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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, 1998
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. [ ]
The aggregate market value of the Registrant's voting stock held as of March 10,
1999 by non-affiliates of the Registrant was $7,750,853. This calculation
assumes that certain parties may be affiliates of the Registrant and that,
therefore, 5,636,984 shares of voting stock are held by non-affiliates.
As of March 10, 1999, the Registrant had 10,103,058 shares of its $0.10 par
value common stock outstanding.
Documents Incorporated by Reference
The Registrant's 1998 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 5, 1999, is incorporated by
reference in Part III.
SCOTT'S LIQUID GOLD-INC.
ANNUAL REPORT ON
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 1998
PART I
Item 1. Business.
Portions of the 1998 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" and "Management Discussion and
Analysis of Financial Condition and Results of Operations" of the Annual Report
hereby is incorporated by reference into this Report.
In the third quarter of 1998, the Company added a retinol product to its
skin care products. This product, sold as Alpha Hydrox Retinol Night ResQ,
includes microsponge-entrapped retinol. It is manufactured by a third party who
is the sole supplier of the product to the Company under a supply and license
agreement. The agreement has a term which continues until the earlier of the
expiration of the last to expire patent relating to the product or June 9, 2008.
The supplier may also terminate the agreement if the Company does not meet
minimum purchase requirements. [The retinol product was in the first two months
of 1999 the highest volume product among the various skin care products of the
Company.]
Item 2. Properties.
The information set forth under "Description of Business - Properties,"
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 9 of Notes to
Consolidated Financial Statements 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. The
plaintiff in the lawsuit alleges that Neoteric contributes to and/or induces
infringement of the patents owned by the plaintiff by selling and promoting
Neoteric skin care 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, and is mounting a vigorous
defense. Certain defendants in this lawsuit, including the Company, are
cooperating with one another in matters of common interest to defend against
this action. The Company expects that the Court in this matter will soon
determine whether to adopt the defendant's interpretations or those of the
plaintiff regarding the scope of the claims of the patents involved in this
case. The Company cannot determine the potential outcome of this lawsuit or the
ultimate impact on the Company's financial position or results of operations.
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 included 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 lawsuit involved a claim for
compensation by the Brooks relating to Alpha Hydrox products. On July 24, 1998,
a jury unanimously found in favor of the Company, its subsidiary, and Jerome J.
Goldstein. The jury found that there was no liability as to each claim of the
plaintiffs. Subsequently, the plaintiffs in the Brooks case filed an appeal of
the judgment to the United States Tenth Circuit Court of Appeals. On
January 21, 1999, the Company entered into a settlement agreement with the
plaintiffs in the Brooks case. The settlement results in a dismissal of the
appeal of that case and a release regarding the Company and the other defendants
in the case. The Company continues to believe that the claims of the plaintiffs
in the Brooks case were groundless. The settlement allowed the Company to avoid
the cost, time, and any uncertainty involved in an appeal of the case. Under
the terms of the settlement, the defendants, including the Company, paid
$225,000 to the plaintiffs who had sought a jury award of $21 million in the
trial court. The $225,000 was paid in January, 1999, but was charged to 1998
operations. In settlement of its claim against the insurer under the Company's
directors and officers liability insurance policy, the Company received in the
first quarter of 1999 a substantial part of the legal expenses and settlement
paid by the Company with respect to the Brooks case.
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 n 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 U.S. Patent and Trademark Office. The issuance of this trademark
was challenged on the basis that the name of the Company's product is a
description of the type of acid used as an ingredient. This challenge was
denied by the United States Patent and Trademark Office in early 1999. At this
time, an appeal has not been filed. The Company believes that the issuance or
non-issuance 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.
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.
The information set forth under "Management Discussion and Analysis of
Financial Condition and Results of Operations - Market Risks" of the Annual
Report hereby is incorporated by reference into this Report.
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 5,
1999, hereby is incorporated by reference into this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K.
(a)(1) Financial Statements:
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets
December 31, 1998 and 1997
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts -
Years ended December 31, 1998, 1997 and 1996
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 8K:
No report was filed by the Company on Form 8-K during the quarter ended
December 31, 1998.
(c) Exhibits:
Exhibit No.
Document
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., incorporated by reference to Exhibit 10.2 of
Annual Report on Form 10-K for the year ended December
31, 1997.
10.3* 1999 Key Executive Bonus Plan.
10.4* Indemnification Agreements dated May 6, 1987 between the
Registrant and Jerome J. Goldstein, Mark E. Goldstein,
Carolyn J. Anderson, and Barry Shepard. 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, incorporated
by reference to Exhibit 10.5 of Annual Report on Form 10-
K for the year ended December 31, 1997. Indemnification
Agreement dated February 23, 1993 between the Registrant
and James F. Keane.
10.5* 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.
10.6* 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.
10.7* Scott's Liquid Gold-Inc. 1998 Stock Option Plan,
incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement No. 333-67141, filed with the
Commission on November 12, 1998.
13 Portions of 1998 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 1 2
at Charge to Charges to Balance at
Description Beginning Costs and Other End of
of Period Expenses Accounts Period
Year Ended December
31, 1998
Allowance for
doubtful accounts $635,700 $43,600 $100 (1) $679,200
Year Ended December
31, 1997
Allowance for
doubtful accounts $580,400 $68,000 $12,700 (1) $635,700
Year Ended December
31, 1996
Allowance for
doubtful accounts $494,200 $270,900 $184,700 (1) $580,400
(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 1998
Annual Report incorporated by reference in this Form 10-K, and have issued our
report thereon dated January 21, 1999. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The supplemental
Schedule II 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 Andersen LLP
Denver, Colorado
January 21, 1999
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, 1999.
SCOTT'S LIQUID GOLD-INC.
a Colorado corporation
By: /s/ Mark E. Goldstein
Mark E. Goldstein, President
Principal Executive Officer
By: /s/ Barry Shepard
Barry Shepard, Treasurer
Principal Financial Officer
By: /s/ Jeffry B. Johnson
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, 1999 Carolyn J. Anderson, )
Director )
)
March 30, 1999 Mark E. Goldstein, )
Director )
)
March 30, 1999 Jerome J. Goldstein, ) /s/ Barry Shepard
Director ) Barry Shepard, for himself
and as Attorney-in-Fact for
the named directors who
March 30, 1999 Dennis H. Field, ) together constitute all of the
Director members of Registrant's Board
) of Directors
March 30, 1999 James F. Keane, )
Director )
)
March 30, 1999 Michael J. Sheets, )
Director )
)
March 30, 1999 Barry Shepard, )
Director )
EXHIBIT INDEX
Exhibit No.
Document
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., incorporated by reference to Exhibit 10.2 of
Annual Report on Form 10-K for the year ended December 31,
1997.
10.3* 1999 Key Executive Bonus Plan.
10.4* Indemnification Agreements dated May 6, 1987 between the
Registrant and Jerome J. Goldstein, Mark E. Goldstein,
Carolyn J. Anderson, and Barry Shepard. 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, incorporated by reference to Exhibit 10.5 of Annual
Report on Form 10-K for the year ended December 31, 1997.
Indemnification Agreement dated February 23, 1993 between
the Registrant and James F. Keane.
10.5* 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.
10.6* 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.
10.7* Scott's Liquid Gold-Inc. 1998 Stock Option Plan,
incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement No. 333-67141, filed with the
Commission on November 12, 1998..
13 Portions of 1998 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
compensator
y plan or
arrangement