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This Schedule contains summary financial information extracted from the
Form 10-KSB of Pure World, Inc. for the year ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
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<NAME> PURE WORLD, INC.
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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, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 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, 1999 were
approximately $14.8 million.
At February 29, 2000, there were 8,268,883 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 $20 million.
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE>
PART I
Item 1. - DESCRIPTION OF BUSINESS
- ------ -----------------------
General
- -------
Through its wholly-owned subsidiary, Pure World Botanicals, Inc. (formerly
Madis Botanicals, Inc. until December 31, 1998)("Pure World Botanicals") 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 "Facility")
- --------------------------------------
The Company believes it has the largest botanical extraction facility in
North America. Situated on 4.5 acres, the 138,000 square foot 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.
During 1998, the Company built a new 13,000 square foot warehouse facility
and substantially expanded and upgraded its plant facilities.
Powdered Herb Facility
- ----------------------
In March 2000, the Company substantially completed its renovation of its
Teterboro, New Jersey facility from a warehouse for raw materials to a botanical
powdering facility. Botanical powders are milled or crushed from crude
botanicals and then used in tablets or capsules. The Company believes that
botanical powders are an essential complement to its line of botanical extracts.
Although botanical extracts are considered to be the expanding segment of
nutraceuticals, many products still consist wholly or partially of botanical
powders. The total investment in the new facility is approximately $1 million.
I-1
<PAGE>
Quality Control in Manufacturing
- --------------------------------
In its registered Food and Drug Administration ("FDA") facility, Pure World
Botanicals is authorized to manufacture The United States Pharmacopeia
("U.S.P.") and pharmaceutical grade products such as, among others, casanthranol
(a further processed product of the bark of the Cascara tree used in natural
laxatives) and benzoin (used as an aromatic and local antiseptic and skin
protectant). The Pure World Botanicals Facility is kosher certified and operates
under current Good Manufacturing Practices ("cGMP's") to assure consistent high
quality in the manufacture of its products. The Pure World Botanicals Facility
is routinely inspected by the FDA. The facility and manufacturing process also
routinely undergo audits by customers, which include pharmaceutical and large
consumer product firms. To the best of its information, the Pure World
Botanicals Facility has never failed an audit. In 1999, the Pure World
Botanicals Facility received organic processing certification.
Laboratory
- ----------
The Pure World Botanicals Facility contains six laboratories: quality
control; research and development; analytical instrumentation; flavor; cosmetic;
and microbiology. The microbiology laboratory evaluates finished products for
microbiological purity. The quality control laboratory is devoted to the
physical and chemical analysis of products measured against Pure World
Botanicals' customer and compendial specifications. The analytical
instrumentation 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 a 400 megahertz Nuclear Magnetic Resonance (NMR)
Instrument. 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. 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 Pure World Botanicals'
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
I-2
<PAGE>
delivery to the customer who will then use it in a finished product. Prior to
delivery, each item undergoes final microbiological and analytical testing.
Raw Materials
- -------------
The Company buys its raw materials from a variety of growers, collectors
and brokers. Generally, the Company has not experienced any shortage of raw
materials that has affected its business other than an occasional increase in
price. The demand for botanical products has experienced exponential growth in
recent years and the demand pressure for some products could outstrip the
capacity of the suppliers. The Company's standardized products have guaranteed
potency, meaning that the products contain a stipulated amount of active
ingredients. The Company believes that for the most part, 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 and an occasional short fall can be
expected. 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. During the past year, the Company had only one
long-term supply contract for St. Johns Wort.
Government Regulation and Intellectual Property
- -----------------------------------------------
Pure World Botanicals is regulated by the 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. Pure World Botanicals 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 and the
loss or misappropriation of its technology would injure the Company. The Company
has six registered trademarks and numerous pending 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.
I-3
<PAGE>
Pure World Botanicals is a member in good standing of the Institute of Food
Technologies, the Cosmetic Toiletries and Fragrance Association, the American
Herbal Products Association, the National Nutritional Foods Association, the
American Botanical Council, the American Society of Pharmacognosy, and the
American Society for Microbiology. The Pure World Botanicals Facility is
certified by the FDA for food, pharmaceutical and cosmetic ingredient production
and has kosher-product and organic 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.
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 good manufacturing procedures
("cGMP's") for the manufacture of nutraceuticals. The Company believes that its
cGMPs 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.
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 UV, 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
I-4
<PAGE>
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 generally 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. Examples
are gingko-biloba and milk thistle. Often, cosmetic companies prefer that
botanicals be purified prior to use primarily to eliminate odor and color. The
Company anticipates the first meaningful revenues from Purified Products in
2000.
The Company has a broad line of more than fifty (50)standardized products.
The Company believes its growth is materially dependent on the development of
new products and therefore expends considerable resources on research and
development.
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 29, 2000, the Company had 99 full-time employees, 93 of whom
were employed by Pure World Botanicals.
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.
I-5
<PAGE>
Item 2. - DESCRIPTION OF PROPERTY
- ------ -----------------------
On February 1, 1999, 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.
Pure World Botanicals leases a 138,000 square-foot facility in South
Hackensack, New Jersey, from an affiliated corporation owned by the former
owners of Pure World Botanicals for $20,000 per month, net, plus one percent of
the gross revenues of Pure World Botanicals up to an additional $200,000 per
annum. At December 31, 1999, the lease had a term of five years and expires in
December 2004 with renewable options for ten additional years. In March 2000,
the lease agreement was amended to provide for two additional ten-year renewal
options at base rates up to $22,898 per month. 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 38,000 square feet.
Pure World Botanicals also leases a facility in Teterboro, New Jersey from
an unrelated party for approximately $11,000 per month which until March of 2000
was used exclusively for storage of raw materials. In March 2000, the Company
substantially completed renovation of this facility, converting it into a
botanical powdering facility. Botanical powders result from milling or crushing
crude botanicals. The powders are then used in tablets or capsules. The Company
believes that botanical powders are an essential complement to its line of
botanical extracts. Although botanical extracts are considered to be the
expanding segment of nutraceuticals, many products still consist wholly or
partly of botanical powders. The total investment in the new facility is
approximately $1 million.
Item 3. - LEGAL PROCEEDINGS
- ------ -----------------
The Company is involved from time to time in various lawsuits that arise in
the course of its business.
In late 1997, Pure World Botanicals hired Turnkey Solutions, Inc.
("Turnkey") to perform work and services in connection with the expansion of the
Pure World Botanicals Facility. In September 1998, Turnkey filed construction
liens against Pure World Botanicals, totaling approximately $140,000, and it has
demanded that Pure World Botanicals pay certain outstanding invoices, totaling
in excess of $1.3 million. In October 1998, Pure World Botanicals filed an
action in the Superior Court of New Jersey, Law Division, Bergen County,
alleging that Turnkey has breached its contract, among other things, in
connection with work and services incident to the expansion of the Pure World
Botanicals Facility. In the action, Pure World Botanicals seeks damages in
excess of $1 million. Turnkey has filed an answer denying the material
allegations of the complaint, and has commenced a third party action against
Malcolm Black Associates, Inc., and Raven Industries, Inc., suppliers of certain
equipment used in the expansion of the Pure World Botanicals Facility.
I-6
<PAGE>
In January 1999, Turnkey filed an action in the Superior Court of New
Jersey, Law Division, Bergen County, alleging that Pure World Botanicals
breached its contract and agreement to pay for work and services provided by
Turnkey incident to the expansion of the Pure World Botanicals Facility. In the
action, Turnkey seeks damages from Pure World Botanicals in excess of $1.3
million. In the same lawsuit, Turnkey has sued Pure World and an officer of Pure
World for tortious interference with contract and prospective economic relations
between Turnkey and Pure World Botanicals, without specifying the amount of
damages alleged. Turnkey has also sued IVM Corporation, the landlord of the Pure
World Botanicals Facility, on the construction liens, in the amount of $147,000.
The defendants filed a motion to dismiss the complaint, which was denied.
Discovery has been exchanged and depositions are being conducted at this time.
No trial date has been set for this matter. No assurance can be given that Pure
World Botanicals, Pure World, the officer or IVM Corporation will be successful
in these litigations. Management intends to vigorously contest these lawsuits.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
None.
I-7
<PAGE>
PART II
-------
Item 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- --------------------------------------------------------
At February 29, 2000, the Company had approximately 2,400 stockholders of
record. The Company's common stock currently trades on the NASDAQ/National
Market System under the symbol "PURW". On February 29, 2000 the closing price
per share of the common stock was $3.9688.
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.
High Low
Calendar Quarter Ended: ---- ---
1999
----
March 31 $ 9.4375 $ 4.1875
June 30 5.0625 4.0625
September 30 5.71875 2.6875
December 31 3.5 2.4062
1998
----
March 31 $11.3125 $ 5.1875
June 30 16.9375 10.625
September 30 16.0625 5.5
December 31 8.875 5
The Company has not declared or paid any cash dividends on its common stock
in 1999 or 1998 and does not foresee doing so in the immediate future. However,
on November 17, 1998, the Company declared a 10% stock dividend to stockholders
of record on January 7, 1999, distributed on January 15, 1999. All per share
information included above and elsewhere in this document has been adjusted for
this dividend.
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.
II-1
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999, the Company had cash and cash equivalents of $5.6
million. Cash equivalents consisted of U.S. Treasury Bills with original
maturities of less than three months and yields ranging from 4.856% to 5.475%.
The Company also had marketable securities with a market value of approximately
$153,000 at December 31, 1999. Marketable securities consisted of trading
securities as defined under generally accepted accounting principles. See Notes
1 and 2 of Notes to Consolidated Financial Statements for additional
information. Net working capital was approximately $13 million at December 31,
1999. 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 $1,450,000 was used by operations in 1999. The use of cash
caused by the net loss of $2,141,000, combined with the increase in inventory of
$3,908,000, partially offset by depreciation and amortization of $1,407,000,
unrealized losses on marketable securities of $812,000 and the decrease in
receivables of $1,404,000 were the primary reasons for the net use of cash.
In 1998, net cash of $550,000 was provided by operations. Operating cash
flows generated by net income of $5,688,000 and depreciation and amortization of
$869,000 were substantially offset by increases in inventory of $3,245,000 and
receivables of $2,717,000.
In 1999, net cash used in investing activities was approximately $2.3
million. Plant and equipment purchases were approximately $2.3 million in 1999
and include $376,000 used for the replacement of underground storage tanks with
greater capacity tanks; $350,000 used for production expansion and $1,619,000
used for various purchases of machinery, furniture and fixtures, computer
equipment and other capital items.
In 1998, net cash used in investing activities was approximately $7.6
million. Plant and equipment purchases were approximately $7.8 million in 1998.
The Company completed an expansion program to upgrade and expand its productive
capacity to build a new warehouse facility in 1998. Also, in 1998, proceeds from
the sale of securities available-for-sale provided $1.8 million which was
partially offset by the purchase of securities available-for-sale of $1.6
million.
Cash provided by financing activities in 1999 was approximately $3.3
million, due primarily to a net increase in borrowings of $3.3 million. For
additional information on the terms of the Company's borrowings, see Note 6 of
Notes to Consolidated Financial Statements. In 1998 cash provided by financing
activities was approximately $5 million, due primarily to the increase in
borrowings.
II-2
<PAGE>
In February 1994, the Company announced a plan to purchase up to two
million shares of the Company's common stock and in September 1998, the Company
announced a plan to purchase up to three hundred thousand shares of the
Company's common stock, subject to market conditions and other considerations as
determined by the Board of Directors (the "Repurchase Plans"). As of December
31, 1999, 696,960 shares had been acquired under the Repurchase Plans for an
aggregate cost of approximately $1,164,000. The Company repurchased 26 shares in
1999 for an aggregate cost of approximately $100. In 1998, 95 shares were
repurchased for an aggregate cost of approximately $700. All shares repurchased
in 1999 and 1998 have been canceled and returned to the status of authorized but
unissued shares.
Results of Operations
- ---------------------
The Company's consolidated operations resulted in a net loss of $2,141,000,
or basic loss per share of ($.26), in 1999 compared to net income of $5,688,000,
or basic earnings per share of $.69 in 1998. Diluted earnings (loss) per share
was ($.26) and $.62 in 1999 and 1998, respectively. Earnings per share figures
have been adjusted to reflect a 10% stock dividend declared on November 17, 1998
to stockholders of record on January 7, 1999 and distributed on January 15,
1999.
The Company had sales in 1999 of approximately $15,779,000, a decrease of
approximately $7,268,000 or 32% from 1998 sales of $23,047,000. Cost of goods
sold was $11,654,000 and gross margin was $4,125,000 in 1999, compared to cost
of goods sold of $12,233,000 and gross margin of $10,814,000 in 1998. Gross
margin as a percentage of sales was 26.1% and 46.9% in 1999 and 1998,
respectively. The decrease in sales and gross margin was principally due to the
reduction in sales of botanical products throughout the industry. Gross margin
decreased as the Company experienced price pressure on its standardized products
in 1999. Sales for the first quarter of 2000 have improved materially from 1999
and sales and earnings for the first quarter of 2000 are expected to be
significantly better than the comparable quarter of 1999. One customer accounted
for more than 10% of sales for the 1999 fiscal year. In 1998, three customers
each accounted for more than 10% of sales.
In 1999, the Company recorded net losses on marketable securities of
$1,204,000, compared to net gains of $606,000 in 1998. Substantially all of the
losses recorded in 1999 were unrealized and substantially all of the gains
recorded in 1998 were realized gains. The primary reason for the net losses in
1999 was the reclassification of securities available-for-sale to trading
securities and marking them to current value. In accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities", $1.1 million of unrealized holding losses, which
had previously been recorded as a separate component of stockholders' equity,
were recognized in earnings. See Note 2 of Notes to Consolidated Financial
Statements for additional information.
Interest, dividends and other income was $260,000 in 1999 compared to
$374,000 in 1998. Interest income was $255,000 and $348,000 in 1999 and 1998
respectively, a decrease of $93,000 or 26.7%. This decrease was due principally
to lower invested balances in 1999.
II-3
<PAGE>
General and administrative expenses (consisting of personnel, professional
and all other expenses) were $5,305,000 in 1999, compared to $5,790,000 in 1998,
a decrease of $485,000 or approximately 8.4%. Personnel expenses were $2,287,000
in 1999, a decrease of $308,000, or 11.9%, from $2,595,000 in 1998. The
principal reasons for the decrease were lower commission and bonus payments
related to the decrease in sales. Professional fees consisting of legal,
accounting and consulting fees, were $409,000 in 1999, a decrease of $58,000, or
12.4%, from the 1998 professional fees of $467,000. Other general and
administrative expenses were $2,609,000 in 1999, a decrease of $119,000 or 4.4%
from $2,728,000 in 1998. Decreased sales expense partially offset by increased
interest expense, was the primary reason for the decrease.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date for FASB Statement No. 133, an Amendment of FASB Statement No.
133", which defers the effective date of SFAS No. 133 to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management does
not expect adoption of SFAS No. 133 to have a material effect on the Company's
financial condition, results of operations or liquidity.
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.
The Company has not experienced significant Year 2000 issues subsequent to
1999's fiscal year end. Although the Company believes it has taken the
appropriate steps to address Year 2000 readiness, there is no guarantee that the
Company's efforts will prevent a material adverse impact on the results of
operations and financial condition.
II-4
<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, 1999
Consolidated Statements of Operations and Comprehensive Income for
the Years ended December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years ended December
31, 1999 and 1998
Notes to Consolidated Financial Statements
II-5
<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, 1999, and the related consolidated
statements of operations and comprehensive income, stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. 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, 1999, and the results of their operations and their cash
flows for the years ended December 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 28, 2000
F-1
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
(in $000's)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,598
Marketable securities 153
Accounts receivable, net of allowance for
uncollectible accounts and returns and
allowances of $149 2,452
Inventories 10,780
Other 501
-------
Total current assets 19,484
Investment in unaffiliated natural products company 1,510
Plant and equipment, net 10,344
Notes receivable from affiliates 331
Goodwill, net of accumulated amortization of $560 1,431
Other assets 667
-------
Total assets $33,767
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,380
Short-term borrowings 4,138
Accrued expenses and other 1,073
-------
Total current liabilities 6,591
Long-term debt 4,439
-------
Total liabilities 11,030
-------
Commitments and Contingencies (Notes 10 and 11)
Stockholders' equity:
Common stock, par value $.01;
30,000,000 shares authorized;
8,268,883 shares issued and outstanding 83
Additional paid-in capital 43,321
Accumulated deficit ( 20,667)
-------
Total stockholders' equity 22,737
-------
Total liabilities and stockholders' equity $33,767
=======
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in $000's, except per share data)
Year Ended December 31,
-----------------------
1999 1998
------ ------
Revenues:
Sales $15,779 $23,047
Net gains (losses) on marketable
securities ( 1,204) 606
Interest, dividend and other income 260 374
------- -------
Total revenues 14,835 24,027
------- -------
Expenses:
Cost of goods sold 11,654 12,233
Selling, general and administrative 5,305 5,790
------- -------
Total expenses 16,959 18,023
------- -------
Income (loss) before income taxes ( 2,124) 6,004
Provision for income taxes 17 316
------- -------
Net income (loss) ( 2,141) 5,688
Other comprehensive income (loss):
Unrealized holding gains (losses)
on securities available-for-sale 244 ( 876)
------- -------
Comprehensive income (loss) ($ 1,897) $ 4,812
======= =======
Basic net income (loss) per share ($ .26) $ .69
======= =======
Diluted net income (loss) per share ($ .26) $ .62
======= =======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in 000's)
Total
Additional Accumulated Other Stock-
Total Shares Common Paid-In Accumulated Comprehensive holders'
Outstanding Stock Capital Deficit Income (Loss) Equity
----------- ----- ------- ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998
as restated for stock dividend 8,256 $ 83 $43,279 ($24,214) $632 $19,780
Change in net unrealized holding
gains/losses on securities
available-for-sale - - - - ( 876) ( 876)
Net income - - - 5,688 - 5,688
Issuance of common stock 13 - 43 - - 43
Repurchase and cancellation
of common stock - - ( 1) - - ( 1)
----- ---- ------- ------- ---- -------
Balance, December 31, 1998 8,269 83 43,321 ( 18,526) ( 244) 24,634
Change in net unrealized holding
gains/losses on securities
available-for-sale - - - - 244 244
Net loss - - - ( 2,141) - ( 2,141)
----- ---- ------- ------- ---- -------
Balance, December 31, 1999 8,269 $ 83 $43,321 ($20,667) $ - $22,737
===== ==== ======= ======= ==== =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in $000's)
Year Ended December 31,
-----------------------
1999 1998
------ ------
Cash flows from operating activities:
Net income (loss) ($ 2,141) $ 5,688
Adjustments:
Depreciation and amortization 1,407 869
Unrealized losses on marketable securities 812 83
Net marketable securities transactions 510 305
Gain on sale of securities
available-for-sale ( 13) ( 621)
Change in inventories ( 3,908) ( 3,245)
Change in receivables 1,404 ( 2,717)
Change in accounts payable and other
accruals 606 452
Other, net ( 127) ( 264)
------- -------
Net cash provided by (used in)
operating activities ( 1,450) 550
------- -------
Cash flows from investing activities:
Purchase of plant and equipment ( 2,345) ( 7,789)
Proceeds from sale of securities
available-for-sale 59 1,793
Purchase of securities available-for-sale - ( 1,600)
Loans to affiliates and others ( 70) ( 60)
Repayments of loans to affiliates 12 283
Other, net - ( 202)
------- -------
Net cash used in investing activities ( 2,344) ( 7,575)
------- -------
Cash flows from financing activities:
Repurchase of common stock - ( 1)
Issuance of common stock - 43
Term loan borrowings 2,631 3,996
Term loan repayments ( 871) ( 396)
Net revolving line of credit borrowings 1,510 1,405
------- -------
Net cash provided by financing activities 3,270 5,047
------- -------
Net decrease in cash and cash equivalents ( 524) ( 1,978)
Cash and cash equivalents at beginning of year 6,122 8,100
------- -------
Cash and cash equivalents at end of year $ 5,598 $ 6,122
======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 548 $ 278
======= =======
Taxes $ 51 $ 549
======= =======
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 wholly-owned
subsidiary, Pure World Botanicals, Inc., ("Pure World Botanicals")
after elimination of all material intercompany accounts and
transactions. The Company, through Pure World Botanicals, manufactures
natural products for the nutraceutical, flavor and cosmetic
industries.
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.
Prior years' financial statements have been reclassified to
conform to the current year's presentation.
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. Unrealized gains and losses on securities
available-for-sale are included in the determination of comprehensive
income.
F-6
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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.
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 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.
Plant and Equipment
-------------------
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.
F-7
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
Goodwill
--------
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, long-term debt and
payables approximate their fair value.
The Company does not hold or issue financial instruments for
trading purposes. Amounts to be paid or received under interest rate
swap agreements are recognized as increases or reductions in interest
expense in the period in which they accrue.
The fair value of the Company's debt approximates their carrying
values due to the variable interest-rate feature of the instruments.
The fair value of the Company's interest rate swaps at December 31,
1999 was insignificant.
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
--------------------
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.
F-8
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
The shares used for basic earnings per common share and diluted
earnings per common share are reconciled below. All share and per
share information has been restated to reflect a 10% stock dividend
declared on November 17, 1998, to stockholders of record on January 7,
1999, distributed on January 15, 1999.
(Shares in Thousands)
1999 1998
---- ----
Basic earnings per common share:
Average shares outstanding for basic
earnings per share 8,269 8,266
===== =====
Diluted earnings per common share:
Average shares outstanding for basic
earnings per share 8,269 8,266
Dilutive effect of stock options - 868
----- -----
Average shares outstanding for diluted
earnings per share 8,269 9,134
===== =====
Major Customers
---------------
One customer accounted for more than 10% of sales for the 1999
fiscal year. In 1998, each of three customers accounted for more than
10% of sales.
New Accounting Standards
------------------------
In June 1998, the Financial Accounting Standards Board Statement
No. 133 ("FASB No. 133"), Accounting for Derivative Instruments and
Hedging Activities was issued. FASB No.133 established requirements
which provide for recognition and measurement of derivative
instruments and hedging activities. This standard will be effective
for the Company in 2000. The Company does not believe that FASB No.
133 will have a material effect on the Company's financial condition
or results of operations.
F-9
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
2. Investment Securities
---------------------
At December 31, 1999, securities consisted of the following (in
$000's):
Gross
Cost Holding Fair
Basis Losses Value
-------- --------- -------
Marketable securities $ 1,044 $ 891 $ 153
======== ======= ======
All investment securities are investments in common stock.
Realized losses of $392,000, as well as unrealized losses of
$812,000 were included in the results of operations for the year ended
December 31, 1999.
In 1998, realized gains and losses of $752,000 and $63,000,
respectively, as well as net unrealized losses of $83,000 were
included in the results of operations.
3. Inventories
-----------
Inventories are comprised of the following (in $000's):
Raw materials $ 2,083
Work-in-process 490
Finished goods 8,207
-------
Total inventories $10,780
=======
4. Plant and Equipment
-------------------
At December 31, 1999, plant and equipment consisted of the
following (in $000's):
Machinery and equipment $ 9,516
Leasehold improvements 1,986
Office equipment, furniture
and fixtures 1,555
Accumulated depreciation ( 2,713)
-------
Total $10,344
=======
F-10
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
5. Investment in Unaffiliated Natural Products Company
---------------------------------------------------
In May 1996, the Company purchased 500 shares of common stock
representing a 25% interest in Gaia Herbs, Inc. ("Gaia") for
approximately $1 million. In June 1997, the Company purchased an
additional 200 shares of common stock for $500,000, increasing its
equity ownership to 35% of Gaia's outstanding shares of common stock
("Pure World's Gaia Stock"). Pure World's Gaia Stock is non-voting.
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 "Pure World Loan"). The Pure
World 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. The parties also agreed that if any
other party acquired voting shares, Pure World's Gaia Stock would
become voting stock.
Additionally, the parties agreed that Gaia and the principal
stockholder of Gaia (the "Principal Stockholder") would have a right
of first refusal to acquire any Gaia stock sold by Pure World and that
Pure World would have a right of first refusal to acquire any Gaia
stock sold by Gaia or the Principal Stockholder.
In June 1998, Gaia requested that Pure World guarantee an
unsecured bank line of $500,000 (the "Gaia Bank Loan"). Because of
expansion plans for Pure World Botanicals, Pure World declined to
issue the guarantee. An individual unaffiliated with Gaia or Pure
World agreed to guarantee the Gaia Bank Loan in consideration of a
cash fee and the issuance to the individual of 100 shares of Gaia's
common stock, representing 5 percent of Gaia's common stock
outstanding (the "Guarantee"). The Guarantee is also secured by Gaia
stock held by Gaia's Principal Stockholder. Pure World notified Gaia
that it wished to exercise its right of first refusal in connection
with the Guarantee. Pure World and Gaia reached an understanding that
Pure World would decline the right of first refusal if by November 30,
1998 thirty percent of Pure World's interest was purchased for
$1,500,000 (leaving five percent of the current Gaia common stock
outstanding) and the Pure World Loan was repaid, including any accrued
interest (the "Repurchase"). If the Repurchase was not closed by
November 30, 1998 ("the Closing Date"), Pure World then would have the
right to assume the Guarantee pursuant to the same terms granted the
original guarantor, except for the cash fee. If the Repurchase did not
close prior to the Closing date, and either before or after the
Closing Date, the Guarantee is called by the bank, Pure World would
then own, or have the right to own a majority of Gaia's voting stock.
The repurchase did not close as of November 30, 1998 and the Company
is in discussions with Gaia about its investment.
F-11
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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.
6. Borrowings
----------
Borrowings consisted of the following at December 31, 1999 (in
$000's):
Loans payable to a bank,
collateralized by certain
property and equipment,
bearing annual interest at
6.878% in December 1999
maturing in December 2003 $2,571
Loans payable to a bank,
pursuant to a $3 million
unsecured line of credit
bearing annual interest at
the prime rate (8.5% at December
31, 1999, currently 9%) maturing
in June 2000 2,914
Loan payable to a bank, collateralized
by certain equipment bearing
annual interest at 7.94%
maturing in October 2004 1,933
Loan payable to a bank, collateralized
by certain equipment bearing
annual interest at 8.75% maturing in
April 2003 214
Loan payable to a bank, collateralized
by certain equipment, bearing annual
interest at 8.75% maturing in August 2003 50
Loan payable to a bank, collateralized
by certain equipment, bearing annual
interest at 8.25% maturing in June 2004 196
F-12
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
Lease payable to IBM Credit Corporation
for gross assets of $150,000 with imputed
interest at 6.5% maturing in January 2002. 143
Leases payable for equipment 358
All other 198
-------
Total 8,577
Less: Current portion of borrowings 4,138
-------
Long-term debt $ 4,439
=======
Interest expense was $548,000 and $278,000 for the years ended
December 31, 1999 and 1998, respectively. The loan agreements
(notional amount $1,833,000) contain certain restrictive covenants
with which the Company has complied with as of December 31, 1999.
Aggregate maturities of borrowings (in $000's) for each of the
years in the five year period ending December 31, 2004 are $1,224;
$1,128; $1,008; $953 and $859. These maturities exclude $2,914,000 of
debt pursuant to a $3 million line of credit.
Interest Rate Swap Agreement
----------------------------
In connection with the origination of a bank loan, the Company
entered into an interest rate swap agreement (Notional amount
$1,833,000) as required by the bank to effectively convert
floating-rate debt to fixed rate debt in order to reduce the Company's
risk to movements in interest rates. This agreement involves the
exchange of fixed and floating interest rate payments over the life of
the agreement without the exchange of the underlying principal amount
and involved no cost to the Company. Accordingly, the impact of the
fluctuations in interest rates on this interest rate swap agreement is
fully offset by the opposite impact on the related debt.
F-13
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
7. 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 and in September
1998, the Company announced a plan to purchase up to 300,000 shares of
the Company's common stock, subject to market conditions and other
considerations as determined by the Board of Directors. As of December
31, 1999, 696,960 shares had been acquired under the Repurchase Plans
for an aggregate cost of approximately $1,164,000.
The Company repurchased 26 shares in 1999 for an aggregate cost
of approximately $100. In 1998, 95 shares were repurchased for an
aggregate cost of approximately $700. All shares repurchased in 1999
and 1998 have been canceled and returned to the status of authorized
but unissued shares.
Stock Dividends
---------------
On November 17, 1998, the Company declared a 10% stock dividend
to stockholders of record on January 7, 1999. On January 15, 1999, the
Company distributed 751,719 shares. The stock dividend was accounted
for similar to a stock split. Accordingly, all share and per share
information have been adjusted for all periods presented.
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 550,000
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
550,000 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.
F-14
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
The following table summarizes option transactions under the
Option Plans for the years ended December 31, 1999 and 1998:
Weighted Average
Shares Exercise Price
------ ----------------
Options outstanding at
January 1, 1998 747,450 $ 2.43
Options granted 134,805 5.31
Options canceled ( 6,050) 5.00
Options exercised ( 11,000) 1.56
------- ------
Options outstanding at
December 31, 1998 865,205 2.90
Options granted 7,000 2.41
Options canceled ( 16,830) 6.23
Options exercised - -
------- ------
Options outstanding at
December 31, 1999 855,375 $ 2.83
======= ======
For options outstanding and exercisable at December 31, 1999, the
exercise price ranges are:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-Average Weighted-
Range of Outstanding at Remaining Life Average Outstanding at Remaining Life Average
Exercise Prices December 31, 1999 (In Years) Exercise Price December 31, 1999 (In Years) Exercise Price
- --------------------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1 - $3 586,700 4 $ 1.73 507,540 4 $ 1.59
$3.01 - $6 258,775 7 $ 5.12 137,500 7 $ 5.22
$6.01 - $8 9,900 9 $ 7.39 - - -
------- ------ ------- ------
855,375 $ 2.90 645,040 $ 2.35
======= ====== ======= ======
</TABLE>
F-15
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
In addition, in 1995 in connection with the Pure World Botanicals
acquisition, the Company issued to the former Pure World Botanicals
shareholders options outside of the 1991 Plan to acquire 275,000 shares of
the Company's common stock at its then approximate fair value of $1.91 per
share. These options lapsed at January 3, 2000. Three employees of Pure
World Botanicals were also given a total of 66,000 options outside of the
1991 Plan with prices ranging from $1.82 - $1.91, the approximate fair
market value at the time of grant, in connection with their employment. In
1996, 62,700 options were granted outside of the 1991 Plan to various
employees of the Company and Pure World Botanicals in connection with their
employment with prices ranging between $1.65 and $2.05, the approximate
fair market value at the time of the grant. In 1997, 44,000 options were
granted outside of the 1997 Plan for new employees with prices ranging from
$3.07 to $4.89 per share. Of these options, 82,500 have since been
canceled.
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.
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:
1999 1998
---- ----
Net income (loss):
As reported (in $000's) ($2,141) $5,688
Pro forma (in $000's) ($2,436) $5,434
Basic net income (loss) per share:
As reported ($ .26) $ .69
Pro forma ($ .29) $ .66
Diluted net income (loss) per share:
As reported ($ .26) $ .62
Pro forma ($ .29) $ .59
F-16
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 FASB Statement 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 55.56
percent in 1999 and 119 percent in 1998; risk free interest rates
between 5.25 percent and 7.63 percent; and weighted average expected
lives of 5 to 10 years.
8. 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.
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 1999 and 1998 for the contingent payments provided
under the terms of the Agreement.
In connection with the Pure World Botanicals 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.
F-17
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
In February 1996, the Company entered into an employment
agreement with Dr. Qun Yi Zheng, Executive Vice President of Pure
World Botanicals for an initial one-year term. In July 1997, this
agreement was amended (the "Amended Zheng Agreement"). The Amended
Zheng Agreement is for a three-year term commencing on August 1, 1997
(the "Commencement Date"). The term is to be automatically extended
one day for each day elapsed after the Commencement Date.
9. Income Taxes
------------
At December 31, 1999, the Company had net operating loss
carryforwards ("NOLs") of approximately $14 million for Federal income
tax reporting purposes, which expire in the years 2002 through 2014.
Additionally, the Company has investment and research and development
tax credit carryforwards aggregating approximately $43,000 and
$497,000, respectively, which expires 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 components of income tax expense (benefit) were as follows
(in $000's):
1999 1998
------ -----
Federal-current $ - $ 121
State-current 34 367
Deferred ( 17) ( 172)
----- -----
Total $ 17 $ 316
===== =====
F-18
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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, 1999 are as follows (in $000's):
Deferred tax assets:
Net operating loss carryforwards $4,869
Alternative minimum tax and
other credit carryforwards 595
Other, net 763
------
6,227
Valuation allowance ( 5,982)
======
Net deferred tax asset $ 245
======
Due to the relatively short expiration periods of the NOLs and
the unpredictability of future earnings, 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 (benefit) (income before income taxes
times the statutory tax rate of 34%) is as follows (in $000's):
1999 1998
-------- ------
Income (loss) before income
taxes ($2,124) $6,004
Statutory federal income
tax rate 34% 34%
------ ------
Expected income tax (benefit) ( 722) 2,041
Alternative minimum tax - 121
State tax 23 242
Change in valuation allowance 711 ( 2,274)
Other, net 5 186
------ ------
Provision for income taxes $ 17 $ 316
====== ======
F-19
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
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 $286,000 which will be
allowed as a credit carryover against regular tax in the future in the
event the regular tax exceeds the AMT tax.
10. 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, 1999 and 1998. Brokerage commissions paid by the
Company totaled approximately $3,000 in 1999 and $41,000 in 1998.
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 certain general and administrative
expenses. Such reimbursements for the years ended December 31, 1999
and 1998 amounted to approximately $412,000 and $386,000,
respectively. Sun received no remuneration or administrative fees for
performing this service.
Rosenman & Colin, LLP ("R&C") performed legal work for the
Company and its subsidiaries in 1999 and 1998. Natalie I. Koether,
President of the Company and of Pure World Botanicals 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
$135,000 in 1999 and $62,000 in 1998.
Pure World Botanicals leases a 138,000 square-foot facility in
South Hackensack, New Jersey, from an affiliated corporation owned by
the former owners of Pure World Botanicals for $20,000 per month, net,
plus one percent of the gross revenues of Pure World Botanicals up to
an additional $200,000 per annum. At December 31, 1999, the lease had
a term of five years which expires in December 2004 with renewable
options for ten additional years. In March 1999, the lease agreement
was amended to provide for two additional ten-year renewal options at
base rates up to $22,898 per month. 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
38,000 square feet.
F-20
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
Pure World Botanicals also leases a warehouse facility in
Teterboro, New Jersey for approximately $11,000 per month from an
unrelated party.
The Company also rents office space from an affiliate. Such rent
expense was approximately $43,000 in 1999 and in 1998.
In connection with the acquisition of Pure World Botanicals, IVM
Corporation, the landlord of the Pure World Botanicals Facility
("IVM"), borrowed $200,000 from the Company (the "First Loan") in
1995, and IVM, and its shareholders (the former owners of Pure World
Botanicals) 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 and were collateralized by the Pure World Botanicals
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 was payable at the rate of $10,000 per
month plus interest until it was satisfied. The First Loan was paid
off in 1996 and the Second Loan was paid off in 1998.
During 1995, the Company loaned money to an officer of the
Company and to an officer of Pure World Botanicals 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 Pure World Botanicals, the Company
loaned $210,000 to Voldemar Madis, who serves as Vice-Chairman of the
Company and of Pure World Botanicals. In the past, Mr. Madis had made
loans for the same amount to the predecessor corporation of Pure World
Botanicals while it operated under the protection of Federal
Bankruptcy Law. These loans were not repaid when Pure World Botanicals
was removed from bankruptcy. The loan made to Mr. Madis by the Company
bore interest at a rate of 8.125%, had a five-year term, and was
collateralized by Mr. Madis' personal residence. In February 1998, the
loan was paid in full.
American Bank, located in Allentown, Pennsylvania, has issued
certain loans to Pure World Botanicals, totaling approximately
$470,000 at December 31, 1999. Mark W. Jaindl, Director of the
Company, is President of American Bank.
F-21
<PAGE>
PURE WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
11. Legal Proceedings
-----------------
In late 1997, Pure World Botanicals hired Turnkey Solutions, Inc.
("Turnkey") to perform work and services in connection with the
expansion of the Pure World Botanicals Facility. In September 1998,
Turnkey filed construction liens against Pure World Botanicals,
totaling approximately $140,000, and it has demanded that Pure World
Botanicals pay certain outstanding invoices, totaling in excess of
$1.3 million. In October 1998, Pure World Botanicals filed an action
in the Superior Court of New Jersey, Law Division, Bergen County,
alleging that Turnkey has breached its contract, among other things,
in connection with work and services incident to the expansion of the
Pure World Botanicals Facility. In the action, Pure World Botanicals
seeks damages in excess of $1 million. Turnkey has filed an answer
denying the material allegations of the complaint, and has commenced a
third party action against Malcolm Black Associates, Inc., and Raven
Industries, Inc., suppliers of certain equipment used in the expansion
of the Pure World Botanicals Facility.
In January 1999, Turnkey filed an action in the Superior Court of
New Jersey, Law Division, Bergen County, alleging that Pure World
Botanicals breached its contract and agreement to pay for work and
services provided by Turnkey incident to the expansion of the Pure
World Botanicals Facility. In the action, Turnkey seeks damages from
Pure World Botanicals in excess of $1.3 million. In the same lawsuit,
Turnkey has sued Pure World and an officer of Pure World for tortious
interference with contract and prospective economic relations between
Turnkey and Pure World Botanicals, without specifying the amount of
damages alleged. Turnkey has also sued IVM Corporation, the landlord
of the Pure World Botanicals Facility, on the construction liens, in
the amount of $147,000. The defendants filed a motion to dismiss the
complaint, which was denied. Discovery has been exchanged and
depositions are being conducted at this time. No trial date has been
set for this matter. No assurance can be given that Pure World
Botanicals, Pure World, the officer or IVM Corporation will be
successful in these litigations. Management intends to vigorously
contest these lawsuits.
F-22
<PAGE>
Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
II-6
<PAGE>
PART III
Item 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ------- ------------------------------------------------------------
The four members of the Board of Directors were elected at the 1999 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 29, 2000
were as follows:
Position and Office
Presently Held with Director
Name of Person Age the Company Since
-------------- --- ------------------- --------
Paul O. Koether 63 Chairman and 1988
Director of the
Company; Chairman
of Pure World Botanicals
Mark W. Jaindl 40 Director of the Company 1994
and of Pure World
Botanicals
Alfredo Mena 47 Director 1992
William Mahomes, Jr. 53 Director 1993
Natalie I. Koether 60 President of the -
Company and Pure World
Botanicals
Voldemar Madis 59 Vice Chairman of the -
Company and Pure World
Botanicals
Dr. Qun Yi Zheng 42 Executive Vice President -
of Pure World Botanicals
John W. Galuchie, Jr. 47 Executive Vice President, -
Treasurer and Secretary
of the Company
Mark Koscinski 42 Senior Vice President -
of the Company; Senior
Vice President, Treasurer
and Secretary of Pure World
Botanicals
III-1
<PAGE>
Paul O. Koether is principally engaged in the following: (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 PWBI, 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 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) from July 1992 to
January 2000, Chairman of Golf Rounds.com, Inc. ("Golf Rounds"), which
operates internet golf and skiing sites; and (vi) since September 1998 as a
director and Chairman of Cortech, Inc., ("Cortech"), a biopharmaceutical
company.
Mark W. Jaindl. Since October 1997, Mr. Jaindl has been President and Chief
Executive Officer of American Bank, a commercial bank located in Allentown,
Pennsylvania. He has served as a director and Vice-chairman of American
Bank since June 1997. 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. 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 PWBI from December 1994 until
May 1995 and has been a director of PWBI since December 1994 and he served
as a director of Golf Rounds from July 1992 to November 1999. From
September 1998 to November 1999 Mr. Jaindl was a director and Vice-chairman
of Cortech. Since February 2000, Mr. Jaindl has been a director of
Continental Information Systems Corporation, an internet based service
provider.
Alfredo Mena. Since 1976, Mr. Mena has been president of Alimentos de El
Salvador S.A. de C.V., having previously served as Director and General
Manager. The Company is engaged in coffee growing, processing and
exporting. From October 1995 until June 1997, he served as Presidential
Commissioner for the Modernization of the Public Sector, in charge of its
decentralization, debureaucratization, deregulation, and privatization. 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,
emphasizing in mediating 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. Mr. Mahomes currently
III-2
<PAGE>
serves on the Board of Directors of a variety of organizations, including
The Salvation Army Adisory Board of Dallas, the Texas Pension Review Board,
the Pegasus Charter School and the Texas Affiliate Board of Healthcare
Service Corporation, formerly known as Blue Cross & Blue Shield of Texas.
Natalie I. Koether is engaged principally in the following activities: (i)
President of the Company since February 1, 1997 and President and Director
of Pure World Botanicals since November 1995; (ii)of Counsel with the law
firm of Rosenman & Colin, LLP, from September 1993.
Voldemar Madis is principally engaged in the following businesses: (i) Vice
Chairman of the Company and of Pure World Botanicals 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 Pure World Botanicals. The terms of the lease are described in
"Item 2 - Description of Property".
Qun Yi Zheng Ph.D., Executive Vice President and Director of Science and
Technology at Pure World Botanicals, has been with the Company since 1996.
Dr. Zheng was Technical Manager at Hauser Nutraceuticals, Colorado from
1995 to 1996 and from 1993 to 1994 he was Senior Chemist at Hauser Chemical
Research, Inc., Colorado.
John W. Galuchie, Jr., a certified public accountant, is engaged in the
following businesses: (i) the Company, as Executive Vice President 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
January 1990 and a director since September 1989; and (iv) Cortech as
President and director since September 1998. Since September 1999, Mr.
Galuchie has been a director and since March 2000, chairman of Gish
Biomedical, Inc., a medical device manufacturer. Mr. Galuchie also served
as a director of HealthRite, Inc., a nutritional products company, from
December 1998 to June 1999, served as a director of NorthCorp Realty
Advisors, Inc., a real estate asset manager from June 1992 until August
1996, and served as Vice President, Treasurer and a director from July 1992
to January 2000 of Golf Rounds.
Mark Koscinski, a certified public accountant is engaged in the following
activities: (i) the Company as Senior Vice President and principal
accounting and financial officer since August 1993; (ii) Vice President of
Sun since August 1993; (iii) Senior Vice President, Treasurer and Secretary
and a Director of Pure World Botanicals since December 1994; and (iv) Vice
President of Kent and Winston since August 1993. Mr. Koscinski resigned
effective March 31, 2000.
III-3
<PAGE>
Item 10. - EXECUTIVE COMPENSATION
- ------- ----------------------
The table below sets forth for the years ended December 31, 1999, 1998 and
1997, the compensation of any person who, as of December 31, 1999, 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").
Long-Term
Name and Annual Compensation(1)(2) Compensation
Principal Position Year Salary Bonus Options(#)(3)
------------------ ---- ------ ----- --------------
Paul O. Koether 1999 $197,283 $ - -
Chairman 1998 215,000 75,000 -
1997 215,000 50,000 -
Natalie I. Koether 1999 $247,981 $ - -
President 1998 270,000 75,000 -
1997 267,000 - 137,500
Voldemar Madis 1999 $161,291 $ - -
Vice Chairman 1998 163,461 6,000 -
1997 150,000 6,000 -
Qun Yi Zheng 1999 $182,080 $20,000 -
Executive Vice 1998 166,051 75,000 55,000
President 1997 116,013 50,000 82,500
Mark Koscinski 1999 $114,530 $ - -
Sr. Vice President 1998 111,000 22,500 -
1997 108,000 22,500 -
- ----------------------------------------------------------
(1) The Company currently has no bonus plan.
(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) Stock options restated to reflect a 10% stock dividend declared on
November 17, 1998 to stockholders of record on January 7, 1999,
distributed on January 15, 1999.
III-4
<PAGE>
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 550,000 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 550,000 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.
The table below contains information concerning the fiscal year-end value
of unexercised options held by the Executive Officers.
Fiscal Year-End Options Values
------------------------------------------------------
Value of Unexercised
Number of Unexercised In-the-Money
Options at 12/31/99 Options at 12/31/99
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Paul O. Koether 165,000 / - $254,687 / $ -
Natalie I. Koether 275,000 / - 214,062 / -
Voldemar Madis 36,115 / - 43,913 / -
Qun Yi Zheng 44,000 / 165,000 35,781 / 24,375
Mark Koscinski 36,300 / 2,200 48,406 / 2,375
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
III-5
<PAGE>
year. No participant, however, may have deferred more than $10,000 in 1999 and
$10,000 in 1998, which amount is indexed each year for inflation. The Company
did not match employee contributions in 1999 or 1998. 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.
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
III-6
<PAGE>
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 Pure World Botanicals on January 3,
1995 by the Company, Pure World Botanicals entered into an employment agreement
with Voldemar Madis to serve as an executive officer of Pure World Botanicals.
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.
In February 1996, the Company entered into an employment agreement with Dr.
Qun Yi Zheng, Executive Vice President of the Company for an initial one-year
term. In July 1997, this agreement was amended (the "Amended Zheng Agreement").
The Amended Zheng Agreement is for a three-year term commencing on August 1,
1997 (the "Commencement Date"). The term is to be automatically extended one day
for each day elapsed after the Commencement Date.
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 1999, the
Company paid directors' fees in the aggregate of approximately $23,000.
III-7
<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 29, 2000, 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:
Number of Shares Approximate
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class
------------------- --------------------- -----------
Paul O. Koether
211 Pennbrook Road
Far Hills, N.J. 07931 3,367,135(2) 37.17%
Natalie I. Koether
211 Pennbrook Road
Far Hills, N.J. 07931 3,367,135(3) 37.17%
Sun Equities Corporation
376 Main Street
Bedminster, NJ 07921 2,457,725 27.13%
Mark W. Jaindl
3150 Coffeetown Road
Orefield, PA 18069 239,382(4) 2.64%
William Mahomes, Jr.
1201 Main Street
Suite 830
Dallas, TX 75201 11,000 *
Alfredo Mena
P. O. Box 520656
Miami, Florida 33152 18,700 *
Voldemar Madis
375 Huyler Street
South Hackensack, NJ 07606 124,070 *
Dr. Qun Yi Zheng
375 Huyler Street
South Hackensack, NJ 07606 44,000 *
Mark Koscinski
376 Main Street
Bedminster, NJ 07921 74,800 *
Dimensional Fund Advisors, Inc.(5)
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 489,840 5.92%
All directors and
officers as a group
(9 persons) 3,935,407(1) 43.45%
------------------------------
*Represents less than one percent.
III-8
<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 (165,000 shares);
Natalie I. Koether (275,000 shares); Mark W. Jaindl (77,000 shares);
Alfredo Mena (16,500 shares); Voldemar Madis (120,000 shares); Qun Yi
Zheng (44,000 shares); Mark Koscinski (36,300 shares) and all directors
and officers as a group (788,800 shares).
(2) Includes 519,750 shares beneficially owned by his wife, including
110,000 shares owned by Emerald Partners of which she is the sole
general partner and 2,200 shares owned by Sussex Group, Inc. of which
she is the President, a director and controlling stockholder, 275,000
shares which she has the right to acquire upon exercise of stock
options and 132,550 shares held in custodial accounts. Mr. Koether may
also be deemed to be the beneficial owner of the 2,457,725 shares owned
by Sun, of which Mr. Koether is a principal stockholder and Chairman,
100,470 shares held in discretionary accounts of certain of his
brokerage customers and 14,190 shares held in Mr. Koether's IRA
account. Mr. Koether disclaims beneficial ownership of all of the
foregoing shares.
(3) Includes (1) 110,000 shares owned by Emerald Partners of which Mrs.
Koether is the sole general partner and 2,200 shares owned by Sussex
Group, Inc. of which she is the President, director and controlling
stockholder; (2) 275,000 shares which she has the right to acquire upon
exercise of stock options; (3) 132,550 shares held in custodial
accounts; and (4) the shares beneficially owned by her husband,
described above in footnote (2). Mrs. Koether may also be deemed to be
the beneficial owner of the 2,457,725 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.
(4) Includes 15,092 shares held in Mr. Jaindl's IRA account and 4,400
shares held by a trust for the benefit of his son, for which Mr. Jaindl
serves as a trustee.
(5) Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered
under the Investment Company Act of 1940, and serves as investment
manager to certain other commingled group trusts and separate accounts.
These investment companies, trusts and accounts are the "Funds". In its
role as investment adviser or manager, Dimensional possesses voting
and/or investment power over the securities of the Issuer described in
this schedule that are owned by the Funds. All securities reported in
this schedule are owned by the Funds. Dimensional disclaims beneficial
ownership of such securities.
III-9
<PAGE>
Item 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
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 certain general and administrative expenses. Such reimbursements for the
years ended December 31, 1999 and 1998 amounted to approximately $412,000 and
$386,000, respectively. Sun received no remuneration or administrative fees for
performing this service.
Rosenman & Colin LLP ("R&C") performed legal work for the Company for which
it billed the Company an aggregate of approximately $135,000 in 1999 and $62,000
in 1998. Natalie I. Koether, Esq., President of the Company and of Pure World
Botanicals and wife of the Chairman of the Company, is of Counsel to R&C.
American Bank, located in Allentown, Pennsylvania, has issued certain loans
to Pure World Botanicals, totaling approximately $470,000 at December 31, 1999.
Mark W. Jaindl, Director of the Company, is President of American Bank.
III-10
<PAGE>
PART IV
Item 13. - EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following exhibits are filed as part of this report:
Exhibit
Number Exhibit Method of Filing
- ------- ------- ----------------
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
Restated Certificate of Incor- Pure World, Inc. Form 10-KSB
poration of the Company for the 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 Incor- Incorporated by reference to
porated Non-Qualified Stock Exhibit A to Computer Memories
Option Plan Incorporated Proxy Statement
dated July 7, 1992.
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.
IV-1
<PAGE>
Exhibit
Number Exhibit Method of Filing
- ------- ------- ----------------
10.5 1997 Non-Qualified Stock Option Incorporated by reference to
Plan 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 Incorporated by reference
Agreement with V. Madis to Pure World, Inc. Form
10-KSB for the year ended
December 31, 1997.
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) for the
year ended March 17, 1995.
10.10 (a) Employment Agreement with Incorporated by reference to
Dr. Q.Y. Zheng Pure World, Inc. Form 10-KSB
dated December 31, 1998
(b) Amendment to Employment Incorporated by reference to
Agreement with Dr. Q.Y. Zheng Pure World, Inc. Form 10-KSB
dated December 31, 1998.
21 Subsidiaries of the Registrant Filed herewith.
27 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K
None
IV-2
<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 29, 2000 By: /s/ Paul O. Koether
-------------------
Paul O. Koether
Chairman of the Board
March 29, 2000 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 29, 2000
- ------------------------- and Director
Paul O. Koether (Principal Executive
Officer)
/s/ William Mahomes, Jr. Director March 29, 2000
- -------------------------
William Mahomes, Jr.
/s/ Alfredo Mena Director March 29, 2000
- -------------------------
Alfredo Mena
/s/ Mark W. Jaindl Director March 29, 2000
- -------------------------
Mark W. Jaindl
IV-3
<PAGE>
EXHIBIT 21
PURE WORLD, INC.
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
American Holdings, Inc. Delaware
Eco-Pure, Inc. Delaware
Pure World Botanicals, Inc. Delaware
Pure World Botanicals Powders, Inc. Delaware
