-----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, IJA3NhJ8p1e+p6UzWDjEd+tzBp8zhsYYRFH3ZxkdFej09Nn674KKaGSE+FCjUp2v fNNi39J7mbuYXdSVF/6uXg== 0000356446-03-000003.txt : 20030328 0000356446-03-000003.hdr.sgml : 20030328 20030328151751 ACCESSION NUMBER: 0000356446-03-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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: 1934 Act SEC FILE NUMBER: 000-10566 FILM NUMBER: 03624883 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: COMPUTER MEMORIES INC DATE OF NAME CHANGE: 19920908 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER MEMORIES INC /DE/ DATE OF NAME CHANGE: 19940411 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HOLDINGS INC /DE/ DATE OF NAME CHANGE: 19940411 10KSB 1 purw10k.txt 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 For the fiscal year ended December 31, 2002 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _________________. Commission file number 0-10566 ------- PURE WORLD, INC. ---------------- (Name of small business issuer in its charter) Delaware 95-3419191 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, P.O. Box 74, Bedminster, New Jersey 07921 ---------------------------------------------------------- (Address of principal executive offices with Zip Code) Issuer's telephone number, including area code (908) 234-9220 -------------- Securities registered under Section 12(b) of the Exchange Act: -------------------------------------------------------------- NONE Securities registered under Section 12(g) of the Exchange Act: -------------------------------------------------------------- Common Stock, par value $.01 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] Issuer's revenues for the fiscal year ended December 31, 2002 were approximately $18.2 million. At February 28, 2003, there were 7,526,954 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 $3.6 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. Pure World, Inc. ("Pure World" or the "Company"), develops, manufactures and sells natural ingredients which principally are derived from plant materials (referred to herein also as botanicals or herbs) using the Company's proprietary extraction technology. Extraction is the process by which the commercial ingredients of plants are drawn out by applying a solution ("menstruum") consisting of water or a combination of water and alcohol to the raw materials. The resultant extract can be converted into fluid extract, solid extract (paste) or powdered extract which can be tableted or encapsulated. The Company has produced more than one thousand botanical extracts which are used by the cosmetic, food and flavor, nutraceutical and pharmaceutical industries to manufacture finished products for the consumer market. The term nutraceuticals incorporates a wide range of natural products, such as vitamins, minerals, anti-oxidants and herbs which enhance health by supplementing diets. (See "Dietary Supplement Health and Education Act of 1994" and "New Nutraceutical Products"). Manufacturing Facility (the "Facility") - --------------------------------------- The Company believes it has the largest botanical extraction facility in North America. Situated on 4.5 acres, the 138,000 square foot Facility contains custom designed stainless steel equipment including milling equipment; percolators; vacuum stills; filters; automatic extractors; ribbon blenders; homogenizers; high capacity spray, fluid bed and vacuum dryers, and dry and wet granulaters. The Company's spray dryers have an annual capacity of over 8,000,000 lbs and produce free-flowing powders for tableting, encapsulation or dissolution in liquids. Powdered Herb Facility - ---------------------- In 2000, the Company converted its Teterboro, New Jersey facility from a warehouse for raw materials to a combination warehouse and botanical powdering facility. Botanical powders are milled or crushed from crude botanicals and then used in tablets or capsules. The Company believes that botanical powders are an essential complement to its line of botanical extracts. Although botanical extracts are considered to be the expanding segment of nutraceuticals, many products still consist wholly or partially of botanical powders. The total investment in the new facility was approximately $1.25 million. I-1 Pure Powders - ------------ In February of 2002, the Company filed a patent in connection with a new invention for eliminating micro contaminants from herbal powders. The invention responds to the need for an alternative to irradiation and Ethylene oxide methods which are or soon will be banned in Europe and Japan. The Company believes that its technology is unique and more economic and effective than its principal competitive methods, steam and ozone. Wet and Dry Granulation - ----------------------- During 2002, the Company significantly expanded its processing capabilities for wet and dry granulation. The Company uses these processes for its own proprietary materials as well as raw materials provided by third parties. It is anticipated that this activity will expand further in 2003. Quality Control in Manufacturing - -------------------------------- As a registered Food and Drug Administration ("FDA") facility, Pure World Botanicals is authorized to manufacture The United States Pharmacopeia ("U.S.P.") and pharmaceutical grade products such as, among others, casanthranol (a further processed product of the bark of the Cascara tree used in natural laxatives) and benzoin (used as an aromatic and local antiseptic and skin protectant). The Facility is kosher certified and operates under current Good Manufacturing Practices ("cGMP's") to assure consistent high quality in the manufacture of its products. The 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 Facility has never failed an audit. In 1999, Pure World Botanicals was certified to manufacture organic extracts and powders. Laboratory - ---------- The Facility contains six laboratories: quality control ("QC"); research and development ("R&D"): analytical instrumentation; flavor; cosmetic; and microbiology. The microbiology laboratory evaluates finished products for microbiological purity. The quality control laboratory is devoted to the physical and chemical analysis of products measured against Pure World Botanicals' customer and compendial specifications. The analytical instrumentation and purification laboratories are equipped with state-of-the-art equipment including a Multi-state Mass Spectrometer (LC/Ms/Ms) on line with numerous High Performance Liquid Chromatographs (HPLC), Gas Chromatographs (GC) and a 400 megahertz Nuclear Magnetic Resonance (NMR). Thin Layer Chromatography (TLC), Infrared Spectroscopy (IR) and Ultra-violet Spectrophotometry (UV) are also routinely used in QC and R&D. I-2 The Laboratory and the Manufacturing Process - -------------------------------------------- The manufacturing process begins and ends in the laboratory. Incoming plant materials are evaluated to verify species, variety and quality. The scientists determine the right menstruum for each plant extract and the optimal method of extraction and drying to maintain product integrity and ensure manufacturing efficiency. When an approved material arrives it is evaluated against the preshipment sample and if it matches, it is forwarded to production along with the appropriate menstruum. Throughout Pure World Botanicals' proprietary manufacturing system, called the Unitized(TM) system, the processed plant material is subjected to a series of QC 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 QC 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. Although many botanicals are currently in over supply, if demand for botanical products experiences growth in the future the demand pressure for some products could outstrip the capacity of the suppliers. The Company's standardized products have guaranteed potency, meaning that the products contain a stipulated amount of active ingredients. The Company believes that for the most part, it can acquire sufficient materials for its standardized line and that its inventory can be replaced without significant cost increase, however botanicals are subject to substantial variations due to weather, unexpected increase in demand, ground conditions and political problems in the source country and therefore supply will always be somewhat unpredictable and an occasional short fall can be expected. The Company has in place, in most instances, multiple geographic sources of raw material to minimize this potential problem. Also, the quality of botanicals varies from season to season and year to year, which can impose a limitation on the ability to produce standardized products and which can result in substantial price changes. 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 I-3 practices. 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. Pure World - Patents - -------------------- The Company has considerable proprietary technology used in its manufacturing processes, QC and R&D, and the loss or misappropriation of its technology would injure the Company. The Company has three patents of which two relate to Maca and one to Resveratrol. The Company has thirteen registered trademarks and numerous pending trademarks which it uses to differentiate its technology and products and it protects its proprietary technology by confidentiality agreements with employees, customers and prospective customers and other contractees. Pure World Botanicals is a member in good standing of the Institute of Food Technologies, the Cosmetic Toiletries and Fragrance Association, the Council for Responsible Nutrition, the National Nutritional Foods Association, the American Society of Pharmacognosy, and the American Society for Microbiology. The Facility is certified by the FDA for food, pharmaceutical and cosmetic ingredient production and has kosher-product and organic certification. Dietary Supplement Health and Education Act of 1994 ("DSHEA") - ------------------------------------------------------------- In 1994, DSHEA was enacted to establish the framework for the regulation of nutraceuticals which were being manufactured and marketed not as drugs but as dietary supplements. Except for certain pharmaceuticals manufactured to the standards of the U.S.P. published by the FDA, the Company's nutraceutical products are categorized as dietary supplements under DSHEA and not drugs which require FDA approval. The legislation recognized the importance of nutrition and benefits of dietary supplements in promoting health and preventive health measures. DSHEA defines dietary supplements as vitamins, minerals, herbs or other botanicals, amino acids, or other dietary substances which enhance or increase the total dietary intake. It provides that where an ingredient is first marketed as a dietary supplement and is subsequently approved as a new drug, it can continue to be sold as a supplement unless the Secretary of Health and Human Services rules that it would not be safe to do so. I-4 The FDA has publicly stated its concern that any claims about the efficacy of supplements receive prior approval by that agency. The FDA has published regulations about making claims and will adopt good manufacturing procedures ("cGMP's") for the manufacture of nutraceuticals. The Company believes that its cGMP's will comply with the FDA's proposed regulations. 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. Examples are gingko-biloba and milk thistle. Often, cosmetic companies prefer that botanicals be purified prior to use primarily to eliminate odor and color. Although several purified products are in the pilot stage none have been manufactured in commercial size quantities. The Company is currently setting up a department within the existing plant to manufacture purified products on a commercial scale. I-5 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 R&D. Competition - ----------- The Company has numerous competitors 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, 2003, the Company had 107 full-time employees, 102 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 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. At December 31, 2002, the lease had a term of two years and expires in December 2004 with three ten-year renewal options at base rates up to $22,898 per month. This facility includes a 20,000 square-foot office area; 10,000 square-feet for laboratories; manufacturing space of 70,000 square feet; and warehousing space of 38,000 square feet. Pure World Botanicals also leases a facility in Teterboro, New Jersey from an unrelated party for approximately $11,000 per month which until March I-6 of 2000 was used exclusively for storage of raw materials. In March 2000, this facility was converted into a combination warehouse and botanical powdering facility. Botanical powders result from milling or crushing crude botanicals. The powders are then used in tablets or capsules. Pure World Botanicals also leases a 23,000 square-foot warehouse in Carlstadt, New Jersey for approximately $15,000 per month. Item 3. - LEGAL PROCEEDINGS - ------- ----------------- The Company is involved from time to time in various lawsuits that arise in the course of its business. Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- The Company held its Annual Meeting of Stockholders on October 29, 2002. 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 6,824,362 88,464 William Mahomes, Jr. 6,839,612 73,214 Alfredo Mena 6,839,612 73,214 I-7 PART II ------- Item 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- At February 28, 2003, the Company had approximately 1,900 stockholders of record. The Company's common stock currently trades on the NASDAQ SmallCap Market under the symbol "PURW". On February 28, 2003 the closing price per share of the common stock was $.80. On March 19, 2003, NASDAQ advised the Company that the Company's share price was below the $1.00 minimum required for listing on the NASDAQ SmallCap Market ("SmallCap") and had until May 12, 2003 to comply. Previously the Company had moved from the National Market to the SmallCap because of the same deficiency. If the Company's price per share does not reach $1.00 per share for a period of ten consecutive days, it will be delisted unless the Company appeals. The following table sets forth the high and low closing prices for the common stock for the periods indicated, as reported by NASDAQ. Calendar Quarter Ended: High Low ---- --- 2002 ---- March 31 $ .91 $ .80 June 30 .90 .58 September 30 .63 .43 December 31 .63 .41 2001 ---- March 31 $ 1.38 $ 1.03 June 30 1.30 .96 September 30 1.36 .96 December 31 1.10 .81 The Company has not declared or paid any cash dividends on its common stock in 2002 or 2001 and does not foresee doing so in the immediate future. II-1 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, 2002, the Company had cash and cash equivalents of $1.9 million. Cash equivalents consisted of U.S. Treasury Bills with original maturities of less than three months and yields ranging from 1.164% to 1.219%. See Note 1 of Notes to Consolidated Financial Statements for additional information. Net working capital was approximately $6.8 million at December 31, 2002. As of December 31, 2002, the Company was in compliance with the covenants of their loan agreements. The Company has also commenced discussions with existing and other lenders to explore the opportunity to refinance some or all of its debt. The management of the Company believes that its financial resources and anticipated cash flows will be sufficient for future operations. Net cash of $1,426,000 was provided by operating activities in 2002. Cash flows from the net loss of $1,842,000 and the increase in receivables of $1,860,000 adjusted for depreciation and amortization of $1,664,000 and changes in inventories and payables of $1,961,000 and $1,510,000 respectively were the primary reasons for the cash provided in 2002. Net cash of $1,643,000 was provided by operating activities in 2001. Cash flows from the net loss of $2,882,000, adjusted for depreciation and amortization of $1,806,000 and changes in inventories and receivables of $1,267,000 and $731,000 respectively were the primary reasons for the cash provided. Net cash of $299,000 was used in investing activities in 2002 due to the purchase of plant and equipment offset by repayments of loans to affiliates. In 2001, net cash of $608,000 was used in investing activities due primarily to the purchase of plant and equipment. Cash used in financing activities was approximately $1,912,000 in 2002 and $1,468,000 in 2001, due primarily to the decrease in borrowings. For additional information on the terms of the Company's borrowings, see Note 5 of Notes to Consolidated Financial Statements. II-2 Results of Operations - --------------------- The Company's consolidated operations resulted in a net loss of $1,842,000, or basic and diluted loss per share of $.24, in 2002 compared to a net loss of $2,882,000, or basic and diluted loss per share of $.35 in 2001. The Company had sales in 2002 of approximately $18,144,000, a decrease of approximately $68,000 from 2001 sales of $18,212,000. Cost of goods sold was $15,766,000 and gross margin was $2,378,000 in 2002, compared to cost of goods sold of $16,113,000 and gross margin of $2,099,000 in 2001. Gross margin as a percentage of sales was 13% and 12% in 2002 and 2001, respectively. Results for 2002 and 2001 were negatively affected by charges of $645,000 and $575,000, respectively to bring the inventory valuation in line with current market conditions. In the year 2002, one customer accounted for approximately 35% of sales. In 2001, that customer accounted for approximately 32% of sales. In 2002, the Company recorded net income on marketable securities of $28,000, compared to $32,000 in 2001. In 2002, $132,000 of realized losses were offset by $160,000 of unrealized gains. In 2001, $322,000 of realized losses were offset by unrealized gains of $354,000. Interest income was $47,000 in 2002 compared to $127,000 in 2001. This decrease was due principally to lower yields on investments in 2002. General and administrative expenses (consisting of personnel, professional and all other expenses) were $4,384,000 in 2002, compared to $5,151,000 in 2001, a decrease of $767,000 or approximately 15%. Personnel expenses were $1,608,000 in 2002, a decrease of $6,000, from $1,614,000 in 2001. Professional fees consisting of legal, accounting and consulting fees, were $518,000 in 2002, a decrease of $117,000, or 18%, from the 2001 professional fees of $635,000. The decrease was principally due to lower legal fees. Other general and administrative expenses were $2,258,000 in 2002, a decrease of $644,000 or 22% from $2,902,000 in 2001. Lower interest expense, lower selling expenses and the elimination of goodwill amortization were the primary reasons for the decrease. New Accounting Standards - ------------------------ In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Intangible Assets". Major provisions of this Statement are as follows: goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill was no longer subject to amortization. The Company discontinued II-3 the amortization of goodwill effective January 1, 2002. This resulted in a reduction of amortization expense of approximately $143,000 in 2002. The Company made the initial assessment that goodwill was not impaired as of the adoption date of January 1, 2002. The Company reassessed its initial conclusion on December 31, 2002, and still believes goodwill to be unimpaired as of that date. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations and costs associated with the retirement of tangible long-lived assets. The Company is required to implement SFAS No. 143 on January 1, 2003, and management has not yet completed their assessment of the impact of the adoption of this standard on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Live Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. This standard applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those assets be measured at the lower of carrying amount of fair value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company was required to implement SFAS No. 144 on January 1, 2002, and management determined that this statement had no material impact on its results of operations or financial positions. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard nullifies Emerging Issue Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This standard requires the recognition of a liability for a cost associated with an exit or disposal activity at the time the liability is incurred, rather than at the commitment date to exit a plan as required by EITF 94-3. The Company will adopt this standard effective January 1, 2003. The Company does not expect the impact of the adoption of SFAS No. 146 to have a material effect on its results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation." This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method II-4 used on reported results. Effective January 1, 2003, The Company will adopt the fair value recognition provisions of SFAS No. 123, prospectively (as permitted under SFAS No. 148) to all new stock-based employee compensation granted, modified or settled after January 1, 2003. The Company does not expect the impact of the adoption of the fair value recognition provisions of SFAS No. 123 to have a material effect on its results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the impact of the Interpretation on its results of operations and financial position. Other Items - ----------- Related Party 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, 2002 and 2001 amounted to approximately $556,000 and $739,000, respectively. Sun received no remuneration or administrative fees for performing this service. KMZ Rosenman ("KMZ") performed legal work for the Company for which it billed the Company an aggregate of approximately $39,000 in 2002 and $53,000 in 2001. 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 KMZ. Significant Accounting Policies - ------------------------------- The Company's significant accounting policies are more fully described in Note 1 to its consolidated financial statements. Certain of the Company's accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of II-5 uncertainty. These judgments are based on the Company's historical experience, its observance of trends in the industry, information provided by its customers and information available from other outside sources, as appropriate. The Company's significant accounting policies include: Impairment of Goodwill ---------------------- Carrying values of goodwill are reviewed periodically for possible impairment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". The Company's impairment review is based on a discounted cash flow approach that requires significant judgment with respect to future volume, revenue and expense growth rates, and the selection of an appropriate discount rate. With respect to goodwill, impairment occurs when the carrying value of the reporting unit exceeds the discounted present value of cash flows for that reporting unit. The Company uses its judgment in assessing whether assets may have become impaired between annual valuations. Indicators such as unexpected adverse, economic factors, unanticipated technological change or competitive activities, acts by governments and courts, may signal that an asset has become impaired. In accordance with SFAS No. 142, the Company completed the annual impairment test of the valuation of goodwill and intangibles as of December 31, 2002 and, based upon the results, there was no impairment. The estimates and assumptions used are consistent with the business plans and estimates that the Company uses to manage its business operations. The use of different assumptions would increase or decrease the estimated value of future cash flows and would have increased or decreased any impairment charge taken. Future outcomes may also differ. If the Company's products fail to achieve estimated volume and pricing targets, market conditions unfavorably change or other significant estimates are not realized, then the Company's revenue and cost forecasts may not be achieved, and the Company may be required to recognize additional impairment charges. Inventory Reserves ------------------ When appropriate, the Company provided allowances to adjust the carrying value of its inventory to the lower of cost or market (net realizable value). II-6 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, 2002 Consolidated Statements of Operations for the Years ended December 31, 2002 and 2001 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2002 and 2001 Consolidated Statements of Cash Flows for the Years ended December 31, 2002 and 2001 Notes to Consolidated Financial Statements II-7 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, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. 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, 2002, and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards No. 142. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey March 19, 2003 F-1 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2002 (in $000's) ASSETS - ------ Current Assets: Cash and cash equivalents $ 1,898 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $337 3,904 Inventories 7,655 Other 581 -------- Total current assets 14,038 Investment in unaffiliated natural products company 1,510 Plant and equipment, net 7,836 Notes receivable from affiliates 279 Goodwill, net of accumulated amortization of $847 1,144 Other assets 371 -------- Total assets $ 25,178 ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Accounts payable $ 2,262 Short-term borrowings 3,173 Accrued expenses and other 1,836 -------- Total current liabilities 7,271 Long-term debt 1,977 -------- Total liabilities 9,248 -------- Commitments and Contingencies (Notes 9 and 10) Stockholders' equity: Common stock, par value $.01; 30,000,000 shares authorized; 7,530,654 shares issued and outstanding 75 Additional paid-in capital 42,837 Accumulated deficit ( 26,982) -------- Total stockholders' equity 15,930 -------- Total liabilities and stockholders' equity $ 25,178 ======== See accompanying notes to consolidated financial statements. F-2 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in $000's, except per share data) Year Ended December 31, --------------------------- 2002 2001 -------- -------- Revenues: Sales $ 18,144 $ 18,212 Net gains on marketable securities 28 32 Interest, dividend and other income 47 127 -------- -------- Total revenues 18,219 18,371 -------- -------- Expenses: Cost of goods sold: Cost of goods sold 15,121 15,538 Inventory write-down 645 575 -------- -------- Total cost of goods sold 15,766 16,113 Selling, general and administrative 4,384 5,151 -------- -------- Total expenses 20,150 21,264 -------- -------- Loss before income taxes ( 1,931) ( 2,893) Benefit for income taxes ( 89) ( 11) -------- -------- Net loss ($ 1,842) ($ 2,882) ======== ======== Basic and diluted net loss per share ($ .24) ($ .35) ======== ======== See accompanying notes to consolidated financial statements. F-3 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in 000's) Additional Total Total Shares Common Paid-In Accumulated Stockholders' Outstanding Stock Capital Deficit Equity ----------- ----- ------- ----------- ------------- Balance, January 1, 2001 8,282 $ 83 $43,337 ($22,258) $21,162 Net loss - - - ( 2,882) ( 2,882) Repurchase of Common Stock ( 37) ( 1) ( 39) - ( 40) ------- ------- ------- ------- ------- Balance, December 31, 2001 8,245 82 43,298 ( 25,140) 18,240 Net loss - - - ( 1,842) ( 1,842) Repurchase of common stock ( 714) ( 7) ( 461) - ( 468) ------- ------- ------- ------- ------- Balance, December 31, 2002 7,531 $ 75 $42,837 ($26,982) $15,930 ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. F-4 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in $000's) Year Ended December 31, ----------------------- 2002 2001 -------- -------- Cash flows from operating activities: Net loss ($ 1,842) ($ 2,882) Adjustments: Depreciation and amortization 1,664 1,806 Unrealized gains on marketable securities ( 160) ( 354) Net marketable securities transactions 187 370 Change in inventories 1,961 1,267 Change in receivables ( 1,860) 731 Change in accounts payable and other accruals 1,510 423 Other, net ( 34) 282 -------- -------- Net cash provided by operating activities 1,426 1,643 -------- -------- Cash flows from investing activities: Purchase of plant and equipment, net ( 420) ( 654) Loans to affiliates and others - ( 30) Repayments of loans to affiliates 121 76 -------- -------- Net cash used in investing activities ( 299) ( 608) -------- -------- Cash flows from financing activities: Repurchase of common stock ( 468) ( 40) Term loan borrowings 59 485 Term loan repayments ( 1,372) ( 1,457) Net revolving line of credit repayments ( 131) ( 456) -------- -------- Net cash used in financing activities ( 1,912) ( 1,468) -------- -------- Net decrease in cash and cash equivalents ( 785) ( 433) Cash and cash equivalents at beginning of year 2,683 3,116 -------- -------- Cash and cash equivalents at end of year $ 1,898 $ 2,683 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 446 $ 573 ======== ======== Taxes $ 19 $ - ======== ======== See accompanying notes to consolidated financial statements. F-5 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 1. Summary of Significant Accounting Policies ------------------------------------------ Basis of Consolidation ---------------------- The consolidated financial statements include the accounts of Pure World, Inc. (the "Company" or "Pure World") and its wholly-owned subsidiary, Pure World Botanicals, Inc., ("Pure World Botanicals") after elimination of all material intercompany accounts and transactions. The Company, through Pure World Botanicals, manufactures natural products for the nutraceutical, flavor and cosmetic industries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- Cash and cash equivalents consist primarily of cash on hand, cash in banks and U.S. Treasury Bills purchased with an original maturity of three months or less. Marketable Securities --------------------- Marketable securities are classified into three categories: debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as marketable securities and reported as a current asset and at fair value, with unrealized gains and losses included in the results of operations; and debt and equity securities not classified as either held-to-maturity securities or marketable securities are classified as available-for-sale securities and reported at fair value with unrealized gains and losses excluded from the results of operations and reported as a separate component of stockholders' equity. Unrealized gains and losses on securities available-for-sale are included in the determination of comprehensive income. F-6 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 The Company accounts for securities transactions on a trade-date basis. For computing realized gains or losses on sale of marketable securities, cost is determined on a first-in, first-out basis. The effect of all unsettled transactions is accrued in the consolidated financial statements. Inventories ----------- Merchandise inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method of accounting. Investment in Unaffiliated Natural Products Company --------------------------------------------------- In May 1996, the Company made an investment in non-voting common stock representing 25% ownership of Gaia Herbs, Inc. ("Gaia") for approximately $1 million. In June 1997, the Company made an additional investment of $500,000, increasing its equity ownership to 35% of Gaia's outstanding shares of common stock. In July 1997, the Company loaned Gaia $200,000, payable interest only, on a quarterly basis for the first four years and 36 monthly payments of principal and interest thereafter. The loan bears interest at 6.49% which was the imputed rate required under the Internal Revenue Code and is classified as an other asset in the consolidated balance sheet. Gaia manufactures and distributes fluid botanical extracts for the high-end consumer market. Gaia is a privately held company and does not publish financial results. The Company is accounting for this investment by the cost method. Plant and Equipment ------------------- The Company records all fixed assets at cost. Depreciation is computed using the straight-line method over the related estimated useful life of the asset. Gains or losses on dispositions of fixed assets are included in operating results as other income. F-7 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 The Company evaluates the carrying value of its long-lived assets whenever there is a significant change in the use of an asset and adjusts the carrying value, if necessary, to reflect the amount recoverable through future operations. Goodwill -------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets" (SFAS No. 142), in June 2001. This statement provides guidance on how to account for existing goodwill and intangible assets from completed acquisitions. In accordance with this statement, the Company adopted SFAS No. 142 in the first quarter of 2002. The Company discontinued the amortization of goodwill and has determined that there is no impairment to goodwill at this time. The following table presents the loss and loss per share on a proforma basis as though goodwill amortization had not been recorded in 2001. Year Ended December 31, ------------------- 2002 2001 ------- -------- Net loss: Reported net loss ($ 1,842) ($ 2,882) Add back goodwill amortization - 143 ------- ------- Adjusted net loss ($ 1,842) ($ 2,739) ======= ======= Basic and diluted loss per share: Reported net loss per share ($ .24) ($ .35) Goodwill amortization - .02 ------- ------- Adjusted net loss per share ($ .24) ($ .33) ======= ======= 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. F-8 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 The Company does not hold or issue financial instruments for trading purposes. The fair value of the Company's debt approximates their carrying values due to the variable interest-rate feature of the instruments. Revenue Recognition ------------------- The Company records revenue when a product is shipped and title and risk of loss pass to the customer. 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 (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 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 (loss) per common share and diluted earnings (loss) per common share are reconciled below. (Shares in Thousands) 2002 2001 ---- ---- Average shares outstanding for basic earnings per share 7,797 8,263 Dilutive effect of stock options - - ----- ----- Average shares outstanding for diluted earnings (loss) per share 7,797 8,263 ===== ===== F-9 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 Major Customers --------------- In the year 2002, one customer accounted for more than 35% of sales. In 2001, that customer accounted for approximately 32% of sales. New Accounting Standards ------------------------ In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Intangible Assets". Major provisions of this Statement are as follows: goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill was no longer subject to amortization. The Company discontinued the amortization of goodwill effective January 1, 2002. This resulted in a reduction of amortization expense of approximately $143,000 in 2002. The Company made the initial assessment that goodwill was not impaired as of the adoption date of January 1, 2002. The Company reassessed its initial conclusion on December 31, 2002, and still believes goodwill to be unimpaired as of that date. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations and costs associated with the retirement of tangible long-lived assets. The Company is required to implement SFAS No. 143 on January 1, 2003, and management has not yet completed their assessment of the impact of the adoption of this standard on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Live Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. This standard applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those assets be measured at the lower of carrying amount of fair value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from F-10 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company was required to implement SFAS No. 144 on January 1, 2002, and management determined that this statement had no material impact on its results of operations or financial positions. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard nullifies Emerging Issue Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This standard requires the recognition of a liability for a cost associated with an exit or disposal activity at the time the liability is incurred, rather than at the commitment date to exit a plan as required by EITF 94-3. The Company will adopt this standard effective January 1, 2003. The Company does not expect the impact of the adoption of SFAS No. 146 to have a material effect on its results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation." This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, The Company will adopt the fair value recognition provisions of SFAS No. 123, prospectively (as permitted under SFAS No. 148) to all new stock-based employee compensation granted, modified or settled after January 1, 2003. The Company does not expect the impact of the adoption of the fair value recognition provisions of SFAS No. 123 to have a material effect on its results of operations or financial position. F-11 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure provisions are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the impact of the Interpretation on its results of operations and financial position. 2. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $ 1,224 Work-in-process 416 Finished goods 6,015 ------- Total $ 7,655 ======= Charges of $645,000 and $575,000 were taken in 2002 and 2001, respectively to bring the inventory valuation in line with current market conditions. 3. Plant and Equipment ------------------- At December 31, 2002, plant and equipment consisted of the following (in $000's): Machinery and equipment $ 10,682 Leasehold improvements 2,885 Office equipment, furniture and fixtures 1,869 Accumulated depreciation ( 7,600) -------- Total $ 7,836 ======== F-12 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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 four 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 Pure World loan balance was approximately $121,000 at December 31, 2002. The parties also agreed that if any other party acquired voting shares, Pure World's Gaia Stock would become voting stock. Additionally, the parties agreed that Gaia and the principal stockholder of Gaia (the "Principal Stockholder") would have a right of first refusal to acquire any Gaia stock sold by Pure World and that Pure World would have a right of first refusal to acquire any Gaia stock sold by Gaia or the Principal Stockholder. In June 1998, Gaia requested that Pure World guarantee an unsecured bank line of $500,000 (the "Gaia Bank Loan"). Because of expansion plans for Pure World Botanicals, Pure World declined to issue the guarantee. An individual unaffiliated with Gaia or Pure World agreed to guarantee the Gaia Bank Loan in consideration of a cash fee and the issuance to the individual of 100 shares of Gaia's common stock, representing 5 percent of Gaia's common stock outstanding (the "Guarantee"). The Guarantee is also secured by Gaia stock held by Gaia's Principal Stockholder. Pure World notified Gaia that it wished to exercise its right of first refusal in connection with the Guarantee. Pure World and Gaia reached an understanding that Pure World would decline the right of first refusal if by November 30, 1998 thirty percent of Pure World's interest was purchased for $1,500,000 (leaving five percent of the current Gaia common stock outstanding) and the Pure World Loan was repaid, including any accrued interest (the "Repurchase"). If the Repurchase was not closed by November 30, 1998 ("the Closing Date"), Pure World then would have the right to assume the Guarantee pursuant to the same terms granted the F-13 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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 Gaia 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 December 31, 2002 (in $000's): Loans payable to a bank, pursuant to a $2.75 million secured line of credit bearing annual interest at at Prime plus 2% (6.75% at December 31, 2002) maturing in September 2003 $ 1,926 Loans payable to a bank, collateralized by certain property and equipment, bearing annual interest at 6.878% maturing in December 2003 1,286 Loans payable to a bank, collateralized by certain equipment bearing annual interest LIBOR plus 2.5% (3.88% at December 31, 2002) maturing in October 2004 733 Lease payable for equipment for gross assets of $800,000 with imputed interest at approximately 8% maturing in June 2007 514 Lease payable for equipment with gross assets of $392,800 with imputed interest of approximately 6.95% maturing in March 2006 255 F-14 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 Loans payable to a bank, bearing annual interest at LIBOR plus 2.5% (3.88% at December 31, 2002) maturing in May 2005 200 Leases payable for equipment 127 All other 109 ------- Total 5,150 Less: Current portion of borrowings 3,173 ------- Long-term debt $ 1,977 ======= Interest expense was $446,000 and $573,000 for the years ended December 31, 2002 and 2001, respectively. The loan agreements contain certain restrictive covenants. The Company was in compliance at December 31, 2002. Aggregate maturities of borrowings (in $000's) for each of the years in the five year period ending December 31, 2007 are $1,247; $1,101; $680; $138 and $58. These maturities exclude $1,926,000 of debt pursuant to a $3 million line of credit. 6. Common Stock ------------ Stock Repurchase ---------------- The Company had previously announced plans to repurchase shares of the Company's common stock subject to market conditions and other considerations as determined by the Board of Directors ("Repurchase Plans"). In 2002, the Company repurchased 713,980 shares of Common Stock which were returned to the status of authorized but unissued shares. The Company can repurchase approximately 940,000 more shares. Stock Options ------------- In August 1991, the Board of Directors of the Company adopted a Non-Qualified Stock Option Plan (the "1991 Plan"). Under the 1991 Plan, non-qualified options to purchase up to an aggregate of 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 ten 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. F-15 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. The following table summarizes option transactions under the Option Plans for the years ended December 31, 2002 and 2001: Weighted Average Shares Exercise Price ---------- ---------------- Options outstanding at January 1, 2001 1,043,080 $ 2.86 Options canceled ( 79,550) 1.46 --------- Options outstanding at December 31, 2001 963,530 2.97 Options canceled ( 193,050) 1.59 --------- Options outstanding at December 31, 2002 770,480 3.31 ========= For options outstanding and exercisable at December 31, 2002, 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 Price December 31, 2002 (In Years) Exercise Price December 31, 2002 (In Years) Exercise Price - ---------------------------------------------------------------------- ----------------------------------------------------- $1 - $3 287,700 4 $ 1.95 246,620 4 $ 1.82 $3.01 - $6 482,780 6 $ 4.12 312,742 6 $ 4.35 -------- ------ ------- ------ 770,480 $ 3.31 559,362 $ 3.26 ======== ====== ======= ======
F-16 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. In 2001, 235,000 options were granted outside of the 1997 plan at $1.00 per share. In 2002, 823,000 options were granted outside of the 1997 plan at $.71 per share. Of these options, 368,500 have since been canceled. The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its options. Accordingly, no compensation cost has been recognized for stock options issued. Had compensation cost for the issued stock options been determined based upon the fair values at the dates of awards under those plans consistent with the method of FASB Statement 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 2002 2001 ------ ------ Net loss (in $000's): As reported ($ 1,842) ($2,882) Pro forma compensation expense ($ 552) ($ 511) Pro forma ($ 2,394) ($3,393) Basic and diluted net loss per share: As reported ($ .24) ($ .35) Pro forma ($ .31) ($ .41) F-17 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 All options granted to date have an exercise price equal to the market price of the Company's stock on the grant date. For purposes of calculating the compensation cost consistent with FASB Statement 123, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used: no dividend yield; expected volatility of 44.90 percent in 2002 and 108.17 percent in 2001; risk free interest rates between 1.22 percent and 7.63 percent; and weighted average expected lives of 5 to 10 years. 7. Compensation Arrangements ------------------------- In April 1990, the Company entered into an employment and deferred compensation agreement (the "Agreement") with the Company's Chairman for an initial three-year term commencing on April 1, 1990 (the "Effective Date") at an annual salary of $185,000, which may be increased but not decreased at the discretion of the Board of Directors. In December 1992, the Board of Directors voted unanimously to increase the Chairman's salary to $215,000 per annum effective December 1, 1992. 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 $36,000 in each of 2002 and 2001 for the contingent payments provided under the terms of the Agreement. F-18 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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. 8. Income Taxes ------------ At December 31, 2002, the Company had net operating loss carryforwards ("NOLs") of approximately $16.5 million for Federal income tax reporting purposes, which expire in the years 2003 through 2022. The ultimate realization of the tax benefits from the net operating loss is dependent upon future taxable earnings of the Company. The components of income tax expense (benefit) were as follows (in $000's): 2002 2001 -------- -------- Federal-current $ - $ - State-current ( 89) ( 11) Deferred - - ---- ---- Total benefit ($ 89) ($ 11) ==== ==== Pure World Botanicals received a state tax refund in 2002. F-19 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 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, 2002 are as follows (in $000's): Deferred tax assets: Net operating loss carryforwards $ 5,918 Alternative minimum tax ("AMT") credit carryforwards 286 Other, net 611 -------- 6,815 Valuation allowance ( 6,566) -------- Net deferred tax asset $ 249 ======== Due to the relatively short expiration periods of the NOLs and the unpredictability of future earnings, the Company believes that a substantial valuation allowance for the deferred tax asset is required. A reconciliation of the provision for income tax expense (benefit) to the expected income tax expense (benefit) (income (loss) before income taxes times the statutory tax rate of 34%) is as follows (in $000's): 2002 2001 -------- -------- Loss before income taxes ($ 1,931) ($ 2,893) Statutory federal income tax rate 34% 34% ------- ------- Expected income tax benefit ( 657) ( 984) State tax, net of federal benefits ( 59) ( 7) Change in valuation allowance ( 354) 1,093 Expiration of tax credit and state net operating loss carryforwards 895 - Other, net 86 ( 113) ------- ------- Benefit for income taxes ($ 89) ($ 11) ======= ======= F-20 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 The Tax Reform Act of 1986, as amended, provides for a parallel tax system which requires the calculation of AMT and the payment of the higher of the regular income tax or AMT. The Company also has an AMT credit carryforward of approximately $286,000 which will be allowed as a credit carryover against regular tax in the future in the event the regular tax exceeds the AMT. 9. Commitments, Contingencies and Related Party Transactions --------------------------------------------------------- The Chairman of the Company is the Chairman of a brokerage firm which provided investment services to the Company during the years ended December 31, 2002 and 2001. Brokerage commissions paid by the Company totaled approximately $12,500 in 2002 and $1,600 in 2001. 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, 2002 and 2001 amounted to approximately $556,000 and $739,000, respectively. Sun received no remuneration or administrative fees for performing this service. KMZ Rosenman ("KMZ") performed legal work for the Company and its subsidiaries in 2002 and 2001. 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 KMZ. Aggregate fees and expenses billed to the Company and its subsidiaries were approximately $39,000 in 2002 and $53,000 in 2001. Pure World Botanicals leases a 138,000 square-foot facility in South Hackensack, New Jersey, from an affiliated corporation owned by the former owners of Pure World Botanicals for $20,000 per month, net, plus one percent of the gross revenues of Pure World Botanicals up to an additional $200,000 per annum. At December 31, 2002, the lease had a term of two years and expires in December 2004 with three ten-year renewal options at base rates up to $22,898 per month. This facility includes a 20,000 square-foot office area; 10,000 square-feet for laboratories; manufacturing space of 70,000 square feet; and warehousing space of 38,000 square feet. F-21 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002 and 2001 Pure World Botanicals also leases a facility in Teterboro, New Jersey for approximately $11,000 per month from an unrelated party and a facility in Carlstadt, New Jersey for approximately $15,000 per month. The Company also rents office space from an affiliate. Such rent expense was approximately $43,000 in 2002 and in 2001. Future minimum lease payments (in $000's) for each of the years in the five year period ending December 31, 2007 are $595; $592; $355; $367; and $189. Rent expense was $612,000 and $608,000 for 2002 and 2001, respectively, which includes $181,000 and $182,000 for 2002 and 2001, respectively representing one percent of the gross revenues of Pure World Botanicals. 10. Legal Proceedings ----------------- The Company is involved from time to time in various lawsuits that arise in the course of its business. F-22 Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND - ------- -------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None II-8 PART III -------- Item 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS - ------- ------------------------------------------------------------ The three members of the Board of Directors were elected at the 2002 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, 2003 were as follows: Position and Office Presently Held with Director Name of Person Age the Company Since -------------- --- ------------------- -------- Paul O. Koether 66 Chairman and 1988 Director of the Company; Chairman of Pure World Botanicals Alfredo Mena 50 Director 1992 William Mahomes, Jr. 56 Director 1993 Natalie I. Koether 63 President of the - Company and of Pure World Botanicals Voldemar Madis 62 Vice Chairman of the - Company and of Pure World Botanicals Dr. Qun Yi Zheng 45 Executive Vice President - of Pure World Botanicals III-1 Paul O. Koether is principally engaged in the following: (i) the Company, as Chairman since April 1988, President from April 1989 to February 1997, a director since March 1988, and for more than five years as the Chairman and President of Sun Equities Corporation ("Sun"), a private, closely-held corporation which is the Company's principal stockholder; (ii) as Chairman of Pure World Botanicals, Inc. ("PWBI"), since January 1995 and as a director since December 1994; (iii) as Chairman and director since July 1987 and President since October 1990 of Kent Financial Services, Inc. ("Kent") which engages in various financial services, including the operation of a retail brokerage business through its wholly-owned subsidiary, T. R. Winston & Company, Inc. ("Winston") and the general partner since 1990 of Shamrock Associates, an investment partnership which is the principal stockholder of Kent; (iv) various positions with affiliates of Kent, including Chairman since 1990 and a registered representative since 1989 of Winston; (v) from July 1992 to January 2000, Chairman of Golf Rounds.com, Inc. ("Golf Rounds"), currently a non-operating company; and (vi) since September 1998 as a director and Chairman of Cortech, Inc., ("Cortech"), a biopharmaceutical company. Alfredo Mena Since 1976, Mr. Mena has been President of Alimentos de El Salvador S.A. de C.V., having previously served as Director and General Manager. The Company is engaged in coffee growing, processing and exporting. From October 1995 until June 1997, he served as Presidential Commissioner for the Modernization of the Public Sector, in charge of its decentralization, debureaucratization, deregulation, and privatization. Mr. Mena is a citizen of El Salvador. William Mahomes, Jr. Mr. Mahomes currently is a Senior Shareholder in Simmons Mahomes P.C., a law firm emphasizing commercial real estate transactions, public finance, business transactions and mediation. From 1997 to May 2001, Mr. Mahomes was in the private practice of law emphasizing mediation, real estate and commercial transactions. From 1994 to March 1997, Mr. Mahomes was a Senior Shareholder at the law firm of Locke Purnell Rain Harrell. From 1989 to 1994 he was an international partner in the Dallas office of Baker & McKenzie law firm. Mr. Mahomes currently serves on the Board of Directors of a variety of organizations, including the Texas Pension Review Board, Center for New Ventures and Entrepreneurship (Texas A&M University), Operation Oasis, Inc. and the Texas Affiliate Board of Healthcare Service Corporation (HCSC), formerly known as Blue Cross and Blue Shield of Texas. Natalie I. Koether is engaged principally in the following activities: (i) President of the Company since February 1, 1997 and President and Director of Pure World Botanicals since November 1995; (ii)of Counsel with the law firm of KMZ Rosenman, from September 1993. III-2 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. 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. From August 2000, Dr. Zheng has been a director of Cortech and from November 2000 a director of Kent. 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. Item 10. - EXECUTIVE COMPENSATION - -------- ---------------------- The table below sets forth for the years ended December 31, 2002, 2001 and 2000, the compensation of any person who, as of December 31, 2002, was the Chief Executive Officer of the Company or who was among the four most highly compensated executive officers of the Company other than the Chief Executive Officer with annual compensation in excess of $100,000 ("Executive Officers"). Long-Term Name and Annual Compensation(1)(2) Compensation ----------------------------- ------------ Principal Position Year Salary Bonus Options(#) - ------------------ ---- ------ ----- ------------ Paul O. Koether 2002 $ 5,000 $ - 200,000 Chairman 2001 17,965 - - 2000 161,652 - - Natalie I. Koether 2002 $ 10,000 $ - 300,000 President 2001 22,531 - 160,000 2000 270,374 - - Voldemar Madis 2002 $ 160,937 $ - - Vice Chairman 2001 160,937 - - 2000 160,937 - - Qun Yi Zheng 2002 $ 192,921 $ - 200,000 Executive Vice 2001 184,812 - 75,000 President 2000 188,753 6,923 100,000 - ---------------------------------------------------------- (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 III-3 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. 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 12/31/02 Options at 12/31/02 Name Exercisable/Unexercisable Exercisable/Unexercisable - ------- ------------------------- ------------------------- Paul O. Koether 255,000 / - $ - / $ - Natalie I. Koether 707,500 / - - / - Voldemar Madis 120,000 / - - / - Qun Yi Zheng 374,000 / 166,000 - / - III-4 401(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 not to exceed the Internal Revenue Service limit ($11,000 in 2002 and $10,500 in 2001.) The Company did not match employee contributions in 2002 or 2001. 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. 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. III-5 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 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 2002, the Company paid directors' fees in the aggregate of approximately $32,000. III-6 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, 2003, 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 3,960,405(2) 43.77% Natalie I. Koether 211 Pennbrook Road Far Hills, N.J. 07931 3,960,405(3) 43.77% Sun Equities Corporation 376 Main Street Bedminster, N.J. 07921 2,500,025 33.21% William Mahomes, Jr. 900 Jackson Street Suite 540 Dallas, TX 75202 11,000 * Alfredo Mena P.O. Box 520656 Miami, FL 33152 18,700 * Voldemar Madis 375 Huyler Street South Hackensack, NJ 07606 124,070 1.37% Dr. Qun Yi Zheng 375 Huyler Street South Hackensack, NJ 07606 421,500 4.66% Dimensional Fund Advisors, Inc. 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 547,190(4) 7.27% All directors and Officers as a group (6 persons) 4,535,675 50.13% ------------------------------ *Represents less than one percent. III-7 (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 (255,000 shares); Natalie I. Koether (707,500 shares); Alfredo Mena (16,500 shares); Voldemar Madis (120,000 shares); Qun Yi Zheng (421,500 shares); and all directors and officers as a group (1,520,500 shares). (2) Includes 950,050 shares beneficially owned by his wife, including 110,000 shares owned by Emerald Partners of which she is the sole general partner, 707,500 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 2,500,025 shares owned by Sun, of which Mr. Koether is a principal stockholder and Chairman, 114,330 shares held in discretionary accounts of certain of his brokerage customers and 31,000 shares held in Mr. Koether's IRA account. Mr. Koether disclaims beneficial ownership of all of the foregoing shares. (3) Includes 110,000 shares owned by Emerald Partners of which Mrs. Koether is the sole general partner; 707,500 shares which she has the right to acquire upon exercise of stock options; 132,550 shares held in custodial accounts; and 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 2,500,025 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) Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the "Funds". In its role as investment adviser or manager, Dimensional possesses voting and/or investment power over the securities of the Issuer described in this schedule that are owned by the Funds. All securities reported in this schedule are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. III-8 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, 2002 and 2001 amounted to approximately $556,000 and $739,000, respectively. Sun received no remuneration or administrative fees for performing this service. KMZ Rosenman ("KMZ") performed legal work for the Company for which it billed the Company an aggregate of approximately $39,000 in 2002 and $53,000 in 2001. 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 KMZ. III-9 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 Incorporation by reference of 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 Incorporation by reference to American Holdings, Inc. Form 10-KSB for the year ended December 31, 1992. 10.1 Employment Agreement, dated as Incorporated by reference to of April 6, 1990, by and between Computer Memories Incorporated Computer Memories Incorporated Form 10-Q for the quarter and Paul O. Koether ended June 30, 1990. 10.2 1991 Computer Memories Incor- Incorporated by reference to porated Non-Qualified Stock Exhibit A to Computer Memories Option Plan Incorporated Proxy Statement Dated July 7, 1992. IV-1 Exhibit Number Exhibit Method of Filing ------ ------- ---------------- 10.3 Agreement and Plan of Merger Incorporated by reference to dated as of December, 1994 American Holdings, Inc. Form 8-K dated January 18, 1995. 10.5 1997 Non-Qualified Stock Option Incorporated by reference to Plan Exhibit A dated November 20, 1997 Proxy Statement 10.6 (a) Employment Agreement with Incorporated by reference to V. Madis American Holdings, Inc. Form 8-K dated January 18, 1995. (b) Amendment to Employment Incorporated by reference Agreement with V. Madis to Pure World, Inc. Form 10-KSB for the year ended December 31, 1997. 10.7 Lease Agreement for premises of Incorporated by reference to Dr. Madis Laboratories, Inc., American Holdings, Inc. Form 375 Huyler Street, South 8-K dated January 18, 1995. Hackensack, New Jersey 10.8 Plan of Reorganization of Incorporated by reference to Dr. Madis Laboratories, Inc. American Holdings, Inc. Form 8-K/A (Amendment No. 1) dated March 17, 1995. 10.9 Disclosure Statement Related Incorporated by reference to to Plan of Reorganization of American Holdings, Inc. Form Dr. Madis Laboratories, Inc. 8-K/A (Amendment No. 1) for the year ended March 17, 1995. 10.10 (a) Employment Agreement with Incorporated by reference to Dr. Q.Y. Zheng Pure World, Inc. Form 10-KSB dated December 31, 1998. (b) Amendment to Employment Incorporated by reference to Agreement with Dr. Q.Y. Zheng Pure World, Inc. Form 10-KSB Dated December 31, 1998. 21 Subsidiaries of the Registrant Filed herewith. 99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K ------------------- None IV-2 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 28, 2003 By: /s/ Paul O. Koether ---------------------------- Paul O. Koether Chairman of the Board March 28, 2003 By: /s/ Sue Ann Itzel ---------------------------- Sue Ann Itzel 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 28, 2003 - ------------------------- and Director Paul O. Koether (Principal Executive Officer) /s/ William Mahomes, Jr. Director March 28, 2003 - ------------------------- William Mahomes, Jr. /s/ Alfredo Mena Director March 28, 2003 - ------------------------- Alfredo Mena IV-3 EXHIBIT 21 PURE WORLD, INC. LIST OF SUBSIDIARIES NAME OF SUBSIDIARY STATE OF INCORPORATION ------------------ ---------------------- American Holdings, Inc. Delaware Eco-Pure, Inc. Delaware Delaware Pure World Botanicals, Inc. Delaware Pure World Botanicals Powders, Inc. Delaware Exhibit 99.1 CERTIFICATIONS I, Paul O. Koether, certify that: 1. I have reviewed this annual report on Form 10-KSB of Pure World, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 28, 2003 /s/ PAUL O. KOETHER ---------------------------------- Paul O. Koether Chairman Exhibit 99.1 CERTIFICATIONS I, Sue Ann Itzel, certify that: 1. I have reviewed this annual report on Form 10-KSB of Pure World, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 28, 2003 /s/ SUE ANN ITZEL ---------------------------------- Sue Ann Itzel Chief Financial Officer Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), Paul O. Koether, the Chairman of Pure World, Inc., (the "Company"), and Sue Ann Itzel, the Vice President, Treasurer and Assistant Secretary of the Company each hereby certifies that, to the best of their knowledge: 1. The Company's Annual Report on Form 10-KSB for the year ended December 31, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: March 28, 2003 /s/ Paul O. Koether - -------------------------------- Paul O. Koether Chairman /s/ Sue Ann Itzel - -------------------------------- Sue Ann Itzel Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----