-----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, JB+1407/2pQAHDwbM/7d7TkwmQjJBrCuxOXiySfKv44jK6+ZKDtAOQqP+yvp1Lq0 vhax6ZBf/a+lZdwnwjB0PQ== 0000356446-04-000008.txt : 20040330 0000356446-04-000008.hdr.sgml : 20040330 20040330095336 ACCESSION NUMBER: 0000356446-04-000008 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 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: 04698301 BUSINESS ADDRESS: STREET 1: P O BOX 74 STREET 2: 376 MAIN ST CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9082349220 MAIL ADDRESS: STREET 1: P O BOX 74 STREET 2: 376 MAIN STREET CITY: BEDMINSTER STATE: NJ ZIP: 07921 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HOLDINGS INC /DE/ DATE OF NAME CHANGE: 19940411 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER MEMORIES INC /DE/ DATE OF NAME CHANGE: 19940411 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER MEMORIES INC DATE OF NAME CHANGE: 19920908 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, 2003 [ ] 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, 2003 were approximately $21.9 million. At February 27, 2004, there were 7,513,536 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 $10 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 granulators. The Company's spray dryers have an annual capacity of over 8,000,000 pounds and produce free-flowing powders for tableting, encapsulation or dissolution in liquids. 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 converting the facility was approximately $1.25 million. I-1 Pure Powders - ------------ In January 2004, the Company was issued 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. 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 seven laboratories: quality control ("QC"); research and development ("R&D"); analytical instrumentation; flavor; cosmetic; purification 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 practices. Pure I-3 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 five patents, of which three relate to Maca, one to Resveratrol and one to its novel process for sterilization and disinfecting of agriculture and botanic products. The Company has sixteen 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 Drug, Chemical and Associated Technologies Association (DCAT), 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 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 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 27, 2004, the Company had 104 full-time employees, 100 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. Strategic Alternatives - ---------------------- On January 14, 2004, the Company announced that it had retained the investment banking firm of Adams, Harkness & Hill to review possible strategic alternatives including but not necessarily limited to sale, merger or other extraordinary corporate transactions. There is no assurance that any transaction will eventuate or that if a transaction occurs it will be on terms that shareholders will consider favorable. Item 2. - DESCRIPTION OF PROPERTY - ------- ----------------------- 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, 2003, the lease had a term of one year, expiring 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 I-6 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 $13,000 per month which is 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. The lease expires in December 2006 and has one four year renewal option. Pure World Botanicals also leases a 23,000 square-foot warehouse in Carlstadt, New Jersey from an unrelated party for approximately $17,000 per month. The lease expires in March 2008 and has one five year renewal option. 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 November 11, 2003. 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 6,698,026 205,310 William Mahomes, Jr. 6,852,956 50,380 Alfredo Mena 6,853,396 49,940 I-7 PART II Item 5. - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------- -------------------------------------------------------- At February 29, 2004, 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 27, 2004 the closing price per share of the common stock was $2.31. 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. In April 2003, the Company's share price met the requirement. 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 ---- --- 2003 March 31 $ .80 $ .40 June 30 3.59 .59 September 30 4.40 1.30 December 31 2.99 1.21 2002 March 31 $ .91 $ .80 June 30 .90 .58 September 30 .63 .43 December 31 .63 .41 The Company has not declared or paid any cash dividends on its common stock in 2003 or 2002 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, 2003, the Company had cash and cash equivalents of $1.2 million. Cash equivalents consisted of U.S. Treasury Bills with original maturities of less than three months yielding .9%. See Note 1 of Notes to Consolidated Financial Statements for additional information. Net working capital was approximately $7.2 million at December 31, 2003. In December 2003, the Company refinanced its bank debt with another financial institution. For more information on the Company's debt, see Note 5 of Notes to Consolidated Financial Statements. At December 31, 2003 the Company was in compliance with all of the covenants of their loan agreements. The management of the Company believes that its financial resources and anticipated cash flows will be sufficient for future operations for the next twelve months. Net cash of $1,460,000 was provided by operating activities in 2003. Cash flows from the net loss of $245,000 combined with the decrease in accounts payable and other accruals of $1,230,000, adjusted for depreciation and amortization of $1,695,000 and changes in receivables of $1,102,000 were the primary reasons for the cash provided by 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 accounts payables and accruals of $1,961,000 and $1,510,000, respectively were the primary reasons for the cash provided in 2002. Net cash of $934,000 and $299,000 was used in investing activities in 2003 and 2002, respectively due to the purchase of plant and equipment offset by repayments of loans to affiliates. Cash used in financing activities was approximately $1,224,000 in 2003 and $1,912,000 in 2002, 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 $245,000, or basic and diluted loss per share of $.03, in 2003 compared to a net loss of $1,842,000, or basic and diluted loss per share of $.24 in 2002. The Company had sales in 2003 of $21,771,000, an increase of $3,627,000 from 2002 sales of $18,144,000. The improvement in sales in 2003 was primarily the result of an increase in the sales of custom blends to two customers. Cost of goods sold was $17,306,000 and gross margin was $4,465,000 in 2003, compared to cost of goods sold of $15,766,000 and gross margin of $2,378,000 in 2002. Gross margin as a percentage of sales was 21% and 13% in 2003 and 2002, respectively. Results for 2002 were negatively affected by a charge of $645,000 to bring the inventory valuation in line with market conditions. Additionally, changes in the product mix sold in 2003 accounted for the increase in gross profit. In 2003, one customer accounted for approximately 29% of sales. In 2002, that customer accounted for approximately 35% of sales. In 2002, the Company recorded net income on marketable securities of $28,000. There were no marketable security transactions in 2003. Interest income was $19,000 in 2003 compared to $47,000 in 2002. This decrease was due principally to lower yields on investments in 2003 and lower invested cash equivalents. Other income in 2003 of $100,000 was derived from a research and development agreement with a pharmaceutical Company. Selling, general and administrative expenses (consisting of personnel, professional and all other expenses) were $4,808,000 in 2003, compared to $4,384,000 in 2002, an increase of $424,000 or 10%. Personnel expenses were $1,781,000 in 2003, an increase of $173,000 from $1,608,000 in 2002. The increase was due to higher salaries in connection with an increase in sales staff and higher commissions. Professional fees consisting of legal, accounting and consulting fees, were $650,000 in 2003, an increase of $132,000, or 25%, from the 2002 professional fees of $518,000. The increase was principally due to higher legal fees. The Company incurred legal fees in connection with certain litigations which were settled in 2003. Other general and administrative expenses were $2,377,000 in 2003, an increase of $119,000 or 5% from $2,258,000 in 2002. Higher selling expenses was the primary reasons for the increase. New Accounting Standards - ------------------------ 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 II-3 assets. The Company implemented SFAS No. 143 on January 1, 2003. The adoption of this standard did not have a material effect on the Company's financial statements. 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 adopted this standard effective January 1, 2003. The adoption of SFAS No. 146 did not 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. The Company has not elected to voluntarily change its stock compensation accounting method. 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 adoption of this standard did not have a material effect on the Company's results of operations or financial position. II-4 Other Items - ----------- 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 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, 2003 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). Such reserves were approximately $1.9 million and $1.4 million at December 31, 2003 and 2002 respectively. II-5 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, 2003 Consolidated Statements of Operations for the Years ended December 31, 2003 and 2002 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2003 and 2002 Consolidated Statements of Cash Flows for the Years ended December 31, 2003 and 2002 Notes to Consolidated Financial Statements II-6 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Pure World, Inc.: We have audited the accompanying balance sheet of Pure World, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2003 and 2002. 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, 2003, and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey March 19, 2004 F-1 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2003 (in $000's) ASSETS - ------ Current Assets: Cash and cash equivalents $ 1,200 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $352 2,802 Inventories 7,469 Other 678 --------- Total current assets 12,149 Investment in unaffiliated natural products company 1,510 Plant and equipment, net 7,134 Notes receivable from affiliates 193 Goodwill 1,144 Other assets 442 --------- Total assets $ 22,572 ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Accounts payable $ 1,567 Short-term borrowings 2,075 Accrued expenses and other 1,301 --------- Total current liabilities 4,943 Long-term debt 1,955 --------- Total liabilities 6,898 --------- Commitments and Contingencies (Notes 9 and 10) Stockholders' equity: Common stock, par value $.01; 30,000,000 shares authorized; 7,513,566 shares issued and outstanding 75 Additional paid-in capital 42,826 Accumulated deficit ( 27,227) --------- Total stockholders' equity 15,674 --------- Total liabilities and stockholders' equity $ 22,572 ========= 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, --------------------------- 2003 2002 -------- -------- Revenues: Sales $ 21,771 $ 18,144 Net gains on marketable securities - 28 Interest and other income 119 47 -------- -------- Total revenues 21,890 18,219 -------- -------- Expenses: Cost of goods sold: Cost of goods sold 17,306 15,121 Inventory write-down - 645 -------- -------- Total cost of goods sold 17,306 15,766 Selling, general and administrative 4,808 4,384 -------- -------- Total expenses 22,114 20,150 -------- -------- Loss before income taxes ( 224) ( 1,931) Provision (benefit) for income taxes 21 ( 89) -------- -------- Net loss ($ 245) ($ 1,842) ======== ======== Basic and diluted net loss per share ($ .03) ($ .24) ======== ======== 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, 2002 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 Net loss - - - ( 245) ( 245) Repurchase of common stock ( 17) - ( 11) - ( 11) -------- -------- -------- -------- -------- Balance, December 31, 2003 7,514 $ 75 $ 42,826 ($ 27,227) $ 15,674 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in $000's) Year Ended December 31, ----------------------- 2003 2002 -------- -------- Cash flows from operating activities: Net loss ($ 245) ($ 1,842) Adjustments: Depreciation and amortization 1,695 1,664 Unrealized gains on marketable securities - ( 160) Net marketable securities transactions - 187 Change in inventories 185 1,961 Change in receivables 1,102 ( 1,860) Change in accounts payable and other accruals ( 1,230) 1,510 Other, net ( 47) ( 34) -------- -------- Net cash provided by operating activities 1,460 1,426 -------- -------- Cash flows from investing activities: Purchase of plant and equipment, net ( 993) ( 420) Repayments of loans to affiliates 59 121 -------- -------- Net cash used in investing activities ( 934) ( 299) -------- -------- Cash flows from financing activities: Repurchase of common stock ( 11) ( 468) Debt issue costs ( 93) - Term loan borrowings 2,438 59 Term loan repayments ( 3,259) ( 1,372) Net revolving line of credit repayments ( 299) ( 131) -------- -------- Net cash used in financing activities ( 1,224) ( 1,912) -------- -------- Net decrease in cash and cash equivalents ( 698) ( 785) Cash and cash equivalents at beginning of year 1,898 2,683 -------- -------- Cash and cash equivalents at end of year $ 1,200 $ 1,898 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 396 $ 446 ======== ======== Taxes $ 3 $ 19 ======== ======== See accompanying notes to consolidated financial statements. F-5 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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 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, 2003 and 2002 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. 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 has not kept strict adherence to the agreed-upon 36 month payment schedule, but continues to make payments. 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, 2003 and 2002 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. Fair Value of Financial Instruments ----------------------------------- The carrying amounts reported in the balance sheet for cash and cash equivalents, investments, accounts receivable, long-term debt and payables approximate their fair value. The Company does not hold or issue financial instruments for trading purposes. The fair value of the Company's debt approximates their carrying values due to the variable interest-rate feature of the instruments. 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 ($12,000 in 2003 and $11,000 in 2002.) The Company did not match employee contributions in 2003 or 2002. 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 F-8 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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. 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. F-9 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 The shares used for basic earnings (loss) per common share and diluted earnings (loss) per common share are reconciled below. (Shares in Thousands) 2003 2002 ---- ---- Average shares outstanding for basic earnings per share 7,517 7,797 Dilutive effect of stock options 625 - ----- ----- Average shares outstanding for diluted earnings (loss) per share 8,142 7,797 ===== ===== Major Customers --------------- In 2003, one customer accounted for more than 29% of sales. In 2002, that customer accounted for approximately 35% of sales. New Accounting Standards ------------------------ 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 implemented SFAS No. 143 on January 1, 2003. The adoption of this standard did not have a material effect on the Company's financial statements. 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 adopted this standard effective January 1, 2003. The adoption of SFAS No. 146 did not 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 F-10 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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. The Company has not elected to voluntarily change its stock compensation accounting method. 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 adoption of this standard did not have a material effect on the Company's results of operations or financial position. 2. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $ 916 Work-in-process 848 Finished goods 5,705 ------- Total $ 7,469 ======= F-11 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 3. Plant and Equipment ------------------- At December 31, 2003, plant and equipment consisted of the following (in $000's): Machinery and equipment $ 11,429 Leasehold improvements 3,171 Office equipment, furniture and fixtures 1,829 Accumulated depreciation ( 9,295) -------- Total $ 7,134 ======== 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. Gaia has not kept strict adherence to the agreed-upon 36 month payment schedule, but continues to make payments. The Pure World loan balance was approximately $94,000 at December 31, 2003. 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. The Company is monitoring its Gaia Investment and discusses its position with Gaia from time to time. F-12 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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, 2003 (in $000's): Loan payable to a bank, pursuant to a $5 million secured line of credit bearing annual interest at Prime plus .5% (4.5% at December 31, 2003) maturing in December 2006 $ 1,627 Loan payable to a bank, collateralized by certain property and equipment, bearing annual interest at Prime plus .75% (4.75% at December 31, 2003) maturing in December 2009 2,000 Lease payable for equipment for gross assets of $300,000 with imputed interest at approximately 5.9% maturing in October 2006 276 Leases payable for equipment 127 ------- Total 4,030 Less: Current portion of borrowings 2,075 ------- Long-term debt $ 1,955 ======= Interest expense was $396,000 and $446,000 for the years ended December 31, 2003 and 2002, respectively. The loan agreements contain certain restrictive covenants. F-13 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 Aggregate maturities of borrowings (in $000's) for each of the years in the five year period ending December 31, 2008 are $448; $435; $376; $286 and $286. These maturities exclude $1,627,000 of debt pursuant to a $5 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 2003, the Company repurchased 17,088 shares of Common Stock for $11,000, which were returned to the status of authorized but unissued shares. The Company can repurchase approximately 926,000 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. In November 1997, the Board of Directors and Shareholders of the Company adopted the 1997 Non-Qualified Stock Option Plan (the "1997 Plan"). Under the 1997 Plan, non-qualified options to purchase up to 550,000 shares of common stock of the Company can be granted. Many of the other features of the 1997 Plan are the same as the 1991 Plan, other than the options are exercisable one-fifth on the third anniversary of their grant and one-fifth in each of the succeeding years, or under such other terms as determined by the Board of Directors. F-14 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 The following table summarizes option transactions under the Option Plans for the years ended December 31, 2003 and 2002: Weighted Average Shares Exercise Price ---------- ---------------- Options outstanding at January 1, 2002 963,530 $ 2.97 Options canceled ( 193,050) $ 1.59 -------- Options outstanding at December 31, 2002 770,480 $ 3.31 Options issued 95,000 $ 2.13 Options canceled ( 30,330) $ .90 -------- Options outstanding at December 31, 2003 835,150 $ 3.26 ======== For options outstanding and exercisable at December 31, 2003, 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, 2003 (In Years) Exercise Price December 31, 2003 (In Years) Exercise Price - ---------------------------------------------------------------------- ----------------------------------------------------- $1 - $3 352,700 4 $ 2.10 271,660 3 $ 1.93 $3.01 - $6 482,450 5 $ 4.12 312,610 5 $ 4.38 ------- ------ ------- ------ 835,150 $ 3.26 584,270 $ 3.24 ======= ====== ======= ======
F-15 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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. In 2003, 15,000 options were granted outside of the plan at $1.30 per share. Of these options, 393,000 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: 2003 2002 ------ ------ Net loss (in $000's): As reported ($ 245) ($1,842) Pro forma compensation expense ($ 115) ($ 552) Pro forma net loss ($ 360) ($2,394) Basic and diluted net loss per share: As reported ($ .03) ($ .24) Pro forma ($ .05) ($ .31) F-16 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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 180 percent in 2003 and 44.90 percent in 2002; risk free interest rates of 4 percent in 2003 and 1.22 percent in 2002; 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 "1990 Agreement") with the Company's Chairman. In November 2003, the Company entered into a new employment and deferred compensation agreement (the "Agreement") with the Chairman for an initial three-year term commencing December 1, 2003 (the "Effective Date") at an annual salary of $215,000, 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. 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 73. F-17 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 In February 1996, the Company entered into an employment agreement with Dr. Qun Yi Zheng, President of the Company and 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") at an annual salary of $120,000 (which was subsequently increased to $210,000), the terms being identical to that of the Chairman's Agreement. The Company recorded an expense of approximately $36,000 in each of 2003 and 2002 for the contingent postemployment payments to potentially be provided under the terms of its employment agreements with its Chairman and President. The Company had $473,000 accrued at December 31, 2003 for these benefits. 8. Income Taxes ------------ At December 31, 2003, the Company had net operating loss carryforwards ("NOLs") of approximately $9 million for Federal income tax reporting purposes, which expire in the years 2004 through 2023. 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): 2003 2002 -------- -------- Federal-current $ - $ - State-current 21 ( 89) Deferred - - ---- ---- Total expense (benefit) $ 21 ($ 89) ==== ==== Pure World Botanicals received a state tax refund in 2002. F-18 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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, 2003 are as follows (in $000's): Deferred tax assets: Net operating loss carryforwards $ 4,952 New Jersey credit carryforward 204 Alternative minimum tax ("AMT") credit carryforwards 286 Other, net 710 -------- 6,152 Valuation allowance ( 5,903) -------- 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 $000's): 2003 2002 -------- -------- Loss before income taxes ($ 224) ($ 1,931) Statutory federal income tax rate 34% 34% ------- ------- Expected income tax benefit ( 76) ( 657) State tax, net of federal benefits 14 ( 59) Change in valuation allowance ( 663) ( 354) Expiration of tax credit and state net operating loss carryforwards 3,377 895 Other, net ( 2,631) 86 ------- ------- Provision (benefit) for income taxes $ 21 ($ 89) ======= ======= F-19 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 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 was until August 2003, the Chairman of a brokerage firm which provided investment services to the Company during the years ended December 31, 2003 and 2002. Brokerage commissions paid by the Company were approximately $12,500 in 2002. No commissions were paid in 2003. The Chairman of the Company is also the President of Sun Equities Corporation ("Sun"), the Company's principal stockholder. Until April 2003, the Company reimbursed 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, 2003 and 2002 amounted to approximately $170,000 and $556,000, respectively. Sun received no remuneration or administrative fees for performing this service. The Chairman of the Company is also the Chairman of Bedminster Management Corporation ("BMC"). Commencing April 2003, the Company reimburses BMC for its proportionate share of the cost of group medical insurance and certain general and administrative expenses. Such reimbursements amounted to approximately $528,000 in 2003. BMC received no remuneration or administrative fees for performing this service. 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, 2003, the lease had a term of one year which 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-20 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2003 and 2002 Pure World Botanicals also leases a facility in Teterboro, New Jersey from an unrelated party for approximately $13,000 per month. The lease expires in December 2006 and has one four year renewal option. Pure World Botanicals also leases a 23,000 square-foot warehouse in Carlstadt, New Jersey from an unrelated party for approximately $17,000 per month. The lease expires in March 2008 and has one five-year renewal option. The Company also rents office space from an affiliate. Such rent expense was approximately $43,000 in 2003 and 2002. Future minimum lease payments (in $000's) for each of the years in the five year period ending December 31, 2008 are $650; $416; $428; $250; and $78. Rent expense was $806,000 and $612,000 for 2003 and 2002, respectively, which includes $200,000 and $181,000 for 2003 and 2002, respectively representing one percent of the gross revenues of Pure World Botanicals, subject to a maximum of $200,000. 10. Legal Proceedings ----------------- The Company is involved from time to time in various lawsuits that arise in the course of its business. 11. Subsequent Events ----------------- On January 14, 2004, the Company announced that it had retained the investment banking firm of Adams, Harkness & Hill to review possible strategic alternatives including but not necessarily limited to sale, merger or other extraordinary corporate transactions. There is no assurance that any transaction will eventuate or that if a transaction occurs it will be on terms that shareholders will consider favorable. F-21 Item 8. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND - ------- -------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None Item 8A. - CONTROLS AND PROCEDURES - -------- ----------------------- As of the end of the period covered by this report, based on an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC's rules and forms. There were no significant changes in the Company's internal controls or in any other factors that could significantly affect those controls subsequent to the date of the most recent evaluation of the Company's internal controls by the Company, including any corrective actions with regard to any significant deficiencies or material weaknesses. II-7 PART III Item 9. - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; - ------- -------------------------------------------------------------------- COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ------------------------------------------------- The three members of the Board of Directors were elected at the 2003 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. The directors and executive officers of the Company at February 29, 2004 were as follows: Position and Office Presently Held with Director Name of Person Age the Company Since -------------- --- ------------------- ----- Paul O. Koether 67 Chairman and 1988 Director of the Company; Chairman of Pure World Botanicals Alfredo Mena 51 Director 1992 William Mahomes, Jr. 57 Director 1993 Dr. Qun Yi Zheng 46 President of the - Company and of Pure World Botanicals Voldemar Madis 63 Vice Chairman of the - Company and of Pure World Botanicals III-1 The following table shows information with respect to each equity compensation plan under which the Company's Common Stock is authorized for issuance as of the end of fiscal year 2003. Equity Compensation Plan Information Number of Securities Weighted-average Number of Securities remaining to be issued upon exercise price of available for future issuance exercise of outstanding under equity compensation outstanding options, options, warrants plans (excluding securities warrants and rights and rights reflected in column (a)) Column (a) Column (b) Column (c) Equity compensation plans approved by security holders 835,150 $ 3.26 8,550 Equity compensation plans not approved by security holders 0 0 0 ------- ------ ----- Total 835,150 $ 3.26 8,550 ======= ====== =====
At December 31,2003, the Company also had 1,127,700 Common Stock options outstanding which were not issued in connection with any equity compensation plan. The weighted-average exercise price of these Common Stock options was $.90. 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 a 40% equity interest in T. R. Winston & Company, LLC ("Winston") and the general partner from 1990 until it was dissolved in 2003 of Shamrock Associates, an investment partnership which was the principal stockholder of Kent; (iv) various positions with affiliates of Kent, including Chairman from 1990 until August 2003 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. Since November 2003 Mr. Koether has been General Partner of Emerald Partners ("Emerald") an investment partnership. III-2 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), also known as Blue Cross and Blue Shield of Texas and the Texas Youth Commission. Qun Yi Zheng Ph.D., With Pure World Botanicals, as President since December, 2003, Chief Operating Officer since September 2003 and Executive Vice President from 1996 through 2003. Since August 2000, Dr. Zheng has been a director of Cortech. From November 2000 until November 2003, Dr. Zheng was 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. 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". Audit Committee Financial Expert - -------------------------------- Pure World's board of directors does not have an "audit committee financial expert," within the meaning of such phrase under applicable regulations of the Securities and Exchange Commission, serving on its audit committee. The board of directors believes that all members of its audit committee are financially literate and experienced in business matters, and that one or more members of the audit committee are capable of (i) understanding generally accepted accounting principles ("GAAP") and financial statements, (ii) assessing the III-3 general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (iii) analyzing and evaluating our financial statements, (iv) understanding our internal controls and procedures for financial reporting; and (v) understanding audit committee functions, all of which are attributes of an audit committee financial expert. However, the board of directors believes that there is not any audit committee member who has obtained these attributes through the experience specified in the SEC's definition of "audit committee financial expert." The board believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated "audit committee financial expert." Code of Ethics - -------------- The Company is currently in the process of adopting its code of ethics. Item 10. - EXECUTIVE COMPENSATION - ------- ---------------------- The table below sets forth for the years ended December 31, 2003, 2002 and 2001, the compensation of any person who, as of December 31, 2003, was the Chief Executive Officer of the Company or who was among the four most highly compensated executive officers of the Company other than the Chief Executive Officer with annual compensation in excess of $100,000 ("Executive Officers"). Long-Term Annual Compensation(1)(2) Compensation Name and ------------------------- ------------ Principal Position Year Salary Bonus Options(#) - ------------------ ---- ------ ----- ------------ Paul O. Koether 2003 $ 90,000 $ - - Chairman 2002 5,000 - 200,000 2001 17,965 - - Qun Yi Zheng 2003 $ 232,144 $ - - President 2002 192,921 - 200,000 2001 184,812 - 75,000 Voldemar Madis 2003 $ 165,749 $ - - Vice Chairman 2002 160,937 - - 2001 160,937 - - - ---------------------------------------------------------- III-4 (1) The Company currently has no bonus plan. (2) Certain Executive Officers received incidental personal benefits during the fiscal years covered by the table. The value of these incidental benefits did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus reported for any of the Executive Officers. Such amounts are excluded from the table. 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. III-5 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 12/31/03 Options at 12/31/03 Name Exercisable/Unexercisable Exercisable/Unexercisable - ------- ------------------------- ------------------------- Paul O. Koether 255,000 / - $ 412,113 / $ - Qun Yi Zheng 401,500 / 138,500 387,640 / - Voldemar Madis 120,000 / - - / - No options were exercised by any executive officer in 2003. 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 ($12,000 in 2003 and $11,000 in 2002.) The Company did not match employee contributions in 2003 or 2002. 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. III-6 Employment Agreements - --------------------- In April 1990, the Company entered into an employment and deferred compensation agreement (the "1990 Agreement") with the Company's Chairman. In November 2003, the Company entered into a new employment and deferred compensation agreement (the "Agreement") with the Chairman for an initial three-year term commencing December 1, 2003 (the "Effective Date") at an annual salary of $215,000, which maybe 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. 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 73. The Company accrued approximately $36,000 in each of 2003 and 2002 for the contingent payments provided under the terms of the 1990 Agreement and the Agreement. 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. III-7 In February 1996, the Company entered into an employment agreement with Dr. Qun Yi Zheng, President of the Company and 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") at an annual salary of $120,000 (which was subsequently increased to $210,000) the terms being identical to that of the Chairman's Agreement. 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 2003, the Company paid directors' fees in the aggregate of approximately $31,000. III-8 Item 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- The following table sets forth the beneficial ownership of Common Stock of the Company as of February 29, 2004, 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 all 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 3,918,665(2) 43.15% The Estate of Natalie I. Koether 211 Pennbrook Road Far Hills, N.J. 07931 1,609,852(3) 17.73% Sun Equities Corporation 376 Main Street Bedminster, N.J. 07921 2,500,025 33.27% 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 469,000 5.16% Dimensional Fund Advisors, Inc. 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 405,090(4) 5.39% All directors and Officers as a group (5 persons) 4,541,435 50.01% ------------------------------ *Represents less than one percent. III-9 (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); The Estate of Natalie I. Koether (707,500 shares); Alfredo Mena (16,500 shares); Voldemar Madis (120,000 shares); Qun Yi Zheng (469,000 shares); and all directors and officers as a group (1,568,000 shares). (2) Includes 110,000 shares owned by Emerald Partners of which he is the sole general partner; 2,500,025 shares owned by Sun, of which Mr. Koether is a principal stockholder and Chairman; 73,030 shares held in discretionary accounts of certain of his brokerage customers; 163,110 shares held in Mr. Koether's IRA account; and 707,500 Common Stock options held by The Estate of Natalie I. Koether. As the Executor of the Estate of Natalie I. Koether, Mr. Koether may be deemed to own these shares beneficially. Mr. Koether disclaims beneficial ownership of all of the foregoing shares. (3) Includes 902,352 shares owned by Sun which represents the Estate of Natalie I. Koether's proportionate ownership of Sun. (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 report that are owned by the Funds. All securities reported in this report are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. This information was obtained from a Schedule 13G/A filed by Dimensional on February 6, 2004. III-10 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. Until April 2003, the Company reimbursed 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, 2003 and 2002 amounted to approximately $170,000 and $556,000, respectively. Sun received no remuneration or administrative fees for performing this service. The Chairman of the Company is also the Chairman of Bedminster Management Corporation ("BMC"). Commencing April 2003, the Company reimburses BMC for its proportionate share of the cost of group medical insurance and certain general and administrative expenses. Such reimbursements amounted to approximately $528,000 in 2003. BMC received no remuneration or administrative fees for performing this service. 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, 2003, the lease had a term of one year 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. III-11 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 American Holdings, Inc. Incorporation 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 Filed herewith. of December 1, 2003, by and between Pure World, Inc. and Paul O. Koether 10.2 1991 Computer Memories Incor- Incorporated by reference to porated Non-Qualified Stock Exhibit A to Computer Memories Option Plan Incorporated Proxy Statement Dated July 7, 1992. 10.3 Agreement and Plan of Merger Incorporated by reference to dated as of December, 1994 American Holdings, Inc. Form 8-K dated January 18, 1995. IV-1 Exhibit Number Exhibit Method of Filing ------ ------- ---------------- 10.5 1997 Non-Qualified Stock Option Incorporated by reference to Plan Exhibit A dated November 20, 1997 Proxy Statement 10.7 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. 10.11 Fleet Capital Corporation Loan Filed herewith. Agreements 21 Subsidiaries of the Registrant Filed herewith. 31.1 Certification pursuant to Section Filed herewith. 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Section Filed herewith. 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section Filed herewith. 906 of the Sarbanes-Oxley Act of 2002 IV-2 (b) Reports on Form 8-K ------------------- On October 6, 2003, Pure World filed a Form 8-K reporting that the Company had issued a press release announcing the untimely passing of its President, Natalie I. Koether. On November 10, 2003 Pure World filed a Form 8-K reporting that the Company had issued a press release announcing results for the three and nine months ended September 30, 2003. On January 14, 2004, Pure World filed a Form 8-K reporting that the Company had issued a press release announcing that the Board of Directors had named Dr. Qun Yi Zheng President. The Company also announced that it has retained the investment banking firm of Adams, Harkness & Hill to review possible strategic alternatives. On January 29, 2004, Pure World filed a Form 8-K reporting that the Company had issued a press release announcing that it had been issued a patent for a "Process for sterilization and disinfecting of agriculture and botanic products." IV-3 ITEM 14. - PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------- -------------------------------------- Year ended December 31, 2003 Audit Fees: The aggregate fees, including expenses, billed by the Company's principal accountant in connection with the audit of its consolidated financial statements and for the review of its financial information included in its Annual Report on Form 10-KSB; and its quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2003 was $90,000. All Other Fees: There were no other fees billed to the Company by its principal accountant during 2003. Year ended December 31, 2002 Audit Fees: The aggregate fees, including expenses, billed by the Company's principal accountant in connection with the audit of its consolidated financial statements and for the review of its financial information included in its Annual Report on Form 10-KSB; and its quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2002 was $85,500. All Other Fees: There were no other fees billed to the Company by its principal accountant during 2002. IV-4 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURE WORLD, INC. March 30, 2004 By: /s/ Paul O. Koether -------------------------------- Paul O. Koether Chairman of the Board March 30, 2004 By: /s/ Sue Ann Merrill -------------------------------- Sue Ann Merrill Chief Financial Officer, Vice President & Treasurer (Principal Financial and Accounting Officer) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date - -------------------------- --------------------- ---------------- /s/ Paul O. Koether Chairman of the Board March 30, 2004 - ------------------------- Paul O. Koether and Director (Principal Executive Officer) /s/ William Mahomes, Jr. Director March 30, 2004 - ------------------------- William Mahomes, Jr. /s/ Alfredo Mena Director March 30, 2004 - ------------------------- Alfredo Mena IV-5 EXHIBIT 21 PURE WORLD, INC. LIST OF SUBSIDIARIES NAME OF SUBSIDIARY STATE OF INCORPORATION ------------------ ---------------------- American Holdings, Inc. Delaware Eco-Pure, Inc. Delaware Pure World Botanicals, Inc. Delaware Pure World Botanicals Powders, Inc. Delaware EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 30, 2004 /s/ PAUL O. KOETHER ----------------------------- Paul O. Koether Chairman EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Sue Ann Merrill, certify that: 1. I have reviewed this annual report on Form 10-KSB of Pure World, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. March 30, 2004 /s/ SUE ANN MERRILL --------------------------------- Sue Ann Merrill Chief Financial Officer Exhibit 32 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 Merrill, the Chief Financial Officer, 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 period ended December 31, 2003, to which this Certification is attached as Exhibit 32 (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 30, 2004 /s/ Paul O. Koether - ---------------------------------- Paul O. Koether Chairman /s/ Sue Ann Merrill - ---------------------------------- Sue Ann Merrill Chief Financial Officer EX-10 2 fleetbankloanagmts.txt EQUIPMENT LOAN NOTE $500,000 December 22, 2003 Cranford, New Jersey FOR VALUE RECEIVED, the undersigned, PURE WORLD BOTANICALS, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of FLEET CAPITAL CORPORATION ("Lender"), at the office of the Lender, located at 750 Walnut Avenue, Cranford, New Jersey 07016, or such other place as the Lender may designate in writing, in lawful money of the United States of America and in immediate available funds, the principal amount of FIVE HUNDRED THOUSAND ($500,000) DOLLARS or so much of such principal amount actually advanced to the Borrower pursuant to a certain Loan and Security Agreement between Borrower and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"). From the date of each Equipment Advance until the Equipment Loan Amortization Date, the Borrower shall pay interest only to Lender on the outstanding principal of Equipment Advances on a monthly basis commencing on the first calendar day of each month (for the immediately preceding month computed through the last calendar day of the preceding month). On the Equipment Loan Amortization Date, the aggregate outstanding principal balance of Equipment Advances then outstanding as of such date shall be automatically converted to a term loan to be repaid in forty-eight (48) equal monthly principal installments, which shall be as nearly equal as practicable, together with accrued interest. Borrower will, if requested by Lender, execute and deliver such additional promissory note(s) to evidence the repayment of Equipment Advances on a term basis as provided in the Loan Agreement and herein. Amounts borrowed under this Equipment Loan Note (the "Note") may not be repaid and reborrowed. This Note is the Equipment Loan Note referred to in, and is issued pursuant to the Loan Agreement and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. The rate of interest in effect hereunder shall be calculated with reference to the Base Rate as more specifically provided in the Loan Agreement. The interest due shall be computed in the manner provided in the Loan Agreement. Except as otherwise expressly provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and with respect to payments of principal and interest thereon, shall be payable at the then applicable rate during such extension. Borrower may terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence and continuation of any one or more of the Events of Default specified in the Loan Agreement which have not been cured by Borrower or waived by Lender, Lender may declare all Obligations evidenced hereby to be immediately due and payable (except with respect to any Event of Default set forth in subsection 10.1.10 of the Loan Agreement, in which case all Obligations evidenced hereby shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of the Lender. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrower may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Borrower shall have the right and privilege of prepaying at any time, all or any portion of the outstanding principal amount under this Note. Provided, however, that a prepayment premium shall be paid if all, or any portion, of this Note is prepaid as follows: (a) if the prepayment is made on or before December 21, 2004, the prepayment fee shall be three (3%) percent of the amount prepaid; (b) if the prepayment is made after December 21, 2004 but on or before December 21, 2005, the prepayment shall be two (2%) percent of the amount prepaid; and (c) if the prepayment is made after December 21, 2005 but on or before December 21, 2006, the prepayment fee shall be one (1%) percent of the amount prepaid. Notwithstanding the foregoing, if this Note is refinanced with Lender, FleetBoston Financial and/or any of their affiliates or related entities, no prepayment fee shall be payable. Time is of the essence of this Note. Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, -2- Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. The validity, interpretation and enforcement of this promissory note shall be governed by the internal laws of the state of New Jersey without giving effect to the conflict of laws principles thereof. Attest: PURE WORLD BOTANICALS, INC. By: /s/ Andrea O'Connor By:/s/ Sue Ann Merill --------------------------------- --------------------------------- ANDREA O'CONNOR SUE ANN MERRILL Controller Chief Financial Officer -3- SECURED PROMISSORY NOTE $2,000,000 December 22, 2003 Cranford, New Jersey FOR VALUE RECEIVED, the undersigned, PURE WORLD BOTANICALS, INC., a Delaware corporation (hereinafter, "Borrower"), hereby promises to pay to the order of FLEET CAPITAL CORPORATION, a Rhode Island corporation (hereinafter, "Lender"), at the office of the Lender located at 750 Walnut Avenue, Cranford, New Jersey 07016 or such other place as the Lender may designate in writing, in such coin or currency of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, the principal sum of TWO MILLION ($2,000,000) DOLLARS together with interest from and after the date hereof on the unpaid principal balance outstanding at a fluctuating rate per annum equal to three quarters (3/4%) percent above the Base Rate. This Secured Promissory Note (the "Note") is the Term Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement between Borrower and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. The rate of interest in effect hereunder shall be calculated with reference to the Base Rate as more specifically provided in the Loan Agreement. The interest due shall be computed in the manner provided in the Loan Agreement. For so long as no Event of Default shall have occurred the principal amount and accrued interest of this Note shall be due and payable on the dates and in the manner hereinafter set forth: (a) Interest shall be due and payable monthly, in arrears, on the first day of each month, commencing on January 1, 2004, and continuing until such time as the full principal balance, together with all other amounts owing hereunder, shall have been paid in full; (b) Principal shall be due and payable monthly commencing on January 1, 2004, and continuing on the first day of each month thereafter to and including the first day of December, 2009, in installments of $23,810 each, based on a seven (7) year amortization; and (c) The entire remaining principal amount then outstanding, together with any and all other amounts due hereunder, shall be due and payable on December 21, 2009. Except as otherwise provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and with respect to payments of principal and interest thereon, shall be payable at the then applicable rate during such extension. Notwithstanding the foregoing, the entire unpaid principal balance and accrued interest on this Note shall be due and payable immediately upon any termination of the Loan Agreement pursuant to Section 4 thereof or as otherwise provided in the Loan Agreement. This Note shall be subject to mandatory prepayment in accordance with the provisions of Section 3.3 of the Loan Agreement. Borrower may also terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Borrower shall have the right and privilege of prepaying at any time, all or any portion of the outstanding principal amount under this Note. Provided, however, that a prepayment premium shall be paid if all, or any portion, of this Note is prepaid as follows: (a) if the prepayment is made on or before December 21, 2004, the prepayment fee shall be three (3%) percent of the amount prepaid; (b) if the prepayment is made after December 21, 2004 but on or before December 21, 2005, the prepayment shall be two (2%) percent of the amount prepaid; and (c) if the prepayment is made after December 21, 2005 but on or before December 21, 2006, the prepayment fee shall be one (1%) percent of the amount prepaid. Notwithstanding the foregoing, if this Note is refinanced with Lender, FleetBoston Financial and/or any of their affiliates or related entities, no prepayment fee shall be payable. Principal payments made are to be applied in the inverse order of principal payments due. Upon the occurrence of an Event of Default, Lender shall have all of the rights and remedies set forth in Section 10 of the Loan Agreement. Borrower shall pay a late payment fee equal to 5% of the amount of any installment of principal or interest, or both, required hereunder which is received by Lender more than ten (10) days after the due date thereof. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws. -2- Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of New Jersey IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and on the date first above written. Attest: PURE WORLD BOTANICALS, INC. By:/s/ Andrea O'Connor By: /s/ Sue Ann Merrill ------------------------------------ ------------------------------- ANDREA O'CONNOR SUE ANN MERRILL Controller Chief Financial Officer REVOLVING CREDIT NOTE $5,000,000 December 22, 2003 Cranford, New Jersey FOR VALUE RECEIVED, the undersigned, PURE WORLD BOTANICALS, INC., a New Jersey corporation ("Borrower"), promises to pay to the order of FLEET CAPITAL CORPORATION ("Lender"), at the office of the Lender located at 750 Walnut Avenue, Cranford, New Jersey 07016 or such other place as the Lender may designate in writing, in lawful money of the United States of America and in immediate available funds, the principal amount of FIVE MILLION ($5,000,000) DOLLARS or so much of such principal amount as shall be outstanding and unpaid on December 21, 2006. This Revolving Credit Note (the "Note") is the Revolving Credit Note referred to in, and is issued pursuant to, that certain Loan and Security Agreement between Borrower and Lender dated the date hereof (hereinafter, as amended from time to time, the "Loan Agreement"), and is entitled to all of the benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and the Security Documents are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. The rate of interest in effect hereunder shall be calculated with reference to the Base Rate as more specifically provided in the Loan Agreement. The interest due shall be computed and paid in the manner provided in the Loan Agreement. Except as otherwise expressly provided in the Loan Agreement, if any payment on this Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and with respect to payments of principal and interest thereon shall be payable at the then applicable rate during such extension. This Note is subject to mandatory prepayment in accordance with the provisions Section 3.3 of the Loan Agreement. Borrower may terminate the Loan Agreement and, in connection with such termination, prepay this Note in the manner provided in Section 4 of the Loan Agreement. Upon the occurrence and continuation of any one or more of the Events of Default specified in the Loan Agreement which have not been cured by Borrower or waived by Lender, Lender may declare all Obligations evidenced hereby to be immediately due and payable (except with respect to any Event of Default set forth in subsection 10.1.10 of the Loan Agreement, in which case all Obligations evidenced hereby shall automatically become immediately due and payable without the necessity of any notice or other demand) without presentment, demand, protest or any other action or obligation of the Lender. Time is of the essence of this Note. Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. The validity, interpretation and enforcement of this promissory note shall be governed by the internal laws of the state of New Jersey without giving effect to the conflict of laws principles thereof. Attest: PURE WORLD BOTANICALS, INC. By: /s/ Andrea O'Connor By: /s/ Sue Ann Merrill -------------------------------- --------------------------------- ANDREA O'CONNOR SUE ANN MERRILL Controller Chief Financial Officer -2- LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made this 22 day of December 2003, by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 750 Walnut Avenue, Cranford, New Jersey 07016 and PURE WORLD BOTANICALS, INC., a Delaware corporation ("Borrower"), with its chief executive office and principal place of business at 375 Huyler Street, South Hackensack, New Jersey 07606. Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP consistently applied. SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a Total Credit Facility of up to $7,500,000 available upon Borrower's request therefor, as follows: 1.1 Revolving Credit Loans. 1.1.1 Loans and Reserves. Lender agrees, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to Borrower from time to time, as requested by Borrower in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the Borrowing Base at such time minus reserves, if any. Lender shall have the right to establish reserves in such amounts, and with respect to such matters, as Lender shall deem necessary or appropriate, against the amount of Revolving Credit Loans which Borrower may otherwise request under this subsection 1.1.1, including, without limitation, with respect to (i) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Borrower's business; (ii) shrinkage, spoilage and obsolescence of Inventory; (iii) other sums chargeable against Borrower's Loan Account as Revolving Credit Loans under any section of this Agreement; (iv) amounts owing by Borrower to any Person to the extent secured by a Lien on, or trust over, any Property of Borrower; and (v) such other matters, events, conditions or contingencies as to which Lender, in its sole credit judgment, determines reserves should be established from time to time hereunder. The Revolving Credit Loans shall be further evidenced by the Revolving Credit Note and shall be secured by all of the Collateral. 1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used solely for the satisfaction of existing Indebtedness of Borrower to PNC Bank, American Bank of Lehigh Valley and for Borrower's general operating capital needs in a manner consistent with the provisions of this Agreement and all applicable laws. 1.2 Term and Equipment Loans. 1.2.1 Term Loan. Lender agrees to make a term loan to Borrower on the Closing Date in the principal amount of $2,000,000, which shall be repayable in accordance with the terms of the Term Note and shall be secured by all of the Collateral. The proceeds of the Term Loan shall be used solely for purposes for which the proceeds of the Revolving Credit Loans are authorized to be used. 1.2.2 Equipment Loans. (i) Under the terms and conditions herein set forth and provided no Default or Event of Default exists, Lender agrees to make a loan or loans to Borrower for the purpose of purchasing Equipment up to an aggregate principal amount advanced of $500,000. The Equipment Loan shall be evidenced by a certain Equipment Loan Note to be executed contemporaneously herewith as the same may be amended or substituted from time to time. Borrower may borrow up to the amount of the Equipment Loan by requesting a single advance or multiple advances, upon giving Lender three (3) Business Days prior written or telegraphic notice of each requested advance, which notice shall specify the Equipment being purchased, the proposed date of the Equipment Loan advance and the amount requested (the "Equipment Advance" or "Equipment Advances"). At the time of each such notice, Borrower shall provide Lender with copies, certified by Borrower's chief financial officer to be true copies, of each of the invoices submitted to Borrower showing the Equipment purchased, the date of delivery and the amount of the Borrower's cost of such Equipment. The proceeds of the Equipment Loan are to be used solely for the purpose of purchasing the Equipment described in the invoice submitted to Lender. With respect to each Equipment Advance requested, Lender will provide Borrower with the amount requested, not to exceed eighty (80%) percent of the face amount of such invoice (excluding all soft costs such as installation fees and the like). Lender shall make each Equipment Advance granted hereunder by crediting the amount thereof to the regular deposit account of Borrower at Bank or by paying the amount thereof to such corporation, partnership, person or other entity as Borrower shall direct, either by cashier's check or wire transfer. Each Equipment Advance shall be in the sum of not less than $25,000. The Equipment Loan(s) shall be further evidenced by the Equipment Loan Note and shall be secured by all of the Collateral. (ii) Lender's commitment to make Equipment Advances hereunder (subject to the provisions of this Section) shall terminate on the date which is the earlier of the following: (1) The date upon which Lender has made Equipment Advances to Borrower which, in the aggregate, total the sum of $500,000; or (2) December 21, 2004 (the "Equipment Loan Amortization Date"). (iii) From the date of each Equipment Advance, Borrower shall pay interest only on the principal of the outstanding Equipment Advances, calculated as hereinafter provided. On the Equipment Loan Amortization Date, any outstanding principal due under the Equipment Advances shall be converted into a term loan to be repaid in up to forty-eight (48) consecutive monthly principal installments, which shall be as nearly equal as practicable, each such installment to be paid together with interest as hereinafter provided. Any payment of principal or interest, or prepayment of principal, howsoever 2 designated by Borrower, shall be applied first to accrued unpaid interest and the balance, if any, to the principal balance outstanding. Amounts borrowed under the Equipment Loan may not be repaid and reborrowed. 1.3 [INTENTIONALLY LEFT BLANK]. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Rates of Interest. Interest shall accrue on the principal amount of the (i) Revolving Credit Loans outstanding at the end of each day at a fluctuating rate per annum equal to 1/2% plus the Base Rate; (ii) Term Loan outstanding at the end of each day at a fluctuating rate per annum equal to 3/4% plus the Base Rate; and (iii) Equipment Loans outstanding at the end of each day at a fluctuating rate per annum equal to 3/4% plus the Base Rate. The rate of interest applicable to the Base Rate shall increase or decrease by an amount equal to any increase or decrease in the Base Rate, effective as of the opening of business on the day that any such change in the Base Rate occurs. 2.1.2 Default Rate of Interest. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all Loans shall bear interest at a rate per annum equal to 5% above the interest rate otherwise applicable thereto (the "Default Rate"). 2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all amounts deemed interest under the Revolving Credit Note, or under the Term Note or the Equipment Note and charged or collected pursuant to the terms of this Agreement or pursuant to the Revolving Credit Note or Term Note or the Equipment Note exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If any provisions of this Agreement, the Revolving Credit Note, the Term Note or the Equipment Note are in contravention of any such law, such provisions shall be deemed amended to conform thereto. 2.2 Computation of Interest and Fees. Interest and unused line fees and collection charges hereunder shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For the purpose of computing interest hereunder, all items of payment received by Lender shall be deemed applied by Lender on account of the Obligations (subject to final payment of such items) on the second Business Day after receipt by Lender of such items in Lender's account located in Cranford, New Jersey. 2.3 Commitment Fee. Borrower shall pay to Lender a commitment fee of $37,500, $18,750 of which has previously been paid to Lender, and the balance of which shall be fully earned and nonrefundable and payable, on the Closing Date. 2.4 [INTENTIONALLY LEFT BLANK]. 3 2.5 Unused Line Fee. Borrower shall pay to Lender a fee equal to .375% per annum of the average monthly amount by which $5,000,000 exceeds the sum of the outstanding principal balance of the Revolving Credit Loans. The unused line fee shall be payable monthly in arrears on the first day of each calendar month hereafter. 2.6 Collection Charges. All items of payment received by Lender at any time (irrespective of whether there are Revolving Credit Loans outstanding at the time of receipt) shall be subject to collection charge equal to two (2) Business Days interest on the amount thereof at the rate then applicable to the Revolving Credit Loans, which collection charges shall be payable monthly in arrears on the first Business Day of each month. 2.7 Audit and Appraisal Fees. Borrower shall pay to Lender audit and appraisal fees in accordance with Lender's current schedule of fees in effect from time to time in connection with audits and appraisals of Borrower's books and records and such other matters as Lender shall deem appropriate, plus all out-of-pocket expenses incurred by Lender in connection with such audits and appraisals. Borrower shall also pay the Lender field examination fees at the rate of $800 per person per man day, plus out-of-pocket expenses incurred by Lender in connection with field examinations performed by Lender or its agents or representatives. Provided no Event of Default has occurred, Lender will, at its option, conduct no fewer than two (2) nor more than four (4) field examinations per annum. Such fees shall be payable on the first day of the month following the date of issuance by Lender of a request for payment thereof to Borrower. After the occurrence of an Event of Default, such fees and the number of field examinations shall be subject to change as Lender shall determine. 2.8 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the negotiation and preparation of this Agreement or any of the other Loan Documents, any amendment of or modification of this Agreement or any of the other Loan Documents; (ii) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrower's affairs; (iv) any attempt to enforce any rights of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (v) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such reasonable legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrower. All amounts chargeable to Borrower under this Section 2.8 shall be Obligations secured by all of the Collateral, shall be payable on demand to Lender, and shall bear interest from the date such demand is made until paid in full at the rate applicable to Revolving Credit Loans from time to time. Borrower shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6 hereof. 2.9 Bank Charges. Borrower shall pay to Lender, on demand, any and all fees, costs or expenses which Lender pays to a bank or other similar institution 4 arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender, of proceeds of loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection, by Lender or any Participating Lender, of any check or item of payment received or delivered to Lender or any Participating Lender on account of the Obligations. SECTION 3. LOAN ADMINISTRATION. 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the credit facility established pursuant to Section 1 hereof shall be as follows: 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower may give Lender notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date, no later than 11:00 a.m. New York time on the proposed borrowing date, provided, however, that no such request may be made at a time when there exists a Default or an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation. As an accommodation to Borrower, Lender may permit telephonic or electronic requests for loans and electronic transmittal of instructions, authorizations, agreements or reports to Lender by Borrower. Unless Borrower specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from Borrower, Lender shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by Borrower and Lender shall have no duty to verify the origin of any such communication or the authority of the person sending it. 3.1.2 Disbursement. Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this subsection 3.1.2 as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent borrowing, by a credit to the Borrower's operating account maintained at Bank and (ii) the proceeds of each Revolving Credit Loan requested under subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.1.3 Authorization. Borrower hereby irrevocably authorizes Lender, in Lender's sole discretion, to advance to Borrower, and to charge to Borrower's Loan Account hereunder at the applicable interest rate, a sum sufficient to pay all interest accrued on the Obligations during the immediately preceding month and to pay all costs, fees and expenses at any time owed by Borrower to Lender hereunder. 5 3.2 Payments. Except where evidenced by notes or other instruments issued or made by Borrower to Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: 3.2.1 Principal. Principal payable on account of Revolving Credit Loans shall be payable by Borrower to Lender immediately upon the earliest of (i) the receipt by Lender or Borrower of any proceeds of any of the Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that if an Overadvance shall exist at any time, Borrower shall, on demand, repay the Overadvance. 3.2.2 Interest. Interest accrued on the Revolving Credit Loans, Term Loan and Equipment Loan shall be due on the earliest of (i) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to Section 4 hereof. 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrower as and when provided in Section 2 hereof, to Lender or to any other Person designated by Lender in writing. Any amounts due under this Agreement may be charged to any account of Borrower maintained with the Bank. 3.2.4 Other Obligations. The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrower to Lender as and when provided in this Agreement, the Other Agreements or the Security Documents, or on demand, whichever is later. 3.3 Mandatory Prepayments. 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. Except as provided in subsection 6.4.2 hereof, if Borrower sells any Equipment, or if any of the Collateral is lost or destroyed or taken by condemnation, Borrower shall pay to Lender, unless otherwise agreed by Lender, as and when received by Borrower and as a mandatory prepayment of the Term Loan or the Equipment Loan, or the Revolving Loan, as determined by Lender, a sum equal to the proceeds (including insurance payments) received by Borrower from such sale, loss, destruction or condemnation. 3.4 Application of Payments and Collections. All items of payment received by Lender by 12:00 noon, New York time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 12:00 noon, New York time, on any Business Day shall be deemed received on the following Business Day. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any 6 and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. If as the result of collections of Accounts as authorized by subsection 6.2.6 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. Such credit balance shall not be applied or be deemed to have been applied as a prepayment of the Term Loan or any Equipment Loan, except that Lender may, at its option, offset such credit balance against any of the Obligations upon and after the occurrence of an Event of Default. 3.5 All Loans to Constitute One Obligation. The Loans shall constitute one general Obligation of Borrower, and shall be secured by Lender's Lien upon all of the Collateral. 3.6 Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. 3.7 Statements of Account. Lender will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrower unless Lender is notified by Borrower in writing to the contrary within thirty (30) days of the date each accounting is mailed to Borrower. Such notice shall only be deemed an objection to those items specifically objected to therein. 3.8 Increased Costs. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) adopted after the date of this Agreement and having general applicability to all banks within the jurisdiction in which Lender operates (excluding, for the avoidance of doubt, the effect of and phasing in of capital requirements or other regulations or guidelines passed prior to the date of this Agreement), or any interpretation or application thereof by any governmental authority charged with the interpretation or application thereof, or the compliance of Lender therewith, shall: (i) (1) subject Lender to any tax with respect to this Agreement (other than (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor is in the nature of an advance collection of a tax based on or measured by the net income of the payee) or (2) change the basis of taxation of payments to Lender of principal, fees, interest or any other amount payable hereunder or under any Loan Documents (other than in respect of (a) any tax based on or measured by net income or otherwise in the nature of a net income tax, including, without limitation, any franchise tax or any similar tax based on capital, net worth or comparable basis for measurement and (b) any tax collected by a withholding on payments and which neither is computed by reference to the net income of the payee nor 7 is in the nature of an advance collection of a tax based on or measured by the net income of the payee); (ii) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (iii) impose on Lender any other condition with respect to any Loan Document; and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining Loans hereunder by an amount that Lender deems to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Loans by an amount that Lender deems to be material, then, in any such case, Borrower shall pay Lender, upon demand and certification not later than sixty (60) days following its receipt of notice of the imposition of such increased costs, such additional amount as will compensate Lender for such additional cost or such reduction, as the case may be, to the extent Lender has not otherwise been compensated, with respect to a particular Loan, for such increased cost as a result of an increase in the Base Rate. An officer of Lender shall determine the amount of such additional cost or reduced amount using reasonable averaging and attribution methods and shall certify the amount of such additional cost or reduced amount to Borrower, which certification shall include a written explanation of such additional cost or reduction to Borrower. Such certification shall be conclusive absent manifest error. If Lender claims any additional cost or reduced amount pursuant to this Section 3.8, then Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to designate a different lending office or to file any certificate or document reasonably requested by Borrower if the making of such designation or filing would avoid the need for, or reduce the amount of, any such additional cost or reduced amount and would not, in the sole discretion of Lender, be otherwise disadvantageous to Lender. 3.9 [INTENTIONALLY LEFT BLANK]. SECTION 4. TERM AND TERMINATION 4.1 Term of Agreement. Subject to Lender's right to cease making Loans to Borrower upon or after the occurrence of any Default or Event of Default, this Agreement shall be in effect for a period of three (3) years from the date hereof, through and including December 21, 2006 (the "Original Term"). 4.2 Termination. 4.2.1 Termination by Lender. Lender may terminate this Agreement as of the last day of the Original Term and Lender may terminate this Agreement upon or after the occurrence of an Event of Default. 8 4.2.2 Termination by Borrower. Upon at least ninety (90) days prior written notice to Lender, Borrower may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrower has paid all of the Obligations in immediately available funds. Any notice of termination given by Borrower shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans on or after the termination date stated in such notice. Borrower may elect to terminate this Agreement in its entirety only. No section of this Agreement or type of Loan available hereunder may be terminated singly. 4.2.3 Termination Charges. At the effective date of termination of this Agreement for any reason, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing, including, without limitation, the prepayment premiums set forth in the Term Note and Equipment Note, under the terms of this Agreement and any of the other Loan Documents) as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to 3% of the Total Credit Facility if termination occurs during the first twelve-month period of the Original Term (December 21, 2003 through December 21, 2004); 2% of the Total Credit Facility if termination occurs during the second 12-month period of the Original Term (December 22, 2004) through December 21, 2005); 1% of the Total Credit Facility if termination occurs during the third 12-month period of the Original Term (December 22, 2005 through December 21, 2006); Notwithstanding the foregoing, if the Obligations are refinanced with Lender, FleetBoston Financial and/or any of their affiliates or related entities, or if termination occurs during the last sixty (60) days of the Original Term, no termination charge shall be payable. Further, the then existing outstanding principal balance of the Term Loan at the time of termination shall be used in calculating the Total Credit Facility for the purposes of the termination charges herein. 4.2.4 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement, the last day of the Original Term, acceleration of the Obligations by the Lender as set forth herein or by prepayment of any of the Obligations. All undertakings, agreements, covenants, warranties and representations of Borrower contained in the Loan Documents shall survive any such termination and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds, together with the applicable termination charge, if any. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from Borrower or any Account Debtor and applied to the Obligations, Lender shall, at its option, (i) have received a written agreement, executed by Borrower and by any Person whose loans or other advances to Borrower are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such loss or damage; or (ii) have retained such monetary reserves and Liens on the Collateral for such period of time as Lender, in its reasonable discretion, may deem necessary to protect Lender from any such loss or damage. 9 SECTION 5. SECURITY INTERESTS 5.1 Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrower hereby grants to Lender a continuing Lien upon all of Borrower's assets, including all of the following Property and interests in Property of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; (ii) Certificated Securities; (iii) Chattel Paper; (iv) Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; (v) Contract Rights; (vi) Deposit Accounts; (vii) Documents; (viii) Equipment; (ix) Financial Assets; (x) Fixtures; (xi) General Intangibles, including Payment Intangibles and Software; (xii) Goods (including all of its Equipment, Fixtures and Inventory), and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (xiii) Instruments; (xiv) Intellectual Property; (xv) Inventory; (xvi) Investment Property; 10 (xvii) money (of every jurisdiction whatsoever); (xviii) Letter-of-Credit Rights; (xix) Payment Intangibles; (xx) Security Entitlements; (xxi) Software; (xxii) Supporting Obligations; (xxiii) Commercial Tort Claims; (xxiv) Uncertificated Securities; and (xxv) to the extent not included in the foregoing, all other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all Proceeds, products, offspring, rents, issues, profits and returns of and from any of the foregoing; provided that to the extent that the provisions of any lease or license of Computer Hardware and Software or Intellectual Property expressly prohibit (which prohibition is enforceable under applicable law) any assignment thereof, and the grant of a security interest therein, Lender will not enforce its security interest in Borrower's rights under such lease or license (other than in respect of the Proceeds thereof) for so long as such prohibition continues, it being understood that upon request of Lender, Borrower will in good faith use reasonable efforts to obtain consent for the creation of a security interest in favor of Lender (and to Lender's enforcement of such security interest) in such Lender's rights under such lease or license. 5.2 Other Collateral. 5.2.1 Commercial Tort Claims. Borrower shall promptly notify Lender in writing upon incurring or otherwise obtaining a Commercial Tort Claim after the Closing Date against any third party and, upon request of Lender, promptly enter into an amendment to this Agreement and do such other acts or things deemed appropriate by Lender to give Lender a security interest in any such Commercial Tort Claim. 5.2.2 Other Collateral. Borrower shall promptly notify Lender in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Deposit Accounts, Investment Property, Letter-of-Credit Rights or Electronic Chattel Paper and, upon the request of Lender, promptly execute such other documents, and do such other acts or things deemed appropriate by Lender to deliver to Lender control with respect to such Collateral; promptly notify Lender in writing upon acquiring or otherwise obtaining any Collateral after the date hereof consisting of Documents or Instruments and, upon the request of 11 Lender, will promptly execute such other documents, and do such other acts or things deemed appropriate by Lender to deliver to Lender possession of such Documents which are negotiable and Instruments, and, with respect to nonnegotiable Documents, to have such nonnegotiable Documents issued in the name of Lender; and with respect to Collateral in the possession of a third party, other than Certificated Securities and Goods covered by a Document and obtain an acknowledgement from the third party that it is holding the Collateral for the benefit of Lender. 5.3 Lien Perfection; Further Assurances. Borrower authorizes such UCC financing statements as are required by the UCC and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral and shall take such other action as may be required to perfect or to continue the perfection of Lender's Lien upon the Collateral. Unless prohibited by applicable law, Borrower hereby irrevocably authorizes Lender to execute and file any such financing statements, including, without limitation, financing statements that indicate the Collateral (i) as all assets of Borrower or words of similar effect, or (ii) as being of an equal or lesser scope, or with greater or lesser detail, than as set forth in Section 5.1, on Borrower's behalf. Borrower also hereby ratifies its authorization for Lender to have filed in any jurisdiction any like financing statements or amendments thereto if filed prior to the date hereof. The parties agree that a photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, Borrower shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents. 5.4 [INTENTIONALLY LEFT BLANK]. SECTION 6. COLLATERAL ADMINISTRATION 6.1 General 6.1.1 Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrower and its Subsidiaries at one or more of the business locations set forth in Exhibit C hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) sales of Inventory in the ordinary course of business; and (ii) removals in connection with dispositions of Equipment that are authorized by subsection 6.4.2 hereof. 6.1.2 Insurance of Collateral. Borrower shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrower's business, covering casualty, hazard, public liability, product liability and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrower shall deliver the originals of such policies to Lender with satisfactory lender's loss payable endorsements, naming Lender as loss payee, assignee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than thirty (30) days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lender shall not be impaired or invalidated by 12 any act or neglect of Borrower or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance, Lender may, at its option, but shall not be required to, procure the same and charge Borrower therefor. Borrower agrees to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 6.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion thereof when due, Lender may, at its option, but shall not be required to, pay the same and charge Borrower therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrower's sole risk. 6.2 Administration of Accounts. 6.2.1 Records, Schedules and Assignments of Accounts. Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Lender on such periodic basis as Lender shall request a sales and collections report for the preceding period, in form satisfactory to Lender. On or before the twentieth (20th) day of each month from and after the date hereof, Borrower shall deliver to Lender, in form acceptable to Lender, a detailed, aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("Schedule of Accounts"), and, upon Lender's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Lender shall reasonably request. In addition, if Accounts become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Eligible Accounts or otherwise established by Lender, Borrower shall notify Lender of such occurrence in the reports required by Section 8.1.3(v) hereof and the Borrowing Base shall thereupon be adjusted accordingly. 6.2.2 Discounts, Allowances, Disputes. If Borrower grants any discounts, allowances or credits that are not shown on the face of the invoice for the Account involved, Borrower shall report such discounts, allowances or credits, as the case may be, to Lender as part of the next required Schedule of Accounts. If any amounts due and owing are in dispute between Borrower and any Account Debtor, Borrower shall provide Lender with written notice thereof at the time of submission of the next Schedule of Accounts, explaining in detail the reason for the dispute, all claims related thereto and the amount in controversy. Upon and after the occurrence of an Event of Default and the continuation thereof, Lender shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as Lender may deem advisable, and 13 to charge the deficiencies, costs and expenses thereof, including attorney's fees, to Borrower. 6.2.3 Taxes. If an Account includes a charge for any tax payable to any governmental taxing authority, Lender is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrower and to charge Borrower therefor, provided, however that Lender shall not be liable for any taxes to any governmental taxing authority that may be due by Borrower. 6.2.4 Account Verification. Whether or not a Default or an Event of Default has occurred, any of Lender's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender, any designee of Lender, or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, electronic communication or otherwise. Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude any such verification process. 6.2.5 Maintenance of Dominion Account. Borrower shall maintain a lockbox and Dominion Account pursuant to the Blocked Account Service Agreement with such banks as may be selected by Borrower and be acceptable to Lender. Borrower shall issue to any such banks an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account for application on account of the Obligations. Borrower shall direct all Account Debtors to remit payment directly to the lockbox, and all items received in the lockbox shall be deposited in the Dominion Account. All funds received into the lockbox or deposited in the Dominion Account shall immediately become the property of Lender and Borrower shall obtain the agreements by such banks in favor of Lender to waive any recoupment, set-off rights, and any security interest in, or against the funds so deposited. Lender assumes no responsibility for such lockbox arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. 6.2.6 Collection of Accounts, Proceeds of Collateral. If, notwithstanding Borrower's instructions to its Account Debtors to remit payment to the lockbox, payments on account of the Accounts receivable are made directly to Borrower, all remittances received by Borrower on account of Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by Borrower as trustee of an express trust for Lender's benefit and Borrower shall immediately deposit same in kind in the Dominion Account. Lender retains the right at all times after the occurrence and during the continuance of a Default or an Event of Default to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name, or in the name of Lender's agent, and to charge the collection costs and expenses, including attorneys' fees, to Borrower. 6.3 Administration of Inventory. 6.3.1 Records and Reports of Inventory. Borrower shall keep accurate and complete records of its Inventory. Borrower shall to furnish Lender Inventory reports in form and detail satisfactory to Lender at such times as Lender may 14 request, but at least once each month, not later than the twentieth (20th) day of such month. Borrower shall conduct a physical inventory no less frequently than annually and shall provide to Lender a report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall request. 6.3.2 Returns of Inventory. If at any time or times hereafter any Account Debtor returns any Inventory in excess of $50,000 to Borrower, Borrower shall immediately notify Lender of the same, specifying the reason for such return and the location, condition and intended disposition of the returned Inventory. 6.4 Administration of Equipment. 6.4.1 Records and Schedules of Equipment. Borrower shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions made in accordance with subsection 6.4.2 hereof, and shall furnish Lender with a current schedule containing the foregoing information on at least an annual basis and more often if requested by Lender. Immediately on request therefor by Lender, Borrower shall deliver to Lender any and all evidence of ownership, if any, of any of the Equipment. 6.4.2 Dispositions of Equipment. Borrower will not sell, lease or otherwise dispose of or transfer any of the Equipment or any part thereof without the prior written consent of Lender; provided, however, that the foregoing restriction shall not apply, for so long as no Default or Event of Default exists, to (i) dispositions of Equipment in the ordinary course of Borrower's business, provided that all proceeds thereof are remitted to Lender for application to the Loans, or (ii) replacements of Equipment that is substantially worn, damaged or obsolete with Equipment of like kind, function and value, provided that the replacement Equipment shall be acquired prior to or concurrently with any disposition of the Equipment that is to be replaced, the replacement Equipment shall be free and clear of Liens other than Permitted Liens that are not Purchase Money Liens, and Borrower shall have given Lender at least five (5) days prior written notice of such disposition. 6.5 Payment of Charges. All amounts chargeable to Borrower under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable on demand and shall bear interest from the date such advance was made until paid in full at the rate applicable to Revolving Credit Loans from time to time. SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrower warrants, represents and covenants to Lender that: 7.1.1 Organization and Qualification. Each of Borrower and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each of Borrower and its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction listed on 15 Exhibit D hereto and in all other states and jurisdictions in which the failure of Borrower or any of its Subsidiaries to be so qualified would have a material adverse effect on the financial condition, business or Properties of Borrower or any of its Subsidiaries. 7.1.2 Corporate Power and Authority. Each of Borrower and its Subsidiaries is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the shareholders (or members, in the case of a limited liability company) of Borrower or any of its Subsidiaries; (ii) contravene Borrower's or any of its Subsidiaries' charter, articles or certificate of incorporation or by-laws; (iii) violate, or cause Borrower or any of its Subsidiaries to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower or any of its Subsidiaries; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower or any of its Subsidiaries is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower or any of its Subsidiaries. 7.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of each of Borrower and its Subsidiaries enforceable against it in accordance with its respective terms. 7.1.4 Capital Structure. Exhibit E hereto states (i) the correct name of each of the Subsidiaries of Borrower, its jurisdiction of incorporation and the percentage of its Voting Stock owned by Borrower, (ii) the name of each of Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of Borrower and each Subsidiary of Borrower and (iv) the number of authorized, issued and treasury shares of Borrower and each Subsidiary of Borrower. Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and non-assessable. There are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of Borrower or any of its Subsidiaries. There are no outstanding agreements or instruments binding upon any of Borrower's shareholders (or members, in the case of a limited liability company) relating to the ownership of its shares of capital stock (or member interests, in the case of a limited liability company). 7.1.5 Corporate Names, etc. Neither Borrower nor any of its Subsidiaries has been known as or used any corporate, fictitious or trade names except those listed on Exhibit F hereto. Except as set forth on Exhibit F, neither Borrower nor any of its Subsidiaries has been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 16 Each of Borrower's and its Subsidiaries' state(s) of incorporation or organization, Type of Organization and Organizational I.D. Number is set forth on Exhibit F. The exact legal name of Borrower and each of its Subsidiaries is set forth on Exhibit F. 7.1.6 Business Locations; Agent for Process. Each of Borrower's and its Subsidiaries' chief executive office and other places of business are as listed on Exhibit C hereto. During the preceding one-year period, neither Borrower nor any of its Subsidiaries has had an office, place of business or agent for service of process other than as listed on Exhibit C. Except as shown on Exhibit C, no Inventory is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person. 7.1.7 Title to Properties; Priority of Liens. Each of Borrower and its Subsidiaries has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. Borrower has paid or discharged all lawful claims which, if unpaid, might become a Lien against any of Borrower's Properties that is not a Permitted Lien except as disclosed in Section 7.1.20 hereof. The Liens granted to Lender under Section 5 hereof are first-priority Liens, subject only to Permitted Liens. 7.1.8 Accounts. Lender may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Account: (i) It is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (ii) It arises out of a completed, bona fide sale and delivery of goods or rendition of services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; (iii) It is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Lender; (iv) Such Account, and Lender's security interest therein, is not, and will not (by voluntary act or omission of Borrower) be in the future, subject to any offset, Lien, deduction, recoupment, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Lender to be immaterial, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; (v) Borrower has made no agreement with any Account Debtor thereunder for any extension, compromise, settlement or modification of any such 17 Account or any deduction therefrom, except discounts or allowances which are granted by Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto and are reflected in the Schedules of Accounts submitted to Lender pursuant to subsection 6.2.1 hereof; (vi) There are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Lender with respect thereto; (vii) To the best of Borrower's knowledge, the Account Debtor thereunder (1) had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (2) such Account Debtor is Solvent; and (viii) To the best of Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of such Account. 7.1.9 Equipment. The Equipment is in good operating condition and repair, and all necessary replacements of and repairs thereto shall be made so that the value and operating efficiency of the Equipment shall be maintained and preserved, reasonable wear and tear excepted. Borrower will not permit any of the Equipment to become affixed to any real Property leased to Borrower so that an interest arises therein under the real estate laws of the applicable jurisdiction unless the landlord of such real Property has executed a landlord waiver or leasehold mortgage in favor of and in form acceptable to Lender, and Borrower will not permit any of the Equipment to become an accession to any personal Property other than Equipment that is subject to first-priority (except for Permitted Liens) Liens in favor of Lender. 7.1.10 Financial Statements; Fiscal Year. The balance sheets of Borrower and such other Persons described therein (including the accounts of all Subsidiaries of Borrower for the respective periods during which a Subsidiary relationship existed) as of September 30, 2003, and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP, and present fairly the financial positions of Borrower and such Persons at such dates and the results of Borrower's and such Persons' operations for such periods. Since September 30, 2003, there has been no material change in the condition, financial or otherwise, of Borrower and such other Persons as shown on the balance sheet as of such date and no change in the aggregate value of Equipment and real Property owned by Borrower or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of Borrower and each of its Subsidiaries ends on December 31 of each year. 7.1.11 Full Disclosure. The financial statements referred to in subsection 7.1.10 hereof do not, nor does this Agreement or any other written statement of 18 Borrower to Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which Borrower has failed to disclose to Lender in writing which materially affects adversely or, so far as Borrower can now foresee, will materially affect adversely the Properties, business, prospects, profits or condition (financial or otherwise) of Borrower or any of its Subsidiaries or the ability of Borrower or its Subsidiaries to perform this Agreement or the other Loan Documents. 7.1.12 Solvent Financial Condition. Each of Borrower and its Subsidiaries is now and, after giving effect to the Loans to be made, at all times will be, Solvent. 7.1.13 Surety Obligations. Neither Borrower nor any of its Subsidiaries is obligated as surety or indemnitor under any surety or similar bond or other contract, or has issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. 7.1.14 Taxes. Borrower's federal tax identification number is 22-3410821. The federal tax identification number of each of Borrower's Subsidiaries is shown on Exhibit G hereto. Borrower and each of its Subsidiaries has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees, levies and other governmental charges upon it, its income and Properties as and when such taxes, assessments, fees, levies and charges are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and Borrower maintains reasonable reserves on its books therefor. The provision for taxes on the books of Borrower and its Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. 7.1.15 Brokers. There are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 7.1.16 Patents, Trademarks, Copyrights and Licenses. Each of Borrower and its Subsidiaries owns or possesses all the patents, trademarks, service marks, tradenames, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights are listed on Exhibit H hereto. 7.1.17 Governmental Consents. Each of Borrower and its Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it. 7.1.18 Compliance with Laws. Each of Borrower and its Subsidiaries has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to Borrower or such Subsidiary, as applicable, its Properties or the conduct of its business and there have been no citations, notices or orders of noncompliance issued to Borrower or any of 19 its Subsidiaries under any such law, rule or regulation. Each of Borrower and its Subsidiaries has established and maintains an adequate monitoring system to insure that it remains in compliance with all federal, state and local laws, rules and regulations applicable to it including, without limitation, those promulgated by the United States Food and Drug Administration, Bureau of Alcohol, Tobacco and Firearms and United States Department of Agriculture. No Inventory has been produced in violation of the above including, without limitation, the Fair Labor Standards Act (29 U.S.C. ss.201 et seq.), as amended. To the extent applicable, Borrower has complied with the provisions of PACA and has paid all invoices due and owing suppliers, brokers and sellers of perishable agricultural commodities. No notices of non-payment have been filed with the United States Department of Agriculture by any supplier, broker or seller of such commodity. Borrower has no knowledge of any breach of the trust created by PACA. 7.1.19 Restrictions. Neither Borrower nor any of its Subsidiaries is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Properties. Neither Borrower nor any of its Subsidiaries is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit I hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Borrower or any of its Subsidiaries, as applicable. 7.1.20 Litigation. Except as set forth on Exhibit J hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower or any of its Subsidiaries, or the business, operations, Properties, prospects, profits or condition of Borrower or any of its Subsidiaries. Neither Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 7.1.21 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrower's performance hereunder, constitute a Default or an Event of Default. Neither Borrower nor any of its Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 7.1.22 Leases. Exhibit K hereto is a complete listing of all capitalized leases of Borrower and its Subsidiaries and Exhibit L hereto is a complete listing of all operating leases of Borrower and its Subsidiaries. Each of Borrower and its Subsidiaries is in full compliance with all of the terms of each of its respective capitalized and operating leases. 7.1.23 Pension Plans. Except as disclosed on Exhibit M hereto, neither Borrower nor any of its Subsidiaries has any Plan. Borrower and each of its Subsidiaries is in full compliance with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of Borrower or any of its Subsidiaries exists in connection with any 20 Plan. Neither Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multi-employer Plan. 7.1.24 Trade Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Borrower or any of its Subsidiaries and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrower or any of its Subsidiaries, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely Borrower or any of its Subsidiaries or prevent Borrower or any of its Subsidiaries from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 7.1.25 Labor Relations. Except as described on Exhibit N hereto, neither Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Borrower's or any of its Subsidiaries' employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 7.2 Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall remain accurate, complete and not misleading at all times during the term of this Agreement, except for changes in the nature of Borrower's or its Subsidiaries' business or operations that would render the information in any exhibit attached hereto either inaccurate, incomplete or misleading, so long as Lender has consented to such changes or such changes are expressly permitted by this Agreement. Without limiting the generality of the foregoing, each loan request made hereunder shall constitute Borrower's reaffirmation, as of the date of each such loan request, of each representation, warranty or other statement made or furnished to Lender by or on behalf of Borrower, or any Subsidiary of Borrower in this Agreement, any of the other Loan Documents, or any instrument, certificate or financial statement furnished in compliance with or in reference thereto. 7.3 Survival of Representations and Warranties. All representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.1.1 Visits and Inspections. Permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours and upon reasonable prior notice provided no Event of Default 21 exists, to visit and inspect the Properties of Borrower and each of its Subsidiaries, inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower's and each of its Subsidiaries' business, assets, liabilities, financial condition, business prospects and results of operations. 8.1.2 Notices. Promptly notify Lender in writing of the occurrence of any event or the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading, including, without limitation, any notice of a breach of the trust created by PACA. 8.1.3 Financial Statements. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared in accordance with GAAP applied on a consistent basis, unless Borrower's certified public accountants concur in any change therein and such change is disclosed to Lender and is consistent with GAAP): (i) not later than ninety (90) days after the close of each fiscal year of Borrower, unqualified, audited financial statements of Borrower and its Subsidiaries as of the end of such year, on a Consolidated and consolidating basis, certified by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Lender (except for a qualification for a change in accounting principles with which the accountant concurs); (ii) not later than thirty (30) days after the end of each month hereafter (excluding the last month of the end of the first three fiscal quarters of Borrower), and including the last month of Borrower's fiscal year, management prepared interim financial statements of Borrower and its Subsidiaries as of the end of such month and of the portion of Borrower's financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Borrower and its Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) not later than thirty (30) days after the end of each quarter, management prepared interim financial statements of Borrower and its Subsidiaries as of the end of such quarter and of the portion of Borrower's financial year then elapsed, on a Consolidated and consolidating basis, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting the Consolidated financial position and results of operations of Borrower and its Subsidiaries for such period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; 22 (iv) promptly upon Lender's request, but in any event, on the last Business Day of each week, a Borrowing Base Certificate reporting Accounts receivable, sales, collections, debits and credits and compliance with PACA; (v) not later than twenty (20) days after the end of each month, a detailed Account receivable aging report and Accounts payable aging report as of the last day of the preceding month, along with a loan recapitulation report and loan/Accounts receivable reconciliation report substantially in the form of Exhibit R attached hereto and calculation of Accounts that fail to meet the requirements of Eligible Accounts, in form and substance satisfactory to Lender; (vi) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower has made available to its shareholders; (vii) promptly after the filing thereof, copies of any annual report to be filed with ERISA in connection with each Plan; (viii) promptly after filing thereof, copies of all reports, certifications, applications and the like required to be filed with the United States Food and Drug Administration and the United States Department of Agriculture; and (ix) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrower's and each of its Subsidiaries' financial condition or results of operations. Concurrently with the delivery of the financial statements described in clause (i) of this subsection 8.1.3, Borrower shall forward to Lender, if issued, a copy of the accountants' letter to Borrower's management that is prepared in connection with such financial statements and also shall cause to be prepared and shall furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of Borrower and its Subsidiaries performed in connection with their examination of said financial statements, they are not aware of any Default or Event of Default, or, if they are aware of such Default or Event of Default, specifying the nature thereof, and acknowledging, in a manner satisfactory to Lender, that they are aware that Lender is relying on such financial statements in making its decisions with respect to the Loans. Concurrently with the delivery of the financial statements described in clauses (i), (ii) and (iii) of this subsection 8.1.3, or more frequently if requested by Lender, Borrower shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of Exhibit O hereto executed by the Chief Financial Officer of Borrower and with respect to the delivery of the financial statements described in clause (i) of this subsection 8.1.3, an accountant's reliance letter acknowledging Lender's reliance upon such financial statements. 23 8.1.4 Landlord and Storage Agreements. Provide Lender with copies of all agreements between Borrower or any of its Subsidiaries and any landlord or warehouseman which owns any premises at which any Inventory may, from time to time, be kept. 8.1.5 Parent Financial Statements. Deliver or cause to be delivered to Lender financial statements for the Parent in form and substance satisfactory to Lender at such intervals and covering such time periods as Lender may request including, without limitation, Parent's 10-Q financial statements within forty-five (45) days after each quarter and 10-K financial statements within ninety (90) days after each fiscal year of the Parent. 8.1.6 Projections. No later than thirty (30) days prior to the end of each fiscal year of Borrower, deliver to Lender Projections of Borrower for the forthcoming three (3) years, year by year, and for the forthcoming fiscal year, month by month. 8.1.7 Deposit and Brokerage Accounts. For each deposit account or brokerage account that Borrower at any time opens or maintains, Borrower shall, at Lender's request and option, pursuant to an agreement in form and substance satisfactory to Lender, cause the depository bank or securities intermediary, as applicable, to agree to comply at any time with instructions from Lender to such depository bank or securities intermediary, as applicable, directing the disposition of funds from time to time credited to such deposit or brokerage account, without further consent of Borrower. 8.2 Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless Lender has first consented thereto in writing, it will not: 8.2.1 Mergers; Consolidations; Acquisitions; Structural Changes. Merge or consolidate, or permit any Subsidiary of Borrower to merge or consolidate, with any Person; nor acquire, nor permit any of its Subsidiaries to acquire, all or any substantial part of the Properties of any Person; nor change its or any of its Subsidiaries' state of incorporation or organization or Type of Organization; nor change its or any of its Subsidiaries' legal names. 8.2.2 Loans. Make, or permit any Subsidiary of Borrower to make, any loans or other advances of money (other than for salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person. 8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist, or permit any Subsidiary of Borrower to create, incur or suffer to exist, any Indebtedness, except: (i) Obligations owing to Lender; (ii) Subordinated Debt existing on the date of this Agreement; (iii) accounts payable to trade creditors and current operating expenses (other than for Money Borrowed) which are not aged more than one hundred twenty (120) days from billing date or more than thirty (30) days 24 from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being actively contested in good faith and by appropriate and lawful proceedings; and Borrower or such Subsidiary shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower or such Subsidiary and its independent accountants; (iv) Obligations to pay Rentals permitted by subsection 8.2.13; (v) Permitted Purchase Money Indebtedness; and (vi) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business. 8.2.4 Affiliate Transactions. Enter into, or be a party to, or permit any Subsidiary of Borrower to enter into or be a party to, any transaction with any Affiliate of Borrower or stockholder, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's or such Subsidiary's business and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrower or such Subsidiary; or co-mingle funds or transfer funds to any Affiliate, Subsidiary or the Parent. 8.2.5 Limitation on Liens. Create or suffer to exist, or permit any Subsidiary of Borrower to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 7.1.14 hereto, but only if in Lender's judgment such Lien does not adversely affect Lender's rights or the priority of Lender's Lien in the Collateral; (iii) Liens arising in the ordinary course of Borrower's business by operation of law or regulation, but only if payment in respect of any such Lien is not at the time required and such Liens do not, in the aggregate, materially detract from the value of the Property of Borrower or materially impair the use thereof in the operation of Borrower's business; (iv) Purchase Money Liens securing Permitted Purchase Money Indebtedness; (v) such other Liens as appear on Exhibit P hereto; and (vi) such other Liens as Lender may hereafter approve in writing. 25 8.2.6 Subordinated Debt. Make, or permit any Subsidiary of Borrower to make, any payment of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt or change any of the terms thereof, except in accordance with the Subordination Agreement relative thereto. 8.2.7 Distributions. Declare or make, or permit any Subsidiary of Borrower to declare or make, any Distributions. 8.2.8 Capital Expenditures. Make Capital Expenditures (including, without limitation, by way of capitalized leases) which, in the aggregate, as to Borrower and its Subsidiaries, exceed $750,000 during Borrower's fiscal year ending 2004 (including the Equipment Loan); and an additional $500,000 in the aggregate for each fiscal year of Borrower thereafter. 8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of any of, or permit any Subsidiary of Borrower to sell, lease or otherwise dispose of any of, its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as no Event of Default exists hereunder, (ii) a transfer of Property to Borrower by a Subsidiary of Borrower or (iii) dispositions expressly authorized by this Agreement. 8.2.10 Stock of Subsidiaries. Permit any of its Subsidiaries to issue any additional shares of its capital stock except director's qualifying shares. 8.2.11 Bill-and-Hold Sales, Etc. Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. 8.2.12 Restricted Investment. Make or have, or permit any Subsidiary of Borrower to make or have, any Restricted Investment. 8.2.13 Leases. Become, or permit any of its Subsidiaries to become, a lessee under any operating lease (other than a lease under which Borrower or any of its Subsidiaries is lessor) of Property if the aggregate Rentals payable during any current or future period of twelve (12) consecutive months under the lease in question and all other leases under which Borrower or any of its Subsidiaries is then lessee would exceed $125,000. The term "Rentals" means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease. 8.2.14 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of Borrower. 8.2.15 Management Fees. Pay or allow to be paid any management fees to any Person. 26 8.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.3.1 Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of not less than the ratio shown below for the period corresponding thereto measured on a trailing twelve (12) month basis (to be tested quarterly): Date of Period End Ratio ------------------ ----- December 31, 2003 1.1 to 1.0 March 31, 2004 1.1 to 1.0 June 30, 2004 1.1 to 1.0 September 30, 2004 and thereafter 1.25 to 1.0 8.3.2 Maximum Leverage Ratio. Maintain a maximum Leverage Ratio of not more than the ratio shown below for the period corresponding thereto (to be tested quarterly): Date of Period End Ratio ------------------ ----- September 30, 2003 and thereafter 2.0 to 1.0 8.3.3 Minimum Net Income. Achieve positive net income on an annual basis in accordance with GAAP commencing with fiscal year ended 2004 based on the audited financials submitted to Lender as set forth herein. SECTION 9. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 9.1 Documentation. Lender shall have received, in form and substance satisfactory to Lender, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Lender shall require in connection therewith from time to time, all in form and substance satisfactory to Lender. 9.2 No Default. No Default or Event of Default shall exist. 9.3 Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 9.4 Availability. Lender shall have determined that immediately after Lender has made the initial Loans and paid all closing costs incurred in 27 connection with the transactions contemplated hereby, Availability shall not be less than $500,000 after deducting Accounts payable that are sixty (60) days or more past the invoice date. 9.5 No Litigation. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby. 9.6 Product Liability Insurance. Lender shall have received copies of Borrower's product liability insurance, in form and substance satisfactory to Lender. 9.7 PACA. To the extent applicable, Lender shall have received evidence of Borrower's compliance with PACA as Lender shall determine. SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 10.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 10.1.1 Payment of Notes. Borrower shall fail to pay any installment of principal, interest or premium, if any, owing on the Revolving Credit Note, the Term Note or any Equipment Note on the due date of such installment. 10.1.2 Payment of Other Obligations. Borrower shall fail to pay any of the Obligations that are not evidenced by the Revolving Credit Note, the Term Note or any Equipment Note within ten (10) days of the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). 10.1.3 Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of Borrower, or any Subsidiary of Borrower in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2 hereof including, without limitation and to the extent applicable, representations with respect to PACA. 10.1.4 Breach of Specific Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3, 6.1.1, 6.1.2, 6.2.5, 6.2.6, 8.1, 8.2 or 8.3 hereof on the date that Borrower is required to perform, keep or observe such covenant. 10.1.5 Breach of Other Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Lender's satisfaction within fifteen (15) days after the sooner to occur of Borrower's receipt of notice of 28 such breach from Lender or the date on which such failure or neglect first becomes known to any officer of Borrower. 10.1.6 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents; or the Other Agreements and such default shall continue beyond any applicable grace period. 10.1.7 Other Defaults. There shall occur any default or event of default on the part of Borrower under any agreement, document or instrument to which Borrower is a party or by which Borrower or any of its Property is bound, creating or relating to any Indebtedness (other than the Obligations) if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made. 10.1.8 Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 10.1.9 Adverse Changes. There shall occur any material adverse change in the financial condition or business prospects of Borrower. 10.1.10 Insolvency and Related Proceedings. Borrower shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against Borrower under the Bankruptcy Code (if against Borrower, the continuation of such proceeding for more than sixty (60) days), or Borrower shall make any offer of settlement, extension or composition to their respective unsecured creditors generally. 10.1.11 Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of Borrower, any Subsidiary of Borrower for a period which significantly affects Borrower's capacity to continue its business, on a profitable basis; or Borrower, any Subsidiary of Borrower shall suffer the loss or revocation of any license or permit now held or hereafter acquired by Borrower which is necessary to the continued or lawful operation of its business; or Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 10.1.12 Change of Ownership. The Parent shall cease to own and control, beneficially and of record, all of the issued and outstanding capital stock of Borrower. 10.1.13 ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any 29 Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if Borrower, any Subsidiary of Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multi-employer Plan resulting from Borrower's, or such Subsidiary's complete or partial withdrawal from such Plan. 10.1.14 Challenge to Agreement. Borrower, or any Subsidiary of Borrower or Parent, or any Affiliate of any of them, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 10.1.15 Repudiation of or Default Under Subordination Agreement. The Parent shall revoke or attempt to revoke the Subordination Agreement, or shall repudiate the Parent's obligations thereunder or shall be in default under the terms thereof. 10.1.16 Criminal Forfeiture. Borrower, or any Subsidiary of Borrower, shall be criminally indicted or convicted under any law that could lead to a forfeiture of any Property of Borrower, or any Subsidiary of Borrower. 10.1.17 Judgments. Any money judgment, writ of attachment or similar process is filed against Borrower, or any Subsidiary of Borrower, or any of their respective Property in excess of $25,000 or not covered by insurance. 10.1.18 PACA. A claim under PACA is made and is not otherwise contested in good faith on such terms as Lender requires. 10.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2 hereof, upon or at any time after the occurrence of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand, protest or further notice by Lender, become at once due and payable and Borrower shall forthwith pay to Lender, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 10.1.10 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. 10.3 Other Remedies. Upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following other rights and remedies: 10.3.1 All of the rights and remedies of a secured party under the UCC or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 30 10.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). 10.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. Lender may, at Lender's option, disclaim any and all warranties regarding the Collateral in connection with any such sale. Borrower agrees that ten (10) days written notice to Borrower of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral; second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. 10.3.4 Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. 10.4 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrower contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to Lender or contained in any other agreement between Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrower herein contained. The failure or delay of Lender to require strict performance by Borrower of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all 31 other Obligations owing or to become owing from Borrower to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents and no Default or Event of Default by Borrower under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. SECTION 11. MISCELLANEOUS 11.1 Power of Attorney. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower and in either Borrower's or Lender's name, but at the cost and expense of Borrower: 11.1.1 At such time or times upon or after the occurrence of an Event of Default as Lender or said agent, in its sole discretion, may determine, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. 11.1.2 At such time or times upon or after the occurrence of an Event of Default as Lender or its agent in its sole discretion may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable and, at Lender's option, with all warranties regarding the Collateral disclaimed; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement. 32 11.2 Indemnity. Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys fees and legal expenses) as the result of Borrower's failure to observe, perform or discharge Borrower's duties hereunder. In addition, Borrower shall defend Lender against and save it harmless from all claims of any Person with respect to the Collateral. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Lender by any Person under any Environmental Laws or similar laws by reason of Borrower's or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 11.2 shall survive the payment in full of the Obligations and the termination of this Agreement. 11.3 Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Lender. Borrower may not sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, Borrower's rights, title, interests, remedies, powers, and duties hereunder or thereunder. Borrower hereby consents to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignments. Borrower agrees that it will use its best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents. Borrower further agrees that Lender may disclose credit information regarding Borrower and its Subsidiaries to any potential participant or assignee. 11.4 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.5 Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrower and Lender permitted under Section 11.3 hereof. 11.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, 33 any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 11.8 Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, one Business Day after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile notice, when sent, addressed as follows: If to Lender: Fleet Capital Corporation 750 Walnut Avenue Cranford, New Jersey 07016 Attention: George Beyjoun, Vice President Facsimile No.: (908) 709-5322 With a copy to: Reed Smith LLP 136 Main Street Princeton, New Jersey 08540 Attention: James A. Dempsey, Esq. Facsimile No.: (609) 951-0824 If to Borrower: Pure World Botanicals, Inc. 375 Huyler Street So. Hackensack, New Jersey 07606 Attention: Sue Ann Merrill, Chief Financial Officer Facsimile No.: (201) 329-9181 With a copy to: Winne, Banta, Hetherington & Basralian, P.C. 25 Main Street Hackensack, New Jersey 07601 Attention: Thomas J. Cangialosi, Jr., Esq. Facsimile No.: (201) 487-8529 or to such other address as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any notice, request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof shall not be effective until received by Lender. 11.9 Lender's Consent. Whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security 34 Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 11.10 Credit Inquiries. Borrower hereby authorizes and permits Lender to respond to usual and customary credit inquiries from third parties concerning Borrower or any of its Subsidiaries. 11.11 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 11.12 Entire Agreement. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 11.13 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CRANFORD, NEW JERSEY. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN NEW JERSEY, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NEW JERSEY. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT ANY COURT OF THE STATE OF NEW JERSEY, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH 35 BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 11.15 WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (v) NOTICE OF ACCEPTANCE HEREOF; AND (VI) EXCEPT AS PROHIBITED BY LAW, ANY RIGHT TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS 36 THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [SIGNATURES FOLLOW NEXT PAGE] 37 IN WITNESS WHEREOF, this Agreement has been duly executed in Cranford, New Jersey, on the day and year specified at the beginning of this Agreement. ATTEST: PURE WORLD BOTANICALS, INC. By:/s/ Andrea O'Connor, Controller ------------------------------- Andrea O'Connor, Controller By: /s/ Sue Ann Merrill, Chief Financial Officer -------------------------------------------- Sue Ann Merrill, Chief Financial Officer FLEET CAPITAL CORPORATION By: /s/ George Beyjoun, Vice President --------------------------------- George Beyjoun, Vice President 38 APPENDIX A A. GENERAL DEFINITIONS When used in the Loan and Security Agreement dated as of December 22 2003, by and between Fleet Capital Corporation and PURE WORLD BOTANICALS, INC., (a) the terms Account, Certificated Security, Chattel Paper, Deposit Account, Document, Equipment, Financial Asset, Fixture, General Intangibles, Goods, Instrument, Inventory, Investment Property, Security, Proceeds, Security Entitlement and Uncertificated Security have the respective meanings assigned thereto under the UCC (as defined below) and as described in the Security Documents; (b) the terms Commercial Tort Claims, Electronic Chattel Paper, Health-Care-Insurance Receivables, Letter-of-Credit Rights, Payment Intangibles, Software, Supporting Obligations and Tangible Chattel Paper have the respective meanings assigned thereto in the UCC (as defined below); (c) all terms indicating Collateral having the meanings assigned thereto under the UCC shall be deemed to mean such Property, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest; (d) capitalized terms which are not otherwise defined have the respective meanings assigned thereto in said Loan and Security Agreement; and (e) the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated on or under or on account of any Account, Contract Right, Chattel Paper or General Intangible. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits thereto and this Appendix A. Availability - the amount of money which Borrower is entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Lender may have paid for the account of Borrower pursuant to any of the Loan Documents and which have not been reimbursed by Borrower) is subtracted from the Borrowing Base. If the amount outstanding is equal to or greater than the Borrowing Base, Availability is zero (0). Bank - Fleet National Bank, its successors and assigns. 39 Base Rate - the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Blocked Account Servicing Agreement. - the Three Party Blocked Account Service Agreement executed on or about the Closing Date among the Borrower, Lender and Bank. Borrowing Base - as at any date of determination thereof, an amount equal to the lesser of: (i) $5,000,000 at such date; or (ii) an amount equal to: (a) up to 85% of the net amount of Eligible Accounts outstanding at such date; PLUS (b) the lesser of (1) $2,500,000 or (2) up to 40%, of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market with the cost of raw materials and finished goods calculated on a first-in, first-out basis. For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, rebates, discounts (which may, at Lender's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. Borrowing Base Certificate - a certificate by a responsible officer of Borrower, substantially in the form of Exhibit Q (or another form acceptable to Lender) setting forth the calculation of the Borrowing Base, including a calculation of each component thereof, all in such detail as shall be satisfactory to Lender. All calculations of the Borrowing Base in connection with the preparation of any Borrowing Base Certificate shall originally be made by Borrower and certified to Lender; provided, that Lender shall have the right to review and adjust, in the exercise of its reasonable credit judgment, any such calculation after giving notice thereof to the Borrower, (1) to reflect its reasonable estimate of declines in value of any of the Collateral described therein, and (2) to the extent that such calculation is not in accordance with this Agreement. 40 Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New Jersey or is a day on which banking institutions located in such state are closed. Capital Expenditures - expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Closing Date - the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied and the initial Loan is made under the Agreement. Collateral - all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Computer Hardware and Software - all of Borrower's rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all Software and all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in any form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, Software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Consolidated - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. Contract Right - any right of Borrower to payment under a contract for the sale or lease of goods or the rendering of services, which right is at the time not yet earned by performance. Current Assets - at any date means the amount at which all of the current assets of a Person would be properly classified as current assets shown on a balance sheet at such date in accordance with GAAP. 41 Default - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in subsection 2.1.2 of the Agreement. Distribution - in respect of any corporation means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Dominion Account - a special account established by Borrower pursuant to the Agreement at a bank selected by Borrower, but acceptable to Lender in its reasonable discretion, and over which Lender shall have sole and exclusive access and control for withdrawal purposes. EBITDA - with respect to any fiscal period, the sum of Borrower's Consolidated net earnings (or loss) (but excluding therefrom extraordinary items and non-recurring gains) before interest expense, taxes, depreciation and amortization for said period as determined in accordance with GAAP. Eligible Account - an Account arising in the ordinary course of Borrower's business from the sale of goods or rendition of services which Lender, in its sole credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (i) it arises out of a sale made by Borrower to a Subsidiary or an Affiliate of Borrower or to a Person controlled by an Affiliate of Borrower; or (ii) it is unpaid for more than sixty (60) days after the original due date shown on the invoice; or (iii) it is due or unpaid more than ninety (90) days after the original invoice date; or (iv) 50% or more of the Accounts from the Account Debtor are not deemed Eligible Accounts hereunder; or (v) the total unpaid Accounts of the Account Debtor exceed 20% of the net amount of all Eligible Accounts, to the extent of such excess; or (vi) any covenant, representation or warranty contained in the Agreement with respect to such Account has been breached; or (vii) the Account Debtor is also Borrower's creditor or supplier, or the Account Debtor has disputed liability with respect to such Account, or the Account Debtor has made any claim with respect to any 42 other Account due from such Account Debtor to Borrower, or the Account otherwise is or may become subject to any right of setoff by the Account Debtor; or (viii) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (ix) it arises from a sale to an Account Debtor outside the United States, unless (a) the sale is on letter of credit, guaranty, credit insurance or acceptance terms, in each case acceptable to Lender, in its sole discretion, (b) it is due from an Account Debtor located in Canada not to exceed the lesser of (1) 10% of Borrower's total Accounts or (2) $200,000 in the aggregate at any time, or (c) it is due from Pepsi Cola Mexicana, SA not to exceed the lesser of (1) 20% of Borrower's total Accounts or (2) $400,000 in the aggregate at any time; or (x) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (xi) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Lender, in a manner satisfactory to Lender, so as to comply with the Assignment of Claims Act of 1940 (31 U.S.C. ss.203 et seq., as amended); or (xii) the Account is subject to a Lien other than a Permitted Lien; or (xiii) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (xiv) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (xv) Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which 43 discounts or allowances are reflected in the calculation of the face value of each invoice related to such Account; or (xvi) Borrower has made an agreement with the Account Debtor to extend the time of payment thereof; or (xvii) the Account or Account Debtor is otherwise unsatisfactory to Lender in its sole discretion. Eligible Inventory - such Inventory of Borrower (other than packaging materials and supplies) which Lender, in its sole credit judgment, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory if: (i) it is not raw materials or finished goods, that is, in Lender's opinion, readily marketable in its current form; or (ii) it is not in good, new and saleable condition; or (iii) it is slow-moving (more than 2 years old), obsolete or unmerchantable; or (iv) it does not meet all standards imposed by any governmental agency or authority; or (v) it does not conform in all respects to the warranties and representations set forth in the Agreement; or (vi) it is not at all times subject to Lender's duly perfected, first-priority security interest and no other Lien; or (vii) it is not situated at a location in compliance with the Agreement or is in transit; or (viii) it is stored at a location not made subject to a landlord waiver and/or bailee waiver acceptable to Lender. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. Equipment Loan - the Loans to be made by Lender to Borrower pursuant to subsection 1.2.2 of the Agreement. 44 Equipment Note - the Equipment Loan Note to be executed by Borrower in favor of Lender as provided in Section 1.2.2 of this Agreement, which shall be in the form of Exhibit B-2 to the Agreement. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1 of the Agreement. Fixed Charge Coverage Ratio -.means, as of any date, the ratio of (i) EBITDA minus Distributions, unfunded Capital Expenditures and cash taxes paid during the applicable measurement period to (ii) scheduled payments of principal on account of current maturities of Money Borrowed plus interest during the applicable measurement period. For the purposes of this definition, the effects of any potential year end inventory adjustments for 2003 shall be excluded from the calculation of EBITDA. GAAP - generally accepted account principles in the United States of America in effect from time to time. Indebtedness - as applied to a Person means, without duplication (i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of Borrower (without duplication), the Obligations. Intellectual Property - all past, present and future: trade secrets, know-how and other proprietary information; trademarks, internet domain names, service marks, trade dress, trade names, business names, designs, logos, slogans (and all translations, adaptations, derivations and combinations of the foregoing) indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights, unpatented inventions (whether or not patentable); patent applications and patents; industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, computer software, source codes, object 45 codes, executable code, data, databases and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; all other intellectual property; and all common law and other rights throughout the world in and to all of the foregoing. Leverage Ratio - means, as of any date, the ratio on a Consolidation basis of (i) Indebtedness minus Subordinated Debt to (ii) Tangible Capital Funds. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents. Loans - all loans and advances of any kind made by Lender, and/or by any affiliate of Lender, pursuant to the Agreement. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to Borrower; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrower, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrower under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrower. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Obligations - all Loans and all other advances, (including, but not limited to, obligations arising under any interest or currency swap, future, option or similar arrangements, foreign exchange contracts, all obligations arising from any derivative transactions and electronic funds transfers (whether through automated clearing house or otherwise) or out of 46 Lender's non-receipt or inability to collect funds or otherwise not being made whole in connection with depositing transfer checks or similar arrangements) debts, liabilities, obligations, covenants and duties, together with all interest, fees (including, without limitation, attorneys' fees) and other charges thereon, owing, arising, due or payable from Borrower to Lender, and/or to any affiliate of Lender, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. Organizational I.D. Number - with respect to Borrower, the organizational identification number assigned to Borrower by the applicable governmental unit or agency of the jurisdiction of organization of Borrower. Original Term - as defined in Section 4.1 of the Agreement. Other Agreements - any and all agreements, instruments and documents (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower, any Subsidiary of Borrower or any other third party and delivered to Lender in respect of the transactions contemplated by this Agreement including, without limitation, the Subordination Agreement. Overadvance - the amount, if any, by which the outstanding principal amount of Revolving Credit Loans exceeds the Borrowing Base. PACA - the Perishable Agricultural Commodities Act 7 U.S.C. ss.499 et seq. and the rules and regulations promulgated thereunder, as may be amended from time to time. Parent - Pure World, Inc., a Delaware corporation. Participating Lender - each Person who shall be granted the right by Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of Borrower incurred after the date hereof which is secured by a Purchase Money Lien and does not exceed the amounts allowable under subsection 8.2.8 of this Agreement. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases shall be computed as a Capitalized Lease Obligation. 47 Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Projections - Borrower's forecasted Consolidated and consolidating (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within ten (10) days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Rentals - as defined in subsection 8.2.13 of the Agreement. Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Restricted Investment - any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of Borrower to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current Assets arising from the sale of goods and services in the ordinary course of business of Borrower and its Subsidiaries; 48 (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one (1) year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one (1) year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; and (vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof. Revolving Credit Loan - a Loan made by Lender as provided in Section 1.1 of the Agreement. Revolving Credit Note - the Revolving Credit Note to be executed by Borrower on or about the Closing Date in favor of Lender to evidence the Revolving Credit Loan, which shall be in the form of Exhibit A to the Agreement. Schedule of Accounts - as defined in subsection 6.2.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Documents - all instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations. Solvent - as to any Person, that such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - Indebtedness of Borrower that is subordinated to the Obligations in a manner satisfactory to Lender pursuant to the Subordination Agreement. Subordination Agreement - the Subordination Agreement to be dated on or about the Closing Date among Borrower, Lender and Parent. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. 49 Tangible Capital Funds - means, at any time, the net worth of a Person as determined in accordance with GAAP, plus Subordinated Debt of such Person minus all items that would be considered "intangible assets" under GAAP minus amounts due from employees, officers, directors and managers and equity holders of such Person. Term Loan - the Loan described in subsection 1.2.1 of the Agreement. Term Note - the Secured Promissory Note to be executed by Borrower on or about the Closing Date in favor of Lender to evidence the Term Loan, which shall be in the form of Exhibit B-1 to the Agreement. Total Credit Facility - $7,500,000, consisting of Revolving Credit Loans ($5,000,000), the Term Loan ($2,000,000) and the Equipment Loan ($500,000). Type of Organization - with respect to Borrower, the kind or type of entity by which Borrower is organized, such as a corporation or limited liability company. UCC - the Uniform Commercial Code as in effect in the State of New Jersey on the date of this Agreement, as the UCC may be amended or otherwise modified. Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Other Terms. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the UCC to the extent the same are used or defined therein. Certain Matters of Construction. The terms "herein," "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. (a) LIST OF EXHIBITS Exhibit A Form of Revolving Credit Note Exhibit B-1 Term Note Exhibit B-2 Equipment Note Exhibit C Borrower's and each Subsidiary's Business Locations Exhibit D Jurisdictions in which Borrower and each Subsidiary is Authorized to do Business Exhibit E Capital Structure of Borrower Exhibit F Corporate Names Exhibit G Tax Identification Numbers of Subsidiaries Exhibit H Patents, Trademarks, Copyrights and Licenses Exhibit I Contracts Restricting Borrower's Right to Incur Debts Exhibit J Litigation Exhibit K Capitalized Leases Exhibit L Operating Leases Exhibit M Pension Plans Exhibit N Labor Contracts Exhibit O Compliance Certificate Exhibit P Permitted Liens Exhibit Q Borrowing Base Certificate Exhibit R Loan Recapitulation Report EX-99 5 empagmtpok.txt This is an EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November 11, 2003, by and between PURE WORLD, INC., a Delaware corporation (the "Corporation"), and Paul O. Koether (the "Executive"). Recitals -------- The Executive currently serves as Chairman of the Company. The Company desires the Executive to continue to serve as the Company's Chairman, and the Executive desires to continue to serve the Company as its Chairman, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive as Chairman of the ---------- Company, and the Executive hereby accepts such employment, upon the terms and conditions set forth herein. 2. Duties and Powers. ------------------ 2.1 Duties. The Executive shall serve as Chairman of the Company and ------ perform the duties of Chairman as defined in the Bylaws of the Company in effect on the date of this Agreement. The Chairman shall receive the compensation provided herein notwithstanding any future amendment to the Bylaws of the Company which diminishes or alters the duties of the Chairman of the Company. The Executive shall not be required to devote his entire working time to the business of the Company, and may devote time to other business interests, including but not limited to serving as Chairman of Kent Financial Services, Inc., Cortech, Inc., and of Sun Equities Corporation, and engaging in the securities brokerage business, currently as a registered representative of T. R. Winston & Company, Inc. 2.2 Chief Officer. As Chairman of the Company, the Executive shall report ------------- only to the Board of Directors of the Company (or, in the event the Company becomes a direct or indirect subsidiary of any other corporation, to the Board of Directors of the ultimate parent of the Company), and his powers and authority shall be superior to those of any other officer or employee of the Company or of any subsidiary of the Company. Subject to the authority of the Board of Directors of the Company, the Executive shall have final responsibility for the conduct of the business and affairs of the Company and of its subsidiaries, and the presidents and chief executive officers of all subsidiaries of the Company shall report to the Executive. 1 2.3 Service as Director. If elected, the Executive shall serve as a -------------------- director of the Company without additional compensation, and shall have the right at any time to serve as a director of any subsidiary of the Company. 3. Term of Agreement. The initial term of employment under this Agreement ----------------- shall be three years commencing effective as of December 1, 2003 (the "Effective Date") and shall extend until November 30, 2006 unless sooner terminated pursuant to Section 6 below. The term of the Executive's employment under this Agreement shall be automatically extended one day for each day elapsed after the Effective Date. Employment of the Executive by the Company prior to the Effective Date shall, subject to the terms and conditions of the benefit plans and arrangements referred to in Section 5.1 below, be counted in determining the Executive's continuous service with the Company for purposes of any benefit computation. 4. Compensation. For all services rendered by the Executive under this ------------ Agreement, the Company shall pay the Executive an annual salary of $215,000 (the "Base Salary"), payable in equal monthly installments. The Board of Directors of the Company shall from time to time review the compensation to be paid to the Executive under this Agreement and shall increase (but not decrease) the compensation in such amounts, if any, as the Board of Directors determines. 5. Benefits, Expenses, Reimbursement, etc. --------------------------------------- 5.1 Benefit Plans. The Company shall provide the Executive with such -------------- medical and disability insurance, hospital insurance and group life insurance and other benefits made available to executive level employees of the Company, subject to the terms and conditions of such benefit plans and arrangements. 5.2 Expenses. The Company shall pay all expenses incurred by the Executive -------- in furtherance of or in connection with the business of the Company and its subsidiaries and affiliates including, without limitation, all (i) travel and living expenses while away from home on business or at the request and in the service of the Company or its subsidiary or affiliate, and (ii) entertainment expenses, upon submission of appropriate receipts or vouchers and in accordance with the standard expense reimbursement policies of the Company as in effect from time to time. If any such expenses are paid by the Executive, the Company shall reimburse him promptly for those expenses. The Executive shall also be entitled to reimbursement for the annual fee(s) of any credit cards the Executive acquires for use in charging expenditures incurred in the performance of his duties under this Agreement. 2 5.3 Vacations. The Executive shall be entitled each year to a vacation of ---------- four weeks (twenty working days), during which time his compensation shall be paid in full and such holidays and other non-working days as are consistent with the policies of the Company for executives generally. All vacations shall be scheduled so as to cause minimal interference with the operations of the Company. If the Executive's employment under this Agreement is terminated pursuant to Section 6, the Executive shall be entitled to payment for all untaken vacation days. 5.4 Death Benefits. Subject to the provisions of Section 5.5(B) of this ---------------- Agreement, in the event of the Executive's death during the term of this Agreement, the Company shall pay to such beneficiaries as the Executive shall designate in writing prior to the Executive's death, or if he fails to designate a beneficiary, to the Executive's spouse or, if none, to the Executive's estate, an annual benefit equal to $215,000 (the "Death Benefit"). The Death Benefit shall be payable in equal monthly installments for a period of 3 years, commencing on the first day of the next month following the month in which the Executive's death occurs. Payments made pursuant to this Section 5.4 shall be made in lieu of any and all payments provided for in Section 4 of this Agreement. 5.5 Disability. ---------- A. The Executive shall be paid such benefits to which he is entitled under the terms of such long-term disability insurance as the Company has provided under Section 5.1 of this Agreement. If at any time during the term of this Agreement (i) the Company is not providing the Executive with long-term disability insurance coverage, or (ii) the amount of coverage provided pays benefits less than an annual benefit to age 73 of 80% or more of the Executive's Base Salary plus cash bonuses which the Executive is being paid prior to the commencement of disability benefits, then the Executive shall be paid the amount specified in Section 5.5(B) of this Agreement. B. Subject to the provisions of Section 5.5(A) of this Agreement, if during the term of this Agreement (i) the Executive suffers any illness, disability or incapacity which renders him unable to perform his duties hereunder and such illness, disability or incapacity is deemed by a duly licensed physician (who may be the Executive's personal physician) to be permanent, or (ii) the Executive is unable to render services to the Company of the nature required by this Agreement because of illness, disability or incapacity for a period of 90 days, whether or not such days are consecutive, during any year of the term hereof, then the Executive shall continue to render advisory and consulting services as he is able and as may be reasonably requested by the Company. The Company shall pay to the Executive an annual disability payment (the "Disability 3 Payment") equal to 80% of the Executive's compensation (Base Salary plus cash bonuses) in effect at the time the event or condition described in Section 5.5(B) (i) or (ii) (the "Condition") above occurs. The Disability Payment shall be paid to the Executive in equal monthly installments until the Executive attains age 73. Disability Payments shall commence on the first day of the month following the month in which the Condition occurs and shall be made even if the Executive is unable to render any services to the Company. C. In the event of the Executive's death during the period in which Disability Payments are to be paid, the Company shall pay any remaining Disability Payments due pursuant to Section 5.5(B) to such beneficiaries as the Executive designates in writing before his death, or upon his failure to designate a beneficiary, to his surviving spouse or, if none, then to the Executive's estate. Such payments shall be paid in lieu of any and all payments provided for in Section 4 and 5.4 of this Agreement. 6. Termination. The Executive's employment hereunder may be terminated only ----------- under the following circumstances: 6.1 Cause. The Company may terminate the Executive's employment hereunder ----- for "cause" upon not less than five days' prior written notice of such termination. For purposes of this Agreement, the Company shall have "cause" to terminate the Executive's employment hereunder upon (A) the continued failure by the Executive to substantially perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or the removal of Executive's office to a location more than 5 miles from its current location), which failure has not been cured (i) within three days after a written demand for substantial performance is delivered to the Executive by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties (the "Three Day Period"), or (ii) in the event such failure cannot be reasonably cured within the Three Day Period, within 20 days thereafter, provided that the Executive promptly commences and thereafter diligently prosecutes the cure thereof, or (B) the Executive's conviction of any criminal act or fraud with respect to the Company. Notwithstanding the foregoing, the Executive's employment may not be terminated for cause unless and until the Company has delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 80 percent of the entire Board of Directors at a meeting of the Board (of which the Executive was given at least 20 days prior 4 written notice and an opportunity, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive has not substantially performed his duties (which failure shall be described in detail) and such failure has not been cured within the period described in (ii) above. In addition, the Company shall not have cause to terminate the Executive's employment hereunder as a result of any event occurring prior to the date hereof and previously disclosed to the Company. The burden of establishing cause shall be upon the Company. 6.2 Termination by the Executive. The Executive may terminate this -------------------------------- employment hereunder for "good reason" upon not less than five days' prior written notice to the Company. For purposes of this Agreement, "good reason" shall mean the continued failure by the Company to perform its obligations under this Agreement (including any material change by the Company in the duties, responsibilities and powers of the Executive as set forth herein or the removal of the Executive's office to a location more than 5 miles from its current location) which failure has not been cured (i) within three days after a written demand for performance is delivered to the Company by the Executive that specifically identifies the manner in which the Executive believes the Company has not performed its obligations (the "Three Day Period"), or (ii) in the event such failure cannot be reasonably cured within the Three Day Period, within twenty (20) days thereafter provided that the Company promptly commences and thereafter diligently prosecutes the cure thereof. 6.3 Change in Control. ------------------ A. The Executive may terminate his employment under this Agreement at any time for "good reason" (as defined below) within 36 months after the date of a Change in Control (as defined below) of the Company. B. A"Change in Control" of the Company shall be deemed to have occurred if: (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") as in effect on the date hereof), other than individuals beneficially owning, directly or indirectly, common stock of the Company representing 30% or more of the Company's issued and outstanding common stock as of the Effective Date, is or becomes the beneficial owner, directly or indirectly, of common stock of the Company representing 30% or more of the Company's then issued and outstanding common stock; or 5 (2) individuals who constitute the Company's Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for Director, without objection to such nomination) shall be, for purposes of this clause, considered as though such person were a member of the Incumbent Board. For purposes of this Section 6.3(A), "good reason" shall mean a determination solely by the Employee, in good faith, that as a result of the change of control of the Company 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. C. If the Executive terminates his employment after a Change of Control of the Company, he shall notify the Company in writing of the effective date of the termination (the "Termination Date") and he shall be paid (i) the Base Salary and any bonuses payable to the Executive under this Agreement through the Termination Date, or (ii) an amount equal to the product of (a) the average annual Base Salary and bonus paid to the Executive during the five years preceding the Termination Date, multiplied by (b) three, whichever of (i) or (ii) is more. The amount payable under this Section 6.3(C) shall be paid in a lump sum on or before the fifth day following the Termination Date. 7. Interest and Counsel Fees. -------------------------- 7.1 Interest. All amounts payable to the Executive under this Agreement -------- shall be due and payable at the time specified herein and any payment which is not made within five days of the date of written demand shall be made with interest on the amount due from the due date until paid in full at an annual rate equal to 2% over the prime or base rate of interest generally offered or charged by Citibank, N.A. to its commercial customers for short-term unsecured loans, as in effect from time to time during the period from such due date until the date such payment is made. 7.2 Counsel Fees. The Company hereby irrevocably authorizes the Executive ------------ from time to time to retain counsel of his choice at the expense of the Company to represent the Executive in connection with the Executive's initiation or defense of any litigation, arbitration or other legal action relating to this Agreement or any provision hereof (whether such action is by or against the Company or any director, officer, stockholder or other person affiliated with the Company, or in any jurisdiction). Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company 6 irrevocably consents to the Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The reasonable fees and expenses of counsel selected by the Executive shall be paid or reimbursed to the Executive by the Company on a regular, periodic basis upon presentation by the Executive of a statement or statements prepared by such counsel in accordance with its customary practices, up to a maximum aggregate amount of $250,000. Notwithstanding the preceding, if it should be finally determined by judgment or order of a court of competent jurisdiction (the time for the appeal of which judgment or order shall have expired), that the Executive has not prevailed in any such litigation, arbitration or other legal action, the Executive shall promptly return to the Company, upon its demand, any amounts so advanced in connection with such action together with interest thereon at the rate provided in Section 7.1 above. 8. No Conflicting Commitments. --------------------------- 8.1 Representation and Warranty. The Executive represents and warrants that ---------------------------- he has no commitments or obligations of any kind whatsoever inconsistent with this Agreement and is under no disability of any kind whatsoever which would impair, infringe upon or limit Executive's ability to enter this Agreement or to perform the services required hereunder. 8.2 Indemnification. The Executive agrees to indemnify and hold the Company --------------- harmless against any claim or other actions asserted against the Company based upon circumstances in which it is alleged that the Executive has breached the warranty set forth in Section 8.1. 9. Governing Law. This Agreement has been executed and delivered in the -------------- State of New Jersey, and shall in all respects be interpreted, construed, and governed by and in accordance with the law of the State of New Jersey. Except as otherwise herein provided, all actions or proceedings arising directly, indirectly or otherwise in connection with, out of, related to, or from this Agreement shall be litigated exclusively and only in courts having situs within the State of New Jersey, and the parties hereby consent and submit to the jurisdiction of any state or federal court located in the State of New Jersey. Notwithstanding the preceding, the Executive, at his sole and exclusive option, 7 exercisable by written notice given to the Company at any time, may elect to submit any dispute arising under this Agreement to resolution by arbitration held in Somerset County, New Jersey in accordance with the rules of the American Arbitration Association. 10. Notices. All notices hereunder shall be in writing and personally ------- delivered or mailed by registered or certified mail, return receipt requested, to the following address: If to the Company: 376 Main Street P. O. Box 74 Bedminster, New Jersey 07921 Attention: Sue Merrill If to the Executive: Paul O. Koether 211 Pennbrook Road P. O. Box 97 Far Hills, New Jersey 07931 The Company or the Executive may hereafter designate another address to the other in writing for purposes of notices under this Agreement. 11. Waivers. Any waiver by any party of any violation of, breach of or -------- default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. 12. Assignability. This Agreement shall not be assignable by the Company -------------- without the written consent of Executive, except that if the Company shall merge or consolidate with or into, or transfer substantially all of its assets to, another corporation or other form of business organization, this Agreement shall be binding on the Executive and be for the benefit of and binding upon the successor of the Company resulting from such merger, consolidation or transfer without Executive's consent, unless this Agreement is terminated pursuant to Section 6.3(C). Executive may not assign, pledge, or encumber any interest in this Agreement or any part thereof without the express written consent of the Company, this Agreement being personal to Executive. 13. Severability. Each provision of this Agreement constitutes a separate ------------ and distinct undertaking, covenant and/or provision hereof. In the event that any provision of this Agreement shall finally be determined to be unlawful, such provision shall be deemed severed from this Agreement, but every other provision of this Agreement shall remain in full force and effect, and in substitution for 8 any such provision held unlawful, there shall be substituted a provision of similar import reflecting the original intent of the parties hereto to the extent permissible under law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first set forth above written. PURE WORLD, INC. By: /s/ Paul O. Koether -------------------------------- Paul O. Koether Title: Executive --------- By: /s/ Alfredo Mena -------------------------------- Alfredo Mena Title: Director -------- By: /s/ William Mahomes -------------------------------- William Mahomes Title: Director -------- 9 -----END PRIVACY-ENHANCED MESSAGE-----