U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2007
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to ___________
Commission File Number: 1-10526
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UNITED-GUARDIAN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-1719724
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Marcus Boulevard, Hauppauge, New York 11788
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(Address of principal executive offices)
(631) 273-0900
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Cover Page 1 of 2 Pages
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
4,946,439 shares of common stock,
par value $.10 per share,
(as of August 1, 2007)
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Cover Page 2 of 2 Pages
UNITED-GUARDIAN, INC.
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income - Three Months and Six
Months ended June 30, 2007 and 2006 (unaudited)......... 2
Consolidated Balance Sheets -
June 30, 2007 (unaudited) and December 31, 2006......... 3-4
Consolidated Statements of Cash Flows - Six Months
ended June 30, 2007 and 2006 (unaudited).............. . 5
Consolidated Notes to (unaudited) Financial Statements.... 6-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13-18
Item 3 - Controls and Procedures..................................... 18
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings........................................... 18
Item 2 - Changes in Securities and Use of Proceeds................... 18
Item 3 - Defaults Upon Senior Securities............................. 18
Item 4 - Submission of Matters to a Vote of Security Holders......... 18
Item 5 - Other Information........................................... 18-19
Item 6 - Exhibits and Reports On Form 8-K............................ 19
Signatures.............................................................. 19
1
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2007 2006 2007 2006
------ ------ ------ ------
Revenue:
Net sales $ 7,244,933 $ 5,921,812 $ 3,017,507 $ 3,057,015
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 3,114,295 2,793,799 1,301,269 1,441,188
Operating expenses 1,479,617 1,374,458 749,411 733,334
---------- ---------- ---------- ----------
4,593,912 4,168,257 2,050,680 2,174,522
---------- ---------- ---------- ----------
Income from operations 2,651,021 1,753,555 966,827 882,493
Other income (expense):
Investment income 285,436 195,102 160,043 114,679
Loss on sale of marketable securities - (349) - (349)
Gain on sale of equipment 5,000 - 5,000 -
Other (42) (227) - (227)
--------- ---------- --------- ----------
Income before income taxes 2,941,415 1,948,081 1,131,870 996,596
Provision for income taxes 1,046,100 675,700 396,600 346,200
--------- --------- --------- ---------
Net income $ 1,895,315 $ 1,272,381 $ 735,270 $ 650,396
========= ========= ========= =========
Earnings per common share
(basic and diluted) $ .38 $ .26 $ .15 $ .13
========= ========= ========= =========
Weighted average shares - basic 4,943,422 4,941,167 4,944,547 4,942,139
========= ========= ========= =========
Weighted average shares - diluted 4,945,382 4,944,600 4,945,877 4,944,876
========= ========= ========= =========
See notes to consolidated financial statements
2
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2007 2006
------------ -------------
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 3,291,118 $ 3,027,486
Temporary investments 541,669 527,825
Marketable securities 7,402,913 7,346,653
Accounts receivable, net of
allowance for doubtful accounts
of 47,000 at June 30, 2007
and December 31, 2006,
respectively 1,260,942 1,421,788
Inventories (net) 1,262,496 1,923,068
Prepaid expenses and other
current assets 253,026 165,288
Deferred income taxes 557,761 534,761
----------- -----------
Total current assets 14,569,925 14,946,869
----------- -----------
Property, plant and equipment:
Land 69,000 69,000
Factory equipment and fixtures 3,187,780 3,119,797
Building and improvements 2,283,717 2,161,418
Waste disposal plant 133,532 133,532
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5,674,029 5,483,747
Less: Accumulated depreciation 4,724,296 4,634,954
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949,733 848,793
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Other assets 148,430 148,430
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$ 15,668,088 $ 15,944,092
=========== ===========
See notes to consolidated financial statements
3
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2007 2006
--------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Dividends payable $ - $1,087,271
Accounts payable 170,331 222,625
Current loans payable 7,988 7,988
Taxes payable 114,529 65,438
Accrued expenses 893,401 579,913
--------- ---------
Total current liabilities 1,186,249 1,963,235
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Loans payable 10,651 14,645
Accrued pension liability 675,847 706,162
Deferred income taxes 34,360 34,360
--------- ---------
720,858 755,167
--------- ---------
Stockholders' equity:
Common stock $.10 par value,
authorized, 10,000,000 shares;
5,008,639 and 5,004,339 shares
issued, respectively, and
4,946,439 and 4,942,139
shares outstanding, respectively 500,864 500,434
Capital in excess of par value 3,806,205 3,792,478
Accumulated other comprehensive loss (604,827) (566,130)
Retained earnings 10,418,369 9,858,538
Treasury stock, at cost; 62,200 shares (359,630) (359,630)
--------- ---------
Total stockholders' equity 13,760,981 13,225,690
--------- ---------
$ 15,668,088 $ 15,944,092
========== ==========
See notes to consolidated financial statements
4
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------
2007 2006
-------- --------
Cash flows provided by operating activities:
Net income $ 1,895,315 $ 1,272,381
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation and amortization 103,367 94,512
Gain on sale of equipment (5,000) -
Realized loss on sale of marketable securities - 349
Provision for doubtful accounts - (11,212)
Reduction in inventory obsolescence - 19,000
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable 160,846 36,286
Inventories 660,572 (502,300)
Prepaid expenses and other current
and non-current assets (87,738) (42,373)
Accounts payable (52,294) 42,016
Accrued pension costs (30,315) -
Accrued expenses and taxes payable 362,579 156,352
---------- ----------
Net cash provided by operating activities 3,007,332 1,065,011
---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (204,307) (26,905)
Proceeds from sale of equipment 5,000 -
Net change in temporary investments (13,844) (303,219)
Purchase of marketable securities (117,957) (93,803)
Proceeds form sale of marketable securities - 600,374
---------- ----------
Net cash (used in) provided by investing
activities (331,108) 176,447
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Cash flows from financing activities:
Payment of long term debt (3,994) -
Proceeds from exercise of stock options 14,157 14,040
Dividends paid (2,422,755) (2,321,926)
---------- ----------
Net cash used in financing activities (2,412,592) (2,307,886)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 263,632 (1,066,428)
Cash and cash equivalents at beginning of period 3,027,486 3,425,593
---------- ----------
Cash and cash equivalents at end of period $ 3,291,118 $ 2,359,165
========== ==========
See notes to consolidated financial statements
5
UNITED-GUARDIAN, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Registrant (also referred to hereinafter as the
"Company"), the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of June 30, 2007 and the results of operations
for the six months and three months ended June 30, 2007 and 2006. The accounting
policies followed by the Company are set forth in the Company's financial
statements included in its Annual Report on Form 10-KSB for the year ended
December 31, 2006.
2. The results of operations for the six months and three months ended June
30, 2007 and 2006 are not necessarily indicative of the results to be expected
for the full year.
3. Stock-Based Compensation: At June 30, 2007, the Company had a
stock-based compensation plan for its employees and Directors, which is more
fully described in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006.
The Company follows the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123R, which requires
that the fair value of all share-based payments to employees, including grants
of employee stock options, be recognized as expense in the financial statements.
At June 30, 2007 the Company had no share-based awards outstanding and
exercisable and did not grant any options during the six months ended June 30,
2007.
As of June 30, 2007 there was no remaining unrecognized compensation cost
related to the non-vested share-based compensation arrangements granted under
the Company's plans.
The Company did not record any compensation expense during the six months
and three months ended June 30, 2007 and 2006 under the provisions of FAS 123R.
The Company received proceeds of $14,157 from the exercise of options for a
total of 4,300 shares that were exercised during the six months ended June 30,
2007. The intrinsic value of those shares was $40,217. For the six months ended
June 30, 2006 the Company received $14,040 from options exercised under all
share-based payment arrangements.
4. Marketable Securities
Unrealized
June 30, 2007 Cost Fair Value Gain/(Loss)
------------------ ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $3,001,026 $2,993,559 $ (7,467)
Fixed income mutual funds 4,335,697 4,140,613 (195,084)
Equity and other mutual funds 232,536 268,741 36,205
---------- ----------- -----------
$7,569,259 $7,402,913 $ (166,346)
========== =========== ===========
6
Unrealized
December 31, 2006 Cost Fair Value Gain/(Loss)
----------------- ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $3,001,026 $3,003,399 $ 2,373
Fixed income mutual funds 4,220,084 4,091,754 (128,330)
Equity and other mutual funds 230,192 251,500 21,308
---------- ----------- -----------
$7,451,302 $7,346,653 $ (104,649)
========== =========== ===========
5. Inventories - Net
Inventories consist of the following: June 30, December 31,
2007 2006
---------- ----------
Raw materials and work in process $ 409,403 $ 313,319
Finished products and fine chemicals 853,093 1,609,749
---------- ----------
$1,262,496 $1,923,068
========== ==========
One of the Company's pharmaceutical products, Renacidin Irrigation, is
currently manufactured for the Company by a third party that had relocated
production to a new facility, necessitating the filing of an application by the
Company to the U.S. Food and Drug Administration ("FDA") to begin production in
the new facility. While this application was pending the Company purchased
additional inventory, which resulted in an increase of approximately $1 million
in the Company's finished goods inventory at December 31, 2006 as compared with
December 31, 2005. At June 30, 2007 the Company had approximately $475,000 of
Renacidin Irrigation remaining. In May, 2007 the Company received FDA approval
of its application.
As of June 30, 2007, and December 31, 2006 the Company had reserves of
$109,000 for slow moving and obsolete inventory.
6. For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Cash payments for taxes were $997,010 and $551,122 for the six months ended
June 30, 2007 and 2006, respectively. No payments were made for
interest during these periods.
The Company paid dividends of $2,422,755 and $2,321,926 for the six months
ended June 30, 2007 and 2006, respectively.
7. Income Taxes/FIN 48 Disclosure
The Company adopted the provisions of FIN 48 (see "RECENT ACCOUNTING
PRONOUNCEMENTS") on January 1, 2007. The implementation of FIN 48 did not result
in any adjustment to the Company's beginning tax positions. The Company
continues to fully recognize its tax benefits which are offset by a valuation
7
allowance to the extent that it is more likely than not that the deferred tax
assets will not be realized. As of January 1, 2007 and June 30, 2007, the
Company did not have any unrecognized tax benefits.
The Company files a consolidated Federal income tax return in the U.S. The
Company and its subsidiaries file separate income tax returns i n New York
State. The Internal Revenue Service ("IRS") has examined the Company's U.S.
income tax returns through 2004. The Company is subject to examination by the
IRS for years 2005 and 2006 and by New York State for years 2003 through 2006.
The Company's policy is to recognize interest and penalties in Other
Expense.
8. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Six months ended June 30, Three months ended June 30,
2007 2006 2007 2006
------ ------ ------ ------
Net income $1,895,315 $1,272,381 $ 735,270 $ 650,396
---------- ---------- ---------- ----------
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities during period ..................... (61,697) (99,078) (88,888) (62,351)
Less reclassification adjustment for net
losses included in net income - 374 - 374
---------- ---------- ---------- ----------
Other comprehensive income gain (loss) before tax (61,697) (98,704) (88,888) (61,977)
Income tax expense (benefit) related to other
comprehensive income ........................... (23,000) (37,800) (33,100) (24,000)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax...... (38,697) (60,904) (55,788) (37,977)
---------- ---------- ---------- ----------
Comprehensive income net of tax ................... $1,856,618 $1,211,477 $ 679,482 $ 612,419
========== ========== ========== ==========
Accumulated other comprehensive income (loss) comprises unrealized gains
and losses on marketable securities and liability for pension benefit net of the
related tax effect.
At December 31, 2006, the Company included an adjustment to initially apply
SFAS 158 of $500,481 in it's 2006 Comprehensive Income calculation in the
Consolidated Statement of Stockholders' Equity. This amount should not have been
included in the December 31, 2006 comprehensive income calculation. The Company
intends to correct the comprehensive income presentation included in the
Statement of Changes in Stockholders' Equity for the year ended December 31,
2006 in the next Form 10-KSB filing. This does not affect total stockholder's
equity at December 31, 2006. The Comprehensive Income for the year ended
December 31, 2006 is as follows:
8
For the year ended December 31, 2006
------------------------------------
As Reported As Revised
----------- ----------
Adjustments to initially apply SFAS 158, net
of deferred income tax benefit of $297,800 $ (500,481) $ -
Unrealized loss on marketable securities, net
of deferred income tax of $11,200 18,716 18,716
Net Income 2,737,232 2,737,232
--------- ---------
Comprehensive Income $ 2,255,467 $ 2,755,948
========= =========
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 2007 and 2006.
Six months ended Three months ended
June 30, June 30,
2007 2006 2007 2006
------ ------ ------ ------
Numerator:
Net income $1,895,315 $1,272,381 $ 735,270 $ 650,396
========= ========= ========= =========
Denominator:
Denominator for basic earnings
per share (weighted average
shares) 4,943,422 4,941,167 4,944,547 4,942,139
Effect of dilutive securities:
Employee stock options 1,960 3,433 1,330 2,737
--------- --------- --------- ---------
Denominator for diluted earnings
per share (adjusted weighted-average
shares) and assumed conversions 4,945,382 4,944,600 4,945,877 4,944,876
========= ========= ========= =========
Basic and diluted earnings per share $ 0.38 $ 0.26 $ 0.15 $ 0.13
========= ========= ========= =========
10. The Company sponsors a non-contributory defined benefit plan for its
employees and has adopted FAS 158 (see "RECENT ACCOUNTING PRONOUNCEMENTS")
effective December 31, 2006. A measurement period from October 1, 2005 to
October 1, 2006 has been used for the year ended December 31, 2006. The
following table sets forth the components of the projected net periodic benefit
costs for the years ending December 31, 2007 and ended December 31, 2006.
9
Projected
2007 2006
--------- ---------
Service cost - benefit earned $ 126,132 $ 111,449
Interest cost - projected benefit obligation 144,358 158,489
Expected return on plan assets (137,632) (162,412)
Amortization of net loss 49,051 61,444
Effects of special events - 91,817
Amortization of prior service costs 7,461 7,461
--------- ---------
Net periodic benefit costs $ 189,370 $ 268,248
========= =========
The Company has made contributions totaling $125,000 to the plan in each of
the six-month periods ended June 30, 2007 and 2006. The Company expensed $94,685
and $88,246 for net periodic benefit costs for the six months ended June 30,
2007 and 2006, respectively.
11. The Company has two reportable business segments: the Guardian
Laboratories Division ("Guardian"), which develops and manufactures cosmetic
ingredients, personal and health care products, pharmaceuticals and specialty
industrial products; and Eastern Chemical Corporation ("Eastern"), a
wholly-owned subsidiary of the Company, which distributes a line of fine
chemicals, test solutions, dyes and reagents.
The accounting policies used to develop segment information correspond to
those described in the summary of significant accounting policies as set forth
in the Annual Report for the year ended December 31, 2006. Segment earnings or
losses are based on earnings or losses from operations before income taxes. The
reportable segments are distinct business units operating in different
industries. They are separately managed, with separate marketing and
distribution systems. The following information about the two segments is for
the six and three months ended June 30, 2007 and 2006.
Six months ended June 30,
2007 2006
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 6,760,706 $ 484,227 $ 7,244,933 $ 5,384,005 $ 537,807 $ 5,921,812
Depreciation and amortization 43,988 - 43,988 42,247 - 42,247
Segment income before income
taxes 2,740,625 (11,527) 2,729,098 1,784,295 46,064 1,830,359
Segment assets 2,853,295 517,993 3,371,288 3,022,098 540,685 3,562,783
Capital expenditure 67,668 - 67,668 18,803 - 18,803
10
Reconciliation to Consolidated Amounts
Six Months Ended June 30,
Income before income taxes 2007 2006
---------------------------- ----------- -----------
Total earnings for reportable segments $ 2,729,098 $ 1,830,359
Other income, net 290,394 194,526
Corporate headquarters expense (78,077) (76,804)
---------- ----------
Consolidated earnings before income taxes $ 2,941,415 $ 1,948,081
========== ==========
Assets
------
Total assets for reportable segments $ 3,371,288 $ 3,562,783
Corporate headquarters 12,296,800 10,561,413
---------- ----------
Total consolidated assets $15,668,088 $14,124,196
========== ==========
Three months ended June 30,
2007 2006
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 2,770,056 $ 247,451 $ 3,017,507 $ 2,802,971 $ 254,044 $ 3,057,015
Depreciation and amortization 21,563 - 21,563 20,079 - 20,079
Segment income before income
taxes 965,755 (3,777) 961,978 897,102 23,730 920,832
Reconciliation to Consolidated Amounts
Three Months Ended June 30,
Income before income taxes 2007 2006
---------------------------- ----------- -----------
Total earnings for reportable segments $ 961,978 $ 920,832
Other income, net 165,043 114,103
Corporate headquarters expense 4,849 (38,339)
---------- ----------
Consolidated earnings before income taxes $ 1,131,870 $ 996,596
========== ==========
Other Significant items
-----------------------
Six months ended June 30,
2007 2006
------------------------------------------ -------------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
------------ ------------ ------------- ------------- ------------ -------------
Capital expenditures $ 67,668 $136,639 $204,307 $ 18,803 $ 8,102 $ 26,905
Depreciation and amortization 43,988 59,379 103,367 42,247 52,265 94,512
11
Geographic Information
----------------------
Six Months Ended June 30,
2007 2006
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
United States $ 3,233,163 $ 949,733 $ 2,413,974 $ 880,873
France 704,673 732,393
Other countries 3,307,097 2,775,445
----------- ------------- ----------- -------------
$ 7,244,933 $ 949,733 $ 5,921,812 $ 880,873
=========== ============= =========== =============
Revenues
---------------------------
2007 2006
----------- -------------
Major Customers
---------------
Customer A (Guardian)** $ 3,057,229 $ 2,085,254
Customer B (Guardian)** 557,001 607,277
All other customers 3,630,703 3,229,281
----------- -----------
$ 7,244,933 $ 5,921,812
=========== ===========
** At June 30, 2007 Customers A and B had balances approximating 38% and
15% of net accounts receivable, respectively. At June 30, 2006 Customers A and B
had balances approximating 36% and 25% of net accounts receivable, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements. SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007, which for the Company will be the 2008
calendar (and fiscal) year. The Company is assessing the impact the adoption of
SFAS No. 157 will have on the Company's consolidated financial position and
results of operations.
In September 2006, the FSAB issued SFAS No. 158, "Employers Accounting for
Defined Benefit Pension and other Postretirement Plans". SFAS No. 158 improves
reporting obligations for pensions by recognizing the over-funded or
under-funded status of plan as an asset or liability. The Company adopted the
initial requirements in its fiscal year ended December 31, 2006. The
pronouncement does not change how the plan assets and obligations are measured
under SFAS 87 and SFAS 106 nor does it change the approach for measuring the
annual benefit cost reported in earnings. Rather, it eliminates the provisions
that permit assets and obligations to be measured as of the date not more than
12
three months prior to the balance sheet date, instead requiring measurement as
of the reporting date, which is effective for fiscal year ending December 31,
2008 for the Company. In addition the pronouncement requires previously
unrecognized items, such as actuarial gains and unrecognized prior service costs
or credits to be recognized in the balance sheet as a component of other
comprehensive income (loss).
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option of
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides an
option to report selected financial assets and financial liabilities using fair
value. The standard establishes required presentation and disclosures to
facilitate comparisons with companies that use different measurements for
similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, with early adoption allowed if SFAS 157 is also
adopted. The Company is currently evaluating the impact of adopting SFAS 159 on
its consolidated financial statements.
On January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
an interpretation of FASB Statement No. 109, "Accounting for Income Taxes." FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation requires that the
Corporation recognize the impact of a tax position in the financial statements
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. In accordance with the provisions of FIN 48, any
cumulative effect resulting from the change in accounting principle is to be
recorded as an adjustment to the opening balance of deficit. The adoption of FIN
48 did not result in a material impact on the Company's financial position or
results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-QSB which are not purely historical are
forward-looking statements with respect to the goals, plans, objectives,
intentions, expectations, financial condition, results of operations, future
performance and business of the Company. Forward-looking statements may be
identified by the use of such words as "believes," "may," "will," "should,"
"intends," "plans," "estimates," or "anticipates" or other similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and
important factors (many of which are beyond our control) could cause actual
results to differ materially from those set forth in the forward-looking
statements. In addition to those specific risks and uncertainties set forth in
the Company's reports currently on file with the SEC, some other factors that
may affect the future results of operations of the Company are: the development
of products that may be superior to those of the Company; changes in the quality
or composition of the Company's products; lack of market acceptance of the
Company's products; the Company's ability to develop new products; general
economic or industry conditions; intellectual property rights; changes in
interest rates; new legislation or regulatory requirements; conditions of the
securities markets; the Company's ability to raise capital; changes in
13
accounting accounting principals, policies or guidelines; financial or political
instability; acts of war or terrorism; and other economic, competitive,
governmental, regulatory and technical factors that may affect the Company's
operations, products, services and prices.
Accordingly, results actually achieved may differ materially from those
anticipated as a result of such forward-looking statements, and those statements
speak only as of the date they are made. The Company does not undertake, and
specifically disclaims, any obligation to update any forward-looking statements
to reflect events or circumstances occurring after the date of such statements.
OVERVIEW
The Company is a Delaware corporation that operates in two business
segments: Guardian and Eastern. Guardian conducts research, product development,
manufacturing and marketing of cosmetic ingredients, personal and health care
products, pharmaceuticals, and specialty industrial products. The products
manufactured by Guardian are marketed through marketing partners, distributors,
direct advertising, mailings, and trade exhibitions. Its most important personal
care product line is its LUBRAJEL(R) line of water-based moisturizing and
lubricating gels. It also sells two pharmaceutical products, which are
distributed primarily through drug wholesalers and surgical supply houses. There
are also indirect sales to the Veteran's Administration and other government
agencies in the United States, and to some hospitals and physicians.
Guardian's pharmaceutical products are distributed primarily in the United
States. Its personal care products are marketed worldwide primarily by its
marketing partners, the largest of which is International Specialty Products
Inc. ("ISP"). Approximately one-half of Guardian's personal care products will
be sold to foreign customers, either directly or through its marketing partners.
While the Company does have competition in the marketplace for some of its
products, many of its products or processes are either unique in their field or
have some unique characteristics, and therefore are not in direct competition
with the products or processes of other pharmaceutical, chemical, or health care
companies. Guardian's research and development department is actively working on
the development of new products to expand the Company's personal care products
line.
The Company has been issued many patents and trademarks, and intends
whenever possible to make efforts to obtain patents in connection with its
product development program.
Eastern distributes a line of fine organic chemicals, research chemicals,
test solutions, indicators, dyes and reagents. Eastern's products are marketed
through advertising in trade publications and direct mailings. Since the
Company's business activities and marketing efforts over the past several years
have focused increasingly on the Guardian division, the Company has reduced
Eastern's inventory levels in order to make it more marketable in the event the
Company decides to sell it at some future date. This has resulted in some
reduction in sales as compared with previous years. Sales of this division have
also declined as a result of increased competition from new and existing
competitors.
14
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006, the discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in conformity with U.S. generally accepted accounting
principles. The preparation of those financial statements required us to make
estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in those financial statements. Those estimates
and assumptions can be subjective and complex, and consequently actual results
could differ from those estimates and assumptions. Our most critical accounting
policies relate to revenue recognition, concentration of credit risk, inventory,
pension costs, patents and other intangible assets, and income taxes. Since
December 31, 2006, there have been no significant changes to the assumptions and
estimates related to those critical accounting policies.
The following discussion and analysis covers material changes in the
financial condition of the Company since the year ended December 31, 2006, and a
comparison of the results of operations for the six and three months ended June
30, 2007 and June 30, 2006. This discussion and analysis should be read in
conjunction with "Management's Discussion and Analysis or Plan of Operation"
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2006.
RESULTS OF OPERATIONS
Revenue
-------
For the six-month period ended June 30, 2007, consolidated revenue
increased $1,323,121 (25.6%) versus the comparable period in 2006. Guardian had
a sales increase of $1,376,701 (25.5%) and Eastern had a sales decrease of
$53,580 (10.0%).
For the three-month period ended June 30, 2007, consolidated revenue
decreased $39,508 (1.3%) versus the comparable period in 2006. Guardian had a
sales decrease of $32,915 (1.2%) and Eastern had a sales decrease of $6,593
(2.6%).
Guardian's increase in sales for the six months ended June 30, 2007 was
primarily attributable to increases in sales in two product lines:
(a) Pharmaceuticals: On March 1, 2007 Guardian increased prices on its
pharmaceutical products, which resulted in customers purchasing unusually large
quantities in February in advance of the price increase. The result was an
increase in sales of $368,000 (32%) for the six months ended June 30, 2007 when
compared with the same period in 2006. The Company expects sales of these
products to continue to be lower than average each month until the end of the
third quarter while its distributors work off the additional inventory, then
gradually increase back to normal levels (based on what has happened after price
increases in the past). The Company expects pharmaceutical sales for the full
year to be comparable to 2006.
(b) Personal Care Products: For the six months ended June 30, 2007
Guardian's sales of personal care products increased by $1,012,000 (30%). That
increase was primarily attributable to increased sales to one of the Company's
marketing partners for distribution globally. Almost all of that increase in
15
sales of personal care products was due to increases in sales of the Company's
extensive line of Lubrajel-based products. The increase in sales was due to a
general increase in demand for these products. The Company cannot yet determine
if such sales increases will continue for the balance of the year.
In addition to the large increase in both pharmaceutical and personal care
products sales there was also an increase in sales of the Company's medical
(non-pharmaceutical) products, which increased by $78,000 (10.0%) for the first
six months of 2007 compared with the same period in 2006. This increase was
attributable to the steadily increasing demand over the past three years for
these products by the Company's existing customers as opposed to sales to any
new customers.
Guardian's decrease in sales for the three months ended June 30, 2007
compared to the same period in 2006 was primarily due to:
(a) A decrease of $308,000 (52%) in the Company's sales of pharmaceutical
products, which was the result of the additional buying that took place in
February because of the price increase that went into effect on March 1st (see
details above).
(b) A decrease of $75,000 (17%) in sales of its medical (non-pharmaceutical
products). The Company believes that this was attributable to normal variability
in the buying patterns as opposed to any real decline in demand for these
products.
These decreases (plus some other smaller decreases) were almost entirely
offset by an increase of $390,000 (22%) in sales of the Company's personal care
products. The Company believes that this increase was primarily the result of
the timing of orders rather than any significant increase in demand for these
products.
The decline in sales of the Company's Eastern Chemical Corporation
subsidiary is a result of the continuing implementation of management's previous
decision to place more emphasis on, and resources into, the growth of the
Company's Guardian Laboratories division. As a result, inventory levels have
continued their planned decline, which has resulted in Eastern's inability to
fill some orders that it might have been able to fill in the past. The Company
continues to closely monitor Eastern and evaluate the advisability of
discontinuing that operation.
Cost of Sales
-------------
Cost of sales as a percentage of sales decreased 4.2% from 47.2% for the
six months ended June 30, 2006 to 43.0% for the comparable period in 2007. For
the three months ended June 30, 2006 compared with the three months ended June
30, 2007, cost of sales as a percentage of sales decreased from 47.1% to 43.1%.
These decreases are primarily due to (a) a decrease in the cost of one of the
Company's primary raw materials; (b) the implementation of a price increase in
March, 2007 on one of the Company's pharmaceutical products; and (c) a positive
variance in overhead absorption created by an increase in production during the
six and three months ended June 30, 2007 when compared with the same period in
2006.
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Operating Expenses
------------------
Operating Expenses increased $105,159 (7.7%) for the six months ended June
30, 2007 compared with the comparable period in 2006. For the three months ended
June 30, 2007 operating expenses increased $16,077 (2.2%) when compared with the
comparable period in 2006. This increase was attributable to increases in
medical costs, legal fees, Board of Director fees, freight costs, and payroll
and payroll-related costs.
Other Income
------------
Other Income increased $95,868 (49.3%) for the six months ended June 30,
2007 and $50,940 (44.6%) for the three months ended June 30, 2007 when compared
with the comparable periods in 2006. The increase was mainly attributable to
higher investment income, which was the result of higher investment balances and
an increase in interest rates.
Provision for Income Taxes
--------------------------
The provision for income taxes increased $370,400 (54.8%) for the six
months ended June 30, 2007 when compared with the comparable period in 2006.
This increase is due to a $993,334 (51.0%) increase in earnings before taxes in
2007 compared to 2006.
Provision for income taxes increased $50,400 (14.6%) for the three months
ended June 2007 when compared to the comparable period in 2006. This increase
was due to a $135,274 (13.6%) increase in earnings before taxes for the three
months ended June 30, 2007 when compared with 2006.
The Company's effective income tax rate increased .9% from 34.7% for the
six months ended June 30, 2006 to 35.6% for the comparable period in 2007. The
Company's effective income taxes increased .3% from 34.7% to 35.0% for the three
months ended June 30, 2006 when compared to 2007. Differences in the effective
income tax rate from the statutory federal incometax rate arise primarily from
capital loss carryforwards, state taxes net of federal benefits, and foreign and
domestic production tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $400,042 from $12,983,634 at December 31, 2006
to $13,383,676 at June 30, 2007. The current ratio increased from 7.6 to 1 at
December 31, 2006 to 12.3 to 1 at June 30, 2007. The increase in the current
ratio was primarily due to the effect of a decrease in dividends payable from
December 31, 2006 to June 31, 2007, partially offset by the increases in taxes
payable and accrued expenses.
The Company has no commitments for any further significant capital
expenditures during the remainder of 2007, and believes that its working capital
is and will continue to be sufficient to support its operating requirements for
at least the next twelve months.
17
The Company generated cash from operations of $3,007,332 and $1,065,011 for
the six months ended June 30, 2007 and June 30, 2006, respectively. The increase
was primarily due to increases in net income from operations, and accrued
expenses, offset by a decrease in inventory and accounts receivable
During the six-month period ended June 30, 2007 $331,108 was used in
investing activities, primarily for building improvements and the purchase of
equipment. For the six-month period ending June 30, 2006 $176,447 was provided
by investing activities, primarily from the sale of marketable securities.
Cash used in financing activities was $2,412,592 and $2,307,886 for the six
months ended June 30, 2007 and June 30, 2006, respectively. The increase is
mainly due to an increase in dividends paid in the second quarter of $.27 per
share in 2007 when compared to $.25 per share in 2006.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the filing of this Quarterly Report on Form 10-QSB
the Company's principal executive officer and principal financial officer
evaluated the effectiveness of the design and operation of Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) and concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is accumulated and communicated to the Company's
management, including its officers, as appropriate to allow timely decisions
regarding required disclosure, and are effective to ensure that such information
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls
The Company's principal executive officer and principal financial officer
have also concluded there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS: NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS: NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES: NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE
ITEM 5 - OTHER INFORMATION:
On July 10, 2007 the Company received a letter from the Market Regulation
Department of the National Association of Securities Dealers (the "NASD"), on
behalf of the American Stock Exchange, advising the Company that the NASD is
conducting a review of trading activity in the Company's common stock from April
2, 2007 through May 7, 2007. In that letter, the NASD requested various
documents and information related to the Company's subsequent earnings
announcement on May 8, 2007.
18
Management of the Company is cooperating fully with this review and has
already provided to the NASD the information it requested, and has offered to
provide any additional information that it needs. The NASD letter states that
its inquiry should not be construed as an indication that the NASD has
determined that any violations of American Stock Exchange rules or federal
securities laws have occurred, or a reflection upon the merits of the securities
involved or upon any person who effected transactions in such securities.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification of Kenneth H. Globus, President and principal
executive officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Robert S. Rubinger, Chief Financial Officer of
the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Kenneth H. Globus, President and principal
executive officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Robert S. Rubinger, Chief Financial Officer of
the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b. Reports on Form 8-K
There were two reports on Form 8-K filed during the fiscal quarter ended
June 30, 2007. The first was filed on May 8, 2007 and related to the issuance of
an earnings release by the Company on May 8, 2007. The second was filed on May
18, 2007 and related to the declaration of a $.27 per share dividend by the
Company's Board of Directors on May 16, 2007.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED-GUARDIAN, INC.
(Registrant)
By: /S/ KENNETH H. GLOBUS
---------------------
Kenneth H. Globus
President
By: /S/ ROBERT S. RUBINGER
----------------------
Robert S. Rubinger
Chief Financial Officer
Date: August 8, 2007
19