10QSB 1 purw10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO 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 stock: As of October 31, 2001, the issuer had 8,253,355 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 SEPTEMBER 30, 2001 (UNAUDITED) (in $000's) Assets Current assets: Cash and cash equivalents $ 2,637 Marketable securities 40 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $151 2,880 Inventories 10,444 Other 507 ------- Total current assets 16,508 Plant and equipment, net 9,484 Investment in unaffiliated natural products company 1,510 Notes receivable from affiliates 295 Goodwill, net of accumulated amortization of $811 1,180 Other assets 612 ------- Total assets $29,589 ======= Liabilities and stockholders' equity ------------------------------------ Current liabilities: Accounts payable $ 1,070 Short-term borrowings 3,379 Accrued expenses and other 1,515 ------- Total current liabilities 5,964 Long-term debt 3,542 ------- Total liabilities 9,506 ------- Stockholders' equity: Common stock, par value $.01; 30,000,000 shares authorized; 8,253,355 shares outstanding 83 Additional paid-in capital 43,306 Accumulated deficit ( 23,306) ------- Total stockholders' equity 20,083 ------- Total liabilities and stockholders' equity $29,589 ======= 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 September 30, ------------------ 2001 2000 ---- ---- Revenues: Sales $ 4,598 $ 8,696 Net losses on marketable securities ( 26) ( 36) Interest income 27 57 ------- ------- Total revenues 4,599 8,717 ------- ------- Expenses: Cost of goods sold 3,684 7,250 Selling, general and administrative 1,339 1,378 ------- ------- Total expenses 5,023 8,628 ------- ------- Income (loss) before income taxes ( 424) 89 Benefit for income taxes ( 19) ( 12) ------- ------- Net income (loss) ($ 405) $ 101 ======= ======= Basic and diluted net income (loss) per share ($ .05) $ .01 ======= ======= See accompanying notes to consolidated financial statements. 3 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($000 Omitted, except per share data) Nine Months Ended September 30, ------------------ 2001 2000 ---- ---- Revenues: Sales $14,952 $19,135 Net gains on marketable securities 32 31 Interest income 107 185 ------- ------- Total revenues 15,091 19,351 ------- ------- Expenses: Cost of goods sold 12,293 14,803 Selling, general and administrative 3,854 4,231 ------- ------- Total expenses 16,147 19,034 ------- ------- Income (loss) before income taxes ( 1,056) 317 Provision (benefit) for income taxes ( 7) 42 ------- ------- Net income (loss) ($ 1,049) $ 275 ======= ======= Basic and diluted net income (loss) per share ($ .13) $ .03 ======= ======= See accompanying notes to consolidated financial statements. 4 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($000 Omitted) Nine Months Ended September 30, ------------------ 2001 2000 ---- ---- Cash flows from operating activities: Net income (loss) ($ 1,049) $ 275 Adjustments: Depreciation and amortization 1,352 1,263 Net marketable securities transactions 3 62 Change in inventories 439 ( 2,440) Change in receivables ( 105) ( 2,381) Change in accounts payable and other accruals 422 2,747 Other, net 208 ( 248) ------- ------- Net cash provided by (used in) operating activities 1,270 ( 722) ------- ------- Cash flows from investing activities: Purchases of plant and equipment ( 640) ( 1,202) Loans to affiliates and others ( 30) ( 20) Repayment of loans to affiliates and others 54 26 ------- ------- Net cash used in investing activities ( 616) ( 1,196) ------- ------- Cash flows from financing activities: Issuance of common stock - 28 Repurchase of common stock ( 32) - Term loan borrowings 485 1,154 Term loan repayments ( 1,097) ( 976) Net revolving line of credit repayments ( 489) ( 484) ------- ------- Net cash used in financing activities ( 1,133) ( 278) ------- ------- Net decrease in cash and cash equivalents ( 479) ( 2,196) Cash and cash equivalents at beginning of period 3,116 5,598 ------- ------- Cash and cash equivalents at end of period $ 2,637 $ 3,402 ======= ======= Supplemental disclosure of cash flow information: Cash paid for: Interest $ 455 $ 536 ======= ======= Taxes $ 1 $ 14 ======= ======= See accompanying notes to consolidated financial statements. 5 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. General ------- The accompanying unaudited consolidated financial statements of Pure World, Inc. and subsidiaries (the "Company" or "Pure World") as of September 30, 2001 and for the three and nine month periods ended September 30, 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 year-end 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. The results of operations for the three and nine month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the entire year or any other period. 2. Marketable Securities --------------------- At September 30, 2001, marketable securities consisted of the following (in $000's): Gross Holding Fair Cost Losses Value -------- -------- ------- Trading securities $ 250 $ 210 $ 40 ===== ===== ===== All marketable securities were investments in common stock. 6 3. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $ 1,450 Work-in-progress 750 Finished goods 8,244 ------- Total inventories $10,444 ======= 4. 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"). In July 2000, Gaia notified the Company that they were deferring the repayment of the principal for one year as allowed in the promissory note. The Pure World Loan bears interest at 6.48% which was the imputed rate required under the Internal Revenue Code and is classified as an other asset in the consolidated balance sheet. The parties also agreed that if any other party acquired voting shares, Pure World's Gaia Stock would become voting stock. Additionally, the parties agreed that Gaia and the principal stockholder of Gaia (the "Principal Stockholder") would have a right of first refusal to acquire any Gaia stock sold by Pure World and that Pure World would have a right of first refusal to acquire any Gaia stock sold by Gaia or the Principal Stockholder. In June 1998, Gaia requested that Pure World guarantee an unsecured bank line of $500,000 (the "Gaia Bank Loan"). Because of expansion plans for Pure World'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 is 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 does not close prior to the Closing Date, and either before or after the Closing 7 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 on November 30, 1998. The Company continues to monitor 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. 5. Borrowings ---------- Borrowings consisted of the following at September 30, 2001 (in $000's): Loans payable to a bank, pursuant to a $3 million secured line of credit bearing annual interest at LIBOR plus 2.5% (6% at September 30, 2001) maturing in June 2002 $ 2,024 Loans payable to a bank, collateralized by certain property and equipment, bearing annual interest of 6.878% maturing in December 2003 1,821 Loan payable to a bank, collateralized by certain equipment bearing annual interest at LIBOR plus 2.5% (6.08% at September 30, 2001) maturing in October 2004 1,233 Lease payable for equipment for gross assets of $800,000 with imputed interest of approximately 8% maturing in June 2007 657 Lease payable for equipment for gross assets of $392,800 with imputed interest of approximately 6.95% maturing in March 2006 354 Loan payable to a bank, bearing annual interest at LIBOR plus 2.5% (6.08% at September 30, 2001) maturing in May 2005 300 8 Leases payable for equipment 236 All other 296 ------- Total borrowings 6,921 Less: Current portion of long-term debt 3,379 ------- Long-term debt $ 3,542 ======= Interest expense was $134,000 and $455,000 for the three and nine months ended September 30, 2001, respectively and $183,000 and $536,000 for the same periods in 2000. 6. Common Stock ------------ In connection with the Company's common stock repurchase plans, 28,600 shares of common stock were repurchased in the nine months ended September 30, 2001. All shares repurchased were returned to the status of authorized but unissued shares. 7. Net Income (Loss) Per Share --------------------------- Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted income (loss) per share is 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 income (loss) per share and diluted income per share are reconciled below (in 000's). Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------ ------ ------ ------ Average shares outstanding for basic income (loss) per shares 8,254 8,282 8,267 8,277 Dilutive effect of stock options - 203 - 318 ----- ----- ----- ----- Average shares outstanding for diluted income (loss) per share 8,254 8,485 8,267 8,595 ===== ===== ===== ===== 8. Litigation ---------- The Turnkey litigation was settled in September 2000. In connection with the settlement, Pure World received net proceeds of $345,000 and was relieved of any potential liability to Turnkey. 9 9. New Accounting Standards ------------------------ On June 29, 2001, Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" was approved by the Financial Accounting Standards Board. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002. The Company has not yet completed its assessment of the impact of the adoption of SFAS No. 142 on its financial position or results of operations. 10 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 September 30, 2001, the Company had cash and cash equivalents of approximately $2.6 million. Cash equivalents of $2.6 million consisted of U.S. Treasury bills with an original maturity of less than three months and yields ranging between 2.55% and 3.58%. The Company had working capital of $10.5 million at September 30, 2001. The management of the Company believes that the Company's financial resources and anticipated cash flows will be sufficient for future operations. Net cash of $1,270,000 was provided by operations in the nine months ended September 30, 2001. Cash flows from the net loss offset by depreciation and amortization, a decrease in inventories, and an increase in accounts payable and other accruals was the primary reason for the cash provided. Net cash of $722,000 was used in operations for the nine months ended September 30, 2000. The net use of cash was primarily attributable to an increase in inventories and receivables, partially offset by an increase in accounts payable and other accruals, and depreciation and amortization. Net cash of $616,000 and $1,196,000 was used in investing activities for the nine months ended September 30, 2001 and 2000, respectively. In 2001, $640,000 was used for the purchase of machinery and equipment. In 2000, $1.1 million was used in connection with the construction of a new powdering facility. Net cash used in financing activities was $1,133,000 for the nine months ended September 30, 2001, compared to cash used in financing activities in the nine months ended September 30, 2000 of $278,000. Net payments of notes payable were the primary reasons for the cash flows. For more information of borrowings, see Note 5 of Notes to Consolidated Financial Statements. Results of Operations --------------------- The Company's operations resulted in a net loss of $405,000, or $.05 basic and diluted loss per share, for the three months ended September 30, 2001 compared to net income of $101,000, or $.01 basic and diluted income per share, for the comparable period in 2000. 11 The net loss was $1,049,000, or $.13 basic and diluted loss per share for the nine months ended September 30, 2001, compared to net income of $275,000, or $.03 basic and diluted income per share, for the comparable period in 2000. The Company, through its wholly-owned subsidiary, Pure World Botanicals, Inc. had sales of $4.6 million for the quarter ended September 30, 2001, compared to sales of $8.7 million for the comparable quarter of 2000, a decrease of $4.1 million, or 47%. For the nine months ended September 30, 2001, sales were $15 million compared to $19.1 million for the comparable period in 2000, a decrease of $4.2 million, or 22%. For the quarters ended September 30, 2001 and 2000, the gross margin (sales less cost of goods sold) was $914,000, or 20% of sales and $1,446,000, or 17% of sales, respectively. For the nine months ended September 30, 2001 and 2000, the gross margin was $2,659,000 or 18% of sales and $4,332,000 or 23% of sales, respectively. Results for the three and nine months ended September 30, 2000 were significantly affected by the delivery of a large contract to one customer to process a natural but not botanical product. That contract ended in October 2000. For the three months ended September 30, 2001, net losses on marketable securities were $26,000 compared to net losses of $36,000 for the same period in 2000. For the nine month period ended September 30, 2001, the net gains on marketable securities were $32,000 compared to net gains of $31,000 for the same period in 2000. Interest income was $27,000 and $57,000 for the three months ended September 30, 2001 and 2000, respectively. Interest income was $107,000 and $185,000 for the nine month periods ended September 30, 2001 and 2000, respectively. Lower invested balances and lower yields on investments were the reasons for the decrease. Selling, general and administrative expenses were $1,339,000 for the three months ended September 30, 2001, a decrease of $39,000 or 3% from $1,378,000 for the comparable period in 2000. Selling, general and administrative expenses were $3,854,000 for the nine months ended September 30, 2001 compared to $4,231,000 for the comparable period in 2000, a decrease of $377,000 or 9%. This decrease was due principally to lower personnel expenses. 12 PART II - OTHER INFORMATION ------- ----------------- Item 4. - Submission of Matters to a Vote of Security Holders ------- --------------------------------------------------- The Company held its Annual Meeting of Stockholders on October 29, 2001. 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 7,783,325 45,676 William Mahomes, Jr. 7,783,430 45,571 Alfredo Mena 7,783,705 45,296 Item 6. - Exhibits and Reports on Form 8-K ------ -------------------------------- (a) Exhibits -------- None (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter for which this report is being filed. 13 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: November 14, 2001 By:/s/ Sue Ann Itzel ------------------------ Sue Ann Itzel Vice President (Principal Accounting Officer) 14