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, 2006.
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
-------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
230 Marcus Blvd., Hauppauge, NY 11788
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (631) 273-0900
Securities registered pursuant to Section l2(b) of the Exchange Act: None
Title of each class: Common Stock, $.10 par value
Name of each exchange on which registered: American Stock Exchange
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, 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, 2006 were
$12,195,672.
On March 1, 2007 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 $21,012,600 (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, 2007 the registrant had issued 5,004,739 shares of Common
Stock, $.10 par value per share ("Common Stock"), of which 4,942,539 shares were
outstanding and 62,200 shares were held as Treasury stock.
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 2007 annual meeting of stockholders ("2007
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 United States
Securities and Exchange Commission ("S.E.C.") 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. ("United" or "Registrant") is a Delaware corporation
that, through its Guardian Laboratories Division ("Guardian"), conducts
research, product development, manufacturing and marketing of cosmetic
ingredients, personal and health care products, pharmaceuticals, and specialty
industrial products. United also distributes an extensive line of fine organic
chemicals, research chemicals, test solutions, indicators, dyes and reagents
through its wholly-owned subsidiary, Eastern Chemical Corporation ("Eastern").
Unless otherwise specified or indicated by the context, "Company" shall refer to
United-Guardian, Inc. as well as its divisions and subsidiaries.
United's predecessor, United International Research Corp. (which name was
later changed to United International Research, Inc. ("UIR"), was founded and
incorporated in New York in 1942 by Dr. Alfred R. Globus, United's Chairman and
Director of Research. On February 10, 1982, a merger took place between UIR and
Guardian Chemical Corp. ("GCC"), an affiliate of UIR, whereby GCC was merged
into UIR and the name was changed to United-Guardian, Inc., a New York
Corporation. On September 14, 1987, United-Guardian, Inc. (New York) was merged
with and into a newly-formed Delaware corporation by the same name,
United-Guardian, Inc., for the purpose of changing the domicile of United.
The following is a description of the two business segments in which the
Company operates:
1
(1) 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 not only develops new products but also modifies and refines existing
products, with the goal of expanding the potential markets for the Company's
products. 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 personal
care products 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 70% of the
Company's sales in 2006, and its RENACIDIN(R) IRRIGATION, a pharmaceutical
product that accounted for approximately 17% of the Company's sales in 2006. 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 35 or so as a subsidiary 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
United 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 Guardian, and many of which have unique properties. The products
manufactured by Guardian are sold to end users through the Company's 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 is also a small amount of direct sales to hospitals and
pharmacies.
During 2006, Guardian's sales accounted for approximately 92% of Company's
total product sales.
2
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
2006 sales from these two product lines accounted for approximately 94% of
Guardian's sales, and 87% of the Company's sales.
PRINCIPAL PRODUCTS:
------------------
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
2006 once again was 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.
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). The
newest products in the LUBRASIL line are the new LUBRASIL II products, which
currently consist of LUBRASIL II DM and LUBRASIL II SB. Both products contain
20% silicone compared with 1% for the original LUBRASIL products.
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. Guardian is continuing to develop new varieties
of LUBRAJEL for this purpose. In 2004 Guardian introduced a new LUBRAJEL under
the name "LUBRAJEL II XD", and at the end of 2004 it introduced an extensive new
3
line of LUBRAJEL products using a different preservative system, which the
Company believes will attract new customers and retain existing customers that
might require a different preservative system. In 2006 Guardian developed the
two new LUBRASIL II products mentioned above, which have enhanced feel and
additional lubricating and/or moisturizing properties. The LUBRASIL II DM was
completed and was sampled to the Company's marketing partners in the third
quarter of 2006, and the LUBRASIL II SB was completed in 2006 and is expected to
be introduced into the market in the second quarter of 2007.
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. In furtherance of that goal, in December, 2006
it entered into an agreement with a marketing consultant, who will be working
with the Company to expand the Company's product line into areas not currently
being serviced by the Company's existing distribution arrangements. That
consultant will initially be concentrating on expanding the medical uses for the
Guardian's products, which has been a growing area in recent years.
The Company believes that any potential sales increases in the LUBRAJEL
line of products may be offset 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.
PHARMACEUTICAL PRODUCTS
-----------------------
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. In October, 1990, the United States Patent Office issued to the Company
patent #4,962,208, which expires in October, 2007, covering the method of
manufacturing RENACIDIN IRRIGATION. The Company does not expect the expiration
of this patent to affect its sales of RENACIDIN IRRIGATION because the brand
name, RENACIDIN, has a long history of use and has become synonymous with this
product category.
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.
OTHER PRODUCTS:
--------------
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.
4
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 Guardian'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.
Of these "Other Products", Klensoft comprised under 5% of the Company's
sales in FY-2006, and the rest of the products combined made up approximately 3%
of the Company's sales in 2006.
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.
Prior to initiating research and development work on a product, market
research is done to determine the marketability of the product, including the
potential market size and most effective method of marketing the product. Ater
that the research and development department will determine whether the product
can be successfully developed, including (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.
5
If that initial development work is successful, further development work to
bring the product to market will continue, including some or all of the
following: (a) clinical studies needed to determine safety and effectiveness of
drug or medical device products; (b) preparatory work for the filing of
Investigational New Drug Applications or New Drug Applications; (c) scaling up
from laboratory production batches to pilot batches to full scale production
batches.
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.
Guardian's major research focus is the development of new and unique
personal care ingredients. The following are some of the projects that Guardian
is either working on intends to work on in the near future:
LUBRAJEL II: This product line is being developed to recapture some of the
market share that the Company has lost over the years to some of its competitors
and to enhance the properties of the existing LUBRAJEL formulations. The first
product in this line, LUBRAJEL II XD, was developed to be a drop-in replacement
for an existing competitive product, and is currently being actively marketed.
The second product, the LUBRASIL II DM, was initially sampled to the marketplace
in August, 2006, and the third product, LUBRASIL II SB, is still in testing and
should begin sampling in mid-2007. The Company hopes to continue 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.
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 developed many years ago and had been approved for certain
uses in France and Canada, and is still being sold on a very limited basis in
Canada. The Company has been working with Howard Industries ("Howard"), an
Ohio-based company that is interested in finding new markets for CLORONINE as a
disinfecting agent. Howard has been testing it for a very specific farming
application, and the results have been promising. They are currently awaiting
the formal results of those tests and, if positive, Howard intends to begin
marketing the product for that use in the second half of 2007. However, in order
to do so it will have to register the product with one or more governmental
agencies, including the United States Environmental Protection Agency, which
could possibly delay their marketing efforts. Howard is also looking at other
possible uses for Cloronine, and the Company is working on developing additional
disinfecting agents, including one based on chlorine dioxide, which the Company
hopes will open up new marketing opportunities with Howard.
CLORONINE GEL: This is another form of Cloronine that is being evaluated by
Howard. It is a gel form of Cloronine, which makes it more effective on vertical
surfaces. It, too, would require regulatory approvals before being marketed.
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. Initial development efforts have produced
mixed results so far, and this product is still in a very early stage of
development.
6
SKIN SENSORIAL AGENTS: A line of products that will enhance the feel of
skin care products. The new Lubrasil II products mentioned are two examples of
the new types of products the Company is looking to develop in this area.
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.
The Company expects its research and development costs for 2007 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 holds many United States
patents and trademarks relating to its products, and regularly 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 its
business are of varying importance to the Company. The most significant products
for which the Company has a registered trademark are LUBRAJEL and RENACIDIN.
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
------------------------------------------------ --------- ----------- ---------- ---------------
Method of Preparing Time-Stable Solutions of Non- 4,962,208 9/1985 10/1990 10/2007
Pyrogenic Magnesium Gluconocitrate ("Renacidin
Irrigation")
Iodophor; Polyethylene Glycol Alkylaryl-sulfonate 4,873,354 4/1988 10/1989 4/2008
Iodine complex
Iodophor; biocide; reacting polyethylene glycol, 5,013,859 4/1988 5/1991 5/2008
alkylarylsulfonate and Iodine water-propylene glycol
solvent refluxing
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.)
Stable, Active Chlorine Containing Anti-microbial 5,128,342 10/1987 7/1992 7/2009
Compositions ("Cloronine")
7
Stabilized Beta Carotene 5,023,355 6/1990 6/1991 6/2010
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 United. It distributes an extensive
line of fine organic chemicals, research chemicals, test solutions, indicators,
dyes and stains, and reagents. In 2006 and 2005 Eastern's sales accounted for
approximately 8% and 9%, 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 reduced 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, Guardian'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 Guardian's other
8
industrial and medical products. In 2006, ISP's purchases for distribution in
the United States were estimated to be approximately $1,032,000 compared with
$1,237,000 in 2005, a decrease of 16.6%. These sales accounted for approximately
8.5% 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 customers of 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 products.
The Company's domestic sales of pharmaceutical products are handled
primarily through the major full-line drug wholesalers and account for
approximately 19.0% of the Company's sales. The Company's other products, such
as its industrial products, are sold directly to end-users and account for
approximately 1.0% of sales.
Foreign Sales
In 2006 and 2005 the Company derived approximately 52.0% and 51.0%,
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 and/or customers as a percentage of the Company's total sales were
as follows: ISP: 26.8% (an estimate of ISP's purchases intended for sale outside
the U.S., based on sales figures provided to the Company by ISP); Sederma:
10.1%; S. Black: 6.0%; C&M International: 2.9%; Harmac: 1.4%; and Castelli:
1.0%. The Company also has two foreign customers for its medical products that
each account for less than 1.0% of the Company's total sales.
Marketing Agreements
In 1994 the Company entered into a marketing agreement with ISP whereby ISP
would distribute Guardian'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 that extended
and modified the 2000 Agreement. This was further modified in December 2005 to
extend ISP's marketing rights until December 2008, and to provide for automatic
extensions until December, 2010 if specified minimum annual purchase levels were
attained. It also specified guidelines and provisions for future price increases
by the Company.
9
The Company believes that in the event ISP were to cease marketing
Guardian's products, alternative arrangements could be made to continue to
supply product to the customers currently using the Guardian'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 has five major raw material vendors that account for 91.0%
of the raw material purchases for Guardian and 78.0% of the raw material
purchases of the Company.
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 the 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.
10
Eastern faces competition from many other chemical manufacturers and
distributors, many of which have much greater financial resources than Eastern.
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 United earned ISO 9001:2000 registration from Underwriters
Laboratories, Inc., indicating that United's documented procedures and overall
operations had attained the high level of quality needed to comply with this new
ISO certification level. United has been in continuous compliance with the new
standard since that initial approval. Prior to that, in November 1998 United had
earned ISO-9002 registration. United will continue to be evaluated every six
months for continued compliance with the new ISO-9001:2000 standard. The Company
has not included Eastern in its ISO registration process.
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 United States Food and Drug Administration
("F.D.A.") 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 F.D.A. regulation, 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.
Guardian is required to comply with all pertinent Good Manufacturing
Practices of the F.D.A. for medical devices and drugs. Accordingly, the
regulations to which Guardian and certain of its products may be subject, and
any changes with respect thereto, may materially affect Guardian'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 2006 and 2005 the Company incurred approximately $47,000 and $49,000,
respectively, in environmental compliance costs. There was no material financial
or other impact on the Company as a result of compliance with environmental
laws.
11
Research and Development Expense
Portions of the Company's operating expenses are directly attributable to
research and development the Company performs. In 2006 and 2005, the Company
incurred approximately $502,000 and $423,000, respectively, in research and
development expenses included in operating 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, 22 in research, quality control and manufacturing, 6 in maintenance
and construction, and 7 in office and administrative work. Of the total number
of employees, 41 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
The Company is not aware of any pending or threatened litigation against
the Company.
The Company may have a contingent liability arising out of a possible
inadvertent violation of Section 5 of the Securities Act of 1933, as amended, in
connection with its issuance of shares ("Plan Shares") under its 1993 Employee
Incentive Stock Option Plan and Non-Statutory Stock Option Plan (collectively,
the "Plans"). Since the initial filing of the Form S-8 in July 1993, the Company
had been unaware that it might be necessary to obtain the consent of its
auditors each year to update the Form S-8 with its filings under the Securities
Exchange Act of 1934. Management believed that its initial registration on Form
S-8 was updated annually by incorporating by reference all future filings under
the 1934 Act, and therefore it did not know that it needed to request the annual
consents. The Company has requested and obtained the consent of its auditors to
incorporate their report included in this Form 10-KSB into the Form S-8, as
Exhibit 23.1. The Company will also obtain and file such consents as exhibits to
all future Forms 10-KSB until such time as it files a post-effective amendment
to the Form S-8 indicating that all registered shares have been sold or
deregistering unsold shares. The Company is in the process of determining
whether or not the failure to obtain and file such auditors consents in previous
Forms 10-KSB in fact created a defect in the Form S-8 which may trigger
liability by the Company to purchasers of Plan Shares during relevant time
periods under Federal and state securities laws. The Company believes that it is
unlikely that any purchasers of stock under the Plans would want to rescind
their purchases. It is also unclear whether any potential liability to the
Company would extend to persons who purchased shares from participants in the
Plans, and, in any event, the Company does not believe that any liability for
12
damages resulting from the resale of such shares would be material to the
accompanying financial statements. The Company is not aware of any threatened or
pending claims against it based upon a Section 5 violation and it intends to
defend any such claims should they arise.
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 United 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, 2005 to
December 31, 2006. The quotations represent prices between dealers and do not
include retail markup, markdown or commission:
Year Ended Year Ended
Quarters December 31, 2006 December 31, 2005
-------- ----------------- -------------------
High Low High Low
---- --- ---- ---
First (1/1 - 3/31) 10.86 8.71 8.40 7.39
Second (4/1 - 6/30) 9.50 8.19 8.20 7.01
Third (7/1 - 9/30) 9.50 7.55 8.49 7.61
Fourth (10/1 - 12/31) 9.90 9.01 11.33 8.15
Holders of Record
As of March 1, 2007 there were 1108 holders of record of Common Stock.
Cash Dividends
On May 17, 2006 the Company declared a special cash dividend of $.25 per
share, which was paid on June, 16, 2006 to all stockholders of record as of June
2, 2006. On December 18, 2006 the Company declared a cash dividend of $.22 per
share, which was paid on January 10, 2007 to all stockholders of record as of
December 27, 2006.
On May 19, 2005 the Company declared a special cash dividend of $.25 per
share to all stockholders of record as of June 1, 2005, which was paid on June
15, 2005. On December 1, 2005 the Company declared a cash dividend of $.22 per
share to all stockholders of record as of December 15, 2005, which was paid on
January 5, 2006.
13
Item 6. Management's Discussion and Analysis or Plan of Operation
Results Of Operations:
Year Ended December 31, 2006 Compared with
Year Ended December 31, 2005
Revenue
Consolidated revenue in 2006 increased by $60,676 (0.5%) compared with
2005. This was due to an increase of $132,207 (1.2%) in Guardian's sales, which
was partially offset by a decrease in Eastern's sales of $71,531 (6.8%).
The increase in Guardian's sales was mainly due to an increase in sales of
certain of the Lubrajel products that are used in medical-related products.
Those sales increased 18.2% in 2006 compared with 2005. This was primarily due
to an increase in volume from existing medical use customers, and relates to
their sales of both existing and new products.
In the personal care market, Guardian's sales to ISP, its largest
customer/distributor, decreased by 4.4% in 2006 compared with 2005. However, ISP
reported to the Company that its sales of Guardian's products actually increased
by 2.6% in the same period, despite the fact that their overall sales of
personal care products were flat in 2006 compared with 2005. ISP believes that
the disparity between what ISP purchased from the Company and what it actually
sold was the result of their purchasing patterns and inventory levels.
Guardian's five other customers/distributors of personal care products
showed both increases and decreases in 2006 compared with 2005. The net effect
of this was that their combined sales increased by 5.0% in 2006 compared with
2005. The Company attributes most of this increase to purchasing patterns and
stocking levels rather than to any significant increase in sales.
Overall, total sales of the Lubrajel line to all customers increased by
3.0% in 2006 compared with 2005, with the entire increase being attributable to
the increase in medical-related uses of Lubrajel as discussed above.
The Company's sales of its two pharmaceutical products decreased by 0.1% in
2006 compared with 2005. Renacidin sales were down slightly and Clorpactin sales
were up slightly. The Company attributes this to normal fluctuations in the
buying patterns of its pharmaceutical customers.
Sales of the Company's industrial specialty products, which represent less
than 1.0% of the Company's total sales, increased by $19,000 (15.6%) from
$121,000 in 2005 to $140,000 in 2006. This was the result of normal fluctuations
in the sales of these products.
Eastern's sales were down 6.8% in 2006 compared with 2005. This was a
result of the continuing reduction in the amount of inventory that Eastern has
on hand, 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
expects to either discontinue or sell this operation in the next few years,
depending on whether or not it continues to be profitable.
14
Cost of Sales
Cost of sales as a percentage of sales in 2006 decreased to 46.3% from
46.9% in the prior year. The decrease was primarily due to a decrease in the
cost of the Company's primary raw material, which decrease was partially offset
by an increase in the cost of manufacturing one of the Company's pharmaceutical
products.
Operating Expenses
Operating expenses increased by $237,084 (9.1%) in 2006 compared with the
prior year. This increase is mainly due to increases in payroll and payroll-
related costs, such as pension costs, medical, disability, and other insurance
premiums, as well as increases in legal and accounting costs, cost of utilities,
and printing costs.
Other Income
Net other income increased $175,002 (73.7%) for the year ended December 31,
2006. This increase is mainly attributable to the net effect of an increase in
income from investments of $77,585 in 2006 and the loss on the sale of a
portfolio of marketable securities (primarily bonds) during 2005, 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. In 2006, the Company had
realized losses on sales of marketable securities in the amount of $873 and a
loss on the sale of fixed assets amounting to $14,695.
Provision for Income Taxes
The provision for income taxes decreased $71,852 (4.9%) in 2006 compared
with 2005. This decrease was primarily due to the fact that in 2005 there was a
capital loss of $116,000 from the sale of a bond portfolio managed by Merrill
Lynch that was not deductible for tax purposes, thereby increasing the income
tax provision for 2005. This did not recur in 2006. Even though earnings before
taxes increased by $47,897 in 2006 compared to 2005, the non-recurrence of that
non-deductible capital loss more than offset the increased earnings, resulting
in a lower tax provision in 2006. That capital loss from 2005 is still available
to offset any future realized capital gains, and can be carried forward for five
years following the year of the loss.
Liquidity and Capital Resources
Working capital increased to $12,983,634 at December 31, 2006 from
$12,281,645 at December 31, 2005, an increase of $701,989 (5.7%). The current
ratio decreased to 7.6 to 1 at December 31, 2006 from 8.3 to 1 at December 31,
2005. The decrease in the current ratio from December 31, 2005 to December 31,
2006 was due primarily to: (a) an increase of approximately $131,000 in accrued
expenses; (b) a decrease of approximately $275,000 in prepaid expenses; and (c)
an increase of approximately $75,000 in accounts payable, all of which were
partially offset by an increase in accounts receivable of approximately $338,000
and an increase in inventories of approximately $892,000.
15
The increase in inventory was the result of the Company bringing in a large
quantity of its Renacidin Irrigation product to fill orders while its
application with the F.D.A. to change manufacturing facilities was pending.
Since final approval is not expected until the end of 2007, the Company brought
in additional inventory which it believes will be sufficient to last until it
can bring in product from the new facility. This has resulted in an increase of
approximately $1 million in the Company's finished goods inventory as compared
with December 2005. The Company expects all of that inventory to be sold prior
to its expiration date. (SEE "NOTE C" of the Company's "Notes To Consolidated
Financial Statements" for additional details.)
At December 31, 2006 the Company did not have any line of credit
agreements. On January 17, 2007 the Company entered into a line of credit
agreement with JPMorgan Chase Bank for borrowings of up to $2,000,000 at an
interest rate of 1.0% below the Prime Rate. The initial line of credit will
expire on June 30, 2007, but it is expected that the line will be renewed by the
Company on an annual basis thereafter. As of March 1, 2007 the Company had no
outstanding balance on this credit line.
The Company generated cash from operations of $2,076,797 in 2006 compared
to $3,172,030 in 2005. The decrease in 2006 was primarily due to the increases
in accounts receivable and inventory.
Cash used in investing activities was $165,687 for the year ended December
31, 2006 compared with $1,381,475 for the year ended December 31, 2005. The
change was mainly due to the net effect of the sale (primarily bonds) and
purchases (primarily bond funds) of marketable securities and temporary
investments in 2005.
Cash used in financing activities was $2,309,217 and $2,100,907 during the
years ended December 31, 2006 and 2005, respectively. The increase was primarily
due to the increase in the dividend declared in December 2005 that was paid in
January 2006 to $.22 per share from the $.18 per share dividend that was
declared in December 2004 and 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 $7,400 in lease commitments, which
expire in 2008, of which approximately $5,300 is payable in 2007 with the
remaining $2,100 payable in 2008.
The Company has an outstanding loan for the purchase of an automobile of
which approximately $22,633 is outstanding, $7,988 is payable in each of 2007
and 2008, with the remaining $6,657 due in 2009.
Patent Expirations
The Company's patent on its Renacidin Irrigation expires in October 2007.
The Company does not believe that the expiration of that patent will have a
material impact on the Company's revenues.
Item 7. Financial Statements.
Annexed hereto starting on page F-1
16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 8A. Controls and Procedures
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of December 31, 2006, was
performed by the management of the Company, with the participation of the
United's President and Chief Financial Officer. Based on that evaluation,
United's President 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 by the S.E.C.'s rules and forms. There have
been no significant changes in 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, 2007
with respect to the executive officers and Directors of the Registrant:
Name Age Position(s) with Registrant
---------------------- ----- ----------------------------------
Dr. Alfred R. Globus 86 Chairman of the Board of Directors;
Director of Research
Kenneth H. Globus 55 President, General Counsel, and
Director
Robert S. Rubinger 64 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Charles W. Castanza 74 Senior Vice President
Derek Hampson 67 Vice President
Joseph J. Vernice 48 Vice President
Peter A. Hiltunen 48 Vice President
Cecile M. Brophy 58 Treasurer, Principal Accounting
Officer, and Controller
Henry P. Globus 84 Director
17
Lawrence F. Maietta 49 Director
Arthur M. Dresner 65 Director
Andrew A. Boccone 61 Director
Christopher W. Nolan, Sr. 42 Director
Dr. Alfred R. Globus has been Chairman of the Board of Directors and
Director of Research of United since its inception in 1942. He had served as
President from 1942 until 1988, and as Chief Executive Officer from 1942 until
2006.
Kenneth H. Globus has been President and General Counsel of United since
July 1988. He also served as Chief Financial Officer from 1997 until 2006. He
has been a Director since 1984.
Robert S. Rubinger has been Executive Vice President and Secretary of
United since July 1988, Treasurer from May 1994 until May 2004, and Chief
Financial Officer since December, 2006. He has been a Director since 1982.
Charles W. Castanza has been Senior Vice President of United since March
2000. He served as Operations Manager of Chemicals and Pharmaceuticals of United
from February 1982 until April 1986. He had been a Director from 1982 until
2006.
Derek Hampson has been a Vice President of United since October 1987. He
has served as Manager of Eastern since 1971 and its President since 1996.
Joseph J. Vernice has been a Vice President of United since February, 1995.
He has been Manager of Research and Development since 1988 and Director of
Technical Services since 1991.
Peter A. Hiltunen has been a Vice President of United since July 2002. He
has been Production Manager since 1982.
Cecile M. Brophy has been Treasurer of United since May 2004. She has
served as Controller since November 1997. From May 1994 until November 1997 she
served as manager of the accounting departments of United and Eastern.
Henry P. Globus has been a consultant to the Company since July 1988. He
served as Executive Vice President of United from February 1982 until July 1988.
He has been a Director since 1947.
Lawrence F. Maietta has been a partner in the public accounting firm of
Bonamassa, Maietta & Cartelli, LLP in Brooklyn, NY since October 1991. He was
controller for United from October 1991 until November 1997, and a Director
since February 1994.
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 United since April 1997.
18
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
United since November 2002.
Christopher W. Nolan, Sr. has been a Managing Director (since March 2006)
and Executive Director (2002 to 2006) in the Mergers & Acquisitions ("M&A")
group of Rabobank International, New York, NY. From 2000 to 2002 he was a Vice
President in M&A for Deutsche Bank Securities, Inc., New York, NY. From
1992-2000 he was a V.P. in Corporate Development and Investor Relations for ISP
in Wayne, NJ. He has been a Director of United since January 2005.
Kenneth H. Globus is the son of Henry P. Globus and the nephew of 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 United'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
the S.E.C.) 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 S.E.C. guidelines. One of United'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, even though he is considered "independent" by the American Stock
Exchange, he is not considered "independent" by the S.E.C., and therefore 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. Christopher Nolan is considered "financially sophisticated" as that
term is defined by the American Stock Exchange.
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 and/or President, 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
19
requirement under Item 5.05 of form 8-K relating to amendments to or waivers
from any provision of its Code of Business 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 Registrant's 2007 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" of
Registrant's 2007 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 subsections entitled "Principal Stockholders" and "Security Ownership of
Management" under the main section entitled "Voting Securities and Principal
Stockholders", as well as to the subsection entitled "Summary Compensation
Table" of the main section entitled "Compensation of Directors and Executive
Officers", of Registrant's 2007 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 Registrant's 2007 Proxy Statement.
Item 13. Exhibits
3(a) Certificate of Incorporation of United as filed April 22,
1987. Incorporated by reference to Exhibit 4.1 to the
Registrant'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 United-Guardian, Inc. (Delaware) 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
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 29, 1988 (the "1988 10-K").
3(c) By-laws of United. Incorporated by reference to Exhibit 4.2
to the 1987 8-K.
4(a) Specimen Certificate for shares of common stock of the
United. 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 Registrant's Registration
Statement on Form S-1 (Registration No. 2-63114) declared
effective February 9, 1979.
20
10(b) Employment Termination Agreement dated July 8, 1988 between
United and Henry Globus. Incorporated by reference to
Exhibit 10(i) to the Registrant'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 United and ISP
Technologies Inc., dated July 5, 2000. Incorporated by
reference to Exhibit 10(d) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2000.
10(d) Letter Amendment between United and ISP Technologies Inc.
dated December 20, 2005 amending the Exclusive Distributor
Agreement between United and ISP Technologies Inc. dated
July 5, 2000. Incorporated by reference to Exhibit 10(d) to
the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005.
21 Subsidiaries of United:
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
** Inactive without assets
23.1 Consent by Eisner LLP to the incorporation by reference in
the Registration Statement of the Company on Form S-8 of
Eisner's report dated March 14, 2007 with respect to its
audits of the consolidated financial statements of the
Company for the years ended December 31, 2006 and 2005.
31.1 Certification of Kenneth H. Globus, President of United,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Robert S. Rubinger, Chief Financial Officer
of United, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Kenneth H. Globus, President of United,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Robert S. Rubinger, Chief Financial Officer
of United, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees that have been paid, or will be paid, to Eisner LLP by
the Company for the review and audit of the Company's financial statements for
21
FY-2006, including the Company's quarterly reports on Form 10-QSB and its annual
report on form 10-KSB, were approximately $68,150 (including out of pocket
expenses). The aggregate fees paid to Eisner LLP by the Company for the review
and audit of the Company's quarterly and annual financial statements for FY-2005
were approximately $64,150 (including out of pocket expenses).
Audit-Related Fees
During FY-2006 there were no payments to Eisner LLP related to the
Company's compliance with section 404 of the Sarbanes-Oxley Act ("SOX
Compliance"). During FY-2005 Eisner LLP billed the Company $1,472 for fees
related to its review of the Company's 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.
Tax Fees
There were no other fees billed by Eisner LLP during the last two fiscal
years for professional services rendered for tax compliance, tax advice, and tax
planning. Accordingly, none of such services were approved pursuant to
pre-approval procedures or permitted waivers thereof.
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. All of the
services described above were approved by the Audit Committee. Accordingly, none
of such services were approved pursuant to pre-approval procedures or permitted
waivers thereof.
Pre-Approval Policies and Procedures
Engagement of accounting services by the Company is not made pursuant to
any pre-approval policies and procedures. Rather, the Company believes that its
accounting firm is independent because all of its engagements by the Company are
approved by the Company's audit committee prior to any such engagement.
The Audit Committee of United'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.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED-GUARDIAN, INC.
Dated: March 19, 2007 By: /s/ Kenneth H. Globus
------------------------
Kenneth H. Globus
President & Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
----------------------- --------------------------------- ---------------
By:/s/ Alfred R. Globus Chairman of the Board of Directors March 19, 2007
------------------------
Alfred R. Globus
By:/s/ Kenneth H. Globus President, General Counsel, March 19, 2007
------------------------ Director,
Kenneth H. Globus
By:/s/ Robert S. Rubinger Executive Vice President, March 19, 2007
------------------------ Secretary, Chief Financial
Robert S. Rubinger Officer; Director
By:/s/ Charles W. Castanza Senior Vice President March 19, 2007
------------------------
Charles W. Castanza
By:/s/ Cecile M. Brophy Treasurer, Principal Accounting March 19, 2007
------------------------ Officer, and Controller
Cecile M. Brophy
By:/s/ Henry P. Globus Director March 19, 2007
------------------------
Henry P. Globus
By:/s/ Lawrence F. Maietta Director March 19, 2007
------------------------
Lawrence F. Maietta
By:/s/ Arthur M. Dresner Director March 19, 2007
------------------------
Arthur M. Dresner
By: /s/ Andrew A. Boccone Director March 19, 2007
------------------------
Andrew A. Boccone
By: /s/ Christopher W. Nolan, Sr. Director March 19, 2007
------------------------------
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,
2006 and 2005 F-3 - F-4
Consolidated Statements of Income for the Years
Ended December 31, 2006 and 2005 F-5
Consolidated Statement of Stockholders' Equity
and Comprehensive Income for the Years Ended
December 31, 2006 and 2005 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2006 and 2005 F-7
Notes to Consolidated Financial Statements F-8 - F-26
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, 2006 and 2005 and the
related consolidated statements of income, changes in stockholders' equity,
comprehensive income, and consolidated cash flows for each of the years in the
two year period ended December 31, 2006. 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.
As discussed in Note A to the consolidated financial statements, effective
January 1, 2006, the Company changed its method of accounting for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123(R), "Share-Based Payment".
As discussed in Note A to the consolidated financial statements, effective
December 31, 2006, the Company changed its method of accounting for its pension
liability in accordance with Statement of Financial Accounting Standards No.158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans".
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, 2006 and 2005 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, 2006, in conformity
with U.S. generally accepted accounting principles.
/s/ EISNER LLP
New York, New York
March 14, 2007
F-2
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------
2006 2005
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................ $3,027,486 $3,425,593
Temporary investments............................. 527,825 699,363
Marketable securities ............................ 7,346,653 7,066,797
Accounts receivable, net of allowance for doubtful
accounts of $47,000 and $47,500, respectively 1,421,788 1,083,992
Inventories ...................................... 1,923,068 1,031,563
Prepaid expenses and other current assets ........ 165,288 440,380
Deferred income taxes ............................ 534,761 217,389
---------- ----------
Total current assets ............... 14,946,869 13,965,077
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land ............................................. 69,000 69,000
Factory equipment and fixtures ................... 3,119,797 3,068,050
Building and improvements ........................ 2,161,418 2,133,422
Waste disposal plant.............................. 133,532 133,532
---------- ----------
5,483,747 5,404,004
Less accumulated depreciation .................... 4,634,954 4,455,524
---------- ----------
848,793 948,480
---------- ----------
OTHER ASSET
Other ............................................ 148,430 108,680
---------- ----------
148,430 108,680
---------- ----------
$15,944,092 $15,022,237
========== ==========
See notes to consolidated financial statements
F-3
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
2006 2005
-------- --------
CURRENT LIABILITIES
Dividends payable ............................ $1,087,271 $1,086,391
Accounts payable ............................. 222,625 148,051
Current loans payable......................... 7,988 -
Accrued taxes payable......................... 65,438 -
Accrued expenses ............................. 579,913 448,990
--------- ---------
Total current liabilities ............... 1,963,235 1,683,432
--------- ---------
Loans payable .................................... 14,645 -
Accrued pension liability ........................ 706,162 -
Deferred income taxes ............................ 34,360 59,817
--------- ---------
755,167 59,817
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Common stock, $.10 par value; 10,000,000
shares authorized; 5,004,339 and 5,000,339
shares issued, respectively; and 4,942,139
and 4,938,139 outstanding, respectively ..... 500,434 500,034
Capital in excess of par value................. 3,792,478 3,778,838
Accumulated other comprehensive loss........... (566,130) (84,365)
Retained earnings ............................. 9,858,538 9,444,111
Treasury stock, at cost; 62,200 shares ........ (359,630) (359,630)
---------- ----------
13,225,690 13,278,988
---------- ----------
$15,944,092 $15,022,237
========== ==========
See notes to consolidated financial statements
F-4
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------
2006 2005
----------- -----------
Revenue
Net sales ............................... $12,195,672 $12,134,996
---------- ----------
Costs and expenses
Cost of sales ........................... 5,641,663 5,690,966
Operating expenses ...................... 2,829,299 2,592,215
---------- ----------
8,470,962 8,283,181
---------- ----------
Income from operations ............. 3,724,710 3,851,815
Other income (expense)
Investment income........................ 429,088 351,503
Loss on sale of marketable securities.... (873) (113,865)
Loss sale of assets...................... (14,695) -
Interest Expense......................... (798) -
Other expense (261) (179)
---------- ----------
Income before income taxes ......... 4,137,171 4,089,274
Provision for income taxes .................. 1,399,939 1,471,791
---------- ----------
Net Income ......................... $ 2,737,232 $ 2,617,483
========== ==========
Earnings per common share (basic
and diluted)............................. $ .55 $ .53
========== ==========
Weighted average shares-basic ............... 4,941,657 4,935,472
========== ==========
Weighted average shares-diluted ............. 4,944,721 4,941,858
========== ==========
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, 2006 and 2005
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, 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
Issuance of common stock in
connection with exercise
of stock options ............ 4,000 400 13,640 14,040
Adjustment to initially apply
SFAS 158, net of deferred
income tax benefit of $297,800 (500,481) (500,481) $(500,481)
Unrealized loss on marketable
securities, net of deferred
income tax of $11,200....... 18,716 18,716 18,716
Net income .................... 2,737,232 2,737,232 2,737,232
Dividends declared ............ (2,322,805) (2,322,805) _________
Comprehensive income .......... $2,255,467
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2006 5,004,339 $ 500,434 $ 3,792,478 $(566,130) $ 9,858,538 $(359,630) $13,225,690
========= ========= =========== ========== ========== ========== ==========
See notes to consolidated financial statements
F-6
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
2006 2005
--------- ---------
Cash flows from operating activities
Net income ......................................... $2,737,232 $2,617,483
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization .................. 195,369 205,811
Realized loss on sale of marketable securities.. 873 116,512
Net loss on sale of equipment................... 14,695 -
Provision for bad debts......................... (500) 23,254
Tax Benefit from exercise of stock options ..... - 2,550
Deferred income taxes .......................... (56,229) 54,645
Provision for inventory obsolescence ........... 1,000 20,000
Increase (decrease) in cash resulting from
changes in operating assets and liabilities
Accounts receivable ....................... (337,296) (189,161)
Inventories ............................... (892,505) 324,317
Prepaid expenses and other current and
non current assets ...................... 235,342 (32,935)
Accounts payable .......................... 74,574 (24,269)
Accrued pension costs (92,119) -
Accrued expenses and taxes payable ........ 196,361 53,823
--------- ---------
Net cash provided by operating activities ..... 2,076,797 3,172,030
--------- ---------
Cash flows from investing activities
Acquisition of plant and equipment.................. (94,412) (156,620)
Proceeds from the sale of plant and equipment....... 8,000 -
Net change in temporary investments................. 171,538 (297,075)
Purchase of marketable securities................... (2,899,491) (5,293,131)
Proceeds from sale of marketable securities......... 2,648,678 4,365,351
-------- --------
Net cash used in investing activities ......... (165,687) (1,381,475)
-------- --------
Cash flows from financing activities
Payment of long term debt........................... (1,332) -
Proceeds from exercise of stock options ............ 14,040 19,905
Dividends paid ..................................... (2,321,925) (2,120,812)
-------- --------
Net cash used in financing activities ......... (2,309,217) (2,100,907)
-------- --------
Net decrease in cash and cash equivalents............. (398,107) (310,352)
Cash and cash equivalents, beginning of year ......... 3,425,593 3,735,945
--------- ---------
Cash and cash equivalents, end of year ............... $3,027,486 $3,425,593
========= =========
See notes to consolidated financial statements
F-7
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
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, which 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 87% and 85% of consolidated
sales for each of the years ended December 31, 2006 and 2005, with Lubrajel
accounting for 70% and 68% and Renacidin accounting for 17% 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 17, 2006 the company declared a special dividend of $.25 per share
payable on June 16, 2006 to stockholders of record as of June 2, 2006 for a
total payout of $1,235,535, and on December 18, 2006 the company declared a cash
dividend of $.22 per share payable on January 10, 2007 to stockholders of record
as of December 27, 2006, for a total payout of $1,087,270.
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.
F-8
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE A (continued)
Statements of Cash Flows
Cash payments for income taxes were $1,223,762 and $1,321,853 for the years
ended December 31, 2006 and 2005, respectively. Cash payments for interest was
$798 for the year ended December 31, 2006 and there were no payments for
interest during the year ended December 31, 2005.
For the year ended December 31, 2006, the Company had the following
non-cash investing and financing activities:
Obligations under long-term debt for equipment purchases ...... $ 23,965
Pension liability, comprehensive loss and related tax effect....$798,000
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, 2006 and 2005
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 Asset
Other asset consists of a $148,430 deposit given to a vendor for regulatory
and validation work being done in order to qualify one of the vendor's other
manufacturing locations for the production of the Company's Renacidin Irrigation
product. This was necessitated by the vendor's relocation of production of this
type of product to another of its 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, 2006 and
2005, two customers, both of them distributors and marketing partners of the
Company, accounted for revenues aggregating 45% and 48% respectively. At
December 31, 2006 and December 31, 2005 those same two customers had accounts
receivable balances aggregating 52% and 32% respectively.
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 $502,000 and $423,000 for the years ended December 31, 2006
and 2005, respectively.
F-10
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
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 $102,000 and $106,000 for the years ended December 31, 2006 and
2005 respectively.
Advertising Costs
Advertising costs are expensed as incurred. During 2006 and 2005 the
Company incurred $64,500 and $76,765 of advertising costs, respectively.
Stock-Based Compensation
In 2004 the Company approved a new stock option plan ("2004 Stock Option
Plan"). Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share Based Payment". We elected to use the
modified prospective transition method, therefore, prior period results were not
restated. Prior to the adoption of SFAS 123R, stock-based compensation expense
related to employee and Director stock options was not recognized in the results
of operations if the exercise price was at least equal to the market value of
the common stock on the grant date, in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Stock-based compensation Issued to
Employees".
SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation expense over the
requisite service period (generally the vesting period) in the financial
statements based on their fair values on grant date. For options with graded
vesting, the Company fair values the stock option grants and recognizes
compensation expense as if each vesting portion of the award was a separate
award. Under the modified prospective method, awards that were granted,
modified, or settled on or after January 1, 2006 are measured and accounted for
in accordance with SFAS 123R. The impact of forfeitures that may occur prior to
vesting is also estimated and considered in the amount of expense recognized. In
addition, the realization of tax benefits in excess of amounts recognized for
financial reporting purposes will be recognized as a financing activity rather
than as an operating activity.
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.
F-11
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE A (continued)
Year Ended December 31,
-------------------------
2005
---------
Reported net income ............................. $ 2,617,483
Stock-based employee compensation
expense included in reported net
income, net of related tax effect .............. 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effect............... 0
---------
Pro forma net income............................. $ 2,617,483
=========
Earnings per share (basic and diluted)
As reported ................................ .53
========
Pro forma .................................. $ .53
========
No stock options were granted in 2006 or 2005 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, pension liability 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
F-12
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE A (continued)
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 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 consolidated financial position, results of operations, and cash
flows.
In September 2006, the S.E.C. issued Staff Accounting Bulletin 108,
"Considering the Effects on Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," ("SAB 108"). SAB 108
requires registrants to quantify errors using both the income statement method
(i.e. iron curtain method) and the rollover method and requires adjustment if
either method indicates a material error. If a correction in the current year
relating to prior year errors is material to the current year, then the prior
year financial information needs to be corrected. A correction to the prior year
results that are not material to those years, would not require a "restatement
process" where prior financials would be amended. SAB 108 is effective for
fiscal years ending after November 15, 2006. The adoption of SAB 108 did not
have a material effect on our consolidated financial position, results of
operations or cash flows.
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, results
of operations, and cash flows.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans."
F-13
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE A (continued)
SFAS No. 158 improves reporting of obligations for pensions by recognizing
the over-funded or under-funded status of plan as an asset or liability, which
is effective for the 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 a 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 services costs or credits to be
recognized in the balance sheet as a component of other comprehensive income
(loss).
The following table reflects the incremental effect of applying FASB
Statement No. 158 on individual line items in the consolidated Balance Sheets at
December 31, 2006.
Before After
Application of Application of
Statement 158 Adjustments Statement 158
------------- ----------- --------------
(Asset)/Liability for pension
benefit ..................... $ (92,120) $ 798,281 $ 706,162
Deferred income taxes .......... (236,961) (297,800) (534,761)
Total liabilities .............. 2,012,240 706,162 2,718,402
Accumulated other
comprehensive income ........ (65,649) (500,481) (566,130)
Total Stockholders' Equity ..... 13,726,171 (500,481) 13,225,690
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
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 only if SFAS 157 is also
adopted. The Company is currently evaluating the impact of adopting SFAS 159 on
its consolidated financial statements.
F-14
NOTE B - MARKETABLE SECURITIES
Marketable securities at December 31, 2006 and 2005 were as follows:
Unrealized
Cost Fair Value Gain/(Loss)
-------- ---------- ----------
December 31, 2006
-----------------
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)
========= ========= ======
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)
========= ========= ======
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
2006 2005
----------- -----------
Raw materials and work-in-process ...... $ 313,319 $ 376,308
Finished products and fine chemicals ... 1,609,749 655,255
---------- ----------
$1,923,068 $1,031,563
========== ==========
One of the Company's pharmaceutical products, Renacidin Irrigation, had
been manufactured for the Company by Hospira, Inc., formerly a division of
Abbott Laboratories, in Rocky Mount, North Carolina. Hospira is changing the
manufacturing facility for Renacidin Irrigation from the Rocky Mount facility to
its facility in Clayton, North Carolina, and as a result it was necessary for
the Company obtain F.D.A. approval to have the product manufactured in the new
facility. The Company filed its application with the F.D.A. in December 2006,
and is awaiting a response.
At December 31, 2006 and 2005, the company has reserved $109,000 and
$108,000 respectively for slow moving and obsolete inventory.
NOTE D - NOTES PAYABLE - BANKS
There were no notes payable at December 31, 2006 and 2005.
F-15
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
Year ended December 31,
--------------------------
2006 2005
Current --------- ---------
Federal .............................. $1,271,863 $1,219,309
State ................................ 184,305 197,837
--------- ---------
1,456,168 1,417,146
Deferred --------- ---------
Federal .............................. (48,693) 47,321
State ................................ (7,536) 7,324
--------- ---------
(56,229) 54,645
--------- ---------
Total provision for income taxes ... $1,399,939 $1,471,791
========= =========
The following is a reconciliation of the Company's effective income tax
rate to the Federal statutory rate:
Year ended December 31,
--------------------------------
2006 2005
-------------- --------------
(000's) % (000's) %
------- --- ------- ---
Income taxes at statutory Federal
income tax rate ................ $1,407 34% $1,390 34%
State income taxes, net of Federal
benefit ........................ 122 3 126 3
Foreign Sales Exclusion ............. (75) (2) (81) (2)
Domestic Production Exclusion ....... (36) (1) (41) (1)
Nondeductible expenses............... 4 - 3 -
Change in deferred tax asset
valuation allowance ............ 0 0 39 1
Other, net .......................... (22) 0 36 1
----- ---- ----- ----
Actual income tax expense ........... $1,400 34% $1,472 36%
===== ==== ===== ====
F-16
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE E (continued)
During 2006 and 2005, the Company realized the tax benefits of the Foreign
Sales exclusion and 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 60% and 80% of the pre-repeal exclusion for transactions
during 2006 and 2005 respectively.
The Domestic Production Activities Deduction was created to replace the
Extraterritorial Income Exclusion. In 2006 and 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
------------------------
2006 2005
----------- -----------
Deferred tax assets
Current
-------
Accounts receivable ...................... $ 17,531 $ 17,718
Unrealized loss on marketable securities.. 39,000 50,200
Accrued pension liability ................ 297,800 -
Inventories .............................. 40,657 40,284
Accrued Expenses ......................... 119,225 101,987
Sec. 263A costs........................... 13,348 -
Capital Loss ............................. 42,798 42,472
Other..................................... 7,200 7,200
-------- --------
577,559 259,861
-------- --------
Valuation Allowance ...................... (42,798) (42,472)
-------- --------
534,761 217,389
Deferred tax liabilities
Non-current
-----------
Deferred taxes ........................... (34,360) (59,817)
--------- ---------
(34,360) (59,817)
--------- ---------
Net deferred tax asset ........................... $ 500,401 $ 157,572
========= =========
The valuation allowances at December 31, 2006 and 2005 are due to the
capital loss carry forwards that the company does not expect to utilize in the
future. The change in the valuation for the year ended December 31, 2006 was
$326.
F-17
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
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 fair value of plan assets as of October 1, 2006 and 2005 was $2,208,527
and $2,314,362, respectively.
The projected benefit obligation to plan assets are $2,914,689 and
$3,054,346 at October 1, 2006 and 2005 respectively.
The net pension liability recorded by the Company at December 31, 2006 is
$706,162, while the net pension asset recorded by the Company at December 31,
2005 was $160,368.
The percentage of the fair value of total plan assets as of October 1, 2006
is as follows:
2006 2005
------ ------
Equity securities 24% 29%
Debt securities - General Investment Account 76% 71%
------ ------
Total 100% 100%
====== ======
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.
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.
F-18
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
Note F (continued)
The accumulated benefit obligation is $2,307,022 and $2,476,741 at December
31, 2006 and 2005 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:
Year Ending Expected Future Benefits Payable
----------- --------------------------------
2007 $ 650,000
2008 100,000
2009 35,000
2010 180,000
2011 140,000
2012-2016 1,890,000
The company estimates that it will make contributions to the pension plan
of approximately $200,000 during 2007 which includes required and discretionary
contributions.
A measurement period from October 1, 2005 to October 1, 2006 has been used
for the year ended December 31, 2006. The liabilities and assets are calculated
at October 1, 2006. Assets are adjusted for known contributions received by the
Company between October 1, 2006 and December 31, 2006.
The following table sets forth the plan's funded status:
Year ended December 31,
----------------------
2006 2005
--------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year. $3,054,346 $2,805,529
Service cost...................................... 111,449 107,786
Interest cost..................................... 158,489 152,104
Actuarial (gain)/loss............................. (24,773) 244,413
Benefits paid..................................... (35,723) (255,486)
Purchase of annuity for retiree .................. (349,099) -
--------- ---------
Projected benefit obligation at end of year....... $2,914,689 $3,054,346
========= =========
F-19
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
Note F (continued)
Change in Plan Assets:
Fair value of plan assets at beginning of year.... $2,314,362 $2,235,475
Actual return on plan assets...................... 780,987 134,373
Employer contributions............................ 200,000 200,000
Benefits paid..................................,.. (35,723) (255,486)
Other............................................. (349,099) -
--------- ---------
Fair value of plan assets at end of year.............. $2,208,527 $2,314,362
========= =========
Funded status at end of year (underfunded)............ $ (706,162) $ (739,984)
========= =========
Amounts recognized in statement of financial position
Noncurrent Liabilities............................ $ (706,162) N/A
========= =========
Amounts recognized in accumulated Other Comprehensive
Income ("OCI")
Total net loss.................................... $ 766,283 N/A
Prior service cost................................ 31,998 N/A
-------- ---------
Total accumulated OCI(not adjusted for
applicable tax...................................... $ 798,281 N/A
======== =========
Weighted-average assumptions used to determine benefit
obligations
Discount rate...................................... 5.50% 5.25%
Rate of compensation increase...................... 5.50% 5.42%
The net periodic benefit cost includes the following components:
Year ended December 31,
-------------------------
2006 2005
Components of net periodic benefit cost: ----------- -----------
Service cost................................... $ 111,449 $ 107,786
Interest cost.................................. 158,489 152,104
Expected return on plan assets................. (162,412) (148,983)
Amortization of net actuarial loss............. 61,444 40,984
Amortization of prior service cost............. 7,461 7,461
Effect of special events....................... 91,817 -
--------- ----------
Net periodic benefit cost................... $ 268,248 $ 159,352
========= ==========
F-20
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
Note F (continued)
Other changes recognized in OCI
Net loss....................................... $ 58,652 $ N/A
Amortization of net gain....................... (61,444) N/A
Amortization of prior service cost............. (7,461) N/A
Amount recognized due to special event......... (91,817) N/A
--------- --------
Total recognized in other comprehensive income. $ (102,070) $ N/A
========= ========
Total recognized in net periodic benefit cost
and OCI ......................................... $ 166,178 $ N/A
========= ========
Weighted-average assumptions used to determine net
period benefit cost
Discount rate................................. 5.25% 5.50%
Expected long-term return on plan assets...... 7.00% 7.00%
Rate of compensation increase................. 5.42% 5.51%
Note: N/A - these items are new this year due to the adoption of SFAS 158.
Retrospective application is not permitted.
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, the Company made contributions of 50%
of the first 6% of each employee's elective deferral up to a maximum employer
contribution of 3% of biweekly pay. Employees become fully vested in Company
contributions after one year of employment. 401(k) Company contributions were
approximately $64,000 and $57,000 for the years ended December 31, 2006 and
2005, 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"):
F-21
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
Note F (continued)
Number Weighted average
EISOP outstanding exercise price
----- ------------ -------
Options outstanding January 1, 2005.... 5,900 3.39
Exercised (1,600) 3.67
------
Options outstanding and exercisable at
December 31, 2005 4 300 3.29
------
Options outstanding and exercisable at
December 31, 2006................. 4,300 3.29
======
Available for grant at December 31, 2006 0
======
NSSOPD
------
Options outstanding at January 1, 2005 . 8,000 3.51
Exercised (4,000) 3.51
------
Options outstanding and exercisable at
December 31, 2005 4,000 3.51
Exercised (4,000) 3.51
------
Options outstanding and exercisable at
December 31, 2006 0
======
Available for grant at December 31, 2006 0
======
At December 31, 2006,the intrinsic value of the 4,300 share awards
outstanding was $24,586.
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, 2006 is as follows:
F-22
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE F (continued)
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 31,2006 Contractual Life Price December 31,2006 Price
------------ ---------------- ---------------- -------- ---------------- --------
EISOP
-----
$2.06 - $3.00 1,100 1.54 $2.66 1,100 $2.66
$3.51 3,200 5.90 3.51 3,200 3.51
------------- ------ ---- ----- ------ -----
$2.06 - $3.51 4,300 4.78 $3.29 4,300 $3.29
As of December 31, 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 year ended
December 31, 2006 under the provisions of FAS 123R.
Cash received from option exercise under all share-based payment
arrangements for the year ended December 31, 2006 was $14,040.
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share at December 31, 2006 and 2005:
2006 2005
--------- ---------
Numerator:
Net income $ 2,737,232 $2,617,483
--------- ---------
Denominator:
Denominator for basic earnings
per share (weighted average shares) 4,941,657 4,935,472
Effect of dilutive securities:
Employee stock options 3,064 6,386
--------- ---------
F-23
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE G (continued)
Denominator for diluted earnings per
share (adjusted weighted-average
shares) and assumed conversions 4,944,721 4,941,858
========= =========
Basic and diluted earnings per share $ 0.55 $ 0.53
========= =========
In 2006 and 2005 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, 2006 and 2005.
2006 2005
--------------------------------------- ---------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ----------- ----------- ------------ ----------- -----------
Revenues from external customers $11,207,903 $ 987,769 $12,195,672 $11,075,696 $ 1,059,300 $12,134,996
Depreciation and amortization 87,306 - 87,306 94,810 - 94,810
Segment income (loss) before income
tax expense 3,884,979 5,501 3,890,480 3,937,574 80,355 4,017,929
Segment assets 3,434,014 435,036 3,869,050 2,599,895 387,570 2,987,465
Capital expenditure 57,297 - 57,297 82,748 - 82,748
F-24
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE H (continued)
Reconciliation to Consolidated Amounts
--------------------------------------
Income before income taxes
----------------------------
Total income for reportable segments $ 3,890,480 $ 4,017,929
Other income, net 412,461 237,459
Corporate headquarters expense (165,770) (166,114)
--------- ---------
Consolidated income before income taxes $ 4,137,171 $ 4,089,274
========= =========
Assets
------
Total assets for reportable segments $ 3,869,050 $ 2,987,465
Corporate headquarters 12,075,042 12,034,772
---------- ----------
Total consolidated assets $15,944,092 $15,022,237
========== ==========
Other Significant Items
-----------------------
2006 2005
-------------------------------------- --------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
---------- ----------- ------------ ----------- ----------- ------------
Capital expenditures $57,297 $ 61,080 $118,377 $82,748 $ 73,872 $156,620
Depreciation and amortization $87,306 $108,063 $195,369 $94,810 $111,001 $205,811
Geographic Information
----------------------
2006 2005
------------------------- -------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
---------- ----------- ---------- -----------
United States $ 5,827,671 $ 848,793 $ 5,891,221 $ 948,480
France 1,485,384 1,579,943
Other countries 4,882,617 4,663,832
---------- --------- ---------- ---------
$12,195,672 $ 848,793 $12,134,996 $ 948,480
========== ========= ========== =========
F-25
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2006 and 2005
NOTE H (continued)
2006 2005
------------------------- -------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
---------- ----------- ---------- -----------
Major Customers
---------------
Customer A (Guardian) $ 4,298,625 $ 4,497,547
Customer B (Guardian) 1,227,466 1,357,764
All other customers 6,669,581 6,279,685
---------- ----------
$12,195,672 $12,134,996
========== ==========
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.
NOTE J - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2006 and 2005 the Company paid to Henry
Globus, a former officer and current Director of the Company, $20,352 and
$19,608 respectively, for consulting services in accordance with his employment
termination agreement of 1988.
During each of the years ended December 31, 2006 and 2005 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.
NOTE K - SUBSEQUENT EVENT
On January 17, 2007 the Company entered into a line of credit agreement
with JPMorgan Chase Bank for borrowings of up to $2,000,000 at an interest rate
of 1% below the Prime Rate. The inital line of credit will expire on June 30,
2007, but it is expected that the Company will renew the line on an annual basis
thereafter. As of March 1, 2007 the Company had no outstanding balance on this
credit line.
F-26