Officers and Directors
KENNETH H. GLOBUS
President & Principal Executive Officer
Chairman of the Board of Directors
General Counsel
ROBERT S. RUBINGER
Executive Vice President, Secretary,
Chief Financial Officer, Director of Product
Development, and Director
JOSEPH J. VERNICE
Vice President
Director of Technical Services
Manager of Research & Development
PETER A. HILTUNEN
Vice President
Production Supervisor
Director of Plant Operations
ARTHUR M. DRESNER
Director; Counsel to the law firm of
Duane Morris LLP
New York, NY
LAWRENCE F. MAIETTA
Director; Partner in the accounting firm of
Bonamassa, Maietta & Cartelli, LLP
Brooklyn, NY
ANDREW A. BOCCONE
Director; Independent Business Consultant,
Former President of Kline & Company, Inc.
Little Falls, NJ (business consulting firm)
CHRISTOPHER W. NOLAN, SR.
Director; Managing Director, Mergers &
Acquisitions of Rabobank International
New York, NY
Corporate Profile
United-Guardian, Inc. is a publicly traded (NASDAQ:UG) fully integrated research, development,
manufacturing, and marketing company that has been supplying unique and innovative products to the
personal care, health care, industrial, and pharmaceutical sectors since 1942 The company's products are
developed and manufactured by its Guardian Laboratories Division, and many are proprietary formulations
with unique combinations of properties and ingredients. The personal care and cosmetic ingredients are
marketed through a worldwide network of marketing partners and distributors, and are used by many of the
major multinational cosmetic companies. The pharmaceuticals are sold primarily to full-line drug
wholesalers, which distribute them to pharmacies, hospitals, physicians, long-term care facilities, and other
health care providers. The health care products are marketed directly to manufacturers of medical devices
and other medical products, which incorporate them into their finished products and distribute them to
hospitals, pharmacies, and other health care facilities. The specialty industrial products are sold directly to
manufacturers in a wide range of industries.
The company's most important product line is its extensive LUBRAJEL® line of water-based moisturizing
and lubricating gel products. The focus of the company's research at the present time is on developing
additional products for the personal care and health care markets.
Over the years the company has been issued over 32 patents, and there are currently additional patents
pending. It has also received ISO 9001:2008 registration from Underwriters Laboratories, Inc., indicating
that its documented procedures and overall operations have attained the very high level of quality needed
for this certification level.
1
2 0 1 1 A N N U A L R E P O R T
to the Stockholders of
U N I T E D - G U A R D I A N , I N C .
April 15, 2012
Dear Stockholder,
While the global economic recovery continues to be slower than expected, this past year has been good to us,
with sales and earnings both reaching new highs. I attribute our success primarily to having a line of products
that sets us apart from many other companies, both in the quality of what we produce and in our ability to
innovate quickly to take advantage of changes in the marketplace. Cosmetics and pharmaceuticals have both
been market segments that historically have been more resistant to economic downturns. As a result, we have
continued to do well, despite the fact that the U.S. and foreign economies are still struggling to improve.
I am happy to report that for the first time in the company’s history sales have exceeded $14 million, increasing
from $13,723,074 in 2010 to $14,338,512 last year, an increase of 4.5%. Consistent with that, our earnings also
reached a record high of $1.03 per share, compared with $0.80 per share in 2010. This is the first time our
earnings have surpassed the $1.00 per share mark.
There are a number of reasons why our financial results were as strong as they were last year. First, sales of
our cosmetic ingredients increased 10% over 2010, due primarily to the continuing success of our marketing
partnerships with companies such as Ashland Specialty Ingredients (ASI), our largest marketing partner. ASI is
one of the four commercial units of Ashland Inc. (NYSE: ASH), and was formed when Ashland Inc. acquired
International Specialty Products Inc. (ISP) in August 2011 and integrated it into Ashland’s Aqualon Functional
Ingredients commercial unit. The name of the combined unit was then changed to Ashland Specialty
Ingredients. As many of you probably know, for many years International Specialty Products has been our
largest marketing partner. We are excited about our new relationship with Ashland, which had $6.5 billion in
sales last year. We have been working closely with them to develop new products, and are confident that, with
their assistance, as well as the marketing efforts of our other marketing partners, we will be able to continue to
grow the sales of our cosmetic ingredients.
The second reason for our strong 2011 results was the growth of our non-pharmaceutical medical products
business, which increased 11% over 2010. This continues to be a growing market for us, and we just
completed work on a project with a major new foreign customer for a new medical lubricant (see Lubrajel TF
below) that we developed specifically for them. We expect to see significant sales to them this year, and are
confident that we can continue to grow this market segment as well.
Sales of our two pharmaceutical products, Clorpactin® and Renacidin® Irrigation, have typically been very
steady from year-to-year, but Renacidin sales still have not fully recovered from the temporary production
curtailment we experienced at the end of 2010 and beginning of 2011. The curtailment was the result of
regulatory issues at the production facility responsible for manufacturing Renacidin for us. Even though our
product was not involved, they were required to obtain FDA approval before they could restart production at
that facility, so we lost considerable sales at the end of 2010 and the first few months of 2011 while they were
undergoing the restart process. Although we were fully compensated by them for our lost profits, it has taken
longer than expected to regain the level of sales we had before the curtailment. We are hopeful that with
increased advertising we will once again reach, and hopefully exceed, our previous sales levels. We are also
investigating the possibility of producing a smaller and more user-friendly dosage size of Renacidin, which we
believe will result in increased sales. If we decide to go forward with that project, and if we are successful with
its development, we believe that it could substantially increase our revenue from Renacidin in the coming years.
Our current estimate is that it will take approximately 24 months to receive FDA approval, which means the
product would probably come onto the market in mid to late 2014.
In addition to our continuing efforts to increase the market share for our existing products, we are also working
with our marketing partners to continue to expand our product lines. The most important product development
work going on right now is in connection with our new Lubrajel Natural. This is a completely new product
formulation of Lubrajel, which is our extensive line of water-based moisturizing and lubricating gels. We expect
the product to be considered “natural” by Ecocert, a leading industry certification organization for natural and
organic products. We believe that this product will be of interest to many companies looking to develop all-
2
natural products. We currently have one prototype formulation being evaluated by ASI, and hope to add
additional formulations as the project progresses. We expect the current interest in all-natural products to
continue to grow, and believe that developing an all-natural Lubrajel formulation would be very exciting to our
customers. We are also researching an all-natural Lubrajel based on ingredients from the sea. Our goal is to
have at least two of these all-natural Lubrajels in the hands of our marketing partners by the end of 2012.
In 2011 we also completed work on our new Unitwix II. This is a reformulation of our original Unitwix, a
cosmetic additive used as a thickener for oils and oil-based liquids. The new formulation is less expensive to
produce, which will enable us to market it at a substantially lower price than the original formulation. Last year,
samples were provided to our current Unitwix customers, and some have already switched to the new product.
The Unitwix II was developed primarily because of the significant increase in raw material costs for Unitwix over
the past two years. Whether this new formulation will be successful or not will depend on whether our primary
customer for Unitwix reformulates with Unitwix II, and whether we are able to continue to obtain the raw
materials for the new formulation at prices that will enable us to sell it at a price that will be cost effective for our
customers.
The status of some of our other research projects is as follows:
• LUBRAJEL TF: A new medical lubricant (mentioned above) developed specifically for a global medical
products company. Development work has been completed and the first trial order has been shipped.
Regular sales are expected to begin by the end of the second quarter of 2012.
• VEGETABLE OIL THICKENER: A thickener for cosmetic products using a vegetable oil base,
particularly lotions. The goal is to develop a thickener that will result in a clear and colorless finished
product, which current products cannot do.
• LUBRAJEL BA: A new Lubrajel formulation for oral care uses.
• SENSORY ENHANCERS: Skin-feel modifiers to enhance the skin feel of cosmetic products.
• RAZORIDE “F”: a modification of our original Razoride formula that has been developed for a new
customer, who plans to market it sometime in 2012 in high-end stores.
With the exception of the Lubrajel Natural, Lubrajel TF, and Unitwix II, all of the projects mentioned above are in
very early stages of development, and it should be understood that there is no guarantee that we will be
successful in our development efforts. However, we believe that there is market potential for all of them, and we
plan to work closely with our marketing partners to decide where our research efforts would be the most
productive.
We were once again very pleased to be in a financial position to not only pay dividends to our stockholders in
2011, but to increase those dividends substantially over the previous year. In 2011, the Board of Directors
declared two semi-annual dividends totaling $0.80 per share, a 27% increase over the $0.63 per share in
dividends that the Board declared in FY-2010. This is the 16th consecutive year that we have paid a dividend,
and once again we are very happy to be able to share our continued success with our stockholders. As those of
you who have been our stockholders for a while know, our stock price over the past few years has risen
steadily. We believe that the increase in earnings and dividend payments that we have experienced is the
primary reason for this. As a result, our stock has come to the attention of people who otherwise may not have
taken notice, and that has increased the daily trading volume of our stock as well.
I am optimistic that we will be able to continue to develop new and unique products for the personal care and
medical markets. Our goal is to continue to increase our sales and earnings in the coming years as we further
increase the market penetration of our existing products, and continue the development of some exciting new
products. I am grateful to all of our stockholders who have put their faith in us, and we will continue to do our
best to make sure that your confidence in us remains justified in the coming years.
Sincerely,
UNITED-GUARDIAN, INC.
Ken Globus
President
3
STATEMENTS OF INCOME
Years ended December 31,
2011
2010
Net sales
$ 14,338,512
$ 13,723,074
Costs and expenses:
Cost of sales
Operating expenses
Pension plan termination
Total costs and expenses
5,650,160
5,250,121
2,552,790
2,567,395
---
8,202,950
847,744
8,665,260
Income from operations
6,135,562
5,057,814
Other income:
Investment income
Gain on sale of assets
Income from damage settlement
Total other income
332,652
18,251
385,182
736,085
455,786
---
---
455,786
Income from operations before income taxes
6,871,647
5,513,600
Provision for income taxes
Net income
2,155,117
1,713,908
$ 4,716,530
$ 3,799,692
Earnings per common share (basic and diluted)
$ 1.03
$ .80
Weighted average shares (basic and diluted)
4,596,439
4,738,357
See Notes to Financial Statements
4
ASSETS
Current assets:
BALANCE SHEETS
December 31,
2011
2010
Cash and cash equivalents
$
1,090,974
$ 1,514,589
Marketable securities
Accounts receivable, net of allowance for doubtful accounts
of $18,000 in 2011 and $23,000 in 2010
Inventories (net)
Prepaid expenses and other current assets
Prepaid income taxes
Deferred income taxes
Total current assets
Property, plant, and equipment:
Land
Factory equipment and fixtures
Building and improvements
Waste disposal plant
9,295,755
1,653,440
8,314,403
1,090,711
1,467,434
1,321,389
163,034
78,613
148,240
182,575
223,546
218,328
13,972,796
12,790,235
69,000
3,694,379
2,714,780
69,000
3,650,283
2,618,253
133,532
133,532
Total property, plant and equipment
6,611,691
6,471,068
Less accumulated depreciation
5,366,204
5,261,908
Net property, plant, and equipment
1,245,487
1,209,160
Other asset
37,672
75,344
Total assets
$
15,255,955
$ 14,074,739
See Notes to Financial Statements
5
BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
December 31, .
2011
2010
$
400,389
$
208,244
676,959
1,077,348
815,996
1,024,240
Deferred income taxes
64,578
3,626
Stockholders’ equity:
Common stock, $.10 par value; 10,000,000 shares
authorized; 4,596,439 shares issued and
outstanding at December 31, 2011 and 2010,
respectively
Accumulated other comprehensive income
459,644
34,612
459,644
6,835
Retained earnings
13,619,773
12,580,394
Total stockholders’ equity
14,114,029
13,046,873
Total liabilities and stockholders’
equity
$ 15,255,955
$ 14,074,739
See Notes to Financial Statements
6
STATEMENTS OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
Years ended December 31, 2011 and 2010
Common Stock
Shares Amount
Capital in
excess of
par value
Accumulated
Other
Comprehensive
income (loss)
Retained
earnings
Treasury
stock
Total
Comprehensive
income
Balance, January 1, 2010
5,008,639 $500,864 $ 3,819,480 $
(345,992) $ 12,042,889
$
(359,630) $15,657,611
Adjustment for pension
termination, net of deferred
income tax benefit of $179,641
Change in unrealized loss on
marketable securities, net of
deferred income tax benefit
of $7,518
Acquisition of treasury stock
338,655
338,655
$
338,655
14,172
14,172
14,172
(3,762,500)
(3,762,500)
Retirement of treasury stock
(412,200)
(41,220)
(3,819,480)
(261,430)
4,122,130
---
Net income
Dividends declared
Comprehensive income
3,799,692
(3,000,757)
3,799,692
3,799,692
(3,000,757)
________
$ 4,101,519
Balance, December 31, 2010
4,596,439
459,644
---
6,835
12,580,394
---
13,046,873
Change in unrealized loss on
marketable securities, net of
deferred income tax of $14,735
Net income
Dividends declared
Comprehensive income
27,777
27,777
27,777
4,716,530
(3,677,151)
4,716,530
4,716,530
(3,677,151)
________
$ 4,744,307
Balance, December 31, 2011
4,596,439 $459,644 $ --- $ 34,612
$ 13,619,773
$ --- $14,114,029
See Notes to Financial Statements
7
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Net gain on sale of assets
Realized loss (gain) on sales of marketable securities
Realized loss on pension termination
Reduction in allowance for bad debts
Deferred income taxes
(Decrease) increase in cash resulting from changes in operating
assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current and non-current assets
Accounts payable
Accrued expenses and taxes payable
Pension liability
Years ended December 31 ,
2011
2010
$ 4,716,530
$ 3,799,692
255,583
(18,251)
8,765
---
(5,092)
40,999
(557,636)
(146,045)
89,168
192,145
(139,037)
---
229,777
---
(39,958)
338,655
(4,678)
82,807
278,853
(168,255)
(59,000)
(114,082)
(141,601)
(108,892)
Net cash provided by operating activities
4,437,129
4,093,318
Cash flows from investing activities:
Acquisitions of plant and equipment
Proceeds from the sale of assets
Purchases of marketable securities
Proceeds from sales of marketable securities
Net change in certificates of deposit
(274,645)
38,658
(454,554)
---
(3,987,606)
(6,323,425)
3,040,000
6,509,428
---
1,014,866
Net cash (used in) provided by investing activities
(1,183,593)
746,315
Cash flows from financing activities:
Acquisition of treasury stock
Dividends paid
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
---
(3,677,151)
(3,677,151)
(423,615)
(3,762,500)
(4,583,617)
(8,346,117)
(3,506,484)
1,514,589
5,021,073
$ 1,090,974
$ 1,514,589
See Notes to Financial Statements
8
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business
United-Guardian, Inc. (the "Company") is a Delaware corporation that, through its Guardian Laboratories
Division, conducts research, product development, manufacturing and marketing of cosmetic ingredients and other
personal care products, pharmaceuticals, medical and health care products, and proprietary specialty industrial
products. Two major product lines, LUBRAJEL® and RENACIDIN®, together accounted for approximately 94% and
95% of revenue for the years ended December 31, 2011 and December 31, 2010, respectively. LUBRAJEL accounted
for 82% and 78% of revenue for the years ended December 31, 2011 and December 31, 2010, and RENACIDIN
accounted for 13% and 17% of revenue for the years ended December 31, 2011 and December 31, 2010,
respectively.
Accounts Receivable and Reserves
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects our best estimate
of the amounts that will not be collected. The reserve for accounts receivable comprises allowance for doubtful
accounts and sales returns. In addition to reviewing delinquent accounts receivable, we consider many factors in
estimating our reserve, including historical data, experience, customer types, credit worthiness and economic
trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors expected
to affect collectability.
Revenue Recognition
The Company recognizes revenue when products are shipped, title and risk of loss pass to customers,
persuasive evidence of a sales arrangement exists, and collections are reasonably assured. All products are shipped
Free On Board (“FOB”) Hauppauge, New York, the location of the Company’s plant. Both title and risk of loss are
deemed by both the Company and its customers to have passed to the customers at the time the goods leave the
Company’s plant. Shipments are only made after confirmation that a valid purchase order has been received and that
the future collection of the sale amount is reasonably assured. All sales of the Company’s products are deemed final,
and there is no obligation on the part of the Company to repurchase or allow the return of the goods unless they are
defective. The Company does not make sales on consignment, and the collection of the proceeds of the sale is not
contingent upon the customer being able to sell the goods to a third party.
Any allowance for returns is taken as a reduction of sales within the same period the revenue is recognized.
Such allowances are based on historical experience. The Company has not experienced significant fluctuations
between estimated allowances and actual activity.
Cash and Cash Equivalents
For financial statement purposes, the Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less at inception. The Company deposits cash and cash equivalents with
high credit quality financial institutions and believes that any amounts in excess of insurance limitations to be at
minimal risk. Cash and cash equivalents held in these accounts are currently insured by the Federal Deposit Insurance
Corporation up to a maximum of $250,000.
9
Dividends
On May 11, 2011, the Company’s Board of Directors declared a semi-annual cash dividend of $0.36 per
share, which was paid on June 13, 2011 to all stockholders of record as of May 30, 2011. On December 7, 2011, the
Company’s Board of Directors declared a semi-annual cash dividend of $0.44 per share, which was paid on December
23, 2011 to all stockholders of record as of December 16, 2011.
On May 12, 2010, the Company’s Board of Directors declared a semi-annual cash dividend of $0.30 per
share, which was paid on June 11, 2010 to all stockholders of record as of May 27, 2010. On December 1, 2010, the
Company’s Board of Directors declared a semi-annual cash dividend of $0.33 per share, which was paid on December
27, 2010 to all stockholders of record as of December 15, 2010.
Supplemental Disclosures of Non-cash Investing and Financing Activities
Cash payments for income taxes were $2,010,000 and $2,082,395 for the years ended December 31, 2011
and 2010, respectively. On May 29, 2010 the Company retired 350,000 shares of stock that it purchased from Kenneth
H. Globus, the Company's President and largest stockholder (see Note I). On June 9, 2010 the Company retired the
62,200 shares of its stock which it previously held as treasury stock.
Marketable Securities and Certificates of Deposit
Marketable securities include investments in equity and fixed income mutual funds, government securities and
corporate bonds, all of which have a high degree of liquidity, are classified as "Available for Sale" securities, and are
reported at their fair values. Unrealized gains and losses on "Available for Sale" securities are reported as
accumulated other comprehensive income (loss) in stockholders' equity, net of the related tax effects. Investment
income is recognized when earned. Realized gains and losses on sales of investments and declines in value judged to
be other than temporary, if any, are reported in other income with cost being determined on a specific identification
basis. Fair values are based on quoted market prices. The Company evaluates its investments periodically for possible
impairment and reviews factors such as the length of time and extent to which fair value has been below cost basis
and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated
recovery in market value.
Certificates of deposit are carried at fair value, which approximates cost. Certificates that mature in one year or
less are classified as current, and those that mature in more than one year are classified as non-current. At December
31, 2011 and 2010 the Company did not hold any certificate of deposits.
Inventories
Inventories are valued at the lower of cost or current market value. Cost is determined using the average cost
method, which approximates cost determined by the first-in, first-out (“FIFO”) method. Inventory costs include material,
labor and factory overhead.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation. Major replacements and
betterments are capitalized, while routine maintenance and repairs are expensed as incurred. Assets are depreciated
under both accelerated and straight-line methods. Depreciation charged to income as a result of using accelerated
methods was not materially different than that which would result from using the straight-line method for all periods
presented. Certain factory equipment and fixtures are constructed by the Company using purchased materials and in-
house labor. Such assets are capitalized and depreciated on a basis consistent with the Company's purchased fixed
assets.
10
Estimated useful lives are as follows:
Factory equipment and fixtures
Building
Building improvements
Waste disposal system
5 - 7 years
40 years
Lesser of useful life or 20 years
7 years
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to sell. No impairments were necessary at
December 31, 2011 and 2010.
Other Asset
Other asset consists of a $188,360 payment given to a vendor for regulatory and validation work that was
needed to qualify one of the vendor's manufacturing locations for the production of the Company's RENACIDIN
product. This amount is being amortized over its estimated 5-year benefit period at the rate of $37,672 per year,
starting in 2008.
Fair Value of Financial Instruments
Management of the Company believes that the fair value of financial instruments, consisting of cash and cash
equivalents, certificates of deposit, accounts receivable, accounts payable, dividends payable and accrued expenses
approximates their carrying value due to their short payment terms.
Concentration of Credit Risk
Accounts receivable potentially exposes the Company to concentrations of credit risk. The Company monitors
the amount of credit it allows each of its customers, using the customer’s prior payment history to determine how much
credit to allow or whether any credit should be given at all. It is the Company’s policy to discontinue shipments to any
customer that is substantially past due on its payments. The Company sometimes requires payment in advance from
customers whose payment record is questionable. As a result of its monitoring of the outstanding credit allowed for
each customer, as well as the fact that the majority of the Company’s sales are to customers whose satisfactory credit
and payment record has been established over a long period of time, the Company believes that its accounts
receivable credit risk has been reduced.
For the year ended December 31, 2011, two customers, both of them distributors and marketing partners of
the Company, accounted for approximately 58% of the Company’s revenues, and one of those customers accounted
for approximately 47% of the Company's outstanding accounts receivable at year end. For the year ended December
31, 2010, these same two customers accounted for a total of 53% of the Company’s revenues and one of those
customers accounted for approximately 31% of the Company’s outstanding accounts receivable at year end.
11
Vendor Concentration
The principal raw materials used by the Company consist of common industrial organic and inorganic
chemicals. Most of these materials are available in ample supply from numerous sources. The Company has five
major raw material vendors that account for approximately 83% and 89% of the raw material purchases by the
Company in 2011 and 2010, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for future tax consequences attributable to the temporary differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes the enactment date. 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.
Uncertain tax positions are accounted for utilizing a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of
December 31, 2011 and 2010, the Company did not have any unrecognized income tax benefits. It is the Company’s
policy to recognize interest and penalties related to taxes as interest expense. During the years ended December 31,
2011 and 2010 the Company did not record any interest or penalties.
The Internal Revenue Service ("IRS") has examined the Company's U.S. income tax returns through 2004.
The Company is subject to examination by the IRS and the State of New York for years 2008 through 2011.
Research and Development
The Company's research and development expenses, included in operating expenses, are recorded in the
year incurred. Research and development expenses were approximately $637,000 and $596,000 for the years ended
December 31, 2011 and 2010, respectively.
Shipping and Handling Costs
Shipping and handling costs are classified in operating expenses in the accompanying statements of income.
Shipping and handling costs were approximately $109,000 and $112,000 for the years ended December 31, 2011 and
2010, respectively.
Advertising Costs
Advertising costs are expensed as incurred. During 2011 and 2010 the Company incurred $28,392 and
$8,800, respectively, in advertising costs.
Stock-Based Compensation
In 2004, the Company approved a stock option plan ("2004 Stock Option Plan"). All share-based payments to
employees, including grants of employee stock options, are recognized as compensation expense over the requisite
service period (generally the vesting period) in the financial statements based on their fair values on grant date. For
options with graded vesting, the Company fair values the stock option grants and recognizes compensation expense
as if each vesting portion of the award was a separate award. The impact of forfeitures that may occur prior to vesting
is also estimated and considered in the amount of expense recognized. In addition, the realization of tax benefits in
12
excess of amounts recognized for financial reporting purposes will be recognized as a financing activity rather than as
an operating activity.
Earnings Per Share Information
Basic earnings per share are computed by dividing net income by the weighted average number of common
shares outstanding during the year. Diluted earnings per share include the dilutive effect of outstanding stock options.
Use of Estimates
In preparing financial statements in conformity with U.S. 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. Such estimated items include
the allowance for bad debts, possible impairment of marketable securities, reserve for inventory obsolescence, and the
allocation of overhead.
New Accounting Standards
In June 2011, the FASB issued an amendment to the disclosure requirements for the presentation of
comprehensive income. The amendment requires that all non-owner changes in stockholders' equity be presented
either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This
guidance is effective retrospectively for the interim periods and annual periods beginning after December 15, 2011.
The Company will adopt this amendment in the first quarter of 2012. The adoption of this amendment will not have a
material impact on the Company's results of operations, cash flows or financial position.
NOTE B - MARKETABLE SECURITIES
The fair values of the Company’s marketable securities are determined in accordance with GAAP, with fair
value being defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, the Company utilizes the three-tier value hierarchy, as prescribed by GAAP, which
prioritizes the inputs used in measuring fair value as follows:
• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets.
• Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
The following available-for-sale securities, which comprise all of the Company's marketable securities, are re-
measured to fair value on a recurring basis and are valued using Level 1 inputs using quoted prices (unadjusted) for
identical assets in active markets:
13
December 31, 2011
Cost
Fair Value
Unrealized
Gain/(Loss)
Available for sale:
U.S. treasury and agencies
Maturities within 1 year
Corporate bonds
Mature within 1 year
Maturities after 1 year through 5 years
Total corporate bonds
Fixed income mutual funds
Equity and other mutual funds
December 31, 2010
Available for sale:
U.S. treasury and agencies
Maturities within 1 year
Maturities after 1 year through 5 years
Total U.S. Treasury and agencies
Corporate bonds
Maturities after 1 year through 5 years
Fixed income mutual funds
Equity and other mutual funds
$ 249,137
$ 234,388
$ (14,749 )
267,251
203,920
471,171
8,268,624
253,850
$ 9,242,782
247,719
195,899
443,618
8,372,216
245,533
$ 9,295,755
(19,532)
(8,021)
(27,553)
103,592
(8,317)
$ 52,973
$
859,589
249,137
1,108,726
$ 853,682
244,161
1,097,843
$
(5,907 )
(4,976)
(10,883)
267,251
6,678,972
248,993
$ 8,303,942
259,154
6,715,870
241,536
$ 8,314,403
(8,097)
36,898
(7,457)
$ 10,461
Proceeds from the sale and redemption of marketable securities amounted to $3,040,000 and $6,509,428 for
the years ended December 31, 2011 and 2010, respectively. Realized (losses) gains were ($8,765) and $39,958 for
the years ended December 31, 2011 and 2010, respectively.
Investment income consisted principally of interest income from bonds and money market funds, and dividend
income from bond funds and mutual funds.
NOTE C - INVENTORIES
Inventories consist of the following:
Raw materials and work-in-process
Finished products
December 31,
2010
2011
$ 447,295
$ 470,532
874,094
996,902
$ 1,321,389
$ 1,467,434
Finished product inventories at December 31, 2011 and 2010 are stated net of a reserve of $20,000 and
$39,000, respectively, for slow moving and obsolete items.
14
NOTE D – INCOME TAXES
The provision for income taxes consists of the following:
Current
Federal
State
Deferred
Federal
State
Total provision for income taxes
Years ended December 31,
2011
$ 2,093,065
21,053
2,114,118
39,817
1,182
40,999
$ 2,155,117
2010
$ 1,792,531
18,211
1,810,742
(94,040)
(2,794)
(96,834)
$ 1,713,908
The following is a reconciliation of the Company's effective income tax rate to the Federal statutory rate (dollar
amounts have been rounded to the nearest thousand):
Years ended December 31, .
2011 .
($) . Tax rate
2010 .
($) Tax rate
Income taxes at statutory federal income tax
rate of 34%
State income taxes, net of Federal benefit
Domestic Production Activities tax benefit
Nondeductible expenses
Prior year over-accrual
R&D credit
Tax exempt income
Actual income tax expense
$ 2,337,000
14,000
(164,000)
1,000
(9,000)
(20,000)
(4,000)
$ 2,155,000
34 %
---
(2)
---
---
---
32 %
$ 1,875,000
12,000
(153,000)
1,000
(15,000)
34 %
---
(3)
---
---
(6,000)
$ 1,714,000
---
31 %
During 2011 and 2010, the Company realized the tax benefits of the Domestic Production Activities deduction,
which amounted to approximately 9% of net taxable income from domestic production activities in each year.
The tax effects of temporary differences which comprise the deferred tax assets and liabilities are as follows:
Deferred tax assets
Current
Accounts receivable
Inventories
Accrued expenses
Deferred tax liabilities
Non-current
Depreciation
Unrealized gain on marketable securities
Net deferred tax asset
Years ended December 31, .
2010
2011
$
7,866
21,478
188,984
218,328
---
(3,626)
(3,626)
$ 214,702
$
6,101
15,905
201,540
223,546
(46,217)
(18,361)
(64,578)
$ 158,968
15
NOTE E - BENEFIT PLANS
Defined Benefit Pension Plan
The Company previously sponsored a non-contributory defined benefit pension plan (“DB Plan”) for its
employees. The Company curtailed future benefit accruals to the DB Plan, which had been frozen since December 31,
2007. In March 2010, the Company received regulatory approval to terminate the DB Plan, and on July 13, 2010 the
DB Plan was formally terminated. The termination resulted in the Company recognizing a one-time non-cash expense
of $518,296, offset by a $179,641 tax benefit associated with recognizing unamortized actuarial losses. In addition, the
Company provided for a cash contribution of $337,378, offset by a $116,900 tax benefit, in order to fully fund the DB
Plan. The recognition of the non-cash and cash contributions resulted in a before-tax charge of $847,744, and an after-
tax charge of $559,133 ($0.12 per share) for the year ended December 31, 2010. Since the non-cash expense had
previously been provided for as a charge to other comprehensive income, the net effect of the termination on
stockholders’ equity was a decrease of $220,478.
The table below sets forth a summary of changes in the fair value of the Plan’s Level 3 assets for the years ended
December 31, 2011 and 2010:
Balance, beginning of year
Realized gains
Unrealized (losses) relating to instruments still held at reporting date
Purchases, sales, issuances and settlements (net)
Balance, end of year
$
2011
---
---
---
2010
$ 1,564,634
---
---
---
$ ---
(1,564,634)
$ 0
The following table sets forth the Plan's funded status as of December 31, 2011 and 2010:
Change in Benefit Obligation:
Projected benefit obligation at beginning of year
Interest cost
Actuarial loss
Benefits paid
Effect of settlement/curtailment
Projected benefit obligation at end of year
Change in Plan Assets:
Fair value of Plan assets at beginning of year
Actual return on Plan assets
Employer contributions
Benefits paid
Effect of settlement
Fair value of Plan assets at end of year
2011
2010
$
---
---
---
---
---
$ ---
$ 2,130,044
---
337,378
---
(2,467,422)
$ 0
$
---
---
---
---
---
$ ---
$ 2,021,152
---
446,270
---
(2,467,422)
$ 0
Funded status at end of year - (underfunded) overfunded
$ ---
$
---
Amounts recognized in statement of financial position:
Current liability
Non-current asset
Total
$
---
---
$ ---
$
$
---
---
---
16
Amounts recognized in accumulated Other Comprehensive
Income ("OCI"):
Total net (gain)
Total accumulated OCI (not adjusted for applicable tax)
Weighted-average assumptions used to determine benefit
obligations:
Discount rate
Rate of compensation increase
The net periodic pension (benefit) cost includes the following components:
Components of net periodic pension (benefit) cost
Interest cost
Expected return on Plan assets
Amortization of net actuarial loss
Effect of special events
Net periodic pension (benefit) cost
Other changes recognized in OCI
Net (gain)
Amortization of net loss
Amount recognized due to special event
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and OCI
Weighted-average assumptions used to determine net
Period pension (benefit) cost:
Discount rate
Expected long-term return on Plan assets
Rate of compensation increase
Defined Contribution Plan
$ ---
$ ---
$
$
---
---
N/A
N/A
N/A
N/A
2011
2010
$
$
$
$
$
---
---
---
---
---
$
$
---
---
---
---
---
---
---
---
---
---
$
(518,297)
---
---
(518,297)
(518,297)
$
$
---
---
---
---
---
---
The Company sponsors a 401(k) defined contribution plan ("DC Plan") that provides for a dollar-for-dollar
employer matching contribution of the first 4% of each employee's pay. Employees become fully vested in employer
matching contributions after one year of employment. Company 401(k) matching contributions were approximately
$97,000 and $90,000 for each of the years ended December 31, 2011 and 2010. In 2010 and 2011 employees were
able to defer up to $16,500 (plus $5,500 for employees over the age of 50) of their yearly pay as a pre-tax investment
in the 401(k)plan, in accordance with limits set by the IRS. (Those limits will increase to $17,000 (plus an additional
$5,500 for employees over the age of 50) in 2012).
The Company also makes discretionary contributions to each employee's account based on a "pay-to-pay"
safe-harbor formula that qualifies the 401(k) plan under current IRS regulations. In December 2011 and 2010 the
Company’s Board of Directors authorized discretionary contributions in the amount of $175,000 per year, to be
allocated among all eligible employees, for the 2011 and 2010 plan years. The 2011 contribution was paid in 2011,
and the 2010 contribution, which was accrued at December 31, 2010, was paid in January 2011. Employees become
vested in the discretionary contributions as follows: 20% after two years of employment, and 20% for each year of
employment thereafter until the employee becomes fully vested after six years of employment.
17
Stock Option Plans
At its meeting on March 19, 2004 the Board of Directors of the Company approved the adoption of the 2004
Stock Option Plan. The plan authorizes the granting of options for up to 500,000 shares, and covers both employees
and directors. The adoption and implementation of the new plan was ratified by the shareholders of the Company at
the Company's annual meeting of shareholders on May 19, 2004.
As of December 31, 2011 and 2010, no stock options had been issued under this plan.
As of December 31, 2011 and 2010, there was no remaining unrecognized compensation cost related to the
non-vested share-based compensation arrangements granted under the Company's plans.
The Company did not record any share-based compensation expense during the years ended December 31,
2011 and 2010.
NOTE F - GEOGRAPHIC and OTHER INFORMATION
Through its Guardian Laboratories division the Company manufactures and markets cosmetic ingredients,
personal care products, pharmaceuticals, medical and health care products, and specialty industrial products. It also
conducts research and development, primarily related to the development of new and unique cosmetic and personal
care products. The Company’s R&D department not only develops new products but also modifies and refines existing
products, with the goal of expanding the potential markets for the Company's products. Many of the cosmetic
ingredient products manufactured by Guardian, particularly its LUBRAJEL line of water-based moisturizing and
lubricating gels, are currently used by many of the major multinational personal care products companies.
The Company operates in one business segment. The Company’s products are separated into four distinct
product categories: pharmaceuticals, personal care products (including cosmetic ingredients), medical products, and
industrial products. Each product category is marketed differently. The cosmetic ingredient/personal care products are
marketed through a global network of marketing partners and distributors. These marketing partners purchase product
outright from the Company and market and re-sell those products to the end users. The Company does not make any
sales on consignment.
No prior regulatory approval was needed by the Company to sell any products other than its pharmaceutical
products. The end users of its products may or may not need regulatory approvals, depending on the intended claims
and uses of those products.
The pharmaceutical products are two urological products that are sold to end users primarily through
distribution agreements with the major drug wholesalers. For these products, the Company does the marketing, and
the drug wholesalers supply the product to the end users, such as hospitals and pharmacies. These products are drug
products that required the Company to obtain regulatory approval before marketing.
The medical products are not pharmaceutical products. They consist primarily of medical lubricants, which are
marketed by the Company directly to end users that incorporate them into urologic catheters and other medical
devices. These products are distinguished from the pharmaceutical products in that, unlike the pharmaceutical
products, the Company does not have to obtain regulatory approval prior to marketing these products, since that is the
responsibility of the end user, who markets the product as a medical device. However, the Company is responsible for
manufacturing these products in accordance with Current Good Manufacturing Practices for medical devices.
The industrial products are also marketed directly to the end users by the Company, and generally do not
require that the Company obtain regulatory approval. However, the end users may have to obtain such regulatory
approvals before marketing these products.
18
The geographic information set forth in table "(b)" below is partially based on sales information provided to the
Company by Customer A (shown in table "(c)" below), which exclusively markets the Company's cosmetic ingredients
in Canada and China, and also sells some of the Company's products into France on a non-exclusive basis along with
Customer B.
(a) Net Sales
Personal Care
Pharmaceuticals
Medical
Industrial and other
Less: Discounts and allowances
Years ended December 31,
2010
2011
$ 9,236,704
2,315,093
2,897,699
133,826
14,583,322
(244,810 )
$ 14,338,512
$ 8,391,156
2,699,467
2,612,088
169,209
13,871,920
(148,846 )
$ 13,723,074
(b) Geographic Information
Years ended December 31, .
2011 .
2010 .
United States
Canada
China
France
Other countries
Revenues
$ 5,805,331
2,551,980
2,144,451
1,029,382
2,807,368
$ 14,338,512
Long-Lived
Assets
$ 1,245,487
---
---
---
---
$ 1,245,487
Revenues
$ 6,068,696
1,995,510
1,549,551
1,323,875
2,785,442
$ 13,723,074
Long-Lived
Assets
$ 1,209,160
---
---
---
---
$ 1,209,160
(c) Sales to Major Customers
Years ended December 31,
Customer A
Customer B
All other customers
2011
$ 7,333,581
909,111
6,095,820
$ 14,338,512
2010
$ 6,034,744
1,177,231
6,511,099
$ 13,723,074
NOTE G - INCOME FROM DAMAGE SETTLEMENT
At the end of 2010 the Company experienced a temporary suspension of RENACIDIN IRRIGATION
production due to regulatory issues at the supplier's facility. Production did not resume until May 2011. As a result, the
Company determined that it lost approximately $390,000 in gross profit that would have been generated from sales of
the product if production had not been curtailed. The Company and its supplier entered into a settlement agreement
whereby the Company would be reimbursed for these losses. The miscellaneous income of $385,182 represents the
amount that was repaid to the Company in 2011. The Company expects to receive the remaining amount
(approximately $4,800) in the second quarter of 2012. Further information can be found in the Company's filing on
Form 10-K for 2010.
19
NOTE H - ACCRUED EXPENSES
Accrued expenses at December 31, 2011 and 2010 consist of:
Accrued 401(k) plan contribution
Accrued bonuses
Accrued distribution fees
Other
$
2011
---
200,000
191,171
285,788
$ 676,959
2010
$ 175,000
180,000
190,590
270,406
$ 815,996
NOTE I - RELATED PARTY TRANSACTIONS
During each of the years ended December 31, 2011 and 2010 the Company paid to Henry Globus, a former
officer and a director of the Company until his death in December 2011, $22,296 for consulting services in accordance
with his employment termination agreement of 1988.
During each of the years ended December 31, 2011 and 2010 the Company paid to Bonamassa, Maietta, and
Cartelli, LLP, $11,000, and $16,500, respectively, for accounting and tax services. Lawrence Maietta, a partner in
Bonamassa, Maietta, and Cartelli, LLP, is a director of the Company.
On May 28, 2010 the Company acquired 350,000 shares of its stock from its largest stockholder and
President, Kenneth H. Globus, at $10.75 per share, for a total of $3,762,500. The Company accounted for these
shares using the retirement method.
During the first quarter of 2011 the Company sold one of its vehicles, with a book value of $20,407, to one of
its Vice Presidents for $15,154 (the vehicle's fair market value) as part of his severance package. As a result, the
Company recognized a non-cash loss of $5,253.
During the third quarter of 2011 the President of the Company, Kenneth H. Globus, was reimbursed $11,406
for the value of the trade-in of a personal vehicle that was used to purchase a Company vehicle.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Critical Accounting Policies
The Company’s financial statements have been prepared in accordance with U.S. generally accepted
accounting principles. Preparation of financial statements requires the Company to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets
and liabilities. The Company uses its historical experience and other relevant factors when developing its estimates
and assumptions, which are continually evaluated. Note A, Nature of Business and Summary of Significant
Accounting Policies, of the Notes to Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K includes a discussion of the Company’s significant
accounting policies. The following accounting policies are those that the Company considers critical to an
understanding of the financial statements because their application places the most significant demands on the
Company’s judgment. The Company’s financial results might have been different if other assumptions had been used
or other conditions had prevailed.
20
Marketable Securities and Certificates of Deposit
The Company classifies its marketable securities as available-for-sale at the time of purchase and re-
evaluates such designation as of each balance sheet date. The Company’s marketable securities include investments
in equity and fixed income mutual funds, government securities, and corporate bonds. The Company’s marketable
securities and certificates of deposit are reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains or losses on
mutual funds are determined using the average cost method, while realized gains or losses on government securities
and bonds are determined using the specific-identification method. Realized gains or losses on the Company's
marketable securities are insignificant for the years ended December 31, 2011 and 2010. The Company evaluates its
investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time
and extent to which fair value had been below cost basis, the financial condition of the issuer and the Company’s
ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market
value. The Company would record an impairment charge to the extent that the cost of the available-for-sale securities
or certificates of deposit exceeds the estimated fair value of the securities and the decline in value is determined to be
other-than-temporary. During 2011 the Company did not record an impairment charge regarding its investment in
marketable securities or certificates of deposit because, based on management’s evaluation of the circumstances,
management believes that the decline in fair value below the cost of certain of the Company’s marketable securities is
temporary.
Revenue Recognition
The Company recognizes revenue when products are shipped, title and risk of loss pass to customers,
persuasive evidence of a sales arrangement exists, and collections are reasonably assured. Any allowances for
returns are taken as a reduction in sales within the same period the revenue is recognized. Such allowances are
based on historical experience as well as other factors that, in the Company’s judgment, could reasonably be expected
to cause sales returns or doubtful accounts to differ from historical experience.
Accounts Receivable Allowance
The Company performs ongoing credit evaluations of the Company’s customers and adjusts credit limits, as
determined by review of current credit information. The Company continuously monitors collection and payments from
customers and maintains an allowance for doubtful accounts based upon historical experience, the Company’s
anticipation of uncollectible accounts receivable and any specific customer collection issues that have been identified.
While the Company’s credit losses have historically been low and within expectations, the Company may not continue
to experience the same credit loss rates that have historically been attained. The receivables are highly concentrated
in a relatively small number of customers. Therefore, a significant change in the liquidity, financial position, or
willingness to pay timely, or at all, of any one of the Company’s significant customers would have a significant impact
on the Company’s results of operations and cash flows.
Inventory Valuation Allowance
In conjunction with the Company’s ongoing analysis of inventory valuation, management constantly monitors
projected demand on a product-by-product basis. Based on these projections, management evaluates the levels of
write-downs required for inventory on hand and inventory on order from contract manufacturers. Although the
Company believes that it has been reasonably successful in identifying write-downs in a timely manner, sudden
changes in buying patterns from customers, either due to a shift in product interest and/or a complete pull back from
their expected order levels, may result in the recognition of larger than anticipated write-downs.
21
Results Of Operations
Year ended December 31, 2011 compared with the year ended December 31, 2010
Net Sales
Net sales in 2011 increased by $615,438 (4.5%) compared with 2010. This increase was primarily attributable
to the following:
(a) Personal care products: Sales of the Company's personal care products, including cosmetic ingredients,
increased by $845,548 (10.1%) for the year ended December 31, 2011 when compared with 2010. The
increase was attributable primarily to an increase in sales to ASI, the Company’s largest marketing partner.
Sales to the Company’s marketing partner in the UK also increased in 2011. Sales to the Company’s three
other marketing partners in Europe and its marketing partner in South Korea all experienced a decrease in
2011. The Company believes that the increase in sales of its personal care products was the result of
improving economic conditions in Asia and North America, which resulted in new consumer product
introductions utilizing its products. The overall increase in sales was almost entirely attributable to an increase
in sales of the Company’s extensive line of LUBRAJEL® products.
The Company's sales to ASI increased by 21.5% in 2011 compared with 2010, which the Company believes is
partially due to normal fluctuations in ASI's buying patterns but is also attributable to new consumer product
introductions and new customers for the Company's products. The Company had combined sales decreases
of $338,854 (15.6%) in 2011 compared with 2010 from its other five marketing partners (four of whom are in
Western Europe). The Company attributes this decrease to a decline in the economic conditions in Western
Europe in 2011, which resulted in a decrease in demand for personal care and cosmetic ingredients.
Overall, sales of the Company's LUBRAJEL products for both personal care and medical uses increased by
$1,042,529 (9.8%) in 2011 compared with 2010. The unit volume of all LUBRAJEL products sold, both for
personal care and medical uses, increased by approximately 8.7% in 2011 compared with 2010.
(b) Pharmaceuticals: Sales of the Company’s two pharmaceutical products, RENACIDIN and CLORPACTIN,
decreased by $400,523 (14.8%) for the year ended December 31, 2011 compared with 2010. RENACIDIN
accounted for approximately 13% of the Company's sales in 2011 compared with 17% in 2010. The decrease
in sales of the Company's pharmaceutical products in 2011 was due to a decrease in sales of RENACIDIN.
This product has been manufactured for the Company under a long-term contract with a major U.S. drug
company that experienced regulatory problems in 2010 at its facility that manufactures RENACIDIN, which
were unrelated to the production of RENACIDIN. The supplier's problems resulted in a temporary suspension
of RENACIDIN production in August 2010. As a result, the Company's inventory of this product was
significantly reduced, forcing the Company to allocate its supply by reducing sales to the Company's
customers from November 2010 until May 2011. This resulted in approximately a 60% reduction in
RENACIDIN sales each month beginning in November 2010 until the Company ran out of product completely
in the beginning of February 2011. The Company's supplier resumed production of RENACIDIN in the first
quarter of 2011, and sales of the product by the Company resumed in May 2011. The reduction in sales of the
Company's pharmaceutical products was partially offset by a price increase that went into effect in June 2011.
(c) Medical (non-pharmaceutical) products: Sales of the Company’s non-pharmaceutical medical products
increased $285,610 (10.9%) when compared with 2010. The Company believes that the increase was partially
due to customer buying patterns, but was also attributable to new customers and an increase in volume to
existing customers.
(d) Industrial and other products: Sales of the Company's industrial products, as well as other
miscellaneous products, decreased by $35,383 (20.9%) when compared with 2010.
22
Sales were negatively impacted by an increase of $95,964 (64.5%) in sales discounts and allowance reserves.
The increase in sales discounts and allowances was mainly due to increases in the allowance for distribution fees.
Cost of Sales
Cost of sales as a percentage of net sales in 2011 increased to 39.4% from 38.3% in the prior year. The
increase was primarily the result of increases in raw material costs, particularly the Company's primary raw material,
as well as an increase in direct labor costs.
Operating Expenses
Operating expenses decreased by $14,605 (0.6%) in 2011 compared with the prior year. This decrease was
due to a reduction in legal and accounting fees.
Portions of the Company's operating expenses are directly attributable to the research and development that
the Company performs. In 2011 and 2010, the Company incurred approximately $637,000 and $596,000, respectively,
in research and development expenses, which are included in operating expenses. The increase in R&D costs
incurred in 2011 was primarily attributable to increases in payroll costs. No portion of the research and development
expenses was directly paid by the Company's customers.
Pension Plan Termination
On July 13, 2010, the Company terminated its non-contributory defined benefit pension plan ("DB Plan"). The
termination resulted in the Company recognizing in 2010 a one-time non-cash expense of $518,296, offset by a
$179,641 tax benefit associated with recognizing unamortized actuarial losses. In addition, in 2010 the Company
provided for a cash contribution of $337,378, offset by a $116,900 tax benefit, in order to fully fund the DB Plan. The
recognition of the non-cash and cash contributions resulted in a before-tax charge of $847,744, and an after-tax
charge of $559,133 ($0.12 per share) for the year ended December 31, 2010. Since the non-cash expense had
previously been provided for as a charge to other comprehensive income, the net effect of the termination on
stockholders' equity in 2010 was a decrease of $220,478.
Other Income (Expense)
Other income (net) increased $280,299 (61.5%) for the year ended December 31, 2011 when compared with
2010. The increase was mainly attributable to $385,182 in income the Company received from the settlement of a
claim for damages between the Company and one of its suppliers. The claim resulted from the temporary suspension
of production of the Company's RENACIDIN by its supplier at the end of 2010 due to regulatory issues at the supplier's
facility. Production did not resume until May 2011. As a result, the Company determined that it lost approximately
$390,000 in gross profit that would have been generated from sales of the product if production had not been curtailed.
The Company and its supplier entered into a settlement agreement whereby the Company would be reimbursed for
these losses. The miscellaneous income of $385,182 represents the amount that was paid to the Company by the
supplier during the third quarter of 2011. The Company expects to receive the remaining amount (approximately
$4,800) in the second quarter of 2012. Further information on this matter can be found in footnote "G" and the
Company's filing on Form 10-K for 2010.
The Company earns interest income from certificates of deposit, money market funds, and bonds, and
dividend income from both stock and bond mutual funds. Other income was reduced by a decrease in investment
income in 2011 of $123,134, which primarily resulted from lower interest and dividend returns compared with 2010.
The Company also had a gain of $23,774 from the sale of a Company asset, which was partially offset by a
loss of $5,523 on the sale of a Company vehicle. There were no comparable gains or losses in 2010.
23
Provision for Income Taxes
The provision for income taxes increased $441,209 (25.7%) in 2011 compared with 2010. This increase was
mainly due to an increase in income before taxes of $1,358,047 (24.6%) in 2011 when compared with 2010. The
Company’s effective income tax rate was approximately 31% in 2011 and 2010, and is lower than the federal statutory
rate of 34% primarily due to the additional tax deduction for domestic production activities.
Liquidity and Capital Resources
Working capital increased from $11,765,995 at December 31, 2010 to $12,895,448 at December 31, 2011, an
increase of $1,129,453 (9.6%). The current ratio increased to 13.0 to 1 at December 31, 2011 from 12.5 to 1 at
December 31, 2010. The increases in working capital and the current ratio were primarily the result of increases in
marketable securities, accounts receivable, and inventory.
Accounts receivable as of December 31, 2011 increased by $562,729 (net of allowance for doubtful accounts)
as compared with 2010. The average period of time that an account receivable was outstanding was approximately 35
days in 2011 and 33 days in 2010. The Company has a bad debt reserve of $18,000, and believes that the balance of
its accounts receivable is fully collectable.
The Company does not maintain a line of credit with a financial institution because the Company has no
foreseeable need for a line of credit, and therefore management believes that the cost of maintaining a line of credit
cannot be justified, especially considering the strong financial condition of the Company.
The Company generated cash from operations of $4,437,129 in 2011 compared with $4,093,318 in 2010. The
increase in 2011 was primarily due to a $916,838 increase in net income, a $557,636 increase in accounts receivable,
a $146,046 increase in inventory, and a $192,146 increase in accounts payable.
Net cash used in investing activities was $1,184,152 for the year ended December 31, 2011 when compared
with net cash provided by investing activities of $746,315 for the year ended December 31, 2010. This was mainly due
to proceeds from the sale of marketable securities and the redemption of certificates of deposit in 2010.
Cash used in financing activities was $3,677,151 and $8,346,117 during the years ended December 31, 2011
and 2010, respectively. The decrease was primarily due to there being no further acquisition of treasury stock in 2011,
and no dividend payable in the first quarter of 2011. The Company chose to pay the year-end dividend in December
2010 rather than waiting until January 2011 due to uncertainties regarding the extension of certain tax cuts on qualified
dividends originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001.
The Company believes that its working capital is sufficient to support its operating requirements for the next
fiscal year. The Company's long-term liquidity position will be dependent upon its ability to generate sufficient cash flow
from profitable operations. The Company has no material commitments for future capital expenditures.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company has no off-balance-sheet transactions that have, or are reasonably likely to have, a current or
future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The information to be reported under this item is not required of smaller reporting companies.
24
NEW ACCOUNTING PRONOUNCEMENTS
See Note "A" to the financial statements regarding new accounting pronouncements.
Market for Registrant’s Common Equity,
Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Market Information
The Common Stock of the Company has traded on the NASDAQ Global Market since March 16, 2009, under
the symbol "UG". From December 1, 2008 through March 13, 2009, following the merger of the American Stock
Exchange with the New York Stock Exchange, the Company's Common Stock was traded on the NYSE Amex Stock
Exchange under the same symbol. Prior to December 1, 2008 its stock traded on the American Stock Exchange under
the same symbol.
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 NASDAQ, for the period January 1, 2010 to December 31, 2011. The quotations
represent prices between dealers and do not include retail markup, markdown or commission:
Quarters
First
Second
Third
Fourth
(1/1 - 3/31)
(4/1 - 6/30)
(7/1 - 9/30)
(10/1 - 12/31)
Year Ended
December 31, 2011
Low
High
$ 14.09
$ 15.30
14.04
15.63
12.96
15.00
14.50
15.25
Year Ended
December 31, 2010
Low
High
$ 11.26
$ 12.99
11.77
13.29
11.03
14.43
13.00
15.39
Holders of Record
As of March 1, 2012, there were 925 holders of record of Common Stock.
Cash Dividends
On May 11, 2011, the Company’s Board of Directors declared a semi-annual cash dividend of $0.36 per
share, which was paid on June 13, 2011 to all stockholders of record as of May 30, 2011. On December 7, 2011, the
Company’s Board of Directors declared a semi-annual cash dividend of $0.44 per share, which was paid on December
23, 2011 to all stockholders of record as of December 16, 2011.
On May 12, 2010, the Company’s Board of Directors declared a semi-annual cash dividend of $0.30 per
share, which was paid on June 11, 2010 to all stockholders of record as of May 27, 2010. On December 1, 2010, the
Company’s Board of Directors declared a semi-annual cash dividend of $0.33 per share, which was paid on December
27, 2010 to all stockholders of record as of December 15, 2010.
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
United-Guardian, Inc.
Hauppauge, New York
We have audited the accompanying balance sheets of United-Guardian, Inc. (the "Company") as of December 31, 2011 and 2010,
and the related statements of income, 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 the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
March 23, 2012
Registrar and Transfer Agent
Continental Stock Transfer & Trust Company
17 Battery Place ● New York, NY 10004
Auditors
Holtz Rubenstein Reminick LLP
Melville, NY
Legal Counsel
Jay Weil, Esq.
New York, NY
Main Office and Plant
230 Marcus Blvd. ● Hauppauge, NY 11788
Mailing Address
P.O. Box 18050 ● Hauppauge, NY 11788
Tel: (631) 273-0900 ● (800) 645-5566 ● Fax: (631) 273-0858 ● web site: www.u-g.com
Upon written request, a copy of the Company's most recent Annual Report on Form 10-K will be furnished without
charge. A fee will be charged for copies of any exhibits attached to such report. Contact: Corporate Secretary, United-
Guardian, Inc., P.O. Box 18050, Hauppauge, NY 11788.
PLEASE NOTE: This document contains both historical and "forward-looking statements” within the meaning of the Private Securities ”
Litigation Reform Act of 1995. These statements about the company’s expectations or beliefs concerning future events, such as financial ”
performance, business prospects, and similar matters, are being made in reliance upon the “safe harbor” provisions of that Act. Such ”
statements are subject to a variety of factors that could cause our actual results or performance to differ materially from the anticipated ”
results or performance expressed or implied by such forward-looking statements. For further information about the risks and uncertainties ”
that may affect the company’s business please refer to the company's reports and filings with the Securities and Exchange Commission.
230 Marcus Boulevard
P.O. Box 18050
Hauppauge, New York 11788
Tel. (631) 273-0900
Fax. (631) 273-0858
www.u-g.com
United-Guardian, Inc.
Excellence through innovation®