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
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State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
230 Marcus Blvd., Hauppauge, NY 11788
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(Address or principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (516) 273-0900
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Securities registered pursuant to Section l2(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<PAGE>
<TABLE>
<CAPTION>
PATENT NAME PATENT # ISSUE DATE EXPIRATION DATE
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
United-Guardian, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common stock Capital in
----------------------- excess of Retained
Shares Amount par value earnings Total
--------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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
</TABLE>
F-20
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,184,319
<SECURITIES> 0
<RECEIVABLES> 938,196
<ALLOWANCES> 32,300
<INVENTORY> 1,372,067
<CURRENT-ASSETS> 3,795,247
<PP&E> 4,379,357
<DEPRECIATION> 2,847,870
<TOTAL-ASSETS> 6,125,846
<CURRENT-LIABILITIES> 821,479
<BONDS> 0
0
0
<COMMON> 487,684
<OTHER-SE> 3,314,210
<TOTAL-LIABILITY-AND-EQUITY> 6,125,846
<SALES> 8,752,133
<TOTAL-REVENUES> 8,752,133
<CGS> 5,404,584
<TOTAL-COSTS> 5,404,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,505
<INCOME-PRETAX> 1,326,866
<INCOME-TAX> 502,620
<INCOME-CONTINUING> 824,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 824,246
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
