Message from the President
Dear Fellow Shareholders:
While we were obviously disappointed with the decline in sales and lack of
profitability in the year 2000, a number of accomplishments were noteworthy
and bode well for the future. As our shareholders know well, Scott's Liquid
Gold-Inc. has suffered from a maturing in the market for alpha hydroxy-based
skin care products during the past couple of years, and from intense
competition from large manufacturers of similar or alternative products. Our
strategy for positioning the Company for a resumption in sales growth and a
return to profitability has included the introduction of a number of "niche"
products and the pursuit of additional marketing channels, as well as the
redesign of advertising campaigns for our traditional products.
The settlement of litigation involving TriStrata Technologies, Inc. has
enabled us to move to more competitive packaging and advertising claims for
the Alpha Hydrox product line in 2001. Our DIABETIC SKIN CARE product, which
was introduced last year, is performing in line with expectations and
continues to gain momentum. We have just begun our national introduction of
our new topical analgesic, RUBOUT(TM), and will be moving shortly into test
market in drug outlets in the Northeastern U.S. during the first quarter of
2001 with our Alpha Radiance line of skin care products for mature women.
As of the date of this letter, the Company is in final negotiations with
Montagne Jeunesse, the manufacturer of certain beauty care products, to act
as a United States sales representative and distributor.
On April 4, 2001, we will celebrate our 50th anniversary. In 1951 my father,
Jerome Goldstein, began making Scott's Liquid Gold in my grandmother's
garage. In our 50 years we have experienced our share of ups and downs. Our
humble beginnings and our challenges against much larger competitors help to
shape the corporate culture of Scott's Liquid Gold-Inc. today. For 50 years,
we have persisted through adversity, and displayed through our actions our
commitment to our brands, our employees, our customers, and our shareholders.
We look forward to our many challenges in 2001 and beyond.
Sincerely,
Mark E. Goldstein
President and Chief Executive Officer
February 28, 2001
Description of Business
General
Scott's Liquid Gold-Inc., a Colorado corporation headquartered in Denver, was
incorporated on February 15, 1954. Through its wholly-owned subsidiaries, the
Company manufactures and markets quality household and skin care products.
Until late 1996, it also manufactured a line of disposable cigarette filters
through a wholly-owned subsidiary, Aquafilter Corporation, whose assets,
other than cash and receivables, were sold during 1996 and 1997. In the first
quarter of 2001, the Company began acting as a distributor in the United
States of beauty care products contained in individual sachets and
manufactured by Montagne Jeunesse. The agreement for this relationship is in
negotiation as of the date of this Report. In this Report, the term "Company"
refers to Scott's Liquid Gold-Inc. and its subsidiaries. The Company's
business is comprised of two segments, household products and skin care
products.
The Company's household products consist of Scott's Liquid Gold for wood, a
wood preservative and cleaner, sold nationally for over thirty years, and Touch
of Scent, an aerosol room air freshener, distributed nationally since 1982.
In early 1992, the Company entered into the skin care business through a
subsidiary, Neoteric Cosmetics, Inc. The Company's skin care products are
sold primarily under the name Alpha Hydrox. At the end of 2000, more than
twenty skin care products were being marketed by the Company. The Company
plans to introduce additional products to the market during 2001.
For information on the Company's operating segments, please see "Note 8,
Segment Information", to the Consolidated Financial Statements of the Company.
Strategy
The Company's policy is to manufacture and market high quality consumer
products which are distinct within each category in which the Company
competes. Scott's Liquid Gold for wood distinguishes itself from competing
products as a wood cleaner and preservative, not simply a polish. Touch of
Scent is different from most competing aerosol air fresheners in that it need
not be shaken before each use, and, because it is activated by an attractive
dispenser which may be mounted on any hard, smooth surface, it is more
convenient to use than competing aerosol brands. With respect to the
Company's line of skin care products, Alpha Hydrox was one of the first alpha
hydroxy acid skin care products sold to retailers for resale to the public at
affordable prices. In 1998, the Company added a retinol product to its skin
care line. In the first half of 1999, the Company brought out Neoteric
Diabetic Skin Care. In 2000, the Company introduced Alpha Hydrox Fade Cream,
Alpha Hydrox Oxygenated Moisturizer, a new Alpha Hydrox Facial Moisturizing
Cleanser, and a new Alpha Hydrox Under Eye Renewal Treatment. The Company, in
2001, has underway the introduction of a topical analgesic called RUBOUT(TM).
The Company also is test marketing a line of skin care products specifically
designed for mature women, called ALPHA RADIANCE(TM). The Company will
continue to examine other possible new products which the Company believes
may fit well with the Company's know-how and financial capabilities.
In the last ten years, the Company operated profitably each year except for
the most recent three years. (Although the Company experienced a net loss in
1996 because of the settlement of an environmental lawsuit with the United
States Army, it nonetheless produced an operating profit for that year.) In
the years 1998 through 2000, the Company experienced significant declines in
sales of skin care products and, to a lesser extent, one of the Company's
major lines of household products.
The growth in sales of Alpha Hydrox from 1992 through 1996 caused the Company
to make substantial investments in property, plant and equipment to handle
that growth and the future growth of the Company's skin care products. The
decline in sales of those products in 1998, 1999 and 2000 without
commensurate decreases in the Company's cost of doing business, particularly
in the area of fixed costs, dictate that the sales decline be reversed.
The goal of the Company for 2001 is to resume sales growth and return to
profitability. To achieve these goals, the Company has introduced a number of
"niche" products, has pursued additional marketing channels such as
television shopping networks, has maintained an aggressive advertising
posture while also taking into account the Company's financial capabilities
and has remained focused on domestic sales while not ignoring opportunities
for expansion into other countries. The Company also redesigned the
advertising campaign for its traditional skin care products.
Products
Scott's Liquid Gold for wood, a wood cleaner and preservative, has been the
Company's core product since the Company's inception. It has been popular
throughout the U.S. for over thirty years. In 1982, the Company added
Touch of Scent, a room air freshener, to its line of household products.
Household products accounted for 42.9% of the Company's consolidated net
sales in 2000, and 37.7% in 1999. Scott's Liquid Gold for wood, when applied
to wood surfaces such as furniture, paneling, and kitchen cabinets, and to
outside stained doors and decking, penetrates microscopic pores in the
surface and lubricates beneath, restoring moisture and, at the same time,
minimizes the appearance of scratches, darkening the wood slightly. Scott's
Liquid Gold preserves wood's natural complexion and beauty without wax.
Touch of Scent is intended to be used in conjunction with a decorative
dispenser which can be mounted on any hard surface and into which the
consumer inserts an aerosol refill unit. At a touch, the dispenser propels
any of several fragrances from a refill unit into the air, masking unpleasant
odors and refreshing the air with a pleasant scent. The Company manufactures
both the dispenser and the refill unit. Unlike some competitive aerosol air
fresheners, Touch of Scent is extremely dry and, therefore, leaves
practically no residue after use. Touch of Scent sales have not been strong
in recent years. In this regard, see "Management's Discussion and Analysis".
In early 1992, the Company began to market two skin care products under the
trade name of Alpha Hydrox. At the end of 2000, the Company's skin care line
consisted of over 20 products, with additional products on the way for
introduction in 2001. The Company's Alpha Hydrox skin care products are sold
through a wholly-owned subsidiary, Neoteric Cosmetics, Inc. The Company's
skin care products are manufactured by Neoteric Cosmetics. Many of the Alpha
Hydrox products contain alpha hydroxyethanoic acids in low but effective
concentrations. Properly blended with a carrier, alpha hydroxyethanoic acids
gently slough off dead skin cells to promote a healthier, more youthful
appearance and diminish fine lines and wrinkles. The Company's products with
alpha hydroxy acids include facial care products, a body lotion and a foot
creme. Other skin care products of the Company do not contain alpha hydroxy
acids. These products include Neoteric Diabetic Skin Care, which is a healing
creme and a therapeutic moisturizer developed by the Company to address the
skin conditions of diabetics, caused by poor blood circulation, and which
contains a patented oxygenated oil technology; Alpha Hydrox Oxygenated
Moisturizer, which is our second skin care product based on the oxygenated
oil technology; a retinol product containing a patented Microsponge
technology that softens fine lines and wrinkles; an Alpha Hydrox Fade Cream
designed to lighten age spots and skin discoloration caused by sun exposure
and other factors; RUBOUT(TM), which is a topical analgesic which helps fade
the discoloration of bruises and eases the pain from muscle sprains and
bruises; and a body wash. Neoteric skin care products accounted for 57.1% of
the Company's consolidated net sales in 2000, and 62.3% in 1999.
The Company also manufactures injection molded components, currently
consisting of plastic caps for Touch of Scent and Scott's Liquid Gold, and
dispensers for Touch of Scent.
Marketing and Distribution
All of the Company's products are sold nationally, directly and through
independent brokers, to mass marketers, drugstores, supermarkets, and other
retail outlets; and to wholesale distributors. In 2000, Wal-Mart Stores, Inc.
of Bentonville, Arkansas, accounted for approximately 31% of the Company's
sales of household products. With regard to the Company's skin care products,
Wal-Mart accounted for approximately 31% of 2000 sales. Wal-Mart accounted
for approximately 25% of sales of both household products and skin care
products in 1999. The loss of this customer could have a material effect on
the Company because it is uncertain whether the consumer base served by this
customer would purchase the Company's products at other retail outlets. No
long-term contracts exist between the Company and Wal-Mart Stores, Inc. or
any other customer. The Company permits returns of its products by its
customers, a common industry practice.
The Company's household products and Alpha Hydrox are or have been advertised
nationally on network television and, at times, on cable television and in
print media. In the past, the Company has also used radio advertising in
selected areas and may do so in the future. The Company maintains an
aggressive posture in promoting and advertising its products, and, in
particular, its skin care products. During 2001, but subject to change, the
Company plans a moderate to substantial decrease in advertising expenditures
from 2000 levels. The Company periodically reviews its advertising plans and
may revise planned advertising expenditures based upon actual sales results
and competitive conditions.
To enable consumers to make informed decisions, the Company's containers and
promotional materials note the concentration of alpha hydroxy acid contained
in each of its Alpha Hydrox products which contain such acids. The Company
recommends the use of sunscreen in its written directions contained in every
box of Alpha Hydrox products with such acids. The Company does not exaggerate
benefits to be expected from the use of its products. The Company also
maintains a 24-hour, toll free telephone number for use by consumers of its
products.
The Company sells its household and skin care products in Canada and other
foreign countries. Please see "Note 8, Segment Information", to the
Consolidated Financial Statements for information regarding sales in foreign
countries. Currently, foreign sales are made to distributors who are
responsible for the marketing of the products, and the Company is paid for
these products in United States currency.
Manufacturing and Suppliers
The Company owns and operates its manufacturing facilities and equipment. The
Company manufactures all of its products, maintaining a high quality
standard. For all of its products, the Company must maintain sufficient
inventories to ship most orders as they are received. Quality control is
enforced at all stages of production, as well as upon the receipt of raw
materials from suppliers. Raw materials are purchased from a number of
suppliers and, at the present time, are readily available. Currently, the
Company's sole supplier of glycolic acid, which is the most common type of
alpha hydroxy acid used by the Company in its Alpha Hydrox products, is E.I.
DuPont de Nemours. So far as the Company knows, this supplier is one of only
two U.S. manufacturers of the grade of glycolic acid approved for use by the
Company. No contract exists between the Company and its supplier of glycolic
acid. The Company's sole supply for the oxygenated oil used in Neoteric
Diabetic Skin Care products is a French company with which the Company has a
supply agreement. The supply agreement provides the Company with an exclusive
right to purchase this oil for incorporation in products specifically
designed for use by diabetics or the beautification of skin. The supply
agreement states that the exclusivity ends December 31, 2002; however, if
during the year 2002 and in each subsequent year Neoteric Cosmetics purchases
a minimum volume of the oil, the exclusivity is extended by one year. The
exclusivity concerns products shipped by the Company to destinations in the
United States or Canada. Relations with these suppliers and other suppliers
are satisfactory. Most of the Company's manufacturing operations, including
most packaging, are highly automated, and, as a result, the Company's
manufacturing operations are not labor intensive, nor, for the most part, do
they involve extensive training. An addition to the Company's plant
facilities, completed in early 1996, greatly increased the Company's capacity
to produce skin care products. The Company currently operates on a one-shift
basis. The Company's manufacturing facilities are capable of producing
substantially more quantities of the Company's products without any
expansion, and, for that reason, the Company believes that its physical plant
facilities are adequate for the foreseeable future.
Competition
The Company's business is highly competitive in both household and skin care
products. Household products are comprised of Touch of Scent air fresheners
and Scott's Liquid Gold, a wood cleaner and preservative. Both the air
freshener and wood care categories are dominated by three to five companies
significantly larger than the Company, each of which produce several
products. Irrespective of the foregoing, the Company maintains a visible
position in the wood care category, but does not have sufficient information
to make an accurate representation as to the market share of its products.
Over the last several years, sales of the Company's air freshener products
have fallen off significantly and may continue to do so in the future. From
time to time, to stem the attrition of this product line, the Company offers
price incentives to its customers.
The skin care category is also highly competitive. Several competitors are
significantly larger than Scott's Liquid Gold-Inc., and each of these
competitors produces several products. Some of these companies also produce
retinol and alpha hydroxy acid products with which Alpha Hydrox must compete.
Because of the number of varied products produced by competitors, the Company
cannot make an accurate representation as to the market share of its skin
care products. Irrespective of the foregoing, it can be stated that the
Company has established a strong national base of distribution for Alpha
Hydrox.
Conforming to its corporate philosophy, the Company competes on the basis of
quality and distinguishing characteristics of its products.
Regulation
The Company is subject to various federal, state and local laws and
regulations, which pertain to the type of products it manufactures and sells.
The Company's skin care products containing alpha hydroxy acids are cosmetics
within the meaning of the Federal Food Drug and Cosmetic Act ("FFDCA"). The
FFDCA defines "cosmetics" as products intended for cleansing, beautifying,
promoting attractiveness or altering the appearance. The Company's cosmetics
products are subject to regulation under the FFDCA and the Fair Packaging and
Labeling Act ("FPLA"), and the regulations promulgated under these acts. The
relevant laws and regulations are enforced by the U.S. Food & Drug
Administration ("FDA"). Such laws and regulations govern the ingredients and
labeling of cosmetic products and set forth general manufacturing practices
for companies to follow. Although FDA regulations require that the safety of
a cosmetic ingredient be substantiated prior to marketing, there is no
requirement that a company contemplating inclusion of a cosmetic ingredient
in its products submit to the FDA the results of its testing or any other
data or information with respect to the ingredient. Prior to marketing its
products, the Company conducts studies to demonstrate that its Alpha Hydrox
products do not irritate the skin or eyes. Consistent with regulations, the
Company does not submit the results of its studies to the FDA.
In April of 1994, an FDA official raised some questions about the safety of
alpha hydroxy acids in skin care products, and later stated that the effects
of long-term usage of such products are unknown. Because of the FDA's
questions, the Cosmetic Ingredient Review Expert Panel ("CIR") sponsored by
the cosmetics industry, was requested to conduct a review of a compilation of
alpha hydroxy acid safety data assembled by cosmetic manufacturers. The CIR
is a cooperative proceeding in which an FDA representative can and does
participate as a nonvoting, liaison member. In June of 1997, the CIR issued
its final report which, among other things, concluded that glycolic acid (the
most common type of alpha hydroxy acid used by the Company) is safe for use
in retail domestic products at concentrations of up to 10%, with a pH level
of no less than 3.5, and when the directions for use include the daily use of
sun protection. The Company's products and directions for use meet the CIR's
criteria.
Following the issuance in June, 1997 of the CIR report, the FDA, in December,
1998, created a joint working group using staff from both the Center for Food
Safety and Applied Nutrition and the Center for Drug Evaluation and Research
to consider, among other things, whether products containing alpha hydroxy
acid should be classified for regulatory purposes as a drug. This group is
expected to analyze additional research initiated at the FDA's request. It is
not expected that recommendations by the working group will be forthcoming in
the near-term future. Further, any recommendation of the group will probably
face strong opposition by manufacturers of products containing alpha hydroxy
acids.
The Company's advertising is subject to regulation under the Federal Trade
Commission Act and its implementing regulations, which prohibit false and
misleading claims in advertising. The Company's labeling and promotional
materials are believed to be in full compliance with applicable statutes and
regulations.
Some chemicals used in consumer products, including some used by the Company,
have come under scrutiny by various state governments and the Congress of the
United States in connection with clean air laws and regulations. These
chemicals are volatile organic compounds ("VOCs") that are contained in
various categories of consumer products. As a result of VOC regulation, it
has been necessary, from time to time, for the Company to reformulate some of
its products including a reformulation of Touch of Scent to conform to
certain regulations of the California Air Resources Board ("CARB") which
became effective on January 1, 1996. The regulations concerning VOC content
are relevant to the household products of the Company but have not affected
the Company's skin care products. The Company believes it has done all that
is now necessary to satisfy the current requirements of the Clean Air Act and
laws of various state governments. Currently, all of the Company's products
may be sold in all areas of the United States.
Limitations regarding the VOC content of consumer products by both state and
federal agencies will continue to be a part of regulatory efforts to achieve
compliance for ozone at or near ground level. Under the Clean Air Act
Amendments of 1990, the Environmental Protection Agency ("EPA") is required
to study the contribution of consumer products to ozone problems and to
promulgate regulations reducing the VOC content of consumer products. During
1995, the EPA published a prioritized list of categories of consumer products
for regulation, including categories which affect Scott's Liquid Gold for
wood and Touch of Scent. Regulations pertaining to these products were
proposed by the EPA in April, 1996. Final regulations to control VOC's from
consumer products, which are no more stringent than those issued previously
by CARB with which the Company complies, were published in the September 11,
1998 Federal Register. Various states, in addition to California, have
enacted or are considering promulgating VOC regulations. The EPA's adoption
of regulations may help to induce states to conform to consistent, nationwide
standards. The Company is unable to predict how many or which other states
might enact legislation regulating the VOC content of consumer products or
what effect such legislation might have upon its household products. The
Company is aware that a group of approximately thirteen northeastern states
have collectively drafted model VOC regulations with standards substantially
identical to those contained in the CARB regulations. The Company expects
that at least some of these states will adopt VOC regulations based on this
model.
Employees
The Company employs 123 persons, 64 in plant and production related functions
and 59 in administrative, sales and advertising functions. No contracts exist
between the Company and any union. The Company monitors wage and salary rates
in the Rocky Mountain area and pursues a policy of providing competitive
compensation to its employees. The compensation of the Company's executive
officers is under the review of the Compensation Committee of the Company's
Board of Directors. Fringe benefits for Company employees include an
excellent medical and dental plan, life insurance, a 401K plan with matching
contributions for lower paid employees (those earning $30,000 or less per
annum), an ESOP plan, and a Profit Sharing plan. The Company considers its
employee relations to be satisfactory.
Patents and Trademarks
At present, the Company currently owns no patents covering its products,
although the Company is seeking patent protection on at least one product.
However, the Company actively uses its registered trademarks for Scott's
Liquid Gold, Liquid Gold, Touch of Scent, Alpha Hydrox,
Tri-Oxygen C, and Neoteric in the United States and has registered trademarks
in a number of additional countries. The Company's registered trademarks and
pending trademark applications concern names and logos relating to its
products as well as the design of boxes for certain of its products.
In December, 2000, the Company entered into a license agreement with
TriStrata Technology, Inc. which owns patents dealing with the use of alpha
hydroxy acids for the purpose of reducing the appearance of wrinkles or fine
lines. Under the license agreement, Neoteric Cosmetics and its affiliates
have been granted a non-exclusive license for the life of the patents to make
and sell skin care products using alpha hydroxy acids for, among other
things, the reduction of the appearance of skin wrinkles and the reduction in
the appearance of skin changes associated with aging. The license agreement
covers a territory which includes the United States and certain foreign
countries. In accordance with the license agreement, Neoteric Cosmetics pays
a royalty on net sales of products covered by the agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Legal Proceedings" later in this Report.
Properties
The Company's facilities, located in Denver, Colorado, are currently
comprised of three connecting, modern buildings and a parking garage
(approximately 261,100 square feet in total) and about 16.2 acres of land, of
which approximately 6 acres are available for future expansion. These
buildings range in age from 6 to 31 years (126,600 square feet having been
added in 1995 and 1996). The Denver facility houses the Company's corporate
headquarters and all of its operations, and serves as one of several
distribution points. The Company believes that its current space will provide
capacity for growth for the foreseeable future. All of the Company's land and
buildings serve as collateral under a deed of trust for a $6.0 million bank
loan consummated by the Company on November 21, 2000. An appraisal as of
November 3, 2000, of the Company's land and buildings for purposes of this
loan established a market value for the Company's realty of $14,300,000.
SELECTED FINANCIAL DATA
Scott's Liquid Gold-Inc. & Subsidiaries
(IN THOUSANDS OF DOLLARS
EXCEPT FOR PER SHARE DATA) 2000 1999 1998 1997 1996
NET SALES:
Scott's Liquid Gold household products $12,275 $12,787 $14,309 $15,377 $17,411
Neoteric Cosmetics 16,333 21,102 25,165 33,968 26,268
----------------------------------------------------------------------------------------------------------------------------
$28,608 $33,889 $39,474 $49,345 $43,679
===========================================================================================================================
Income (loss) from continuing operations
before income taxes $(2,261) (761) $(4,532) $8,485 $(1,487)
Income tax expense (benefit) - (256) (1,758) 3,154 (553)
----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (2,261) (505) (2,774) 5,331 (934)
Discontinued operations, net of taxes - - - 751 23
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(2,261) $(505) $(2,774) $6,082 $(911)
===========================================================================================================================
EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $(0.22) $(0.05) $(0.27) $0.53 $(0.09)
Discontinued operations - - - 0.07 -
----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $(0.22) $(0.05) $(0.27) $0.60 $(0.09)
===========================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $(0.22) $(0.05) $(0.27) $0.52 $(0.09)
Discontinued operations - - - 0.07 -
----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $(0.22) $(0.05) $(0.27) $0.59 $(0.09)
===========================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ 0.10 $ - $ -
===========================================================================================================================
ASSETS $26,937 $28,975 $31,995 $37,592 $34,464
===========================================================================================================================
WORKING CAPITAL* $4,857 $6,980 $7,940 $11,631 $6,197
===========================================================================================================================
CAPITAL ADDITIONS $95 $294 $189 $210 $1,057
===========================================================================================================================
DEPRECIATION $801 $888 $1,038 $998 $1,015
===========================================================================================================================
LONG-TERM DEBT * $5,309 $5,866 $6,981 $7,978 $10,777
===========================================================================================================================
* See Management Discussion & Analysis of Financial Condition and Results of
Operations.
SELECTED QUARTERLY FINANCIAL DATA
2000
-------------------------------------------------------------------------------
First Second Third Fourth Year
-------------------------------------------------------------------------------------------------------------------
Net sales $ 7,371 $7,404 $7,267 $6,566 $28,608
Gross profit $ 4,700 $4,623 $4,646 $4,212 $18,181
Income (loss) before income taxes $(1,804) $ (363) $ 602 $ (696) $(2,261)
Net loss $(1,191) $ (239) $ (135) $ (696) $(2,261)
Loss per share $ (0.12) $(0.02) $(0.01) $(0.07) $ (0.22)
Diluted loss per share $ (0.12) $(0.02) $(0.01) $(0.07) $ (0.22)
1999
-------------------------------------------------------------------------------
First Second Third Fourth Year
-------------------------------------------------------------------------------------------------------------------
Net sales $ 9,784 $ 7,742 $8,382 $7,981 $33,889
Gross profit $ 6,383 $ 4,837 $5,365 $5,546 $22,131
Income (loss) before income taxes $(1,319) $(1,844) $ 343 $2,059 $ (761)
Net income (loss) $ (831) $(1,369) $ 226 $1,469 $ (505)
Earnings (loss) per share $ (0.08) $ (0.14) $ 0.02 $ 0.15 $ (0.05)
Diluted earnings (loss) per share $ (0.08) $ (0.14) $ 0.02 $ 0.15 $ (0.05)
Management Discussion & Analysis
Of Financial Condition and Results of Operations
Result of Operations
Summary of Results as a Percentage of Operations
Year Ended December 31,
-------------------------------------------
2000 1999 1998
Net sales
Scott's Liquid Gold
household products 42.9% 37.7% 36.3%
Neoteric Cosmetics 57.1% 62.3% 63.7%
------------------------------------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 36.4% 35.2% 34.4%
------------------------------------------
Gross profit 63.6% 64.8% 65.6%
Other revenue 3.1% 1.9% 1.6%
------------------------------------------
66.7% 66.7% 67.2%
------------------------------------------
Operating expenses 70.7% 65.4% 75.6%
Interest 3.9% 3.5% 3.1%
------------------------------------------
74.6% 68.9% 78.7%
Loss before income taxes (7.9%) (2.2%) (11.5%)
Management Discussion & Analysis
Of Financial Condition and Results of Operations
General
The Company manufactures and markets both household and skin care products.
In September of 1996, it discontinued the manufacture and sale of cigarette
filters by one of its wholly owned subsidiaries. The Company's products are
sold throughout the United States and Canada and insignificantly in other
countries. The majority of skin care products are sold under the name Alpha
Hydrox and Neoteric Diabetic Skin Care. Sales of such products were about
$25.2 million in 1998, $21.1 million in 1999, and $16.3 million in 2000.
Year Ended
December 31, 2000
Compared to Year Ended December 31, 1999
Consolidated net sales for 2000 were $28.6 million vs. $33.9 million for
1999, a decrease of $5.3 million or about 15.6%. Average selling prices for
2000 were greater than those of 1999 by $1,471,700, prices of household
products being up by $475,800 ($345,100 for Scott's Liquid Gold for wood and
$130,700 for Touch of Scent), while average selling prices of cosmetics
products increased by $995,900.
During 2000, net sales of cosmetics products accounted for 57.1% of
consolidated net sales compared to 62.3% in 1999. Net sales of those products
were $21,102,500 in 1999 compared to $16,333,300 in 2000, a decrease of
$4,769,200 or 22.6%. That decrease was comprised of a drop in unit sales of
most of the Company's earlier established skin care products, offset by an
increase in their average selling prices and by sales of more recently
introduced products. The Company believes that its skin care sales were
adversely affected by the maturation of the alpha hydroxy acid category of
skin care products, by the Company's emphasis on retinol products in
allocating its advertising dollars during 1999, and by intense competition
from producers of similar or alternative products, many of whom are
considerably larger than Neoteric Cosmetics, Inc., the Company's skin care
subsidiary. In the year 2000, the Company implemented a revised approach to
its television advertising, emphasizing short advertising spots on various
television channels. The Company continues to address the decrease in sales
of products in the alpha hydroxy acid category of skin care products through
the introduction of new products which target "niche" market opportunities.
However, sales of such new products have not been sufficient to offset
declining shipments of alpha hydroxy acid-based products. The Company
believes that its future success is highly dependent upon the favorable
acceptance in the marketplace of its new products and the sales of its Alpha
Hydrox products.
During the first half of 1999, the Company's subsidiary, Neoteric Cosmetics,
Inc., introduced Neoteric Diabetic Skin Care, a healing creme and a
therapeutic moisturizer developed by the Company to address skin conditions
of diabetics which are caused by poor blood circulation. In early 2000, we
introduced Alpha Hydrox Fade Cream, which is designed to lighten age spots
and skin discoloration caused by sun exposure and other factors, and Alpha
Hydrox Oxygenated Moisturizer, which is our second skin care product based on
a patented oxygenated oil technology. During the second half of the year
2000, the Company introduced a new Alpha Hydrox Facial Moisturizing Cleanser
and a new Alpha Hydrox Under Eye Renewal treatment. Sales of these four
products and of the diabetic products have been satisfactory. Products
planned for 2001 include a line of skin care products specifically designed
for problems common to mature women and a unique topical analgesic which
helps fade the discoloration of bruises and eases the pain from muscle
sprains and bruises. These two new products began shipments in early 2001.
The Company discontinued its Belleza Latina product line which was introduced
during the second half of 1998.
As of the date of this Report, the Company is in final negotiations with
Montagne Jeunesse, the manufacturer of certain beauty care products, to act
as a United States sales representative and distributor.
Sales of household products in 2000 accounted for 42.9% of consolidated net
sales compared to 37.7% in 1999. 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. Sales of household products were $12,786,900
in 1999 compared to $12,274,200 in 2000, a decrease of $512,700, or 4%. Sales
of Scott's Liquid Gold for wood decreased from $8,903,500 in 1999 to
$8,437,800 in 2000 (down by $465,700 or 5.2%) because of what we believe to
be ineffective advertising. Sales of Touch of Scent decreased from $3,883,400
in 1999 to $3,836,400 in 2000 (down by $47,000 or 1.2%). As noted in previous
reports to shareholders, efforts in recent years to revitalize Touch of Scent
have produced less than satisfactory results. Although the Company continues
to seek products to replace or augment Touch of Scent, particularly products
which would utilize the same manufacturing facilities, it believes that a
centralization of purchasing activities by certain customers may continue to
help to stabilize and improve Touch of Scent sales in 2001.
On a consolidated basis, cost of goods sold in 2000 was $10,426,300 compared
to $11,921,300 in 1999, a decrease of $1,495,000 or 12.5 % (on a sales
decrease of about 15.6%). As a percentage of consolidated net sales, cost of
goods sold was 36.4% in 2000 vs. 35.2% in 1999, an increase of about 3.4%.
That increase in the cost of goods sold percentage is the result of an
increase in average selling prices in 2000 offset by lower production during
2000 vs. 1999, cost of goods sold being affected by a lower absorption of on-
going (fixed)
manufacturing costs resulting from a lower level of products manufactured by
the Company. The increase in the cost of goods sold also was affected by a
change in the product mix.
Operating expenses, comprised primarily of advertising, selling, and
administrative expenses, decreased by $1,937,400 from 1999 to 2000, largely
because of the decline in advertising expenses. The various components of
operating expenses are discussed below.
Advertising expenses for 2000 were $8,972,400 compared to $10,808,300 for
1999, a decrease of $1,835,900 or 17% (mostly for television). In 2000, the
Company spent $7,502,000 to advertise its cosmetics products, compared to
$10,018,900 in 1999, a decrease of 25.1%, and $1,470,400 in 2000 compared to
$789,400 in 1999 to advertise household products, an increase of almost
86.3%. Advertising expenses for Scott's Liquid Gold for wood increased from
$464,200 in 1999 to $1,246,300 in 2000, whereas expenses to advertise Touch
of Scent decreased from $325,200 in 1999 to $224,100 in 2000. As a result of
the license agreement entered into with TriStrata Technology Inc. in the
fourth quarter of 2000, the Company has added to its advertisements for the
Alpha Hydrox products with alpha hydroxy acid that the products reduce or
diminish fine lines and wrinkles. Irrespective of year to year changes in
expenditures to advertise its products, the Company recognizes that, whenever
it is fiscally responsible to do so, it must continue to advertise
aggressively because the markets for skin care products, furniture polish,
and air fresheners are highly competitive and, accordingly, the Company's
brand names need to be kept in front of current and potential consumers.
Sustaining the Company's advertising program is highly dependent upon sales
of its skin care products.
Selling expenses for 2000 were $6,130,900 compared to $6,087,600 for 1999, a
less than 1% increase. That increase was comprised of a decrease in brokerage
commissions and freight out (which vary with sales volume) of $133,000, a
reduction in sales salaries and fringe benefits of $95,800, a decrease of
$25,100 in telephone expenses, and a net decrease in other expenses of
$26,400, none of which, by itself, was significant, all offset by an increase
in depreciation, amortization and royalty expense of $67,100 and an increase
in costs of promotional merchandise of $256,500.
Administrative expenses in 2000 were $5,110,300 compared to $5,254,900 in
1999, a decrease of $144,600 or 2.8%. That decrease was attributable to
decreases in salaries, wages, and fringe benefits of $700,700, in
depreciation expense of $30,700,in property taxes of $24,400, all offset by
an increase of $425,200 in legal and professional fees (such increase was
attributable to the recovery in 1999, through insurance, of $550,000 in legal
fees which were expensed in prior periods), and increases in bad debt
allowances of $27,800, and in other administrative expenses, none of which,
standing alone, was significant, of $158,200.
Interest expense for 2000 was $1,141,400 versus $1,203,900 for 1999. Other
income was $912,900 in 2000 as compared to $625,600 in 1999, an increase of
$287,300 or 45.9%. Other income essentially consists of interest earned on
the Company's cash reserves and on its bond sinking fund. Because the
Company's 10% bonds have been refinanced with a long-term loan at a prime
rate and because the Company no longer has the sinking fund relating to the
bonds, both interest expense and other income will decrease substantially in
2001. During both 2000 and 1999, expenditures for research and development
were not material (under 2% of revenues).
Year Ended
December 31, 1999
Compared to Year Ended December 31, 1998
Consolidated net sales for 1999 were $33.9 million vs. $39.5 million for
1998, a decrease of $5.6 million or about 14.2%. Average selling prices for
1999 were greater than those of 1998 by $1,290,800, prices of household
products being up by $769,700 ($294,100 for Scott's Liquid Gold for wood and
$475,600 for Touch of Scent), while average selling prices of cosmetics
products increased by $521,100.
During 1999, net sales of cosmetics products accounted for 62.3% of
consolidated net sales compared to 63.7% in 1998. Net sales of those products
were $25,164,700 in 1998 compared to $21,102,500 in 1999, a decrease of
$4,062,200 or 16.1%. That decrease was comprised of a drop in unit sales of
most of the Company's earlier established skin care products, offset by an
increase in their average selling prices and by sales of more recently
introduced products. The Company believes that its skin care sales were
adversely affected by the maturation of the alpha hydroxy acid category of
skin care products, by the Company's emphasis on retinol products in
allocating its advertising dollars during 1999, and by intense competition
from producers of similar or alternative products, many of whom are
considerably larger than Neoteric Cosmetics, Inc., the Company's skin care
subsidiary. Although some brands of alpha hydroxy acid skin care products
experienced an increase in sales during 1999, available information indicates
that sales of all brands of such products were down by about 4% during that
year, compared to the next preceding year. During the second half of 1998,
Neoteric Cosmetics, Inc. introduced two new lines of skin care products,
Belleza Latina, specifically designed for the Hispanic market, and Alpha
Hydrox Night ResQ, a retinol-based product; and, early in 1999, introduced
Neoteric Diabetic Skin Care, a healing cream and a therapeutic moisturizer
developed to address skin conditions of
diabetics which is caused by poor blood circulation. Sales of these products
and of the diabetic products met expectations, but sales of the Belleza
Latina line were disappointing.
Sales of household products in 1999 accounted for 37.7% of consolidated net
sales compared to 36.3% in 1998. 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. Sales of household products were $14,309,600
in 1998 compared to $12,786,900 in 1999, a decrease of $1,522,700, or 10.6%.
Sales of Scott's Liquid Gold for wood decreased from $9,335,100 in 1998 to
$8,903,500 in 1999 (down by $431,600 or 4.6%) and sales of Touch of Scent
decreased from $4,974,500 in 1998 to $3,883,400 in 1999 (down by $1,091,100
or 21.9%). The Company believes that a substantial decrease in expenditures
to advertise Scott's Liquid Gold for wood during 1999 compared to 1998 and a
continued erosion of its Touch of Scent sales volume were largely responsible
for the decrease in sales of household products. Touch of Scent sales
declined once again in 1999, adding to the downward trend of the last several
years.
On a consolidated basis, cost of goods sold in 1999 was $11,921,300 compared
to $13,581,900 in 1998, a decrease of $1,660,600 or 12.2 % (on a sales
decrease of about 14.2%). As a percentage of consolidated net sales, cost of
goods sold was 35.2% in 1999 vs. 34.4% in 1998, an increase of about 2%. That
increase in the cost of goods sold percentage is the result of an increase in
average selling prices in 1999 offset by lower production during 1999 vs.
1998, cost of good sold being affected by a lower absorption of on-going
(fixed) manufacturing costs resulting from a lower level of products
manufactured by the Company.
Advertising expenses for 1999 were $10,808,300 compared to $15,221,200 for
1998, a decrease of $4,412,900 or 29% (mostly for television). In 1999, the
Company spent $10,018,900 to advertise its cosmetics products, compared to
$11,376,800 in 1998, a decrease of 12.0%, and $789,400 in 1999 compared to
$3,844,400 in 1998 to advertise household products, a decrease of almost
79.5%. Advertising expenses for Scott's Liquid Gold for wood decreased from
$3,675,900 in 1998 to $464,200 in 1999, whereas expenses to advertise Touch
of Scent increased from $168,500 in 1998 to $325,200 in 1999.
Selling expenses for 1999 were $6,087,600 compared to $7,376,300 for 1998, a
decrease of $1,288,700 or 17.5%. That decrease was comprised of a decrease in
brokerage commissions and freight out (which vary with sales volume) of
$491,800, a reduction in travel expenses of $140,300, decreases in costs of
promotional merchandise of $225,300, a drop in slotting allowances of
$121,900, a reduction in sales salaries and fringe benefits of $220,900, a
decrease of $96,500 in telephone expenses, and a net decrease in other
expenses of $106,700, none of which, by itself, was significant, all offset
by an increase in depreciation and amortization of $114,700.
Administrative expenses in 1999 were $5,254,900 compared to $7,248,100 in
1998, a decrease of $1,993,200 or 27.5%. That decrease was attributable to a
decrease of $1,617,100 in legal and professional fees, of which $550,000
derived from an insurance recovery of expenses incurred in 1998, and to the
culmination of a lawsuit in 1998 for which $770,400 was charged against
income in that year, and to decreases in depreciation expense of $116,800, in
salaries, wages, and fringe benefits of $198,900, and in other administrative
expenses, none of which, standing alone, was significant, of $60,400.
Interest expense and other income for 1999 were essentially the same as they
were for 1998. During both 1999 and 1998, expenditures for research and
development were not material (under 2% of revenues).
Liquidity and Capital Resources
On July 29, 1994, the Company consummated a $12 million 10% bond issuance to
finance the expansion of the Company's Denver facilities. This expansion,
prompted by the growth of the Company's wholly-owned subsidiary, Neoteric
Cosmetics, Inc., manufacturer of Alpha Hydrox skin care products, included
construction of a 74,600 square foot office building, replacing a smaller,
existing office structure; and an additional 52,000 square feet of
manufacturing and warehouse space at an aggregate cost of approximately
$13.65 million, including the cost of furniture, fixtures and equipment. This
project began in August of 1994 and was completed in January of 1996. On
November 21, 2000 the Company redeemed the entire $12 million bond issue and
entered into a seven year bank loan at the prime rate (9.5% at that time and
on December 31, 2000), adjustable yearly, secured by the Company's land and
buildings, with principal and interest payable monthly. The loan agreement
with the bank contains a number of covenants, including the requirement for
maintaining a current ratio of at least 1:1 and a ratio of consolidated
long-term debt to consolidated net worth of not more than 1:1. The Company
may not declare any dividends that would result in a violation of either of
these covenants. The foregoing requirements were met at December 31, 2000.
During 2000, the Company's working capital decreased by $2,123,500, while its
current ratio (current assets divided by current liabilities) decreased from
2.6:1 at December 31, 1999 to 2.0:1 at December 31, 2000. This decrease in
working capital is attributable to (1) a net loss in 2000 of $2,260,900, (2)
a reduction of long-term debt of $556,900, and (3) an increase in other
assets of $47,100, all offset by (4) depreciation in excess of capital
additions of $706,200, and (5) an increase of deferred income taxes of
$35,200.
At December 31, 2000 net trade accounts receivable were $772,300 compared to
$2,212,700 at the end of 1999, a decrease of $1,440,400, primarily due to a
decrease in last quarter 2000 sales vs. those of the same period last year.
Other receivables decreased by $349,300 during 2000, largely consisting of
the net decrease in income tax refunds receivable of $356,700. Inventories
were up by $21,100 at the end of 2000 compared to 1999. Prepaid expenses and
taxes decreased by $86,800 during 2000, because of the amortization of bond
fees originating from the 1994 bond issue. Trade accounts payable increased
from the end of 1999 to the end of 2000 by $1,286,200, largely due to an
increase in advertising payables at the end of 2000 vs. 1999. Accrued
expenses were down $181,700 from 1999 to 2000, primarily because of reduced
payroll accruals at December 31, 2000.
The Company has no significant capital expenditures planned for 2001 and
expects that its available cash and cash flows from operating activities will
fund the next twelve months cash requirements.
As a result of Board action the Company purchased 232,100 shares of its
common stock, in 2000, on the open market at a cost of $215,600. Such stock
was contributed by the Company to its Employee Stock Ownership Plan ("ESOP").
Legal Proceedings
Prior Annual Reports of the Company from 1996 forward describe a patent
infringement suit which was filed against Neoteric Cosmetics, Inc. (and
others) in May of 1996 in the United States District Court for the District
of Delaware by TriStrata Technology, Inc. Neoteric Cosmetics, Inc., a wholly
owned subsidiary of the Company, manufactures and sells skin care products
under the name Alpha Hydrox. The plaintiff in the lawsuit alleged that
Neoteric Cosmetics contributes to and/or induces infringement of patents
owned by the plaintiff by selling and promoting Neoteric skin care products,
which contain alpha hydroxy acid, 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. In December of 2000 the Company settled the
lawsuit. This settlement is contained in a license agreement between
TriStrata and Neoteric Cosmetics, Inc. Under the license agreement, TriStrata
grants to Neoteric Cosmetics and its affiliates a non-exclusive license to
make and sell skin care products using certain alpha hydroxy acids for, among
other things, the reduction of the appearance of skin wrinkles and the
reduction in the appearance of skin changes associated with aging. The
license agreement covers a territory which includes the United States and
certain foreign countries. In accordance with the license agreement, Neoteric
Cosmetics has issued a fixed payment for alleged past infringements and will
pay a royalty on future net sales of products covered by the license
agreement.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss due to adverse changes in financial
and commodity market prices and rates. The Company is not materially exposed
to market risks regarding interest rates because the interest on the
Company's outstanding debt is at the prime rate, adjustable yearly. Further,
the Company does not use foreign currencies in its business. Currently, it
receives payments for sales to parties in foreign countries in U.S. dollars.
Additionally, the Company does not use derivative instruments or engage in
hedging activities. As a result, the Company does not believe that near-term
changes in market risks will have a material effect on results of operations,
financial position or cash flows of the Company.
Forward Looking Statements
This report may contain "forward-looking statements" within the meaning of
the U.S. federal securities laws. These statements are made pursuant to the
safe harbor provisions of the private Securities Litigation Reform act of
1995. Forward-looking statements and the Company's performance inherently
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. Factors that would cause or
contribute to such differences include, but are not limited to, continued
acceptance of the Company's products in the marketplace; the degree of
success of any new product or product line introduction by the Company;
competitive factors; the need for effective advertising of the Company's
products; limited resources available for such advertising; new competitive
products and/or technological changes; dependence upon third party vendors
and upon sales to major customers; changes in the regulation of the Company's
products, including applicable environmental regulations; adverse
developments in pending litigation; the loss of any executive officer; and
other matters discussed in the Company's periodic filings with the Securities
and Exchange Commission.
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Scott's Liquid Gold-Inc.
We have audited the accompanying consolidated balance sheets of Scott's
Liquid Gold-Inc. (a Colorado corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scott's Liquid Gold-Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Denver, Colorado,
January 26, 2001
Consolidated Statements of Operations
Year ended December 31,
-----------------------------------------------
2000 1999 1998
-------------- ------------- --------------
Revenues:
Net sales $ 28,607,500 $ 33,889,400 $ 39,474,300
Other income 912,900 625,600 621,700
-------------- ------------- --------------
29,520,400 34,515,000 40,096,000
Costs and Expenses:
Cost of sales 10,426,300 11,921,300 13,581,900
Advertising 8,972,400 10,808,300 15,221,200
Selling 6,130,900 6,087,600 7,376,300
General and administrative 5,110,300 5,254,900 7,248,100
Interest 1,141,400 1,203,900 1,201,000
-------------- ------------- --------------
31,781,300 35,276,000 44,628,500
-------------- ------------- --------------
Loss from operations (2,260,900) (761,000) (4,532,500)
Income tax benefit (Note 6) - (256,500) (1,758,400)
-------------- ------------- --------------
Net loss $ (2,260,900) $ (504,500) $ (2,774,100)
============== ============= ==============
Loss per common share (Note 7):
Basic $ (0.22) $ (0.05) $ (0.27)
============== ============= ==============
Diluted $ (0.22) $ (0.05) $ (0.27)
============== ============= ==============
Weighted average shares outstanding:
Basic 10,103,100 10,103,100 10,103,100
============== ============= ==============
Diluted 10,103,100 10,103,100 10,103,100
============== ============= ==============
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
December 31,
------------------------------
2000 1999
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,485,000 $ 5,008,600
Trade receivables, less allowances
of $595,000 and $645,500 for
doubtful accounts 772,300 2,212,700
Other receivables 59,000 408,300
Inventories (Note 2) 2,787,400 2,766,300
Prepaid expenses 88,500 216,000
Deferred tax assets (Note 6) 754,400 713,700
------------- -------------
Total current assets 9,946,600 11,325,600
Property, plant and equipment, net (Note 3) 16,924,600 17,630,800
Other assets 65,800 18,700
------------- -------------
$ 26,937,000 $ 28,975,100
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,706,800 $ 1,420,600
Accrued payroll and benefits 716,500 956,800
Other accrued expenses 1,026,400 967,800
Current maturities of long-term debt (Note 5) 640,000 1,000,000
------------- -------------
Total current liabilities 5,089,700 4,345,200
Long-term debt (Note 5) 5,309,000 5,865,900
Deferred income taxes (Note 6) 1,189,700 1,154,500
------------- -------------
11,588,400 11,365,600
Commitments and contingencies (Note 10) - -
Shareholders' equity (Note 7):
Common stock $0.10 par value,
authorized 50,000,000 shares;
issued and outstanding 10,103,100 1,010,300 1,010,300
Capital in excess of par 4,829,500 4,829,500
Retained earnings 9,508,800 11,769,700
------------- -------------
Shareholders' equity 15,348,600 17,609,500
------------- -------------
$ 26,937,000 $ 28,975,100
============= =============
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Year ended December 31,
------------------------------------------------
2000 1999 1998
------------- ------------- --------------
Cash flows from operating activities:
Net loss $ (2,260,900) $ (504,500) $ (2,774,100)
Adjustments to reconcile net loss to net
cash provided (used) by operating activites:
Depreciation and amortization 817,700 1,281,800 1,316,800
Provision for doubtful accounts 27,800 - 43,500
Change in assets and liabilities:
Trade and other receivables 1,761,900 1,174,400 1,376,100
Inventories (21,100) 423,400 643,200
Prepaid expenses and other assets 63,600 (16,300) (38,500)
Deferred income taxes (5,500) 17,800 (79,700)
Accounts payable and accrued expenses 1,104,500 (1,380,500) (1,054,500)
------------- ------------- -------------
Total adjustments to net loss 3,748,900 1,500,600 2,206,900
------------- ------------- -------------
Net cash provided (used) by operating activities 1,488,000 996,100 (567,200)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (94,700) (294,200) (189,400)
------------- ------------- -------------
Net cash used by investing activities (94,700) (294,200) (189,400)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options - - 22,700
Proceeds from short-term borrowings - 110,500 -
Principal payments on short-term borrowings - (110,500) -
Proceeds from long-term borrowings 6,000,000 - -
Principal payments on long-term borrowings (51,000) - (40,200)
Increase in bond sinking fund (770,800) (1,114,700) (997,200)
Payoff of mortgage bonds, net of sinking fund assets (6,095,100) - -
Dividends paid - - (1,009,200)
------------- ------------- -------------
Net cash used by financing activities (916,900) (1,114,700) (2,023,900)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 476,400 (412,800) (2,780,500)
Cash and cash equivalents, beginning of year 5,008,600 5,421,400 8,201,900
------------- ------------- -------------
Cash and cash equivalents, end of year $ 5,485,000 $ 5,008,600 $ 5,421,400
============= ============= =============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 1,142,700 $ 1,201,800 $ 1,194,400
============= ============= =============
Income taxes $ 11,700 $ 2,700 $ 1,928,500
============= ============= =============
See Notes to Consolidated Financial Statements.
Consolidated Statement of Shareholders' Equity
Common Stock Capital
---------------------------- in Excess Retained
Shares Amount of Par Earnings
------------ ------------- ------------- --------------
Balance @ January 1, 1998 10,089,400 $ 1,008,900 $ 4,808,200 $ 16,057,500
Net loss - - - (2,774,100)
Dividend - - - (1,009,200)
Other stock issuances 13,700 1,400 21,300 -
----------- ------------ ------------- --------------
Balance @ December 31, 1998 10,103,100 1,010,300 4,829,500 12,274,200
Net loss - - - (504,500)
----------- ------------ ------------- --------------
Balance @ December 31, 1999 10,103,100 1,010,300 4,829,500 11,769,700
Net loss - - - (2,260,900)
----------- ------------ ------------- --------------
Balance @ December 31, 2000 10,103,100 $ 1,010,300 $ 4,829,500 $ 9,508,800
=========== ============ ============= ==============
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company manufactures and markets household chemical products and
skin care products.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made
in the 1999 and 1998 Consolidated Financial Statements to conform to the
classifications used in the current year.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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. Actual results could differ from
those estimates.
The Company considers all highly liquid investments with a maturity
of three months or less at the date of acquisition to be cash equivalents.
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, plant and equipment are recorded at historical costs.
Depreciation is provided using the straight-line method over estimated useful
lives of the assets ranging from three to forty-five years.
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and
trade receivables. The Company maintains its cash balances in the form of
bank demand deposits with financial institutions that management believes are
creditworthy. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information. The Company has no 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 Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment is indicated when the carrying
amount of the asset is greater than amounts recoverable from future
undiscounted cash flows.
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes" which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements and tax basis of assets and liabilities using current
tax rates.
The Company expenses advertising costs as incurred.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company has elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options. Under
APB No. 25, if the exercise price of employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-based Compensation" (See Note 7 -
Shareholders' Equity).
The Company follows SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components. The Company's net loss equaled its comprehensive loss for
the years ended December 31, 2000, 1999 and 1998,
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Pursuant to Emerging Issues Task Force Issue 00-10 "Accounting for
Shipping and Handling Fees and Costs," amounts billed to a customer in a sale
transaction related to shipping and handling are classified as revenue and
the classification of shipping and handling costs totaling $1,205,100,
$1,070,900 and $1,307,500 for the years ending December 31, 2000, 1999 and
1998, respectively, are included as a component of Selling expense on the
accompanying Consolidated Statement of Operations.
Pursuant to Emerging Issues Task Force Issue 00-14 "Accounting for
Certain Sales Incentives," coupon related costs previously reflected as a
component of Selling expenses are now reflected as a reduction to Net Sales.
Results for the years ended December 31, 2000, 1999 and 1998 presented herein
have been restated to reflect this change.
In June 1998, SFAS No.133, "Accounting for Derivative Instruments
and Hedging Activities" was issued. This statement was subsequently amended
in June 1999 by SFAS No.137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, " which changed the effective date of SFAS No. 133 to fiscal quarters
and fiscal years beginning after June 15, 2000. SFAS No.133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Since inception, the Company has not entered into any derivative
instruments nor does it engage in hedging activities. Management believes the
adoption of this standard will not have a material effect on its financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No.101, "Revenue Recognition in Financial
Statements ("SAB 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met in order to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The subsequent issuance of SAB 101B deferred the timing
of the adoption of the requirements until the fourth quarter of 2000, at
which time the Company adopted these provisions. The Company recognizes
revenue when the price is fixed or determinable, when there is persuasive
evidence of an arrangement, and when title and risk of ownership of its
products passes to the customer, which generally is upon delivery of the
products. The Company estimates the amount of any returns and allowances and
provides for an appropriate reserve.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." FIN No. 44 provides clarification
and guidance on applying APB No. 25. FIN No. 44 generally provides for
prospective application for grants or modifications to existing stock options
or awards made after June 30, 2000. The Company's adoption of FIN No. 44 did
not have a material impact on its financial statements.
NOTE 2. INVENTORIES
Inventories consisting of materials, labor and overhead were
comprised of the following:
At December 31,
-----------------------------
2000 1999
------------ ------------
Finished goods $ 1,745,000 $ 1,404,300
Raw materials 1,042,400 1,362,000
----------- -----------
$ 2,787,400 $ 2,766,300
=========== ===========
NOTE 3. PROPERTY, PLANT and EQUIPMENT
Property accounts are comprised of the following:
At December 31,
---------------------------------
2000 1999
------------ ------------
Land $ 1,091,600 $ 1,091,600
Buildings 16,252,700 16,240,200
Production equipment 7,589,500 7,557,800
Office furniture & equipment 1,921,300 1,984,100
Other 207,700 234,400
------------ ------------
27,062,800 27,108,100
Less accumulated depreciation 10,138,200 9,477,300
------------ ------------
$ 16,924,600 $ 17,630,800
============ ============
Depreciation expense for the years ended December 31, 2000, 1999 and
1998 were $800,900. $887,700 and $1,038,000, respectively.
NOTE 4. FINANCIAL INSTRUMENTS
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 values of
the Company's long-term debt have been estimated using discounted cash flow
analysis based on current borrowing rates for debt with similar maturities and
ratings.
At December 31, 2000 At December 31, 1999
---------------------------------- -----------------------------------
Book Value Fair Value Book Value Fair Value
--------------- ------------- --------------- ------------
Long-term debt $ 5,949,000 $ 5,949,000 $ 6,865,900 $ 7,122,500
=============== ============= =============== ============
NOTE 5. LONG-TERM DEBT
In November 2000, the Company received a seven-year term loan in the
amount of $6.0 million with a commercial bank. The proceeds of the loan along
with the existing sinking fund and cash on hand were used to pay-off the
Company's $12 million bond indebtedness. The loan agreement with the Company's
bank contains affirmative and negative covenants.
Long-term debt is comprised of the following:
At December 31,
-------------------------------
2000 1999
------------- --------------
First mortgage loan, secured by land and buildings,
due November 20, 2007, principal and interest of $98,064
payable monthly, interest at bank prime (9.5% at
December 31, 2000) and adjusted annually, $ 5,949,000 $ -
First mortgage bonds secured by land and buildings - 12,000,000
------------ -------------
5,949,000 12,000,000
Bond sinking fund - (5,134,100)
------------ -------------
5,949,000 6,865,900
Less current maturities 640,000 1,000,000
------------ -------------
$ 5,309,000 $ 5,865,900
============ =============
Maturities of long-term debt for the years 2001 through 2005 are
respectively: $640,000, $702,300, $772,000, $848,700, $932,900 and $2,053,100
maturing after 2005.
NOTE 6. INCOME TAXES
The provisions for income taxes include the following:
Years ended December 31,
-------------------------------------------
2000 1999 1998
--------- ------------ -------------
Current provision (benefit):
Federal $ - $ (368,600) $ (1,541,000)
State - - (176,500)
--------- ------------ ------------
Total current provision (benefit) $ - $ (368,600) $ (1,717,500)
========= ============ ============
Deferred provision (benefit):
Federal $ - $ 100,200 $ (36,600)
State - 11,900 (4,300)
--------- ------------ ------------
Total deferred provision (benefit) $ - $ 112,100 $ (40,900)
========= ============ ============
Provision (benefit):
Federal $ - $ (268,400) $ (1,577,600)
State - 11,900 (180,800)
--------- ------------ ------------
Total provision (benefit) $ - $ (256,500) $ (1,758,400)
========= ============ ============
Income tax expense (benefit) at the statutory tax rate is reconciled to
the overall income tax expense (benefit) as follows:
Years ended December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------ -------------
Federal income tax at statutory rates $ (768,700) $ (258,700) $ (1,541,000)
State income taxes, net of federal tax effect (59,500) - (180,800)
Other (17,800) 2,300 (36,600)
----------- ----------- ------------
Total (846,000) (256,400) (1,758,400)
Tax credits - (100) -
Valuation allowance 846,000 - -
----------- ----------- ------------
Effective tax $ - $ (256,500) $ (1,758,400)
=========== =========== ============
NOTE 6. INCOME TAXES (continued)
Deferred taxes are determined based on estimated future tax effects of
differences between the amounts reflected in the financial statements and the
tax basis of assets and liabilities given the provisions of enacted tax laws.
The net deferred tax assets and liabilities are comprised of the following:
At December 31,
-----------------------------
2000 1999
------------- -------------
Current:
Allowance for uncollectible accounts $ 226,100 $ 228,700
Inventory reserves 290,500 171,700
Prepaid insurance 57,000 63,900
Accrued vacation 212,800 211,700
Net operating loss carryforwards 848,200 -
Other 31,400 37,700
Valuation allowance (911,600) -
------------- -------------
Net current deferred tax assets $ 754,400 $ 713,700
============= =============
Noncurrent:
Accelerated depreciation for tax $ (1,232,500) $ (1,196,500)
Tax credits 41,800 40,800
Other 1,000 1,200
------------- -------------
Net noncurrent deferred tax liability $ (1,189,700) $ (1,154,500)
============= =============
At December 31, 2000 and 1999, the Company has no federal tax credit
carryforwards. The Company carried back 1999's federal tax loss to offset the
taxes paid in 1997 remaining after the previous carryback of 1998's tax loss.
The Company has state net operating losses of approximately $2,500,000 expiring
over a period ending in the year 2020 and state tax credits of $41,800 expiring
over a period ending in the year 2013.
During 2000, the Company increased its valuation allowance by $911,600
due mainly to uncertainty relating to the realization of the Company's net
operating loss carryforwards. The amount of the deferred tax assets considered
realizable could be adjusted in the future if taxable income materializes.
A reconciliation of the Company's loss before taxes for financial
statement purposes to taxable loss is as follows:
Years ended December 31,
-----------------------------------------------
2000 1999 1998
-------------- ------------- --------------
Loss from operations before income taxes $ (2,260,900) $ (761,000) $ (4,532,500)
Difference between loss before
income taxes and taxable loss:
Permanent differences 6,600 6,700 12,900
Net changes in temporary differences (27,000) (294,900) 107,600
------------ ------------ -------------
(20,400) (288,200) 120,500
------------ ------------ -------------
Federal taxable loss $ (2,281,300) $ (1,049,200) $ (4,412,000)
============ ============ =============
NOTE 7. SHAREHOLDERS' EQUITY
In 1993, a non-qualified stock option plan was adopted for the outside
directors; in 1997, an incentive stock option plan was adopted for Company
employees; and, in 1998, an incentive stock option plan for Company employees,
officers and directors was adopted, all of which permited the Company to grant
options up to an aggregate of 1,050,000 shares of common stock. In December
2000, the Board of Directors approved an amendment increasing the number of
options available under the 1998 plan by 750,000 shares. Options are granted at
not less than fair market value of the stock at the date of grant and those
granted are exercisable from the grant date for five years.
1993 Plan 1997 Plan 1998 Plan
------------------------- ------------------------- -------------------------
Number Average Number Average Number Average
of Option Price of Option Price of Option Price
Shares Per Share Shares Per Share Shares Per Share
--------- ------------ --------- ------------- ---------- ------------
Maximum number of shares
under the plan 400,000 300,000 1,100,000
========= ======== =========
Outstanding, December 31, 1997 300,000 $ 3.15 - $ - - $ -
Granted in 1998 185,000 1.69 523,000 2.65 200,000 1.77
Exercised - - - - - -
Cancelled (185,000) 4.37 (231,500) 3.87 - -
--------- -------- ---------
Outstanding, December 31, 1998 300,000 1.50 291,500 1.69 200,000 1.77
Granted in 1999 - - - - 101,800 1.63
Exercised - - - - - -
Cancelled (48,300) 1.71 (15,300) 1.76 - -
--------- -------- ---------
Outstanding, December 31, 1999 251,700 1.46 276,200 1.69 301,800 1.72
Granted in 2000 30,000 0.94 16,000 0.97 497,000 0.69
Exercised - - - - - -
Cancelled - - (38,000) 1.69 - -
--------- -------- ---------
Outstanding, December 31, 2000 281,700 $ 1.40 254,200 $ 1.64 798,800 $ 1.08
========= ======== =========
Available for option,
December 31, 2000 18,300 45,800 301,200
========= ======== =========
A summary of additional information related to the options outstanding
as of December 31, 2000 is as follows:
Options Outstanding and Exercisable
-------------------------------------------
Weighted Average
Number --------------------------
Outstanding Remaining
Range of at Contractual Exercise
Exercise Prices 12/31/00 Life Price
------------------- ------------ ------------ -----------
$0.69 - $0.97 543,000 4.9 years $ 0.72
$1.09 - $1.56 160,800 1.2 years $ 1.27
$1.69 - $2.00 630,900 2.9 years $ 1.71
---------- --------- ---------
Total 1,334,700 3.5 years $ 1.25
==========
NOTE 7. SHAREHOLDERS' EQUITY (continued)
The weighted average fair value of each option grant has been estimated
as of the date of grant using the Black-Scholes option pricing model using the
following assumptions at December 31,
2000 1999 1998
--------- --------- ---------
Dividend rate $ - $ - $ -
Expected volatility 64.95% 56.22% 67.17%
Risk-free interest rate 5.02% 4.55% 4.24%
Expected life (in years) 4.5 4.5 4.5
Using these assumptions, the fair value of the stock options granted in 2000,
1999 and 1998 were estimated to be $209,700, $81,700 and $578,500 respectively,
net of income taxes. Had compensation cost been recorded based on the fair value
of the options granted, the Company's pro-forma net loss and net loss per share
for the years ended December 31, 2000, 1999 and 1998 would have been as follows:
2000 1999 1998
------------------------------ --------------------------- -------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-------------- -------------- ------------ ------------ ------------- ---------------
Net loss $ (2,260,900) $ (2,470,600) $ (504,500) $ (586,200) $ (2,774,100) $ (3,352,600)
============= ============= =========== =========== ============= ==============
Loss per share $ (0.22) $ (0.24) $ (0.05) $ (0.06) $ (0.27) $ (0.33)
============= ============= =========== =========== ============= ==============
Diluted loss
per share $ (0.22) $ (0.24) $ (0.05) $ (0.06) $ (0.27) $ (0.33)
============= ============= =========== =========== ============= ==============
The Company has an Employee Stock Ownership Plan ("ESOP") to provide
retirement benefits for its employees. The plan is designed to invest primarily
in the Company's common stock and is non-contributory on the part of the
employees. Contributions to the plan are discretionary as determined by the
Company's Board of Directors. The Company expenses the cost of shares issued to
the plan which amounted to $216,000 (232,100 shares), $50,000 (62,900 shares)
and $103,000 (25,000 shares) in 2000, 1999 and 1998, respectively, all shares
having been purchased on the open market.
The Company presents basic and diluted earnings or loss per share in
accordance with SFAS No. 128, "Earnings per Share" which establishes standards
for computing and presenting basic and diluted earnings per share. Per share
data is determined by using the weighted average number of common shares
outstanding. Common equivalent shares are considered only for diluted earnings
per share, unless considered anti-dilutive (as in the years 2000, 1999 and
1998). Common equivalent shares, determined using the treasury stock method,
result from stock options with exercise prices that are below the average market
price of the common stock. A reconciliation of the weighted average number of
common shares outstanding follows:
NOTE 7. SHAREHOLDERS' EQUITY (continued)
2000 1999 1998
------------ ------------ ------------
Common shares outstanding, beginning of the year 10,103,100 10,103,100 10,089,400
Stock options exercised - 13,700
----------- ----------- -----------
Weighted average number of
common shares outstanding 10,103,100 10,103,100 10,103,100
Common share equivalents - - -
----------- ----------- -----------
Diluted weighted average number
of common shares outstanding 10,103,100 10,103,100 10,103,100
=========== =========== ===========
The Company has 20,000,000 shares of preferred stock issuable in one or
more series, none of which is outstanding.
On March 2, 1998, the Company paid a dividend of $0.10 per share
(aggregate $1,009,200) to shareholders of record on February 24, 1998.
NOTE 8. SEGMENT INFORMATION
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires disclosure of operating
segments, which as defined, are components of an enterprise about which separate
financial information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
The Company operates in two different segments: household products and
skin care products. The Company's products are sold internationally (primarily
in Canada), directly and through independent brokers, to mass marketers, drug
stores, supermarkets, wholesale distributors and other retail outlets.
Management has chosen to organize the Company around these segments based on
differences in products sold. The household products segment produces 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 products segment produces Alpha
Hydrox, including alpha hydroxy acid cleansers and lotions and a retinol
product, and Diabetic Skin Care, a healing cream and moisturizer developed to
address skin conditions of diabetics.
The Company's accounting policies for segments are the same as those
described in Note 1, "Summary of Significant Accounting Policies." Management
evaluates segment performance based on segment income or loss before profit
sharing, bonuses, income taxes and nonrecurring gains and losses. Information on
the Company's segments as of and for the years ended December 31 are as follows:
2000 1999 1998
---------------------------- ----------------------------- -----------------------------
Household Skin Care Household Skin Care Household Skin Care
Products Products Products Products Products Products
------------ ------------ ------------ ------------- ------------ -------------
Net sales to
external customers $ 12,274,200 $ 16,333,300 $ 12,786,900 $ 21,102,500 $ 14,309,600 $ 25,164,700
Income (loss) before
profit sharing, bonuses
and income taxes $ 502,300 $ (2,763,200) $ 2,008,100 $ (2,769,100) $ (2,619,400) $ (1,766,400)
Identifiable assets $ 3,500,500 $ 6,804,400 $ 3,916,700 $ 8,251,200 $ 4,241,400 $ 8,435,900
NOTE 8. SEGMENT INFORMATION (continued)
The following is reconciliation of segment information to consolidated
information:
Years ended December 31,
----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
Revenues from reportable segments $ 28,607,500 $ 33,889,400 $ 39,474,300
Other revenues 912,900 625,600 621,700
------------- -------------- -------------
Consolidated revenues $ 29,520,400 $ 34,515,000 $ 40,096,000
============= ============== =============
Loss before profit sharing, bonuses
and income taxes for reportable segments $ (2,260,900) $ (761,000) $ (4,385,800)
Corporate activities - - (146,700)
------------- -------------- -------------
Consolidated loss before income taxes $ (2,260,900) $ (761,000) $ (4,532,500)
============= ============== =============
Identifiable assets for reportable segments $ 10,304,900 $ 12,167,900 $ 12,677,300
Corporate assets 16,632,100 16,807,200 19,318,000
------------- -------------- -------------
Consolidated total assets $ 26,937,000 $ 28,975,100 $ 31,995,300
============= ============== =============
The Company attributes revenues to different geographical areas based
on the location of the customer. All of the Company's long-lived assets are
located in the United States. For the years ended December 31, revenues for each
geographical area are as follows:
2000 1999 1998
------------- ------------ ------------
United States $ 27,851,100 $ 32,204,100 $ 37,519,400
Foreign countries 756,400 1,685,300 1,954,900
------------ ------------ ------------
Total net sales $ 28,607,500 $ 33,889,400 $ 39,474,300
============ ============ ============
In 2000, 1999 and 1998, one customer accounted for approximately
$9,200,000, $8,800,000 and $10,400,000 respectively of consolidated revenues.
This customer is not related to the Company and is a customer of both segments.
A loss of this customer could have a material effect on the Company if the
consumer base served by this customer did not purchase the Company's products at
other retail outlets. No long-term contracts exist between the Company and this
customer or any other customer.
NOTE 9. RETIREMENT PLANS
The Company has a 401(k) Profit Sharing Plan ("Plan") covering its
full-time employees who have completed four months of service, as defined in the
Plan, and are age 18 or older. Participants may defer from 1% to 15% of their
compensation up to a maximum limit determined by law. The Company may make
discretionary "matching" contributions up to a maximum of 6% of each
participant's compensation, but only for those employees earning no more than
$30,000 annually. Additionally, the Company may make discretionary "profit
sharing" contributions to eligible employees. Participants are always fully
vested in their contributions, matching contributions and allocated earnings
thereon. Vesting in the Company's profit sharing contributions is based on years
of service, with a participant fully vested after five years. Company matching
contributions totaled $25,400 in 2000, $31,500 in 1999 and $29,500 in 1998. The
Company has made no discretionary profit sharing contributions in 2000, 1999 or
1998.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In May 1996, a patent infringement suit was filed in the United States
District Court for the District of Delaware against Neoteric Cosmetics, Inc.
(and others) by TriStrata Technology, Inc. The plaintiff in the lawsuit alleged
that Neoteric Cosmetics, Inc. contributes to and/or induces infringement of
patents owned by the plaintiff by selling and promoting Neoteric skin care
products, which contain alpha hydroxy acid, 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 requested 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 the
infringement. In 1995, after the issuance of one of the patents involved in the
lawsuit, the Company changed its advertising and packaging to remove reference
to wrinkles and fine lines. In December 2000, the Company entered into a
settlement agreement with the plaintiff, which allows the Company to make
reference to wrinkles and fine lines in both its packaging and advertising and
obligates the Company to pay royalties to the plaintiff on certain products.
NOTE 11. TRANSACTIONS WITH RELATED PARTIES
Until January 1999, the Company, Neoteric Cosmetics, Inc., and the
Company's late Chairman, Jerome J. Goldstein were defendants in a lawsuit filed
in the Federal District Court for the District of Colorado brought by Dr. and
Mrs. Norman Brooks and a related corporation. Mrs. Brooks is the daughter of the
late Chairman. 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
judgement 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 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, in March 1999, received
$550,000 which was a substantial part of the legal expenses and settlement paid
by the Company with respect to the Brooks case.
The Company has adopted a bonus plan for its executive officers for
2001. The Plan provides that an amount will be distributed to the Company's
executive officers equal to 10% of the annual before tax profit exceeding $1
million, excluding items that are infrequent, unusual, or extraordinary. In
2000, 1999 and 1998, no bonuses were accrued or paid under a similar plan.
Corporate Data
Plant and Executive Offices
Scott's Liquid Gold-Inc., 4880 Havana Street, Denver, Colorado 80239
Phone 303-373-4860
Stock Transfer Agent
Wells Fargo Minnesota, N.A., Stock Transfer 161 N. Concord Exchange,
South St. Paul, Minnesota 55075-0738
Shareholders
As of February 20, 2001 the Company had approximately 1,143
shareholders of record.
Market Information
The high and low prices of Scott's Liquid Gold-Inc. common
stock as traded on the NASD Over the Counter Bulletin Board
commencing November 8, 1999, and prior to
that date on the New York Stock Exchange, were as follows.
The over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
2000 1999
THREE MONTHS ENDED THREE MONTHS ENDED
HIGH LOW HIGH LOW
----------------------------------------------------------------------------------------------------------
March 31 $1.063 $0.688 March 31 1-5/8 1-13/16
June 30 $1.625 $0.625 June 30 1-7/8 1-3/16
September 30 $1.093 $0.781 September 30 1-7/8 7/8
December 31 $0.850 $0.531 December 31 1-3/16 19/32
----------------------------------------------------------------------------------------------------------
NYSE Symbol: SGD (prior to November 8, 1999)
NASD OTCBB Symbol: SLGD (effective November 8, 1999)
No decision has been made as to future dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for information
concerning restrictions on dividends.
Current stock quotes, SEC filings, quarterly earnings and press releases can be
found at: http://www.businesswire.com/cnn/slgd.htm
Product web sites: http://www.scottsliquidgold.com
http://www.alphahydrox.com
http://www.touchofscent.com
http://www.neotericdiabetic.com
Directors and Officers
Mark E. Goldstein Chairman of the Board, President, Chief Executive Officer
and Director
Carolyn J. Anderson Executive Vice President, Chief Operating Officer,
Corporate Secretary and Director
Jeffrey R. Hinkle Vice President-Marketing and Director
Jeffry B. Johnson Treasurer, Chief Financial Officer and Director
Carl A. Bellini Independent Businessman and Director
Dennis H. Field Independent Consultant and Director
James F. Keane Independent Consultant and Director