10QSB 1 purw10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 -------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from _________ to __________ Commission File No.: 0-10566 ------- Pure World, Inc. ---------------- (Exact name of small business issuer as specified in its charter) Delaware 95-3419191 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 376 Main Street, Bedminster, New Jersey 07921 --------------------------------------------- (Address of principal executive offices) (908) 234-9220 -------------- (Issuer's telephone number) N/A --- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of April 30, 2004, the issuer had 7,527,336 shares of its common stock, par value $.01 per share, outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART I. - FINANCIAL INFORMATION ------- --------------------- ITEM 1. - Financial Statements ------- -------------------- PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31,2004 ($000 Omitted) (UNAUDITED) ASSETS ------ Current assets: Cash and cash equivalents $ 819 Accounts receivable, net of allowance for uncollectible accounts and returns and allowances of $217 4,289 Inventories 7,578 Other 630 --------- Total current assets 13,316 Plant and equipment, net 6,811 Investment in unaffiliated natural products company 1,510 Notes receivable from affiliates 190 Goodwill 1,144 Other assets 542 --------- Total assets $ 23,513 ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 1,705 Short-term borrowings 2,361 Accrued expenses and other 1,671 --------- Total current liabilities 5,737 Long-term debt 1,892 --------- Total liabilities 7,629 --------- Stockholders' equity: Common stock, par value $.01 30,000,000 shares authorized; 7,527,336 shares issued and outstanding 75 Additional paid-in capital 42,834 Accumulated deficit ( 27,025) --------- Total stockholders' equity 15,884 --------- Total liabilities and stockholders' equity $ 23,513 ========= See accompanying notes to consolidated financial statements. 2 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($000 Omitted, except per share data) (UNAUDITED) Three Months Ended March 31, ---------------------- 2004 2003 -------- -------- Revenues: Sales $ 7,613 $ 7,466 Interest and other income 2 107 ------- ------- Total revenues 7,615 7,573 ------- ------- Expenses: Cost of goods sold 6,082 5,426 Selling, general and administrative 1,305 1,316 ------- ------- Total expenses 7,387 6,742 ------- ------- Income before income taxes 228 831 Provision for income taxes 26 139 ------- ------- Net income $ 202 $ 692 ======= ======= Basic and diluted net income per share $ .03 $ .09 ======= ======= See accompanying notes to consolidated financial statements. 3 PURE WORLD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($000 Omitted) (UNAUDITED) Three Months Ended March 31, ---------------------- 2004 2003 -------- -------- Cash flows from operating activities: Net income $ 202 $ 692 Adjustments: Depreciation and amortization 438 444 Change in inventories ( 108) 78 Change in receivables ( 1,486) ( 257) Change in accounts payable and other accruals 507 ( 57) Other, net ( 65) ( 75) -------- -------- Net cash provided by (used in) operating activities ( 512) 825 -------- -------- Cash flows from investing activities: Purchase of plant and equipment ( 116) ( 340) Repayment of loans to affiliates and others 14 28 -------- -------- Net cash used in investing activities ( 102) ( 312) -------- -------- Cash flows from financing activities: Repurchase of common stock ( 2) ( 10) Issuance of common stock 11 - Term loan borrowings 58 138 Term loan repayments ( 114) ( 347) Net revolving line of credit borrowings 280 91 -------- -------- Net cash provided by (used in) financing activities 233 ( 128) -------- -------- Net increase (decrease) in cash and cash equivalents ( 381) 385 Cash and cash equivalents at beginning of period 1,200 1,898 -------- -------- Cash and cash equivalents at end of period $ 819 $ 2,283 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 56 $ 96 ======== ======== Income taxes $ 18 $ - ======== ======== See accompanying notes to consolidated financial statements. 4 PURE WORLD, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2004 AND 2003 (UNAUDITED) 1. General ------- The accompanying unaudited consolidated financial statements of Pure World, Inc. and subsidiaries ("Pure World" or the "Company") as of March 31, 2004 and for the quarters ended March 31, 2004 and 2003 reflect all material adjustments consisting of only normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the quarters ended March 31, 2004 and 2003 are not necessarily indicative of the results to be expected for the entire year or any other period. 2. Inventories ----------- Inventories are comprised of the following (in $000's): Raw materials $ 1,098 Work-in-progress 1,267 Finished goods 5,213 -------- Total inventories $ 7,578 ======== 5 3. 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 "Gaia Loan"). The Gaia 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 Gaia Loan balance was approximately $82,000 at March 31, 2004. 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. Gaia manufactures and distributes fluid botanical extracts for the high-end consumer market. Gaia is a privately held company. The Company is accounting for this investment by the cost method. 4. Borrowings ---------- Borrowings consisted of the following at March 31, 2004 (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 March 31, 2004) maturing in December 2006 $ 1,907 6 Loan payable to a bank, collateralized by certain property and equipment, bearing annual interest at Prime plus .75% (4.75% at March 31, 2004) maturing in December 2009 1,929 Lease payable for equipment for gross assets of $300,000 with imputed interest at approximately 5.9% maturing in October 2006 253 Leases payable for equipment 164 ------- Total 4,253 Less: Current portion of borrowings 2,361 ------- Long-term debt $ 1,892 ======= Interest expense was $56,000 and $96,000 for the three months ended March 31, 2004 and 2003, respectively. 5. Common Stock ------------ Stock Issuance -------------- In March 2004, 15,000 shares of common stock were issued due to the exercise of stock options. Stock Repurchase ---------------- In connection with the Company's common stock repurchase plans, 1,230 shares of common stock were purchased in the three months ended March 31, 2004. All shares repurchased were canceled and returned to the status of authorized but unissued shares. Stock Options ------------- 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. 7 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: Three Months Ended March 31, --------------------- 2004 2003 ------ ------ Net income (in $000's): As reported $ 202 $ 692 Pro forma compensation expense ($ 29) ($ 40) Pro forma net income $ 173 $ 652 Basic and diluted net income per share: As reported $ .03 $ .09 Pro forma $ .02 $ .09 6. Net Income Per Share -------------------- Basic income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding plus the dilutive effect of shares issuable through the exercise of stock options. The shares used for basic income per common share and diluted income per common share are reconciled below. (Shares in Thousands) 2004 2003 ---- ---- Average shares outstanding for basic income per share 7,516 7,526 Dilutive effect of stock options 285 - ----- ----- Average shares outstanding for diluted income per share 7,801 7,526 ===== ===== 8 ITEM 2. - Management's Discussion and Analysis of Financial Condition and ------- -------------------------------------------------------------------- Results of Operations --------------------- This Form 10-QSB contains forward-looking statements which may involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future periods or performance suggested by these statements. Liquidity and Capital Resources ------------------------------- At March 31, 2004, the Company had cash and cash equivalents of approximately $819,000. Cash equivalents of $798,000 consisted of U.S. Treasury bills with an original maturity of less than three months yielding .96%. The Company had working capital of $7.6 million at March 31, 2004. At March 31, 2004 the Company was in compliance with the covenants of its 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 $512,000 was used in operations in the quarter ended March 31, 2004, compared to net cash provided by operations of $825,000 in the same quarter of 2003. The net income of $202,000 in the first quarter of 2004 compared to the net income of $692,000 in the first quarter of 2003 combined with the increase in receivables was the primary reason for the change. Net cash of $102,000 and $312,000 was used in investing activities in the three months ended March 31, 2004 and 2003, respectively, due primarily to the purchase of equipment. Cash provided by financing activities in the first quarter of 2004 was $233,000 compared to net cash used in financing activities of $128,000 in the same period in 2003. Changes in notes payable were the primary reasons for these cash flows. For more information on borrowings, see Note 4 of Notes to Consolidated Financial Statements. Results of Operations --------------------- The Company's operations resulted in net income of $202,000, or $.03 basic and diluted income per share, for the three months ended March 31, 2004 compared to net income of $692,000, or $.09 basic and diluted income per share, for the comparable period in 2003. 9 The Company, through its wholly-owned subsidiary, Pure World Botanicals, Inc. had sales of $7.6 million in the quarter ended March 31, 2004, compared to sales of $7.5 million in the comparable quarter of 2003, an increase of approximately 2%. The increase in sales resulted from various factors including the introduction of several new products which may or may not result in significant business in the future. For the three months ended March 31, 2004 and 2003, the gross margin (sales less cost of goods sold) was $1,531,000, or 20% of sales and $2,040,000, or 27% of sales, respectively. The decrease in gross margin was due to the change in the product sales mix. Interest income was $2,000 for the three month period ended March 31, 2004, compared to $7,000 for the three month period ended March 31, 2003. Lower invested balances and lower yields on investments were the reasons for the decrease. Other income in the quarter ended March 31, 2003 was derived from a research and development agreement with a pharmaceutical company. Selling, general and administrative expenses were $1,305,000 for the three months ended March 31, 2004 compared to $1,316,000 for the comparable period in 2003. 10 Item 3. - Controls and Procedures ------- ----------------------- As of the end of the period covered by this report, the Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2004 that have materially affected or are reasonably likely to materially affect the company's internal controls over financial reporting evaluation. 11 PART II - OTHER INFORMATION ------- ----------------- Item 2. - Changes in Securities ------- --------------------- On March 18, 2004, the Company issued 15,000 shares of its common stock, par value $.01 per share, for proceeds of $10,650, upon the exercise of 15,000 common stock options pursuant to a private placement pursuant to section 4 (2) under the Securities Act of 1933. SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES (COMMON STOCK) (c) Total Number of (d) Maximum Shares Number of Purchased as Shares that Part of May Yet Be (a) Total Publicly Purchased Number of (b) Announced Under the Shares Average Price Plans or Plans or Period Purchased Paid per Share Programs Programs (1) January 1, 2004 - January 31, 2004 - - - 925,832 February 1, 2004 - February 29, 2004 30 $ 2.23 30 925,802 March 1, 2004 - March 31, 2004 1,200 $ 1.84 1,200 924,602 Total 1,230 $ 1.85 1,230 924,602 (1) In May 2002, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 1,000,000 shares of its common stock. This program has no expiration date. 12 Item 6. - Exhibits and Reports on Form 8-K ------- -------------------------------- (a) Exhibits -------- 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------- 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." On April 23, 2004, Pure World filed a Form 8-K reporting that the Company had issued a press release announcing results for the three months ended March 31, 2004. 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PURE WORLD, INC. Dated: May 13, 2004 By: /s/ Sue Ann Merrill ------------------------------- Sue Ann Merrill Chief Financial Officer, Vice President & Treasurer (Principal Financial and Accounting Officer) 14 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 quarterly report on Form 10-QSB 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. May 13, 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 quarterly report on Form 10-QSB 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. May 13, 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 Quarterly Report on Form 10-QSB for the period ended March 31, 2004, 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 and results of operations of the Company. Dated: May 13, 2004 /s/ Paul O. Koether -------------------------------- Paul O. Koether Chairman /s/ Sue Ann Merrill -------------------------------- Sue Ann Merrill Chief Financial Officer