U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)

þ  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
              For the quarterly period ended     September 30, 2009
 
¨  
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
              For the transition period from _________  to  _________
 
Commission File Number:   1-10526
 
UNITED-GUARDIAN, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 Delaware  11-1719724
 (State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer Identification No.)
 
 
230 Marcus Boulevard, Hauppauge, New York 11788
(Address of Principal Executive Offices)
 
(631) 273-0900
(Registrant’s Telephone Number)
 
 N/A
 (Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate  by check  mark  whether  the  registrant  (1) has filed  all  reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  þ      No £

Cover Page 1 of 2
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  £      No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer
£
 
Non-accelerated filer
£  (Do not check if a smaller reporting company)
 
Accelerated filer
£
 
Smaller reporting company
þ

Indicate  by check mark  whether  the  registrant  is a shell  company  (as defined in Rule 12b-2 of the Exchange Act.)
Yes  £      No  þ


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

4,946,439 shares of common stock, par value $.10 per share
 (as of November 1, 2009)
 

 
Cover Page 2 of 2

 
 
 

UNITED-GUARDIAN, INC.
INDEX TO FINANCIAL STATEMENTS

Page No.
 
 
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   


 
 
Page 1 of 19
 
Part I.  FINANCIAL INFORMATION
 
ITEM 1.  Condensed Financial Statements
 
UNITED-GUARDIAN, INC.
STATEMENTS OF INCOME
(UNAUDITED)
 
   
NINE MONTHS ENDED
 SEPTEMBER 30,
    
THREE MONTHS ENDED
 SEPTEMBER 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Net sales
   $ 10,281,426     $ 9,500,563     $ 3,393,139     $ 3,498,325  
                                 
Costs and expenses:
                                
Cost of sales
     4,137,843       4,169,106       1,317,927       1,631,927  
Operating expenses
     1,938,293       1,980,430       540,911       628,798  
      6,076,136       6,149,536       1,858,838       2,260,725  
Income from operations
     4,205,290       3,351,027       1,534,301       1,237,600  
                                 
Other income (expense):
                                
Investment income
     274,010       362,161       88,927       113,387  
Gain (Loss) on sale of assets
     420       (7,763 )     ---       ---  
Other
     ---       (1,868 )     420       (493 )
      274,430       352,530       89,347       112,894  
                                 
Income from operations before
     income taxes
     4,479,720       3,703,557       1,623,648       1,350,494  
Provision for income taxes
     1,487,300       1,216,500       541,900       439,000  
                                 
      Net Income
   $ 2,992,420     $ 2,487,057     $ 1,081,748     $ 911,494  
 
                                
          Earnings per common share
              (Basic and Diluted)
   $ 0.60     $ 0.50     $ 0.22     $ 0.18  
                                 
Weighted average shares – basic and diluted
     4,946,439       4,946,439       4,946,439       4,946,439  
 
See notes to condensed financial statements
 
 
 
Page 2 of 19
 
UNITED-GUARDIAN, INC.
BALANCE SHEETS
 
ASSETS
  
SEPTEMBER 30,
    
DECEMBER 31,
  
   
2009
    
2008
  
   
(UNAUDITED)
    
 
  
Current assets:
            
Cash and cash equivalents
   $ 2,194,680     $ 3,425,538  
Certificates of deposit
     3,006,994       812,952  
Marketable securities
     8,204,975       8,239,183  
Accounts receivable, net of allowance for doubtful
     accounts of $27,400 at September 30, 2009 and
     $30,000 at December 31, 2008
     1,511,271       1,381,012  
Inventories (net)
     1,199,750       1,344,579  
Prepaid expenses and other current assets
     248,701       226,330  
Deferred income taxes
     355,798       355,798  
Total current assets
     16,722,169       15,785,392  
                 
Certificate of deposit maturing October, 2010
     105,437       271,976  
                 
Property, plant and equipment:
                
Land
     69,000       69,000  
Factory equipment and fixtures
     3,281,284       3,288,808  
Building and improvements
     2,435,988       2,431,908  
Waste disposal plant
     133,532       133,532  
      5,919,804       5,923,248  
Less: Accumulated depreciation
     5,059,175       4,971,269  
Total property, plant and equipment, net
     860,629       951,979  
                 
Other assets
                
Pension asset
     131,682       123,589  
Other
     122,434       150,687  
Total other assets
     254,116       274,276  
                 
TOTAL ASSETS
   $ 17,942,351     $ 17,283,623  
 
See notes to condensed financial statements

 
 
Page 3 of 19
 
UNITED-GUARDIAN, INC.
  BALANCE SHEETS
(continued)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
   
SEPTEMBER 30,
    
DECEMBER 31,
  
   
 2009
    
 2008
  
Current liabilities:
  
(UNAUDITED)
    
 
  
Dividends payable 
   $ ---     $ 1,385,003  
Accounts payable 
     205,720       187,810  
Loans payable 
     ---       6,657  
Accrued taxes payable
     170,695       ---  
Accrued expenses 
     893,908       969,242  
Total current liabilities 
     1,270,323       2,548,712  
                 
Deferred income taxes 
     142,890       28,616  
                 
Stockholders’ equity: 
                
Common stock $.10 par value, authorized,
     10,000,000 shares; 5,008,639 shares issued,
     and 4,946,439 shares outstanding at
     September 30, 2009 and December 31, 2008
     500,864       500,864  
Capital in excess of par value 
     3,819,480       3,819,480  
Accumulated other comprehensive loss 
     (170,782       (386,208  
Retained earnings 
     12,739,206       11,131,789  
Treasury stock, at cost; 62,200 shares 
     (359,630       (359,630  
Total stockholders’ equity 
     16,529,138       14,706,295  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’
     EQUITY
   $ 17,942,351     $ 17,283,623  

See notes to condensed financial statements

 
 
Page 4 of 19
 
UNITED-GUARDIAN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
   
NINE-MONTHS ENDED
  
   
September 30,
  
   
2009
   
2008
 
Cash flows from operating activities:
            
Net Income
   $ 2,992,420     $ 2,487,057  
Adjustments to reconcile net income to net cash
                
provided by operating activities:
                
                   Depreciation and amortization
     128,544       160,055  
                   Realized loss (gain) on sales of marketable
                        securities
     633       (438 )
                   (Gain) Loss on sale of equipment
     (420 )     7,763  
                   Reduction in allowance for bad debts
     (2,616 )     (10,684 )
                   Increase (decrease) in cash resulting from
                
                        changes in operating assets and liabilities:
                
                                 Accounts receivable
     (127,643 )     (544,936 )
                                 Inventories
     144,829       102,809  
                                 Prepaid expenses and other current
                
                                      and non-current assets
     (30,464 )     (49,960 )
                                 Accounts payable
     17,910       107,306  
                                 Accrued pension cost
     ---       (110,698 )
                                 Accrued expenses and taxes payable
     95,361       329,447  
Net cash provided by continuing operating activities
     3,218,554       2,477,721  
Net cash provided by discontinued operating activities
     ---       17,233  
Net cash provided by operating activities 
     3,218,554       2,494,954  
                 
Cash flows from investing activities:
                
         Acquisition of property, plant and equipment
     (28,521 )     (107,457 )
         Proceeds from sales of assets
     20,000       7,988  
         Proceeds from sales of marketable securities
     900,000       1,550,000  
         Purchases of marketable securities
     (536,725 )     (1,588,328 )
         Net change in certificates of deposit
     (2,027,503 )     224,193  
Net cash (used in) provided by investing activities
     (1,672,749 )     86,396  
                             
                
Cash flows from financing activities:
                
         Payment of long term debt
     (6,657 )     (5,991 )
         Dividends paid
     (2,770,006 )     (2,720,542 )
Net cash used in financing activities
     (2,776,663 )     (2,726,533 )
                 
Net decrease in cash and cash equivalents
     (1,230,858 )     (145,183 )
Cash and cash equivalents at beginning of period
     3,425,538       4,555,388  
Cash and cash equivalents at end of period
   $ 2,194,680     $ 4,410,205  
 
See notes to condensed financial statements
 
 
 
Page 5 of 19
 
UNITED-GUARDIAN, INC.
 
NOTES TO FINANCIAL STATEMENTS
(unaudited)
 
1.
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.
 
2. 
Basis of Presentation
 
Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation SX.  In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods have been included.  The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2009.  The interim unaudited financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
 
The Company has evaluated all subsequent events through November 11, 2009, a date that is no more than 3 days prior to the release of the Company’s financial statements, for appropriate accounting and disclosure.
 
3.
Stock-Based Compensation
 
At September 30, 2009, the Company had a stock-based compensation plan for its employees and directors, which is more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
 
     
The Company follows the Financial Accounting Standards Certification (“ASC”) 718 Compensation – Stock Compensation, which requires that the fair value of all share-based payments to employees, including grants of employee stock options, be recognized as expense in the financial statements.
 
     
As of September 30, 2009, the Company had no share-based awards outstanding and exercisable and did not grant any options during the nine months ended September 30, 2009.
 
     
As of September 30, 2009, there was no remaining unrecognized compensation cost related to the non-vested share-based compensation arrangements granted under the Company's plan.

 
 
Page 6 of 19
 
 
     
The Company did not record any compensation expense under the provisions of ASC 718 during the nine- and three-month periods ended September 30, 2009 and 2008.
 
 
The Company did not receive any proceeds from the exercise of options during the nine months ended September 30, 2009 and 2008.
 
4.
Recent Accounting Pronouncements
 
 
NEW ACCOUNTING STANDARDS ADOPTED IN FISCAL 2009
 
Effective January 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) statement on the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated stockholders' equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, this statement revises the accounting for both increases and decreases in a parent's controlling ownership interest. The adoption of this statement did not have an impact on the Company’s financial statements.
 
In December 2007, the FASB issued a statement that changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer's income tax valuation allowance. This statement is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  Adoption by the Company of this statement as of January 1, 2009 did not have an impact on the Company’s financial statements.
 
In March 2008, the FASB issued a statement that requires additional disclosures for derivative instruments and hedging activities.  This statement is effective for the Company beginning January 1, 2009.  The Company does not have any derivative instruments nor has it engaged in any hedging activities.  Adoption of this statement had no impact on the Company’s financial statements.
 
In April 2008, the FASB issued a staff position (“FSP”) that amends the list of factors an entity should consider in developing renewal or extension assumptions in determining the useful life of recognized intangible assets under ASC 350 Intangibles – Goodwill and Other.  The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions.  Under this FSP, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension.  This FSP is effective for fiscal years beginning after December 15, 2008.  Adoption by the Company of this FSP as of January 1, 2009 did not have an impact on the Company’s financial statements.
 
In April 2009, the FASB issued an FSP that requires disclosures about fair value in interim financial statements as well as in annual financial statements.  This FSP applies to all financial instruments within the scope of ASC 820 Fair Value Measurements and Disclosures, and requires all entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.  This FSP is effective for interim and annual periods ending after
 
 
 
Page 7 of 19
 
September 15, 2009 and does not require comparative disclosure for earlier periods presented upon initial adoption. The Company adopted this FSP on its effective date and its application had no impact on the Company’s financial statements.
 
In April 2009, the FASB issued an FSP that amends existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities.  This FSP is effective for interim and annual periods ending after June 15, 2009. The Company adopted this FSP on is effective date and its application had no impact on the Company’s financial statements.
 
In April 2009, the FASB issued an FSP that provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability.  This FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly and is effective for interim and annual periods ending after June 15, 2009.  The Company adopted this FSP on its effective date and its application had no impact on the Company’s financial statements.
 
In June 2009, the FASB issued ASC 855 Subsequent Events.  ASC 855 incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. ASC 855 is effective for all interim and annual periods ending after June 15, 2009.  The Company adopted ASC 855 upon its issuance and it had no material impact on its financial statements. See Note 2 for this new disclosure.
 
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
 
In June 2009, the FASB issued a statement that will require more information about transfers of financial assets, eliminates the qualifying special purpose entity (QSPE) concept, changes the requirements for derecognizing financial assets and requires additional disclosures.  This statement is effective as of the beginning of the first annual reporting period that begins after November 15, 2009.  The Company is currently evaluating the impact that the adoption of this statement may have on its financial statements and related disclosures.
 
In June 2009, the FASB issued a statement that amends the consolidation guidance applicable to variable interest entities and is effective as of the beginning of the first annual reporting period that begins after November 15, 2009.  The Company is currently evaluating the impact that the adoption of this statement may have on its financial statements and related disclosures.
 
5.  
Investments
 
Effective January 1, 2008, the Company adopted ASC 820 Fair Value Measurements and Disclosures, for assets and liabilities measured at fair value on a recurring basis. ASC 820 accomplishes the following key objectives:
 
 
•
Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
 
 
•
Establishes a three-level hierarchy ("Valuation Hierarchy") for fair value measurements;
 
 
•
Requires consideration of the Company's creditworthiness when valuing liabilities; and

 
 
Page 8 of 19
 
 
 
•
Expands disclosures about instruments measured at fair value.
 
The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy and the distribution of the Company's financial assets within it are 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 are re-measured to fair value on a recurring basis and are valued using Level 1 inputs and the market approach as defined by ASC 820:

               
Unrealized
  
September 30, 2009
  
Cost
    
Fair Value
    
Gain/(Loss)
  
                   
 Available for Sale: 
                  
       U.S. Treasury and agencies 
                  
          Mature within 1 year
   $ 1,647,032     $ 1,666,299     $ 19,267  
          Mature 1-5 years
     1,452,045       1,477,147       25,102  
            Total US Treasury and agencies
     3,099,077       3,143,446       44,369  
                         
       Fixed income mutual funds 
     4,848,958       4,862,690       13,732  
       Equity and other mutual funds 
     243,290       198,839       (44,451 )
    $ 8,191,325     $ 8,204,975     $ 13,650  


December 31, 2008 
  
Cost
    
Fair Value
    
Unrealized
Gain/(Loss)
  
                   
 Available for Sale: 
                  
       U.S. Treasury and agencies 
                  
          Mature within 1 year
   $ 1,140,227     $ 1,153,798     $ 13,571  
          Mature 1-5 years
     2,458,685       2,536,931       78,246  
             Total US Treasury and agencies
     3,598,912       3,690,729       91,817  
                         
       Fixed income mutual funds 
     4,715,827       4,380,669       (335,158 ) 
       Equity and other mutual funds 
     240,494       167,785       (72,709 )
    $ 8,555,233     $ 8,239,183     $ (316,050 )

 
Proceeds from the sale and redemption of US Treasury and agency bonds amounted to $900,000 and $1,550,000 for the nine months ended September 30, 2009 and 2008, respectively, which included a realized loss of $633 in 2009 and a gain of $438 in 2008.  For the nine-month period ended September 30, 2009, $329,700 was reclassified from unrealized losses back into marketable securities.  For the nine-month period ended September 30, 2008, $295,615 was classified as unrealized losses.
 
 
Page 9 of 19
 

Investment income consists principally of interest income from certificates of deposit, bonds and money market funds and dividend income from bond funds and mutual funds.
 
6.
Inventories - Net 
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
Inventories consist of the following: 
            
Raw materials and work in process
   $ 377,669     $ 422,437  
Finished products  
     822,081       922,142  
    $ 1,199,750     $ 1,344,579  
 
     
As of September 30, 2009 and December 31, 2008, the Company had reserves of $39,000 for slow moving and obsolete inventory.
 
7.
Supplemental Financial Statement Information
 
For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
 
Cash payments for taxes were $1,333,420 and $1,025,530 for the nine months ended September 30, 2009 and September 30, 2008, respectively.  No payments were made for interest during these periods.
 
     
The Company paid $2,770,006 and $2,720,542 in dividends for the nine months ended September 30, 2009 and September 30, 2008, respectively.
 
 
Research and development expenses amounted to $400,928 and $324,608 for the nine months ended September 30, 2009 and September 30, 2008, respectively, and are included in operating expenses.
 
 
Marketable securities include investments in equity mutual funds, government securities and corporate bonds which are classified as “Available for Sale” securities and are reported at their fair value under ASC 320 Investments – Debt and Equity Securities.  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 loses on sales of investments are determined on a specific identification basis.  Fair values are based on quoted market prices.
 
 
Certificates of deposit 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.  These certificates are carried at cost, which approximate fair value.
 
8.
Income Taxes
 
     
The Company’s tax provision is based on its estimated annual effective tax rate.
 
The Company follows the provisions of ASC 740 Income Taxes.  The Company continues to fully recognize its tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. As of September 30, 2009 and December 31, 2008 the Company did not have any unrecognized tax benefits.

 
 
Page 10 of 19
 
 
     
The Company files consolidated Federal income tax returns in the U.S. with its inactive subsidiary, and separate income tax returns in New York State. The Company is subject to examination by the Internal Revenue Service for years 2006 through 2008 and by New York State for years 2005 through 2008.
 
The Company's policy is to recognize interest and penalties in interest expense.
 
9.
Comprehensive Income
 
The components of comprehensive income are as follows:
 
   
Nine months ended
 September 30,
    
Three months ended
 September 30
  
  
  
2009
    
2008
    
2009
    
2008
  
                         
Net income 
   $ 2,992,420     $ 2,487,057     $ 1,081,748     $ 911,494  
                                 
Other comprehensive income
                                
     Unrealized gain (loss) on marketable
                                
          securities during period 
     329,700       (295,615 )     182,923       (213,246 )
                                 
     Income tax expense (benefit) related
                                
          to other comprehensive income 
     114,274       (102,298 )     63,401       (73,783 )
                                 
Other comprehensive income, net of
                                
     tax 
     215,426       (193,317 )     119,522       (139,463 )
Comprehensive income 
   $ 3,207,846     $ 2,293,740     $ 1,201,270     $ 772,031  
 
     
Accumulated other comprehensive income comprises unrealized gains and losses on marketable securities and liability for pension benefit net of the related tax effect.
 
10.
Defined Benefit Pension Plan and New Defined Contribution Plan
 
The Company sponsors a non-contributory defined benefit plan (“Plan”) for its employees.  As of December 31, 2007 the Company curtailed future benefit accruals to the Plan and reported the effect of the curtailment through December 31, 2008.  The following table sets forth the components of the projected net periodic (income) benefit costs for the year ending December 31, 2009 and the actual net periodic benefit cost for the year ended December 31, 2008.
 
    2009     2008  
   
(projected)
        
Interest cost – projected benefit obligation 
   $ 113,864     $ 176,429  
Expected return on plan assets 
     (131,315 )     (232,109 )
Effect of special events 
     ---       112,552  
Amortization of net loss
     6,659       ---  
Net periodic (income) benefit costs 
   $ (10,792 )   $ 56,872  

 
The Company made cash contributions totaling $77,272 to the Plan during the nine-month period ended September 30, 2008, and did not make any contributions to the Plan in 2009. The Company recorded income applicable to the Plan of $8,094 and $33,426 for the nine months
 
 
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ended September 30, 2009 and September 30, 2008, respectively.  These amounts are included in operating expenses.
 
As of December 31, 2007, the Company froze future benefit accruals to the Plan while it investigated the advisability of replacing the Plan with a defined contribution plan, to be coordinated with, and be part of, the Company’s 401(k) plan. On February 19, 2008, the Company decided to terminate the Plan, subject to regulatory approval, and has initiated the steps necessary to do so.  The Company expects to obtain regulatory approval in late 2009 or early 2010.
 
Upon termination of the Plan, non-vested benefits will become fully vested. Any resulting gain will first be offset against any existing net loss included in accumulated other comprehensive income.
 
Because the Company froze all benefits in its defined benefit pension plan as of December 31, 2007, and has initiated termination of that Plan, the Company modified its 401(k) plan, effective January 1, 2008, by increasing the employer contribution to a maximum of 100% of the first 4% of each employee's pay, and, in 2009, began making additional discretionary contributions to each employee's account based on a “pay-to-pay” safe-harbor formula that qualified the 401(k) plan under current IRS regulations.
 
For the new defined contribution plan, the Company accrued $131,250 and $150,000 for the nine months ended September 30, 2009 and September 30, 2008, respectively, as discretionary contributions.
 
Under ASC 715 Compensation – Retirement Benefits, if the net effect of a termination is a gain, the gain is to be recognized when the termination occurs, which would be the date the employees are terminated or the date the Plan is terminated.
 
11.   Other Information
 
(a)   Accrued Expenses
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
                 
Accrued 401K plan contributions
   $ 131,250     $ 175,000  
Accrued vacations
     75,254       98,974  
Accrued bonuses
     91,000       170,000  
Accrued annual report expenses
     55,854       63,859  
Accrued distribution fees
     315,926       213,541  
Other
     224,624       247,868  
    $ 
893,908
     $
969,242
  

(b)  Related Party Transactions
 
During the nine-month periods ended September 30, 2009 and September 30, 2008, the Company paid to Henry Globus, a former officer and current director of the Company, $16,722 and $16,242, respectively, for consulting services in accordance with his employment termination agreement of 1988.
 
During the nine-month periods ended September 30, 2009 and September 30, 2008, the Company paid to Bonamassa, Maietta and Cartelli, LLP $13,000 and $9,000, respectively, for
 
 
 
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accounting and tax services.   Lawrence Maietta, a partner in Bonamassa, Maietta and Cartelli, LLP, is currently a director of the Company.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plans, objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company. Forward-looking statements may be identified by the use of such words as “believes”, “may”, “will”, “should”, “intends”, “plans”, “estimates”, “anticipates”, or other similar expressions.
 
     
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) could cause actual results to differ materially from those set forth in the forward-looking statements. In addition to those specific risks and uncertainties set forth in the Company's reports currently on file with the SEC, some other factors that may affect the future results of operations of the Company are: the development of products that may be superior to those of the Company; changes in the quality or composition of the Company's products; lack of market acceptance of the Company's products; the Company's ability to develop new products; general economic or industry conditions; intellectual property rights; changes in interest rates; new legislation or regulatory requirements; conditions of the securities markets; the Company's ability to raise capital; changes in accounting principles, policies or guidelines; financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory and technical factors that may affect the Company's operations, products, services and prices.
 
     
Accordingly, results actually achieved may differ materially from those anticipated as a result of such forward-looking statements, and those statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
 
OVERVIEW
 
    
The Company is a Delaware corporation that conducts research, product development, manufacturing and marketing of cosmetic ingredients, personal and health care products, pharmaceuticals, and specialty industrial products. All of the products that the Company manufactures, with the exception of its RENACIDIN IRRIGATION®, are produced at its facility in Hauppauge, New York, and are marketed through marketing partners, distributors, wholesalers, direct advertising, mailings, and trade exhibitions. Its most important personal care product line is its LUBRAJEL® line of water-based moisturizing and lubricating gels. It also sells two pharmaceutical products for urological uses. Those products are sold primarily through the major drug wholesalers, which in turn sell the products to pharmacies, hospitals, nursing homes and other long-term care facilities, and to government agencies, primarily the Veteran's Administration.
 
 
 
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The Company’s pharmaceutical products are distributed primarily in the United States. Its personal care products are marketed worldwide by five marketing partners, of which International Specialty Products Inc. ("ISP") purchases the largest volume of products from the Company.  Approximately one-half of the Company's personal care products are sold, either directly or through the Company’s marketing partners, to end-users located outside of the United States.
 
     
While the Company does have competition in the marketplace for some of its products, many of its products are either unique in their field or have some unique characteristics, and therefore are not in direct competition with the products of other pharmaceutical, specialty chemical, or health care companies.  Many of the Company’s products are manufactured using patented or proprietary processes.  The Company’s research and development department is actively working on the development of new products to expand the Company's line of personal care and medical products.
 
 
The Company recognizes revenue when products are shipped, title and risk of loss pass to the customers, persuasive evidence of a sales arrangement exists, and collections are reasonably assured.  An allowance for returns, based on historical experience, is taken as a reduction of sales within the same period the revenue is recognized.
 
     
The Company has been issued many patents and trademarks and intends, whenever possible, to make efforts to obtain patents in connection with its product development program.    
 
CRITICAL ACCOUNTING POLICIES
 
     
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, the discussion and analysis of the Company’s financial condition and results of operations are based on its financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of those financial statements required the Company to make estimates and assumptions that affect the carrying value of assets, liabilities, revenues and expenses reported in those financial statements. Those estimates and assumptions can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. The Company’s most critical accounting policies relate to revenue recognition, concentration of credit risk, inventory, pension costs, patents, and income taxes. Since December 31, 2008, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.
 
     
The following discussion and analysis covers material changes in the financial condition of the Company since the year ended December 31, 2008, and a comparison of the results of operations for the nine- and three-month periods ended September 30, 2009 and September 30, 2008. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis or Plan of Operation" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
 
RESULTS OF OPERATIONS
 
 
Sales
 
For the nine-month period ended September 30, 2009, net sales increased $780,863, or 8.2%, as compared with the same period in 2008, while sales for the three-month period ended September 30, 2009 decreased $105,186, or 3.0%, as compared with the same period in 2008.  

 
 
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The changes in net sales for both the nine- and three-month periods ended September 30, 2009 were principally attributable to changes in sales of the following product lines:
 
(a)  
Pharmaceuticals:  Pharmaceutical sales decreased $102,783, or 14.5%, for the three months ended September 30, 2009 as compared with the same period in 2008. This was the result of a 5% price increase that was implemented on May 1, 2009, which caused a significant increase in sales in the second quarter as customers purchased additional inventory in anticipation of the price increase.  The Company implemented a slightly smaller price increase (4%) on April 1, 2008, which affected sales in the first quarter of that year rather than the second quarter, but the increase in sales prior to the effective date of that increase was not nearly as large as it was in 2009.  As a result, pharmaceutical sales increased $321,081, or 16.4%, for the nine months ended September 30, 2009 as compared with the same period in 2008.  Since the annual sales of these products are relatively stable from year-to-year, the Company anticipates that the volume of pharmaceutical products that will be sold in 2009 will be comparable to what was sold in 2008.
 
(b)  
Personal care products: For the three months ended September 30, 2009, the Company’s sales of personal care products increased $64,239, or 2.7%, when compared with same period in 2008. For the nine months ended September 30, 2009, the Company’s sales of personal care products decreased $103,177, or 1.7%, when compared with the same period in 2008.  Based on information provided by the Company’s marketing partners, the Company believes that the overall changes in sales were due primarily to the ordering patterns of its customers rather than any real decline in the use of the Company’s products.  There were, however, more significant changes in sales by geographic regions, with sales to some of our marketing partners increasing while sales to others decreased.  This may be partly due to the economies of the various countries having been affected differently by the worldwide recession.
 
(c)  
Medical (non-pharmaceutical) products:  Sales of the Company’s medical products decreased $62,107, or 12.4%, and increased $632,052, or 41.7%, for the three- and nine-month periods ended September 30, 2009 when compared with the same periods in 2008.  These changes are primarily due to two factors. First, one of the Company’s customers concentrated its 2009 purchases into the first six months of the year in anticipation of  moving its production facility later this year, which resulted in lower-than-normal sales to that customer in the third quarter. Second, another customer recently sold its product line, which utilizes one of our products, to a major multinational pharmaceutical company, resulting in a sales increase of our product to them of $258,091, or 128%, and an increase in volume of 99% for the nine-month period.
 
(d)  
Industrial products: For the three months ended September 30, 2009, sales of industrial products increased $3,148, or 10.6%, when compared with the same period in 2008. Sales of industrial products increased $9,745, or 12.0%, for the nine-month period ended September 30, 2009 when compared with the same period in 2008.  The Company believes these increases are the result of customer purchasing patterns
 
In addition to the above changes in sales, net sales allowances increased $78,383, or 39.5%, and $7,683, or 9.9%, for the nine- and three-month periods, respectively, ended September 30, 2009, when compared with the same periods in 2008.  The increases were primarily due to increases in allowance for distribution fees.

 
 
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Cost of Sales
 
Cost of sales as a percentage of sales decreased to 40.2% for the nine months ended September 30, 2009 from 43.9% for the comparable period in 2008.  For the three months ended September 30, 2009, cost of sales as percentage of sales decreased to 38.8% from 46.6% for the comparable period in 2008.   The decrease in cost of sales was primarily due to a decrease in the cost of the Company’s most significant raw material.
 
Operating Expenses
 
Operating expenses consist of selling, general and administrative expenses. Operating expenses decreased $42,137, or 2.1%, for the nine-month period ended September 30, 2009 and decreased $87,887, or 14.0%, for the three-month period ended September 30, 2009 compared with the same periods in 2008. These decreases were primarily attributable to a reduction in payroll and payroll-related expenses.
 
Other Income
 
Investment income decreased $88,151, or 24.3%, and $24,460, or 21.6%, for the nine- and three-month periods, respectively, ended September 30, 2009, when compared with the same periods in 2008. These decreases were mainly attributable to a decrease in interest rates and lower returns on investments in 2009.
 
Provision for Income Taxes
 
The provision for income taxes increased $270,800, or 22.3%, and $102,900, or 23.4%, for the nine- and three-month periods ended September 30, 2009, respectively, when compared with the same periods in 2008. These increases were primarily due to increases in income before taxes of $776,163, or 21.0%, and $273,154, or 20.2%, for the nine- and three-month periods, respectively, ended September 30, 2009 compared with the same periods in 2008.
 
The Company's effective income tax rate was approximately 33.0% for all periods presented.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     
Working capital increased by $2,215,166 to $15,451,846 at September 30, 2009 from $13,236,680 at December 31, 2008. The current ratio increased to 13 to 1 at September 30, 2009 from 6.2 to 1 at December 31, 2008. The increase in the current ratio was primarily due to the effect of a decrease in dividends payable, partially offset by other changes in working capital items.
 
     
During the nine-month period ended September 30, 2009, the average period of time that an account receivable was outstanding was approximately 39 days. The average period of time that an account receivable was outstanding during the nine-month period ended September 30, 2008 was 46 days, which was mainly due to a few customers who were paying more slowly than normal at that time.
 
 
Page 16 of 19
 
 
     
The Company believes that its working capital is and will continue to be sufficient to support its operating requirements for at least the next twelve months.  The Company does not expect to incur any significant capital expenditures for the remainder of 2009.
 
     
The Company generated cash from operations of $3,218,554 and $2,494,954 for the nine-months ended September 30, 2009 and September 30, 2008, respectively. The increase was primarily due to an increase in net income and increases in accrued expenses and taxes payable.
 
 
Cash used in investing activities for the nine-month period ended September 30, 2009 was $1,672,749, while cash provided by investing activities for the nine-month period ended September 30, 2008 was $86,396. This decrease was primarily due to purchases of certificates of deposit with cash generated.
 
     
Cash used in financing activities was $2,776,663 and $2,726,533 for the nine-month periods ended September 30, 2009 and September 30, 2008, respectively.  This was mainly related to dividend payments.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
Please see Note 4 to the Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the financial statements.
 
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.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
The information to be reported under this item is not required of smaller reporting companies.
 
CONTROLS AND PROCEDURES
 
(a)  
DISCLOSURE CONTROLS AND PROCEDURES
 
The Company’s management, including its Principal Executive Officer and Principal Financial Officer, has evaluated the design, operation, and effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”).  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon the evaluation performed by the Company’s management, including its Principal Executive Officer and Principal Financial Officer, it was determined that,
 
 
Page 17 of 19
 
as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosures.
 
(b)  
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The Company's Principal Executive Officer and Principal Financial Officer have determined that, during the period covered by this quarterly report, there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  They have also concluded that there were no significant changes in the Company’s internal controls after the date of the evaluation.
 
 
 
PART II - OTHER INFORMATION
 
LEGAL PROCEEDINGS
 
NONE
 
RISK FACTORS
 
The information to be reported under this item is not required of smaller reporting companies.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
NONE
 
DEFAULTS UPON SENIOR SECURITIES
 
NONE
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
NONE
 
OTHER INFORMATION
 
NONE
 
EXHIBITS AND REPORTS ON FORM 8-K
 
(a)          Exhibits
 
 
Page 18 of 19
 
 
 
31.1     
Certification of Kenneth H. Globus, President and principal executive officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
31.2     
Certification of Robert S. Rubinger, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
32.1     
Certification of Kenneth H. Globus, President and principal executive officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
 
32.2     
Certification of Robert S. Rubinger, Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(b)          Reports on Form 8-K
 
There were two reports on Form 8-K filed during the fiscal quarter ended September 30, 2009.  The first was filed on July 10, 2009 and related to (a) the discharge of the Company’s certifying accountant; (b) the Company’s engagement of a new certifying accountant; and (c) a change in control of the Company due to the death of the Company’s largest stockholder on April 9, 2009. The second was filed on August 12, 2009 and related to the issuance by the Company of a press release on August 12, 2009 announcing the Company’s financial results for the six-month period ended June 30, 2009.
 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
UNITED-GUARDIAN, INC.
(Registrant)

 

 
By:  /S/  KENNETH H. GLOBUS
Kenneth H. Globus
President 

 
By: /S/  ROBERT S. RUBINGER
Robert S. Rubinger
Chief Financial Officer

Date: November 12, 2009
 
 
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