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 September 30, 2006
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to ___________
Commission File Number: 1-10526
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UNITED-GUARDIAN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-1719724
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Marcus Boulevard, Hauppauge, New York 11788
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(Address of principal executive offices)
(631) 273-0900
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(Registrant's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Cover Page 1 of 2 Pages
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
4,942,139 shares of common stock,
par value $.10 per share,
as November 1, 2006
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Cover Page 2 of 2 Pages
UNITED-GUARDIAN, INC.
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income - Nine and Three
Months Ended September 30, 2006 and 2005 (unaudited).... 2
Consolidated Balance Sheets -
September 30, 2006 (unaudited) and December 31, 2005.... 3-4
Consolidated Statements of Cash Flows - Nine Months
ended September 30, 2006 and 2005 (unaudited)........... 5
Consolidated Notes to (unaudited) Financial Statements.... 6-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13-17
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
Item 6 - Exhibits and Reports On Form 8-K............................ 18
Signatures.............................................................. 19
1
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------ ------ ------ ------
Revenue:
Net sales $ 8,942,178 $9,697,066 $ 3,020,366 $ 3,049,494
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 4,235,851 4,408,053 1,442,052 1,366,493
Operating expenses 1,966,602 1,885,612 592,144 560,273
---------- ---------- ---------- ----------
6,202,453 6,293,665 2,034,196 1,926,766
---------- ---------- ---------- ----------
Income from operations 2,739,725 3,403,401 986,170 1,122,728
Other income (expense):
Investment income 303,718 235,466 108,616 74,175
Loss on sale of marketable securities (1,134) (113,888) (785) 343
Other (1,060) (178) (833) (130)
--------- ---------- --------- ----------
Income before income taxes 3,041,249 3,524,801 1,093,168 1,197,116
Provision for income taxes 1,058,000 1,282,300 382,300 421,400
--------- --------- --------- ---------
Net income $ 1,983,249 $ 2,242,501 $ 710,868 $ 775,716
======== ========= ======== =========
Earnings per common share
(basic and diluted) $ .40 $ .45 $ .14 $ .16
========= ========= ========= =========
Weighted average shares - basic 4,941,494 4,934,528 4,942,139 4,937,356
========= ========= ========= =========
Weighted average shares - diluted 4,944,637 4,941,266 4,944,704 4,942,614
========= ========= ========= =========
See notes to consolidated financial statements
2
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------ -------------
ASSETS (UNAUDITED) (AUDITED)
Current assets:
Cash and cash equivalents $ 2,264,167 $ 3,425,593
Temporary investments 764,550 699,363
Marketable securities 6,631,398 7,066,797
Accounts receivable, net of
allowance for doubtful accounts
of $36,288 and $47,500 at
September 30, 2006 and December 31,
2005, respectively 1,540,320 1,083,992
Inventories (net) 2,007,113 1,031,563
Prepaid expenses and other
current assets 365,480 440,380
Deferred income taxes 218,901 217,389
----------- -----------
Total current assets 13,791,929 13,965,077
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Property, plant and equipment:
Land 69,000 69,000
Factory equipment and fixtures 3,108,142 3,068,050
Building and improvements 2,161,175 2,133,422
Waste disposal plant 133,532 133,532
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5,471,849 5,404,004
Less: Accumulated depreciation 4,599,873 4,455,524
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871,976 948,480
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Other assets 148,430 108,680
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$ 14,812,335 $ 15,022,237
=========== ===========
See notes to consolidated financial statements
3
UNITED-GUARDIAN, INC.
CONSOLIDATED BALANCE SHEETS
September 30, DECEMBER 31,
2006 2005
--------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Dividends payable $ - $1,086,391
Accounts payable 242,992 148,051
Accrued expenses 394,055 448,990
Taxes Payable 62,303 -
--------- ---------
Total current liabilities 699,350 1,683,432
--------- ---------
Deferred income taxes 59,817 59,817
--------- ---------
Stockholders' equity:
Common stock $.10 par value,
authorized, 10,000,000 shares;
5,004,339 and 5,000,339 shares
issued, respectively, and
4,942,139 and 4,938,139
shares outstanding, respectively 500,434 500,034
Capital in excess of par value 3,792,478 3,778,838
Accumulated other comprehensive loss (71,939) (84,365)
Retained earnings 10,191,825 9,444,111
Treasury stock, at cost; 62,200 shares (359,630) (359,630)
--------- ---------
Total stockholders' equity 14,053,168 13,278,988
--------- ---------
$ 14,812,335 $ 15,022,237
========== ==========
See notes to consolidated financial statements
4
UNITED-GUARDIAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------
2006 2005
------- -------
Cash flows provided by operating activities:
Net income $ 1,983,249 $ 2,242,501
Adjustments to reconcile net earnings
to net cash flows from operations:
Depreciation and amortization 144,349 149,269
Net realized loss on sale of
marketable securities 1,134 116,512
Provision for doubtful accounts (11,212) (11,029)
Reduction of inventory obsolescence reserve 19,000 -
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (445,116) (617,022)
Inventories (994,550) 425,882
Prepaid expenses and other current
and non-current assets 26,438 74,933
Accounts payable 94,941 35,094
Accrued expenses and taxes payable 7,368 (32,241)
---------- ----------
Net cash provided by operating activities 825,601 2,383,899
---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (67,845) (108,878)
Net change in temporary investments (65,187) (296,694)
Purchase of marketable securities (1,646,827) (4,683,147)
Proceeds from sale of marketable securities 2,100,718 4,116,413
---------- ----------
Net cash provided by (used in) investing
activities 320,859 (972,306)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 14,040 19,905
Dividends paid (2,321,926) (2,120,812)
---------- ----------
Net cash used in financing activities (2,307,886) (2,100,907)
---------- ----------
Net decrease in cash and cash equivalents (1,161,426) (689,314)
Cash and cash equivalents at beginning of period 3,425,593 3,735,945
---------- ----------
Cash and cash equivalents at end of period $ 2,264,167 $ 3,046,631
========== ==========
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 September 30, 2006 and the results of
operations for the nine and three months ended September 30, 2006 and 2005. The
accounting policies followed by the Company are set forth in the Company's
financial statements included in its Annual Report to Shareholders for the year
ended December 31, 2005.
2. The results of operations for the nine and three months ended September
30, 2006 and 2005 are not necessarily indicative of the results to be expected
for the full year.
3. Stock-Based Compensation: At September 30, 2006, the Company had two
stock-based employee compensation plans, which are more fully described in the
Company's Annual Report on Form 10-KSB for the year ended 2005. As permitted
under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-based Compensation ("FAS 123"), through December 31, 2005, the Company
elected to follow the guidance of APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25 ("FIN 44"), in accounting
for the Company's stock-based employee compensation arrangements. Accordingly,
no compensation cost was recognized for any of the Company's stock options
granted to employees when the exercise price of each option equaled or exceeded
the fair value of the underlying common stock as of the grant date for each
stock option. The Company accounted for equity instruments issued to
non-employees in accordance with the provisions of FAS 123.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("FAS 123R"), which replaced
FAS 123 and supersedes APB 25 and FIN 44. FAS 123R requires that the fair value
of all share-based payments to employees, including grants of employee stock
options, be recognized as expense in the financial statements. The pro forma
disclosures previously permitted under FAS 123 are no longer an alternative to
financial statement recognition. The Company adopted the provisions of FAS 123R
on January 1, 2006 using the modified prospective application method of adoption
which requires the Company to record compensation cost related to unvested stock
awards as of December 31, 2005 by recognizing the unamortized grant date fair
value of these awards over the remaining service periods of those awards with no
change in historical reported earnings. Awards granted after December 31, 2005
are valued at fair value in accordance with provisions of FAS 123R and
recognized on a straight line basis over the service periods of each award. The
estimated forfeiture rates utilized for the nine months ended September 30, 2006
were based on the Company's historical experience. Upon adoption of FAS 123R the
Company elected to continue using the Black-Scholes option pricing model.
At September 30, 2006 the Company had 4,300 share-based awards that were
outstanding and exercisable, with a weighted average exercise price of $3.29, an
aggregate intrinsic value of $25,833, and a weighted average remaining term of
5.08 years. All of those options were fully vested as of December 31, 2005. The
Company did not grant any options during the nine months ended September 30,
2006 and 2005.
6
As of September 30, 2006 there was no remaining unrecognized compensation
cost related to the non-vested share-based compensation arrangements granted
under the Company's plans.
The Company did not record any compensation expense during the nine months
ended September 30, 2006 under the provisions of FAS 123R.
Cash received from option exercise under all share-based payment
arrangements for the nine months ended September 30, 2006, was $14,040.
The following table illustrates the effect on net income and income per
share for the nine months ended September 30, 2005 if the Company had applied
the fair value recognition provisions of FAS 123 since the original effective
date of FAS 123 to stock-based employee compensation for options granted under
the Company's arrangements as well as to the arrangement of the Company's
subsidiaries:
Nine Months Ended
September 30, 2005
-----------------
Net income as reported $2,242,501
Add back (deduct): Total stock-based employee
compensation expense determined under APB 25 for
all awards, net of related tax effects --
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effects --
Pro forma net income $2,242,501
=========
Income per share:
Basic--as reported $ .45
Basic--pro forma $ .45
Diluted--as reported $ .45
Diluted--pro forma $ .45
4. Marketable Securities
Unrealized
September 30, 2006 Cost Fair Value Gain/(Loss)
------------------ ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $2,347,646 $2,349,453 $ 1,807
Fixed income mutual funds 4,170,048 4,046,177 (123,871)
Equity and other mutual funds 228,643 235,768 7,125
---------- ----------- -----------
$6,746,337 6,631,398 (114,939)
========== =========== ===========
7
Unrealized
December 31, 2005 Cost Fair Value Gain/(Loss)
----------------- ---------- ---------- -----------
Available for Sale:
U.S. Treasury and agencies $2,046,900 $2,028,984 $ (17,916)
Corporate debt securities 900,595 892,110 (8,485)
Fixed income mutual funds 4,028,072 3,928,513 (99,559)
Equity and other mutual funds 225,793 217,190 (8,603)
---------- ----------- -----------
$7,201,360 $7,066,797 $ (134,563)
========== =========== ===========
5. Inventories - Net
Inventories consist of the following: September 30, December 31,
2006 2005
---------- ----------
Raw materials and work in process $ 338,140 $ 376,308
Finished products and fine chemicals 1,668,973 655,255
---------- ----------
$2,007,113 $1,031,563
========== ==========
One of the Company's pharmaceutical products, Renacidin Irrigation, is
currently manufactured for the Company by Hospira, Inc., formerly a division of
Abbott Laboratories, in Rocky Mount, North Carolina. Hospira is changing the
manufacturing facility for Renacidin Irrigation to Clayton, North Carolina, and
as a result the Company is in the process of obtaining F.D.A. approval to change
to the new facility. Since approval is not expected until the end of 2007, the
Company brought in sufficient inventory to last until the new facility is
approved. This has resulted in an increase of approximately $1 million in the
Company's finished goods inventory as compared with December 2005. The Company
expects all of that inventory to be sold prior to its expiration date.
At September 30, 2006 and December 31, 2005, the Company has reserved
$89,000 and $108,000, respectively, for slow moving and obsolete inventory.
6. For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Cash payments for taxes were $837,442 and $983,553 for the nine months
ended September 30, 2006 and 2005, respectively. During the nine months ended
September 30, 2006 the Company paid $798 in interest. No payments were made for
interest in 2005.
The Company paid dividends of $2,321,926 and $2,120,812 for the nine months
ended September 30, 2006 and 2005, respectively.
8
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Nine months ended September 30, Three months ended September 30,
2006 2005 2006 2005
------ ------ ------ ------
Net income $1,983,249 $2,242,501 $ 710,868 $ 775,716
---------- ---------- ---------- ----------
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities during period ...................... 18,468 (82,306) 117,546 (38,426)
Less: reclassification adjustment for net
losses (gain) included in net income .......... 1,158 116,512 784 (343)
---------- ---------- ---------- ----------
Other comprehensive income (loss) before tax .... 19,626 34,206 118,330 (38,769)
Income tax expense (benefit) related to other
comprehensive income ............................ 7,200 12,800 45,000 (14,400)
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax....... 12,426 21,406 73,330 (24,369)
---------- ---------- ---------- ----------
Comprehensive income net of tax .................... $1,995,675 $2,263,907 $ 784,198 $ 751,347
========== ========== ========== ==========
Accumulated other comprehensive income (loss) is comprised of unrealized
gains and losses on marketable securities, net of the related tax effect.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the nine and three months ended September 30, 2006 and
2005.
Nine months ended Three months ended
September 30, September 30,
2006 2005 2006 2005
------ ------ ------ ------
Numerator:
Net income $1,983,249 $2,242,501 $ 710,868 $ 775,716
======= ========= ======= =========
Denominator:
Denominator for basic earnings
per share (weighted average
shares) 4,941,494 4,934,528 4,942,139 4,937,356
Effect of dilutive securities:
Employee stock options 3,143 6,738 2,565 5,258
--------- --------- --------- ---------
Denominator for diluted earnings
per share (adjusted weighted-average
shares) and assumed conversions 4,944,637 4,941,266 4,944,704 4,942,614
========= ========= ========= =========
Basic and diluted earnings per share $ 0.40 $ 0.45 $ 0.14 $ 0.16
========= ========= ========= =========
9
9. 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, 2005. Segment earnings or
losses are based on earnings or losses from operations before income taxes. The
reportable segments are distinct business units operating in different
industries. They are separately managed, with separate marketing and
distribution systems. The following information about the two segments is for
the nine and three months ended September 30, 2006 and 2005.
Nine months ended September 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 8,139,067 $ 803,111 $ 8,942,178 $ 8,847,905 $ 849,161 $ 9,697,066
Depreciation and amortization 64,906 - 64,906 65,187 - 65,187
Segment income before income
taxes 2,794,693 68,593 2,863,286 3,459,359 70,445 3,529,804
Segment assets 3,477,887 377,716 3,855,603 2,893,000 378,643 3,271,643
Capital expenditure 38,973 - 38,973 32,825 - 32,825
Reconciliation to Consolidated Amounts
Income before income taxes
----------------------------
Total earnings for reportable segments $ 2,863,286 $ 3,529,804
Other income, net 301,524 121,400
Corporate headquarters expense (123,561) (126,403)
---------- ----------
Consolidated earnings before income taxes $ 3,041,249 $ 3,524,801
========== ==========
Assets
------
Total assets for reportable segments $ 3,855,603 $ 3,271,643
Corporate headquarters 10,956,732 11,315,585
---------- ----------
Total consolidated assets $14,812,335 $14,587,228
========== ==========
10
Three months ended September 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Revenues from external customers $ 2,755,062 $ 265,304 $ 3,020,366 $ 2,793,515 $ 255,979 $ 3,049,494
Depreciation and amortization 22,659 - 22,659 20,437 - 23,437
Segment income before income
taxes 1,010,398 22,529 1,032,927 1,131,460 38,492 1,169,952
Capital Expenditure 20,170 0 20,170 4,909 0 4,909
Reconciliation to Consolidated Amounts
Three months ended September 30,
2006 2005
------------------------------------ ------------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ------------ ----------- ------------ ------------ -----------
Income before income taxes
----------------------------
Total earnings for reportable segments $ 1,032,927 $ 1,169,952
Other income, net 106,998 74,388
Corporate headquarters expense (46,757) (47,224)
---------- ----------
Consolidated earnings before income taxes $ 1,093,168 $ 1,197,116
========== ==========
Other Significant items
-----------------------
Nine months ended September 30,
2006 2005
------------------------------------------ -------------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
------------ ------------ ------------- ------------- ------------ -------------
Capital expenditures $ 38,973 $ 28,872 $ 67,845 $ 32,825 $ 76,053 $108,878
Depreciation and amortization 64,906 79,443 144,349 65,187 84,082 149,269
Geographic Information
----------------------
2006 2005
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
United States $ 4,225,334 $ 871,976 $ 4,608,137 $ 957,280
France 1,052,692 1,182,796
Other countries 3,664,152 3,906,133
----------- ------------- ----------- -------------
$ 8,942,178 $ 871,976 $ 9,697,066 $ 957,280
=========== ============= =========== =============
11
2006 2005
--------------------------- ---------------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
----------- ------------- ----------- -------------
Major Customers
---------------
Customer A (Guardian)** $ 3,071,648 $ 3,721,307
Customer B (Guardian)** 868,393 1,022,408
All other customers 5,002,137 4,953,351
----------- -----------
$ 8,942,178 $ 9,697,066
=========== ===========
** At September 30, 2006 Customers A and B had balances approximating 33%
and 11% of net accounts receivable, respectively. At September 30, 2005
Customers A and B had balances approximating 37% and 15% of net accounts
receivable, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109" ("FIN 48"), regarding accounting for,
and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact FIN 48 will
have on its results of operations and financial position.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006. We do not
anticipate that SAB 108 will have a material effect on our financial position,
results of operations or cash flows.
12
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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans." SFAS No.
158 requires the recognition of the funded status of a benefit plan in the
balance sheet; the recognition in other comprehensive income of gains or losses
and prior service costs or credits arising during the period but which are not
included as components of periodic benefit cost; the measurement of defined
benefit plan assets and obligations as of the balance sheet date; and disclosure
of additional information about the effects on periodic benefit cost for the
following fiscal year arising from delayed recognition in the current period. In
addition, SFAS No. 158 amends SFAS No. 87, "Employers' Accounting for Pensions,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," to include guidance regarding selection of assumed discount rates for
use in measuring the benefit obligation. SFAS No. 158 is effective for our year
ending December 31, 2006. The Company is not currently able to quantify the
effects of the adoption of SFAS No. 158 since actual amounts will depend on
year-end calculations.
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
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.
13
Accordingly, results actually achieved may differ materially from those
anticipated as a result of such forward-looking statements, and those statements
speak only as of the date they are made. The Company does not undertake, and
specifically disclaims, any obligation to update any forward-looking statements
to reflect events or circumstances occurring after the date of such statements.
OVERVIEW
The Company is a Delaware corporation that operates in two business
segments. Guardian conducts research, product development, manufacturing and
marketing of cosmetic ingredients, personal and health care products,
pharmaceuticals, and specialty industrial products. The products manufactured by
Guardian are marketed through marketing partners, distributors, direct
advertising, mailings, and trade exhibitions. Its most important personal care
product line is its LUBRAJEL(R) line of water-based moisturizing and lubricating
gels. It also sells two pharmaceutical products, which are distributed primarily
through drug wholesalers and surgical supply houses. There are also indirect
sales to the Veteran's Administration and other government agencies, and to some
hospitals and physicians.
While the Company does have competition in the marketplace for some of its
products, many of its products or processes are either unique in their field or
have some unique characteristics, and therefore are not in direct competition
with the products or processes of other pharmaceutical, chemical, or health care
companies. Guardian's research and development department is actively working on
the development of new products to expand the Company's personal care line.
The Company has been issued many patents and trademarks, and intends
whenever possible to make efforts to obtain patents in connection with its
product development program.
Eastern distributes a line of fine organic chemicals, research chemicals,
test solutions, indicators, dyes and reagents. Eastern's products are marketed
through advertising in trade publications and direct mailings. Since the
Company's business activities and marketing efforts over the past several years
have focused increasingly on the Guardian division, the Company has reduced
Eastern's inventory levels in order to make it more marketable in the event the
Company decides to sell it at some future date. This has resulted in some
reduction in sales as compared with previous years. Sales of this division have
also declined as a result of increased competition from new and existing
competitors.
Guardian's pharmaceutical products are distributed primarily in the United
States. 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.
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, 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
14
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, 2005, 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, 2005, and a
comparison of the results of operations for the nine and three months ended
September 30, 2006 and September 30, 2005. This discussion and analysis should
be read in conjunction with "Management's Discussion and Analysis or Plan of
Operation" included in the Company's Form 10-KSB for the year ended December 31,
2005.
RESULTS OF OPERATIONS
Revenue
-------
For the nine-month period ended September 30, 2006 net sales decreased
$754,888 (7.8%) versus the comparable period in 2005. Guardian had a sales
decrease of $708,838 ( 8.0%) and Eastern had a sales decrease of $46,050 (5.4%).
For the three-month period ended September 30, 2006, net sales decreased
$29,128 (1.0%) versus the comparable period in 2005. Guardian had a sales
decrease of $38,453 (1.4%) and Eastern had a sales increase of $9,325 (3.6%).
The decline in Guardian's sales for the nine-month period ended September
30, 2006 compared to the same period in 2005 was due to a number of factors:
(a) On March 1, 2005 the Company increased prices on its pharmaceutical
products, which resulted in an unusually high volume of sales of those products
in the first quarter of 2005 compared to the first quarter of 2006. This extra
buying in the first quarter of 2005 continued to impact sales through the first
nine months, with sales of the Company's pharmaceutical products for the first
nine months of 2006 down 5% from the first nine months of 2005. It is
anticipated that sales of these products for the full year in 2006 will be
substantially the same as 2005.
(b) In the first quarter of 2005 the Company experienced an unusual
number of shipments of orders that some customers had requested not be shipped
out at the very end of 2004. That situation did not recur in 2006.
(c) Sales of the Company's personal care products to the Company's
largest customer ("Customer A") and second largest customer ("Customer B") were
down in the first 9 months of 2006 compared to the same period in 2005 by 17%
and 15% respectively. However, sales to Customer A in October were almost double
sales to that customer in October 2005, so the Company believes that much of the
decrease in sales for the nine-month period was due to the timing of orders.
This is supported by information provided to the Company by Customer A that
showed that Customer A's sales of the Company's products to its own customers
were actually up for the nine-month period. For this reason the Company does not
believe that the reduced purchases from that customer are an indication or trend
of any loss of customers or sales.
15
The overall decrease of 1% in Guardian sales for the third quarter of 2006
was primarily due to a decrease in sales to the Company's two largest customers,
which was almost entirely offset by higher sales to a number of its existing
customers. The Company believes that this temporary decline in sales is
primarily the result of the timing of inventory purchases versus sales, and does
not indicate any real reduction in the sales level of Guardian products by its
customers.
The changes in Eastern sales for the three- and nine-month period ended
September 30, 2006, is believed to be due to normal fluctuations in the
purchasing patterns of its customers.
Cost of Sales
-------------
Cost of Sales as a percentage of sales increased to 47.4% for the nine
months ended September 30, 2006, from 45.5% for the comparable period in 2005.
For the three months ended September 30, 2006 Cost of Sales as a percentage of
sales increased to 47.7% as compared with 44.8% for the three months ended
September 30, 2005. These increases were due to increases in standard overhead
rates for Guardian that resulted primarily from increases in insurance and
payroll and payroll-related costs.
Operating Expenses
------------------
Operating Expenses increased $80,990 (4.3%) for the nine months ended
September 30, 2006 compared with the comparable period in 2005. This increase
was mainly attributable to increases in payroll and payroll-related expenses
partially offset by the reduction of the Company's bad debt reserve. For the
three-month period ended September 30, 2006, Operating Expenses increased
$31,871 (5.7%) when compared with the comparable period ended September 30,
2005. This increase was due mainly to increases in payroll and payroll related
expenses.
Other Income
------------
Other Income increased to $301,524 from $121,400 for the nine month period
ended September 30, 2006 and September 30, 2005, respectively, an increase of
$180,124 (148.4%). This increase was mainly attributable to the net effect of an
increase in investment income of $68,252 in 2006 and a decrease in losses on the
sale of marketable securities of $112,754 in 2006. In 2005 the sale of a
portfolio of securities, primarily bonds, the bulk of which had been managed for
the Company by a financial institution, resulted in a realized loss of
approximately $116,000, of which approximately $107,000 had previously been
recorded in the equity section of the balance sheet as an "accumulated other
comprehensive loss". Approximately $108,000 of the above loss was due to the
sale of the bond portfolio managed by a financial institution, which, over the
18 months the Company held it, had realized interest income net of broker fees
of approximately $154,000. The sale of bonds in the second quarter of 2006
resulted in a loss of $349. Investment income is recorded net of brokerage fees.
For the three months ended September 30, 2006, Other Income increased
$32,610 (43.8%) which was mainly attributable to higher investment income due to
an increase in interest rates.
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Provision for Income Taxes
--------------------------
The Provision for Income Taxes decreased $224,300 (17.5%) for the nine
months ended September 30, 2006 when compared with the comparable period in
2005. This decrease was due to (a) decreased earnings before taxes of $483,552
in 2006, and (b) the reduction in taxable capital gains in 2006 by capital
losses carried forward from when the Company recorded $116,000 in losses upon
the sale of its bond portfolio in 2005.
The Provision for Income Taxes decreased $39,100 (9.3%) for the three
months ended September 30, 2006 which is mainly due to a decrease in earnings
before taxes of $103,948.
The Company had effective income tax rates of 34.8% and 36.4% for the nine
months ended September 30, 2006 and September 30, 2005, respectively, and 35%
and 35.2% for the three months ended September 30, 2006 and September 30, 2005
respectively. Differences in the effective income tax rate from the statutory
federal income tax rate arise primarily from capital loss carryforwards, state
taxes net of federal benefits, and other differences.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $12,281,645 at December 31, 2005 to
$13,092,579 at September 30, 2006. The current ratio increased from 8.3 to 1 at
December 31, 2005 to 19.7 to 1 at September 30, 2006. The increase in current
ratio was primarily due to the net effect of a decrease in dividends payable and
increases in inventories, partially offset by decreases in cash and investments.
The increase in inventory was due primarily to the Company bringing in
additional inventory of Renacidin Irrigation while it is awaiting F.D.A.
approval to change the manufacturing site for the product, which is expected to
take about a year. The Company believes that all of the additional inventory
will be sold prior to its expiration date.
The Company has no commitments for any further significant capital
expenditures during the remainder of 2006, and believes that its working capital
is and will continue to be sufficient to support its operating requirements for
at least the next twelve months.
The Company generated cash from operations of $825,601 and $2,383,899 for
the nine months ended September 30, 2006 and September 30, 2005, respectively.
The decrease was primarily due to decreases in net income from operations and
increases in inventory.
During the nine month period ended September 30, 2006, $320,859 was
provided by investment activities, as compared with the nine month period ended
September 30, 2005, when $972,306 was used in investing activities. The change
is mainly due to the net effect of the sale (primarily bonds) and purchases
(primarily bond funds) of marketable securities during the nine months ending
September 30, 2005 and an increase in investments due to reinvested income from
mutual funds and temporary investments in the nine months ending September 30,
2006.
Cash used in financing activities was $2,307,886 and $2,100,907 for the
nine months ended September 30, 2006 and September 30, 2005, respectively. The
increase was due primarily to an increase in dividends paid during the nine
months ended September 30, 2006.
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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: NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Kenneth H. Globus, President and Chief
Financial Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Alfred R. Globus, Chairman and Chief Executive
Officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Kenneth H. Globus, President and Chief Financial
Officer of the Company, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
There was one report on Form 8-K filed during the fiscal quarter ended
September 30, 2006. It was filed on August 10, 2006 and related to the issuance
of an earnings release by the Company on August 9, 2006.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED-GUARDIAN, INC.
(Registrant)
By: /S/ ALFRED R. GLOBUS
--------------------
Alfred R. Globus
Chief Executive Officer
By: /S/ KENNETH H. GLOBUS
---------------------
Kenneth H. Globus
Chief Financial Officer
Date: November 5, 2006
19