10QSB 1 purw10q301.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2001 -------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 0-10566 ------- Pure World, Inc. -------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 95-3419191 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, Bedminster, New Jersey 07921 ----------------------------------------------- (Address of principal executive offices) (908) 234-9220 ------------------------------------------ (Issuer's telephone number) N/A -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 --- --- State the number of shares outstanding of each of the issuer's classes of common equity: As of April 30, 2001, the issuer had 8,281,955 shares of its common stock, par value $.01 per share, outstanding. Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I - FINANCIAL INFORMATION ------ --------------------- ITEM 1. - Financial Statements ------ -------------------- PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31,2001 (UNAUDITED) (in $000's) ASSETS ------ Current assets: Cash and cash equivalents $ 3,033 Marketable securities 95 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $179 2,946 Inventories 10,555 Other 432 ------- Total current assets 17,061 Plant and equipment, net 10,218 Investment in unaffiliated natural products company 1,510 Notes receivable from affiliates 311 Goodwill, net of accumulated amortization of $739 1,252 Other assets 673 ------- Total assets $31,025 ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 1,116 Short-term borrowings 3,931 Accrued expenses and other 1,634 ------- Total current liabilities 6,681 Long-term debt 3,868 ------- Total liabilities 10,549 ------- Stockholders' equity: Common stock, par value $.01; 30,000,000 shares authorized; 8,281,955 shares issued and outstanding 83 Additional paid-in capital 43,337 Accumulated deficit ( 22,944) ------- Total stockholders' equity 20,476 ------- Total liabilities and stockholders' equity $31,025 ======= See accompanying notes to consolidated financial statements. 2 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($000 Omitted, except per share data) Three Months Ended March 31, ------------------ 2001 2000 ------ ------ Revenues: Sales $ 4,184 $ 5,730 Net gains on marketable securities 79 93 Interest income 45 69 ------- ------- Total revenues 4,308 5,892 ------- ------- Expenses: Cost of goods sold 3,704 4,060 Selling, general and administrative 1,286 1,384 ------- ------- Total expenses 4,990 5,444 ------- ------- Income (loss) before income taxes ( 682) 448 Provision for income taxes 5 35 ------- ------- Net income (loss) ($ 687) $ 413 ======= ======= Basic and diluted net income (loss) per share ($ .08) $ .05 ======= ======= See accompanying notes to consolidated financial statements. 3 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($000 Omitted) Three Months Ended March 31, -------------------- 2001 2000 ------- ------- Cash flows from operating activities: Net income (loss) ($ 687) $ 413 Adjustments: Depreciation and amortization 445 468 Net marketable securities transactions ( 52) ( 4) Change in inventories 328 ( 1,043) Change in receivables ( 171) ( 790) Change in accounts payable and other accruals 589 808 Other, net 225 96 -------- -------- Net cash provided by (used in) operating activities 677 ( 52) -------- -------- Cash flows from investing activities: Purchase of plant and equipment ( 538) ( 712) Loans to affiliates and others - ( 20) Repayment of loans to affiliates and others 2 21 Other, net - 2 -------- -------- Net cash used in investing activities ( 536) ( 709) -------- -------- Cash flows from financing activities: Term loan borrowings 66 255 Term loan repayments ( 342) ( 358) Net revolving line of credit borrowings (repayments) 52 ( 187) -------- -------- Net cash used in financing activities ( 224) ( 290) -------- -------- Net decrease in cash and cash equivalents ( 83) ( 1,051) Cash and cash equivalents at beginning of period 3,116 5,598 -------- -------- Cash and cash equivalents at end of period $ 3,033 $ 4,547 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 163 $ 170 ======== ======== See accompanying notes to consolidated financial statements. 4 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 (UNAUDITED) 1. General ------- The accompanying unaudited consolidated financial statements of Pure World, Inc. and subsidiaries ("Pure World" or the "Company") as of March 31, 2001 and for the quarters ended March 31, 2001 and 2000 reflect all material adjustments consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000 as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts 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 year's financial statements have been reclassified to conform to the current years' presentation. The results of operations for the quarters ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the entire year or any other period. 2. Summary of Significant Accounting Policies ------------------------------------------ In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 138, Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities - an amendment of SFAS No. 133. This statement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and for certain hedging activities.The Company adopted SFAS No. 138 on Jaunary 1, 2001. In connection with the origination of a bank loan, the Company entered into an interest rate swap agreement (notional amount $1,433,000) as required by the bank to effectively convert floating-rate debt to fixed rate debt in order to reduce the Company's risk to movements in interest rates. This agreement involves the exchange of fixed and floating interest rate payments over the life of 5 the agreement without the exchange of the underlying principal amount and involved no cost to the Company. Accordingly, the impact of the fluctuations in interest rates on this interest rate swap agreement is fully offset by the opposite impact on the related debt. 3. Marketable Securities --------------------- At March 31, 2001, marketable securities consisted of the following (in $000's): Gross Holding Fair Cost Losses Value ---- ------- ----- Trading securities $ 276 $ 181 $ 95 ===== ===== ==== All marketable securities were investments in common stock. 4. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $ 1,902 Work-in-progress 27 Finished goods 8,626 ------- Total inventories $10,555 ======= 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. 6 Additionally, the parties agreed that Gaia and the principal stockholder of Gaia (the "Principal Stockholder") would have a right of first refusal to acquire any Gaia stock sold by Pure World and that Pure World would have a right of first refusal to acquire any Gaia stock sold by Gaia or the Principal Stockholder. In June 1998, Gaia requested that Pure World guarantee an unsecured bank line of $500,000 (the "Gaia Bank Loan"). Because of expansion plans for Pure World's wholly-owned subsidiary, Pure World Botanicals Inc., 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. The Company is monitoring its investment and discusses its position with Gaia from time to time. 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. 7 6. Borrowings ---------- Borrowings consisted of the following at March 31, 2001 (in $000's): Loan payable to a bank, pursuant to a $3 million unsecured line of credit bearing annual interest at LIBOR plus 2.5% (8% at March 31, 2001, maturing in June 2001 $ 2,565 Loan payable to a bank, collateralized by certain property and equipment, bearing annual interest at 6.878% maturing in December 2003 2,036 Loan payable to a bank, collateralized by certain equipment bearing annual interest at LIBOR plus 2.5% (7.78% at March 31, 2001), maturing in October 2004 1,433 Loan payable to a bank, bearing annual interest at LIBOR plus 2.5% (8.07% at March 31, 2001) maturing in May 2005 340 Loan payable to a bank, collateralized by certain equipment, bearing annual interest at 8.25% maturing in June 2004 149 Loan payable to a bank, collateralized by certain equipment bearing annual interest at 8.75% maturing in April 2003 140 Loan payable to a bank, collateralized by certain equipment bearing annual interest at 8.75% maturing in August 2003 36 Lease payable for equipment for gross assets of $800,000 with imputed interest of approximately 8% maturing in June 2007 713 8 Lease payable to IBM Credit Corporation for gross assets of $150,000 with inputed interest of 6.5% maturing in January 2002. 58 Leases payable for equipment 318 All other 11 ------- Total borrowings 7,799 Less: Current portion of long-term debt 3,931 ------- Long-term debt $ 3,868 ======= Interest expense was $163,000 and $170,000 for the three months ended March 31, 2001 and 2000, respectively. 7. Net Income (Loss) Per Share --------------------------- Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings(loss) per share are computed by dividing net income (loss) 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 (loss) per common share and diluted earnings (loss) per common share are reconciled below. (Shares in Thousands) 2001 2000 ------ ------ Average shares outstanding for basic earnings(loss) per share 8,282 8,269 Dilutive effect of stock options - 452 ----- ----- Average shares outstanding for diluted earnings(loss) per share 8,282 8,721 ===== ===== Excluded from the calculation of net earnings (loss) per share in 2001 are 663 common stock options which, if included, would have an antidilutive effect. 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results ------ of Operations ------------- This Form 10-QSB 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 March 31, 2001, the Company had cash and cash equivalents of approximately $3 million. Cash equivalents of $2.8 million consisted of U.S. Treasury bills with an original maturity of less than three months and yields ranging between 4.42% and 5.12%. The Company had working capital of $10.4 million at March 31, 2001. The management of the Company believes that the Company's financial resources and anticipated cash flows will be sufficient for future operations and possible acquisitions of other operating businesses. Net cash of $677,000 was provided by operations in the first quarter of 2001, compared to net cash used by operations of $52,000 in the first quarter of 2000. The net loss of $687,000 offset by depreciation and amortization, increases in accounts payable and other accruals and a decrease in inventory were the primary reasons for the cash provided by operations in the first quarter of 2001. In the first quarter of 2000, the net use of cash was primarily attributable to an increase in inventories, partially offset by an increase in accounts payable and other accruals and depreciation and amortization. Net cash of $536,000 and $709,000 was used in investing activities in the three months ended March 31, 2001 and 2000, respectively, primarily for the purchase of plant and equipment. Cash flows used in financing activities in the first quarter of 2001 were $224,000 compared to net cash used of $290,000 in the same period in 2000. Changes in notes payable were the primary reason for these cash flows. For more information on borrowings, see Note 6 of Notes to Consolidated Financial Statements. Results of Operations --------------------- The Company's operations resulted in a net loss of $687,000, or $.08 basic and diluted loss per share, for the three months ended March 31, 2001 compared to net income of $413,000, or $.05 basic and diluted earnings per share, for the comparable period in 2000. The Company, through its wholly-owned subsidiary, Pure World Botanicals, Inc. had sales of $4.2 million for the quarter ended March 31, 2001, compared to sales of $5.7 million for the comparable quarter of 2000, a decrease of $1.5 million, or 27%. The Company believes that sales in the herbal product industry continue to decline dramatically. 10 For the three month periods ended March 31, 2001 and 2000, the gross margin (sales less cost of goods sold) was $480,000, or 11.5% of sales and $1,670,000, or 29% of sales, respectively. The decrease in gross margin was due to the change in the product sales mix and pricing pressures. For the three month period ended March 31, 2001, the Company recorded net gains on marketable securities of $79,000 compared to $93,000 for the same period in 2000. In 2001, $333,000 were unrealized gains and $254,000 were realized losses. In 2000, $478,000 were unrealized gains and $385,000 were realized losses. Interest income was $45,000 for the three month period ended March 31, 2001, compared to $69,000 for the three month period ended March 31, 2000. Lower invested balances and lower yields on investments were the reasons for the decrease. Selling, general and administrative expenses were $1,286,000 for the three months ended March 31, 2001 compared to $1,384,000 for the comparable period in 2000, a decrease of $98,000 or 7%. Lower selling and interest expenses were the primary reasons for the decrease. 11 PART II - OTHER INFORMATION ------- ----------------- Item 6. - Exhibits and Reports on Form 8-K ------- -------------------------------- (a) Exhibits -------- None (b) Reports on Form 8-K ------------------- None 12 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURE WORLD, INC. Dated: May 15, 2001 By: /s/ Sue Ann Itzel -------------------- Sue Ann Itzel Assistant Secretary (Principal Accounting Officer) 13