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
September 30, 2005
Commission File No. 001-13458
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 September 30, 2005, the Registrant had 10,501,000
shares 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 Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 6,506,000 $ 5,116,700 $17,753,300 $15,633,600
Operating costs
and expenses:
Cost Of Sales 3,513,600 3,129,000 9,752,500 8,849,600
Advertising 151,800 101,000 630,300 738,100
Selling 1,455,700 1,381,200 4,422,000 4,162,600
General and
administrative 757,100 835,700 2,779,100 2,772,400
----------- ----------- ----------- -----------
5,878,200 5,446,900 17,583,900 16,522,700
----------- ----------- ----------- -----------
Income (loss)
from operations 627,800 (330,200) 169,400 (889,100)
Interest income 9,900 10,400 30,200 30,900
Interest expense (54,000) (40,000) (149,300) (128,300)
----------- ----------- ----------- -----------
583,700 (359,800) 50,300 (986,500)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net income
(loss) $ 583,700 $ (359,800) $ 50,300 $ (986,500)
=========== =========== =========== ===========
Net income
(loss) per
common share
(Note 3):
Basic $ .06 $ (.03) $ .00 $ (.10)
=========== =========== =========== ===========
Diluted $ .06 $ (.03) $ .00 $ (.10)
=========== =========== =========== ===========
Weighted average
shares
outstanding:
Basic 10,494,800 10,387,900 10,478,900 10,368,600
=========== =========== =========== ===========
Diluted 10,560,400 10,387,900 10,500,800 10,368,600
=========== =========== =========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2005 2004
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,912,900 $ 3,354,600
Investment securities 52,500 54,200
Trade receivables, net of allowance
for doubtful accounts of $89,000
and $83,000, respectively 1,073,000 1,419,700
Other receivables 50,800 56,900
Inventories 4,795,700 2,940,300
Prepaid expenses 256,200 489,600
Deferred tax assets 304,000 339,400
----------- -----------
Total current assets 8,445,100 8,654,700
Property, plant and equipment, net 13,826,500 14,349,600
Other assets 14,500 22,600
----------- -----------
TOTAL ASSETS $22,286,100 $23,026,900
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of Credit $ 1,030,000 $ 790,000
Accounts payable 1,603,200 1,795,700
Accrued payroll and benefits 925,500 1,050,500
Other accrued expenses 403,800 413,700
Current maturities of
long-term debt 953,000 917,000
----------- -----------
Total current liabilities 4,915,500 4,966,900
Long-term debt, net of current maturities 1,173,600 1,893,000
Deferred tax liabilities 304,000 339,400
----------- -----------
Total liabilities 6,393,100 7,199,300
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock; $.10 par value, authorized
50,000,000 shares; issued and
outstanding 10,501,000 shares and
10,471,000 shares, respectively 1,050,100 1,047,100
Capital in excess of par 4,993,000 4,979,200
Accumulated comprehensive income 2,500 4,200
Retained earnings 9,847,400 9,797,100
----------- -----------
Shareholders' equity 15,893,000 15,827,600
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $22,286,100 $23,026,900
=========== ===========
SCOTT'S LIQUID GOLD-INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 50,300 $ (986,500)
----------- -----------
Adjustments to reconcile net
income (loss) to net
cash provided (used)
by operating activities:
Depreciation and amortization 553,700 554,000
Stock issued to ESOP 16,800 30,000
Changes in assets and liabilities:
Trade and other receivables, net 352,800 (242,900)
Inventories (1,855,400) (231,700)
Prepaid expenses and other assets 225,300 (51,600)
Accounts payable and accrued
expenses (327,400) 678,900
----------- ----------
Total adjustments to net
income (loss) (1,034,200) 736,700
----------- -----------
Net Cash Used by
Operating Activities (983,900) (249,800)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities (248,400) -
Proceeds from sale or maturity
of investment securities 250,000 250,000
Purchase of property, plant &
equipment (16,000) (109,800)
----------- -----------
Net Cash Provided (Used) by
Investing Activities (14,400) 140,200
----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings 500,000 200,000
Payments on short-term borrowings (260,000) -
Principal payments on
long-term borrowings (683,400) (652,500)
----------- -----------
Net Cash Used by
Financing Activities (443,400) (452,500)
----------- -----------
Net Decrease in Cash and
Cash Equivalents (1,441,700) (562,100)
Cash and Cash Equivalents,
beginning of period 3,354,600 3,498,600
----------- -----------
Cash and Cash Equivalents, end of period $ 1,912,900 $ 2,936,500
=========== ===========
Supplemental disclosures:
Cash paid during period for:
Interest $ 145,500 $ 129,200
=========== ===========
Income taxes $ 600 $ -
=========== ===========
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, "we" or "our")
manufacture and market quality household and skin care products.
Since the first quarter of 2001, we have acted as a distributor
in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. Our
business is comprised of two segments, household products and
skin care products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts
and our 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
We consider 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
We account 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 we classify investments in
marketable securities according to management's intended use of
such investments. We invest our excess cash and have established
guidelines relative 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. We consider all investments as
available for use in our current operations and, therefore,
classify 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 September 30, 2005, are scheduled
to mature within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and
are stated at the lower of cost (first-in, first out method) or
market. We record a reserve for slow moving and obsolete products
and raw materials.
Inventories were comprised of the following at:
September 30, 2005 December 31, 2004
---------------------------------------------------------------------
Finished goods $ 3,553,900 $ 2,256,100
Raw materials 1,550,800 993,200
Inventory valuation
in reserve (309,000) (309,000)
---------------------------------------------------------------------
$ 4,795,700 $ 2,940,300
=====================================================================
(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. Building structures and building improvements
are estimated to have useful lives of 35 to 45 years and 3 to 20
years, respectively. Production equipment and production support
equipment are estimated to have useful lives of 15 to 20 years and
3 to 10 years, respectively. Office furniture and office machines
are estimated to have useful lives 10 to 20 and 3 to 5 years,
respectively. Carpeting, drapes and company vehicles are
estimated to have useful lives of 5 to 10 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 us to
concentrations of credit risk include cash and cash equivalents,
investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits with
financial institutions that management believes are creditworthy.
We establish an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical
trends and other information. We have no significant financial
instruments with off-balance sheet risk of accounting loss, such
as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
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. Our 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
September 30, 2005 and December 31, 2004.
i) Long-Lived Assets
We account 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
We account 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 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 September 30, 2005 and December 31, 2004 approximately $888,400
and $862,600, respectively, had been reserved as a reduction of
accounts receivable, and approximately $35,000 and $90,000,
respectively, had been reserved as current liabilities. Co-op
advertising, marketing funds, slotting fees and coupons are
deducted from gross sales and total $1,447,900 and $1,380,600
for the nine months ended September 30, 2005 and September 30,
2004, respectively.
(l) Advertising Costs
We expense advertising costs as incurred.
(m) Stock-based Compensation
We have elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees"
and related interpretations in accounting for our 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.
We have adopted the disclosure only provisions of SFAS
No. 123, "Accounting for Stock-based Compensation".
We granted 720,000 options for shares of our common stock
during the nine months ended September 30, 2005 with an average
exercise price equal to $0.57. Had compensation cost been
recorded based on the fair value of options granted by us, our
pro-forma net income (loss) and net income (loss) per share would
have been as follows:
Three Months Ended September 30,
------------------------------------------------------
2005 2004
-------------------------- --------------------------
As Reported Pro Forma As Reported Pro-Forma
------------ ------------ ------------ ------------
Net income
(loss) $ 583,700 $ 526,200 $ (359,800) $ (360,600)
Basic income
(loss)
per share $ 0.06 $ 0.05 $ (0.03) $ (0.03)
Diluted
income (loss)
per share $ 0.06 $ 0.05 $ (0.03) $ (0.03)
Nine Months Ended September 30,
------------------------------------------------------
2005 2004
-------------------------- --------------------------
As Reported Pro Forma As Reported Pro-Forma
------------ ------------ ------------ ------------
Net income
(loss) $ 50,300 $ (98,200) $ (986,500) $(1,003,900)
Basic income
(loss) per
share $ - $ (0.01) $ (0.10) $ (0.10)
Diluted income
(loss) per
share $ - $ (0.01) $ (0.10) $ (0.10)
The fair value of options granted has been estimated as of the
date of grant using the following assumptions as of:
Three Months Ended Nine Months Ended
September 30 September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- ----------- --------- -----------
Dividend rate $ - $ - $ - $ -
Expected volatility 65% 72% 65% 153%
Risk-free
interest rate 3.80% 3.10% 3.80% 3.10%
Expected life
(in years) 4.5 4.5 4.5 4.5
(n) Comprehensive Income
We follow 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 our net income
(loss) to our total comprehensive income (loss) for the three months
and nine months ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ----------- ----------
Net income (loss) $ 583,700 $ (359,800) $ 50,300 $ (986,500)
Unrealized gain
(loss) on
investment
securities (900) 1,500 (1,700) (1,000)
----------- ----------- ----------- ----------
Comprehensive
income (loss) $ 582,800 $ (358,300) $ 48,600 $ (987,500)
=========== =========== =========== ==========
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing
and distribution including labor, materials, freight-in,
purchasing and receiving, quality control, internal transfer costs,
repairs, maintenance and other indirect costs, as well as
warehousing and distribution costs. We classify shipping and
handling costs comprised primarily of freight-out and nominal
outside warehousing costs as a component of selling expense on
the accompanying Consolidated Statement of Operations. Shipping
and handling costs totaled $1,198,600 and $1,073,700 for the
nine months ended September 30, 2005 and 2004, respectively.
For the three months ended September 30, 2005 and 2004, shipping
and handling costs totaled $438,500 and $383,200, respectively.
Selling expenses consist primarily of shipping and handling
costs, wages and benefits for sales and sales support personnel,
travel brokerage commissions, promotional costs, as well as other
indirect costs.
General and administrative expenses consist of wages and
benefits associated with management and administrative support
departments, business insurance costs, professional fees, office
facility related expenses and other general support costs.
(p) Recently Issued Accounting Pronouncements
In November 2004 the FASB issued Statement of Financial
Accounting Standards No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). The provisions of SFAS 151
are intended to eliminate narrow differences between the existing
accounting standards of the FASB and the International Accounting
Standards Board (IASB) related to inventory costs, in particular,
the treatment of abnormal idle facility expense, freight,
handling costs, and spoilage. SFAS No. 151 requires that these
costs be recognized as current period charges regardless of the
extent to which they are considered abnormal. The provisions of
SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of SAAS 151 is
not expected to have a material impact on our operations, financial
position or liquidity.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123, (revised 2004) "Share-Based Payment"
("SFAS 123(R)"). This statement is a revision of Statement of
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" as amended ("SFAS 123"), and requires
entities to measure the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value of the award. The cost will be recognized
over the period during which an employee is required to provide
services in exchange for the award (usually the vesting period).
SFAS 123(R) covers various share-based compensation arrangements
including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase
plans. SFAS 123(R) eliminates the ability to use the intrinsic
value method of accounting for share options, as provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). SFAS 123(R) is effective
beginning January 1, 2006, with early adoption encouraged. We
are currently evaluating the statement's transition methods and
do not expect this statement to have an effect materially
different than that of the pro forma SFAS 123 disclosures
provided in Note 1 to the our Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary
Data" in our 2004 Annual Report on Form 10-K and in Note 1 above.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29" ("SFAS 153"). This Statement
amends APB Opinion No. 29 to permit the exchange of nonmonetary
assets to be recorded on a carry over basis when the nonmonetary
assets do not have commercial substance. This is an exception to
the basic measurement principal of measuring a nonmonetary asset
exchange at fair value. A nonmonetary asset exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. We have not
entered into exchanges of nonmonetary assets in the past and do
not expect to enter into any nonmonetary assets exchanges in the
foreseeable future; however, if we enter into significant
nonmonetary asset exchanges in the future, SFAS 153 could have a
material effect on our consolidated financial position, results
of operations or cash flows.
(q) Reclassifications
Certain reclassifications have been made to the December 31,
2004 balance sheet to conform to the current period presentation.
Note 2. Basis of Preparation of Financial Statements
We have prepared these unaudited interim consolidated
financial statements 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 our financial statements included in our 2004 Annual Report on
Form 10-K.
Note 3. Earnings per Share
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 are comprised of outstanding
stock options of 1,780,000 and 1,120,000 at September 30, 2005
and 2004.
A reconciliation of the weighted average number of common
shares outstanding for the three and nine months ended
September 30, 2005 follows:
Total
Three Months Nine Months Shares
------------ ----------- ----------
Common shares outstanding
beginning of period 10,471,000 10,471,000 10,471,000
Stock issued to ESOP 23,800 7,900 30,000
---------- ---------- ----------
Weighted average number
of common shares
outstanding 10,494,800 10,478,900 10,501,000
Dilutive effect of
common share equivalents 65,600 21,900 -
---------- ---------- ----------
Diluted weighted average
number of common shares
outstanding 10,560,400 10,500,800 10,501,000
========== ========== ==========
* For the three and nine months ended September 30, 2005, the
stock issued to the ESOP is a weighted average.
At September 30, 2005, there were authorized 50,000,000
shares of our $0.10 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 September 30, 2005.
Note 4. Segment Information
We operate in two different segments: household products
and skin care products. Our products are sold in the United States
and internationally (primarily Canada), directly and through
independent brokers, to mass merchandisers, drug stores,
supermarkets, wholesale distributors and other retail outlets.
Our Management has chosen to organize our business 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 us.
The following provides information related to our segments
as of and for the three and nine months ended September 30, 2005
and 2004:
Three Months Ended September 30,
-----------------------------------------------------
2005 2004
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ----------- -----------
Net sales to
external
customers $ 1,874,400 $ 4,631,600 $ 2,059,800 $ 3,056,900
=========== =========== =========== ===========
Income (loss)
Before profit
sharing,
bonuses, and
income taxes $ (91,000) $ 674,700 $ (121,100) $ (238,700)
=========== =========== =========== ===========
Identifiable
Assets $ 3,420,400 $ 7,797,600 $ 3,476,600 $ 6,830,900
=========== =========== =========== ===========
Nine Months Ended September 30,
-----------------------------------------------------
2005 2004
------------------------- -------------------------
Household Skin Care Household Skin Care
Products Products Products Products
----------- ----------- ---------- -----------
Net sales to
external
customers $ 6,027,900 $11,725,400 $ 6,815,100 $ 8,818,500
=========== =========== =========== ===========
Income (loss)
before profit
sharing,
bonuses and
income taxes $ (845,600) $ 895,900 $ (555,500) $ (431,000)
=========== =========== =========== ===========
Identifiable
Assets $ 3,420,400 $ 7,797,600 $ 3,476,600 $ 6,830,900
=========== =========== =========== ===========
The following is a reconciliation of segment information to
consolidated information as of and for the three and nine months
ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales to
external
customers $ 6,506,000 $ 5,116,700 $17,753,300 $15,633,600
=========== =========== =========== ===========
Income (loss)
before profit
sharing,
bonuses and
income taxes $ 583,700 $ (359,800) $ 50,300 $ (986,500)
=========== =========== =========== ===========
Identifiable
assets $11,218,000 $10,307,500 $11,218,000 $10,307,500
Corporate
assets 11,068,100 13,366,900 11,068,100 13,366,900
----------- ----------- ----------- -----------
Consolidated
total assets $22,286,100 $23,674,400 $22,286,100 $23,674,400
=========== =========== =========== ===========
Corporate assets noted above are comprised primarily of our
cash and investments, deferred income tax assets and property and
equipment not directly associated with the manufacturing, warehousing,
shipping and receiving activities.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited)
Results of Operations
During the first nine months of 2005 we experienced increases
in sales of our Montagne Jeunesse line of skin care products and an
increase in sales of our other skin care products because of the
introductions of new Alpha Hydrox products and additional Montagne
Jeunesse sachets, while experiencing a decrease in our line of
household products. Our net income for the first nine months of
2005 was $50,300 versus a loss of $986,500 in the first nine
months of 2004. The income for 2005 was primarily due to the
increase in sales from our new Alpha Hydrox product introductions.
Summary of Results as a Percentage of Net Sales
Year Ended Nine Months Ended
December 31, September 30,
2004 2005 2004
------------- ----------- -----------
(Audited) (Unaudited) (Unaudited)
Net sales
Scott's Liquid Gold
household products 41.3% 34.0% 43.6%
Neoteric Cosmetics 58.7% 66.0% 56.4%
------- ------- -------
Total Net Sales 100.0% 100.0% 100.0%
Cost of Sales 57.0% 54.9% 56.6%
------- ------- -------
Gross profit 43.0% 45.1% 43.4%
Other revenue 0.2% 0.2% 0.2%
------- ------- ------
43.2% 45.3% 43.6%
------- ------- -------
Operating expenses 46.4% 44.2% 49.1%
Interest expense 0.8% 0.8% 0.8%
------- ------- -------
47.2% 45.0% 49.9%
------- ------- -------
Income (loss) before
income taxes (4.0%) 0.3% (6.3%)
======== ======= =======
Our gross margins may not be comparable to those of other entities,
since some entities include all of the costs related to their
distribution network in cost of sales and others, like us, exclude
a portion of them (freight out to customers and nominal outside
warehouse costs) from gross margin, including them instead in the
selling expense line item. See Note 1(o), Operating Costs and
Expenses Classification, to the Consolidated Financial Statements
in this Report.
Comparative Net Sales
Nine Months Ended Percentage
September 30, Increase
2005 2004 (Decrease)
----------- ----------- ----------
Scott's Liquid Gold $ 4,683,000 $ 4,908,800 (4.6%)
Touch of Scent 1,344,900 1,906,300 (29.5%)
----------- ----------- ------
Total household
chemical products 6,027,900 6,815,100 (11.6%)
----------- ----------- ------
Alpha Hydrox and
other skin care 4,863,500 2,698,300 80.2%
Montagne Jeunesse
skin care 6,861,900 6,120,200 12.1%
----------- ----------- ------
Total skin care
Products 11,725,400 8,818,500 33.0%
----------- ----------- ------
Total Net
Sales $17,753,300 $15,633,600 13.6%
=========== =========== ======
Nine Months Ended September 30, 2005
Compared to Nine Months Ended September 30, 2004
Consolidated net sales for the first nine months of the
current year were $17,753,300 versus $15,633,600 for the first nine
months of 2004, an increase of $2,119,700 or about 13.6%. Average
selling prices for the first nine months of 2005 were down by
$174,000 over those of the comparable period of 2004, prices of
household products being up by $27,800, while average selling
prices of skin care products were down by $201,800. This decrease
was primarily due to price promotions on selected cosmetic
products. Co-op advertising, marketing funds, slotting fees and
coupon expenses (promotional allowances) paid to retailers were
subtracted from gross sales in accordance with current accounting
policies totaling $1,447,900 in the first nine of 2005 versus
$1,380,600 in the same period in 2004, an increase of $67,300 or 4.9%.
During the first nine months of the year, net sales of skin
care products accounted for 66.0% of consolidated net sales compared
to 56.4% for the first nine months of 2004. Net sales of these
products for those periods were $11,725,400 in 2005 compared to
$8,818,500 in 2004, an increase of $2,906,900 or 33.0%. We have
continued to experience a drop in unit sales of our
earlier-established alpha hydroxy acid products due primarily to
maturing in the market for alpha hydroxy acid-based skin care
products, intense competition from producers of similar or
alternative products, many of which are considerably larger than
Neoteric Cosmetics, Inc. and reduced distribution of these products
at retail stores in prior periods. During the first quarter of
2005 we began introduction of four new items in our Alpha Hydrox
line of cosmetic products. Because of this, our sales of Alpha
Hydrox products (with and without alpha hydroxy acid) have
increased during the first nine months of 2005. Although we are
optimistic that this trend will continue, it is still too early to
tell the consumer acceptance of these products which is necessary
for reorders of these products and expanding the distribution of
these products. For the first nine months of 2005, the sales of
our Alpha Hydrox products accounted for 32.9% of net sales of
skin care products and 21.7% of total net sales, compared to
19.5% of net sales of skin care products and 11.0% of total net
sales in the first nine months of 2004.
For 2005, net sales of Montagne Jeunesse were approximately
$6,861,900 compared to $6,120,200 in 2004. We believe that this
increase in sales of Montagne Jeunesse is attributable to an
increase in the number and type of Montagne Jeunesse sachets on
retailers' shelves in the first half of 2005 versus 2004. We also
believe that there were fewer units of products left over from
holiday sales at the end of 2004 versus 2003 thus creating a need
to replenish retailer inventory in the following year.
In 2001, we commenced purchases of the skin care sachets
from Montagne Jeunesse under a distribution agreement covering
the United States. Montagne Jeunesse is the sole supplier of
that product. On May 4, 2005, we entered into a new distribution
agreement with Montagne Jeunesse International Ltd., which replaces
the distribution agreement previously in effect. Sales of these
products represent a significant source of our revenues. If the
Montagne Jeunesse distribution agreement were to be terminated, it
would significantly reduce our revenues, would have a material
adverse effect on our operating results and cash flow and, absent
other developments, would result in the need for substantial
reductions in our expenses. The principal and controlling owner of
Montagne Jeunesse is, to our knowledge, the beneficial owner at
March 15, 2005 of approximately 10% of our outstanding common stock.
Sales of household products for the first nine months of this
year accounted for 34.0% of consolidated net sales compared to 43.6%
for the same period of 2004. These products are comprised primarily
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
nine months ended September 30, 2005, sales of household products
were $6,027,900, as compared to sales of $6,815,100 for the same nine
months of 2004. Sales of "Scott's Liquid Gold" for wood were down by
$225,800, a decrease of 4.6%. This decrease was due to decreased
distribution at retail stores. Sales of "Touch of Scent" were down
by $561,400 or 29.5%, due to a decrease in distribution. In the
second quarter, we began introducing a wood wash under the Scott's
Liquid Gold product line; sales have been minimal to date.
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 our revenues and operating results. We believe that our
future success is highly dependent on favorable acceptance in the
marketplace of Montagne Jeunesse products and the sales of our Alpha
Hydrox products and "Scott's Liquid Gold" for wood.
On a consolidated basis, cost of goods sold was $9,752,500
during the first nine months of 2005 compared to $8,849,600 for the
same period of 2004, an increase of $902,900 (10.2% on a sales
increase of 13.6%). As a percentage of consolidated net sales for
the first nine months of 2005, cost of goods sold was 54.9%
compared to 56.6% in 2004, a decrease of 3.0%. This was essentially
due to our increase in plant utilization, resulting from increased
sales of our Alpha Hydrox cosmetic products during 2005, offset by
greater sales of Montagne Jeunesse products at a higher cost per
unit, along with the increased cost of steel cans and increase in
the cost of petroleum based raw materials used in many of our
products.
Operating Expenses, Interest Expense and Other Income
Nine Months Ended Percentage
September 30, Increase
2005 2004 (Decrease)
----------- ----------- ----------
Operating Expenses
Advertising $ 630,300 $ 738,100 (14.6%)
Selling 4,422,000 4,162,600 6.2%
General & Administrative 2,779,100 2,772,400 0.2%
----------- ----------- ------
Total operating
expenses $ 7,831,400 $ 7,673,100 2.1%
=========== =========== ======
Interest Income $ 30,200 $ 30,900 (2.3%)
=========== =========== ======
Interest Expense $ 149,300 $ 128,300 16.4%
=========== =========== ======
Operating expenses, comprised primarily of advertising,
selling and general and administrative expenses, increased by
$158,300 or 2.1% in the first nine months of 2005, when compared
to the first nine months of 2004. The various components of
operating expenses are discussed below.
Advertising expenses for the first nine months of 2005 were
$630,300 compared to $738,100 for the comparable nine months of
2004, a decrease of $107,800 or 14.6%. That decrease was entirely
due to a decrease in advertising expenses applicable to household
products. We will be advertising both our household chemical
products and our skincare products in the fourth quarter. As a
result, our advertising expenses for 2005 could be approximately
equal to last year's totals. This additional advertising in the
fourth quarter over the third quarter could also (depending on the
sales benefit of that advertising) result in lower operating
results in the fourth quarter.
Selling expenses for the first nine months of 2005 were
$4,422,000 compared to $4,162,600 for the comparable nine months
of 2004, an increase of $259,400 or 6.2%. That increase was
comprised of an increase in freight and brokerage expenses of
$87,500, an increase in salaries and fringe benefits and related
travel expense of $138,700 primarily because of staffing changes
and sales incentives in 2005 versus 2004, an increase in
depreciation and royalty expense of $68,500 offset by a net
decrease in other selling expenses, none of which by itself is
significant, of $35,300.
General and administrative expenses for the first nine months
of 2005 were $2,779,100 compared to $2,772,400 for the comparable
nine months of 2004, an increase of $6,700 or 0.2%.
Interest expense for the first nine months of 2005 was
$149,300 versus $128,300 for the comparable period of 2004.
Interest expense increased because of higher interest rates and
borrowing levels under our line of credit. Interest income for
the nine months ended September 30, 2005 was $30,200 compared to
$30,900 for the same period of 2004, which consists of interest
earned on our cash reserves in 2005 and 2004.
During the third quarter of 2005 and of 2004, expenditures
for research and development were not material (under 2% of revenues).
Three Months Ended September 30, 2005
Compared to Three Months Ended September 30, 2004
Consolidated net sales for the third quarter of the current
year were $6,506,000 versus $5,116,700 for the comparable quarter
of 2004, an increase of $1,389,300 or about 27.2%. Average selling
prices for the third quarter of 2005 were down by $199,300 over
those of the comparable period of 2004, prices of household
products being down by $55,100, while average selling prices of
skin care products were down by $144,200. Co-op advertising,
marketing funds, slotting fees and coupon expenses (promotional
allowances) paid to retailers were subtracted from gross sales
in accordance with current accounting policies totaling $592,400
in the third quarter of 2005 versus $458,800 in the same period
in 2004, an increase of $133,600 or 29.1%. This increase
consisted of an increase in coupon expenses of $13,700, an
increase in slotting of $111,900, and an increase in co-op
advertising of $8,000.
During the third quarter of 2005, net sales of skin care
products accounted for 71.2% of consolidated net sales compared
to 59.7% for the third quarter of 2004. Net sales of these
products for those periods were $4,631,600 in 2005 compared to
$3,056,900 in 2004, an increase of $1,574,700 or 51.5%. The
increase was almost entirely due to the introduction of four new
items in our Alpha Hydrox line of products. Net sales of Montagne
Jeunesse were approximately $2,168,900 in the third quarter of
2005 compared to $2,509,500 in the third quarter of 2004, this
decrease was primarily due to a decrease in promotional display
orders.
Sales of household products for the third quarter of this
year accounted for 28.8% of consolidated net sales compared to
40.3% for the same period of 2004. These products are comprised
primarily 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 third quarter of 2005, sales of household
products were $1,874,400, as compared to sales of $2,059,800 for
the same three months of 2004. Sales of "Scott's Liquid Gold" for
wood were down by $59,800, a decrease of 4.0%. Please see the
discussion above for the first nine months of 2005 for additional
information regarding sales of household products, which is also
applicable to sales of household products in the third quarter of
2005.
On a consolidated basis, cost of goods sold was $3,513,600
during the third quarter of 2005 compared to $3,129,000 for the
same period of 2004, an increase of $384,600 (12.3%, on a sales
increase of 27.2%). As a percentage of consolidated net sales for
the third quarter of 2005, cost of goods sold was 54.0% compared
to 61.2% in 2004, a decrease of 11.7%. This percentage decrease
was essentially due to greater sales of our Alpha Hydrox products
at a lower cost per unit offset by increased cost of steel cans
and the increase in the cost of petroleum based raw materials
used in many of our products.
Operating expenses, comprised primarily of advertising,
selling and general and administrative expenses, increased by
$46,700 or 2.0% in the third quarter of 2005, when compared to
the same period during 2004. The various components of operating
expenses are discussed below.
Advertising expenses for the third quarter of 2005 were
$151,800 compared to $101,000 for the comparable quarter of 2004,
an increase of $50,800 or 50.3%. Advertising expenses applicable
to household products decreased by $12,100 (29.9%), and
advertising expenses for Alpha Hydrox products increased for
the comparative three-month period by $62,900 (104.0%).
Selling expenses for the three months ended September 30,
2005 were $1,455,700 compared to $1,381,200 for the comparable
three months of 2004, an increase of $74,500 or 5.4%. That
increase was primarily because of an increase in depreciation
and royalty expense of $68,800 and a net increase in other
selling expenses, none of which by itself is significant,
of $5,700.
General and administrative expenses for the third quarter
of 2005 were $757,100 compared to $835,700 for the comparable
period of 2004, a decrease of $78,600 or 9.4%. Such decrease
was primarily attributable to a decrease in bad debt expense of
$61,400, a decrease in salaries and fringe benefits of $42,100,
and a net increase in other administrative expenses, none of
which by itself is significant, of $24,900.
Interest expense for the third quarter of 2005 was $54,000
versus $40,000 for the comparable period of 2004. Interest expense
increased because of higher interest rates and borrowing levels
under our line of credit. Interest income for the three months
ended September 30, 2005 was $9,900 compared to $10,400 for the
same period of 2004.
During the third quarter of 2005 and of 2004, expenditures
for research and development were not material (under 2% of
revenues).
Liquidity and Capital Resources
On August 8, 2005 we obtained a new $1,800,000 line of
credit with Citywide Banks of Aurora, Colorado. This line replaced
the $1,500,000 line of credit dated August 8, 2004, from the same
bank. Initially the original line of credit was to assist with
inventory for the 2004 holiday sales; we continue to use the line
of credit for inventory and other working capital purposes. The
line of credit bears interest at a rate of .5% over the bank's
base rate (6.75% at September 30, 2005) and matures on August 8,
2006. The line of credit is secured by inventory and accounts
receivable. Under its terms, events of default include a
material adverse change in our financial condition. The
covenants remain the same as the bank loan described below.
We have a bank loan for approximately $2.13 million at the
bank's base rate, adjustable annually each November (5.00% at
November 2004), secured by our 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. We 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 nine months of 2005.
During the first nine months of 2005, our working capital
decreased by $158,200, and concomitantly, our current ratio
(current assets divided by current liabilities) decreased from
1.74:1 at December 31, 2004 to 1.72:1 at September 30, 2005.
This decrease in working capital is attributable to net income
in the first nine months of 2005 of $50,300, and a reduction in
long-term debt of $719,400, a decrease in deferred tax liabilities
of $35,400, a decrease in accumulated comprehensive income of
$1,700, offset by depreciation in excess of capital additions of
$523,100, a decrease in other assets of $8,100 and an increase
in common stock and capital in excess of par of $16,800.
At September 30, 2005, trade accounts receivable were
$1,073,000 versus $1,419,700 at year-end, largely because sales
in December of 2004 were greater than those of September of 2005.
Accounts payable decreased from the end of 2004 through September
of 2005 by $192,500, primarily due to a decrease in trade
suppliers payables related to the increased inventory purchases
in previous quarters. At September 30, 2005 inventories were
$1,855,400 more than at December 31, 2004, due to the increase
in inventories of Montagne Jeunesse, Alpha Hydrox, and household
products to support sales of these products in the upcoming
quarters. Accrued payroll and benefits decreased $125,000 from
December 31, 2004 to September 30, 2005 primarily because of the
decrease in accrued payroll, due to a decrease in the number of
days of accrued payroll at September 30, 2005, versus December 31,
2004. Other accrued liabilities decreased by $9,900. Prepaid
expenses decreased primarily because of a decrease in prepaid
promotional expenses and prepaid insurance expenses.
We have no significant capital expenditures planned for 2005
and have no current plans for any external financing, other than
our existing bank loans. We expect that our available cash, cash
flows from operating activities and borrowings under our line of
credit will fund the cash requirements through September 30, 2006.
Our dependence on operating cash flow means that risks
involved in our business can significantly affect our liquidity.
Any loss of a significant customer, any further decreases in
distribution of our earlier established skin care products or
our household products, insufficient consumer acceptance of our
new Alpha Hydrox products, any new competitive products affecting
sales levels of our products, or any significant expense not
included in our internal budget could result in the need to raise
cash, such as through a bank financing. Except for the short-term
line of credit described above, we have no arrangements for an
external financing of debt or equity, and we are not certain
whether any such financing would be available on acceptable terms.
Please also see other risks summarized in "Forward Looking
Statements" below. We expect our operating cash flows to
improve if we achieve profitability in 2005.
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.
We are not materially exposed to market risks regarding interest
rates because the interest on our outstanding debt is at the
lender's base rate, which approximates the prime rate, adjustable
yearly. Our 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 our debt and equity securities would have
decreased by approximately $600. Further, we do not use foreign
currencies in our business. Currently, we receive payments for
sales to parties in foreign countries in U.S. dollars.
Additionally, we do not use derivative instruments or engage
in hedging activities. As a result, we do not believe that
near-term changes in market risks will have a material effect
on results of our operations, financial position or cash flows.
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 our 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 our products in the marketplace; the
degree of success of any new product or product line introduction
by us; competitive factors; any decrease in distribution of
(i.e., retail stores carrying) our significant products;
continuation of our distributorship agreement with Montagne
Jeunesse; the need for effective advertising of our 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 our products, including applicable environmental
regulations; adverse developments in pending litigation; the loss
of any executive officer; and other matters discussed in our
periodic filings with the Securities and Exchange Commission.
We undertake 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 September 30, 2005, we 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 us 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 September 30, 2005.
There was no change in our internal control over financial
reporting during the quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
On July 20, 2005, we contributed 30,000 shares of our
common stock to our Employee Stock Ownership Plan (the "Plan").
No consideration was paid by the Plan for these contributions.
We believe that these contributions were not subject to the
securities registration requirements of the Securities Act of
1933 because they did not involve a sale. The contributions of
the shares to the Plan may also be exempt from such securities
registration as a non-public offering under Section 4(2) of the
Securities Act of 1933.
Please see Item 2 of Part I, Management's Discussion and
Analysis of Financial Condition and Results of Operation, for
information in the first two paragraphs under "Liquidity and
Capital Resources" regarding a bank line of credit established
in August, 2005. Such information is incorporated by reference.
The bank line of credit includes covenants on maintaining a
current ratio and limitations on the payment of dividends.
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(b) Exhibits
31.1 Rule 13(a)-14(a) Certification of the Chief Executive Officer
31.2 Rule 13(a)-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certifications
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.
BY: /s/ Mark E. Goldstein
-------------------------------------
Date November 3, 2005 Mark E. Goldstein
President and Chief Executive Officer
BY: /s/ Jeffry B. Johnson
-------------------------------------
Date November 3, 2005 Jeffry B. Johnson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Document
31.1 Rule 13(a)-14(a) Certification of the Chief
Executive Officer
31.2 Rule 13(a)-14(a) Certification of the Chief
Financial Officer
32.1 Section 1350 Certification