<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Form 10KSB of Pure World, Inc. for the year ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000356446
<NAME> PURE WORLD, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,100
<SECURITIES> 380
<RECEIVABLES> 1,259
<ALLOWANCES> 120
<INVENTORY> 3,627
<CURRENT-ASSETS> 13,702
<PP&E> 2,924
<DEPRECIATION> 731
<TOTAL-ASSETS> 21,476
<CURRENT-LIABILITIES> 1,696
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 19,705
<TOTAL-LIABILITY-AND-EQUITY> 21,476
<SALES> 10,758
<TOTAL-REVENUES> 12,721
<CGS> 5,990
<TOTAL-COSTS> 10,149
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 2,547
<INCOME-TAX> 211
<INCOME-CONTINUING> 2,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,336
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
MARK ONE:
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1997
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period
from _________________ to _________________.
Commission file number 0-10566
PURE WORLD, INC.
(Name of small business issuer in its charter)
Delaware 95-3419191
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921
(Address of principal executive offices with Zip Code)
Issuer's telephone number, including area code (908) 234-9220
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the fiscal year ended December 31, 1997 were
approximately $12.7 million.
At February 28, 1998, there were 7,505,256 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant, based on the closing price of such stock on
such date as reported by NASDAQ, was approximately $44 million.
Transitional Small Business Disclosure Format Yes No X
<PAGE>
PART I
Item 1. - DESCRIPTION OF BUSINESS
-----------------------
Madis Botanicals, Inc.
- ----------------------
General
- -------
Through its wholly-owned subsidiary, Madis Botanicals, Inc., Pure
World, Inc. ("Pure World" or the "Company"), develops, manufactures and sells
natural ingredients which principally are derived from plant materials (referred
to herein also as botanicals or herbs) using the Company's proprietary
extraction technology. Extraction is the process by which the commercial
ingredients of plants are drawn out by applying a solution ("menstruum")
consisting of water or a combination of water and alcohol to the raw materials.
The resultant extract can be converted into fluid extract, solid extract (paste)
or powdered extract which can be tableted or encapsulated. The Company has
produced more than one thousand botanical extracts which are used by the
cosmetic, food and flavor, nutraceutical and pharmaceutical industries to
manufacture finished products for the consumer market. The term nutraceuticals
incorporates a wide range of natural products, such as vitamins, minerals,
anti-oxidants and herbs which enhance health by supplementing diets. (See
"Dietary Supplement Health and Education Act of 1994" and "New Nutraceutical
Products").
Manufacturing Facility (the "Madis Facility")
- ---------------------------------------------
The Company believes it has the largest botanical extraction facility
in North America. Situated on 4.5 acres, the 125,000 square foot Madis Facility
contains custom designed stainless steel equipment including milling equipment;
percolators; vacuum stills; filters; automatic extractors; ribbon blenders;
homogenizers; and high capacity spray, fluid bed and vacuum dryers. The
Company's spray dryers have an annual capacity of over 8,000,000 pounds and
produce free-flowing powders for tableting, encapsulation or dissolution in
liquids.
The Company is building a new 13,000 square foot warehouse facility
and expanding and upgrading its plant facilities in 1998. The total cost of
the warehouse and expansion will be between $5 and $6 million, including
certain equipment purchases for the laboratory. The Company has obtained an
equipment line of credit of $3 million from a bank. The balance will be paid
from working capital. The expansion is scheduled to be completed by the end of
the Second Quarter 1998.
Quality Control in Manufacturing
- --------------------------------
In its registered Food and Drug Administration ("FDA") facility, Madis
is authorized to manufacture The United States Pharmacopeia ("U.S.P.") and
pharmaceutical grade products such as casanthranol (a further processed product
of the bark of the Cascara tree used in natural laxatives), coal tar (used by
the cosmetic industry for dandruff control shampoos) and benzoin (used as an
aromatic and local antiseptic and skin protectant). The Madis Facility is kosher
certified and operates under current Good Manufacturing Practices ("GMP") to
assure consistently high quality in the manufacture of its products. The Madis
Facility is routinely inspected by the FDA. The facility and manufacturing
process also routinely undergoes audits by customers, which include
pharmaceutical and large consumer product firms. To the best of its information,
the Madis Facility has never failed an audit.
<PAGE>
Laboratory
- ----------
The Madis Facility contains six laboratories: quality control; research
and development; instrumental analytical; flavor; cosmetic; and microbiology,
which are all in use and fully equipped. The microbiology laboratory, believed
to be the first on-site microbiology laboratory in the industry, evaluates
finished products for microbiological purity. Madis' microbiological standards
of less than five thousand organisms per gram are believed to be currently
among the most rigorous in the industry.
The quality control laboratory is devoted to physical/chemical analysis
of products against Madis' customer and compendial specifications. The
instrumental analytical laboratory and the purification laboratory are equipped
with state-of-the-art equipment including a Multi-state Mass Spectrometer
(LC/Ms/Ms) on line with numerous High Performance Liquid Chromatographs
(HPLC), Gas Chromatographs (GC) and the recently acquired 400 megahertz Nuclear
Magnetic Resonance Instrument expected to be on line in April 1998. Thin
Layer Chromatography (TLC), Infrared Spectroscopy (IR) and Ultra-violet
Spectrophotometry (UV) are also routinely used in research and development.
The Laboratory and the Manufacturing Process
- --------------------------------------------
The manufacturing process begins and ends in the laboratory. Incoming plant
materials are evaluated to verify species, variety and quality. The scientists
determine the right menstruum for each plant extract and the optimal method of
extraction and drying to maintain product integrity and ensure manufacturing
efficiency. Only after a raw material obtains laboratory approval is price a
determinative factor in the purchasing process. When an approved material
arrives it is evaluated against the preshipment sample and if it matches, it is
forwarded to production along with the appropriate menstruum. The Company
estimates that only forty percent of samples are accepted for production.
Throughout Madis' proprietary manufacturing system, called the Unitized(TM)
system, the processed plant material is subjected to a series of laboratory
control tests which examine physical and chemical properties such as active
constituents, color, flavor and purity. The material is then either stored in a
finished state called a native extract which is available for further processing
when an order is received or further processed into a liquid, solid or powdered
extract ready for delivery to the customer who will then use it in a finished
product. Prior to delivery, each item undergoes final microbiological and
analytical testing. The Company calls its quality control program Truth in
Testing(TM).
Raw Materials
- -------------
The Company buys its raw materials from a variety of growers, collectors
and brokers. To date the Company has not experienced any shortage of raw
materials that has affected its business other than an occasional increase in
price. Nonetheless the demand for botanical products has experienced exponential
growth in recent years and the demand pressure for some products may outstrip
the capacity of the suppliers. Moreover, the Company's standardized products
have guaranteed potency, meaning that the products contain a stipulated amount
of active ingredients. The Company believes that it can acquire sufficient
materials for its standardized line and that its inventory can be replaced
without significant cost increase, however botanicals are subject to substantial
variations due to weather, unexpected increase in demand, ground conditions and
political problems in the source country and therefore supply will always be
somewhat unpredictable. The Company has in place, in most instances, multiple
geographic sources of raw material to minimize this potential problem. Also, the
quality of botanicals varies from season to season and year to year, which can
impose a limitation on the ability to produce standardized products and which
can result in substantial price changes.
<PAGE>
Government Regulation and Intellectual Property
- -----------------------------------------------
Madis is regulated by the Food and Drug Administration ("FDA") and the
New Jersey Department of Health in matters of cleanliness, labeling and
manufacturing practices and conforms to the FDA's proposed "Good Manufacturing
Procedures" for the Dietary Supplement industry. Madis is also regulated by the
Occupational Safety and Health Administration in matters of general safety in
the operation of its manufacturing facility, and the Bureau of Alcohol, Tobacco
and Firearms in its use of alcohol in its production process as well as state
and federal environmental agencies on a variety of environmental issues
affecting air and ground water. The United States Department of Agriculture may
also inspect the raw materials and plant facilities used in production. The
Company knows of no material problems with any of these regulators.
The Company has considerable proprietary technology used in its
manufacturing processes, quality control and research and development. Although
it has no patents, the loss or misappropriation of its technology would injure
the Company. The Company has numerous trademarks which it uses to differentiate
its technology and products and it protects its proprietary technology by
confidentiality agreements with employees and prospective customers and other
contractees. Among the product trademarks used are KavaPure(R), VeraPure(R),
CimiPure(TM) and OlivePure(TM).
Madis is a member in good standing of the Institute of Food
Technologies, the Cosmetic Toiletries and Fragrance Association, the Society of
Cosmetic Chemists, the American Herbal Products Association, the Synthetic
Organic Chemical Manufacturing Association, the National Nutritional Foods
Association, the American Botanical Council, the American Society of
Pharmacognosy, and the American Society for Microbiology. The Madis production
facilities are certified by the FDA for food, pharmaceutical and cosmetic
ingredient production and have kosher-product certification.
Dietary Supplement Health and Education Act of 1994 ("DSHEA")
- -------------------------------------------------------------
In 1994, DSHEA was enacted to establish the framework for the
regulation of nutraceuticals which were being manufactured and marketed not as
drugs but as dietary supplements. Except for certain pharmaceuticals
manufactured to the standards of the U.S.P. published by the FDA, the Company's
nutraceutical products are categorized as dietary supplements under DSHEA and
not drugs which require FDA approval. The legislation recognized the importance
of nutrition and benefits of dietary supplements in promoting health and
preventive health measures. DSHEA defines dietary supplements as vitamins,
minerals, herbs or other botanicals, amino acids, or other dietary substances
which enhance or increase the total dietary intake. It provides that where an
ingredient is first marketed as a dietary supplement and is subsequently
approved as a new drug, it can continue to be sold as a supplement unless the
Secretary of Health and Human Services rules that it would not be safe to do so.
Conversely, if an ingredient is undergoing review as a drug, it cannot be
marketed as a supplement unless the Secretary determines it would be safe to do
so.
The FDA has publicly stated its concern that any claims about the
efficacy of supplements receive prior approval by that agency. The FDA has
published regulations about making claims and will adopt current GMPs for the
manufacture of nutraceuticals. The Company believes that its GMPs are at least
as stringent as any that the FDA is considering.
New Nutraceutical Products
- --------------------------
Historically, most of the nutraceutical products sold by the Company
were based on the amount of raw material used in the manufacturing process,
i.e., the amount of kilograms of crude material required to produce each
kilogram of the plant extract. These extracts, generally called "drug ratios",
were the principal nutraceutical products sold by the Company until 1996.
<PAGE>
Increasingly, the dietary supplement market is turning to
nutraceuticals that contain a specified amount of a plant ingredient, called the
"active ingredient" or "marker". Many of these products were first developed in
Europe and are supported by clinical studies which document the efficacy of the
active ingredients. Analytical methods using the HPLC and the LC/Ms/Ms measure
the specific level of the active ingredients. Generally these products are
called "standardized" or "guaranteed potency" extracts. Many of the Company's
competitors, particularly those in Europe, refine products to increase the level
of the active ingredient above the level found naturally in the plant ("Purified
Products"). The Company believes that the active ingredient in some botanicals
is only a "marker", meaning that it denotes at least one of a plant's active
ingredients but it may be only one, among many important ingredients to be found
in the plant. Therefore, with certain exceptions, the Company's extracts contain
the whole profile of the plant with the active ingredients and/or markers
guaranteed to a certain level being only one part of the profile. The Company
believes the synergistic effect from different chemical components of a plant
mixture are an important part of the efficacy of the extract. The Company
utilizes HPLC and Mass Spectrometry to match the profile of the raw plant
material with the resultant botanical extract.
In 1997, the Company opened a new laboratory devoted to the development
of Purified Products. Although the Company maintains its commitment to the
extraction of the whole plant, there are active ingredients which can be
produced at efficacious levels only through a process of purification
("Purification"). Examples are gingko-biloba and milk thistle. Also, the
cosmetic industry requires that botanicals be purified prior to use primarily to
eliminate odor and color. No significant revenues from Purified Products are
expected in 1998.
The Company has a broad line of more than twenty (20) standarized
products. The Company believes its growth is materially dependent on the
development of new products and therefore expends considerable resources on
research and development. In 1997, the Company developed and marketed several
new products, including the trademarked product CimiPure(TM) (black cohosh root
extract).
Competition
- -----------
The Company has numerous competitors, in each of the industry segments
it serves both domestically and abroad, principally European. Some of the
competitors are larger than the Company and have been producing nutraceuticals
for a longer period.
Employees
- ---------
At February 28, 1998, the Company had 67 full-time employees, 61 of
whom were employed by Madis.
Products Liability Insurance
- ----------------------------
The Company has experienced no product liability claims to date,
however the development and marketing of botanical extracts entails an inherent
risk that product liability claims may be asserted against it in the future. The
Company currently has obtained product liability coverage, which it deems
adequate, but there can be no assurance that the Company can maintain adequate
insurance on acceptable terms in the future. Any claim against the Company would
negatively affect the reputation of the Company and a judgment above the policy
limits would have an adverse financial effect on the Company.
<PAGE>
Item 2. - DESCRIPTION OF PROPERTY
-----------------------
On February 1, 1994, the Company entered into a five-year lease
agreement with an affiliate for 1,700 square feet of office space at a monthly
rate of approximately $3,600.
Madis leases a 125,000 square-foot facility in South Hackensack, New
Jersey, from an affiliated corporation owned by the former owners of Madis for
$20,000 per month, net, plus one percent of the gross revenues of Madis up to an
additional $200,000 per annum. The lease has a term of five years and expires in
December 1999 with renewable options for fifteen additional years. This facility
includes a 20,000 square-foot office area; 10,000 square-feet for laboratories;
manufacturing space of 70,000 square feet; and warehousing space of 25,000
square feet.
The Company is building a new 13,000 square foot warehouse facility and
is expanding and upgrading its plant facilities in 1998. The total cost of the
warehouse and expansion will be between $5 and $6 million, including certain
equipment purchases for the laboratory. The Company has obtained an equipment
line of credit of $3 million from a bank. The balance will be paid from working
capital. The expansion is scheduled to be completed by the end of the Second
Quarter 1998.
Madis also leases a warehouse facility in Teterboro, New Jersey from an
unrelated party for $130,000 per year.
Item 3. - LEGAL PROCEEDINGS
-----------------
The Company is involved from time to time in various lawsuits that
arise in the course of its business. There are no lawsuits currently outstanding
or known, the outcome of which, if adverse, would have a material affect on the
financial condition and results of operations of the Company.
<PAGE>
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on November 20,
1997. All nominees to the Company's Board of Directors were elected.
<TABLE>
The following is a vote tabulation for all nominees:
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Paul O. Koether 6,974,828 21,052
Mark W. Jaindl 6,976,693 18,917
William Mahomes, Jr. 6,977,454 18,426
Alfredo Mena 6,977,469 18,411
</TABLE>
The stockholders also voted to adopt the 1997 Non-Qualified Stock
Option Plan. The following is a vote tabulation for this plan:
<TABLE>
<S> <C>
FOR 4,733,592
NOT VOTED 1,915,477
WITHHELD 346,811
</TABLE>
For more information about this Plan, see Note 5 of Notes to the
Consolidated Financial Statements and Item 10 - Executive Compensation.
<PAGE>
PART II
Item 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
At February 28, 1998, the Company had approximately 2,700 stockholders of
record. The Company's common stock currently trades on the NASDAQ/National
Market System under the symbol "PURW." On February 27, 1998 the closing price
per share of the common stock was $9 9/16.
The following table sets forth the high and low closing prices for the
common stock for the periods indicated, as reported by NASDAQ on the National
Market System.
<TABLE>
<CAPTION>
Calendar Quarter Ended:
High Low
------ ------
<S> <C> <C>
1997
----
March 31 $ 3 3/16 $ 2 1/16
June 30 4 1/4 2 17/32
September 30 8 3 7/8
December 31 8 1/8 4 15/16
1996
----
March 31 $ 4 1/16 $ 2 1/8
June 30 3 9/16 2 1/16
September 30 2 1/4 1 11/16
December 31 2 1/2 1 11/16
</TABLE>
The Company had not declared or paid any dividends on its common stock
in 1996 and 1997 and does not foresee doing so in the immediate future.
Item 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
This Form 10-KSB contains forward-looking statements which may involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results and performance in future periods to be materially
different from any future periods or performance suggested by these statements.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Company had cash and cash equivalents of $8.1
million. Cash equivalents consisted of U.S. Treasury Bills with maturities of
less than three months and yields ranging from 4.99% to 5.44%. The Company
had marketable securities with a market value of approximately $380,000 at
December 31, 1997. Marketable securities consisted of trading securities as
defined under generally accepted accounting principles. Securities available-
for-sale were $1,652,000 at the same date. See Notes 1 and 2 of Notes to
Consolidated Financial Statements for additional information. Net working
capital was approximately $12 million at December 31, 1997. The management of
the Company believes that its financial resources and anticipated cash flows
will be sufficient for future operations and possible acquisitions of other
operating businesses.
Net cash of $156,000 was used by operations in 1997 compared to net
cash provided by operations of approximately $735,000 in 1996. In 1997, gains on
sales of securities available-for-sale of $705,000 and an increase in inventory
of $1,636,000 substantially offset the net income of $2,336,000 and depreciation
and amortization of $427,000. Depreciation and amortization of $427,000
increased by $97,000 in 1997 compared to 1996 due to the continuing investment
in laboratory and production equipment at Madis. Inventory increased by
$1,636,000 from $1,991,000 at December 31, 1996 to $3,627,000 at December 31,
1997 due to an expected increase in sales at Madis.
In 1996, cash provided by operations of $735,000 was generated
principally by net gains on sales of securities of $641,000 and net marketable
securities transactions of $1,775,000 but were partially offset by the growth in
accounts receivable and inventory and a decrease in accounts payable and other
liabilities.
Net cash of $2,283,000 was used in investing activities in 1997. In
October 1997, the Company acquired the remaining 17% minority interest in Madis
for approximately $941,000. As a result of this transaction, goodwill was
increased by $576,000 and minority interest, included in other liabilities in
the consolidated financial statements, was decreased by $365,000.
Furniture and equipment purchases were approximately $1 million in
1997. The Company, which has been increasing its investment in laboratory and
manufacturing facilities, has begun an expansion program to upgrade and expand
its productive capacity and to build a new warehouse facility. The total cost
of the warehouse and expansion will be between $5 and $6 million, including
certain equipment purchases for the laboratory. The Company has obtained an
equipment line of credit of $3 million from a bank. The balance will be
paid from working capital. The expansion is scheduled to be completed by the
end of the Second Quarter 1998.
In May 1996, the Company made an investment in non-voting common stock
representing 25% ownership of Gaia Herbs, Inc. ("Gaia") for approximately $1.0
million. In June 1997, the Company made an additional investment of $500,000
increasing its equity ownership to 35% of Gaia's outstanding shares of common
stock. The Company loaned Gaia $200,000 in July 1997 payable interest only on a
quarterly basis for the first three years and 36 monthly payments of principal
and interest thereafter. The loan bears interest at 6.49% which was the imputed
rate required under the Internal Revenue Code and is classified as an other
asset in the consolidated balance sheet. Gaia manufactures and distributes fluid
botanical extracts for the high-end consumer market. Gaia is a privately held
company and does not publish financial results. The Company is accounting for
this investment by the cost method.
In 1996, net cash of $900,000 was provided by investing activities. The
net proceeds from the purchase and sale of securities available-for-sale
of $2,086,000 was partially offset by the investment in Gaia and the acquisition
of furniture and equipment at Madis.
<PAGE>
Cash flows used in financing activities in 1997 and 1996 of
approximately $326,000 and $127,000, respectively, consisted principally of the
purchase of Company common shares.
In February 1994, the Company announced a plan to purchase up to two
million shares of the Company's common stock, subject to market conditions and
other considerations (the "Repurchase Plan") as determined by the Board of
Directors. As of December 31, 1997, 696,839 shares had been acquired under the
Repurchase Plan for an aggregate cost of approximately $1,163,000. The Company
repurchased 129,093 shares in 1997 for an aggregate cost of approximately
$357,000. In 1996, 70,579 shares were repurchased for an aggregate cost of
approximately $127,000. All shares repurchased in 1996 and 1997 have been
canceled and returned to the status of authorized but unissued shares.
Results of Operations
- ---------------------
The Company's consolidated operations resulted in net income of
$2,336,000, or basic earnings per share of $.31, in 1997 compared to net income
of $229,000, or basic earnings per share of $.03 per share, in 1996. Diluted
earnings per share was $.29 and $.03 per shares in 1997 and 1996 respectively.
The Company had sales in 1997 of approximately $10,758,000, an increase
of approximately $4,115,000 or 62% from 1996 sales of $6,643,000. Cost of goods
sold was $5,990,000 and gross margin was $4,768,000 in 1997, compared to cost of
goods sold of $4,292,000 and gross margin of $2,351,000 in 1996. Gross margin as
a percentage of sales was 44.3% and 35.4% in 1997 and 1996 respectively. The
growth in sales and gross profit was principally due to the introduction and
marketing of standardized products such as St. John's Wort, CimiPure(TM) black
cohosh root, olive leaf and KavaPure(R) kava extracts.
In 1997, the Company recorded net gains on marketable securities of
$717,000, compared to net gains of $918,000 in 1996. Substantially all gains
in 1997 and 1996 were realized gains. See Note 2 of Notes to Consolidated
Financial Statements for additional information.
Interest, dividend and other income was $543,000 in 1997 compared to
$938,000 in 1996. In 1996, other income included $394,000 received in connection
with the settlement of litigation. See Note 6 of Notes to Consolidated Financial
Statements for additional information. Interest income was $530,000 and $502,000
in 1997 and 1996 respectively, an increase of $28,000 or 5.58%. This increase
was due principally to higher invested balances in 1997.
Retention income of $703,000 in 1997 consists of cash received in
connection with the sale of a prior business in 1994. The Company does not
anticipate additional revenue from this source.
General and administrative expenses (consisting of personnel,
professional and all other expenses) were $4,184,000 in 1997, compared to
$3,973,000 in 1996, an increase of $211,000 or approximately 5%. Personnel
expenses were $2,020,000 in 1997, an increase of $207,000, or 11.4%, from
$1,813,000 in 1996. The principal reason for the increase was added management
and laboratory personnel at Madis as well as cost of living and merit increases
given to the employees of the Company and Madis. Professional fees consisting
of legal, accounting and consulting fees, were $405,000 in 1997, a decrease of
$293,000, or 42%, from the 1996 professional fees of $698,000. Legal fees
decreased due to the settlement in 1996 of litigations in which the Company was
involved. Other general and administrative expenses were $1,759,000 in 1997,
an increase of $297,000 or 20.3% from $1,462,000 in 1996. Increased sales
expenses, depreciation expense and minority interest in the earnings of Madis
were the primary reasons for the increase.
New Accounting Standards
- ------------------------
The Financial Accounting Standards Board ("FASB") has issued Statement
No. 128 "Earnings Per Share ("EPS")" which becomes effective for periods ending
after December 15, 1997. This statement requires restatement of all prior period
EPS data presented and simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS and requires dual presentation of diluted EPS on
the face of the income statement for all entities with complex capital
structures.
<PAGE>
Basic EPS excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion No. 15. The EPS reported in this Form 10-KSB is
equivalent to diluted EPS under FASB No. 128.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 129 "Disclosure of Information about Capital Structure" which establishes
standards for disclosing information about an entity's capital structure. The
Company's reporting has always comprehended the requirements of this standard.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which will be effective for the Company beginning January 1, 1998. Statement No.
131 redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to a company's operating
segments. The Company has not yet completed its analysis of which operating
segments it will report on.
Year 2000 Issue
- ---------------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
Management has determined that the year 2000 Issue will not pose
significant operational problems for its computer systems. As a result, all
costs associated with this conversion are being expensed as incurred. There can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted and would not have an adverse effect on
the Company's systems.
The Company will utilize external resources to reprogram, or replace,
and test the software for Year 2000 modifications. The Company anticipates
completing the Year 2000 project not later than October 31, 1999, which is prior
to any anticipated impact on its operating systems. The total cost of the Year
2000 project is not expected to be material and will be funded through operating
cash flows, which will be expensed as incurred.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimate, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modifications plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
<PAGE>
Item 7. - FINANCIAL STATEMENTS
--------------------
The financial statements filed with this item are listed below:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statements of Operations for the Years ended December 31,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Pure World, Inc.:
We have audited the accompanying consolidated balance sheet of Pure World,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pure World, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 25, 1998
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
(in $000's)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 8,100
Marketable securities 380
Accounts receivable, net of allowance for
uncollectible accounts and returns and
allowances of $120 1,139
Inventories, net 3,627
Other 456
-------
Total current assets 13,702
-------
Securities available-for-sale 1,652
Investment in unaffiliated natural products company 1,510
Fixed assets, net 2,193
Notes receivable from affiliates 496
Goodwill, net of
accumulated amortization of $274 1,717
Other assets 206
-------
Total assets $21,476
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable $ 452
Accrued expenses and other liabilities 1,244
-------
Total liabilities 1,696
-------
Commitments and Contingencies (Note 9)
Stockholders' equity:
Common stock, par value $.01;
30,000,000 shares authorized;
7,505,285 shares issued and outstanding 75
Additional paid-in capital 43,287
Accumulated deficit ( 24,214)
Unrealized holding gains on
securities available-for-sale 632
-------
Total stockholders' equity 19,780
-------
Total liabilities and stockholders' equity $21,476
========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in $000's, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Sales $10,758 $ 6,643
Net gains on marketable securities 717 918
Interest, dividends and other income 543 938
Retention income 703 -
------- -------
Total Revenues 12,721 8,499
------- -------
Expenses:
Cost of goods sold 5,990 4,292
Personnel 2,020 1,813
Professional fees 405 698
Other 1,759 1,462
------- -------
Total Expenses 10,174 8,265
------- -------
Income before income taxes 2,547 234
Provision for income taxes 211 5
------- -------
Net income $ 2,336 $ 229
======= =======
Basic net income per share $ .31 $ .03
======= =======
Diluted net income per share $ .29 $ .03
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in 000's)
<TABLE>
<CAPTION>
Unrealized Holding
Gains/(Losses) Total
Additional On Securities Stock-
Total Shares Common Paid-In Accumulated Available- Holders'
Outstanding Stock Capital Deficit for-Sale Equity
------------ ------ ---------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 7,705 $ 77 $43,769 ($26,779) ($101) $16,966
Change in net unrealized holding
gains/losses on securities
available-for-sale -- -- -- -- 383 383
Net income -- -- -- 229 -- 229
Repurchase and cancellation
of common stock ( 71) ( 1) ( 126) -- -- ( 127)
----- ---- ------- ------- ---- -------
Balance, December 31, 1996 7,634 76 43,643 ( 26,550) 282 17,451
Change in net unrealized holding
gains/losses on securities
available-for-sale -- -- -- -- 350 350
Net income -- -- -- 2,336 -- 2,336
Repurchase and cancellation
of common stock ( 129) ( 1) ( 356) -- -- ( 357)
----- ---- ------ ------- ---- -------
Balance, December 31, 1997 7,505 $ 75 $43,287 ($24,214) $632 $19,780
===== ===== ======= ======= ==== =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in $000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,336 $ 229
Adjustments:
Depreciation and amortization 427 330
Net marketable securities
transactions ( 318) 1,775
Gain on sale of securities
available-for-sale ( 705) ( 641)
Change in inventories ( 1,636) ( 430)
Change in receivables ( 66) ( 164)
Change in accounts payable and other
accruals ( 66) ( 288)
Other, net ( 128) ( 76)
------- -------
Net cash provided by (used in)
operating activities ( 156) 735
------- -------
Cash flows from investing activities:
Purchase of minority interest in Madis ( 941) -
Purchase of furniture and equipment, net ( 1,013) ( 332)
Proceeds from sale of securities
available-for-sale 977 2,530
Purchase of securities available-for-sale ( 727) ( 444)
Loans to affiliates and others ( 230) ( 100)
Repayments of loans to affiliates 136 123
Investment in unaffiliated
natural products company ( 500) ( 1,010)
Other, net 15 133
------- -------
Net cash provided by (used in)
investing activities ( 2,283) 900
------- -------
Cash flows from financing activities:
Repurchase of common stock ( 357) ( 127)
Other, net 31 --
------- -------
Net cash used in financing
activities ( 326) ( 127)
------- -------
Net increase (decrease) in cash
and cash equivalents ( 2,765) 1,508
Cash and cash equivalents at beginning
of year 10,865 9,357
------- -------
Cash and cash equivalents at
end of year $ 8,100 $10,865
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest expense $ 25 $ 13
======= =======
Taxes $ 190 $ 15
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of Pure
World, Inc. (the "Company" or "Pure World") and its 100% owned
subsidiaries, Madis Botanicals, Inc. ("Madis") and Pure World
Botanicals, Inc.("PWBI") after elimination of all material intercompany
accounts and transactions. The Company, through its subsidiaries,
manufactures natural products for the nutraceutical, flavor and
cosmetic industries. PWBI and Madis merged on January 2, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivaLents consist primarily of cash on hand, cash in
banks and U.S. Treasury Bills purchased with an original maturity of
three months or less.
Marketable Securities
---------------------
Marketable securities are classified into three categories: debt
securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported
at amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as marketable securities and reported as a current asset and
at fair value, with unrealized gains and losses included in the results
of operations; and debt and equity securities not classified as either
held-to-maturity securities or marketable securities are classified as
available-for-sale securities and reported at fair value with
unrealized gains and losses excluded from the results of operations and
reported as a separate component of stockholders' equity.
The Company accounts for securities transactions on a trade-date basis.
For computing realized gains or losses on sale of marketable
securities, cost is determined on a first-in, first-out basis. The
effect of all unsettled transactions is accrued in the consolidated
financial statements.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
Inventories
-----------
Merchandise inventories are valued at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method of accounting.
Investment in Unaffiliated Natural Products Company
---------------------------------------------------
In May 1996, the Company made an investment in non-voting common
stock representing 25% ownership of Gaia Herbs, Inc. ("Gaia") for
approximately $1.0 million. In June 1997, the Company made an
additional investment of $500,000, increasing its equity ownership to
35% of Gaia's outstanding shares of common stock. In July 1997, the
Company loaned Gaia $200,000, payable interest only, on a quarterly
basis for the first three years and 36 monthly payments of principal
and interest thereafter. The loan bears interest at 6.49% which was
the imputed rate required under the Internal Revenue Code and is
classified as an other asset in the consolidated balance sheet.
Gaia manufactures and distributes fluid botanical extracts for the
high-end consumer market. Gaia is a privately held company and does not
publish financial results. The Company is accounting for this
investment by the cost method.
Fixed Assets, net
-----------------
The Company records all fixed assets at cost. Depreciation is computed
using the straight-line method over the related estimated useful life
of the asset. Gains or losses on dispositions of fixed assets are
included in operating results as other income.
The Company evaluates the carrying value of its long-lived assets
whenever there is a significant change in the use of an asset and
adjusts the carrying value, if necessary, to reflect the amount
recoverable through future operations.
Goodwill
--------
Goodwill had been established in connection with the acquisition of
Madis in 1995. In October 1997, the Company acquired the remaining 17%
minority interest for approximately $941,000. Madis is now a
wholly-owned subsidiary of the Company. As a result of this
transaction, goodwill was increased by approximately $576,000 and
minority interest in Madis, included in other liabilities on the
consolidated balance sheet was decreased by approximately $365,000.
Goodwill is being amortized using the straight-line method over a
fifteen-year period.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the balance sheet for cash and cash
equivalents, investments, accounts receivable and payables approximate
their fair value.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
Income Taxes
------------
The Company follows the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). SFAS No. 109 requires an asset and liability approach
for the accounting for income taxes.
Net Income per Share
--------------------
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share." This standard revises certain methodology
for computing earnings per common share and requires the reporting of
two earnings per share figures: basic earnings per share and diluted
earnings per share. Basic earnings per common share are computed by
dividing net income by the weighted-average number of common shares
outstanding. Diluted earnings per share are computed by dividing net
income by the sum of the weighted-average number of common shares
outstanding plus the dilutive effect of shares issuable through the
exercise of stock options.
All prior period earnings per share figures presented herein have been
restated in accordance with the adoption of SFAS No. 128.
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled as follows:
<TABLE>
<CAPTION>
(Shares in Thousands)
1997 1996
-------- --------
<S> <C> <C>
Basic earnings per common share:
Average shares outstanding for basic
earnings per share 7,534 7,683
===== =====
Diluted earnings per common share:
Average shares outstanding for basic
earnings per share 7,534 7,683
Dilutive effect of warrants, options
and deferred stock units 496 127
----- -----
Average shares outstanding for diluted
earnings per share 8,030 7,810
===== =====
</TABLE>
Options excluded from the above calculations were 157,500 at December
31, 1997 and 337,000 at December 31, 1996.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
2. Investment Securities
---------------------
Investment securities consisted of the following (in $000's):
<TABLE>
<CAPTION>
Gross Gross
Cost Holding Holding Fair
Basis Gains Losses Value
----- ------- ------- -----
<S> <C> <C> <C> <C>
Marketable securities $ 375 $ 5 $ - $ 380
Securities
available-for-sale 1,020 638 6 1,652
------ ------ ----- -----
Total investment
securities $1,395 $ 643 $ 6 2,032
====== ====== ===== =====
</TABLE>
All investment securities are investments in common stock.
Realized gains and losses of $700,000 and $1,000, respectively, as well
as net unrealized gains of $18,000 were included in the results of
operations for the year ended December 31, 1997. The net unrealized
gains on securities available-for-sale included as a separate component
of consolidated stockholders' equity was approximately $632,000 at
December 31, 1997.
In 1996, realized gains and losses of $1,161,000 and $2,000,
respectively, as well as net unrealized losses of $241,000 were
included in the results of operations.
3. Inventories
-----------
Inventories are comprised of the following (in 000's):
<TABLE>
<CAPTION>
<S> <C>
Raw materials $1,299
Work-in-process 189
Finished goods 2,139
------
Total inventories $3,627
======
</TABLE>
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
4. Fixed Assets, net
-----------------
At December 31, 1997, fixed assets consist of the following (in
$000's):
<TABLE>
<CAPTION>
<S> <C>
Furniture, machinery and
equipment $ 2,604
Construction in progress 320
Accumulated depreciation ( 731)
-------
$ 2,193
=======
</TABLE>
5. Common Stock
------------
Stock Repurchase
----------------
In February 1994, the Company announced a plan to purchase up to two
million shares of the Company's common stock, subject to market
conditions and other considerations (the "Repurchase Plan") as
determined by the Board of Directors. As of December 31, 1997, 696,839
shares had been acquired under the Repurchase Plan for an aggregate
cost of approximately $1,163,000.
The Company repurchased 70,579 shares in 1996 for an aggregate cost of
approximately $127,000. In 1997, 129,093 shares were repurchased for an
aggregate cost of approximately $357,000. All shares repurchased in
1996 and 1997 have been canceled and returned to the status of
authorized but unissued shares.
Stock Options
-------------
In August 1991, the Board of Directors of the Company adopted a
Non-Qualified Stock Option Plan (the "1991 Plan"). Under the 1991 Plan,
non-qualified options to purchase up to an aggregate of 500,000 shares
of common stock of the Company may be granted by the Board of Directors
to officers, directors and employees of the Company at their fair
market value at the date of grant. Options will expire five years from
date of grant and will be exercisable as to one-half of the shares on
the date of grant of the option and as to the other half, on the first
anniversary of the date of grant of the option, or under such other
terms as determined by the Board of Directors.
In November 1997, the Board of Directors and Shareholders of the
Company adopted the 1997 Non-Qualified Stock Option Plan (the "1997
Plan"). Under the 1997 Plan, non-qualified options to purchase up to
500,000 shares of common stock of the Company can be granted. Many of
the other features of the 1997 Plan are the same as the 1991 Plan,
other than the options are exercisable one-fifth on the third
anniversary of their grant and one-fifth in each of the succeeding
years, or under such other terms as determined by the Board of
Directors.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
The following table summarizes option transactions under the Option
Plans for the year ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Options outstanding at
January 1, 1996 490,000 $ 1.70
Options granted -
Options canceled -
Options exercised -
-------
Options outstanding at
December 31, 1996 490,000 $ 1.70
Options granted 224,500 $ 4.65
Options canceled ( 35,000) $ 1.72
-------
Options outstanding at
December 31, 1997 679,500 $ 2.67
=======
</TABLE>
For options outstanding and exercisable at December 31, 1997, the
exercise price ranges are:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding at Remaining Life Average Outstanding at Average
Exercise Prices December 31, 1997 (In Years) Exercise Price December 31, 1997 Exercise Price
- ----------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$1 to $3 455,000 2 $ 1.70 455,000 $1.70
$3.01-$7 224,500 9 4.75 - -
------- ------ ------- -----
679,500 $ 2.67 455,000 $1.70
======= ====== ======= =====
</TABLE>
In addition, in 1995 in connection with the Madis acquisition, the
Company issued to the former Madis shareholders options outside of the
1991 Plan to acquire 250,000 shares of the Company's common stock at
its then approximate fair value of $2.10 per share. Three employees of
Madis were also given a total of 60,000 options outside of the 1991
Plan with prices ranging from $2.00 - $2.10, the approximate fair
market value at the time of grant, in connection with their employment.
Sixty thousand have since been canceled. In 1996, 57,000 options were
granted outside of the 1991 Plan to various employees of the Company
and Madis in connection with their employment with prices ranging
between $1.8125 and $2.25, the approximate fair market value at the
time of the grant. In 1997, 40,000 options were granted outside of the
1997 Plan for new employees with prices ranging from $3.375 to $5.375
per share.
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for its options. Accordingly, no
compensation cost has been recognized for stock options issued.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
Had compensation cost for the issued stock options been determined
based upon the fair values at the dates of awards under those plans
consistent with the method of FASB Statement 123, the Company's net
income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income:
As reported (in 000's) $ 2,336 $ 229
Pro forma (in 000's) $ 2,240 $ 76
Basic net income per share:
As reported $ .31 $ .03
Pro forma $ .30 $ .01
Diluted net income per share:
As reported $ .29 $ .03
Pro forma $ .28 $ .01
</TABLE>
All options granted to date have an exercise price equal to the market
price of the Company's stock on the grant date. For purposes of
calculating the compensation cost consistent with FAS No. 123, the fair
value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions used:
no dividend yield; expected volatility of 49 percent in 1997 and
48 percent in 1996; risk free interest rates between 5.25 percent
and 7.63 percent; and weighted average expected lives of 5 to 10 years.
6. Settlement of Dispute and Litigation with
American Industrial Properties REIT
-----------------------------------------
In November 1996, the Company and American Industrial Properties REIT
("IND") entered a settlement agreement resolving all disputes and
litigation that arose between them as a result of the Company's efforts
to influence the management of and protect its investment in IND. The
settlement agreement provided that IND pay $825,000 to the Company as
reimbursement for costs incurred in connection with the disputes and as
consideration for releases and a standstill agreement. The Company also
sold its investment in IND to an unrelated third party for an aggregate
price of approximately $2.5 million. IND agreed to make numerous
changes to its Bylaws designed to remedy the corporate governance
problems which the Company pointed to in the disputes. The sale of the
investment in IND resulted in a net gain of approximately $619,000 in
1996. The reimbursement of expenses incurred in years prior to 1996 of
$394,000 to protect the Company's investment in IND was recorded as
other income, while the remaining reimbursement of $431,000 offset
expenses incurred in 1996.
7. Compensation Arrangements
-------------------------
In April 1990, the Company entered into an employment and deferred
compensation agreement (the "Agreement") with the Company's Chairman
for an initial three-year term commencing on April 1, 1990 (the
"Effective Date") at an annual salary of $185,000, which may be
increased but not decreased at the discretion of the Board of
Directors. In December 1992, the Board of Directors voted unanimously
to increase the Chairman's salary to $215,000 per annum effective
December 1, 1992.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
The term is to be automatically extended one day for each day elapsed
after the Effective Date. The Chairman may terminate his employment
under the Agreement under certain conditions specified in the
Agreement, and the Company may terminate the Chairman's employment
under the Agreement for cause. In the event of the Chairman's death
during the term of the Agreement, his beneficiary shall be paid a
monthly death benefit equal to $215,000 per year for three years
payable in equal monthly installments. Should the Chairman become
"disabled" (as such term is defined in the Agreement) during the term
of the Agreement, he shall be paid an annual disability payment
equal to 80 percent of his base salary plus cash bonuses in effect
at the time of the disability. Such disability payments shall continue
until the Chairman attains the age of 70. The Company accrued
approximately $35,000 in each of 1996 and 1997 for the contingent
payments provided under the terms of the Agreement.
In connection with the Madis acquisition, the Vice Chairman of Madis
was given an employment agreement commencing January 3, 1995 for a
term of four years at an annual salary of $150,000. The employment
contract was subsequently extended for an additional two years on
January 2, 1998.
8. Income Taxes
------------
At December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $18.4 million for Federal income tax
reporting purposes, which expire in the years 2002 and 2003.
Additionally, the Company has investment and research and development
tax credit carryforwards aggregating approximately $170,000 and
$870,000, respectively, which expire from 1998 through 2000. The
ultimate realization of the tax benefits from the net operating loss
and tax credit carryforwards is dependent upon future taxable earnings
of the Company.
The Company's federal income tax returns for the years ended March 31,
1987 and 1988 and for the nine months ended December 31, 1988 were
examined by the Internal Revenue Service ("IRS"). The IRS challenged
the deductibility of certain payments aggregating approximately $8.1
million made during those periods in connection with certain litigation
settlements and legal fees primarily related to the settlement of a
class action lawsuit. The Company disagrees with the IRS. Even though
the Company intends to vigorously defend its position when it utilizes
the NOLs, there can be no assurance that the Company's position will be
sustained.
The components of income tax expense (benefit) were as follows
(in $000's):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Federal-current $ 51 $ 7
State-current 160 ( 2)
Deferred - -
----- ------
Total $ 211 $ 5
===== ======
</TABLE>
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
Deferred income taxes reflect the tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. The tax
effects of significant items comprising the Company's net deferred tax
asset as of December 31, 1997 are as follows (in 000's):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $6,268
Alternative minimum tax ("AMT")
and other credit carryforwards 1,205
Other, net 329
------
$7,802
======
Valuation allowance ($7,727)
======
Net deferred tax asset $ 75
======
</TABLE>
Due to the relatively short expiration periods of the NOLs and the past
earnings trend, the Company believes that a substantial valuation
allowance for the deferred tax asset is required.
A reconciliation of the provision for income tax expense to the
expected income tax expense (income before income taxes times the
statutory tax rate of 34%) is as follows (in 000's):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Income before income taxes $ 2,547 $ 234
Statutory federal income
tax rate 34% 34%
------ ------
Expected income tax 866 80
Dividends received deduction - ( 9)
Alternative minimum tax 51 7
State tax 106 ( 1)
Change in valuation allowance ( 863) ( 108)
Other, net 51 36
------- ------
Provision for income taxes $ 211 $ 5
======= ======
</TABLE>
The Tax Reform Act of 1986, as amended, provides for a parallel tax
system which requires the calculation of AMT and the payment of the
higher of the regular income tax or AMT. The Company also has an AMT
credit carryforward of approximately $171,000 which will be allowed as
a credit carryover against regular tax in the future in the event the
regular tax exceeds the AMT tax.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
9. Commitments, Contingencies and Related Party Transactions
---------------------------------------------------------
The Chairman of the Company is the Chairman of a brokerage firm which
provided investment services to the Company during the years ended
December 31, 1997 and 1996. Brokerage commissions paid by the Company
totaled approximately $36,000 in 1997 and $33,000 in 1996.
The Chairman of the Company is also the President of Sun Equities
Corporation ("Sun"), the Company's principal stockholder. The Company
reimburses Sun for the Company's proportionate share of the cost of
group medical insurance and office supplies. Such reimbursements for
the years ended December 31, 1997 and 1996 amounted to approximately
$419,000 and $76,000, respectively. This increase is because group
medical insurance for the Company was managed by Sun for all of 1997
compared to only the last three months of 1996. Sun received no
remuneration or administrative fees for performing this service. Total
medical costs incurred by the Company and Madis were essentially equal
in 1997 compared to 1996.
Rosenman & Colin, LLP ("R&C") performed legal work for the Company and
its subsidiaries in 1997 and 1996. Natalie I. Koether, President of the
Company and of Madis and the wife of the Chairman of the Company, is of
counsel to R&C. Aggregate fees and expenses billed to the Company and
its subsidiaries were approximately $19,000 in 1997 and $118,000 in
1996.
Madis leases a 125,000 square-foot facility in South Hackensack, New
Jersey, from an affiliated corporation ("Madis Affiliate") owned by the
former shareholders of Madis for $20,000, net, per month plus one per
cent of the gross revenues of Madis up to an additional $200,000 per
year over a term of five years expiring in December 1999 with renewal
options for fifteen additional years. This facility includes a 20,000
square-foot office area; 10,000 square-feet for laboratories,
manufacturing space of 70,000 square feet; and warehousing space of
25,000 square feet.
Madis also leases a warehouse facility in Teterboro, New Jersey
for $130,000 per year from an unrelated party.
The Company rents office space on a month-to-month basis from an
affiliate. Such rent expense was approximately $43,000 in 1997 and
in 1996.
In connection with the acquisition of Madis, the Madis Affiliate
borrowed $200,000 from the Company (the "First Loan") in 1995, and the
Madis Affiliate and its shareholders borrowed $205,000 in 1994 from
the Company (the "Second Loan"). Both Loans bore interest at the rate
of 2% above the Citibank prime rate (but in no event more than 13%) and
are collateralized by the Madis facility. The First Loan was repayable
at $10,000 per month plus interest commencing February 1, 1995 until
it was satisfied and thereafter the Second Loan is payable at the rate
of $10,000 per month plus interest until it is satisfied. The First
Loan was paid off in 1996 and the current balance of the Second Loan
was approximately $55,000 at December 31, 1997.
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
During 1995, the Company loaned money to an officer of the Company and
to an officer of Madis to acquire common stock ("Stock") of the
Company in the open market. These loans, amounting to $86,000, are
non-recourse loans collateralized by the Stock, bearing interest at
the minimum rate required under the Internal Revenue Code to avoid
imputation of interest. Also in 1995 in connection with the
acquisition of Madis, the Company loaned $210,000 to Voldemar Madis,
who serves as Vice-Chairman of the Company and of Madis. In the past,
Mr. Madis had made loans for the same amount to Madis while it
operated under the protection of Federal Bankruptcy Law. These
loans were not repaid when Madis was removed from bankruptcy. The
loan made to Mr. Madis by the Company bears interest at a rate of
8.125%, has a five-year term, and is collateralized by Mr. Madis'
personal residence. The loan to Mr. Madis had a principal balance of
$202,000 at December 31, 1997. In February 1998, the loan was paid in
full.
<PAGE>
Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
---------------------------------------------
Not applicable.
<PAGE>
PART III
Item 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The four members of the Board of Directors were elected at the 1997
Annual Meeting of Stockholders and will serve until the next Annual Meeting of
Stockholders or until their successors are duly elected and qualified. The
Company's officers are elected by and serve at the leave of the Board.
There is no arrangement or understanding between any executive officer
and any other person pursuant to which such officer was elected. Paul O.
Koether, the Chairman of the Company, and Natalie I. Koether, the President of
the Company, are spouses.
The directors and executive officers of the Company at February 28,
1998 were as follows:
Position and Office
Presently Held with Director
Name of Person Age the Company Since
- -------------- --- ------------------- --------
Paul O. Koether 61 Chairman and 1988
Director of the
Company; Chairman
of Madis
Mark W. Jaindl 38 Director 1994
Alfredo Mena 45 Director 1992
William Mahomes, Jr. 51 Director 1993
Natalie I. Koether 58 President of the -
Company and Madis
Voldemar Madis 57 Vice Chairman of the -
Company and Madis
Mark Koscinski 40 Senior Vice President -
of the Company; Vice
President, Treasurer
and Secretary of Madis
John W. Galuchie, Jr. 45 Executive Vice President, -
Treasurer and Secretary
of the Company
- --------------------
Paul O. Koether is principally engaged in the following businesses: (i)
the Company, as Chairman since April 1988, President from April 1989 to February
1997, a director since March 1988, and for more than five years as the Chairman
and President of Sun Equities Corporation ("Sun"), a private, closely-held
corporation which is the Company's principal stockholder; (ii) as Chairman of
Madis Botanicals, Inc., ("Madis") a majority-owned subsidiary of the Company,
since January 1995 and as a director since December 1994; (iii) as Chairman and
director since July 1987 and President since October 1990 of Kent Financial
Services, Inc. ("Kent") which engages in various financial services, including
the operation of a retail brokerage business through its wholly-owned
subsidiary, T. R. Winston & Company, Inc. ("Winston") and the general partner
<PAGE>
since 1990 of Shamrock Associates, an investment partnership which is the
principal stockholder of Kent; (iv) various positions with affiliates of Kent,
including Chairman since 1990 and a registered representative since 1989 of
Winston; (v) since July 1992, as Chairman of American Metals Service, Inc.,
which is currently seeking to acquire an operating business and (vi) a director
of Gaia Herbs, Inc., a private company of which the Company owns 35% since 1997.
Prior to August 1994, Mr. Koether also served as Chairman and director of
NorthCorp Realty Advisors, Inc. ("NorthCorp"), formerly a subsidiary of the
Company.
Mark W. Jaindl. From May 1982 to October 1991, and again since May
1995, Mr. Jaindl has served as Chief Financial Officer of Jaindl Farms, which is
engaged in diversified businesses, including the operation of a 12,000-acre
turkey farm, a John Deere dealership and a grain operation. Mr. Jaindl is
President and CEO of American Bank of the Lehigh Valley, a commercial bank
located in Allentown, Pennsylvania. He also serves as the Chief Financial
Officer of Jaindl Land Company, a developer of residential, commercial and
industrial properties in eastern Pennsylvania. From June 1992 until May 1995 he
was Senior Vice President of the Company. He was Senior Vice President of Madis
from December 1994 until May 1995 and a director of Madis since December 1994
and he has served as a director of American Metals Service, Inc. since July
1992. Mr. Jaindl was a director of NorthCorp from June 1992 until September 1994
and was Interim President of NorthCorp from February 1994 until August 1994.
Alfredo Mena. Since 1986, Mr. Mena has been the president of CIA.
Salvadorena de Inversiones, S.A. de C.V. and had served as its Director and
General Manager from 1974 to 1986. CIA. Salvadorena de Inversiones, S.A. de C.V.
is engaged in coffee growing, processing and exporting. From October 1995 until
June 1997, he served as the Presidential Commissioner for Privatization and
Modernization of El Salvador. Mr. Mena is a citizen of El Salvador.
William Mahomes, Jr. In March 1997, Mr. Mahomes formed Mahomes
& Associates, a Professional Corporation, involved in the practice of law,
specializing in real estate and commercial transactions. From 1994 to March
1997, Mr. Mahomes was a Senior Shareholder of the law firm of Locke Purnell Rain
Harrell. From 1990 to 1994 he was an international partner in the Dallas office
of Baker & McKenzie. Prior to that, from 1987 to 1990, he served as Executive
Vice President and General Counsel of Pro-Line Corporation, which is engaged in
the manufacture and distribution of hair care products. Mr. Mahomes currently
serves on the Board of Directors of a variety of organizations, including the
Bethlehem Foundation, The Salvation Army, MESBIC Ventures, Inc., the Dallas
Opera, the Texas Pension Review Board and the Pegasus Charter School.
Natalie I. Koether is engaged principally in the following activities:
(i) President of the Company since February 1, 1997 and President and Director
of Madis since November 1995; (ii) Counsel with the law firm of Rosenman &
Colin, LLP, from September 1993. From February 1989 to September 1993, Mrs.
Koether was the partner-in-charge of the New York and New Jersey offices of Keck
Mahin Cate & Koether, a national law firm.
Voldemar Madis is principally engaged in the following businesses: (i)
Vice Chairman of the Company and of Madis since November 1, 1995 and (ii)
President of IVM Corporation ("IVM"). IVM is a real estate holding company. From
1973 through 1994, Mr. Madis was the President of Dr. Madis Laboratories, Inc.
("DML"). Both IVM and DML operated under the protection of Federal Bankruptcy
Law for the five-year period prior to January 3, 1995 when DML was acquired by
the Company. IVM is the owner of the premises occupied by Madis. The terms of
the lease are described in "Item 2 - Description of Property".
<PAGE>
Mark Koscinski, a certified public accountant is engaged in the
following activities: (i) the Company as Senior Vice President and principal
accounting and senior financial officer since August 1993; (ii) Vice President
of Sun since August 1993; (iii) Vice President, Treasurer and Secretary and a
Director of Madis since December 1994; and (iv) Vice President of Kent and
Winston since August 1993. Mr. Koscinski was Vice President of Accounting
Operations of Chemical Bank, New York from October 1992 to August 1993.
John W. Galuchie, Jr., a certified public accountant, is engaged in the
following businesses: (i) the Company, as Executive Vice President, Treasurer
and Secretary since April 1988 and director from January 1990 until October
1994; (ii) Kent, as Vice President and Treasurer since September 1986 and a
director from June 1989 to August 1993; (iii) Winston, as President and
Treasurer since September 1989. Mr. Galuchie was a director of NorthCorp from
June 1992 until August 1996 and Secretary from November 1992 to August 1994.
Item 10. - EXECUTIVE COMPENSATION
----------------------
The table below sets forth for the years ended December 31, 1997, 1996
and 1995, the compensation of any person who, as of December 31, 1997, was the
Chief Executive Officer of the Company or who was among the four most highly
compensated executive officers of the Company other than the Chief Executive
Officer with annual compensation in excess of $100,000 ("Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Name and Annual Compensation(1)(2) Compensation
Principal Position Year Salary Bonus Options(#)
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Paul O. Koether 1997 $215,000 $ 50,000 -
Chairman 1996 215,000 - -
1995 215,000 - 50,000
Natalie I. Koether 1997 $267,000 $ - 125,000
President 1996 244,760 - -
1995 55,807 - 100,000
Mark Koscinski(3) 1997 $108,000 $ 22,500 -
Senior Vice President 1996 108,000 15,101 10,000
1995 88,250 3,500 15,000
Voldemar Madis 1997 $150,000 $ 6,000 -
Vice Chairman(5) 1996 152,885 6,101 -
1995 150,000 - 36,115(4)
- ----------------------------------
</TABLE>
(1) The Company currently has no bonus plan.
<PAGE>
(2) Certain Executive Officers received incidental personal benefits during the
fiscal years covered by the table. The value of these incidental benefits did
not exceed the lesser of either $50,000 or 10% of the total annual salary and
bonus reported for any of the Executive Officers. Such amounts are excluded from
the table.
(3) In 1995, the Company loaned Mr. Koscinski $43,425 to acquire 25,000 shares
of Company stock in the open market (the "Shares"). The Shares are held as
security for the loan which shall accrue interest at the interest rate necessary
to avoid the imputation of interest under the Internal Revenue Code of 1986. The
loan or loan interest shall be paid solely from the proceeds of any sale by Mr.
Koscinski of the Shares. In no event will Mr. Koscinski be otherwise liable for
the loan or loan interest.
(4) Options granted in conjunction with the acquisition of Madis Botanicals,
Inc. on January 3, 1995.
(5) Mr. Madis was President of Dr. Madis Laboratories, Inc., the predecessor
corporation of Madis ("DML"), and is President of IVM Corporation ("IVM"). Both
IVM and DML operated under the protection of Federal Bankruptcy Law for the
five-year period prior to January 3, 1995, when DML was acquired by the Company.
IVM is the owner of the premises occupied by Madis. The terms of the lease to
the Company by IVM are described in "Item 2-Description of Property".
Options Granted
- ---------------
Under the Company's 1991 Non-Qualified Stock Option Plan (the "1991
Plan"), non-qualified options to purchase up to an aggregate of 500,000 shares
of the Company's Common Stock may be granted by the Board of Directors to
officers, directors and employees of the Company, its subsidiaries or parent.
The exercise price for the shares may not be less than the fair market value of
the Common Stock on the date of grant. Options will expire five years from the
date of grant and will be exercisable as to one-half of the shares on the date
of grant and as to the other half, after the first anniversary of the date of
grant, or at such other time, or in such other installments as may be determined
by the Board of Directors or a committee thereof at the time of grant. The
options are non-transferable (other than by will or by operation of the laws of
descent) and are exercisable generally only while the holder is employed by the
Company or by a subsidiary or parent of the Company or, in the event of the
holder's death or permanent disability while employed by the Company, within one
year after such death or disability.
In November 1997, the Board of Directors and shareholders of the
Company adopted the 1997 Non-Qualified Stock Option Plan (the "1997 Plan").
Under the 1997 Plan, non-qualified options to purchase up to 500,000 shares of
common stock of the Company can be granted. Many of the other features of the
1997 Plan are the same as the 1991 Plan, other than the options are exercisable
one-fifth on the third anniversary of their grant and one-fifth in each of the
succeeding years, or at such other time, or in such other installments as may be
determined by the Board of Directors.
<PAGE>
The table below contains information concerning the fiscal year-end
value of unexercised options held by the Executive Officers.
<TABLE>
<CAPTION>
Fiscal Year-End Options Values
-------------------------------------------------------
Value of Unexercised
Number of Unexercised In-the-Money
Options at 12/31/97 Options at 12/31/97
Name Exercisable/Unexercisable Exercisable/Unexercisable
------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Paul O. Koether 150,000 - $ 582,813 $ -
Natalie I. Koether 125,000 125,000 $ 487,500 $ -
Mark Koscinski 29,000 6,000 $ 115,219 $ 20,250
Voldemar Madis 50,261 - $ 177,170 $ -
</TABLE>
401(k) Plan
- -----------
The Company has established a Retirement Savings Plan pursuant to
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan
permits employees of the sponsor to defer a portion of their compensation on a
pre-tax basis. Employees who meet the 401(k) Plan's eligibility requirements may
defer up to 15% of their compensation (base pay plus any bonuses and overtime)
for the year. No participant, however, may have deferred more than $9,500 in
1997 and 1996, which amount is indexed each year for inflation. The Company did
not match employee contributions in 1997 or 1996. Federally mandated
discrimination testing limits the amounts which highly paid employees may defer
based on the amounts contributed by all other employees. Participant elective
deferral accounts are fully vested and participant matching contribution
accounts in the 401(k) Plan are vested in accordance with a graduated vesting
schedule over a period of six years of service. All participant accounts in the
401(k) Plan are invested at the direction of the participants among several
different types of funds offered by a large mutual fund management company
selected by the Company. Distributions of account balances are normally made
upon death, disability or termination of employment after normal retirement
date (age 60) or early retirement date (age 55). However, distribution may be
made at any time after an employee terminates employment. Participants may make
withdrawals from their deferred accounts in the event of financial hardship
but may not borrow from their accounts. Amounts payable to an employee are
dependent on the employee's account balance, which is credited and debited with
appropriate earnings, gains, expenses and losses of the underlying investment.
Benefits are determined by contributions and investment performance over the
entire period an employee participates in the 401(k) Plan. Payment is made in
a single cash sum no later than sixty days following the close of the year in
which the event giving rise to the distribution occurs.
The Company does not have any other bonus, profit sharing, or
compensation plans in effect.
Employment Agreements
- ---------------------
In April 1990 the Company entered into an employment agreement (the
"Agreement") with Mr. Koether, the Company's Chairman, for an initial three-year
term commencing on April 1, 1990 (the "Effective Date") at an annual salary of
$185,000 ("Base Salary"), which may be increased but not decreased at the
discretion of the Board of Directors. The term is to be automatically extended
one day for each day elapsed after the Effective Date. In December 1992, the
Board of Directors voted to increase the Chairman's Base Salary to $215,000
effective December 1, 1992.
<PAGE>
The Chairman may terminate his employment under the Agreement at any
time for "good reason" (defined below) within 36 months after the date of a
Change in Control (defined below) of the Company. Upon his termination, he shall
be paid the greater of (i) the Base Salary and any bonuses payable under the
Agreement through the expiration date of the Agreement or (ii) an amount equal
to three times the average annual Base Salary and bonuses paid to him during the
preceding five years.
Change in Control is deemed to have occurred if (i) any individual or
entity, other than individuals beneficially owning, directly or indirectly,
common stock of the Company representing 30% or more of the Company's stock
outstanding as of April 1, 1990, is or becomes the beneficial owner, directly or
indirectly, of 30% or more of the Company's outstanding stock or (ii)
individuals constituting the Board of Directors on April 1, 1990 ("Incumbent
Board"), including any person subsequently elected to the Board whose election
or nomination for election was approved by a vote of at least a majority of the
Directors comprising the Incumbent Board, cease to constitute at least a
majority of the Board. "Good reason" means a determination made solely by Mr.
Koether, in good faith, that as a result of a Change in Control he may be
adversely affected (i) in carrying out his duties and powers in the fashion he
previously enjoyed or (ii) in his future prospects with the Company.
Mr. Koether may also terminate his employment if the Company fails to
perform its obligations under the Agreement (including any material change in
Mr. Koether's duties, responsibilities and powers or the removal of his office
to a location more than five miles from its current location) which failure is
not cured within specified time periods.
In conjunction with the acquisition of Madis on January 3, 1995 by the
Company, Madis entered into an employment agreement with Voldemar Madis to serve
as an executive officer of Madis. Under the terms of the agreement, Mr. Madis
will be employed for four years from the date of the agreement at an annual
salary of $150,000. The agreement may be terminated for cause, as defined. The
agreement has been extended for an additional two years.
Remuneration of Directors
- -------------------------
Directors who are not employees of the Company receive a fee of $1,800
for attending each meeting of the Board or a committee meeting. During 1997,
the Company paid directors' fees in the aggregate of approximately $25,000.
In addition, the Company retired 5,000 stock options previously issued
to Mr. Mahomes pursuant to the Company's 1991 Stock Option Plan for a payment of
approximately $21,400.
<PAGE>
Item 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth the beneficial ownership of Common Stock
of the Company as of February 28, 1998, by each person who was known by the
Company to beneficially own more than 5% of the Common Stock, by each director
and officer and directors and officers as a group:
<TABLE>
<CAPTION>
Number of Shares Approximate
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class
- ------------------- --------------------- -----------
<S> <C> <C>
Paul O. Koether
211 Pennbrook Road
Far Hills, N.J. 07931 2,995,996(2)(3) 37.43%
Natalie I. Koether
211 Pennbrook Road
Far Hills, N.J. 07931 2,995,996(4) 37.43%
Sun Equities Corporation
376 Main Street
Bedminster, N.J. 07921 2,234,296 27.91%
Mark W. Jaindl
3150 Coffeetown Road
Orefield, PA 18069 167,620(5) 2.09%
William Mahomes, Jr.
5400 Renaissance Tower
1201 Elm Street
Dallas, TX 75201 10,000 *
Alfredo Mena
P. O. Box 520656
Miami, Florida 33152 17,000 *
Voldemar Madis
375 Huyler Street
So. Hackensack, NJ 07606 53,961 *
Mark Koscinski
376 Main Street
Bedminster, NJ 07921 64,000 *
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 469,000(6) 5.86%
All directors and
officers as a group
(8 persons) 3,359,777(1) 41.97%
- ------------------------------
*Represents less than one percent.
</TABLE>
<PAGE>
(1) The beneficial owner has both sole voting and sole investment powers with
respect to these shares except as set forth in this footnote or in other
footnotes below. Included in such number of shares beneficially owned are shares
subject to options currently exercisable or becoming exercisable within sixty
days: Paul O. Koether (150,000 shares); Natalie I. Koether (125,000 shares);
Mark W. Jaindl (70,000 shares); William Mahomes, Jr. (10,000 shares); Alfredo
Mena (15,000 shares); Voldemar Madis (50,261 shares); Mark Koscinski (29,000
shares) and all directors and officers as a group (499,261 shares).
(2) Includes (1) 32,400 shares held by a trust for the benefit of Mr. Koether's
daughter for which he serves as the sole trustee; (2) 347,500 shares
beneficially owned by his wife, including 100,000 shares owned by Emerald
Partners of which she is the sole general partner and 2,000 shares owned by
Sussex Group, Inc. of which she is the President, a director and controlling
stockholder, 125,000 shares which she has the right to acquire upon exercise of
stock options and 120,500 shares held in custodial accounts; and (3) 33,900
shares owned by Mr. Koether's daughter. Mr. Koether may also be deemed to be the
beneficial owner of the 2,234,296 shares owned by Sun, of which Mr. Koether is a
principal stockholder and Chairman, 45,000 shares held in discretionary accounts
of certain of his brokerage customers and 12,900 shares held in Mr. Koether's
IRA account. Mr. Koether disclaims beneficial ownership of all of the foregoing
shares.
(3) Includes 40,000 shares owned by Winston. Mr. Koether is an officer and
director of Winston and of Kent, Winston's parent company, and may be deemed the
beneficial owners of such shares. Mr. Koether disclaims such beneficial
ownership.
(4) Includes (1) 100,000 shares owned by Emerald Partners of which Mrs. Koether
is the sole general partner and 2,000 shares owned by Sussex Group, Inc. of
which she is the President, director and controlling stockholder; (2) 125,000
shares which she has the right to acquire upon exercise of stock options; (3)
120,500 shares held in custodial accounts; and (4) the shares beneficially owned
by her husband, described above in footnotes (2) and (3). Mrs. Koether may also
be deemed to be the beneficial owner of the 2,234,296 shares owned by Sun, of
which she is a principal stockholder and her husband is a principal stockholder
and Chairman. Mrs. Koether disclaims beneficial ownership of all of the
foregoing shares.
(5) Includes 13,720 shares held in Mr. Jaindl's IRA account and 4,000
shares held by a trust for the benefit of his son, for which Mr. Jaindl serves
as a trustee.
(6) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 469,000 shares of Pure World,
Inc. stock as of December 31, 1997, all of which shares are held in portfolios
of DFA Investment Dimensions Group, Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware business
trust, or the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional Fund
Advisors Inc. serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
<PAGE>
Item 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company reimbursed Sun approximately $419,000 and $76,000 in 1997 and
1996, respectively, for the Company's proportionate share of certain general and
administrative expenses. This increase is because group medical insurance for
the Company was managed by Sun for all of 1997 compared to only the last three
months of 1996. Sun received no remuneration or administrative fees for
performing this service. Total medical costs incurred by the Company and Madis
were essentially equal in 1997 compared to 1996.
Rosenman & Colin LLP ("R&C") performed legal work for the Company for which
it billed the Company an aggregate of approximately $19,000 in 1997 and $118,000
in 1996. Natalie I. Koether, Esq., President of the Company and of Madis and
wife of the Chairman of the Company, is of Counsel to R&C.
<PAGE>
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Method of Filing
- ------ ------- ----------------
<S> <C> <C>
3.1 (a) Restated Certificate of Incorporated by reference to
Incorporation of the Company Computer Memories Incorporated
Form 10-K for the year ended
March 31, 1987.
(b) Certificate of Amendment Incorporated by reference to
of Restated Certificate of Exhibit A to Computer Memories
Incorporation of the Company Incorporated Proxy Statement
dated February 16, 1990.
(c) Certificate of Amendment of Incorporated by reference to
Restated Certificate of Incor- American Holdings, Inc.
poration of the Company Form 10-KSB for the year ended
December 31, 1992.
(d) Certificate of Amendment of Incorporated by reference to Pure
Restated Certificate of Incor- World, Inc. Form 10-KSB for the
poration of the Company year ended December 31, 1996.
3.2 By-laws, as amended Incorporated by reference to
American Holdings, Inc.
Form 10-KSB for the year ended
December 31, 1992.
10.1 Employment Agreement, dated as Incorporated by reference to
of April 6, 1990, by and between Computer Memories Incorporated
Computer Memories Incorporated Form 10-Q for the quarter
and Paul O. Koether ended June 30, 1990.
10.2 1991 Computer Memories Incorporated Incorporated by reference to
Non-Qualified Stock Option Plan Exhibit A to Computer Memories
Incorporated Proxy Statement
dated July 7, 1992.
<PAGE>
Exhibit
Number Exhibit Method of Filing
- ------- ------- ----------------
10.3 Agreement and Plan of Merger Incorporated by reference to
dated as of December, 1994 American Holdings, Inc. Form
8-K dated January 18, 1995.
10.4 Employment Agreement with Incorporated by reference to
Dr. V. Madis, Chairman Emeritus American Holdings, Inc. Form
of Dr. Madis Laboratories, Inc. 8-K dated January 18, 1995.
10.5 1997 Non-Qualified Stock Option Plan Incorporated by reference to
Exhibit A dated November 20,
1997 Proxy Statement
10.6 (a) Employment Agreement with Incorporated by reference to
V. Madis American Holdings, Inc. Form
8-K dated January 18, 1995.
(b) Amendment to Employment Agreement Filed herewith.
with V. Madis
10.7 Lease Agreement for premises of Incorporated by reference to
Dr. Madis Laboratories, Inc., American Holdings, Inc. Form
375 Huyler Street, South 8-K dated January 18, 1995.
Hackensack, New Jersey
10.8 Plan of Reorganization of Incorporated by reference to
Dr. Madis Laboratories, Inc. American Holdings, Inc. Form
8-K/A (Amendment No. 1) dated
March 17, 1995.
10.9 Disclosure Statement Related Incorporated by reference to
to Plan of Reorganization of American Holdings, Inc. Form
Dr. Madis Laboratories, Inc. 8-K/A (Amendment No. 1) dated
March 17, 1995.
21 Subsidiaries of the Registrant Filed herewith.
27 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K
None
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PURE WORLD, INC.
March 27, 1998 By: /s/ Paul O. Koether
------------------------
Chairman of the Board
By: /s/ Mark Koscinski
------------------------
Mark Koscinski
Senior Vice President
(Principal Financial and
Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Paul O. Koether Chairman of the Board March 27, 1998
- ------------------------- and Director
Paul O. Koether (Principal Executive
Officer)
/s/ William Mahomes, Jr. Director March 27, 1998
- -------------------------
William Mahomes, Jr.
/s/ Alfredo Mena Director March 27, 1998
- -------------------------
Alfredo Mena
/s/ Mark W. Jaindl Director March 27, 1998
- -------------------------
Mark W. Jaindl
<TABLE>
<CAPTION>
PURE WORLD, INC.
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
American Holdings, Inc. Delaware
Eco-Pure, Inc. Delaware
Madis Botanicals, Inc. Delaware
Pure World Botanicals, Inc. Delaware
Strategic Information Systems, Inc. Delaware
</TABLE>
EXHIBIT 10.6(b)
AMENDMENT
---------
This is an amendment to the agreement dated as of January 2, 1995 (the
"Employment Agreement") by and among Voldemar Madis ("Employee"), Madis
Botanicals, Inc., a New Jersey corporation (the "Company") and Pure World, Inc.
("Pure World") pursuant to which Employee has been employed by the Company (the
"Amendment").
R E C I T A L S
- - - - - - - -
The Employee currently serves as Vice Chairman of the Company pursuant
to the Employment Agreement. As an inducement for the continued service of
Employee and his commitment to stay with the Company for at least three years,
the Company has agreed to increase the term of the Employment Agreement and the
annual compensation.
NOW, THEREFORE, the parties agree as follows:
1. Survival of Employment Agreement. The Amendment shall amend
the Employment Agreement only to the extent expressly provided herein and the
Amendment shall supersede the terms of the Employment Agreement only where the
two agreements are in conflict. In all other respects, the Employment Agreement
shall survive and control the terms of Employee's employment. The Amendment and
the Employment shall be incorporated together and constitute one agreement (the
"Amended Employment Agreement").
2. Term of Agreement. The term of employment under the Amended
Employment Agreement shall be three years from January 2, 1998 (the "Effective
Date") and shall extend until December 31, 2000.
3. Compensation. For all services rendered by the Employee
under the Amended Employment Agreement, the Company shall pay the Employee an
annual salary of $150,000, payable in the same periodic installments customary
for other employees of the Company.
4. Notices. All notices hereunder shall be in writing and
personally delivered or mailed by registered or certified mail, return receipt
requested, to the following address:
If to the Company:
376 Main Street
P.O. Box 74
Bedminster, New Jersey 07921
<PAGE>
If to the Employee:
375 Huyler Street
South Hackensack, New Jersey 07606
The Company or the Employee may hereunder designate another address to
the other in writing for purposes of notices under the Amended Employment
Agreement.
5. Waivers. Any waiver by any party of any violation of,
breach of or default under any provision of this Agreement by the other party
shall not be construed as, or constitute, a continuing waiver of such provision,
or waiver of any other violation of, breach of or default under any other
provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of October 20, 1997.
MADIS BOTANICALS, INC.
By: /s/ Natalie I. Koether
----------------------
Natalie I. Koether
Title: President
PURE WORLD, INC.
By: /s/ Natalie I. Koether
----------------------
Natalie I. Koether
Title: President
/s/ Voldemar Madis
----------------------
VOLDEMAR MADIS
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