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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________________ to
_______________________________
Commission file number 0-5128
SCOTT'S LIQUID GOLD-INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-0920811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4880 Havana Street, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 373-4860
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
$0.10 Par Value Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (? 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's voting stock held as of March 11,
1997 by non-affiliates of the Registrant was $22,571,052. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 5,642,763 shares of voting stock are held by nonaffiliates.
As of March 11, 1997, the Registrant had 10,092,358 shares of its $0.10 par
value common stock outstanding.
Documents Incorporated by Reference
The Registrant's 1997 Annual Report to shareholders is incorporated by reference
in Parts I, II and IV. The Registrant's definitive Proxy Statement for the
Annual Meeting of shareholders to be held on May 6, 1998, is
incorporated by reference in Part III.
SCOTT'S LIQUID GOLD-INC. ANNUAL REPORT ON
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1997
PART I
Item 1. Business.
Portions of the 1997 Annual Report to shareholders of Scott's Liquid Gold-
Inc. (the "Company" or "Registrant") are attached to this Report as Exhibit 13
and are called in this Report the "Annual Report". The information set forth
under the headings "Description of Business," "Products & Services," and
"Management Discussion and Analysis of Financial Condition and Results of
Operations" of the Annual Report hereby is incorporated by reference into this
Report.
Item 2. Properties.
The information set forth under "Description of Business - Properties" and
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" of the Annual Report hereby is
incorporated by reference into this Report.
Item 3. Legal Proceedings.
As previously reported, a lawsuit was commenced in May of 1996 against
Neoteric Cosmetics, Inc. and others not related to the Company alleging
infringement of certain patents. Neoteric Cosmetics is the Company's wholly
owned subsidiary which manufactures and sells skin care products under the name
Alpha Hydrox. The lawsuit was brought by TriStrata Technology, Inc. in the
United States District Court for the District of Delaware. The plaintiff claims
to be the assignee of five patents relating to the use of alpha hydroxy acids to
treat or reduce cosmetic conditions, particularly wrinkles or fine lines. Three
of the patents were issued in 1995; one issued in 1996; and one, which was
issued in 1992, was the subject of a re-examination completed in 1995. When the
suit was filed in 1996, four patents were asserted, of which three were asserted
against Neoteric. A fifth patent was added by amendment in 1997 and asserted
against Neoteric. Neoteric, in turn, has asserted a counterclaim contending all
5 patents as well as two other related but unasserted patents are invalid. The
plaintiff denies it has alleged infringement against Neoteric with respect to
three patents and contends the Court lacks jurisdiction to determine their
infringement or validity. All five patents asserted by plaintiff were subject
to a successful re-examination. The plaintiff in the lawsuit alleges that
Neoteric contributes to and/or induces infringement of the patents by selling
and promoting Neoteric products for the purpose of visibly reducing a human skin
wrinkle and/or fine lines and for the purpose of treating and/or preventing
cosmetic conditions and dermatologic disorders of the human skin such as
wrinkles and fine lines. The plaintiff requests damages to compensate the
plaintiff for any infringement, an injunction against further infringement, and
treble damages because of an alleged willful and deliberate nature of
infringement. In 1995, after the issuance of one of the patents involved in the
lawsuit, the Company changed its advertising and packaging to remove references
to wrinkles and fine lines. The Company denies the allegations of the
plaintiff, asserts the invalidity of patents as indicated above, and is mounting
a vigorous defense.
In June of 1997, a lawsuit was filed in the federal District Court for
the District of Colorado against the Company by Leslee Brooks, her husband, Dr.
Norman Brooks (a California dermatologist), and a corporation related to Dr.
Brooks. Other defendants include the Company's wholly-owned subsidiary,
Neoteric Cosmetics, Inc., Jerome J. Goldstein and the Goldstein Family Limited
Partnership. Leslee Brooks is a daughter of Jerome J. Goldstein and a sister of
Mark E. Goldstein, who are officers and directors of the Company. The Goldstein
Family Limited Partnership was established in November of 1996 by Mr. and Mrs.
Jerome J. Goldstein and was the recipient of common stock of the Company
previously held by Mr. and Mrs. Goldstein.
The plaintiffs in this case filed in December, 1997, an amended complaint
which claims that their disclosure to the Company in 1991 of the concept of an
alpha hydroxy acid based product for the mass market, as well as their
assistance in developing the company's Alpha Hydrox products, entitles the
plaintiffs to compensation under a doctrine of unjust enrichment. In the
amended complaint, the plaintiffs also claim that they entered into a joint
venture partnership with the defendants to earn profits from originating,
developing and marketing alpha hydroxy skin care products, that the defendants
breached fiduciary duties resulting from the relationship of the parties, and
that the Company and its subsidiary aided and abetted, and conspired as to, the
alleged breaches of fiduciary duties. The plaintiffs assert additionally that
the defendants made fraudulent representations and conspired as to those
representations by Mr. Jerome J. Goldstein stating that the plaintiffs would get
rich and by the defendants' failure to disclose that they never intended to
compensate the plaintiffs. Another claim is made for negligent
misrepresentations and conspiracy by the defendants regarding these same
matters. For each of these claims, the plaintiffs claim one-third of the total
income from Alpha Hydrox products, a minimum amount of $10 million and punitive
damages. In calculating one-third of the total income from the products, the
plaintiffs assert that they are entitled to an amount equal to at least one-
third of the pre-tax net profit earned by Neoteric Cosmetics from its inception
through 1996 and, prospectively on a cash discounted basis, to such profits
predicted by them through 2002. The total amount computed by plaintiffs is
$14.4 million. In a related claim, the plaintiffs ask that a "constructive
trust" be imposed on the stock transferred to the Goldstein Family Limited
Partnership.
The Company unequivocally believes that there was no agreement, written or
oral, to provide any compensation to the plaintiffs beyond consulting fees paid
by the Company to them through Dr. Brooks' professional corporation, that there
was no expectation of such compensation and that the compensation already paid
to them for consulting services was fair and reasonable. The Company also
believes unequivocally there was no joint venture between the plaintiffs and the
Company, a subject that was first raised in the December, 1997 amended complaint
in this litigation. The Company views the lawsuit as groundless and is
vigorously defending itself. Discovery in this litigation is complete. The
trial in the Brooks case is tentatively scheduled to commence in April, 1998,
although the trial date may be changed to a later time. The trial in this
matter is expected to last approximately two weeks.
Neither the Company nor its legal counsel can determine the potential
outcome of the two lawsuits discussed above nor the ultimate impact on the
Company's financial position or results of operations.
As previously reported, the Company had been a defendant in an
environmental lawsuit brought by the United States Justice Department at the
request of the United States Army, alleging contribution by the Company to
contamination in a groundwater aquifer underlying a portion of the Rocky
Mountain Arsenal. In October of 1996, the Company and the United States, on
behalf of the Department of the Army, negotiated a settlement of this dispute.
The Settlement Agreement, which admits no wrong doing by the Company and which
was approved by the Court on November 6, 1996, required the payment to the
United States of $6 million of which $2.4 million was paid at once by the
Company's insurers (with an additional $600,000 paid in January of 1997) and $1
million was paid by the Company. The additional $2 million, by the terms of the
Agreement, was to be paid by the Company in equal
installments of $250,000 over eight years, beginning on October 31, 1997,
together with interest approximating the Treasury Bill rate. Due to income tax
considerations, the Company decided to liquidate its entire indebtedness to the
Army and did so in October of 1997. In December, 1996, the Company filed
lawsuits, now pending in the United States District Court for the District of
Colorado, against three insurers (which did not participate in the settlement)
to recover at least amounts paid to the Army by the Company, plus punitive
damages and attorneys' fees. The Company has settlements with all but one of
its insurers, and as a result of the insurance settlements in 1996 and 1997,
most of the costs incurred to resolve environmental claims relating to the Rocky
Mountain Arsenal have now been recovered. Claims for recovery of the remainder
of the costs are pending against one insurance company.
The Company has applied for federal registration of the trademark "Alpha
Hydrox" with the U.S. Patent and Trademark Office. The issuance of this
trademark is being challenged on the basis that the name of the Company's
product falls within the realm of a general description of the type of acid used
as an ingredient. The Company believes that the issuance or nonissuance of this
trademark is not material to the Company or to its sales of Alpha Hydrox
products. Whether or not the federal registration of "Alpha Hydrox" is granted
to the Company, the Company claims under common law the exclusive right to use
"Alpha Hydrox" as a trademark and to the right to prevent the use by others of
confusingly similar marks. The outcome of any such claim, if contested in
court, will depend on the facts and circumstances then existing with respect to
the use of the mark in a particular geographical area. To date, there have been
no court contests, but the Company has been successful in convincing several
manufacturers to refrain from the use of names similar to Alpha Hydrox.
As described in prior Reports, two lawsuits were filed by the Company in
1995 and 1996 against two private label companies which the Company alleged had,
among other things, infringed the Company's trademark and trade dress rights
concerning Alpha Hydrox products. Both of these suits were settled on terms
satisfactory to the Company, one in 1996 and one in 1997. Payments received by
the Company were not material.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information set forth under "Corporate Data" and "Market Information"
of the Annual Report hereby is incorporated by reference into this Report.
Item 6. Selected Financial Data.
The information set forth under "Selected Financial Data" of the Annual
Report hereby is incorporated by reference into this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information set forth under "Management Discussion and Analysis of
Financial Condition and Results of Operations" of the Annual Report hereby is
incorporated by reference into this Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information set forth under "Consolidated Financial Statements," "Notes
to Consolidated Financial Statements," "Report of Independent Public
Accountants" and "Selected Financial Data - Selected Quarterly Financial Data"
of the Annual Report hereby is incorporated by reference into this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management. Item
13. Certain Relationships and Related Transactions.
For Part III, the information set forth in the Company's definitive Proxy
Statement for the Company's Annual Meeting of Shareholders to be held on May 6,
1998, hereby is incorporated by reference into this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements:
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets -
December 31, 1997 and 1996
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity Years ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts -
Years ended December 31, 1997, 1996 and 1995
Inasmuch as Registrant is primarily a holding company and all subsidiaries
are wholly-owned, only consolidated statements are being filed. Schedules other
than those listed above are omitted because of the absence of the conditions
under which they are required or because the information is included in the
financial statements or notes to the financial statements.
(b) Reports on Form 8-K:
The following report was filed by the Company on Form 8-K during the
quarter ended December 31, 1997: A Current Report on Form 8-K dated December
30, 1997 with an event reported under Item 5, Other Events.
(c) Exhibits:
Exhibit Document
No.
3.1 Restated Articles of Incorporation, as amended and
restated through May 1, 1996, incorporated by reference to Exhibit 3.1 of
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996.
3.2 Bylaws, as amended through February 27, 1996,
incorporated by reference to Exhibit 3.2 of Annual Report on Form 10-K
for the year ended December 31, 1995.
4.1 Indenture of Trust (including form of First Mortgage
Bond Due 2001) dated July 1, 1994 between Registrant and Norwest Bank
Colorado, N.A. as Trustee, incorporated by reference to Exhibit 4.1 of
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1994.
4.2 Combination Deed of Trust, Security Agreement and
Fixture Financing Statement, dated July 29, 1994, between the Company, as
Grantor, the Public Trustee for the City and County of Denver, Colorado,
and Norwest Bank Colorado, N.A. as Beneficiary, incorporated by reference
to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1994.
10.1* Scott's Liquid Gold-Inc. Fourth Amended Health and Accident Plan
effective January 1, 1995, incorporated by reference to Exhibit 10.1 of
Annual Report on Form 10-K for the year ended December 31, 1994.
10.2* Amended Key Executive Disability Plan -- Scott's Liquid Gold-Inc.
10.3* Scott's Liquid Gold-Inc. Restricted Stock Plan effective July 22, 1987,
incorporated by reference to Exhibit 10.3 of Annual Report on Amended
Form 10-K for the year ended December 31, 1993.
10.4* 1998 Key Executive Bonus Plan.
10.5* Indemnification Agreements dated May 6, 1987 between the Registrant and
Jerome J. Goldstein, Mark E. Goldstein, Carolyn J. Anderson, and Barry
Shepard, incorporated by reference to Exhibit 10.5 of Annual Report on
Amended Form 10-K for the year ended December 31, 1993. An
Indemnification Agreement dated October 2, 1990 between the Registrant
and Michael J. Sheets, incorporated by reference to Exhibit 10.5 of
Annual Report on Form 10-K for the year ended December 31, 1996. An
Indemnification Agreement dated December 23, 1991 between the Registrant
and Dennis H. Field, and two separate Indemnification Agreements dated
January 17, 1992 between the Registrant and Michael J. Sheets and Dennis
H. Field. Indemnification Agreement dated February 23, 1993 between the
Registrant and James F. Keane, incorporated by reference to Exhibit 10.5
of Quarterly Report on Form 10-Q for the three months ended March 31,
1993.
10.6* Scott's Liquid Gold-Inc. Employee Stock Ownership Plan and Trust
Agreement, effective January 1, 1989, and First and Second Amendments
thereto, incorporated by reference to Exhibit 10.6 of Annual Report on
Form 10-K for the year ended December 31, 1994.
10.7* 1986 Incentive Stock Option Plan and First Amendment thereto,
incorporated by reference to Exhibit 4.4 of the Company's Registration
Statement No. 33-63254 on Form S-8, filed with the Commission on May 25,
1993.
10.8* Scott's Liquid Gold-Inc. 1993 Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit 4.7 of the Company's Registration
Statement No. 33-63254 on Form S-8, filed with the Commission on May 25,
1993.
13 Portions of 1997 Annual Report to Security Holders.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
____________________________________
*Management contract or compensatory plan or arrangement
Supporting Schedules Supporting Schedules
Valuation and Qualifying Accounts
Schedule II
Scott's Liquid Gold-Inc. and Subsidiaries
Column A Column B Column C Column D Column E
Additions Deductions
Balance at 1 2
Beginning of Charge to Charges to Balance
Description Period Costs and Other at
Expenses Accounts End of
Period
Year Ended December
31, 1997 $580,400 $68,000 $12,700 $635,700
Allowance for
doubtful accounts
Year Ended December
31, 1996 $494,200 $270,900 $184,700 (1 $580,400
Allowance for )
doubtful accounts
Year Ended December
31, 1995 $339,000 $229,000 $73,800 (1 $494,200
Allowance for )
doubtful accounts
(1) Uncollectible accounts written off, net of recoveries.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Scott's Liquid Gold-Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Scott's Liquid Gold-Inc.'s
1997 Annual Report incorporated by reference in this Form 10-K, and have issued
our report thereon dated January 21, 1998. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
Schedule 11 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
Arthur Anderson LLP
Denver, Colorado
January 21, 1998
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 30, 1998.
SCOTT'S LIQUID GOLD-INC.
a Colorado corporation
By: Mark E. Goldstein, President
Principal Executive Officer
By: Barry Shepard, Treasurer
Principal Financial Officer
By: Jeffry B. Johnson, Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons of the Registrant and in
the capacities and on the dates indicated:
Date Name and Title Signature
March 30, 1998 Carolyn J. Anderson,)
Director )
)
March 30, 1998 Mark E. Goldstein, )
Director )
)
March 30, 1998 Jerome J. Goldstein,)
Director ) Barry Shepard, for himself and
) as Attorney-in-Fact for the
March 30, 1998 Dennis H. Field, ) named directors who together
Director ) constitute all of the members
) of Registrant's Board of
March 30, 1998 James F. Keane, ) Directors
Director )
)
March 30, 1998 Michael J. Sheets, )
Director )
)
March 30, 1998 Barry Shepard, )
Director )
EXHIBIT INDEX
Exhibit Document
No.
3.1 Restated Articles of Incorporation, as amended and
restated through May 1, 1996, incorporated by reference to Exhibit 3.1
of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996.
3.2 Bylaws, as amended through February 27, 1996,
incorporated by reference to Exhibit 3.2 of Annual Report on Form 10-K
for the year ended December 31, 1995.
4.1 Indenture of Trust (including form of First
Mortgage Bond Due 2001) dated July 1, 1994 between Registrant and
Norwest Bank Colorado, N.A. as Trustee, incorporated by reference to
Exhibit 4.1 of the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1994.
4.2 Combination Deed of Trust, Security Agreement and
Fixture Financing Statement, dated July 29, 1994, between the Company,
as Grantor, the Public Trustee for the City and County of Denver,
Colorado, and Norwest Bank Colorado, N.A. as Beneficiary, incorporated
by reference to Exhibit 4.2 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
10.1* Scott's Liquid Gold-Inc. Fourth Amended Health and
Accident Plan effective January 1, 1995, incorporated by reference to
Exhibit 10.1 of Annual Report on Form 10-K for the year ended December
31, 1994.
10.2* Amended Key Executive Disability Plan- Scott's
Liquid Gold-Inc.
10.3* Scott's Liquid Gold-Inc. Restricted Stock Plan
effective July 22, 1987, incorporated by reference to Exhibit 10.3 of
Annual Report on Amended Form 10-K for the year ended December 31,
1993.
10.4* 1998 Key Executive Bonus Plan.
10.5* Indemnification Agreements dated May 6, 1987
between the Registrant and Jerome J. Goldstein, Mark E. Goldstein,
Carolyn J. Anderson, and Barry Shepard, incorporated by reference to
Exhibit 10.5 of Annual Report on Amended Form 10-K for the year ended
December 31, 1993. An Indemnification Agreement dated October 2, 1990
between the Registrant and Michael J. Sheets, incorporated by
reference to Exhibit 10.5 of Annual Report on Form 10-K for the year
ended December 31, 1996. An Indemnification Agreement dated December
23, 1991 between the Registrant and Dennis H. Field, and two separate
Indemnification Agreements dated January 17, 1992 between the
Registrant and Michael J. Sheets and Dennis H. Field. Indemnification
Agreement dated February 23, 1993 between the Registrant and James F.
Keane, incorporated by reference to Exhibit 10.5 of Quarterly Report
on Form 10-Q for the three months ended March 31, 1993.
10.6* Scott's Liquid Gold-Inc. Employee Stock Ownership
Plan and Trust Agreement, effective January 1, 1989, and First and
Second Amendments thereto, incorporated by reference to Exhibit 10.6
of Annual Report on Form 10-K for the year ended December 31, 1994.
10.7* 1986 Incentive Stock Option Plan and First
Amendment thereto, incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement No. 33-63254 on Form S-8, filed with
the Commission on May 25, 1993.
10.8* Scott's Liquid Gold-Inc. 1993 Stock Option Plan for
Outside Directors, incorporated by reference to Exhibit 4.7 of the
Company's Registration Statement No. 33-63254 on Form S-8, filed with
the Commission on May 25, 1993.
13 Portions of 1997 Annual Report to Security Holders.
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24 Powers of Attorney.
27 Financial Data Schedule
_
*Management contract or compensatory plan or arrangement