-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cr9XCDlrBgUCWrkPdbUlBREnRV+N05G8mn8nlj1h9ZcYKF+fW80LoPG1z9o/cQNc 8UZFkWQQ17XoRN5i2XuFVQ== 0000356446-99-000005.txt : 19990402 0000356446-99-000005.hdr.sgml : 19990402 ACCESSION NUMBER: 0000356446-99-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURE WORLD INC CENTRAL INDEX KEY: 0000356446 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 953419191 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-10566 FILM NUMBER: 99580693 BUSINESS ADDRESS: STREET 1: P O BOX 74 STREET 2: 376 MAIN ST CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9082349220 MAIL ADDRESS: STREET 1: P O BOX 74 STREET 2: 376 MAIN STREET CITY: BEDMINSTER STATE: NJ ZIP: 07921 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HOLDINGS INC /DE/ DATE OF NAME CHANGE: 19940411 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER MEMORIES INC /DE/ DATE OF NAME CHANGE: 19940411 EX-27 1 FDS --
5 This Schedule contains summary financial information extracted from the Form 10-KSB of Pure World, Inc. for the year ended December 31, 1998 and is quaified in its entirety by reference to such financial statements. 0000356446 PURE WORLD, INC. 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 6,122 75 3,996 140 6,872 17,318 10,712 1,449 31,788 3,983 0 0 0 83 24,551 31,788 23,047 24,027 12,233 17,745 0 0 278 6,004 316 5,688 0 0 0 5,688 0.69 0.62
10KSB 2 FOR THE YEAR ENDED DECEMBER 31, 1998 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, 1998 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from _________________ to _________________. Commission file number 0-10566 PURE WORLD, INC. (Name of small business issuer in its charter) Delaware 95-3419191 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921 (Address of principal executive offices with Zip Code) Issuer's telephone number, including area code (908) 234-9220 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Issuer's revenues for the fiscal year ended December 31, 1998 were approximately $24 million. At February 28, 1999, there were 8,268,909 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 $25 million. Transitional Small Business Disclosure Format Yes No X 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 "Pure World Botanicals Facility") - ------------------------------------------------------------- The Company believes it has the largest botanical extraction facility in North America. Situated on 4.5 acres, the 138,000 square foot Pure World Botanicals 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 1999, the Company leased an 11,000 square foot facility in Central New Jersey for two years. This facility will be used to process botanical powders using cryogenic milling. 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 partly of botanical powders. 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), coal tar (used by the cosmetic industry for dandruff control shampoos) 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") 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. Laboratory - ---------- The Pure World Botanicals Facility contains six laboratories: quality control; research and development; analytical instrumentation; flavor; cosmetic; and microbiology. The microbiology laboratory, believed to be the first on-site microbiology laboratory in the industry, evaluates finished products for microbiological purity. The quality control laboratory is devoted to physical/chemical analysis of products 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 the recently acquired 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. Only after a raw material obtains laboratory approval is price a determinative factor in the purchasing process. When an approved material arrives it is evaluated against the preshipment sample and if it matches, it is forwarded to production along with the appropriate menstruum. The Company estimates that only forty percent of samples are accepted for production. Throughout 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 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. At times during 1998, the supply of St. Johns Wort and kava has been below optimal levels. Moreover, the demand for botanical products has experienced exponential growth in recent years and the demand pressure for some products may outstrip the capacity of the suppliers. 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 has made numerous formal commitments with cultivators and collectors of the Company's major crops, such as St. Johns Wort, echinacea and kava. 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 numerous trademarks which it uses to differentiate its technology and products and it protects its proprietary technology by confidentiality agreements with employees and prospective customers and other contractees. Among the product trademarks used are KavaPure(R), VeraPure(R), CimiPure(R), MacaPure(TM), ResveraPure(TM) and OlivePure(TM). Pure World has filed a patent on its standardized Maca extract, MacaPure(TM), which contains chemical compounds not previously known. 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 have kosher-product certification. Dietary Supplement Health and Education Act of 1994 ("DSHEA") - ------------------------------------------------------------- In 1994, DSHEA was enacted to establish the framework for the regulation of nutraceuticals which were being manufactured and marketed not as drugs but as dietary supplements. Except for certain pharmaceuticals manufactured to the standards of the U.S.P. published by the FDA, the Company's nutraceutical products are categorized as dietary supplements under DSHEA and not drugs which require FDA approval. The legislation recognized the importance of nutrition and benefits of dietary supplements in promoting health and preventive health measures. DSHEA defines dietary supplements as vitamins, minerals, herbs or other botanicals, amino acids, or other dietary substances which enhance or increase the total dietary intake. It provides that where an ingredient is first marketed as a dietary supplement and is subsequently approved as a new drug, it can continue to be sold as a supplement unless the Secretary of Health and Human Services rules that it would not be safe to do so. The FDA has publicly stated its concern that any claims about the efficacy of supplements receive prior approval by that agency. The FDA has published regulations about making claims and will adopt current cGMPs 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 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 ("Purification"). Examples are gingko-biloba and milk thistle. Also, the cosmetic industry requires that botanicals be purified prior to use primarily to eliminate odor and color. No significant revenues from Purified Products are expected in 1999. 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 28, 1999, the Company had 88 full-time employees and one part-time employee, 83 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. 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. The lease has a term of five years and expires in December 1999 with renewable options for fifteen additional years. This facility includes a 20,000 square-foot office area; 10,000 square-feet for laboratories; manufacturing space of 70,000 square feet; and warehousing space of 38,000 square feet which includes a new 13,000 square foot warehouse facility completed as part of the Company's 1998 expansion. In March 1999, the Company leased an 11,000 square foot facility in Central New Jersey for two years. This facility will be used to process botanical powders using cryogenic milling. 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 partly of botanical powders. Pure World Botanicals also leases a warehouse facility in Teterboro, New Jersey from an unrelated party for $140,000 per year. Item 3. - LEGAL PROCEEDINGS - ------- ----------------- The Company is involved from time to time in various lawsuits that arise in the course of its business. 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 one million three hundred thousand dollars. 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 one million dollars. 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 one million three hundred thousand dollars. In the same lawsuit, Turnkey has sued 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 have filed a motion to dismiss the complaint. No assurance can be given that Pure World Botanicals, Pure World 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 - ------- --------------------------------------------------- The Company held its Annual Meeting of Stockholders on November 3, 1998. All nominees to the Company's Board of Directors were elected. The following is a vote tabulation for all nominees: For Withheld --------- ---------- Paul O. Koether 7,000,143 44,628 Mark W. Jaindl 7,000,089 44,682 William Mahomes, Jr. 7,000,152 44,619 Alfredo Mena 7,000,152 44,619 PART II Item 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- At February 28, 1999, the Company had approximately 2,492 stockholders of record. The Company's common stock currently trades on the NASDAQ/National Market System under the symbol "PURW." On February 26, 1999 the closing price per share of the common stock was $4.8125. 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. Calendar Quarter Ended: High Low ------ ----- 1998 ---- March 31 $ 11 5/16 $ 5 3/16 June 30 16 15/16 10 5/8 September 30 16 1/16 5 1/2 December 31 8 7/8 5 1997 ---- March 31 $ 3 3/16 $ 2 1/16 June 30 4 1/4 2 17/32 September 30 8 3 7/8 December 31 8 1/8 4 15/16 The Company has not declared or paid any cash dividends on its common stock in 1997 and 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. Liquidity and Capital Resources - ------------------------------- At December 31, 1998, the Company had cash and cash equivalents of $6.1 million. Cash equivalents consisted of U.S. Treasury Bills with original maturities of less than three months and yields ranging from 3.998% to 4.638%. The Company had marketable securities with a market value of approximately $75,000 at December 31, 1998. Marketable securities consisted of trading securities as defined under generally accepted accounting principles. Securities available-for-sale were $1,203,000 at the same date. See Notes 1 and 2 of Notes to Consolidated Financial Statements for additional information. Net working capital was approximately $13.3 million at December 31, 1998. 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. 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. Depreciation and amortization of $869,000 increased by $442,000 in 1998 compared to 1997 due to the continuing investment in laboratory and production equipment at Pure World Botanicals. Inventory increased by $3,245,000 from $3,627,000 at December 31, 1997 to $6,872,000 at December 31, 1998 due to the increase in sales at Pure World Botanicals. Net receivables increased by $2,717,000 from $1,139,000 at December 31, 1997 to $3,856,000 at December 31, 1998, due to the increase in sales in 1998. Net cash of $156,000 was used by operations in 1997. Gains on sales of securities available-for-sale of $705,000 included in cash flows from investing activities, and an increase in inventory of $1,636,000 substantially offset the net income of $2,336,000 and depreciation and amortization of $427,000. 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, which has been increasing its investment in laboratory and manufacturing facilities, completed an expansion program to upgrade and expand its productive capacity and to build a new warehouse facility. The Company obtained an equipment line of credit of $3 million from a bank to finance this growth. The balance was paid from working capital. 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. Net cash of $2.3 million was used in investing activities in 1997. Plant and equipment purchases were approximately $1 million in 1997. These expenditures were primarily a result of the expansion program described above which began in 1997. In October 1997, the Company acquired the remaining 17% minority interest in Pure World Botanicals for approximately $941,000. 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. The Company loaned Gaia $200,000 in July 1997 payable interest only on a quarterly basis for the first three years and 36 monthly payments of principal and interest thereafter. The loan bears interest at 6.49% which was the imputed rate required under the Internal Revenue Code and is classified as an other asset in the consolidated balance sheet. Gaia manufactures and distributes fluid botanical extracts for the high-end consumer market. Gaia is a privately held company and does not publish financial results. The Company is accounting for this investment by the cost method. (See Note 5 of Notes to Consolidated Financial Statements for more information.) Cash provided by financing activities in 1998 was approximately $5 million, due primarily to the increase in borrowings of $5 million. For additional information on the terms of the Company's borrowings, see Note 6 of Notes to Consolidated Financial Statements. In 1997 cash used in financing activities was $326,000, which was primarily due to the purchase of the Company's common stock. 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, 1998, 696,934 shares had been acquired under the Repurchase Plans for an aggregate cost of approximately $1,164,000. The Company repurchased 95 shares in 1998 for an aggregate cost of approximately $700. In 1997, 129,093 shares were repurchased for an aggregate cost of approximately $357,000. All shares repurchased in 1998 and 1997 have been canceled and returned to the status of authorized but unissued shares. Results of Operations - --------------------- The Company's consolidated operations resulted in net income of $5,688,000, or basic earnings per share of $.69, in 1998 compared to net income of $2,336,000, or basic earnings per share of $.28 in 1997. Diluted earnings per share was $.62 and $.26 in 1998 and 1997 respectively. Earning per share figures have been restated 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 1998 of approximately $23,047,000, an increase of approximately $12,289,000 or 114% from 1997 sales of $10,758,000. Cost of goods sold was $12,233,000 and gross margin was $10,814,000 in 1998, compared to cost of goods sold of $5,990,000 and gross margin of $4,768,000 in 1997. Gross margin as a percentage of sales was 46.9% and 44.3% in 1998 and 1997 respectively. The growth in sales and gross profit was principally due to the sales of standardized products such as St. John's Wort, CimiPure(R) black cohosh root, and KavaPure(R) kava extracts. Each of three customers accounted for more than 10% of sales for the 1998 fiscal year. Sales for the first quarter of 1999 have slowed compared to 1998 and sales and earnings for the first quarter of 1999 are expected to be significantly below the comparable quarter of 1998. In 1998, the Company recorded net gains on marketable securities of $606,000, compared to net gains of $717,000 in 1997. Substantially all gains in 1998 and 1997 were realized gains. See Note 2 of Notes to Consolidated Financial Statements for additional information. Interest, dividends and other income was $374,000 in 1998 compared to $543,000 in 1997. Interest income was $348,000 and $530,000 in 1998 and 1997 respectively, a decrease of $182,000 or 34.3%. This decrease was due principally to lower invested balances and lower yields on investments in 1998. Retention income of $703,000 in 1997 consists of cash received in connection with the sale of a prior business in 1994. The Company does not anticipate additional revenue from this source. General and administrative expenses (consisting of personnel, professional and all other expenses) were $5,790,000 in 1998, compared to $4,184,000 in 1997, an increase of $1,606,000 or approximately 38.4%. Personnel expenses were $2,595,000 in 1998, an increase of $575,000, or 28.5%, from $2,020,000 in 1997. The principal reasons for the increase were increased commissions and bonus payments related to the increase in sales. Professional fees consisting of legal, accounting and consulting fees, were $467,000 in 1998, an increase of $62,000, or 15.3%, from the 1997 professional fees of $405,000. Other general and administrative expenses were $2,728,000 in 1998, an increase of $969,000 or 55.1% from $1,759,000 in 1997. Increased sales expense and interest expense, were the primary reasons for the increase. 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. Year 2000 Issue - --------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Management has determined that the year 2000 Issue will not pose significant operational problems for its computer systems. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company will utilize external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company anticipates completing the Year 2000 project not later than October 31, 1999, which is prior to any anticipated impact on its operating systems. The Company anticipates incurring costs of $250,000 to upgrade its management information systems ("MIS") in 1999 and to correct any potential Year 2000 issues. The upgrade in MIS is required due to the increase in sales volume and the need for enchanced systems to more effectively manage ongoing business. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimate, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modifications plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 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, 1998 Consolidated Statements of Operations and Comprehensive Income for the Years ended December 31, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the Years ended December 31, 1998 and 1997 Notes to Consolidated Financial Statements ______________________________________________________ Deloitte & Touche LLP Telephone: (973) 683-7000 Two Hilton Court Facsimile: (973) 683-7459 P.O. Box 319 Parsippany, New Jersey 07054-0319 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, 1998, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for the years ended December 31, 1998 and 1997. 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, 1998, and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey February 25, 1999 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1998 (in $000's) ASSETS Current Assets: Cash and cash equivalents $ 6,122 Marketable securities 75 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $140 3,856 Inventories 6,872 Other 393 ------- Total current assets 17,318 Securities available-for-sale 1,203 Investment in unaffiliated natural products company 1,510 Plant and equipment, net 9,263 Notes receivable from affiliates 273 Goodwill, net of accumulated amortization of $417 1,574 Other assets 647 ------- Total assets $31,788 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 805 Current portion of long-term debt 2,137 Accrued expenses and other 1,041 ------- Total current liabilities 3,983 Long-term debt 3,171 ------- Total liabilities 7,154 ------- Commitments and Contingencies (Notes 10 and 11) Stockholders' equity: Common stock, par value $.01; 30,000,000 shares authorized; 8,268,909 shares issued and outstanding 83 Additional paid-in capital 43,321 Accumulated deficit ( 18,526) Accumulated other comprehensive loss ( 244) ------- Total stockholders' equity 24,634 ------- Total liabilities and stockholders' equity $31,788 ======= See accompanying notes to consolidated financial statements. PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in $000's, except per share data) Year Ended December 31, ----------------------- 1998 1997 ------ ------ Revenues: Sales $23,047 $10,758 Net gains on marketable securities 606 717 Interest, dividends and other income 374 543 Retention income - 703 ------- ------- Total revenues 24,027 12,721 ------- ------- Expenses: Cost of goods sold 12,233 5,990 Selling, general and administrative 5,790 4,184 ------- ------- Total expenses 18,023 10,174 ------- ------- Income before income taxes 6,004 2,547 Provision for income taxes 316 211 ------- ------- Net income 5,688 2,336 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale ( 876) 350 ------- ------- Comprehensive income $ 4,812 $ 2,686 ======= ======= Basic net income per share $ .69 $ .28 ======= ======= Diluted net income per share $ .62 $ .26 ======= ======= See accompanying notes to consolidated financial statements.
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 ------------ ------ ---------- ----------- ------------------ -------- Balance, January 1, 1997 as restated for stock dividend 8,397 $ 84 $43,635 ($26,550) $282 $17,451 Change in net unrealized holding gains/losses on securities available-for-sale - - - - 350 350 Net income - - - 2,336 - 2,336 Repurchase and cancellation of common stock ( 141) ( 1) ( 356) - - ( 357) ----- ---- ------- ------- ---- ------- Balance, December 31, 1997 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 ===== ==== ======= ======= ==== ======= See accompanying notes to consolidated financial statements.
PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in $000's) Year Ended December 31, ----------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income $ 5,688 $ 2,336 Adjustments: Depreciation and amortization 869 427 Net marketable securities transactions 305 ( 318) Gain on sale of securities available-for-sale ( 621) ( 705) Change in inventories ( 3,245) ( 1,636) Change in receivables ( 2,717) ( 66) Change in accounts payable and other accruals 452 ( 66) Other, net ( 181) ( 128) ------- ------- Net cash provided by (used in) operating activities 550 ( 156) ------- ------- Cash flows from investing activities: Purchase of minority interest in Pure World Botanicals - ( 941) Plant and equipment ( 7,789) ( 1,013) Proceeds from sale of securities available-for-sale 1,793 977 Purchase of securities available-for-sale ( 1,600) ( 727) Loans to affiliates and others ( 60) ( 230) Repayments of loans to affiliates 283 136 Investment in unaffiliated natural products company - ( 500) Other, net ( 202) 15 ------- ------- Net cash used in investing activities ( 7,575) ( 2,283) ------- ------- Cash flows from financing activities: Repurchase of common stock ( 1) ( 357) Issuance of common stock 43 - Increase in borrowings 5,005 31 ------- ------- Net cash provided by (used in) financing activities 5,047 ( 326) ------- ------- Net decrease in cash and cash equivalents ( 1,978) ( 2,765) Cash and cash equivalents at beginning of year 8,100 10,865 ------- ------- Cash and cash equivalents at end of year $ 6,122 $ 8,100 ======= ======= Supplemental disclosure of cash flow information Cash paid for: Interest $ 278 $ 25 ======= ======= Taxes $ 549 $ 190 ======= ======= See accompanying notes to consolidated financial statements. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 1. Summary of Significant Accounting Policies ------------------------------------------ Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of Pure World, Inc. (the "Company" or "Pure World") and its 100% owned subsidiary, Pure World Botanicals, Inc., formerly Madis 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 years' 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. The Company accounts for securities transactions on a trade-date basis. For computing realized gains or losses on sale of marketable PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 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. Fixed Assets, Net ----------------- The Company records all fixed assets at cost. Depreciation is computed using the straight-line method over the related estimated useful life of the asset. Gains or losses on dispositions of fixed assets are included in operating results as other income. The Company evaluates the carrying value of its long-lived assets whenever there is a significant change in the use of an asset and adjusts the carrying value, if necessary, to reflect the amount recoverable through future operations. Goodwill -------- Goodwill had been established in connection with the acquisition of Pure World Botanicals in 1995. In October 1997, the Company acquired the remaining 17% minority interest for approximately $941,000. As a result of this transaction, goodwill was increased by approximately $576,000. Goodwill is being amortized using the straight-line method over a fifteen-year period. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 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. 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. 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) 1998 1997 ------ ----- Basic earnings per common share: Average shares outstanding for basic earnings per share 8,266 8,287 ===== ===== Diluted earnings per common share: Average shares outstanding for basic earnings per share 8,266 8,287 Dilutive effect of stock options 868 546 ----- ----- Average shares outstanding for diluted earnings per share 9,134 8,833 ===== ===== PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 No options were excluded from the above calculations at December 31, 1998 and 173,250 were excluded at December 31, 1997. Major Customers --------------- Each of three customers accounted for more than 10% of sales for the 1998 fiscal year. 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. 2. Investment Securities --------------------- Investment securities consisted of the following (in $000's): Gross Cost Holding Fair Basis Losses Value -------- --------- --------- Marketable securities $ 154 $ 79 $ 75 Securities available-for-sale 1,447 244 1,203 ------ ------ ------ Total investment securities $1,601 $ 323 $1,278 ====== ====== ====== All investment securities are investments in common stock. 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 for the year ended December 31, 1998. The net unrealized losses on securities available- for-sale included as a separate component of consolidated stockholders' equity was approximately $244,000 at December 31, 1998. In 1997, realized gains and losses of $700,000 and $1,000, respectively, as well as net unrealized gains of $18,000 were included in the results of operations. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 3. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $3,447 Work-in-process 398 Finished goods 3,027 ------ Total inventories $6,872 ====== 4. Plant and Equipment ------------------- At December 31, 1998, plant and equipment consisted of the following (in $000's): Machinery and equipment $ 7,412 Leasehold improvements 1,906 Office equipment, furniture and fixtures 1,394 Accumulated depreciation ( 1,449) ------- Total $ 9,263 ======= 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. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 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's wholly-owned subsidiary, 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. 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. Long-term Debt -------------- Long-term debt consisted of the following at December 31, 1998 (in $000's): Loans payable to a bank, collateralized by certain property and equipment, bearing annual interest at 7.75% in December 1998 maturing in December 2003 $3,000 Loans payable to a bank, pursuant to a $2 million unsecured line of credit bearing annual interest at the prime rate (currently 7.75%) in December 1998 maturing in March 1999, interest only payments until March 1999 1,405 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 Loan payable to a bank, collateralized by certain equipment bearing annual interest at 8.75% maturing in April 2003 267 Loan payable to a bank, collateralized by certain equipment bearing annual interest at 8.75% maturing in August 2003 61 Leases payable for equipment 450 All other 125 ------ Total 5,308 Less: Current portion of long- term debt 2,137 ------ Long-term debt $3,171 ====== Interest expense was $278,000 and $25,000 for the years ended December 31, 1998 and 1997, respectively. The loan agreements contain certain restrictive covenants with which the Company has complied with as of December 31, 1998. In January 1999, Pure World Botanicals entered into two additional loan agreements. The first increased the unsecured line of credit described above from $2 million to $3 million. All other terms remained the same. The second agreement is for a convertible line of credit of up to $2 million. This line of credit has not yet been utilized. Aggregate maturities of long-term debt (in $000's) for each of the years in the five year period ending December 31, 2003 are $2,137; $691; $581; $533; and $1,359. 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, 1998, 696,934 shares had been acquired under the Repurchase Plans for an aggregate cost of approximately $1,164,000. The Company repurchased 95 shares in 1998 for an aggregate cost of approximately $700. In 1997, 129,093 shares were repurchased for an aggregate cost of approximately $357,000. All shares repurchased in 1998 and 1997 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 has been restated 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. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 The following table summarizes option transactions under the Option Plans for the years ended December 31, 1998 and 1997: Weighted Average Shares Exercise Price ---------- ------------------ Options outstanding at January 1, 1997 539,000 $ 1.55 Options granted 246,950 4.23 Options canceled ( 38,500) 1.56 ------- ------ Options outstanding at December 31, 1997 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 ======= ====== For options outstanding and exercisable at December 31, 1998, the exercise price ranges are:
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, 1998 (In Years) Exercise Price December 31, 1998 (In Years) Exercise Price - -------------------------------------------------------------------- ------------------------------------------------------ $1 - $3 579,700 5 $ 1.73 489,500 4 $ 1.54 $3.01 - $6 259,105 8 $ 5.12 137,500 8 $ 5.23 $6.01 - $8 26,400 8 $ 6.68 - - - ------- ------ ------- ------ 865,205 $ 2.90 627,000 $ 2.35 ======= ====== ======= ======
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. 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 No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 1998 1997 ---- ---- Net income: As reported (in 000's) $5,688 $2,336 Pro forma (in 000's) $5,434 $2,240 Basic net income per share: As reported $ .69 $ .28 Pro forma $ .66 $ .27 Diluted net income per share: As reported $ .62 $ .26 Pro forma $ .59 $ .25 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 No. 123, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used: no dividend yield; expected volatility of 119 percent in 1998 and 49 percent in 1997; 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. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 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 1998 and 1997 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. 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, 1998, the Company had net operating loss carryforwards ("NOLs") of approximately $13 million for Federal income tax reporting purposes, which expire in the years 2002 and 2003. Additionally, the Company has investment and research and development tax credit carryforwards aggregating approximately $170,000 and $870,000, respectively, which expire from 1999 through 2000. The ultimate realization of the tax benefits from the net operating loss and tax credit carryforwards is dependent upon future taxable earnings of the Company. The Company's federal income tax returns for the years ended March 31, 1987 and 1988 and for the nine months ended December 31, 1988 were examined by the Internal Revenue Service ("IRS"). The IRS challenged the deductibility of certain payments aggregating approximately $8.1 million made during those periods in connection with certain litigation settlements and legal fees primarily related to the settlement of a class action lawsuit. The Company disagrees with the IRS. Even though the Company intends to vigorously defend its position PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 when it utilizes the NOLs, there can be no assurance that the Company's position will be sustained. The components of income tax expense were as follows (in $000's): 1998 1997 ------- ------- Federal-current $ 121 $ 51 State-current 367 160 Deferred ( 172) - ----- ----- Total $ 316 $ 211 ===== ===== 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, 1998 are as follows (in $000's): Deferred tax assets: Net operating loss carryforwards $4,266 Alternative minimum tax and other credit carryforwards 902 Other, net 348 ------ $5,516 ====== Valuation allowance ($5,271) ====== 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. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 A reconciliation of the provision for income tax expense to the expected income tax expense (income before income taxes times the statutory tax rate of 34%) is as follows (in $000's): 1998 1997 --------- -------- Income before income taxes $ 6,004 $ 2,547 Statutory federal income tax rate 34% 34% ------- ------- Expected income tax 2,041 866 Alternative minimum tax 121 51 State tax 242 106 Change in valuation allowance ( 2,274) ( 863) Other, net 186 51 ------- ------- Provision for income taxes $ 316 $ 211 ======= ======= The Tax Reform Act of 1986, as amended, provides for a parallel tax system which requires the calculation of AMT and the payment of the higher of the regular income tax or AMT. The Company also has an AMT credit carryforward of approximately $171,000 which will be allowed as a credit carryover against regular tax in the future in the event the regular tax exceeds the AMT tax. 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, 1998 and 1997. Brokerage commissions paid by the Company totaled approximately $41,000 in 1998 and $36,000 in 1997. 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, 1998 and 1997 amounted to approximately $386,000 and $419,000, 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 1998 and 1997. 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 $62,000 in 1998 and $19,000 in 1997. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 Pure World Botanicals leases a 138,000 square-foot facility in South Hackensack, New Jersey, from an affiliated corporation ("Pure World Botanicals Affiliate") owned by the former shareholders of Pure World Botanicals for $20,000, net, per month plus one per cent of the gross revenues of Pure World Botanicals up to an additional $200,000 per year over a term of five years expiring in December 1999 with renewal options for fifteen additional years. This facility includes a 20,000 square-foot office area; 10,000 square-feet for laboratories, manufacturing space of 70,000 square feet; and warehousing space of 38,000 square feet. Pure World Botanicals also leases a warehouse facility in Teterboro, New Jersey for $140,000 per year from an unrelated party. The Company also rents office space from an affiliate. Such rent expense was approximately $43,000 in 1998 and in 1997. 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. The loan to Mr. Madis had a principal balance of $202,000 at December 31, 1997. In February 1998, the loan was paid in full. PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998 and 1997 American Bank of the Lehigh Valley, located in Allentown, Pennsylvania, has issued certain loans to Pure World Botanicals, totaling approximately $343,000 at December 31, 1998. Mark W. Jaindl, Director of the Company, is President of American Bank of the Lehigh Valley. 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 one million three hundred thousand dollars. 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 one million dollars. 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 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 one million three hundred thousand dollars. In the same lawsuit, Turnkey has sued 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, the landlord of the Pure World Botanicals Facility, on the construction liens, in the amount of $147,000. The defendants have filed a motion to dismiss the complaint. No assurance can be given that Pure World Botanicals, Pure World or IVM will be successful in litigation. Management intends to vigorously contest these lawsuits. Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- FINANCIAL DISCLOSURE ---------- Not applicable. PART III -------- Item 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS - ------- ------------------------------------------------------------ The four members of the Board of Directors were elected at the 1998 Annual Meeting of Stockholders and will serve until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified. The Company's officers are elected by and serve at the leave of the Board. There is no arrangement or understanding between any executive officer and any other person pursuant to which such officer was elected. Paul O. Koether, the Chairman of the Company, and Natalie I. Koether, the President of the Company, are spouses. The directors and executive officers of the Company at February 28, 1999 were as follows: Position and Office Presently Held with Director Name of Person Age the Company Since - -------------- --- ------------------- -------- Paul O. Koether 62 Chairman and 1988 Director of the Company; Chairman of Pure World Botanicals Mark W. Jaindl 39 Director of the Company 1994 and of Pure World Botanicals Alfredo Mena 46 Director 1992 William Mahomes, Jr. 52 Director 1993 Natalie I. Koether 59 President of the - Company and Pure World Botanicals Voldemar Madis 58 Vice Chairman of the - Company and Pure World Botanicals Dr. Qun Yi Zheng 41 Executive Vice President - of Pure World Botanicals John W. Galuchie, Jr. 46 Executive Vice President, - Treasurer and Secretary of the Company Mark Koscinski 41 Senior Vice President - of the Company; Senior Vice President, Treasurer and Secretary of Pure World Botanicals Paul O. Koether is principally engaged in the following businesses: (i) the Company, as Chairman since April 1988, President from April 1989 to February 1997, a director since March 1988, and for more than five years as the Chairman and President of Sun Equities Corporation ("Sun"), a private, closely-held corporation which is the Company's principal stockholder; (ii) as Chairman of Pure World Botanicals, Inc., ("Pure World Botanicals") a majority-owned subsidiary of the Company, since January 1995 and as a director since December 1994; (iii) as Chairman and director since July 1987 and President since October 1990 of Kent Financial Services, Inc. ("Kent") which engages in various financial services, including the operation of a retail brokerage business through its wholly-owned subsidiary, T. R. Winston & Company, Inc. ("Winston") and the general partner since 1990 of Shamrock Associates, an investment partnership which is the principal stockholder of Kent; (iv) various positions with affiliates of Kent, including Chairman since 1990 and a registered representative since 1989 of Winston; (v) since July 1992, as Chairman of American Metals Service, Inc., which is currently seeking to acquire an operating business; and (vi) since September 1998 as a director and Chairman of Cortech, Inc., ("Cortech"), a biopharmaceutical company. Prior to August 1994, Mr. Koether also served as Chairman and a director of NorthCorp Realty Advisors, Inc. ("NorthCorp"), formerly a subsidiary of the Company. Mark W. Jaindl. Since October 1997, Mr. Jaindl has been President and Chief Executive Officer of American Bank of the Lehigh Valley, 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 Pure World Botanicals from December 1994 until May 1995 and has been a director of Pure World Botanicals since December 1994 and he has served as a director of American Metals Service, Inc. since July 1992. Mr. Jaindl was a director of NorthCorp from June 1992 until September 1994 and was Interim President of NorthCorp from February 1994 until August 1994. Since September 1998, Mr. Jaindl has been a director and Vice-chairman of Cortech. Alfredo Mena. Since 1986, Mr. Mena has been the president of CIA. Salvadorena de Inversiones, S.A. de C.V. and had served as its Director and General Manager from 1974 to 1986. CIA. Salvadorena de Inversiones, S.A. de C.V. is engaged in coffee growing, processing and exporting. From October 1995 until June 1997, he served as the Presidential Commissioner for Privatization and Modernization of El Salvador. Mr. Mena is a citizen of El Salvador. William Mahomes, Jr. In March 1997, Mr. Mahomes formed Mahomes & Associates, a Professional Corporation, involved in the practice of law, specializing in real estate and commercial transactions. From 1994 to March 1997, Mr. Mahomes was a Senior Shareholder of the law firm of Locke Purnell Rain Harrell. From 1990 to 1994 he was an international partner in the Dallas office of Baker & McKenzie. Mr. Mahomes currently serves on the Board of Directors of a variety of organizations, including the Bethlehem Foundation, The Salvation Army, the Dallas Opera, the Texas Pension Review Board and the Pegasus Charter School. Natalie I. Koether is engaged principally in the following activities: (i) President of the Company since February 1, 1997 and President and Director of 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, Treasurer and Secretary since April 1988 and director from January 1990 until October 1994; (ii) Kent, as Vice President and Treasurer since September 1986 and a director from June 1989 to August 1993; (iii) Winston, as President and Treasurer since September 1989; (iv) Cortech, as Director and President and (v) HealthRite, Inc., as a Director since December 1998. Mr. Galuchie was a director of NorthCorp from June 1992 until August 1996 and Secretary from November 1992 to August 1994. 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. Item 10. - EXECUTIVE COMPENSATION - ------- ----------------------- The table below sets forth for the years ended December 31, 1998, 1997 and 1996, the compensation of any person who, as of December 31, 1998, 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 Annual Compensation(1)(2) Compensation Name and ------------------------- ------------- Principal Position Year Salary Bonus Options(#)(3) ------------------ ---- ------ ----- ------------- Paul O. Koether 1998 $215,000 $75,000 - Chairman 1997 215,000 50,000 - 1996 215,000 - - Natalie I. Koether 1998 $270,000 $75,000 - President 1997 267,000 - 137,500 1996 244,760 - - Voldemar Madis 1998 $163,461 $ 6,000 - Vice Chairman 1997 150,000 6,000 - 1996 152,885 6,101 - Qun Yi Zheng 1998 $166,051 $75,000 55,000 Executive Vice 1997 116,013 50,000 82,500 President 1996 73,147 20,000 27,500 Mark Koscinski 1998 $111,000 $22,500 - Sr. Vice President 1997 108,000 22,500 - 1996 108,000 15,101 11,000 - ---------------------------------------------------------- (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. 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 12/31/98 Options at 12/31/98 Name Exercisable/Unexercisable Exercisable/Unexercisable - ----- -------------------------- ------------------------- Paul O. Koether 165,000 / - $838,281 / $ - Natalie I. Koether 275,000 / - 897,657 / - Voldemar Madis 55,287 / - 262,770 / - Qun Yi Zheng 27,500 / 137,500 126,953 / 413,672 Mark Koscinski 34,100 / 4,400 166,641 / 20,313 401(k) Plan - ----------- The Company has established a Retirement Savings Plan pursuant to Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan permits employees of the sponsor to defer a portion of their compensation on a pre-tax basis. Employees who meet the 401(k) Plan's eligibility requirements may defer up to 15% of their compensation (base pay plus any bonuses and overtime) for the year. No participant, however, may have deferred more than $10,000 in 1998 and $9,500 in 1997, which amount is indexed each year for inflation. The Company did not match employee contributions in 1998 or 1997. 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 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 Botancials on January 3, 1995 by the Company, Madis 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 1998, the Company paid directors' fees in the aggregate of approximately $37,800. In addition, the Company retired 5,000 stock options previously issued to Mr. Mahomes pursuant to the Company's 1991 Stock Option Plan for a payment of approximately $21,400. Item 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- -------------------------------------------------------------- The following table sets forth the beneficial ownership of Common Stock of the Company as of February 28, 1999, 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 3,367,675(2) 37.53% Natalie I. Koether 211 Pennbrook Road Far Hills, N.J. 07931 3,367,675(3) 37.53% Sun Equities Corporation 376 Main Street Bedminster, NJ 07921 2,457,725 27.39% Mark W. Jaindl 3150 Coffeetown Road Orefield, PA 18069 184,382(4) 2.05% 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 59,357 * Dr. Qun Yi Zheng 375 Huyler Street South Hackensack, NJ 07606 27,500 * Mark Koscinski 376 Main Street Bedminster, NJ 07921 72,600 * All directors and officers as a group (9 persons) 3,797,534(1) 42.32% ------------------------------ *Represents less than one percent. (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 (55,287 shares); Qun Yi Zheng (27,500 shares); Mark Koscinski (34,100 shares) and all directors and officers as a group (705,387 shares). (2) Includes (1) 35,640 shares held by a trust for the benefit of Mr. Koether's daughter for which he serves as the sole trustee; (2) 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, 65,370 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. 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, 1998 and 1997 amounted to approximately $386,000 and $419,000, 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 $62,000 in 1998 and $19,000 in 1997. 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 of the Lehigh Valley, located in Allentown, Pennsylvania, has issued certain loans to Pure World Botanicals, totaling approximately $343,000 at December 31, 1998. Mark W. Jaindl, Director of the Company, is President of American Bank of the Lehigh Valley. 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 Incorporated Incorporated by reference to Non-Qualified Stock Option Plan Exhibit A to Computer Memories 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. 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 Pure World, Inc. Incorporated Agreement with V. Madis by reference to 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) dated March 17, 1995. 10.10 (a) Employment Agreement with Filed herewith. Dr. Q.Y. Zheng (b) Amendment to Employment Agreement with Dr. Q.Y. Zheng Filed herewith. 21 Subsidiaries of the Registrant Filed herewith. 27 Financial Data Schedule Filed herewith. (b) Reports on Form 8-K ------------------- None 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 30, 1999 By:/s/ Paul O. Koether ------------------------- Paul O. Koether Chairman of the Board March 30, 1999 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 30, 1999 - ------------------------- and Director Paul O. Koether (Principal Executive Officer) /s/ William Mahomes, Jr. Director March 30, 1999 - ------------------------- William Mahomes, Jr. /s/ Alfredo Mena Director March 30, 1999 - ------------------------- Alfredo Mena /s/ Mark W. Jaindl Director March 30, 1999 - ------------------------- Mark W. Jaindl EX-99 3 EXHIBIT 21- LIST OF SUBSIDIARIES 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 Strategic Information Systems, Inc. Delaware EX-99 4 EXHIBIT 10.10(A) - EMPLOYMENT AGREEMENT Exhibit 10.10(a) EMPLOYMENT AGREEMENT This is an Employment Agreement dated as of February 16, 1996, among Dr. Qun Yi Zheng, an individual residing at 1263 S. Elmoro Court, Superior, Colorado (the "Employee"); Madis Botanicals, Inc., a Delaware corporation with principal offices at 375 Huyler Street, South Hackensack, New Jersey 07606 (the "Company"); and Pure World, Inc., a Delaware corporation with principal offices at 376 Main Street, Bedminster, New Jersey 07921 ("Pure World"). RECITALS Pure World and the Company desire that the Company employ the Employee and the Employee desires to be employed by the Company, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company offers, and the Employee accepts, employment upon the terms and conditions stated in this Agreement, which terms and conditions shall supersede any other prior oral or written employment agreements between the Company (and any predecessors) and the Employee. The Employee shall assume such responsibilities and perform such duties as the Company shall from time to time assign to the Employee. The Employee's initial title shall be Director of Research. The Employee shall perform his duties to the best of his ability, experience and talents, all to the reasonable satisfaction of the Company, and shall use his best efforts to promote the interests of the Company. During the Term (as defined in Section 2) of this Agreement, the Employee shall not engage in any capacity or activity which is contrary to the welfare, interest or benefit of the business conducted by the Company. The Employee shall devote all of his business time, ability and attention to the business of the Company, unless otherwise authorized in writing by the Board of Directors of the Company. The Employee shall engage in such travel on behalf of the Company as may reasonably be required in connection with the performance of his duties hereunder. 2. Term of this Agreement. The initial term of this Agreement (the "Initial Term") shall extend from February 16, 1996 until February 16, 1997 and thereafter shall automatically continue after the initial Term until and unless terminated by either party on three month's notice. The commencement date of the Initial Term may be delayed by Employee by three weeks to satisfy any notice obligations to his current employer. 3. Compensation. 3.1 Amount. In connection with his employment, the Employee shall be paid an annual gross salary of ninety thousand dollars ($90,000) during the Initial Term and thereafter as mutually agreed upon by the Company and the Employee. In addition, Employee will be entitled to the regular bonuses paid to all the Company's employees and special bonuses granted to him in the discretion of the Board of Directors for his efforts on behalf of the Company. 3.2 Moving Expense. Employee will use his best efforts to sell his home in Colorado ("Colorado Home"). Until Employee closes the sale of his Colorado Home, the Company will secure and pay for reasonable living quarters for Employee in New Jersey. The Company will arrange for and pay for the delivery of Employee's car from Colorado to New Jersey. Until Employee's family moves to New Jersey (which shall not be later than two weeks after the end of the school year for Employee's oldest child), the Company will pay for Employee to fly to Colorado once every three weeks after the commencement of his employment and once to arrange for the movement of his family to New Jersey. Employee will reimburse Employee for the amount by which, if any, the net sales price of his Colorado Home is less than his original purchase price after adding the costs of closing including any commissions. 3.3 Benefits Plans. The Company shall provide the Employee with such medical and disability insurance, hospital insurance and group life insurance and other benefits made available to executive level employees of the Company, subject to the terms and conditions of such benefit plans and arrangements. 3.4 Vacations. The Employee shall be entitled each year to a vacation of fifteen (15) working days, during which time his compensation shall be paid in full and such holidays and other non-working days as are consistent with the policies of the Company for executives generally. All vacations shall be scheduled so as to cause minimal interference with the operations of the Company. If the Employee's employment under this Agreement is terminated by the Company pursuant to Section 5.2, the Employee shall be entitled to payment for all unused vacation days. 3.5 Reimbursement of Expenses. Any reasonable expenses incurred by Employee in promoting the business of the Company will be promptly paid directly or promptly reimbursed to Employee upon receipt of receipts or other documentation evidencing the date, amount and business reason for the expenditure. 4. Employee's Equity in Pure World. 4.1 Purchase of the Pure World Stock. Pure World shall loan to Employee (the "Loan") up to sixty five thousand dollars ($65,000) to acquire twenty five thousand (25,000) shares of the common stock of Pure World ( the "Pure World Stock"). 4.2 Pure World Security Interest in Pure World Stock. As soon as practicable after acquiring the Pure World Stock, Employee shall deliver to Pure World stock certificates representing the Pure World Stock, duly endorsed in blank or with stock powers attached, duly endorsed in blank. Pure World shall hold the Pure World Stock as security for the repayment of the Loan and any accrued interest. 4.3 Interest at Imputed Rate. The Loan shall accrue interest at the lowest rate necessary to avoid the imputation of interest under Section 483 of the Internal Revenue Code of 1986, as amended (the "Loan Interest"). 4.4 Repayment of Loan. The Loan and the Loan Interest shall be paid solely from the proceeds of any sale by Employee of the Pure World Stock (the "Sales Proceeds") as and when Sales Proceeds are received by Employee or by Pure World for the benefit of Employee until the Loan and the Loan Interest are paid in full. In no event will Employee be otherwise liable for the Loan or Loan Interest. Employee agrees to assign to Pure World the right to receive Sales Proceeds and agrees to remit to Pure World any Sales Proceeds he receives until the Loan and Loan Interest are fully repaid. 4.5 Prerequisite to Sale or Transfer. Except in the case of a termination by the Company pursuant to Section 5.2, Employee may not sell, assign, transfer, hypothecate or otherwise encumber the Pure World Stock unless and until he has been continuously employed by the Company from the Commencement Date through March 1, 1998. 4.6 Termination Prior to March 1, 1998. If this Agreement is terminated prior to March 1, 1998 for any reason other than by the Company pursuant to Section 5.2, Pure World will cancel the Loan and all Employee's right, title and interest in the Pure World Stock will be transferred to Pure World without any further action by Employee. If the Company terminates this Agreement pursuant to Section 5.2, Employee shall have one year from the date of termination to sell the Pure World Stock and repay the Loan and the Loan Interest as provided herein. 4.7 Delivery of Pure World Stock to Employee. At any time the Loan and Loan Interest are fully paid as provided herein, Pure World shall immediately deliver to the Employee the Pure World Stock and the remainder of any remaining Sales Proceeds held by Pure World. 4.8 Cancellation of Loan for Non-Payment. If the Loan and Loan Interest are not repaid by March 1, 1998, Pure World shall have the right to cancel the Loan at any time thereafter and in that event all Employee's right, title and interest in the Pure World Stock will be transferred to Pure World without any further action by Employee. 5. Termination. 5.1 Termination For Cause. The Company may terminate this Agreement with the Employee for "cause". Upon termination of the Employee for cause, all rights and obligations of the parties under this Agreement shall terminate, except those rights and obligations under Sections 6, 7 and 8. For purposes of this Agreement, "cause" shall mean only the following acts, omissions or occurrences by or with respect to the Employee: (i) substantial and continuous non-performance of assigned duties; (ii) failure to comply with a material written policy of the Company; (iii)failure to devote sufficient time to the Company's business as reasonably expected for executives of comparable position and compensation; (iv) an act of dishonesty; or (v) conviction of a felony (other than a felony arising out of non-repetitive traffic violations), or other criminal act or fraud. 5.2 Termination Without Cause. The Company may terminate Employee's employment without cause, by giving not less than ninety days written notice. If the Company terminates Employee's employment without cause, then notwithstanding anything contained herein to the contrary, or otherwise provided by law, Employee shall be entitled to receive all compensation described in Section 3.1 for the period equal to the period remaining between the date of his termination of employment and the last day of the Term of this Agreement in accordance with his regular payment schedule. 5.3 Death or Disability. In the event of Employee's death or permanent disability, this Agreement shall terminate and Employee, or his personal representative, as the case may be, shall be paid three months salary or the balance of salary due from the date of Termination until the last day of the Term of this Agreement, whichever is less. For purposes of this subsection, permanent disability shall mean the failure to perform the prescribed duties assigned to Employee by virtue of a health condition for a continuous period of three months. 6. Covenant Not to Compete. 6.1 Covenant. Subject to Section 6.2, during the Term and for two (2) years thereafter, the Employee agrees not to do any of the following: (i) Engage, directly or indirectly, in a business similar to the business currently being conducted by the Company, including but not limited to, the manufacture and sale of botanical extracts, flavors, and fragrances within sixty (60) miles of the Company's current facilities or the facilities of any subsidiary or affiliate. (ii) Engage, directly or indirectly, in any way in the solicitation of employees or independent contractors of the Company or its affiliates in connection with any job, venture or other employment opportunity of any nature. (iii)Interfere in any material way, directly or indirectly, whether for his own account or for the account of any other person, firm, corporation or other business organization, with the Company's relationship with, or endeavor to entice away from the Company, any person, firm corporation or other entity who or which was an executive employee consultant, distributor, agent, contractor, supplier, source of material and/or product or customer of, the Company. 6.2 Engagement in Business. For purposes of this Section 6, the Employee shall be deemed directly or indirectly engaged in a business or activity if he participates in such business or activity as a material proprietor, partner, joint venturer, stockholder, director, officer, manager, employee, consultant, advisor or agent or if he controls such business or entity. Notwithstanding the above, the Employee shall not be deemed a stockholder merely by reason of holding less than five percent (5%) of the outstanding equity of any publicly owned corporation, provided that the Employee shall not be in a control position with regard to such corporation. 7. Confidential Information. 7.1 No Disclosure; Definition of Confidential Information. The Employee shall not at any time during the Term or thereafter use for his own benefit and/or reveal, divulge or publish or make known, directly or indirectly, to any person, including for example and not by way of limitation, any information contained in the Company's books and records, any customers of the Company and any other business information relating to the business of the Company, whether written or oral, that the Employee has acquired during the Term (hereinafter referred to as "Confidential Information"). Notwithstanding the above, the term Confidential Information shall not include: (i) any information which is in the public domain and could readily be known or determined without being employed by the Company or which enters the public domain through no breach of the Employee's obligations hereunder; and (ii) any information which the Employee acquires through or from parties independent of the Company, but only to the extent the Employee can verify the independence of his information or knowledge to the reasonable satisfaction of the Company; (iii) any information required to be disclosed by law or regulation; and (iv) any information disclosed for the purpose of completing and filing any tax returns of Employee. 7.2 Information Held in Trust. The Employee shall hold in trust and confidence for the benefit of the Company all Confidential Information of the Company, and the Employee shall not disclose such Confidential Information for any purpose other than on behalf of the Company in accordance with his duties under this Agreement. The Employee shall not make any copies of Confidential Information without the express prior written consent of the Company. It is hereby expressly understood that by disclosing the Confidential Information to the Employee, the Company does not grant any express, implied or other license or right of any nature to the Employee with respect to the Confidential Information. 7.3 Duties Upon Termination. Upon expiration of the Term or termination of the Employer's services for the Company irrespective of the time, manner or cause of such Termination, the Employee shall surrender to the Company all lists, books, records and documents provided by, belonging to, relating to or used in connection with the Company's business and/or all other property belonging to the Company or to the Company's customers. 7.4 Information from Employee. The Company does not wish to receive any confidential information from the Employee. Any and all information disclosed by the Employee to the Company shall not be deemed confidential, and the Company shall be under no obligation to retain any such information in confidence. 8. Employee's Representations and Warranties. The Employee hereby represents and warrants to the Company that the execution and delivery by him of this Agreement, and the performance by him of his duties and responsibilities on behalf of the Company as set forth in this Agreement, will not constitute a breach, violation or default by him under any employment agreement, confidentiality agreement, non-competition agreement, or any other agreement or any judgment or other instrument to which he is a party or by which he is otherwise bound or subject. 9. Equitable Relief and Limits of Liability. The parties recognize that irreparable harm will result to either party if the other party fails or refuses to perform the obligations under this Agreement and that the remedy at law for such failure or refusal will be inadequate. Accordingly, in addition to any other remedies and damages available, the Company and the Employee shall be entitled to injunctive relief, and other appropriate equitable relief. Nothing herein shall be construed as prohibiting the Company or the Employee from pursuing any other remedies in addition to equitable relief, including the recovery of damages; provided, however, that the Company's damages for breach of this Agreement shall be limited, in all respects, to a maximum amount equal to the remaining amount to be paid to Employee hereunder following the date of breach. Notwithstanding anything to the contrary set forth herein, in no event shall the Company be entitled to consequential or punitive damages as a result of such breach. 10. Invalidity and Severability. If any provisions of this Agreement are held invalid or unenforceable, such invalidity or unenforceability shall not affect the other provisions of this Agreement, and, to the extent, the provisions of this Agreement are intended to be and shall be deemed severable. In particular and without limiting the foregoing sentence, in the event that any provision of Section 6 of this Agreement shall be held to be invalid or unenforceable by reason of the geographic or business scope or the duration thereof, such invalidity or unenforceability shall attach only to such provision and shall not affect or render invalid or unenforceable any other provision of this Agreement. This Agreement and such provisions of Section 6 shall be construed as if the geographic or business scope or the duration of such provision had been more narrowly drawn so as not to be invalid or unenforceable. 11. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if delivered by hand, sent via facsimile, or sent by registered or certified mail, return receipt requested, as follows: As to the Employee: Dr. Qun Yi Zheng 1263 S. Elmoro Court Superior, Colorado 80027 As to the Company: Madis Botanicals, Inc. 375 Huyler Street South Hackensack, New Jersey 07606 Att: Mark Koscinski As to Pure World: Pure World, Inc. 376 Main Street Bedminster, New Jersey 07921 Att: Natalie I. Koether With a copy to: Natalie I. Koether, Esq. Rosenman & Colin 56 Pennbrook Road, P.O. Box 97 Far Hills, New Jersey 07931 or to such other address as either party hereto may designate to the other by written notice given in accordance with this Agreement. Notices shall be deemed sent on the date personally delivered and receipt or written acknowledgment is received if sent via facsimile. 12. Assignment. This Agreement and the rights and obligations of the parties hereto shall be binding upon and inure to the benefit of the Company and its successors and assigns. The parties acknowledge that the services to be provided by the Employee hereunder are unique to the Employee. Accordingly, the Employee may not assign any obligation hereunder without the prior written consent of the Company, which may be withheld in the Company's sole discretion. 13. Waiver of Breach. Waiver by either party of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach by such other party. The failure of any party hereto to take any action by reason of a breach shall not deprive that party of the right to take action at any time while such breach continues. 14. Benefit of Affiliates. Any protection, benefits, rights or other provisions given to the Company in this Agreement shall also be deemed to apply to, protect and inure to the benefit of the Company's subsidiaries and affiliates. 15. Entire Agreement. This Agreement contains the entire agreement of the parties as to the subject matter hereof and supersedes any and all other agreements of the parties as to the subject matter hereof. This Agreement and its terms may not be waived, changed, modified, extended or discharged orally, except by an agreement in writing signed by the party against whom enforcement of such waiver, change, modification, extension or discharge is sought. 16. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of New Jersey. 17. Construction. The section and subsection headings used herein are for convenience of reference only, are not a part of this Agreement and are not to affect the construction of, or be taken into consideration in interpreting, any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. MADIS BOTANICALS, INC. By:/s/ Natalie I. Koether ---------------------- Natalie I. Koether PURE WORLD, INC. By:/s/ Paul O. Koether ---------------------- Paul O. Koether EMPLOYEE By: /s/ Dr. Qun Yi Zheng -------------------- Dr. Qun Yi Zheng EX-99 5 EXHIBIT 10.10(B) - AMENDMENT Exhibit 10.10(b) AMENDMENT This is an amendment to the agreement dated as of March 1, 1996 (the "Employment Agreement") by and among Qun Yi Zheng ("Employee"), Madis Botanicals, Inc., a New Jersey corporation (the "Company") and Pure World, Inc. ("Pure World") pursuant to which Employee has been employed by the Company (the "Amendment"). R E C I T A L S The Employee currently serves as a Vice President of the Company pursuant to the Employee Agreement. Effective August 1, 1997, the Company's Board of Directors has elected Employee a Senior Vice President. As an inducement for the continued service of Employee and his commitment to stay with the Company for at least three years, the Company has agreed to increase the term of the Employment Agreement and to guarantee the compensation under such agreement for a period of three years even in the event of death or disability. NOW, THEREFORE, the parties agree as follows: 1. Survival of Employment Agreement. The Amendment shall amend the Employment Agreement only to the extent expressly provided herein and the Amendment shall supercede the terms of the Employment Agreement only where the two agreements are in conflict. In all other respects, the Employment Agreement shall survive and control the terms of Employee's employment. The Amendment and the Employment shall be incorporated together and constitute one agreement (the "Amended Employment Agreement"). 2. Terms of Agreement. The term of employment under the Amended Employment Agreement shall be three years commencing August 1, 1997 (the "Effective Date") and shall extend until August 1, 2000 unless sooner terminated pursuant to Section 6 hereof. The term of the Employees' employment under the Amended Employment Agreement shall be automatically extended one day for each day elapsed after the Effective Date. Employment of the Employee by the Company prior to the Effective Date shall be counted in determining the Employee's continuous service with the Company for purposes of any benefit computation. 3. Compensation. For all services rendered by the Employee under the Amended Employment Agreement, the Company shall pay the Employee an annual salary of $120,000 (the "Base Salary"), payable in the same periodic installments customary for other employees of the Company. The Board of Directors of the Company shall from time to time review the compensation to be paid to the Employee under the Amended Employment Agreement and shall increase (but not decrease) the compensation in such amounts, if any, as the Board of Directors determines. 4. Death Benefits. Subject to the provisions of Section 6.1 of the Amendment, in the event of the Employee's death during the term hereof, the Company shall pay to such beneficiaries as the Employee shall designate in writing prior to the Employee's death, or if he fails to designate a beneficiary, to the Employee's spouse or, if none, to the Employee's estate, an annual benefit equal to his then current annual salary (the "Death Benefit"). The Death Benefit shall be payable in equal monthly installments for a period of 3 years, commencing on the first day of the next month following the month in which the Employee's death occurs. Payments made pursuant to this Section 4 shall be made in lieu of any and all payments provided for in Section 2 of the Amendment 5. Disability. A. In the event of Employee's disability as defined in the Employment Agreement, the Employee shall be paid such benefits to which he is entitled under the terms of such long-term disabiity insurance as the Company has provided him or 80% of his salary for a period of three years from the date of such disability whichever is higher ("Disability Payments"). B. In the event of the Employee's death during the period in which Disability Payments are to be paid, the Company shall pay any remaining Disability Payments due pursuant to such beneficiaries as the Employee designates in writing before his death, or upon his failure to designate a beneficiary, to his surviving spouse or, if none, then to the Employee's estate. Such payments shall be paid in lieu of any and all payments provided for in Section 4 the Amendment. 6. Termination. The Employee's employment hereunder may be terminated only under the following circumstances: 6.1 By the Company for Cause. The Company may terminate the Employee's employment hereunder for "cause" upon not less than five days' prior written notice of such termination. For purposes of this Agreement, the Company shall have "cause" to terminate the Employee's employment hereunder upon (A) the continued failure by the Employee to substantially perform his duties hereunder (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or the removal of Employee's office to a location more than 5 miles from its current location), which failure has not been cured (i) within three days after a written demand for substantial performance is delivered to the Employee by the Company that specifically identifies the manner in which the Company believes the Employee has not substantially performed his duties (the "Three Day Period"), or (ii) in the event such failure cannot be reasonably cured within the Three Day Period, within 20 days thereafter, provided that the Employee promptly commences and thereafter diligently prosecutes the cure thereof, or (B) Employee's conviction of any criminal act or fraud with respect to the Company. Notwithstanding the foregoing, the Employee's employment may not be terminated for cause unless and until the Company has delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than 75 percent of the entire Board of Directors at a meeting of the Board (of which the Employee was given at least 20 days prior written notice and an opportunity, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Employee has not substantially performed his duties (which failure shall be described in detail) and such failure has not been cured within the period described in (ii) above. In addition, the Company shall not have cause to terminate the Employee's employment hereunder as a result of any event occurring prior to the date hereof and previously disclosed to the Company. The burden of establishing cause shall be upon the Company. 6.2 Termination by the Employee. The Employee may terminate his employment hereunder for failure to make the payments specified herein if the Company fails to make such payments for a period of five days after Employee has given notice of such failure. 7. Notices. All notices hereunder shall be in writing and personally delivered or mailed by registered or certified mail, return receipt requested, to the following address: If to the Company: 376 Main Street PO Box 74 Bedminster, New Jersey 07921 If to the Employee: 6 Fox Hill Drive Wayne, New Jersey 07470 The Company or the Employee may hereafter designate another address to the other in writing for purposes of notices under the Amended Employment Agreement. 8. Waivers. Any waiver by any party of violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 9. Assignability. This Agreement shall not be assignable by the Company without the written consent of Employee, except that if the Company shall merger or consolidate with or into, or transfer substantially all of its assets to, another corporation or other form of business organization, this Agreement shall be binding to the Employee and be for the benefit of and binding upon the successor of the Company resulting from such merger, consolidation or transfer without Employee's consent, unless this Agreement is terminated pursuant to Section 6.2. Employee may not assign, pledge, or encumber any interest in this Agreement or any part thereof without the express written consent of the Company, this Agreement being personal to Employee. 10. Severability. Each provision of the Amended Employment Agreement constitutes a separate and distinct undertaking, covenant and/or provision hereof. In the event that any provision of the Amended Employment Agreement shall finally be determined to be unlawful, such provision shall be deemed severed from the Amended Employment Agreement, but every other provision of the Amended Employment Agreement shall remain in full force and effect, and in substitution for any such provision held unlawful, there shall be substituted a provision of similar import reflecting the original intent of the parties hereto to the extent permissible under law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of July 28, 1997. MADIS BOTANICALS, INC. By: /s/ Natalie I. Koether ---------------------- Title: President PURE WORLD, INC. By: /s/ Paul O. Koether ------------------------ Title: Chairman QUN YI ZHENG /s/ Qun Yi Zheng - ---------------- Qun Yi Zheng -----END PRIVACY-ENHANCED MESSAGE-----