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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
March 31, 2004
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: (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 May 6, 2004, the Registrant had 10,356,000 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
March 31,
2004 2003
----------- -----------
Net sales $ 5,209,000 $ 5,735,700
----------- -----------
Operating costs and expenses:
Cost Of Sales 2,750,600 2,858,000
Advertising 463,700 809,000
Selling 1,323,900 1,420,400
General and administrative 986,500 1,024,000
----------- -----------
5,524,700 6,111,400
----------- -----------
Loss from operations (315,700) (375,700)
Interest income 10,700 16,300
Interest expense (45,800) (56,900)
----------- -----------
(350,800) (416,300)
Income tax expense (benefit) - -
----------- -----------
Net loss $ (350,800) $ (416,300)
=========== ===========
Net loss per common share (Note 2):
Basic $ (0.03) $ (0.04)
=========== ===========
Diluted $ (0.03) $ (0.04)
=========== ===========
Weighted average shares outstanding:
Basic 10,356,000 10,153,100
=========== ===========
Diluted 10,356,000 10,153,100
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2004 2003
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,786,300 $ 3,498,600
Investment securities 306,100 305,300
Trade receivables, net of allowance
for doubtful accounts of $68,400
and $82,000, respectively 1,646,300 1,108,600
Other receivables 35,800 35,400
Inventories 3,726,400 3,122,600
Prepaid expenses 371,800 256,400
Deferred tax assets 533,000 525,000
----------- -----------
Total current assets 9,405,700 8,851,900
Property, plant and equipment, net 14,750,400 14,909,300
Deferred tax assets 634,000 658,000
Other assets 30,700 33,400
----------- -----------
TOTAL ASSETS $24,820,800 $24,452,600
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,261,200 $ 1,256,900
Accrued payroll and benefits 1,070,900 1,106,300
Other accrued expenses 533,300 552,500
Current maturities of
long-term debt 887,000 878,000
---------- -----------
Total current liabilities 4,752,400 3,793,700
Long-term debt, net of current
maturities 2,583,100 2,807,300
Deferred tax liabilities 1,167,000 1,183,000
----------- -----------
Total liabilities 8,502,500 7,784,000
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,356,000 shares 1,035,600 1,035,600
Capital in excess of par 4,927,200 4,927,200
Accumulated comprehensive income 6,100 5,600
Retained earnings 10,349,400 10,700,200
----------- -----------
Shareholders' equity 16,318,300 16,668,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $24,820,800 $24,452,600
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
---------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net loss $ (350,800) $ (416,300)
------------ -----------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 184,500 188,900
Changes in assets and liabilities:
Trade and other receivables, net (538,100) 753,300
Inventories (603,800) (657,900)
Prepaid expenses and other assets (115,500) (69,900)
Accounts payable and accrued expenses 949,700 1,014,700
----------- -----------
Total adjustments to net
income (loss) (123,200) 1,229,100
----------- -----------
Net Cash Provided (Used) by
Operating Activities (474,000) 812,800
----------- -----------
Cash flows from investing activities:
Purchase of investment securities - (495,600)
Proceeds from sale or maturity of
investment securities - 500,000
Purchase of property, plant & equipment (23,100) (9,700)
----------- -----------
Net Cash Provided (Used) by
Investing Activities (23,100) (5,300)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term
borrowings (215,200) (204,200)
----------- -----------
Net Cash Used by Financing
Activities (215,200) (204,200)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (712,300) 603,300
Cash and Cash Equivalents,
beginning of period 3,498,600 2,786,400
----------- -----------
Cash and Cash Equivalents, end of period $ 2,786,300 $ 3,389,700
=========== ===========
Supplemental disclosures:
Cash Paid during period for:
Interest $ 46,000 $ 57,200
=========== ===========
Income taxes $ 1,700 $ 1,000
=========== ===========
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, the "Company")
manufacture and market quality household and skin care products.
In the first quarter of 2001, the Company began acting as a
distributor in the United States of beauty care products
contained in individual sachets and manufactured by Montagne
Jeunesse. The Company's business is comprised of two segments,
household products and skin care products.
(b) Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its 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
The Company considers 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
The Company accounts 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 the Company
classify investments in marketable securities according to
management's intended use of such investments. The Company
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.
The Company considers all investments as available for use in
its current operations and, therefore, classifies 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
March 31, 2004, are scheduled to mature within one year.
(f) Inventories
Inventories are stated at the lower of cost (first-in,
first-out method) or market. The Company records a reserve for
slow moving and obsolete products and raw materials.
(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. 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 the Company
to concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. The
Company maintains its cash balances in the form of bank demand
deposits with financial institutions that management believes are
creditworthy. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. The Company
has no financial instruments with off-balance sheet risk of
accounting loss.
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. The Company's 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 March 31, 2004 and
December 31, 2003.
(i) Long-Lived Assets
The Company accounts 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
The Company accounts 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 recorded as a reduction
of revenue, and 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 March 31, 2004
and December 31, 2003 approximately $532,300 and $873,400,
respectively, had been reserved as a reduction of accounts
receivable, and approximately $185,000 and $175,000, respectively,
had been reserved as current liabilities. Co-op advertising,
marketing funds, slotting fees and coupons are deducted from
gross sales and total $515,100 and $491,300 at March 31, 2004
and December 31, 2003, respectively.
(l) Advertising Costs
The Company expenses advertising costs as incurred.
(m) Stock-based Compensation
The Company has elected to follow Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
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. The Company has adopted the disclosure
only provisions of SFAS No. 123, "Accounting for Stock-based
Compensation".
The Company granted 35,000 options for shares of the
Company's common stock during the three months ended March 31,
2004 with an exercise price equal to $0.76. Had compensation
cost been recorded based on the fair value of options granted
by the Company, the Company's pro-forma net loss and net loss
per share for the quarters ended March 31, 2004 and 2003 would
have been as follows:
2004 2003
------------------------- --------------------------
As Reported Pro Forma As Reported Pro-Forma
----------- ----------- ----------- -----------
Net loss $ (350,800) $ (367,100) $ (416,300) $ (462,800)
Basic loss
per share $ (0.03) $ (0.04) $ (0.04) $ (0.05)
Diluted loss
per share $ (0.03) $ (0.04) $ (0.04) $ (0.05)
The fair value of options granted has been estimated as of
the date of grant using the following assumptions as of March 31:
2004 2003
-------- --------
Dividend rate $ - $ -
Expected volatility 169% 170%
Risk-free interest rate 3.04% 3.06%
Expected life 4.5 years 4.5 years
(n) Comprehensive Income
The Company follows 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 the Company's net
loss to its total comprehensive loss for the quarters ended
March 31, 2004 and 2003:
2004 2003
--------- ---------
Net loss $(350,800) $(416,300)
Unrealized gain on
investment securities 500 100
--------- ---------
Comprehensive loss $(350,300) $(416,200)
========= =========
(o) Shipping and Handling
The Company classifies amounts billed to a customer in a sale
transaction related to shipping and handling as revenue and
classifies shipping and handling costs as a component of selling
expense on the accompanying Consolidated Statement of Operations.
Shipping and handling costs totaled $323,300 and $344,100 for
the quarters ended March 31, 2004 and 2003, respectively.
Note 2.
Basis of Preparation of Financial Statements
These unaudited interim consolidated financial statements
of 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 2003 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 1,134,000 and 1,121,100 at March 31,
2004 and 2003, 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 months ended March 31 follows:
2004 2003
---------- ----------
Common shares outstanding,
beginning of the year 10,356,000 10,153,100
Stock options exercised - -
---------- ----------
Weighted average number of
common shares outstanding 10,356,000 10,153,100
Dilutive effect of common share
equivalents - -
---------- ----------
Diluted weighted average number
of common shares outstanding 10,356,000 10,153,100
========== ==========
At March 31, 2004, there were authorized 50,000,000 shares of the
Company's $.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 March 31, 2004.
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. One right 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 Acquiring 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 4.
The Company operates in two different segments: household
products and skin care products. The Company's products are
sold in the United States and internationally (primarily
Canada), directly and through independent brokers, to mass
marketers, drug stores, supermarkets, wholesale distributors
and other retail outlets. Management has chosen to organize
the Company 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 the Company.
The following provides information on the Company's segments
for the three months ended March 31:
2004 2003
----------------------- -----------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external customers $ 2,303,200 $ 2,905,800 $ 2,233,200 $ 3,502,500
========== =========== =========== ===========
Loss before profit
sharing, bonuses
and income taxes $ (390,800) $ 40,000 $ (405,000) $ (11,300)
=========== =========== =========== ===========
Identifiable assets $ 3,915,200 $ 7,306,600 $ 3,578,200 $ 6,840,200
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information for the three months ended March 31:
2004 2003
------------ -----------
Net sales to external customers $ 5,209,900 $ 5,735,700
=========== ===========
Loss before profit sharing,
bonuses and income taxes $ (350,800) $ (416,300)
=========== ===========
Identifiable assets $11,221,800 $10,418,400
Corporate activities 13,599,000 16,055,100
----------- -----------
Consolidated total assets $24,820,800 $26,473,500
=========== ===========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
During the first quarter of 2004 we experienced a small increase
in our Scott's Liquid Gold for wood sales while experiencing a
decrease in our skin care products including the Montagne
Jeunesse line of products. Our net loss for the first quarter
of 2004 was $350,800 versus a loss of $416,300 in the first
quarter of 2003. The loss for 2004 was primarily due to slower
sales of Montagne Jeunesse products as explained below.
Summary of Results as a Percentage of Net Sales
Year Ended Three Months Ended
December 31, March 31,
2003 2004 2003
----------- -------- -------
Net sales
Scott's Liquid Gold
household products 36.8% 44.2% 38.9%
Neoteric Cosmetic 63.2% 55.8% 61.1%
------ ------ ------
Total N 100.0% 100.0% 100.0%
Cost of Sales 52.6% 52.8% 49.8%
------ ------ ------
Gross profit 47.4% 47.2% 50.2%
Other revenue .2% .2% .3%
------ ------ ------
47.6% 47.4% 50.5%
------ ------ ------
Operating expenses 47.5% 53.2% 56.7%
Interest .9% .9% 1.0%
------ ------ ------
48.4% 54.1% 57.7%
------ ------ ------
Loss before
income taxes (0.8%) (6.7%) (7.2%)
====== ====== ======
Comparative Net Sales
Percentage
Increase
2004 2003 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold $ 1,660,100 $ 1,563,700 6.2%
Touch of Scent 643,100 669,500 (3.9%)
----------- ----------- ------
Total household
chemical products 2,303,200 2,233,200 3.1%
----------- ----------- ------
Alpha Hydrox and other
skin care 1,241,600 1,458,100 (14.8%)
Montagne Jeunesse skin care 1,664,200 2,044,400 (18.6%)
----------- ----------- ------
Total skin care
products 2,905,800 3,502,500 (17.0%)
----------- ----------- ------
Total Net Sales $ 5,209,000 $ 5,735,700 (9.2%)
=========== =========== ======
Three Months Ended March 31, 2004
Compared to Three Months Ended March 31, 2003
Consolidated net sales for the first quarter of the current year
were $5,209,000 vs. $5,735,700 for the first three months of 2003,
a decrease of $526,700. Average selling prices for the first
three months of the year 2004 were relatively unchanged over the
comparable period of 2003. "Off-sales promotions" comprised of
co-op advertising, marketing funds, slotting fees and coupon
expenses paid to retailers were recorded as a reduction of gross
sales and totaled $515,100 in the first quarter of 2004 versus
$491,300 in the same quarter in 2003, an increase of $23,800 or
4.8%.
During the first quarter of 2004, net sales of skin care products
accounted for 55.8% of consolidated net sales compared to 61.1% for
the same quarter of 2003. Net sales of these products for that
period were $2,905,800 in 2004 compared to $3,502,500 in 2003, a
decrease of $596,700 or 17.0%. 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 which are considerably larger than
Neoteric Cosmetics, Inc. Sales of the Company's Alpha Hydrox
products (with and without alpha hydroxy acid) have also
decreased during 2003 and the first quarter of 2004, due to
reduced distribution of those products at retail stores,
including the Company's largest and other customers having
reduced in prior quarters the number of types of those products
carried on their shelves and discontinuation in 2003 of these
products at certain retail chains. In addition, increased
television advertising for Alpha Hydrox products in the first
half of 2003 was not cost effective in terms of the impact on
sales. In the second quarter of 2003, the Company's largest
customer (which accounted for 23.6% of sales of Alpha Hydrox
skin care products in 2002) decreased significantly the number
of stores carrying Alpha Hydrox products of the Company. This
change has resulted, and is likely to result in the future, in
lower sales of those products. For the first quarter of 2004,
the sales of the Company's Alpha Hydrox products accounted for
29.3% of net sales of skin care products and 16.4% of total net
sales, compared to 33.3% of net sales of skin care products and
20.3% of total net sales in the first quarter of 2003.
For 2004, sales of Montagne Jeunesse products comprised a
majority of net sales of the Company's skin care products.
Net sales of Montagne Jeunesse were approximately $1,664,200
in 2004 compared to $2,044,400 in 2003. The Company believes
that this decrease in sales of Montagne Jeunesse is attributable
primarily to a decrease in the number of display promotions at
retailers in the first quarter of 2004 versus 2003 and to 2003
products that had not sold through the retail stores until 2004
thus resulting in fewer first quarter re-sales.
As part of its sales efforts in the first half of 2003, the
Company used direct response television (infomercial)
commercials for the sale of its Alpha Hydrox products. The
Company has not used television advertisements for the Montagne
Jeunesse products. The Company did not introduce new products
during 2003 nor in the first quarter of 2004, except different
items in Montagne Jeunesse sachets.
Sales of household products for the first quarter of this year
accounted for 44.2% of consolidated net sales compared to 38.9%
for the same period of 2003. 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
quarter ended March 31, 2004, sales of household products were
$2,303,200 as compared to sales of $2,233,200 for the same
quarter of 2003. Sales of Scott's Liquid Gold for wood, were
up by $96,400, an increase of 6.2%, which the Company believes
is the result primarily of advertising in the fourth quarter of
2003 and the first quarter of 2004. Sales of Touch of Scent
were down by $26,400 or 3.9%, primarily due to a decrease in
orders for, and distribution of, the Company's Touch of Scent
dispenser package.
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 skin care products, "Scott's Liquid
Gold" for wood or "Touch of Scent", could have a significant
adverse impact on the Company's revenues and operating results.
The Company believes that its future success is highly dependent
on favorable acceptance in the marketplace of Montagne Jeunesse
products and the sales of its Alpha Hydrox products and "Scott's
Liquid Gold" for wood.
On a consolidated basis, cost of goods sold was $2,750,600 during
the first three months of 2004 compared to $2,858,000 for the
same period of 2003, a decrease of $107,400 or 3.8%, on a sales
decrease of 9.2%. As a percentage of consolidated net sales,
cost of sales was 52.8% in 2004 versus 49.8% in 2003, an
increase of about 6.0%, which was essentially due to a greater
percentage of off-sales promotions in 2004 versus 2003, and
spreading the ongoing manufacturing costs over the lower number
of units of products manufactured at the Company's facility.
Operating Expenses, Interest Expense and Other Income
Percentage
Increase
2004 2003 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 463,700 $ 809,000 (42.7%)
Selling 1,323,900 1,420,400 (6.8%)
General & Administrative 986,500 1,024,000 (3.7%)
----------- ----------- ------
Total operating
expenses $ 2,774,100 $ 3,253,400 (14.7%)
=========== =========== ======
Interest Income $ 10,700 $ 16,300 (34.4%)
Interest Expense $ 45,800 $ 56,900 (19.5%)
Operating expenses, comprised primarily of advertising, selling
and general and administrative expenses, decreased by $479,300
in the first quarter of 2004 when compared to first quarter of
2003. The various components of operating expenses are
discussed below.
Advertising expenses for the first three months of 2004 were
$463,700 compared to $809,000 for the comparable quarter of
2003, a decrease of $345,300 or 42.7%. Advertising expenses
applicable to household products decreased by $24,800 (6.2%)
during the first quarter of 2004, whereas, advertising expenses
for Alpha Hydrox products decreased from the comparative
three-month period by $320,500 (76.2%) due primarily to a
decrease in direct response television advertising.
Selling expenses for the first quarter of 2004 were $1,323,900
compared to $1,420,400 for the comparable three months of 2003,
a decrease of $96,500 or 6.8%. That decrease was comprised of
a decrease in depreciation and royalty expense of $31,600, a
decrease in internet and direct television sales expense of
$78,900, offset by a net increase in other selling expenses,
none of which by itself is significant, of $14,000.
General and administrative expenses for the first three months
of 2004 were $986,500 compared to $1,024,000 for the comparable
period of 2003, a decrease of $37,500 or 3.7%. Such decrease
was attributable to the reduction of legal and professional
fees of $72,400, a decrease in bad debt expense of $22,500,
a net decrease in other expenses of $8,000, offset by an
increase in salaries and fringe benefits of $65,400.
Interest expense for the first quarter of 2004 was $45,800
versus $56,900 for the comparable quarter of 2003. Interest
expense decreased because of the reduced principal of the
Company's bank loan. Interest income for the three months
ended March 31, 2004 was $10,700 compared to $16,300 for the
same period of 2003, which consists of interest earned on the
Company's cash reserves in 2004 and 2003.
During the first quarter of 2004 and of 2003, expenditures
for research and development were not material (under 2% of
revenues).
Liquidity and Capital Resources
The Company has a bank loan for approximately $3.5 million at
the bank's base rate, adjustable yearly (4.75% at March 31,
2004), secured by the Company's 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. The Company 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 quarter of 2004.
During the first quarter of 2004 the Company's working capital
decreased by $404,900, and concomitantly, its current ratio
(current assets divided by current liabilities) decreased from
2.3:1 at December 31, 2003 to 2.0:1 at March 31, 2004. This
decrease in working capital is attributable to a net loss in
the first three months of 2004 of $350,800, and a reduction in
long-term debt of $224,200, a decrease in deferred tax
liabilities of $16,000, offset by depreciation in excess of
capital additions of $158,900, a decrease in non-current
deferred tax assets of $24,000, a decrease in other assets
of $2,700, and an increase in accumulated comprehensive
income of $500. At March 31, 2004, the ratio of consolidated
long-term debt to consolidated net worth was .16:1.
At March 31, 2004, trade accounts receivable were $1,646,300
versus $1,108,600 at year-end, largely because sales in March
of 2004 were greater than those of December of 2003. Accounts
payable increased from the end of 2003 through March of 2004
by $1,004,300 corresponding primarily with the increase in
inventory over that period, as well as, an increase in
advertising activity during the first quarter of 2004 when
compared to the fourth quarter of 2003. At March 31, 2004
inventories were $603,800 more than at December 31, 2003,
largely due to the increase in Montagne Jeunesse inventory to
support sales of these products in the upcoming quarters.
Accrued expenses decreased by $54,600 from December 31, 2003
to March 31, 2004 primarily from a decrease in accrued salaries
and related items of $35,400.
The Company has no significant capital expenditures planned for
2004 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 or household chemical products,
any new competitive products affecting sales levels of the
Company's products, or 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.
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. The Company
is not materially exposed to market risks regarding interest rates
because the interest on the Company's outstanding debt is at the
lender's base rate, which approximates 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; any decrease in distribution of (i.e.,
retail stores carrying) the Company's significant products;
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.
Item 4. Controls and Procedures
As of March 31, 2004, the Company 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 the Company 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 March 31, 2004. There was no
change in our internal control over financial reporting during
the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The following report was filed by the Company on Form 8-K during
the first quarter of 2004: A current report on Form 8-K filed on
January 29, 2004 reporting on Item 5, Other Events; and a current
report of Form 8-K filed on March 9, 2004 regarding Item 12,
Results of Operations and Financial Condition.
(b) Exhibits
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.
May 6, 2004 BY: /s/ Mark E. Goldstein
Date --------------------------------------
Mark E. Goldstein
President and Chief Executive Officer
May 6, 2004 BY: /s/ Jeffry B. Johnson
Date --------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Document
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
EXHIBIT 31.1
CERTIFICATION
I, Mark E. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the
quarter ended March 31, 2004 of Scott's Liquid Gold-Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
DATED: May 6, 2004
/s/ Mark E. Goldstein
------------------------------------
Mark E. Goldstein
President, Chief Executive Officer,
and Chairman of the Board
Principal Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Jeffry B. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q for
the quarter ended March 31, 2004 of Scott's Liquid Gold-Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
DATED: May 6, 2004
/s/ Jeffry B. Johnson
--------------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION OF 10-Q REPORT
OF
SCOTT'S LIQUID GOLD-INC.
FOR THE QUARTER MARCH 31, 2004
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 March 31, 2004.
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 May 6, 2004.
/s/ Mark E. Goldstein
- -----------------------------------
Mark E. Goldstein
President, Chief Executive Officer
and Chairman of the Board
Principal Executive Officer
/s/ Jeffry B. Johnson
- -----------------------------------
Jeffry B. Johnson
Treasurer and Chief Financial Officer
Principal Financial Officer