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 March 31, 2007
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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 registrant 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:
4,942,539 shares of common stock,
par value $.10 per share,
(as of May 1, 2007)
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 - Three Months
Ended March 31, 2007 and 2006 (unaudited)............... 2
Consolidated Balance Sheets -
March 31,2007 (unaudited) and December 31, 2006......... 3-4
Consolidated Statements of Cash Flows - Three Months
ended March 31, 2007 and 2006 (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)
THREE MONTHS ENDED
MARCH 31,
2007 2006
------ ------
Revenue:
Net sales $ 4,227,426 $ 2,864,797
---------- ----------
Costs and expenses:
Cost of sales 1,813,026 1,352,611
Operating expenses 730,206 641,124
---------- ----------
2,543,232 1,993,735
---------- ----------
Income from operations 1,684,194 871,062
Other income (expense):
Investment income 125,393 80,423
Other (42) -
--------- ----------
Income before income taxes 1,809,545 951,485
Provision for income taxes 649,500 329,500
--------- ---------
Net income $ 1,160,045 $ 621,985
========= =========
Earnings per common share
(basic and diluted) $ .23 $ .13
========= =========
Weighted average shares - basic 4,942,289 4,940,183
========= =========
Weighted average shares - diluted 4,944,876 4,944,311
========= =========
See notes to consolidated financial statements
2
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2007 2006
------------ -------------
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 3,523,510 $ 3,027,486
Temporary investments 534,681 527,825
Marketable securities 7,424,101 7,346,653
Accounts receivable, net of
allowance for doubtful accounts
of 47,000 at March 31, 2007
and December 31,2006,
respectively 2,060,327 1,421,788
Inventories (net) 1,331,777 1,923,068
Prepaid expenses and other
current assets 265,300 165,288
Deferred income taxes 524,661 534,761
----------- -----------
Total current assets 15,664,357 14,946,869
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Property, plant and equipment:
Land 69,000 69,000
Factory equipment and fixtures 3,156,761 3,119,797
Building and improvements 2,161,419 2,161,418
Waste disposal plant 133,532 133,532
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5,520,712 5,483,747
Less: Accumulated depreciation 4,682,598 4,634,954
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838,114 848,793
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Other assets 148,430 148,430
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$ 16,650,901 $ 15,944,092
=========== ===========
See notes to consolidated financial statements
3
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2007 2006
--------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Dividends payable $ - $1,087,271
Accounts payable 169,039 222,625
Current loans payable 7,988 7,988
Taxes payable 594,929 65,438
Accrued expenses 724,782 579,913
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Total current liabilities 1,496,738 1,963,235
--------- ---------
Loans payable 12,648 14,645
Accrued pension liability 703,504 706,162
Deferred income taxes 34,360 34,360
--------- ---------
750,512 755,167
--------- ---------
Stockholders' equity:
Common stock $.10 par value,
authorized, 10,000,000 shares;
5,004,739 and 5,004,339 shares
issued, respectively, and
4,942,539 and 4,942,139
shares outstanding, respectively 500,474 500,434
Capital in excess of par value 3,793,263 3,792,478
Accumulated other comprehensive loss (549,039) (566,130)
Retained earnings 11,018,583 9,858,538
Treasury stock, at cost; 62,200 shares (359,630) (359,630)
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Total stockholders' equity 14,403,651 13,225,690
--------- ---------
$ 16,650,901 $ 15,944,092
========== ==========
See notes to consolidated financial statements
4
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------
2007 2006
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Cash flows provided by operating activities:
Net income $ 1,160,045 $ 621,985
Adjustments to reconcile net earnings
to net cash flows from operations:
Depreciation and amortization 47,644 48,336
Increase in provision for doubtful accounts - (10,500)
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (638,539) (237,653)
Inventories 591,291 (737,641)
Prepaid expenses and other current
and non-current assets (100,012) 38,615
Accounts payable (53,586) 294,261
Accrued pension costs (2,658) -
Accrued expenses and taxes payable 674,360 136,970
---------- ----------
Net cash provided by operating activities 1,678,545 154,373
---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (36,965) (17,832)
Net change in temporary investments (6,856) (579)
Purchase of marketable securities (50,257) (33,000)
---------- ----------
Net cash used in investing
activities (94,078) (51,411)
---------- ----------
Cash flows from financing activities:
Payment of long term debt (1,997) -
Proceeds from exercise of stock options 825 14,040
Dividends paid (1,087,271) (1,086,391)
---------- ----------
Net cash used in financing activities (1,088,443) (1,072,351)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 496,024 (969,389)
Cash and cash equivalents at beginning of period 3,027,486 3,425,593
---------- ----------
Cash and cash equivalents at end of period $ 3,523,510 $ 2,456,204
========== ==========
See notes to consolidated financial statements
5
UNITED-GUARDIAN, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Registrant (also referred to hereinafter as 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 March 31, 2007 and the results of operations
for the three months ended March 31, 2007 and 2006. The accounting policies
followed by the Company are set forth in the Company's financial statements
included in its Annual Report on Form 10-KSB for the year ended December 31,
2006.
2. The results of operations for the three months ended March 31, 2007 and
2006 are not necessarily indicative of the results to be expected for the full
year.
3. Stock-Based Compensation: At March 31, 2007, 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 December 31, 2006.
The Company follows the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123R, which requires
that the fair value of all share-based payments to employees, including grants
of employee stock options, be recognized as expense in the financial statements.
At March 31, 2007 the Company had 3,900 share-based awards that were
outstanding and exercisable, with a weighted-average exercise price of $3.42, an
aggregate intrinsic value of $23,016, and a weighted-average remaining term of
5.04 years. All of those options were fully vested as of December 31, 2006. The
Company did not grant any options during the three months ended March 31, 2007
and 2006.
As of March 31, 2007 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 three months
ended March 31, 2007 and 2006 under the provisions of FAS 123R.
The Company received proceeds of $825 and $14,040 from options exercised
under all share-based payment arrangements for the three months ended March 31,
2007 and 2006 respectively.
4. Marketable Securities
Unrealized
March 31, 2007 Cost Fair Value Gain/(Loss)
------------------ ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $3,001,026 $3,009,351 $ 8,325
Fixed income mutual funds 4,269,430 4,161,657 (107,773)
Equity and other mutual funds 231,102 253,093 21,991
---------- ----------- -----------
$7,501,558 $7,424,101 $ (77,457)
========== =========== ===========
6
Unrealized
December 31, 2006 Cost Fair Value Gain/(Loss)
----------------- ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $3,001,026 $3,003,399 $ 2,373
Fixed income mutual funds 4,220,084 4,091,754 (128,330)
Equity and other mutual funds 230,192 251,500 21,308
---------- ----------- -----------
$7,451,302 $7,346,653 $ (104,649)
========== =========== ===========
5. Inventories - Net
Inventories consist of the following: March 31, December 31,
2007 2006
---------- ----------
Raw materials and work in process $ 275,659 $ 313,319
Finished products and fine chemicals 1,056,118 1,609,749
---------- ----------
$1,331,777 $1,923,068
========== ==========
One of the Company's pharmaceutical products, Renacidin Irrigation, is
currently manufactured for the Company by a third party that is in the process
of relocating Renacidin production to a new manufacturing facility, which
requires the approval of the U.S. Food and Drug Administration ("FDA"). In order
to avoid running out of product while the application was pending, the Company
had brought in sufficient inventory to last until at least the end of 2007,
which was when FDA approval had been expected. This resulted in an increase of
approximately $1 million in the Company's finished goods inventory at December
31, 2006 as compared with December 2005. The Company expects all of that
inventory to be sold prior to its expiration date. On May 7, 2007, much earlier
than expected, the Company received notification that the FDA had approved its
application for the new manufacturing facility, and expects production in the
new facility to begin late this year or early in 2008. The Company believes that
it will have sufficient inventory to last until it receives product from the
newly approved facility.
As of March 31, 2007, the Company has reserved $109,000 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 $120,009 and $49,802 for the three months
ended March 31, 2007 and 2006, respectively. No payments were made for interest
during these periods.
The Company paid dividends of $1,087,271 and $1,086,391 for the three
months ended March 31, 2007 and 2006, respectively.
7. Income Taxes/FIN 48 Disclosure
The Company adopted the provisions of FIN 48 (see "RECENT ACCOUNTING
PRONOUNCEMENTS") on January 1, 2007. The implementation of FIN 48 did not result
in any adjustment to the Company's beginning tax positions. The Company
continues to fully recognize its tax benefits which are offset by a valuation
7
allowance to the extent that it is more likely than not that the deferred tax
assets will not be realized. As of January 1, 2007 and March 31, 2007, the
Company did not have any unrecognized tax benefits.
The Company files a consolidated Federal income tax return in the U.S. The
Company and its subsidiaries file separate income tax returns in New York State.
The Internal Revenue Service ("IRS") has examined the Company's U.S. income tax
returns through 2004. The Company is subject to examination by the IRS for years
2005 and 2006 and by New York State for years 2003 through 2006.
The Company's policy is to recognize interest and penalties in Other
Expense.
8. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Three months ended March 31,
2007 2006
------ ------
Net income $1,160,045 $ 621,985
---------- ----------
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities during period ..................... 27,191 (36,727)
---------- ----------
Other comprehensive income gain (loss) before tax 27 190 (36,727)
Income tax expense (benefit) related to other
comprehensive income ........................... 10,100 (13,800)
---------- ----------
Other comprehensive income (loss), net of tax...... 17,091 (22,927)
---------- ----------
Comprehensive income net of tax ................... $1,177,136 $ 599,058
========== ==========
Accumulated other comprehensive income (loss) comprises unrealized gains
and losses on marketable securities and liability for pension benefit net of the
related tax effect.
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2007 and 2006.
8
Three months ended
March 31,
2007 2006
------ ------
Numerator:
Net income $1,160,045 $ 621,985
========= =========
Denominator:
Denominator for basic earnings
per share (weighted average
shares) 4,942,289 4,940,183
Effect of dilutive securities:
Employee stock options 2,587 4,128
--------- ---------
Denominator for diluted earnings
per share (adjusted weighted-average
shares) and assumed conversions 4,944,876 4,944,311
========= =========
Basic and diluted earnings per share $ 0.23 $ 0.13
========= =========
10. The company sponsors a non-contributory defined benefit plan for its
employees and has adopted FAS 158 (see "RECENT ACCOUNTING PRONOUNCEMENTS")
effective December 31, 2006. A measurement period from October 1, 2005 to
October 1, 2006 has been used for the year ended December 31, 2006. The
following table sets forth the components of the projected net periodic benefit
costs for the years ending December 31, 2007 and ended December 31, 2006.
Projected
2007 2006
--------- ---------
Service cost $ 126,132 $ 111,449
Interest cost 144 358 158,489
Expected return on plan assets (137,632) (162,412)
Amortization of net loss 49,051 61,444
Effects of special events - 91,817
Amortization of prior service costs 7,461 7,461
--------- ---------
Net periodic benefit costs $ 189,370 $ 268,248
========= =========
The company has made contributions of $50,000 to the plan in each of the
three months ended March 31, 2007 and 2006. The company expensed $47,342 and
$44,108 for net periodic benefit costs for the three months ended March 31, 2007
and 2006, respectively.
11. The Company has two reportable business segments: the Guardian
Laboratories Division ("Guardian"), which develops and manufactures cosmetic
ingredients, personal and health care products, pharmaceuticals and specialty
industrial products; and Eastern Chemical Corporation ("Eastern"), a
wholly-owned subsidiary of the Company, which distributes a line of fine
chemicals, test solutions, dyes and reagents.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies as set forth
9
in the Annual Report for the year ended December 31, 2006. 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 three months ended March 31, 2007 and 2006.
Three months ended March 31,
2007 2006
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 3,990,650 $ 236,776 $ 4,227,426 $ 2,581,034 $ 283,763 $ 2,864,797
Depreciation and amortization 22,425 - 22,425 22,168 - 22,168
Segment income before income
taxes 1,774,870 (7,750) 1,767,120 887,193 22,334 909,527
Segment assets 3,488,308 420,067 3,908,375 3,292,436 445,742 3,738,178
Capital expenditure 36,965 - 36,965 16,713 - 16,713
Reconciliation to Consolidated Amounts
Three Months Ended March 31,
Income before income taxes 2007 2006
---------------------------- ----------- -----------
Total earnings for reportable segments $ 1,767,120 $ 909,527
Other income, net 125,351 80,423
Corporate headquarters expense (82,926) (38,465)
---------- ----------
Consolidated earnings before income taxes $ 1,809,545 $ 951,485
========== ==========
Assets
------
Total assets for reportable segments $ 3,908,375 $ 3,738,178
Corporate headquarters 12,742,526 11,241,997
---------- ----------
Total consolidated assets $16,650,901 $14,980,175
========== ==========
Other Significant items
-----------------------
Three months ended March 31,
2007 2006
------------------------------------------ -------------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
------------ ------------ ------------- ------------- ------------ -------------
Capital expenditures $ 36,965 $ - $ 36,965 $ 16,713 $ 1,119 $ 17,832
Depreciation and amortization 22,425 25,219 47,644 22,168 26,168 48,336
10
Geographic Information
----------------------
2007 2006
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
United States $ 2,152,086 $ 838,114 $ 1,377,758 $ 917,976
France 270,984 245,600
Other countries 1,804,356 1,241,439
----------- ------------- ----------- -------------
$ 4,227,426 $ 838,114 $ 2,864,797 $ 917,976
=========== ============= =========== =============
Revenues
---------------------------
2007 2006
----------- -------------
Major Customers
---------------
Customer A (Guardian)** $ 1,638,580 $ 1,128,726
Customer B (Guardian)** 180,055 168,847
Customer C (Guardian)** 571,803 162,796
All other customers 1,836,988 1,404,428
----------- -----------
$ 4,227,426 $ 2,864,797
=========== ===========
** At March 31, 2007 Customers A and C had balances approximating 43% and
24% of net accounts receivable, respectively. Customer B did not have an
outstanding balance at March 31, 2007. At March 31, 2006 Customers A, B and C
had balances approximating 26%, 12% and 5% of net accounts receivable,
respectively.
12. Subsequent Events
On May 7, 2007, the Company received notification from the FDA that the
Company's application for approval of a new manufacturing facility for Renacidin
Irrigation was approved. The Company expects to begin production later this year
or early in 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements. SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007, which for the Company will be the 2008
calendar (and fiscal) year. The Company is assessing the impact the adoption of
SFAS No. 157 will have on the Company's consolidated financial position and
results of operations.
In September 2006, the FSAB issued SFAS No. 158, "Employers Accounting for
Defined Benefit Pension and other Postretirement Plans". SFAS No. 158 improves
reporting obligations for pensions by recognizing the over-funded or
11
under-funded status of plan as an asset or liability. The Company adopted the
initial requirements in its fiscal year ended December 31, 2006. The
pronouncement does not change how the plan assets and obligations are measured
under SFAS 87 and SFAS 106 nor does it change the approach for measuring the
annual benefit cost reported in earnings. Rather, it eliminates the
provisions that permit assets and obligations to be measured as of the date not
more than three months prior to the balance sheet date, instead requiring
measurement as of the reporting date, which is effective for fiscal year ending
December 31, 2008 for the Company. In addition the pronouncement requires
previously unrecognized items, such as actuarial gains and unrecognized prior
service costs or credits to be recognized in the balance sheet as a component of
other comprehensive income (loss).
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option of
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides an
option to report selected financial assets and financial liabilities using fair
value. The standard establishes required presentation and disclosures to
facilitate comparisons with companies that use different measurements for
similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, with early adoption allowed if SFAS 157 is also
adopted. The Company is currently evaluating the impact of adopting SFAS 159 on
its consolidated financial statements.
On January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
an interpretation of 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. The interpretation requires that the
Corporation recognize the impact of a tax position in the financial statements
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. In accordance with the provisions of FIN 48, any
cumulative effect resulting from the change in accounting principle is to be
recorded as an adjustment to the opening balance of deficit. The adoption of FIN
48 did not result in a material impact on the Company's financial position
or results of operations.
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.
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
12
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 and Eastern. 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 in the United States, and to some hospitals and physicians.
Guardian's pharmaceutical products are distributed primarily in the United
States. Its personal care products are marketed worldwide primarily by its
marketing partners, the largest of which is International Specialty Products
Inc. ("ISP"). Approximately one-half of Guardian's personal care products will
be sold to foreign customers, either directly or through its marketing partners.
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
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.
13
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006, the discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with U.S. generally accepted accounting
principles. The preparation of those financial statements required us to make
estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in those financial statements. Those estimates
and assumptions can be subjective and complex, and consequently actual results
could differ from those estimates and assumptions. Our most critical accounting
policies relate to revenue recognition, concentration of credit risk, inventory,
pension costs, patents and other intangible assets, and income taxes. Since
December 31, 2006, there have been no significant changes to the assumptions and
estimates related to those critical accounting policies.
The following discussion and analysis covers material changes in the
financial condition of the Company since the year ended December 31, 2006, and a
comparison of the results of operations for the three months ended March 31,
2007 and March 31, 2006. This discussion and analysis should be read in
conjunction with "Management's Discussion and Analysis or Plan of Operation"
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006.
RESULTS OF OPERATIONS
Revenue
-------
For the three-month period ended March 31, 2007, consolidated revenue
increased $1,362,629 (47.6%) versus the comparable period in 2006. Guardian had
a sales increase of $1,409,616 (54.6%) and Eastern had a sales decrease of
$46,987 (16.6%).
Guardian's increase in sales was primarily attributable to increases in
sales in its three main product categories (pharmaceuticals, cosmetic
ingredients, and medical products), as discussed below:
(a) Pharmaceuticals: On March 1, 2007 Guardian increased prices on its
pharmaceutical products, which resulted in customers purchasing unusually large
quantities of product in February in order to avoid the price increase. The
result was an increase in sales of $676,257 (119%) for the three months ended
March 31, 2007 when compared with the same period in 2006. This increase was
primarily attributable to the price increase. Because of the unusually large
orders in February, sales in March were about half of what the average monthly
sales would have been had there not been a price increase, and the Company
expects sales of these products to continue to be lower for the next few months
while its distributors work off the extra inventory, then gradually increase
back to normal levels. The Company expects pharmaceutical sales for the full
year to be comparable to 2006.
(b) Cosmetic Ingredients: For the three months ended March 31, 2007
Guardian's sales of cosmetic ingredients increased by $622,438 (37.3%). Most of
that increase was attributable to sales to one large distributor for
distribution globally. Sales of the Company's line of Lubrajel products
increased by $767,538 (39.6%), again attributable primarily to increased sales
to that same distributor. The increase in sales was due to a general increase in
business as opposed to any significant increase in the number of new customers,
and most of the sales increases were attributable to increased sales in Western
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and Eastern Europe and Asia-Pacific. The Company cannot yet determine if such
sales increases will continue for the balance of the year.
(c) Medical (non-pharmaceutical) products: Sales of the Company's medical
lubricants increased by $153,976 (42%) for the first three months of 2007
compared with the same period in 2006. This increase was attributable to the
steadily increasing demand over the past three years for these products by the
Company's existing customers as opposed to sales to any new customers.
The decrease in Eastern sales is believed to be a continuation of the
gradual decline in Eastern's sales over the past few years. Some of that
decrease is attributable to normal fluctuations in Eastern's business, but much
of the decrease was the result of the Company's continuing efforts to reduce
Eastern's inventory levels, which has resulted in an inability to fill some
orders from existing stock as it might have been able to do in the past. This is
part of a continuing effort on the part of the Company to put more of its
resources into the growth of Guardian. The Company is monitoring closely the
profitability of Eastern and evaluating the advisability of discontinuing that
operation, which it intends to do if and when it determines that the Eastern
operation is no longer profitable.
Cost of Sales
-------------
Cost of Sales as a percentage of sales decreased 4.3% from 47.2% for the
three months ended March 31, 2006 to 42.9% for the comparable period in 2007.
This decrease was primarily due to (a) a decrease in the cost of one of the
Company's primary raw materials, and (b) a positive variance in overhead
absorption created by an increase in production during the first quarter ended
March 31, 2007 when compared with the same period in 2006.
Operating Expenses
------------------
Operating Expenses increased $89,082 (13.9%) for the three months ended
March 31, 2007 compared with the comparable period in 2006. This increase was
attributable to increases in medical costs, legal fees, Board of Director fees,
freight costs, and payroll and payroll-related costs.
Other Income
------------
Other Income increased $44,970 (55.9%) for the three months ended March 31,
2007. The increase was mainly attributable to higher investment income, which
was the result of higher investment balances and an increase in interest rates.
Provision for Income Taxes
--------------------------
The Provision for Income Taxes increased $320,000 (97.1%) for the three
months ended March 31, 2007 when compared with the comparable period in 2006.
This increase was due to an $858,060 (90.2%) increase in earnings before taxes
in 2007 as compared with 2006.
The Company's effective income tax rate increased 1.3% from 34.6% for the
three months ended March 31, 2006 to 35.9% for the comparable period in 2007.
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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 foreign and domestic production tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $1,183,985 from $12,983,634 at December 31,
2006 to $14,167,619 at March 31, 2007. The current ratio increased from 7.6 to 1
at December 31, 2006 to 10.5 to 1 at March 31, 2007. The increase in the current
ratio was primarily due to the effect of a decrease in dividends payable from
December 31, 2006 to March 31, 2007 offset by the increases in taxes payable and
accrued expenses.
The Company has no commitments for any further significant capital
expenditures during the remainder of 2007, 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 $1,678,545 and $154,373 for
the three months ended March 31, 2007 and March 31, 2006, respectively. The
increase was primarily due to increases in net income from operations,
inventory, and accrued expenses, offset by a decrease in accounts receivable.
During the three-month period ended March 31, 2007 and March 31, 2006,
$94,078 and $51,411 was used in investment activities, respectively. The change
is mainly due to the reinvestment of investment income.
Cash used in financing activities was $1,088,443 and $1,072,351 for the
three months ended March 31, 2007 and March 31, 2006, respectively. The increase
was due to a decrease in proceeds from the exercise of stock options in 2007
compared with 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.
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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 Kenneth H. Globus, President and principal
executive officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Robert S. Rubinger, Chief Financial Officer of
the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Kenneth H. Globus, President and principal
executive officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Robert S. Rubinger, Chief Financial Officer of
the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b. Reports on Form 8-K
There was one report on Form 8-K filed during the fiscal quarter ended
March 31, 2007. It was filed on March 28, 2007 and related to the issuance of an
earnings release by the Company on March 28, 2007.
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/ KENNETH H. GLOBUS
---------------------
Kenneth H. Globus
President
By: /S/ ROBERT S. RUBINGER
----------------------
Robert S. Rubinger
Chief Financial Officer
Date: May 8, 2007
17