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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-27646
GUM TECH INTERNATIONAL, INC.
(Name of small business issuer in its charter)
UTAH 87-0482806
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
246 East Watkins Street
Phoenix, AZ 85004
(602) 252-1617
(Address of principal executive offices,
Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
Nasdaq National Market
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 [ ]
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 24, 2000, 8,866,017 shares of the Registrant's Common Stock
were outstanding. As of March 24, 2000, the market value of the Registrant's
Common Stock, excluding shares held by affiliates, was $154.4 million based upon
a closing bid price of $17.6875 per share of Common Stock on the Nasdaq National
Market.
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TABLE OF CONTENTS
Page
----
PART I...................................................................... 1
ITEM 1. BUSINESS........................................................ 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 5
ITEM 3. LEGAL PROCEEDINGS............................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 6
PART II..................................................................... 7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 7
ITEM 6. SELECTED FINANCIAL DATA......................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 17
PART III.................................................................... 17
ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE
OFFICERS........................................................ 17
ITEM 11. EXECUTIVE COMPENSATION.......................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................. 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 22
PART IV..................................................................... 22
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................... 22
Unless otherwise indicated in this filing, "Gum Tech," "us," "we," "our" and
similar terms refer to Gum Tech International, Inc. and its subsidiaries. The
Gum Tech name and logo and Zicam are trademarks of Gum Tech International, Inc.
Other brands, names and trademarks contained in this filing are the property of
their respective owners.
-i-
PART I
ITEM 1. BUSINESS
INTRODUCTION
GUM OPERATIONS
We develop and manufacture specialty chewing gum products for branded and
private label customers, as well as products marketed under our own brand.
Specialty chewing gums include vitamins, herbals, and active over-the-counter
drug ingredients formulated to provide specific health-related benefits to the
user. We manufacture and continue to develop specialty chewing gums that are
formulated to:
* promote oral hygiene and breath freshness;
* promote weight management;
* reduce pain;
* relieve indigestion;
* contribute to energy and endurance;
* reduce the risk of osteoporosis; and
* reduce tobacco cravings.
In 1998, following a significant management restructuring, we changed our
principal strategy from developing, manufacturing, and distributing our own
branded and private label gum products to developing, manufacturing, and
packaging specialty gum products for sale and distribution by major branded and
private label customers that we believe have the capital resources and
distribution capability to promote and market specialty chewing gums on a large
national and international scale. We adopted this change in strategy primarily
because we did not have the financial resources, name recognition, and
distribution capability to successfully market and distribute our gums on a
wide-scale.
Most of our sales from gum operations are currently attributable to
products developed, manufactured, and packaged by us for marketing and sale by
five consumer products companies: Breath Asure, Inc., Ranir/DCP, Inc., Heritage
Consumer Products, Herbalife International, Inc., and Pharma-Green Ltd. We are
also actively involved in discussions with other major consumer product
companies regarding the development and formulation of a variety of additional
specialty chewing gum products.
In December 1999, we reached an agreement in principle to form a joint
venture with Swedish Match AB. The joint venture will be organized as an
independent company for the purpose of developing, manufacturing, marketing, and
distributing non-tobacco nicotine products worldwide. Under the terms of this
agreement, Swedish Match will own 51% and we will own 49% of the joint venture.
We will contribute intellectual property related to chewing gum products
containing nicotine and Swedish Match will contribute $10 million in start-up
capital. Swedish Match, based in Stockholm, Sweden, is an international group
which develops, manufactures, markets, and distributes, through its own
subsidiaries worldwide, a broad range of tobacco products within the OTP (Other
Tobacco Products) category, with smokeless tobacco as its core business along
with cigars and pipe tobacco, as well as matches and lighters. Swedish Match's
extensive range of products is sold in 140 countries, with annual sales totaling
approximately $1 billion.
1
ZICAM OPERATIONS
Through a joint venture with BioDelivery Technologies, Inc. (formerly Gel
Tech, Inc.), a California corporation, we are engaged in the manufacture,
marketing, and distribution of health-related products using a patent-pending,
nasal gel technology. The initial product marketed by this joint venture is
Zicam, a nasal gel formula that has been formulated to reduce the severity and
duration of the common cold. An initial internal study and a subsequent
independent clinical study of Zicam have indicated that use of Zicam
significantly reduces the duration and severity of the common cold when taken at
the onset of a cold. To conduct clinical studies and develop, manufacture, and
market Zicam, we entered into an operating agreement with BioDelivery
Technologies under which both parties transferred their respective interests in
the patent rights to the nasal gel technology in exchange for membership
interests in Gel Tech LLC, an Arizona limited liability company. We have a 60%
interest in the capital and profits of the joint venture and parties affiliated
with BioDelivery Technologies collectively own a 40% interest in the capital and
profits of the joint venture. In addition, as contemplated by the operating
agreement, we contributed $3.5 million to the joint venture.
We were incorporated in Utah in 1991. Our principal executive offices are
located at 246 E. Watkins Street, Phoenix, Arizona and our telephone number is
(602) 252-1617.
STRATEGY
We are pursuing the following business strategies:
* CONTINUE TO RESEARCH AND DEVELOP NEW SPECIALTY GUM PRODUCTS. We
possess considerable gum formulation expertise, and together with our
existing and potential customers, are developing new products in the
specialty chewing gum market.
* PARTNER WITH MAJOR CONSUMER PRODUCT COMPANIES TO INCREASE SALES. Since
early 1998, we have pursued a strategy of partnering with major
consumer products companies that have the financial resources and
distribution capability to market and distribute specialty chewing gum
products on a national and international scale. Most recently in
December 1999, we announced a joint venture with Swedish Match to
produce, market and distribute nicotine products throughout the world.
* IMPROVE MANUFACTURING OPERATIONS TO ENHANCE EFFICIENCY AND INCREASE
PROFIT MARGINS. In 1998 and 1999, we expanded our operations,
including adding personnel and additional packaging and coating
equipment, to meet expected increases in demand for several gum
products.
* CONTINUE TO EFFECTIVELY MARKET GUM TECH BRANDED PRODUCTS. While we
have changed our principal strategy to focus on contract manufacturing
for others, we continue to support several of our own branded products
and believe that these products and related marketing efforts provide
a showcase for new product concepts and demonstrate our expertise in
developing new gum formulations.
* EFFECTIVELY MANAGE THE DEVELOPMENT AND GROWTH OF THE GEL TECH LLC
JOINT VENTURE AND THE MANUFACTURING AND MARKETING OF ZICAM. Zicam is a
new product that we believe represents an opportunity for substantial
growth in our revenue. In order to realize this growth in revenue,
however, we must effectively manage the development and growth of our
joint venture with BioDelivery Technologies and Zicam must achieve
significant market acceptance. In addition, we are exploring product
line extensions that would utilize GelTech's nasal gel technology.
2
PRODUCT INFORMATION
The table below describes certain information related to specific chewing
gum products currently manufactured by us for other consumer products companies.
Product Intended Benefits to User Market Distributed By
------- ------------------------- ------ --------------
Breath Asure Dental Gum(TM) Promotes oral hygiene and breath freshness Oral Care Breath Asure
Private label dental gums Promote oral hygiene and breath freshness Oral Care Ranir/DCP
AcuTrim(R) Promotes weight management OTC drug Heritage Consumer Products
Aspergum(R) Pain relief OTC drug Heritage Consumer Products
Chooz Antacid and prevents osteoporosis OTC drug Heritage Consumer Products
Herbalife NRG(R) Improves energy & endurance Dietary supplement Herbalife
Herbalife Chew Slim(R) Promotes weight management Dietary supplement Herbalife
Pharma-Green (seven varieties) Various Dietary supplement Pharma-Green Ltd.
Brain Gum Improves brain function Dietary supplement KR Research, Inc.
MANUFACTURING AND PACKAGING
We manufacture all of our gum products, including those marketed and
distributed by others. The manufacture of specialty chewing gums involves:
* storing bulk raw materials and "fine" raw materials, such as flavor,
colors and active ingredients;
* producing and mixing the gum base in large stainless steel mixers;
* extruding the gum into selected sizes and shapes;
* coating the gum, generally with a sugarless coating solution;
* branding the product if required;
* packaging the gum in blister packages; and
* packaging the blisters, according to customer specifications, for
shipment.
All of our gum products contain one or more active ingredients which are
added either to the gum center in the mixing stage or included in the coating
solution.
Prior to commencing production of the chewing gum, we record lot numbers
for all ingredients, examine and file certificates of ingredients, perform
quality control tests, and sanitize equipment and utensils. Our personnel
conduct additional quality control tests throughout the manufacturing process.
We manufacture our products in compliance with current good manufacturing
procedures requiring written standard operating procedures.
Zicam is currently manufactured and packaged by Botanical Laboratories,
Inc. of Ferndale, Washington in accordance with current good manufacturing
processes. The finished product is shipped to our warehouse facility in Phoenix
for warehousing and shipment to customers.
COMPETITION
Although the specialty gum market is emerging as a market category distinct
from the traditional, established chewing gum market, Gum Tech and the companies
to whom we sell face significant competition in each of the four categories in
which we operate. These categories include oral care products, OTC drugs,
3
smoking cessation products, and dietary supplements. In the oral care products
market, we manufacture products for Breath Asure and Ranir/DCP, which compete
directly with Arm & Hammer dental gum, Trident Advantage, and V-6 dental gum. We
manufacture OTC drug-related gum products, including Aspergum, an analgesic,
Chooz, an antacid/calcium supplement, and AcuTrim, a dietary gum. Each of these
products competes generally with analgesics, antacids, and dietary products
produced and marketed by major consumer products companies. We will be pursuing
opportunities in the smoking cessation market through our joint venture with
Swedish Match, which is currently dominated by the Nicorette product marketed by
Pharmacia and Upjohn. In the dietary supplement market, our various gum products
compete with a large number of non-gum dietary supplement products.
Competitive factors in the chewing gum industry include price, flavor, and
name recognition resulting from media advertising. We historically have not had
the capital resources, marketing and distribution networks, product name
recognition, and advertising budget to produce or introduce chewing gum brands
that could compete effectively with the multi-national chewing gum manufacturers
and large specialty chewing gum marketers. Accordingly, we have adopted a
strategy of partnering with major branded and private label customers that
possess the resources and capabilities needed to market and distribute gum
products on a wide-scale.
We face significant competition from a large number of major drug companies
involved in selling a variety of cough and cold remedies that compete directly
with Zicam. Most of these competitors have greater name recognition, more
established brands, wider distribution capabilities and greater financial and
marketing resources than we do.
FDA AND OTHER GOVERNMENT REGULATION
We are subject to various Federal, state and local laws affecting our
business. All of our chewing gum and Zicam products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. In addition, some of our products are considered "drugs."
Consequently, manufacture of these products must comply with "good manufacturing
practices" mandated by the FDA, which prescribes specific requirements and
procedures for the manufacture of FDA-regulated drug products. If we fail to
comply with these requirements and procedures, the FDA has the right to restrict
the sale of or remove such products from the market. We believe that all of our
products comply with all regulatory requirements including the FDA manufacturing
standards and practices for drug products.
Our advertising claims made with respect to all of our products are also
subject to the jurisdiction of the FDA and the Federal Trade Commission. In both
cases, we are required to obtain scientific data to support any advertising or
labeling of health claims we make concerning our products.
In addition, our chewing gum manufacturing facility and the facilities of
Botanical Laboratories are subject to regulation by various governmental
agencies including state and local licensing, zoning, land use, construction and
environmental regulations and various health, sanitation, safety and fire codes
and standards. Suspension of certain licenses or approvals, due to failure to
comply with applicable regulations or otherwise, could interrupt our
manufacturing operations. We are also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions.
4
TRADEMARKS, TRADE NAMES, AND PROPRIETARY RIGHTS
We own a perpetual non-exclusive license to use Microdent, a
plaque-reducing agent, in our coated chewing gum products. Microdent is the
critical ingredient in the chewing gums that we manufacture and package for
Breath Asure and Ranir/DCP.
We routinely seek trademark protection from the United States Patent Office
("USPO") and from similar agencies in foreign countries for chewing gum brands
and Zicam. Despite these protections, we may not be able to successfully defend
any trademarks granted to us against claims from or use by competitors. In
addition, trademark applications may not be approved by the USPO or any similar
foreign agency.
We consider some of our chewing gum formulations and processes to be
proprietary in nature and rely upon a combination of nondisclosure agreements,
other contractual restrictions, and trade secrecy laws to protect this
proprietary information. Despite these precautions, these steps may not be
adequate to prevent misappropriation of our proprietary information and our
competitors could independently develop chewing gum formulations and processes
that are substantially equivalent or superior to those that we develop.
EMPLOYEES
As of December 31, 1999, our gum operations employed 75 individuals,
including three executive officers, 56 manufacturing and warehouse personnel,
four research and development personnel, and 12 administrative/sales personnel.
As of December 31, 1999, Gel Tech employed six executive and administrative
personnel.
ITEM 2. DESCRIPTION OF PROPERTY
We lease an approximately 28,000 square foot building for our principal
executive offices and chewing gum manufacturing facilities at 246 East Watkins,
Phoenix, Arizona 85004. Our ten-year lease (with two three-year renewal options)
for this building expires on December 2005. The monthly rental expense for this
property is approximately $12,000. In September 1998, we leased an additional
31,000 square foot building located near our principal executive offices and
manufacturing facility to house our warehouse and packaging operations. This
lease provides for monthly rent of approximately $12,000 and a five year term,
subject to a five year renewal option.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
On October 16, 1996, a lawsuit was filed against us and other parties in
the United States District Court for the Central District of California,
CV-95-9784. The action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The
complaint, as it relates to us, principally alleged that we engaged in unlawful
rebates, appropriations and overcharges, commercial bribery, fraud and unjust
enrichment. On September 4, 1998, the court granted a motion for summary
judgment in our favor, and dismissed the plaintiff's claims against us and our
current and former directors. The ruling remains subject to appeal.
On January 27, 1999, an action was filed against us and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. The complaint alleges
intentional interference with business relations, intentional misrepresentation,
negligent misrepresentation, securities fraud, and consumer fraud. The plaintiff
seeks compensatory damages of $720,000, unspecified punitive damages, and
attorneys' fees and costs. We deny the plaintiff's allegations and intend to
vigorously defend this action.
5
On June 2, 1999, we filed a complaint in the Superior Court of Maricopa
County, Arizona against DJ Ltd. ("DJ"), CIV 99-1136-PHX-PGR (D. Ariz.). Our
complaint sought a declaratory judgment that DJ was not owed any fee under an
agreement entered into between the parties pursuant to which DJ was to act as
our financial advisor. DJ removed the case to the United States District Court
for the District of Arizona and filed a counterclaim. In its counterclaim, DJ
alleges that we breached the contract between the parties and that Gum Tech has
been unjustly enriched. DJ seeks damages in the amount of $480,000, plus costs,
expenses and warrants to purchase 50,000 shares of Gum Tech common stock. DJ
also seeks a declaratory judgment confirming its version of its rights under the
agreement.
On October 21, 1999, an action was filed against us in the Superior Court
of the State of California in and for the County of Los Angeles, case number BC
218 878, by International Interest Group, Inc. ("IIG") The complaint alleges the
breach of an alleged oral finder's fee agreement between the parties relating to
the introduction of certain individuals associated with BioDelivery Technology
to a former chief executive officer of Gum Tech in 1996. BioDelivery Technology
and Gum Tech formed a joint venture in 1999 to manufacture, market and
distribute Zicam. The complaint seeks unspecified general contract damages,
declaratory relief, and an accounting. We removed the action to the United
States District Court for the Central District of California on February 2,
2000. We deny the existence, as well as the validity, of the alleged oral
agreement, and intend to vigorously defend the action.
On November 9, 1999, The Quigley Corporation commenced a civil action
against Gum Tech, Inc., Gel-Tech Industries, Inc., and Gel-Tech, L.L.C. in the
United States District Court for the Eastern District of Pennsylvania. The
complaint alleges infringement of a patent by the defendants' use of Zicam. The
complaint seeks compensatory damages and injunctive relief. Each of the
defendants denies infringement of the patent and alleges that the patent is
invalid. The defendants filed a motion for summary judgment on January 21, 2000,
seeking to dismiss the lawsuit as a matter of law. This motion was denied on
March 9, 2000. Quigley filed a motion for preliminary injunction on February 25,
2000, seeking an injunction against the defendants regarding future sales by
Zicam. A hearing on the motion is scheduled to be heard by the court on March
31, 2000. The defendants assert that the claim by Quigley is totally without
merit and intend to continue vigorously defending this lawsuit.
We are not involved as a party in any other legal proceeding other than
various claims and lawsuits arising in the normal course of business, none of
which, in the opinion of our management, is individually or collectively
material to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"GUMM" since April 24, 1996. The following table sets forth for the quarters
indicated the range of high and low closing prices of the Company's common stock
as reported by the Nasdaq National Market, but does not include retail markup,
markdown or commissions.
Market Price
--------------------
High Low
-------- --------
FISCAL YEAR 1998
First Quarter ...................................... $ 7.3750 $ 4.8125
Second Quarter ..................................... $ 7.5625 $ 5.2500
Third Quarter ...................................... $10.7500 $ 7.1875
Fourth Quarter ..................................... $ 8.0000 $ 5.4375
FISCAL YEAR 1999
First Quarter ...................................... $14.6719 $ 8.3750
Second Quarter ..................................... $11.8750 $ 9.5625
Third Quarter ...................................... $13.5625 $10.7500
Fourth Quarter ..................................... $20.3750 $12.5000
FISCAL YEAR 2000
First Quarter (through March 24, 1999) ............. $33.8750 $16.3125
As of March 20, 1999, Gum Tech had approximately 5,482 record and
beneficial stockholders.
DIVIDEND POLICY
We have paid only limited cash dividends on our common stock in the past
and intend to retain earnings, if any, for use in the operation and expansion of
the business. The amount of future dividends, if any, will be determined by the
board of directors based upon earnings, financial condition, capital
requirements and other conditions.
7
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data for Gum Tech
for each of the years in the five-year period ended December 31, 1999. The
selected annual historical statement of income and balance sheet data is derived
from Gum Tech's financial statements audited by independent auditors. For
additional information, see the financial statements of Gum Tech and the notes
thereto included elsewhere in this report. The following table should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified by reference thereto and
to Gum Tech's financial statements and notes thereto.
Year
--------------------------------------------------------
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Net sales $ 15,500 $ 5,273 $ 3,777 $ 3,116 $ 4,344
Net income (loss) applicable
to common stock $ (1,012) $ (6,261) $ (5,399) $ (3,388) $ 497
Net income (loss) per share
of common stock $ (0.14) $ (0.97) $ (1.02) $ (0.77) $ 0.11
Dividends per share $ -- $ -- $ -- $ -- $ 0.01
Shares outstanding at year end 8,321 6,858 5,856 4,949 3,437
Total assets $ 20,028 $ 7,900 $ 9,685 $ 7,458 $ 4,592
Long term obligations $ 2,241 $ 2,380 $ 3,785 $ 1,488 $ 2,507
Stockholders' equity $ 12,702 $ 3,718 $ 4,673 $ 5,283 $ 1,623
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand labels. Specialty chewing gums include vitamins, herbals and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. Gum Tech currently targeted four market segments: oral
care, smoking cessation, dietary supplement, and over-the-counter (OTC) drug. A
substantial majority of Gum Tech's sales from its gum operations currently are
attributable to products developed, manufactured and packaged by Gum Tech for
marketing and sale by five branded and private label consumer products
companies.
In January 1999, Gum Tech entered into a joint venture with BioDelivery
Technologies, Inc. to manufacture, market and distribute Zicam, a nasal gel
formula. Under an operating agreement signed on May 6, 1999, Gum Tech and
BioDelivery Technologies transferred their respective interests in the patent
rights to the nasal gel technology used in Zicam in exchange for membership
interests in Gel Tech LLC, an Arizona limited liability company. Gum Tech has a
60% interest in the capital and profits of the joint venture and has provided
$3.5 million of capital to the joint venture. Gum Tech reports financial results
of Gel Tech LLC on a consolidated basis, but identifies certain information by
its two business segments--chewing gum operations and Zicam operations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998
The following table details certain financial information for our chewing
gum and Zicam operations for the year ended December 31, 1999:
Chewing Gum Zicam Consolidated
----------- ----------- -----------
Net sales $ 5,910,221 $ 9,589,803 $15,500,024
Cost of sales 4,806,544 2,534,818 7,341,362
----------- ----------- -----------
Gross profit 1,103,677 7,054,985 8,158,662
Operating expenses 2,277,263 3,428,227 5,705,490
Research and development 422,555 241,893 664,448
----------- ----------- -----------
Income (Loss) from operations (1,596,141) 3,384,865 1,788,724
Interest and other income 73,136 50,428 123,564
Interest expense 1,311,792 0 1,311,792
----------- ----------- -----------
Income (loss) before income tax $(2,834,797) $ 3,435,293 $ 600,496
----------- ----------- -----------
9
CHEWING GUM OPERATIONS
Certain information is set forth below for our chewing gum operations
expressed in dollars and as a percentage of net sales for the periods indicated:
Year Ended December 31
------------------------------------------
1999 1998
------------------- -------------------
Net sales $ 5,910,221 100% $ 5,272,547 100%
Cost of sales 4,806,544 81 4,357,010 83
----------- ----- ----------- -----
Gross profit 1,103,677 19 915,537 17
Operating expenses 2,277,263 39 6,164,022 117
Research and development 422,555 7 667,067 12
----------- ----- ----------- -----
Income (Loss) from operations (1,596,141) (27) (5,915,552) (112)
Interest and other income 73,136 1 127,947 2
Interest expense 1,311,792 22 473,811 9
Provision (benefit)
for income taxes -- -- -- --
----------- ----- ----------- -----
Net income (loss) $(2,834,797) (48)% $(6,261,416) (119)%
=========== ===== =========== =====
NET SALES. Net sales increased to approximately $5.9 million for the 12
months ended December 31, 1999, or 12% above the prior year. This increase
reflects the addition of several new customers and/or products in mid- to late
1998. Among these were Ranir DCP, Breath Asure, Heritage Consumer Products'
AcuTrim(R) gum and Pharmagreen Ltd. Sales in the prior year largely reflect
sales of Cigarest's smoking cessation gum, Herbalife's diet and energy gums,
Aspergum(R) and Chooz(R) and initial deliveries of Breath Asure Dental Gum(TM).
Although sales to our five principal gum customers have contributed
significantly to our growth in sales over the past two years, we do not
anticipate additional growth in sales to these customers in the coming year, and
sales to these customers may in fact decline. We expect that any future growth
in our chewing gum operations will result primarily from the addition of new
contract relationships with new partners, including the recently announced
relationship with Swedish Match. We cannot assure you, however, that we will be
able to attract any new partners, or that any joint venture with any new
partners will ultimately prove successful.
COST OF SALES. Cost of sales increased to approximately $4.8 million, or
approximately $450,000 above the prior year, due to the higher level of sales.
GROSS PROFIT. Gross profit increased to $1.1 million reflecting both the
higher level of sales and improvement in our manufacturing processes.
OPERATING EXPENSES. Operating expenses declined by approximately $3.9
million from the 1998 level to $2.3 million in 1999. The amount for 1998
includes unusual one-time charges of $1,478,750 to reflect the cost of an
extension of options to a former officer, $732,000 for options granted to
another individual, and $618,230 representing a severance compensation expense.
Exclusive of these charges, operating expenses in 1998 were $3,335,042, or
approximately $1.06 million greater than the 1999 level. The reduction in normal
recurring operating expenses in 1999 was principally due to a reduction in
advertising, trade show and travel expense of $522,000 due to the change in
corporate strategy in 1998, lower legal expenses of $157,000 due to costs
associated with the management restructuring in early 1998, and the allocation
of administrative and warehousing expenses to Gel Tech LLC of $167,000 in 1999.
10
INTEREST AND OTHER INCOME. Interest and other income decreased due to a
lower cash balance.
INTEREST EXPENSE. Interest expense increased from 1998 by $837,981 to
approximately $1.3 million primarily due to interest charges associated with the
Citadel financing in June 1999. Included in these amounts were a number of
non-cash interest charges associated with this financing. This financing,
together with the Company's outstanding term loan facility, were redeemed in
full in the first quarter of 2000, which we anticipate will virtually eliminate
interest expense in subsequent quarters.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Net
loss decreased by approximately $3.4 million primarily due to the substantial
decrease in operating expenses offset in part by higher interest expense.
Despite the anticipated reduction in interest charges, gum operations will
continue to record a net loss in the future until sales of gum products
increase.
ZICAM OPERATIONS
Zicam sales and operations began January 1, 1999. As a result, the
financial results for Zicam operations cannot be compared to the prior period.
For the year ended December 31, 1999, Zicam operations recorded net sales
of approximately $9.6 million. The bulk of Zicam sales occurred late in the
fourth quarter of 1999 after widespread national publicity in November 1999
resulted in unexpectedly high demand for this new product. Initially, production
of Zicam could not be increased sufficiently to meet this high level of demand.
Consequently, deliveries of Zicam were delayed. Due to the highly seasonal
nature of cold remedies such as Zicam and a relatively short cold season, these
delays limited our ability to realize the full potential of Zicam sales for the
1999-2000 cold season.
Gross profit on Zicam for the 12 months ended December 31, 1999 was
approximately $7.1 million, or 74% of net sales. Operating expenses of $3.4
million were recorded for this period, of which approximately $2.25 million was
spent, or accrued for advertising, sales commissions, public relations and other
sales expenses. Research and development expenses of $241,892 for this period
largely reflect the cost of on-going clinical work associated with Zicam.
Interest and other income largely reflects interest income associated with
invested cash. Gel Tech did not have any debt outstanding during this period and
consequently did not record any interest expense.
11
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
The following table presents certain statement of operations information
expressed in dollars and as a percentage of net sales for the periods indicated:
Years Ended December 31
------------------------------------------
1998 1997
------------------- -------------------
Net sales $ 5,272,547 100% $ 3,776,562 100%
Cost of sales 4,357,010 83 4,197,777 (111)
----------- ----- ----------- -----
Gross profit 915,537 17 (421,215) (11)
Operating expenses 6,164,022 117 3,881,238 103
Research & development 667,067 12 209,783 5
----------- ----- ----------- -----
Income (Loss) from operations (5,915,552) (112) (4,512,236) (119)
Interest and other income 127,947 2 204,220 5
Interest expense 473,811 9 1,090,618 29
Provision (benefit)
for income taxes -- -- -- --
----------- ----- ----------- -----
Net income (loss) $(6,261,416) (119)% $(5,398,634) (143)%
=========== ===== =========== =====
NET SALES. Net sales for 1998 were $5.27 million, approximately 40% above
the 1997 level. Sales in 1998 reflect the change in the Company's strategy early
in the year to a focus on contract manufacturing whereas sales in 1997 largely
reflect sales of Cigarrest, which the Company marketed, and sales of the
Company's own gum products. Sales in 1998 included deliveries of diet and energy
gums to Herbalife in the first half of the year, Aspergum (an analgesic gum),
and Chooz (an antacid gum) in the second quarter, Breath Asure dental gum in the
third quarter, and Ranir/DCP private label dental gum, Accutrim (a diet gum),
seven different gums to Pharma-green and a dental gum to EcoDenT in the fourth
quarter.
COST OF SALES. Cost of sales increased to $4.4 million, approximately
$159,000 above the 1997 level, primarily reflecting the increased level of
sales. In 1997, the Company recorded sales under its barter agreements at a zero
value with a cost of sales of $715,000. Adjusting for this cost, the cost of
sales for 1997 was $3.5 million, or 92% of net sales. The improvement in the
gross profit percentage from 8% in 1997 to 17% in 1998 is due to increased
utilization of plant facilities resulting in lower per unit overhead costs and
the efficiencies realized by producing larger quantities of the same gum. Both
periods were impacted by sizable write-offs of obsolete inventory ($260,000 in
1998 and $350,000 in 1997).
GROSS PROFIT. Gross profit for 1998 increased to $915,537 reflecting the
higher level of sales and increased utilization of plant facilities.
OPERATING EXPENSES. Operating expenses in 1998 were significantly impacted
by one-time charges related to the management restructuring that occurred in
early 1998 and continuing charges attributable to the Company's prior corporate
strategy. These charges resulted from an extension of stock options to a former
officer of the Company ($1.48 million) and an expense to reflect options owed to
another individual ($732,000), both of which were non-cash charges, and
severance compensation to certain corporate officers ($600,000). Excluding these
items, operating expenses were $3.4 million, or $480,000 less than the 1997
level, which is primarily attributable to a decrease in advertising expenses.
RESEARCH & DEVELOPMENT. Research & development expenses increased in 1998
to $667,067 from $209,783 in 1997 due to the introduction of more than 20 new
gum products in 1998, including three that contained over-the-counter drugs.
Research and development expenses include the cost of formulation, process and
ingredient validation, and production scale-up costs of new products as well as
costs of product concepts still under study.
12
INTEREST AND OTHER INCOME. Interest income declined in 1998 from 1997 due
to a decrease in the Company's invested cash position during the year.
INTEREST EXPENSE. Interest expense decreased due to the refinancing and
restructuring of an equipment lease in late 1997 to a term loan and conversion
into common stock of approximately $1.0 million in principal amount of the
Company's convertible debt in the second half of 1998.
NET INCOME (LOSS). The net loss for 1998 was $6.3 million compared to $5.4
million the prior year. Although the results for 1998 were negatively impacted
by some significant one time charges, the Company continued to experience a
sizable loss in 1998 due to insufficient sales to support the Company's overhead
expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, Gum Tech's working capital was approximately $12.5
million compared to $2.2 million at December 31, 1998. During the 12 months
ended December 31, 1999, Gum Tech experienced a decrease in cash used by
operating activities of approximately $3.2 million, versus $3.9 million the
prior year. The decrease in cash for 1999 is largely attributable to the
increase in accounts receivable primarily associated with sales of Zicam in the
fourth quarter ($6.8 million) offset in part by the minority interest in
earnings of consolidated affiliates and a provision for sales returns and
allowances.
Investing activities used $230,000 of cash for the year ended December 31,
1999 compared to $864,000 for the same period in 1998. The 1998 amount reflects
expenditures to expand our gum operations.
Financing activities provided approximately $8.5 million of cash for the
year ended December 31, 1999 compared to $1.7 million in 1998. Approximately
$5.5 million of the 1999 amount reflects net proceeds realized from the Citadel
financing in June 1999. Details of the Citadel financing are contained in our
Current Report on Form 8-K filed on June 9, 1999. Proceeds realized from the
exercise of options and warrants contributed approximately $3.7 million versus
$2.0 million in 1998. Gum Tech issued 249,867 shares of Common Stock to Citadel
Investment Group in 1999 to redeem $2.0 million of Senior Secured Notes and $1.0
million of Series A Preferred Stock and issued an additional 193,447 shares of
Common Stock in early 2000 to redeem the remaining $3.0 million of Citadel debt
and preferred stock.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
our anticipated growth in business and future results of operations. These
forward-looking statements are based on our expectations and are subject to a
number of risks and uncertainties, many of which cannot be predicted or
quantified and are beyond our control. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Factors that could cause actual results to differ
materially from our expectations include less than anticipated demand for our
chewing gum or nasal gel products, such as Zicam, lack of market acceptance for
or uncertainties concerning the efficacy of Zicam, fluctuations in seasonal
demand for Zicam relative to the cold season, difficulties in increasing
production to meet unexpectedly high demand in the short term, a decrease in the
level of reorders from existing customers, financial difficulties encountered by
13
one or more of our principal customers, difficulties in obtaining additional
capital for marketing, research and development, and other expenses, the
possibility of material charges incurred as a result of prior activities,
aggressive pricing and marketing efforts by rival gum manufacturers,
unavailability of third-party material products at reasonable prices, inventory
obsolescence due to shifts in market demand, and material litigation involving
patent and contractual claims, product liabilities and consumer issues. These
potential risks and uncertainties, together with those mentioned below and
elsewhere in this report, could affect our future operating results, financial
condition, and the market price of its common stock.
Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking words such as "believes",
"expects", "may", "should", or "anticipates" or by discussions of trends or
strategy. We may not achieve the future results discussed in these
forward-looking statements.
The following matters constitute cautionary statements identifying
important factors that relate to the forward-looking statements.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS
We began operations in February 1991 and have a limited operating history
upon which potential investors may evaluate our performance. We reported
significant losses for the last four years. Although we earned a profit for the
fourth quarter of 1999, we incurred a loss for the year ended December 31, 1999.
In addition, despite achieving a profit in the fourth quarter of 1999, our
future operations may not be profitable. The likelihood of our success must be
considered relative to the problems, difficulties, complications, and delays
frequently encountered in connection with the development and operation of a new
business, the significant change in strategy in early 1998, and the development
and marketing of Zicam, a relatively new product.
IF ZICAM DOES NOT GAIN MARKET WIDESPREAD ACCEPTANCE, OUR ANTICIPATED SALES AND
RESULTS OF OPERATIONS WILL SUFFER
In 1999, Gel Tech LLC, a joint venture in which we hold a 60% interest in
profits and capital, launched a new homeopathic cold remedy known as Zicam.
Although studies have indicated that Zicam can significantly reduce the duration
and severity of the common cold, there is no guarantee that the product will
achieve widespread acceptance by the market. If any unanticipated problem arises
concerning the efficacy of Zicam or the product fails to achieve widespread
market acceptance for any reason, our prospects for our future operating results
would be adversely affected. In addition, although initial sales of Zicam were
significant, there is no assurance that demand for this product will continue to
grow, especially following the peak of the cold season.
WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS
To the extent Zicam or any other new product we introduce achieves
widespread market acceptance and generates significant demand, we may be unable
to produce and deliver sufficient quantities of the product to meet our
customers' demands on a timely basis. If so, we could lose opportunities to sell
larger quantities of the product and damage relationships with distributors
whose orders could not be timely filled. This problem, if encountered, could be
particularly damaging if we are not able to meet customer demand during the cold
season, when we expect demand for sales of Zicam to peak.
14
UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT COULD DELAY OR HINDER
INTRODUCTION OF NEW PRODUCTS
We may experience unanticipated difficulties in developing new products
that could delay or prevent the introduction of those products. We may be
dependent in the near future upon chewing gum products that are currently being
developed. If we are unable to develop new chewing gum products on a timely
basis, our business, operating results, and financial condition could be
materially adversely affected.
OUR RELIANCE UPON A FEW GUM CUSTOMERS MAY NEGATIVELY IMPACT OUR FINANCIAL
RESULTS
The shift in our chewing gum strategy in early 1998 to a focus on contract
manufacturing has made our chewing gum operations dependent for sales and future
growth on a few customers. These customers include Herbalife, Breath Asure,
Ranir, Heritage Consumer Products and PharmaGreen. While the decision to partner
with these firms relieves us of the direct responsibility to market products, we
become dependent on the financial resources and marketing capabilities of third
parties. Further, we are at risk for their non-payment or late payment for
amounts owed to us. While we intend to add to this portfolio of customers to
reduce the risk of non-performance by any single customer, we have not yet been
successful in that effort.
OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES
The marketing of certain of our chewing gum and nasal gel products,
including Zicam, involves claims that these products assist in weight loss,
promote dental hygiene, and reduce the duration of the common cold, among
others. Under FDA and FTC rules, we are required to obtain scientific data to
support any health claims we make concerning our products. Although we have not
provided nor been requested to provide any scientific data to the FDA in support
of claims regarding our products, we have obtained scientific data for all of
our products. There can be no assurance that the scientific data we have
obtained in support of our claims will be deemed acceptable to the FDA or FTC,
should either agency request any such data in the future. If the FDA or the FTC
requests any supporting information, and we are unable to provide support that
is acceptable to the FDA or the FTC, either agency could force us to stop making
the claims in question or restrict us from selling the affected products.
FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS
We are subject to various federal, state and local laws affecting our
business. Our chewing gum and nasal gel products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or incur substantial costs in
adopting measures to maintain compliance with these regulations.
Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the related product.
15
WE MAY BE UNABLE TO SUCCESSFULLY EXPAND OUR OPERATIONS
We intend to continue expanding our manufacturing and marketing operations.
Expansion will place substantial strains on our management and our operational,
accounting, and information systems. Successful management of growth will
require us to improve our financial controls, operating procedures, and
management information systems, and to train, motivate, and manage our
employees.
In addition, to the extent that actual demand for our products in the
future is less than anticipated, we may incur higher than necessary costs in
preparing for an anticipated growth in sales that does not materialize or
materializes more slowly than expected.
Failure to manage growth effectively would have a material adverse effect
on the results of our operations and our ability to execute our business
strategy.
WE MAY BE UNABLE TO PREVENT OTHERS FROM DEVELOPING SIMILAR PRODUCTS
We routinely seek trademark and patent protection from the United States
Patent Office and from similar agencies in foreign countries for chewing gum
brands and have done so for Zicam. There can be no assurance that we will be
able to successfully defend any trademarks, trade names or patents against
claims from or use by competitors or that trademark, trade name or patent
applications will be approved by the USPO or any similar foreign agency.
We consider some of our chewing gum formulations and processes to be
proprietary in nature and rely upon a combination of non-disclosure agreements,
other contractual restrictions and trade secrecy laws to protect such
proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of our proprietary information or that our
competitors will not independently develop chewing gum formulations and
processes that are substantially equivalent or superior to our own.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK
Sales of substantial amounts of common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price for the common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act.
Therefore, all of these shares may be immediately sold by the holders. A
substantial increase in the volume of trading in our stock may depress the price
of our common stock.
THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE
The market price of our common stock has been highly volatile and may
continue to be volatile in the future. Factors such as our operating results or
public announcements may cause the market price of our stock to decline quickly.
Market prices for securities of many small capitalization companies have
experienced wide fluctuations in response to variations in quarterly operating
results, general economic indicators and other factors beyond our control.
WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and Consolidated Financial Statements of
Gum Tech, including the Notes to those statements, are set forth on pages F-1
through F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Gum Tech has had no disagreements with its independent accountants in
regard to accounting and financial disclosure and has not changed its
independent accountants during the two most recent fiscal years.
PART III
ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to Directors,
nominees to the Board of Directors, and executive officers of the Company.
Name Age Position With Company and Tenure
---- --- --------------------------------
Gary S. Kehoe 41 President since 1998 and Chief Operating Officer
and Director since 1995
W. Brown Russell, III 44 Chairman of the Board of Directors since 1999,
Director of Investor Relations and Legal and
Director since 1998
William D. Boone 52 Director since 1998
William A. Yuan 39 Director since 1998
William J. Hemelt 46 Secretary, Treasurer, and Chief Financial Officer
since 1998 (Principal Financial Officer)
Gary S. Kehoe joined Gum Tech in 1995 as Chief Operating Officer and a
Director. He was responsible for construction and start-up of our manufacturing
facility and research and development of gum products. In February 1998, the
Board of Directors elected Mr. Kehoe as our President. Prior to joining Gum
Tech, Mr. Kehoe was employed by Planters/LifeSavers, a division of Nabisco Food
Group, in various capacities, including Senior Food Technologist, where he was
responsible for functional and nutriceutical products in the confectionery
division. He developed or co-developed several new technologies, processes, and
products involving CareFree, Bubble Yum, Fruit Stripe, and Beech Nut chewing
gums and is listed as inventor or co-inventor on 22 U.S. patents filed by
Nabisco and Gum Tech.
17
W. Brown Russell, III was elected to the Board of Directors in February
1998 and appointed as Chairman of the Board in August 1999. He joined Gum Tech
as a Special Advisor to the President in February 1998 before assuming his
current position as Director of Investor Relations and Legal. Before joining Gum
Tech, Mr. Russell operated Brown Russell Investment Services, Inc., a private
money management firm. From 1987 to 1994, Mr. Russell was the President of
Capital Investment Properties, a real estate and property management firm based
in Athens, Georgia. During this time, Mr. Russell was also a partner in the law
firm of Russell & Russell. Mr. Russell earned a Juris Doctorate and Bachelor of
Arts from the University of Georgia.
William D. Boone was elected to the Board of Directors in February 1998,
and served as a manufacturing consultant to Gum Tech in early 1998. Mr. Boone
has 30 years experience in small business management and sales growth, including
co-founding and co-managing Trade Printers, Inc., a Phoenix-based wholesale
printing manufacturer, which he subsequently sold.
William A. Yuan has been a Director since 1998. Mr. Yuan is President and
Chief Executive Officer of Reliance Management, LLC. From 1985 until 1996, Mr.
Yuan was employed by Merrill Lynch and Salomon Smith Barney in various
positions. Mr. Yuan earned a Bachelor of Science in Economics from Cornell
University.
William J. Hemelt joined us in June 1998 as our Chief Financial Officer,
Treasurer, and Secretary. From 1980 to 1997, Mr. Hemelt held a variety of
financial positions with Arizona Public Service Company, Arizona's largest
utility, including 6 years as Treasurer and 4 years as Controller. Mr. Hemelt
earned a Master of Business Administration and a Bachelor of Science in
Electrical Engineering from Lehigh University.
Bruce A. Jorgenson, M.D., resigned from the Board of Directors effective
February 17, 2000. We intend to add at least one additional board member in the
future.
All Directors terms are on an annual basis.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1999, our Board of Directors held
7 meetings, either in person or by consent resolution. All Directors attended or
participated in at least 75% of those meetings and the total number of meetings
held by all committees of the Board on which they served.
AUDIT COMMITTEE
In 1998, our Board of Directors elected Dr. Bruce A. Jorgenson, William
Boone, William A. Yuan, and W. Brown Russell to the Audit Committee. The
functions of the Audit Committee are to receive reports with respect to loss
contingencies, the public disclosure or financial statement notation of which
may be legally required; annually review and examine those matters that relate
to a financial and performance audit of our employee plans; recommend to our
Board of Directors the selection, retention, and termination of our independent
accountants; review the professional services, proposed fees and independence of
such accountants; and provide for the periodic review and examination of
management performance in selected aspects of corporate responsibility. The
Audit Committee did not meet in 1999.
COMPENSATION COMMITTEE
In 1998 our Board of Directors elected Dr. Bruce A. Jorgenson and William
Boone to the Compensation Committee. The functions of the Compensation Committee
are to review annually the performance of the President and of the other
principal officers whose compensation is subject to the review and
18
recommendation by the Compensation Committee to our Board of Directors.
Additionally, the Compensation Committee is to review compensation of outside
directors for service on our Board of Directors and for service on committees of
our Board of Directors, and to review the level and extent of applicable
benefits provided by us with respect to automobiles, travel, insurance, health
and medical coverage, stock options and other stock plans and benefits. The
Compensation Committee held two meetings during fiscal 1999.
DIRECTOR COMPENSATION
The Company's nonemployee Directors receive reimbursement for out-of-pocket
expenses incurred in attending Board of Directors" meetings and have been
granted stock options under the Company's 1995 Stock Option Plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Gum Tech's officers and directors, and persons who own more than ten
percent of a registered class of Gum Tech's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). These officers, directors and shareholders are required by
SEC regulation to furnish Gum Tech with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms were
required for such persons, Gum Tech believes that during the fiscal year ended
December 31, 1999, all filing requirements applicable to its officers,
directors, and greater than ten percent beneficial owners were complied with
except as set forth below.
Messrs. Russell, Kehoe, Jorgenson, Boone, and Yuan reported the October
1999 grant of options to each of them on a Form 5 filing in February 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses, for the years ended December 31, 1997, 1998,
and 1999, certain compensation paid to the Company's Chief Executive Officer,
and to each other executive officer whose total compensation in 1999 exceeded
$100,000. No other executive officer of the Company at December 31, 1999 earned
more than $100,000 in annual compensation during the fiscal year ended December
31, 1999.
19
SUMMARY COMPENSATION TABLE
Long Term Compensation
-----------------------
Annual Compensation Awards Payouts
----------------------------------- ----------------------- -------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Award(s) Options/SARS Payouts Compensation(1)
- -------- ---- -------- -------- ------------ -------- ------------ ------- ---------------
Gary S. Kehoe 1999 $132,292 $ 50,000 0 0 80,000 0 $ 3,965
President, Chief 1998 $ 95,000 $ 30,000(2) 0 0 188,000(3) 0 $ 2,847
Operating Officer 1997 $ 84,333 $ 20,000(4) 0 0 88,000(5) 0 $ 880
William J. Hemelt 1999 $100,000 $ 0 0 0 24,000 0 $ 3,000
Chief Financial 1998 $ 58,333 $ 0 0 0 50,000 0 $ 1,750
Officer, Treasurer
and Secretary
W. Brown Russell 1999 $ 96,667 $ 0 0 0 60,000 0 $ 2,821
Chairman of the Board 1998 $ 44,000 $ 0 0 0 70,000 0 $ 0
and Director of Legal
and Investor Relations
(1) Includes matching contributions under our SRA/IRA defined contribution
program.
(2) Includes $10,000 that was accrued in 1998 but paid in 1999.
(3) Represents options originally granted in prior years that were repriced in
1998. (See footnote 5 below). In accordance with SEC rules, these options
are reported as options granted during the fiscal year 1998 as a result of
the repricing of these options in April 1998.
(4) Includes $10,000 that was accrued in 1997 but paid in 1998.
(5) Each option was repriced to $5.625 per share in April 1998, equal to the
fair market value on the date of repricing.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants during the
year ended December 31, 1999 to the named executive officers:
Number of Percent of
Securities Total Options/ Exercise
Underlying Sars Granted Price Grant Date
Options/sars to Employees in (Per Expiration Present
Name Granted Fiscal Year (1) Share) Date Value(1)
---- ------- --------------- ------ ---- --------
Gary S. Kehoe 70,000(2) 15% $11.7500 08/10/2002 $384,090
10,000(3) 2% $12.5625 10/07/2002 $ 58,680
William J. Hemelt 24,000(4) 5% $11.7500 08/10/2004 $131,688
W. Brown Russell 50,000(5) 11% $11.7500 08/10/2002 $274,350
10,000(3) 2% $12.5625 10/07/2002 $ 58,680
(1) The grant date present values per option share were derived using the
Black-Scholes option pricing model in accordance with SEC rules and
regulations and are not intended to forecast future appreciation of our
stock price. The options granted on August 10, 1999 had a grant date
20
present value of $5.487 per option and the options granted on October 7,
1999 had a grant date present value of $5.868 per option. The Black-Scholes
model was used with the following assumptions: volatility of 63.1% based on
a historical weekly average; dividend yield of 0%; risk-free interest of
5.90% based on a U.S. Treasury rate of three years; and a three year option
life.
(2) 30,000 vested upon the completion of the second clinical test of Zicam
efficacy, 20,000 vest upon completion of a major dental gum contract, as
determined by the Compensation committee of the Board and 20,000 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board
(3) 5,000 vested upon the completion of the second clinical test of Zicam
efficacy, 2,500 vest upon completion of a major dental gum contract, as
determined by the Compensation commmittee of the Board and 2,500 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board.
(4) 12,000 vested upon the completion of the second clinical test of Zicam
efficacy, 4,000 vest on each of August 10, 2000, August 10, 2001 and August
10, 2002.
(5) 30,000 vested upon the completion of the second clinical test of Zicam
efficacy, 10,000 vest upon completion of a major dental gum contract, as
determined by the Compensation committee of the Board and 10,000 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
The following table provides information on the value realized by the
exercise of options by the named executive officers during 1999 and the value of
the named executive officer's unexercised options at December 31, 1999.
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/sars At In-the-money Options/
Acquired Fiscal Year-end Sars At Fiscal Year-end
On Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
Gary S. Kehoe 100,000 $1,191,250 88,000 80,000 $913,000 $331,875
William J. Hemelt 18,000 $ 218,812 7,000 49,000 $ 73,500 $364,500
W. Brown Russell 10,000 $ 111,250 60,000 60,000 $597,400 $246,875
Gum Tech has entered into employment agreements with Messrs. Kehoe and
Hemelt. Mr. Kehoe's agreement, which was originally signed on June 1, 1995,
expires on December 31, 2000. Mr. Kehoe's salary has been increased by the Board
to an annual rate of $150,000, which is above the level required in the contract
to reflect the additional responsibilities Mr. Kehoe has assumed as President of
Gum Tech. The contract agreement provides a bonus payment structure that is
related to annual sales levels of new gums developed by Mr. Kehoe. Mr. Hemelt's
agreement, which expires at the end of May 31, 2000, provides for an annual
salary of $100,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of March 15, 2000, with
respect to the number of shares of GumTech's Common Stock beneficially owned by
the named executive officers, by individual directors, by all directors and
officers as a group, and by persons known by Gum Tech to own more than 5% its
outstanding Common Stock. The address of all persons (unless otherwise noted in
the footnotes below) is in care of Gum Tech at 246 E. Watkins Street, Phoenix,
Arizona 85004. The indicated percentages are based upon the number of shares of
Common Stock outstanding as of March 15, 2000, plus, where applicable, the
number of shares that the indicated person or group had a right to acquire
within 60 days of that date.
21
Percent of
Name of Beneficial Number of Common Stock
Owner and Address Shares Owned
----------------- ------ -----
Gary S. Kehoe(1) 269,400 3.0%
William D. Boone(2) 80,200 0.9%
William A. Yuan(3) 20,071 0.2%
W. Brown Russell, III(4) 133,500 1.5%
William J. Hemelt (5) 40,000 0.5%
All directors and 543,171 5.9%
officers as a group
(5 persons)
- ----------
(1) Includes options to purchase 88,000 shares at $5.625 per share, 70,000
shares at $11.75 per share and 10,000 shares at $12.5625 per share.
(2) Includes options to purchase 50,000 shares at $5.625 per share, 20,000
shares at $6.88 and 10,000 shares at $12.5625 per share.
(3) Includes options to purchase 10,000 shares at $5.81 per share and 10,000
shares at $12.5625 per share.
(4) Includes options to purchase 20,000 shares at $6.88 per share, 40,000
shares at $5.625 per share, 50,000 shares at $11.75 per share and 10,000
shares at $12.5625.
(5) Includes options to purchase 4,000 shares at $5.50 per share and 12,000
shares at $11.75 per share..
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit No. Title
----------- -----
3.01 Certificate of Incorporation and Amendments thereto of the
Registrant(1)
3.02 Bylaws of the Registrant(1)
10.01 1995 Stock Option Plan(1)
10.02 Amendment to Stock Option Plan(1)
10.03 Employment Contract with Gary S. Kehoe(1)
10.04 Employment Contract with William J. Hemelt(2)
22
10.05 Lease Agreement - Phoenix, Arizona manufacturing facility(1)
10.06 Lease Agreement between Gum Tech and Beardsley & 1-17
L.L.C., for the lease of packaging/warehouse facility(3)
10.07 Form of Convertible Note Dated February 20, 1997(4)
10.09 Registration Rights Agreement(4)
10.10 Installment Loan with Textron Financial Corporation(3)
10.11 Form of Manufacturing Agreement(5)
10.12 Operating Agreement of Gel Tech, L.L.C.(6)
10.13 Securities Purchase Agreement with Citadel Investment
Group(7)
10.14 Credit Agreement between Gel Tech LLC and Imperial Bank
23 Consent of Angell & Deering
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.
(2) Incorporated by reference to the Registrant's Report on Form 10-QSB for the
quarter ending September 30, 1998, file number 000-27646.
(3) Incorporated by reference to the Registrant's Report on Form 10-KSB for the
year ending December 31, 1997, file number 000-27646.
(4) Incorporated by reference to the Registrant's Form 8-K filed March 6, 1997.
(5) Incorporated by reference to the Registrant's Form 10-KSB filed March 31,
1999.
(6) Incorporated by reference to the Registrant's Report on Form 10-QSB for the
quarter ending March 31, 1999, file number 000-27646.
(7) Incorporated by reference to the Registrant's Form 8-K filed June 9, 1999.
REPORTS ON FORM 8-K
Gum Tech filed a report on Form 8-K on November 8, 1999 announcing the
withdrawal from publication by the American Journal of Infection Control of the
manuscript "The effects of direct application of ionic zinc nasal spray gel on
the duration of the common cold."
23
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, in Phoenix, Arizona, on March 30, 2000.
GUM TECH INTERNATIONAL, INC.
By: /s/ Gary S. Kehoe
-------------------------------------
Gary S. Kehoe
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dated indicated.
Signature Title Date
- --------- ----- ----
/s/ W. Brown Russell, III Chairman of the Board of March 30, 2000
- ------------------------- Directors, Director of
W. Brown Russell, III Legal and Investor Relations
/s/ William D. Boone Director March 30, 2000
- -------------------------
William D. Boone
/s/ William J. Hemelt Secretary, Chief Financial March 30, 2000
- ------------------------- Officer (Principal Financial
William J. Hemelt Officer), Principal Accounting
Officer
/s/ William A. Yuan Director March 30, 2000
- -------------------------
William A. Yuan
24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31,
1999 and 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 1998
and 1997 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 F-7
Notes To Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Gum Tech International, Inc.
We have audited the accompanying consolidated balance sheets of Gum Tech
International, Inc. and Subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1999, 1998 and 1997. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc.
and Subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 5, 2000
F-2
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
Current Assets:
Cash and cash equivalents $ 5,595,075 $ 517,852
Restricted cash 270,878 20,149
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $50,482 and $35,000 8,197,180 1,462,639
Employees 56,237 --
Inventories 1,966,819 1,896,161
Prepaid expenses 155,281 60,851
------------ ------------
Total Current Assets 16,241,470 3,957,652
------------ ------------
Property and Equipment, at cost:
Machinery and equipment 4,455,694 4,272,746
Office furniture and equipment 295,577 238,371
Leasehold improvements 383,854 332,452
------------ ------------
5,135,125 4,843,569
Less accumulated depreciation (1,724,276) (1,295,342)
------------ ------------
Net Property and Equipment 3,410,849 3,548,227
------------ ------------
Other Assets:
Deposits 214,936 279,131
Intangible assets, net of accumulated
amortization of $548,744 and $156,526 160,659 114,855
------------ ------------
Total Other Assets 375,595 393,986
------------ ------------
Total Assets $ 20,027,914 $ 7,899,865
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 2,078,358 $ 1,309,067
Accrued interest -- 42,449
Customer deposits 10,500 34,763
Sales returns and allowances 1,202,100 35,000
Current portion of long-term debt 420,043 381,280
------------ ------------
Total Current Liabilities 3,711,001 1,802,559
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other 2,646,897 2,736,525
Obligations under capital leases 14,105 24,256
Less current portion above (420,043) (381,280)
------------ ------------
Total Long-Term Debt 2,240,959 2,379,501
------------ ------------
Minority interest in consolidated affiliate 1,374,117 --
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares
authorized:
Series A preferred stock, $1,000 stated value,
2,000 shares authorized, 1,000 shares issued
and outstanding 1,000,000 --
Common stock: no par value, 20,000,000 shares
authorized, 8,320,705 and 6,857,999 shares
issued and outstanding 23,687,579 15,145,037
Additional paid in capital 3,551,766 2,915,152
Accumulated deficit (15,537,508) (14,342,384)
------------ ------------
Total Stockholders' Equity 12,701,837 3,717,805
------------ ------------
Total Liabilities and Stockholders' Equity $ 20,027,914 $ 7,899,865
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
Net sales $ 15,500,024 $ 5,272,547 $ 3,776,562
Cost of sales 7,341,362 4,357,010 4,197,777
------------ ------------ ------------
Gross Profit 8,158,662 915,537 (421,215)
Operating expenses 5,705,490 6,164,022 3,881,238
Research and development 664,448 667,067 209,783
------------ ------------ ------------
Income (Loss) From Operations 1,788,724 (5,915,552) (4,512,236)
------------ ------------ ------------
Other Income (Expense):
Interest and other income 123,564 127,947 204,220
Interest expense (1,311,792) (473,811) (1,090,618)
------------ ------------ ------------
Total Other Income (Expense) (1,188,228) (345,864) (886,398)
------------ ------------ ------------
Income (Loss) Before Provision For
Income Taxes and Minority Interest 600,496 (6,261,416) (5,398,634)
Provision for income taxes -- -- --
Minority interest in earnings of
consolidated affiliate 1,374,117 -- --
------------ ------------ ------------
Net Income (Loss) (773,621) (6,261,416) (5,398,634)
Preferred stock dividends 238,466 -- --
------------ ------------ ------------
Net Income (Loss) Applicable to
Common Shareholders $ (1,012,087) $ (6,261,416) $ (5,398,634)
============ ============ ============
Net Income (Loss) Per Share of Common Stock:
Basic $ (.14) $ (.97) $ (1.02)
Diluted $ (.14) $ (.97) $ (1.02)
Weighted Average Number of Common Shares
Outstanding:
Basic 7,412,959 6,427,815 5,294,099
Diluted 7,412,959 6,427,815 5,294,099
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Series A
Preferred Stock Common Stock Additional
--------------------------- --------------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 -- $ -- 4,948,740 $ 7,965,060 $ -- $ (2,682,334)
Issuance of common stock upon
exercise of stock options and
warrants (net of costs of $188,678) -- -- 907,720 4,123,090 -- --
Beneficial conversion feature
of convertible notes -- -- -- -- 665,790 --
Net loss -- -- -- -- -- (5,398,634)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 -- -- 5,856,460 12,088,150 665,790 (8,080,968)
Issuance of common stock upon
exercise of stock options and
warrants -- -- 785,962 2,032,897 -- --
Conversion of convertible notes
payable into common stock -- -- 215,577 1,023,990 -- --
Compensation from extension and
issuance of stock options -- -- -- -- 2,249,362 --
Net loss -- -- -- -- -- (6,261,416)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 -- -- 6,857,999 15,145,037 2,915,152 (14,342,384)
Issuance of common stock upon
exercise of stock options and
warrants -- -- 890,800 3,672,044 -- --
Conversion of convertible notes
payable into common stock -- -- 317,046 1,505,972 -- --
Issuance of Series A preferred
stock (net of costs of $519,011) 2,000 2,000,000 -- -- (519,011) --
Issuance of common stock for
repayment of senior notes,
including prepayment penalty -- -- 163,704 2,200,000 -- --
Issuance of common stock for
redemption of Series A preferred
stock, including prepayment penalty (1,000) (1,000,000) 86,163 1,100,000 -- --
Issuance of common stock for payment
of interest on senior notes -- -- 4,993 64,526 -- --
Compensation from issuance of
stock options -- -- -- -- 64,275 --
Issuance of warrants in connection
with financing -- -- -- -- 1,091,350 --
Payment of Series A preferred stock
dividends -- -- -- -- -- (238,466)
Dividend distribution of subsidiary -- -- -- -- -- (183,037)
Net loss -- -- -- -- -- (773,621)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 1,000 $ 1,000,000 8,320,705 $ 23,687,579 $ 3,551,766 $(15,537,508)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $ (773,621) $(6,261,416) $(5,398,634)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation 430,223 304,277 551,404
Amortization 392,218 108,816 47,710
Amortization of discount on notes payable 387,500 -- --
Provision for bad debts 45,000 34,613 94,500
(Gain) loss on disposal of assets 1,544 (2,699) 10,633
Interest expense from beneficial conversion feature
of notes payable -- -- 665,790
Compensation from forgiveness of note receivable -- 114,012 --
Compensation from extension and issuance of stock options 64,275 2,249,362 --
Common stock issued for payment of interest 264,526 -- --
Minority interest in earnings of consolidated affiliate 1,374,117 -- --
Changes in assets and liabilities:
Accounts receivable (6,779,541) (415,018) (648,527)
Employee receivables (56,237) 61,054 (61,054)
Inventories (70,658) (862,779) 333,562
Income tax receivable -- -- 234,440
Prepaid expenses and other (345,159) 92,254 (55,106)
Interest receivable -- 60,164 (60,164)
Deposits and other -- 7,291 128,602
Accounts payable and accrued expenses 726,842 551,058 470,600
Customer deposits (24,263) 19,763 (50,500)
Sales returns and allowances 1,167,100 35,000 --
----------- ----------- -----------
Net Cash (Used) By Operating Activities (3,196,134) (3,904,248) (3,736,744)
----------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (294,389) (990,557) (134,083)
Proceeds from disposal of equipment -- 16,122 6,363
Receipt of principal on notes receivable -- 250,000 177,653
Deposits and other 64,195 (139,358) (10,598)
----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities (230,194) (863,793) 39,335
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 4,000,000 -- 2,530,000
Principal payments on notes payable (381,307) (343,184) (204,871)
Issuance of common stock 3,672,054 2,032,897 4,311,768
Issuance of preferred stock 2,000,000 -- --
Offering costs incurred (155,231) -- (188,678)
Debt issuance costs incurred (310,462) (11,733) (259,648)
Dividend distribution of subsidiary (183,037) -- --
Dividends paid on preferred stock (138,466) -- --
----------- ----------- -----------
Net Cash Provided By Financing Activities 8,503,551 1,677,980 6,188,571
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 5,077,223 (3,090,061) 2,491,162
Cash and Cash Equivalents at Beginning of Year 517,852 3,607,913 1,116,751
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 5,595,075 $ 517,852 $ 3,607,913
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 509,997 $ 392,693 $ 306,972
Income taxes 150 150 150
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Conversion of account receivable to a note receivable $ -- $ -- $ 225,665
Note payable incurred for purchase of equipment under a capital
lease -- -- 1,564,457
Conversion of convertible notes payable into common stock 1,505,972 1,023,990 --
Issuance of warrants in connection with financing 1,091,340 -- --
Issuance of common stock to repay senior notes and redeem
preferred stock 3,000,000 -- --
Issuance of common stock for payment of dividends 100,000 -- --
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Gum Tech International, Inc. (the "Company") was incorporated in Utah on
February 4, 1991 to develop, market and distribute specialty chewing gum
products for branded and private label customers, as well as products
marketed under the Company's brand. The Company currently targets four
market segments: oral care, smoking cessation, dietary supplement, and
over-the-counter (OTC) drug.
The Company also is developing, marketing and selling homeopathic remedies
utilizing a nasal gel technology through a majority owned subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, Gel Tech, L.L.C. All significant
intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out pricing method.
PROPERTY AND EQUIPMENT
Depreciation of the primary asset classifications is calculated based on
the following estimated useful lives using the straight-line method.
Classification Useful Life in Years
-------------- --------------------
Machinery and equipment 5-30
Office furniture and equipment 5
Leasehold improvements 10
Depreciation of property and equipment charged to operations is $430,223,
$304,277 and $551,404 for the years ended December 31, 1999, 1998 and 1997,
respectively.
INTANGIBLE ASSETS
Debt issuance costs are being amortized using the straight-line method over
the term of the notes.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer, net of an allowance for sales returns.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation". The Company will continue
to measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". See Note 7 for pro forma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by SFAS No. 123 had been applied in measuring
compensation expense.
F-8
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
reviews for the impairment of long-lived assets and certain identifiable
intangibles, whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss would
be recognized when the estimated future cash flows is less than the
carrying amount of the assets. No impairment losses have been identified by
the Company.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities using enacted
tax laws and rates for the years when the differences are expected to
reverse.
ADVERTISING
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production
costs, as incurred. Advertising expense was $1,343,492, $421,363 and
$1,140,386 for the years ended December 31, 1999, 1998 and 1997,
respectively.
BARTER CREDITS
The Company records sales under barter transactions at the carrying value
of the inventory after reducing the inventory to its net realizable value
for any impairment. At the time barter credits are utilized by the Company
for advertising, packaging, travel expenses and other purchases an expense
is recognized based on the carrying value of the barter credits plus cash
paid. The Company recorded the sales under its barter transactions in 1996
and 1997 at a zero value and, therefore, when the barter credits are used
by the Company it will recognize an expense only for the cash expended for
the items purchased.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
The Company adopted SFAS No. 128, "Earnings Per Share", which specifies the
method of computation, presentation and disclosure for earnings per share.
SFAS No. 128 requires the presentation of two earnings per share amounts,
basic and diluted.
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the dilutive effect of
outstanding stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had
a net loss in 1999, 1998 and 1997 and the inclusion of stock options and
other incremental shares would be antidilutive. Consequently, options,
warrants and other incremental shares to purchase 1,540,168, 1,554,968 and
2,502,680 shares of common stock at December 31, 1999, 1998 and 1997,
respectively were excluded from the computation of diluted earnings per
share.
F-9
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents.
ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's 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 amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. RESTRICTED CASH
Cash of $270,878 and $20,149 at December 31, 1999 and 1998, respectively,
was held as collateral by a bank for letters of credit issued to the lessor
of the Company's manufacturing and warehouse facilities and to a lender.
3. INVENTORIES
Inventories consists of the following:
1999 1998
---------- ----------
Raw materials and packaging $1,140,713 $1,216,070
Work in process 541,886 731,686
Finished goods 284,220 178,405
Less reserve for obsolescence -- (230,000)
---------- ----------
Total $1,966,819 $1,896,161
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
---------- ----------
FINANCIAL INSTITUTIONS AND OTHER
9.73% installment note due in 2001 with monthly
principal and interest payments of $39,550,
collateralized by machinery and equipment and
a $250,000 letter of credit. $ 859,397 $1,230,525
11% subordinated convertible notes with interest
payable quarterly until January 1, 2000 at which
time the principal and interest is payable in
twenty four equal monthly installments through
January 1, 2002. The notes are convertible into
common stock of the Company at $4.75 per share. -- 1,506,000
F-10
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
OBLIGATIONS UNDER CAPITAL LEASES
9.4% installment notes due in 2001 with monthly
principal and interest payments of $1,000,
collateralized by equipment. $ 14,105 $ 24,256
SENIOR NOTES
8% senior notes due in 2001 with interest payable
quarterly. One half of the notes must be repaid
within one year with a 10% prepayment penalty,
collateralized by substantially all assets of the
Company and the notes may be repaid in shares of
the Company's common stock. Any repayments of
the notes must be accompanied by a redemption of
the Series A preferred stock on a prorata basis
of two thirds notes and one third preferred
stock (Note 6). The notes are subject to
financial covenants regarding net revenue,
EBITDA, and cash balances with all covenants
calculated on the Company's operations excluding
its majority owned subsidiary. The Company was
in default on the EBITDA covenant at December
31, 1999. The Company repaid the entire amount
of the notes in January and February 2000
through the issuance of common stock. 2,000,000 --
Less debt discount (212,500) --
---------- ----------
Net Senior Notes 1,787,500 --
---------- ----------
Total Long-Term Debt 2,661,002 2,760,781
Less current portion of long-term debt (420,043) (381,280)
---------- ----------
Long-Term Debt $2,240,959 $2,379,501
========== ==========
Installments due on debt principal, including the capital leases, at
December 31, 1999 are as follows:
Year Ending
December 31,
------------
2000 $ 420,043
2001 2,453,459
----------
Total $2,873,502
==========
F-11
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The components of the provision for income taxes are as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- -- --
---- ---- ----
Total -- -- --
---- ---- ----
Deferred:
Federal -- -- --
State -- -- --
--- ---- ----
Total -- -- --
---- ---- ----
Total Provision For Income Taxes $ -- $ -- --
==== ==== ====
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate (34)% (34)% (34)%
State income taxes, net of federal benefits (5) (5) (5)
Valuation allowance 39 39 39
---- ---- ----
Total --% --% --%
==== ==== ====
The following is a reconciliation of the provision for income taxes
to income before provision for income taxes computed at the federal
statutory rate of 34%.
1999 1998 1997
----------- ----------- -----------
Income taxes at the federal statutory rate $ (263,031) $(2,128,881) $(1,835,536)
State income taxes, net of federal benefits (38,681) (330,603) (294,204)
Nondeductible expenses 3,836 8,864 20,969
Valuation allowance 297,876 2,450,620 2,108,771
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
Significant components of deferred income taxes as of December 31, 1999 and
1998 are as follows:
Net operating loss carryforward $10,521,400 $ 8,745,000
Reserve for bad debts 10,700 14,700
Reserve for obsolete inventory -- 96,600
----------- -----------
Total deferred tax asset 10,532,100 8,856,300
----------- -----------
Depreciation (496,400) (373,300)
Stock option compensation (3,577,600) (2,338,000)
Other (5,700) --
----------- -----------
F-12
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES (CONTINUED)
Total deferred tax liability (4,079,700) (2,711,300)
Less valuation allowance (6,452,400) (6,145,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
=========== ===========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax assets will
be realized. The valuation allowance of $6,452,400 is maintained on
deferred tax assets which the Company has not determined to be more likely
than not realizable at this time. The net change in the valuation allowance
for deferred tax assets was an increase of $307,400. The Company will
continue to review this valuation on a quarterly basis and make adjustments
as appropriate.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $24,900,000 and $25,600,000, respectively.
Such carryforwards expire in the years 2011 through 2019 and 2001 through
2004 for federal and state purposes, respectively.
6. PREFERRED STOCK
The authorized preferred stock of the Company consists of 1,000,000 shares,
no par value. The preferred stock may be issued in series from time to time
with such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of preferred stock may
differ with respect to such matters as may be determined by the Board of
Directors, including without limitation, the rate of dividends, method and
nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any),
and voting rights. Unless the nature of a particular transaction and
applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.
In June 1999, the Company designated a new class of preferred stock "Series
A Preferred Stock" and the number of shares constituting such series is
2,000 shares with no par value. The new series was authorized in connection
with a Securities Purchase Agreement for the sale of $4,000,000 of senior
notes (Note 4) and $2,000,000 of Series A preferred stock. Each preferred
share shall bear dividends at a rate of 14% per year, which shall be
cumulative, and are payable on a quarterly basis. Upon the second
anniversary of the issuance date (June 2, 2001) each preferred share will
automatically convert into shares of common stock by dividing the stated
value of the preferred shares ($1,000) by 80% of the average of the closing
bid price of the Company's common stock for the 20 days preceding such
date. Until all of the preferred shares have been converted into common
stock or redeemed, the Company may not declare or pay any cash dividends on
its common stock without the written consent of at least two thirds of the
holders of the preferred shares. One half of the preferred shares must be
redeemed within one year with a 10% prepayment penalty. Any redemptions of
the preferred shares must be accompanied by a repayment of the Company's
senior notes on a prorata basis of one third preferred stock and two thirds
senior notes. Any redemptions of the preferred stock prior to June 2, 2001
are based on 95% of the average of the closing bid price of the Company's
common stock for the 20 days prior to the date of redemption.
F-13
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREFERRED STOCK (CONTINUED)
The company may redeem the preferred stock in cash, solely at its option.
The Company redeemed all of the outstanding preferred shares in January and
February 2000 through the issuance of common stock.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN
In March 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of both incentive stock options and non-qualified
options. A total of 2,000,000 shares of common stock have been reserved for
issuance under the Plan.
Options under the Company's plan are issuable only to eligible officers,
directors, key employees and consultants of the Company. The Plan is
administered by a committee selected by the Board of Directors, which
determines those individuals who shall receive options, the time period
during which the options may be exercised, the number of shares of common
stock that may be purchased under each option, and the option price. Unless
sooner terminated, the Plan shall remain in effect until January 1, 2005.
The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plan unless the
option price is at least 110% of the fair market value of the common stock
subject to the option, determined on the date of grant.
All options granted under the Plan provide for the payment of the exercise
price in cash or, with the prior written consent of the Company, by
delivery to the Company of shares of common stock already owned by the
optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
The following table contains information on the stock options under the
Company's Plan for the years ended December 31, 1997, 1998 and 1999. The
outstanding agreements expire from June 2000 to October 2004.
Number of Weighted Average
Shares Exercise Price
---------- ------
Options outstanding at December 31, 1996 1,318,000 $ 4.00
Granted 565,000 9.81
Exercised (184,000) 1.72
Cancelled (15,000) 6.38
---------- ------
Options outstanding at December 31, 1997 1,684,000 6.18
Granted 912,000 5.79
Exercised (600,250) 2.78
Cancelled (1,298,750) 7.65
---------- ------
F-14
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Options outstanding at December 31, 1998 697,000 5.86
Granted 315,000 11.90
Exercised (333,500) 5.62
Cancelled (14,000) 5.63
---------- ------
Options outstanding at December 31, 1999 664,500 $ 8.85
========== ======
On April 24, 1998, the Board of Directors approved a repricing of
substantially all outstanding employee stock options granted under the Plan
with an exercise price of greater than $5.625 per share to $5.625 per
share. The Board of Directors would not typically consider reducing the
exercise price of previously granted options. However, these options were
repriced due to the occurrence of certain events beyond the reasonable
control of the employees of the Company which significantly reduced the
incentive these options were intended to create. The fair market value of
the common stock was $5.625 on the date of the repricing. Options to
purchase approximately 588,000 shares were affected by this repricing.
NON-QUALIFIED STOCK OPTIONS
The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding agreements expire from
June 2000 to January 2004.
The following table contains information on all of the Company's
non-qualified stock options for the years ended December 31, 1997, 1998 and
1999.
Number of Weighted Average
Shares Exercise Price
---------- ------
Options outstanding at December 31, 1996 360,000 $ 1.80
Granted 100,000 4.75
Exercised (180,000) 1.80
Cancelled -- --
---------- ------
Options outstanding at December 31, 1997 280,000 2.85
Granted 25,000 11.44
Exercised (180,000) 1.80
Cancelled -- --
---------- ------
Options outstanding at December 31, 1998 125,000 6.09
Granted 215,000 9.63
Exercised (100,000) 4.75
Cancelled -- --
---------- ------
Options outstanding at December 31, 1999 240,000 $ 9.82
========== ======
PROFORMA DISCLOSURES
The Company adopted SFAS No. 123 during the year ended December 31, 1996.
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based
F-15
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
PROFORMA DISCLOSURES (CONTINUED)
compensation plans other than for options granted to non-employees. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would be reduced to the following pro forma amounts:
1999 1998 1997
----------- ----------- -----------
Net income (loss) applicable to
common shareholders:
As reported $(1,012,087) $(6,261,416) $(5,398,634)
Pro forma $(1,654,447) $(7,299,820) $(5,881,867)
Net income (loss) per share of
common stock:
As reported $ (.14) $ (.97) $ (1.02)
Pro forma $ (.22) $ (1.14) $ (1.11)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.90% 5.45% 5.88%
Expected life 3 years 2 years 2 years
Expected volatility 63.1% 61.82% 63.51%
Expected dividend yield 0% 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock-based compensation plans.
The weighted average fair value price of options granted was $5.56, $1.56
and $3.82 in 1999, 1998 and 1997, respectively.
The following table summarizes information about stock-based compensation
plans outstanding at December 31, 1999:
F-16
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options Outstanding and Exercisable by Price Range as of December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
-------------- ------- ---- ------ -------- ------
$ 5.50 - 6.88 329,500 1.02 $ 5.78 329,500 $ 5.82
$11.44 - 12.56 335,000 3.67 $11.88 143,000 $11.44
-------------- ------- ---- ------ -------- ------
$ 5.50 - 12.56 664,500 2.36 $ 8.85 472,500 $ 6.00
============== ======= ==== ====== ======== ======
COMPENSATION EXPENSE
The Company recorded compensation expense of $64,275, $2,249,362 and $-0-
for the years ended December 31, 1999, 1998 and 1997, respectively for the
value of certain options granted to non-employees of the Company and for
the extension of options previously granted to an Officer and Director of
the Company. The valuation of the options and warrants granted to employees
is based on the difference between the exercise price and the market value
of the stock on the measurement date. The valuation of the options granted
to non-employees is estimated using the Black-Scholes option pricing model.
WARRANTS
1995 BRIDGE LOAN
In 1995, the Company borrowed $1,550,000 from a group of four lenders
("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders. Each warrant is exercisable to purchase one share of the
Company's common stock at $2.00 per share in perpetuity. In 1997, 75,000
warrants were exercised and 390,000 warrants were exercised in 1999.
UNDERWRITER'S WARRANTS
In connection with the Company's Initial Public Offering in 1996 the
Company issued the Underwriter warrants to purchase up to 40,000 units of
the Company's securities for $24.75 per unit. Each warrant is exercisable
to purchase three shares of common stock and one redeemable common stock
purchase warrant which is exercisable to purchase one share of common stock
at $7.50 per share at anytime until April 24, 2001. The Underwriter's
warrant is exercisable at anytime until April 24, 2001.
In 1999, 1998 and 1997, 16,825, 1,428 and 2,830, respectively, of the
Underwriter's warrants were exercised and 18,917 are outstanding as of
December 31, 1999.
F-17
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
MARKETING AND DEVELOPMENT OPTIONS
In 1998, the Company agreed to issue 200,000 stock options to an individual
in consideration for a joint venture opportunity to develop and market
various gum products. The options are exercisable at $9.00 per share at
anytime until October 30, 2000 and all 200,000 options are outstanding at
December 31, 1999.
FINANCING WARRANTS
In connection with the Company's Securities Purchase Agreement for the sale
of senior notes and Series A preferred stock the Company issued warrants to
the lenders. The Company issued a total of 300,000 common stock purchase
warrants. Each warrant is exercisable to purchase one share of the
Company's common stock at $12.44 per share at anytime until June 1, 2002.
All of the warrants are outstanding at December 31, 1999.
The Company also issued a total of 60,000 common stock purchase warrants as
a finders fee in connection with the financing. Each warrant is exercisable
to purchase one share of the Company's common stock, 30,000 at $11.70 per
share through June 1, 2002 and 30,000 at $15.00 per share through June 1,
2004. All of the warrants are outstanding at December 31, 1999.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and packaging facilities, manufacturing and
warehouse facilities and certain equipment under long-term leasing
arrangements. The Company's manufacturing and warehouse facilities lease
contains two three-year renewal options. In addition, the Company's office
and packaging facilities contains a five year renewal option. The following
is a schedule of future minimum lease payments at December 31, 1999 under
the Company's capital leases (together with the present value of minimum
lease payments) and operating leases that have initial or remaining
noncancellable lease terms in excess of one year:
Year Ending Capital
December 31, Leases Facilities Total
------------ ------- ---------- ----------
2000 $12,004 $ 277,950 $ 289,954
2001 3,001 287,310 290,311
2002 -- 303,426 303,426
2003 -- 252,383 252,383
2004 -- 145,188 145,188
Thereafter -- 133,089 133,089
------- ---------- ----------
Total Minimum Lease Payments 15,005 $1,399,346 $1,414,351
========== ==========
Less amount representing interest 900
-------
Present Value of Net
Minimum Lease Payments $14,105
=======
Rental expense charged to operations was $323,173, $193,152 and $187,826
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-18
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Continued)
Leased equipment under capital leases as of December 31, 1999 and 1998 is
as follows:
1999 1998
-------- --------
Equipment $ 47,727 $ 47,727
Less accumulated depreciation (35,795) (26,250)
-------- --------
Net Property and Equipment Under Capital Leases $ 11,932 $ 21,477
======== ========
MINORITY INTEREST
The Company has an option to purchase the 40% minority interest in Gel Tech
at the Company's discretion at any time after January 27, 2001 or the date
on which cumulative sales of Gel Tech's products have exceeded $50,000,000.
If the Company exercises its option, the Company shall issue shares of the
Company's common stock in exchange for the minority interest in Gel Tech.
The fair market value of the shares of the Company's common stock to be
issued shall be equal to the fair market value of the minority interest in
Gel Tech at the time the Company exercises its option.
9. RELATED PARTY TRANSACTIONS
In 1998, two former officers and directors of the Company repaid notes they
owed to the Company of $250,000 plus $48,770 of accrued interest. In
addition, the Company wrote off two notes receivable in the amount of
$145,017 which included $24,344 of accrued interest in connection with the
termination of two former officers of the Company.
10. EMPLOYEE BENEFIT PLAN
Effective September 1, 1997, the Company adopted a Simple Retirement
Account Plan for employees who are not covered by any collective bargaining
agreement. The Company shall make a matching contribution for each employee
in an amount equal to each employees Salary Reduction Contributions for the
Plan year of up to 3% of the employees compensation for the Plan year. The
Company made matching contributions of $28,250, $33,353 and $20,059 for the
years ended December 31, 1999, 1998 and 1997, respectively. Each employee
shall be fully vested at all times in his contribution and the Company's
matching contributions.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality financial
institutions and limits its credit exposure with any one financial
institution. The Company's cash in its banks exceeds the federally insured
limits. The Company provides credit in the normal course of business to
many of the nation's top drug stores, mass merchandisers and health food
chains and major private label companies. The Company's accounts receivable
are due from customers located throughout the United States and various
foreign countries. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral. The
Company obtains letters of credit from many of its foreign customers to
limit its exposure to credit risk on its accounts receivable. The Company
maintains reserves for potential credit losses, and such losses have not
exceeded management's expectations.
Sales to major customers, which comprised 10% or more of net sales, for the
years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
---- ---- ----
Customer A * 23.8% *
Customer B * 38.3% 15.0%
Customer C 10.1% * 10.2%
Customer D * * 15.0%
* Less than 10%
F-19
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures about Fair Value of Financial Instruments for the Company's
financial instruments are presented in the table below. These calculations
are subjective in nature and involve uncertainties and significant matters
of judgment and do not include income tax considerations. Therefore, the
results cannot be determined with precision and cannot be substantiated by
comparison to independent market values and may not be realized in actual
sale or settlement of the instruments. There may be inherent weaknesses in
any calculation technique, and changes in the underlying assumptions used
could significantly affect the results. The following table presents a
summary of the Company's financial instruments as of December 31, 1999 and
1998:
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and cash equivalents $5,595,075 $5,595,075 $ 517,852 $ 517,852
Restricted cash 270,878 270,878 20,149 20,149
Financial Liabilities:
Long-term debt 2,661,002 2,661,002 2,760,781 2,760,781
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of long-term debt,
including the current portion, approximates fair value because of the
market rate of interest on the long-term debt and the interest rate
implicit in the obligations under the capital leases.
13. SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Company's operating segments are organized on the basis of products and
include gum products and nasal gel cold remedies. The gum products include
gum products for private label customers as well as products marketed under
the Company's brand. The nasal gel cold remedies currently consists of a
single product, Zicam(TM). There are no significant intersegment
transactions. The table below contains information utilized by management
to evaluate its operating segments.
F-20
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
1999
------------------------------------------
Gum Products Zicam Consolidated
------------ ------------ ------------
Net sales $ 5,910,221 $ 9,589,803 $ 15,500,024
Income (loss) before provision for
income taxes and minority interest (2,834,797) 3,435,293 600,496
Interest income 73,136 50,428 123,564
Interest expense (1,311,792) -- (1,311,792)
Depreciation 425,484 4,739 430,223
Total assets 10,209,095 9,818,819 20,027,914
The 1997 and 1998 operations consisted of one operating segment, gum
products. Sales and operations of Zicam did not commence until January
1999.
14. JOINT VENTURE AGREEMENT
The Company entered into a letter of intent with Swedish Match AB ("SM") to
form a joint venture. The joint venture will be organized for the purpose
of developing, manufacturing, marketing and distributing nicotine products
The Board of Directors of the joint venture will consist of four members:
two members designated by SM, one of which will act as chairman, and two
members designated by the Company. SM will make a cash commitment of
$10,000,000 to the joint venture of which $3,500,000 will be funded at the
closing of the formation of the joint venture and the remainder will be
funded on an as needed basis and in exchange SM will receive a 51% interest
in the joint venture. The Company will contribute intellectual property
relating to all of its gum products containing nicotine (except chewing gum
products containing leaf tobacco) to the joint venture and will receive a
49% interest in the joint venture.
15. SUBSEQUENT EVENTS
FINANCING ARRANGEMENT
In January 2000, the Company's majority owned subsidiary entered into a
financing agreement (the "Agreement") with a Bank for a $1,000,000 line of
credit with interest at 3% above the prime rate. Advances under the line of
credit are limited to 50% of the eligible accounts receivable plus cash on
deposit with the Bank. The loan is collateralized by accounts receivable,
inventory, property and equipment and intangible assets. The loan also
contains various financial covenants regarding liquidity percentages and
the Company's majority owned subsidiary must maintain a profit on a
quarterly basis.
F-21