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| UG > SEC Filings for UG > Form 10-K on 24-Mar-2009 | All Recent SEC Filings |
24-Mar-2009
Annual Report
Critical Accounting Policies
The Company's consolidated 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 Consolidated 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 consolidated 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.
Marketable Securities
The Company accounts for its marketable securities in accordance with SFAS 115, Accounting for Certain Investments in Debt or Equity Securities. The Company classifies its marketable securities as available-for-sale at the time of purchase and re-evaluates such designation as of each consolidated balance sheet date. The Company's marketable securities include investments in equity mutual funds, government securities, and corporate bonds. The Company's marketable securities 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 the sale of marketable securities are determined using the specific-identification method and are insignificant for the years ended December 31, 2008 and 2007. 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 exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. During 2008 the Company did not record an impairment charge regarding its investment in marketable securities 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.
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.
Results Of Operation:
Year Ended December 31, 2008 compared with Year Ended December 31, 2007
Revenue
Revenue in 2008 increased by $403,585 (3.4%) compared with 2007. This increase was primarily attributable to increases in sales in three product lines:
(a) Personal Care products: Revenue from the sales of personal care products, including cosmetic ingredients, increased by $ญญญญญ100,206 (1.3%) for the year ended December 31, 2008 when compared with 2007. All of the increase was attributable to price increases on the personal care products, which amounted to approximately 7% for the year. The volume of sales of these products decreased by approximately 6% for the year. Almost all of the increase in revenue was the result of increased sales of the Company's extensive line of LUBRAJEL products. The Company believes that the decrease in volume was primarily due to ordering patterns of the Company's customers, and not the result of any decrease in demand for these products.
(c) Medical (non-pharmaceutical) products: Revenue from the sales of the Company's non-pharmaceutical medical products increased $226,501 (13.1%) when compared with 2007. Approximately 7% of this increase was the result of a price increase; the balance was due to increased demand as well as the buying patterns of its customers.
Revenue was also impacted slightly by a decrease of $29,092 (21.5%) in revenue from the Company's line of specialty industrial products, and an increase of $32,573 (12.5%) in sales discounts and allowance reserves.
In the personal care market, the Company's sales to ISP, its largest marketing partner, increased by 6.0% in 2008 compared with 2007. The Company's five other marketing partners for personal care products exhibited both increases and decreases in 2008 compared with 2007. The net effect was that the Company's combined sales to those five marketing partners decreased 8.0% in 2008 compared with 2007. The Company attributes most of this decrease to purchasing patterns and stocking levels rather than to any significant decrease in demand for the Company's products..
Overall, total revenue from the sales of LUBRAJEL products to all customers increased by 4.4% in 2008 compared with 2007. It is estimated that price increases accounted for approximately 7% of this increase for all but two of the products in the LUBRAJEL line (which did not increase in price in 2008). The volume of all LUBRAJEL products sold, both for personal care and medical uses, decreased by approximately 2.2% in 2008 compared with 2007.
The Company's sales of its two pharmaceutical products increased by 5.8% in 2008 compared with 2007. Both RENACIDIN and CLORPACTIN sales were up, but approximately 4% of the revenue increase was due to the price increase rather than an increase in volume.
Cost of Sales
Cost of sales as a percentage of sales in 2008 increased to 44.0% from 40.8% in the prior year. The increase was primarily due to an increase in the cost of one of the Company's primary raw materials, as well as increases in overhead costs and a decrease in production volumes. Overhead increases were mainly due to increases in factory expense, shipping expense, intangible amortization, and indirect labor expenses.
Operating Expenses
Operating expenses increased by $102,595 (4.0%) in 2008 compared with the prior year. This increase was mainly due to increases in payroll and payroll related expenses, which were partially offset by a decrease in consulting fees.
Other Income (Expense)
The Company has interest income from certificates of deposit, money market funds, and bonds, and dividend income from both stock and bond mutual funds. Other income (net) decreased $99,352 (17.0%) for the year ended December 31, 2008, which was mainly attributable to a decrease in investment income of $113,068 in 2008. This decrease was primarily attributable to a decline in interest rates on the certificates of
Discontinued Operations
In December 2007 the Company realized a gain of $84,361 (net of income taxes of $45,396) on the sale of substantially all of the assets of its Eastern subsidiary. Income from operations of Eastern during 2007 prior to the sale amounted to $32,862 (net of income taxes of $19,600). The Company believes that the absence of cash flows from the discontinuation of Eastern will not have a significant impact on the Company's future liquidity.
Provision for Income Taxes
The provision for income taxes decreased $91,581 (5.7%) in 2008 compared with 2007. This decrease was mainly due to a decrease in earnings from continuing operations before taxes of $355,735 (7.1%) in 2008 when compared with 2007. The Company's effective income tax rate was approximately 32% for each year.
Liquidity and Capital Resources
Working capital decreased from $13,400,692 at December 31, 2007 to $13,236,680 at December 31, 2008, a decrease of $164,012 (1.2%). The current ratio decreased to 6.1 to 1 at December 31, 2008 from 6.7 to 1 at December 31, 2007. The decrease in working capital and in the current ratio reflects usual fluctuations in working capital components associated with the Company's normal business activities.
Accounts receivable increased by $102,626 in 2008 compared with 2007. This was mainly due to one customer paying more slowly than in prior years. The average period of time that an account receivable was outstanding was approximately forty days for both 2008 and 2007. The Company has a bad debt reserve of $30,000, and believes that the balance of its accounts receivable is fully collectable.
On January 17, 2007 the Company entered into a line of credit agreement with JPMorgan Chase Bank for borrowings of up to $2,000,000 at an interest rate of 1.0% below the Prime Rate. The line of credit expired June 30, 2008. The Company decided that the cost of maintaining the line of credit was no longer justified, since the Company had no foreseeable need for the line. For that reason, the Company has chosen not to renew it.
The Company generated cash from operations of $3,412,385 in 2008 compared with $4,161,063 in 2007. The decrease in 2008 was primarily due to increases in accounts receivable and inventory, and a decrease in net income, which were offset by an increase in accounts payable and a decrease in prepaid expenses.
Cash used in investing activities was $1,813,705 for the year ended December 31, 2008 compared with $229,851 for the year ended December 31, 2007. The change was mainly due to an increase in the purchases of marketable securities in 2008.
Cash used in financing activities was $2,728,530 and $2,403,311 during the years ended December 31, 2008 and 2007, respectively. The increase was primarily due to the increase in the dividend declared in December 2007 (which was paid in January 2008) to $0.28 per share from the $0.22 per share dividend that was declared in December 2006 (and paid in January 2007). 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
Commitments
The Company currently has approximately $15,721 in lease commitments. Of this amount, $6,738 is due in 2009, $6,738 is due in 2010, and the remaining $2,245 is due in 2011.
The Company has an outstanding loan for the purchase of an automobile, the balance of which, approximately $6,657, is due in 2009.
New Accounting Pronouncements
See Note A to the financial statements regarding new accounting pronouncements.
Patent Expirations
The following of the Company's patents expired over the past two fiscal years:
1. Renacidin Irrigation - expired October 2007
2. Iodophor; polyethylene glycol alkyl aryl sulfonate iodine complex - expired April 2008
3. Iodophor; biocide; reacting polyethylene glycol, alkyl aryl sulfonate and iodine water-propylene glycol solvent refluxing - expired April 2008
4. Thermal-resistant microbial agent ("Cloronine") - expired December 2008
5. Use of Clorpactin for the treatment of animal mastitis & the applicator used in that treatment (owned jointly by the Company and JohnsonDiversey Inc.) - expired December 2008
The Company does not believe that the expiration of any of these patents will have a material impact on the Company's revenues.
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