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, 2004.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 1-10526
UNITED-GUARDIAN, INC.
(Name of small business issuer in its charter)
Delaware 11-1719724
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
230 Marcus Blvd., Hauppauge, NY 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (631) 273-0900
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Securities registered pursuant to Section l2(b) of the Exchange Act: None
Title of each class Name of each exchange on which registered
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Common Stock, $.10 par value American Stock Exchange
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or l5(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Cover Page 1 of 2 Pages
Indicate by check mark if there is no disclosure herein of delinquent filers
pursuant to Item 405 of Regulation S-B, and if, to the best of registrant's
knowledge, no disclosure will be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended December 31, 2004 were
$11,123,475.
On March 1, 2005 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 $17,982,466 (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, 2005 the Registrant had issued 4,994,739 shares of Common
Stock, $.10 par value per share ("Common Stock"),of which 4,932,539 shares were
outstanding and 62,200 held as Treasury stock as of that date.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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 2005 annual meeting of stockholders ("2005
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
Cover Page 2 of 2 Pages
This annual report on Form 10-KSB contains both historical and
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which provides a safe harbor for forward-looking
statements by the Registrant about its expectations or beliefs concerning future
events, such as financial performance, business prospects, and similar matters.
The Registrant desires to take advantage of such "safe harbor" provisions and is
including this statement for that express purpose. Words such as "anticipates",
"believes", "expects", "intends", "future", and similar expressions identify
forward-looking statements. Any such "forward-looking" statements in this report
reflect the Registrant's current views with respect to future events and
financial performance, and are subject to a variety of factors that could cause
Registrant's actual results or performance to differ materially from historical
results or from the anticipated results or performance expressed or implied by
such forward-looking statements. Because of such factors, there can be no
assurance that the actual results or developments anticipated by the Registrant
will be realized or, even if substantially realized, that they will have the
anticipated results. The risks and uncertainties that may affect Registrant's
business include, but are not limited to: economic conditions, governmental
regulations, technological advances, pricing and competition, acceptance by the
marketplace of new products, retention of key personnel, the sufficiency of
financial resources to sustain and expand Registrant's operations, and other
factors described in this report and in prior filings with the Securities and
Exchange Commission. Readers should not place undue reliance on such
forward-looking statements, which speak only as of the date hereof, and should
be aware that except as may be otherwise legally required of Registrant,
Registrant undertakes no obligation to publicly revise any such forward-looking
statements to reflect events or circumstances that may arise after the date
hereof.
PART I
Item 1. Description of Business
(a) General Development of Business
United-Guardian, Inc. (the "Company") is a Delaware corporation that
conducts research, product development, manufacturing and marketing of cosmetic
ingredients, personal and health care products, pharmaceuticals, and specialty
industrial products. The Company also distributes an extensive line of fine
organic chemicals, research chemicals, test solutions, indicators, dyes and
reagents through a wholly owned subsidiary, Eastern Chemical Corporation
("Eastern").
The Company's predecessor, United International Research Corp. (name later
changed to United International Research, Inc.), was founded and incorporated in
New York in 1942 by Dr. Alfred R. Globus, the Company's Chairman and Chief
Executive Officer. On February 10, 1982, a merger took place between the Company
and Guardian Chemical Corp. ("GCC"), an affiliate of the Company, whereby GCC
was merged into the Company and the name was changed to United-Guardian, Inc. On
September 14, 1987, United-Guardian, Inc. (New York) was merged with and into
United-Guardian, Inc., a newly incorporated Delaware corporation formed for the
purpose of changing the domicile of the Company.
The Company operates in two business segments:
(1) The Guardian Laboratories Division ("Guardian") conducts research,
product development, manufacturing and marketing of cosmetic ingredients,
personal and health care products, pharmaceuticals, and specialty industrial
products. The Research and Development Department of Guardian engages in
research and development in the fields of cosmetics, health care products, and
specialty industrial chemical products, for the purpose of developing new
products, and refining existing products that will be marketed or licensed by
Guardian. Many of the products manufactured by Guardian, particularly its
LUBRAJEL(R) line of products, are marketed worldwide through a network of
distributors, and are currently used by many of the major multinational cosmetic
companies.
Guardian presently has a broad range of products, some of which are
currently marketed, some of which are marketable but are not currently marketed
by the Company, and some of which are still in the developmental stage. Of
the products being actively marketed, the two largest product lines are the
LUBRAJEL line of cosmetic ingredients, which accounted for approximately 67% of
the Company's sales in 2004, and its RENACIDIN(R) IRRIGATION, a pharmaceutical
product that accounted for approximately 16% of the Company's sales in 2004. The
Company actively seeks other companies as potential marketers for its
products, particularly for those products that are not yet being actively
marketed by the Company.
(2) Eastern is a distributor of fine organic chemicals, research chemicals,
intermediates, reagents, indicators, dyes and stains. It has been in business
for over 50 years, the last 30 or so as a part of the Company. It carries an
extensive line of products which it sells throughout the United States as well
as overseas. Eastern's products are primarily sold either to distributors for
resale in smaller quantities or as intermediates and raw materials for further
chemical processing. Sales quantities range from a few hundred grams to several
thousand kilos of a product. Although Eastern carries out no chemical
manufacturing, it does contract with several custom chemical manufacturers and
also will package to order for those customers that require it.
Paragon Organic Chemicals, Inc. ("Paragon") is a wholly owned subsidiary of
the Company that functions as a purchasing arm for Eastern. It has no assets
or sales of its own.
(b) Narrative Description of Business
Guardian Laboratories Division
Guardian conducts research, product development, manufacturing and
marketing of many different cosmetic ingredients, personal and health care
products, pharmaceuticals, and specialty industrial products, all of which are
developed by the Company, and many of which have unique properties. The products
manufactured by Guardian are marketed through marketing partners, distributors,
direct advertising, mailings, and trade exhibitions. Guardian's proprietary
cosmetic ingredients are sold through marketing partners and distributors and
are incorporated into products marketed by many of the major international
cosmetic companies. Many of Guardian's products are marketed through
collaborative agreements with larger companies. The pharmaceutical products are
sold to end users primarily through drug wholesalers. These sales include
indirect sales to the Veteran's Administration and other government agencies.
There are also a small number of direct sales to hospitals and pharmacies.
During 2004, Guardian's sales accounted for approximately 90% of
Company's total product sales.
Guardian's products are sold under trademarks or trade names owned by the
Company. The marks for the most important products, LUBRAJEL and RENACIDIN, are
registered as trademarks in the United States Patent and Trademark Office. In
2004 sales from these two product lines accounted for approximately 92% of
Guardian's sales, and 83% of the sales of the Company as a whole.
PRINCIPAL PRODUCTS:
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LUBRAJEL
LUBRAJEL is a line of nondrying water-based moisturizing and lubricating
gels that have applications in the cosmetic industry primarily as a moisturizer
and as a base for other cosmetic products, and in the medical field primarily as
a lubricant. In the cosmetic industry it is used primarily as a stable gel for
application around the eyes and on the face and as an ingredient in skin creams
and moisturizers, makeup, body lotions, hair preparations, salves, and
ointments. As a medical lubricant it has been used on catheters, prelubricated
enema tips, and thermometers. The most important product in the LUBRAJEL line in
2004 was once again LUBRAJEL CG, the original form of LUBRAJEL; the second
largest revenue producer in the Lubrajel line was LUBRAJEL OIL.
The Company believes that its ability to increase sales of its LUBRAJEL
products will depend on (a) the ability of its marketing partners, especially
International Specialty Products ("ISP), its largest marketing partner, to
continue to bring the product to the attention of new customers, and (b) the
Company's success in bringing to market new forms of LUBRAJEL that will enable
the product to be used in new applications. The Company is currently developing
new varieties of LUBRAJEL for this purpose. In 2004 the Company introduced a new
LUBRAJEL under the name "LUBRAJEL II XD", and intends to expand this new line as
well as make other modifications to the LUBRAJEL line, such as changes to its
preservative system, that will expand the product to new markets and new
applications. The Company believes that there is still significant potential to
expand the sales of its LUBRAJEL line of products through both product
modifications and by geographic expansion, especially in developing markets such
as mainland China, India, and eastern Europe.
The Company believes that any sales increases in the LUBRAJEL line of
products may be offset somewhat by continuing competition from products
introduced by the Company's competitors. Despite this competition, the Company
believes that it will still be able to expand the market for its LUBRAJEL
product line. The Company believes that LUBRAJEL'S reputation for quality and
customer service, as well as future additions to the LUBRAJEL line, will enable
it to continue to compete effectively in the marketplace.
RENACIDIN
RENACIDIN is a urological prescription drug, approved in the U.S. only,
which is used primarily to prevent the formation of and to dissolve
calcifications in catheters implanted in the urinary bladder. It is marketed as
a ready to use sterile solution under the name "RENACIDIN IRRIGATION". RENACIDIN
IRRIGATION is also approved for use in dissolving certain types of kidney
stones. On October 9, 1990, the Patent Office issued to the Company patent #
4,962,208, which expires on October 9, 2007, covering the method of
manufacturing RENACIDIN IRRIGATION.
OTHER PRODUCTS:
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Other significant products that are manufactured and sold by Guardian but
which did not individually comprise more than 5% of the Company's sales in 2004
are as follows:
CLORPACTIN(R) WCS-90 is a microbicidal product used primarily in urology
and surgery as an antiseptic for treating a wide range of localized infections
in the urinary bladder, the peritoneum, the abdominal cavity, the eye, ear, nose
and throat, and sinuses. The product is a white powder that is made into a
liquid prior to use. It is a powerful disinfectant, fungicide, deodorizer,
bleach, and detergent.
KLENSOFT(TM) is a surfactant (a surface active agent, such as a soap or
detergent, that can reduce the surface tension of a liquid and thus allow it to
foam or penetrate solids or act as a wetting agent), that can be used in
shampoos, shower gels, makeup removers, and other cosmetic formulations. The
primary customer for Klensoft for many years has been in Taiwan, but over the
past few years there have been new customers for the product in the United
Kingdom, Australia, France and Korea. The erratic purchasing patterns of the
major customer for this product, which is located in Taiwan, make it difficult
to predict or compare sales from year to year. During 2004 the Company developed
an improved form of Klensoft for this customer, KLENSOFT II, to improve the
stability of the product. This new product started shipping in October, 2004.
The Company is hopeful that the improved product will result in the retention of
that major Taiwanese customer for the product, as well as bring in new customers
that were unable to use the original form of the product.
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.
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.
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.
Other products that do not have significant sales at the present time but
have the potential for increased sales in the future, and which as a group
constituted approximately 2% of the Company's sales in 2004, are as follows:
LUBRASIL 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).
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.
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.
DESELEX(R) is a replacement for phosphates in detergents.
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.
HYDRAJEL PL and HYDRAJEL VM are personal lubricants and moisturizers
developed specifically for the feminine personal care market.
ORCHID COMPLEX(TM) is a successor product to the Company's previous Oil of
Orchids product and is a base for skin creams, lotions, cleansers, and other
cosmetics. This product is an extract of fresh orchids, modified by extractants,
stabilizers, and preservatives, and is characterized by its excellent lubricity,
spreadability and light emolliency. Because of its alcohol solubility, it may
also be used in fragrance products such as perfumes and toiletries. Its light
emolliency lends use in shampoos, bath products and facial cleansers. It is also
a superior emollient for sunscreens, vitamin creams, toners and skin serums. It
is sold in two forms, water-soluble and oil soluble.
Development Activities
Guardian's Research and Development Department has developed a large number
of products that can be used in many different industries, including the
pharmaceutical, medical, cosmetic, health care, and specialty chemical
industries. These products are in various stages of development, some being
currently marketable and some being in the very early stages of development
requiring a substantial amount of development work to bring them to market.
Research is also being done on new uses for currently marketed products. Once a
product is created, the initial development work on it may consist of one or
more of the following: (a) laboratory refinements and adjustments to suit the
intended uses of the product; (b) stability studies to determine the effective
shelf-life of the product and suitable storage and transportation conditions for
the product; and (c) laboratory efficacy tests to determine the effectiveness of
the product under different conditions.
After the Research and Development Department has completed its initial
work on a product and is satisfied with the results of that work, further
development work to bring the product to market will continue, including some or
all of the following: (a) animal and human clinical studies needed to determine
safety and effectiveness of drug or medical device products, which would be
needed for submissions to the appropriate regulatory agencies, such as the
United States Food and Drug Administration ("FDA") or the United States
Environmental Protection Agency ("EPA"); (b) preparatory work for the filing of
Investigational New Drug Applications or New Drug Applications; (c) market
research to determine the marketability of the product, including the potential
market size and most effective method of marketing the product; (d) scaling up
from laboratory production batches to pilot batches, and then to full scale
production batches, including the determination of the type of equipment
necessary to produce the products; (e) upgrading or purchasing new equipment to
manufacture the products; and (f) the negotiation of joint venture or
distribution agreements to develop and/or market the product. Some of the
foregoing work may be done by outside contractors.
While there can be no assurance that any particular project will result in
a new marketable product or a commercially successful product, the Company
believes that a number of its development projects, including those discussed
below, may have commercial potential.
The Company's major research focus is the development of new and unique
personal care ingredients. The following are some of the projects the Company is
working on at the present time:
SUCROSCRUB: This product is an exfoliant that, unlike other mechanical
exfoliants, such as ground apricot and walnut shells and pumice, will dissolve
in water. It is made from pure crystalline sugar that is treated with a special
polymer to make it temporarily insoluble in water. It can then be incorporated
into water-based creams, lotions and bath gels without dissolving. When it is
used it will slowly dissolve as it mechanically exfoliates dead skin cells. The
Company's ability to market this product will depend on its success in finding
an outside source to manufacture it, since it would be prohibitively expensive
for the Company to put in place the equipment necessary to do so. The Company is
also researching a possible alternative composition and manufacturing process
that might enable it to produce it in house. The Company has a patent
application pending for this new product.
LUBRAJEL "FREE": This is a new line of Lubrajel products that is free of
parabens, which are commonly used cosmetic preservatives that some companies are
trying to remove from their products. While it is not anticipated that there
will be a major shift away from parabens in the immediate future, one major
cosmetic company has asked the Company to develop this new product line for some
new paraben-free products that they are bringing to market, and it is possible
that this may accelerate the changeover for other companies. The Company is
working to expand this concept to all of its Lubrajel products so that in the
event the demand for paraben-free products does increase, the Company will be
ready with a complete line of Lubrajel products to fill the needs of the
marketplace.
LUBRAJEL II: This product line was being developed to recapture some of the
market share that the Company has lost over the years to some of its
competitors. The first product in this line, LUBRAJEL II XD, was developed to be
a drop-in replacement for one of those products. The Company expects 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. With the R&D focus
primarily on SucroScub and the other new Lubrajel products mentioned above, it
is not expected that this development work will be completed in 2005.
CLORONINE: Cloronine is a powerful disinfectant, germicide, and sanitizer
for disinfecting medical and surgical instruments and equipment (particularly
where autoclaves are not available), and for the purification of water supplies.
The product had been approved for certain uses in France and Canada, and is
still being sold on a very limited basis in Canada. The Company is currently
working with a new potential customer for this product that is exploring
possible use by the government as a decontamination agent. However, before this
product can be marketed in the United States for any purpose, additional tests
will have to be done to determine if the product can be registered with the EPA
as a sterilant or germicide. These tests would comprise laboratory
microbiological studies, compatibility studies, and specific studies on its
intended uses. The product may also have to be registered with the FDA as an
accessory to a medical device. Neither registration process has yet begun. Due
to the expense and time required, the Company hopes to work jointly with other
companies to obtain these registrations. The Company was granted two patents for
this product.
The Company expects its research and development costs for FY-2005 to be
comparable to those of the last two fiscal years. Any additional increase in
development and/or production costs will depend on whether capital investments
are required in order to continue development work on, or to manufacture, any of
the new products under development.
Trademarks and Patents
The Company strongly believes in protecting its intellectual property and
intends whenever possible to make efforts to obtain patents in connection with
its product development program. The Company currently owns many United States
patents and trademarks relating to its products. The Company has patent and
trademark applications pending with respect to a number of its research and
development products. Patents formerly held by the Company on certain products
have expired. There can be no assurance that any patents held by the Company
will be valid or otherwise of value to the Company or that any patent applied
for will be granted. However, the Company believes that its proprietary
manufacturing techniques and procedures with respect to certain products offer
it some protection from duplication by competitors regardless of the patent
status of the products.
The various trademarks and trade names owned or used by the Company in
Guardian's business are of varying importance to the Company. The most
significant products for which the Company has a registered trademark are
LUBRAJEL, RENACIDIN, and CLORPACTIN.
Set forth below is a table listing certain information with respect to all
unexpired U.S. patents held by the Company:
PATENT NAME PATENT # ISSUE DATE EXPIRATION
DATE
------------------------------------------------ --------- ---------- ----------
Iodophor; Polyethylene Glycol Alkylaryl-sulfonate 4,873,354 10/10/89 10/10/06
Iodine complex
Thermal Resistant Microbial Agent ("Cloronine") 4,954,316 9/4/90 9/4/07
Method of Preparing Time-Stable Solutions of Non- 4,962,208 10/9/90 10/9/07
Pyrogenic Magnesium Gluconocitrate ("Renacidin
Irrigation")
Use of Clorpactin for the Treatment of Animal 4,983,634 1/8/91 1/8/08
Mastitis & the applicator used in that treatment
(owned jointly by the Company and Diversey Ltd.)
Iodophor; biocide; reacting polyethylene glycol, 5,013,859 5/7/91 5/7/08
alkylarylsulfonate and Iodine water-propylene glycol
solvent refluxing
Stabilized Beta Carotene 5,023,355 6/11/91 6/11/08
Stable, Active Chlorine Containing Anti-microbial 5,128,342 7/7/92 7/7/09
Compositions ("Cloronine")
Gamma Radiation Resistant Lubricating Gel 5,405,622 4/11/95 4/11/12
Delivery system for oil soluble actives in cosmetic/ 6,117,419 9/12/00 9/12/17
personal care products
Microemulsion of silicone in a water-based gel that 6,348,199 2/19/02 2/19/19
forms a clear, transparent, highly stable moisturizer
and lubricant for cosmetic and medical use
The Company requires all employees and consultants who may receive
proprietary information to agree in writing to keep such proprietary information
confidential.
Eastern Chemical Corporation
Eastern is a wholly owned subsidiary of the Company. It distributes an
extensive line of fine organic chemicals, research chemicals, test solutions,
indicators, dyes and stains, and reagents. In 2004 and 2003 Eastern's sales
accounted for approximately 10% of the total product sales of the Company. the
Company's business activities and marketing efforts over the past several years
have focused increasingly on the Guardian division, which the Company believes
has greater growth potential than Eastern. As a result, the Company has been
exploring the possibility of selling this operation. Over the past few months it
has discussed a possible sale with several potential buyers, but has not yet
made any firm decision to sell.
In order to facilitate a possible future sale the Company has been steadily
reducing Eastern's on-hand inventory. This has resulted in an inability to
supply certain items that required immediate shipment from inventory. This,
along with a general decrease in Eastern's business due to competition from new
companies in this field, has resulted in a steady decline in Eastern's sales
over the past few years.
Until the Company makes a final decision on selling Eastern, it intends to
continue to reduce the operation's expenses as much as possible to maximize its
profits based on the current reduced sales level. 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, 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 chemical products.
Eastern's products are marketed through advertising in trade publications
and direct mailings. They are sold to distributors and directly to users in a
wide variety of applications. Eastern does not sell any unique products and is
not dependent on any single customer or group of customers on a continuous
basis.
Domestic Sales
In the United States, the Company's cosmetic products are marketed
exclusively by ISP in accordance with a marketing agreement entered into in 1996
and subsequently amended and expanded in 2000 and 2002 (see "Marketing
Agreements" below). ISP also has certain rights to sell some of the Company's
other industrial and medical products. In 2004, ISP's purchases for distribution
in the United States were estimated to be approximately $1,394,000 compared to
$1,667,000 in 2003, a decrease of 16%, and accounted for approximately 13% 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 (a) pipeline fills for two new product introductions in 2003 that were
not repeated in 2004; and (b) the timing of orders, in particular the delaying
by ISP of some end of year shipments on which it did not want to take delivery
until after the first of the new year.
The Company's domestic sales of pharmaceutical products are handled
primarily through the major full-line drug wholesalers and account for
approximately 19% of the Company's sales. The Company's other products, such as
its industrial products, are sold directly to end-users and account for less
than 2% of sales.
Foreign Sales
In 2004 and 2003 the Company derived approximately 49% of its sales from
customers in foreign countries, primarily from sales of its cosmetic products in
Europe and Asia. The Company currently has 6 distributors for its cosmetic
products outside the United States: S. Black Ltd. in the United Kingdom ("S.
Black"); Sederma in France; Luigi & Felice Castelli S.R.L. in Italy; S. Black
Gmbh in Switzerland; C&M International in Korea; and ISP in Germany, Spain,
Scandinavia, Eastern Europe, the Benelux countries, Canada, Mexico, South &
Central America, Asia (with the exception of Korea), and most of the remaining
foreign markets. The Company's foreign sales attributable to each of its foreign
distributors as a percentage of the Company's total foreign sales were as
follows: ISP: 26% (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%; S.
Black: 4%; C&M International: 3%; and Castelli: 1%.
Marketing Agreements
In December, 2002 the Company entered into a new marketing agreement with
ISP, which modified and consolidated three previous marketing agreements entered
into with ISP in 1994, 1996, and 2000. The previous agreements had granted ISP
the right to market the Company's personal care products, as well as some
medical and industrial products, in the United States, Canada, Mexico, Central
and South America, Europe (excluding France, Italy, and Switzerland), Asia
(except Korea), Australia, and Africa. The 2000 agreement gave the Company
greater flexibility in appointing other marketing partners in areas where ISP is
not active or has not been successful, and gave ISP certain additional
territories in which they can market the Company's products. The agreement
provided for exclusivity for ISP in those markets as long as annual minimum
purchase requirements were met. The 2002 agreement provided for automatic
extensions of the agreement through December, 2008 provided ISP meets certain
purchase requirements during each year of the agreement. ISP is currently in
compliance with its contractual requirements. ISP manufactures and markets an
extensive line of personal care, pharmaceutical, and industrial products on a
global basis.
The Company believes that in the event ISP were to cease marketing the
Company's products, alternative arrangements could be made to continue to supply
product to the customers currently using the Company's products without any
significant interruption of supply.
The Company has other marketing arrangements with marketing partners in the
U.K, France, Switzerland, Korea, and Italy, but all of these other arrangements
are operating under either verbal agreements or expired written agreements, and
are subject to termination at any time by either party.
Raw Materials
The principal raw materials used by the Company consist of common
industrial organic chemicals, laboratory reagents, and common inorganic
chemicals. Most of these materials are available in ample supply from numerous
sources. The Company's principal raw material suppliers are Procter and Gamble,
Callahan Chemical Company, Univar USA, Inc., Noveon, Inc., Alzo, Inc., Esprit
Chemical Company LP, Clariant Corp., Ishihara U.S.A., Nissei Trading Co.,
Varessa, Ltd., E.I. duPont, S.A. Fine Chemicals, and Loba Chemie.
Inventories; Returns and Allowances
The Company's business requires that it maintain moderate inventories of
certain of its finished goods. Historically, returns and allowances have not
been a significant factor in the Company's business.
Backlog
The Company currently does not have any significant backlog.
Competition
Guardian has many products or processes that are either unique in their
field or have some unique characteristics, and therefore are not in direct
competition with the products or processes of other pharmaceutical, personal
care, chemical, or health care companies. However, the pharmaceutical, health
care, and cosmetic industries are all highly competitive, and the Company
expects competition to intensify as advances in the field are made and become
widely known. There may be many domestic and foreign companies that are engaged
in the same or similar areas of research as those in which the Company is
engaged, many of which have substantially greater financial, research, manpower,
marketing and distribution resources than the Company. In addition, there are
many large, integrated and established pharmaceutical, chemical and cosmetic
companies that have greater capacity than the Company to develop and to
commercialize types of products upon which the Company's research and
development programs are based. However, the Company believes that the expense
of testing and evaluating possible substitutes for Company's products that are
already in customers' formulations, as well as the expense to the customer in
relabeling its products, is a significant barrier to displacing the Company's
products in current customer formulations. These cost factors make it less
likely that a customer would choose a competitive product unless there was a
significant cost savings in doing so. The Company believes that manufacturing,
regulatory, distribution and marketing expertise will be increasingly important
competitive factors in favor of the Company. In this regard, the Company
believes that its marketing arrangements with its global marketing partners will
be important in the commercialization of many of the products which it is
currently developing.
Eastern faces competition from many other chemical manufacturers and
distributors, many of which have much greater financial resources than those of
the Company. Eastern's competition is based primarily upon price, service and
quality. Eastern attempts to maintain its competitive position in the industry
through its ability to (i) locate and make wholesale arrangements to purchase
the chemicals with suppliers located all over the world, (ii) maintain a
sufficient inventory of its most popular items at all times, and (iii) customize
each order as to quantity of the item requested and to tailor the price of the
order to such quantity. Eastern's primary competitors are SA Fine Chemicals,
Acros Organics, Pfaltz & Bauer, Inc., and Spectrum Chemical Mfg. Corp.
ISO-9001:2000 REGISTRATION
In December, 2003 the Company earned ISO 9001:2000 registration from
Underwriters Laboratories, Inc., indicating that the Company's documented
procedures and overall operations had attained the high level of quality needed
to comply with this new ISO certification level. Prior to that, in November,
1998 the Company had earned ISO-9002 registration, and had been in continual
compliance with that standard since that time. The Company will continue to be
evaluated every six months for continued compliance with the new ISO-9001:2000
standard, and is currently in good standing under this new registration.
Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacturing and marketing of many of
the Company's products. The Company and many of the Company's products are
subject to certain government regulations. Products that may be developed and
sold by the Company in the United States may require approval from federal
regulatory agencies, such as the FDA, as well as state regulatory agencies.
Products that may be developed and sold by the Company outside of the United
States may require approval from foreign regulatory agencies. Any medical device
products developed by the Company will be subject to regulation by the Center
for Devices and Radiological Health of the FDA, and will usually require a
510(k) pre-market notification. Most pharmaceutical products will require
clinical evaluation under an Investigational New Drug ("IND") application prior
to submission of a New Drug Application ("NDA") for approval of a new drug
product.
A drug product normally must go through several phases in order to obtain
FDA approval. The research phase involves work up to and including discovery,
research, and initial production. Next is the pre-clinical phase, which involves
studies in animal models necessary to support an IND application to the FDA and
foreign health registration authorities to commence clinical testing in humans.
Clinical trials for pharmaceutical products are conducted in three phases. In
Phase I, studies are conducted to determine safety and dosages. In Phase II,
studies are conducted to gain preliminary evidence as to the efficacy of the
product. In Phase III, studies are conducted to provide sufficient data for the
statistical proof of safety and efficacy, including dose regimen. Phase III is
the final stage of such clinical studies prior to the submission of an
application for approval of an NDA. The amount of time necessary to complete any
of these phases cannot be predicted with any certainty.
In all cases, the Company is required to comply with all pertinent Good
Manufacturing Practices of the FDA for medical devices and drugs. Accordingly,
the regulations to which the Company and certain of its products may be subject,
and any changes with respect thereto, may materially affect the Company's
ability to produce and market new products developed by the Company.
The Company's present and future activities are, and will likely continue
to be, subject to varying degrees of additional regulation under the
Occupational Safety and Health Act, Environmental Protection Act, import, export
and customs regulations, and other present and possible future foreign, federal,
state and local regulations.
Portions of the Company's operating expenses are directly attributable to
complying with federal, state, and local environmental statutes and regulations.
In 2004 and 2003 the Company incurred approximately $48,000 and $47,000
respectively, in environmental compliance costs.
Research and Development Expense
Portions of the Company's operating expenses are directly attributable to
research and development the Company performs. In 2004 and 2003, the Company
incurred approximately $415,000 and $403,000 respectively in research and
development expenses. No portion of the research and development expenses was
directly paid by the Company's customers.
Employees
The Company presently employs 42 people, 8 of whom serve in an executive
capacity, 22 in research, quality control and manufacturing, 5 in maintenance
and construction, and 7 in office and administrative work. Of the total number
of employees, 40 are full time employees. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relations with its employees are satisfactory.
Item 2. Description of Property.
The Company maintains its principal office, factory, and conducts most of
its research at 230 Marcus Boulevard, Hauppauge, New York 11788. These premises,
which the Company owns, contain approximately 30,000 square feet of
manufacturing space, 15,000 square feet of warehouse space, and 5,000 square
feet of office and laboratory space on approximately 2.7 acres of land. The
Company has now fully developed the 2.7 acres, and fully utilizes the buildings
occupying the land. The Company believes that the aforementioned property is
adequate for its immediately foreseeable needs. The property is presently
unencumbered and is adequately insured.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Common Stock of the Company is traded on the American Stock Exchange
(the "AMEX") under the symbol "UG". The following table sets forth for the
periods indicated the high and low closing sale prices of the shares of Common
Stock, as reported by the AMEX Market Statistics for the period January 1, 2003
to December 31, 2004. The quotations represent prices between dealers and do not
include retail markup, markdown or commission:
Year Ended Year Ended
Quarters December 31, 2004 December 31, 2003
-------- ----------------- -------------------
High Low High Low
---- --- ---- ---
First (1/1 - 3/31) 8.93 7.48 $ 4.63 $ 4.00
Second (4/1 - 6/30) 8.15 5.75 $ 8.60 $ 4.29
Third (7/1 - 9/30) 7.03 5.60 $ 8.55 $ 6.95
Fourth (10/1 - 12/31) 8.58 6.26 $ 8.90 $ 7.35
Holders of Record
As of March 1, 2005 there were 1,244 holders of record of Common Stock.
Cash Dividends
On January 5, 2005 the Company paid a cash dividend of $.18 per share to
all stockholders of record as of December 15, 2004. On October 8, 2004 the
Company paid a special cash dividend of $.25 per share to all stockholders of
record as of September 24, 2004. On January 5, 2004 the Company paid a cash
dividend of $.15 per share to all stockholders of record as of December 15,
2003.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results Of Operations:
Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003
Revenue
Consolidated revenue in 2004 decreased by $33,948 (0.3%) compared to 2003
due to a decrease in the Guardian Division of $64,084 (0.6%) partially offset by
an increase in revenues in the Eastern Division of $30,136 (3%).
Guardian's sales showed little change when comparing 2004 to 2003. The
increase in Eastern's sales is believed to be due mainly to normal fluctuations
in purchasing patterns of its customers. The company does not anticipate any
significant increase or decrease in Eastern's sales in the near future.
Cost of Sales
Cost of sales as a percentage of sales in 2004 increased to 45.6% from
45.4% in the prior year. Excluding realized savings from disposal costs and
obsolete inventory, cost of sales, as a percentage of sales would have been
46.4% in the year ended December 2004 compared to 47.3% for the year ended
December 31, 2003.
In 2004 and 2003 the company sold approximately $91,000 and $147,000,
respectively, of inventory previously reserved as obsolete. As a result, in 2003
the company was able to reverse approximately $60,000 of estimated disposal
costs that had been previously accrued for the disposal of that inventory.
Operating Expenses
Operating expenses increased by $133,794 (5%) compared to the prior year.
The increase is due to increases in insurance costs, payroll and payroll related
costs and printing costs. These increases were partially offset by a decrease in
advertising costs.
Investment income increased to $222,820 in 2004 from $168,867 in 2003. This
32% increase is attributable to an increase in interest rates. Investment income
is recorded net of brokerage fees.
Provision for Income Taxes
The provision for income taxes decreased to $1,208,341 in 2004 from
$1,339,757 in 2003. The decrease was due to increases in the foreign income
exclusion.
Liquidity and Capital Resources
Working capital increased to $11,967,840 at December 31, 2004 from
$11,599,502 at December 31, 2003, an increase of $368,338 (3%). The current
ratio decreased to 9.2 to 1 at December 31, 2004 from 9.3 to 1 at December 31,
2003. The decrease in current ratio was due primarily to approximately $150,000
in dividends payable; $283,000 in inventory; and $251,000 in prepaid expenses,
offset by a decrease in accounts payable of approximately $138,000. In addition,
in September, 2004 the Company declared a special dividend of approximately
$1,232,000.
The Company has a line of credit agreement with a bank for borrowings of up
to $700,000, which expires in May, 2005 and which the Company plans to renew. As
of December 31, 2004, there were no outstanding borrowings on this line of
credit.
The Company generated cash from operations of $2,172,576 in 2004 compared
to $2,631,957 in 2003. The decrease in 2004 was primarily due to the net effect
of increases in prepaid expenses and inventory costs which were partially offset
by a decrease in accounts receivable and accounts payable. During 2004 and 2003
the company invested $198,371 and $118,179 respectively in plant and equipment.
Cash provided by investing activities was $788,398 for the year ended December
31, 2004 whereas cash used in investing activities was $2,764,260 for the year
ended December 31, 2003. The increase of $3,552,658 was mainly due to the
reduction in purchases of marketable securities.
Cash used in financing activities was $1,935,058 and $342,267 during the
years ended December 31, 2004 and 2003, respectively. The increase was primarily
due to a special dividend of approximately $1,232,385 on October 7, 2004 and an
increase in the dividend paid in January 2005 to $.18 per share from $.15 per
share in 2004. 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 $3,200 in lease commitments, which
expire in 2005.
Impact of Inflation, Changing Prices, and Seasonality
While it is difficult to assess the impact of inflation on the Company's
operations, management believes that, because of the proprietary nature of the
majority of its product line, inflation has had little impact on net sales.
Sales have changed as a result of volume and product mix. While inflation has
had an impact on the cost of sales and payroll, these increases have been
recaptured by price increases to the greatest extent possible. The Company's
products and sales are not considered to be seasonal, and are generally
distributed evenly throughout the year.
Critical Accounting Policies
The Company's financial statements have been prepared in accordance with
U.S. generally accepted accounting principles. As such, some accounting policies
have a significant impact on amounts reported in the financial statements. A
summary of those significant accounting policies can be found in Notes to
Financial Statements: Note A - Nature of Business and Summary of Significant
Accounting Policies. In particular, judgment is used in areas such as
determining the allowance for doubtful accounts, adjustments to inventory
valuations, estimated sales returns, and asset impairments.
Item 7. Financial Statements.
Annexed hereto starting on page F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 8A. Controls and Procedures
As of March 1, 2005, an evaluation was performed by the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that material information related to the Company and its
consolidated subsidiaries is made known to them by others within such entities.
There have been no significant changes in the the Company's internal controls
over financial reporting during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Executive Officers
Set forth in the table below is certain information as of March 1, 2005
with respect to the executive officers and directors of the Company:
Name Age Position(s) with the Company
---------------------- ----- ----------------------------------
Dr. Alfred R. Globus 84 Chairman of the Board, Chief
Executive Officer and Director
Kenneth H. Globus 53 President, Chief Financial Officer,
General Counsel and Director
Robert S. Rubinger 62 Executive Vice President,
Secretary and Director
Charles W. Castanza 72 Senior Vice President and Director
Derek Hampson 65 Vice President
Joseph J. Vernice 46 Vice President
Peter A. Hiltunen 46 Vice President
Cecile M. Brophy 56 Treasurer and Controller
Lawrence F. Maietta 47 Director
Henry P. Globus 82 Director
Arthur M. Dresner 63 Director
Andrew A. Boccone 59 Director
Christopher W. Nolan, Sr. 40 Director
Dr. Alfred Globus has been Chairman of the Board and Chief Executive
Officer of the Company since July, 1988. He served as Chairman of the Board and
President of the Company from the inception of the Company in 1942 until July,
1988. He has been a director of the Company since 1942.
Kenneth H. Globus has been President and General Counsel of the Company
since July, 1988. He served as Vice President and General Counsel of the Company
from July, 1983 until July, 1988. He has been a director of the Company since
1984. He became the Chief Financial Officer in November, 1997.
Robert S. Rubinger has been Executive Vice President and Secretary of the
Company since July, 1988, and served as Treasurer from May, 1994 until May,
2004. He served as Vice President and Secretary of the Company from February,
1982 until July, 1988. He has been a director of the Company since 1982.
Charles W. Castanza has been a Senior Vice President of the Company since
March 2000. He served as Vice President from April, 1986 until March 2000. He
served as Operations Manager of Chemicals and Pharmaceuticals of the Company
from February, 1982 until April, 1986. He has been a director of the Company
since 1982.
Derek Hampson has been a Vice President of the Company since October, 1987.
He has served as Manager of the Eastern Chemical Corp. subsidiary since 1971.
Joseph J. Vernice has been a Vice President of the Company since February,
1995. He served as Assistant Vice President of the Company from November, 1991
until February, 1995. He has been Manager of Research and Development for the
Company since 1988 and Director of Technical Services since 1991.
Peter A. Hiltunen has been a Vice President of the Company since July,
2002. He served as Assistant Vice President of the Company from November, 1991
until July, 2002. He has been Production Manager of the Company since 1982.
Cecile M. Brophy has been Treasurer of the Company since May, 2004. She has
served as Controller of the Company since November, 1997. From May, 1994 until
November, 1997 she served as manager of the Company's accounting department.
Lawrence F. Maietta has been a partner in the public accounting firm of
Bonamassa, Maietta & Cartelli, LLP in Brooklyn, NY since October, 1991. For more
than five years prior to that he was a partner in the public accounting firm of
Wilfred, Wyler & Co. in New York, NY. He was controller for the Company from
October, 1991 until November, 1997, and a director of the Company since
February, 1994.
Henry P. Globus has been a consultant to the Company since July, 1988. He
served as Executive Vice President of the Company from 1982 until July, 1988. He
has been a director of the Company since 1947.
Arthur M. Dresner has been a partner in the law firm Reed Smith, LLP since
January, 2003. From 1998 to 2003 he had been "Of Counsel" to that firm as well
as to the law firm of McAulay, Nissen, Goldberg & Kiel LLP, which combined with
Reed Smith in 2000. From 1974 until 1997 he was employed as a Vice President in
corporate development and general management of International Specialty
Products, Inc., our major marketing partner, in Wayne, New Jersey. He has been a
director of the Company since April, 1997.
Andrew A. Boccone is an independent business consultant. From 1990 to his
retirement in 2001 he was President of Kline & Company, a leading international
business consulting and research firm that he first joined in 1974, developing
growth strategies and providing business solutions for many multinational
chemical companies. Prior to joining Kline & Company Mr. Boccone served in
various management positions at American Cyanamid. He has been a Director of the
Company since November, 2002.
Christopher W. Nolan, Sr. has been an Executive Director in the Mergers &
Acquisitions group of Rabobank International, the largest retail bank in the
Netherlands, in its New York City office, since 2002. From 2000-2002 he was a
Vice President with Deutsche Bank Securities, NYC; in 2000 he was a Vice
President with Salomon Smith Barney, NYC; from 1992-2000 he was a Vice President
with the GAF Corporation/International Specialty Products, Wayne, NJ; and from
1986-1991 he worked as a special projects manager for the National Starch and
Chemical Company, Bridgewater, NJ. Mr. Nolan has an undergraduate degree in
Chemical Engineering and an M.B.A. from the Harvard Business School. He has been
a director of the Company since January 26, 2005
Dr. Alfred R. Globus and Henry P. Globus are brothers. Kenneth H. Globus is
the son of Henry P. Globus and the nephew of Dr. Alfred R. Globus. There are no
other family relationships between any directors or officers of the Company.
The directors are elected to serve for one year or until the next Annual
Meeting of Stockholders and until their successors have been elected and
qualified.
Audit Committee Members and Financial Expert
The Board of Directors has an Audit Committee that meets with the Company's
independent auditors to review the plan, scope and results of its audits. The
Audit Committee consists of three of the Company's directors, each of whom is
considered an independent, outside director. The Chairman of the Audit Committee
is Arthur Dresner; the other two members are Andrew A. Boccone and Christopher
W. Nolan, Sr.
The Company does not have a "financial expert" (as that term is defined by
SEC regulations) on its audit committee due the expense involved in placing
another independent director on its Board of Directors and audit committee who
would qualify as such. While all three Audit Committee members have experience
in reading and analyzing financial statements, none has the experience necessary
to qualify as a "financial expert" under the SEC guidelines. One of the
Company's other directors, Lawrence F. Maietta, is a Certified Public Accountant
with experience in preparing and analyzing financial statements and would
qualify as a "financial expert" if it were not for the fact that he receives
payment from the Company to assist in the preparation of its financial reports,
and for that reason he is not considered "independent" and cannot serve on the
audit committee. Mr. Maietta now serves as an expert financial advisor to the
audit committee in lieu of having a financial expert on the committee.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies
to all officers, directors, and employees, serving in any capacity to the
Company, including the Chief Executive Officer, Chief Financial Officer, and
principal accounting Officer. A copy of the Company's Code of Conduct and Ethics
is available on the Company's web site at http://www.u-g.com/corporate. The
Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K
relating to amendments to or waivers from any provision of its Code of Conduct
and Ethics applicable to Chief Executive Officer, Chief Financial Officer and
principal accounting officer by posting this information on the Company's web
site.
Compliance with Section 16(a) of the Exchange Act
The information required by this section is incorporated herein by
reference to the section entitled "Directors and Executive Officers - Section
16(a) Beneficial Ownership Reporting Compliance" of Company's 2005 Proxy
Statement.
Item 10. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the section entitled "Compensation of Directors and Executive Officers -
Summary Compensation Table" of the Company's 2005 Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is incorporated herein by reference
to the sections entitled "Voting Securities and Principal Stockholders -
Security Ownership of Management" and "Compensation of Directors and Executive
Officers" of the 2005 Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's 2005 Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
3(a) Certificate of Incorporation of the Company as filed
April 22, 1987. Incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K, dated
September 21, 1987 (the "1987 8-K").
3(b) Certificate of Merger of United-Guardian, Inc. (New York)
with and into the Company as filed with the Secretary of
State of the State of Delaware on September 10, 1987.
Incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 29, 1988 (the "1988 10-K").
3(c) By-laws of the Company. Incorporated by reference to
Exhibit 4.2 to the 1987 8-K.
4(a) Specimen Certificate for shares of common stock of the
Company. Incorporated by reference to Exhibit 4(a) to
the 1988 10-K.
10(a) Qualified Retirement Income Plan for Employees of the
Company, as restated April 1, 1976. Incorporated by
reference to Exhibit 11(c) of the Company's Registration
Statement on Form S-1 (Registration No. 2-63114) declared
effective February 9, 1979.
10(b) Employment Termination Agreement dated July 8, 1988 between
the Company and Henry Globus. Incorporated by reference
to Exhibit 10(i) to the Company's Annual Report on Form
10-K for the 10-month transition period from March 1, 1991
to December 31, 1991.
10(c) Exclusive Distributor Agreement between the Company and
ISP Technologies Inc., dated July 5, 2000. Incorporated by
reference to Exhibit 10(d) to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 2000.
10(d) Letter Amendment between the Company and ISP
Technologies Inc. dated December 16, 2002 amending the
Exclusive Distributor Agreement between the Company and
ISP Technologies Inc. dated July 5, 2000. Incorporated by
reference to Exhibit 10(d)of the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003.
21 Subsidiaries of the Company:
Jurisdiction of Name Under Which
Name Incorporation it does Business
Eastern Chemical Corporation New York (same)
Dieselite Corporation ** Delaware N/A
Paragon Organic Chemicals, Inc. New York (same)
Transcontinental Processes (Pty.) Ltd.* Australia N/A
* Inactive without assets
** Inactive
31.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Kenneth H. Globus, President and Chief
Financial of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Kenneth H. Globus, President and Chief
Financial Officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On March 12, 2004, May 27, 2004, August 9, 2004, and November 5, 2004, the
Company filed reports on Form 8-K disclosing the issuance press releases that
reported the earnings of the Company for FY-2003 and the first, second, and
third quarters of 2004 respectively. On September 13, 2004 and December 8, 2004
the Company filed reports on Form 8-K disclosing the issuance of press releases
that announced the payment of a cash dividend.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed by Eisner LLP for the audit of the Company's
annual financial statements and the reviews of the financial statements included
in the Company's quarterly reports on Form 10-QSB for FY-2004 were approximately
$55,500, including out of pocket expenses. The aggregate fees billed by Eisner
LLP for the audit of the Company's annual financial statements for FY-2003 were
approximately $49,000.
Audit-Related Fees
There were no other fees billed by Eisner LLP during 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 that related to tax preparation or compliance that were not reported under
"Audit Fees" above.
All Other Fees
There were no other fees billed by Eisner LLP during the last two fiscal
years for other products and services provided by Eisner LLP.
Pre-Approval Policies and Procedures
The Audit Committee of the Company's Board of Directors meets periodically
to review and approve the scope of the services to be provided to the Company by
its Independent Registered Public Accounting Firm, as well to review and discuss
any issues that may arise during an engagement. The Audit Committee is
responsible for the prior approval of every engagement of the Company's
Independent Registered Public Accounting Firm to perform audit and permissible
non-audit services for the Company (such as quarterly reviews, tax matters,
and, in future years, reporting on management's internal controls assessment.)
Before the auditors are engaged to provide those services, the chief
financial officer and controller will make a recommendation to the Audit
Committee regarding each of the services to be performed, including the fees to
be charged for such services. At the request of the Audit Committee the
Independent Registered Public Accounting Firm and/or management shall
periodically report to the Audit Committee regarding the extent of services
being provided by the Independent Registered Public Accounting Firm, and the
fees for the services performed to date.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED-GUARDIAN, INC.
Dated: March 16, 2005 By: /s/ Alfred R. Globus
------------------------
Alfred R. Globus
Chief Executive Officer & Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on
the dates indicated.
Signature Title Date
----------------------- --------------------------------- ---------------
By:/s/ Alfred R. Globus Chief Executive Officer, Director March 16, 2005
------------------------ (Principal Executive Officer)
Alfred R. Globus
By:/s/ Kenneth H. Globus President, General Counsel, March 16, 2005
------------------------ Director, Chief Financial
Kenneth H. Globus Officer
By:/s/ Robert S. Rubinger Executive Vice President, March 16, 2005
------------------------ Secretary, Director
Robert S. Rubinger
By:/s/ Charles W. Castanza Senior Vice President, Director March 16, 2005
------------------------
Charles W. Castanza
By:/s/ Cecile M. Brophy Treasurer, Principal Accounting March 16, 2005
------------------------ Officer, and Controller
Cecile M. Brophy
By:/s/ Henry P. Globus Director March 16, 2005
------------------------
Henry P. Globus
By:/s/ Lawrence F. Maietta Director March 16, 2005
------------------------
Lawrence F. Maietta
By:/s/ Arthur M. Dresner Director March 16, 2005
------------------------
Arthur M. Dresner
By: /s/ Andrew A. Boccone Director March 16, 2005
------------------------
Andrew A. Boccone
By: /s/ Christopher W. Nolan, Sr. Director March 16, 2005
------------------------------
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,
2004 and 2003 F-3 - F-4
Consolidated Statements of Income for the Years
Ended December 31, 2004 and 2003 F-5
Consolidated Statement of Stockholders' Equity
and Comprehensive Income for the Years Ended
December 31, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8 - F-23
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, 2004 and 2003 and the
related consolidated statements of income, changes in stockholders' equity and
consolidated cash flows for each of the years in the two year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of
United-Guardian, Inc. and subsidiaries as of December 31, 2004 and 2003 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, 2004, in conformity
with U.S. generally accepted accounting principles.
/s/ EISNER LLP
New York, New York
March 9, 2005
F-2
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------
2004 2003
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................ $3,735,945 $2,710,029
Temporary investments............................. 402,288 1,615,751
Marketable securities ............................ 6,251,764 6,098,986
Accounts receivable, net of allowance for doubtful
accounts of $45,000 and $27,000, respectively 918,085 1,007,055
Inventories ...................................... 1,375,880 1,093,312
Prepaid expenses and other current assets ........ 515,425 264,978
Deferred income taxes ............................ 223,617 207,817
---------- ----------
Total current assets ............... 13,423,004 12,997,928
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land ............................................. 69,000 69,000
Factory equipment and fixtures ................... 2,975,305 2,825,125
Building and improvements ........................ 2,089,547 2,068,752
Waste disposal system ............................ 133,532 133,532
---------- ----------
5,267,384 5,096,409
Less accumulated depreciation .................... 4,269,713 4,070,158
---------- ----------
997,671 1,026,251
---------- ----------
OTHER ASSETS
Processes and patents, net of accumulated
amortization of $981,797 and $981,732,
respectively .................................. - 65
Other ............................................ 700 700
---------- ----------
700 765
---------- ----------
$14,421,375 $14,024,944
========== ==========
See notes to consolidated financial statements
F-3
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
2004 2003
-------- --------
CURRENT LIABILITIES
Dividends payable ............................ $ 887,677 $ 737,736
Accounts payable ............................. 172,320 309,921
Accrued expenses ............................. 395,167 350,769
--------- ---------
Total current liabilities ............... 1,455,164 1,398,426
--------- ---------
DEFERRED INCOME TAXES ............................ 10,000 10,000
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value; 10,000,000
shares authorized; 4,994,739 and 4,984,439
shares issued, respectively; and 4,932,539
4,922,239 outstanding, respectively ........ 499,474 498,444
Capital in excess of par value................. 3,756,943 3,717,160
Accumulated other comprehensive loss........... (86,730) (30,614)
Retained earnings ............................. 9,146,154 8,791,158
Treasury stock, at cost; 62,200 shares ........ (359,630) (359,630)
---------- ----------
12,956,211 12,616,518
---------- ----------
$14,421,375 $14,024,944
========== ==========
See notes to consolidated financial statements
F-4
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------
2004 2003
----------- -----------
Revenue
Net sales ....................... $11,123,475 $11,157,423
---------- ----------
Costs and expenses
Cost of sales ................... 5,072,033 5,060,616
Operating expenses .............. 2,589,034 2,455,240
---------- ----------
7,661,067 7,515,856
---------- ----------
Income from operations ..... 3,462,408 3,641,567
Other income (expense)
Investment income................ 222,820 168,867
(Loss) gain on sale of assets.... (1,724) 500
Other expense (105) (23)
---------- ----------
Income before income taxes . 3,683,399 3,810,911
Provision for income taxes .......... 1,208,341 1,339,757
---------- ----------
Net Income ................. $ 2,475,058 $ 2,471,154
========== ==========
Earnings per common share (basic
and diluted)..................... $ .50 $ .50
========== ==========
Weighted average shares-basic ....... 4,928,785 4,898,456
========== ==========
Weighted average shares-diluted ..... 4,938,026 4,914,412
========== ==========
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, 2004 and 2003
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, 2002 4,943,339 $ 494,334 $3,538,423 $ (55,776) $ 7,057,740 $(359,630) $10,675,091
Issuance of common stock in
connection with exercise
of stock options ........... 41,100 4,110 141,737 145,847
Tax Benefit from exercise of
stock options .............. 37,000 37,000
Unrealized loss on marketable
securities, net of deferred
income tax of $14,880 ...... 25,162 25,162 $ 25,162
Net income .................... 2,471,154 2,471,154 2,471,154
Dividends declared ............ (737,736) (737,736)
---------
Comprehensive income $2,496,316
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2003 4,984,439 498,444 3,717,160 (30,614) 8,791,158 (359,630) 12,616,518
Issuance of common stock in
connection with exercise
of stock options ........... 10,300 1,030 34,033 35,063
Tax Benefit from exercise of
stock options .............. 5,750 5,750
Unrealized loss on marketable
securities, net of deferred
income tax of $33,300 ...... (56,116) (56,116) $ (56,116)
Net income .................... 2,475,058 2,475,058 2,475,058
Dividends declared ............ (2,120,062) (2,120,062)
---------
Comprehensive income $2,418,942
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2004 4,994,739 $ 499,474 $ 3,756,943 $ (86,730) $ 9,146,154 $(359,630) $12,956,211
========= ========= =========== ========== ========== ========== ==========
See notes to consolidated financial statements
F-6
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
2004 2003
--------- ---------
Cash flows from operating activities
Net income ....................................... $2,475,058 $2,471,154
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ................ 209,792 197,889
Amortization of bond premium.................. - 5,916
Net loss (gain) on sale of equipment ......... 1,724 (500)
Provision for bad debts....................... 18,000 14,479
Tax Benefit from exercise of stock options ... 5,750 37,000
Deferred income taxes ........................ 17,500 75,077
Provision for inventory obsolescence ......... 91,000 147,000
Increase (decrease) in cash resulting from
changes in operating assets and liabilities
Accounts receivable ..................... 70,970 (316,974)
Inventories ............................. (373,568) (202,997)
Prepaid expenses and other assets ....... (250,447) 77,498
Accounts payable ........................ (137,601) 121,053
Accrued expenses and taxes payable ...... 44,398 5,362
--------- ---------
Net cash provided by operating activities ... 2,172,576 2,631,957
--------- ---------
Cash flows from investing activities
Acquisition of plant and equipment................ (198,371) (118,179)
Proceeds from the sale of plant and equipment..... 15,500 500
Net decrease in temporary investments............. 1,213,463 2,536,036
Purchase of marketable securities................. (2,274,468) (5,862,617)
Proceeds from sale of marketable securities....... 2,032,274 680,000
-------- --------
Net cash provided (used in) by investing
activities ................................ 788,398 (2,764,260)
-------- --------
Cash flows from financing activities
Proceeds from exercise of stock options .......... 35,063 145,847
Dividends paid ................................... (1,970,121) (488,114)
-------- --------
Net cash used in financing activities ....... (1,935,058) (342,267)
-------- --------
Net increase (decrease) in cash and cash equivalents.. 1,025,916 (474,570)
Cash and cash equivalents, beginning of year ......... 2,710,029 3,184,599
--------- ---------
Cash and cash equivalents, end of year ............... $3,735,945 $2,710,029
========= =========
See notes to consolidated financial statements
F-7
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United-Guardian, Inc. (the "Company") is a Delaware corporation that
operates in two business segments: (1) the Guardian Laboratories Division
conducts research, product development, manufacturing and marketing of
pharmaceuticals, cosmetic ingredients, health care products, and
proprietary specialty industrial products, and (2) the Eastern Chemical
Corporation subsidiary distributes a line of fine organic chemicals,
research chemicals, test solutions, indicators, intermediates, dyes and
reagents. Two major product lines, Lubrajel and Renacidin, included in the
Guardian Laboratories Division, accounted for approximately 83% of
consolidated sales for each of the years ended December 31, 2004 and 2003,
with Lubrajel accounting for 67% and Renacidin accounting for 16% of
consolidated sales for each of those years.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of United-Guardian, Inc. and its wholly-owned subsidiaries, Eastern
Chemical Corporation and Paragon Organic Chemicals, Inc. (a purchasing
agent for Eastern). All inter-company accounts and transactions have been
eliminated.
Revenue Recognition
The Company recognizes revenue as products are shipped, collections are
reasonably assured, and title passes to customers. An allowance for returns
is taken as a reduction of sales within the same period the revenue is
recognized. Such allowances are based on historical experience. The Company
has not experienced significant fluctuations between estimated allowances
and actual activity.
Cash and Cash Equivalents
For financial statement purposes the Company considers as cash equivalents
all highly liquid investments with an original maturity of three months or
less.
Dividends
On September 9, 2004 the Company declared a special dividend of $.25 per
share payable on October 8, 2004 to stockholders of record as of September
24, 2004, aggregating $1,232,385, and on December 2, 2004 the Company
declared a cash dividend of $.18 per share payable on January 5, 2005 to
stockholders of record as of December 15, 2004, aggregating $887,677. On
December 3, 2003, the Company declared a dividend of $.15 per share payable
on January 5, 2004 to stockholders of record as of December 15, 2003,
aggregating $737,736.
F-8
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE A (continued)
Statements of Cash Flows
Cash payments for income taxes were $1,399,522 and $1,135,025 for the years
ended December 31, 2004 and 2003, respectively. There were no cash payments
for interest during the years ended December 31, 2004 and 2003.
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 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
Processes and Patents
Processes and patents are amortized over periods ranging from 5 to 15
years. Amounts are shown net of accumulated amortization.
F-9
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
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.
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,
2004 and 2003, one customer, the Company's principal marketing partner and
distributor, accounted for revenues aggregating 39% and 40% respectively.
At December 31, 2004 and 2003, two customers had accounts receivable
balances aggregating 32% and 46%, 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 $415,000 and $403,000 for the years ended
December 31, 2004 and 2003, respectively.
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 $107,000 and $115,000 for the years ended December 31,
2004 and 2003, respectively.
F-10
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE A (continued)
Advertising Costs
Advertising costs are expensed as incurred. During 2004 and 2003 the
Company incurred $71,911 and $100,261 of advertising costs, respectively.
Stock-Based Compensation
In 2004 the Company approved a new stock option plan ("2004 Stock Option
Plan"). The 1993 Employee Incentive Stock Option Plan ("EISOP") and the
Non-Statutory Stock Option Plan for Directors ("NSSOPD") expired in 2003.
As permitted under SFAS NO. 123 as amended, "Accounting for Stock-Based
Compensation", the Company has elected to continue to follow the intrinsic
value method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principle Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees", and related interpretations
including Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation, and
interpretations of APB No. 25". The following table illustrates the effect
on net income and earnings per share if the company had applied the fair
value recognition provisions of SFAS No.123 to stock-based employee
compensation.
Year Ended December 31
-------------------------
2004 2003
--------- ---------
Reported net income .................... $ 2,475,058 $ 2,471,154
Stock-based employee compensation
expense included in reported net
income, net of related tax effect ..... 0 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effect...... 0 (18,743)
--------- ---------
Pro forma net income.................... $ 2,475,058 $ 2,452,411
========= =========
Earnings per share (basic and diluted)
As reported ....................... $ .50 $ .50
======== ========
Pro forma ......................... $ .50 $ .50
======== ========
No stock options were granted in 2004 or 2003 under the EISOP (Employee
Incentive Stock Option Plan), the NSSOPD (Non-Statutory Stock Option Plan),
or the 2004 Stock Option Plan.
F-11
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
Earnings Per Share Information
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted
earnings per share includes the dilutive effect of outstanding stock
options.
Use of Estimates
In preparing financial statements in conformity with U.S. generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates. Such estimated items
include the allowance for bad debts, reserve for inventory obsolescence,
and the allocation of overhead.
Segment Reporting
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that the Company disclose certain information about
its business segments defined as "components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance."
New Accounting Pronouncements
In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based
Payment" (SFAS 123(R)), which supercedes APB Opinion No. 25 and revised
SFAS 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro-forma disclosure is no longer an
alternative. As such, the company is required to adopt the provisions of
SFAS 123(R) in the first quarter of 2006, While the company currently
discloses the pro-forma earnings effects of its stock-based grants, it is
currently evaluating the impact of the implementation guidance and
revisions required under SFAS 123(R) on the consolidated financial
statements.
In November 2004, the Financial Accounting Standards Board, or FASB issued
FASB Statement No. 151 "Inventory Costs, an Amendment of ARB No. 43 Chapter
4" ("FAS 151"). FAS 151 is applicable for Inventory costs incurred during
fiscal years beginning after June 15, 2005. FAS 151 requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling be recognized as current-period charges rather than being
included in inventory regardless of whether the costs meet the criterion of
abnormal as defined in ARB 43. The Company does not believe the adoption of
the standard will have a material impact on the Company upon adoption in
2006 as the Company has historically expensed such costs as incurred.
F-12
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE B - MARKETABLE SECURITIES
Marketable securities at December 31, 2004 and 2003 were as follows:
Unrealized
Cost Fair Value Gain/(Loss)
-------- ---------- ----------
December 31, 2004
-----------------
Available for sale:
U.S. Treasury and agencies $4,014,855 $3,942,247 $ (72,608)
Corporate debt securities 2,080,114 2,032,065 (48,049)
Mutual funds 295,125 277,452 (17,673)
--------- --------- ------
$6,390,094 $6,251,764 $(138,330)
========= ========= ======
December 31, 2003
-----------------
Available for sale:
U.S. Treasury and agencies $3,817,880 $3,810,829 $ ( 7,051)
Corporate debt securities 2,040,522 2,037,035 ( 3,487)
Mutual funds 289,498 251,122 (38,376)
--------- --------- ------)
$6,147,900 $6,098,986 $ (48,914)
========= ========= ======
NOTE C - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
2004 2003
----------- -----------
Raw materials and work-in-process ...... $ 332,798 $ 225,443
Finished products and fine chemicals ... 1,043,082 867,869
---------- ----------
$1,375,880 $1,093,312
========== ==========
At December 31, 2004 and 2003, the company has reserved $128,000 and
$219,000 respectively for slow moving and obsolete inventory.
F-13
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE D - NOTES PAYABLE - BANKS
The Company has a line of credit agreement with a bank which provides for
borrowings of up to $700,000 and expires on May 31, 2005. It is the
Company's intention to renew the line of credit agreement before it
expires. Interest under the line is at the bank's prime rate plus 1/2%. The
line of credit agreement contains financial covenants relating to minimum
net worth, working capital, current ratio, a debt to capitalization ratio
and maintenance of compensating balances. There were no outstanding
borrowings at December 31, 2004 and 2003.
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
Year ended December 31,
--------------------------
2004 2003
Current --------- ---------
Federal .............................. $1,014,625 $1,085,789
State ................................ 176,216 178,891
--------- ---------
1,190,841 1,264,680
Deferred --------- ---------
Federal .............................. 15,154 65,013
State ................................ 2,346 10,064
--------- ---------
17,500 75,077
--------- ---------
Total provision for income taxes ... $1,208,341 $1,339,757
========= =========
The following is a reconciliation of the Company's effective income tax
rate to the Federal statutory rate:
Year ended December 31,
--------------------------------
2004 2003
-------------- --------------
(000's) % (000's) %
------- --- ------- ---
Income taxes at statutory Federal
income tax rate ................ $1,252 34% $1,296 34%
State income taxes, net of Federal
benefit ........................ 118 3 125 3
Foreign Sales Exclusion ............. (102) (3) (68) (2)
Nondeductible expenses............... 2 - 10 -
Other, net .......................... (62) (2) (23) -
----- ---- ----- ----
Actual income tax expense ........... $1,208 32% $1,340 35%
===== ==== ===== ====
F-14
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
During 2004 and 2003, the Company recognized the tax benefit of the Foreign
Sales exclusion.
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities are as follows:
December 31
------------------------
2004 2003
----------- ------------
Deferred tax assets
Current
-------
Accounts receivable ...................... $ 16,785 $ 10,071
Unrealized loss on marketable securities.. 51,600 18,300
Inventories .............................. 47,744 81,687
Accrued Expenses ......................... 71,217 62,643
Other..................................... 36,271 35,116
-------- --------
223,617 207,817
-------- --------
Deferred tax liabilities
Non-current
-----------
Other .................................... (10,000) (10,000)
--------- ---------
(10,000) (10,000)
--------- ---------
Net deferred tax asset ........................... $ 213,617 $ 197,817
========= =========
There was no valuation of allowance at December 31, 2004 and 2003.
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.
F-15
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE F (continued)
The unamortized prior year service cost as of the measurement date is
$46,920 and $54,381 for 2004 and 2003 respectively.
The net pension asset recorded by the Company at December 31, 2004 and 2003
is $119,720 and $61,246,respectively.
The percentage of the fair value of total plan assets as of the measurement
date is as follows:
2004 2003
------ -------
Equity securities 26% 25%
Debt securities - General Investment Account 74% 75%
------ -------
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 comprising of private placed loans including residential
and commercial mortgages and private placement bonds. This fund is a "book
value" fund and its value is not adjusted for changing market conditions.
Historical returns of multiple asset classes were analyzed to develop a
risk free real rate of return and risk premiums for each asset class. The
overall rates for each asset class was developed by combining a long-term
inflation component, the risk free real rate of return, and the associated
risk premium. A weighted average rate was developed based on those overall
rates and target asset allocation of the plan.
In March, 1998, the Board of Directors authorized a one time investment of
some of the assets of the plan into two equity funds operated by the
Principal Financial Group. In addition, in 2001 when the Principal
Financial Group became a publicly traded company a distribution of their
stock was made to all investors. This investment has resulted in a third
equity investment. No additional contributions have been made to any of the
three equity investments. Any future investments will continue to be
determined by the Board of Directors.
The accumulated benefit obligation is $2,272,390 and $1,900,414 at December
31, 2004 and 2003 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:
F-16
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE F (continued)
Year Ending Expected Future Benefits Payable
----------- --------------------------------
2005 $ 80,000
2006 80,000
2007 130,000
2008 135,000
2009 135,000
2010-2014 1,040,000
The company estimates that it will make contributions to the pension plan
of approximately $200,000 during 2005 which includes required and
discretionary contributions.
A measurement period from October 1, 2003 to October 1, 2004 has been used
for the year ended December 31, 2004. The liabilities and assets are
calculated at October 1, 2004. Assets are adjusted for known contributions
received by the Company between October 1, 2004 and December 31, 2004.
The following table sets forth the plan's funded status:
Year ended December 31,
----------------------
2004 2003
--------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year... $2,360,399 $2,125,941
Service cost........................................ 88,597 83,291
Interest cost....................................... 139,588 134,820
Actuarial loss...................................... 270,112 63,899
Benefits paid....................................... (53,167) (47,552)
--------- ---------
Projected benefit obligation at end of year....... $2,805,529 $2,360,399
========= =========
Change in Plan Assets:
Fair value of plan assets at beginning of year... $1,957,256 $1,754,025
Actual return on plan assets..................... 152,387 147,042
Employer contributions........................... 179,000 103,741
Benefits paid.................................... (53,167) (47,552)
--------- ---------
Fair value of plan assets at end of year....... $2,235,476 $1,957,256
========= =========
Reconciliation of Funded Status:
Funded status (underfunded)...................... $ (570,053) $ (403,143)
Unrecognized net actuarial loss.................. 642,853 410,008
Unrecognized prior service cost.................. 46,920 54,381
--------- ---------
Prepaid benefit cost........................... $ 119,720 $ 61,246
========= =========
F-17
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE F (continued)
The net periodic benefit cost includes the following components:
Year ended December 31,
-------------------------
2004 2003
Components of net periodic benefit cost: ----------- -----------
Service cost..................................... $ 88,597 $ 83,291
Interest cost.................................... 139,588 134,820
Expected return on plan assets................... (134,031) (139,295)
Recognized net actuarial loss.................... 18,910 15,748
Amortization of prior service cost............... 7,461 7,461
--------- ---------
Net periodic benefit cost..................... $ 120,525 $ 102,025
========= =========
Weighted-average assumptions as of December 31:
2004 2003
----------- ----------
Discount rate...................................... 5.50% 6.00%
Expected long term rate of return.................. 7.00% 7.00%
Weighted average rate of compensation increase..... 5.51% 5.69%
Amortization method................................ Straight-Line Straight-Line
401(k) Plan
The Company maintains a 401(k) Plan for all of its eligible employees.
Under the plan, employees may defer up to 15% of their weekly pay as a
pretax investment in a savings plan. In addition, the Company makes a
contribution of 50% of the first 4% of each employee's elective deferral up
to a maximum employer contribution of 2% of weekly pay. Employees become
fully vested in Company contributions after one year of employment. 401(k)
Company contributions were approximately $38,000 and $39,000 for the years
ended December 31, 2004 and 2003, 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.
F-18
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE F (continued)
The following summarizes the stock option transactions from the expired
EISOP and NSSOPD:
Number Weighted average
EISOP outstanding exercise price
----- ------------ -------
Options outstanding January 1, 2003.... 45,500 3.55
Expired (200) 3.51
Exercised (35,100) 3.58
------
Options outstanding and exercisable at
December 31, 2003 10,200 3.44
Exercised (4,300) 3.49
------
Options outstanding and exercisable at
December 31, 2004................. 5,900 3.39
======
Available for grant at December 31, 2004 0
======
NSSOPD
------
Options outstanding at January 1, 2003.. 20,000 $3.41
Exercised (6,000) 3.34
------
Options outstanding and exercisable at
December 31, 2003 14,000 3.44
Exercised (6,000) 3.34
------
Options outstanding and exercisable at
December 31, 2004 8,000 3.51
======
Available for grant at December 31, 2004 0
======
In 2004 the Company authorized up to 500,000 shares to be granted under the
2004 Stock Option Plan.
Summarized information about stock options outstanding under these plans at
December 31, 2004 is as follows:
F-19
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
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 31,2003 Contractual Life Price December 31,2003 Price
------------ ---------------- ---------------- -------- ---------------- --------
EISOP
-----
$2.06 - $3.30 1,300 3.65 $2.71 1,300 $2.71
$3.51 - $3.86 4,600 6.81 3.59 4,600 3.59
------------- ------ ---- ----- ------ -----
$2.06 - $3.86 5,900 6.11 $3.39 5,900 $3.39
NSSOPD
--------
$3.51 8,000 2.90 3.51 8,000 3.51
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share at December 31, 2004 and 2003:
2004 2003
--------- ---------
Numerator:
Net earnings $ 2,475,057 $ 2,471,154
Denominator:
Denominator for basic earnings
per share (weighted average shares) 4,928,785 4,898,456
Effect of dilutive securities:
Employee stock options 9,241 15,956
--------- ---------
Denominator for diluted earnings per
share (adjusted weighted-average
shares) and assumed conversions 4,938,026 4,914,412
========= =========
Basic and diluted earnings per share $ 0.50 $ 0.50
========= =========
F-20
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE G (continued)
In 2004 and 2003 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, 2004 and 2003.
2004 2003
---------------------------------- ----------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ----------- ----------- ------------ ----------- -----------
Revenues from external customers $10,004,893 $ 1,118,582 $11,123,475 $10,068,977 $ 1,088,446 $11,157,423
Depreciation and amortization 91,845 - 91,845 84,510 - 84,510
Segment income (loss) before income
tax expense 3,725,217 (91,988) 3,633,229 3,798,573 8,421 3,806,994
Segment assets 2,532,195 358,804 2,890,999 2,189,252 381,553 2,570,805
Capital expenditure 125,616 - 125,616 72,039 - 72,039
Reconciliation to Consolidated Amounts
Income before income taxes
----------------------------
Total income for reportable segments $ 3,633,229 $ 3,806,994
Other income, net 220,991 169,344
Corporate headquarters expense (170,821) (165,427)
--------- ---------
Consolidated income before income taxes $ 3,683,399 $ 3,810,911
========= =========
Assets
------
Total assets for reportable segments $ 2,890,999 $ 2,570,805
Corporate headquarters 11,530,376 11,454,139
---------- ----------
Total consolidated assets $14,421,375 $14,024,944
========== ==========
F-21
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE H (continued)
Other Significant Items
-----------------------
2004 2003
-------------------------------------- --------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
---------- ----------- ------------ ---------- ----------- ------------
Capital expenditures 125,616 72,755 198,371 72,039 46,140 118,179
Depreciation and amortization 91,845 117,947 209,792 84,510 119,295 203,805
Geographic Information
----------------------
2004 2003
------------------------- ------------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
---------- ----------- ---------- -----------
United States $ 5,634,832 $ 997,671 $ 5,676,595 $ 1,026,316
France 1,275,612 1,335,734
Other countries 4,213,031 4,145,094
---------- --------- ---------- ---------
$11,123,475 $ 997,671 $11,157,423 $ 1,026,316
========== ========= ========== =========
Major Customers
---------------
Customer A (Guardian) $ 4,289,603 $ 4,422,424
Customer B (Guardian) 1,086,869 1,096,923
All other customers 5,747,003 5,638,076
---------- ----------
$11,123,475 $11,157,423
========== ==========
NOTE I - CONTINGENCIES
While the Company has claims that arise from time to time in the ordinary
course of its business, the Company is not currently involved in any
material claims.
F-22
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2004 and 2003
NOTE J - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003 the Company paid to Henry
Globus, a former officer and current Director of the Company, $18,852 and
$18,210 respectively, for consulting services in accordance with his
employment termination agreement of 1998.
During the years ended December 31, 2004 and 2003 the Company paid to
Bonamassa , Maietta, and Cartelli, LLP, $10,500 and $9,000 respectively for
accounting and tax services. Lawrence Maietta, a partner in Bonamassa,
Maietta, and Cartelli, LLP, is currently a Director of the Company.
During 2004, the Company sold an asset to an officer of the Company. Based
upon its estimated fair value on the date of sale, the Company recorded a
loss of $1,724.
F-23