U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2006
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to ___________
Commission File Number: 1-10526
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UNITED-GUARDIAN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-1719724
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Marcus Boulevard., Hauppauge, New York 11788
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(Address of principal executive offices)
(631) 273-0900
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(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 whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the Company filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
4,942,139 shares of common stock,
par value $.10 per share,
as of August 1, 2006
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Cover Page 2 of 2 Pages
UNITED-GUARDIAN, INC.
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income - Six and Three
Months Ended June 30, 2006 and 2005 (unaudited).......... 2
Consolidated Balance Sheets -
June 30, 2006 (unaudited) and December 31, 2005.......... 3-4
Consolidated Statements of Cash Flows - Six Months
ended June 30, 2006 and 2005 (unaudited)................. 5
Consolidated Notes to (unaudited) Financial Statements..... 6-12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12-16
Item 3 - Controls and Procedures...................................... 16
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 17
Item 2 - Changes in Securities and Use of Proceeds..................... 17
Item 3 - Defaults Upon Senior Securities............................... 17
Item 4 - Submission of Matters to a Vote of Security Holders........... 17
Item 5 - Other Information............................................. 17
Item 6 - Exhibits and Reports On Form 8-K.............................. 17
Signatures................................................................ 17
1
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
June 30, JUNE 30,
2006 2005 2006 2005
------ ------ ------ ------
Revenue:
Net sales $ 5,921,812 $ 6,647,572 $ 3,057,015 $ 2,767,455
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 2,793,799 3,041,560 1,441,188 1,272,793
Operating expenses 1,374,458 1,325,339 733,334 656,646
---------- ---------- ---------- ----------
4,168,257 4,366,899 2,174,522 1,929,439
---------- ---------- ---------- ----------
Income from operations 1,753,555 2,280,673 882,493 838,016
Other income (expense):
Investment income 195,102 161,291 114,679 94,952
Loss on sale of marketable securities (349) (114,231) (349) -
Other (227) (48) (227) -
--------- ---------- --------- ----------
Income before income taxes 1,948,081 2,327,685 996,596 932,968
Provision for income taxes 675,700 860,900 346,200 321,900
--------- --------- --------- ---------
Net income $ 1,272,381 $ 1,466,785 $ 650,396 $ 611,068
======== ========= ======== =========
Earnings per common share
(basic and diluted) $ .26 $ .30 $ .13 $ .12
========= ========= ========= =========
Weighted average shares - basic 4,941,167 4,932,761 4,942,139 4,932,981
========= ========= ========= =========
Weighted average shares - diluted 4,944,600 4,940,239 4,944,876 4,940,204
========= ========= ========= =========
See notes to consolidated financial statements
2
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2006 2005
------------ -------------
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 2,359,165 $ 3,425,593
Temporary investments 1,002,582 699,363
Marketable securities 6,461,173 7,066,797
Accounts receivable, net of
allowance for doubtful accounts
of $36,288 and $47,500 at
June 30, 2006 and December 31,
2005, respectively 1,058,918 1,083,992
Inventories (net) 1,514,863 1,031,563
Prepaid expenses and other
current assets 443,003 440,380
Deferred income taxes 255,189 217,389
----------- -----------
Total current assets 13,094,893 13,965,077
----------- -----------
Property, plant and equipment:
Land 69,000 69,000
Factory equipment and fixtures 3,087,972 3,068,050
Building and improvements 2,140,405 2,133,422
Waste disposal plant 133,532 133,532
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5,430,909 5,404,004
Less: Accumulated depreciation 4,550,036 4,455,524
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880,873 948,480
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Other assets 148,430 108,680
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$ 14,124,196 $ 15,022,237
=========== ===========
See notes to consolidated financial statements
3
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
June 30, DECEMBER 31,
2006 2005
--------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Dividends payable $ - $1,086,391
Accounts payable 190,067 148,051
Accrued expenses 605,342 448,990
--------- ---------
Total current liabilities 795,409 1,683,432
--------- ---------
Deferred income taxes 59,817 59,817
--------- ---------
Stockholders' equity:
Common stock $.10 par value,
authorized, 10,000,000 shares;
5,004,339 and 5,000,339 shares
issued, respectively, and
4,942,139 and 4,938,139
shares outstanding, respectively 500,434 500,034
Capital in excess of par value 3,792,478 3,778,838
Accumulated other comprehensive loss (145,269) (84,365)
Retained earnings 9,480,957 9,444,111
Treasury stock, at cost; 62,200 shares (359,630) (359,630)
--------- ---------
Total stockholders' equity 13,268,970 13,278,988
--------- ---------
$ 14,124,196 $ 15,022,237
========== ==========
See notes to consolidated financial statements
4
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------
2006 2005
------- -------
Cash flows provided by operating activities:
Net income $ 1,272,381 $ 1,466,785
Adjustments to reconcile net earnings
to net cash flows from operations:
Depreciation and amortization 94,512 100,524
Realized loss on sale of marketable securities 349 116,855
Provision for doubtful accounts (11,212) (11,029)
Reduction of inventory obsolescence 19,000 -
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable 36,286 (551,997)
Inventories (502,300) 336,239
Prepaid expenses and other current
and non-current assets (42,373) 186,925
Accounts payable 42,016 29,046
Accrued expenses and taxes payable 156,352 155,282
---------- ----------
Net cash provided by operating activities 1,065,011 1,828,630
---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (26,905) (85,509)
Net change in temporary investments (303,219) (295,764)
Purchase of marketable securities (93,803) (4,342,520)
Proceeds from sale of marketable securities 600,374 3,465,351
---------- ----------
Net cash provided by (used in) investing
activities 176,447 (1,258,442)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 14,040 5,865
Dividends paid (2,321,926) (2,120,812)
---------- ----------
Net cash used in financing activities (2,307,886) (2,114,947)
---------- ----------
Net decrease in cash and cash equivalents (1,066,428) (1,544,759)
Cash and cash equivalents at beginning of period 3,425,593 3,735,945
---------- ----------
Cash and cash equivalents at end of period $ 2,359,165 $ 2,191,186
========== ==========
See notes to consolidated financial statements
5
UNITED-GUARDIAN, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30, 2006
and the results of operations for the six and three months ended June 30, 2006
and 2005. The accounting policies followed by the Company are set forth in the
Company's financial statements included in its Annual Report to Shareholders for
the year ended December 31, 2005.
2. The results of operations for the six and three months ended June 30,
2006 and 2005 are not necessarily indicative of the results to be expected for
the full year.
3. Stock-Based Compensation: At June 30, 2006, the Company had two
stock-based employee compensation plans, which are more fully described in the
Company's Annual Report on Form 10-KSB, for the year ended 2005. As permitted
under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-based Compensation ("FAS 123"), through December 31, 2005, the Company
elected to follow the guidance of APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25 ("FIN 44"), in accounting
for the Company's stock-based employee compensation arrangements. Accordingly,
no compensation cost was recognized for any of the Company's fixed stock options
granted to employees when the exercise price of each option equaled or exceeded
the fair value of the underlying common stock as of the grant date for each
stock option. The Company accounted for equity instruments issued to
non-employees in accordance with the provisions of FAS 123.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("FAS 123R"), which replaced
FAS 123 and supersedes APB 25 and FIN 44. FAS 123R requires that the fair value
all share-based payments to employees, including grants of employee stock
options, be recognized as expense in the financial statements. The pro forma
disclosures previously permitted under FAS 123 are no longer an alternative to
financial statement recognition. The Company adopted the provisions of FAS 123R
on January 1, 2006 using the modified prospective application method of adoption
which requires the Company to record compensation cost related to unvested stock
awards as of December 31, 2005 by recognizing the unamortized grant date fair
value of these awards over the remaining service periods of those awards with no
change in historical reported earnings. Awards granted after December 31, 2005
are valued at fair value in accordance with provisions of FAS 123R and
recognized on a straight line basis over the service periods of each award. The
estimated forfeiture rates utilized for the six months ended June 30, 2006 were
based on the Company's historical experience. Upon adoption of FAS 123R the
Company elected to continue using the Black-Scholes option pricing model.
At June 30, 2006 the Company had 4,300 share-based awards that were
outstanding and exercisable, with a weighted average exercise price of $3.29, an
aggregate intrinsic value of $24,801, and a weighted average remaining term of
5.28 years. All of those options were fully vested as of December 31, 2005. The
Company did not grant any options during the six months ended June 30, 2006 and
2005.
6
As of June 30, 2006 there was no remaining unrecognized compensation cost
related to the non-vested share-based compensation arrangements granted under
the Company's plans.
The Company did not record any compensation expense during the six-months
ended June 30, 2006 under the provisions of FAS 123R.
Cash received from option exercise under all share-based payment
arrangements for the six-months ended June 30, 2006, was $14,040.
The following table illustrates the effect on net income and income per
share for the six-months ended June 30, 2005 if the Company had applied the fair
value recognition provisions of FAS 123 since the original effective date of FAS
123 to stock-based employee compensation for options granted under the Company's
arrangements as well as to the arrangement of the Company's subsidiaries:
Six Months Ended
June 30, 2005
--------------
Net income as reported $1,466,785
Add back (deduct): Total stock-based employee
compensation expense determined under APB 25 for
all awards, net of related tax effects --
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects --
Pro forma net income $1,466,785
=========
Income per share:
Basic--as reported $ .30
Basic--pro forma $ .30
Diluted--as reported $ .30
Diluted--pro forma $ .30
4. Marketable Securities
Unrealized
June 30, 2006 Cost Fair Value Gain/(Loss)
------------------ ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $1,747 433 $1,735,247 $ (12,186)
Corporate debt securities 599,688 597,921 (1,767)
Fixed income mutual funds 4,120,106 3,904,795 (215,311)
Equity and other mutual funds 227,785 223,210 (4,575)
---------- ----------- -----------
$6,695,012 6,461,173 (233,839)
========== =========== ===========
7
Unrealized
December 31, 2005 Cost Fair Value Gain/(Loss)
------------------ ---------- ---------- -----------
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)
========== =========== ===========
5. Inventories - Net
Inventories consist of the following: June 30, December 31,
2006 2005
---------- ----------
Raw materials and work in process $ 335,835 $ 376,308
Finished products and fine chemicals 1,179,028 655,255
---------- ----------
$1,514,863 $1,031,563
========== ==========
At June 30, 2006 and December 31, 2005, the Company has reserved $89,000
and $108,000 respectively for slow moving and obsolete inventory.
6. For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Cash payments for taxes were $551,122 and $585,674 for the six months ended
June 30, 2006 and 2005, respectively. There were no payments for interest during
these periods.
Dividends paid were $1,235,535 and $1,233,135 for the six months ended June
30, 2006 and 2005, respectively.
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Six months ended June 30, Three months ended June 30,
2006 2005 2006 2005
------ ------ ------ ------
Net income $1,272,381 $1,466,785 $ 650,396 $ 611,068
---------- ---------- ---------- ----------
Other comprehensive income (loss):
Unrealized (loss) gain on marketable
securities during period ...................... (99,078) (43,880) (62,351) 55,313
Less: reclassification adjustment for net
losses included in net income ................. 374 116,855 374 -
---------- ---------- ---------- ----------
Other comprehensive (loss) income before tax .... (98,704) 72,975 (61,977) 55,313
8
(table continued from previous page) Six months ended June 30, Three months ended June 30,
2006 2005 2006 2005
------ ------ ------ ------
Income tax expense (benefit) related to other
comprehensive income ............................ (37,800) 27,200 (24,000) 20,600
---------- ---------- ---------- ----------
Other comprehensive (loss) income, net of tax....... (60,904) 45,775 (37,977) 34,713
---------- ---------- ---------- ----------
Comprehensive income net of tax .................... $1,211,477 $1,512,560 $ 612,419 $ 645,781
========== ========== ========== ==========
Accumulated other comprehensive income (loss) is comprised of unrealized
gains and losses on marketable securities, net of the related tax effect.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the six and three months ended June 30, 2006 and 2005.
Six months ended Three months ended
June 30, June 30,
2006 2005 2006 2005
------ ------ ------ ------
Numerator:
Net income $1,272,381 $1,466,785 $ 650,396 $ 611,068
======= ========= ======= =========
Denominator:
Denominator for basic earnings
per share (weighted average
shares) 4,941,167 4,932,761 4,942,139 4,932,981
Effect of dilutive securities:
Employee stock options 3,433 7,478 2,737 7,223
--------- --------- --------- ---------
Denominator for diluted earnings
per share (adjusted weighted-average
shares) and assumed conversions 4,944,600 4,940,239 4,944,876 4,940,204
========= ========= ========= =========
Basic and diluted earnings per share $ 0.26 $ 0.30 $ 0.13 $ 0.12
========= ========= ========= =========
9. The Company has two reportable business segments: the Guardian
Laboratories Division ("Guardian") conducts research, development and
manufacturing of cosmetic ingredients, personal and health care products,
pharmaceuticals and specialty industrial products. Eastern Chemical Corporation
("Eastern"), a wholly-owned subsidiary of the Company, distributes a line of
fine chemicals, solutions, dyes and reagents.
9
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies as set forth
in the Annual Report for the year ended December 31, 2005. Segment earnings or
losses are based on earnings or losses 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 six and three months ended June 30, 2006 and 2005.
Six months ended June 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 5,384,005 $ 537,807 $ 5,921,812 $ 6,054,390 $ 593,182 $ 6,647,572
Depreciation and amortization 42,247 - 42,247 44,750 - 44,750
Segment income before income
taxes 1,784,295 46,064 1,830,359 2,327,899 31,953 2,359,852
Segment assets 3,022,098 540,685 3,562,783 2,648,972 354,204 3,003,176
Capital expenditure 18,803 - 18,803 27,916 - 27,916
Reconciliation to Consolidated Amounts
Income before income taxes
----------------------------
Total earnings for reportable segments $ 1,830,359 $ 2,359,852
Other income, net 194,526 47,012
Corporate headquarters expense (76,804) (79,179)
---------- ----------
Consolidated earnings before income taxes $ 1,948,081 $ 2,327,685
========== ==========
Assets
------
Total assets for reportable segments $ 3,562,783 $ 3,003,176
Corporate headquarters 10,561,413 11,000,140
---------- ----------
Total consolidated assets $14,124,196 $14,003,316
========== ==========
Three months ended June 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 2,802,971 $ 254,044 $ 3,057,015 $ 2,486,642 $ 280,813 $ 2,767,455
Depreciation and amortization 20,079 - 20,079 23,415 - 23,415
Segment income before income
taxes 897,102 23,730 920,832 857,842 19,679 877,521
10
(table continued from previous page)
Reconciliation to Consolidated Amounts
Three months ended June 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Income before income taxes
----------------------------
Total earnings for reportable segments $ 920,832 $ 877,521
Other income, net 114,103 94,952
Corporate headquarters expense (38,339) (39,505)
---------- ----------
Consolidated earnings before income taxes $ 996,596 $ 932,968
========== ==========
Other Significant items
-----------------------
Six months ended June 30,
2006 2005
------------------------------------------ -------------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
------------ ------------ ------------- ------------- ------------ -------------
Capital expenditures $ 18,803 $ 8,102 $ 26,905 $ 27,916 $ 57,593 $ 85,509
Depreciation and amortization 42,247 52,265 94,512 44,750 55,774 100,524
Geographic Information
----------------------
2006 2005
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
United States $ 2,413,974 $ 880,873 $ 3,391,534 $ 982,656
France 732,393 781,473
Other countries 2,775,445 2,474,565
----------- ------------- ----------- -------------
$ 5,921,812 $ 880,873 $ 6,647,572 $ 982,656
=========== ============= =========== =============
11
(table continued from previous page)
2006 2005
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
Major Customers
---------------
Customer A (Guardian)** $ 2,085,254 $ 2,313,604
Customer B (Guardian)** 607 277 665,793
All other customers 3,229,281 3,668,175
----------- -----------
$ 5,921,812 $ 6,647,572
=========== ===========
** At June 30, 2006 Customers A and B had balances approximating 36% and
25% of net accounts receivable, respectively. At June 30, 2005 Customers A and B
had balances approximating 49% and 15% of net accounts receivable, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109" ("FIN 48"), regarding accounting for,
and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact FIN 48 will
have on its results of operations and financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-QSB which are not purely historical are
forward-looking statements with respect to the goals, plans, objectives,
intentions, expectations, financial condition, results of operations, future
performance and business of the Company. Forward-looking statements may be
identified by the use of such words as "believes," "may," "will," "should,"
"intends," "plans," "estimates," or "anticipates" or other similar expressions.
12
Forward-looking statements involve inherent risks and uncertainties, and
important factors (many of which are beyond our control) could cause actual
results to differ materially from those set forth in the forward-looking
statements. In addition to those specific risks and uncertainties set forth in
the Company's reports currently on file with the SEC, some other factors that
may affect the future results of operations of the Company are: the development
of products that may be superior to those of the Company; changes in the quality
or composition of the Company's products; lack of market acceptance of the
Company's products; the Company's ability to develop new products; general
economic or industry conditions; intellectual property rights; changes in
interest rates; new legislation or regulatory requirements; conditions of the
securities markets; the Company's ability to raise capital; changes in
accounting principals, policies or guidelines; financial or political
instability; acts of war or terrorism; and other economic, competitive,
governmental, regulatory and technical factors that may affect the Company's
operations, products, services and prices.
Accordingly, results actually achieved may differ materially from those
anticipated as a result of such forward-looking statements, and those statements
speak only as of the date they are made. The Company does not undertake, and
specifically disclaims, any obligation to update any forward-looking statements
to reflect events or circumstances occurring after the date of such statements.
OVERVIEW
The Company is a Delaware corporation that operates in two business
segments. Guardian conducts research, product development, manufacturing and
marketing of cosmetic ingredients, personal and health care products,
pharmaceuticals, and specialty industrial products. The products manufactured by
Guardian are marketed through marketing partners, distributors, direct
advertising, mailings, and trade exhibitions. Its most important personal care
product line is its LUBRAJEL(R) line of water based moisturizing and lubricating
gels. It also sells two pharmaceutical products, which are distributed primarily
through drug wholesalers and surgical supply houses. There are also indirect
sales to the Veteran's Administration and other government agencies, and to some
hospitals and physicians.
While the Company does have competition in the marketplace for some of its
products, many of its products or processes 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, chemical, or health care
companies. Guardian's research and development department is actively working on
the development of new products to expand the Company's personal care line.
The Company has been issued many patents and trademarks, and intends
whenever possible to make efforts to obtain patents in connection with its
product development program.
Eastern distributes a line of fine organic chemicals, research chemicals,
test solutions, indicators, dyes and reagents. Eastern's products are marketed
through advertising in trade publications and direct mailings. Since the
Company's business activities and marketing efforts over the past several years
have focused increasingly on the Guardian division, the Company has reduced
Eastern's inventory levels in order to make it more marketable in the event the
13
Company decides to sell it at some future date. This has resulted in some
reduction in sales as compared with previous years. Sales of this division have
also declined as a result of increased competition from new and existing
competitors.
Guardian's pharmaceutical products are distributed primarily in the United
States. It's personal care products are marketed worldwide primarily by its
marketing partners, the largest of which is International Specialty Products
("ISP"). Approximately half of Guardian's personal care products will be sold to
foreign customers, either directly of through its marketing partners.
The following discussion and analysis covers material changes in the
financial condition of the Company since the year ended December 31, 2005, and a
comparison of the results of operations for the six and three months ended June
30, 2006 and June 30, 2005. This discussion and analysis should be read in
conjunction with "Management's Discussion and Analysis or Plan of Operation"
included in the Company's Form 10-KSB for the year ended December 31, 2005.
RESULTS OF OPERATIONS
Gross revenue from operations
-----------------------------
For the six-month period ended June 30, 2006 net sales decreased $725,760
(10.9%) versus the comparable period in 2005. Guardian had a sales decrease of
$670,385 (11.1%) and Eastern had a sales decrease of $55,375 (9.3%).
For the three-month period ended June 30, 2006, net sales increased
$289,560 (10.5%) versus the comparable period in 2005. Guardian had a sales
increase of $316,329 (12.7%) and Eastern had a sales decrease of $26,769 (9.5%).
The decline in Guardian's sales for the six-month period ended June 30,
2006 versus the comparable period in 2005 was due to lower sales in the first
quarter that were partially offset by higher sales in the second quarter. The
lower first quarter sales were due primarily to a price increase for the
company's pharmaceutical products that went into effect on March 1, 2005, the
anticipation of which resulted in an unusually high volume of sales of the
company's pharmaceutical products in the first quarter of 2005. That situation
was not repeated in the first quarter of 2006, resulting in more typical sales
levels for the pharmaceutical products. In addition, the first quarter of 2005
experienced an unusual number of shipments of orders that customers had
requested not be shipped out at the very end of 2004. That situation did not
recur this year. The increase in Guardian's sales in the second quarter of 2006
was due mainly to an increase in sales of the company's pharmaceutical products
compared with the same period in 2005.
The decrease in Eastern's sales is believed to be due to normal
fluctuations in the purchasing patterns of its customers.
Cost of sales
-------------
Cost of sales as a percentage of sales increased to 47.2% for the six
months ended June 30, 2006 from 45.8% for the comparable period ended June 30,
2005. For the three months ended June 30, 2006 compared with the three months
ended June 30, 2005, cost of sales as a percentage of sales increased from 46.0%
to 47.1%. These increases were due to increases in standard overhead rates for
14
Guardian that resulted primarily from increases in insurance and payroll and
payroll-related costs.
Operating Expenses
------------------
Operating expenses increased $49,119 (3.7%) for the six months ended June
30, 2006 compared with the comparable period in 2005. This increase was mainly
attributable to the net effect of increases in payroll and payroll-related
expenses and the reduction of the Company's bad debt reserve. For the three-
month period ended June 30, 2006, operating expenses increased $76,688 (11.7%)
when compared with the comparable period ended June 30, 2005. This increase was
due mainly to increases in payroll and payroll related expenses.
Other Income
------------
Other Income increased to $194,526 from $47,012 for the six month period
ended June 30, 2006 and June 30, 2005, respectively, an increase of $147,514
(313.8%). This increase was mainly attributable to the net effect of an increase
in investment income of $33,811 in 2006 and substantially lower losses on the
sale of marketable securities in 2005. In 2005 the sale of a portfolio of
securities, primarily bonds, the bulk of which had been managed for the Company
by a financial institution, resulted in a realized loss of approximately
$116,000, of which approximately $107,000 had previously been recorded in the
equity section of the balance sheet as an "accumulated other comprehensive
loss". Approximately $108,000 of the above loss was due to the sale of the bond
portfolio managed by a financial institution, which, over the 18 months the
company held it, had realized interest income net of broker fees of
approximately $154,000. The sale of bonds in the second quarter of 2006 resulted
in a loss of $349. Investment income is recorded net of brokerage fees.
For the three months ended June 30, 2006 Other Income increased $19,151
(20.2%) which was mainly attributable to higher investment income due to an
increase in interest rates.
Provision for income taxes
--------------------------
The provision for income taxes decreased $185,200 (21.5%) for the six
months ended June 30, 2006 when compared with the comparable period in 2005.
This decrease was due to (a) decreased earnings before taxes of $379,604 in
2006, and (b) the adding back of the approximately $116,000 in capital loss from
the sale of the bond portfolio in 2005, which loss will be available to offset
any realized capital gains in 2005 and any excess may be carried forward for
five years following the year of the loss.
The provision for income taxes increased $24,300 (7.5%) for the three
months ended June 30, 2006 which is mainly due to an increase in earnings before
taxes of $63,628.
The company had effective income tax rates of 34.7% and 37.0% for the six
months ended June 30, 2006 and June 30,2005, respectively, and 34.7% and 34.5%
for the three months ended June 30, 2006 and June 30, 2005 respectively.
Differences in the effective income tax rate from the statutory federal income
tax rate arise primarily from capital loss carryforwards, state taxes net of
federal benefits, and other differences.
15
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $12,281,645 at December 31, 2005 to
$12,299,484 at June 30, 2006. The current ratio increased from 8.3 to 1 at
December 31, 2005 to 16.5 to 1 at June 30, 2006. The increase in current ratio
was primarily due to the net effect of a decrease in dividends payable offset by
increases in inventories, and decreases in cash and investments.
The Company has no commitments for any further significant capital
expenditures during the remainder of 2006, and believes that its working capital
is and will continue to be sufficient to support its operating requirements for
at least the next twelve months.
The Company generated cash from operations of $1,065,011 and $1,828,630 for
the six months ended June 30, 2006 and June 30, 2005, respectively. The decrease
was primarily due to the decreases in net income from operations, losses on sale
of investments, and the net effect of increases in inventory and prepaid
expenses.
During the six-month period ended June 30, 2006, $176,447 was provided by
investment activities, as compared with the six-month period ended June 30,
2005, when $1,258,442 was used in investing activities. The change is mainly due
to the net effect of the sale (primarily bonds) and purchases (primarily bond
funds) of marketable securities during the six months ending June 30, 2005.
Cash used in financing activities was $2,307,886 and $2,114,947 for the six
months ended June 30, 2006 and June 30, 2005, respectively. The increase was due
primarily to an increase in dividends paid during the six months ended June 30,
2006.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of this Quarterly Report on Form 10-QSB
the Company's principal executive officer and principal financial officer
evaluated the effectiveness of the design and operation of Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) and concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is accumulated and communicated to the Company's
management, including its officers, as appropriate to allow timely decisions
regarding required disclosure, and are effective to ensure that such information
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls
The Company's principal executive officer and principal financial officer
have also concluded there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS: NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS: NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE
ITEM 5 - OTHER INFORMATION: NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
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 Officer 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.
b. Reports on Form 8-K
There were two reports on Form 8-K filed during the fiscal quarter ended
June 30, 2006. One was filed on May 10, 2006 and related to the issuance of an
earnings release by the Company on May 8, 2006. The second was filed on May 19,
2006, and related to the declaration of a special dividend by the Company's
Board of Directors on May 18, 2006.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED-GUARDIAN, INC.
(Registrant)
By: /s/ Alfred R. Globus
--------------------
Alfred R. Globus
Chief Executive Officer
By: /s/ Kenneth H. Globus
---------------------
Kenneth H. Globus
Chief Financial Officer
Date: August 10, 2006
17