SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ______________ to _______________
Commission File No. 0-27646
GUM TECH INTERNATIONAL, INC.
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(Name of Small Business Issuer in its Charter)
Utah 87-0482806
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
246 East Watkins Street
Phoenix, AZ 85004
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 277-0606
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
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(Title of Class)
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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
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As of March 24, 1998, 5,856,460 shares of the Registrant's no par value
Common Stock were outstanding. As of March 24, 1998, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$31,372,505 based upon a closing bid price of $5.688 per share of Common Stock
on the NASDAQ National Market.
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-KSB or any amendment to
this Form 10-KSB. X
The Registrant's revenues for its year ended December 31, 1997 were
$3,776,562.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: Portions of the Registrant's Definitive Proxy Statement for
its forthcoming annual meeting of shareholders are incorporated herein by
reference.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products under its own brand names and on a private label
basis for other chewing gum marketers. The Company's current chewing gum
products contain ingredients which it claims (i) reduces tobacco cravings (under
the "CigArrest" brand name which is licensed to Bancroft Pharmaceuticals), (ii)
may reduce the risk of osteoporosis (under the "Calcium Gum" brand name), (iii)
contribute to energy and endurance (under the "Ginseng Gum," "Love Gum," "High
Gear" and "Buzz Gum" brand names), (iv) promotes weight management (under the
"ChromaTrim" and "CitrusSlim" brand names), (v) reduces free radicals (under the
"Complete Antioxidant Formula" brand name) and (vi) promotes oral hygiene and
breath freshness (under the "DentaHealth" brand name). The Company also produces
gum under the "Chew and Sooth Zinc" brand name for the cold and flu season.
Sales of CigArrest, Calcium Gum, High Gear, Ginseng Gum and Chew and Sooth Zinc
Gum, commenced in 1997. Sales of Buzz Gum, ChromaTrim, Love Gum, CitrusSlim and
DentaHealth commenced in 1991, 1993, 1994, 1995 and 1996, respectively. The
Complete Antioxidant Formula Gum will be introduced in mid-1998. In 1998 the
Company also plans to include its DentaHealth product in a line with other oral
care products marketed as an OTC anti-plaque oral care regimen.
The Company contracted with others for the manufacture of all its chewing
gum products until February 1996 when it completed leasehold improvements and
began manufacture of chewing gum products in its 28,000 square foot facility in
Phoenix, Arizona. The facility employs 37 workers and produces all of the
Company's chewing gum products. See "Item l - Manufacturing and Packaging."
The Company's business strategy is to: (i) manufacture its own chewing gum
products and the private label chewing gum products of other chewing gum
marketers in greater quantities and at lower costs; (ii) increase revenues by
(a) expanding its marketing efforts for existing chewing gum products, (b)
developing new chewing gum products through its own research and development
facilities, (c) developing further its private label business, and (d) forming
marketing alliances and joint ventures with multinational companies which market
consumer packaged goods; and (iii) expand its distribution and customer base by
adding over-the-counter ("OTC") non-prescription medications, such as antacids,
cough suppressants and pain relievers to its chewing gum products. See "Item 1 -
Strategy."
The Company markets its branded chewing gum products directly and through
wholesale distributors who distribute primarily to drug store and convenience
chains (Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium, Long's, Thrifty,
Payless, Phar-Mor, Eckard and 7-11), mass market chains (Kmart and Pamida),
major supermarket chains (Smith's, Randall's, H.E.Butt, Pathmark and Fry's) and
to various natural foods stores. In addition, the Company sells its branded and
private label gum in a number of international markets, including Europe, Asia
and Canada. The Company also manufactures product for sale to private label
customers who market under their own brand names.
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The Company's chewing gum products are subject to regulation by the United
States Food and Drug Administration ("FDA"). The FDA may conclude that certain
of the Company's chewing gum products are "drugs" under applicable FDA
regulations. Further, if the Company commences marketing of OTC chewing gum
products, such products will be considered "drugs" under such regulations. In
either case, the FDA may restrict or remove any or all of the Company's chewing
gum products from the market if such products violate applicable FDA rules or
regulations.
The Company was incorporated in Utah in February 1991 as a specialty
chewing gum products marketer under the name Nekros International Marketing,
Inc. with office and warehouse facilities located in Ogden, Utah. In November
1994, control of the Company changed and between May 1995 and November 1995, the
Company raised an aggregate of $1,006,000 of equity capital and $2,400,000 of
debt capital. The funds raised in 1995 were used to establish a new management
team, develop additional chewing gum products, build inventories and purchase
chewing gum manufacturing equipment for its 28,000 square foot leased
manufacturing facility in Phoenix, Arizona.
In October 1995, the Company borrowed $1,550,000 from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders, each such warrant exercisable to purchase one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity. The Bridge
Loan bore interest at 8% per annum and was repaid in April 1996 using proceeds
from a public offering in April, 1996, which is further described below. The
Bridge Loan lenders included Brett Bouchy, a former principal stockholder of the
Company, who received 165,000 warrants, and Robert H. Wood, a former director of
the Company, who received 75,000 warrants.
In March 1996, Brett Bouchy sold the 165,000 warrants acquired pursuant to
the Bridge Loan for $5.00 per warrant. 100,000 warrants were sold to Gary S.
Kehoe and 65,000 to Robert H. Wood, both of whom were officers and directors of
the Company. Messrs. Kehoe and Wood paid the purchase price by issuing
promissory notes to Mr. Bouchy bearing interest at 9% per annum. The warrants
were not collateral for the promissory notes. The promissory notes are due the
earlier of (i) six months after the warrants are exercised, or (ii) if during
the period from April 24, 1997 until April 24, 2000 the closing price of the
Company's Common Stock on NASDAQ is $10.00 or more per share for five
consecutive trading days, then the promissory notes are due six months from the
last such trading day. If neither event occurs, the promissory notes become void
and of no value on April 24, 1999 and the warrants remain the property of
Messrs. Kehoe and Wood. Under no circumstances will the warrants become
returnable to Mr. Bouchy. In July, 1997, Mr. Kehoe sold the 100,000 warrants
acquired from Mr. Bouchy to Andrew Lessman for $6.88 per warrant and used the
proceeds to satisfy the promissory note to Mr. Bouchy. Mr. Lessman has not
exercised the warrants.
In December 1995, Dale Holdings, Inc. ("Dale"), a principal shareholder of
the Company owned by Riverlux Trust REG and Mr. Brett Bouchy, dissolved and
transferred 51% and 49%, respectively, of its Common Stock in the Company and
its loans receivable due from the Company to Riverlux Trust REG and Brett
Bouchy. Riverlux Trust REG and Brett Bouchy received 665,265 shares and 639,175
shares, respectively, of Dale's stockholdings in the Company and $433,500 and
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$416,500, respectively, of Dale's loans receivable from the Company. The loans
were repaid out of proceeds of the 1996 Public Offering, which is further
described below. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold
20,000 shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.
Through a private equity placement in January 1996, the Company raised
$3,095,875 to repurchase and retire 619,175 shares of the Company's Common Stock
held by a former principal stockholder.
In April 1996, the Company sold 460,000 Units to the public at $18.00 per
Unit, for gross proceeds of $8,280,000. Each Unit consisted of three shares of
Common Stock and one Common Stock Purchase Warrant (the "Public Warrant") to
purchase an additional share of Common Stock at any time until April 14, 2001 at
$7.50 per share (the "1996 Public Offering"). At the same time, the Company
registered the 619,115 shares which were sold in the January 1996 private
placement. The 1996 Public Offering was underwritten by Kensington Securities,
Inc.
In June of 1997, the Company called for the redemption of all of the Public
Warrants at the redemption price of $.01 per share. Prior to the July 21, 1997
redemption date, in excess of 99% of the Public Warrants were exercised at $7.50
per share.
In March 1997, the Company completed the sale of an aggregate of $2,530,000
of convertible debentures ("Debentures"). The Debentures bear interest at 11%
per annum, mature on January 1, 2002 and are convertible into the Company's
Common Stock at $4.75 per share. The Common Stock issuable under the Debentures
carries certain demand registration rights after July 31, 1997. Common Stock
issuable upon conversion of the Debentures was subject to a lock-up agreement
with the Company through January 31, 1998. Proceeds from the sale of the
Debentures are being used for working capital and other corporate purposes.
Strategy
The Company pursues the following business strategy:
(i) Manufacture its own chewing gum products. The Company will continue to
manufacture its chewing gum products under its own labels and on a private label
basis for other chewing gum marketers. The Company believes that operating its
own manufacturing facility significantly reduces its dependence on third party
manufacturers, assists it in maintaining the secrecy of its proprietary chewing
gum formulas, will reduce its per unit product costs given sufficient volumes,
and increases product capacity for itself and its large volume customers.
(ii) Increase revenues by expanding its marketing efforts for existing
chewing gum products, developing new chewing gum products, further developing
its private label business and forming marketing alliances. The Company will
continue to expand marketing efforts for existing products, both in the United
States and internationally, and to further develop its private label business in
order to manufacture more chewing gum products for other chewing gum marketers.
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The Company will continue to develop new specialty chewing gum products for
itself and its private label customers. Because of the Company's expertise in
formulating chewing gum, the Company has been able to attract private label
customers that are looking for an alternative delivery system to pills and
capsules. The Company also seeks to form marketing alliances and joint venture
arrangements with multinational companies which market consumer packaged goods
to promote and distribute the Company's existing and future gum products.
(iii) Expand its distribution and customer base by adding OTC medications,
such as antacids, cough suppressants, and pain relievers, to its chewing gum
products. The Company has certain OTC chewing gum products in development and
plans to explore the market potential for a number of such products in the
future, given sufficient capital and market acceptance for the products. The
Company believes that OTC chewing gum products may appeal to certain retailers,
such as drug stores and health food stores, and offer the Company the potential
to develop new consumer niche markets. Certain OTC chewing gum products will
require FDA permission prior to their being introduced to market and, in any
event, will be subject to ongoing FDA marketing and manufacturing regulations.
See "FDA and Other Government Regulation."
Marketing
The Company markets its chewing gum products directly and through wholesale
distributors which distribute primarily to drug store and convenience chains
(Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium, Long's, Thrifty, Payless,
Phar-Mor, Eckard and 7-11), mass market chains (Kmart and Pamida), major
supermarket chains (Smith's, Randall's, H.E.Butt, Pathmark and Fry's) and to
various natural foods stores. In addition, the Company sells in a number of
international markets, including Europe, Asia and Canada. The Company also
manufactures product for sale to private label customers who market under their
own brand names, including Herbalife's "Chew Slim," GNC's "Optibolic" and
"Ginseng Gold," Kevis' "BrainGum," NuCare's "Chewtrition,"and GEN's "Creatine
Gum."
The Company manufactures for, and is continually working on research and
development projects with, over 35 private label customers which intend to bring
their products to market. Included in these projects is the Company's
development of certain OTC chewing gum products, including both nicotine and
non-nicotine alternatives in the smoking cessation category. Under private label
arrangements, the Company supplies chewing gum products, including formulas used
by the Company and its customers, labeled with brand names selected by its
private label customers or otherwise includes the private label customer's name
on the gum product packaging. Some of these private label customers include
Nabisco, Herbalife, General Nutrition Centers (GNC), NuCare, Kevis, Pro Health
and Genetic Evolutionary Nutrition (GEN).
The Company intends to continue to expand its marketing efforts by: (i)
retaining personnel to further develop the Company's private label business and
seek other forms of contract manufacturing business; (ii) forming marketing
alliances and joint ventures with multinational companies which market consumer
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packaged goods; (iii) hiring additional sales personnel to obtain and manage new
brokers and distributors; and (iv) developing media advertising materials for
use by the Company and its brokers and distributors. The Company plans to use
its private label business to expand its branded product in 1998.
Manufacturing and Packaging
The Company began manufacturing, packaging and shipping its chewing gum
products from a 28,000 square foot leased manufacturing facility in Phoenix,
Arizona in March 1996, The manufacture of chewing gum products involves: (i)
storing bulk raw materials and "fine" raw materials, such as flavor, colors and
active ingredients; (ii) producing and mixing the gum base in large stainless
steel mixers; (iii) extruding the gum into selected sizes and shapes; (iv)
coating the gum, in the case of chiclet gums, with sugar or sugarless solutions;
and (v) packaging the gum in bottles or blister packages for shipment.
Prior to commencing production of the chewing gum, the Company records lot
numbers for all ingredients, examines and files certificates of ingredients,
performs quality control tests and sanitizes equipment and utensils. It conducts
additional quality control tests throughout the manufacturing process. All
processes are done under strict common good manufacturing procedures requiring
written standard operating procedures.
In December of 1997, the Company refinanced its lease obligation with
Textron Financial Corporation relating to its chewing gum manufacturing
equipment by entering into an installment note in the principal amount of
$1,564,000 payable over a 48 month term. The note bears interest at 9.73% per
annum, is payable at a rate of $39,550 per month, and is secured by the
equipment.
The Company's manufacturing facility produces all of the Company's chewing
gum products and provides the capacity to meet all of the Company's private
label product requirements for the foreseeable future. During 1997, the Company
doubled its coating capacity and in 1998 the Company anticipates doubling its
blister packaging capabilities.
Competition
The distribution and sale of chewing gum products are highly competitive.
The Company currently markets its products in three categories at the retail
level. These categories are OTC drug, dietary supplements and traditional
chewing gums with value added features. The Company's principal OTC competition
is Smith-Kline Beecham, which markets the smoking cessation product, Nicorette.
Its principal competition in the dietary supplement market is Twin Labs, a
leader in that industry. Wrigley, Warner Lambert and Ford Gum and Machine are
the Company's main competition in the value added market.
Competitive factors in the chewing gum industry include price, flavor and
name recognition resulting from media advertising. The Company does not have the
capital resources, marketing and distribution networks, manufacturing
facilities, personnel, product name recognition or advertising budget to produce
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or introduce chewing gum brands which compete or will compete with the
multinational chewing gum manufacturers or the large specialty chewing gum
marketers. However, although there can be no assurances in this regard, the
Company believes that it can develop and market specialty chewing gum products
in niche markets, such as the weight loss, vitamin, dental hygiene,
anti-smoking, zinc and calcium markets, that are considered too small for
exploitation by many of the Company's competitors.
FDA and Other Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. The Company's chewing gum products manufactured by it or by others
for it under contract or otherwise that are considered foods rather than
"drugs," 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. Moreover, if
the FDA concludes that any of the Company's chewing gum products are "drugs"
under applicable FDA regulations or otherwise violate FDA rules or regulations,
the products will be subject to the foregoing regulations and FDA may also (i)
require that manufacture of such products be in accordance with FDA drug "good
manufacturing practices," which prescribe specific requirements and procedures
for the manufacture of FDA regulated drug products, or (ii) restrict or remove
such products from the market. The Company: (i) believes all of its products are
in compliance with all regulatory requirements; (ii) has not been advised that
the FDA considers any of its products to be "drugs," except for its CigArrest
product; and (iii) has not submitted any information or applications for
approval to the FDA. If the Company commences marketing OTC chewing gum
products, such products will be deemed to be "drugs" and will be subject to
marketing permission and ongoing regulation by the FDA including: (i)
requirements that the Company comply with certain more stringent FDA
manufacturing standards and practices; (ii) conformity with FDA labeling
requirements including dosage information; and (iii) the ability to determine
the origin of all chewing gum ingredients included in the manufacturing process.
Advertising claims made by the Company with respect to its products are
subject to the jurisdiction of the FDA and the FTC. In both cases the Company is
required to obtain scientific data to support any advertising or labeling health
claims it makes concerning its products, although no preclearance is required to
be made with either agency.
The Company's chewing gum manufacturing facility is subject to regulation
by various governmental agencies, including state and local licensing, zoning,
land use, construction and environmental regulations and various health,
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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 the Company's manufacturing operations. If the Company commences
marketing OTC chewing gum products, its manufacturing facility will also be
subject to inspection and regulation by the FDA as a drug producing facility.
The Company is subject to federal and state laws establishing minimum wages and
regulating overtime and working conditions. Because many of the Company's
personnel are paid at rates based on the federal minimum wage, an increase in
such minimum wage will result in an increase in the Company's labor costs.
Barter Agreements
The Company entered into barter agreements (the "Barter Agreements") with
Active Media Services, Inc. ("Active") in December 1996 and with SKR Resources,
Inc. ("SKR") in May 1997 under which it exchanged certain of its gum products
with Active and SKR for advertising, printing and travel credits totaling
$3,550,000 and $750,000, respectively. Under the Barter Agreements, the Company
must pay for approximately 75% of the advertising, printing and travel expenses
in cash and may pay the remaining 25% using its bartered credits. Further, any
unused credits on February 28, 2000 expire and will be valueless. The Company
shipped product in the fourth quarter of calendar year 1996 as a result of the
Barter Agreement with Active and the balance of product during the 1997 calendar
year under the Barter Agreement with SKR. The Company has recorded the barter
credits in an amount equal to the carrying value of the inventory, which was
reduced to zero prior to the exchange (as more fully described in Note 2 to the
financial statements "Restatement of Financial Information"). Therefore, no
amounts have been recorded for the barter credits.
Trademarks, Trade Names and Proprietary Rights
The Company routinely seeks trademark protection from the United States
Patent Office ("USPO") and from similar agencies in foreign countries for
chewing gum brands. There can be no assurance that the Company will be able to
successfully defend any trademarks or trade names granted to it against claims
from or use by competitors or that trademark or trade name applications will be
approved by the USPO or any similar foreign agency.
The Company considers some of its chewing gum formulations and processes to
be proprietary in nature and relies upon a combination of nondisclosure
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 the Company's proprietary information or
that the Company's competitors will not independently develop chewing gum
formulations and processes that are substantially equivalent or superior to
those of the Company.
Employees
As of March 26, 1998, the Company employed 46 individuals including its two
executive officers, 26 manufacturing and warehouse personnel, 3 research and
development personnel, 4 sales personnel, and 11 administrative personnel.
On February 10, 1998 the Company accepted the resignation of Gerald N.
Kern, the Chairman, Chief Executive Officer and President of the Company. Mr.
Kern's severance package includes a payment of $200,000, the forgiveness of
$116,000 of debt and officer's advances owed to the Company, and 100,000 Company
stock options which are exercisable by Mr. Kern for up to one year at $5.81 per
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share upon cancellation of all of his existing options. $50,000 of the cash
payment to Mr. Kern is being held in trust for 120 days subject to a mutual
non-disparagement clause.
Gary Kehoe was named the interim President, and Bruce Jorgenson was named
the Chairman.
ITEM 2. DESCRIPTION OF PROPERTY
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The Company leases 3,345 square feet of office space at 4205 North 7th
Avenue, Phoenix, Arizona 85013 on a three-year lease expiring December 31, 1998
for an average rental of approximately $3,000 per month. The Company also leases
an approximately 28,000 square foot building for its chewing gum manufacturing
facilities at 246 East Watkins, Phoenix, Arizona 85004 on a ten-year lease (with
two three-year renewal options) expiring December 2005 at a monthly rental of
approximately $12,000. The Company has combined its executive offices and
manufacturing plant at the Watkins property, and plans to sublease the 7th
Avenue office space.
The Company believes its facilities are adequate for its needs in the
foreseeable future. However, the Company's capacity needs could increase based
on the Joint Development Agreement entered into with Nabisco, Inc. in August
1997, although no assurances can be offered in this regard. If the Company does
need additional capacity, it believes that such space is available at reasonable
rates.
ITEM 3. LEGAL PROCEEDINGS
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Litigation
In October 1996, an action was filed against the Company in the United
States District Court for the Central District of California, CV-95-9784,
entitled "GCN Products, Inc. vs. Roy Kelly, et al." In that portion of the
complaint relating to the Company, the Plaintiff alleges that the Company
engaged in unlawful rebates, appropriations, overcharges, commercial bribery,
fraud and unjust enrichment. The plaintiff seeks compensatory and punitive
damages. The Company denies the plaintiff's allegations and intends to
vigorously defend the Action.
On December 11, 1996, a complaint was filed by Moira Cervi-Skinner, a
former employee of the Company, with the United States Equal Employment
Opportunity Commission (EEOC) in Phoenix, Arizona naming the Company and an
officer and director of the Company. The complaint alleges unwelcome sexual
conduct and sex discrimination as a condition of employment at the Company. In
addition, a demand letter has been received from the complainant's attorney
demanding $825,000. The complaint was settled in November, 1997 prior to
litigation being filed.
On August 27, 1997, an action was filed against the Company and certain
other parties in a Superior Court in and for the County of Maricopa,
CV-97-15896, by Paul Janssens Lens. As it relates to the Company, the Complaint
alleges intentional interference with business relations, securities fraud,
consumer fraud and misrepresentation. The plaintiff seeks compensatory damages
of $1.7 million plus unspecified punitive damages. The Company denies the
plaintiff's allegations and intends to vigorously defend the Action. The Company
believes that the plaintiff and other defendants have settled the suit and that
the Company will be dismissed from the litigation.
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The Company is not involved as a party to any other legal proceeding other
than various claims and lawsuits arising in the normal course of business, none
of which, in the opinion of the Company's management, is individually or
collectively material to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock has traded on the 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 National
Market but does not include retail markup, markdown or commission.
Price
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Year Ended December 31, 1997 High Low
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Fourth Quarter 11-3/4 6-3/4
Third Quarter 15-1/8 10-3/4
Second Quarter 11-7/8 7-4/16
First Quarter 8-3/4 5-1/2
Price
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Year Ended December 31, 1996 High Low
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Fourth Quarter 7-3/4 5-3/4
Third Quarter 6-1/8 6
Second Quarter (beginning April 24, 1996) 6-7/8 6-3/8
As of March 24, 1998, the Company had approximately 2,501 record and
beneficial stockholders.
Dividend Policy
The Company has paid only limited cash dividends on its Common Stock in the
past and intends to retain earnings, if any, for use in the operation and
expansion of its business. The amount of future dividends, if any, will be
determined by the Board of Directors based upon the Company's earnings,
financial condition, capital requirements and other conditions.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Overview
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products under its own brand names and on a private label
basis for other chewing gum marketers. The Company's first chewing gum product
included a natural caffeine substance marketed to runners and other exercise
enthusiasts as a source of energy and carbohydrates. In 1994 and 1995, the
Company raised funds through debt and equity financings. The funds were used to
establish a new management team, develop additional chewing gum products, build
inventories and purchase chewing gum manufacturing equipment for the Company's
28,000 square foot manufacturing facility. The facility commenced operations in
late March, 1996. The facility currently has 37 employees and by the end of 1996
the Company produced 100% of its chewing gum products.
The Company's current chewing gum products contain ingredients which it
claims (i) reduce tobacco cravings (under the "CigArrest" brand name which is
licensed to Bancroft Pharmaceuticals), (ii) may reduce the risk of osteoporosis
(under the "Calcium Gum" brand name, (iii) contribute to energy and endurance
(under the "High Gear" "Ginseng Gum", "Love Gum", and "Buzz Gum" brand names),
(iv) promote weight management (under the "ChromaTrim" and "CitrusSlim" brand
names), (v) reduces free radicals (under the "Complete Antioxidant Formula"
brand name, and (vi) promotes oral hygiene and breath freshness (under the
"DentaHealth" brand name). The Company also produces gum under the "Chew and
Sooth Zinc" brand name for the cold and flu season. Sales of CigArrest, Calcium
Gum, Ginseng Gum, High Gear and Chew and Sooth Zinc Gum commenced in 1997. Sales
of Buzz Gum, ChromaTrim, Love Gum, CitrusSlim and DentaHealth commenced in 1991,
1993, 1994, 1995 and 1996, respectively. The Complete Antioxidant Formula Gum
will be introduced in mid-1998. In 1998, the Company also plans to include its
DentaHealth product in a line with other oral care products marketed as an OTC
anti-plaque oral care regimen. These dental technologies will be shared by
several other market leaders in 1998-99. The Company is also involved in many
private label endeavors, including the research and development of various
nicotine and non-nicotine smoking cessation products. Private label customers
market under their own brand names.
The Company markets its branded chewing gum products directly and through
wholesale distributors who distribute primarily to drug store and convenience
chains (Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium, Long's, Thrifty,
Payless, Phar-Mor, Eckard and 7-11), mass market chains (Kmart and Pamida),
major supermarket chains (Smith's, Randall's, H.E. Butt, Pathmark and Fry's) and
to various natural food stores. In addition, the Company sells its products in a
number of international markets including Europe, Asia and Canada.
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Results of Operations for the Year Ended December 31, 1997 Compared to the Year
Ended December 31, 1996.
The following table sets forth certain statement of operations information
expressed both in dollars and as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
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1997 1996
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<S> <C> <C> <C> <C>
Net sales $3,776,562 100% $3,116,130 100%
Cost of sales 4,197,777 (111) 2,070,443 66
Gross profit (421,215) (11) 1,045,687 34
Operating expenses 3,881,238 103 4,199,288 135
Research and development 209,783 5 364,728 12
Income (Loss) from operations (4,512,236) (119) (3,518,329) (113)
Interest and other income 204,220 5 117,219 4
Interest expense 1,090,618 29 219,668 7
Provision (benefit) for income taxes - - (232,371) (7)
Net income (Loss) (5,398,634) (143) (3,388,407) (109)
</TABLE>
Net Sales. Net sales increased by $660,432, or 21%, to $3,776,562 for the
year ended December 31, 1997 compared to $3,116,130 for the year ended December
31, 1996. Private label sales increased 657% to $1.59 million in 1997 compared
to $210,000 for 1996. Additionally, the Company saw an increase of 41% in net
sales of its branded products to $1.17 million in 1997 compared to $824,000 in
1996. The Company experienced a decrease in international sales of 52% and
completely eliminated its dependence on National Distributing Group, a former
major customer.
Cost of Sales. Cost of sales, as a percentage of net sales, increased 45%
to $4,197,777 or (111%) of net sales for the year ended December 31, 1997
compared to $2,070,443 or 66% of net sales for the same period in 1996. The
Company recorded the sales under its barter agreements at a zero value with a
cost of sales of $715,000 in 1997. With the exception of December, 1997,
production at the manufacturing facility was below optimum capacity, resulting
in a higher price per pound of gum. Approximately $1,193,683 of plant operating
expenses were allocated to cost of sales for the year ended December 31, 1997,
of which $530,000 was directly related to depreciation of the plant's
manufacturing equipment. Also, the Company wrote off approximately $350,000 of
obsolete inventory in the fourth quarter in 1997.
Gross Profit. Gross profit, as a percentage of net sales, decreased by 45%
to $(421,215) or (11%) of net sales for the year ended December 31, 1997,
compared to $1,045,687 or 34% of net sales for the same period in 1996. The
decrease in gross profit percentage was directly related to the increase in cost
of sales.
Operating Expenses. Operating expenses were $3,881,238, a decrease of
$318,050 for the year ended December 31, 1997 compared to the same period in
1996. Significant non-manufacturing operating expenses for the year ended
December 31, 1997, were advertising ($984,783), administrative management labor
($778,626), accounting, legal and professional consulting fees ($549,390),
travel and trade shows ($421,140), general administrative labor ($216,468) and
sales labor ($154,557).
-14-
<PAGE>
Research and Development. Research and Development expenditures were
$209,783 for the year ended December 31, 1997 compared to $364,728 for the same
period in 1996. The majority of these costs were related to the formulation of
the following: a Ginseng gum, which helps maintain overall good health; High
Gear, an energy gum; an Antacid/Calcium gum, which prevents, helps and treats
osteoporosis and prevents upset stomachs; a newly reformulated Love Gum; and
other various private label projects. These private label products consisted of
dental gums, OTC antacid and analgesic gums, diet gums, multi-vitamin gums,
ginseng gum, nicotine and non-nicotine smoking cessation gums and body-building
cube gums.
Interest and Other Income and Interest Expense. Interest and other income
was $204,220 an increase of $87,001 for the year ended December 31, 1997,
primarily as a result of an increase in working capital from equity financings
that were invested in short-term investments. Interest expense was $1,090,618 an
increase of $870,950 for the year ended December 31, 1997, primarily as a result
of the Company issuing $2,530,000 of subordinated convertible notes in March,
1997. These debentures had a beneficial conversion feature to the individual
investors that resulted in a $665,790 non-cash charge to interest expense.
Net Loss. Net loss increased to $5,398,634 for year ended December 31, 1997
compared to a net loss of $3,388,407 for the same period in 1996.
Liquidity and Capital Resources
As of December 31, 1997, the Company's working capital was $5.09 million
compared to $2.90 million at December 31, 1996. For the year ended December 31,
1997, the Company experienced a decrease in cash used by operating activities of
$3.74 million primarily as a result of the net loss for the period.
Investing activities provided $39,335 in cash for year ended December 31,
1997, compared to $1,037,009 of cash used in the same period of 1996. The cash
provided for 1997 was primarily from the repayment of a note receivable from
National Distributing Group, which is controlled by an officer and director of
the Company.
Financing activities provided $6.19 million in cash for year ended December
31, 1997, compared to $5.35 million in cash provided for the same period in
1996. The cash provided for 1996 was primarily a result of the Company
successfully completing its Initial Public Offering on April 24, 1996 less the
repayment of notes payable. The cash provided for 1997 was primarily from the
exercise of the Company's Common Stock Purchase Warrants issued in the Company's
Initial Public Offering . The Company called the Warrants for redemption in
July, 1997, and 457,400 of its 460,000 (99.43%) Warrants were exercised at an
exercise price of $7.50 per share prior to the date set for redemption for total
gross proceeds to the Company of $3,430,500. In addition, the Company sold an
aggregate of $2.53 million of convertible debentures in February and March,
1997.
The Company's future results of operations and other forward looking
statements contained in this section, in particular the statement(s) concerning
plant efficiencies and capacities, capital spending, research and development
and other expenses involve a number of risks and uncertainties. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: business conditions and the
general economy; competitive factors, such as rival gum manufacturers' pricing
and marketing efforts; availability of third-party material products at
reasonable prices; risk of nonpayment of accounts receivable; risks of inventory
obsolescence due to shifts in market demand; timing of product introductions;
and litigation involving product liabilities and consumer issues.
-15-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
-16-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1997 F-3
Statements of Operations for the years ended
December 31, 1997 and 1996 F-5
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997 and 1996 F-6
Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-7
Notes To Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Gum Tech International, Inc.
We have audited the accompanying balance sheet of Gum Tech International, Inc.
as of December 31, 1997 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. 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. as
of December 31, 1997 and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
March 16, 1998
F-2
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,607,913
Restricted cash 57,049
Accounts receivable:
Trade, net of allowance for doubtful accounts of $129,500 1,082,234
Employees 61,054
Inventories 1,033,382
Notes receivable 298,012
Interest receivable 60,164
Prepaid expenses 116,205
-----------
Total Current Assets 6,316,013
-----------
Property and Equipment, at cost:
Machinery and equipment 3,613,141
Office furniture and equipment 142,864
Leasehold improvements 190,526
-----------
3,946,531
Less accumulated depreciation (1,002,754)
-----------
Net Property and Equipment 2,943,777
-----------
Other Assets:
Deposits 139,773
Note receivable 66,000
Intangible assets, net of accumulated
amortization of $47,710 211,938
Other 7,291
-----------
Total Other Assets 425,002
-----------
Total Assets $ 9,684,792
===========
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 798,718
Accrued interest 70,147
Customer deposits 15,000
Current portion of long-term debt 343,174
------------
Total Current Liabilities 1,227,039
------------
Long-Term Debt, net of current portion above:
Financial institutions and other 4,094,457
Obligations under capital leases 33,498
Less current portion above (343,174)
------------
Total Long-Term Debt 3,784,781
------------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares
authorized, none issued or outstanding --
Common stock: no par value, 10,000,000 shares
authorized, 5,856,460 shares issued and outstanding 12,088,150
Additional paid in capital 665,790
Retained earnings (deficit) (8,080,968)
------------
Total Stockholders' Equity 4,672,972
------------
Total Liabilities and Stockholders' Equity $ 9,684,792
============
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Net sales $ 3,776,562 $ 3,116,130
Cost of sales 4,197,777 2,070,443
----------- -----------
Gross Profit (421,215) 1,045,687
Operating expenses 3,881,238 4,199,288
Research and development 209,783 364,728
----------- -----------
Income (Loss) From Operations (4,512,236) (3,518,329)
----------- -----------
Other Income (Expense):
Interest and other income 204,220 117,219
Interest expense (1,090,618) (219,668)
----------- -----------
Total Other Income (Expense) (886,398) (102,449)
----------- -----------
Income (Loss) Before Provision For Income Taxes (5,398,634) (3,620,778)
Provision (benefit) for income taxes -- (232,371)
----------- -----------
Net Income (Loss) $(5,398,634) $(3,388,407)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic $ (1.02) $ (.77)
Diluted $ (1.02) $ (.77)
Weighted Average Number of Common Shares
Outstanding:
Basic 5,294,099 4,423,402
Diluted 5,294,099 4,423,402
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Common Stock Additional Retained
---------------------------- Paid In Earnings
Shares Amount Capital (Deficit)
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 3,436,740 $ 917,117 $ -- $ 706,073
Issuance of common stock upon
exercise of stock options 132,000 234,000 -- --
Issuance of common stock and
warrants in public offering
(net of offering costs of $1,466,057) 1,380,000 6,813,943 -- --
Net loss -- -- -- (3,388,407)
----------- ----------- ----------- -----------
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)
=========== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(5,398,634) $(3,388,407)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation 551,404 454,654
Amortization 47,710 --
Provision for bad debts 94,500 20,111
Loss on disposal of assets 10,633 11,036
Interest expense from beneficial conversion
feature of notes payable 665,790 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (648,527) 161,348
(Increase) in employee receivables (61,054) --
(Increase) decrease in inventories 333,562 (468,279)
(Increase) decrease in income tax receivable 234,440 (234,440)
(Increase) in prepaid expenses and other (55,106) (73,660)
(Increase) in interest receivable (60,164) --
(Increase) decrease in deposits and other 128,602 (80,401)
Increase (decrease) in accounts payable and
accrued expenses 470,600 (133,330)
Increase (decrease) in customer deposits (50,500) 28,541
----------- -----------
Net Cash (Used) By Operating Activities (3,736,744) (3,702,827)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (134,083) (572,602)
Proceeds from disposal of equipment 6,363 --
Increase in notes receivable -- (216,000)
Receipt of principal on notes receivable 177,653 --
Deposits on purchase of equipment and other -- (248,407)
Increase in deposits and other (10,598) --
----------- -----------
Net Cash (Used) By Investing Activities 39,335 (1,037,009)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 2,530,000 706,397
Principal payments on notes payable (204,871) (2,589,330)
Issuance of common stock 4,311,768 8,514,000
Offering costs incurred (188,678) (1,277,807)
Debt issuance costs incurred (259,648) --
----------- -----------
Net Cash Provided By Financing Activities 6,188,571 5,353,260
----------- -----------
Net Increase in Cash and Cash Equivalents 2,491,162 613,424
Cash and Cash Equivalents at Beginning of Year 1,116,751 503,327
----------- -----------
Cash and Cash Equivalents at End of Year $ 3,607,913 $ 1,116,751
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 306,972 $ 327,031
Income taxes 150 24,409
Supplemental Disclosure of Non-cash Investing and
Financing Activities:
Capital lease obligations incurred for new equipment $ -- $ 1,194,544
Conversion of account receivable to a note receivable 225,665 --
Note payable incurred for purchase of equipment under
a capital lease 1,564,457 --
The accompanying notes are an integral
part of these financial statements.
F-7
</TABLE>
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO 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 under its own brand names and on a private label
basis for other chewing gum marketers. The Company currently markets
chewing gum products with certain ingredients added to promote weight
control, energy endurance, oral hygiene and breath freshness. The
Company also markets chewing gum products which include anti-oxidant
vitamins, zinc, calcium and anti-smoking preparations.
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
$551,404 and $454,654 for the years ended December 31, 1997 and 1996,
respectively.
Intangible Assets
-----------------
Debt issuance costs are being amortized using the straight-line method
over the 59 month term of the convertible notes.
Revenue Recognition
-------------------
The Company recognizes revenue from product sales upon shipment to the
customer.
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, 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 8 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.
Long-Lived Assets
-----------------
In accordance with Statement of Financial Accounting Standards (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.
F-8
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------------------------
Income Taxes
------------
Beginning January 1, 1993, the Company was an S corporation under the
provisions of the Internal Revenue Code and, accordingly, no provision
was made for income taxes since all income, deductions, gains, losses
and credits were reported on the tax returns of the stockholders. The
S corporation status of the Company terminated on November 18, 1994
and, thereafter, the Company became a taxable entity. Effective
November 18, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the liability method of accounting for
income taxes. Deferred income taxes result from temporary differences
in the recognition of revenue and expenses for income tax and
financial reporting purposes. These differences are primarily due to
depreciation.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 7), costs
incurred to complete the offering have been deferred and were offset
against the proceeds of the offering.
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
(Note 2) 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 (Loss) Income Per Share of Common Stock
-------------------------------------------
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (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.
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.
F-9
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
2. Restatement of Financial Information
------------------------------------
The Company has restated its financial statements for the year ended
December 31, 1996 to eliminate the financial impact of barter credit
transactions. The Company took this action as a result of an inquiry
by The Nasdaq Stock Market and subsequent discussions with the
Securities and Exchange Commission concerning the Company's accounting
for its barter transactions.
The Company entered into barter agreements with Active Media Services,
Inc. in December 1996 and with SKR Resources, Inc. in May 1997. The
barter credits were to be used for advertising, packaging and travel
expenses, among other items, to launch the Company's branded products
in several retail markets. These credits would have reduced the cash
portion of the Company's obligations for these services. The Company
recorded the barter transactions as revenue based on the wholesale
price of each product bartered. By September 30, 1997 cumulative
revenues attributable to barter sales for fiscal 1996 and 1997 were
approximately $4.3 million.
Under the restatement, the Company has recorded the barter credits in
an amount equal to the carrying value of the inventory, which was
reduced to zero prior to the exchange. Therefore, no amounts have been
recorded for the barter credits.
In the opinion of management, all material adjustments necessary to
correct the financial statements have been recorded. The impact of
these adjustments on the Company's financial results as originally
reported is summarized below:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
As reported As restated
----------- -----------
<S> <C> <C>
Net sales $3,868,642 $3,116,130
Net income (loss) (2,635,895) (3,388,407)
Net income (loss) per share (.60) (.77)
Retained earnings (deficit) end of year (1,929,822) (2,682,334)
</TABLE>
3. Restricted Cash
---------------
Cash of $57,049 was held as collateral by a bank for a letter of
credit issued to the lessor of the Company's manufacturing and
warehouse facilities.
4. Inventories
-----------
Inventories at December 31, 1997 consist of the following:
Raw materials and packaging $ 583,652
Work in process 280,483
Finished goods 169,247
----------
Total $1,033,382
==========
F-10
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
5. Long-Term Debt
--------------
Long-term debt consists of the following:
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. $1,564,457
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. 2,530,000
Obligations Under Capital Leases
--------------------------------
9.4% installment notes due in 2002 with monthly
principal and interest payments of $1,000,
collateralized by equipment. 33,498
----------
Total Long-Term Debt 4,127,955
Less current portion of long-term debt (343,174)
----------
Long-Term Debt $3,784,781
==========
Installments due on debt principal, including the capital leases,
at December 31, 1997 are as follows:
Year Ending
December 31,
------------
1998 $ 343,174
1999 381,280
2000 1,685,043
2001 1,718,458
----------
Total $4,127,955
==========
6. Income Taxes
------------
The components of the provision for income taxes are as follows:
1997 1996
---- ----
Current:
Federal $ -- $(232,371)
State -- --
------- ---------
Total -- (232,371)
------- ---------
Deferred:
Federal -- --
State -- --
------- ---------
Total -- --
------- ---------
Total Provision For Income Taxes $ -- $(232,371)
======= =========
F-11
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
6. Income Taxes (Continued)
------------------------
The $232,371 benefit for income taxes for the year ended December
31, 1996 is the result of the carryback of the net operating loss
for 1996 to prior tax years which resulted in an income tax refund
receivable of $234,440.
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:
1997 1996
---- ----
Federal statutory rate (34)% (34)%
State income taxes, net
of federal benefits (5) (5)
Valuation allowance 39 32
Other -- (1)
---- ----
Total --% (8)%
==== ====
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%.
1997 1996
---- ----
Income taxes at the
federal statutory rate $(1,835,536) $(975,210)
State income taxes, net
of federal benefits (294,204) (135,712)
Nondeductible expenses 20,969 6,550
Valuation allowance 2,108,771 912,512
Other -- (40,511)
----------- ---------
Total $ -- $(232,371)
============ =========
Significant components of deferred income taxes as of December 31,
1997 are as follows:
Net operating loss carryforward $ 3,295,354
Reserve for bad debts 43,154
Other 41,842
-----------
Total deferred tax asset 3,380,350
-----------
Depreciation (180,350)
-----------
Total deferred tax liability (180,350)
Less valuation allowance (3,200,000)
-----------
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 $3,200,000 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
$2,287,488. The Company will continue to review this valuation on a
quarterly basis and make adjustments as appropriate.
F-12
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
6. Income Taxes (Continued)
------------------------
At December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $7,800,000 and $8,500,000,
respectively. Such carryforwards expire in the years 2011 and 2012 and
2001 and 2002 for federal and state purposes, respectively.
7. Stockholders' Equity
--------------------
Private Offering of Common Stock
--------------------------------
In January 1996, the Company sold 619,175 shares of its common stock
at $5.00 per share through an Underwriter. The Company paid a sales
commission of 10% of the gross proceeds of the common stock sold. All
of the net proceeds of the offering ($2,786,288) were used to
repurchase from Brett Bouchy, a principal stockholder of the Company,
and retire, 619,175 shares of the Company's common stock held by Mr.
Bouchy at a repurchase price of $4.50 per share. Other expenses of the
offering, including legal fees, accounting fees, printing and other
expenses were paid by Mr. Bouchy.
Public Stock Offering
---------------------
The closing for the Company's IPO occurred on April 30, 1996. The
Company sold 400,000 units of its securities, each unit consisting of
three shares of the Company's common stock and one redeemable common
stock purchase warrant to the public at $18.00 per unit. Each warrant
is exercisable to purchase one share of common stock at $7.50 per
share for a period of five years until April 24, 2001 and may be
redeemed by the Company for $.01 per warrant if the closing price of
the common stock on the Nasdaq National Market System is at least
$9.00 per share for 20 consecutive trading days. In May 1996, the
Underwriter exercised its option to purchase an additional 60,000
units from the Company to cover over-allotments.
In June 1997, the Company called the warrants and 457,400 were
exercised resulting in gross proceeds to the Company of $3,430,500 and
the remaining 2,600 warrants expired unexercised.
The Company paid the Underwriter a commission equal to ten percent of
the gross proceeds of the offering and a non-accountable expense
allowance equal to three percent of the gross proceeds of the
offering. In connection with the offering, the Company issued the
Underwriter a warrant, for $100, to purchase up to 40,000 units for
$24.75 per unit. The Underwriter's warrant is exercisable for a period
of four years beginning April 24, 1997. The units subject to the
Underwriter's warrant are identical to the units sold to the public.
In 1997, 2,830 of the Underwriter's warrants were exercised and 37,170
are outstanding as of December 31, 1997.
8. 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 1,200,000 shares of common stock
have been reserved for issuance under the Plan. The Plan was amended
in May 1996 to increase the shares available for issuance to
1,500,000.
F-13
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
-------------------------------------
Stock Option Plan (Continued)
-----------------------------
The Plan was amended in June 1997 to increase the shares available for
issuance to 2,000,000. Incentive stock options 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.
The exercise date of an option granted under the Plan cannot be later
than three years from 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, 1996 and 1997. The
outstanding agreements expire from March 1998 to September 2000.
Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at
December 31, 1995 750,000 $1.64
Granted 700,000 6.11
Exercised (132,000) 1.77
Cancelled -- --
------- -----
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
========= =====
Non-qualified Stock Options
---------------------------
The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding agreements expire
from April 1998 to November 1999. The following table contains
information on all of the stock options, except those granted under
the Company's stock option plan, for the years ended December 31, 1996
and 1997.
F-14
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
--------------------------------------
Non-qualified Stock Options (Continued)
---------------------------------------
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Options outstanding at
December 31, 1995 500,000 $2.98
Granted -- --
Exercised -- --
Cancelled (140,000) 6.00
-------- -----
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
======== =====
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
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:
1997 1996
---- ----
Net income (loss):
As reported $(5,398,634) $(3,388,407)
Pro forma $(5,881,867) $(4,937,720)
Net income (loss) per share
of common stock:
As reported $(1.02) $ (.77)
Pro forma $(1.11) $(1.12)
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,
1997 and 1996.
1997 1996
---- ----
Risk-free interest rate 5.88% 5.88%
Expected life 2 years 2 years
Expected volatility 63.51% 58.73%
Expected dividend yield 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
F-15
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
--------------------------------------
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 following table summarized information about stock based
compensation plans outstanding at December 31, 1997:
Options Outstanding and Exercisable by Price Range as of December 31,
1997:
<TABLE>
<CAPTION>
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
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 - 2.00 434,000 .25 $ 1.57 434,000 $ 1.57
$ 6.00 - 6.38 817,500 1.95 $ 6.15 758,750 $ 5.64
$10.75 - 11.44 432,500 2.68 $10.86 216,250 $10.86
-------------- --------- ---- ------ --------- ------
$ 1.50 - 11.44 1,684,000 1.70 $ 6.18 1,409,000 $ 5.19
============== ========= ==== ====== ========= ======
</TABLE>
Warrants
--------
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 are
outstanding at December 31, 1997.
9. 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.
10. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases its office 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 executive
F-16
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
10. Commitments and Contingencies (Continued)
-----------------------------------------
Leases (Continued)
------------------
offices contains a two year renewal option. The following is a
schedule of future minimum lease payments at December 31, 1997 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:
<TABLE>
<CAPTION>
Year Ending Capital
December 31, Leases Facilities Total
------------ -------- ---------- -----
<S> <C> <C> <C>
1998 $ 12,004 $ 163,832 $ 175,836
1999 12,004 125,915 137,919
2000 12,004 131,976 143,980
2001 3,001 132,527 135,528
2002 -- 138,576 138,576
Thereafter -- 417,404 417,404
-------- ---------- ----------
Total Minimum Lease Payments 39,013 $1,110,230 $1,149,243
========== ==========
Less amount representing interest 5,515
--------
Present Value of Net
Minimum Lease Payments $ 33,498
========
</TABLE>
Rental expense charged to operations was $187,826 and $176,994 for the
years ended December 31, 1997 and 1996, respectively.
Leased equipment under capital leases as of December 31, 1997 is as
follows:
Equipment $ 47,727
Less accumulated depreciation (16,704)
--------
Net Property and Equipment Under Capital Leases $ 31,023
========
Employment Agreements
----------------------
In January 1996, the Company entered into an employment agreement with
Mr. Bernstein through December 31, 2000 which may be extended until
December 31, 2005 at Mr. Bernstein's option if the Company's net sales
(as hereinafter defined) for the calendar year ending December 31,
2000 exceed $50 million. Under the employment agreement, Mr. Bernstein
is to receive a base salary of $100,000 with subsequent annual base
salaries equal to 2% of the Company's prior year's net sales but in no
event may such annual base salary exceed $500,000. "Net sales" are
defined as gross sales from the sale of all products in the "Target
Markets", which in turn are defined as all markets except (i) the
natural food markets, (ii) private label markets or (iii) markets
developed from direct response television infomercial advertising. In
addition, Mr. Bernstein is entitled to an annual bonus equal to (i) 5%
of the first $5 million of net sales in excess of the prior year's net
sales, (ii) 4% of the next $5 million of net sales in excess of the
prior year's net sales, (iii) 3% of the next $5 million of net sales
in excess of the prior year's net sales and (iv) 2% of all net sales
in excess of $20 million of net sales in the prior year.
F-17
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
11. Related Party Transactions
--------------------------
On November 18, 1994, Gregory Gossett, the Company's founder,
President and majority stockholder, sold 1,550,000 shares of his
common stock in the Company to Dale Holdings, Inc., LDC ("Dale") for
$750,000, or $.48 per share. On the same date, the Company sold an
additional 516,740 shares to Dale for $250,000, or $.48 per share.
In February 1995, Dale sold an aggregate of 367,150 shares of common
stock of the Company held by it to a group of eleven investors for
$560,000, or $1.53 per share. After paying commissions of $56,000,
Dale loaned the remaining $504,000 to the Company, evidenced by a
promissory note. In May 1995 the Company and Dale each sold 420,000
shares of the Company's common stock through an Underwriter at $1.80
per share and paid a commission of 10% of the gross proceeds of the
common stock. Dale loaned the Company $346,000 from the proceeds of
the common stock sold by it, which is evidenced by a promissory note.
Both loans from Dale were collateralized by all of the Company's
accounts receivable, inventory and equipment. The notes were
distributed to Dale's two partners in December 1995 and the notes were
subordinated to the Company's equipment lease and were repaid in 1996.
The Company entered into exclusive U.S. and foreign distribution
agreements (the "Distribution Agreements") with Bernstein Bros.
Marketing Incorporated (doing business as National Distributing)
("National"). National held exclusive rights to market the Company's
ChromaTrim gum to retailers within the United States, except retailers
in the natural food industry, the private label market or directly to
customers ("direct response") through media advertisements and
infomercials broadcast on cable television networks. United Merchants,
Inc. ("UMI") held rights to market the same products on a direct
response basis within the United States and both on a direct response
basis and to retail accounts outside the United States.
In January 1996, the Company, National and UMI cancelled their
exclusive U.S., and foreign Distribution Agreements. The Company
entered into a two year agreement with National pursuant to which the
Company agreed to sell National, on a non-exclusive basis, ChromaTrim
and CitrusSlim chewing gum for sale by National solely to non- chain
convenience stores, grocery stores, drugstores and other similar
retail food stores. The Company entered into a two year agreement with
UMI pursuant to which the Company agreed to sell to UMI on a
non-exclusive basis ChromaTrim and CitrusSlim chewing gum for sale by
UMI solely in the United States through direct response television
infomercial advertising.
Richard Bernstein, a director of the Company, is an executive officer
and director of National and a principal stockholder of UMI. The
Distribution Agreements, which primarily relate to the Company's
ChromaTrim chewing gum, represented 3.5% and 21.0% of the Company's
total sales for the years ended December 31, 1997 and 1996,
respectively. Trade accounts receivable from National and UMI combined
were $46,851 and $227,047 at December 31, 1997 and 1996, respectively.
Payments are generally due within 30 days of the invoice date.
F-18
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
11. Related Party Transactions (Continued)
--------------------------------------
The Company has notes receivable from officers and directors as of
December 31, 1997, as follows:
8% unsecured note due from the Company's Senior
Vice President, with principal and interest due in
December 1997. The note was paid in January 1998. $ 100,000
8% unsecured note due from the Company's Vice
President, with principal and interest due in
January 1998. The note was extended until April
1998. 150,000
8% unsecured note due from the Company's President
and CEO, with principal and interest payable out
of stock sale profits, if stock sale profits are
not sufficient to repay the loan by November 1999,
then the balance will be converted to compensation
(Note 15). 66,000
10% note due from NDG on December 31, 1997,
collateralized by substantially all of the assets
of NDG. 48,012
---------
Total $ 364,012
=========
The interest receivable on the above notes receivable is $67,455 at
December 31, 1997.
The Company repaid notes payable to stockholders in the amount of
$2,150,000 in 1996 together with interest at 8% in the amount of
$159,943.
12. 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. Employee and Company matching
contributions are discretionary. The Company made matching
contributions of $20,059 for the year ended December 31, 1997. Each
employee shall be fully vested at all times in his contribution and
the Company's matching contributions.
13. 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 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.
F-19
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
13. Concentration of Credit Risk and Major Customers (Continued)
------------------------------------------------------------
The Company performs periodic credit evaluations of its customers'
financial condition and generally requires no collateral. The Company
obtains letters of credit form 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, 1997 and 1996 were as follows:
1997 1996
---- ----
Customer A 17.5%
Customer B 15.0%
Customer C 13.8%
Customer D 10.2% 10.2%
Customer E 15.0%
14. 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,
1997:
1997
----------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Financial Assets:
Cash and cash equivalents $3,607,913 $3,607,913
Restricted cash 57,049 57,049
Notes receivable 364,012 364,012
Financial Liabilities:
Long-term debt 4,127,955 4,127,955
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 carrying amount of
notes receivable approximates fair value because of the market rate of
interest on the notes receivable. 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.
F-20
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
15. Subsequent Events
-----------------
On February 10, 1998 Gerald Kern resigned his employment as CEO,
President and Chairman of the Board. The Company entered into a
Settlement Agreement and Release (the "Agreement") with Mr. Kern
effective February 10, 1998. The Agreement terminates Mr. Kern's
employment agreement with the Company. As a part of the Agreement the
Company agreed to pay Mr. Kern $200,000 of which $50,000 is to be held
in a trust account for 120 days. The Company also agreed to forgive
any salary advances ($48,027 at December 31, 1997) and to forgive the
$66,000 note receivable from Mr. Kern plus accrued interest on the
note owed by Mr. Kern which was to become due on November 1, 1999. In
addition, the Company agreed to assign ownership of a life insurance
policy to Mr. Kern that it held on Mr. Kern.
The Company also agreed to issue Mr. Kern a stock option to purchase
100,000 shares of the Company's common stock at $5.81 per share at
anytime through February 10, 1999 and to cancel all stock options held
by Mr. Kern in excess of the 100,000 shares. Mr. Kern held options on
456,500 shares of common stock at the time of issuing the restated
stock option which results in cancellation of 356,500 stock options
effective February 10, 1998.
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
There have been no changes in or disagreements with accountants on
accounting or financial disclosure.
-17-
<PAGE>
PART III
As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders to be prepared in accordance with the Schedule 14A and filed with
the Securities and Exchange Commission within 120 days of the end of the fiscal
year covered by this report:
Material in Proxy Statement for 1998 Annual Meeting
which is incorporated herein by reference
<TABLE>
<CAPTION>
Item No. Item Caption Proxy Statement Caption
-------- ------------ -----------------------
<S> <C> <C>
9 Directors and Executive Officers of the "Directors and Executive Officers"
Registrant
10 Executive Compensation "Executive Compensation"
11 Security Ownership of Certain Beneficial "Security Ownership of Principal
Owners and Management Stockholders and Management"
12 Certain Relationships and Related "Certain Transactions"
Transactions
</TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibits
Exhibit No. Title
1.07 Form of Warrant Agreement(1)
2.01 Certificate of Incorporation and Amendments thereto of the
Registrant(1)
2.02 Bylaws of the Registrant(1)
10.01 1995 Stock Option Plan(1)
10.02 Lease Agreement - Phoenix Executive Office Facility(1)
10.05 Employment Contract with Mr. Kehoe(1)
10.07 Form of Bridge Loan Agreement together with Exhibits thereto(1)
-18-
<PAGE>
10.08 Lease Agreement - Phoenix, Arizona manufacturing facility(1)
10.09 Amendment to Stock Option Plan(1)
10.12 Memorandum of Understanding with Bernstein Bros. Marketing
Corporation(1)
10.13 Waiver Under Employment Agreement (Mr. Ratcliff)(1)
10.16 Employment Agreement with Mr. Bernstein(1)
10.20 Form of Convertible Note Dated February 20, 1997(2)
10.21 Registration Rights Agreement(2)
10.25 Employment Agreement with Mr. Bouchy
10.28 Installment Loan with Textron Financial Corporation
10.29 Settlement Agreement and Release with Gerald N. Kern
- -------------------
(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 Form 8-K filed March 6, 1997.
Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 1997.
-19-
<PAGE>
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 31, 1998.
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 the dated
indicated.
Signature Title Date
--------- ----- ----
/s/ Bruce Jorgenson Chairman of the Board March 31, 1998
- ---------------------------- of Directors
Bruce Jorgenson
/s/ Gary S. Kehoe President and Chief March 31, 1998
- ---------------------------- Operating Officer and
Gary S. Kehoe Director
/s/ Jeffrey L. Bouchy Secretary, Treasurer, Chief March 31, 1998
- ---------------------------- Financial Officer (Principal
Jeffrey L. Bouchy Accounting Officer)
/s/ Richard Ratcliff Director March 31, 1998
- ----------------------------
Richard Ratcliff
/s/ William Yuan Director March 31, 1998
- ----------------------------
William Yuan
/s/ William Boone Director March 31, 1998
- ----------------------------
William Boone
/s/ W. Brown Russell Director March 31, 1998
- ----------------------------
W. Brown Russell
20
TFC TEXTRON
[GRAPHIC OMITTED]
INSTALLMENT NOTE DATED AS OF DECEMBER 8, 1997
---------------------------------------------
For value received, the undersigned (jointly and severally if more than
one) promises to pay to the order of Textron Financial Corporation ("TFC"),
having its principal place of business in Providence, Rhode Island (together
with any other holder of this Note, hereinafter referred to as the "Holder"),
the principal sum of One Million Five Hundred Sixty Four Thousand Four Hundred
Fifty Seven and 18/100 Dollars ($1,564,457.18), together with interest on the
unpaid principal balance of this Note at the rate of Nine and 73/100 percent
(9.73%) per annum. The obligations of the undersigned hereunder are
"Obligations" secured by the "Collateral" as defined and described in a Security
Agreement between the undersigned and the Holder dated as of December 8th , 1997
(the "Security Agreement"), and are entitled to all of the rights and privileges
provided therein, including rights of acceleration of this Note.
This Note shall be due and payable in 48 monthly installments of principal
and interest due and payable on the 15th day of each month and in the amounts
specified below:
48 consecutive installment(s) of $39,549.79 each beginning on January 15, 1998,
and continuing each month thereafter through and including December 15, 2001.
The entire remaining unpaid balance and all accrued and unpaid charges due
hereunder and under the Security Agreement shall be due and payable on December
15, 2001 (the "Final Maturity Date").
In the event any amount due hereunder is past due by more than ten (10)
days, the undersigned agrees to pay a late payment charge equal to the lesser of
(a) five percent (5%) on and in addition to the amount of the past due payment,
or (b) the maximum charges allowable under then applicable law. Upon the
maturity of this Note (by reason of default and acceleration or otherwise), the
undersigned agrees to pay interest on the unpaid balance and all accrued and
unpaid amounts due hereunder and under the Security Agreement from the maturity
hereof through the day of payment at a rate of interest equal to the lesser of
(a) the Holder's default rate of interest of 18% per annum, or (b) the maximum
rate of interest allowable under then applicable law.
The entire unpaid principal balance of this Note may be prepaid in full
(but not in part) upon five days prior written notice to the Holder hereof,
provided that any such prepayment shall be made together with (a) all accrued
interest and other charges owing hereunder or under the Security Agreement, and
(b) a prepayment fee equal to three percent (3%) of such prepayment if made
prior to the first anniversary of this Note; thereafter, two percent (2%) of
such prepayment if made prior to the second anniversary of this Note;
thereafter, one percent (1%) of such prepayment. The prepayment fee provided
herein shall also be due and payable in the event of a default and acceleration
of the maturity of this Note in accordance with the terms hereof and the
Security Agreement.
Each payment hereunder shall be made in lawful money of the United States
and shall be payable to such account or address as the Holder hereof shall from
time to time direct the undersigned. All amounts received shall be applied
first, to accrued late charges and any other costs or expenses due and owing
hereunder or under the terms of the Security Agreement; second, to accrued
interest; and third, to unpaid principal. If at any time during the term of this
Note the interest rate applicable hereunder exceeds the maximum rate of interest
permitted under then applicable law, then the interest rate shall thereafter be
Page 1 of 2
<PAGE>
deemed to be the maximum rate permitted under then applicable law, and amounts
of interest received from the undersigned in excess of such maximum rate shall
be considered reductions to principal to the extent of any such excess.
Failure to pay this Note, or any installment hereunder after ten days
written notice, or default or failure in the performance or due observance of
any of the terms, conditions or obligations hereunder or under the Security
Agreement or in any other agreement or instrument between the undersigned (or
any endorser, guarantor, surety or other party liable for the undersigned's
obligations hereunder, or any other entity controlling, controlled by or under
common control with the Holder), shall entitle the Holder to accelerate the
maturity of this Note and to declare the entire unpaid principal balance and all
accrued interest and other charges hereunder and under the Security Agreement to
be immediately due and payable, and to proceed at once to exercise each and
every one of the remedies set forth in the Security Agreement or otherwise
available at law or in equity.
The undersigned and all other parties who may be liable (whether as
endorsers, guarantors, sureties or otherwise) for payment of any sum or sums due
or to become due under the terms of this Note waive diligence, presentment,
demand, protest, notice of dishonor and notice of any other kind whatsoever
(except as may be provided herein or in the Security Agreement) and agree to pay
all costs incurred by the Holder in enforcing its rights under this Note or the
Security Agreement, including reasonable attorney's fees, and they do hereby
consent to any number of renewals or extensions at any time in the payment of
this Note. No extension of time for payment of this Note made by any agreement
with any person now or hereafter liable for payment of this Note shall operate
to release, discharge, modify, change or affect the original liability under
this Note, either in whole or in part, of the undersigned. No delay or failure
by the Holder hereof in exercising any right, power, privilege or remedy shall
be deemed to be a waiver of the same or any part thereof; nor shall any single
or partial exercise thereof or any failure to exercise the same in any instance
preclude any future exercise thereof, or exercise of any other right, power,
privilege or remedy, and the rights and remedies provided for hereunder are
cumulative and not exclusive of any other right or remedy available at law or in
equity. The Holder of this Note may proceed against all or any of the Collateral
securing this Note or against any guarantor hereof, or may proceed
contemporaneously or in the first instance against the undersigned, in such
order and at such times following default hereunder as the Holder may determine
in its sole discretion. All of the undersigned's obligations under this Note are
absolute and unconditional, and shall not be subject to any offset or deduction
whatsoever. The undersigned waives any right to assert, by way of counterclaim
or affirmative defense (except for in the event of a compulsory counterclaim) in
any action to enforce the undersigned's obligations hereunder, any claim
whatsoever against the Holder of this Note.
The provisions of this Note shall be governed by and construed in
accordance with the laws of the State of Rhode Island.
ATTEST/WITNESS: MAKER:
Gum Tech International, Inc.
By: /s/ Shanna L. Gallo By: /s/ Jeffrey Bouchy
--------------------------------- ------------------------------
Name: Shanna L. Gallo Name: Jeffrey Bouchy
Title: Secretary & Treasurer
Page 2 of 2
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release ("Agreement") is entered into the
10th day of February, 1998, by and between GERALD KERN, a married person
("KERN"), and GUMTECH INTERNATIONAL INC., ("GUMTECH")
RECITALS
--------
A. KERN was an employee of GUMTECH from August 14, 1996 until February 10,
1998, when he resigned from his employment as Chief Executive Officer, Chairman
of the Board, President, and member of the Board.
B. KERN has been represented by legal counsel throughout the Litigation and
the negotiations that resulted in this Agreement, and he enters into this
Agreement freely, voluntarily and with a full and complete understanding of the
rights that he is forever surrendering, releasing, discharging and settling
under this Agreement.
C. Both parties desire to settle any and all claims that either may have
against the other except as specifically excluded.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual promises, covenants' and
relinquishment of rights agreed to herein, as well as other consideration, the
receipt and sufficiency of which is hereby acknowledged, KERN and GUMTECH agree
as follows:
1. Payment to KERN. Upon the full execution of this Agreement GUMTECH
shall issue a check, payable to KERN and Schleier Law Offices, P.C., in the
amount of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000). An additional FIFTY
THOUSAND DOLLARS ($50,000) from which all necessary withholdings will be taken
for all amounts attributed to wages will be issued to KERN. The remainder of the
FIFTY THOUSAND DOLLARS ($50,000) will be deposited in the trust account of Cheri
L. McCracken, Esq. for 120 days from the date of this agreement to be paid to
KERN at that time if KERN has not disparaged GUMTECH, its Directors, officers,
or employees. In the event GUMTECH believes KERN has disparaged GUMTECH within
the 120 day period from the date of this Agreement, the notification procedures
set forth in paragraph 8 shall be utilized. KERN shall be paid his full pay and
allowances up to and including February 10, 1998. The parties agree that
two-thirds (2/3) of the total of TWO HUNDRED THOUSAND DOLLARS ($200,000) is
attributable to the settlement of tort claims, including defamation and
intentional interference asserted by KERN.
KERN's stock options shall be Amended and Restated or Reissued for
100,000 shares of GUMTECH International Inc. common stock at the price of $5.81
<PAGE>
an option. The option shares shall be exactly like those he now holds. This
option will expire one year from the date of this Agreement. A cancellation
agreement will be executed for the options KERN now holds above 100,000 and for
the option on shares held by Ratcliff. GUMTECH will act promptly and reasonably
to enable KERN to exercise his options.
GUMTECH International Inc. shall forgive any salary advances and
interest thereon owed to it by KERN. The debt owed by KERN to GUMTECH
International Inc. of SIXTY-SIX THOUSAND ( $66,000.00) DOLLARS plus interest
which will become compensation on November 1, 1999, will be unconditionally
forgiven on November 1, 1999.
2. Release. By executing this Agreement, KERN, for himself and his
successors, heirs, assigns, agents and representatives, hereby knowingly and
voluntarily forever releases, discharges and forgives GUMTECH and all of its
directors, officers, shareholders, employees, agents, administrators, divisions,
and related corporations and entities, from and against any and all legal and
equitable claims, liabilities, causes of action, debts, damages and rights to
payment or performance of any nature whatsoever, whether known or unknown,
vested or contingent, liquidated or unliquidated asserted or not yet asserted,
arising from or in any way related to or associated with (i) KERN's employment
with GUMTECH, (ii) the resignation of said employment, (iii) any aspect of any
other relationship between KERN and GUMTECH, and (iv) any other event occurring
or transaction entered into at any time up to and including the date of February
10, 1998, including without limitation any matters that were or could have been
alleged by KERN. Without in any way limiting the generality of the foregoing,
KERN acknowledges by his execution of this Agreement that he has been paid in
full for all vacation pay, wages, leave, and other benefits to which he was
entitled as an employee of GUMTECH, other than the consideration given to- him
under this Agreement.
3. By executing this Agreement, GUMTECH, hereby knowingly and voluntarily
forever releases, discharges and forgives KERN for himself and his successors,
heirs, assigns, agents and representatives from and against any and all legal
and equitable claims, liabilities, causes of action, debts, damages and rights
to payment or performance, whether known or unknown, vested or contingent,
liquidated or unliquidated, asserted or not yet asserted, arising from or in any
way related to or associated with (i) KERN's employment with GUMTECH, (ii) the
resignation of said employment, (iii) any aspect of any other relationship
between KERN and GUMTECH, and (iv) any other event occurring or transaction
entered into at any time up to and including February 10, 1998. Notwithstanding
the foregoing, GUMTECH does not for itself, its shareholders, employees, or
agents release KERN of any actions that violate State or Federal regulatory
2
<PAGE>
statutes or regulations or any fraudulent action and cannot. Further, KERN
acknowledges by his execution of this Agreement that he has been paid in full
for all vacation pay, wages, leave, and other benefits to which he was entitled
as an employee of GUMTECH, other than the consideration given to him under this
Agreement.
4. Waiver of Reinstatement. Without in any way limiting the generality of
Section 3 of this Agreement, KERN hereby knowingly and voluntarily forever
releases, discharges, and forgives GUMTECH from and against any claim he may
have or have had for reinstatement to the position he held before the
resignation of his employment with GUMTECH. KERN further promises, covenants and
agrees that, from and after the execution of this Agreement, he will never apply
for employment with GUMTECH or any corporation or other entity related to
GUMTECH in any way, and, further, that if he does apply for such employment,
GUMTECH or its related corporation or entity, as the case may be, may refuse to
employ KERN for any reason or no reason, notwithstanding any contrary provision
of any law, statute, regulation or agreement otherwise applicable to such
application.
5. Employment Status and References. For all purposes, GUMTECH shall treat
the resignation of KERN's employment with GUMTECH as a voluntary resignation. If
any third party requests any information regarding such resignation, GUMTECH
shall indicate to such third party that the resignation was a voluntary
resignation. If any third party requests a reference regarding KERN, GUMTECH
shall provide only the foregoing information, together with KERN's name, dates
of employment and last position held, and will indicate to such third party that
the provision of only such information is GUMTECH's normal and standard
reference policy.
6. Life Insurance. KERN shall be assigned the ownership of life insurance
policy on his life that GUMTECH International Inc. has purchased on him, and the
beneficiary shall be changed to the Gerald Kern and Cynthia Kern Living Trust.
7. Insurance Indemnification. KERN will be indemnified by GUMTECH
International Inc. for his deductible on any matter that is covered by the
errors and omissions insurance policy.
8. Non-Disparagement. Both parties, including GUMTECH's officers and
directors, agree not to engage in any conduct or make any statement that would
disparage the other or their respective business interests in any way. GUMTECH
and KERN agree and understand that non-disparagement of the other party,
including GUMTECH's officers and Directors, is a material term of this Agreement
and that violation of such term would cause great harm to the other part](. If
either party believes that the other party has breached the obligation and
3
<PAGE>
commitments on non-disparagement, the non-breaching party shall give the alleged
breaching party reasonable notice, in writing, of the alleged breach, the
factual basis for such alleged breach, and an opportunity to respond within 7
days of the receipt of the notice of said alleged breach. After such 7 day time
frame has passed, the non-breaching party may commence arbitration as described
in Paragraph 7.4 of the Employment Agreement previously executed by KERN and
GUMTECH.
If the existence of a breach is disputed and arbitrated, the
losing party with respect to that issue will pay the prevailing party's
reasonable attorneys' fees and costs incurred in arbitrating the alleged breach.
The parties agree that the losing party shall pay the prevailing party
liquidated damages in the amount of Two Hundred Thousand ($200,000.00) Dollars
as the harm that would be caused by a breach of the non-disparagement obligation
is difficult if not impossible to accurately estimate momentarily. However, the
noted sum is deemed by the parties to be a reasonable forecast of just
compensation for the harm that would be caused by a breach of the obligation of
non-disparagement.
9. Tax Consequences and Indemnification. KERN will indemnify GUMTECH
International Inc. against all tax consequences that might arise because of the
allocation of the damages.
The parties agree that should any governmental authority
determine that all or any part of the payment under paragraph is taxable income,
KERN will be solely responsible for the payment of all such taxes. KERN agrees
to indemnify and hold GUMTECH harmless if any governmental authority seeks
payment of taxes, costs, assessments, penalties, damages, fees interest,
withholding, or other losses, including losses, if a claim or determination is
made that all or part of this damage payment should have been treated as taxable
income. KERN further agrees that, if the aforementioned sum or any portion
thereof, is treated as taxable income, KERN will promptly execute and deliver to
GUMTECH the applicable federal and state tax forms stating that he has paid the
taxes, costs, interest, withholding, assessments, penalties, damages or other
losses, if any. In addition, KERN understand and agrees that GUMTECH has no duty
to defend against any claim or assertion that all or part of this damage payment
should be treated as taxable income, and KERN agrees to assume responsibility
for contesting any such claim or assertion, and to cooperated fully in the
defense of any such claim or claims regarding the taxability of such sum which
is brought against GUMTECH.
10. Mutual Press Release. KERN and the GUMTECH International Inc. have
issued a mutual press release.
4
<PAGE>
11. Return All Company Equipment, Property. and Documents. KERN has
resigned all positions with GUMTECH International Inc. and will return all
company equipment, property, and documents. He has returned all credit cards he
has in his personal possession. Two phone accounts will be switched to KERN, to
be his accounts. He will be responsible for all charges on the account as of
February 10, 1998.
12. No Assignment. KERN represents and warrants to GUMTECH that he has not
sold, assigned, conveyed or otherwise transferred, in whole or in part, any
claim, cause of action, debt, damage, or right to payment or performance against
GUMTECH and that no other person owns or claims any interest in or to any such
claim, cause of action, debt, damage or right to payment or performance of KERN
against GUMTECH
13. No Admissions. By entering into this Agreement and by performing their
respective obligations hereunder, neither KERN nor GUMTECH admit any wrongdoing.
14. Voluntary and Knowing Agreement. KERN and GUMTECH each hereby state
that they have read this Agreement, have consulted with (or have had the
opportunity to consult with) legal counsel of its or his own choosing in
connection with the decision to enter into this Agreement, and have entered into
this Agreement knowingly, freely and voluntarily, with full and complete
knowledge of the meaning and significance of the terms of this Agreement.
15. Settlement Costs. KERN AND GUMTECH shall bear their own respective
costs, expenses and attorneys' fees incurred in negotiating the terms of the
Agreement.
16. Entire Agreement This Agreement constitutes the entire agreement
between KERN and GUMTECH pertaining to the subject matter of this Agreement. No
covenants, promises, representations or warranties have been made or are being
relied upon by either party except as expressly set forth herein. Any prior
negotiations, discussions or positions by and between the parties are hereby
merged into this Agreement, and shall not operate or be construed to alter the
terms or affect the interpretation of this Agreement. This Agreement may be
amended only by a writing signed by both KERN and GUMTECH; no such written
modification exists as of the execution of this Agreement.
17. Severability. If any provision of this Agreement is deemed to be
unenforceable, for whatever reason, by a court of competent jurisdiction, such
court shall have the authority to modify such provisions to the minimum extent
necessary, consistent with the intent of the parties, to make such provision
fully enforceable, or, if such provision cannot be so modified, then such
provision shall be severed from this Agreement and the remainder of this
Agreement shall continue in full force and effect, as if the Agreement had been
executed with the unenforceable provision so modified or severed, as the case
may be.
5
<PAGE>
18. Counterparts. This Agreement may be executed in counterparts, and when
all required signatures have been obtained on such counterpart pages, this
Agreement will be deemed to have been fully executed and to be fully binding on
all parties hereto as though all parties had signed a single Agreement rather
than counterpart originals thereof.
IN WITNESS WHEREOF, the undersigned have executed this Settlement Agreement
and Release as of the date and year first above written.
GUMTECH INTERNATIONAL INC.
By /s/ GERALD KERN
----------------------------- ---------------------------------
GERALD KERN
Its
----------------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this, the 2nd day of March, 1998, before me, the undersigned Notary
Public, personally appeared GERALD KERN, known to me or proved to be the
individual whose name is subscribed to the foregoing instrument, and
acknowledged that he executed the same for the purposes stated in the
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ Mary H. Portillo
-----------------------------------
My Commission Expires:
(Seal Omitted)
6
<PAGE>
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this, the ................. day of ................... 1998, before me,
the undersigned Notary Public, personally appeared ............................,
known to me or proved to be the individual whose name is subscribed to the
foregoing instrument, and acknowledged that he executed the same on behalf of
GUMTECH International Inc. for the purposes stated in the instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
------------------------------
Notary Public
My Commission Expires:
- ---------------------
7
<PAGE>
Cancellation Agreement
This Cancellation Agreement (this "Agreement") is entered into as of February
10, 1998, by and between Gum Tech International, Inc., a Utah corporation ("Gum
Tech"), and Gerald Kern (Kern").
Whereas, Gum Tech granted to Kern incentive stock options pursuant to the Gum
Tech International, Inc. Stock Option Plan, as amended, as follows (the
"Options"): (i) Grant of Incentive Stock Option dated August 14, 1996 for the
right to purchase 50,000 shares of voting, common stock, no par value of Gum
Tech ("Common Stock"); (ii) Grant of Incentive Stock Option dated December 30,
1996 for the right to purchase 250,000 shares Common Stock; (iii) Grant of
Incentive Stock Option dated September 23, 1997 for the right to purchase
156,500 shares of Common Stock;
Whereas, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Gum Tech and Kern desire to cancel and terminate
the Options;
Now, therefore, Gum Tech and Kern hereby irrevocably cancel and terminate the
Options and any other rights to acquire shares of Common Stock from Gum Tech,
excluding the option to purchase 100,000 shares of Common Stock pursuant to a
Grant of Incentive Stock Option dated February 10, 1998.
This Agreement shall be construed in accordance with and goverened by the laws
of the State of Arizona. The parties agree that any action interpreting the
Agreement shall be brought in the superior Court in and for the County of
Maricopa, Arizona and they consent to the jurisdiction and venue of such a
court. This agreement shall be binding upon the heirs, successors and assigns of
the parties hereto.
Gum Tech International, Inc., a Utah
corporation
By: /s/ Gary Kehoe
-------------------------------- --------------------------------
Gary Kehoe, President GERALD KERN
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officers to
execute and attest this Grant of Incentive Stock Option, and to apply the
corporate seal hereto, and the Grantee has placed his or her signature hereon,
effective as of the Date of Grant.
GUM TECH INTERNATIONAL, INC.,
a Utah corporation
By: /s/ Gary Kehoe
--------------------------------------
Gary Kehoe, President
ACCEPTED AND AGREED TO:
-----------------------------------------
GERALD KERN
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<ARTICLE> 5
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,664,962
<SECURITIES> 0
<RECEIVABLES> 1,211,734
<ALLOWANCES> 129,500
<INVENTORY> 1,033,382
<CURRENT-ASSETS> 6,316,013
<PP&E> 3,946,531
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0
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<COMMON> 12,088,150
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<SALES> 3,776,562
<TOTAL-REVENUES> 3,776,562
<CGS> 4,197,777
<TOTAL-COSTS> 4,197,777
<OTHER-EXPENSES> 209,783
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<INTEREST-EXPENSE> 1,090,618
<INCOME-PRETAX> (5,398,634)
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