-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGscwjS1+Q9Ir5xZtRbqSk27N4PLfTgh5VG4bbTcsPJRAsWtUBagQyfVpbED+LWJ b47KNG4wos41TcJMKSf6gg== 0000101295-98-000002.txt : 19980325 0000101295-98-000002.hdr.sgml : 19980325 ACCESSION NUMBER: 0000101295-98-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED GUARDIAN INC CENTRAL INDEX KEY: 0000101295 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 111719724 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-10526 FILM NUMBER: 98571774 BUSINESS ADDRESS: STREET 1: 230 MARCUS BLVD CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5162730900 MAIL ADDRESS: STREET 1: P.O. BOX 18050 STREET 2: 230 MARCUS BLVD. CITY: HAUPPAUGE STATE: NY ZIP: 11788 FORMER COMPANY: FORMER CONFORMED NAME: UNITED INTERNATIONAL RESEARCH INC DATE OF NAME CHANGE: 19820422 10KSB 1 FORM 10-KSB FOR YEAR ENDED 12/31/97 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, 1997. OR |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from __________ to ____________ For the transition period from __________ to ____________ Commission file number 0-7855 UNITED-GUARDIAN, INC. (Name of small business issuer in its charter) Delaware 11-1719724 - --------------------------- ---------------- State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 230 Marcus Blvd., Hauppauge, NY 11788 - --------------------------------------- --------- (Address or principal executive offices) (Zip Code) Issuer's telephone number, including area code: (516) 273-0900 -------------------- Securities registered pursuant to Section l2(b) of the Exchange Act: Title of each class Name of each exchange on which registered ---------------------------- ----------------------------------------- Common Stock, $.10 par value American Stock Exchange Securities registered pursuant to Section l2(g) of the Exchange Act: None 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 |_| 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, 1997 were $8,752,133. On March 6, 1998 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 $11,037,300. (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 are affiliates of the Registrant and no person, other than Alfred R. Globus, is an affiliate by virtue of his stockholdings. The statements made herein shall not be construed as an admission for determining the affiliate status of any person.) On March 6, 1998 the Registrant had issued and outstanding 4,876,839 shares of Common Stock, $.10 par value per share ("Common Stock"). Transitional Small Business Disclosure Format: Yes |_| No |X| DOCUMENTS INCORPORATED BY REFERENCE: The 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 "1998 Proxy Statement") in connection with its 1998 annual meeting of stockholders, which is to be filed no later than April 30, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended. 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 pharmaceuticals, cosmetics, health care products, medical devices, and proprietary industrial products. The Registrant also distributes a line of over 3,000 fine organic chemicals, research chemicals, test solutions, indicators, dyes and reagents. The Registrant operates in two industry segments: (1) The Guardian Laboratories Division ("Guardian") conducts research, development, manufacturing, and marketing of a variety of pharmaceuticals, medical devices, health care and cosmetic products, and proprietary specialty chemical 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 Registrant's LUBRAJEL(R) line of cosmetic ingredients, and its line of RENACIDIN(R) pharmaceutical products, accounted for approximately 63% of the Registrant's sales in 1997. 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 a line of over 3,000 fine organic chemicals, research chemicals, test solutions, indicators, dyes, stains, and reagents. Since 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 has explored the possibility of selling the Eastern division. The Registrant concluded in 1997 that the Eastern operation would be more marketable if Eastern could reduce its inventory and focus its marketing efforts on the inventory items that sell more regularly. Registrant is in the process of implementing this change, and Registrant anticipates that Eastern's sales may be adversely affected as this is taking place. (b) Narrative Description of Business Guardian Laboratories Division Guardian conducts research, product development, manufacturing and marketing of many different pharmaceuticals, medical devices, health care products, cosmetic bases, and proprietary specialty chemical products, all of which are developed by the Registrant. The products manufactured by Guardian are marketed through agents, distributors, direct advertising and mailings, and trade exhibitions. Guardian's proprietary cosmetic and specialty chemical products are sold through 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 generally sold through drug wholesalers and surgical supply houses, as well as directly to the Veteran's Administration, other government agencies, hospitals, and physicians. During 1997, Guardian's sales accounted for approximately 80% 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 1997 sales from these two product lines accounted for approximately 79% of Guardian's sales, and 63% of the sales of the Registrant as a whole. LUBRAJEL -------- LUBRAJEL is a nondrying water-based lubricating gel that has applications in the medical field as a lubricant, and in the cosmetic industry as a moisturizer and as a base for other cosmetic products. As a medical lubricant it has been used on prelubricated enema tips and thermometers, and as a lubricant for catheters. In the cosmetic industry it is used 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. During 1997, sales of LUBRAJEL products increased by 9% compared with 1996. During 1997, sales of LUBRAJEL products represented 59% of Guardian's sales and 47% of the sales of the Registrant as a whole. Revenue from the sale of the Registrant's LUBRAJEL products increased compared with the previous year as a result of (a) greater marketing success on the part of Registrant's distributors, and (b) the expansion of Registrant's marketing efforts as a result of Registrant's new marketing alliance with International Specialty Products ("ISP") (discussed in more detail in the "Marketing" section below). In particular, sales of LUBRAJEL CG (the original form of LUBRAJEL) increased by 22% from $954,181 in 1996 to $1,164,727 in 1997, and sales of LUBRAJEL MS (the most popular form of Lubrajel) decreased 2% from $1,233,094 in 1996 to $1,211,883 in 1997 even though volume increased by 3%. This was a result of a certain price reductions. As a result of its new marketing alliance with ISP, Registrant believes that LUBRAJEL sales will increase in 1998, despite increased competition from competitive products introduced by European manufacturers. Registrant believes that LUBRAJEL'S reputation for quality and reliability, as well as Registrant's innovations to the LUBRAJEL product line, will enable it to compete effectively with these new products. The Registrant is developing other uses for LUBRAJEL. See "Item 1. Description of Business-Development Activities". RENACIDIN --------- RENACIDIN is a urological prescription drug sold by the Registrant for many years in powder form ("RENACIDIN POWDER") to prevent the formation of and to dissolve calcifications in catheters implanted in the urinary bladder. RENACIDIN POWDER had to be reconstituted prior to use by the hospital, pharmacy, or nursing facility using it. On October 2, 1990 the Registrant received approval from the United States Food & Drug Administration ("FDA") to market, under the tradename "RENACIDIN IRRIGATION", a ready to use 10% sterile solution made from the RENACIDIN POWDER. In addition to the uses previously approved for RENACIDIN POWDER, the RENACIDIN IRRIGATION is also approved for use in dissolving certain types of kidney stones. In May, 1997 Registrant discontinued sales of RENACIDIN POWDER in favor of the RENACIDIN IRRIGATION. Sales of RENACIDIN IRRIGATION accounted for 19% of Guardian's sales in 1997, 94% of sales of all forms of RENACIDIN, and 15% of the sales of the Registrant as a whole. Partially as a result of the gradual replacement of sales of RENACIDIN POWDER by RENACIDIN IRRIGATION, which brings in greater revenue for comparable doses, sales of RENACIDIN IRRIGATION increased by 23% in 1997. On October 9, 1990, the Patent Office issued to the Registrant a patent covering the method of manufacturing RENACIDIN IRRIGATION. Other Products Other products that are manufactured and sold by Guardian but which did not individually comprise more than 5% of the Registrant's sales in 1997 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 amounted to $287,011 during 1997 compared to $273,711 in 1996, an increase of 5%. KLENSOFT is a surfactant that can be used in shampoos, makeup removers, and other cosmetic formulations. Sales of Klensoft increased considerably in 1997 primarily as a result of expanded product use in Taiwan. Sales in 1997 amounted to $253,836 compared to $58,620 in 1996, an increase of 333%. PHOSPHOCHOLATE is a mouth moisturizer used primarily by cancer patients. The product was developed for, and is being marketed exclusively by, Sage Products, Inc., an Illinois health care company with which the Registrant had been working since 1993. Phosphocholate is a significant improvement over a product previously marketed by Sage for many years, and has replaced all of the sales of the previous formulation. Shipments to Sage began in November 1994, and amounted to $243,771 in 1997 compared to $200,756 in 1996, an increase of 21%. LUBRAJEL PF is a preservative-free version of LUBRAJEL currently being marketed 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. Tests conducted by Sederma indicate that the product self-preserves, and aids in the preservation of other cosmetic ingredients with which it is formulated. Sales of Norgel amounted to $199,344 in 1997 compared to $215,125 in 1996, a decrease of 7%. LUBRAJEL RR (and LUBRAJEL RC, which is a lower cost alternative product) are special grades of LUBRAJEL that can withstand sterilization by gamma radiation, which is the preferred method of sterilizing medical and hospital products. 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 the product since January, 1996. The Registrant also authorized Horizon to market another grade of LUBRAJEL RR as a component of a wound healing system. It has introduced this product on a limited basis. On April 11, 1995, the Registrant was granted a U.S. patent for these new forms of LUBRAJEL. Sales of LUBRAJEL RC to Horizon amounted to $155,133 in 1997 compared to $136,869 in 1996, an increase of 13%. OIL OF ORCHIDS(TM) 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. It is soluble in water and alcohol and acts as a supplementary moisturizer. It is also an enhancer for fragrances in perfumes and toiletries. It is sold in two forms, water-soluble and oil soluble. Total sales in 1997 amounted to $69,440 compared to $64,510 in 1996, an increase of 8%. LUBRASIL is a special type of LUBRAJEL in which silicone oil is incorporated into a LUBRAJEL base by microemulsification, while maintaining much of the clarity of regular LUBRAJEL. The product has a silky feel, and is water resistant while moisturizing the skin. Sales in 1997 amounted to $111,406 compared to $51,772 in 1996, an increase of 115%. CONFETTI DERMAL ESSENTIALS is a new product line introduced in 1996 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 the needs of individual customers. Registrant believes that its product is unique and that it has excellent market potential based on initial reaction from the many cosmetic companies now evaluating the product. The first commercial products using Confetti appeared in 1997, and the Registrant believes that product sales should increase in 1998. DERMA-SURE PROTECTIVE LOTION is an alcohol-based product applied to the skin which protects the skin against grease, oil, paint, stain, and many other chemicals. The product can be both a consumer and industrial product, and is currently produced in two formulations. In October, 1997 the product appeared on the home shopping network QVC, but sales were disappointing. As a result, the product was reformulated to last longer and is now being evaluated by a major consumer and industrial products company. RAZORIDE is a clear, water-based, soap-free shaving product with excellent lubricity and moisturizing properties. A marketer of shaving products is currently evaluating the product, and Registrant is currently looking into other methods of marketing this product. DESELEX(R) is a replacement for phosphates in detergents. LUBRASLIDE(TM) and a related product, B-122(TM), are powders used in the manufacture of cosmetics such as pressed powders, eye shadows, and rouges. FOAMBREAKER(TM) is a defoamer for cleansing solutions in the electroplating, painting, and electronics industries. The product does not leave the typical "fish-eye" residues associated with silicone defoamers. It is an industrial product that does not require governmental registrations or approvals. It is an unpatented, proprietary product. UNITWIX(TM) is a cosmetic additive used as a thickener for oils and oil-based liquids. The product has recently stimulated interest on the part of cosmetic manufacturers. It is a proprietary, unpatented product that does not require government approval to market. Sales of Unitwix amounted to $83,890 in 1997 compared to $35,710 in 1996, and increase of 135%. LUBRASEPTIC(R) JELLY was a lubricating gel produced and marketed by Registrant for many years for urological use. In April 1994 the Registrant discovered that the sterilization process for the product was adversely affecting the level of active ingredients in the product, and the Registrant voluntarily recalled and discontinued production of the product. As a result of an agreement with the FDA the Registrant has now discontinued making antibacterial and anesthetic claims for the product, and promotes it only as a urological lubricant. The product was put back on the market in November 1995 for the purpose of selling off the remaining inventory. Because the Registrant had more inventory than could be sold within the expiration dating of the product it has disposed of the excess inventory and kept just enough to enable it to continue sales until the expiration date. In 1997, Registrant reduced the value of its inventory by $85,325 to account for the final disposition of this product. 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 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 -------- Preliminary studies indicated that LUBRAJEL may help to accelerate the healing of wounds, such as leg ulcers, when applied daily and used in conjunction with a Spandex or similar bandage. The Registrant believes that an additional study done on a larger group of patients is warranted. Horizon Medical, Inc. (see "LUBRAJEL RR" discussion above) had done some work with the product for this use, and received authorization from the FDA to market the product as an accessory to a medical device for specific wound healing uses. Registrant is continuing to look for other potential marketers for this product. 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 has been approved for certain uses in France and 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 sterilizer 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. FELINE HEALTH PRODUCTS ---------------------- In March, 1996 Registrant entered into a research & development agreement with Feline Health Products ("FHP") to develop a new animal health care product. The exact product cannot be disclosed at the present time due to a confidentiality agreement that is in effect between the Registrant and FHP. The product development has been completed, tests conducted at Cornell University were positive, and the finished product is now being tested by a company that distributes veterinary products throughout the United States. If the results of that testing are positive, FHP has indicated to the Registrant that it intends to enter into a marketing agreement with that company, which would include a provision for the Registrant to manufacture the key component. LIDOCAINE GEL ------------- Registrant has developed a new Lidocaine-based urological anaesthetic gel to replace its Lubraseptic Jelly. This product was developed for a company in the United Kingdom, but has not yet been brought to market. Registrant has not yet decided whether it will market this product itself or look for other potential marketers for it. GLYCERYL GLYCOLATE ------------------ This product is intended to replace the currently popular alpha-hydroxy acids with a less irritating and longer lasting product. The product is currently being evaluated by a major cosmetics company in Europe with whom Registrant hopes to enter into a joint venture to further develop and market the product. This product is still in the development stage. SONORITE -------- Sonorite is a product developed by the Registrant to reduce the severity of snoring. It is a soft tissue lubricant that reduces the surface tension in obstructed airways and allows for increased air flow. The product development has been completed on this product, and in 1997 the Registrant secured the exclusive right to market the product from a group of investors who had initially funded the development work. Registrant has entered into discussions with a company that currently markets another breathing aid, and that company has initiated tests to determine the relative effectiveness of the two products and any synergy between them. Registrant hopes to enter into a joint venture with either that company or, if they do not proceed, with a different company to market the product for this use in the near future. Registrant believes that the marketing of the product for this use would only require the filing of a 510-k premarket notification to the FDA, which means that marketing could begin within the next year if an interested partner can be found. The product has also been tested for use in reducing the incidence of sleep apnea, a sleep disorder affecting millions of people. Some initial clinical work has indicated that the product may be effective for this use as well. However, since the marketing of the product for this use would require a New Drug Application, the Registrant is currently endeavoring to find a partner that is interested in completing the additional clinical work that will be required before the product can be marketed for this additional use. 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 relating to its products. The Registrant has patent 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 Stabilization of ethanol/gasoline mixtures 4,328,004 5/4/82 5/4/99 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
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 Chemical Corporation is a wholly owned subsidiary of the Registrant. It distributes a line of over 3,000 fine organic chemicals, research chemicals, test solutions, indicators, dyes and stains, and reagents. In 1997, Eastern's sales accounted for approximately 20% of the total product sales of the Registrant. 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 generally sold in the United States to drug wholesalers, surgical supply houses and drug stores for resale, and directly to hospitals, physicians, the Veteran's Administration, and other government agencies. The proprietary cosmetic 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 other cosmetic 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 ISP in accordance with a marketing agreement entered into in 1996 (see "Marketing Agreements" below). ISP also has the right to sell some of Registrant's other industrial and medical products. In 1997 ISP's purchases for distribution in the United States were approximately $1,124,973 and accounted for approximately 13% of the Registrant's sales in 1997. 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 by the Registrant and account for less than 2% of Registrant's sales. Foreign Sales In 1997 the Registrant derived approximately 43% of its sales from customers in foreign countries, primarily from sales of its cosmetic products in Europe, compared to 39% in 1996. The Registrant currently has 9 distributors for its cosmetic products outside the United States: S. Black (Import & Export) Ltd. in the United Kingdom ("S. Black"); Sederma and Warwick France in France; S.A. de Especialidades Quimicas in Spain; Luigi & Felice Castelli S.R.L. in Italy; Vendico in Scandinavia; Mimox AG in Switzerland; C&M International in Korea; and ISP in Germany, Eastern Europe, the Benelux countries, Canada, Mexico, South & Central America, Asia (with the exception of Korea), and most of the remaining foreign markets. The percentage of Registrant's sales by its largest foreign distributors were as follows: Sederma-11%; ISP (for sales outside of the United States)-10.5%; S. Black-7.5%; and C&M International-4%. Marketing Agreements In 1994 Registrant entered into an agreement with ISP which provided for ISP to sell Registrant's products, primarily its cosmetic products, in Europe and Asia. That agreement established an alliance with ISP that was intended to bring the Registrant's products to many regions of the world where either they had not been marketed before, or where previous marketing efforts had been unsatisfactory. The major focus of that agreement was the Far East, but also included Eastern Europe, Russia, and some countries in Western Europe, most importantly Germany. The agreement provided for exclusivity in those areas as long as minimum purchase requirements were met. ISP manufactures and markets an extensive line of personal care, pharmaceutical, and industrial products on a global basis. In 1996 Registrant entered into an additional marketing agreement with ISP whereby ISP became Registrant's exclusive distributor of its cosmetic products in the United States, Canada, Mexico, and Central and South America, thereby significantly expanding ISP's territory. As with its earlier agreement, this agreement provided for exclusivity as long as yearly minimum purchase levels are attained. Accompanying this agreement was a modification to the 1994 agreement to provide consistency between the two agreements. Registrant believes that the marketing agreements with ISP could have a significant impact on sales in the next few years. In the event that ISP ceased marketing Registrant's products, Registrant believes that alternative arrangements could be made to continue to supply product to the customers using Registrants products without any interruption of supply. In an effort to accelerate the marketing of some of Registrant's other products, Registrant in late 1995 entered into an agreement with Creative Technologies, Inc., ("Creative") a marketing consulting company. Since that time Registrant has been working with Creative to place some of Guardian's products with companies not previously contacted by the Registrant, as well as to provide Guardian with market information that will enable it to develop products to fill existing market needs. The agreement with Creative was for an initial six month period that ended May 31, 1996, which was extended until November 30, 1996. Since that time Creative is continuing to work on behalf of the Registrant based on a commission schedule relating to the volume of business that Creative brings to the Registrant. Most of Registrant's other marketing arrangements are not in the form of long-term contracts and can be terminated at any time. Raw Materials The principal raw materials used by the Registrant consist of common industrial organic chemicals, laboratory reagents, and common inorganic chemicals. These materials are available in ample supply from numerous sources. The Registrant's principal raw material suppliers are Callahan Chemical Company, Van Waters & Rogers, Inc., Protameen Chemicals Inc., Alzo, Inc., Vitusa Products, Inc., B.A.S.F., DSM Fine Chemicals Inc., Eastman Chemical, Clariant Corp., Ishihara U.S.A., Nissei Trading Co., and Varessa, Ltd. Inventories; Returns and Allowances The Registrant's business requires that it maintain large inventories of finished goods for Eastern, but not Guardian. 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, 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 Fluka Chemicals, Sigma Chemical Company, Aldrich Chemical Co., Inc., Acros Organics, Pfaltz & Bauer, Inc., and Spectrum Chemical Mfg. Corp. 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 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 1997 and 1996 the Registrant incurred approximately $45,000 and $ 39,000 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 1997 and 1996, the Registrant incurred approximately $285,000 and $268,000 respectively, in research and development expenses. The expenses consist of direct costs as well as factory overhead. No portion of the research and development expenses was directly paid by the Registrant's customers. Revenue and Earnings The tables below set forth, for the years indicated, the revenue (including fees and retainers), and earnings from operations attributable to the Registrant and to the Registrant's industry segments: YEAR ENDED YEAR ENDED December 31, December 31, 1997 1996 ----------- ----------- Revenue: Guardian .................................... $ 6,964,060 $ 6,010,904 Eastern ..................................... 1,788,073 2,025,642 ----------- ----------- $ 8,752,133 $ 8,036,546 =========== =========== Earnings from Operations: Guardian .................................... $ 1,526,310 $ 936,731 Eastern ..................................... (45,308) 89,007 Corporate ................................... (161,123) (154,706) ----------- ----------- $ 1,319,879 $ 871,032 =========== =========== Identifiable Assets The table below sets forth as of the dates indicated the identifiable assets of the Registrant as a whole, as well as the identifiable assets of the Registrant's industry segments: As of: December 31, December 31, 1997 1996 --------- --------- Guardian .................................. $2,650,668 $2,607,254 Eastern ................................... 772,401 1,166,828 Corporate ................................. 2,702,777 2,080,057 ---------- ---------- $6,125,846 $5,854,139 ========== ========== For certain additional financial information concerning the Registrant's industry segments see Note J of Notes to Consolidated Financial Statements of the Registrant contained in Item 7 herein. Employees The Registrant presently employs 47 people, 6 of whom serve in an executive capacity, 26 in research, quality control and manufacturing, 5 in maintenance and construction and 10 in office and clerical work. Of the total number of employees, 43 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 offices 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 Registrant had previously given a first mortgage on the property to State Bank of Long Island to secure a note in the original amount of $ 758,333.63. During 1997 that note was paid in full, and the property is presently unencumbered. Item 3. Legal Proceedings. In 1996 Registrant filed a lawsuit in the Superior Court of New Jersey in Bergen County, New Jersey against Microbalanced Products ("Microbalanced"), a former customer of the Registrant that had failed to pay an outstanding bill of approximately $28,000. In January, 1997 Microbalanced filed a countersuit against the Registrant alleging that the product sold to it by Registrant, which was various forms of Registrant's Lubrajel product, was not "all natural". In February, 1997 two individuals who were the principals of Microbalanced, along with another individual, filed a civil action against Registrant in the Superior Court of New Jersey in Bergen County, New Jersey to recover $275,000 that they invested in a project with Registrant in 1985 to develop a product to reduce snoring ("Sonorite"). In April, 1997 Registrant, Microbalanced, and all parties involved in the lawsuits reached an out of court agreement that settled all outstanding issues between them. In exchange for Registrant obtaining all rights to the Sonorite technology, the outstanding debt of Microbalanced was cancelled and the three individuals involved in the Sonorite project were jointly paid a total of $100,000 and given 100,000 shares of restricted stock of the Registrant. Registrant now has the exclusive rights to the Sonorite technology. 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, 1996 to December 31, 1997. The quotations represent prices between dealers and do not include retail markup, markdown or commission: Year Ended Year Ended Quarters December 31, 1997 December 31, 1996 -------- ------------------- ------------------- High Low High Low ------ ----- -------- ----- First (1/1 - 3/31) $ 2 3/8 $ 1 3/4 $ 1 15/16 $ 1 1/2 Second (4/1 - 6/30) 5 1 15/16 3 1/4 1 1/2 Third (7/1 - 9/30) 4 7/8 3 3/4 3 1/16 1 3/4 Fourth (10/1 - 12/31) 6 1/8 3 3/4 2 1/8 1 9/16 Holders of Record As of March 6, 1998 there were 1,352 holders of record of Common Stock. Cash Dividends On January 5, 1998 the Registrant paid a $.06 per share dividend to all stockholders of record as of December 12, 1997. On January 6, 1997 the Registrant paid a $.05 per share dividend to all stockholders of record as of December 10, 1996. Recent Sales of Unregistered Securites On July 21, 1997 Registrant transferred 100,000 shares of Registrant's unregistered Common Stock to two of the three individuals that were involved in the civil action discussed in "Item 3. Legal Proceedings" above. The two individuals, Christian Yegen and Reuven Gershoni ("Transferees"), were issued the stock as part of the settlement of all lawsuits that had been pending between the Registrant, Transferees, Microbalanced Products, and Dan Palmon. In consideration for this transfer of stock, all lawsuits were dropped and Registrant received the exclusive marketing rights to "Sonorite", a product to reduce the incidence of sleep apnea and snoring that had been developed for, and funded by, the Transferees. Item 6. Management's Discussion and Analysis or Plan of Operation Results Of Operations: Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue Revenue in 1997 increased by $715,587 (9%) compared to 1996 due to revenue increases in the Guardian Division of $953,156 (16%) and a decrease in the Eastern Division of $237,569 (12%). The increase in the sales of the Guardian division was primarily the result of an increase in sales of its cosmetics products (primarily Lubrajel to ISP) both for their international and their domestic sales, and increases of sales of Renacidin Irrigation as a result of a mid year discontinuation of the powder form of the product resulting in higher volumes of the Irrigation which has a higher selling price. The decrease in sales of the Eastern Division was the result of an overall decrease in sales volume not attributable to any one product or customer. Costs and Expenses Costs and expenses in 1997 increased by $266,740 (4%) compared to the prior year due to increases in cost of sales of $238,041 (5%) and operating expenses of $28,699 (1%). Costs of sales as a percentage of sales decreased to 62% in 1997 as compared to 65% 1996. The decrease is mainly due to the absorption of fixed plant costs by higher revenue. An additional 2% decline in the cost of sales percentage in 1997 was offset by the Registrant's charge of $180,000, of which $85,000 was for a write-down in the remaining value of Lubraseptic Jelly and a $95,000 increase in inventory reserves. The increase in operating expenses in 1997 is primarily due to higher payroll and payroll related costs. Other Income (Expense) Interest expense decreased from $80,210 to $31,505 due to a reduction in bank loans outstanding. Interest income increased from $14,789 to $34,619 due to investing of excess cash provided from operations. The Registrant realized gain on sale of assets of $44,312 in 1996 while there was no gain or loss in 1997. Provision for Income Taxes The provision for income taxes increased from $324,767 in 1996 to $502,620 in 1997. This increase is primarily due to the increase in earnings before income taxes of $474,791 (56%) between years. Liquidity and Capital Resources Working capital decreased from $2,982,472 as of the end of 1996 to $2,973,768 as of the end of 1997, a decrease of $8,704 (.2%). The Current Ratios were approximately 4.6 to 1 at December 31, 1997 and 1996. The Registrant has line of credit agreements with two banks, which provide for borrowings of up to $250,000 and $700,000, respectively. As of December 31, 1997, the unused portion of these lines, in the aggregate, was $950,000. The Registrant generated cash from operations of $1,497,078 in 1997 compared to $1,059,577 in 1996. The increase in 1997 was primarily due to increased earnings and a decrease in inventories. During each of the years 1997 and 1996 the Registrant invested approximately $291,000 and $250,000 respectively for plant and equipment. During the second half of 1997 the Registrant invested excess cash of approximately $360,000 in certificates of deposit with maturities not in excess of one year. Cash used in financing activities increased approximately $434,000 to approximately $797,000 due to additional reductions in bank debt and payment of a $.05 cash dividend of $238,144. While the Registrant believes that its working capital is sufficient to support its operating requirements for the next fiscal year, the Registrant's long-term liquidity position will be dependent upon its ability to generate sufficient cash flow from operations. The Registrant has no material commitments for future capital expenditures. Impact of Inflation and Changing Prices While it is difficult to assess the impact of inflation on the Registrant's operations, management believes, because of the proprietary nature of the majority of its product line, that inflation has had little effect on net sales. Sales have changed as a result of volume, price 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. Impact of the "Year 2000" issue The Registrant has evaluated the impact of the Year 2000 issue on its business and does not expect to incur any significant costs associated with Year 2000 compliance or that the Year 2000 issue will oooo have a material impact on the Registrant's business, results of operations, or financial condition. Sales of the Guardian Laboratories division, which account for most of the Registrant's sales, are already handled on a Year 2000 compliant system. The only part of the Registrant's operations that might be affected by this issue is its Eastern Chemical subsidiary ("Eastern"), which uses an older computer system that may not be Year 2000 compliant. The Registrant is currently making this determination. However, the Registrant has decided that if the cost to make Eastern's software Year 2000 compliant is too high it will put the Eastern operations on the same software used by the Guardian Laboratories division. Regardless of which option Registrant chooses, it does not believe that it will incur any material expenses in resolving this issue as it relates to Eastern. While Registrant has no knowledge of any problems that its customers or suppliers may have in regard to the Year 2000 issue, it has no reason to believe that any problems they might have will have any material impact on the Registrant. 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 6, 1998 with respect to the executive officers and directors of the Registrant: Name Age Position(s) with the Registrant --------- --- ------------------------------- Dr. Alfred R. Globus 77 Chairman of the Board, Chief Executive Officer and Director Kenneth H. Globus 46 President, Chief Financial Officer, General Counsel and Director Robert S. Rubinger 55 Executive Vice President, Secretary, Treasurer and Director Charles W. Castanza 65 Vice President and Director Derek Hampson 58 Vice President Joseph J. Vernice 39 Vice President Lawrence Maietta 40 Director Henry P. Globus 75 Director Benjamin Wm. Mehlman 87 Director Alan E. Katz 54 Director Arthur Dresner 56 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 Vice President of the Registrant since April, 1986. 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 division 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. Lawrence Maietta has been a partner in the public accounting firm of Bonamassa & Maietta, C.P.A.s in Brooklyn, NY since October, 1991. For 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 has been counsel to the law firm of William T. Friedman and its predecessor, Friedman and Shaftan, P.C. since 1984. He has been a director of the Registrant since 1964. Alan E. Katz has been a partner in the law firm of Greenfield Stein & Senior, LLP, New York, NY since November, 1984. He has been a director of the Registrant since February, 1994. Arthur Dresner is an independent business consultant. 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. 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 1998 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 1998 Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference to the section entitled "Voting Securities and Principal Stockholders - Security Ownership of Management" of the 1998 Proxy Statement. Item 12. Certain Relationships and Related Transactions. The Registrant has a split dollar life insurance arrangement with Alfred R. Globus, its Chairman and Chief Executive Officer ("Insured"). On an annual basis the Registrant makes non-interest bearing advances of approximately $86,000 or 87% of the cost of a $1,500,000 policy, which is owned by a trust of which the Insured is the grantor and another officer, Kenneth H. Globus, is a beneficiary. Under a collateral assignment agreement the proceeds from the policy will first be paid to the Registrant to repay the advances it made. If the policy is terminated prior to the death of the Insured, the Registrant will be entitled to the cash surrender value of the policy at that time, and any shortfall between that amount and the amount of the advances made by the Registrant will be repaid to the Registrant by the Insured. As of December 31, 1997 and 1996, advances of $261,559 and $175,010, respectively, are recorded in the Consolidated Balance Sheets under "Other Assets". 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) Distribution Agreement between the Registrant and Societe D'Etudes Dermatologies, dated November 20, 1991. Incorporated by reference to Exhibit 10(k) 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(d) Exclusive Distributor Agreement between the Registrant and ISP (Switzerland) A.G. dated December 9, 1994. Incorporated by reference to Exhibit 10(m) of the 1994 10-KSB. The Registrant has been granted confidential treatment of portions of some of the schedules to this Agreement. 10(e) Exclusive Distributor Agreement between the Registrant and ISP Technologies Inc. dated September 20, 1996. The Registrant has been granted confidential treatment of portions of some of the schedules to this Agreement. Incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-KSB for the year ending December 31, 1996 ("1996 10-KSB") 21 Subsidiaries of the Registrant: Name Under Jurisdiction of Which it does Name Incorporation Business Eastern Chemical Corporation New York Eastern Chemical Corporation Transcontinental Processes (Pty.) Ltd.* Australia N/A Dieselite Corporation** Delaware N/A Paragon Organic Chemicals, Inc. New York Paragon Organic Chemicals Shield Chemical Ltd.*** Canada N/A * Inactive without assets ** Inactive; formerly Vital Industries, Inc. *** Inactive without assets; in the process of liquidation 27 Financial Data Schedule (b) Reports on Form 8-K None 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 18, 1998 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 18, 1998 Alfred R. Globus (Principal Executive Officer) By:/s/ Kenneth H. Globus President, General Counsel, March 18, 1998 Kenneth H. Globus Director, Chief Financial Officer (Principal Financial and Accounting Officer) By:/s/ Robert S. Rubinger Executive Vice President, March 18, 1998 Robert S. Rubinger Secretary, Treasurer, Director By:/s/ Charles W. Castanza Vice President, Director March 18, 1998 Charles W. Castanza By:/s/ Henry P. Globus Director March 18, 1998 Henry P. Globus By:/s/ Benjamin Wm. Mehlman Director March 18, 1998 Benjamin Wm. Mehlman By:/s/ Lawrence F. Maietta Director March 18, 1998 Lawrence F. Maietta By:/s/ Alan E. Katz Director March 18, 1998 Alan E. Katz By:/s/ Arthur Dresner Director March 18, 1998 Arthur Dresner United-Guardian, Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ------ Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3 - F-4 Consolidated Statements of Earnings for the Years Ended December 31, 1997 and 1996 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 F-7 Notes to Consolidated Financial Statements F-8 - F-23 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders United-Guardian, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of United-Guardian, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United-Guardian Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Melville, New York March 5, 1998 F-2 United-Guardian, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1997 1996 --------- --------- CURRENT ASSETS Cash and cash equivalents ........................ $ 822,596 $ 826,079 Investments - short term ......................... 361,723 - Accounts receivable, net of allowance for doubtful accounts of $32,300 and $38,900, respectively 905,896 859,146 Inventories ...................................... 1,372,067 1,812,629 Prepaid expenses and other current assets ........ 225,854 199,516 Deferred income taxes ............................ 107,111 116,233 ---------- ---------- Total current assets ............... 3,795,247 3,813,603 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land ............................................. 69,000 69,000 Factory equipment and fixtures ................... 2,333,654 2,119,223 Building and improvements ........................ 1,843,171 1,766,174 Waste disposal plant ............................. 133,532 133,532 ---------- ---------- 4,379,357 4,087,929 Less accumulated depreciation .................... 2,847,870 2,583,297 ---------- --------- 1,531,487 1,504,632 Assets under capital leases, net ................. 1,444 6,934 ---------- --------- 1,532,931 1,511,566 ---------- --------- OTHER ASSETS Processes and patents, net ....................... 533,984 351,835 Split dollar life insurance ...................... 261,559 175,010 Other ............................................ 2,125 2,125 ---------- --------- 797,668 528,970 ---------- --------- $6,125,846 $5,854,139 ========== ========== The accompanying notes are an integral part of these statements. F-3 United-Guardian, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 -------- --------- CURRENT LIABILITIES Current portion of long-term debt and capital lease obligations .............. $ -- $114,241 Dividends payable ............................ 292,610 238,144 Accounts payable ............................. 292,632 222,743 Accrued expenses ............................. 165,841 100,772 Taxes payable ................................ 70,396 155,231 -------- -------- Total current liabilities ............... 821,479 831,131 -------- -------- LONG-TERM DEBT ................................... -- 475,000 -------- -------- DEFERRED INCOME TAXES ............................ 20,116 31,618 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.10 par value; authorized, 10,000,000 shares; issued and outstanding, 4,876,839 and 4,762,889 shares, respectively ...................... 487,684 476,289 Capital in excess of par value ............... 3,314,210 3,089,380 Retained earnings ............................ 1,482,357 950,721 ---------- ---------- 5,284,251 4,516,390 ---------- ---------- $6,125,846 $5,854,139 ========== ========== The accompanying notes are an integral part of these statements. F-4 United-Guardian, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31, 1997 1996 ----------- ----------- Revenue Net sales ....................... $ 8,752,133 $ 8,001,546 Fees and retainers .............. -- 35,000 ----------- ----------- 8,752,133 8,036,546 ----------- ----------- Costs and expenses Cost of sales ................... 5,404,584 5,166,543 Operating expenses .............. 2,027,670 1,998,971 ----------- ----------- 7,432,254 7,165,514 ----------- ----------- Earnings from operations ... 1,319,879 871,032 Other income (expense) Interest expense ................ (31,505) (80,210) Gain on sale of assets .......... -- 44,312 Other ........................... 38,492 16,941 ----------- ----------- Earnings before income taxes 1,326,866 852,075 Provision for income taxes .......... 502,620 324,767 ----------- ----------- NET EARNINGS ............... $ 824,246 $ 527,308 =========== =========== Earnings per common share (Basic and Diluted)...................... $ .17 $ .11 =========== =========== Basic weighted average shares ....... 4,832,783 4,762,889 =========== =========== Diluted weighted average shares ..... 4,852,641 4,764,853 =========== =========== The accompanying notes are an integral part of these statements. F-5
United-Guardian, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common stock Capital in ----------------------- excess of Retained Shares Amount par value earnings Total --------- ----------- ----------- ----------- ---------- Balance, January 1, 1996 . 4,762,889 $ 476,289 $ 3,089,380 $ 661,557 $ 4,227,226 Net earnings ............. -- -- -- 527,308 527,308 Dividends declared ....... -- -- -- (238,144) (238,144) --------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 4,762,889 476,289 3,089,380 950,721 4,516,390 Issuance of common stock in connection with exercise of stock options ...... 13,950 1,395 28,580 -- 29,975 Issuance of common stock for purchase of technology. 100,000 10,000 196,250 -- 206,250 Net earnings ............. 824,246 824,246 Dividends declared ....... -- -- -- (292,610) (292,610) --------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 4,876,839 $ 487,684 $ 3,314,210 $ 1,482,357 $ 5,284,251 ========= =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. F-6 United-Guardian, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1997 1996 --------- ------- Cash flows from operating activities Net earnings .................................... $ 824,246 $ 527,308 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization ............... 394,164 334,999 Net gain on sale of equipment ............... -- (44,312) Provision for doubtful accounts ............. 22,140 16,651 Deferred income taxes ....................... (2,380) (68,233) Provision for inventory obsolescence ........ 180,000 205,000 Increases (decreases) in cash resulting from changes in operating assets and liabilities Accounts receivable .................... (68,890) 168,881 Inventories ............................ 260,562 271,699 Prepaid expenses and other assets ...... (112,887) (137,591) Accounts payable ....................... 69,889 (323,158) Accrued expenses and taxes payable ..... (69,766) 108,333 ---------- ---------- Net cash provided by operating activities .. 1,497,078 1,059,577 ---------- ---------- Cash flows from investing activities Acquisition of plant and equipment, net ......... (291,428) (249,309) Proceeds from the sale of plant and equipment ... -- 71,406 Purchase of technology .......................... (50,000) -- Purchase of short term investments .............. (361,723) -- --------- --------- Net cash used in investing activities .... (703,151) (177,903) --------- --------- Cash flows from financing activities Net decrease in notes payable - banks ........... -- (100,000) Principal payments of long-term debt ............ (584,167) (252,462) Principal payments of capital lease obligations . (5,074) (10,194) Proceeds from exercise of stock options ......... 29,975 -- Dividends paid .................................. (238,144) -- --------- --------- Net cash used in financing activities ...... (797,410) (362,656) --------- --------- Net (decrease) increase in cash and cash equivalents (3,483) 519,018 Cash and cash equivalents, beginning of year ........ 826,079 307,061 --------- --------- Cash and cash equivalents, end of year .............. $ 822,596 $ 826,079 ========= ========= The accompanying notes are an integral part of these statements. F-7 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 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 industry segments: (1) the Guardian Laboratories Division which conducts research, product development, manufacturing and marketing of pharmaceuticals, cosmetics, health care products, medical devices and proprietary industrial products, and (2) the Eastern Chemical Division which distributes a line of fine organic chemicals, research chemicals, test solutions, indicators, dyes and reagents. Sales from the Company's two major product lines, Lubrajel and Renacidin, accounted for approximately 63% and 60% of consolidated sales for the years ended December 31, 1997 and 1996 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. All intercompany accounts and transactions have been eliminated. Statements of Cash Flows For financial statement purposes (including cash flows), the Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less. During 1997 the Company declared a cash dividend of $.06 payable on January 5, 1998 to stockholders of record as of December 12, 1997 aggregating $292,610. During 1996, the Company declared a dividend of $.05 payable on January 7, 1997 to stockholders of record as of December 10, 1996 aggregating $238,144. Cash payments for interest were $34,635 and $82,492 for the years ended December 31, 1997 and 1996, respectively. Cash payments for income taxes were $586,608 and $265,123 for the years ended December 31, 1997 and 1996, respectively. F-8 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE A (continued) Investments - short term Investments in short-term instruments at December 31, 1997 of $361,723, principally represent certificates of deposit which are classified as "held to maturity" securities and are reported at their amortized cost which approximates market value. Such investments mature in less than a year. Inventories Inventories are valued at the lower of cost or current market value. Costs are determined using the first-in, first-out method ("FIFO") for the Eastern Chemical Division, and the average cost method (which approximates FIFO) for the Guardian Laboratories Division. 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 earnings as a result of using accelerated methods was not materially different than that which would result from using the straight-line method for all periods presented. Certain factory equipment and fixtures are constructed by the Company using purchased materials and in-house labor. Such assets are capitalized and depreciated on a basis consistent with the Company's purchased fixed assets. Estimated useful lives are as follows: Factory equipment and fixtures 5 - 7 years Building 40 years Building improvements Lesser of useful life or 20 years Waste disposal plant 7 years Processes and Patents Processes and patents are amortized over periods ranging from 5 to 15 years. Amounts are shown net of accumulated amortization. F-9 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE A (continued) Long-Lived Assets It is the Company's policy to evaluate and recognize an impairment to its long-lived assets if it is probable that the recorded amounts are in excess of anticipated undiscounted future cash flows. Fair Value of Financial Instruments The Company has estimated the fair value of financial instruments using available market information and other valuation methodologies in accordance with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." Management of the Company believes that the fair value of financial instruments, consisting of accounts receivable and payable, notes payable and capital lease obligations, approximates carrying value due to the short payment terms associated with its accounts receivable and payable and the interest rates associated with its notes payable and capital lease obligations. 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 are recorded in the year incurred. Research and development expenses were approximately $285,000 and $268,000 for the years ended December 31, 1997 and 1996, respectively. Earnings Per Share Information In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. F-10 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE A (continued) New Pronouncement Not Yet Adopted In June, 1997, the FASB issued SFAS No. 131 - "Disclosures about Segments of and Enterprise and Related Information", which is effective for the Company's year ending December 31, 1998. The statement changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports. Adoption of SFAS No. 131 relates to disclosure within the financial statements and is not expected to have a material effect on the Company's financial statements. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - INVENTORIES Inventories consist of the following: December 31, December 31, 1997 1996 ----------- ----------- Raw materials and work-in-process ........... $ 272,833 $ 319,817 Finished products and fine chemicals ........ 1,099,234 1,492,812 ---------- ---------- $1,372,067 $1,812,629 ========== ========== NOTE C - PROCESSES AND PATENTS (1) On October 1, 1984, a partnership agreed to provide the Company with funding of $454,800 for a liquid Renacidin research and development project. In 1985, funds of $154,800 were received, and the balance was payable by a $300,000 note due on November 30, 1992 bearing interest at 12%. On August 14, 1992, the F-11 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE C (continued) Company and the partnership terminated the agreement. Pursuant to the termination agreement, the partnership conveyed its interest in the technology to the Company in exchange for cancellation of the note plus accrued interest which together amounted to $513,000. The technology is being amortized by the Company under the straight-line method over a ten-year period commencing in 1992. Additionally, during 1993, the Company and a stockholder issued warrants to the two partners of the partnership to purchase a total of 104,000 shares of the Company's common stock at $6.00 per share, which approximated market value at that time. During 1994, the Company renegotiated its warrant agreement (64,000 warrants) to reflect a reduced price of $4.00 per share with an expiration date of December 31, 1998. The warrants previously issued in 1993 by a stockholder to purchase 40,000 shares of the Company's common stock were cancelled. (2) During 1991, the Company contracted with Abbott Laboratories, Inc. ("Abbott") for the production of Renacidin Irrigation. Such production was to commence following approval by the Food and Drug Administration ("FDA") of Abbott as the producer. In conjunction with this agreement, the Company paid a nonrefundable fee of $154,370 to Abbott for their assistance in obtaining an approved supplement to the Company's New Drug Application ("NDA") for Renacidin Irrigation. The NDA supplement covers the manufacture of Renacidin Irrigation at the Abbott plant in North Carolina. During 1993, FDA approval was granted and production commenced. Amounts paid to Abbott have been recorded as deferred costs, and are being amortized over a five-year period consistent with the initial term of the production agreement. (3) In August, 1985 the Company entered into an agreement with three private investors to develop a product to reduce snoring. The investors provided $275,000 to fund the project, and in exchange received majority ownership interest in the technology. The Company successfully developed the product, which was known as "Sonorite", but shortly thereafter one of the key raw materials was discontinued and the project did not proceed further until 1996 when a satisfactory replacement was found. In February, 1997 the investors filed suit claiming breach of the development agreement. That lawsuit was settled in April, 1997. As part of the settlement the Company purchased from the investors their interest in the Sonorite technology in exchange for $100,000 and 100,000 shares of restricted stock of the Company, thereby giving the Company the exclusive right to commercialize the technology. F-12 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 Processes and patents consist of the following: December 31, December 31, 1997 1996 ----------- ----------- Capitalized technology - Renacidin (1).......... $513,000 $513,000 Deferred costs - Renacidin (2).................. 154,370 154,370 Capitalized technology - Sonorite (3)........... 306,250 -- Patents ........................................ 8,177 78,177 -------- -------- 981,797 745,547 Less accumulated amortization .................. 447,813 393,712 -------- -------- $533,984 $351,835 ======== ======== NOTE D - NOTES PAYABLE - BANKS The Company has line of credit agreements with two banks which provide for borrowings of up to $250,000 and $700,000 and expire in April 30, 1998 and May 31, 1998, respectively. It is the Company's intention to renew both line of credit agreements before they expire. Interest under each line is at the bank's prime rate plus 1/2%. The outstanding line of credit agreements contain financial covenants relating to minimum net worth, working capital, current ratio, debt to capitalization and maintenance of compensating balances. There were no outstanding borrowings at December 31, 1997 and 1996. NOTE E - LONG-TERM DEBT Long-term debt is as follows: December 31, December 31, 1997 1996 ----------- ----------- Mortgage (a) ............................... $ -- $566,667 Term loans ................................ -- 17,500 -------- -------- Total long-term debt ..... -- 584,167 Less current portion ....................... -- 109,167 -------- -------- $ -- $475,000 ======== ======== F-13 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE E (continued) (a) The Company had a mortgage on its building that was paid in full during 1997. The mortgage note bore interest at the bank's prime rate (8.5% at December 31, 1996) plus 1%, up to a maximum of 3% higher or lower than the base rate in effect, which was reset every three-years at the bank's prime rate plus 1% as in effect the first day of each three-year period. The land and building had been pledged as collateral for the debt. The principal of this mortgage was payable in monthly installments of $8,333 until January 10, 2004. After January 10, 2001 the holder of the note could accelerate payment upon 120 days' prior written notice. NOTE F - INCOME TAXES The provision for income taxes consists of the following: Year ended Year ended December 31, December 31, 1997 1996 --------- ---------- Current Federal .......................... $ 435,000 $ 332,000 State ............................ 70,000 61,000 --------- ---------- 505,000 393,000 --------- ---------- Deferred Federal .......................... (5,266) (59,149) State ............................ 2,886 (9,084) --------- ---------- (2,380) (68,233) --------- ---------- Total provision ............ $ 502,620 $ 324,767 ========= ========= F-14 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE F (Continued) The difference between the Company's effective income tax rate and the United States statutory rate is reconciled below: Year ended Year ended December 31, December 31, 1997 1996 -------------- -------------- (000's) % (000's) % ------- --- ------- --- Tax expense at statutory Federal income tax rate .............................. $ 451 34% $ 290 34% State income taxes, net of Federal benefit 48 4 34 4 Meals and entertainment disallowance ..... 2 -- 2 -- Other, net ............................... 1 -- (1) -- ----- ----- ---- ----- Actual tax expense ....................... $ 502 38% $ 325 38% ===== ===== ===== ===== The tax effects of temporary differences which comprise the deferred tax assets and liabilities are as follows: December 31, December 31, 1997 1996 ----------- ----------- Deferred tax assets Accounts receivable .................... $ 12,069 $ 14,516 Inventories ............................ 84,671 87,646 Accrued vacation ....................... 3,171 3,171 State net operating loss carryforward .. 7,200 10,900 --------- ---------- 107,111 116,233 --------- ---------- Deferred tax liabilities Deferred costs - Renacidin ............. (10,116) (21,618) Other .................................. (10,000) (10,000) --------- ---------- (20,116) (31,618) --------- ---------- Net deferred tax asset ..................... $ 86,995 $ 84,615 ========= ========== F-15 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE G - 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. Net pension cost, included the following components: Year ended Year ended December 31, December 31, 1997 1996 --------- ---------- Service cost - benefits earned during the period ... $ 57,887 $ 61,601 Interest cost on projected benefit obligation ...... 95,960 86,625 Actual return on plan assets ....................... (115,115) (40,747) Net amortization and deferral ...................... 20,179 (46,196) --------- --------- Net pension cost .............................. $ 58,911 $ 61,283 ========= ========= In calculating amortization for any prior service costs, the straight-line method has been used over the average remaining service period of employees expected to receive benefits under the plan. The funded status of the Company's pension plan was as follows: December 31, December 31, 1997 1996 ----------- ----------- Actuarial present value of benefit obligations Accumulated benefit obligation, including vested benefits of $1,001,205 and $930,527, respectively ................................ $ 1,031,436 $ 951,156 =========== =========== Projected benefit obligation ..................... $ 1,412,269 $ 1,329,659 Plan assets at fair value ........................ 1,192,657 1,132,370 ----------- ----------- F-16 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE G (continued) Projected benefit obligation in excess of plan assets 219,612 197,289 Unrecognized net loss .......................... (204,728) (134,450) Unrecognized net prior service cost and transition obligation .................... (90,061) (99,844) ----------- ----------- Accrued (prepaid) pension cost ................. $ (75,177) $ (37,005) =========== =========== For the years ended December 31, 1997 and 1996, the projected benefit obligation was determined using a discount rate of 6.50% and 7.25% and a rate of increase in future compensation of 5.19% and 5.12%, respectively. For the years ended December 31, 1997 and 1996, the expected long-term rate of return on plan assets was 8% and 9% respectively. 401(k) Plan The Company maintains a 401(k) Plan for all of its 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 each employee's elective deferral up to 2% of weekly pay for a 4% employee deferral. Employees become fully vested in Company contributions after one year of employment. 401(k) Company contributions were approximately $26,000 per year for the years ended December 31, 1997 and 1996. 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. 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123). 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-17 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE G (continued) If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's net income and basic and diluted earnings per share as of December 31, 1997 and 1996 would be reduced to the pro forma amounts indicated below: 1997 1996 ---------- ---------- Net income As reported $ 824,246 $ 527,308 Pro forma 795,148 513,628 Basic and diluted earnings per common share As reported $ .17 $ .11 Pro forma .16 .10 The pro forma amounts may not be representative of future disclosure because they do not take into account pro forma compensation expense related to grants made before 1995. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 1997: expected volatility of 56.30%; risk-free interest rates of 5.82% to 5.95%; expected life of three to five years; and expected dividends of 1.2%. The assumptions for the year ended December 31, 1996 were: expected volatility of 52.58%; risk-free interest rates of 6.24%; and expected life of ten years. F-18 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE G (continued) The following summarizes the stock option transactions under both Plans: Weighted average Fair value Number exercise at date EISOP outstanding price of grant Options outstanding, January 1, 1996 30,500 $ 4.42 Granted 6,000 1.88 $ 1.33 Surrendered/Expired (1,000) 5.00 ======= Options outstanding and exercisable December 31, 1996 35,500 3.99 Granted 22,200 2.06 1.13 Exercised (8,450) 2.28 Surrendered/Expired (1,000) 5.00 ------- Options outstanding, and exercisable December 31, 1997 48,250 3.38 ======= Available for grant, December 31, 1997 43,300 ======= NSSOPD - ------ Options outstanding January 1, 1996 14,000 3.36 Granted 8,000 1.88 1.33 ====== F-19 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE G (continued) Outstanding and exercisable December 31, 1996 22,000 2.82 Granted 8,000 2.06 .83 Exercised (6,000) 1.96 Expired (2,000) 5.00 ------ Options outstanding at December 31, 1997 22,000 2.58 ====== Available for grant December 31, 1997 72,000 ====== Summarized information about stock options outstanding under the two plans at December 31, 1997 is as follows:
Options Oustanding Options Exercisable --------------------------------------------- ------------------------- Range of Number Weighted Weighted- Number Weighted Exercise Outstanding Average Average Exercisable Average Prices at Remaining Exercise at Exercise Dec. 31, 1997 Contractual Price Dec. 31, 1997 Price Life EISOP - ----- $1.88 - $2.82 26500 8.50 $1.90 26500 $1.90 $4.25 - $5.00 21750 6.00 $5.00 21750 $5.00 - ------------- ----- ---- ----- ----- ----- $1.88 - $5.00 48250 7.40 $3.38 48250 $3.38 NSSOPD - -------- $1.88 - $2.82 18000 3.00 $2.04 10000 $2.03 $4.25 - $5.00 4000 0.50 $5.00 4000 $5.00 - ------------- ----- ---- ----- ----- ----- $1.88 - $5.00 22000 2.60 $2.58 14000 $2.88
F-20 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE H - RELATED PARTY TRANSACTION The Company has a split dollar life insurance arrangement with Alfred R. Globus, its Chairman and Chief Executive Officer (the "Insured"). On an annual basis the Company makes non-interest bearing advances of approximately $86,000 or 87% of the cost of a $1,500,000 life insurance policy, which is owned by a trust of which the Insured is the grantor and another officer, Kenneth H. Globus, is a beneficiary. Under a collateral assignment agreement the proceeds from the policy will first be paid to the Company to repay the advances it made. If the policy is terminated prior to the death of the Insured, the Company will be entitled to the cash surrender value of the policy at that time, and any shortfall between that amount and the amount of the advances made by the Company will be repaid to the Company by the Insured. As of December 31, 1997 and 1996, advances of $261,559 and $175,010, respectively, are recorded in the Consolidated Balance Sheets under "Other Assets". NOTE I - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share at December 31, 1997 and 1996: 1997 1996 ---------- --------- Numerator: Net income $ 824,246 $ 527,308 Denominator: Denominator for basic earnings per share ( weighted average shares) 4,832,783 4,762,889 Effect of dilutive securities: Employee stock options 19,858 1,964 --------- --------- Denominator for diluted earnings per share (adjusted weighted-average shares) and assumed conversions 4,852,641 4,764,853 ========= ========= Basic earnings per share $ 0.17 $ 0.11 ========= ========= Diluted earnings per share $ 0.17 $ 0.11 ========= ========= F-21 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE J - NATURE OF BUSINESS AND SEGMENT INFORMATION The Company operates in two industry segments (Note A). Certain financial and operating data related to the Company's segments are as follows: As of or for As of or for the year ended the year ended December 31, December 31, 1997 1996 ------------- ----------- Revenue Guardian ........................ $ 6,964,060 $ 6,010,904 Eastern ......................... 1,788,073 2,025,642 ----------- ----------- $ 8,752,133 $ 8,036,546 =========== =========== Earnings from operations Guardian ........................ $ 1,526,310 $ 936,731 Eastern ......................... (45,308) 89,007 Corporate ....................... (161,123) (154,706) ----------- ----------- $ 1,319,879 $ 871,032 =========== =========== Identifiable assets Guardian ........................ $ 2,650,668 $ 2,607,254 Eastern ......................... 772,401 1,166,828 Corporate ....................... 2,702,777 2,080,057 ----------- ----------- $ 6,125,846 $ 5,854,139 =========== =========== Depreciation and amortization Guardian ........................ $ 266,181 $ 212,785 Corporate ....................... 127,983 122,214 ----------- ----------- $ 394,164 $ 334,999 =========== =========== Capital expenditures Guardian ........................ $ 203,202 $ 152,913 Corporate ....................... 88,226 96,396 ----------- ----------- $ 291,428 $ 249,309 =========== =========== F-22 United-Guardian, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1997 and 1996 NOTE J (continued) The Company sells to companies in various industries throughout the United States and Europe. Due to the diversity of its product line, distribution area and customer base, management does not believe there is a significant concentration of credit risk. Foreign sales represented approximately 43% and 39% of total sales in 1997 and 1996, respectively. Revenues from significant customers exceeding 10% of total revenue and to companies in foreign countries are summarized as follows: Percentage of revenue --------------------------- Year ended Year ended December 31, December 31, 1997 1996 -------- ---------- Significant customers Customer A (United States) ............ 24% -- Customer B (France) ................... 11 11% NOTE K - CONTINGENCIES The Company is involved in various legal matters involving claims and counterclaims arising from the ordinary course of business. In the opinion of the Company's management and its in-house legal counsel, any unfavorable outcome associated with these matters would not have a material adverse effect on the Company's financial position and results of operations. F-23 EX-27 2 EXHIBIT 27 TO FORM 10-KSB FOR YEAR ENDED 12/31/97
5 YEAR DEC-31-1997 DEC-31-1997 1,184,319 0 938,196 32,300 1,372,067 3,795,247 4,379,357 2,847,870 6,125,846 821,479 0 0 0 487,684 3,314,210 6,125,846 8,752,133 8,752,133 5,404,584 5,404,584 0 0 31,505 1,326,866 502,620 824,246 0 0 0 824,246 .17 .17
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