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May 5, 1998
SCOTTS LIQUID GOLD INC (SGD)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition And Results Of Operations
General
The Company manufactures and markets household chemical products and skincare products; and, until it discontinued the
operations of one of its subsidiaries in September of 1996, also produced and marketed cigarette filters. In early 1992, the
Company entered into the cosmetics business, introducing a new line of skincare products, Alpha Hydrox, which is now sold
throughout the United States and Canada, and, on a modest level, in certain South American countries, Asia and eastern
Europe. Sales of cosmetics products, which account for the greatest portion of the Company's business, were $31.6 million in
1995, $26.6 million in 1996, and $34.5 million in 1997. The Company's annual, after-tax income from continuing operations
averaged $2,393,700 over the most recent three years, equal to an average for the three years of 24-cents a share. Results of
Operations
Summary of Results as a Percentage of Net Sales
(Audited) Three Months
Year Ended
Ended March 31,
31-Dec-97 1998 1997
Net sales
Scott's Liquid Gold
household products 31.1% 35.0% 30.8%
Neoteric Cosmetics 68.9% 65.0% 69.2%
Total net sales 100.0% 100.0% 100.0%
Cost of sales 28.2% 30.7% 26.8%
Gross profit 71.8% 69.3% 73.2%
Other revenue 0.9% 1.5% 0.8%
72.7% 70.8% 74.0%
Operating expenses 53.1% 81.2% 62.5%
Interest 2.6% 2.4% 2.3%
55.7% 83.6% 64.8%
Income (loss) from operations 17.0% (12.8%) 9.2%
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Consolidated net sales for the first quarter of 1998 were $12,557,000 vs. $14,324,800 for the first three months of 1997, a
decrease of $1,767,800 or about 12.3%. Average selling prices for the first quarter of 1998 were lower than those of the first
quarter of 1997 by $1,350,300, prices of household chemical products being down by $834,000 (all of which related to
Touch of Scent), while average selling prices of cosmetics products were down by $516,300.
During the first quarter of 1998, net sales of cosmetics products accounted for 65.0% of consolidated net sales compared to
69.2% for the first quarter of 1997.Net sales of these products for those periods were $8,156,100 in 1998 compared to
$9,917,500 in 1997, a decrease of $1,761,400 or 17.8%, which occurred irrespective of a substantial increase in advertising
during the first quarter of 1998 compared to 1997. A portion of the sales decrease (23.3%) resulted from reduced average
selling prices, primarily attributable to promotions, and the balance (60.7%) was the result of a decrease in the number of units
sold. The Company notes that the foregoing comparisons pit an average first quarter in 1998 against an exceptional first quarter
for skincare products in 1997.
Sales of household chemical products for the first quarter of 1998 accounted for 35.0% of consolidated net sales compared to
30.8% for the same quarter of 1997. 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 three months ended March 31, 1998, sales of
household chemical products were $4,400,900 compared to $4,407,300 for the first three months of 1997, a decrease of only
$6,400. Sales of "Scott's Liquid Gold" for wood were up by $943,200, an increase of 44.5%, a result of increased television
advertising, while sales of "Touch of Scent" were down by $949,600 (41.5%), principally due to reduced average selling
prices. As noted in the Company's most recent Annual Report, efforts to revitalize Touch of Scent during 1997 were less than
satisfactory. Notwithstanding the Company's introduction, near the end of 1996, of a new line of highly decorative fixtures to
dispense new, concentrated formulae contained in its refill units, and the Company's more recent offers of price incentives for its
Touch of Scent product, the downtrend in sales of this product line has continued into 1998.
On a consolidated basis, cost of goods sold was $3,860,300 during the first quarter of 1998 compared to $3,838,200 for the
same quarter of 1997, an increase of $22,100 (less than 1.0%, but on a decrease in sales of 12.3%). As a percentage of
consolidated net sales for the first quarter of 1998, cost of goods sold was 30.7% compared to 26.8% in 1997, an increase of
about 14.6%. But for the decrease in average selling prices, the increase in cost of goods sold for the first quarter of 1998
would have been 27.8% instead of 30.7%. The balance of the cost increase was essentially due to changes in the mix of
products sold, household chemical products being more costly to produce relative to their selling prices than the Company's
skincare products.
Advertising expenses for the first three months of 1998 were $6,094,100 compared to $5,091,500 for the comparable three
months of 1997, an increase of $1,002,600 or 19.7%. Advertising expenses applicable to household chemicals decreased
during the first quarter of 1998 compared to the first quarter of 1997 by $269,500, or 11.8%. Advertising expenses for Liquid
Gold increased by $1,681,700, whereas expenses to advertise Touch of Scent decreased by $1,951,200. Advertising
expenses for Alpha Hydrox were $1,272,100 higher during the quarter ended March 31, 1998 than in the comparable quarter
of 1997, an increase of 45.4%. During each of the remaining three quarters of 1998, the Company intends to spend significant
amounts to advertise its products, but less than it spent during the first quarter of the year. Regardless of year to year or quarter
to quarter changes in expenditures to advertise its products, the Company has, in the past, made clear that, as a matter of
sound business judgment, it must continue to advertise aggressively whenever it is fiscally responsible to do so because (i) the
markets for skincare products, furniture polish, and air fresheners are highly competitive and, accordingly, the Company's brand
names, particularly Alpha Hydrox and Scott's Liquid Gold, need to be kept in front of the consuming public; and (ii) television
advertising currently is the best option available to the Company in its on-going attempt to increase the sales levels of both the
Company's cosmetic and household chemical products. It is noted that sustaining the Company's advertising program is highly
dependent upon sales of its skin care products.
Selling expenses for the first quarter of 1998 were $2,302,300 compared to $2,089,800 for the comparable quarter of 1997,
an increase of $212,500 or 10.2%. Coupon costs, offset by lower slotting allowances, accounted for $209,900 of the increase
in selling expenses.
Administrative expenses for the first quarter of 1998 were only 1.9% higher than those of the first quarter of 1997. Interest
expense for the first quarter of 1998 was lower than that of the comparable quarter of 1997 by $31,700, a decrease of 9.5%,
which essentially was due to the payment at the end of 1997 of $2 million then owed to the U.S. Army. Other income
increased by $84,700 during the quarter ended March 31, 1998 compared to the same quarter of 1997, an increase of 77.3%,
due to a slight increase in interest earned on the Company's cash reserves and an increase in the cash reserves themselves.
During the first quarter of 1998 and 1997, expenditures for research and development were not material (under 1% of
revenues).
Liquidity and Capital Resources
On July 29, 1994, the Company consummated a $12 million bond issuance to finance the expansion of the Company's Denver
facilities. Interest on the $12 million bond issue is payable semi-annually beginning on January 1, 1995 at the rate of 10% per
annum. (The January 1, 1998 interest payment was made in a timely manner. There is no reason to believe that the interest
payment due on July 1, 1998 will not be made as is required by the Bond Indenture.) A sinking fund payment of $1 million is
required annually. Sinking fund payments for 1995 through 1997 were made as required. Currently, the Company is voluntarily
paying $183,300 each month to the Trustee to cover future interest and sinking fund payments. The Trustee, at the Company's
request, holds such moneys in accounts to which the Company has no access.
During the first quarter of 1998, the Company's working capital decreased by $2,131,200, and concomitantly, its current ratio
(current assets divided by current liabilities) decreased from 2.7:1 at December 31, 1997 to 2.6:1 at March 31, 1998. This
decrease in working capital is attributable to a net loss in the first quarter of $1,011,400, a reduction in long-term debt of
$342,100, and a dividend payment of $1,009,200 (equal to $0.10 a share, paid in March, 1998); all offset by depreciation in
excess of capital additions of $204,900, a decrease in other assets of $21,600, and exercises of stock options of $5,000. At
March 31, 1998, the ratio of consolidated funded debt to consolidated net worth was .38:1.
During the first quarter of 1998, trade accounts receivable increased by $820,700 primarily because sales of March 1998
exceeded those of December 1997. The Company's average collection period remained at under 30 days. The decrease in
other receivables during the quarter ended March 31, 1998 primarily relates to a previous settlement of the Company's
environmental lawsuit with the United States Army. Accounts payable increased from the end of 1997 through March of 1998
by $2,053,300 largely due to the existence of advertising payables at the end of the quarter whereas none existed at the end of
last year. Accrued expenses decreased from year end through March 31, 1998 by $2,628,600 primarily due to the payment of
1997 income taxes and accrued profit sharing and bonus expenses.
Legal Proceedings
The Company's 1997 Annual Report describes a patent infringement suit which was filed in May of 1996 in the United States
District Court for the District of Delaware against Neoteric Cosmetics, Inc. (and others) by TriStrata Technology, Inc.
Neoteric Cosmetics is the Company's wholly-owned subsidiary which manufactures and sells skincare products under the
name Alpha Hydrox. Certain defendants in this lawsuit, including the Company, have joined together to defend against this
action. The Company expects that, in or about the third quarter of this year, the Court will determine whether to adopt the
defendants' interpretations or those of the plaintiff regarding the scope of the claims of the patents involved in the case.
In June of 1997, a lawsuit was filed in the United States 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 (see list of
Officers and Directors on last page of this Report). 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. As described in the Company's 1997 Annual Report, this lawsuit involves a claim for compensation
relating to Alpha Hydrox products. Discovery is complete. The court has changed the trial date in the Brooks case to June 15,
1998, although that date may be again changed, over the Company's objections, to a later time. A trial in this matter is
expected to last approximately two weeks.
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; competitive factors, the need for effective
advertising of the Company's products; limited resources available for such advertising, new products and 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 this Report and in the Company's other periodic filings with the Securities and Exchange
Commission. |
