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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
of Incorporation or Organization)
246 East Watkins Street
Phoenix, Az 85004
(Address of principal executive offices) (Zip Code)
(602) 252-1617
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Check if there is no disclosure contained herein of delinquent filers
in response to Item 405 of Regulation S-B, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenues for its year ended December 31, 1998 were
$5,272,547.
As of March 26, 1999, 7,144,061 shares of the Registrant's no par value
Common Stock were outstanding. As of March 26, 1999, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$66,711,070 based upon a closing bid price of $9.75 per share of Common Stock on
the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO ITS
FORTHCOMING 1999 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE
INTO PART III HEREOF TO THE EXTENT PROVIDED HEREIN. EXCEPT AS SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN, THE PROXY STATEMENT IS NOT BEING FILED AS PART
OF THIS ANNUAL REPORT ON FORM 10-KSB.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1 -- Description of Business.................................... 3
Item 2 -- Description of Property.................................... 7
Item 3 -- Legal Proceedings.......................................... 7
Item 4 -- Submission of Matters to a Vote of Security Holders........ 8
PART II
Item 5 -- Market for Common Equity and Related Stockholder Matters... 8
Item 6 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 7 -- Financial Statements....................................... 14
Item 8 -- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 15
PART III
Item 9 -- Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act....................................... 15
Item 10 -- Executive Compensation.................................... 15
Item 11 -- Security Ownership of Certain Beneficial Owners
and Management............................................ 15
Item 12 -- Certain Relationships and Related Transactions............ 15
Item 13 -- Exhibits, List and Reports on Form 8-K.................... 15
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
SUMMARY
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand. Specialty chewing gums include vitamins, herbals, and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. Gum Tech manufactures and continues to develop specialty
chewing gums that provide the following benefits:
+ promote oral hygiene and breath freshness;
+ promote weight management;
+ reduce pain;
+ relieve indigestion;
+ contribute to energy and endurance;
+ reduce the risk of osteoporosis;
+ reduce tobacco cravings; and
+ relieve cold and flu symptoms.
A substantial majority of Gum Tech's sales currently are attributable to
products developed, manufactured and packaged by Gum Tech for marketing and sale
by major branded and private label consumer products companies such as Breath
Asure, Inc., Ranir/DCP, Inc., Heritage Consumer Products, Herbalife
International, Inc., and Pharma-Green Ltd. Gum Tech also is actively involved in
discussions with other major consumer product companies regarding the
development and formulation of a variety of specialty chewing gum products.
In 1998, following a significant management restructuring, Gum Tech changed
its principal strategy from developing, manufacturing, and distributing its own
branded and private label gum products to developing, manufacturing, and
packaging specialty gum products for sale and distribution by major branded and
private label customers that have the capital resources and distribution
capability to promote and market specialty chewing gums on a large national and
international scale. Gum Tech adopted this change in strategy primarily because
it did not have the financial resources, name recognition, and distribution
capability to successfully market and distribute its gums on a wide scale basis.
Gum Tech operates the only stainless steel gum manufacturing facility in
the United States registered with the Food and Drug Administration to produce
Over-The-Counter (OTC) chewing gum products. Completed in 1996, Gum Tech
believes this facility is the only facility in the United States that currently
is capable of producing over-the-counter drugs in chewing gum form.
Gum Tech recently announced a joint venture with Gel Tech, Inc., a
California corporation, to manufacture, market and distribute health-related
products using a patent-pending, nasal gel technology. The initial product to be
developed and marketed by this joint venture is Zicam(TM), a nasal gel formula.
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An initial internal study of Zicam indicated that Zicam reduced the duration of
the common cold from an average of 10-14 days to 1-3 days. Gum Tech and Gel Tech
have signed a letter of intent under which both parties would transfer their
respective interests in the patent rights to the nasal gel technology in
exchange for membership interests in Gel Tech LLC, a recently formed Arizona
limited liability company. The letter of intent also provides that Gum Tech will
have a 60% interest in the capital and profits of the joint venture and that
parties affiliated with Gel Tech, Inc. will own a 40% interest in the capital
and profits of the joint venture. In addition, the letter of intent contemplates
that Gum Tech will lend up to $3.5 million dollars to the joint venture, which
will be secured by a pledge of the intellectual property rights contributed to
the joint venture. The parties to the joint venture currently are negotiating a
definitive operating agreement and related documents. Until the parties execute
definitive agreements, Gum Tech cannot assure that the actual terms will not
differ materially from those contemplated by the letter of intent, or that the
parties will be successful in reaching a definitive agreement. Because Zicam is
in the initial stages of production and distribution, there can be no assurance
that this product will be successful.
Gum Tech was incorporated in Utah in 1991. Gum Tech's principal executive
offices are located at 246 E. Watkins Street, Phoenix, Arizona and its telephone
number is (602) 252-1617.
STRATEGY
Gum Tech is pursuing the following business strategies:
+ CONTINUE TO RESEARCH AND DEVELOP NEW GUM PRODUCTS. Gum Tech possesses
considerable gum formulation expertise, and together with its existing
and potential customers, develops new products in the specialty
chewing gum market. The Company is uniquely positioned to manufacture
over-the- counter gum products because it possesses the only stainless
steel gum making facility in the United States registered with the FDA
to produce over-the-counter chewing gum products.
+ PARTNER WITH MAJOR CONSUMER PRODUCT COMPANIES TO INCREASE SALES. Since
early 1998, the Company has pursued a strategy of partnering with
major consumer products companies that have the financial resources
and distribution capability to market and distribute specialty chewing
gum products on a national scale. Gum Tech expanded these
relationships significantly during 1998 with the addition of Breath
Asure, Ranir/DCP, Heritage Consumer Products, Pharma-Green Ltd. (an
Israeli company), and EcoDenT, among others.
+ IMPROVE ITS MANUFACTURING OPERATIONS TO ENHANCE EFFICIENCY AND
INCREASE PROFIT MARGINS. Gum Tech has recently expanded its
operations, including adding personnel and additional packaging and
coating equipment, to meet an expected increase in demand for several
products. Following this expansion of operations, Gum Tech is
continuing to take steps to increase its business and to lower the
costs of manufacturing its gum products.
+ CONTINUE TO EFFECTIVELY MARKET GUM TECH BRANDED PRODUCTS. While Gum
Tech has changed its principal strategy to focus on contract
manufacturing for others, Gum Tech continues to support several of its
own branded products and believes that these products and related
marketing efforts provide a showcase for new product concepts and
demonstrate Gum Tech's expertise in developing new gum formulations.
+ EFFECTIVELY MANAGE THE DEVELOPMENT AND GROWTH OF THE GEL TECH LLC
JOINT VENTURE AND THE MANUFACTURING AND MARKETING OF ZICAM. Zicam is a
new product that Gum Tech believes represents an opportunity for
substantial growth in its revenues. In order to realize this growth in
revenues, however, Gum Tech must effectively manage the development
and growth of its joint venture with Gel Tech and Zicam must achieve
significant market acceptance. In addition, Gum Tech has committed to
the Gel Tech LLC to fund its initial capital requirements to develop,
manufacture, and market Zicam, including the costs necessary to
conduct an independent clinical study.
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PRODUCT INFORMATION
The table below describes certain information related to specific chewing
gum products currently manufactured by Gum Tech for other consumer products
companies.
<TABLE>
<CAPTION>
PRODUCT BENEFITS TO USER MARKET Distributed by
- ------- ---------------- ------ --------------
<S> <C> <C> <C>
Breath Asure Dental Gum(TM) Promotes oral hygiene and breath freshness Oral Care Breath Asure
Private label dental gums Promotes oral hygiene and breath freshness Oral Care Ranir/DCP
AcuTrim(R) Promotes weight management OTC drug Heritage Consumer Products
Aspergum(R) Pain relief OTC drug Heritage Consumer Products
Chooz Antacid and prevents osteoporiasis OTC drug Heritage Consumer Products
Herbalife NRG(R) Improves energy & endurance Dietary supplement Herbalife
Herbalife Chew Slim(R) Promotes weight management Dietary supplement Herbalife
Pharma-Green seven varieties Various Dietary supplement Pharma-Green Ltd.
Brain Gum Improves brain function Dietary supplement KK Research
</TABLE>
Gum Tech also markets the following products under the Gum Tech brand: Ginseng,
Chew & Soothe(R), CitrusSlim(R), Chromatrim(R), Calcium, Zone(TM),
DentaHealth(R) and Love Gum(R).
MANUFACTURING AND PACKAGING
The manufacture of specialty chewing gums involves:
+ storing bulk raw materials and "fine" raw materials, such as flavor,
colors and active ingredients;
+ producing and mixing the gum base in large stainless steel mixers;
+ extruding the gum into selected sizes and shapes;
+ coating the gum, generally with a sugarless coating solution;
+ branding the product if required;
+ packaging the gum in blister packages; and
+ packaging the blisters, according to customer specifications, for
shipment.
All of Gum Tech's gum products contain one or more active ingredients which
are added either to the gum center in the mixing stage or included in the
coating process.
Prior to commencing production of the chewing gum, Gum Tech records lot
numbers for all ingredients, examines and files certificates of ingredients,
performs quality control tests, and sanitizes equipment and utensils. Gum Tech
personnel conduct additional quality control tests throughout the manufacturing
process. Gum Tech manufactures its products in compliance with good
manufacturing procedures requiring written standard operating procedures.
Gum Tech manufactures all of its gum products, including those marketed and
distributed by others. In 1998, Gum Tech added significantly to its coating and
packaging capability and secured an additional gum rolling line to meet an
anticipated increase in demand for its gums.
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COMPETITION
Although the specialty gum market is emerging as a market category distinct
from the traditional, established chewing gum market, Gum Tech and the companies
to whom it sells face significant competition in each of the four categories in
which they operate. These categories include oral care products, OTC drugs,
smoking cessation and dietary supplements. In the oral care products market, Gum
Tech manufactures products for Breath Asure and Ranir/DCP, which compete
directly with Arm & Hammer dental gum, Trident Advantage and V-6 dental gum. Gum
Tech manufactures OTC drug-related gum products, including Aspergum, an
analgesic, Chooz, an antacid/calcium supplement, and AcuTrim, a dietary gum.
Each of these products competes generally with analgesics, antacids, and dietary
products produced and marketed by major consumer products companies. Gum Tech is
evaluating opportunities in the smoking cessation market, which is currently
dominated by the Nicorette product marketed by Pharmacia and Upjohn. In the
dietary supplement market, Gum Tech's various gum products compete with a large
number of non-gum dietary supplement products.
Competitive factors in the chewing gum industry include price, flavor, and
name recognition resulting from media advertising. Gum Tech currently does not
have the capital resources, marketing and distribution networks, product name
recognition, and advertising budget to produce or introduce chewing gum brands
that could compete effectively with the multi-national chewing gum manufacturers
and large specialty chewing gum marketers. Accordingly, Gum Tech has adopted a
strategy of partnering with major branded and private label customers that
possess the resources and capabilities needed to market and distribute gum
products on a wide scale basis.
FDA AND OTHER GOVERNMENT REGULATION
Gum Tech is subject to various Federal, state and local laws affecting its
business. All of Gum Tech's products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. In addition, some of Gum Tech's products are considered
"drugs," which require that the manufacture of such products comply with "good
manufacturing practices" mandated by the FDA, which prescribes specific
requirements and procedures for the manufacture of FDA-regulated drug products.
If Gum Tech fails to comply with these requirements and procedures, the FDA has
the right to restrict the sale of or remove such products from the market. Gum
Tech believes all of its products comply with all regulatory requirements
including the FDA manufacturing standards and practices for drug products.
Advertising claims made by Gum Tech with respect to its products are also
subject to the jurisdiction of the FDA and the Federal Trade Commission. In both
cases, Gum Tech is required to obtain scientific data to support any advertising
or labeling of health claims it makes concerning its products.
In addition, Gum Tech'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,
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 Gum Tech's manufacturing operations. Gum Tech also is subject to
federal and state laws establishing minimum wages and regulating overtime and
working conditions.
TRADEMARKS, TRADE NAMES AND PROPRIETARY RIGHTS
Gum Tech owns a perpetual, exclusive U.S. license (and a non-exclusive
license abroad) to use Microdent(TM), a plaque-reducing agent, in its coated
chewing gum products. Microdent is the critical ingredient in the chewing gums
manufactured and packaged by Gum Tech for Breath Asure and Ranir/DCP.
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Gum Tech routinely seeks trademark protection from the United States Patent
Office ("USPO") and from similar agencies in foreign countries for chewing gum
brands. Despite these protections, Gum Tech may not be able to successfully
defend any trademarks granted to it against claims from or use by competitors or
that trademark applications will be approved by the USPO or any similar foreign
agency.
Gum Tech 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 this
proprietary information. Despite these precautions, these steps may not be
adequate to prevent misappropriation of Gum Tech's proprietary information or
that Gum Tech's competitors will not independently develop chewing gum
formulations and processes that are substantially equivalent or superior to
those developed by Gum Tech.
EMPLOYEES
As of March 1, 1999, the Company employed approximately 60 individuals,
including 2 executive officers, 42 manufacturing and warehouse personnel, 4
research and development personnel, and 12 administrative/sales personnel.
ITEM 2. DESCRIPTION OF PROPERTY
Gum Tech leases an approximately 28,000 square foot building for its
principal executive offices and 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. In
September 1998, Gum Tech leased an additional 31,000 square foot building
located near its principal executive offices and manufacturing facility to house
Gum Tech's warehouse and packaging operations. This lease provides for monthly
rent of approximately $11,000 and a five year term, subject to a five year
renewal option.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
On October 16, 1996, a lawsuit was filed against Gum Tech and other parties
in the United States District Court for the Central District of California,
CV-95-9784. The action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The
complaint, as it relates to Gum Tech, principally alleged that Gum Tech engaged
in unlawful rebates, appropriations and overcharges, commercial bribery, fraud
and unjust enrichment. On September 4, 1998, the court granted a motion for
summary judgment in Gum Tech's favor, and dismissed the plaintiff's claims
against Gum Tech and its current and former directors. The ruling remains
subject to appeal.
On July 2, 1998, Kirk Gossett, a former employee of Gum Tech, filed a
lawsuit against Gum Tech and three officers and employees of Gum Tech, and their
spouses, alleging violation of overtime requirements of the Fair Labor Standards
Act. Mr. Gossett is claiming damages of over $80,000, in addition to seeking
treble damages permitted under the Fair Labor Standards Act. Gum Tech denies all
allegations and intends to vigorously defend the suit.
On January 27, 1999, an action was filed against Gum Tech and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. As it relates to Gum Tech, the
complaint alleges intentional interference with business relations, intentional
misrepresentation, negligent misrepresentation, securities fraud, and consumer
fraud. The plaintiff seeks compensatory damages of $720,000, unspecified
punitive damages, and attorneys' fees and costs. Gum Tech denies the plaintiff's
allegations and intends to vigorously defend the action.
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Gum Tech 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 Gum Tech's management, is individually or
collectively material to Gum Tech's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Gum Tech's Common Stock has traded on the Nasdaq National Market under the
symbol "GUMM" since April 24, 1996.
The following table sets forth for the quarters indicated the range of high
and low closing prices of the Company's common stock as reported by the Nasdaq
National Market, but does not include retail markup, markdown or commissions.
MARKET PRICE
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HIGH LOW
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FISCAL YEAR 1997
First Quarter .............................. $ 8.75 $ 5.50
Second Quarter ............................. $ 11.875 $ 7.688
Third Quarter .............................. $ 15.125 $ 10.75
Fourth Quarter ............................. $ 11.75 $ 6.75
FISCAL YEAR 1998
First Quarter .............................. $ 7.375 $ 4.8125
Second Quarter ............................. $ 7.5625 $ 5.25
Third Quarter .............................. $ 10.75 $ 7.1875
Fourth Quarter ............................. $ 8.00 $ 5.4375
FISCAL YEAR 1999
First Quarter (through March 26, 1999) ..... $ 14.6719 $ 8.3750
As of March 26, 1999, Gum Tech had approximately 3,571 record and
beneficial stockholders.
DIVIDEND POLICY
Gum Tech 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 Gum Tech'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
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand. Specialty chewing gums include vitamins, herbals, and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. A substantial majority of Gum Tech's sales currently are
attributable to products developed, manufactured and packaged by Gum Tech for
marketing and sale by major branded and private label consumer products
companies.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31,1997.
The following table presents certain Statement of Operations information
expressed in dollars and as a percentage of Net Sales for the periods indicated:
YEARS ENDED DECEMBER 31
--------------------------------------------
1998 1997
-------------------- --------------------
Net Sales ...................... $ 5,272,547 100% $ 3,776,562 100%
Cost of Sales .................. 4,357,010 83 4,197,777 (111)
Gross profit ................... 915,537 17 (421,215) (11)
Operating expenses ............. 6,164,022 117 3,881,238 103
Research & development ......... 667,067 12 209,783 5
Income (loss) from operations .. (5,915,552) (112) (4,512,236) (119)
Interest and other income ...... 127,947 2 204,220 5
Interest expense ............... 473,811 9 1,090,618 29
Provision (benefit) for
income taxes ................. -- -- -- --
Net income (loss) .............. $(6,261,416) (119) $(5,398,634) (143)
NET SALES. Net sales for 1998 were $5.27 million, approximately 40% above
the 1997 level. Sales in 1998 reflect the change in the Company's strategy early
in the year to a focus on contract manufacturing whereas sales in 1997 largely
reflect sales of Cigarrest, which the Company marketed, and sales of the
Company's own gum products. Sales in 1998 included deliveries of diet and energy
gums to Herbalife in the first half of the year, Aspergum (an analgesic gum),
and Chooz (an antacid gum) in the second quarter, Breath Asure dental gum in the
third quarter, and Ranir/DCP private label dental gum, AcuTrim (a diet gum),
seven different gums to Pharma-Green and a dental gum to EcoDenT in the fourth
quarter.
COST OF SALES. Cost of sales increased to $4.4 million, approximately
$159,000 above the 1997 level, primarily reflecting the increased level of
sales. In 1997, the Company recorded sales under its barter agreements at a zero
value with a cost of sales of $715,000. Adjusting for this cost, the cost of
sales for 1997 was $3.5 million, or 92% of net sales. The improvement in the
gross profit percentage from 8% in 1997 to 17% in 1998 is due to increased
utilization of plant facilities resulting in lower per unit overhead costs and
the efficiencies realized by producing larger quantities of the same gum. Both
periods were impacted by sizable write-offs of obsolete inventory ($260,000 in
1998 and $350,000 in 1997).
GROSS PROFIT. Gross profit for 1998 increased to $915,537 reflecting the
higher level of sales and increased utilization of plant facilities.
OPERATING EXPENSES. Operating expenses in 1998 were significantly impacted
by one-time charges related to the management restructuring that occurred in
early 1998 and continuing charges attributable to the Company's prior corporate
strategy. These charges resulted from an extension of stock options to a former
officer of the Company ($1.48 million) and an expense to reflect options owed to
another individual ($732,000), both of which were non-cash charges, and
severance compensation to certain corporate officers ($600,000). Excluding these
items, operating expenses were $3.4 million, or $480,000 less than the 1997
level, which is primarily attributable to a decrease in advertising expenses.
RESEARCH & DEVELOPMENT. Research & development expenses increased in 1998
to $667,067 from $209,783 in 1997 due to the introduction of more than 20 new
gum products in 1998, including three that contained over-the-counter drugs.
Research and development expenses include the cost of formulation, process and
ingredient validation, and production scale-up costs of new products as well as
costs of product concepts still under study.
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INTEREST AND OTHER INCOME. Interest income declined in 1998 from 1997 due
to a decrease in the Company's invested cash position during the year.
INTEREST EXPENSE. Interest expense decreased due to the refinancing and
restructuring of an equipment lease in late 1997 to a term loan and conversion
into common stock of approximately $1.0 million in principal amount of the
Company's convertible debt in the second half of 1998.
NET INCOME (LOSS). The net loss for 1998 was $6.3 million compared to $5.4
million the prior year. Although the results for 1998 were negatively impacted
by some significant one time charges, the Company continued to experience a
sizable loss in 1998 due to insufficient sales to support the Company's overhead
expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company's working capital was $2.2 million
compared to $5.1 million at the end of 1997. For 1998, the Company experienced a
decrease in cash used by operating activities of $3.9 million primarily as a
result of the net loss for the period and an increase in inventory of $863,000
and accounts receivable of $415,000.
Investing activities consumed $864,000 in 1998, largely due to the
Company's investment in additional packaging, coating and gum rolling equipment,
as well as leasehold improvements to both of its production facilities. Cash
flow from investing activities provided net cash of $39,000 in 1997.
Financing activities in 1998 provided net cash of $1.7 million largely
through the exercise of common stock options and warrants. Financing activities
provided $6.2 million of cash in 1997 from the exercise of warrants issued in
conjunction with the Company's initial public offering and the issuance of the
Company's convertible notes in March 1997.
In February 1999, the Company entered into a $2 million financing
arrangement with a commercial bank for the sale of accounts receivable submitted
to the bank. To date, the Company has not borrowed under this facility, and may
cancel the facility, at any time, without penalty. Since December 31, 1998
financing activities have provided net cash of $1.0 million through the exercise
of options and warrants. In addition, $500,000 of convertible notes have been
converted into common stock.
On March 30, 1999, Gum Tech announced that it had entered into a letter of
intent with an institutional investor for $6 million of combined senior debt and
preferred equity. The letter of intent provides that Gum Tech may redeem the
debt and repurchase the preferred stock with common stock rather than cash, at
Gum Tech's option, within the next two years. The primary purpose of the private
placement is to raise funds to finance the initial development and operations of
the Gel Tech LLC. The proposed private placement is subject to the negotiation
and delivery of a definitive purchase agreement and related documents and the
completion of satisfactory due diligence by the purchaser. As a result, there
can be no assurance that Gum Tech will be able to successfully complete this
proposed private placement or that the principal terms will not be materially
different then outlined above. The securities to be offered in this proposed
private placement will not be registered under the Securities Act of 1933 and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
Gum Tech's anticipated growth in business and future results of operations.
These forward-looking statements are based on Gum Tech's expectations and are
subject to a number of risks and uncertainties, many of which cannot be
predicted or quantified and are beyond Gum Tech's control. Future events and
actual results could differ materially from those set forth in, contemplated by,
or underlying the forward-looking statements. Factors that could cause actual
results to differ materially from Gum Tech's expectations include less than
anticipated demand for Gum Tech's chewing gum products, lack of market
acceptance for or uncertainties concerning the efficacy of Zicam, a decrease in
the level of reorders from existing customers, financial difficulties
encountered by one or more of Gum Tech's principal customers, difficulties in
obtaining additional capital for marketing, research and development, and other
expenses, the possibility of material charges incurred as a result of prior
activities, aggressive pricing and marketing efforts by rival gum manufacturers,
unavailability of third-party material products at reasonable prices, inventory
obsolescence due to shifts in market demand, and material litigation involving
product liabilities and consumers issues. These potential risks and
uncertainties, together with those mentioned below and elsewhere in this report,
could affect Gum Tech's future operating results, financial condition, and the
market price of its common stock.
Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking words such as "believes",
"expects", "may", "should", or "anticipates" or by discussions of trends or
strategy. Gum Tech gives no assurance that it will achieve the future results
addressed by these forward-looking statements.
The following matters constitute cautionary statements identifying
important factors that relate to the forward- looking statements. These factors
include certain risks and uncertainties that could cause actual results to vary
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materially from the future results addressed in the forward-looking statements.
These and other factors could also cause actual results to vary materially from
the future results contemplated by such forward-looking statements.
LIMITED OPERATING HISTORY; RECENT LOSSES
Gum Tech began operations in February 1991 and has had a limited operating
history upon which potential investors may evaluate its performance. Gum Tech
has reported significant losses in each of the last three years. Gum Tech can
give no assurance that future operations will be profitable. The likelihood of
Gum Tech's success must be considered relative to the problems, difficulties,
complications and delays frequently encountered in connection with the
development and operation of a new business and Gum Tech's significant change in
strategy in early 1998.
RELIANCE ON A FEW CUSTOMERS
With Gum Tech's shift in strategy in early 1998 to a focus on contract
manufacturing, Gum Tech has become very dependent for its current sales and
future growth on a few customers. These customers include Herbalife, Breath
Asure, Ranir/DCP, and Heritage Consumer Products. If any of these large
customers reduces its orders for Gum Tech's products, Gum Tech's sales and
operating results could be adversely affected. While the decision to partner
with these firms relieves Gum Tech of the direct responsibility to market these
products, it does introduce a dependability on these customers to market their
products effectively. Further, Gum Tech also is at risk for their non-payment or
late payment for amounts owed to Gum Tech. While Gum Tech intends to add to this
portfolio of customers to reduce the risk of non-performance by any single
customer, there can be no assurance that it will be successful in that effort.
FDA AND OTHER GOVERNMENT REGULATION
Gum Tech's chewing gum products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. Failure to comply with these regulations could cause the
FDA to suspend sales of one or more of Gum Tech's products or to remove those
products from the market.
Gum Tech's advertising claims regarding its products, including claims made
by companies for which Gum Tech manufactures its products, are subject to the
jurisdiction of the FTC as well as the FDA. In both cases, Gum Tech and the
companies for which Gum Tech manufactures its products are required to obtain
scientific data to support any advertising or labeling health claims it makes
concerning its products, although no pre-clearance or filing is required to be
made with either agency.
Gum Tech'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, 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 Gum Tech's manufacturing operations and delay shipments of
product to its customers.
Gum Tech also is subject to federal and state laws establishing minimum
wages and regulating overtime and working conditions. Because many of Gum Tech's
personnel are paid at rates based on the federal minimum wage, an increase in
such minimum wage will result in an increase in Gum Tech's labor costs.
NO ASSURANCE OF SCIENTIFIC PROOF
Under FDA and FTC rules, Gum Tech is required to obtain scientific data to
support any health claims it makes concerning its products. Gum Tech believes it
has obtained appropriate scientific data for all of its products and gathered
and organized the scientific data when required. Gum Tech has not yet provided
nor been requested to provide any scientific data to the FDA. The marketing of
certain of Gum Tech's products involves claims that such products assist in
weight loss, promote dental hygiene and reduce the duration of the common cold.
11
<PAGE>
There can be no assurance that the scientific data obtained in support of these
claims will be deemed acceptable by the FDA or FTC, should either agency request
any such data in the future. If scientific data is not deemed acceptable, Gum
Tech would be forced to obtain acceptable supporting data for its claims or
cease marketing the product based on those claims. In particular, the claim that
Zicam significantly reduces the duration and severity of the common cold is
based on an initial internal study and has not yet been independently verified
by a clinical study.
DIFFICULTIES IN ACHIEVING WIDESPREAD MARKET ACCEPTANCE FOR NEW PRODUCTS
Gum Tech's future success depends in part on the success of the Gel Tech
LLC joint venture in developing and marketing Zicam, a recently introduced nasal
gel product. For a number of reasons, including lack of financial resources,
inability to mount large scale media advertising campaigns, and lack of name
recognition, Gum Tech has been unable to achieve significant market acceptance
with respect to any of its own specialty gum products. As a result, Gum Tech and
the Gel Tech LLC will face significant challenges in establishing Zicam as a
widely accepted consumer health related product.
NO ASSURANCE OF PROPRIETARY PROTECTION
Gum Tech seeks trademark and patent protection from the USPO and from
similar agencies in foreign countries for chewing gum brands. Despite these
precautions, Gum Tech may not be able to successfully defend any trademarks,
trade names, or patents against claims from or use by competitors.
Gum Tech considers some of its chewing gum formulations and processes to be
proprietary in nature and relies upon a combination of non-disclosure
agreements, other contractual restrictions and trade secrecy laws to protect its
proprietary information. Despite these precautions, Gum Tech may be unable to
prevent misappropriation of this proprietary information and cannot guarantee
that its competitors will not independently develop chewing gum formulations and
processes that are substantially equivalent or superior to its own.
COSTS OF NEW PRODUCT DEVELOPMENT
Gum Tech may experience difficulties that could delay or prevent the
introduction of new chewing gum products. Gum Tech's growth and future
operations may depend upon chewing gum products that are currently being
developed and that may not be accepted by the market. If Gum Tech is unable to
develop successful new chewing gum products on a timely basis, Gum Tech's
operating results and financial condition could be materially adversely
affected.
RISKS ASSOCIATED WITH BUSINESS EXPANSION
Significant growth will place substantial strains on Gum Tech's management
team and its operational, accounting, and information systems. In addition, if
Gum Tech overestimates demand for its products and sales do not meet
expectations, Gum Tech may suffer the effects of excess capacity, including
higher than necessary labor and inventory costs . Successful management of
growth will require Gum Tech to improve its financial controls, operating
procedures, and management information systems, and to train, motivate, and
manage employees. Failure to manage growth effectively would have a material
adverse effect on the results of Gum Tech's operations and its ability to
execute its business strategy.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
Gum Tech recognizes the potential business impacts related to the Year 2000
computer system issue and is implementing a plan to assess and improve its state
of readiness with respect to these issues. The "Year 2000 issue" refers to the
risk that systems, products, and equipment having date-sensitive components will
not recognize dates after December 31, 1999. These risks are derived
predominantly from the fact that many software programs have historically
categorized the "year" in a two-digit format. The Year 2000 issue creates
potential risks for Gum Tech in its information technology and non-information
technology systems used in its business operations. Gum Tech also may be exposed
to risks from third parties with whom Gum Tech interacts that fail to adequately
address their own Year 2000 issue.
12
<PAGE>
In recognition of the Year 2000 issue, Gum Tech has started a comprehensive
review of all information technology and non-information technology systems that
it uses. This review includes testing and analysis and inquiries of third
parties supplying information technology and non-information technology systems,
computer hardware and software products and components, and other equipment to
Gum Tech.
As a result of its review to date, Gum Tech has determined that certain of
its internal software systems may be inadequate for its future business needs,
and may need to be updated, because of various considerations, including Year
2000 non-compliance. Gum Tech expects to make necessary modifications or changes
to its computer information systems related to Year 2000 non-compliance prior to
the Year 2000. Gum Tech believes the costs of modification to the current
information technology systems will not have a material effect on its financial
position or results of operations.
At this time, Gum Tech has not developed Year 2000 contingency plans, other
than the review and remedial actions described above, and does not intend to do
so unless it believes such plans are merited by the results of its continuing
Year 2000 review.
If Gum Tech or the third parties with which it has relationships were to
cease or not successfully complete Year 2000 remediation efforts, Gum Tech could
encounter disruptions to its operations that could have a material adverse
effect on its business, financial condition, and results of operations. Gum Tech
also could be materially and adversely impacted by widespread economic or
financial market disruption caused by Year 2000 computer system failures.
DEPENDENCE UPON MANAGEMENT PERSONNEL AND EXECUTIVE OFFICERS; MANAGEMENT CHANGES
Gum Tech's operations are dependent upon its ability to hire and retain
qualified management personnel and upon the continued services of its executive
officers. The loss of the services of any of Gum Tech's executive officers,
whether as a result of death, disability, or otherwise, could have a material
adverse effect upon its business.
Gum Tech experienced significant changes in its management team and Board
of Directors in 1998, including the appointment of a new President and a new
Chief Financial Officer.
NEED FOR ADDITIONAL FINANCING
Gum Tech will be required to seek additional debt or equity financing in
the future in order to fund its proposed investment in Gel Tech LLC, its
manufacturing activities, and its research and development programs. There can
be no assurance that such additional financing will be available on acceptable
terms or at all. Any future equity financing may involve substantial dilution to
the interests of Gum Tech's stockholders.
PRODUCT LIABILITY
Gum Tech is subject to significant liability should use or consumption of
any Gum Tech manufactured products cause injury, illness or death. Although Gum
Tech carries product liability insurance, there can be no assurance that its
insurance will be adequate to protect Gum Tech against product liability claims
or that insurance coverage will continue to be available on reasonable terms.
POSSIBLE VOLATILITY OF SECURITIES PRICES
The market price of Gum Tech's common stock has been highly volatile and
may continue to be volatile in the future. Factors such as operating results or
public announcements may have a significant effect on the market price of our
securities. Market prices for securities of many small capitalization companies
have experienced wide fluctuations in response to variations in quarterly
operating results, general economic indicators and other factors beyond our
control.
13
<PAGE>
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK; PREVENTION OF CHANGES IN CONTROL
Gum Tech's Certificate of Incorporation authorizes the issuance of up to
1,000,000 shares of preferred stock with rights and preferences determined by
the Board of Directors. Under the Certificate of Incorporation, the Board of
Directors may, without shareholder approval, issue preferred stock with
dividend, liquidation, conversion, voting, redemption or other rights which
could adversely affect the voting power or other rights of the holders of the
common stock. The issuance of any shares of preferred stock having rights
superior to those of the common stock may result in a decrease in the value or
market price of the common stock and could be used by the Board of Directors as
a device to prevent a change in control of Gum Tech. Holders of the preferred
stock may have the right to receive dividends, certain preferences in
liquidation, and conversion rights that are preferential or superior to those of
the common stockholders.
ELIMINATION OF DIRECTOR LIABILITY
Gum Tech's Certificate of Incorporation contains a provision eliminating a
director's liability to the company or its stockholders for monetary damages for
a breach of fiduciary duty. This limitation does not apply in circumstances
involving a financial benefit to a director, the intentional infliction of harm
to Gum Tech, or certain wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of criminal law. Gum Tech's Bylaws contain provisions
obligating it to indemnify its directors and officers to the fullest extent
permitted under Utah law. These provisions could serve to insulate Gum Tech's
officers and directors against liability for actions which damage the company or
its stockholders.
SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES
Sales of substantial amounts of common stock in the open market or the
availability of such shares for sale could adversely affect the market price for
Gum Tech's common stock. Substantially all of Gum Tech's outstanding shares of
common stock, including shares underlying vested but unexercised warrants and
options, have either been registered for public sale or may be sold under Rule
144 under the Securities Act of 1933. Therefore, all of these shares may be
immediately sold by the holders.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE
Independent Auditors' Report F-1
Balance Sheet as of December 31, 1998 F-2
Statements of Operations for the years ended
December 31, 1998 and 1997 F-4
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998 and 1997 F-5
Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes To Financial Statements F-7
14
<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, 1998 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc. as
of December 31, 1998 and the results of its operations and its cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 5, 1999, except for
the last paragraph of Note
14 as to which the date is
March 30, 1999
F-1
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 517,852
Restricted cash 20,149
Accounts receivable - trade, net of allowance
for doubtful accounts of $35,000 1,462,639
Inventories 1,896,161
Prepaid expenses 60,851
-----------
Total Current Assets 3,957,652
-----------
Property and Equipment, at cost:
Machinery and equipment 4,272,746
Office furniture and equipment 238,371
Leasehold improvements 332,452
-----------
4,843,569
Less accumulated depreciation (1,295,342)
-----------
Net Property and Equipment 3,548,227
-----------
Other Assets:
Deposits 279,131
Intangible assets, net of accumulated amortization
of $156,526 114,855
-----------
Total Other Assets 393,986
-----------
Total Assets $ 7,899,865
===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,344,067
Accrued interest 42,449
Customer deposits 34,763
Current portion of long-term debt 381,280
------------
Total Current Liabilities 1,802,559
------------
Long-Term Debt, net of current portion above:
Financial institutions and other 2,736,525
Obligations under capital leases 24,256
Less current portion above (381,280)
------------
Total Long-Term Debt 2,379,501
------------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares
authorized, none issued or outstanding --
Common stock: no par value, 20,000,000 shares
authorized, 6,857,999 shares issued and outstanding 15,145,037
Additional paid in capital 2,915,152
Accumulated deficit (14,342,384)
------------
Total Stockholders' Equity 3,717,805
------------
Total Liabilities and Stockholders' Equity $ 7,899,865
============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Net sales $ 5,272,547 $ 3,776,562
Cost of sales 4,357,010 4,197,777
----------- -----------
Gross Profit 915,537 (421,215)
Operating expenses 6,164,022 3,881,238
Research and development 667,067 209,783
----------- -----------
Income (Loss) From Operations (5,915,552) (4,512,236)
----------- -----------
Other Income (Expense):
Interest and other income 127,947 204,220
Interest expense (473,811) (1,090,618)
----------- -----------
Total Other Income (Expense) (345,864) (886,398)
----------- -----------
Income (Loss) Before Provision For Income Taxes (6,261,416) (5,398,634)
Provision for income taxes -- --
----------- -----------
Net Income (Loss) $(6,261,416) $(5,398,634)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic $ (.97) $ (1.02)
Diluted $ (.97) $ (1.02)
Weighted Average Number of Common Shares
Outstanding:
Basic 6,427,815 5,294,099
Diluted 6,427,815 5,294,099
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
COMMON STOCK ADDITIONAL
---------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
Balance at December 31, 1996 4,948,740 $ 7,965,060 $ -- $ (2,682,334)
Issuance of common stock upon
exercise of stock options and
warrants (net of costs of
$188,678) 907,720 4,123,090 -- --
Beneficial conversion feature
of convertible notes -- -- 665,790 --
Net loss -- -- -- (5,398,634)
--------- ----------- ---------- ------------
Balance at December 31, 1997 5,856,460 12,088,150 665,790 (8,080,968)
Issuance of common stock upon
exercise of stock options and
warrants 785,962 2,032,897 -- --
Conversion of notes payable
into common stock 215,577 1,023,990 -- --
Compensation from extension and
issuance of stock options -- -- 2,249,362 --
Net loss -- -- -- (6,261,416)
--------- ----------- ---------- ------------
Balance at December 31, 1998 6,857,999 $15,145,037 $2,915,152 $(14,342,384)
========= =========== ========== ============
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $(6,261,416) $(5,398,634)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation 304,277 551,404
Amortization 108,816 47,710
Provision for bad debts 34,613 94,500
(Gain) loss on disposal of assets (2,699) 10,633
Interest expense from beneficial conversion
feature of notes payable -- 665,790
Compensation from forgiveness of note receivable 114,012 --
Compensation from extension and issuance of
stock options 2,249,362 --
Changes in assets and liabilities:
(Increase) in accounts receivable (415,018) (648,527)
(Increase) decrease in employee receivables 61,054 (61,054)
(Increase) decrease in inventories (862,779) 333,562
Decrease in income tax receivable -- 234,440
(Increase) decrease in prepaid expenses
and other 92,254 (55,106)
(Increase) decrease in interest receivable 60,164 (60,164)
Decrease in deposits and other 7,291 128,602
Increase in accounts payable and accrued
expenses 586,058 470,600
Increase (decrease) in customer deposits 19,763 (50,500)
----------- -----------
Net Cash (Used) By Operating Activities (3,904,248) (3,736,744)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (990,557) (134,083)
Proceeds from disposal of equipment 16,122 6,363
Receipt of principal on notes receivable 250,000 177,653
Increase in deposits and other (139,358) (10,598)
----------- -----------
Net Cash Provided (Used) By Investing
Activities (863,793) 39,335
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing -- 2,530,000
Principal payments on notes payable (343,184) (204,871)
Issuance of common stock 2,032,897 4,311,768
Offering costs incurred -- (188,678)
Debt issuance costs incurred (11,733) (259,648)
----------- -----------
Net Cash Provided By Financing Activities 1,677,980 6,188,571
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (3,090,061) 2,491,162
Cash and Cash Equivalents at Beginning of Year 3,607,913 1,116,751
----------- -----------
Cash and Cash Equivalents at End of Year $ 517,852 $ 3,607,913
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 392,693 $ 306,972
Income taxes 150 150
Supplemental Disclosure of Non-cash Investing and
Financing Activities:
Conversion of account receivable to a note
receivable $ -- $ 225,665
Note payable incurred for purchase of equipment
under a capital lease -- 1,564,457
Conversion of notes payable into common stock 1,023,990 --
The accompanying notes are an integral part of these financial statements.
F-6
<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 for branded and private label customers, as well as products
marketed under the Company's brand. The Company currently targets four
market segments: oral care, smoking cessation, dietary supplement, and
over-the-counter (OTC) drug. The Company's current strategy is to offer its
research and the use of its formulations in exchange for co-manufacturing
agreements with major branded and private label customers that possess the
capital resources to promote functional chewing gum on a large national and
international scale.
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 $304,277
and $551,404 for the years ended December 31, 1998 and 1997, respectively.
INTANGIBLE ASSETS
Debt issuance costs are being amortized using the straight-line method over
the term of the notes.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer, net of an allowance for sales returns.
STOCK-BASED COMPENSATION
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 7 for pro forma disclosures of net income and earnings
per share as if the fair value-based method prescribed by SFAS No. 123 had
been applied in measuring compensation expense.
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
F-7
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS (CONTINUED)
long-lived assets and certain identifiable intangibles, whenever events or
changes in circumstances indicate that the carrying value of an asset may
not be recoverable. An impairment loss would be recognized when the
estimated future cash flows is less than the carrying amount of the assets.
No impairment losses have been identified by the Company.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities using enacted
tax laws and rates for the years when the differences are expected to
reverse.
BARTER CREDITS
The Company records sales under barter transactions at the carrying value
of the inventory after reducing the inventory to its net realizable value
for any impairment. At the time barter credits are utilized by the Company
for advertising, packaging, travel expenses and other purchases an expense
is recognized based on the carrying value of the barter credits plus cash
paid. The Company recorded the sales under its barter transactions in 1996
and 1997 at a zero value and, therefore, when the barter credits are used
by the Company it will recognize an expense only for the cash expended for
the items purchased.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
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.
The basic and diluted earnings per share are the same since the Company had
a net loss in 1998 and 1997 and the inclusion of stock options and other
incremental shares would be antidilutive. Consequently, options, warrants
and other incremental shares to purchase 1,554,968 and 2,502,680 shares of
common stock at December 31, 1998 and 1997, respectively were excluded from
the computation of diluted earnings per share.
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
F-8
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES (CONTINUED)
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.
2. RESTRICTED CASH
Cash of $20,149 was held as collateral by a bank for a letter of credit
issued to the lessor of the Company's manufacturing and warehouse
facilities.
3. INVENTORIES
Inventories at December 31, 1998 consists of the following:
Raw materials and packaging $1,216,070
Work in process 731,686
Finished goods 178,405
Less reserve for obsolescence (230,000)
----------
Total $1,896,161
==========
4. 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. $1,230,525
11% subordinated convertible notes with interest
payable quarterly until January 1, 2000 at which time
the principal and interest is payable in twenty four
equal monthly installments through January 1, 2002.
The notes are convertible into common stock of the
Company at $4.75 per share. 1,506,000
OBLIGATIONS UNDER CAPITAL LEASES
9.4% installment notes due in 2001 with monthly
principal and interest payments of $1,000,
collateralized by equipment. 24,256
----------
Total Long-Term Debt 2,760,781
Less current portion of long-term debt (381,280)
----------
Long-Term Debt $2,379,501
==========
F-9
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
Installments due on debt principal, including the capital leases, at
December 31, 1998 are as follows:
Year Ending
December 31,
------------
1999 $ 381,280
2000 1,173,043
2001 1,206,458
----------
Total $2,760,781
==========
5. INCOME TAXES
The components of the provision for income taxes are as follows:
1998 1997
---- ----
Current:
Federal $ -- $ --
State -- --
---- ----
Total -- --
---- ----
Deferred:
Federal -- --
State -- --
---- ----
Total -- --
---- ----
Total Provision For Income Taxes $ -- $ --
==== ====
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
1998 1997
---- ----
Federal statutory rate (34)% (34)%
State income taxes, net of
federal benefits (5) (5)
Valuation allowance 39 39
Other -- --
---- ----
Total -- % -- %
==== ====
The following is a reconciliation of the provision for income taxes to
income before provision for income taxes computed at the federal statutory
rate of 34%.
1998 1997
---- ----
Income taxes at the federal
statutory rate $(2,128,881) $(1,835,536)
State income taxes, net of
federal benefits (330,603) (294,204)
Nondeductible expenses 8,864 20,969
Valuation allowance 2,450,620 2,108,771
Other -- --
----------- -----------
Total $ -- $ --
=========== ===========
F-10
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
5. INCOME TAXES (CONTINUED)
Significant components of deferred income taxes as of December 31, 1998 are
as follows:
Net operating loss carryforward $ 8,745,000
Reserve for bad debts 14,700
Reserve for obsolete inventory 96,600
-----------
Total deferred tax asset 8,856,300
-----------
Depreciation (373,300)
Stock option compensation (2,338,000)
-----------
Total deferred tax liability (2,711,300)
Less valuation allowance (6,145,000)
-----------
Net Deferred Tax Asset $ --
===========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax assets will
be realized. The valuation allowance of $6,145,000 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 $2,945,000. The Company will
continue to review this valuation on a quarterly basis and make adjustments
as appropriate.
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $20,700,000 and $21,400,000, respectively.
Such carryforwards expire in the years 2011 through 2018 and 2001 through
2003 for federal and state purposes, respectively.
6. STOCKHOLDERS' EQUITY
AMENDMENT TO AUTHORIZED COMMON SHARES
In June 1998, the Company's Board of Directors authorized, and the
shareholders approved, an amendment of the Company's Articles of
Incorporation, to increase the number of authorized shares of common stock
from 10,000,000 to 20,000,000.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN
In March 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of both incentive stock options and non-qualified
options. A total of 2,000,000 shares of common stock have been reserved for
issuance under the Plan.
Options under the Company's plan are issuable only to eligible officers,
directors, key employees and consultants of the Company. The Plan is
administered by a committee selected by the Board of Directors, which
determines those individuals who shall receive options, the time period
during which the options may be exercised, the number of shares of common
stock that may be purchased under each option, and the option price. Unless
sooner terminated, the Plan shall remain in effect until January 1, 2005.
F-11
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plan unless the
option price is at least 110% of the fair market value of the common stock
subject to the option, determined on the date of grant.
All options granted under the Plan provide for the payment of the exercise
price in cash or, with the prior written consent of the Company, by
delivery to the Company of shares of common stock already owned by the
optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
The following table contains information on the stock options under the
Company's Plan for the years ended December 31, 1997 and 1998. The
outstanding agreements expire from April 1999 to June 2001.
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding at December 31, 1996 1,318,000 $4.00
Granted 565,000 9.81
Exercised (184,000) 1.72
Canceled (15,000) 6.38
---------- -----
Options outstanding at December 31, 1997 1,684,000 6.18
Granted 912,000 5.79
Exercised (600,250) 2.78
Canceled (1,298,750) 7.65
---------- -----
Options outstanding at December 31, 1998 697,000 $5.86
========== =====
On April 24, 1998, the Board of Directors approved a repricing of
substantially all outstanding employee stock options granted under the Plan
with an exercise price of greater than $5.625 per share to $5.625 per
share. The Board of Directors would not typically consider reducing the
exercise price of previously granted options. However, these options were
repriced due to the occurrence of certain events beyond the reasonable
control of the employees of the Company which significantly reduced the
incentive these options were intended to create. The fair market value of
the common stock was $5.625 on the date of the repricing. Options to
purchase approximately 588,000 shares were affected by this repricing.
NON-QUALIFIED STOCK OPTIONS
The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding agreements expire from
November 1999 to June 2001.
F-12
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
NON-QUALIFIED STOCK OPTIONS (CONTINUED)
The following table contains information on all of the Company's
non-qualified stock options for the years ended December 31, 1997 and 1998.
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding at December 31, 1996 360,000 $ 1.80
Granted 100,000 4.75
Exercised (180,000) 1.80
Canceled -- --
-------- ------
Options outstanding at December 31, 1997 280,000 2.85
Granted 25,000 11.44
Exercised (180,000) 1.80
Canceled -- --
-------- ------
Options outstanding at December 31, 1998 125,000 $ 6.09
======== ======
PROFORMA DISCLOSURES
The Company adopted SFAS No. 123 during the year ended December 31, 1996.
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based 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:
1998 1997
---- ----
Net income (loss):
As reported $(6,261,416) $(5,398,634)
Pro forma $(7,299,820) $(5,881,867)
Net income (loss) per share of common stock:
As reported $ (.97) $ (1.02)
Pro forma $ (1.14) $ (1.11)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 1998 and 1997.
1998 1997
---- ----
Risk-free interest rate 5.45% 5.88%
Expected life 2 years 2 years
Expected volatility 61.82% 63.51%
Expected dividend yield 0% 0%
F-13
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock-based compensation plans.
The weighted average fair value price of options granted was $1.56 and
$3.82 in 1998 and 1997, respectively.
The following table summarizes information about stock-based compensation
plans outstanding at December 31, 1998:
Options Outstanding and Exercisable by Price Range as of December 31, 1998:
<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>
$ 5.50 - 6.88 677,000 1.72 $ 5.70 403,500 $ 5.63
$ 11.44 20,000 1.45 $ 11.44 10,000 $ 11.44
-------------- -------- ---- ------- -------- -------
$ 5.50 - 11.44 697,000 1.71 $ 5.86 413,500 $ 5.77
============== ======= ==== ======= ======= =======
</TABLE>
COMPENSATION EXPENSE
The Company recorded compensation expense of $2,249,362 and $-0- for the
years ended December 31, 1998 and 1997, respectively for the value of
certain options granted to non-employees of the Company ($770,612) and for
the extension of options previously granted to an Officer and Director of
the Company ($1,478,750). The valuation of the options and warrants granted
to employees is based on the difference between the exercise price and the
market value of the stock on the measurement date. The valuation of the
options granted to non-employees is estimated using the Black-Scholes
option pricing model.
WARRANTS
1995 BRIDGE LOAN
In 1995, the Company borrowed $1,550,000 from a group of four lenders
("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders. Each warrant is exercisable to purchase one share of the
Company's common stock at $2.00 per share in perpetuity. In 1997, 75,000
warrants were exercised and 390,000 warrants are outstanding at December
31, 1998.
F-14
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
UNDERWRITER'S WARRANTS
In connection with the Company's Initial Public Offering in 1996 the
Company issued the Underwriter warrants to purchase up to 40,000 units of
the Company's securities for $24.75 per unit. Each warrant is exercisable
to purchase three shares of common stock and one redeemable common stock
purchase warrant which is exercisable to purchase one share of common stock
at $7.50 per share at anytime until April 24, 2001. The Underwriter's
warrant is exercisable at anytime until April 24, 2001.
In 1998 and 1997, 1,428 and 2,830, respectively, of the Underwriter's
warrants were exercised and 35,742 are outstanding as of December 31, 1998.
MARKETING AND DEVELOPMENT OPTIONS
In 1998, the Company agreed to issue 200,000 stock options to an individual
in consideration for a joint venture opportunity to develop and market
various gum products. The options are exercisable at $9.00 per share at
anytime until October 30, 2000.
8. 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.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and packaging facilities, manufacturing and
warehouse facilities and certain equipment under long-term leasing
arrangements. The Company's manufacturing and warehouse facilities lease
contains two three-year renewal options. In addition, the Company's office
and packaging facilities contains a five year renewal option. The following
is a schedule of future minimum lease payments at December 31, 1998 under
the Company's capital leases (together with the present value of minimum
lease payments) and operating leases that have initial or remaining
noncancellable lease terms in excess of one year:
YEAR ENDING CAPITAL
DECEMBER 31, LEASES FACILITIES TOTAL
------------ ------ ---------- -----
1999 $12,004 $ 254,272 $ 266,276
2000 12,004 277,950 289,954
2001 3,001 287,310 290,311
2002 -- 303,426 303,426
2003 -- 252,383 252,383
Thereafter -- 278,277 278,277
------- ---------- ----------
Total Minimum Lease Payments 27,009 $1,653,618 $1,680,627
========== ==========
F-15
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (CONTINUED)
Less amount representing interest 2,753
-------
Present Value of Net Minimum
Lease Payments $24,256
=======
Rental expense charged to operations was $193,152 and $187,826 for the
years ended December 31, 1998 and 1997, respectively.
Leased equipment under capital leases as of December 31, 1998 is as
follows:
Equipment $ 47,727
Less accumulated depreciation (26,250)
--------
Net Property and Equipment Under Capital Leases $ 21,477
========
THE YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failures. Costs of addressing potential problems are expensed as incurred
and are not expected to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
However, if the Company or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material
financial risk. Accordingly, the Company plans to devote the necessary
resources to resolve all significant Year 2000 issues in a timely manner.
While the Company does not at this time anticipate significant problems
with suppliers and customers, it has not developed Year 2000 contingency
plans, other than the review and remedial actions described above and does
not intend to do so unless it believes such plans are merited by the
results of its continuing Year 2000 review.
10. RELATED PARTY TRANSACTIONS
In 1998, two former officers and directors of the Company repaid notes they
owed to the Company of $250,000 plus $48,770 of accrued interest. In
addition, the Company wrote off two notes receivable in the amount of
$145,017 which included $24,344 of accrued interest in connection with the
termination of two former officers of the Company.
11. EMPLOYEE BENEFIT PLAN
Effective September 1, 1997, the Company adopted a Simple Retirement
Account Plan for employees who are not covered by any collective bargaining
agreement. The Company shall make a matching contribution for each employee
in an amount equal to each employees Salary Reduction Contributions for the
Plan year of up to 3% of the employees compensation for the Plan year. The
Company made matching contributions of $33,353 and $20,059 for the years
ended December 31, 1998 and 1997, respectively. Each employee shall be
fully vested at all times in his contribution and the Company's matching
contributions.
F-16
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
12. 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. 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, 1998 and 1997 were as follows:
1998 1997
---- ----
Customer A 23.8%
Customer B 38.3% 15.0%
Customer C 10.2%
Customer D 15.0%
13. 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, 1998:
1998
-------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
Financial Assets:
Cash and cash equivalents $517,852 $517,852
Restricted cash 20,149 20,149
Financial Liabilities:
Long-term debt 2,760,781 2,760,781
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of long-term debt,
including the current portion, approximates fair value because of the
market rate of interest on the long-term debt and the interest rate
implicit in the obligations under the capital leases.
14. SUBSEQUENT EVENTS
FINANCING ARRANGEMENT
In February 1999, the Company entered into a financing agreement (the
F-17
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS (CONTINUED)
FINANCING ARRANGEMENT (CONTINUED)
"Agreement") with a Bank for the sale of its accounts receivable, up to
$2,000,000, on a full recourse basis. Under the Agreement, the Company may
sell its receivables to the Bank and obtain up to 80% of the receivables
assigned and will receive the remaining 20% at the time of payment by the
customer to the Bank. The Company will pay the Bank a factor management fee
of 1% per month on the face amount of each outstanding invoice and an
administrative fee of 1% per month of the average daily balance of funds
advanced against factored invoices for each monthly period. The Agreement
is collateralized by substantially all assets of the Company.
LETTER OF INTENT FOR JOINT VENTURE
In January 1999, the Company entered into a binding agreement with Gel
Tech, Inc. ("Gel Tech") with respect to the formation of Gel Tech, L.L.C.
("LLC") for the purpose of developing, marketing and selling homeopathic
remedies utilizing a zinc-based nasal gel technology or other homeopathic
nasal gels. The Company and Gel Tech will contribute certain intellectual
property rights relating to the product. The Company will provide a loan to
the LLC of $3.5 million with interest at 8% per annum based on certain
terms and conditions. The LLC will be managed by five managers, two of whom
will be designated by the Company, two of whom will be designated by Gel
Tech, and one of whom will be designated jointly by the Company and Gel
Tech. The LLC will be owned 60% by the Company and 40% by Gel Tech. The
Company and Gel Tech must negotiate and agree upon the form of a definitive
operating agreement (the "Operating Agreement") to effectuate the letter of
intent. The Operating Agreement will contain the specific terms of
operation of the LLC and the duties and responsibilities of the Company and
Gel Tech.
The LLC will enter into employment agreements with four individuals and the
Company will grant them options to acquire up to 190,000 shares of the
Company's common stock at the fair market value of the common stock. The
options will be nonqualified stock options, will have a term of five years
from their grant date, 10,000 of which will vest on the date of grant and
the remainder will vest on the first anniversary of the date of grant.
LETTER OF INTENT FOR FINANCING
On March 30, 1999, the Company entered into a letter of intent with Citadel
Investment Group, L.L.C. ("Citadel") for $6,000,000 in financing. The
financing consists of $4,000,000 of 8% Senior Secured Redeemable Notes and
$2,000,000 of Redeemable Preferred Stock at a rate of 14% per annum. The
interest on the Notes and dividends on the Preferred Stock may be paid in
shares of common stock. In addition, the Preferred Stock shall be converted
into common stock at 80% of the average closing bid price of the common
stock during the 20 trading day period immediately preceding the maturity
date. The Notes and Preferred Stock will have a term of two years from the
date of issuance and 50% of the original issuance of the Notes and
Preferred Stock shall be required to be redeemed within twelve months of
their issuance. The financing is subject to negotiation of the Definitive
Agreements and there can be no assurance that the financing will be
completed by the Company.
F-18
<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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information regarding (i) Gum Tech's directors and executive officers is
set forth under the caption "Information Concerning Directors and Executive
Officers" and (ii) compliance with Section 16(a) is set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance," in Gum Tech's Proxy
Statement relating to its 1999 Annual Meeting of Shareholders (the "1999 Proxy
Statement") and is incorporated by reference into this Annual Report on Form
10-KSB, which has been filed with the Commission in accordance with Rule 14a-6
promulgated under the Exchange Act. With the exception of the foregoing
information and other information specifically incorporated by reference into
this report, Gum Tech's 1999 Proxy Statement is not being filed as a part
hereof.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the caption
"Executive Compensation" in the 1999 Proxy Statement, which information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1999 Proxy Statement, which information
is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of
management is set forth under the caption "Certain Transactions and
Relationships" in the 1999 Proxy Statement, which information is incorporated
herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT NO. TITLE
----------- -----
3.01 Certificate of Incorporation and Amendments thereto
of the Registrant(1)
3.02 Bylaws of the Registrant(1)
10.01 1995 Stock Option Plan(1)
10.02 Amendment to Stock Option Plan(1)
10.03 Employment Contract with Gary S. Kehoe(1)
15
<PAGE>
10.04 Employment Contract with William J. Hemelt (2)
10.05 Settlement Agreement and Release with Gerald N. Kern (3)
10.06 Form of Bridge Loan Agreement together with Exhibits
thereto(1)
10.07 Lease Agreement - Phoenix, Arizona manufacturing facility(1)
10.08 Lease Agreement between Gum Tech and Beardsley & 1-17
L.L.C., for the lease of packaging/warehouse facility (3)
10.09 Form of Convertible Note Dated February 20, 1997(4)
10.10 Registration Rights Agreement(4)
10.11 Installment Loan with Textron Financial Corporation (3)
10.12 Form of Manufacturing Agreement
23 Consent of Angell & Deering
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.
(2) Incorporated by reference to the Registrant's Report on Form 10-QSB for the
quarter ending September 30, 1998, file number 000-27646.
(3) Incorporated by reference to the Registrant's Report on Form 10-KSB for the
year ending December 31, 1997, file number 000-27646.
(4) Incorporated by reference to the Registrant's Form 8-K filed March 6, 1997.
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, 1998.
16
<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, 1999.
GUM TECH INTERNATIONAL, INC.
By: /s/ Gary S. Kehoe
---------------------------------
Gary S. Kehoe
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dated indicated.
SIGNATURE TITLE DATE
/s/ Bruce Jorgenson Chairman of the Board March 31, 1999
- ---------------------- of Directors
Bruce Jorgenson
/s/ Gary S. Kehoe President and Chief March 31, 1999
- ---------------------- Operating Officer and
Gary S. Kehoe Director
/s/ William Yuan Director March 31, 1999
- ----------------------
William Yuan
/s/ William Boone Director March 31, 1999
- ----------------------
William Boone
/s/ W. Brown Russell Director March 31, 1999
- ----------------------
W. Brown Russell
/s/ William J. Hemelt
- ---------------------- Chief Financial Officer March 31, 1999
William J. Hemelt
17
This form of Manufacturing Agreement is used by the Company in the ordinary
course of business with several customers, including Breath Asure, Inc.,
Ranir/DCP, Inc., Heritage Consumer Products, and Herbalife International, Inc.
<PAGE>
MANUFACTURING AGREEMENT
EFFECTIVE DATE:
-------------------------------
PARTIES: , a corporation ("CUSTOMER")
-------------------- ---------------
Address:
---------------------------
---------------------------
GUM TECH INTERNATIONAL, INC., a Utah corporation ("GUM TECH")
Address: 246 East Watkins Street
Phoenix, Arizona 85004
RECITALS:
A. Gum Tech manufactures and packages specialty gums and other products for
others for their sale and distribution.
B. Customer desires to have Gum Tech manufacture and package certain
specialty gum products upon the terms and conditions of this Manufacturing
Agreement (this "AGREEMENT").
AGREEMENTS:
In consideration of the mutual promises contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1) DEFINITIONS. For purposes of this Agreement the following terms shall
have the following meanings:
a) "APPLICABLE LAWS" means all applicable determinations of any
governmental authority and all applicable federal, state or local laws,
statutes, ordinances, rules, regulations and orders, including, without
limitation, the Federal Food, Drug and Cosmetic Act, 21 U.S.C. Section 301, ET
SEQ., as amended (the "ACT").
b) "PRODUCT" or "PRODUCTS" means those products listed on the
attached EXHIBIT A.
c) "SKU" OR "STOCK KEEPING UNIT" means a particular configuration
of the Product (flavor and packaging) that would normally be tracked as a stock
keeping unit by a retailer.
1
<PAGE>
d) "SPECIFICATIONS" means the specifications for the Products"
formulas, packaging and labeling as set forth on the attached EXHIBIT B. In the
event that complete --------- specifications are not attached to this Agreement
at the time it is executed, the parties shall thereafter mutually agree upon the
Specifications. Either party may terminate this Agreement in the event that the
parties cannot, in good faith, agree upon the specifications within sixty (60)
days after the Effective Date.
2) MANUFACTURING.
a) Gum Tech shall manufacture and package the Products for Customer in
accordance with the Specifications.
b) Gum Tech may, with the prior written consent of Customer, which
consent shall not be unreasonably withheld or delayed, subcontract the
manufacturing and/or packaging processes to any of its affiliates or a
third party.
c) At the request of Gum Tech, Customer shall, at its cost and
expense, provide Gum Tech with such technical assistance as may be
reasonably necessary to enable Gum Tech to manufacture and package the
Product in conformance with the Specifications.
d) Except as otherwise set forth herein, Gum Tech shall supply all of
the raw materials and packaging materials for the Product.
3) EXCLUSIVITY. During the term of this Agreement, Customer shall not
itself manufacture, or engage any other person or entity to manufacture, the
Product, without Gum Tech's prior written consent.
4) CHANGE IN SPECIFICATIONS. Customer may change the Specifications for a
Product with at least ninety (90) days prior notice to Gum Tech, provided that
Customer may not change the Specifications so substantially that the Product no
longer falls within the general description of the Product on EXHIBIT A. If Gum
Tech has reasonable, articulable, objections to the change in Specifications, it
shall have the right to terminate this Agreement by written notice to Customer
within thirty (30) days after it receives the notice regarding the change in
Specifications from Customer. In the event that GumTech does not terminate this
Agreement as provided herein, it shall implement the requested change(s) to the
Specifications and Customer shall (i) reimburse Gum Tech, within thirty (30)
days of the date of invoice, for the cost of any packaging materials or finished
Product in inventory that is rendered obsolete because of the change(s); and
(ii) pay any increase in the cost of production of the Product due to the
change(s), as provided in SECTION 8.(C) below.
5) ADVERTISING/PACKAGING DESIGN. Advertising and sales promotion copy
associated with the marketing, sale or distribution of the Product will be
prepared by Customer and be the sole responsibility of Customer and shall comply
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with all Applicable Laws. Customer shall likewise be responsible for and shall
supply the design for all packaging hereunder in a digital format. All design,
artwork, print plates and film costs shall be borne by Customer. Customer shall
be responsible for reviewing and approving final proofs or films for packaging
prior to printing. Gum Tech shall NOT be responsible for press checks.
6) TERM. This Agreement shall be effective on the Effective Date and,
unless sooner terminated pursuant to the terms hereof, shall continue through
the ____ anniversary date of the Effective Date. The Agreement shall,
thereafter, be automatically renewed for consecutive one (1) year periods,
provided that Customer has met the minimum annual purchase requirements set
forth on EXHIBIT D, unless either party at least sixty (60) days prior to a
renewal date, notifies the other party in writing that such party elects not to
renew the Agreement.
7) FORECAST; PURCHASE ORDERS; SHIPMENT.
a) FORECAST. Upon the execution of this Agreement, Customer and Gum
Tech shall work together to develop a written, ninety (90)-day forecast of the
requirements for the Products to be manufactured and packaged by Gum Tech
hereunder (the "FORECAST"). Customer and Gum Tech shall work together to update
the Forecast every thirty (30) days during the Term.
b) PURCHASE ORDERS. Purchase orders for the Product shall be in
writing and shall specify the particular Product to be manufactured and
packaged, the quantity of said Product and the date upon which Customer desires
to have the Product ready for delivery (the "REQUESTED DELIVERY DATE") which
shall be at least thirty (30) days after the date the Purchase Order is
received. All Purchase Orders shall be subject to and be deemed to incorporate
all provisions of this Agreement and any term in any Purchase Order inconsistent
with this Agreement shall have no effect whatsoever, unless Gum Tech expressly
acknowledges the inconsistency in writing and expressly agrees in writing to
abide by such inconsistent term. Purchase Orders must be for the minimum order
quantities set forth on EXHIBIT D.
c) ACCEPTANCE OR REJECTION OF PURCHASE ORDERS. Gum Tech shall give
prompt notice to Customer of any rejection of a purchase order, in whole or in
part. Gum Tech may reject a purchase order in whole or in part for any of the
following reasons: (i) Gum Tech has experienced a Force Majeure Delay as
provided in SECTION 7.(F) below; (ii) Customer is in breach of any provision
hereof or any provision of any other written agreement between Customer and Gum
Tech; (iv) Customer is a party to any voluntary or involuntary proceeding
seeking liquidation, reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or similar law or Customer is generally
failing to pay its debts when due or Customer has taken any corporate action in
furtherance of any of the foregoing; or (vi) the purchase order contains terms
which are inconsistent with the terms of this Agreement or the course of dealing
between Customer and Gum Tech or are violative of any Applicable Law.
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d) TIMING. Subject to SECTION 7.(F) below and further subject to Gum
Tech's timely receipt of packaging materials: (i) to the extent that the
requested quantity is as was projected in the Forecast (delivered at least sixty
(60) days prior to the placement of the purchase order) for the relevant time
period, Gum Tech shall deliver the Product in accordance with SECTION 7.(E) on
the requested Delivery Date; but (ii) to the extent that the requested quantity
exceeds the projected quantity in the Forecast for the relevant time period, Gum
Tech shall only be required to use commercially reasonable efforts to complete
the order by the Requested Delivery Date.
e) SHIPPING. Shipping shall be FOB Phoenix, Arizona, meaning that Gum
Tech shall, at Gum Tech's shipping location, bear the risk and expense of
placing the Product ordered in the possession of an inland carrier for shipment
to Customer, and thereafter: (i) Customer shall bear all further risks and
transportation/ freight costs and other expenses; (ii) such Product shall be
deemed accepted by Customer, except as otherwise set forth in this Agreement;
and (iii) all obligations of Gum Tech hereunder with respect to the delivery and
the Product delivered shall terminate and cease as to such Product except for
the warranty set forth in SECTION 9.(C) below or otherwise provided in this
paragraph. Customer shall be responsible for meeting all claims with carriers,
insurers, warehouses and others for mis-delivery or non- delivery, loss, damage,
delay or otherwise. The date of delivery for purposes of this Agreement shall be
the date on which the inland carrier takes possession.
f) DELAYS. Gum Tech shall not be liable for delays in delivery and/or
shipment of the Product if such delay derives from governmental regulation or
control, riot, war, acts of God, fires, floods, droughts, storms, strikes, labor
disturbances, lock-outs, delays in transportation, untimely delivery or
manufacture of components or materials or packaging not manufactured by Gum
Tech, epidemics, civil commotions, destruction of Gum Tech's plant or plants, or
from any other cause whatsoever, whether or not enumerated, beyond Gum Tech's
control (collectively, "FORCE MAJEURE DELAY"). If, in such an event, Gum Tech is
unable to make delivery to Customer for three (3) months, Customer shall have
the option of canceling all orders, including the unshipped portion of any such
orders already received and accepted by Gum Tech, by giving thirty (30) days
notice in writing thereof.
8) PRICES; PAYMENT.
a) PRICE. Customer will pay Gum Tech for the Product at the prices set
forth on the attached EXHIBIT C (the "PRICE"). The Price does not include any
sales, transaction privilege, excise, value added or use or consumption taxes
imposed by any federal, state or local taxing authority and the same shall be
the sole responsibility of Customer.
b) REIMBURSABLE EXPENSE. In addition to the Price, Customer shall pay
to Gum Tech any and all reasonable costs incurred by Gum Tech in:
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i) Reformulating or modifying the Product after the Effective
Date hereof at the request of Customer;
ii) Complying with or responding to any requirements,
recommendations or inquiries of the United States Food and Drug Administration
("FDA") relating to the Product, beyond normal FDA requirements;
iii) Complying with the requirements of any foreign regulatory
agency;
iv) Changing the tooling with respect to the manufacture and
packaging of the Product to conform to any change in the Specifications
requested by Customer.
In no event shall Gum Tech be required to make plant modifications or to install
specialized equipment exclusively related to the manufacturing and/or packaging
of the Product, unless and until Gum Tech and Customer mutually agree upon a
price adjustment and/or an amortization of the costs therefor.
c) ADJUSTMENT IN PRICE.
i) AUTHORIZED ADJUSTMENTS. The Price may be adjusted periodically
by Gum Tech to reflect any increase in the costs of raw materials, production,
labor and packaging or other costs incurred by Gum Tech in connection with the
fulfillment of the purchase orders hereunder, plus Gum Tech's normal mark up on
the increased amount. If requested in writing, Gum Tech shall substantiate such
increase by providing documentation to Customer.
ii) DUTY TO MINIMIZE PRICE INCREASES. Gum Tech will use
reasonable efforts to minimize any such increases by seeking low-cost suppliers,
with due regard to quality and reliability, and will cooperate with Customer in
investigating and, where Gum Tech deems it appropriate, utilizing any such
suppliers identified by Customer. Gum Tech shall not be responsible hereunder
for any delays or deficiencies caused by a supplier utilized by Gum Tech at the
request of Customer.
iii) EFFECTIVE DATE OF PRICE ADJUSTMENTS. Any such increase in
price shall be effective upon thirty (30) days written notice to Customer of
such change. Such change shall apply to any new orders made after the effective
date of the change. Any orders which were placed for immediate delivery but
remain unfilled in whole or in part at the effective time of such change shall
be delivered at the old price.
iv) INCREASED COST DUE TO CHANGE IN SPECIFICATIONS.
Notwithstanding anything to the contrary above, if any change to the
Specifications (whether to the formula, the packaging or the labeling) is
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required by Customer or by any governmental or regulatory agency, and such
changes result in increased costs to Gum Tech, Gum Tech shall be immediately
entitled to increase its Price to Customer by the amount of such cost increases,
plus the normal mark up on the increased amount.
d) Payment Terms. Payment, in lawful money of the United States, shall
be due within thirty (30) days following delivery by Gum Tech.
9) REPRESENTATION AND WARRANTIES; REGULATORY COMPLIANCE.
a) COMPLIANCE WITH APPLICABLE LAWS. Each party thereto represents and
warrants that its obligations hereunder shall be performed in full compliance
with all Applicable Laws. Each party shall cooperate with the other, as
necessary, to be and remain in full compliance with Applicable Laws.
b) PERMITS AND REGULATORY APPROVALS. Gum Tech represents and warrants
that it has all the necessary permits and licenses for the manufacture of
Product. Customer represents and warrants that it has all the necessary
regulatory approvals and registrations for the sale and distribution of the
Product.
c) GUM TECH PRODUCT WARRANTY.
i) Gum Tech represents and warrants that it shall manufacture and
package the Product in compliance with the Specifications and all Applicable
Laws and that the Product will be free from defects in Materials utilized by Gum
Tech in manufacturing the Product.
ii) Customer shall give written notice to Gum Tech of a defect
claimed to be within the scope of this warranty within five (5) days of
Customer's discovery of the defect. The Product involved must be returned to Gum
Tech at its manufacturing facility or other mutually agreeable location within
five (5) business days after Customer receives the Product from the customer or
other end-user, at Customer's expense. The Product must be properly preserved,
packaged and shipped to avoid damage or degradation in transit. Gum Tech shall
have the right to conduct tests and other investigation on the returned Product,
the results of which will be shared with Customer, in order to determine whether
it in fact suffers from a defect for which Gum Tech is responsible hereunder. In
the event that a defect is discovered that is covered by this warranty, Gum Tech
shall reimburse Customer for the cost of shipping the Product and shall replace
the Product with conforming Product. Gum Tech shall not be liable for any
consequential or incidental damages caused by any defect in the Product. In the
event that no defect is discovered for which Gum Tech is responsible hereunder,
Customer shall reimburse Gum Tech for the cost of testing the returned Product.
iii) The warranties provided in this SECTION 9.(C), the
obligations and liabilities of Gum Tech hereunder, and the rights and remedies
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of Customer hereunder ARE EXCLUSIVE AND IN SUBSTITUTION FOR AND CUSTOMER HEREBY
WAIVES ALL OTHER WARRANTIES, GUARANTEES, OBLIGATIONS, LIABILITIES, RIGHTS AND
REMEDIES, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, AS TO DESCRIPTION,
QUALITY, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, PRODUCTIVENESS OR
ANY OTHER MATTER, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTY OF
MERCHANTABILITY, ANY IMPLIED WARRANTY ARISING FROM COURSE OR PERFORMANCE, COURSE
OF DEALING OR USAGE OF TRADE, ANY IMPLIED WARRANTY OF FITNESS OR FOR LOSS OF
USE, REVENUE OR PROFIT, OR FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES.
iv) In the event Customer modifies, alters or changes the Product
in any way subsequent to the purchase of the Product without the prior written
consent of Gum Tech, Gum Tech's obligations under this warranty shall be
terminated.
d) CUSTOMER WARRANTIES. Customer represents and warrants that if Gum
Tech's manufacturing and packaging processes conform to the Specifications, the
packaging shall be in full compliance with all Applicable Laws. Customer shall
use reasonable efforts to ensure, to the extent within the control of Customer,
that after delivery of the Product, the Product will not become "adulterated" or
"misbranded" within the meaning of the Federal Food, Drug and Cosmetic Act (the
"ACT") or violate similar regulations of other countries in which the Product is
to be sold. Customer represents and warrants that all packaging and package
labeling complies with all requirements of the Fair Packaging and Labeling Act
and all other Applicable Laws.
e) ORGANIZATION. Each party represents and warrants that it is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was formed and is qualified to do business in every
jurisdiction in which the nature of its business or assets requires such
qualification.
f) VALID AND BINDING AGREEMENT. Each party represents and warrants
that execution of this Agreement, delivery of the same to the other party, and
the performance hereunder are duly authorized by all necessary action and that
this Agreement constitutes the valid and binding obligation of the party,
enforceable in accordance with its terms, subject as to the enforcement of
remedies to applicable insolvency, moratorium and other laws affecting the
rights of creditors generally and to judicial limitations on the enforcement of
equitable remedies. Each party represents and warrants that it is not a party to
any contract or subject to any other legal restrictions that would prevent or
restrict complete fulfillment of any of the terms and conditions of this
Agreement.
g) ADVERTISING; COMPLIANCE WITH LAW. Customer represents and warrants
that all advertising, marketing and promotional activities in connection with
the Product comply with all Applicable Laws.
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10) COMPLIANCE WITH REGULATIONS.
a) FACILITY INSPECTIONS. If a designated representative of the United
States, its territories, the District of Columbia, or other regulatory agency
chooses to inspect any manufacturing facility used by Gum Tech in the
performance of its obligations under this Agreement, Gum Tech shall provide
Customer with notice of the requested inspection.
b) REGULATORY REPORTS. Each party shall promptly furnish the other
with copies of reports or other information relating to the Product prepared by
it, or on its behalf, to be filed with the FDA or other governmental authorities
or received from the FDA or other governmental authorities. Any and all issues
concerning distribution or advertising/promotion of the Product shall be
addressed and resolved by Customer. Any and all issues raised with respect to
the manufacturing of the Product shall be resolved by Gum Tech. Each shall
apprise the other in writing of all decisions, actions or other steps taken by
Customer to resolve any issues raised.
11) INDEMNIFICATION.
a) PARTIES. As used in this SECTION 11, the term "CUSTOMER GROUP"
means Customer and its subsidiary and affiliated companies, and each of their
officers, directors, shareholders, employees, agents and their successors and
assigns, and each of them and the term "GUM TECH GROUP" means Gum Tech and its
subsidiary and affiliated companies, and each of their officers, directors,
shareholders, employees, agents and their successors and assigns, and each of
them.
b) CUSTOMER INDEMNITY. Customer shall indemnify, defend, and hold
harmless Gum Tech Group from and against any damages, costs and expenses
(including reasonable attorneys' fees), losses, obligations, liabilities,
claims, actions or causes of action sustained or suffered by Gum Tech Group as a
result of any claim by a third party arising from or relating to any material
breach of any representation, warranty, covenant or agreement made by Customer
in this Agreement, or in any certificate, instrument or agreement delivered by
Customer pursuant hereto or thereto or in connection with the transactions
contemplated hereby or thereby, or any facts or circumstances constituting such
breach. This indemnity shall survive expiration or earlier termination of this
Agreement.
c) GUM TECH INDEMNITY. Gum Tech shall indemnify, defend, and hold
harmless Customer Group as a result of any claim by a third party from and
against any damages, costs and expenses (including reasonable attorneys' fees),
losses, obligations, liabilities, claims, actions or causes of action sustained
or suffered by Customer Group arising from or related to any material breach of
any representation, warranty, covenant or agreement made by Gum Tech in this
Agreement, or in any certificate, instrument or agreement delivered by Gum Tech
pursuant hereto or thereto or in connection with the transactions contemplated
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hereby or thereby, or any facts or circumstances constituting such breach. This
indemnity shall survive expiration or earlier termination of this Agreement.
d) DEFENSE. In case any claim, demand or deficiency (a "CLAIM") is
asserted or any action is commenced or notice is given of any administrative or
other proceeding against the person(s) and/or entities seeking indemnity under
this SECTION 11 (hereinafter referred to as the "INDEMNITEE") in respect of
which such indemnity is sought hereunder (each and all of such persons and
entities being hereinafter referred to as the "INDEMNITOR") pursuant to this
SECTION 11, Indemnitee shall give prompt notice thereof in writing to
Indemnitor. Within thirty (30) days after receipt of such notice (or prior to
such earlier date as any answer in any administrative or other proceeding is
due), Indemnitor may give Indemnitee written notice of its election to conduct
the defense of such Claim at its own expense. If Indemnitor has given Indemnitee
such notice of election to conduct the defense, Indemnitee shall nevertheless
have the right to participate in the defense thereof, but such participation
shall be solely at its expense. If Indemnitor shall not notify Indemnitee in
writing (within the time hereinabove provided) of its election to conduct the
defense of such Claim, Indemnitee may (but need not) conduct (at the expense of
Indemnitor) the defense of any Claim. The party assuming the defense of a Claim
hereunder (the "DEFENDING PARTY") shall notify the other party of its intention
to settle, compromise or satisfy any such Claim and may make such settlement,
compromise or satisfaction unless such other party (the "ASSUMING PARTY") shall
notify the Defending Party in writing (within thirty (30) days after receipt of
such notice of intention to settle, compromise or satisfy) of its election to
assume (at its sole expense) the defense of any such Claim and promptly
thereafter take appropriate action to implement such defense. The Assuming Party
shall indemnify the Defending Party and hold it harmless against any losses in
excess of the amount of losses the Defending Party would have incurred if the
proposed settlement had been agreed upon. Indemnitee shall cooperate with
Indemnitor in such defense, at Indemnitor's cost, and Indemnitee shall provide
reasonable assistance of Indemnitee's employees in connection with such defense.
12) INSURANCE. Each party shall maintain, during the term of this
Agreement, on occurrence basis, comprehensive general liability insurance
(including products liability and contractual liability) with an insurance
carrier reasonably acceptable to the other party, which insurance policy or
policies shall maintain the full products hazards provisions with products
hazards limits subject to deductibles not in excess of $10,000 in the aggregate,
and with at least $1,000,000 per occurrence and at least $3,000,000 overall
coverage for claims of bodily injury and property damage arising out of any
claim. Each party shall extend coverage with respect to occurrences during a
policy period, regardless of the dates on which claims arising from such
occurrences are made, and shall include the other party as a named insured in
such policy. Each party shall provide the other with the certificate of
insurance to the effect set forth herein. Each policy shall also expressly cover
any liability arising from an obligation to indemnify the other party under this
Agreement. Each party shall receive thirty (30) days prior written notice of any
alteration, modification or cancellation of the insurance coverage to be
provided herein.
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13) RECALLS.
a) If any governmental authority having jurisdiction over the subject
matters of this Agreement requires Customer to recall any Product, Customer
shall immediately notify Gum Tech and review with Gum Tech the basis for the
recall.
b) Prior to commencing any recall, Customer shall review with Gum Tech
the proposed manner in which the recall is to be carried out in compliance with
instructions of the applicable regulatory authority. Customer shall carry out
the recall in the manner agreed upon between Customer and Gum Tech in as
expeditious a manner as possible and in such a way as to cause the least
disruption to the sales of Product and to preserve the goodwill and reputation
associated with the Product and the names of Customer and Gum Tech. All costs
including, but not limited to, attorneys' fees incurred in connection with any
recall or the disposal of any recalled Product shall be borne solely by Customer
unless the recall was necessitated by a manufacturing defect in the Product, in
which event Gum Tech shall reimburse Customer for all reasonable costs incurred
in the recall or disposal.
c) Notice shall be given as soon as possible by the receiving party to
the other affected party or parties of any actual or threatened legal or
administrative action arising out of the manufacture, sale, distribution,
marketing or consumption of the Product. Customer agrees to maintain a file on
all written or oral consumer or other type of complaints received which in any
way relate to the Product for the duration of the Agreement and otherwise in
accordance with Applicable Laws. Should Customer receive any consumer or other
type of complaints, Customer shall review, investigate and, if necessary, notify
the FDA and endeavor to handle and satisfactorily resolve such complaints.
14) INTELLECTUAL PROPERTY.
a) TRADEMARKS/TRADENAMES. Customer shall sell the Product under their
generic names and under its own trademarks or trade names, if any. In connection
with the performance of this Agreement, Customer hereby grants to Gum Tech the
right to reproduce and print on the Products those trademarks and/or trade names
of Customer as are designated by Customer. Gum Tech shall notify Customer in
writing of any Gum Tech trademark or trade name associated with the Product.
Customer shall not have any right, title, or interest in or to any of Gum Tech's
trademarks or trade names.
b) NO VIOLATION OF THIRD PARTY RIGHTS. Customer represents and
warrants to Gum Tech that the execution of this Agreement and performance by
Customer and Gum Tech hereunder shall not violate any rights of the parties
hereunder or any third party in any patent, copyright, trademark or trade name
or other proprietary technology or information ("INTELLECTUAL PROPERTY"). If any
claim based upon alleged infringement of rights to Intellectual Property is
asserted against Gum Tech by virtue of its contractual duties hereunder,
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Customer shall indemnify and hold Gum Tech harmless from all claims, demands and
legal actions against Gum Tech in accordance with the provisions of SECTION
11.(B) above.
c) SPECIFICATIONS. At all times, Gum Tech shall retain ownership of
the Specifications and any improvements thereto.
15) CONFIDENTIALITY.
a) DEFINITION OF "CONFIDENTIAL INFORMATION". The term "Confidential
Information" means any oral or written information or materials relating to and
including, but not limited to, such matters as trade secrets, systems,
procedures, manuals, confidential reports, lists of suppliers, research and
development projects, policies, processes, formulas, techniques, know-how and
facts relating to sales, advertising, mailing, promotions, financial matters,
customers, customer lists, purchases or requirements or other methods used by a
party in its operations. Notwithstanding the above, the term "Confidential
Information" shall not include any information that:
i) At the time of disclosure is generally available to the public
or thereafter becomes available to the public by publication or otherwise
through no act, omission or default of the party to whom disclosure is made.
ii) Was in the possession of the party to whom disclosure is made
prior to the time of disclosure and was not acquired directly or indirectly from
the disclosing party or any person, firm or corporation acting on behalf of, or
otherwise subject to any duty of confidentiality to, the disclosing party.
iii) Is independently made available as a matter of right by a
third party who is under no duty of confidentiality to the disclosing party .
iv) Is independently developed by an employee of the receiving
party who has not had access to the Confidential Information received from the
disclosing party.
b) DUTY NOT TO DISCLOSE. Each party recognizes and acknowledges that
by the terms of this Agreement it shall from time to time obtain and have access
to the Confidential Information of the other party. Accordingly, it shall not,
during the term hereof and at all times forever after the expiration or
termination of this Agreement, in any way, directly or indirectly, make use of,
divulge, publish, reveal or disclose any of the Confidential Information of the
other party or any part thereof for any purpose whatsoever to any person, firm,
corporation, association or other entity without the express written consent of
the disclosing party. Notwithstanding any provision to the contrary contained
herein, the foregoing restriction shall not apply to any release, publication,
or disclosure required by Applicable Law, provided that, in the event of any
such legal compulsion to disclose Confidential Information, the party being
compelled shall immediately notify the disclosing party of the compulsion and
shall cooperate with the disclosing party in any effort to limit or annul such
compulsion.
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c) DUTY TO PRESERVE CONFIDENTIALITY. Each party shall use its best
efforts, including, but not limited to, efforts fully commensurate with those
employed by such party for the protection of its own confidential information,
to protect the Confidential Information of the other party in such party's
possession. Each party shall instruct its employees, agents, directors,
officers, and any other person acting on such party's behalf to treat the other
party's Confidential Information as confidential.
d) CUSTOMER NOT TO REPLICATE PRODUCT. Customer shall not, under any
circumstances, copy, replicate, imitate or reverse engineer any of Gum Tech's
products, including, but not limited to, the Product.
e) INJUNCTIVE RELIEF. Each party acknowledges and realizes that the
other party's Confidential Information is special, unique and extraordinary and
is vital to the other party. Accordingly, the parties acknowledge that the
breach of this SECTION 15 by one of the parties will result in irreparable to
the other party and that, therefore, in addition to any and all other remedies
the other party may have under this Agreement, at law or in equity, it shall be
entitled to institute and prosecute proceedings at law or in equity, in any
court of competent jurisdiction, to obtain an injunction restraining the first
party from violating or continuing to violate this SECTION 15. Each party agrees
that the disclosing party's remedy at law would be inadequate and, therefore,
agrees and consents that temporary and/or permanent injunctive relief may be
sought in any proceeding which may be brought to enforce this SECTION 15 without
the necessity or proof of actual damage.
f) SURVIVAL OF OBLIGATIONS. The obligations under this SECTION 15
shall survive the expiration or termination of this Agreement.
16) TERMINATION. This Agreement may be terminated by:
a) Gum Tech in the event that Customer does not meet the minimum
annual purchase levels or minimum order amounts set forth on EXHIBIT D.
b) Gum Tech in the event that an invoice is not paid within fifteen
(15) days after the due date thereof or in the event that Customer is in
material default of any covenant, representation, agreement, warranty or other
non-monetary obligation hereunder, which material default is not cured within
fifteen (15) days following written notice of such default.
c) Customer in the event that Gum Tech is in material default of any
covenant, representation, agreement, warranty or other obligation hereunder,
which material default is not cured within fifteen (15) days following written
notice of such default, or
d) Customer in accordance with SECTION 7.(F).
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In the event of a termination of this Agreement, Customer agrees to pay for all
raw materials and packaging materials purchased exclusively for Customer and all
finished Product on hand.
17) MISCELLANEOUS.
a) INDEPENDENT CONTRACTORS. Both parties agree to perform under this
Agreement solely as independent contractors and shall not hold themselves out as
employees or agents of the other. This Agreement does not and shall not be
construed to constitute a partnership, agency relationship, or joint venture
between the parties, and neither party shall have the right to obligate or bind
the other party except as specifically set forth herein.
b) COMPLETE AGREEMENT. This Agreement and Exhibits attached hereto
contain the entire understanding of the parties and may not be modified, altered
or amended except in writing signed by both parties. Customer acknowledges that
Gum Tech and its representatives have made no promise or affirmation of fact to
Customer with respect to the Product which is not set forth in the terms and
conditions of this Agreement or any written materials furnished by one party to
the other. This is the complete and final expression of the bargain made between
the parties hereto.
c) SEVERABILITY OF PROVISIONS. If any provision of this Agreement, or
its application to any person or circumstances, is invalid or unenforceable,
then the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby.
d) ATTORNEYS' FEES. In the event either party hereto is required to
bring any action to enforce any provision hereof, or to secure specific
performance hereof, or to collect damages of any kind for any breach of this
Agreement, the prevailing party shall be entitled to all court costs, all
expenses arising out of or incurred by reasons of the litigation and any
reasonable attorneys' fees expended or incurred in any such proceedings, and all
costs and expenses shall be included in the judgment.
e) NOTICES. All notices provided for by this Agreement shall be given
in writing, postage or transmission costs prepaid, and shall be addressed to the
intended recipient at the address first set forth above, or such other address
as such party may from time to time designate in writing. All notices shall be
deemed received by the intended recipient on: (i) the third business day after
the date placed in the United States mail, as certified mail, return receipt
requested and postage paid thereon; (ii) the day that such notice is sent by
telecopy or facsimile to the intended recipient provided that such notice is
also sent by United States mail, as certified mail, return receipt requested and
postage paid thereon, and (iii) the business day after the date sent by
reputable overnight service.
f) GOVERNING LAW. This Agreement and each purchase order shall be
exclusively governed by the laws of the State of Arizona, including, but not
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limited to, the uniform commercial code in effect in the State of Arizona,
without giving effect to the choice of law principals thereof. It is the parties
express intent that this Agreement and all sales to Customer shall be deemed to
be made in Phoenix, Maricopa County, Arizona. The parties agree that any action
interpreting the Agreement shall be brought in Superior Court of Arizona in
Maricopa County, Arizona and they consent to the jurisdiction and venue of such
a court.
g) TIME OF ESSENCE. Time is of the essence of hereunder.
h) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
i) AUTHORITY. Each signer of this Agreement is authorized and warrants
that he, she, or it is authorized to enter into this Agreement on behalf of
himself, herself, or itself or his, her, or its respective principals.
j) FURTHER ASSURANCES. In addition to the respective obligations
required to be performed under this Agreement, Customer and Gum Tech shall each
perform, from time to time, other acts, and shall execute, acknowledge and/or
deliver such other instruments, documents and other materials, as may be
reasonably required in order to consummate the transactions described in this
Agreement. It is understood and agreed, inter alia, that the foregoing
provisions shall not be deemed to require either party to perform any of the
obligations of the other.
k) ASSIGNMENT. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other party. Notwithstanding the foregoing, Customer approves the
transfer of Gum Tech's rights and obligations hereunder to any entity or person
which purchases substantially all of Gum Tech's assets.
l) BINDING EFFECT. This Agreement shall be binding upon, and inure to
the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns.
m) WAIVER. None of the terms of this Agreement shall be deemed to be
waived or modified except by a written document drawn expressly for such purpose
and executed by the party against whom enforcement of such waiver or
modification is sought. Failure or delay of either party hereto to enforce any
of its rights under this Agreement shall not be deemed a modification or a
continuing waiver by such party of any of its rights hereunder.
n) INCORPORATION. The Recitals and the Exhibits are incorporated in
this Agreement by this reference.
14
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date and year first written above.
GUM TECH INTERNATIONAL, INC., a Utah
Corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
, a
----------------------------- ----------
Corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
15
<PAGE>
EXHIBIT A
PRODUCTS
16
<PAGE>
EXHIBIT B
SPECIFICATIONS
17
<PAGE>
EXHIBIT C
PRICE
18
<PAGE>
EXHIBIT D
MINIMUM ANNUAL PURCHASE REQUIREMENTS
MINIMUM ORDER AMOUNTS
19
INDEPENDENT AUDITORS' CONSENT
To the Stockholders and Board of Directors
of GumTech International, Inc.
We consent to the incorporation by reference in the following Registration
Statements of GumTech International, Inc. and any amendments thereto (1) No.
333-06199 on Form S-8; (2) No. 333-34019 on Form S-8; (3) No. 333-28821 on Form
S-3 and (4) No. 333-38555 on Form S-3 of our report dated February 5, 1999,
except for the last paragraph of Note 14 as to which the date is March 30, 1999,
relating to the balance sheet of GumTech International, Inc. as of December 31,
1998 and the related statements of operations, cash flows and stockholders'
equity for the years ended December 31, 1998 and 1997, which report appears or
is incorporated by reference in the December 31, 1998 Annual Report on Form
10-KSB of GumTech International, Inc.
/s/ Angell & Deering
Denver, Colorado
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 517,852
<SECURITIES> 0
<RECEIVABLES> 1,497,639
<ALLOWANCES> 35,000
<INVENTORY> 1,896,161
<CURRENT-ASSETS> 3,957,652
<PP&E> 4,843,569
<DEPRECIATION> 1,295,342
<TOTAL-ASSETS> 7,899,865
<CURRENT-LIABILITIES> 1,802,559
<BONDS> 2,379,501
0
0
<COMMON> 15,145,037
<OTHER-SE> (11,427,232)
<TOTAL-LIABILITY-AND-EQUITY> 7,899,865
<SALES> 5,272,547
<TOTAL-REVENUES> 5,272,547
<CGS> 4,357,010
<TOTAL-COSTS> 6,831,089
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 34,613
<INTEREST-EXPENSE> 473,811
<INCOME-PRETAX> (6,261,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,261,416)
<EPS-PRIMARY> (0.97)
<EPS-DILUTED> (0.97)
</TABLE>
