UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB/A
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1997
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File number 0-27646
Gum Tech International, Inc.
--------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
Utah 87-0482806
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4205 North Seventh Avenue
Suite 300
Phoenix, AZ 85013-3080
--------------------------------------
(Address of principal executive offices)
(602) 277-0606
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
There are 5,836,460 shares of the registrant's common stock, no par value
outstanding as of October 31, 1997.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Note for Restatement of Financial Information 1
Item 1. Condensed Balance Sheet as of
September 30, 1997 2
Condensed Statements of Operations
for the three months ended September 30, 1997
and 1996 4
Condensed Statements of Operations
for the nine months ended September 30, 1997
and 1996 5
Condensed Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information and Signatures 13
<PAGE>
Restatement of Financial Information
The Company has restated its financial statements for the nine months ended
September 30, 1997 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 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.
Also, in March, 1997, the Company sold an aggregate of $2.53 million in
convertible debentures. These debentures had a beneficial conversion feature to
the investors that resulted in a $665,790 non-cash charge to interest expense.
In accordance with a newly issued pronouncement by the Emerging Issues Task
Force published in mid-1997, the Company restated its financial statements.
In the opinion of management, all material adjustments necessary to correct
the financial statements have been recorded.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
September 30, 1997
(Unaudited)
ASSETS
*
Current Assets:
Cash and cash equivalents $ 4,776,608
Restricted Cash 56,452
Accounts receivable, net of
allowance for doubtful accounts
of $21,516 987,796
Inventories 1,097,283
Current portion of notes receivable 311,585
Accrued interest 59,763
Prepaid expenses and other 157,592
------------
Total Current Assets 7,447,079
------------
Property and Equipment, at cost:
Machinery and production equipment 3,436,409
Office furniture and equipment 136,750
Leasehold improvements 190,526
------------
Total Property and Equipment 3,763,685
Less accumulated depreciation (890,574)
------------
Net Property and Equipment 2,873,111
------------
Other Assets:
Notes receivable 66,000
Intangible assets, net of
accumulated amortization 225,144
Deposits and other 245,029
------------
Total Other Assets 536,173
------------
Total Assets $ 10,856,363
============
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of
these condensed financial statements.
2
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
September 30, 1997
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
*
Current Liabilities:
Accounts Payable $ 359,718
Accrued interest 29,697
Customer deposits 816
Current portion of long-term debt 230,544
------------
Total Current Liabilities 620,775
------------
Long Term Debt, net of current portion above:
Notes payable 2,530,000
Equipment Lease Obligations 1,315,349
------------
Total Long Term Debt 3,845,349
------------
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,
5,761,460 shares issued and outstanding 11,898,150
Additional paid in capital 665,790
Accumulated deficit (6,173,701)
------------
Total Stockholders' Equity 6,390,239
------------
Total Liabilities and Stockholders' Equity $ 10,856,363
============
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of
these condensed financial statements.
3
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
September 30,
---------------------------
1997* 1996
---------------------------
Net Sales $ 1,284,746 $ 396,757
Cost of Sales 820,149 291,153
----------- -----------
Gross Profit 464,597 105,604
Operating Expenses 825,981 1,605,487
Research and Development 21,754 144,551
----------- -----------
Income (Loss) From Operations (383,138) (1,644,434)
----------- -----------
Other Income (Expense):
Interest and Other Income 67,083 27,714
Interest Expense (120,006) (41,816)
----------- -----------
Total Other Income (Expense) (52,923) (14,102)
----------- -----------
Income (Loss) Before Provision For Income Taxes (436,061) (1,658,536)
Provision (benefit) for income taxes -- --
----------- -----------
Net Income (Loss) $ (436,061) $(1,658,536)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number of Common
Shares Outstanding 6,653,686 4,879,566
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.07) $ (0.34)
=========== ===========
Fully diluted:
Weighted Average Number of Common
Shares Outstanding 6,653,686 4,879,566
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.07) $ (0.34)
=========== ===========
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended
September 30,
---------------------------
1997* 1996
---------------------------
Net Sales $ 2,592,434 $ 2,441,288
Cost of Sales 2,948,498 1,360,985
----------- -----------
Gross Profit (356,064) 1,080,303
Operating Expenses 2,211,162 3,229,902
Research and Development 92,971 195,324
----------- -----------
Income (Loss) From Operations (2,660,197) (2,344,923)
----------- -----------
Other Income (Expense):
Interest and Other Income 148,786 73,447
Interest Expense (979,956) (179,427)
----------- -----------
Total Other Income (Expense) (831,170) (105,980)
----------- -----------
Income (Loss) Before Provision
For Income Taxes (3,491,367) (2,450,903)
Provision (benefit) for income taxes -- (213,343)
----------- -----------
Net Income (Loss) $(3,491,367) $(2,237,560)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Primary:
Weighted Average Number of Common
Shares Outstanding 6,143,529 4,278,128
=========== ===========
Net Income (Loss) Per Share
of Common Stock $ (0.57) $ (0.52)
=========== ===========
Fully diluted:
Weighted Average Number of Common
Shares Outstanding 6,143,529 4,278,128
=========== ===========
Net Income (Loss) Per Share
of Common Stock $ (0.57) $ (0.52)
=========== ===========
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of
these condensed financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-----------------------------------
1997* 1996
-----------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income (loss) $(3,491,367) $(2,237,560)
Adjustments to reconcile net income
(loss) to net cash (used)
by operating activities:
Depreciation 431,171 317,446
Amortization 34,504 --
Interest expense from beneficial conversion
feature of notes payable 665,790 --
Deferred income taxes -- (215,412)
Accrued interest on notes receivable (59,763) (20,652)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (233,924) 303,452
Decrease in income tax receivable 234,440 --
Decrease (Increase) in inventories 269,661 (560,654)
Decrease (Increase) in prepaid
expenses and other (94,073) (60,241)
Decrease (Increase) in deposits and other 166,623 (120,049)
(Decrease) in accounts payable and accrued expenses (8,850) (337,914)
(Decrease) in customer deposits (64,684) (36,959)
----------- -----------
Net Cash (Used) By Operating Activities (2,150,472) (2,968,543)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (165,800) (648,339)
Decrease in notes receivable (61,585) (216,000)
----------- -----------
Net Cash (Used) By Investing Activities (227,385) (864,339)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 2,530,000 706,397
Principal payments on notes payable (165,728) (2,536,942)
Issuance of common stock -- 8,430,000
Issuance of common stock upon exercise
of options/warrants 4,121,768 --
Costs for issuance of common stock (188,678) --
Debt issuance costs incurred (259,648) --
Offering costs incurred -- (1,277,807)
----------- -----------
Net Cash Provided By Financing Activities 6,037,714 5,321,648
----------- -----------
Net Increase in Cash and Cash Equivalents 3,659,857 1,488,766
Cash and Cash Equivalents at
Beginning of Period 1,116,751 503,327
----------- -----------
Cash and Cash Equivalents at
End of Period $ 4,776,608 $ 1,992,093
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 209,515 $ 286,790
Income taxes -- 23,165
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Capital lease obligation incurred for new equipment
$ -- $ 1,194,554
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral part of
these condensed financial statements.
6
</TABLE>
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial information of the Company is prepared in
accordance with the rules prescribed for filing condensed interim financial
statements and, accordingly, does not include all disclosures that may be
necessary for complete financial statements prepared in accordance with
generally accepted accounting principles. The disclosures presented are
sufficient, in management's opinion, to make the interim information
presented not misleading. All adjustments, consisting of normal recurring
adjustments, which are necessary so as to make the interim information not
misleading, have been made. Results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of results of operations
that may be expected for the year ending December 31, 1997. It is
recommended that this financial information be read with the complete
financial statements included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996 previously filed with the Securities
and Exchange Commission.
2. Restatement of Financial Information
The Company has restated its financial statements for the nine months ended
September 30, 1997 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 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.
Also, in March, 1997, the Company sold an aggregate of $2.53 million in
convertible debentures. These debentures had a beneficial conversion
feature to the investors that resulted in a $665,790 non-cash charge to
interest expense. In accordance with a newly issued pronouncement by the
Emerging Issues Task Force published in mid-1997, the Company restated its
financial statements.
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>
Quarter Ended September 30, 1997 Nine Months Ended September 30, 1997
As reported As restated As reported As restated
<S> <C> <C> <C> <C>
Net sales $1,783,334 $1,284,746 $6,194,689 $2,592,434
Net income (loss) 24,800 (436,061) 716,925 (3,491,367)
Net income (loss)
per share .00 (.07) .13 (.57)
Retained earnings
(deficit) end of period (1,212,897) (6,173,701) (1,212,897) (6,173,701)
</TABLE>
3. Net income (loss) per share of common stock is computed using the weighted
average number of common shares and common share equivalents outstanding
during the periods presented. Common share equivalents result from
outstanding options and warrants to purchase common stock. Pursuant to the
requirements of the Securities and Exchange Commission, common shares
issued by the Company during the twelve months immediately preceding the
initial public offering, plus the number of shares issuable upon exercise
of stock options granted during this period, have been included in the
calculation of the shares used in computing net income (loss) per share as
if they were outstanding for all periods presented (using the treasury
stock method and the estimated public offering price in calculating
equivalent shares).
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products. 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 which 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 which commenced operations in late March, 1996. The
facility currently has 34 employees and by the end of 1996 the Company produced
100% of its chewing gum products.
The Company distributes its branded and private-label nutrient and
therapeutic chewing gum products to many of the nation's top drugstore chains,
including Rite-Aid, Walgreens, Drug Emporium, Longs, Thrifty, Phar-Mor, Eckard
and Payless. The Company also has nationwide distribution in the mass market
chains (Target, Kmart, Meijer), major supermarket chains (Smith's , Lucky's) and
various health food distributors. In addition, the Company is increasing
distribution and further expanding its presence in international markets
including Japan, Korea, Russia, Scandinavia, and Europe. The Company is also
involved in many private label endeavors, including the research and development
of various nicotine and non-nicotine smoking cessation products.
Results of Operations for the Three Months Ended September 30, 1997 Compared to
the Three Months Ended September 30, 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:
Quarters Ended September 30,
1997* 1996
------------------ --------------------
Net sales $1,284,746 100% $396,757 100%
Cost of sales 820,149 64 291,153 73
Gross profit 464,597 36 105,604 27
Operating expenses 825,981 64 1,605,487 405
Research and development 21,754 2 144,551 36
Income (Loss) from operations (383,138) (30) (1,644,434) (414)
Interest and other income 67,083 5 27,714 7
Interest expense (120,006) 9 (41,816) 11
Provision (benefit) for income taxes - - - -
Net income (Loss) (436,061) (34) (1,658,536) (418)
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
8
<PAGE>
Net Sales. Net sales increased by $887,989, or 224%, to $1,284,746 for the
three months ended September 30, 1997 compared to $396,757 for the three months
ended September 30, 1997. The majority of the increase in the Company's sales
were from private label customers. Also, CigArrest, a smoking cessation gum had
a significant impact on chain drug store sales.
Cost of Sales. Cost of sales decreased 9% to $820,149 or 64% of net sales
for the three months ended September 30, 1997 compared to $291,153 or 73% of net
sales for the three months ended September 30, 1996. The decrease in cost of
sales percentage is directly related to the increased manufacturing volume
during the quarter which led to a lower cost per product produced. In addition,
the sales mix of CigArrest and certain private label customers contributed to
this decrease.
Gross Profit. Gross profit, as a percentage of net sales, increased by 9%
to $464,597 or 36% of net sales for the three months ended September 30, 1997
compared to $105,604 or 27% of net sales for the same period in 1996. The
increase in gross profit was directly related to the decrease in cost of sales.
Operating Expenses. Operating expenses were $825,981, a decrease of
$779,506 for the three months ended September 30, 1997 compared to the same
period in 1996. Approximately $440,340 of these operating expenses for the three
months ended September 30, 1997, were attributable to the operations of the
manufacturing plant, of which, $134,000 were directly related to depreciation of
the plant's manufacturing equipment. Factors contributing to a decrease in
non-manufacturing operating expenses for the three months ended September 30,
1997 were primarily related to advertising of $388,362 versus $742,985 for the
same period in 1996. Other significant non-manufacturing operating expenses for
the three months ended September 30, 1997 were administrative management labor
$190,159, accounting, legal and professional consulting fees $116,376, travel
and trade shows $55,978, general administrative labor $52,964 and sales labor
$35,422.
Research and Development. Research and Development expenditures were
$21,754 for the three months ended September 30, 1997, compared to $144,551 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; an Antacid/Calcium gum, which prevents, helps and treats osteoporosis
and prevents upset stomachs; a newly reformulated Love Gum; and other various
private label dental, smoking cessation and body building cube gums.
Interest and Other Income and Interest Expense. Interest and other income
was $67,083 an increase of $39,369 for the three months ended September 30,
1997, primarily as a result of an increase in working capital from equity
financings that were invested in short-term investments. Interest expense was
9
<PAGE>
$120,006 an increase of $78,190 for the three months ended September 30, 1997,
primarily as a result of the Company issuing $2,530,000 of subordinated
convertible notes in February and March, 1997.
Net Income (Loss). Net loss decreased to $(436,061) for the three months
ended September 30, 1997 compared to a net loss of $(1,658,536) for the same
period in 1996.
Results of Operations for the Nine Months Ended September 30, 1997 Compared to
the Nine Months Ended September 30, 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:
Nine Months Ended September 30,
1997* 1996
------------------- -------------------
Net sales $2,592,434 100% $2,441,288 100%
Cost of sales 2,948,498 114 1,360,985 56
Gross profit (356,064) (14) 1,080,303 44
Operating expenses 2,211,162 85 3,229,902 132
Research and development 92,971 4 195,324 8
Income (Loss) from operations (2,660,197) (103) (2,344,923) (96)
Interest and other income 148,786 6 73,447 3
Interest expense (979,956) 38 (179,427) 7
Provision (benefit) for income taxes - - (213,343) (8)
Net Income (Loss) (3,491,367) (135) (2,237,560) (92)
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
Net Sales. Net sales increased by $151,146, or 6%, to $2,592,434 for the
nine months ended September 30, 1997 compared to $2,441,288 for the nine months
ended September 30, 1997. The Company had significant increases in sales to its
chain drug stores, its mass market stores and its private label customers. These
significant increases were offset by zero sales to National Distributing Group,
a former major customer and a decrease in shipments to health food and
international customers.
Cost of Sales. Cost of sales increased 58% to $2,948,498 or 114% of net
sales for the nine months ended September 30, 1997 compared to $1,360,985 or 56%
of net sales for the nine months ended September 30, 1996. The primary reasons
for the increase is the Company's sales under its Barter Agreements have been
recorded at a zero value with a cost of sale of $715,164. In addition, the
Company's manufacturing facility has been operating at minimal capacity
resulting in a higher price per pound of gum.
Gross Profit. Gross profit, as a percentage of net sales, decreased by 58%
to ($356,064) or (14%) of net sales for the nine months ended September 30, 1997
compared to $1,080,303 or 44% of net sales for the same period in 1996. The
decrease in gross profit was directly related to the increase in cost of sales.
10
<PAGE>
Operating Expenses. Operating expenses were $2,211,162, a decrease of
$1,018,740 for the nine months ended September 30, 1997 compared to the same
period in 1996. Approximately $1,223,124 of these operating expenses were
attributable to the operations of the manufacturing plant, of which, $417,592
were directly related to depreciation of the plant's manufacturing equipment.
Factors contributing to a decrease in non-manufacturing operating expenses for
the nine months ended September 30, 1997 were primarily related to advertising
of $570,159 versus $1,062,511 for the same period in 1996. Other significant
non-manufacturing operating expenses for the nine months ended September 30,
1997 were administrative management labor $541,116, travel and trade shows
$282,865, accounting, legal and professional consulting fees $301,396, general
administrative labor $165,957, art/production fees $125,471 and sales labor
$100,097.
Research and Development. Research and Development expenditures were
$92,971 for the nine months ended September 30, 1997, compared to $195,324 for
the same period in 1996. The majority of these costs for the nine months ended
September 30, 1997 were related to the formulation of the following: Vita ACES+,
an anti-oxidant gum; Chew and Sooth Zinc gum, a throat soother; High Gear, and
energy gum; Calcium gum, prevents, helps and treats osteoporosis; Ginseng gum,
helps maintain overall good health; and other various private label dental,
smoking cessation and body building cube gums.
Interest and Other Income and Interest Expense. Interest and other income
was $148,786, an increase of $75,339 for the nine months ended September 30,
1997, primarily as a result of an increase in working capital from equity
financings that were invested in short-term investments. Interest expense was
$979,956 an increase of $800,529 for the nine months ended September 30, 1997.
The increase was a result of a beneficial conversion feature received by
investors that participated in the Company's convertible debentures issued on
March 6, 1997 which resulted in a $665,790 non-cash charge to interest expense.
Net Income (Loss). Net loss increased to $(3,491,367) for the nine months
ended September 30, 1997 compared to a net loss $2,237,560 for the same period
in 1996.
Liquidity and Capital Resources
As of September 30, 1997, the Company's working capital was $6.83 million
compared to $2.90 million at December 31, 1996. Cash used by operating
activities was $2.15 million primarily as a result of the Company's net loss for
the nine months ended September 30, 1997.
Investing activities consumed $227,385 in cash for the nine months ended
September 30, 1997 compared to $864,339 of cash used in the same period of 1996.
This was primarily from the acquisition of additional manufacturing equipment.
11
<PAGE>
Financing activities provided $6.04 million in cash for the nine months
ended September 30, 1997 compared to $5.32 million in cash 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.
Outlook
The statements contained in this section are based on current expectations.
These statement are forward looking, and actual results may differ materially.
The Company expects to continue to support CigArrest, the reformulated
ChromaTrim and CitrusSlim weight loss/control gums and all other new products
(i.e. Calcium gum, Ginseng gum and the Zinc Chew and Sooth gums) with various
advertising campaigns and direct response. During the fourth quarter of 1997,
the Company has committed to approximately $540,000 of advertising.
The $3.4 million received from the Common Stock Purchase Warrant redemption
will be added to the Company's working capital and may be used to expand and
completely rebuild the Company's manufacturing and warehouse facilities when
demand outstrips capacity.
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; unused barter credits, if any; 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.
12
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
- -------------------------
On October 16, 1996, a lawsuit was filed against the Company in the United
States District Court for the Central District of California, CV-95-9784. The
action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The complaint, as it
relates to the Company, principally alleges that the Company engaged in unlawful
rebates, appropriations and overcharges, commercial bribery, fraud and unjust
enrichment. Plaintiff seeks compensatory and punitive damages. The Company
denies all allegations and intends to vigorously defend the suit.
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. There is no lawsuit filed at this time. The Company intends
to contest these allegations and all alleged damages vigorously if a suit should
be brought. The Company believes it is insured for its own attorneys fees and
costs in this matter.
On August 27, 1997, a lawsuit was filed by Paul R. Janssens-Lens against
Gum Tech International, Inc., in the case of Janssens-Lens v. Gum Tech
International, Inc., Kensington Securities, Inc., Kirtis Wyatt and Jane Doe
Wyatt in the Superior Court of Arizona, in and for the County of Maricopa, case
number CV97-15896. The Jansenns-Lens lawsuit alleges both breach of contract and
tort actions, including intentional interference with prospective economic
advantage, misrepresentation, securities fraud and consumer fraud and seeks
compensatory damages in an amount of no less than $1,680,000, together with an
award of punitive damages in an amount to be determined at trial. The lawsuit
settled in the early stages between plaintiff Paul R. Janssens-Lens and
defendants Kensington Securities, Inc. and Kirtis Wyatt. The Company did not
participate in this settlement agreement. The plaintiff is now in the process of
determining whether he believes he still has a viable cause of action against
the Company. In the event the plaintiff elects to proceed against the Company,
the Company intends to vigorously defend the lawsuit. The Company believes it is
insured for its costs in this matter.
Item 2. Changes in Securities
- -----------------------------
None
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
Item 5. Other
- -------------
None
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
A. Exhibits
None
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated August 14, 1997,
where Gum Tech International, Inc. and Nabisco, Inc. entered into a "Joint
Development Agreement" to develop and commercialize a number of new and improved
products. In the development phase of the agreement, Gum Tech will combine its
expertise in areas such as coatings and active ingredients with Nabisco's
expertise in areas such as gum bases and flavors. Gum Tech commits to having a
minimum manufacturing capacity for at least 20 million units from now until June
1, 1998.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Gum Tech International, Inc.
/s/ Gary Kehoe
----------------------------------------
Gary Kehoe
President and Chief Operating Officer
/s/ Jeffrey L. Bouchy
----------------------------------------
Jeffrey L. Bouchy
Senior Vice President -
Chief Financial Officer
March 25, 1998
15
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