Back to GetFilings.com
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, 2002
Commission File No. 0-5128
SCOTT'S LIQUID GOLD-INC.
4880 Havana Street
Denver, CO 80239
Phone: 303-373-4860
Colorado 84-0920811
State of Incorporation I.R.S. Employer
Identification No.
Indicate by check mark whether the registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
YES X NO _
The Registrant had 10,153,058 common shares, $0.10 par value, its
only class of common stock, issued and outstanding on June 30, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ----------- ------------
Revenues:
Net sales $ 5,710,100 $ 7,338,600 $10,984,800 $ 14,357,000
Other Income 15,800 59,200 36,600 148,600
------------ ------------- ------------ -------------
5,725,900 7,397,800 11,021,400 14,505,600
Costs and Expenses:
Cost of sales 3,239,900 3,378,100 6,325,200 6,212,300
Advertising 88,500 879,100 465,600 2,725,200
Selling 1,495,800 1,589,400 2,799,400 3,158,200
General and
administrative 902,400 1,391,700 2,142,400 2,790,500
Interest 67,500 140,300 136,000 285,600
------------ ------------- ------------ -------------
5,794,100 7,378,600 11,868,600 15,171,800
____________ _____________ ____________ _____________
Income (loss)
before income taxes $ (68,200) $ 19,200 $ (847,200) $ (666,200)
Income tax expense
(benefit) (483,000) - (483,000) -
------------ ------------ ----------- -------------
Net income (loss) $ 414,800 $ 19,200 $ (364,200) $ (666,200)
============ ============ ============= =============
Net income (loss)
per common share
(Note 4):
Basic $ 0.04 $ 0.00 $ (0.04) $ (0.07)
=========== ============ ============= =============
Diluted $ 0.04 $ 0.00 $ (0.04) $ (0.07)
=========== ============ ============= =============
Weighted average
shares outstanding:
Basic 10,153,100 10,103,100 10,153,100 10,103,100
=========== ============ ============= =============
Diluted 10,153,100 10,103,100 10,153,100 10,103,100
=========== ============ ============= =============
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash
equivalents $ 1,698,200 $ 1,220,800
Investment securities 1,634,800 2,084,500
Trade receivables, net (Note 2) 507,300 432,200
Other receivables (Note 3) 508,300 21,400
Inventories:
Finished goods 2,126,000 3,214,800
Raw materials 987,900 826,900
Prepaid expenses 168,500 121,100
Deferred tax asset 823,800 823,800
----------- ----------
Total current assets 8,454,800 8,745,500
Property, plant and equipment at cost 27,029,700 27,025,600
Less accumulated depreciation 11,135,600 10,736,600
----------- -----------
15,894,100 16,289,000
Other assets 49,600 55,000
----------- ----------
TOTAL ASSETS $24,398,500 $25,089,500
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,795,800 $ 2,941,100
Accrued expenses 2,147,800 1,939,400
Current maturities of long-term debt 809,000 789,000
----------- -----------
Total current liabilities 5,752,600 5,669,500
Long-term debt 4,105,400 4,515,300
Deferred income taxes 1,259,100 1,259,100
----------- -----------
11,117,100 11,443,900
Shareholders' equity (Note 4):
Common stock 1,015,300 1,015,300
Capital in excess of par 4,847,000 4,847,000
Retained earnings 7,419,100 7,783,300
Shareholders' equity 13,281,400 13,645,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $24,398,500 $25,089,500
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
--------------------
2002 2001
---------- -----------
Cash flows from operating activities:
Net loss
$ (364,200) $ (666,200)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization 404,400 408,600
Provision for doubtful accounts
receivable 9,000 69,000
Gain on sale of investment securities (2,700) -
Accrued interest on investment securities (300) -
Change in assets and liabilities:
Trade and other receivables (571,000) 339,700
Inventories 927,800 (1,493,000)
Prepaid expenses (47,400) (28,700)
Accounts payable and accrued expenses 63,100 526,000
---------- ----------
Total adjustments to net loss 782,900 (178,400)
__________ __________
Net Cash Provided (Used) by
Operating Activities 418,700 (844,600)
__________ __________
Cash flows from investing activities:
Sale of investment securities 452,700 -
Purchase of property, plant &
equipment (4,100) (58,200)
---------- ----------
Net Cash Provided (Used) by
Investing Activities 448,600 (58,200)
__________ __________
Cash flows from financing activities:
Principal payments on long-term borrowings
(389,900) (311,400)
__________ __________
Net Cash Used by Financing Activities (389,900) (311,400)
__________ __________
Net Increase (Decrease) in Cash and
Cash Equivalents 477,400 (1,214,200)
Cash and Cash Equivalents, beginning
of period 1,220,800 5,485,000
---------- ----------
Cash and Cash Equivalents, end of period $1,698,200 $4,270,800
========== ==========
Supplemental disclosures:
Cash paid during period for:
Interest $ 136,600 $ 288,200
========== ==========
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 2001 Annual Report
on Form 10-K.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Certain prior year amounts
have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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. Certain accounting policies
involving significant judgements, estimates, or assumptions
include inventory reserves for slow moving and obsolete products
and raw materials, allowance for doubtful accounts which is based
primarily upon factors surrounding the credit risk of specific
customers, allowance for estimated returns, discounts and
incentives which is based on various market data, historical
trends and information from customers, and valuation of
long-lived assets. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standard ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," was issued in June 2001
and requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized but instead be reviewed
annually for impairment using a fair-value based approach.
Intangible assets that have a finite life will continue to be
amortized over their respective estimated useful lives.
SFAS No. 142 is effective for all fiscal years beginning after
December 15, 2001, with early application permitted. The
Company does not have any significant goodwill or other
intangible assets; therefore, adoption did not have a material
impact on the Company's consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued in August 2001, which supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 144
requires one accounting model be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001.
Management has adopted this statement which did not have a
material impact on the Company's consolidated financial statements
because the Company has not held any long-lived assets for sale or
had any discontinued operations. Pursuant to the provisions
of SFAS No.144, the Company will continue to assess impairment of
its long-lived assets to be held and used in a similar manner
to that used under SFAS No. 121.
Note 2.
Allowance for doubtful accounts at June 30, 2002 and December 31,
2001 were $688,200 and $665,000, respectively.
Note 3.
Other receivables include $483,000 (at June 30, 2002) in federal
income taxes to be recouped as a result of the carryback of the
net loss from the year 2001 against taxes paid on income
reported in 1997.
Note 4.
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. The common equivalent shares were excluded from
the computation of weighted average shares outstanding due to
the anti-dilutive effect.
As of June 30, 2002 and 2001, the Company had 1,181,000 and
1,184,200 stock options outstanding, respectively.
At June 30, 2002, 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.
Note 5.
The following provides information on the Company's segments for
the three and six months ended June 30, 2002 and 2001:
Three Months Ended June 30,
----------------------------------------------------
2002 2001
----------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to external
customers $ 2,445,600 $ 3,264,500 $ 2,880,900 $ 4,457,700
=========== =========== =========== ===========
Income (loss) before
profit sharing, bonuses
and income taxes $ 214,900 $ (283,100) $ (402,000) $ 421,200
=========== ========== =========== ===========
Six Months Ended June 30,
----------------------------------------------------
2002 2001
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to external
customers $ 5,152,600 $ 5,832,200 $ 5,725,100 $ 8,631,900
=========== =========== =========== ===========
Income (loss) before
profit sharing, bonuses
and income taxes $ 319,500 $(1,166,700) $ (377,100) $ (289,100)
=========== =========== =========== ===========
Identifiable Assets $ 3,025,000 $ 6,912,200 $ 3,534,600 $ 7,717,300
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three and six months ended
June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Net sales to external
customers $ 5,710,100 $ 7,338,600 $10,984,800 $14,357,000
Other income 15,800 59,200 36,600 148,600
----------- ----------- ----------- -----------
$ 5,725,900 $ 7,397,800 $11,021,400 $14,505,600
=========== =========== =========== ===========
Income (loss) before
profit sharing, bonuses
and income taxes for
reportable segments $ (68,200) $ 19,200 $ (847,200) $ (666,200)
Corporate activities - - - -
----------- ----------- ----------- ----------
Consolidated income (loss)
before income taxes $ (68,200) $ 19,200 $ (847,200) $ (666,200)
=========== =========== =========== ==========
Identifiable assets for
reportable segments $ 9,937,200 $11,251,900 $ 9,937,200 $11,251,900
Corporate assets 14,461,300 15,233,500 14,461,300 15,233,500
----------- ----------- ----------- -----------
Consolidated total
assets $24,398,500 $26,485,400 $24,398,500 $26,485,400
=========== =========== =========== ===========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation (Unaudited)
Critical Accounting Policies
The Company has identified the policies below as critical to the
Company's business operations and the understanding of the
Company's results of operations. These policies involve significant
judgments, estimates and assumptions by the Company's management.
For a detailed discussion on the application of these and other
accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements of the Company's annual report on Form 10-K
for the year ended December 31, 2001 and Note 1 in Notes to
Consolidated Financial Statements in Part I, Item 1 of this Report.
Revenue Recognition
The Company's revenue recognition policy is significant because
the amount and timing of revenue is a key component of the
Company's results of operations. The Company follows the
guidance of Staff Accounting Bulletin No. 101 ("SAB 101"),
which requires that a strict series of criteria are met in
order to recognize revenue related to product shipment. If
these criteria are not met, the associated revenue is deferred
until the criteria are met. Generally, these criteria are
that there be an arrangement to sell the product, the Company has
delivered the product in accordance with that arrangement, the
sales price is determinable, and collectibility is probable.
Reserves for marketing rebates, pricing allowances and returns
are provided in the period of sale. These reserves involve
estimates made by management. In the event that actual results
differ from these estimates, results of future periods may be
impacted. Reserves for bad debts (currently $688,200 at
June 30, 2002) are set up and are subject to estimates by
management including factors surrounding the credit risk
of specific customers; historically the Company has not
experienced significant bad debts and believes its allowances
are adequate.
Inventory Valuation and Reserves
The Company's inventory is a significant component of the
Company's total assets. In addition, the carrying value of
such inventory directly impacts the gross margins that the
Company recognizes when the Company subsequently sells the
inventory. The Company's inventory is valued at the lower
of cost or market, cost being determined under the first-in,
first-out method. Management estimates reserves for slow moving
and obsolete products and raw materials. In the event that
actual results differ from these estimates, results of future
periods may be impacted. Discontinued products in inventory
have been generally sold at cost, and obsolete raw materials
are reserved for and/or converted to finished goods and sold
at cost.
Other Reserves
Certain other accounting policies involving significant
judgements, estimates, or assumptions include: The allowance
for estimated returns, discounts and incentives which is based
on various market data, historical trends and information from
customers; and valuation of long-lived assets.
Results of Operations
Summary of Results as a Percentage of Net Sales
Year Ended Six Months Ended
December 31, June 30,
----------- -----------------------
2001 2002 2001
--------- ---------- ----------
(Audited) (Unaudited) (Unaudited)
Net sales
Scott's Liquid Gold
household products 47.7% 46.9% 39.9%
Neoteric Cosmetics 52.3% 53.1% 60.1%
------ ------ ------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 46.7% 57.6% 43.3%
------ ------ ------
Gross profit 53.3% 42.4% 56.7%
Other revenue 1.2% 0.3% 1.0%
----- ----- ------
54.5% 42.7% 57.7%
______ ______ ______
Operating Expenses 59.4% 49.2% 60.4%
Interest 2.2% 1.2% 2.0%
------ ------ -----
61.6% 50.4% 62.4%
______ ______ ______
Loss before income taxes (7.1%) (7.7%) (4.7%)
====== ====== ======
Six Months Ended June 30, 2002
Compared to Six Months Ended June 30, 2001
Consolidated net sales for the first half of the current year were
$10,984,800 vs. $14,357,000 for the first six months of 2001, a
decrease of $3,372,200 or about 23.5%. Average selling prices
for the first six months of the year 2002 were down by $228,200
over those of the comparable period of 2001, prices of household
products being up by $35,200, while average selling prices of
skin care products were down by $263,400. This decrease was
primarily due to an increase in coupon expense in 2002 versus
2001. 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
$1,734,600 in the first half of 2002 versus $1,041,600 in the
same period in 2001, an increase of $693,000 or 66.5%. Of this
increase $455,500 was an increase in coupon expenses and an
increase of $237,500 in cooperative advertising expenses.
During the first half of the year, net sales of skin care products
accounted for 53.1% of consolidated net sales compared to 60.1%
for the first six months of 2001. Net sales of these products
for those periods were $5,832,200 in 2002 compared to $8,631,900
in 2001, a decrease of $2,799,700 or 32.4%. The Company has
continued to experience a drop in unit sales of the Company's
earlier established 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., a wholly-owned subsidiary.
Sales of the Company's Alpha Hydrox products in the first half
of 2002, compared to the first half of 2001, have also been
affected by a decrease in the distribution of those products
at retail stores, including the Company's largest customer
having reduced in prior quarters the number of types of those
products carried on its shelves, and may have been affected
by decreases in advertising expenses for Alpha Hydrox products.
The Company continues to address the decrease in sales of
products in the alpha hydroxy acid category of skin care
products through focusing on its core products, and its
niche marketing opportunities, including the distribution and
sale of products purchased from Montagne Jeunesse. In the first
half of 2002, the Company reduced the number of types of its
Alpha Hydrox products with alpha hydroxy acids in order to
concentrate marketing and distribution resources of the Company
and in response to slow, decreasing sales of other items in the
Alpha Hydrox line of skin care products. (Other skin care
products of the Company do not contain alpha hydroxy acids.)
In 2002, the sales of more recently introduced products,
primarily Montagne Jeunesse, were not sufficient to offset the
declining shipments of the alpha hydroxy acid-based products.
The net sales of Montagne Jeunesse were approximately $2,730,000
in the first half of 2002; this product was not sold by the
Company until the second quarter of 2001. 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.
New products for 2001 included a line of skin care products
specifically designed for problems common to mature women
(Alpha Radiance) and a unique topical analgesic (Rubout)
which helps fade the discoloration of bruises. These
products have not met the Company's expectations. The
Company did not introduce new products in the first half of 2002.
Sales of household products for the first half of this year
accounted for 46.9% of consolidated net sales compared to 39.9%
for the same period of 2001. 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, 2002, sales of household products
were $5,152,600, as compared to sales of $5,725,100 for the same
six months of 2001. Sales of "Scott's Liquid Gold" for wood
were down by $376,600, a decrease of 9.2%, largely in
management's view because of the lack of television
advertisement to support this product and additional
competitive products. Sales of "Touch of Scent" were
down by $195,900 or 12.0%. As noted in previous reports to
shareholders, Touch of Scent sales were affected by a decrease
in the number of stores of the Company's largest customer
carrying Touch of Scent and who no longer sells the Touch of
Scent dispenser. 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 $6,325,200 during
the first six months of 2002 compared to $6,212,300 for the same
period of 2001, an increase of $112,900 (1.8% on a sales decrease
of 23.5%). As a percentage of consolidated net sales for the
first half of 2002, cost of goods sold was 57.6% compared to 43.3%
in 2001, an increase of 33.0% which was essentially due to changes
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), to spreading on-going (fixed)
manufacturing costs over lower unit production in the first half
of 2002 than in 2001, and to the close out sales of a few
discontinued items.
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased 18.5% as a
percentage of sales in the first half of 2002, when compared to
the first half of 2001, largely because of the decline in
advertising expenses. The various components of operating
expenses are discussed below.
Advertising expenses for the first six months of 2002 were
$465,600 compared to $2,725,200 for the comparable six months
of 2001, a decrease of $2,259,600 or 82.9%. Advertising expenses
applicable to household products decreased by $752,700 (88.1%)
during the first half of 2002, whereas, advertising expenses for
Alpha Hydrox products decreased for the comparative six-month
period by $1,506,900 (80.5%).
As a result of the license agreement entered into with TriStrata
Technology Inc. in the fourth quarter of 2000, in 2001 the Company
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 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. The
Company's advertising program is highly dependent upon sales of
its skin care products.
Selling expenses for the first half of 2002 were $2,799,400
compared to $3,158,200 for the comparable six months of 2001,
a decrease of $358,800 or 11.4%. That decrease was comprised of
a decrease of $224,400 in freight and brokerage costs, a decrease
in travel expenses of $128,700, a decrease in salary and fringe
benefits of $51,700, an increase in promotional expenses of
$94,600, a decrease in postage of $18,100, and a net decrease
in a variety of other expenses, none of which, by itself, was
material, of $30,500.
General and administrative expenses for the first six months of
2002 were $2,142,400 compared to $2,790,500 for the comparable
period of 2001, a decrease of $648,100 or 23.2%. That decrease
is made up of a decrease in salary and fringe benefits cost of
$208,200, a decrease in professional fees of $316,700, a decrease
in equipment rental expenses of $27,900, a decrease in bad debt
expenses of $60,000, and a net decrease in other administrative
expenses, none of which, by itself, was material, of $35,300.
The Company continues to take steps to reduce expenses. As
indicated above, one part of this effort involved a substantial
decrease in television advertising for the Company's products.
In April, 2002, the Company entered into a listing agreement for
the lease or sale of all or part of two of its buildings at its
facilities in Denver, Colorado. The buildings are an office
building and an adjacent warehouse with a total of approximately
128,000 square feet. The Company's facilities also include a
manufacturing building which is not covered by the listing
agreement. The Company does not know whether an acceptable
transaction for the listed buildings will be possible in the
current real estate market.
Interest expense for the first half of 2002 was $136,000 versus
$285,600 for the comparable period of 2001. Other income for
the six months ended June 30, 2002 was $36,600 compared to
$148,600 for the same period of 2001. Other income essentially
consists of interest earned on the Company's cash reserves.
The income tax benefit of $483,000 results from the carry-back
of a net loss as described in Note 3 to the Notes to Consolidated
Financial Statements in Part I, Item 1 above in this report.
During the first six months of 2002 and of 2001, expenditures for
research and development were not material (under 2% of revenues).
Three Months Ended June 30, 2002
Compared to Three Months Ended June 30, 2001
Consolidated net sales for the second quarter of the current year
were $5,710,100 vs. $7,338,600 for the comparable quarter of 2001,
a decrease of $1,628,500 or about 22.2%. Average selling prices
for the second quarter of 2002 were up by $42,600 over those of
the comparable period of 2001, prices of household products being
up by $53,600, while average selling prices of skin care products
were down by $11,000. 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
$905,100 in the second quarter of 2002 versus $582,900 in the same
period in 2001, an increase of $322,200 or 55.3%. This increase
was made up of an increase in cooperative advertising of $224,800,
an increase in coupon expense of $139,800, and a decrease in
slotting expense of $42,400.
During the second quarter of 2002, net sales of skin care products
accounted for 57.2% of consolidated net sales compared to 60.7%
for the second quarter of 2001. Net sales of these products for
those periods were $3,264,500 in 2002 compared to $4,457,700 in
2001, a decrease of $1,193,200 or 26.8%. Please see the discussion
above for the first half of 2002 for additional information
regarding sales of skin care products, which is also applicable to
sales of skin care products in the second quarter.
Sales of household products for the second quarter of this year
accounted for 42.8% of consolidated net sales compared to 39.3%
for the same period of 2001. 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 2002, sales of household products were
$2,445,600, as compared to sales of $2,880,900 for the same
three months of 2001. Sales of "Scott's Liquid Gold" for wood
were down by $325,900, a decrease of 15.4%. Sales of "Touch of
Scent" were down by $109,400 or 14.4%. Please see the discussion
above for the first half of 2002 for additional information
regarding sales of household products, which is also applicable
to sales of household products in the second quarter of 2002.
On a consolidated basis, cost of goods sold was $3,239,900 during
the second quarter of 2002 compared to $3,378,100 for the same
period of 2001, a decrease of $138,200 (4.1%, on a sales decrease
of 22.2%). As a percentage of consolidated net sales for the
second quarter of 2001, cost of goods sold was 56.7% compared
to 46.0% in 2001, an increase of 23.3%, 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 second quarter of 2002 than in 2001, and to the close out
sales of a few discontinued items.
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased 17.3% as a
percentage of sales in the second quarter of 2002, when compared
to the same period during 2001, largely because of the decline
in advertising expenses.
Advertising expenses for the second quarter of 2002 were $88,500
compared to $879,100 for the comparable quarter of 2001, a decrease
of $790,600 or 89.9%. Advertising expenses applicable to household
products decreased by $540,800 (92.2%) during the second quarter of
2002, whereas, advertising expenses for Alpha Hydrox products
decreased for the comparative three-month period by $249,800 (85.3%).
With respect to advertising expenses for household products, the
amount expended to advertise Scott's Liquid Gold for wood decreased
by $509,500, while expenditures to advertise Touch of Scent decreased
by $31,300. Advertising expenses for Scott's Liquid Gold for wood
and for Alpha Hydrox products during each of the third and fourth
quarters of 2002 are expected to increase from those of the
second quarter.
As a result of the license agreement entered into with TriStrata
Technology Inc. in the fourth quarter of 2000, in 2001 the Company
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 preparing a new television
commercial for Alpha Hydrox products to run during the second
half of 2002. 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. The Company's
advertising program is highly dependent upon sales of its skin
care products.
Selling expenses for the three months ended June 30, 2002 were
$1,495,800 compared to $1,589,400 for the comparable three months
of 2001, a decrease of $93,600 or 5.9%. That decrease was
comprised of a decrease of $137,800 in freight and brokerage costs,
a decrease in travel expenses of $13,900, a decrease in salaries
and fringe benefits of $25,200, an increase in promotional
expenses of $99,700, and a net decrease in a variety of other
expenses, none of which, by itself, was material, of $16,400.
General and administrative expenses for the second quarter of 2002
were $902,400 compared to $1,391,700 for the comparable period of
2001, a decrease of $489,300 or 35.2%. Such decrease was
attributable to a decrease in legal and professional fees of
$284,900, a decrease in salaries and fringe benefits of $123,000,
a decrease in bad debt expense of $60,000, and a net decrease
in other administrative expenses, none of which, by itself,
was material, of $21,400.
Interest expense for the second quarter of 2002 was $67,500 versus
$140,300 for the comparable period of 2001. Other income for the
three months ended June 30, 2002 was $15,800 compared to $59,200
for the same period of 2001. Other income essentially consists
of interest earned on the Company's cash reserves.
The income tax benefit of $483,000 results from the carry-back of
a net loss as described in Note 3 to the Notes to Consolidated
Financial Statements in Part I, Item 1 above in this report.
During the second quarter of 2002 and of 2001, 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 (5.0% at December 31, 2001), 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
June 30, 2002.
During the first half of 2002, the Company's working capital
decreased by $373,800, and concomitantly, its current ratio
(current assets divided by current liabilities) decreased from
1.54:1 at December 31, 2001 to 1.47:1 at June 30, 2002. This
decrease in working capital is attributable to a net loss in
the first six months of 2002 of $364,200, and a reduction in
long-term debt of $409,900, both offset by depreciation in
excess of capital additions of $394,900 and a decrease in other
assets of $5,400. At June 30, 2002, the ratio of consolidated
funded debt to consolidated net worth was .31:1.
At June 30, 2002, trade accounts receivable were $75,100 higher
than at year end. Miscellaneous receivables increased by $486,900
from December 31, 2001 until June 30, 2002 primarily because of a
$483,000 federal income tax refund receivable. Accounts payable
decreased from the end of 2001 through June of 2002 by $145,300
primarily due to the decrease in advertising payables at the end
of the second quarter versus at the end of last year. At
June 30, 2002, inventories were $927,800 less than at
December 31, 2001, largely due to the reduction in sales
(inventory was not replaced as sales declined) and the sale
of discontinued items. Accrued expenses increased by $208,400
from December 31, 2001 to June 30, 2002 primarily from an
increase in accrued salaries and related items of $185,900,
an increase in accrued travel expenses of $55,500 all offset
by a net decrease in other accruals of $33,000.
In July, 2002, the Company received $594,600 upon conclusion
of a lawsuit against an insurer. This lawsuit is described
in Part II, Item 1, Legal Proceedings.
The Company has no significant capital expenditures planned
for 2002 and expects that its available cash and cash flows
from operating activities will fund the next twelve months
cash requirements.
The Company's dependence on operating cash flow means that risks
involved in its business can significantly affect its liquidity.
Any loss of a significant customer, any further decreases in
distribution of its skin care products, any new competitive
products affecting sales levels of the Company's products,
any significant expense not included in the Company's internal
budget could result in the need to raise cash, such as through
a bank financing. The Company has no arrangements for an
external financing of debt or equity, and the Company is not
certain whether any such financing would be available on
acceptable terms. Please also see other risks summarized in
"Forward-Looking Statements" below. Also, the Company
expects its operating cash to improve if the Company achieves
profitability in 2002.
Quantitative and Qualitative Disclosures About 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 interest on the Company's outstanding debt is at the
prime rate, adjustable yearly. The Company's 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 the
Company's debt and equity securities would have decreased by
approximately $11,800. Further, the Company does not use
foreign currencies in its business. Currently, it receives
payments for sales to parties in foreign countries 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 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; 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.
The Company undertakes 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We have previously reported a lawsuit filed in the United States
District Court for the District of Colorado against three insurers
which did not participate in the settlement with the United States
Army regarding the Rocky Mountain Arsenal environmental matter. In
that suit, we have sought to recover the amounts paid to the Army
by us, plus punitive damages and attorneys' fees. Two of those
insurers settled with us. The United States District Court ruled
in our favor on our claim against the one non-settling insurer, and
the insurer appealed. On June 14, 2002, the United States Tenth
Circuit Court of Appeals ruled in our favor by affirming in part
the decision of the United States District Court. As of
June 30, 2002, the Company believed there was potential for an
appeal. On July 31, 2002, the defendant insurer paid to us
$594,600 in payment of our judgment against the insurer.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 2002, the Company held its 2002 Annual Meeting of Shareholders.
At that meeting, the six existing directors were nominated and re-elected
as directors of the Company. These six persons constitute all members
of the Board of Directors of the Company. These directors and the votes
for and withheld for each of them were as follows:
For Withheld
--------- --------
Mark E. Goldstein 9,092,371 185,728
Carolyn J. Anderson 9,094,024 184,075
Jeffrey R. Hinkle 9,094,324 183,775
Jeffry B. Johnson 9,094,524 183,575
Carl A. Bellini 9,090,624 187,475
Dennis H. Field 9,089,024 189,075
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The following report was filed by the Company on Form 8-K during
the second quarter of 2002: A current report on Form 8-K dated
April 8, 2002 reporting an event under Item 5, Other Events.
(b) Exhibits
None.
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 13, 2002 BY: /s/ Mark E. Goldstein
_________________________________
Mark E. Goldstein
President and Chief Executive Officer
August 13, 2002 BY: /s/ Jeffry B. Johnson
_________________________________
Jeffry B. Johnson
Treasurer, Chief Financial Officer,
and Assistant Corporate Secretary
CERTIFICATION OF 10-Q REPORT
OF
SCOTT'S LIQUID GOLD-INC.
FOR THE QUARTER ENDED JUNE 30, 2002
1. The undersigned are the Chief Executive Officer and the Chief
Financial Officer of Scott's Liquid Gold-Inc. ("Scott's Liquid Gold").
This Certification is made pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. This Certification accompanies the 10-Q Report of Scott's
Liquid Gold for the quarter ended June 30, 2002.
2. We certify that such 10-Q Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 and that the information contained in such 10-Q Report
fairly presents, in all material respects, the financial condition
and results of operations of Scott's Liquid Gold.
This Certification is executed as of August 13, 2002.
/s/ Mark E. Goldstein
______________________________________
Mark E. Goldstein
President, Chief Executive Officer and
Chairman of the Board
/s/ Jeffry B. Johnson
______________________________________
Jeffry B. Johnson
Treasurer and Chief Financial Officer