U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 1O-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 1-10526
UNITED-GUARDIAN, INC.
(Name of small business issuer in its charter)
Delaware 11-1719724
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
230 Marcus Blvd., Hauppauge, NY 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (631) 273-0900
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Securities registered pursuant to Section l2(b) of the Exchange Act: None
Title of each class Name of each exchange on which registered
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Common Stock, $.10 par value American Stock Exchange
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or l5(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Cover Page 1 of 2 Pages
Indicate by check mark if there is no disclosure herein of delinquent filers
pursuant to Item 405 of Regulation S-B, and if, to the best of registrant's
knowledge, no disclosure will be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
The Registrant's revenues for the fiscal year ended December 31, 2005 were
$12,134,996.
On March 1, 2006 the aggregate market value of the Registrant's Common
Stock (based upon the closing sales price of such shares on the American Stock
Exchange as reported in The Wall Street Journal) held by non-affiliates of the
Registrant was approximately $24,719,000 (Aggregate market value has been
estimated solely for the purposes of this report. For the purpose of this report
it has been assumed that all officers and directors of the Registrant, as well
as all stockholders holding 10% or more of Registrant's stock, are affiliates of
the Registrant. The statements made herein shall not be construed as an
admission for determining the affiliate status of any person.)
As of March 1, 2006 the Registrant had issued shares of 5,004,339 Common
Stock, $.10 par value per share ("Common Stock"), of which 4,942,139 shares were
outstanding and 62,200 held as Treasury stock as of that date.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III (portions of Item 9, as well as
Items 10, 11, and 12) is incorporated by reference to the Registrant's
definitive proxy statement for the 2006 annual meeting of stockholders ("2006
Proxy Statement"), which, pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, is to be filed with the Securities and Exchange
Commission no later than 120 days after Registrant's fiscal year end.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Cover Page 2 of 2 Pages
This annual report on Form 10-KSB contains both historical and
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a safe harbor for forward-looking
statements by the Registrant about its expectations or beliefs concerning future
events, such as financial performance, business prospects, and similar matters.
The Registrant desires to take advantage of such "safe harbor" provisions and is
including this statement for that express purpose. Words such as "anticipates",
"believes", "expects", "intends", "future", and similar expressions identify
forward-looking statements. Any such "forward-looking" statements in this report
reflect the Registrant's current views with respect to future events and
financial performance, and are subject to a variety of factors that could cause
Registrant's actual results or performance to differ materially from historical
results or from the anticipated results or performance expressed or implied by
such forward-looking statements. Because of such factors, there can be no
assurance that the actual results or developments anticipated by the Registrant
will be realized or, even if substantially realized, that they will have the
anticipated results. The risks and uncertainties that may affect Registrant's
business include, but are not limited to: economic conditions, governmental
regulations, technological advances, pricing and competition, acceptance by the
marketplace of new products, retention of key personnel, the sufficiency of
financial resources to sustain and expand Registrant's operations, and other
factors described in this report and in prior filings with the Securities and
Exchange Commission. Readers should not place undue reliance on such
forward-looking statements, which speak only as of the date hereof, and should
be aware that except as may be otherwise legally required of Registrant,
Registrant undertakes no obligation to publicly revise any such forward-looking
statements to reflect events or circumstances that may arise after the date
hereof.
PART I
Item 1. Description of Business
(a) General Development of Business
United-Guardian, Inc. (the "Company") is a Delaware corporation that
conducts research, product development, manufacturing and marketing of cosmetic
ingredients, personal and health care products, pharmaceuticals, and specialty
industrial products. The Company also distributes an extensive line of fine
organic chemicals, research chemicals, test solutions, indicators, dyes and
reagents through a wholly owned subsidiary, Eastern Chemical Corporation
("Eastern").
The Company's predecessor, United International Research Corp. (name later
changed to United International Research, Inc.), was founded and incorporated in
New York in 1942 by Dr. Alfred R. Globus, the Company's Chairman and Chief
Executive Officer. On February 10, 1982, a merger took place between the Company
and Guardian Chemical Corp. ("GCC"), an affiliate of the Company, whereby GCC
was merged into the Company and the name was changed to United-Guardian, Inc. On
September 14, 1987, United-Guardian, Inc. (New York) was merged with and into
United-Guardian, Inc., a newly incorporated Delaware corporation formed for the
purpose of changing the domicile of the Company.
The Company operates in two business segments:
(1) The Guardian Laboratories Division ("Guardian") conducts research,
product development, manufacturing and marketing of cosmetic ingredients,
personal and health care products, pharmaceuticals, and specialty industrial
products. The Research and Development Department of Guardian engages in
research and development in the fields of cosmetics, health care products, and
specialty industrial chemical products, for the purpose of developing new
products, and refining existing products that will be marketed or licensed by
Guardian. Many of the products manufactured by Guardian, particularly its
LUBRAJEL(R) line of products, are marketed worldwide through a network of
distributors, and are currently used by many of the major multinational cosmetic
companies.
Guardian presently has a broad range of products, some of which are
currently marketed, some of which are marketable but are not currently marketed
by the Company, and some of which are still in the developmental stage. Of the
products being actively marketed, the two largest product lines are the LUBRAJEL
line of cosmetic ingredients, which accounted for approximately 68% of the
Company's sales in 2005, and its RENACIDIN(R) IRRIGATION, a pharmaceutical
product that accounted for approximately 17% of the Company's sales in 2005. The
Company actively seeks other companies as potential marketers for its products,
particularly for those products that are not yet being actively marketed by the
Company.
(2) Eastern is a distributor of fine organic chemicals, research chemicals,
intermediates, reagents, indicators, dyes and stains. It has been in business
for over 50 years, the last 30 or so as a part of the Company. It carries an
extensive line of products which it sells throughout the United States as well
as overseas. Eastern's products are primarily sold either to distributors for
resale in smaller quantities or as intermediates and raw materials for further
chemical processing. Sales quantities range from a few hundred grams to over a
thousand kilos per shipment. Although Eastern carries out no chemical
manufacturing, it does contract with several custom chemical manufacturers and
also will package to order for those customers that require it.
Paragon Organic Chemicals, Inc. ("Paragon") is a wholly owned subsidiary of
the Company that functions as a purchasing arm for Eastern. It has no assets
or sales of its own.
(b) Narrative Description of Business
Guardian Laboratories Division
Guardian conducts research, product development, manufacturing and
marketing of many different cosmetic ingredients, personal and health care
products, pharmaceuticals, and specialty industrial products, all of which are
developed by the Company, and many of which have unique properties. The products
manufactured by Guardian are marketed through marketing partners, distributors,
direct advertising, mailings, and trade exhibitions. Guardian's proprietary
cosmetic ingredients are sold through marketing partners and distributors and
are incorporated into products marketed by many of the major international
cosmetic companies. Many of Guardian's products are marketed through
collaborative agreements with larger companies. The pharmaceutical products are
sold to end users primarily through drug wholesalers. These sales include
indirect sales to the Veteran's Administration and other government agencies.
There are also a small number of direct sales to hospitals and pharmacies.
During 2005, Guardian's sales accounted for approximately 91% of Company's
total product sales.
Guardian's products are sold under trademarks or trade names owned by the
Company. The marks for the most important products, LUBRAJEL and RENACIDIN, are
registered as trademarks in the United States Patent and Trademark Office. In
2005 sales from these two product lines accounted for approximately 93% of
Guardian's sales, and 85% of the sales of the Company as a whole.
PRINCIPAL PRODUCTS:
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LUBRAJEL
LUBRAJEL is a line of nondrying water-based moisturizing and lubricating
gels that have applications in the cosmetic industry primarily as a moisturizer
and as a base for other cosmetic products, and in the medical field primarily as
a lubricant. In the cosmetic industry it is used primarily as a stable gel for
application around the eyes and on the face and as an ingredient in skin creams
and moisturizers, makeup, body lotions, hair preparations, salves, and
ointments. As a medical lubricant it has been used on catheters, prelubricated
enema tips, and thermometers. The most important product in the LUBRAJEL line in
2005 was once again LUBRAJEL CG, the original form of LUBRAJEL; the second
largest revenue producer in the Lubrajel line was LUBRAJEL MS.
LUBRAJEL RR and RC are special grades of LUBRAJEL that can withstand
sterilization by gamma radiation, which is one of the methods of terminally
sterilizing medical and hospital products. On April 11, 1995, the Company was
granted a U.S. patent for this unique form of LUBRAJEL. In September, 1994 the
Company entered into a marketing agreement with Avail Medical (formerly Horizon
Medical), a California company engaged in the development and manufacturing of
products and services to the medical device and pharmaceutical industries. Avail
has been actively marketing LUBRAJEL RC since January, 1996. Lubrajel RR, the
original radiation resistant form of Lubrajel, is sold to medical device
manufacturers primarily for use in lubricating urethral catheters.
The Company believes that its ability to increase sales of its LUBRAJEL
products will depend on (a) the ability of its marketing partners, especially
ISP Technologies Inc. ("ISP"), its largest marketing partner, to continue to
bring the product to the attention of new customers, and (b) the Company's
success in bringing to market new forms of LUBRAJEL that will enable the product
to be used in new applications. The Company is currently developing new
varieties of LUBRAJEL for this purpose. In 2004 the Company introduced a new
LUBRAJEL under the name "LUBRAJEL II XD", and intends to expand this new line
further. At the end of 2004 it also introduced a new Lubrajel line using a
different preservative system, which the Company believes will attract new
customers and retain existing customers that might require a different
preservative system. It also intends to develop some new skin care products that
will have enhanced feel and additional luricating and/or moisturizing
properties. The Company believes that there is still significant potential to
expand the sales of its LUBRAJEL line of products through both product
modifications and by geographic expansion, especially in developing markets such
as mainland China, India, and eastern Europe.
The Company believes that any sales increases in the LUBRAJEL line of
products may be offset somewhat by sales of competitive products. Despite this
competition, the Company believes that it will still be able to expand the
market for its LUBRAJEL product line. The Company believes that LUBRAJEL'S
reputation for quality and customer service, as well as future additions to the
LUBRAJEL line, will enable it to continue to compete effectively in the
marketplace.
RENACIDIN
RENACIDIN is a urological prescription drug, approved in the U.S. only,
which is used primarily to prevent the formation of and to dissolve
calcifications in catheters implanted in the urinary bladder. It is marketed as
a ready to use sterile solution under the name "RENACIDIN IRRIGATION". RENACIDIN
IRRIGATION is also approved for use in dissolving certain types of kidney
stones. On October 9, 1990, the Patent Office issued to the Company patent
#4,962,208, which expires on October 9, 2007, covering the method of
manufacturing RENACIDIN IRRIGATION.
OTHER PRODUCTS:
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Other significant products that are manufactured and sold by Guardian but
which did not individually comprise more than 5% of the Company's sales in 2005
are as follows:
CLORPACTIN(R) WCS-90 is a microbicidal product used primarily in urology
and surgery as an antiseptic for treating a wide range of localized infections
in the urinary bladder, the peritoneum, the abdominal cavity, the eye, ear, nose
and throat, and sinuses. The product is a white powder that is mixed with water
and used as a solution. It is a powerful disinfectant, fungicide, deodorizer,
bleach, and detergent.
KLENSOFT(TM) is a surfactant (a surface active agent, such as a soap or
detergent, that can reduce the surface tension of a liquid and thus allow it to
foam or penetrate solids or act as a wetting agent) that can be used in
shampoos, shower gels, makeup removers, and other cosmetic formulations. The
primary customer for Klensoft for many years has been in Taiwan, but over the
past few years there have been new customers for the product in the United
Kingdom, Australia, France and Korea.
LUBRAJEL PF is a preservative-free form of LUBRAJEL currently being
marketed primarily by Societe D'Etudes Dermatologiques ("Sederma") under the
tradename "Norgel". Sederma is the Company's distributor of LUBRAJEL in France
and a major European cosmetic ingredient supplier. It is also distributed by
some of the Company's other marketing partners under the name LUBRAJEL PF. Tests
conducted by Sederma indicated that the product self-preserved, and aided in the
preservation of other cosmetic ingredients with which it was formulated.
LUBRASIL(TM) and LUBRASIL DS are special types of LUBRAJEL in which
silicone oil is incorporated into a LUBRAJEL base by microemulsification, while
maintaining much of the clarity of regular LUBRAJEL. The products have a silky
feel, and are water resistant while moisturizing the skin. (These sales are
already included in the total Lubrajel sales figure mentioned previously).
Other products that do not have significant sales at the present time but
have the potential for increased sales in the future, and which as a group
constituted approximately 2% of the Company's sales in 2005, are as follows:
CONFETTI(TM)DERMAL DELIVERY FLAKES is a product line introduced in 2000
that incorporates various functional oil-soluble ingredients into colorful
flakes that can be added to, and suspended in, various water-based products. The
product color and ingredients can be customized to meet the needs of individual
customers.
ORCHID COMPLEX(TM) is a successor product to the Company's previous Oil of
Orchids product and is a base for skin creams, lotions, cleansers, and other
cosmetics. This product is an extract of fresh orchids, modified by extractants,
stabilizers, and preservatives, and is characterized by its excellent lubricity,
spreadability and light emolliency. Because of its alcohol solubility, it may
also be used in fragrance products such as perfumes and toiletries. Its light
emolliency lends use in shampoos, bath products and facial cleansers. It is also
a superior emollient for sunscreens, vitamin creams, toners and skin serums. It
is sold in two forms, water-soluble and oil soluble.
UNITWIX(R) is a cosmetic additive used as a thickener for oils and
oil-based liquids. It is a proprietary, unpatented product that does not require
government approval to market.
LUBRASLIDE(TM) and a related product, B-122(TM), are powdered lubricants
used in the manufacture of cosmetics such as pressed powders, eye liners, and
rouges. They are used as binders for these products, increasing their drop
strength and lowering the coefficient of friction and water-repellency.
RAZORIDE(TM) is a clear, hypo-allergenic, non-foaming, water-based shaving
product that is surfactant and soap-free and has excellent lubricity and
moisturizing properties.
DESELEX(R) is a replacement for phosphates in detergents.
HYDRAJEL PL and HYDRAJEL VM are personal lubricants and moisturizers
developed specifically for the feminine personal care market.
Development Activities
Guardian's Research and Development Department has developed a large number
of products that can be used in many different industries, including the
pharmaceutical, medical, cosmetic, health care, and specialty chemical
industries. These products are in various stages of development, some being
currently marketable and some being in the very early stages of development
requiring a substantial amount of development work to bring them to market.
Research is also being done on new uses for currently marketed products. Once a
product is created, the initial development work on it may consist of one or
more of the following: (a) laboratory refinements and adjustments to suit the
intended uses of the product; (b) stability studies to determine the effective
shelf-life of the product and suitable storage and transportation conditions for
the product; and (c) laboratory efficacy tests to determine the effectiveness of
the product under different conditions.
After the Research and Development Department has completed its initial
work on a product and is satisfied with the results of that work, further
development work to bring the product to market will continue, including some or
all of the following: (a) animal and human clinical studies needed to determine
safety and effectiveness of drug or medical device products, which would be
needed for submissions to the appropriate regulatory agencies, such as the
United States Food and Drug Administration ("FDA") or the United States
Environmental Protection Agency ("EPA"); (b) preparatory work for the filing of
Investigational New Drug Applications or New Drug Applications; (c) market
research to determine the marketability of the product, including the potential
market size and most effective method of marketing the product; (d) scaling up
from laboratory production batches to pilot batches, and then to full scale
production batches, including the determination of the type of equipment
necessary to produce the products; (e) upgrading or purchasing new equipment to
manufacture the products; and (f) the negotiation of joint venture or
distribution agreements to develop and/or market the product. Some of the
foregoing work may be done by outside contractors.
While there can be no assurance that any particular project will result in
a new marketable product or a commercially successful product, the Company
believes that a number of its development projects, including those discussed
below, may have commercial potential if the Company's development efforts are
successful.
The Company's major research focus is the development of new and unique
personal care ingredients. The following are some of the projects the Company is
either working on at the present time or which the Company intends to work on in
the near future:
NEW FORM OF LUBRASIL: This will be a new addition to the Company's Lubrasil
product line that will contain a much higher level of silicone, which the
Company believes will create an expanded market for these types of skin care
products.
SELF-PRESERVING POLYMERIC THICKENER: This product will be a self-preserving
raw material for cosmetic use that will enable cosmetic formulators to formulate
preservative free cosmetic products.
SKIN SENSORIAL AGENTS: A line of products that will enhance the feel of
skin care products. The new Lubrasil mentioned above might be one such product.
MICROEMULSIFIED ANTIMICROBIAL: This would be a new form of antimicrobial
product for use in skin disinfection products. The product could be sold either
as a raw material or as a finished product in a hand cleanser.
LUBRAJEL II: This product line was being developed to recapture some of the
market share that the Company has lost over the years to some of its
competitors. The first product in this line, LUBRAJEL II XD, was developed to be
a drop-in replacement for one of those products, and is currently being actively
marketed. The Company hopes to expand this product line over the next few years,
introducing new formulations that have enhanced properties over competitive
products. This new line is intended to be a supplement to, not replacement for,
the current line of Lubrajel products. Its composition also will enable it to be
used in certain countries, such as Japan, more easily than the current Lubrajel
formulations. Because other projects have higher priority, it is not expected
that there will be new products launched in this line in 2006.
CLORONINE: Cloronine is a powerful disinfectant, germicide, and sanitizer
for disinfecting medical and surgical instruments and equipment (particularly
where autoclaves are not available), and for the purification of water supplies.
The product had been approved for certain uses in France and Canada, and is
still being sold on a very limited basis in Canada. The Company is currently
working with a new potential customer for this product that is exploring
possible use by the government as a decontamination agent. However, before this
product can be marketed in the United States for any purpose, additional tests
will have to be done to determine if the product can be registered with the EPA
as a sterilant or germicide. These tests would comprise laboratory
microbiological studies, compatibility studies, and specific studies on its
intended uses. The product may also have to be registered with the FDA as an
accessory to a medical device. Neither registration process has yet begun. Due
to the expense and time required, the Company hopes to work jointly with other
companies to obtain these registrations. The Company was granted two patents for
this product.
CLORONINE GEL: This would be another form of Cloronine in gel form, which
may increase its effectiveness and functionality.
The Company expects its research and development costs for FY-2006 to be
comparable to those of the last two fiscal years. Any additional increase in
development and/or production costs will depend on whether capital investments
are required in order to continue development work on, or to manufacture, any of
the new products under development.
Trademarks and Patents
The Company strongly believes in protecting its intellectual property and
intends whenever possible to make efforts to obtain patents in connection with
its product development program. The Company currently owns many United States
patents and trademarks relating to its products. The Company has patent and
trademark applications pending with respect to a number of its research and
development products. Patents formerly held by the Company on certain products
have expired. There can be no assurance that any patents held by the Company
will be valid or otherwise of value to the Company or that any patent applied
for will be granted. However, the Company believes that its proprietary
manufacturing techniques and procedures with respect to certain products offer
it some protection from duplication by competitors regardless of the patent
status of the products.
The various trademarks and trade names owned or used by the Company in
Guardian's business are of varying importance to the Company. The most
significant products for which the Company has a registered trademark are
LUBRAJEL, RENACIDIN, and CLORPACTIN.
Set forth below is a table listing certain information with respect to all
unexpired U.S. patents held by the Company:
PATENT NAME PATENT # FILING DATE ISSUE DATE EXPIRATION DATE
------------------------------------------------ --------- ----------- ---------- ---------------
Iodophor; Polyethylene Glycol Alkylaryl-sulfonate 4,873,354 4/1988 10/1989 4/2008
Iodine complex
Thermal Resistant Microbial Agent ("Cloronine") 4,954,316 12/1988 9/1990 12/2008
Use of Clorpactin for the Treatment of Animal 4,983,634 12/1988 1/1991 12/2008
Mastitis & the applicator used in that treatment
(owned jointly by the Company and Diversey Ltd.)
Method of Preparing Time-Stable Solutions of Non- 4,962,208 1/1989 10/1990 1/2009
Pyrogenic Magnesium Gluconocitrate ("Renacidin
Irrigation")
Iodophor; biocide; reacting polyethylene glycol, 5,013,859 9/1989 5/1991 9/2009
alkylarylsulfonate and Iodine water-propylene glycol
solvent refluxing
Stabilized Beta Carotene 5,023,355 1/1990 6/1991 1/2010
Stable, Active Chlorine Containing Anti-microbial 5,128,342 8/1990 7/1992 8/2010
Compositions ("Cloronine")
Gamma Radiation Resistant Lubricating Gel 5,405,622 12/1993 4/1995 12/2013
Delivery system for oil soluble actives in cosmetic/ 6,117,419 9/1996 9/2000 12/2016
personal care products
Microemulsion of silicone in a water-based gel that 6,348,199 1/1994 2/2002 2/2019
forms a clear, transparent, highly stable moisturizer
and lubricant for cosmetic and medical use
The Company requires all employees and consultants who may receive
proprietary information to agree in writing to keep such proprietary information
confidential.
Eastern Chemical Corporation
Eastern is a wholly owned subsidiary of the Company. It distributes an
extensive line of fine organic chemicals, research chemicals, test solutions,
indicators, dyes and stains, and reagents. In 2005 and 2004 Eastern's sales
accounted for approximately 9% and 10% respectively of the total product sales
of the Company. The Company's business activities and marketing efforts over the
past several years have focused increasingly on the Guardian division, which the
Company believes has greater growth potential than Eastern. As a result, the
Company has been reducing the amount of inventory kept on hand by Eastern, which
in turn has resulted in some decline in its sales. There also has been a general
decrease in Eastern's business due to competition from new companies in this
field. The Company has considered, and will continue to consider, the
possibility of selling Eastern at such time as it determines that keeping the
operation is no longer in the Company's best interests. The Company believes
that if it were to sell Eastern, the loss of revenue from that subsidiary would
not have a material impact on the Company's net income.
Marketing
Guardian markets its products through (a) distributors; (b) advertising in
medical and trade journals, by mailings to physicians and to the trade; and (c)
exhibitions at appropriate medical meetings. The pharmaceutical products are
sold in the United States primarily to drug wholesalers that distribute to drug
stores for resale, and to hospitals, physicians, long-term care facilities, the
Veteran's Administration, and other government agencies. The proprietary
personal care and specialty chemical products are sold to distributors for
resale and directly to manufacturers for use as ingredients or additives in the
manufacture or compounding of their cosmetic, personal care, or industrial
products.
Eastern's products are marketed through advertising in trade publications
and direct mailings. They are sold to distributors and directly to users in a
wide variety of applications. Eastern does not sell any unique products and is
not dependent on any single customer or group of customers on a continuous
basis.
Domestic Sales
In the United States, the Company's cosmetic products are marketed
exclusively by ISP in accordance with a marketing agreement entered into in 1996
and subsequently amended and expanded in 2000, 2002, and 2005 (see "Marketing
Agreements" below). ISP also has certain rights to sell some of the Company's
other industrial and medical products. In 2005, ISP's purchases for distribution
in the United States were estimated to be approximately $1,237,000 compared to
$1,394,000 in 2004, a decrease of 11%, and accounted for approximately 10% of
the Company's sales (NOTE: ISP's domestic sales figure is an estimate based on
sales information provided to the Company by ISP. The Company has no way of
independently determining which of ISP's purchases from the Company are intended
for domestic sale and which are intended for foreign sale.) The Company believes
that the decrease in ISP's domestic sales of the Company's products was the
result of the discontinuation by some of the Company's customers of some
products that contained the Company's raw materials. However, this decrease in
ISP's domestic sales was offset by an increase in ISP's foreign sales of the
Company's product.
The Company's domestic sales of pharmaceutical products are handled
primarily through the major full-line drug wholesalers and account for
approximately 20% of the Company's sales. The Company's other products, such as
its industrial products, are sold directly to end-users and account for less
than 1% of sales.
Foreign Sales
In 2005 and 2004 the Company derived approximately 51% and 49% respectively
of its sales from customers in foreign countries, primarily from sales of its
cosmetic products in Europe and Asia. The Company currently has six distributors
for its personal care products outside the United States, with ISP being the
largest. ISP has global distribution rights with the exception of the following:
S. Black Ltd. in the United Kingdom; Sederma in France; Luigi & Felice Castelli
S.R.L. in Italy; S. Black Gmbh in Switzerland; and C&M International in Korea.
The Company's foreign sales attributable to each of its foreign distributors as
a percentage of the Company's total sales were as follows: ISP: 27% (an estimate
of ISP's purchases intended for sale outside the U.S., based on sales figures
provided to the Company by ISP); Sederma: 11%; S. Black: 4%; C&M International:
4%; and Castelli: 1%. The Company also has two foreign customers for its medical
products that each account for approximately 1% of the Company's total sales.
Marketing Agreements
In 1994 the Company entered into a marketing agreement with ISP whereby ISP
would distribute the Company's personal care products, as well as some medical
and industrial products, in certain parts of Europe, Asia, Australia, and
Africa. ISP manufactures and markets an extensive line of personal care,
pharmaceutical, and industrial products on a global basis. In 1996 the parties
entered into another agreement, extending those distribution rights to the
United States, Canada, Mexico, Central and South America. In July, 2000 the
parties entered into an Exclusive Marketing Agreement (the "2000 Agreement"),
which modified, extended, and consolidated the 1994 and 1996 agreements. The
2000 Agreement also gave the Company greater flexibility in appointing other
marketing partners in areas where ISP was not active or had not been successful,
gave ISP certain additional territories, and granted ISP exclusivity in the
territories assigned to it as long as annual minimum purchase requirements were
met.
In December, 2002 the parties entered into a letter agreement ("2002
Agreement") that extended and modified the 2000 Agreement and provided for
automatic extensions of the 2000 Agreement through December, 2008 provided ISP
met certain purchase requirements during each calendar year of the agreement.
ISP was not able to meet the minumum purchase requirement for calendar year
2003, but the Company agreed to continue ISP's marketing rights based on its
satisfaction with ISP's marketing efforts.
In December, 2005 the parties entered into another letter agreement ("2005
Agreement" modifying and extending the 2000 Agreement and superceding and
replacing the 2002 Agreement. The 2005 Agreement extended ISP's marketing rights
until December, 2008, and provided for the possibility of additional automatic
extensions until December, 2010 if specified miniumum annual purchase levels
were attained. It also specifed guideliness and provisions for future price
increases by the Company.
The Company believes that in the event ISP were to cease marketing the
Company's products, alternative arrangements could be made to continue to supply
product to the customers currently using the Company's products without any
significant interruption of supply.
The Company has other marketing arrangements with marketing partners in the
U.K, France, Switzerland, Korea, and Italy, but all of these other arrangements
are operating under either verbal agreements or expired written agreements, and
are subject to termination at any time by either party.
Raw Materials
The principal raw materials used by the Company consist of common
industrial organic chemicals, laboratory reagents, and common inorganic
chemicals. Most of these materials are available in ample supply from numerous
sources. The Company's principal raw material suppliers are Procter and Gamble,
Callahan Chemical Company, Univar USA, Inc., Noveon, Inc., Ishihara U.S.A.,
Nissei Trading Co., Varessa, Ltd., E.I. duPont, S.A. Fine Chemicals, and Loba
Chemie.
Inventories; Returns and Allowances
The Company's business requires that it maintain moderate inventories of
certain of its finished goods. Historically, returns and allowances have not
been a significant factor in the Company's business.
Backlog
The Company currently does not have any significant backlog.
Competition
Guardian has many products or processes that are either unique in their
field or have some unique characteristics, and therefore are not in direct
competition with the products or processes of other pharmaceutical, personal
care, chemical, or health care companies. However, the pharmaceutical, health
care, and cosmetic industries are all highly competitive, and the Company
expects competition to intensify as advances in the field are made and become
widely known. There may be many domestic and foreign companies that are engaged
in the same or similar areas of research as those in which the Company is
engaged, many of which have substantially greater financial, research, manpower,
marketing and distribution resources than the Company. In addition, there are
many large, integrated and established pharmaceutical, chemical and cosmetic
companies that have greater capacity than the Company to develop and to
commercialize types of products upon which the Company's research and
development programs are based. However, the Company believes that the expense
of testing and evaluating possible substitutes for Company's products that are
already in customers' formulations, as well as the expense to the customer in
relabeling its products, is a significant barrier to displacing the Company's
products in current customer formulations. These cost factors make it less
likely that a customer would choose a competitive product unless there was a
significant cost savings in doing so. The Company believes that manufacturing,
regulatory, distribution and marketing expertise will be increasingly important
competitive factors in favor of the Company. In this regard, the Company
believes that its marketing arrangements with its global marketing partners will
be important in the commercialization of many of the products which it is
currently developing.
Eastern faces competition from many other chemical manufacturers and
distributors, many of which have much greater financial resources than those of
the Company. Eastern's competition is based primarily upon price, service and
quality. Eastern attempts to maintain its competitive position in the industry
through its ability to (i) locate and make wholesale arrangements to purchase
the chemicals with suppliers located all over the world, (ii) maintain a
sufficient inventory of its most popular items at all times, and (iii) customize
each order as to quantity of the item requested and to tailor the price of the
order to such quantity. Eastern's primary competitors are SA Fine Chemicals,
Acros Organics, Pfaltz & Bauer, Inc., and Spectrum Chemical Mfg. Corp.
ISO-9001:2000 REGISTRATION
In December, 2003 the Company earned ISO 9001:2000 registration from
Underwriters Laboratories, Inc., indicating that the Company's documented
procedures and overall operations had attained the high level of quality needed
to comply with this new ISO certification level, and has been in continual
compliance with that new standard since that initial approval. Prior to that, in
November, 1998 the Company had earned ISO-9002 registration. The Company will
continue to be evaluated every six months for continued compliance with the new
ISO-9001:2000 standard.
Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacturing and marketing of many of
the Company's products. The Company and many of the Company's products are
subject to certain government regulations. Products that may be developed and
sold by the Company in the United States may require approval from federal
regulatory agencies, such as the FDA, as well as state regulatory agencies.
Products that may be developed and sold by the Company outside of the United
States may require approval from foreign regulatory agencies. Any medical device
products developed by the Company will be subject to regulation by the Center
for Devices and Radiological Health of the FDA, and will usually require a
510(k) pre-market notification. Most pharmaceutical products will require
clinical evaluation under an Investigational New Drug ("IND") application prior
to submission of a New Drug Application ("NDA") for approval of a new drug
product.
A drug product normally must go through several phases in order to obtain
FDA approval. The research phase involves work up to and including discovery,
research, and initial production. Next is the pre-clinical phase, which involves
studies in animal models necessary to support an IND application to the FDA and
foreign health registration authorities to commence clinical testing in humans.
Clinical trials for pharmaceutical products are conducted in three phases. In
Phase I, studies are conducted to determine safety and dosages. In Phase II,
studies are conducted to gain preliminary evidence as to the efficacy of the
product. In Phase III, studies are conducted to provide sufficient data for the
statistical proof of safety and efficacy, including dose regimen. Phase III is
the final stage of such clinical studies prior to the submission of an
application for approval of an NDA. The amount of time necessary to complete any
of these phases cannot be predicted with any certainty.
In all cases, the Company is required to comply with all pertinent Good
Manufacturing Practices of the FDA for medical devices and drugs. Accordingly,
the regulations to which the Company and certain of its products may be subject,
and any changes with respect thereto, may materially affect the Company's
ability to produce and market new products developed by the Company.
The Company's present and future activities are, and will likely continue
to be, subject to varying degrees of additional regulation under the
Occupational Safety and Health Act, Environmental Protection Act, import, export
and customs regulations, and other present and possible future foreign, federal,
state and local regulations.
Portions of the Company's operating expenses are directly attributable to
complying with federal, state, and local environmental statutes and regulations.
In 2005 and 2004 the Company incurred approximately $49,000 and $48,000
respectively, in environmental compliance costs. There was no material financial
or other impact on the Company as a result of compliance with environmental
laws.
Research and Development Expense
Portions of the Company's operating expenses are directly attributable to
research and development the Company performs. In 2005 and 2004, the Company
incurred approximately $423,000 and $415,000 respectively in research and
development expenses. No portion of the research and development expenses was
directly paid by the Company's customers.
Employees
The Company presently employs 43 people, 8 of whom serve in an executive
capacity, 23 in research, quality control and manufacturing, 5 in maintenance
and construction, and 7 in office and administrative work. Of the total number
of employees, 40 are full time employees. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are satisfactory.
Item 2. Description of Property.
The Company maintains its principal office, factory, and conducts most of
its research at 230 Marcus Boulevard, Hauppauge, New York 11788. These premises,
which the Company owns, contain approximately 30,000 square feet of
manufacturing space, 15,000 square feet of warehouse space, and 5,000 square
feet of office and laboratory space on approximately 2.7 acres of land. The
Company has now fully developed the 2.7 acres, and fully utilizes the buildings
occupying the land. The Company believes that the aforementioned property is
adequate for its immediately foreseeable needs. The property is presently
unencumbered and is adequately insured.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
Market Information
The Common Stock of the Company is traded on the American Stock Exchange
(the "AMEX") under the symbol "UG". The following table sets forth for the
periods indicated the high and low closing sale prices of the shares of Common
Stock, as reported by the AMEX Market Statistics for the period January 1, 2004
to December 31, 2005. The quotations represent prices between dealers and do not
include retail markup, markdown or commission:
Year Ended Year Ended
Quarters December 31, 2005 December 31, 2004
-------- ----------------- -------------------
High Low High Low
---- --- ---- ---
First (1/1 - 3/31) 8.45 7.35 8.93 7.48
Second (4/1 - 6/30) 8.20 7.00 8.15 5.75
Third (7/1 - 9/30) 8.58 7.30 7.03 5.60
Fourth (10/1 - 12/31) 12.01 8.05 8.58 6.26
Holders of Record
As of March 1, 2006 there were 1,161 holders of record of Common Stock.
Cash Dividends
On January 5, 2005 the Company paid a regular annual cash dividend of $.18
per share to all stockholders of record as of December 15, 2004. On June 15,
2005 the Company paid a special cash dividend of $.25 per share to all
stockholders of record as of June 1, 2005. In December, 2005 the Company
declared and accrued a regular annual cash dividend of $.22 per share, which was
paid on January 6, 2006 to all stockholders of record as of December 15, 2005.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results Of Operations:
Year Ended December 31, 2005 Compared to
Year Ended December 31, 2004
Revenue
Consolidated revenue in 2005 increased by $1,011,521 (9.1%) compared to
2004 due to an increase in the Guardian Division of $1,070,803 (10.7%) partially
offset by a decrease in revenues in the Eastern Division of $59,282 (5.3%).
The increase in Guardian's sales was mainly due to an increase in sales of
the company's Lubrajel product line, which accounted for approximately $795,000
of the increase. Most of the increase was attributable to increases in sales of
the two largest selling products in that line, supplemented by additional sales
of two forms of Lubrajel sold for medical uses. A smaller portion of the
increase was due to an increase in revenue from the company's Renacidin
Irrigation product, which was the result of both an increase in volume as well
as a price increase. The decrease in Eastern's sales is believed to be due
mainly to normal fluctuations in the purchasing patterns of its customers. The
company does not anticipate any significant increase or decrease in Eastern's
sales in the near future.
Cost of Sales
Cost of sales as a percentage of sales in 2005 increased to 46.9% from
45.6% in the prior year. Excluding realized savings from obsolete inventory,
cost of sales, as a percentage of sales, would have been 46.4% in the year ended
December 2004 compared to 47.1% for the year ended December 31, 2005.
In 2004 the company sold approximately $91,000 of inventory previously
reserved as obsolete.
Operating Expenses
Operating expenses increased by $3,181 (.1%) in 2005 compared to the prior
year.
Other Income
Net other income increased $14,818 (6.7%) for the year ended December 31,
2005. This increase is mainly attributable to the net effect of an increase in
income from securities of $120,889 and the sale of a portfolio of marketable
securities during 2005, primarily bonds, the bulk of which had been managed for
the company by Merrill Lynch. The sale of this portfolio resulted in a realized
loss of approximately $116,000, of which approximately $107,000 had been
previously recorded in the equity section of the balance sheet as an
"accumulated other comprehensive loss". Approximately $108,000 of the loss was
due to the sale of the bond portfolio managed by Merrill Lynch, which, over the
18 months the company held it, realized interest income net of broker fees of
approximately $154,000.
Provision for Income Taxes
The provision for income taxes increased $263,450 (21.8%). This increase is
due to the net effect of (a) increased earnings before taxes of $405,875;(b) the
non-deductibility of the approximately $116,000 capital loss from the sale of
the Merrill Lynch bond portfolio, which loss is available to offset any realized
capital gains, to be carried forward for five years following the year of the
loss; and (c) and a decrease in the foreign tax exclusion, which was more than
offset by the new manufacturer's production deduction.
Liquidity and Capital Resources
Working capital increased to $12,281,645 at December 31, 2005 from
$11,967,840 at December 31, 2004, an increase of $313,805 (2.6%). The current
ratio decreased to 8.3 to 1 at December 31, 2005 from 9.2 to 1 at December 31,
2004. The decrease in the current ratio was due primarily to (a) an increase of
approximately $199,000 in dividends payable; (b) a decrease of approximately
$344,000 in inventory; and (c) an increase of approximately $54,000 in accrued
expenses, partially offset by an increase in accounts receivable of
approximately $166,000 and an increase in marketable securities of approximately
$815,000.
The Company has a line of credit agreement with a bank for borrowings of up
to $700,000, which expires in May, 2006 and which the Company plans to renew. As
of December 31, 2005, there were no outstanding borrowings on this line of
credit.
The Company generated cash from operations of $3,172,030 in 2005 compared
to $2,172,576 in 2004. The increase in 2005 was primarily due to the net effect
of an increase in net income from operations as well as decreases in prepaid
expenses and inventory costs which were partially offset by an increase in
accounts receivable.
Cash used in investing activities was $1,381,475 for the year ended
December 31, 2005 whereas cash provided by investing activities was $788,398 for
the year ended December 31, 2004. The change is mainly due to the net effect of
the sale (primarily bonds) and purchases (primarily bond funds) of marketable
securities and temporary investments.
Cash used in financing activities was $2,100,904 and $1,935,058 during the
years ended December 31, 2005 and 2004, respectively. The increase was primarily
due to the increase in the dividend declared in December 2005 payable in January
2006 to $.22 per share from $.18 per share for the dividend declared in December
2004 paid in January 2005. The Company believes that its working capital is
sufficient to support its operating requirements for the next fiscal year. The
Company's long-term liquidity position will be dependent upon its ability to
generate sufficient cash flow from profitable operations. The Company has no
material commitments for future capital expenditures.
Commitments
The Company currently has approximately $12,700 in lease commitments, which
expire in 2008, of which approximately $5,300 is payable each year in 2006 and
2007 with the remaining $2,100 payable in 2008.
Patent Expirations
The Company has three patents that will be expiring in the next two years.
Two of them are for products no longer marketed. The third is for the Company's
Renacidin Irrigation. The Company does not anticipate that the expiration of any
of these patents will have a material impact on the Company's revenues.
Item 7. Financial Statements.
Annexed hereto starting on page F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 8A. Controls and Procedures
As of December 31, 2005, an evaluation was performed by the management of
the Company with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. There
have been no significant changes in the the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Item 8B. Other Information
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Executive Officers
Set forth in the table below is certain information as of March 1, 2005
with respect to the executive officers and directors of the Company:
Name Age Position(s) with the Company
---------------------- ----- ----------------------------------
Dr. Alfred R. Globus 85 Chairman of the Board, Chief
Executive Officer and Director
Kenneth H. Globus 54 President, Chief Financial Officer,
General Counsel and Director
Robert S. Rubinger 63 Executive Vice President,
Secretary and Director
Charles W. Castanza 73 Senior Vice President and Director
Derek Hampson 66 Vice President
Joseph J. Vernice 47 Vice President
Peter A. Hiltunen 47 Vice President
Cecile M. Brophy 57 Treasurer and Controller
Lawrence F. Maietta 48 Director
Henry P. Globus 83 Director
Arthur M. Dresner 64 Director
Andrew A. Boccone 60 Director
Christopher W. Nolan, Sr. 41 Director
Dr. Alfred Globus has been Chairman of the Board and Chief Executive
Officer of the Company since July 1988. He served as Chairman of the Board and
President of the Company from the inception of the Company in 1942 until July
1988. He has been a director of the Company since 1942.
Kenneth H. Globus has been President and General Counsel of the Company
since July 1988. He served as Vice President and General Counsel of the Company
from July 1983 until July 1988. He has been a director of the Company since
1984. He became the Chief Financial Officer in November 1997.
Robert S. Rubinger has been Executive Vice President and Secretary of the
Company since July 1988, and served as Treasurer from May 1994 until May 2004.
He served as Vice President and Secretary of the Company from February 1982
until July 1988. He has been a director of the Company since 1982.
Charles W. Castanza has been Senior Vice President of the Company since
March 2000. He served as Vice President from April 1986 until March 2000. He
served as Operations Manager of Chemicals and Pharmaceuticals of the Company
from February 1982 until April 1986. He has been a director of the Company since
1982.
Derek Hampson has been a Vice President of the Company since October 1987.
He has served as Manager of the Eastern Chemical Corp. subsidiary since 1971.
Joseph J. Vernice has been a Vice President of the Company since February,
1995. He served as Assistant Vice President of the Company from November 1991
until February 1995. He has been Manager of Research and Development for the
Company since 1988 and Director of Technical Services since 1991.
Peter A. Hiltunen has been a Vice President of the Company since July 2002.
He served as Assistant Vice President of the Company from November 1991 until
July 2002. He has been Production Manager of the Company since 1982.
Cecile M. Brophy has been Treasurer of the Company since May 2004. She has
served as Controller of the Company since November 1997. From May 1994 until
November 1997 she served as manager of the Company's accounting department.
Lawrence F. Maietta has been a partner in the public accounting firm of
Bonamassa, Maietta & Cartelli, LLP in Brooklyn, NY since October 1991. For more
than five years prior to that he was a partner in the public accounting firm of
Wilfred, Wyler & Co. in New York, NY. He was controller for the Company from
October 1991 until November 1997, and a director of the Company since February
1994.
Henry P. Globus has been a consultant to the Company since July 1988. He
served as Executive Vice President of the Company from February 1982 until July
1988. He has been a director of the Company since 1947.
Arthur M. Dresner has been a partner in the law firm Reed Smith, LLP since
January 2003. From 1998 to 2003 he had been "Of Counsel" to that firm as well as
to the law firm of McAulay, Nissen, Goldberg & Kiel LLP, which combined with
Reed Smith in 2000. From 1974 until 1997 he was employed as a Vice President in
corporate development and general management of ISP in Wayne, New Jersey. He has
been a director of the Company since April 1997.
Andrew A. Boccone is an independent business consultant. From 1990 to his
retirement in 2001 he was President of Kline & Company, a leading international
business consulting and research firm that he first joined in 1974, developing
growth strategies and providing business solutions for many multinational
chemical companies. Prior to joining Kline & Company Mr. Boccone served in
various management positions at American Cyanamid. He has been a Director of the
Company since November 2002.
Christopher W. Nolan, Sr. has been a Managing Director (since March 2006)
and Executive Director (2002 to 2006) in Mergers & Acquisitions ("M&A") for
Rabobank International, New York, NY. From 2000 to 2002 he was a V.P. in M&A for
Deutsche Bank Securities, Inc., New York, NY. In 2000 he was a V.P. with Salomon
Smith Barney, New York, NY. From 1992-2000 he was a V.P. in Corporate
Development and Investor Relations for ISP in Wayne, NJ.
Dr. Alfred R. Globus and Henry P. Globus are brothers. Kenneth H. Globus is
the son of Henry P. Globus and the nephew of Dr. Alfred R. Globus. There are no
other family relationships between any directors or officers of the Company.
The directors are elected to serve for one year or until the next Annual
Meeting of Stockholders and until their successors have been elected and
qualified.
Audit Committee Members and Financial Expert
The Board of Directors has an Audit Committee that meets with the Company's
independent auditors to review the plan, scope and results of its audits. The
Audit Committee consists of three of the Company's directors, each of whom is
considered an independent, outside director. The Chairman of the Audit Committee
is Arthur Dresner; the other two members are Andrew A. Boccone and Christopher
W. Nolan, Sr.
The Company does not have a "financial expert" (as that term is defined by
SEC regulations) on its audit committee due to the expense involved in placing
another independent director on its Board of Directors and Audit Committee who
would qualify as such. While all three Audit Committee members have experience
in reading and analyzing financial statements, none has the experience necessary
to qualify as a "financial expert" under the SEC guidelines. One of the
Company's other directors, Lawrence F. Maietta, is a Certified Public Accountant
with experience in preparing and analyzing financial statements and would
qualify as a "financial expert" if it were not for the fact that he receives
payment from the Company to assist in the preparation of its financial reports,
and for that reason he is not considered "independent" and cannot serve on the
audit committee. Mr. Maietta now serves as an expert financial advisor to the
audit committee in lieu of having a financial expert on the committee.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies
to all officers, directors, and employees, serving in any capacity to the
Company, including the Chief Executive Officer, Chief Financial Officer, and
principal accounting Officer. A copy of the Company's Code of Conduct and Ethics
is available on the Company's web site at http://www.u-g.com/corporate. The
Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K
relating to amendments to or waivers from any provision of its Code of Conduct
and Ethics applicable to Chief Executive Officer, Chief Financial Officer and
principal accounting officer by posting this information on the Company's web
site.
Compliance with Section 16(a) of the Exchange Act
The information required by this section is incorporated herein by
reference to the section entitled "Directors and Executive Officers - Section
16(a) Beneficial Ownership Reporting Compliance" of Company's 2006 Proxy
Statement.
Item 10. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the section entitled "Compensation of Directors and Executive Officers -
Summary Compensation Table" of the Company's 2006 Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is incorporated herein by reference
to the sections entitled "Voting Securities and Principal Stockholders -
Security Ownership of Management" and "Compensation of Directors and Executive
Officers" of the 2006 Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's 2006 Proxy Statement.
Item 13. Exhibits
3(a) Certificate of Incorporation of the Company as filed April
22, 1987. Incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, dated September 21,
1987 (the "1987 8-K").
3(b) Certificate of Merger of United-Guardian, Inc. (New York)
with and into the Company as filed with the Secretary of
State of the State of Delaware on September 10, 1987.
Incorporated by reference to Exhibit 3(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended
February 29, 1988 (the "1988 10-K").
3(c) By-laws of the Company. Incorporated by reference to Exhibit
4.2 to the 1987 8-K.
4(a) Specimen Certificate for shares of common stock of the
Company. Incorporated by reference to Exhibit 4(a) to the
1988 10-K.
10(a) Qualified Retirement Income Plan for Employees of the
Company, as restated April 1, 1976. Incorporated by
reference to Exhibit 11(c) of the Company's Registration
Statement on Form S-1 (Registration No. 2-63114) declared
effective February 9, 1979.
10(b) Employment Termination Agreement dated July 8, 1988 between
the Company and Henry Globus. Incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on Form 10-K
for the 10-month transition period from March 1, 1991 to
December 31, 1991.
10(c) Exclusive Distributor Agreement between the Company and ISP
Technologies Inc., dated July 5, 2000. Incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2000.
10(d) Letter Amendment between the Company and ISP Technologies
Inc. dated December 20, 2005 amending the Exclusive
Distributor Agreement between the Company and ISP
Technologies Inc. dated July 5, 2000.
21 Subsidiaries of the Company:
Jurisdiction of Name Under Which
Name Incorporation it does Business
Eastern Chemical Corporation New York (same)
Dieselite Corporation ** Delaware N/A
Paragon Organic Chemicals, Inc. New York (same)
Transcontinental Processes (Pty.) Ltd.* Australia N/A
* Inactive without assets ** Inactive
31.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Kenneth H. Globus, President and Chief
Financial of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Kenneth H. Globus, President and Chief
Financial Officer of the Company, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed by Eisner LLP for the audit of the Company's
annual financial statements and the reviews of the financial statements included
in the Company's quarterly reports on Form 10-QSB for FY-2005 were approximately
$65,600, including out of pocket expenses. The aggregate fees billed by Eisner
LLP for the audit of the Company's annual financial statements for FY-2004 were
approximately $55,500.
Audit-Related Fees
During FY-2005 Eisner LLP billed the Company $2,972 for fees related to its
review of the Company's compliance with section 404 of the Sarbanes-Oxley Act
("SOX"). During FY-2004 there were no fees billed by Eisner LLP that were
related to SOX compliance. No other fees were billed by Eisner LLP for the last
two fiscal years that were reasonably related to the performance of the audit or
review of the Company's financial statements and not reported under "Audit Fees"
above.
All Other Fees
There were no other fees billed by Eisner LLP during the last two fiscal
years for other products and services provided by Eisner LLP.
Pre-Approval Policies and Procedures
The Audit Committee of the Company's Board of Directors meets periodically
to review and approve the scope of the services to be provided to the Company by
its Independent Registered Public Accounting Firm, as well to review and discuss
any issues that may arise during an engagement. The Audit Committee is
responsible for the prior approval of every engagement of the Company's
Independent Registered Public Accounting Firm to perform audit and permissible
non-audit services for the Company (such as quarterly reviews, tax matters,
consultation on new accounting and disclosure standards, and, in future years,
reporting on management's internal controls assessment.)
Before the auditors are engaged to provide those services, the chief
financial officer and controller will make a recommendation to the Audit
Committee regarding each of the services to be performed, including the fees to
be charged for such services. At the request of the Audit Committee the
Independent Registered Public Accounting Firm and/or management shall
periodically report to the Audit Committee regarding the extent of services
being provided by the Independent Registered Public Accounting Firm, and the
fees for the services performed to date.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED-GUARDIAN, INC.
Dated: March 22, 2006 By: /s/ Alfred R. Globus
------------------------
Alfred R. Globus
Chief Executive Officer & Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Signature Title Date
----------------------- --------------------------------- ---------------
By:/s/ Alfred R. Globus Chief Executive Officer, Director March 22, 2006
------------------------ (Principal Executive Officer)
Alfred R. Globus
By:/s/ Kenneth H. Globus President, General Counsel, March 22, 2006
------------------------ Director, Chief Financial
Kenneth H. Globus Officer
By:/s/ Robert S. Rubinger Executive Vice President, March 22, 2006
------------------------ Secretary, Director
Robert S. Rubinger
By:/s/ Charles W. Castanza Senior Vice President, Director March 22, 2006
------------------------
Charles W. Castanza
By:/s/ Cecile M. Brophy Treasurer, Principal Accounting March 22, 2006
------------------------ Officer, and Controller
Cecile M. Brophy
By:/s/ Henry P. Globus Director March 22, 2006
------------------------
Henry P. Globus
By:/s/ Lawrence F. Maietta Director March 22, 2006
------------------------
Lawrence F. Maietta
By:/s/ Arthur M. Dresner Director March 22, 2006
------------------------
Arthur M. Dresner
By: /s/ Andrew A. Boccone Director March 22, 2006
------------------------
Andrew A. Boccone
By: /s/ Christopher W. Nolan, Sr. Director March 22, 2006
------------------------------
Christopher W. Nolan, Sr.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----------
Report of Independent Registered Public Accounting Firm F-2
Financial Statements
Consolidated Balance Sheets as of December 31,
2005 and 2004 F-3 - F-4
Consolidated Statements of Income for the Years
Ended December 31, 2005 and 2004 F-5
Consolidated Statement of Stockholders' Equity
and Comprehensive Income for the Years Ended
December 31, 2005 and 2004 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-8 - F-24
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
United-Guardian, Inc.
We have audited the accompanying consolidated balance sheets of
United-Guardian, Inc. and subsidiaries as of December 31, 2005 and 2004 and the
related consolidated statements of income, changes in stockholders' equity and
consolidated cash flows for each of the years in the two year period ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (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 enumerated above present fairly,
in all material respects, the consolidated financial position of
United-Guardian, Inc. and subsidiaries as of December 31, 2005 and 2004 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the two-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
/s/ EISNER LLP
New York, New York
February 27, 2006
F-2
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------
2005 2004
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................ $3,425,593 $3,735,945
Temporary investments............................. 699,363 402,288
Marketable securities ............................ 7,066,797 6,251,764
Accounts receivable, net of allowance for doubtful
accounts of $47,500 and $45,000, respectively 1,083,992 918,085
Inventories ...................................... 1,031,563 1,375,880
Prepaid expenses and other current assets ........ 440,380 515,425
Deferred income taxes ............................ 217,389 223,617
---------- ----------
Total current assets ............... 13,965,077 13,423,004
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land ............................................. 69,000 69,000
Factory equipment and fixtures ................... 3,068,050 2,975,305
Building and improvements ........................ 2,133,422 2,089,547
Waste disposal plant.............................. 133,532 133,532
---------- ----------
5,404,004 5,267,384
Less accumulated depreciation .................... 4,455,524 4,269,713
---------- ----------
948,480 997,671
---------- ----------
OTHER ASSETS
Other ............................................ 108,680 700
---------- ----------
108,680 700
---------- ----------
$15,022,237 $14,421,375
========== ==========
See notes to consolidated financial statements
F-3
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
2005 2004
-------- --------
CURRENT LIABILITIES
Dividends payable ............................ $1,086,391 $ 887,677
Accounts payable ............................. 148,051 172,320
Accrued expenses ............................. 448,990 395,167
--------- ---------
Total current liabilities ............... 1,683,432 1,455,164
--------- ---------
DEFERRED INCOME TAXES ............................ 59,817 10,000
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value; 10,000,000
shares authorized; 5,000,339 and 4,994,739
shares issued, respectively; and 4,938,139
and 4,932,539 outstanding, respectively ..... 500,034 499,474
Capital in excess of par value................. 3,778,838 3,756,943
Accumulated other comprehensive loss........... (84,365) (86,730)
Retained earnings ............................. 9,444,111 9,146,154
Treasury stock, at cost; 62,200 shares ........ (359,630) (359,630)
---------- ----------
13,278,988 12,956,211
---------- ----------
$15,022,237 $14,421,375
========== ==========
See notes to consolidated financial statements
F-4
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------
2005 2004
----------- -----------
Revenue
Net sales ............................... $12,134,996 $11,123,475
---------- ----------
Costs and expenses
Cost of sales ........................... 5,690,966 5,072,033
Operating expenses ...................... 2,592,215 2,589,034
---------- ----------
8,283,181 7,661,067
---------- ----------
Income from operations ............. 3,851,815 3,462,408
Other income (expense)
Investment income........................ 351,503 230,614
Loss on sale of marketable securities.... (113,865) (7,794)
Loss sale of assets...................... - (1,724)
Other expense (179) (105)
---------- ----------
Income before income taxes ......... 4,089,274 3,683,399
Provision for income taxes .................. 1,471,791 1,208,341
---------- ----------
Net Income ......................... $ 2,617,483 $ 2,475,058
========== ==========
Earnings per common share (basic
and diluted)............................. $ .53 $ .50
========== ==========
Weighted average shares-basic ............... 4,935,472 4,928,785
========== ==========
Weighted average shares-diluted ............. 4,941,858 4,938,026
========== ==========
See notes to consolidated financial statements
F-5
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 2005 and 2004
Accumulated
Common stock Capital in other
----------------------- excess of comprehensive Retained Treasury Comprehensive
Shares Amount par value income (loss) earnings stock Total income
--------- ----------- ---------- ------------- --------- -------- --------- ------------
Balance, December 31, 2003 4,984,439 $498,444 $3,717,160 $(30,614) $8,791,158 $(359,630) $12,616,518
Issuance of common stock in
connection with exercise
of stock options ........... 10,300 1,030 34,033 35,063
Tax Benefit from exercise of
stock options .............. 5,750 5,750
Unrealized loss on marketable
securities, net of deferred
income tax of $33,300 ...... (56,116) (56,116) $ (56,116)
Net income .................... 2,475,058 2,475,058 2,475,058
Dividends declared ............ (2,120,062) (2,120,062) _________
Comprehensive income $2,418,942
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2004 4,994,739 499,474 3,756,943 (86,730) 9,146,154 (359,630) 12,956,211
Issuance of common stock in
connection with exercise
of stock options ............ 5,600 560 19,345 19,905
Tax Benefit from exercise of
stock options .............. 2,550 2,550
Unrealized loss on marketable
securities, net of deferred
income tax of $1,400........ 2,365 2,365 $ 2,365
Net income .................... 2,617,483 2,617,483 2,617,483
Dividends declared ............ (2,319,526) (2,319,526) _________
Comprehensive income .......... $2,619,848
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2005 5,000,339 $ 500,034 $ 3,778,838 $ (84,365) $ 9,444,111 $(359,630) $13,278,988
========= ========= =========== ========== ========== ========== ==========
See notes to consolidated financial statements
F-6
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
2005 2004
--------- ---------
Cash flows from operating activities
Net income ......................................... $2,617,483 $2,475,058
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization .................. 205,811 209,792
Realized loss on sale of marketable securities.. 116,512 -
Net loss on sale of equipment................... - 1,724
Provision for bad debts......................... 23,254 18,000
Tax Benefit from exercise of stock options ..... 2,550 5,750
Deferred income taxes .......................... 54,645 17,500
Provision for inventory obsolescence ........... 20,000 91,000
Increase (decrease) in cash resulting from
changes in operating assets and liabilities
Accounts receivable ....................... (189,161) 70,970
Inventories ............................... 324,317 (373,568)
Prepaid expenses and other current and
non current assets..................... (32,935) (250,447)
Accounts payable .......................... (24,269) (137,601)
Accrued expenses and taxes payable ........ 53,823 44,398
--------- ---------
Net cash provided by operating activities ..... 3,172,030 2,172,576
--------- ---------
Cash flows from investing activities
Acquisition of plant and equipment.................. (156,620) (198,371)
Proceeds from the sale of plant and equipment....... - 15,500
Net change in temporary investments................. (297,075) 1,213,463
Purchase of marketable securities................... (5,293,131) (2,274,468)
Proceeds from sale of marketable securities......... 4,365,351 2,032,274
-------- --------
Net cash (used in) provided by investing
activities .................................. (1,381,475) 788,398
-------- --------
Cash flows from financing activities
Proceeds from exercise of stock options ............ 19,905 35,063
Dividends paid ..................................... (2,120,812) (1,970,121)
-------- --------
Net cash used in financing activities ......... (2,100,907) (1,935,058)
-------- --------
Net (decrease) increase in cash and cash equivalents.. (310,352) 1,025,916
Cash and cash equivalents, beginning of year ......... 3,735,945 2,710,029
--------- ---------
Cash and cash equivalents, end of year ............... $3,425,593 $3,735,945
========= =========
See notes to consolidated financial statements
F-7
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United-Guardian, Inc. (the "Company") is a Delaware corporation that
operates in two business segments: (1) the Guardian Laboratories Division
conducts research, product development, manufacturing and marketing of
pharmaceuticals, cosmetic ingredients, health care products, and proprietary
specialty industrial products, and (2) the Eastern Chemical Corporation
subsidiary distributes a line of fine organic chemicals, research chemicals,
test solutions, indicators, intermediates, dyes and reagents. Two major product
lines, Lubrajel and Renacidin, included in the Guardian Laboratories Division,
accounted for approximately 85% and 83% of consolidated sales for each of the
years ended December 31, 2005 and 2004, with Lubrajel accounting for 68% and 67%
and Renacidin accounting for 17% and 16% of consolidated sales for each of those
years.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of United-Guardian, Inc. and its wholly-owned subsidiaries, Eastern Chemical
Corporation and Paragon Organic Chemicals, Inc. (a purchasing agent for
Eastern). All inter-company accounts and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue as products are shipped, collections are
reasonably assured, and title passes to customers. An allowance for returns is
taken as a reduction of sales within the same period the revenue is recognized.
Such allowances are based on historical experience. The Company has not
experienced significant fluctuations between estimated allowances and actual
activity.
Cash and Cash Equivalents
For financial statement purposes the Company considers as cash equivalents
all highly liquid investments with an original maturity of three months or less
at inception.
Dividends
On May 19, 2005 the Company declared a special dividend of $.25 per share
payable on June 15,2005 to stockholders of record as of June 1, 2005, for a
total payout of $1,233,135, and on December 1, 2005 the Company declared a cash
dividend of $.22 per share payable on January 6, 2006 to stockholders of record
as of December 15, 2005, for a total payout of $1,086,391. On September 9, 2004
the Company declared a special dividend of $.25 per share payable on October 8,
2004 to stockholders of record as of September 24, 2004, for a total payout of
$1,232,385, and on December 2, 2004, the Company declared a dividend of $.18 per
share payable on January 5, 2005 to stockholders of record as of December 15,
2004, for a total payout of $887,677.
F-8
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE A (continued)
Statements of Cash Flows
Cash payments for income taxes were $1,321,853 and $1,399,522 for the years
ended December 31, 2005 and 2004, respectively. There were no cash payments for
interest during the years ended December 31, 2005 and 2004.
Marketable Securities and Temporary Investments
Marketable securities include investments in equity mutual funds,
government securities and corporate bonds which are classified as "Available for
Sale" securities and are reported at their fair values. Unrealized gains and
losses on "Available for Sale" securities are reported as accumulated other
comprehensive income (loss) in stockholders' equity, net of the related tax
effects. Investment income is recognized when earned. Realized gains and losses
on sales of investments are determined on a specific identification basis. Fair
values are based on quoted market prices.
Temporary investments consist of certificates of deposit and treasury bills
that mature in one year or less.
Inventories
Inventories are valued at the lower of cost or current market value. Cost
is determined using the average cost method (which approximates FIFO). Inventory
costs include material, labor and factory overhead.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation. Major replacements and betterments are capitalized while routine
maintenance and repairs are expensed as incurred. Assets are depreciated under
both accelerated and straight-line methods. Depreciation charged to income as a
result of using accelerated methods was not materially different than that which
would result from using the straight-line method for all periods presented.
Certain factory equipment and fixtures are constructed by the Company using
purchased materials and in-house labor. Such assets are capitalized and
depreciated on a basis consistent with the Company's purchased fixed assets.
Estimated useful lives are as follows:
Factory equipment and fixtures 5 - 7 years
Building 40 years
Building improvements Lesser of useful life or 20 years
Waste disposal system 7 years
F-9
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE A (continued)
Long-Lived Assets
It is the Company's policy to evaluate and recognize an impairment to its
long-lived assets if it is probable that the recorded amounts are in excess of
anticipated undiscounted future cash flows.
Other Assets
Other assets consist of deposits given to vendors of which $108,430
represents a 50% deposit to one of our vendors for regulatory and validation
work being done in order to qualify one of the vendor's other locations for the
production of our Renacidin Irrigation product. This is necessitated by the
vendor's relocation of production of this type of product to another of their
facilities.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments." Management of the Company believes
that the fair value of financial instruments, consisting of cash, temporary
investments, marketable securities, accounts receivable, accounts payable,
dividends payable and accrued expenses approximates their carrying value due to
their short payment terms.
Concentration of Credit Risk
Accounts receivable potentially expose the Company to concentrations of
credit risk. The Company routinely addresses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited. For each of the years ended December 31, 2005 and
2004, two customers, both of them distributors and marketing partners of the
Company, accounted for revenues aggregating 48% and 49% respectively. At
December 31, 2005 and December 31, 2004 those same two customers had accounts
receivable balances aggregating 32%.
Income Taxes
Deferred tax assets and liabilities reflect the future tax consequences of
the differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Research and Development
The Company's research and development expenses, included in operating
expenses, are recorded in the year incurred. Research and development expenses
were approximately $423,000 and $415,000 for the years ended December 31, 2005
and 2004, respectively.
F-10
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE A (continued)
Shipping and Handling Costs
Shipping and handling costs are classified in operating expenses in the
accompanying consolidated statements of income. Shipping and handling costs were
approximately $106,000 and $107,000 for the years ended December 31, 2005 and
2004 respectively.
Advertising Costs
Advertising costs are expensed as incurred. During 2005 and 2004 the
Company incurred $76,765 and $71,911 of advertising costs, respectively.
Stock-Based Compensation
In 2004 the Company approved a new stock option plan ("2004 Stock Option
Plan"). As permitted under SFAS NO. 123 as amended, "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangements as
defined by Accounting Principle Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related interpretations including Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation, and interpretations of APB No. 25".
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No.123
to stock-based employee compensation.
Year Ended December 31,
-------------------------
2005 2004
--------- ---------
Reported net income .................... $ 2,617,483 $ 2,475,058
Stock-based employee compensation
expense included in reported net
income, net of related tax effect ..... 0 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effect...... 0 0
--------- ---------
Pro forma net income.................... $ 2,617,483 $ 2,475,058
========= =========
Earnings per share (basic and diluted)
As reported ....................... $ .53 $ .50
======== ========
Pro forma ......................... $ .53 $ .50
======== ========
F-11
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
No stock options were granted in 2005 or 2004 under the 2004 Stock Option
Plan.
Earnings Per Share Information
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share includes the dilutive effect of outstanding stock options.
Use of Estimates
In preparing financial statements in conformity with U.S. generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates. Such estimated items include the allowance
for bad debts, reserve for inventory obsolescence, and the allocation of
overhead.
Segment Reporting
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that the Company disclose certain information about its
business segments defined as "components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance."
New Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application to prior
period financial statements of a voluntary change in accounting principle unless
it is impractical to determine period specific changes. This statement is
effective for fiscal periods beginning after December 15, 2005 and is not
expected to have a significant impact on the Company's financial statements.
In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based
Payment" (SFAS 123(R)), which supercedes APB Opinion No. 25 and revised SFAS
123. SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro-forma disclosure is no longer an alternative. As such,
F-12
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
the company is required to adopt the provisions of SFAS 123(R) in the first
quarter of 2006, While the company currently discloses the pro-forma earnings
effects of its stock-based grants, it is currently evaluating the impact of the
implementation guidance and revisions required under SFAS 123(R) on the
consolidated financial statements.
In November 2004, the Financial Accounting Standards Board, or FASB issued
FASB Statement No. 151 "Inventory Costs, an Amendment of ARB No. 43 Chapter 4"
("FAS 151"). FAS 151 is applicable for Inventory costs incurred during fiscal
years beginning after June 15, 2005. FAS 151 requires that items such as idle
facility expense, excessive spoilage, double freight, and rehandling be
recognized as current-period charges rather than being included in inventory
regardless of whether the costs meet the criterion of abnormal as defined in ARB
43. The Company does not believe the adoption of the standard will have a
material impact on the Company upon adoption in 2006 as the Company has
historically expensed such costs as incurred.
NOTE B - MARKETABLE SECURITIES
Marketable securities at December 31, 2005 and 2004 were as follows:
Unrealized
Cost Fair Value Gain/(Loss)
-------- ---------- ----------
December 31, 2005
-----------------
Available for sale:
U.S. Treasury and agencies $2,046,900 $2,028,984 $ (17,916)
Corporate debt securities 900,595 892,110 (8,485)
Fixed income mutual funds 4,028,072 3,928,513 (99,559)
Equity and other mutual funds 225,793 217,190 (8,603)
--------- --------- ------)
$7,201,360 $7,066,797 $(134,563)
========= ========= ======
December 31, 2004
-----------------
Available for sale:
U.S. Treasury and agencies $4,014,855 $3,942,247 $ (72,608)
Corporate debt securities 2,080,114 2,032,065 (48,049)
Fixed income mutual funds 45,162 50,193 5,031
Equity and other mutual funds 249,963 227,259 (22,704)
--------- --------- ------)
$6,390,094 $6,251,764 $(138,330)
========= ========= ======
F-13
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
2005 2004
----------- -----------
Raw materials and work-in-process ...... $ 376,308 $ 332,798
Finished products and fine chemicals ... 655,255 1,043,082
---------- ----------
$1,031,563 $1,375,880
========== ==========
At December 31, 2005 and 2004, the company has reserved $108,000 and
$128,000 respectively for slow moving and obsolete inventory.
NOTE D - NOTES PAYABLE - BANKS
The Company has a line of credit agreement with a bank which provides for
borrowings of up to $700,000 and expires on May 31, 2006. It is the Company's
intention to renew the line of credit agreement before it expires. Interest
under the line is at the bank's prime rate plus 1/2%. The line of credit
agreement contains financial covenants relating to minimum net worth, working
capital, current ratio, a debt to capitalization ratio and maintenance of
compensating balances. There were no outstanding borrowings at December 31, 2005
and 2004.
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
Year ended December 31,
--------------------------
2005 2004
Current --------- ---------
Federal .............................. $1,219,309 $1,014,625
State ................................ 197,837 176,216
--------- ---------
1,417,146 1,190,841
Deferred --------- ---------
Federal .............................. 47,321 15,154
State ................................ 7,324 2,346
--------- ---------
54,645 17,500
--------- ---------
Total provision for income taxes ... $1,471,791 $1,208,341
========= =========
F-14
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
The following is a reconciliation of the Company's effective income tax
rate to the Federal statutory rate:
Year ended December 31,
--------------------------------
2005 2004
-------------- --------------
(000's) % (000's) %
------- --- ------- ---
Income taxes at statutory Federal
income tax rate ................ $1,390 34% $1,252 34%
State income taxes, net of Federal
benefit ........................ 126 3 118 3
Foreign Sales Exclusion ............. (81) (2) (102) (3)
Domestic Production Exclusion ....... (41) (1) - -
Nondeductible expenses............... 3 - 2 -
Change in deferred tax asset
valuation allowance ............ 39 1 - -
Other, net .......................... 36 1 (62) (2)
----- ---- ----- ----
Actual income tax expense ........... $1,472 36% $1,208 32%
===== ==== ===== ====
During 2005 and 2004, the Company realized the tax benefit of the Foreign
Sales exclusion and in 2005 the Company realized the tax benefit of the Domestic
Production Activities Deduction. The American Jobs Creation Act repealed the
Extraterritorial Income Exclusion for transactions after 2004 subject to
transitional rules. As such, the company is entitled to claim 80% and 100% of
the pre repeal exclusion for transactions during 2005 and 2004 respectively.
The Domestic Production Activities Deduction was created to replace the
Extraterritorial Income Exclusion. In 2005, this deduction amounted to 3% of net
income from domestic production activities.
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities are as follows:
December 31
------------------------
2005 2004
----------- ------------
Deferred tax assets
Current
-------
Accounts receivable ...................... $ 17,718 $ 16,785
Unrealized loss on marketable securities.. 50,200 51,600
Inventories .............................. 40,284 47,744
Accrued Expenses ......................... 71,469 71,217
F-15
Capital Loss ............................. 42,472 -
Other..................................... 37,718 36,271
-------- --------
259,861 223,617
-------- --------
Valuation Allowance ...................... (42,472) -
-------- --------
217,389 223,617
Deferred tax liabilities
Non-current
-----------
Prepaid pension........................... (59,817) (10,000)
--------- ---------
(59,817) (10,000)
--------- ---------
Net deferred tax asset ........................... $ 157,572 $ 213,617
========= =========
There was no valuation allowance at December 31, 2004. The valuation
allowance at December 31, 2005 was due to the capital loss carry forwards that
the company does not expect to utilize in the future.
NOTE F - BENEFIT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan which covers
substantially all of its employees. Benefits are based on years of service and
employees' compensation prior to retirement. Amounts are funded in accordance
with the requirements of ERISA (Employee Retirement Income Security Act of 1974)
and the plan is administered by a trustee who is responsible for payments to
retirees. The plan assets primarily consist of cash equivalents, bonds,
commercial paper and mortgage-backed securities, and are recorded at fair value
within the plan.
The unamortized prior year service cost as of October 1, 2005 ("Measurement
Date") is $39,459 and $46,920 for 2005 and 2004 respectively.
The net pension asset recorded by the Company at December 31, 2005 and 2004
is $160,368 and $119,720, respectively.
The percentage of the fair value of total plan assets as of the Measurement
Date is as follows:
2005 2004
------ ------
Equity securities 29% 26%
Debt securities - General Investment Account 71% 74%
------ ------
Total 100% 100%
====== ======
F-16
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
Note F (continued)
Investment strategies are determined by the Board of Directors in which all
new monies are invested in debt securities operated by the Principal Financial
Group comprised of private placed loans including residential and commercial
mortgages and private placement bonds. This fund is a "book value" fund and its
value is not adjusted for changing market conditions.
Historical returns of multiple asset classes were analyzed to develop a
risk free real rate of return and risk premiums for each asset class. The
overall rates for each asset class was developed by combining a long-term
inflation component, the risk free real rate of return, and the associated risk
premium. A weighted average rate was developed based on those overall rates and
target asset allocation of the plan.
In March, 1998, the Board of Directors authorized a one time investment of
some of the assets of the plan into two equity funds operated by the Principal
Financial Group. In addition, in 2001, when the Principal Financial Group became
a publicly traded company, a distribution of their stock was made to all
investors. This investment has resulted in a third equity investment. No
additional contributions have been made to any of the three equity investments.
Any future investments will continue to be determined by the Board of Directors.
The accumulated benefit obligation is $2,476,741 and $2,272,390 at December
31, 2005 and 2004 respectively.
Based on current data and assumptions, the following benefit payments,
which reflect expected future employee service, as appropriate, are expected to
be paid over the next ten years as follows:
NOTE F (continued)
Year Ending Expected Future Benefits Payable
----------- --------------------------------
2006 $ 71,000
2007 120,000
2008 120,000
2009 120,000
2010 140,000
2011-2015 970,000
The company estimates that it will make contributions to the pension plan
of approximately $200,000 during 2006 which includes required and discretionary
contributions.
A measurement period from October 1, 2004 to October 1, 2005 has been used
for the year ended December 31, 2005. The liabilities and assets are calculated
at October 1, 2005. Assets are adjusted for known contributions received by the
Company between October 1, 2005 and December 31, 2005.
F-17
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
Note F (continued)
The following table sets forth the plan's funded status:
Year ended December 31,
----------------------
2005 2004
--------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year... $2,805,529 $2,360,399
Service cost........................................ 107,786 88,597
Interest cost....................................... 152,104 139,588
Actuarial loss...................................... 244,413 270,112
Benefits paid....................................... (255,486) (53,167)
--------- ---------
Projected benefit obligation at end of year....... $3,054,346 $2,805,529
========= =========
Change in Plan Assets:
Fair value of plan assets at beginning of year... $2,235,475 $1,957,256
Actual return on plan assets..................... 134,373 152,387
Employer contributions........................... 200,000 179,000
Benefits paid.................................... (255,486) (53,167)
--------- ---------
Fair value of plan assets at end of year....... $2,314,362 $2,235,476
========= =========
Reconciliation of Funded Status:
Funded status (underfunded)...................... $ (739,984) $ (570,053)
Unrecognized net actuarial loss.................. 860,893 642,853
Unrecognized prior service cost.................. 39,459 46,920
--------- ---------
Prepaid benefit cost........................... $ 160,368 $ 119,720
========= =========
The net periodic benefit cost includes the following components:
Year ended December 31,
-------------------------
2005 2004
Components of net periodic benefit cost: ----------- -----------
Service cost..................................... $ 107,786 $ 88,597
Interest cost.................................... 152,104 139,588
Expected return on plan assets................... (148,983) (134,031)
Recognized net actuarial loss.................... 40,984 18,910
Amortization of prior service cost............... 7,461 7,461
--------- ---------
Net periodic benefit cost..................... $ 159,352 $ 120,525
========= =========
F-18
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE F (continued)
Weighted-average assumptions as of December 31:
2005 2004
----------- ----------
Discount rate.................................... 5.50% 6.00%
Expected long term rate of return................ 7.00% 7.00%
Weighted average rate of compensation increase... 5.51% 5.69%
Amortization method.............................. Straight-Line Straight-Line
401(k) Plan
The Company maintains a 401(k) Plan for all of its eligible employees.
Under the plan, employees may defer up to 15% of their weekly pay as a pretax
investment in a savings plan. In addition, in 2005 and 2004 the Company made
contributions of 50% of the first 6% and 4%, respectively, of each employee's
elective deferral up to a maximum employer contribution of 3% and 2%,
respectively, of biweekly pay. Employees become fully vested in Company
contributions after one year of employment. 401(k) Company contributions were
approximately $57,000 and $38,000 for the years ended December 31, 2005 and
2004, respectively.
Stock Option Plans
At its meeting on March 19, 2004 the Board of Directors of the Company
approved the adoption of the 2004 Stock Option Plan. The new plan covers both
employees and Directors. The adoption and implementation of the new plan was
ratified by the shareholders of the Company at the Company's annual meeting of
shareholders on May 19, 2004.
The following summarizes the stock option transactions from the expired
Employee Incentive Stock Option Plan ("EISOP") and Non-Statutory Stock Option
Plan for Directors ("NSSOPD"):
Number Weighted average
EISOP outstanding exercise price
----- ------------ -------
Options outstanding January 1, 2004.... 10,200 3.44
Exercised (4,300) 3.49
------
Options outstanding and exercisable at
December 31, 2004 5 900 3.39
Exercised (1,600) 3.67
------
Options outstanding and exercisable at
December 31, 2005................. 4,300 3.29
======
Available for grant at December 31, 2005 0
======
F-19
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE F (continued)
NSSOPD
------
Options outstanding at January 1, 2004.. 14,000 3.44
Exercised (6,000) 3.34
------
Options outstanding and exercisable at
December 31, 2004 8,000 3.51
Exercised (4,000) 3.51
------
Options outstanding and exercisable at
December 31, 2005 4,000 3.51
======
Available for grant at December 31, 2005 0
======
In 2004 the Company authorized up to 500,000 shares to be granted under the
2004 Stock Option Plan.
Summarized information about stock options outstanding under these plans at
December 31, 2005 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Number of Shares Weighted Weighted Number of Shares Weighted
Range of Outstanding Average Average Exercisable Average
Exercise at Remaining Exercise at Exercise
Prices December 31,2005 Contractual Life Price December 31,2005 Price
------------ ---------------- ---------------- -------- ---------------- --------
EISOP
-----
$2.06 - $3.00 1,100 2.54 $2.66 1,100 $2.66
$3.51 3,200 6.90 3.51 3,200 3.51
------------- ------ ---- ----- ------ -----
$2.06 - $3.51 4,300 5.78 $3.29 4,300 $3.29
NSSOPD
--------
$3.51 4,000 1.90 3.51 4,000 3.51
F-20
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share at December 31, 2005 and 2004:
2005 2004
--------- ---------
Numerator:
Net income $ 2,617,483 $ 2,475,057
--------- ---------
Denominator:
Denominator for basic earnings
per share (weighted average shares) 4,935,472 4,928,785
Effect of dilutive securities:
Employee stock options 6,386 9,241
--------- ---------
Denominator for diluted earnings per
share (adjusted weighted-average
shares) and assumed conversions 4,941,858 4,938,026
========= =========
Basic and diluted earnings per share $ 0.53 $ 0.50
========= =========
In 2005 and 2004 there were no options excluded from the computation of
diluted earnings per share.
NOTE H - NATURE OF BUSINESS AND SEGMENT INFORMATION
The Company has the following two reportable business segments: Guardian
Laboratories and Eastern Chemical. The Guardian segment conducts research,
development and manufacturing of cosmetic ingredients, personal and health care
products, pharmaceuticals and specialty industrial products. The Eastern segment
distributes fine chemicals, solutions, dyes and reagents.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies. Segment
earnings or loss is based on earnings or loss from operations before income
taxes. The reportable segments are distinct business units operating in
different industries. They are separately managed, with separate marketing and
distribution systems. The following information about the two segments is for
the years ended December 31, 2005 and 2004.
F-21
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE H (continued)
2005 2004
---------------------------------- ----------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ----------- ----------- ------------ ----------- -----------
Revenues from external customers $11,075,696 $ 1,059,300 $12,134,996 $10,004,893 $ 1,118,582 $11,123,475
Depreciation and amortization 94,810 - 94,810 91,845 - 91,845
Segment income (loss) before income
tax expense* 3,937,574 80,355 4,017,929 3,725,217 (91,988) 3,633,229
Segment assets 2,599,895 387,570 2,987,465 2,532,195 358,804 2,890,999
Capital expenditure 82,748 - 82,748 125,616 - 125,616
* On January 1, 2005 the Company revised the estimated overhead allocated
to the Eastern Chemical subsidiary due to reductions in personnel and inventory
and an overall downsizing of the Eastern operation. This has resulted in a
reduction in the amount of overhead allocated to Eastern and a commensurate
increase in the amount of overhead being absorbed by the Guardian division. This
has also resulted in an increase in the overhead rate for the Guardian division.
If the current allocation had been used for the Eastern subsidiary, Eastern
would have had earnings from operations of $33,527 for the year ended December
31, 2004.
Income before income taxes
----------------------------
Total income for reportable segments $ 4,017,929 $ 3,633,229
Other income, net 237,459 220,991
Corporate headquarters expense (166,114) (170,821)
--------- ---------
Consolidated income before income taxes $ 4,089,274 $ 3,683,399
========= =========
Assets
------
Total assets for reportable segments $ 2,987,465 $ 2,890,999
Corporate headquarters 12,034,772 11,530,376
---------- ----------
Total consolidated assets $15,022,237 $14,421,375
========== ==========
F-22
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE H (continued)
Other Significant Items
-----------------------
2005 2004
-------------------------------------- --------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
---------- ----------- ------------ ----------- ----------- ------------
Capital expenditures $82,748 $ 73,872 $156,620 $125,616 $ 72,755 $198,371
Depreciation and amortization $94,810 $111,001 $205,811 $ 91,845 $117,947 $209,792
Geographic Information
----------------------
2005 2004
------------------------- -------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
---------- ----------- ---------- -----------
United States $ 5,891,221 $ 948,480 $ 5,634,832 $ 997,671
France 1,579,943 1,275,612
Other countries 4,663,832 4,213,031
---------- --------- ---------- ---------
$12,134,996 $ 948,480 $11,123,475 $ 997,671
========== ========= ========== =========
Major Customers
---------------
Customer A (Guardian) $ 4,497,547 $ 4,289,603
Customer B (Guardian) 1,357,764 1,086,869
All other customers 6,279,685 5,747,003
---------- ----------
$12,134,996 $11,123,475
========== ==========
NOTE I - CONTINGENCIES
While the Company has claims that arise from time to time in the ordinary
course of its business, the Company is not currently involved in any material
claims.
F-23
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2005 and 2004
NOTE J - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2005 and 2004 the Company paid to Henry
Globus, a former officer and current Director of the Company, $19,608 and
$18,852 respectively, for consulting services in accordance with his employment
termination agreement of 1998.
During the years ended December 31, 2005 and 2004 the Company paid to
Bonamassa , Maietta, and Cartelli, LLP, $10,500 for accounting and tax services.
Lawrence Maietta, a partner in Bonamassa, Maietta, and Cartelli, LLP, is
currently a Director of the Company.
During 2004, the Company sold an asset to an officer of the Company. Based
upon its estimated fair value on the date of sale, the Company recorded a loss
of $1,724.
F-24