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, 2002.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 1-10526
UNITED-GUARDIAN, INC.
(Name of small business issuer in its charter)
Delaware 11-1719724
-------------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
230 Marcus Blvd., Hauppauge, NY 11788
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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. [ ]
The Registrant's revenues for the fiscal year ended December 31, 2002
were $ 9,091,416.
On March 3, 2003 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 $9,188,755. (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, 2003 the Registrant had issued 4,943,339 shares of
Common Stock, $.10 par value per share ("Common Stock"), of which 4,881,139
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 and 11) is incorporated by reference to the Registrant's definitive
proxy statement (the "2003 Proxy Statement") in connection with its 2003 annual
meeting of stockholders, which is to be filed no later than April 30, 2003 with
the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
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
The Registrant 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
Registrant also distributes a line of over 3,000 fine organic chemicals,
research chemicals, test solutions, indicators, dyes and reagents through a
wholly owned subsidiary.
The Registrant'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 Registrant's
Chairman and Chief Executive Officer. On February 10, 1982, a merger took place
between the Registrant and Guardian Chemical Corp. ("GCC"), whereby GCC was
merged into the Registrant 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 Registrant.
The Registrant 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.
The Registrant 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 Registrant, and some of which are still in the developmental stage. Of
the products being actively marketed, the two largest product lines are
Registrant's LUBRAJEL(R) line of cosmetic ingredients, which accounted for
approximately 61% of the Registrant's sales in 2002, and its RENACIDIN(R)
IRRIGATION, a pharmaceutical product that accounted for approximately 17% of the
Registrant's sales in 2002. The Registrant actively seeks other companies as
potential marketers for its products, particularly for those products that are
not yet being actively marketed by the Registrant.
(2) Eastern Chemical Corporation ("Eastern"), a wholly-owned subsidiary of
the Registrant, distributes an extensive line of fine organic chemicals,
research chemicals, test solutions, indicators, dyes, stains, and reagents. The
Registrant's business activities and marketing efforts over the past several
years have focused increasingly on the Guardian division, which the Registrant
believes has greater growth potential. The Registrant is in the process of
reducing Eastern's inventory levels in order to make the subsidiary more
marketable in the event Registrant decides to sell the Eastern operation at some
future date. Registrant believes that if the Registrant were to sell Eastern,
the loss of revenue from that subsidiary would not significantly impact the
Registrant's net income.
Paragon Organic Chemicals ("Paragon") is a wholly owned subsidiary of the
Registrant. It has no assets or sales of its own, and its sole function is to
act as a purchasing arm of the Registrant.
(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 Registrant, 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 and specialty chemical products 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 2002, Guardian's sales accounted for approximately 87% of
Registrant's total product sales.
Guardian's products are sold under trademarks or trade names owned by the
Registrant. The marks for the most important products, LUBRAJEL and RENACIDIN,
are registered as trademarks in the United States Patent and Trademark Office
("Patent Office"). In 2002 sales from these two product lines accounted for
approximately 90% of Guardian's sales, and 78% of the sales of the Registrant as
a whole.
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 prelubricated enema tips
and thermometers, and as a lubricant for catheters. During 2002, sales of
LUBRAJEL products decreased 1.2% from $5,649,557 in 2001 to $5,582,293 in 2002.
Sales of LUBRAJEL products represented 70% of Guardian's sales and 61% of the
sales of the Registrant as a whole. The most important product in the LUBRAJEL
line in 2002 was LUBRAJEL CG, the original form of LUBRAJEL, the sales of which
decreased 1% from $1,951,990 in 2001 to $1,931,408 in 2002. Sales of the second
largest revenue producer in the Lubrajel line, LUBRAJEL MS, increased 2.2% from
$1,161,907 in 2001 to $1,188,170 in 2002. Sales of LUBRAJEL OIL, another
important product in the LUBRAJEL line, increased 7% from $571,291 in 2001 to
$610,997 in 2002. The Registrant believes that while it is possible the 1%
decrease in LUBRAJEL sales could have been the result of a slight decline in
demand for Registrant's Lubrajel products, it is more likely that the modest
decrease was just a function of the ordering patterns of its marketing partners.
It should also be noted that the first three quarters of the fiscal year
experienced a more significant decline in Lubrajel sales, which was almost
completely offset by a surge in sales in the fourth quarter which has continued
through the first two months of 2003.
Registrant believes that its ability to increase sales of its LUBRAJEL
products will depend on (a) the ability of Registrant's marketing partners and
distributors to continue to bring the product to the attention of new customers,
and (b) Registrant's success in bringing to market new forms of LUBRAJEL that
will enable the product to be used in new applications. Registrant is currently
developing new varieties of LUBRAJEL for this purpose, and is in the process of
introducing several new types of LUBRAJEL products under a "LUBRAJEL II"
designation, which it hopes will expand its market for this product line.
Registrant believes that there is still significant potential to expand the
sales of its LUBRAJEL line of products by (a) increasing the number of potential
products in which it can be used, and (b) by continuing to increase its
marketing efforts into new markets that have only been developed recently, such
as in China. Any sales increases may be offset somewhat by continuing
competition from products introduced by Registrant's competitors. Despite this
competition, Registrant believes that it will still be able to expand the market
for its LUBRAJEL product line. Registrant believes that LUBRAJEL'S reputation
for quality and customer service will enable it to continue to compete
effectively in the marketplace.
RENACIDIN
RENACIDIN is a urological prescription drug 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 10% 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 Registrant patent # 4,962,208, which expires on October 9, 2007,
covering the method of manufacturing RENACIDIN IRRIGATION. Sales of RENACIDIN
IRRIGATION in 2002 accounted for 19% of Guardian's sales and 17% of the sales of
the Registrant as a whole. Sales of RENACIDIN IRRIGATION in 2002 decreased
slightly from $1,606,498 in 2001 to $1,538,191 in 2002. This decrease was solely
the result of a decrease in unit sales, and most likely was reflective of the
ordering patterns of the drug wholesalers.
Other Products
Other significant products that are manufactured and sold by Guardian but
which did not individually comprise more than 5% of the Registrant's sales in
2002 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. Sales of CLORPACTIN decreased slightly from $297,414 in
2001 to $296,764 in 2002 to due to normal year to year fluctuations.
KLENSOFT(TM) is a surfactant that can be used in shampoos, body washes,
makeup removers, and other cosmetic formulations. The primary customer for
Klensoft for many years has been in Taiwan, and over the past few years there
have been new customers for the product in the United Kingdom, Australia, France
and Korea. Klensoft sales increased significantly from $38,788 in 2001 to
$140,369 in 2002 due primarily to an increase in demand for the product from
Registrant's primary customer for the product in Taiwan. Based on current
projections Registrant believes that Klensoft sales will once again increase in
2003 due to higher demand from this primary customer and the addition of new
customers for this product in Australia and Europe. Registrant believes that the
significant year to year sales fluctuations for this product are the result of
erratic purchasing on the part of the major customer for this 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 Registrant's distributor of LUBRAJEL in
France and a major European cosmetic supplier. It is also distributed by some of
Registrant'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. Sales
of Lubrajel PF decreased from $138,880 in 2001 to $60,900 in 2002, a decrease of
27%. (These sales are already included in the total Lubrajel sales figure
mentioned previously).
CONFETTI(TM) II 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. Sales of Confetti II decreased from $214,863 in 2001 to $34,952 in
2002, a decrease of 84%. The decrease was due primarily to the discontinuation
of a new product, marketed by a major cosmetic company in Germany, which
contained this product.
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 Registrant was
granted a U.S. patent for this unique form of LUBRAJEL. In September, 1994 the
Registrant entered into a marketing agreement with Horizon Medical, Inc., a
California company engaged in the development and manufacturing of products and
services to the medical device and pharmaceutical industries. Horizon has been
actively marketing LUBRAJEL RC since January, 1996. Sales of LUBRAJEL RC and RR
increased by 10% from $528,295 in 2001 to $580,165 in 2002. (These sales are
already included in the total Lubrajel sales figure mentioned previously).
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 5% of Registrant's sales in 2002, 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. A new form of Unitwix was introduced in fiscal
year 2000.
DESELEX(R) is a replacement for phosphates in detergents.
B-122(TM) and a related product, LUBRASLIDE(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. Although sales
have not been significant to date, a number of companies are evaluating these
products for possible inclusion into their product lines.
ORCHID COMPLEX(TM) is a successor product to our 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. New
uses for currently marketed products are also being developed. 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 product; (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 Registrant
believes that a number of its development projects, including those discussed
below, may have commercial potential.
LUBRAJEL
Registrant's major research focus at the present time is the development of
several new water-based gel products that will increase Registrant's strength in
the personal care market sector. The first new line will be marketed under the
tradename "PLEXAJEL". The first formulation in that new line will be marketed as
"PLEXAJEL ASC", which stands for "Acid Stable Complex". This product is intended
to enable customers to incorporate low pH ingredients, such as alpha hydroxy
acids, into clear, water-based gel formulations. The current form of Lubrajel,
as well as the competitive products to Lubrajel, cannot be used to gel low pH or
salt-containing formulations. Registrant believes that this will open up many
new possibilities for this product line. Registrant intends to expand this line
with additional products over the next few years. The development work for the
initial product in this line, the Plexajel ASC, has been completed, and
Registrant is in the process of preparing brochures for the anticipated
introduction of the product at the In-Cosmetics show in Paris at the end of
March, 2003.
The other new addition to this product line was introduced at the
beginning of February, 2003, and is known as the "Lubrajel II" line, with
"LUBRAJEL II XD" being the first product in this line. This line will be a
supplement to, and not a replacement for, the current Lubrajel line. It consists
of a modified Lubrajel composition that enhances some of the properties of the
current Lubrajel line, and allows it to be used as a drop-in replacement for one
of the main competitors for Lubrajel. Its composition also will enable it to be
used in certain countries, such as Japan, more easily than the current Lubrajel
formulation. Registrant intends to expand this line with additional formulations
in the near future, providing enhancements such as superior moisturization and
lubrication. Registrant believes that this new line will enable it to recover
some of the business it has lost to its competitors over the years, and will
give customers even greater formulating choices.
The Registrant is continuing to work on a project with a global
personal care products company based in the United Kingdom for the use of
LUBRAJEL FLUID, a modified form of LUBRAJEL, in a globally marketed consumer
health product. The exact nature of this project cannot yet be disclosed due to
confidentiality agreements between the Registrant and this U.K. company. In 2000
the Registrant began to ship small quantities of product, which have been
gradually increasing as the customer rolls out the product in different
countries and expands the use of our product into more of its product lines.
While sales from this project have not increased as quickly as Registrant
originally expected, indications from the customer are that over time their
requirements will increase as the product is expanded to new markets and
additional product lines.
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 in Canada. 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 will 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
Registrant hopes to work jointly with other companies to obtain these
registrations. The Registrant was granted two patents for this product.
CLORPACTIN
In 2002 the Registrant completed a preliminary clinical trial in
conjunction with the School of Dental Medicine at Boston University to determine
whether Clorpactin, Registrant's proprietary antimicrobial product, would be
effective in the treatment of gingivitis and other periodontal disease. The
results of that initial test were very positive, but indicated that it would be
necessary to alter the taste of the product in order to achieve the proper
patient compliance. As a result, the Registrant is contracting with Boston
University to conduct a second test using a modified form of Clorpactin that
Registrant believes will solve that problem. If approved by the Institutional
Review Board of Boston University it is anticipated that this second trial will
be completed by the end of the third quarter of this year. If the results of
this second test are positive, Registrant will either proceed further on its own
and conduct a Phase I clinical trial, or will resume its previous efforts to
locate a partner to work with it on this project. While regulatory approvals
would be needed in order to market the product for this new use, because this
product is currently being marketed for human use and has a 40+ year history of
such use, Registrant believes that animal studies will not be required by the
F.D.A. and that it will be permitted to proceed directly with a Phase I clinical
trial.
CARRIER FOR ANTI-VIRAL COMPOUND
Registrant is working with a company that has developed a new anti-viral
compound and has requested the assistance of the Registrant in developing a
water-based gel base to carry their active ingredient. Because of Registrant's
long experience in developing water-based gels, Registrant believes that it is
in an excellent position to develop a suitable carrier for the product. If
Registrant is successful, it would supply the base product and incorporate their
anti-viral compound. Registrant has already provided this company with several
samples, and the initial test results have been very promising. While the market
potential for this product could be very significant, regulatory approvals would
be needed before the product could be marketed. As a result, even if Registrant
is successful in developing this product it does not anticipate any revenue
being generated for several years. At the present time the Registrant is
awaiting further results from tests that are being conducted by this company. If
they are successful, Registrant expects to enter into discussions about
Registrant's role in the future development of this product.
Trademarks and Patents
The Registrant 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 Registrant currently owns many United
States patents and trademarks relating to its products. The Registrant has
patent and trademark applications pending with respect to a number of its
research and development products. Patents formerly held by the Registrant on
certain products have expired. There can be no assurance that any patents held
by the Registrant will be valid or otherwise of value to the Registrant or that
any patent applied for will be granted. However, the Registrant 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 Registrant in
Guardian's business are of varying importance to the Registrant. The most
significant products for which the Registrant 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 Registrant:
PATENT NAME PATENT # ISSUE DATE EXPIRATION
DATE
------------------------------------------------ --------- ---------- ----------
Treatment of Hazardous Waste 4,581,130 4/8/86 4/8/03
Treatment of Hazardous Materials; Dehalogenation 4,601,817 7/22/86 7/22/03
with sodium-copper-lead alloy
Treatment of Hazardous Waste - ternary alloy and oil 4,695,400 9/22/87 9/22/04
slurry thereof; sodium, copper, lead
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 Registrant 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 Registrant 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 Registrant. It distributes an
extensive line of fine organic chemicals, research chemicals, test solutions,
indicators, dyes and stains, and reagents. In 2002, Eastern's sales accounted
for approximately 13% of the total product sales of the Registrant versus 14.9%
in 2001. Eastern's sales decreased by 19.5% in 2002. The decrease was partially
the result of a loss of sales due to Registrant's continuing efforts to reduce
Eastern's inventory, which resulted in an inability to supply certain items that
required immediate shipment from inventory. Eastern was also affected by the
general economic slowdown in 2002.
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 Registrant's cosmetic products are marketed
exclusively by International Specialty Products ("ISP") in accordance with a
marketing agreement entered into in 1994 and subsequently amended and expanded
in 1996, 2000, and most recently in December, 2002 (see "Marketing Agreements"
below). ISP also has certain rights to sell some of Registrant's other
industrial and medical products. In 2002, ISP's purchases for distribution in
the United States were estimated to be approximately $837,218 compared to
$1,210,749 in 2001, and accounted for approximately 9% of the Registrant's sales
(an estimate based on sales information provided to Registrant by ISP.
Registrant has no way of independently determining which of ISP's purchases from
Registrant are intended for domestic sale and which are intended for foreign
sale.) Registrant believes that much of the decline in ISP's domestic sales of
Registrant's products was due to a temporary reduction in purchases by a major
ISP customer, and that customer has significantly increased its purchases in the
first quarter of 2003.
Registrant's domestic sales of pharmaceutical products are handled
primarily through the major full-line drug wholesalers and account for
approximately 20% of Registrant's sales. Registrant'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 2002, Registrant derived approximately 49% of its sales from customers
in foreign countries, primarily from sales of its cosmetic products in Europe
and Asia, compared to 46.7% in 2001. The Registrant 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 percentages of Registrant's foreign sales
attributable to each of its foreign distributors were as follows: ISP: 22.9% (an
estimate of ISP's purchases intended for sale outside the U.S., based on foreign
sales figures provided to the Registrant by ISP); Sederma: 9.5%; S. Black: 4.6%;
C&M International: 3.8%; and Castelli: 0.7%.
Marketing Agreements
ISP
In December, 2002 Registrant 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 Registrant'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 Registrant 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 Registrant'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 manufactures and markets an extensive line of personal
care, pharmaceutical, and industrial products on a global basis.
Registrant believes that in the event ISP were to cease marketing
Registrant's products, alternative arrangements could be made to continue to
supply product to the customers currently using Registrant's products without
any significant interruption of supply.
Registrant 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 Registrant 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 Registrant's principal raw material suppliers are Proctor and
Gamble, Callahan Chemical Company, Univar USA, Inc., Protameen Chemicals Inc.,
Alzo, Inc., Esprit Chemical Company LP, Eastman Chemical Products, 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 Registrant'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 Registrant's business.
Backlog
The Registrant 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 Registrant
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 Registrant is
engaged, many of which have substantially greater financial, research, manpower,
marketing and distribution resources than the Registrant. In addition, there are
many large, integrated and established pharmaceutical, chemical and cosmetic
companies that have greater capacity than the Registrant to develop and to
commercialize types of products upon which the Registrant's research and
development programs are based. The Registrant believes that manufacturing,
regulatory, distribution and marketing expertise will be increasingly important
competitive factors. In this regard, the Registrant believes that arrangements
with major health care and medical or hospital products suppliers will be
important factors 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 Registrant. 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 each of its 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-9000 REGISTRATION
On November 24, 1998 the Registrant earned ISO-9002 registration from
Underwriters Laboratories, Inc., indicating that the Registrant's documented
procedures and overall operations had attained the high level of quality needed
to receive ISO registration. Registrant continues to be evaluated every six
months for continued compliance with ISO-9002 standards, and is currently in
good standing under this registration. It is also in the process of qualifying
under the new ISO-9001:2000 standard, which goes into effect in 2003.
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 Registrant's products. The Registrant and many of Registrant's products are
subject to certain government regulations. Products that may be developed and
sold by the Registrant 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 Registrant outside of the United
States may require approval from foreign regulatory agencies. Any medical device
products developed by the Registrant 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 Registrant is required to comply with all pertinent Good
Manufacturing Practices of the FDA for medical devices and drugs. Accordingly,
the regulations to which the Registrant and certain of its products may be
subject, and any changes with respect thereto, may materially affect the
Registrant's ability to produce and market new products developed by the
Registrant.
The Registrant'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 Registrant's operating expenses are directly attributable
to complying with federal, state, and local environmental statutes and
regulations. In 2002 and 2001 the Registrant incurred approximately $43,000 and
$48,000 respectively, in environmental compliance costs.
Research and Development Expense
Portions of the Registrant's operating expenses are directly attributable
to research and development the Registrant performs. In 2002 and 2001, the
Registrant incurred approximately $347,934 and $334,000, respectively, in
research and development expenses. No portion of the research and development
expenses was directly paid by the Registrant's customers.
Employees
The Registrant presently employs 43 people, 7 of whom serve in an executive
capacity, 21 in research, quality control and manufacturing, 5 in maintenance
and construction, and 10 in office and administrative work. Of the total number
of employees, 40 are full time employees. None of the Registrant's employees are
covered by a collective bargaining agreement. The Registrant believes that its
relations with its employees are satisfactory.
Item 2. Description of Property.
The Registrant maintains its principal office, factory, and conducts most
of its research at 230 Marcus Boulevard, Hauppauge, New York 11788. These
premises, which the Registrant 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
Registrant has now fully developed the 2.7 acres, and fully utilizes the
buildings occupying the land. The Registrant 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
On January 25, 2002 Registrant received notice that it had been named as a
co-defendant in a medical malpractice claim filed in the Superior Court of Santa
Clara County, California. The claim alleged negligence on the part of the
plaintiff's physician during the administration of Clorpactin, one of
Registrant's medical products. It also alleged that Registrant's product was
responsible for some of the injuries caused to the Plaintiff. No damages were
specified. Registrant turned the claim over to its insurance carrier, which
retained legal counsel for the Registrant in California. Registrant's retention
(deductible) under that policy is $25,000. Just prior to a scheduled non-binding
arbitration hearing, the Plaintiff offered to settle the case against Registrant
for $18,000, and while the Registrant continued to vigorously deny that its
product had any causal connection with the Plaintiff's injuries, the insurance
carrier believed that it was in everyone's best interest to settle the claim
rather than continue to incur legal expenses, so the claim was settled for
$18,000 and Registrant was released from the lawsuit. Registrant's total
expenses in connection with the defense and settlement of the lawsuit were the
$18,000 settlement payment plus $7,000 of the legal fees. At no time did
Registrant admit any liability in connection with the injuries sustained by the
Plaintiff.
In February, 2002 Registrant was notified that it might be made a third
party defendant in a lawsuit filed by the New York State Department of
Environmental Conservation ("DEC") against seven large chemical companies in
connection with the cleanup of a hazardous waste site previously occupied by
Hexagon Laboratories in the Bronx, New York. The purpose of the action by the
DEC was to recover, from anyone who did business with Hexagon over its 40 year
existence, the costs incurred by the State in cleaning up the site. Paragon
purchased small quantities of Hexagon products during the period 1963 through
1982, and was one of approximately 172 companies notified that they might be
made parties to this action to help contribute to the cleanup costs. While
Paragon was never officially brought in as a defendant in the lawsuit, as a
result of discussions held with the office of the Attorney General of New York,
the State agreed that it would not pursue any action against Paragon or the
Registrant at the present time, although it reserved the right to do so in the
future if the situation changed.
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 Registrant 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, 2001
to December 31, 2002. The quotations represent prices between dealers and do not
include retail markup, markdown or commission:
Year Ended Year Ended
Quarters December 31, 2002 December 31, 2001
-------- ----------------- -----------------
High Low High Low
---- --- ---- ---
First (1/1 - 3/31) $ 6.36 $ 5.10 $ 5.75 $ 4.25
Second (4/1 - 6/30) $ 7.36 $ 5.20 $ 8.00 $ 4.95
Third (7/1 - 9/30) $ 5.45 $ 3.74 $ 6.36 $ 4.60
Fourth (10/1 - 12/31) $ 4.20 $ 3.25 $ 5.60 $ 5.07
Holders of Record
As of March 1, 2003 there were 1,032 holders of record of Common Stock.
Cash Dividends
On January 8, 2003 the Registrant paid a $.10 per share dividend to all
stockholders of record as of December 20, 2002. On January 10, 2002 the
Registrant paid a $.10 per share dividend to all stockholders of record as of
December 26, 2001.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results Of Operations:
Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001
Revenue
Consolidated revenue in 2002 decreased by $492,266 (5%) compared to 2001
due to a revenue decrease in the Guardian Division of $212,728 (3%) and a
revenue decrease in the Eastern Division of $279,538 (20%).
The decrease in Guardian's sales is due to a decline in demand for
Guardian's products that the Company believes is due to (a) reluctance on the
part of many end users of the Company's products to launch new products during
2002, and (b) the overall weak economic conditions in the United States and
overseas. It is anticipated that sales will increase as (a) customers for the
Company's products begin to bring out new product launches incorporating the
Company's products, and (b) the global economic conditions improve, thereby
increasing demand for the products the Company sells. Based on feedback that the
Company has received from its largest marketing partner, there are indications
that some of the Company's customers are launching new products in 2003, which
should increase demand for the Company's products. The Company also plans to
introduce two new product lines in the first half of 2003, and is hopeful that
these new products will bring increased revenue in the coming years.
The decline in Eastern's sales is believed to be due mainly to normal
fluctuations in the purchasing patterns of its customers, but may also be
partially attributable to some loss of business due to an inability to provide
some products as a result of the ongoing program to reduce Eastern's on-hand
inventory. The Company does not anticipate any significant increase or decrease
in Eastern's sales in the near future.
Costs and Expenses
Costs and expenses in 2002 increased by $208,975 (3%) compared to the prior
year due to increases in cost of sales of $242,386 (5%), which was partially
offset by a decrease in operating expenses of $33,411 (1%). Costs of sales as a
percentage of sales increased to 54% in 2002 from 49% in 2001.
The increase in cost of sales was mainly due to the absorption of fixed
costs by a lower sales volume in 2002 as compared to 2001. The decrease in
operating expenses in 2002 was primarily due to decreases in consulting and
advertising costs.
Other Income (Expense)
Investment income decreased to $192,132 in 2002 from $244,415 in 2001. This
decrease is attributable to a decline in interest rates.
Provision for Income Taxes
The provision for income taxes decreased to $662,341 in 2002 from $941,055
in 2001. The decrease was due to a reduction in income before taxes of $748,219
for the year ended December 31, 2002.
Liquidity and Capital Resources
Working capital increased to $9,578,365 at December 31, 2002 from
$8,501,914 at December 31, 2001, an increase of $1,076,451 (13%). The current
ratio increased to 10.4 to 1 at December 31, 2002 from 9.1 to 1 at December 31,
2001. The increase in working capital was due primarily to an increase in cash
and cash equivalents from the Company's continued profitable operations.
The Company has a line of credit agreement with a bank for borrowings of up
to $700,000, which expires in May, 2003 and which the Company plans to renew. As
of December 31, 2002, there were no outstanding borrowings on this line of
credit.
The Company generated cash from operations of $1,944,067 in 2002 compared
to $2,261,653 in 2001. The decrease in 2002 was primarily due to the decline in
net income. During 2002 and 2001 the Company invested approximately $131,650 and
$173,000, respectively, in plant and equipment. Cash provided by investing
activities was $91,744 whereas cash used by investing activities was $2,490,709
in the years ended December 31, 2002 and 2001, respectively. The change to cash
provided by investing activities of $91,744 in 2002 from cash used in investing
activities of $2,490,709 in 2001 was mainly due to decreased purchases of
temporary investments (primarily certificates of deposit) and marketable
securities, and redemption of some certificates of deposit in 2002. Cash used in
financing activities was $451,069 and $397,899 during the years ended December
31, 2002 and 2001, respectively. The increase was primarily due to a decrease in
proceeds from stock options exercised during 2002. 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.
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
accounting principles generally accepted in the United States of America. 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, 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.
Not Required.
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, 2003
with respect to the executive officers and directors of the Registrant:
Name Age Position(s) with the Registrant
---------------------- ----- ----------------------------------
Dr. Alfred R. Globus 82 Chairman of the Board, Chief
Executive Officer and Director
Kenneth H. Globus 51 President, Chief Financial Officer,
General Counsel and Director
Robert S. Rubinger 60 Executive Vice President,Secretary,
Treasurer and Director
Charles W. Castanza 70 Senior Vice President and Director
Derek Hampson 63 Vice President
Joseph J. Vernice 44 Vice President
Peter A. Hiltunen 44 Vice President
Lawrence Maietta 45 Director
Henry P. Globus 80 Director
Benjamin Wm. Mehlman 92 Director
Arthur Dresner 61 Director
Andrew A. Boccone 57 Director
Dr. Alfred Globus has been Chairman of the Board and Chief Executive
Officer of the Registrant since July, 1988. He served as Chairman of the Board
and President of the Registrant from the inception of the Registrant in 1942
until July, 1988. He has been a director of the Registrant since 1942.
Kenneth H. Globus has been President and General Counsel of the Registrant
since July, 1988. He served as Vice President and General Counsel of the
Registrant from July, 1983 until July, 1988. He has been a director of the
Registrant since 1984. He became the Chief Financial Officer in November, 1997.
Robert S. Rubinger has been Executive Vice President and Secretary of the
Registrant since July, 1988, and Treasurer since May, 1994. He served as Vice
President and Secretary of the Registrant from February, 1982 until July, 1988.
He has been a director of the Registrant since 1982.
Charles W. Castanza has been a Senior Vice President of the Registrant
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
Registrant from February, 1982 until April, 1986. He has been a director of the
Registrant since 1982.
Derek Hampson has been a Vice President of the Registrant 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 Registrant since
February, 1995. He served as Assistant Vice President of the Registrant from
November, 1991 until February, 1995. He has been Manager of Research and
Development for the Registrant since 1988 and Director of Technical Services
since 1991.
Peter A. Hiltunen has been a Vice President of the Registrant since July,
2002. He served as Assistant Vice President of the Registrant from November,
1991 until July, 2002. He has been Production Manager of the Registrant since
1982.
Lawrence 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 Registrant from
October, 1991 until November, 1997, and a director of the Registrant since
February, 1994.
Henry P. Globus has been a consultant to the Registrant since July, 1988.
He served as Executive Vice President of the Registrant from 1982 until July,
1988. He has been a director of the Registrant since 1947.
Benjamin William Mehlman was formerly a judge and attorney in private
practice until he retired from the practice of law in June, 1997. From 1984 to
1997 he had been counsel to the law firm of William T. Friedman and its
predecessor, Friedman and Shaftan. He has been a director of the Registrant
since 1964.
Arthur Dresner is an attorney in private practice and an independent
business consultant. From June 1998 to the present he has been engaged as "Of
Counsel" to the law firm of Reed Smith, LLP (formerly McAulay Nissen Goldberg
Kiel & Hand in New York City). From 1974 until 1997 he was employed as a Vice
President in the corporate development area and general management of ISP. He
has been a director of the Registrant since April, 1997.
Andrew A. Boccone is a senior advisor to Kline & Company, a leading
international business research firm that he first joined in 1974. After serving
in various management positions he became President of that company in 1990 and
served in that position until his retirement in 2001, 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
Registrant since November, 2002.
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 Registrant.
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 the proxy statement for the
2003 annual meeting of stockholders ("2003 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 2003 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 2003 Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
NONE
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits
3(a) Certificate of Incorporation of the Registrant as filed
April 22, 1987. Incorporated by reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K, dated
September 21, 1987 (the "1987 8-K").
3(b) Certificate of Merger of United-Guardian, Inc. (New York)
with and into the Registrant as filed with the Secretary of
State of the State of Delaware on September 10, 1987.
Incorporated by reference to Exhibit 3(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 29, 1988 (the "1988 10-K").
3(c) By-laws of the Registrant. Incorporated by reference to
Exhibit 4.2 to the 1987 8-K.
4(a) Specimen Certificate for shares of common stock of the
Registrant. Incorporated by reference to Exhibit 4(a) to
the 1988 10-K.
10(a) Qualified Retirement Income Plan for Employees of the
Registrant, as restated April 1, 1976. Incorporated by
reference to Exhibit 11(c) of the Registrant's Registration
Statement on Form S-1 (Registration No. 2-63114) declared
effective February 9, 1979.
10(b) Employment Termination Agreement dated July 8, 1988 between
the Registrant and Henry Globus. Incorporated by reference
to Exhibit 10(i) to the Registrant's Annual Report on Form
10-K for the 10-month transition period from March 1, 1991
to December 31, 1991.
10(c) Exclusive Distributor Agreement between the Registrant and
ISP Technologies Inc., dated July 5, 2000. Incorporated by
reference to Exhibit 10(d) to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended December
31, 2000.
10(d) Letter Amendment between the Registrant and ISP
Technologies Inc. dated December 16, 2002 amending the
Exclusive Distributor Agreement between the Registrant and
ISP Technologies Inc. dated July 5, 2000.
21 Subsidiaries of the Registrant:
99.1 Certification of Alfred R. Globus, Chairman and Chief
Executive Officer of the Company, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Kenneth H. Globus, President and Chief
Financial Officer of the Company, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Jurisdiction of Name Under Which
Name Incorporation it does Business
Eastern Chemical Corporation New York Eastern Chemical Corporation
Dieselite Corporation ** Delaware N/A
Paragon Organic Chemicals, Inc. New York Paragon Organic Chemicals
Transcontinental Processes (Pty.) Australia N/A
Ltd.*
* Inactive without assets
** Inactive
(b) Reports on Form 8-K:
On December 10, 2002 the Registrant filed a report on Form 8-K reporting
(a) a change in the Registrant's certifying accountant, and (b) the resignation
of one of the members of Registrant's Board of Directors.
Item 14. Controls and Procedures
As of March 1, 2003, an evaluation was performed by the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Registrant's disclosure controls and procedures.
Based on that evaluation, the Registrant's Chief Executive Officer and Chief
Financial Officer concluded that the Registrant's disclosure controls and
procedures are effective in ensuring that material information related to the
Registrant is made known to them by others within the Registrant. There have
been no significant changes in the Registrant's internal controls or in other
factors that could significantly affect internal controls subsequent to March 1,
2003.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED-GUARDIAN, INC.
Dated: March 12, 2003 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 registrant and in the
capacities and on the dates indicated.
Signature Title Date
----------------------- --------------------------------- ---------------
By:/s/ Alfred R. Globus Chief Executive Officer, Director March 12, 2003
------------------------ (Principal Executive Officer)
Alfred R. Globus
By:/s/ Kenneth H. Globus President, General Counsel, March 12, 2003
------------------------ Director, Chief Financial
Kenneth H. Globus Officer(Principal Financial
and Accounting Officer)
By:/s/ Robert S. Rubinger Executive Vice President, March 12, 2003
------------------------ Secretary, Treasurer, Director
Robert S. Rubinger
By:/s/ Charles W. Castanza Senior Vice President, Director March 12, 2003
------------------------
Charles W. Castanza
By:/s/ Henry P. Globus Director March 12, 2003
------------------------
Henry P. Globus
By:/s/ Benjamin Wm. Mehlman Director March 12, 2003
------------------------
Benjamin Wm. Mehlman
By:/s/ Lawrence F. Maietta Director March 12, 2003
------------------------
Lawrence F. Maietta
By:/s/ Arthur Dresner Director March 12, 2003
------------------------
Arthur Dresner
By: /s/ Andrew A. Boccone Director March 12, 2003
------------------------
Andrew A. Boccone
SECTION 302 CERTIFICATIONS
I, Alfred R. Globus, Chief Executive Officer of United-Guardian, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of United-Guardian, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 12, 2003 /s/ Alfred R. Globus
--------------------------
Alfred R. Globus
Chief Executive Officer
I, Kenneth H. Globus, President and Chief Financial Officer of
United-Guardian, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of United-Guardian, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 12, 2003 /s/ Kenneth H. Globus
-------------------------------
Kenneth H. Globus
President and Chief Financial Officer
EXHIBIT 10(d)
-------------
December 16, 2002
United-Guardian, Inc.
230 Marcus Blvd.
Hauppauge, New York 11788
Attention: Mr. Kenneth H. Globus, Esq., President
Gentlemen:
This letter agreement when accepted and agreed to by
United-Guardian, Inc. ("UGI") and ISP Technologies Inc. ("ISP")
shall constitute an amendment to the Exclusive Distributor
Agreement between UGI and ISP dated July 5, 2000, pursuant to
which ISP acts as UGI's (i) exclusive distributor in certain
markets and territories and (ii) non-exclusive distributor for
certain other markets and territories, for certain of UGI's
specialty chemical products (the "Agreement"), as more
particularly set forth therein.
In consideration of the premises set forth herein, and
other good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, UGI and ISP hereby
agree to amend the Agreement as follows.
1. Section 3.1 of the Agreement is hereby deleted in its
entirety and the following substituted:
3.1 Unless earlier terminated or extended as provided
herein, the term of this Agreement shall be deemed to
have commenced as of January 1, 2000 and shall
continue through and including December 31, 2005.
2. Section 3.2 of the Agreement is hereby deleted in its
entirety and the following substituted:
3.2 If ISP purchases at least 1,780,000 pounds of
PRODUCTS from UGI during the fifth contract year
(calendar year 2004) the initial six year term will be
extended for a seventh and eighth year. Regardless of
whether ISP meets the aforementioned purchase target
for the fifth contract year (calendar year 2004), if
ISP purchases at least 1,980,000 pounds of PRODUCTS
from UGI during the sixth contract year (calendar year
2005) the initial six year term will be extended for a
seventh and eighth year. UGI shall provide ISP with
copies of UGI's records with respect to ISP's
purchases of PRODUCTS and such records shall be used
by the parties to determine whether ISP has met the
aforementioned purchase targets. Such records shall be
provided to ISP within 30 days of the end of each
calendar quarter and shall include all such purchases
for that calendar quarter.
3. Section 4.1 (a) of the Agreement is hereby modified to
delete the phrase "during the five year term of this Agreement
(if the Agreement remains in effect for five years)" and to
substitute the phrase "during the eight year term of this
Agreement (if the Agreement remains in effect for eight years)".
This amendment shall be deemed effective as of the date
of this letter agreement.
Except as specifically amended hereby, the Agreement
shall remain in full force and effect.
Please confirm UGI's acceptance of, and agreement to be
bound by, the foregoing by signing below where indicated and return one
duplicate original of this letter agreement to the undersigned.
Very truly yours,
ISP TECHNOLOGIES INC.
By: /s/ Stephen R. Olsen
--------------------
Name: Stephen R. Olsen
Title: Senior Vice President
ACCEPTED AND AGREED TO:
UNITED-GUARDIAN, INC.
By: /s/ Ken Globus
--------------
Name: Ken Globus
Title: President
EXHIBIT 99.1
------------
UNITED-GUARDIAN, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United-Guardian, Inc. (the
"Registrant") on Form 10-KSB for the year ended December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Alfred R. Globus, Chief Executive Officer of the Registrant, hereby certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: March 12, 2003 /s/ Alfred R. Globus
--------------------------
Alfred R. Globus
Chief Executive Officer
EXHIBIT 99.2
------------
UNITED-GUARDIAN, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United-Guardian, Inc. (the
"Registrant") on Form 10-KSB for the year ended December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Kenneth H. Globus, President and Chief Financial Officer of the Registrant,
hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: March 12, 2003 /s/ Kenneth H. Globus
-------------------------------
Kenneth H. Globus
President and Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----------
Reports of Independent Certified Public Accountants F-2 & F-3
Financial Statements
Consolidated Balance Sheets as of December 31,
2002 and 2001 F-4 & F-5
Consolidated Statements of Income for the Years
Ended December 31, 2002 and 2001 F-6
Consolidated Statement of Stockholders' Equity
and Comprehensive Income for the Years Ended
December 31, 2002 and 2001 F-7
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002 and 2001 F-8
Notes to Consolidated Financial Statements F-9 - F-24
F-1
INDEPENDENT AUDITORS' REPORT
Eisner LLP
750 Third Ave.
New York, NY 10017-2703
Board of Directors and Stockholders
United-Guardian, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheet of United-Guardian,
Inc. and subsidiaries as of December 31, 2002 and the related consolidated
statements of income, changes in stockholder's equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United-Guardian,
Inc. and subsidiaries as of December 31, 2002 and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ EISNER LLP
New York, New York
February 28, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
United-Guardian, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
United-Guardian, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 2001, and the rekted consolidated statements of earnings, stockholders'
equity and comprehensive income, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinon on these financial statements based on
our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 out opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
United-Guardian, Inc. and Subsidiaries as of December 31, 2001, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ GRANT THORNTON LLP
Melville, New York
March 1, 2002
F-3
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------
2002 2001
--------- ---------
CURRENT ASSETS
Cash and cash equivalents ........................ $3,184,599 $1,599,857
Temporary investments............................. 4,151,787 4,365,114
Marketable securities............................. 882,243 944,348
Accounts receivable, net of allowance for doubtful
accounts of $25,500 and $63,100, respectively 704,560 844,388
Inventories ...................................... 1,037,315 1,185,535
Prepaid expenses and other current assets ........ 342,476 327,924
Deferred income taxes ............................ 297,774 279,824
---------- ----------
Total current assets ............... 10,600,754 9,546,990
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land ............................................. 69,000 69,000
Factory equipment and fixtures ................... 2,738,110 2,698,088
Building and improvements ........................ 2,045,588 2,019,136
Waste disposal system ............................ 133,532 133,532
---------- ----------
4,986,230 4,919,756
Less accumulated depreciation .................... 3,880,660 3,721,343
---------- ----------
1,105,570 1,198,413
---------- ----------
OTHER ASSETS
Processes and patents, net of accumulated
amortization of $981,341 and $946,647,
respectively .................................. 456 35,150
Other ............................................ 700 1,000
---------- ----------
1,156 36,150
---------- ----------
$11,707,480 $10,781,553
========== ==========
See notes to financial statements
F-4
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
2002 2001
-------- --------
CURRENT LIABILITIES
Dividends payable ............................ $ 488,114 $ 487,044
Accounts payable ............................. 188,868 213,728
Accrued expenses ............................. 345,407 344,304
-------- --------
Total current liabilities ............... 1,022,389 1,045,076
-------- --------
DEFERRED INCOME TAXES ............................ 10,000 10,000
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.10 par value; 10,000,000 shares
shares authorized; 4,943,339 and 4,932,639
shares issued, respectively; 4,881,139 and
4,870,439 outstanding, respectively ........ 494,334 493,264
Additional paid-in capital .................... 3,538,423 3,492,518
Accumulated other comprehensive loss........... (55,776) (24,024)
Retained earnings ............................. 7,057,740 6,124,349
Treasury stock, at cost; 62,200 shares ........ (359,630) (359,630)
---------- ----------
10,675,091 9,726,477
---------- ----------
$11,707,480 $10,781,553
========== ==========
See notes to financial statements statements
F-5
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-------------------------
2002 2001
----------- -----------
Revenue
Net sales ....................... $ 9,091,416 $ 9,583,682
Costs and expenses
Cost of sales ................... 4,896,637 4,654,251
Operating expenses .............. 2,303,030 2,336,441
----------- -----------
7,199,667 6,990,692
----------- -----------
Income from operations ..... 1,891,749 2,592,990
Other income (expense)
Interest expense ................ - (38)
Investment income................ 192,132 244,415
Gain (loss) on sale of assets.... 79 (5,302)
Other expense (114) -
----------- -----------
Income before income taxes . 2,083,846 2,832,065
Provision for income taxes .......... 662,341 941,055
----------- -----------
Net Income ................. $ 1,421,505 $ 1,891,010
=========== ===========
Earnings per common share (basic
and diluted)..................... .29 .39
=========== ===========
Basic weighted average shares ....... 4,878,401 4,868,215
=========== ===========
Diluted weighted average shares ..... 4,888,958 4,886,769
=========== ===========
See notes to financial statements
F-6
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 2001 and 2002
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, 2000 4,901,139 $ 490,114 $ 3,373,417 $ (3,274) $ 4,720,383 $(205,000) $8,375,640 $
Issuance of common stock in
connection with exercise
of stock options ........... 31,500 3,150 91,101 94,251
Tax Benefit from exercise of
stock options .............. 28,000 28,000
Unrealized loss on
marketable securities,
net of deferred income
tax benefit of $8,671....... (20,750) (20,750) $ (20,750)
Net income .................... 1,891,010 1,891,010 1,891,010
Dividends declared ............ (487,044) (487,044)
Acquisition of treasury stock.. (154,630) (154,630)
---------
Comprehensive income $1,870,260
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2001 4,932,639 $ 493,264 $ 3,492,518 $ (24,024) $ 6,124,349 $(359,630) $9,726,477
Issuance of common stock in
connection with exercise
of stock options ........... 10,700 1,070 34,905 35,975
Tax Benefit from exercise of
stock options ............... 11,000 11,000
Unrealized loss on
marketable securities,
net of deferred income
tax benefit of $22,562...... (31,752) (31,752) $ (31,752)
Net income .................... 1,421,505 1,421,505 1,421,505
Dividends declared ............ (488,114) (488,114)
---------
Comprehensive income $1,389,753
--------- --------- ----------- ---------- ---------- ---------- ---------- =========
Balance, December 31, 2002 4,943,339 $ 494,334 $ 3,538,423 $ (55,776) $ 7,057,740 $(359,630) $10,675,091
========= ========= =========== ========== ========== ========== ==========
See notes to financial statements
F-7
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net income ....................................... $1,421,505 $1,891,010
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ................ 256,990 275,301
Net(gain)loss on sale of equipment ........... (79) 5,302
(Recovery of) provision for bad debts......... (27,187) 21,313
Tax Benefit from exercise of stock options ... 11,000 28,000
Deferred income taxes ........................ 4,612 (46,465)
Provision for inventory obsolescence ......... - 36,000
Increase (decrease) in cash resulting from
changes in operating assets and liabilities
Accounts receivable ..................... 167,015 (64,631)
Inventories ............................. 148,220 243,029
Prepaid expenses and other assets ....... (14,252) (165,633)
Accounts payable ........................ (24,860) 35,693
Accrued expenses and taxes payable ...... 1,103 2,734
--------- ---------
Net cash provided by operating activities ... 1,944,067 2,261,653
--------- ---------
Cash flows from investing activities
Acquisition of plant and equipment................ (131,650) (173,136)
Proceeds from the sale of plant and equipment..... 14,500 13,500
Net decrease (increase) in temporary investments.. 213,327 (1,628,228)
Purchase of marketable securities................. (4,433) (752,845)
Proceeds from sale of marketable securities....... - 50,000
-------- ---------
Net cash provided by (used in) investing
activities............................... 91,744 (2,490,709)
-------- ---------
Cash flows from financing activities
Principal payments on long-term debt ............. - (6,036)
Proceeds from exercise of stock options .......... 35,975 94,251
Dividends paid ................................... (487,044) (486,114)
-------- ---------
Net cash used in financing activities ....... (451,069) (397,899)
-------- ---------
Net increase (decrease) in cash and cash equivalents.. 1,584,742 (626,955)
Cash and cash equivalents, beginning of year ......... 1,599,857 2,226,812
--------- ---------
Cash and cash equivalents, end of year ............... $3,184,599 $1,599,857
========= =========
See notes to financial statements
F-8
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
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, cosmetics, health care products, medical devices and
proprietary industrial products, and (2) the Eastern Chemical Corporation
subsidiary distributes a line of fine organic chemicals, research
chemicals, test solutions, indicators, dyes and reagents. Two major product
lines, Lubrajel and Renacidin, included in the Guardian Laboratories
Division, accounted for approximately 78% and 76% of consolidated sales,
respectively, for each of the years ended December 31, 2002 and 2001, with
Lubrajel accounting for 61% and 59%, and Renacidin accounting for 17% of
consolidated sales for the years ended December 31, 2002 and 2001,
respectively.
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 and title passes to
customers.
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 December 4, 2002 the Company declared a cash dividend of $.10 payable on
January 08, 2003 to stockholders of record as of December 20, 2002
aggregating $488,114. On December 14, 2001, the Company declared a dividend
of $.10 payable on January 10, 2002 to stockholders of record as of
December 26, 2001 aggregating $487,044.
F-9
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE A (continued)
Statements of Cash Flows
Cash payments for interest expense were $38 for the year ended December 31,
2001. Cash payments for income taxes were $ 611,630 and $1,202,271 for the
years ended December 31, 2002 and 2001, respectively.
Marketable Securities and Temporary Investments
Marketable securities include investments in equity mutual funds 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.
F-10
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE A (continued)
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.
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 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, 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. At December 31, 2002 and 2001, one
customer had a balance greater than 10% of the Company's accounts
receivable aggregating 35% and 12%, respectively.
F-11
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE A (continued)
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 $348,000 and $334,000 for the years ended
December 31, 2002 and 2001, 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 $107,800 and $105,937 for the years ended December 31,
2002 and 2001, respectively.
Advertising Costs
Advertising costs are expensed as incurred. During 2002 and 2001 the
Company incurred $74,579 and $91,527 of advertising costs, respectively.
Stock-Based Compensation
At December 31, 2002, the Company had two stock-based employee compensation
plans, which are described more fully in note F. As permitted under SFAS
NO. 148, Accounting for Stock-Based Compensation-Transition and Disclosure,
which amended SFAS NO. 123 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 interpretation 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.
F-12
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
Year Ended December 31
--------------------------
2002 2001
---------- -----------
Reported net income .................... $ 1,421,505 $ 1,891,010
Stock-based employee compensation
expense included in reported net
income, net of related tax effects ... 0 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effect...... (11,676) 0
---------- ----------
Pro forma net income..................... 1,409,829 1,891,010
========== ==========
Earnings per share (basic and diluted)
As reported ....................... $ .29 $ .39
========== ==========
Pro forma ......................... .29 .39
========== ==========
In 2002, 22,800 stock options were granted under the EISOP plan and 16,000
stock options were granted under the NSSOPD plan. No stock options were
granted under either plan in 2001.
The fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with a volatility of 45% for 2002,
expected life of options of three to five years, risk free interest rates
of 2.31% and 3.13% and a dividend yield of 2%. The weighted average fair
value of options granted during the year ended December 31, 2002 was $1.15.
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 accounting principles
generally accepted in the United States of America,
F-13
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE A (continued)
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.
Segment Reporting
Statement of Financial Accounting Standards ("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 April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission
of SFAS statements No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections." The provisions of SFAS No. 145 are effective for
financial statements issued on or after May 15, 2002. The adoption of SFAS
No. 145 had no effect on the financial statements.
In June 2002, the FASB issued SFAS No. 146. "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting
for restructuring and similar costs. SFAS No. 146 is effective for exit
disposal activities that are initiated after December 31, 2002. Management
believes that the adoption of SFAS No. 146 will not have a material impact
on its results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" as an amendment to SFAS No. 123
by introducing two additional conversion methods when converting to the
fair value based method from the intrinsic value method of accounting for
stock-based employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosure about the effects on
reported
F-14
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE A (continued)
net income (loss) of an entity's accounting policy decisions with respect
to stock-based employee compensation and amends APB Opinion No. 28 to
require disclosure about those effects in interim financial information.
The disclosure provisions are effective for fiscal years ending after
December 15, 2002 and for interim periods beginning after December 15,
2002. The Company follows the intrinsic value method of accounting for
stock-based employee compensation, but will continue to evaluate the
benefits of a voluntary change to the fair value based method.
NOTE B - INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
2002 2001
----------- -----------
Raw materials and work-in-process ...... $ 222,997 $ 245,849
Finished products and fine chemicals ... 814,318 939,686
---------- ----------
$1,037,315 $1,185,535
========== ==========
NOTE C - 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, 2003. 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, 2002 and 2001.
NOTE D - LONG-TERM DEBT
The Company financed the purchase of transportation equipment with proceeds
of an installment loan. The loan, which was collateralized by the
underlying equipment, required monthly payments of $868 including interest
through July 31, 2001. In July, 2001 this loan was paid in full.
F-15
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE E - INCOME TAXES
The provision for income taxes consists of the following:
Year ended December 31,
--------------------------
2002 2001
--------- ---------
Current
Federal .............................. $ 562,310 $ 864,568
State ................................ 95,419 122,952
--------- ---------
657,729 987,520
--------- ---------
Deferred
Federal .............................. 3,997 (40,237)
State ................................ 615 (6,228)
--------- ---------
4,612 (46,465)
--------- ---------
Total provision for income taxes ... $ 662,341 $ 941,055
========= =========
The following is a reconciliation of the Company's effective income tax
rate to the Federal statutory rate:
Year ended December 31,
--------------------------------
2002 2001
-------------- --------------
(000's) % (000's) %
------- --- ------- ---
Income taxes at statutory Federal income
tax rate .............................. $ 709 34% $ 963 34%
State income taxes, net of Federal benefit 63 3 87 3
Foreign Sales Exclusion .................. (68) (3) (77) (3)
Nondeductible expenses.................... 2 - 2 -
Other, net ............................... (44) (2) (34) (1)
----- ---- ----- ----
Actual income tax expense ................ $ 662 32% $ 941 33%
===== ==== ===== ====
F-16
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE E (continued)
During 2002 and the fourth quarter of 2001, 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
------------------------
2002 2001
----------- -----------
Deferred tax assets
Current
-------
Accounts receivable .................... $ 19,652 $ 23,536
Unrealized loss on marketable securities 33,180 10,618
Inventories ............................ 136,518 136,518
Accrued Expenses ....................... 82,620 87,643
Other................................... 25,804 21,509
--------- ---------
297,774 279,824
--------- ---------
Deferred tax liabilities
Non-current
-----------
Other .................................. (10,000) (10,000)
--------- ---------
(10,000) (10,000)
--------- ---------
Net deferred tax asset ..................... $ 287,774 $ 269,824
========= =========
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-17
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE F (continued
The following table sets forth the plan's
funded status:
Year ended December 31,
----------------------
2002 2001
--------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year... $1,909,099 $1,652,931
Service cost........................................ 76,115 66,920
Interest cost....................................... 122,743 106,558
Actuarial loss...................................... 42,067 114,089
Other............................................... 1,042 21,525
Benefits paid....................................... (25,125) (52,924)
--------- ---------
Projected benefit obligation at end of year....... $2,125,941 $1,909,099
========= =========
Change in Plan Assets:
Fair value of plan assets at beginning of year... $1,559,145 $1,310,433
Actual return on plan assets..................... 115,805 199,676
Employer contributions........................... 104,200 101,960
Benefits paid.................................... (25,125) (52,924)
--------- ---------
Fair value of plan assets at end of year....... $1,754,025 $1,559,145
========= =========
Reconciliation of Funded Status:
Funded status (underfunded)...................... $ (371,916) $ (349,955)
Unrecognized net actuarial loss.................. 369,604 332,734
Unrecognized transition obligation............... - 4,298
Unrecognized prior service cost.................. 61,842 68,156
--------- ---------
Prepaid benefit cost........................... $ 59,530 $ 55,233
========= =========
The net periodic benefit cost includes the following components:
Year ending December 31,
-------------------------
2002 2001
Components of net periodic benefit cost: ----------- -----------
Service cost..................................... $ 76,115 $ 66,920
Interest cost.................................... 122,743 106,558
Expected return on plan assets................... (124,245) (104,999)
Recognized net actuarial loss.................... 13,637 14,983
Amortization of transition obligation............ 4,298 4,497
Amortization of prior service cost............... 7,356 5,286
--------- ---------
Net periodic benefit cost..................... $ 99,904 $ 93,245
========= =========
F-18
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE F (continued)
Weighted-average assumptions as of December 31:
2002 2001
----------- ----------
Discount rate...................................... 6.50% 6.50%
Expected long term rate of return.................. 8.00% 8.00%
Weighted average rate of compensation increase..... 5.51% 5.46%
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 $36,000 for the years
ended December 31, 2002 and 2001, respectively.
Stock Option Plans
The Company maintains two stock option plans, the 1993 Employee Incentive
Stock Option Plan ("EISOP") and the Non-Statutory Stock Option Plan for
Directors ("NSSOPD"), each of which provides for the issuance of up to
100,000 shares of common stock at the market price on the date of the
grant. Such options are exercisable either upon grant or after a waiting
period specified in the agreement. The Company has adopted only the
disclosure provisions of SFAS No. 123, "Accounting for Stock-based
Compensation." It applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its plans.
Accordingly, no compensation costs have been recognized for either plan.
F-19
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE F (continued)
The following summarizes the stock option transactions under both plans:
Number Weighted average
EISOP outstanding exercise price
----- ------------ -------
Options outstanding January 1, 2001 55,300 3.44
Expired (400) 3.00
Exercised (23,500) 3.26
------
Options outstanding and exercisable at
December 31, 2001 31,400 3.59
Granted 22,800 3.54
Exercised (8,700) 3.66
------
Options outstanding at December 31, 2002. 45,500 3.55
======
Options exercisable
at December 31, 2002 ................ 34,700 3.54
======
Available for grant at December 31, 2002 50
======
NSSOPD
------
Options outstanding at January 1, 2001.. 16,000 $2.55
Exercised .......................... (8,000) 2.20
Options outstanding and exercisable
at December 31, 2001 8,000 2.77
------
Forfeited (2,000) 3.00
Exercised (2,000) 2.06
Granted 16,000 3.51
------
Options outstanding at December 31, 2002 20,000 3.41
======
Options exercisable at December 31, 2002 4,000 3.00
======
Available for grant at December 31, 2002 54,000
======
F-20
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE F (continued)
Summarized information about stock options outstanding under the two plans at
December 31, 2002 is as follows:
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Range of Number of Shares Weighted Weighted Number of Shares Weighted
Exercise Outstanding Average Average Exercisable Average
Prices at Remaining Exercise at Exercise
December 31,2002 Contractual Price December 31,2002 Price
Life
---------------- ---------- -------- ---------------- --------
EISOP
-----
$1.88 - $3.30 14,200 4.27 $2.70 14,200 $2.70
$3.31 - 5.00 31,300 7.20 3.94 20,500 4.13
------------- ------ ---- ----- ------ -----
$1.88 - $5.00 45,500 6.28 $3.55 34,700 $3.54
NSSOPD
--------
$1.88 - $3.00 4,000 1.30 $3.00 4,000 $3.00
$3.31 - 5.00 16,000 4.90 3.51 - -
------------- ------ ---- ---- ----- -----
$1.88 - $5.00 20,000 3.40 $3.41 4,000 $3.00
NOTE G - RELATED PARTY TRANSACTION
The Company previously had a split dollar life insurance arrangement with
Alfred R. Globus, its Chairman and Chief Executive Officer ("Insured"). For
fiscal years 1995 through 1998 the Company made non-interest-bearing
advances totaling $348,161 to cover its portion of the policy premium. The
Insured had agreed to repay the Company in the event the policy was ever
terminated, which it was in July, 2000. In August, 2000 the Insured
executed a Promissory Note in the amount of $348,161 plus interest at the
rate of 6.6% per annum from July 8, 2000. The note was due and payable on
July 8, 2003. In 2000 the Insured paid to the Company $205,000 by
transferring to the Company 40,000 shares of his stock of the Company,
which was valued at $5.125 per share, the closing price on the date of the
transfer of the stock. Of this amount, $4,155 was applied to accrued
F-21
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE G (continued)
interest, and $200,845 to principal, leaving an outstanding balance as of
December 31, 2000 of $147,316 in principal and $2,930 in accrued interest.
In April, 2001 the Insured transferred to the Company another 20,000 shares
of his stock of the Company. The closing price of the stock on the day of
the transfer was $7.11 per share. $136,180 of this amount was applied
towards principal, and $6,020 towards accrued interest. In May, 2001 the
Insured transferred to the Company another 2,200 shares of his stock of the
Company. The closing price of the stock on the day of the transfer was
$5.65 per share. $11,136 of this amount was applied towards principal, and
$42 was applied towards accrued interest. This final transfer paid off the
balance due on the promissory note. An overpayment of $1,252 was returned
to the Insured. The surrendered shares and the related cost of those shares
have been classified as "Treasury stock" in the accompanying balance sheet.
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share at December 31, 2002 and 2001:
2002 2001
---------- ----------
Numerator:
Net earnings $ 1,421,505 $ 1,891,010
Denominator:
Denominator for basic earnings
per share (weighted average shares) 4,878,401 4,868,215
Effect of dilutive securities:
Employee stock options 10,557 18,554
--------- ---------
Denominator for diluted earnings per
share (adjusted weighted-average
shares) and assumed conversions 4,888,958 4,886,769
========= =========
Basic and diluted earnings per share $ 0.29 $ 0.39
========= =========
Options to purchase 8,500 shares of the Company's common stock have been
excluded from the computation of diluted earnings per share in 2002 as
their inclusion would be antidilutive. In 2001 there were no options
excluded from the computation of diluted earnings per share.
F-22
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE I - 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 pharmaceuticals, medical devices,
cosmetics, products and proprietary specialty chemical 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, 2002 and 2001.
2002 2001
---------------------------------- ----------------------------------
GUARDIAN EASTERN TOTAL GUARDIAN EASTERN TOTAL
------------ ----------- ----------- ------------ ----------- -----------
Revenues from external customers $ 7,938,428 $ 1,152,988 $ 9,091,416 $ 8,151,156 $ 1,432,526 $ 9,583,682
Depreciation and amortization 130,037 - 130,037 157,927 - 157,927
Segment income (loss) before
income taxes expense (benefit) 2,153,927 (82,656) 2,071,271 2,712,132 44,625 2,756,757
Segment assets 2,405,390 668,936 3,074,326 2,350,585 426,830 2,777,415
Capital expenditure 53,189 - 53,189 49,441 - 49,441
Reconciliation to Consolidated Amounts
Income before income taxes
----------------------------
Total income for reportable segments $ 2,071,271 $ 2,756,757
Other income, net 192,097 239,075
Corporate headquarters expense (179,522) (163,767)
--------- ---------
Consolidated income before income taxes $ 2,083,846 $ 2,832,065
========= =========
Assets
------
Total assets for reportable segments $ 3,074,326 $ 2,777,415
Corporate headquarters 8,633,154 8,004,138
---------- ----------
Total consolidated assets $11,707,480 $10,781,553
========== ==========
F-23
UNITED-GUARDIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2002 and 2001
NOTE I (continued)
Other Significant Items
-----------------------
2002 2001
-------------------------------------- --------------------------------------
Segment Consolidated Segment Consolidated
Totals Corporate Totals Totals Corporate Totals
---------- ----------- ------------ ---------- ----------- ------------
Interest expense $ - $ - $ - $ - $ 38 $ 38
Capital expenditures 53,189 78,461 131,650 49,441 123,695 173,136
Depreciation and amortization 130,037 126,953 256,990 157,927 117,374 275,301
Geographic Information
----------------------
2002 2001
---------------------- ----------------------
Revenues Long-Lived Revenues Long-Lived
Assets Assets
---------- ----------- ---------- -----------
United States $ 4,633,847 $ 1,106,026 $ 5,112,528 $ 1,233,563
France 1,179,919 1,221,664
Other countries 3,277,650 3,249,490
---------- --------- ---------- ---------
$ 9,091,416 $ 1,106,026 $ 9,583,682 $ 1,233,563
========== ========= ========== =========
Major Customers
---------------
Customer A (Guardian) $ 2,916,638 $ 3,111,665
All other customers 6,174,778 6,472,017
---------- ----------
$ 9,091,416 $ 9,583,682
========== ==========
NOTE J - 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. The settlement of such claims has not had a material
adverse effect on the Company's financial position and results of
operations.
F-24