll and benefits increased $168,200 from December 31,
2004 to June 30, 2005 primarily because of the increase in accrued
employee fringe benefits. Other accrued liabilities decreased by
$60,200 primarily because of a decrease in accrued property taxes.
We have no significant capital expenditures planned for 2005
and have no current plans for any external financing, other than our
existing bank loans. We expect that our available cash, cash flows
from operating activities and borrowings under our line of credit
will fund the cash requirements through
June 30, 2006.
Our dependence on operating cash flow means that risks
involved in our business can significantly affect our liquidity.
Any loss of a significant customer, any further decreases in
distribution of our skin care or household products, any new
competitive products affecting sales levels of our products, or
any significant expense not included in our internal budget could
result in the need to raise cash, such as through a bank financing.
Except for the short-term line of credit described above, we have
no arrangements for an external financing of debt or equity, and
we are not certain whether any such financing would be available
on acceptable terms. Please also see other risks summarized in
"Forward Looking Statements" below. We expect our operating
cash flows to improve if we achieve profitability in 2005.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss due to adverse
changes in financial and commodity market prices and rates.
We are not materially exposed to market risks regarding interest
rates because the interest on our outstanding debt is at the
lender's base rate, which approximates the prime rate, adjustable
yearly. Our investments in debt and equity securities are
short-term and not subject to significant fluctuations in fair
value. If interest rates were to rise 10% from year-end levels,
the fair value of our debt and equity securities would have
decreased by approximately $600. Further, we do not use foreign
currencies in our business. Currently, we receive payments for
sales to parties in foreign countries in U.S. dollars.
Additionally, we do not use derivative instruments or engage in
hedging activities. As a result, we do not believe that near-term
changes in market risks will have a material effect on results of
our operations, financial position or cash flows.
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 our 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 our products in the
marketplace; the degree of success of any new product or product
line introduction by us; competitive factors; any decrease in
distribution of (i.e., retail stores carrying) our significant
products; continuation of our distributorship agreement with
Montagne Jeunesse; the need for effective advertising of our
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 our products, including applicable
environmental regulations; adverse developments in pending
litigation; the loss of any executive officer; and other matters
discussed in our periodic filings with the Securities and
Exchange Commission. We undertake no obligation to revise any
forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
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.
Item 4. Controls and Procedures
As of June 30, 2005, we conducted an evaluation, under the
supervision and with the participation of the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time periods specified in Securities and
Exchange Commission rules and forms as of June 30, 2005. There
was no change in our internal control over financial reporting
during the quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 4, 2005, we held our 2005 Annual Meeting of Shareholders.
At that meeting, the seven existing directors were nominated and
re-elected as our directors. These seven persons constitute all
members of our Board of Directors. These directors and the votes
for and withheld for each of them were as follows:
For Withheld
--------- --------
Mark E. Goldstein 8,021,121 213,678
Jeffrey R. Hinkle 8,018,031 216,768
Jeffry B. Johnson 8,018,031 216,768
Dennis P. Passantino 8,018,031 216,768
Carl A. Bellini 8,031,881 202,918
Dennis H. Field 8,031,881 202,918
Gerald J. Laber 8,032,381 202,418
In addition, at the 2005 Annual Meeting of Shareholders, our
shareholders approved the Scott's Liquid Gold-Inc. 2005 Incentive
Stock Plan as set forth in Exhibit B to our Proxy Statement dated
April 6, 2005. The votes at such meeting with respect to such Plan
were as follows:
For Against Abstain Broker Non-Votes
- --------- --------- --------- ----------------
4,281,713 317,351 4,850 3,630,885
Item 5. Not Applicable
Item 6. Exhibits
10.0 Business Loan Agreement with Citywide Banks regarding a line
of credit, a related Promissory Note and a related
Security Agreement, all dated August 8, 2005
31.1 Rule 13a-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification
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 10, 2005 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
August 10, 2005 BY: /s/ Jeffry B. Johnson
Date --------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Document
10.0 Business Loan Agreement with Citywide Banks
regarding a line of credit, a related Promissory
Note and a related Security Agreement, all dated
August 8, 2005
31.1 Rule 13a-14(a) Certification of the Chief
Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief
Financial Officer
32.1 Section 1350 Certification