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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-27646
GUM TECH INTERNATIONAL, INC.
(Name of small business issuer in its charter)
UTAH 87-0482806
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
246 East Watkins Street
Phoenix, AZ 85004
(602) 252-1617
(Address of principal executive offices,
Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
Nasdaq National Market
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES [X NO [ ]
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 24, 2000, 8,866,017 shares of the Registrant's Common Stock
were outstanding. As of March 24, 2000, the market value of the Registrant's
Common Stock, excluding shares held by affiliates, was $154.4 million based upon
a closing bid price of $17.6875 per share of Common Stock on the Nasdaq National
Market.
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<PAGE>
TABLE OF CONTENTS
Page
----
PART I...................................................................... 1
ITEM 1. BUSINESS........................................................ 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 5
ITEM 3. LEGAL PROCEEDINGS............................................... 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 6
PART II..................................................................... 7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 7
ITEM 6. SELECTED FINANCIAL DATA......................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................... 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 17
PART III.................................................................... 17
ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE
OFFICERS........................................................ 17
ITEM 11. EXECUTIVE COMPENSATION.......................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................. 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 22
PART IV..................................................................... 22
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................... 22
Unless otherwise indicated in this filing, "Gum Tech," "us," "we," "our" and
similar terms refer to Gum Tech International, Inc. and its subsidiaries. The
Gum Tech name and logo and Zicam are trademarks of Gum Tech International, Inc.
Other brands, names and trademarks contained in this filing are the property of
their respective owners.
-i-
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
GUM OPERATIONS
We develop and manufacture specialty chewing gum products for branded and
private label customers, as well as products marketed under our own brand.
Specialty chewing gums include vitamins, herbals, and active over-the-counter
drug ingredients formulated to provide specific health-related benefits to the
user. We manufacture and continue to develop specialty chewing gums that are
formulated to:
* promote oral hygiene and breath freshness;
* promote weight management;
* reduce pain;
* relieve indigestion;
* contribute to energy and endurance;
* reduce the risk of osteoporosis; and
* reduce tobacco cravings.
In 1998, following a significant management restructuring, we changed our
principal strategy from developing, manufacturing, and distributing our own
branded and private label gum products to developing, manufacturing, and
packaging specialty gum products for sale and distribution by major branded and
private label customers that we believe have the capital resources and
distribution capability to promote and market specialty chewing gums on a large
national and international scale. We adopted this change in strategy primarily
because we did not have the financial resources, name recognition, and
distribution capability to successfully market and distribute our gums on a
wide-scale.
Most of our sales from gum operations are currently attributable to
products developed, manufactured, and packaged by us for marketing and sale by
five consumer products companies: Breath Asure, Inc., Ranir/DCP, Inc., Heritage
Consumer Products, Herbalife International, Inc., and Pharma-Green Ltd. We are
also actively involved in discussions with other major consumer product
companies regarding the development and formulation of a variety of additional
specialty chewing gum products.
In December 1999, we reached an agreement in principle to form a joint
venture with Swedish Match AB. The joint venture will be organized as an
independent company for the purpose of developing, manufacturing, marketing, and
distributing non-tobacco nicotine products worldwide. Under the terms of this
agreement, Swedish Match will own 51% and we will own 49% of the joint venture.
We will contribute intellectual property related to chewing gum products
containing nicotine and Swedish Match will contribute $10 million in start-up
capital. Swedish Match, based in Stockholm, Sweden, is an international group
which develops, manufactures, markets, and distributes, through its own
subsidiaries worldwide, a broad range of tobacco products within the OTP (Other
Tobacco Products) category, with smokeless tobacco as its core business along
with cigars and pipe tobacco, as well as matches and lighters. Swedish Match's
extensive range of products is sold in 140 countries, with annual sales totaling
approximately $1 billion.
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ZICAM OPERATIONS
Through a joint venture with BioDelivery Technologies, Inc. (formerly Gel
Tech, Inc.), a California corporation, we are engaged in the manufacture,
marketing, and distribution of health-related products using a patent-pending,
nasal gel technology. The initial product marketed by this joint venture is
Zicam, a nasal gel formula that has been formulated to reduce the severity and
duration of the common cold. An initial internal study and a subsequent
independent clinical study of Zicam have indicated that use of Zicam
significantly reduces the duration and severity of the common cold when taken at
the onset of a cold. To conduct clinical studies and develop, manufacture, and
market Zicam, we entered into an operating agreement with BioDelivery
Technologies under which both parties transferred their respective interests in
the patent rights to the nasal gel technology in exchange for membership
interests in Gel Tech LLC, an Arizona limited liability company. We have a 60%
interest in the capital and profits of the joint venture and parties affiliated
with BioDelivery Technologies collectively own a 40% interest in the capital and
profits of the joint venture. In addition, as contemplated by the operating
agreement, we contributed $3.5 million to the joint venture.
We were incorporated in Utah in 1991. Our principal executive offices are
located at 246 E. Watkins Street, Phoenix, Arizona and our telephone number is
(602) 252-1617.
STRATEGY
We are pursuing the following business strategies:
* CONTINUE TO RESEARCH AND DEVELOP NEW SPECIALTY GUM PRODUCTS. We
possess considerable gum formulation expertise, and together with our
existing and potential customers, are developing new products in the
specialty chewing gum market.
* PARTNER WITH MAJOR CONSUMER PRODUCT COMPANIES TO INCREASE SALES. Since
early 1998, we have pursued a strategy of partnering with major
consumer products companies that have the financial resources and
distribution capability to market and distribute specialty chewing gum
products on a national and international scale. Most recently in
December 1999, we announced a joint venture with Swedish Match to
produce, market and distribute nicotine products throughout the world.
* IMPROVE MANUFACTURING OPERATIONS TO ENHANCE EFFICIENCY AND INCREASE
PROFIT MARGINS. In 1998 and 1999, we expanded our operations,
including adding personnel and additional packaging and coating
equipment, to meet expected increases in demand for several gum
products.
* CONTINUE TO EFFECTIVELY MARKET GUM TECH BRANDED PRODUCTS. While we
have changed our principal strategy to focus on contract manufacturing
for others, we continue to support several of our own branded products
and believe that these products and related marketing efforts provide
a showcase for new product concepts and demonstrate our expertise in
developing new gum formulations.
* EFFECTIVELY MANAGE THE DEVELOPMENT AND GROWTH OF THE GEL TECH LLC
JOINT VENTURE AND THE MANUFACTURING AND MARKETING OF ZICAM. Zicam is a
new product that we believe represents an opportunity for substantial
growth in our revenue. In order to realize this growth in revenue,
however, we must effectively manage the development and growth of our
joint venture with BioDelivery Technologies and Zicam must achieve
significant market acceptance. In addition, we are exploring product
line extensions that would utilize GelTech's nasal gel technology.
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PRODUCT INFORMATION
The table below describes certain information related to specific chewing
gum products currently manufactured by us for other consumer products companies.
<TABLE>
<CAPTION>
Product Intended 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 Promote oral hygiene and breath freshness Oral Care Ranir/DCP
AcuTrim(R) Promotes weight management OTC drug Heritage Consumer Products
Aspergum(R) Pain relief OTC drug Heritage Consumer Products
Chooz Antacid and prevents osteoporosis OTC drug Heritage Consumer Products
Herbalife NRG(R) Improves energy & endurance Dietary supplement Herbalife
Herbalife Chew Slim(R) Promotes weight management Dietary supplement Herbalife
Pharma-Green (seven varieties) Various Dietary supplement Pharma-Green Ltd.
Brain Gum Improves brain function Dietary supplement KR Research, Inc.
</TABLE>
MANUFACTURING AND PACKAGING
We manufacture all of our gum products, including those marketed and
distributed by others. The manufacture of specialty chewing gums involves:
* storing bulk raw materials and "fine" raw materials, such as flavor,
colors and active ingredients;
* producing and mixing the gum base in large stainless steel mixers;
* extruding the gum into selected sizes and shapes;
* coating the gum, generally with a sugarless coating solution;
* branding the product if required;
* packaging the gum in blister packages; and
* packaging the blisters, according to customer specifications, for
shipment.
All of our gum products contain one or more active ingredients which are
added either to the gum center in the mixing stage or included in the coating
solution.
Prior to commencing production of the chewing gum, we record lot numbers
for all ingredients, examine and file certificates of ingredients, perform
quality control tests, and sanitize equipment and utensils. Our personnel
conduct additional quality control tests throughout the manufacturing process.
We manufacture our products in compliance with current good manufacturing
procedures requiring written standard operating procedures.
Zicam is currently manufactured and packaged by Botanical Laboratories,
Inc. of Ferndale, Washington in accordance with current good manufacturing
processes. The finished product is shipped to our warehouse facility in Phoenix
for warehousing and shipment to customers.
COMPETITION
Although the specialty gum market is emerging as a market category distinct
from the traditional, established chewing gum market, Gum Tech and the companies
to whom we sell face significant competition in each of the four categories in
which we operate. These categories include oral care products, OTC drugs,
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smoking cessation products, and dietary supplements. In the oral care products
market, we manufacture products for Breath Asure and Ranir/DCP, which compete
directly with Arm & Hammer dental gum, Trident Advantage, and V-6 dental gum. We
manufacture OTC drug-related gum products, including Aspergum, an analgesic,
Chooz, an antacid/calcium supplement, and AcuTrim, a dietary gum. Each of these
products competes generally with analgesics, antacids, and dietary products
produced and marketed by major consumer products companies. We will be pursuing
opportunities in the smoking cessation market through our joint venture with
Swedish Match, which is currently dominated by the Nicorette product marketed by
Pharmacia and Upjohn. In the dietary supplement market, our various gum products
compete with a large number of non-gum dietary supplement products.
Competitive factors in the chewing gum industry include price, flavor, and
name recognition resulting from media advertising. We historically have not had
the capital resources, marketing and distribution networks, product name
recognition, and advertising budget to produce or introduce chewing gum brands
that could compete effectively with the multi-national chewing gum manufacturers
and large specialty chewing gum marketers. Accordingly, we have adopted a
strategy of partnering with major branded and private label customers that
possess the resources and capabilities needed to market and distribute gum
products on a wide-scale.
We face significant competition from a large number of major drug companies
involved in selling a variety of cough and cold remedies that compete directly
with Zicam. Most of these competitors have greater name recognition, more
established brands, wider distribution capabilities and greater financial and
marketing resources than we do.
FDA AND OTHER GOVERNMENT REGULATION
We are subject to various Federal, state and local laws affecting our
business. All of our chewing gum and Zicam products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. In addition, some of our products are considered "drugs."
Consequently, manufacture of these products must comply with "good manufacturing
practices" mandated by the FDA, which prescribes specific requirements and
procedures for the manufacture of FDA-regulated drug products. If we fail to
comply with these requirements and procedures, the FDA has the right to restrict
the sale of or remove such products from the market. We believe that all of our
products comply with all regulatory requirements including the FDA manufacturing
standards and practices for drug products.
Our advertising claims made with respect to all of our products are also
subject to the jurisdiction of the FDA and the Federal Trade Commission. In both
cases, we are required to obtain scientific data to support any advertising or
labeling of health claims we make concerning our products.
In addition, our chewing gum manufacturing facility and the facilities of
Botanical Laboratories are subject to regulation by various governmental
agencies including state and local licensing, zoning, land use, construction and
environmental regulations and various health, sanitation, safety and fire codes
and standards. Suspension of certain licenses or approvals, due to failure to
comply with applicable regulations or otherwise, could interrupt our
manufacturing operations. We are also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions.
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TRADEMARKS, TRADE NAMES, AND PROPRIETARY RIGHTS
We own a perpetual non-exclusive license to use Microdent, a
plaque-reducing agent, in our coated chewing gum products. Microdent is the
critical ingredient in the chewing gums that we manufacture and package for
Breath Asure and Ranir/DCP.
We routinely seek trademark protection from the United States Patent Office
("USPO") and from similar agencies in foreign countries for chewing gum brands
and Zicam. Despite these protections, we may not be able to successfully defend
any trademarks granted to us against claims from or use by competitors. In
addition, trademark applications may not be approved by the USPO or any similar
foreign agency.
We consider some of our chewing gum formulations and processes to be
proprietary in nature and rely upon a combination of nondisclosure agreements,
other contractual restrictions, and trade secrecy laws to protect this
proprietary information. Despite these precautions, these steps may not be
adequate to prevent misappropriation of our proprietary information and our
competitors could independently develop chewing gum formulations and processes
that are substantially equivalent or superior to those that we develop.
EMPLOYEES
As of December 31, 1999, our gum operations employed 75 individuals,
including three executive officers, 56 manufacturing and warehouse personnel,
four research and development personnel, and 12 administrative/sales personnel.
As of December 31, 1999, Gel Tech employed six executive and administrative
personnel.
ITEM 2. DESCRIPTION OF PROPERTY
We lease an approximately 28,000 square foot building for our principal
executive offices and chewing gum manufacturing facilities at 246 East Watkins,
Phoenix, Arizona 85004. Our ten-year lease (with two three-year renewal options)
for this building expires on December 2005. The monthly rental expense for this
property is approximately $12,000. In September 1998, we leased an additional
31,000 square foot building located near our principal executive offices and
manufacturing facility to house our warehouse and packaging operations. This
lease provides for monthly rent of approximately $12,000 and a five year term,
subject to a five year renewal option.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
On October 16, 1996, a lawsuit was filed against us and other parties in
the United States District Court for the Central District of California,
CV-95-9784. The action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The
complaint, as it relates to us, principally alleged that we engaged in unlawful
rebates, appropriations and overcharges, commercial bribery, fraud and unjust
enrichment. On September 4, 1998, the court granted a motion for summary
judgment in our favor, and dismissed the plaintiff's claims against us and our
current and former directors. The ruling remains subject to appeal.
On January 27, 1999, an action was filed against us and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. The complaint alleges
intentional interference with business relations, intentional misrepresentation,
negligent misrepresentation, securities fraud, and consumer fraud. The plaintiff
seeks compensatory damages of $720,000, unspecified punitive damages, and
attorneys' fees and costs. We deny the plaintiff's allegations and intend to
vigorously defend this action.
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On June 2, 1999, we filed a complaint in the Superior Court of Maricopa
County, Arizona against DJ Ltd. ("DJ"), CIV 99-1136-PHX-PGR (D. Ariz.). Our
complaint sought a declaratory judgment that DJ was not owed any fee under an
agreement entered into between the parties pursuant to which DJ was to act as
our financial advisor. DJ removed the case to the United States District Court
for the District of Arizona and filed a counterclaim. In its counterclaim, DJ
alleges that we breached the contract between the parties and that Gum Tech has
been unjustly enriched. DJ seeks damages in the amount of $480,000, plus costs,
expenses and warrants to purchase 50,000 shares of Gum Tech common stock. DJ
also seeks a declaratory judgment confirming its version of its rights under the
agreement.
On October 21, 1999, an action was filed against us in the Superior Court
of the State of California in and for the County of Los Angeles, case number BC
218 878, by International Interest Group, Inc. ("IIG") The complaint alleges the
breach of an alleged oral finder's fee agreement between the parties relating to
the introduction of certain individuals associated with BioDelivery Technology
to a former chief executive officer of Gum Tech in 1996. BioDelivery Technology
and Gum Tech formed a joint venture in 1999 to manufacture, market and
distribute Zicam. The complaint seeks unspecified general contract damages,
declaratory relief, and an accounting. We removed the action to the United
States District Court for the Central District of California on February 2,
2000. We deny the existence, as well as the validity, of the alleged oral
agreement, and intend to vigorously defend the action.
On November 9, 1999, The Quigley Corporation commenced a civil action
against Gum Tech, Inc., Gel-Tech Industries, Inc., and Gel-Tech, L.L.C. in the
United States District Court for the Eastern District of Pennsylvania. The
complaint alleges infringement of a patent by the defendants' use of Zicam. The
complaint seeks compensatory damages and injunctive relief. Each of the
defendants denies infringement of the patent and alleges that the patent is
invalid. The defendants filed a motion for summary judgment on January 21, 2000,
seeking to dismiss the lawsuit as a matter of law. This motion was denied on
March 9, 2000. Quigley filed a motion for preliminary injunction on February 25,
2000, seeking an injunction against the defendants regarding future sales by
Zicam. A hearing on the motion is scheduled to be heard by the court on March
31, 2000. The defendants assert that the claim by Quigley is totally without
merit and intend to continue vigorously defending this lawsuit.
We are not involved as a party in any other legal proceeding other than
various claims and lawsuits arising in the normal course of business, none of
which, in the opinion of our management, is individually or collectively
material to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"GUMM" since April 24, 1996. The following table sets forth for the quarters
indicated the range of high and low closing prices of the Company's common stock
as reported by the Nasdaq National Market, but does not include retail markup,
markdown or commissions.
Market Price
--------------------
High Low
-------- --------
FISCAL YEAR 1998
First Quarter ...................................... $ 7.3750 $ 4.8125
Second Quarter ..................................... $ 7.5625 $ 5.2500
Third Quarter ...................................... $10.7500 $ 7.1875
Fourth Quarter ..................................... $ 8.0000 $ 5.4375
FISCAL YEAR 1999
First Quarter ...................................... $14.6719 $ 8.3750
Second Quarter ..................................... $11.8750 $ 9.5625
Third Quarter ...................................... $13.5625 $10.7500
Fourth Quarter ..................................... $20.3750 $12.5000
FISCAL YEAR 2000
First Quarter (through March 24, 1999) ............. $33.8750 $16.3125
As of March 20, 1999, Gum Tech had approximately 5,482 record and
beneficial stockholders.
DIVIDEND POLICY
We have paid only limited cash dividends on our common stock in the past
and intend to retain earnings, if any, for use in the operation and expansion of
the business. The amount of future dividends, if any, will be determined by the
board of directors based upon earnings, financial condition, capital
requirements and other conditions.
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ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data for Gum Tech
for each of the years in the five-year period ended December 31, 1999. The
selected annual historical statement of income and balance sheet data is derived
from Gum Tech's financial statements audited by independent auditors. For
additional information, see the financial statements of Gum Tech and the notes
thereto included elsewhere in this report. The following table should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified by reference thereto and
to Gum Tech's financial statements and notes thereto.
<TABLE>
<CAPTION>
Year
--------------------------------------------------------
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 15,500 $ 5,273 $ 3,777 $ 3,116 $ 4,344
Net income (loss) applicable
to common stock $ (1,012) $ (6,261) $ (5,399) $ (3,388) $ 497
Net income (loss) per share
of common stock $ (0.14) $ (0.97) $ (1.02) $ (0.77) $ 0.11
Dividends per share $ -- $ -- $ -- $ -- $ 0.01
Shares outstanding at year end 8,321 6,858 5,856 4,949 3,437
Total assets $ 20,028 $ 7,900 $ 9,685 $ 7,458 $ 4,592
Long term obligations $ 2,241 $ 2,380 $ 3,785 $ 1,488 $ 2,507
Stockholders' equity $ 12,702 $ 3,718 $ 4,673 $ 5,283 $ 1,623
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand labels. Specialty chewing gums include vitamins, herbals and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. Gum Tech currently targeted four market segments: oral
care, smoking cessation, dietary supplement, and over-the-counter (OTC) drug. A
substantial majority of Gum Tech's sales from its gum operations currently are
attributable to products developed, manufactured and packaged by Gum Tech for
marketing and sale by five branded and private label consumer products
companies.
In January 1999, Gum Tech entered into a joint venture with BioDelivery
Technologies, Inc. to manufacture, market and distribute Zicam, a nasal gel
formula. Under an operating agreement signed on May 6, 1999, Gum Tech and
BioDelivery Technologies transferred their respective interests in the patent
rights to the nasal gel technology used in Zicam in exchange for membership
interests in Gel Tech LLC, an Arizona limited liability company. Gum Tech has a
60% interest in the capital and profits of the joint venture and has provided
$3.5 million of capital to the joint venture. Gum Tech reports financial results
of Gel Tech LLC on a consolidated basis, but identifies certain information by
its two business segments--chewing gum operations and Zicam operations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998
The following table details certain financial information for our chewing
gum and Zicam operations for the year ended December 31, 1999:
Chewing Gum Zicam Consolidated
----------- ----------- -----------
Net sales $ 5,910,221 $ 9,589,803 $15,500,024
Cost of sales 4,806,544 2,534,818 7,341,362
----------- ----------- -----------
Gross profit 1,103,677 7,054,985 8,158,662
Operating expenses 2,277,263 3,428,227 5,705,490
Research and development 422,555 241,893 664,448
----------- ----------- -----------
Income (Loss) from operations (1,596,141) 3,384,865 1,788,724
Interest and other income 73,136 50,428 123,564
Interest expense 1,311,792 0 1,311,792
----------- ----------- -----------
Income (loss) before income tax $(2,834,797) $ 3,435,293 $ 600,496
----------- ----------- -----------
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CHEWING GUM OPERATIONS
Certain information is set forth below for our chewing gum operations
expressed in dollars and as a percentage of net sales for the periods indicated:
Year Ended December 31
------------------------------------------
1999 1998
------------------- -------------------
Net sales $ 5,910,221 100% $ 5,272,547 100%
Cost of sales 4,806,544 81 4,357,010 83
----------- ----- ----------- -----
Gross profit 1,103,677 19 915,537 17
Operating expenses 2,277,263 39 6,164,022 117
Research and development 422,555 7 667,067 12
----------- ----- ----------- -----
Income (Loss) from operations (1,596,141) (27) (5,915,552) (112)
Interest and other income 73,136 1 127,947 2
Interest expense 1,311,792 22 473,811 9
Provision (benefit)
for income taxes -- -- -- --
----------- ----- ----------- -----
Net income (loss) $(2,834,797) (48)% $(6,261,416) (119)%
=========== ===== =========== =====
NET SALES. Net sales increased to approximately $5.9 million for the 12
months ended December 31, 1999, or 12% above the prior year. This increase
reflects the addition of several new customers and/or products in mid- to late
1998. Among these were Ranir DCP, Breath Asure, Heritage Consumer Products'
AcuTrim(R) gum and Pharmagreen Ltd. Sales in the prior year largely reflect
sales of Cigarest's smoking cessation gum, Herbalife's diet and energy gums,
Aspergum(R) and Chooz(R) and initial deliveries of Breath Asure Dental Gum(TM).
Although sales to our five principal gum customers have contributed
significantly to our growth in sales over the past two years, we do not
anticipate additional growth in sales to these customers in the coming year, and
sales to these customers may in fact decline. We expect that any future growth
in our chewing gum operations will result primarily from the addition of new
contract relationships with new partners, including the recently announced
relationship with Swedish Match. We cannot assure you, however, that we will be
able to attract any new partners, or that any joint venture with any new
partners will ultimately prove successful.
COST OF SALES. Cost of sales increased to approximately $4.8 million, or
approximately $450,000 above the prior year, due to the higher level of sales.
GROSS PROFIT. Gross profit increased to $1.1 million reflecting both the
higher level of sales and improvement in our manufacturing processes.
OPERATING EXPENSES. Operating expenses declined by approximately $3.9
million from the 1998 level to $2.3 million in 1999. The amount for 1998
includes unusual one-time charges of $1,478,750 to reflect the cost of an
extension of options to a former officer, $732,000 for options granted to
another individual, and $618,230 representing a severance compensation expense.
Exclusive of these charges, operating expenses in 1998 were $3,335,042, or
approximately $1.06 million greater than the 1999 level. The reduction in normal
recurring operating expenses in 1999 was principally due to a reduction in
advertising, trade show and travel expense of $522,000 due to the change in
corporate strategy in 1998, lower legal expenses of $157,000 due to costs
associated with the management restructuring in early 1998, and the allocation
of administrative and warehousing expenses to Gel Tech LLC of $167,000 in 1999.
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INTEREST AND OTHER INCOME. Interest and other income decreased due to a
lower cash balance.
INTEREST EXPENSE. Interest expense increased from 1998 by $837,981 to
approximately $1.3 million primarily due to interest charges associated with the
Citadel financing in June 1999. Included in these amounts were a number of
non-cash interest charges associated with this financing. This financing,
together with the Company's outstanding term loan facility, were redeemed in
full in the first quarter of 2000, which we anticipate will virtually eliminate
interest expense in subsequent quarters.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. Net
loss decreased by approximately $3.4 million primarily due to the substantial
decrease in operating expenses offset in part by higher interest expense.
Despite the anticipated reduction in interest charges, gum operations will
continue to record a net loss in the future until sales of gum products
increase.
ZICAM OPERATIONS
Zicam sales and operations began January 1, 1999. As a result, the
financial results for Zicam operations cannot be compared to the prior period.
For the year ended December 31, 1999, Zicam operations recorded net sales
of approximately $9.6 million. The bulk of Zicam sales occurred late in the
fourth quarter of 1999 after widespread national publicity in November 1999
resulted in unexpectedly high demand for this new product. Initially, production
of Zicam could not be increased sufficiently to meet this high level of demand.
Consequently, deliveries of Zicam were delayed. Due to the highly seasonal
nature of cold remedies such as Zicam and a relatively short cold season, these
delays limited our ability to realize the full potential of Zicam sales for the
1999-2000 cold season.
Gross profit on Zicam for the 12 months ended December 31, 1999 was
approximately $7.1 million, or 74% of net sales. Operating expenses of $3.4
million were recorded for this period, of which approximately $2.25 million was
spent, or accrued for advertising, sales commissions, public relations and other
sales expenses. Research and development expenses of $241,892 for this period
largely reflect the cost of on-going clinical work associated with Zicam.
Interest and other income largely reflects interest income associated with
invested cash. Gel Tech did not have any debt outstanding during this period and
consequently did not record any interest expense.
11
<PAGE>
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
The following table presents certain statement of operations information
expressed in dollars and as a percentage of net sales for the periods indicated:
Years Ended December 31
------------------------------------------
1998 1997
------------------- -------------------
Net sales $ 5,272,547 100% $ 3,776,562 100%
Cost of sales 4,357,010 83 4,197,777 (111)
----------- ----- ----------- -----
Gross profit 915,537 17 (421,215) (11)
Operating expenses 6,164,022 117 3,881,238 103
Research & development 667,067 12 209,783 5
----------- ----- ----------- -----
Income (Loss) from operations (5,915,552) (112) (4,512,236) (119)
Interest and other income 127,947 2 204,220 5
Interest expense 473,811 9 1,090,618 29
Provision (benefit)
for income taxes -- -- -- --
----------- ----- ----------- -----
Net income (loss) $(6,261,416) (119)% $(5,398,634) (143)%
=========== ===== =========== =====
NET SALES. Net sales for 1998 were $5.27 million, approximately 40% above
the 1997 level. Sales in 1998 reflect the change in the Company's strategy early
in the year to a focus on contract manufacturing whereas sales in 1997 largely
reflect sales of Cigarrest, which the Company marketed, and sales of the
Company's own gum products. Sales in 1998 included deliveries of diet and energy
gums to Herbalife in the first half of the year, Aspergum (an analgesic gum),
and Chooz (an antacid gum) in the second quarter, Breath Asure dental gum in the
third quarter, and Ranir/DCP private label dental gum, Accutrim (a diet gum),
seven different gums to Pharma-green and a dental gum to EcoDenT in the fourth
quarter.
COST OF SALES. Cost of sales increased to $4.4 million, approximately
$159,000 above the 1997 level, primarily reflecting the increased level of
sales. In 1997, the Company recorded sales under its barter agreements at a zero
value with a cost of sales of $715,000. Adjusting for this cost, the cost of
sales for 1997 was $3.5 million, or 92% of net sales. The improvement in the
gross profit percentage from 8% in 1997 to 17% in 1998 is due to increased
utilization of plant facilities resulting in lower per unit overhead costs and
the efficiencies realized by producing larger quantities of the same gum. Both
periods were impacted by sizable write-offs of obsolete inventory ($260,000 in
1998 and $350,000 in 1997).
GROSS PROFIT. Gross profit for 1998 increased to $915,537 reflecting the
higher level of sales and increased utilization of plant facilities.
OPERATING EXPENSES. Operating expenses in 1998 were significantly impacted
by one-time charges related to the management restructuring that occurred in
early 1998 and continuing charges attributable to the Company's prior corporate
strategy. These charges resulted from an extension of stock options to a former
officer of the Company ($1.48 million) and an expense to reflect options owed to
another individual ($732,000), both of which were non-cash charges, and
severance compensation to certain corporate officers ($600,000). Excluding these
items, operating expenses were $3.4 million, or $480,000 less than the 1997
level, which is primarily attributable to a decrease in advertising expenses.
RESEARCH & DEVELOPMENT. Research & development expenses increased in 1998
to $667,067 from $209,783 in 1997 due to the introduction of more than 20 new
gum products in 1998, including three that contained over-the-counter drugs.
Research and development expenses include the cost of formulation, process and
ingredient validation, and production scale-up costs of new products as well as
costs of product concepts still under study.
12
<PAGE>
INTEREST AND OTHER INCOME. Interest income declined in 1998 from 1997 due
to a decrease in the Company's invested cash position during the year.
INTEREST EXPENSE. Interest expense decreased due to the refinancing and
restructuring of an equipment lease in late 1997 to a term loan and conversion
into common stock of approximately $1.0 million in principal amount of the
Company's convertible debt in the second half of 1998.
NET INCOME (LOSS). The net loss for 1998 was $6.3 million compared to $5.4
million the prior year. Although the results for 1998 were negatively impacted
by some significant one time charges, the Company continued to experience a
sizable loss in 1998 due to insufficient sales to support the Company's overhead
expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, Gum Tech's working capital was approximately $12.5
million compared to $2.2 million at December 31, 1998. During the 12 months
ended December 31, 1999, Gum Tech experienced a decrease in cash used by
operating activities of approximately $3.2 million, versus $3.9 million the
prior year. The decrease in cash for 1999 is largely attributable to the
increase in accounts receivable primarily associated with sales of Zicam in the
fourth quarter ($6.8 million) offset in part by the minority interest in
earnings of consolidated affiliates and a provision for sales returns and
allowances.
Investing activities used $230,000 of cash for the year ended December 31,
1999 compared to $864,000 for the same period in 1998. The 1998 amount reflects
expenditures to expand our gum operations.
Financing activities provided approximately $8.5 million of cash for the
year ended December 31, 1999 compared to $1.7 million in 1998. Approximately
$5.5 million of the 1999 amount reflects net proceeds realized from the Citadel
financing in June 1999. Details of the Citadel financing are contained in our
Current Report on Form 8-K filed on June 9, 1999. Proceeds realized from the
exercise of options and warrants contributed approximately $3.7 million versus
$2.0 million in 1998. Gum Tech issued 249,867 shares of Common Stock to Citadel
Investment Group in 1999 to redeem $2.0 million of Senior Secured Notes and $1.0
million of Series A Preferred Stock and issued an additional 193,447 shares of
Common Stock in early 2000 to redeem the remaining $3.0 million of Citadel debt
and preferred stock.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
our anticipated growth in business and future results of operations. These
forward-looking statements are based on our expectations and are subject to a
number of risks and uncertainties, many of which cannot be predicted or
quantified and are beyond our control. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Factors that could cause actual results to differ
materially from our expectations include less than anticipated demand for our
chewing gum or nasal gel products, such as Zicam, lack of market acceptance for
or uncertainties concerning the efficacy of Zicam, fluctuations in seasonal
demand for Zicam relative to the cold season, difficulties in increasing
production to meet unexpectedly high demand in the short term, a decrease in the
level of reorders from existing customers, financial difficulties encountered by
13
<PAGE>
one or more of our principal customers, difficulties in obtaining additional
capital for marketing, research and development, and other expenses, the
possibility of material charges incurred as a result of prior activities,
aggressive pricing and marketing efforts by rival gum manufacturers,
unavailability of third-party material products at reasonable prices, inventory
obsolescence due to shifts in market demand, and material litigation involving
patent and contractual claims, product liabilities and consumer issues. These
potential risks and uncertainties, together with those mentioned below and
elsewhere in this report, could affect our future operating results, financial
condition, and the market price of its common stock.
Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking words such as "believes",
"expects", "may", "should", or "anticipates" or by discussions of trends or
strategy. We may not achieve the future results discussed in these
forward-looking statements.
The following matters constitute cautionary statements identifying
important factors that relate to the forward-looking statements.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS
We began operations in February 1991 and have a limited operating history
upon which potential investors may evaluate our performance. We reported
significant losses for the last four years. Although we earned a profit for the
fourth quarter of 1999, we incurred a loss for the year ended December 31, 1999.
In addition, despite achieving a profit in the fourth quarter of 1999, our
future operations may not be profitable. The likelihood of our success must be
considered relative to the problems, difficulties, complications, and delays
frequently encountered in connection with the development and operation of a new
business, the significant change in strategy in early 1998, and the development
and marketing of Zicam, a relatively new product.
IF ZICAM DOES NOT GAIN MARKET WIDESPREAD ACCEPTANCE, OUR ANTICIPATED SALES AND
RESULTS OF OPERATIONS WILL SUFFER
In 1999, Gel Tech LLC, a joint venture in which we hold a 60% interest in
profits and capital, launched a new homeopathic cold remedy known as Zicam.
Although studies have indicated that Zicam can significantly reduce the duration
and severity of the common cold, there is no guarantee that the product will
achieve widespread acceptance by the market. If any unanticipated problem arises
concerning the efficacy of Zicam or the product fails to achieve widespread
market acceptance for any reason, our prospects for our future operating results
would be adversely affected. In addition, although initial sales of Zicam were
significant, there is no assurance that demand for this product will continue to
grow, especially following the peak of the cold season.
WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS
To the extent Zicam or any other new product we introduce achieves
widespread market acceptance and generates significant demand, we may be unable
to produce and deliver sufficient quantities of the product to meet our
customers' demands on a timely basis. If so, we could lose opportunities to sell
larger quantities of the product and damage relationships with distributors
whose orders could not be timely filled. This problem, if encountered, could be
particularly damaging if we are not able to meet customer demand during the cold
season, when we expect demand for sales of Zicam to peak.
14
<PAGE>
UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT COULD DELAY OR HINDER
INTRODUCTION OF NEW PRODUCTS
We may experience unanticipated difficulties in developing new products
that could delay or prevent the introduction of those products. We may be
dependent in the near future upon chewing gum products that are currently being
developed. If we are unable to develop new chewing gum products on a timely
basis, our business, operating results, and financial condition could be
materially adversely affected.
OUR RELIANCE UPON A FEW GUM CUSTOMERS MAY NEGATIVELY IMPACT OUR FINANCIAL
RESULTS
The shift in our chewing gum strategy in early 1998 to a focus on contract
manufacturing has made our chewing gum operations dependent for sales and future
growth on a few customers. These customers include Herbalife, Breath Asure,
Ranir, Heritage Consumer Products and PharmaGreen. While the decision to partner
with these firms relieves us of the direct responsibility to market products, we
become dependent on the financial resources and marketing capabilities of third
parties. Further, we are at risk for their non-payment or late payment for
amounts owed to us. While we intend to add to this portfolio of customers to
reduce the risk of non-performance by any single customer, we have not yet been
successful in that effort.
OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES
The marketing of certain of our chewing gum and nasal gel products,
including Zicam, involves claims that these products assist in weight loss,
promote dental hygiene, and reduce the duration of the common cold, among
others. Under FDA and FTC rules, we are required to obtain scientific data to
support any health claims we make concerning our products. Although we have not
provided nor been requested to provide any scientific data to the FDA in support
of claims regarding our products, we have obtained scientific data for all of
our products. There can be no assurance that the scientific data we have
obtained in support of our claims will be deemed acceptable to the FDA or FTC,
should either agency request any such data in the future. If the FDA or the FTC
requests any supporting information, and we are unable to provide support that
is acceptable to the FDA or the FTC, either agency could force us to stop making
the claims in question or restrict us from selling the affected products.
FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS
We are subject to various federal, state and local laws affecting our
business. Our chewing gum and nasal gel products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or incur substantial costs in
adopting measures to maintain compliance with these regulations.
Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the related product.
15
<PAGE>
WE MAY BE UNABLE TO SUCCESSFULLY EXPAND OUR OPERATIONS
We intend to continue expanding our manufacturing and marketing operations.
Expansion will place substantial strains on our management and our operational,
accounting, and information systems. Successful management of growth will
require us to improve our financial controls, operating procedures, and
management information systems, and to train, motivate, and manage our
employees.
In addition, to the extent that actual demand for our products in the
future is less than anticipated, we may incur higher than necessary costs in
preparing for an anticipated growth in sales that does not materialize or
materializes more slowly than expected.
Failure to manage growth effectively would have a material adverse effect
on the results of our operations and our ability to execute our business
strategy.
WE MAY BE UNABLE TO PREVENT OTHERS FROM DEVELOPING SIMILAR PRODUCTS
We routinely seek trademark and patent protection from the United States
Patent Office and from similar agencies in foreign countries for chewing gum
brands and have done so for Zicam. There can be no assurance that we will be
able to successfully defend any trademarks, trade names or patents against
claims from or use by competitors or that trademark, trade name or patent
applications will be approved by the USPO or any similar foreign agency.
We consider some of our chewing gum formulations and processes to be
proprietary in nature and rely upon a combination of non-disclosure agreements,
other contractual restrictions and trade secrecy laws to protect such
proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of our proprietary information or that our
competitors will not independently develop chewing gum formulations and
processes that are substantially equivalent or superior to our own.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK
Sales of substantial amounts of common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price for the common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act.
Therefore, all of these shares may be immediately sold by the holders. A
substantial increase in the volume of trading in our stock may depress the price
of our common stock.
THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE
The market price of our common stock has been highly volatile and may
continue to be volatile in the future. Factors such as our operating results or
public announcements may cause the market price of our stock to decline quickly.
Market prices for securities of many small capitalization companies have
experienced wide fluctuations in response to variations in quarterly operating
results, general economic indicators and other factors beyond our control.
WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and Consolidated Financial Statements of
Gum Tech, including the Notes to those statements, are set forth on pages F-1
through F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Gum Tech has had no disagreements with its independent accountants in
regard to accounting and financial disclosure and has not changed its
independent accountants during the two most recent fiscal years.
PART III
ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS
The following sets forth certain information with respect to Directors,
nominees to the Board of Directors, and executive officers of the Company.
Name Age Position With Company and Tenure
---- --- --------------------------------
Gary S. Kehoe 41 President since 1998 and Chief Operating Officer
and Director since 1995
W. Brown Russell, III 44 Chairman of the Board of Directors since 1999,
Director of Investor Relations and Legal and
Director since 1998
William D. Boone 52 Director since 1998
William A. Yuan 39 Director since 1998
William J. Hemelt 46 Secretary, Treasurer, and Chief Financial Officer
since 1998 (Principal Financial Officer)
Gary S. Kehoe joined Gum Tech in 1995 as Chief Operating Officer and a
Director. He was responsible for construction and start-up of our manufacturing
facility and research and development of gum products. In February 1998, the
Board of Directors elected Mr. Kehoe as our President. Prior to joining Gum
Tech, Mr. Kehoe was employed by Planters/LifeSavers, a division of Nabisco Food
Group, in various capacities, including Senior Food Technologist, where he was
responsible for functional and nutriceutical products in the confectionery
division. He developed or co-developed several new technologies, processes, and
products involving CareFree, Bubble Yum, Fruit Stripe, and Beech Nut chewing
gums and is listed as inventor or co-inventor on 22 U.S. patents filed by
Nabisco and Gum Tech.
17
<PAGE>
W. Brown Russell, III was elected to the Board of Directors in February
1998 and appointed as Chairman of the Board in August 1999. He joined Gum Tech
as a Special Advisor to the President in February 1998 before assuming his
current position as Director of Investor Relations and Legal. Before joining Gum
Tech, Mr. Russell operated Brown Russell Investment Services, Inc., a private
money management firm. From 1987 to 1994, Mr. Russell was the President of
Capital Investment Properties, a real estate and property management firm based
in Athens, Georgia. During this time, Mr. Russell was also a partner in the law
firm of Russell & Russell. Mr. Russell earned a Juris Doctorate and Bachelor of
Arts from the University of Georgia.
William D. Boone was elected to the Board of Directors in February 1998,
and served as a manufacturing consultant to Gum Tech in early 1998. Mr. Boone
has 30 years experience in small business management and sales growth, including
co-founding and co-managing Trade Printers, Inc., a Phoenix-based wholesale
printing manufacturer, which he subsequently sold.
William A. Yuan has been a Director since 1998. Mr. Yuan is President and
Chief Executive Officer of Reliance Management, LLC. From 1985 until 1996, Mr.
Yuan was employed by Merrill Lynch and Salomon Smith Barney in various
positions. Mr. Yuan earned a Bachelor of Science in Economics from Cornell
University.
William J. Hemelt joined us in June 1998 as our Chief Financial Officer,
Treasurer, and Secretary. From 1980 to 1997, Mr. Hemelt held a variety of
financial positions with Arizona Public Service Company, Arizona's largest
utility, including 6 years as Treasurer and 4 years as Controller. Mr. Hemelt
earned a Master of Business Administration and a Bachelor of Science in
Electrical Engineering from Lehigh University.
Bruce A. Jorgenson, M.D., resigned from the Board of Directors effective
February 17, 2000. We intend to add at least one additional board member in the
future.
All Directors terms are on an annual basis.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1999, our Board of Directors held
7 meetings, either in person or by consent resolution. All Directors attended or
participated in at least 75% of those meetings and the total number of meetings
held by all committees of the Board on which they served.
AUDIT COMMITTEE
In 1998, our Board of Directors elected Dr. Bruce A. Jorgenson, William
Boone, William A. Yuan, and W. Brown Russell to the Audit Committee. The
functions of the Audit Committee are to receive reports with respect to loss
contingencies, the public disclosure or financial statement notation of which
may be legally required; annually review and examine those matters that relate
to a financial and performance audit of our employee plans; recommend to our
Board of Directors the selection, retention, and termination of our independent
accountants; review the professional services, proposed fees and independence of
such accountants; and provide for the periodic review and examination of
management performance in selected aspects of corporate responsibility. The
Audit Committee did not meet in 1999.
COMPENSATION COMMITTEE
In 1998 our Board of Directors elected Dr. Bruce A. Jorgenson and William
Boone to the Compensation Committee. The functions of the Compensation Committee
are to review annually the performance of the President and of the other
principal officers whose compensation is subject to the review and
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<PAGE>
recommendation by the Compensation Committee to our Board of Directors.
Additionally, the Compensation Committee is to review compensation of outside
directors for service on our Board of Directors and for service on committees of
our Board of Directors, and to review the level and extent of applicable
benefits provided by us with respect to automobiles, travel, insurance, health
and medical coverage, stock options and other stock plans and benefits. The
Compensation Committee held two meetings during fiscal 1999.
DIRECTOR COMPENSATION
The Company's nonemployee Directors receive reimbursement for out-of-pocket
expenses incurred in attending Board of Directors" meetings and have been
granted stock options under the Company's 1995 Stock Option Plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Gum Tech's officers and directors, and persons who own more than ten
percent of a registered class of Gum Tech's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). These officers, directors and shareholders are required by
SEC regulation to furnish Gum Tech with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms were
required for such persons, Gum Tech believes that during the fiscal year ended
December 31, 1999, all filing requirements applicable to its officers,
directors, and greater than ten percent beneficial owners were complied with
except as set forth below.
Messrs. Russell, Kehoe, Jorgenson, Boone, and Yuan reported the October
1999 grant of options to each of them on a Form 5 filing in February 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses, for the years ended December 31, 1997, 1998,
and 1999, certain compensation paid to the Company's Chief Executive Officer,
and to each other executive officer whose total compensation in 1999 exceeded
$100,000. No other executive officer of the Company at December 31, 1999 earned
more than $100,000 in annual compensation during the fiscal year ended December
31, 1999.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
Annual Compensation Awards Payouts
----------------------------------- ----------------------- -------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Award(s) Options/SARS Payouts Compensation(1)
- -------- ---- -------- -------- ------------ -------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary S. Kehoe 1999 $132,292 $ 50,000 0 0 80,000 0 $ 3,965
President, Chief 1998 $ 95,000 $ 30,000(2) 0 0 188,000(3) 0 $ 2,847
Operating Officer 1997 $ 84,333 $ 20,000(4) 0 0 88,000(5) 0 $ 880
William J. Hemelt 1999 $100,000 $ 0 0 0 24,000 0 $ 3,000
Chief Financial 1998 $ 58,333 $ 0 0 0 50,000 0 $ 1,750
Officer, Treasurer
and Secretary
W. Brown Russell 1999 $ 96,667 $ 0 0 0 60,000 0 $ 2,821
Chairman of the Board 1998 $ 44,000 $ 0 0 0 70,000 0 $ 0
and Director of Legal
and Investor Relations
</TABLE>
(1) Includes matching contributions under our SRA/IRA defined contribution
program.
(2) Includes $10,000 that was accrued in 1998 but paid in 1999.
(3) Represents options originally granted in prior years that were repriced in
1998. (See footnote 5 below). In accordance with SEC rules, these options
are reported as options granted during the fiscal year 1998 as a result of
the repricing of these options in April 1998.
(4) Includes $10,000 that was accrued in 1997 but paid in 1998.
(5) Each option was repriced to $5.625 per share in April 1998, equal to the
fair market value on the date of repricing.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants during the
year ended December 31, 1999 to the named executive officers:
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options/ Exercise
Underlying Sars Granted Price Grant Date
Options/sars to Employees in (Per Expiration Present
Name Granted Fiscal Year (1) Share) Date Value(1)
---- ------- --------------- ------ ---- --------
<S> <C> <C> <C> <C> <C>
Gary S. Kehoe 70,000(2) 15% $11.7500 08/10/2002 $384,090
10,000(3) 2% $12.5625 10/07/2002 $ 58,680
William J. Hemelt 24,000(4) 5% $11.7500 08/10/2004 $131,688
W. Brown Russell 50,000(5) 11% $11.7500 08/10/2002 $274,350
10,000(3) 2% $12.5625 10/07/2002 $ 58,680
</TABLE>
(1) The grant date present values per option share were derived using the
Black-Scholes option pricing model in accordance with SEC rules and
regulations and are not intended to forecast future appreciation of our
stock price. The options granted on August 10, 1999 had a grant date
20
<PAGE>
present value of $5.487 per option and the options granted on October 7,
1999 had a grant date present value of $5.868 per option. The Black-Scholes
model was used with the following assumptions: volatility of 63.1% based on
a historical weekly average; dividend yield of 0%; risk-free interest of
5.90% based on a U.S. Treasury rate of three years; and a three year option
life.
(2) 30,000 vested upon the completion of the second clinical test of Zicam
efficacy, 20,000 vest upon completion of a major dental gum contract, as
determined by the Compensation committee of the Board and 20,000 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board
(3) 5,000 vested upon the completion of the second clinical test of Zicam
efficacy, 2,500 vest upon completion of a major dental gum contract, as
determined by the Compensation commmittee of the Board and 2,500 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board.
(4) 12,000 vested upon the completion of the second clinical test of Zicam
efficacy, 4,000 vest on each of August 10, 2000, August 10, 2001 and August
10, 2002.
(5) 30,000 vested upon the completion of the second clinical test of Zicam
efficacy, 10,000 vest upon completion of a major dental gum contract, as
determined by the Compensation committee of the Board and 10,000 vest upon
completion of a major nicotine gum contract, as determined by the
Compensation committee of the Board.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
The following table provides information on the value realized by the
exercise of options by the named executive officers during 1999 and the value of
the named executive officer's unexercised options at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/sars At In-the-money Options/
Acquired Fiscal Year-end Sars At Fiscal Year-end
On Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Kehoe 100,000 $1,191,250 88,000 80,000 $913,000 $331,875
William J. Hemelt 18,000 $ 218,812 7,000 49,000 $ 73,500 $364,500
W. Brown Russell 10,000 $ 111,250 60,000 60,000 $597,400 $246,875
</TABLE>
Gum Tech has entered into employment agreements with Messrs. Kehoe and
Hemelt. Mr. Kehoe's agreement, which was originally signed on June 1, 1995,
expires on December 31, 2000. Mr. Kehoe's salary has been increased by the Board
to an annual rate of $150,000, which is above the level required in the contract
to reflect the additional responsibilities Mr. Kehoe has assumed as President of
Gum Tech. The contract agreement provides a bonus payment structure that is
related to annual sales levels of new gums developed by Mr. Kehoe. Mr. Hemelt's
agreement, which expires at the end of May 31, 2000, provides for an annual
salary of $100,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of March 15, 2000, with
respect to the number of shares of GumTech's Common Stock beneficially owned by
the named executive officers, by individual directors, by all directors and
officers as a group, and by persons known by Gum Tech to own more than 5% its
outstanding Common Stock. The address of all persons (unless otherwise noted in
the footnotes below) is in care of Gum Tech at 246 E. Watkins Street, Phoenix,
Arizona 85004. The indicated percentages are based upon the number of shares of
Common Stock outstanding as of March 15, 2000, plus, where applicable, the
number of shares that the indicated person or group had a right to acquire
within 60 days of that date.
21
<PAGE>
Percent of
Name of Beneficial Number of Common Stock
Owner and Address Shares Owned
----------------- ------ -----
Gary S. Kehoe(1) 269,400 3.0%
William D. Boone(2) 80,200 0.9%
William A. Yuan(3) 20,071 0.2%
W. Brown Russell, III(4) 133,500 1.5%
William J. Hemelt (5) 40,000 0.5%
All directors and 543,171 5.9%
officers as a group
(5 persons)
- ----------
(1) Includes options to purchase 88,000 shares at $5.625 per share, 70,000
shares at $11.75 per share and 10,000 shares at $12.5625 per share.
(2) Includes options to purchase 50,000 shares at $5.625 per share, 20,000
shares at $6.88 and 10,000 shares at $12.5625 per share.
(3) Includes options to purchase 10,000 shares at $5.81 per share and 10,000
shares at $12.5625 per share.
(4) Includes options to purchase 20,000 shares at $6.88 per share, 40,000
shares at $5.625 per share, 50,000 shares at $11.75 per share and 10,000
shares at $12.5625.
(5) Includes options to purchase 4,000 shares at $5.50 per share and 12,000
shares at $11.75 per share..
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit No. Title
----------- -----
3.01 Certificate of Incorporation and Amendments thereto of the
Registrant(1)
3.02 Bylaws of the Registrant(1)
10.01 1995 Stock Option Plan(1)
10.02 Amendment to Stock Option Plan(1)
10.03 Employment Contract with Gary S. Kehoe(1)
10.04 Employment Contract with William J. Hemelt(2)
22
<PAGE>
10.05 Lease Agreement - Phoenix, Arizona manufacturing facility(1)
10.06 Lease Agreement between Gum Tech and Beardsley & 1-17
L.L.C., for the lease of packaging/warehouse facility(3)
10.07 Form of Convertible Note Dated February 20, 1997(4)
10.09 Registration Rights Agreement(4)
10.10 Installment Loan with Textron Financial Corporation(3)
10.11 Form of Manufacturing Agreement(5)
10.12 Operating Agreement of Gel Tech, L.L.C.(6)
10.13 Securities Purchase Agreement with Citadel Investment
Group(7)
10.14 Credit Agreement between Gel Tech LLC and Imperial Bank
23 Consent of Angell & Deering
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.
(2) Incorporated by reference to the Registrant's Report on Form 10-QSB for the
quarter ending September 30, 1998, file number 000-27646.
(3) Incorporated by reference to the Registrant's Report on Form 10-KSB for the
year ending December 31, 1997, file number 000-27646.
(4) Incorporated by reference to the Registrant's Form 8-K filed March 6, 1997.
(5) Incorporated by reference to the Registrant's Form 10-KSB filed March 31,
1999.
(6) Incorporated by reference to the Registrant's Report on Form 10-QSB for the
quarter ending March 31, 1999, file number 000-27646.
(7) Incorporated by reference to the Registrant's Form 8-K filed June 9, 1999.
REPORTS ON FORM 8-K
Gum Tech filed a report on Form 8-K on November 8, 1999 announcing the
withdrawal from publication by the American Journal of Infection Control of the
manuscript "The effects of direct application of ionic zinc nasal spray gel on
the duration of the common cold."
23
<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 30, 2000.
GUM TECH INTERNATIONAL, INC.
By: /s/ Gary S. Kehoe
-------------------------------------
Gary S. Kehoe
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dated indicated.
Signature Title Date
- --------- ----- ----
/s/ W. Brown Russell, III Chairman of the Board of March 30, 2000
- ------------------------- Directors, Director of
W. Brown Russell, III Legal and Investor Relations
/s/ William D. Boone Director March 30, 2000
- -------------------------
William D. Boone
/s/ William J. Hemelt Secretary, Chief Financial March 30, 2000
- ------------------------- Officer (Principal Financial
William J. Hemelt Officer), Principal Accounting
Officer
/s/ William A. Yuan Director March 30, 2000
- -------------------------
William A. Yuan
24
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31,
1999 and 1998 F-3
Consolidated Statements of Operations for the
years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1999, 1998
and 1997 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 F-7
Notes To Consolidated Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Gum Tech International, Inc.
We have audited the accompanying consolidated balance sheets of Gum Tech
International, Inc. and Subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc.
and Subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 5, 2000
F-2
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
Current Assets:
Cash and cash equivalents $ 5,595,075 $ 517,852
Restricted cash 270,878 20,149
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $50,482 and $35,000 8,197,180 1,462,639
Employees 56,237 --
Inventories 1,966,819 1,896,161
Prepaid expenses 155,281 60,851
------------ ------------
Total Current Assets 16,241,470 3,957,652
------------ ------------
Property and Equipment, at cost:
Machinery and equipment 4,455,694 4,272,746
Office furniture and equipment 295,577 238,371
Leasehold improvements 383,854 332,452
------------ ------------
5,135,125 4,843,569
Less accumulated depreciation (1,724,276) (1,295,342)
------------ ------------
Net Property and Equipment 3,410,849 3,548,227
------------ ------------
Other Assets:
Deposits 214,936 279,131
Intangible assets, net of accumulated
amortization of $548,744 and $156,526 160,659 114,855
------------ ------------
Total Other Assets 375,595 393,986
------------ ------------
Total Assets $ 20,027,914 $ 7,899,865
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 2,078,358 $ 1,309,067
Accrued interest -- 42,449
Customer deposits 10,500 34,763
Sales returns and allowances 1,202,100 35,000
Current portion of long-term debt 420,043 381,280
------------ ------------
Total Current Liabilities 3,711,001 1,802,559
------------ ------------
Long-Term Debt, net of current portion above:
Financial institutions and other 2,646,897 2,736,525
Obligations under capital leases 14,105 24,256
Less current portion above (420,043) (381,280)
------------ ------------
Total Long-Term Debt 2,240,959 2,379,501
------------ ------------
Minority interest in consolidated affiliate 1,374,117 --
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares
authorized:
Series A preferred stock, $1,000 stated value,
2,000 shares authorized, 1,000 shares issued
and outstanding 1,000,000 --
Common stock: no par value, 20,000,000 shares
authorized, 8,320,705 and 6,857,999 shares
issued and outstanding 23,687,579 15,145,037
Additional paid in capital 3,551,766 2,915,152
Accumulated deficit (15,537,508) (14,342,384)
------------ ------------
Total Stockholders' Equity 12,701,837 3,717,805
------------ ------------
Total Liabilities and Stockholders' Equity $ 20,027,914 $ 7,899,865
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 15,500,024 $ 5,272,547 $ 3,776,562
Cost of sales 7,341,362 4,357,010 4,197,777
------------ ------------ ------------
Gross Profit 8,158,662 915,537 (421,215)
Operating expenses 5,705,490 6,164,022 3,881,238
Research and development 664,448 667,067 209,783
------------ ------------ ------------
Income (Loss) From Operations 1,788,724 (5,915,552) (4,512,236)
------------ ------------ ------------
Other Income (Expense):
Interest and other income 123,564 127,947 204,220
Interest expense (1,311,792) (473,811) (1,090,618)
------------ ------------ ------------
Total Other Income (Expense) (1,188,228) (345,864) (886,398)
------------ ------------ ------------
Income (Loss) Before Provision For
Income Taxes and Minority Interest 600,496 (6,261,416) (5,398,634)
Provision for income taxes -- -- --
Minority interest in earnings of
consolidated affiliate 1,374,117 -- --
------------ ------------ ------------
Net Income (Loss) (773,621) (6,261,416) (5,398,634)
Preferred stock dividends 238,466 -- --
------------ ------------ ------------
Net Income (Loss) Applicable to
Common Shareholders $ (1,012,087) $ (6,261,416) $ (5,398,634)
============ ============ ============
Net Income (Loss) Per Share of Common Stock:
Basic $ (.14) $ (.97) $ (1.02)
Diluted $ (.14) $ (.97) $ (1.02)
Weighted Average Number of Common Shares
Outstanding:
Basic 7,412,959 6,427,815 5,294,099
Diluted 7,412,959 6,427,815 5,294,099
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Additional
--------------------------- --------------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 4,948,740 $ 7,965,060 $ -- $ (2,682,334)
Issuance of common stock upon
exercise of stock options and
warrants (net of costs of $188,678) -- -- 907,720 4,123,090 -- --
Beneficial conversion feature
of convertible notes -- -- -- -- 665,790 --
Net loss -- -- -- -- -- (5,398,634)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 -- -- 5,856,460 12,088,150 665,790 (8,080,968)
Issuance of common stock upon
exercise of stock options and
warrants -- -- 785,962 2,032,897 -- --
Conversion of convertible notes
payable into common stock -- -- 215,577 1,023,990 -- --
Compensation from extension and
issuance of stock options -- -- -- -- 2,249,362 --
Net loss -- -- -- -- -- (6,261,416)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 -- -- 6,857,999 15,145,037 2,915,152 (14,342,384)
Issuance of common stock upon
exercise of stock options and
warrants -- -- 890,800 3,672,044 -- --
Conversion of convertible notes
payable into common stock -- -- 317,046 1,505,972 -- --
Issuance of Series A preferred
stock (net of costs of $519,011) 2,000 2,000,000 -- -- (519,011) --
Issuance of common stock for
repayment of senior notes,
including prepayment penalty -- -- 163,704 2,200,000 -- --
Issuance of common stock for
redemption of Series A preferred
stock, including prepayment penalty (1,000) (1,000,000) 86,163 1,100,000 -- --
Issuance of common stock for payment
of interest on senior notes -- -- 4,993 64,526 -- --
Compensation from issuance of
stock options -- -- -- -- 64,275 --
Issuance of warrants in connection
with financing -- -- -- -- 1,091,350 --
Payment of Series A preferred stock
dividends -- -- -- -- -- (238,466)
Dividend distribution of subsidiary -- -- -- -- -- (183,037)
Net loss -- -- -- -- -- (773,621)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 1,000 $ 1,000,000 8,320,705 $ 23,687,579 $ 3,551,766 $(15,537,508)
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (773,621) $(6,261,416) $(5,398,634)
Adjustments to reconcile net income (loss) to net cash
(used) by operating activities:
Depreciation 430,223 304,277 551,404
Amortization 392,218 108,816 47,710
Amortization of discount on notes payable 387,500 -- --
Provision for bad debts 45,000 34,613 94,500
(Gain) loss on disposal of assets 1,544 (2,699) 10,633
Interest expense from beneficial conversion feature
of notes payable -- -- 665,790
Compensation from forgiveness of note receivable -- 114,012 --
Compensation from extension and issuance of stock options 64,275 2,249,362 --
Common stock issued for payment of interest 264,526 -- --
Minority interest in earnings of consolidated affiliate 1,374,117 -- --
Changes in assets and liabilities:
Accounts receivable (6,779,541) (415,018) (648,527)
Employee receivables (56,237) 61,054 (61,054)
Inventories (70,658) (862,779) 333,562
Income tax receivable -- -- 234,440
Prepaid expenses and other (345,159) 92,254 (55,106)
Interest receivable -- 60,164 (60,164)
Deposits and other -- 7,291 128,602
Accounts payable and accrued expenses 726,842 551,058 470,600
Customer deposits (24,263) 19,763 (50,500)
Sales returns and allowances 1,167,100 35,000 --
----------- ----------- -----------
Net Cash (Used) By Operating Activities (3,196,134) (3,904,248) (3,736,744)
----------- ----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (294,389) (990,557) (134,083)
Proceeds from disposal of equipment -- 16,122 6,363
Receipt of principal on notes receivable -- 250,000 177,653
Deposits and other 64,195 (139,358) (10,598)
----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities (230,194) (863,793) 39,335
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 4,000,000 -- 2,530,000
Principal payments on notes payable (381,307) (343,184) (204,871)
Issuance of common stock 3,672,054 2,032,897 4,311,768
Issuance of preferred stock 2,000,000 -- --
Offering costs incurred (155,231) -- (188,678)
Debt issuance costs incurred (310,462) (11,733) (259,648)
Dividend distribution of subsidiary (183,037) -- --
Dividends paid on preferred stock (138,466) -- --
----------- ----------- -----------
Net Cash Provided By Financing Activities 8,503,551 1,677,980 6,188,571
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 5,077,223 (3,090,061) 2,491,162
Cash and Cash Equivalents at Beginning of Year 517,852 3,607,913 1,116,751
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 5,595,075 $ 517,852 $ 3,607,913
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 509,997 $ 392,693 $ 306,972
Income taxes 150 150 150
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Conversion of account receivable to a note receivable $ -- $ -- $ 225,665
Note payable incurred for purchase of equipment under a capital
lease -- -- 1,564,457
Conversion of convertible notes payable into common stock 1,505,972 1,023,990 --
Issuance of warrants in connection with financing 1,091,340 -- --
Issuance of common stock to repay senior notes and redeem
preferred stock 3,000,000 -- --
Issuance of common stock for payment of dividends 100,000 -- --
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-7
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Gum Tech International, Inc. (the "Company") was incorporated in Utah on
February 4, 1991 to develop, market and distribute specialty chewing gum
products for branded and private label customers, as well as products
marketed under the Company's brand. The Company currently targets four
market segments: oral care, smoking cessation, dietary supplement, and
over-the-counter (OTC) drug.
The Company also is developing, marketing and selling homeopathic remedies
utilizing a nasal gel technology through a majority owned subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, Gel Tech, L.L.C. All significant
intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out pricing method.
PROPERTY AND EQUIPMENT
Depreciation of the primary asset classifications is calculated based on
the following estimated useful lives using the straight-line method.
Classification Useful Life in Years
-------------- --------------------
Machinery and equipment 5-30
Office furniture and equipment 5
Leasehold improvements 10
Depreciation of property and equipment charged to operations is $430,223,
$304,277 and $551,404 for the years ended December 31, 1999, 1998 and 1997,
respectively.
INTANGIBLE ASSETS
Debt issuance costs are being amortized using the straight-line method over
the term of the notes.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer, net of an allowance for sales returns.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation". The Company will continue
to measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". See Note 7 for pro forma
disclosures of net income and earnings per share as if the fair value-based
method prescribed by SFAS No. 123 had been applied in measuring
compensation expense.
F-8
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
reviews for the impairment of long-lived assets and certain identifiable
intangibles, whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss would
be recognized when the estimated future cash flows is less than the
carrying amount of the assets. No impairment losses have been identified by
the Company.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities using enacted
tax laws and rates for the years when the differences are expected to
reverse.
ADVERTISING
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production
costs, as incurred. Advertising expense was $1,343,492, $421,363 and
$1,140,386 for the years ended December 31, 1999, 1998 and 1997,
respectively.
BARTER CREDITS
The Company records sales under barter transactions at the carrying value
of the inventory after reducing the inventory to its net realizable value
for any impairment. At the time barter credits are utilized by the Company
for advertising, packaging, travel expenses and other purchases an expense
is recognized based on the carrying value of the barter credits plus cash
paid. The Company recorded the sales under its barter transactions in 1996
and 1997 at a zero value and, therefore, when the barter credits are used
by the Company it will recognize an expense only for the cash expended for
the items purchased.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
The Company adopted SFAS No. 128, "Earnings Per Share", which specifies the
method of computation, presentation and disclosure for earnings per share.
SFAS No. 128 requires the presentation of two earnings per share amounts,
basic and diluted.
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the dilutive effect of
outstanding stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had
a net loss in 1999, 1998 and 1997 and the inclusion of stock options and
other incremental shares would be antidilutive. Consequently, options,
warrants and other incremental shares to purchase 1,540,168, 1,554,968 and
2,502,680 shares of common stock at December 31, 1999, 1998 and 1997,
respectively were excluded from the computation of diluted earnings per
share.
F-9
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents.
ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. RESTRICTED CASH
Cash of $270,878 and $20,149 at December 31, 1999 and 1998, respectively,
was held as collateral by a bank for letters of credit issued to the lessor
of the Company's manufacturing and warehouse facilities and to a lender.
3. INVENTORIES
Inventories consists of the following:
1999 1998
---------- ----------
Raw materials and packaging $1,140,713 $1,216,070
Work in process 541,886 731,686
Finished goods 284,220 178,405
Less reserve for obsolescence -- (230,000)
---------- ----------
Total $1,966,819 $1,896,161
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
---------- ----------
FINANCIAL INSTITUTIONS AND OTHER
9.73% installment note due in 2001 with monthly
principal and interest payments of $39,550,
collateralized by machinery and equipment and
a $250,000 letter of credit. $ 859,397 $1,230,525
11% subordinated convertible notes with interest
payable quarterly until January 1, 2000 at which
time the principal and interest is payable in
twenty four equal monthly installments through
January 1, 2002. The notes are convertible into
common stock of the Company at $4.75 per share. -- 1,506,000
F-10
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
OBLIGATIONS UNDER CAPITAL LEASES
9.4% installment notes due in 2001 with monthly
principal and interest payments of $1,000,
collateralized by equipment. $ 14,105 $ 24,256
SENIOR NOTES
8% senior notes due in 2001 with interest payable
quarterly. One half of the notes must be repaid
within one year with a 10% prepayment penalty,
collateralized by substantially all assets of the
Company and the notes may be repaid in shares of
the Company's common stock. Any repayments of
the notes must be accompanied by a redemption of
the Series A preferred stock on a prorata basis
of two thirds notes and one third preferred
stock (Note 6). The notes are subject to
financial covenants regarding net revenue,
EBITDA, and cash balances with all covenants
calculated on the Company's operations excluding
its majority owned subsidiary. The Company was
in default on the EBITDA covenant at December
31, 1999. The Company repaid the entire amount
of the notes in January and February 2000
through the issuance of common stock. 2,000,000 --
Less debt discount (212,500) --
---------- ----------
Net Senior Notes 1,787,500 --
---------- ----------
Total Long-Term Debt 2,661,002 2,760,781
Less current portion of long-term debt (420,043) (381,280)
---------- ----------
Long-Term Debt $2,240,959 $2,379,501
========== ==========
Installments due on debt principal, including the capital leases, at
December 31, 1999 are as follows:
Year Ending
December 31,
------------
2000 $ 420,043
2001 2,453,459
----------
Total $2,873,502
==========
F-11
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
The components of the provision for income taxes are as follows:
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $ -- $ --
State -- -- --
---- ---- ----
Total -- -- --
---- ---- ----
Deferred:
Federal -- -- --
State -- -- --
--- ---- ----
Total -- -- --
---- ---- ----
Total Provision For Income Taxes $ -- $ -- --
==== ==== ====
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate (34)% (34)% (34)%
State income taxes, net of federal benefits (5) (5) (5)
Valuation allowance 39 39 39
---- ---- ----
Total --% --% --%
==== ==== ====
The following is a reconciliation of the provision for income taxes
to income before provision for income taxes computed at the federal
statutory rate of 34%.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at the federal statutory rate $ (263,031) $(2,128,881) $(1,835,536)
State income taxes, net of federal benefits (38,681) (330,603) (294,204)
Nondeductible expenses 3,836 8,864 20,969
Valuation allowance 297,876 2,450,620 2,108,771
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Significant components of deferred income taxes as of December 31, 1999 and
1998 are as follows:
Net operating loss carryforward $10,521,400 $ 8,745,000
Reserve for bad debts 10,700 14,700
Reserve for obsolete inventory -- 96,600
----------- -----------
Total deferred tax asset 10,532,100 8,856,300
----------- -----------
Depreciation (496,400) (373,300)
Stock option compensation (3,577,600) (2,338,000)
Other (5,700) --
----------- -----------
F-12
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES (CONTINUED)
Total deferred tax liability (4,079,700) (2,711,300)
Less valuation allowance (6,452,400) (6,145,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
=========== ===========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax assets will
be realized. The valuation allowance of $6,452,400 is maintained on
deferred tax assets which the Company has not determined to be more likely
than not realizable at this time. The net change in the valuation allowance
for deferred tax assets was an increase of $307,400. The Company will
continue to review this valuation on a quarterly basis and make adjustments
as appropriate.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $24,900,000 and $25,600,000, respectively.
Such carryforwards expire in the years 2011 through 2019 and 2001 through
2004 for federal and state purposes, respectively.
6. PREFERRED STOCK
The authorized preferred stock of the Company consists of 1,000,000 shares,
no par value. The preferred stock may be issued in series from time to time
with such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of preferred stock may
differ with respect to such matters as may be determined by the Board of
Directors, including without limitation, the rate of dividends, method and
nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any),
and voting rights. Unless the nature of a particular transaction and
applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.
In June 1999, the Company designated a new class of preferred stock "Series
A Preferred Stock" and the number of shares constituting such series is
2,000 shares with no par value. The new series was authorized in connection
with a Securities Purchase Agreement for the sale of $4,000,000 of senior
notes (Note 4) and $2,000,000 of Series A preferred stock. Each preferred
share shall bear dividends at a rate of 14% per year, which shall be
cumulative, and are payable on a quarterly basis. Upon the second
anniversary of the issuance date (June 2, 2001) each preferred share will
automatically convert into shares of common stock by dividing the stated
value of the preferred shares ($1,000) by 80% of the average of the closing
bid price of the Company's common stock for the 20 days preceding such
date. Until all of the preferred shares have been converted into common
stock or redeemed, the Company may not declare or pay any cash dividends on
its common stock without the written consent of at least two thirds of the
holders of the preferred shares. One half of the preferred shares must be
redeemed within one year with a 10% prepayment penalty. Any redemptions of
the preferred shares must be accompanied by a repayment of the Company's
senior notes on a prorata basis of one third preferred stock and two thirds
senior notes. Any redemptions of the preferred stock prior to June 2, 2001
are based on 95% of the average of the closing bid price of the Company's
common stock for the 20 days prior to the date of redemption.
F-13
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREFERRED STOCK (CONTINUED)
The company may redeem the preferred stock in cash, solely at its option.
The Company redeemed all of the outstanding preferred shares in January and
February 2000 through the issuance of common stock.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN
In March 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of both incentive stock options and non-qualified
options. A total of 2,000,000 shares of common stock have been reserved for
issuance under the Plan.
Options under the Company's plan are issuable only to eligible officers,
directors, key employees and consultants of the Company. The Plan is
administered by a committee selected by the Board of Directors, which
determines those individuals who shall receive options, the time period
during which the options may be exercised, the number of shares of common
stock that may be purchased under each option, and the option price. Unless
sooner terminated, the Plan shall remain in effect until January 1, 2005.
The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plan unless the
option price is at least 110% of the fair market value of the common stock
subject to the option, determined on the date of grant.
All options granted under the Plan provide for the payment of the exercise
price in cash or, with the prior written consent of the Company, by
delivery to the Company of shares of common stock already owned by the
optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
The following table contains information on the stock options under the
Company's Plan for the years ended December 31, 1997, 1998 and 1999. The
outstanding agreements expire from June 2000 to October 2004.
Number of Weighted Average
Shares Exercise Price
---------- ------
Options outstanding at December 31, 1996 1,318,000 $ 4.00
Granted 565,000 9.81
Exercised (184,000) 1.72
Cancelled (15,000) 6.38
---------- ------
Options outstanding at December 31, 1997 1,684,000 6.18
Granted 912,000 5.79
Exercised (600,250) 2.78
Cancelled (1,298,750) 7.65
---------- ------
F-14
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Options outstanding at December 31, 1998 697,000 5.86
Granted 315,000 11.90
Exercised (333,500) 5.62
Cancelled (14,000) 5.63
---------- ------
Options outstanding at December 31, 1999 664,500 $ 8.85
========== ======
On April 24, 1998, the Board of Directors approved a repricing of
substantially all outstanding employee stock options granted under the Plan
with an exercise price of greater than $5.625 per share to $5.625 per
share. The Board of Directors would not typically consider reducing the
exercise price of previously granted options. However, these options were
repriced due to the occurrence of certain events beyond the reasonable
control of the employees of the Company which significantly reduced the
incentive these options were intended to create. The fair market value of
the common stock was $5.625 on the date of the repricing. Options to
purchase approximately 588,000 shares were affected by this repricing.
NON-QUALIFIED STOCK OPTIONS
The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding agreements expire from
June 2000 to January 2004.
The following table contains information on all of the Company's
non-qualified stock options for the years ended December 31, 1997, 1998 and
1999.
Number of Weighted Average
Shares Exercise Price
---------- ------
Options outstanding at December 31, 1996 360,000 $ 1.80
Granted 100,000 4.75
Exercised (180,000) 1.80
Cancelled -- --
---------- ------
Options outstanding at December 31, 1997 280,000 2.85
Granted 25,000 11.44
Exercised (180,000) 1.80
Cancelled -- --
---------- ------
Options outstanding at December 31, 1998 125,000 6.09
Granted 215,000 9.63
Exercised (100,000) 4.75
Cancelled -- --
---------- ------
Options outstanding at December 31, 1999 240,000 $ 9.82
========== ======
PROFORMA DISCLOSURES
The Company adopted SFAS No. 123 during the year ended December 31, 1996.
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based
F-15
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
PROFORMA DISCLOSURES (CONTINUED)
compensation plans other than for options granted to non-employees. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would be reduced to the following pro forma amounts:
1999 1998 1997
----------- ----------- -----------
Net income (loss) applicable to
common shareholders:
As reported $(1,012,087) $(6,261,416) $(5,398,634)
Pro forma $(1,654,447) $(7,299,820) $(5,881,867)
Net income (loss) per share of
common stock:
As reported $ (.14) $ (.97) $ (1.02)
Pro forma $ (.22) $ (1.14) $ (1.11)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.90% 5.45% 5.88%
Expected life 3 years 2 years 2 years
Expected volatility 63.1% 61.82% 63.51%
Expected dividend yield 0% 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock-based compensation plans.
The weighted average fair value price of options granted was $5.56, $1.56
and $3.82 in 1999, 1998 and 1997, respectively.
The following table summarizes information about stock-based compensation
plans outstanding at December 31, 1999:
F-16
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Options Outstanding and Exercisable by Price Range as of December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
-------------- ------- ---- ------ -------- ------
$ 5.50 - 6.88 329,500 1.02 $ 5.78 329,500 $ 5.82
$11.44 - 12.56 335,000 3.67 $11.88 143,000 $11.44
-------------- ------- ---- ------ -------- ------
$ 5.50 - 12.56 664,500 2.36 $ 8.85 472,500 $ 6.00
============== ======= ==== ====== ======== ======
COMPENSATION EXPENSE
The Company recorded compensation expense of $64,275, $2,249,362 and $-0-
for the years ended December 31, 1999, 1998 and 1997, respectively for the
value of certain options granted to non-employees of the Company and for
the extension of options previously granted to an Officer and Director of
the Company. The valuation of the options and warrants granted to employees
is based on the difference between the exercise price and the market value
of the stock on the measurement date. The valuation of the options granted
to non-employees is estimated using the Black-Scholes option pricing model.
WARRANTS
1995 BRIDGE LOAN
In 1995, the Company borrowed $1,550,000 from a group of four lenders
("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders. Each warrant is exercisable to purchase one share of the
Company's common stock at $2.00 per share in perpetuity. In 1997, 75,000
warrants were exercised and 390,000 warrants were exercised in 1999.
UNDERWRITER'S WARRANTS
In connection with the Company's Initial Public Offering in 1996 the
Company issued the Underwriter warrants to purchase up to 40,000 units of
the Company's securities for $24.75 per unit. Each warrant is exercisable
to purchase three shares of common stock and one redeemable common stock
purchase warrant which is exercisable to purchase one share of common stock
at $7.50 per share at anytime until April 24, 2001. The Underwriter's
warrant is exercisable at anytime until April 24, 2001.
In 1999, 1998 and 1997, 16,825, 1,428 and 2,830, respectively, of the
Underwriter's warrants were exercised and 18,917 are outstanding as of
December 31, 1999.
F-17
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
MARKETING AND DEVELOPMENT OPTIONS
In 1998, the Company agreed to issue 200,000 stock options to an individual
in consideration for a joint venture opportunity to develop and market
various gum products. The options are exercisable at $9.00 per share at
anytime until October 30, 2000 and all 200,000 options are outstanding at
December 31, 1999.
FINANCING WARRANTS
In connection with the Company's Securities Purchase Agreement for the sale
of senior notes and Series A preferred stock the Company issued warrants to
the lenders. The Company issued a total of 300,000 common stock purchase
warrants. Each warrant is exercisable to purchase one share of the
Company's common stock at $12.44 per share at anytime until June 1, 2002.
All of the warrants are outstanding at December 31, 1999.
The Company also issued a total of 60,000 common stock purchase warrants as
a finders fee in connection with the financing. Each warrant is exercisable
to purchase one share of the Company's common stock, 30,000 at $11.70 per
share through June 1, 2002 and 30,000 at $15.00 per share through June 1,
2004. All of the warrants are outstanding at December 31, 1999.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and packaging facilities, manufacturing and
warehouse facilities and certain equipment under long-term leasing
arrangements. The Company's manufacturing and warehouse facilities lease
contains two three-year renewal options. In addition, the Company's office
and packaging facilities contains a five year renewal option. The following
is a schedule of future minimum lease payments at December 31, 1999 under
the Company's capital leases (together with the present value of minimum
lease payments) and operating leases that have initial or remaining
noncancellable lease terms in excess of one year:
Year Ending Capital
December 31, Leases Facilities Total
------------ ------- ---------- ----------
2000 $12,004 $ 277,950 $ 289,954
2001 3,001 287,310 290,311
2002 -- 303,426 303,426
2003 -- 252,383 252,383
2004 -- 145,188 145,188
Thereafter -- 133,089 133,089
------- ---------- ----------
Total Minimum Lease Payments 15,005 $1,399,346 $1,414,351
========== ==========
Less amount representing interest 900
-------
Present Value of Net
Minimum Lease Payments $14,105
=======
Rental expense charged to operations was $323,173, $193,152 and $187,826
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-18
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies (Continued)
Leased equipment under capital leases as of December 31, 1999 and 1998 is
as follows:
1999 1998
-------- --------
Equipment $ 47,727 $ 47,727
Less accumulated depreciation (35,795) (26,250)
-------- --------
Net Property and Equipment Under Capital Leases $ 11,932 $ 21,477
======== ========
MINORITY INTEREST
The Company has an option to purchase the 40% minority interest in Gel Tech
at the Company's discretion at any time after January 27, 2001 or the date
on which cumulative sales of Gel Tech's products have exceeded $50,000,000.
If the Company exercises its option, the Company shall issue shares of the
Company's common stock in exchange for the minority interest in Gel Tech.
The fair market value of the shares of the Company's common stock to be
issued shall be equal to the fair market value of the minority interest in
Gel Tech at the time the Company exercises its option.
9. RELATED PARTY TRANSACTIONS
In 1998, two former officers and directors of the Company repaid notes they
owed to the Company of $250,000 plus $48,770 of accrued interest. In
addition, the Company wrote off two notes receivable in the amount of
$145,017 which included $24,344 of accrued interest in connection with the
termination of two former officers of the Company.
10. EMPLOYEE BENEFIT PLAN
Effective September 1, 1997, the Company adopted a Simple Retirement
Account Plan for employees who are not covered by any collective bargaining
agreement. The Company shall make a matching contribution for each employee
in an amount equal to each employees Salary Reduction Contributions for the
Plan year of up to 3% of the employees compensation for the Plan year. The
Company made matching contributions of $28,250, $33,353 and $20,059 for the
years ended December 31, 1999, 1998 and 1997, respectively. Each employee
shall be fully vested at all times in his contribution and the Company's
matching contributions.
11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality financial
institutions and limits its credit exposure with any one financial
institution. The Company's cash in its banks exceeds the federally insured
limits. The Company provides credit in the normal course of business to
many of the nation's top drug stores, mass merchandisers and health food
chains and major private label companies. The Company's accounts receivable
are due from customers located throughout the United States and various
foreign countries. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral. The
Company obtains letters of credit from many of its foreign customers to
limit its exposure to credit risk on its accounts receivable. The Company
maintains reserves for potential credit losses, and such losses have not
exceeded management's expectations.
Sales to major customers, which comprised 10% or more of net sales, for the
years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
---- ---- ----
Customer A * 23.8% *
Customer B * 38.3% 15.0%
Customer C 10.1% * 10.2%
Customer D * * 15.0%
* Less than 10%
F-19
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures about Fair Value of Financial Instruments for the Company's
financial instruments are presented in the table below. These calculations
are subjective in nature and involve uncertainties and significant matters
of judgment and do not include income tax considerations. Therefore, the
results cannot be determined with precision and cannot be substantiated by
comparison to independent market values and may not be realized in actual
sale or settlement of the instruments. There may be inherent weaknesses in
any calculation technique, and changes in the underlying assumptions used
could significantly affect the results. The following table presents a
summary of the Company's financial instruments as of December 31, 1999 and
1998:
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and cash equivalents $5,595,075 $5,595,075 $ 517,852 $ 517,852
Restricted cash 270,878 270,878 20,149 20,149
Financial Liabilities:
Long-term debt 2,661,002 2,661,002 2,760,781 2,760,781
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of long-term debt,
including the current portion, approximates fair value because of the
market rate of interest on the long-term debt and the interest rate
implicit in the obligations under the capital leases.
13. SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Company's operating segments are organized on the basis of products and
include gum products and nasal gel cold remedies. The gum products include
gum products for private label customers as well as products marketed under
the Company's brand. The nasal gel cold remedies currently consists of a
single product, Zicam(TM). There are no significant intersegment
transactions. The table below contains information utilized by management
to evaluate its operating segments.
F-20
<PAGE>
GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
1999
------------------------------------------
Gum Products Zicam Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 5,910,221 $ 9,589,803 $ 15,500,024
Income (loss) before provision for
income taxes and minority interest (2,834,797) 3,435,293 600,496
Interest income 73,136 50,428 123,564
Interest expense (1,311,792) -- (1,311,792)
Depreciation 425,484 4,739 430,223
Total assets 10,209,095 9,818,819 20,027,914
</TABLE>
The 1997 and 1998 operations consisted of one operating segment, gum
products. Sales and operations of Zicam did not commence until January
1999.
14. JOINT VENTURE AGREEMENT
The Company entered into a letter of intent with Swedish Match AB ("SM") to
form a joint venture. The joint venture will be organized for the purpose
of developing, manufacturing, marketing and distributing nicotine products
The Board of Directors of the joint venture will consist of four members:
two members designated by SM, one of which will act as chairman, and two
members designated by the Company. SM will make a cash commitment of
$10,000,000 to the joint venture of which $3,500,000 will be funded at the
closing of the formation of the joint venture and the remainder will be
funded on an as needed basis and in exchange SM will receive a 51% interest
in the joint venture. The Company will contribute intellectual property
relating to all of its gum products containing nicotine (except chewing gum
products containing leaf tobacco) to the joint venture and will receive a
49% interest in the joint venture.
15. SUBSEQUENT EVENTS
FINANCING ARRANGEMENT
In January 2000, the Company's majority owned subsidiary entered into a
financing agreement (the "Agreement") with a Bank for a $1,000,000 line of
credit with interest at 3% above the prime rate. Advances under the line of
credit are limited to 50% of the eligible accounts receivable plus cash on
deposit with the Bank. The loan is collateralized by accounts receivable,
inventory, property and equipment and intangible assets. The loan also
contains various financial covenants regarding liquidity percentages and
the Company's majority owned subsidiary must maintain a profit on a
quarterly basis.
F-21
================================================================================
CREDIT AGREEMENT
by and between
GEL TECH, L.L.C., an Arizona limited liability company
and
IMPERIAL BANK, a California banking corporation
Dated as of
January 11, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS ................................................................... 1
ARTICLE 1 DEFINITION OF TERMS ......................................... 2
1.1 Definitions ................................................. 2
1.2 References .................................................. 8
1.3 Accounting Terms ............................................ 8
ARTICLE 2 THE RLC ..................................................... 9
2.1 RLC Commitment .............................................. 9
2.2 Revolving Line of Credit .................................... 9
2.3 RLC Payments ................................................ 9
2.4 Excess Balance Payment ...................................... 10
2.5 Conditions .................................................. 10
2.6 Other RLC Advances by Lender ................................ 10
2.7 Assignment .................................................. 10
ARTICLE 3 PAYMENTS AND FEES PROVISIONS ................................ 12
3.1 Payments .................................................... 12
3.2 (a) RLC Non-Use Fee ............................................. 12
(b) RLC Fee ..................................................... 13
3.3 Computations ................................................ 13
3.4 Maintenance of Accounts ..................................... 13
ARTICLE 4 SECURITY .................................................... 14
4.1 Security .................................................... 14
4.2 Security Documents .......................................... 14
ARTICLE 5 CONDITIONS PRECEDENT ........................................ 15
5.1 Initial or Any Subsequent Advance ........................... 15
5.2 No Event of Default ......................................... 16
5.3 No Material Adverse Effect .................................. 16
5.4 Representations and Warranties .............................. 16
ARTICLE 6 REPRESENTATIONS AND WARRANTIES .............................. 17
6.1 Recitals .................................................... 17
6.2 Organization and Good Standing .............................. 17
6.3 Authorization and Power ..................................... 17
6.4 Security Documents .......................................... 17
6.5 No Conflicts or Consents .................................... 17
6.6 No Litigation ............................................... 17
-i-
<PAGE>
6.7 Financial Condition ......................................... 18
6.8 Taxes ....................................................... 18
6.9 No Stock Purchase ........................................... 18
6.10 Advances .................................................... 18
6.11 Enforceable Obligations ..................................... 18
6.12 No Default .................................................. 18
6.13 Significant Debt Agreements ................................. 18
6.14 ERISA ....................................................... 19
6.15 Compliance with Law ......................................... 19
6.16 Solvent ..................................................... 19
6.17 Investment Borrower Act ..................................... 19
6.18 Title ....................................................... 19
6.19 Survival of Representations, Etc. ........................... 19
6.20 Environmental Matters ....................................... 19
6.21 Licenses, Tradenames ........................................ 19
6.22 Year 2000 Compliance ........................................ 20
ARTICLE 7 AFFIRMATIVE COVENANTS ....................................... 21
7.1 Financial Statements, Reports and Documents ................. 21
7.2 Maintenance of Existence and Rights; Conduct of
Business; Management ...................................... 22
7.3 Operations and Properties ................................... 22
7.4 Authorizations and Approvals ................................ 22
7.5 Compliance with Law ......................................... 22
7.6 Payment of Taxes and Other Indebtedness ..................... 22
7.7 Compliance with Significant Debt Agreements and
Other Agreements .......................................... 22
7.8 Compliance with Credit Documents ............................ 22
7.9 Notice of Default ........................................... 23
7.10 Other Notices ............................................... 23
7.11 Books and Records; Access; Audits ........................... 23
7.12 ERISA Compliance ............................................ 23
7.13 Further Assurances .......................................... 23
7.14 Insurance ................................................... 24
7.15 Year 2000 Compliance ........................................ 24
7.16 Deposit Accounts ............................................ 25
ARTICLE 8 NEGATIVE COVENANTS .......................................... 26
8.1 Existence ................................................... 26
8.2 Amendments to Organizational Documents ...................... 26
8.3 Margin Stock ................................................ 26
8.4 Distributions ............................................... 26
8.5 Liens ....................................................... 26
8.6 Transfer Collateral ......................................... 26
8.7 Merger; Sale of Assets ...................................... 26
-ii-
<PAGE>
8.8 Indebtedness ................................................ 26
8.9 Financial Covenants ......................................... 27
ARTICLE 9 EVENTS OF DEFAULT ........................................... 28
9.1 Events of Default ........................................... 28
9.2 Remedies Upon Event of Default .............................. 30
9.3 Performance by Lender ....................................... 31
ARTICLE 10 MISCELLANEOUS ............................................... 32
10.1 Modification ................................................ 32
10.2 Waiver ...................................................... 32
10.3 Payment of Expenses ......................................... 32
10.4 Notices ..................................................... 32
10.5 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial .... 33
10.6 Invalid Provisions .......................................... 33
10.7 Binding Effect .............................................. 34
10.8 Entirety .................................................... 34
10.9 Headings .................................................... 34
10.10 Survival .................................................... 34
10.11 No Third Party Beneficiary .................................. 34
10.12 Time ........................................................ 34
10.13 Reference Provision ......................................... 34
10.14 Schedules and Exhibits Incorporated ......................... 36
10.15 Counterparts ................................................ 36
10.16 Participations .............................................. 36
EXHIBIT "A" Form of Advance Notice
EXHIBIT "B" Form of Compliance Certificate
EXHIBIT "C" Form of Borrowing Base Certificate
EXHIBIT "D" Form of Waiver/Release of Lien Rights
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CREDIT AGREEMENT
BY THIS CREDIT AGREEMENT (together with any amendments or modifications,
the "Credit Agreement"), entered into as of this 11th day of January, 2000 by
and between GEL TECH, L.L.C., an Arizona limited liability company ("Borrower"),
and IMPERIAL BANK, a California banking corporation (the "Lender"), in
consideration of the mutual promises herein contained and for other valuable
consideration, the parties hereto do hereby agree as follows:
RECITALS
A. Borrower has requested that Lender establish the following financial
accommodations:
(1) A revolving line of credit facility (the "RLC") in the principal
amount of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) for the purpose of
funding Borrower's short-term working capital.
B. As a condition for extending such financial accommodations, Lender has
required that Borrower enter into this Credit Agreement, establishing the terms
and conditions thereof.
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ARTICLE 1
DEFINITION OF TERMS
1.1. Definitions. For the purposes of this Credit Agreement, unless the
context otherwise requires, the following terms shall have the respective
meanings assigned to them in this Article 1 or in the Section hereof referred to
below:
"Advance" means an RLC Advance.
"Affiliate" of any Person means any Person which, directly or
indirectly, Controls or is Controlled by such Person.
"Authorized Manager" means one or more managers of Borrower duly
authorized (and so certified to Lender by the member of Borrower pursuant to a
borrowing authorization from time to time satisfactory to Lender in the exercise
of Lender's reasonable discretion), acting alone, to request Advances under the
provisions of this Credit Agreement and execute and deliver documents,
instruments, agreements, reports, statements and certificates in connection
herewith.
"Banking Day" means a day of the year on which banks are not required
or authorized to close in Inglewood, California and/or Phoenix, Arizona.
"Borrower": See the Preamble hereto.
"Borrowing Base" means the sum of (i) the Eligible Accounts Amount
plus (ii) the Eligible Deposit Amount.
"Borrowing Base Certificate" means a certificate substantially in the
form attached hereto as Exhibit C.
"Closing Date" means the date of delivery of this Credit Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means all property subject to the Security Documents.
"Control" when used with respect to any Person means the power,
directly or indirectly, to direct the management policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Controlled Group" means, severally and collectively, the members of
the group controlling, controlled by and/or in common control of Borrower,
within the meaning of Section 4001(b) of ERISA.
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"Credit Agreement": See the Preamble hereto.
"Credit Documents" means this Credit Agreement, the Note (including
any renewals, extensions and refundings thereof), the Security Documents, the
Triparty Agreement and any written agreements, certificates or documents (and
with respect to this Credit Agreement and such other written agreements and
documents, any amendments or supplements thereto or modifications thereof)
executed or delivered pursuant to the terms of this Credit Agreement.
"Default Rate" means at any time five percent (5%) per annum over the
then applicable interest rate.
"Dollars" and the sign "$" mean lawful currency of the United States
of America.
"Eligible Accounts" means those accounts receivable of Borrower,
except Eligible Accounts shall not include any of the following:
(a) Account balances over ninety (90) calendar days from invoice
date.
(b) Accounts with respect to which the account debtor is an
officer, director, shareholder, employee, subsidiary or affiliate of
Borrower.
(c) Accounts with respect to which 25% or more of the account
debtor's total accounts or obligations outstanding to Borrower are
more than 90 calendar days from invoice date.
(d) As to accounts representing more than the Maximum
Concentration Percentage of Borrower's total accounts receivable,
outstanding at any time the balance in excess of Maximum Concentration
Percentage is not eligible, where the "Maximum Concentration
Percentage" means 40% as to Borrower's accounts with Walgreens, Kmart,
McKesson Drug and Costco, and 20% as to all other accounts of
Borrower.
(e) Accounts with respect to international transactions unless
insured by an insurance company acceptable to Lender in its sole
discretion or covered by letters of credit issued or confirmed by a
bank acceptable to Lender or unless otherwise acceptable to Lender, in
its sole and absolute discretion.
(f) Credit balances greater than ninety (90) calendar days from
invoice date.
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(g) Accounts where the account debtor is a seller to Borrower,
whereby a potential offset (contra) exists, to the extent of the
offset.
(h) Consignment or guaranteed sales.
(i) Bill and hold accounts.
(j) Contracts receivable.
(k) Progress billings.
"Eligible Accounts Amount" means an amount equal to fifty percent
(50.0%) of the Eligible Accounts.
"Eligible Deposit Amount" means an amount equal to one hundred percent
(100.0%) of all cash of Borrower on deposit with Lender plus all funds invested
by Borrower with Lender.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with all final and permanent regulations issued pursuant
thereto. References herein to sections and subsections of ERISA are deemed to
refer to any successor or substitute provisions therefor.
"Event of Default": See Section 9.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934.
"Financial Covenants": See Section 8.9 hereof.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board or through other appropriate boards or
committees thereof and which are consistently applied for all periods after the
date hereof so as to properly reflect the financial condition, and the results
of operations and changes in the financial position, of Borrower, including
without limitation accounting rules promulgated pursuant to Regulations SX and
SK, except that any accounting principle or practice required to be changed by
the said Accounting Principles Board or Financial Accounting Standards Board (or
other appropriate board or committee of the said Boards) in order to continue as
a generally accepted accounting principle or practice may be so changed.
"Governmental Authority" means any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or any of its business,
operations or properties.
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"Indebtedness" of a Person means each of the following (without
duplication): (a) obligations of that Person to any other Person for payment of
borrowed money, (b) capital lease obligations, (c) notes and drafts drawn or
accepted by that Person payable to any other Person, whether or not representing
obligations for borrowed money (but without duplication of indebtedness for
borrowed money), (d) any obligation for the purchase price of property the
payment of which is deferred for more than one year or evidenced by a note or
equivalent instrument, (e) guarantees of Indebtedness of third parties, and (f)
a recourse or nonrecourse payment obligation of any other Person that is secured
by a Lien on any property of the first Person, whether or not assumed by the
first Person, up to the fair market value (from time to time) of such property
(absent manifest evidence to the contrary, the fair market value of such
property shall be the amount determined under GAAP for financial reporting
purposes).
"IP Security Agreement": See Section 4.1(b) hereof.
"Lender": See the Preamble hereto.
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
encumbrance, conditional sale or title retention arrangement, or any other
interest in property designed to secure the repayment of Indebtedness whether
arising by agreement or under any statute or law, or otherwise.
"Liquidity Percentage" means at any time Borrower's Eligible Deposit
Amount as a percentage of the RLC Balance.
"Loan" or "Loans" means the RLC.
"Material Adverse Effect" means any circumstance or event which (i)
has any material adverse effect upon the validity or enforceability of any
Credit Document, (ii) materially impairs the ability of Borrower to fulfill its
obligations under the Credit Documents, or (iii) causes an Event of Default or
any event which, with notice or lapse of time or both, would become an Event of
Default.
"Maturity Date" means the RLC Maturity Date.
"Maximum RLC Loan Amount": See Section 2.1 hereof.
"Net Income" means, for any period, the net income of Borrower for
such period, determined in accordance with GAAP.
"Note" or "Notes" means the RLC Note.
"Obligation" means all present and future indebtedness, obligations
and liabilities of Borrower to Lender, and all renewals and extensions thereof,
or any part thereof, arising pursuant to this Credit Agreement or represented by
the Note, including without limitation the Loan and all interest accruing
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thereon, and attorneys' fees incurred in the enforcement or collection thereof,
regardless of whether such indebtedness, obligations and liabilities are direct,
indirect, fixed, contingent, joint, several or joint and several; together with
all indebtedness, obligations and liabilities of Borrower evidenced or arising
pursuant to any of the other Credit Documents, and all renewals and extensions
thereof, or part thereof.
"Payment Date" means the first day of each month, provided that if any
such day is not a Banking Day, then such Payment Date shall be the next
successive Banking Day.
"PBGC" means the Pension Benefit Guaranty Corporation, and any
successor to all or substantially all of the Pension Benefit Guaranty
Corporation's functions under ERISA.
"Permitted Liens" means:
(a) Liens in Lender's favor.
(b) Liens for taxes not delinquent.
(c) Liens resulting from purchase money financing as to the
personal property so financed and any sales proceeds therefrom.
"Person" includes an individual, a corporation, a joint venture, a
partnership, a trust, a limited liability company, an unincorporated
organization or a government or any agency or political subdivision thereof.
"Plan" means an employee defined benefit plan or other plan maintained
by Borrower for employees of Borrower and covered by Title IV of ERISA, or
subject to the minimum funding standards under Section 412 of the Code.
"Prime Rate" means the interest rate per annum publicly announced by
Lender, or its successors, as its "prime rate" as in effect from time to time.
Borrower acknowledges that the Prime Rate is not necessarily the best or lowest
rate offered by Lender and Lender may lend to its customers at rates that are
at, above or below its Prime Rate.
"Quarterly End Date" means each March 31, June 30, September 30 and
December 31.
"Regulation U" means Regulation U promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 221, or any other
regulation hereafter promulgated by said Board to replace the prior Regulation U
and having substantially the same function.
"Reportable Event" means any "reportable event" as described in
Section 4043(b) of ERISA with respect to which the thirty (30) day notice
requirement has not been waived by the PBGC.
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"RLC": See Recital A hereof.
"RLC Advance" means a disbursement of the proceeds of the RLC.
"RLC Balance" means the aggregate outstanding principal amount of all
RLC Advances.
"RLC Commitment" means One Million And No/100 Dollars ($1,000,000.00).
"RLC Fee": See Section 3.2(b) hereof.
"RLC Maturity Date" means January 10, 2001.
"RLC Non-Use Fee": See Section 3.2(a) hereof.
"RLC Note" means that Revolving Promissory Note of even date herewith
in the amount of the RLC Commitment, executed by Borrower and delivered pursuant
to the terms of this Credit Agreement, together with any renewals, extensions,
modifications or replacements thereof.
"Security Agreement": See Section 4.1(a) hereof.
"Security Documents": See Section 4.2 hereof.
"Significant Debt Agreement" means all documents, instruments and
agreements executed by Borrower, evidencing, securing or ensuring any
Indebtedness of Borrower or any guaranty in excess of $100,000.00 in outstanding
principal (or principal equivalent) amount.
"Subordinated Debt" means Indebtedness of Borrower subordinated to the
payment of the Obligation pursuant to written agreements acceptable to Lender.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such corporation,
irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency, is at the time directly or indirectly owned by the Borrower, by the
Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"Triparty Agreement": See Section 5.1(k) hereof.
"Variable Rate" means the rate per annum equal to the sum of three
percent (3.0%) and the Prime Rate per annum as in effect from time to time. The
Variable Rate will change on each day that the "Prime Rate" changes.
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"Variable Rate Advance" means an Advance that bears interest at the
Variable Rate.
1.2 References. Capitalized terms shall be equally applicable to both the
singular and the plural forms of the terms therein defined. References to
"Credit Agreement," "this Agreement," "herein," "hereof," "hereunder," or other
like words mean this Credit Agreement as amended, supplemented, restated or
otherwise modified and in effect from time to time.
1.3 Accounting Terms. Except as expressly provided to the contrary herein,
all accounting terms shall be interpret ed and all accounting determinations
shall be made in accordance with GAAP, except as otherwise specifically provi
ded for herein. To the extent any change in GAAP affects any computation or
determination required to be mad e pursuant to this Credit Agreement, such
computation or determination shall be made as if such change in GAAP had not
occurred unless Borrower and Lender agree in writing on an adjustment to such
computation or determination t o account for such change in GAAP.
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ARTICLE 2
THE RLC
2.1 RLC Commitment. Subject to the conditions herein set forth, Lender
agrees to make the RLC available to or for the benefit of Borrower, and Borrower
agrees to draw upon the RLC, in the manner and upon the terms and conditions
herein expressed, amounts that shall not exceed the lesser of the following (the
"Maximum RLC Loan Amount"):
(a) The RLC Commitment.
(b) The Borrowing Base.
2.2 Revolving Line of Credit.
(a) Subject to the terms and conditions set forth in this Credit
Agreement, the RLC shall be a revolving line of credit, against which RLC
Advances may be made to Borrower, repaid by Borrower and new RLC Advances made
to Borrower, as Borrower may request, provided that (i) no RLC Advance shall be
made if an Event of Default shall be continuing, (ii) no RLC Advance shall be
made that would cause the outstanding principal balance of the RLC to exceed the
Maximum RLC Loan Amount, and (iii) no RLC Advance shall be made on or after the
RLC Maturity Date.
(b) The RLC shall be evidenced by the RLC Note.
2.3 RLC Payments. The RLC shall bear interest and be payable to Lender upon
the following terms and conditions:
(a) Interest shall accrue on the unpaid principal of an RLC Advance at
the Variable Rate.
(b) All interest shall be computed on the basis of a 360-day year and
accrue on a daily basis for the actual number of days elapsed. All accrued and
unpaid interest through the end of the preceding month shall be due and payable
on each Payment Date.
(c) The entire unpaid principal balance, all accrued and unpaid
interest, and all other amounts payable under the RLC Note shall be due and
payable in full on the RLC Maturity Date.
(d) Each request for an RLC Advance shall be substantially in the form
attached hereto as Exhibit "A" from an Authorized Officer and
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shall, in addition to complying with the other requirements in this Credit
Agreement, specify the date and amount of the requested RLC Advance.
(e) If any payment of interest and/or principal is not received by
Lender within ten (10) days of when such payment is due, then in addition to the
remedies conferred upon Lender under the Credit Documents, a late charge of five
percent (5%) of the amount of the installment due and unpaid will be added to
the delinquent amount to compensate Lender for the expense of handling the
delinquency for any payment past due in excess of ten (10) days, regardless of
any notice and cure period.
(f) Upon the occurrence of an Event of Default and after maturity,
including maturity upon acceleration, the unpaid principal balance, all accrued
and unpaid interest and all other amounts payable hereunder shall bear interest
at the Default Rate.
2.4 Excess Balance Payment. There shall be due and payable from Borrower to
Lender, and Borrower shall repay to Lender, within five (5) days of written
demand from Lender, from time to time, any amount by which the outstanding
principal balance of the RLC exceeds the Maximum RLC Loan Amount.
2.5 Conditions. Lender shall have no obligation to make any RLC Advance
unless and until all of the conditions and requirements of this Credit Agreement
are fully satisfied. However, Lender in its sole and absolute discretion may
elect to make one or more RLC Advances prior to full satisfaction of one or more
such conditions and/or requirements. Notwithstanding that such an RLC Advance or
RLC Advances are made, such unsatisfied conditions and/or requirements shall not
be waived or released thereby. Borrower shall be and continue to be obligated to
fully satisfy such conditions and requirements, and Lender, at any time, in
Lender's sole and absolute discretion, may stop making RLC Advances until all
conditions and requirements are fully satisfied.
2.6 Other RLC Advances by Lender. Lender, after giving fifteen (15) days
prior written notice to Borrower to allow for corrective action, from time to
time, may make RLC Advances in any amount in payment of accrued and unpaid (i)
insurance premiums, taxes, assessments, liens or encumbrances existing against
property encumbered by the Security Documents, (ii) any charges and expenses
that are the obligation of Borrower under this Credit Agreement or any Security
Document, and (iii) any charges or matters necessary to preserve the property
encumbered by the Security Documents or to cure any still existing Event of
Default.
2.7 Assignment. Borrower shall have no right to any RLC Advance other than
to have the same disbursed by Lender in accordance with the disbursement
provisions contained in this Credit Agreement. Any assignment or transfer,
voluntary or involuntary, of this Credit Agreement or any right hereunder shall
not be binding upon or in any way affect Lender without its written consent;
Lender may make RLC Advances under the disbursement provisions herein,
notwithstanding any such assignment or transfer.
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ARTICLE
PAYMENTS AND FEES PROVISIONS
3.1 Payments.
(a) All payments and prepayments by the Borrower of principal of and
interest on the Note and all fees, expenses and any other Obligation payable to
Lender in connection with the Loans shall be nonrefundable and made in Dollars
or immediately available funds to Lender not later than 2:00 p.m., (Phoenix,
Arizona local time) on the dates called for under this Credit Agreement, at the
office of Lender in Phoenix, Arizona. Funds received after such hour shall be
deemed to have been received by Lender on the next Banking Day.
(b) Unless otherwise required by applicable law, payments will be
applied first to accrued, unpaid interest, then to principal, and any remaining
amount to any unpaid collection costs, late charges and other charges; provided,
however, upon delinquency or other default, Lender reserve the right to apply
payments among principal, interest, late charges, collection costs and other
charges at its discretion.
(c) Interest shall be due and payable on the Loans on each Payment
Date and on the Maturity Date.
(d) Whenever any payment to be made hereunder shall be stated to be
due on a day which is not a Banking Day, such payment shall be made on the next
succeeding Banking Day, and such extension of time shall in such case be
included in the computation of interest, commission or fee, as the case may be.
(e) Borrower authorizes Lender to collect all interest, fees, costs,
and/or expenses due under this Credit Agreement by charging Borrower's demand
deposit account number 97005486 with Lender, or any other demand deposit account
maintained by Borrower with Lender, for the full amount thereof. Should there be
insufficient funds in any such demand deposit account to pay all such sums when
due, the full amount of such deficiency shall be immediately due and payable by
Borrower.
3.2 (a) RLC Non-Use Fee: Borrower agrees to pay Lender a quarterly fee (the
"RLC Non-Use Fee") in an annualized amount equal to one-half percent (0.5%) of
the average daily undrawn balance of the RLC Commitment during the prior
calendar quarterly period. The RLC Non-Use Fee shall initially accrue from the
Closing Date and shall be due and payable in arrears within three (3) Banking
Days after written notice of such amount due by Lender to Borrower and shall be
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non-refundable. The first such payment shall be due on March 31, 2000 and
thereafter on each Quarterly End Date.
(b) RLC Fee: Borrower agrees to pay to Lender on the Closing Date a
fee (the "RLC Fee") in an amount equal to one percent (1.0%) of the RLC
Commitment. Lender agrees to apply the RLC Fee to any origination fee that may
be charged by Lender on any future increase in the RLC Commitment so long as
such increase is requested by Borrower within 180 days of the Closing Date.
3.3 Computations. All fees and interest on the Note shall be computed on
the basis of a year of 360-days/year and accrue on a daily basis for the actual
number of days elapsed.
3.4 Maintenance of Accounts. Lender shall maintain, in accordance with its
usual practice, an account or accounts evidencing the indebtedness of the
Borrower and the amounts payable and paid from time to time hereunder. In any
legal action or proceeding in respect of this Credit Agreement, the entries made
in the ordinary course of business in such account or accounts shall be evidence
of the existence and amounts of the obligations of the Borrower therein
recorded. The failure to record any such amount shall not, however, limit or
otherwise affect the obligations of the Borrower hereunder to repay all amounts
owed hereunder, together with all interest accrued thereon as provided in the
Note.
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ARTICLE
SECURITY
4.1 Security. So long as the Loan is outstanding, Borrower shall cause the
Loan and Borrower's obligations under this Credit Agreement to be secured at all
times by the following:
(a) a valid and effective security agreement (the "Security
Agreement"), duly executed and delivered by or on behalf of Borrower, granting
Lender a valid and enforceable security interest in all of its personal property
as described therein, subject to no prior Liens except for Permitted Liens; and
(b) by a valid and effective intellectual property security agreement
(the "IP Security Agreement") duly executed and delivered by or on behalf of
Borrower, granting Lender a valid and enforceable security interest in all of
its intellectual property described therein, subject to no prior Liens except
for Permitted Liens.
4.2 Security Documents. All of the documents required by this Article 4
shall be in form satisfactory to Lender and Lender's counsel, and, together with
any Financing Statements for filing and/or recording, and any other items
required by Lender to fully perfect and effectuate the liens and security
interests of Lender contemplated by the Security Agreement, and this Credit
Agreement, may heretofore or hereinafter be referred to as the "Security
Documents."
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ARTICLE
CONDITIONS PRECEDENT
The obligation of Lender to make any Loan and to make each and any Advance
hereunder is subject to the full prior satisfaction at each such time of each of
the following conditions precedent:
5.1 Initial or Any Subsequent Advance. Prior to its making the initial
Advance or any subsequent Advance, Lender shall have received the following each
in form and substance satisfactory to Lender:
(a) This Credit Agreement. This Credit Agreement, duly executed and
delivered to Lender by Borrower.
(b) The RLC Note. The RLC Note, duly executed, drawn to the order of
Lender and otherwise as provided in Article 2 hereof.
(c) Organizational Documents. A copy of the current organization
documents of Borrower, including all amendments thereto, certified as current
and complete by the appropriate authority of the state of Borrower's formation,
together with evidence of its good standing in the state of formation and in
every other state in which it is doing business or the conduct of its business
requires such standing for the enforcement of material contracts.
(d) Secretary Certificate. A certificate of the secretary of Borrower,
signed by the duly appointed secretary thereof and issued as of the Closing
Date, certifying that (i) attached thereto is a true and complete copy of its
organizational documents in effect on the date of passage of the authorizations
described immediately below and at all subsequent times to and including the
date of the certificate, (ii) attached thereto is a true and complete copy of
any of its resolutions or authorizations authorizing the Loan, the execution,
delivery, and performance of this Credit Agreement, the Note, the Credit
Documents, and all advances of credit hereunder, and that such resolutions have
not been modified, rescinded, or amended and are in full force and effect, (iii)
no change has been made to its charter documents other than as reflected in the
certified copies submitted in connection with the delivery of this Credit
Agreement or as approved in writing by Lender, and (iv) set forth therein and
appropriately identified are the names, current official titles, and signatures
of its officers authorized to sign this Credit Agreement and other documents to
be delivered hereunder and/or to act as Authorized Manager hereunder.
(e) Security Agreement. The Security Agreement, duly executed and
delivered to Lender by Borrower.
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(f) IP Security Agreement. The IP Security Agreement, duly executed
and delivered to Lender by Borrower and, if required by Lender, filed with the
US Patent Office.
(g) Compliance Certificate. A Compliance Certificate substantially in
the form of Exhibit "B" attached hereto, indicating that Borrower is in
compliance with the Financial Covenants as of September 30, 1999.
(h) Fees and Costs. Payment of the RLC Fee and costs of the Lender.
(i) Financing Statements. Financing Statements, duly executed and
delivered to Lender by Borrower.
(j) Accounts Receivable. A listing and aging of the accounts
receivable of Borrower as of September 30, 1999.
(k) Triparty Agreement. A Triparty Agreement, duly executed and
delivered to Lender by Borrower and Gum Tech International, Inc. (the "Triparty
Agreement").
(l) Borrower's Financial Statements. Borrower's September 30, 1999
financial statements.
(m) Landlord Waivers. Lien waivers substantially in the form of
Exhibit "D" attached hereto, executed by the landlord of each leased premises
where collateral is located, if any.
(n) Additional Information. Such other information and documents as
may reasonably be required by Lender or Lender's counsel.
5.2 No Event of Default. No Event of Default known to Borrower shall have
occurred and be continuing, or result from Lender's making of any Loan.
5.3 No Material Adverse Effect. Since the date of the most recent financial
statements provided to Lender by Borrower, no change shall have occurred in the
business or financial condition of Borrower that could have a Material Adverse
Effect.
5.4 Representations and Warranties. The representations and warranties
contained in Article 6 hereof shall be true and correct in all material
respects, with the same force and effect as though made on and as of the Closing
Dat e (other than those of such representations which by their express terms
speak to a date prior to that date, whic h representations shall, in all
material respects, be true and correct as of such respective date).
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ARTICLE 6
REPRESENTATIONS AND WARRANTIES
To induce Lender to make the Loan, Borrower represents and warrants to
Lender that:
6.1 Recitals. The recitals and statements of intent appearing in this
Credit Agreement are true and correct.
6.2 Organization and Good Standing. It is duly organized, validly existing
and in good standing in all states and/or countries in which the nature of its
business and property makes such qualifications necessary or appropriate. It has
the legal power and authority to own its properties and assets and to transact
the business in which it is engaged and is or will be qualified in those states
and/or countries wherein the nature of its proposed business and property will
make such qualifications necessary or appropriate in the future.
6.3 Authorization and Power. It has the power and requisite authority to
execute, deliver and perform this Credit Agreement, the Note and the other
Credit Documents to be executed by it; it is duly authorized to, and has taken
all action, corporate or otherwise, necessary to authorize it to, execute,
deliver and perform this Credit Agreement, the Note and such other Credit
Documents and is and will continue to be duly authorized to perform this Credit
Agreement, the Note and such other Credit Documents.
6.4 Security Documents. The liens, security interests and assignments
created by the Security Documents will, when granted, be valid, effective and
enforceable liens, security interests and assignments, except to the extent (if
any) otherwise agreed in writing by Lender.
6.5 No Conflicts or Consents. Neither the execution and delivery of this
Credit Agreement, the Note or the other Credit Documents to which it is a party,
nor the consummation of any of the transactions herein or therein contemplated,
nor compliance with the terms and provisions hereof or with the terms and
provisions thereof, (a) will materially contravene or conflict with: (i) any
provision of law, statute or regulation to which it is subject, (ii) any
judgment, license, order or permit applicable to it, (iii) any indenture, credit
agreement, mortgage, deed of trust, or other agreement or instrument to which it
is a party or by which it may be bound, or to which it may be subject, or (b)
will violate any provision of its organizational documents. No consent,
approval, authorization or order of any court or Governmental Authority or other
Person is required in connection with the execution and delivery by it of the
Credit Documents or to consummate the transactions contemplated hereby or
thereby, or if required, such consent, approval, authorization or order shall
have been obtained.
6.6 No Litigation. Except for those matters that have been previously
disclosed to Lender in writing, there are no actions, suits or legal, equitable,
arbitration or administrative proceedings pending, or to its actual knowledge
overtly threatened, against Borrower that would, if adversely determined, have a
Material Adverse Effect.
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6.7 Financial Condition. It has delivered to Lender copies of the
Borrower's most recent financial statements. Such financial statements, in all
material respects, fairly and accurately present the financial position of
Borrower as of such date, have been prepared in accordance with GAAP and neither
contain any untrue statement of a material fact nor fail to state a material
fact required in order to make such financial statement not misleading. Since
the date thereof, Borrower has not discovered any obligations, liabilities or
indebtedness (including contingent and indirect liabilities and obligations or
unusual forward or long-term commitments) which in the aggregate are material
and adverse to the financial position or business of Borrower that should have
been but were not reflected in such financial statements. No changes having a
Material Adverse Effect have occurred in the financial condition or business of
Borrower since the date of such financial statements.
6.8 Taxes. It has filed or caused to be filed all returns and reports which
are required to be filed by any jurisdiction, and has paid or made provision for
the payment of all taxes, assessments, fees or other governmental charges
imposed upon its properties, income or franchises, as to which the failure to
file or pay would have a Material Adverse Effect, except such assessments or
taxes, if any, which are being contested in good faith by appropriate
proceedings.
6.9 No Stock Purchase. No part of the proceeds of any financial
accommodation made by Lender in connection with this Credit Agreement will be
used to purchase or carry "margin stock," as that term is defined in Regulation
U, or to extend credit to others for the purpose of purchasing or carrying such
margin stock.
6.10 Advances. Each request for an Advance or for the extension of any
financial accommodation by Lender whatsoever shall constitute an affirmation
that the representations and warranties contained herein are, true and correct
as of the time of such request. All representations and warranties made herein
shall survive the execution of this Credit Agreement, all advances of proceeds
of the Loans and the execution and delivery of all other documents and
instruments in connection with the Loans and/or this Credit Agreement, so long
as Lender has any commitment to lend hereunder and until the Loans have been
paid in full and all of Borrower's obligations under this Credit Agreement, the
Note and all Security Documents have been fully discharged.
6.11 Enforceable Obligations. This Credit Agreement, the Note and the other
Credit Documents are the legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms, except
as limited by bankruptcy, insolvency or other laws or equitable principles of
general application relating to the enforcement of creditors' rights.
6.12 No Default. No event or condition has occurred and is continuing that
constitutes an Event of Default.
6.13 Significant Debt Agreements. It is not in default in any material
respect under any Significant Debt Agreement.
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6.14 ERISA. (a) No Reportable Event has occurred and is continuing with
respect to any Plan; (b) PBGC has not instituted proceedings to terminate any
Plan; (c) neither the Borrower, any member of the Controlled Group, nor any
duly-appointed administrator of a Plan (i) has incurred any liability to PBGC
with respect to any Plan other than for premiums not yet due or payable or (ii)
has instituted or intends to institute proceedings to terminate any Plan under
Section 4041 or 4041A of ERISA; and (d) each Plan of Borrower has been
maintained and funded in all material respects in accordance with its terms and
in all material respects in accordance with all provisions of ERISA applicable
thereto. Neither the Borrower nor any of its Subsidiaries participates in, or is
required to make contributions to, any Multi-employer Plan (as that term is
defined in Section 3(37) of ERISA).
6.15 Compliance with Law. It is in substantial compliance with all laws,
rules, regulations, orders, writs, injunctions and decrees that are applicable
to it, or its properties, noncompliance with which would have a Material Adverse
Effect.
6.16 Solvent. It (both before and after giving effect to the Loans
contemplated hereby) is solvent, has assets having a fair value in excess of the
amount required to pay its probable liabilities on its existing debts as they
become absolute and matured, and has, and will have, access to adequate capital
for the conduct of its business and the ability to pay its debts from time to
time incurred in connection therewith as such debts mature.
6.17 Investment Borrower Act. It is not, and is not directly or indirectly
controlled by, or acting on behalf of, any person which is, an "Investment
Borrower" within the meaning of the Investment Borrower Act of 1940, as amended.
6.18 Title. It has good and marketable title to the Collateral.
6.19 Survival of Representations, Etc. All representations and warranties
by Borrower herein shall survive the making of the Loan and the execution and
delivery of the Note; any investigation at any time made by or on behalf of
Lender shall not diminish Lender's right to rely on the representations and
warranties herein.
6.20 Environmental Matters. Except as previously disclosed to Lender in
writing, it, to the best of its knowledge after due investigation, is in
compliance in all material respects with all applicable environmental, health
and safety statutes and regulations and Borrower does not have any material
contingent liability in connection with any improper treatment, disposal or
release into the environment of any hazardous or toxic waste or substance.
6.21 Licenses, Tradenames. It, as of the date hereof, possesses all
necessary trademarks, tradenames, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with valid trademarks, tradenames, copyright patents and license rights of
others.
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6.22 Year 2000 Compliance. Borrower and its Subsidiaries, as applicable,
have reviewed the areas within their opera tions and business which could be
adversely affected by, and have developed or are developing a program to address
on a timely basis, the Year 2000 Problem and have made related appropriate
inquiry of material suppliers and vend ors, and based on such review and
program, the Year 2000 Problem will not have a Material Adverse Effect upo n
their financial condition, operations or business as now conducted. "Year 2000
Problem" means the possibility th at any computer applications or equipment used
by Borrower may be unable to recognize and properly perform d ate sensitive
functions involving certain dates prior to and any dates on or after December
31, 1999.
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ARTICLE 7
AFFIRMATIVE COVENANTS
Until payment in full of the Loans and the complete performance of the
Obligation, Borrower agrees that:
7.1 Financial Statements, Reports and Documents. It shall deliver, or cause
to be delivered, to Lender each of the following:
(a) Annual Statements of Borrower. As soon as available and in any
event within ninety (90) days after the close of each fiscal year of Borrower,
audited financial statements of Borrower, including its balance sheet as of the
close of such fiscal year and statements of income of Borrower for such fiscal
year, in each case setting forth in comparative form the figures for the
preceding fiscal year, all in reasonable detail and accompanied by an
unqualified opinion thereon of independent public accountants of recognized
national standing selected by Borrower and acceptable to Lender, to the effect
that such financial statements have been prepared in accordance with GAAP.
(b) Monthly Statements of Borrower. As soon as available, and in any
event within twenty (20) days after the end of each month (except for that at
the close of the fiscal year), copies of the balance sheet of Borrower as of the
end of such month, and statement of income of Borrower for that month and for
the portion of the fiscal year ending with such month, all in reasonable detail
and fairly stated, certified by Borrower and prepared by Borrower in accordance
with GAAP.
(c) Compliance Certificate of Borrower. At the end of each weekly
period until Borrower's Net Income is positive for at least two consecutive
fiscal quarters, and thereafter within twenty (20) days after the end of each
month, a certificate signed by the Authorized Manager of the Borrower,
substantially in the form of Exhibit "B" attached hereto certifying that after a
review of the activities of Borrower during such period, Borrower has observed,
performed and fulfilled each and every obligation and covenant contained herein
and no Event of Default exists under any of the same or, if any Event of Default
shall have occurred, specifying the nature and status thereof, and stating that
all financial statements of Borrower delivered to Lender during the respective
period pursuant to Sections 7.1(a) and 7.1(b) hereof, to his/her knowledge,
fairly present in all material respect the financial position of the Borrower
and the results of its operations at the dates and for the periods indicated,
and have been prepared in accordance with GAAP, together with a calculation of
the Financial Covenants.
(d) Borrowing Base Certificate. At the end of each weekly period until
Borrower's Net Income is positive for at least two consecutive fiscal quarters,
and thereafter within twenty (20) days after the end of each month, a Borrowing
Base Certificate substantially in the form attached hereto as Exhibit "C".
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(e) Other Information. Such other information concerning the business,
properties or financial condition of Borrower as Lender shall reasonably
request.
7.2 Maintenance of Existence and Rights; Conduct of Business; Management.
It will preserve and maintain its existence and all of its rights, privileges,
licenses, permits, franchises and other rights necessary or desirable in the
normal conduct of its business, conduct its business in an orderly and efficient
manner consistent with good business practices and maintain professional
management of its business.
7.3 Operations and Properties. It will keep in good working order and
condition, ordinary wear and tear excepted, all of its assets and properties
which are necessary to the conduct of its business.
7.4 Authorizations and Approvals. It will maintain, at its own expense, all
such governmental licenses, authorizations, consents, permits and approvals as
may be required to enable it to comply with its obligations hereunder and under
the other Credit Documents and to operate its businesses as presently or
hereafter duly conducted.
7.5 Compliance with Law. It will comply with all applicable laws, rules,
regulations, and all final, nonappealable orders of any Governmental Authority
applicable to it or any of its property, business operations or transactions,
including without limitation, any environmental laws applicable to it, a breach
of which could result in a Material Adverse Effect.
7.6 Payment of Taxes and Other Indebtedness. It will pay and discharge (i)
all income taxes and payroll taxes, (ii) all taxes, assessments, fees and other
governmental charges imposed upon it or upon its income or profits, or upon any
property belonging to it, before delinquent, which become due and payable, (iii)
all lawful claims (including claims for labor, materials and supplies), which,
if unpaid, might become a Lien upon any of its property, and (iv) all of its
Indebtedness as it becomes due and payable, except as prohibited hereunder;
provided, however, that it shall not be required to pay any such tax,
assessment, charge, levy, claims or Indebtedness if and so long as the amount,
applicability or validity thereof shall currently be contested in good faith by
appropriate actions and appropriate accruals and reserves therefor have been
established in accordance with GAAP.
7.7 Compliance with Significant Debt Agreements and Other Agreements. It
will comply in all material respects with (i) all Significant Debt Agreements,
and (ii) all agreements and contracts to which it is a party, a breach of which
could result in a Material Adverse Effect.
7.8 Compliance with Credit Documents. It will comply with any and all
covenants and provisions of this Credit Agreement, the Note and all other Credit
Documents.
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7.9 Notice of Default. It will furnish to Lender immediately upon becoming
actually aware of the existence of any event or condition that constitutes an
Event of Default, a written notice specifying the nature and period of existence
thereof and the action which it is taking or proposes to take with respect
thereto.
7.10 Other Notices. It will promptly notify Lender of (a) any Material
Adverse Effect, (b) any waiver, release or default under any Significant Debt
Agreement, (c) any claim not covered by insurance against Borrower or any of
Borrower's properties, and (d) the commencement of, and any material
determination in, any litigation with any third party or any proceeding before
any Governmental Authority affecting it, except litigation or proceedings which,
if adversely determined, would not have a Material Adverse Effect.
7.11 Books and Records; Access; Audits. Upon three (3) Banking Days notice
from Lender, it will give any authorized representative of Lender access during
normal business hours to, and permit such representative to examine, copy or
make excerpts from, any and all books, records and documents in its possession
of and relating to the Loans, and to inspect any of its properties. It will
maintain complete and accurate books and records of its transactions in
accordance with good accounting practices. In addition, so long as no Event of
Default has occurred and is continuing, it will give any authorized
representative of Lender access during normal business hours to conduct a
minimum of one (1) collateral audit per year and the costs of such audit shall
be for the account of the Borrower.
7.12 ERISA Compliance. With respect to its Plans, it shall (a) at all times
comply with the minimum funding standards set forth in Section 302 of ERISA and
Section 412 of the Code or shall have duly obtained a formal waiver of such
compliance from the proper authority; (b) at Lender's request, within thirty
(30) days after the filing thereof, furnish to Lender copies of each annual
report/return (Form 5500 Series), as well as all schedules and attachments
required to be filed with the Department of Labor and/or the Internal Revenue
Service pursuant to ERISA, in connection with each of its Plans for each year of
the plan; (c) notify Lender within a reasonable time of any fact, including, but
not limited to, any Reportable Event arising in connection with any of its
Plans, which constitutes grounds for termination thereof by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such Plan, together with a statement, if requested by Lender, as to
the reason therefor and the action, if any, proposed to be taken with respect
thereto; and (d) furnish to Lender within a reasonable time, upon Lender's
request, such additional information concerning any of its Plans as may be
reasonably requested.
7.13 Further Assurances. It will make, execute or endorse, and acknowledge
and deliver or file or cause the same to be done, all such notices,
certifications and additional agreements, undertakings or other assurances, and
take any and all such other action, as Lender may, from time to time, deem
reasonably necessary or proper to fully evidence the Loan.
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7.14 Insurance. It shall maintain in full force and effect at all times all
insurance coverages required under the terms of this Credit Agreement and/or the
Security Documents to which it is a party. In addition, it shall maintain in
full force and effect at all times:
(a) Policies of all risk coverage insurance covering all tangible
personalty in which Lender has been granted or obtained a security interest to
secure the Obligation, in coverage amounts not less than, from time to time, the
fair market value thereof.
(b) Policies of insurance evidencing personal liability and property
damage liability coverages in amounts not less than $1,000,000.00 (combined
single limit for bodily injury and property damage), and an umbrella excess
liability coverage in an amount not less than $2,000,000.00 shall be in effect
with respect to Borrower.
(c) Policies of workers' compensation insurance in amounts and with
coverages as legally required.
Without limitation of the foregoing, it shall at all times maintain insurance
coverages in scope and amount not less than, and not less extensive than, the
scope and amount of insurance coverages customary in the trades or businesses in
which it is from time to time engaged. All of the aforesaid insurance coverages
shall be issued by insurers reasonably acceptable to Lender.
Copies of all policies of insurance evidencing such coverages in effect
from time to time and showing Lender as an additional insured and loss payee
shall be delivered to Lender within fifteen (15) days of the Closing Date and
upon reasonable notice upon issuance of new policies thereafter. From time to
time, promptly upon Lender's request, it shall provide evidence satisfactory to
Lender (i) that required coverage in required amounts is in effect, and (ii)
that Lender is shown as an additional insured and loss payee with respect to all
such coverages, as Lender's interest may appear, by standard (non-attribution)
loss payable endorsement, additional insured endorsement, insurer's certificate
or other means acceptable to Lender in its reasonable discretion. At Lender's
option, it shall deliver to Lender certified copies of all such policies of
insurance in effect from time to time, to be retained by Lender so long as
Lender shall have any commitment to lend hereunder and/or any portion of the
Obligation shall be outstanding or unsatisfied. All such insurance policies
shall provide for at least thirty (30) days prior written notice of the
cancellation or modification thereof to Lender.
7.15 Year 2000 Compliance. It will perform all acts reasonably necessary to
ensure that (a) Borrower and any business in which Borrower holds a substantial
interest, and (b) all customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As used in
this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms of this
paragraph as Bank may from time to time require.
7.16 Deposit Accounts. It shall maintain its principal depository accounts
with Lender.
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ARTICLE 8
NEGATIVE COVENANTS
Until payment in full of the Loans and the performance of the Obligation,
Borrower shall not, without receiving the prior express written consent of
Lender:
8.1 Existence. Dissolve or liquidate, or merge or consolidate with or into
any other entity, or turn over the management or operation of its property,
assets or business to any other Person or make any substantial change in the
character of its business.
8.2 Amendments to Organizational Documents. Amend its organizational
documents if the result thereof could result in the occurrence directly or
indirectly of a Material Adverse Effect.
8.3 Margin Stock. Use any proceeds of the Loans, or any proceeds of any
other or future financial accommodation from Lender for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any "margin stock"
as that term is defined in Regulation U or to reduce or retire any indebtedness
undertaken for such purposes within the meaning of said Regulation U, and will
not use such proceeds in a manner that would involve Borrower in a violation of
Regulation U or of any other Regulation of the Board of Governors of the Federal
Reserve System, nor use such proceeds for any purpose not permitted by Section 7
of the Exchange Act, or any of the rules or regulations respecting the
extensions of credit promulgated thereunder.
8.4 Distributions. Declare or pay any dividends or make any distributions
of any kind other than distributions necessary to satisfy the tax liabilities of
the members of Borrower arising from the operations of Borrower.
8.5 Liens. On and after the date hereof, create, issue, assume or suffer to
exist Liens upon the Collateral, except Permitted Liens.
8.6 Transfer Collateral. Assign, transfer or convey any of its right, title
and interest in the Collateral.
8.7 Merger; Sale of Assets. (i) Sell, lease, transfer or dispose of
substantially all of the Collateral to another entity; or (ii) consolidate with
or merge into another entity, or permit any transfer of the ownership of the
Collateral, permit any other entity to merge into Borrower or consolidate with
it, or permit any transfer of the ownership or power to control Borrower.
8.8 Indebtedness. Incur in excess of $100,000 in the aggregate for any
fiscal year, without receiving the prior express written consent of Lender,
which consent shall not be unreasonably withheld.
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8.9 Financial Covenants. Permit:
(a) Its Liquidity Percentage to be less than thirty percent (30%) as
of the end of each weekly period until Borrower's Net Income is positive for at
least two consecutive fiscal quarters and thereafter as of the end of each
monthly period.
(b) Beginning with that fiscal quarter ending March 31, 2000, its Net
Income to be less than $0 (i.e. net loss) in any quarter.
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ARTICLE 9
EVENTS OF DEFAULT
9.1 Events of Default. An "Event of Default" shall exist if any one or more
of the following events (herein collectively called "Events of Default") shall
occur and be continuing:
(a) Borrower shall fail to pay any principal of, or interest on, the
Note when the same shall become due or payable and such failure continues for
ten (10) Banking Days after notice thereof to Borrower.
(b) Any failure or neglect to perform or observe any of the covenants,
conditions, provisions or agreements of Borrower contained herein, or in any of
the other Credit Documents (other than a failure or neglect described in one or
more of the other provisions of this Section 9.1) and such failure or neglect
either cannot be remedied or, if it can be remedied, it continues unremedied for
a period of thirty (30) days after written notice thereof to Borrower.
(c) Any warranty, representation or statement contained in this Credit
Agreement or any of the other Credit Documents, or which is contained in any
certificate or statement furnished or made to Lender pursuant hereto or in
connection herewith or with the Loans, shall be or shall prove to have been
false when made or furnished.
(d) The occurrence of any material "event of default" or "default" by
Borrower under any Credit Document, or any agreement, now or hereafter existing,
to which Lender or an Affiliate of Lender, and Borrower or an Affiliate of
Borrower are a party.
(e) Borrower shall (i) fail to pay any Indebtedness of Borrower (other
than the Note) due under any Significant Debt Agreement, or any interest or
premium thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand, or otherwise) or within any applicable grace period, (ii)
fail to perform or observe any term, covenant, or condition on its part to be
performed or observed under any agreement or instrument relating to such
Indebtedness, within any applicable grace period when required to be performed
or observed, if the effect of such failure to perform or observe is to
accelerate the maturity of such Indebtedness, or any such Indebtedness shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled prepayment), prior to the stated maturity thereof, or (iii)
allow the occurrence of any material event of default with respect to such
Indebtedness.
(f) Any one or more of the Credit Documents shall have been determined
to be invalid or unenforceable against Borrower executing the same in accordance
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with the respective terms thereof, or shall in any way be terminated or become
or be declared ineffective or inoperative, so as to deny Lender the substantial
benefits contemplated by such Credit Document or Credit Documents.
(g) Borrower or Guarantor shall (i) apply for or consent to the
appointment of a receiver, trustee, custodian, intervenor or liquidator of
itself or of all or a substantial part of its assets, (ii) file a voluntary
petition in bankruptcy or admit in writing that it is unable to pay its debts as
they become due, (iii) make a general assignment for the benefit of creditors,
(iv) file a petition or answer seeking reorganization of an arrangement with
creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an
answer admitting the material allegations of, or consent to, or default in
answering, a petition filed against it in any bankruptcy, reorganization or
insolvency proceeding, or (vi) take corporate action for the purpose of
effecting any of the foregoing
(h) An involuntary petition or complaint shall be filed against
Borrower or Guarantor, seeking bankruptcy or reorganization of Borrower or
Guarantor, or the appointment of a receiver, custodian, trustee, intervenor or
liquidator of Borrower or Guarantor, or all or substantially all of its assets,
and such petition or complaint shall not have been dismissed within sixty (60)
days of the filing thereof; or an order, order for relief, judgment or decree
shall be entered by any court of competent jurisdiction or other competent
authority approving a petition or complaint seeking reorganization of Borrower
or Guarantor, appointing a receiver, custodian, trustee, intervenor or
liquidator of Borrower or Guarantor, or all or substantially all of its assets,
and such order, judgment or decree shall continue unstayed and in effect for a
period of sixty (60) days.
(i) Any final judgment(s) (excluding those the enforcement of which is
suspended pending appeal) for the payment of money in excess of the sum of
$250,000 in the aggregate (other than any judgment covered by insurance where
coverage has been acknowledged by the insurer) shall be rendered against
Borrower, and such judgment or judgments shall not be satisfied, settled, bonded
or discharged at least ten (10) days prior to the date on which any of its
assets could be lawfully sold to satisfy such judgment.
(j) Either (i) proceedings shall have been instituted to terminate, or
a notice of termination shall have been filed with respect to, any Plans (other
than a Multi-Employer Pension Plan as that term is defined in Section 4001(a)(3)
of ERISA) by Borrower, any member of the Controlled Group, PBGC or any
representative of any thereof, or any such Plan shall be terminated, in each
case under Section 4041 or 4042 of ERISA, and such termination shall give rise
to a liability of the Borrower or the Controlled Group to the PBGC or the Plan
under ERISA having an effect in excess of $100,000 or (ii) a Reportable Event,
the occurrence of which would cause the imposition of a lien in excess of
$100,000 under Section 4062 of ERISA, shall have occurred with respect to any
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Plan (other than a Multi-Employer Pension Plan as that term is defined in
Section 4001(a)(3) of ERISA) and be continuing for a period of sixty (60) days.
(k) Any of the following events shall occur with respect to any Multi-
Employer Pension Plan (as that term is defined in Section 4001(a)(3) of ERISA)
to which Borrower contributes or contributed on behalf of its employees and
Lender determines in good faith that the aggregate liability likely to be
incurred by Borrower, as a result of any of the events specified in Subsections
(i), (ii) and (iii) below, will have an effect in excess of $100,000; (i)
Borrower incurs a withdrawal liability under Section 4201 of ERISA; (ii) any
such plan is "in reorganization" as that term is defined in Section 4241 of
ERISA; or (iii) any such Plan is terminated under Section 4041A of ERISA.
(l) The occurrence of a change in the ownership structure without the
written consent of Lender, which will not be unreasonably withheld.
(m) The dissolution, liquidation, sale, transfer, lease or other
disposal of all or substantially all of the assets or business of Borrower.
(n) Any failure to observe any of the Financial Covenants.
(o) A substantial change of the Borrower's executive management group
as determined by Lender in its reasonable discretion without the written consent
of Lender which consent shall not be unreasonably withheld.
(p) The occurrence of any adverse change in the, business, operations,
assets or financial condition of Borrower, taken as a whole, that Lender in its
reasonable discretion deems material, or if Lender in good faith shall believe
that the prospect of payment or performance of the Loans is impaired.
9.2 Remedies Upon Event of Default. If an Event of Default shall have
occurred and be continuing, then Lender may, at its sole option, exercise any
one or more of the following rights and remedies, and any other remedies
provided in any of the Credit Documents, as Lender in its sole discretion may
deem necessary or appropriate, all of which remedies shall be deemed cumulative,
and not alternative:
(i) Cease making Advances or extensions of financial
accommodations in any form to or for the benefit of Borrower,
(ii) Declare the principal of, and all interest then accrued on,
the Note and any other liabilities hereunder to be forthwith due and
payable, whereupon the same shall become immediately due and payable
without presentment, demand, protest, notice of default, notice of
acceleration or of intention to accelerate or other notice of any kind
all of which Borrower hereby expressly waives, anything contained
herein or in the Note to the contrary notwithstanding,
(iii) Reduce any claim to judgment, and/or
(iv) Without notice of default or demand, pursue and enforce any
of Lender' rights and remedies under the Credit Documents, or
otherwise provided under or pursuant to any applicable law or
agreement; provided, however, that if any Event of Default specified
in Sections 9.1(g) and 9.1(h) shall occur, the principal of, and all
interest on, the Note and other liabilities hereunder shall thereupon
become due and payable concurrently therewith, without any further
action by Lender and without presentment, demand, protest, notice of
default, notice of acceleration or of intention to accelerate or other
notice of any kind, all of which Borrower hereby expressly waives.
Upon the occurrence and during the continuance of any Event of Default,
Lender is hereby authorized at any time and from time to time, with five (5)
days notice to Borrower, to setoff and apply any and all moneys, securities or
other property of Borrower and the proceeds therefrom, now or hereafter held or
received by or in transit to Lender or its agents, from or for the account of
Borrower, whether for safe keeping, custody, pledge, transmission, collection or
otherwise, and also upon any and all deposits (general or special) and credits
of Borrower, and any and all claims of Borrower against Lender at any time
existing. Lender agrees promptly to notify Borrower prior to and after any such
setoff and application, provided that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of Lender under
this Section 9.2 are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which Lender may have.
9.3 Performance by Lender. Should Borrower fail to perform any covenant,
duty or agreement with respect to the pay ment of taxes, obtaining licenses or
permits, or any other requirement contained herein or in any of the Credit
Documents within the period provided herein, if any, for correction of such
failure, Lender may, with five (5) days prior notice, at its option, perform or
attempt to perform such covenant, duty or agreement on behalf of Borrower . In
such event, Borrower shall, at the request of Lender, promptly pay any amount
expended by Lender in such per formance or attempted performance to Lender at
its office in Inglewood, California, together with interest ther eon at the
Default Rate, from the date of such expenditure until paid. Notwithstanding the
foregoing, it is e xpressly understood that Lender does not assume any liability
or responsibility for the performance of any duties of Borrower hereunder or
under any of the Credit Documents or other control over the management and aff
airs of Borrower.
-28-
<PAGE>
ARTICLE 10
MISCELLANEOUS
10.1 Modification. All modifications, consents, amendments or waivers of
any provision of any Credit Document, or consent to any departure by Borrower
therefrom, shall be effective only if the same shall be in writing and accepted
by Lender.
10.2 Waiver. No failure to exercise, and no delay in exercising, on the
part of Lender, any right hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other further exercise
thereof or the exercise of any other right. The rights of Lender hereunder and
under the Credit Documents shall be in addition to all other rights provided by
law. No modification or waiver of any provision of this Credit Agreement, the
Note or any Credit Documents, nor consent to departure therefrom, shall be
effective unless in writing and no such consent or waiver shall extend beyond
the particular case and purpose involved. No notice or demand given in any case
shall constitute a waiver of the right to take other action in the same, similar
or other instances without such notice or demand.
10.3 Payment of Expenses. Borrower shall pay all costs and expenses of
Lender (including, without limitation, the attorneys' fees of Lender's legal
counsel) incurred by Lender in connection with the documentation of the Loans,
and the preservation and enforcement of Lender's rights under this Credit
Agreement, the Note, and/or the other Credit Documents; provided, however, that
notwithstanding the aforesaid, with respect to any legal action between the
parties hereto that is pursued to judgment the prevailing party only shall be
reimbursed by the other party for all costs and expenses (including, without
limitation, reasonable attorneys' fees and costs) incurred in connection with
the preservation and enforcement of its rights under this Credit Agreement, the
Note and/or other Credit Documents. In addition, Borrower shall pay all costs
and expenses of Lender in connection with the negotiation, preparation,
execution and delivery of any and all amendments, modifications and supplements
of or to this Credit Agreement, the Note or any other Credit Document. Borrower
shall receive a written estimate of all legal fees and related legal costs and
will have an opportunity to review all such estimates prior to its approval,
which shall not be unreasonably withheld.
10.4 Notices. Except for telephonic notices permitted herein, any notices
or other communications required or permitted to be given by this Credit
Agreement or any other documents and instruments referred to herein must be (i)
given in writing and personally delivered or mailed by prepaid certified or
registered mail or sent by overnight delivery service, or (ii) made by
telefacsimile delivered or transmitted, to the party to whom such notice or
communication is directed, to the address of such party as follows:
Borrower: GEL TECH, INC.
246 East Watkins Street
Phoenix, Arizona 85004
Attention: William J. Hemelt
Telecopier: (602) 420-9949
Lender: Imperial Bank
9920 South La Cienega Boulevard
Suite 636
Inglewood, California 90301
Attention: Lending Services
Telecopier: (310) 417-5695
With a copy to: Imperial Bank
400 East Van Buren
Suite 900
Phoenix, Arizona 85004
Attention: Edmund Ozorio
Telecopier: (602) 261-7881
Any notice to be personally delivered may be delivered to the principal offices
(determined as of the date of such delivery) of the party to whom such notice is
directed. Any such notice or other communication shall be deemed to have been
given (whether actually received or not) on the day it is personally delivered
as aforesaid; or, if mailed, on the third day after it is mailed as aforesaid;
or, if transmitted by telefacsimile, on the day that such notice is transmitted
as aforesaid. Any party may change its address for purposes of this Credit
Agreement by giving notice of such change to the other parties pursuant to this
Section 10.4.
10.5 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Credit
Documents shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of California, except to the extent
Lender has greater rights or remedies under Federal law, whether as a national
bank or otherwise, in which case such choice of California law shall not be
deemed to deprive Lender of any such rights and remedies as may be available
under Federal law. Subject to the provisions of Section 10.13 hereof, each party
consents to the personal jurisdiction and venue of the state courts located in
Los Angeles, State of California in connection with any controversy related to
this Agreement, waives any argument that venue in any such forum is not
convenient and agrees that any litigation initiated by any of them in connection
with this Agreement shall be venued in the Superior Court of Los Angeles County,
California. The parties waive any right to trial by jury in any action or
proceeding based on or pertaining to this Agreement or any of the Credit
Documents.
10.6 Invalid Provisions. If any provision of any Credit Document is held to
be illegal, invalid or unenforceable under present or future laws during the
term of this Credit Agreement, such provision shall be fully severable; such
Credit Document shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of such Credit Document; and
the remaining provisions of such Credit Document shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance from such Credit Document. Furthermore, in lieu of
each such illegal, invalid or unenforceable provision there shall be added as
part of such Credit Document a provision mutually agreeable to Borrower and
Lender as similar in terms to such illegal, invalid or unenforceable provision
as may be possible and be legal, valid and enforceable.
10.7 Binding Effect. The Credit Documents shall be binding upon and inure
to the benefit of Borrower and Lender and their respective successors, assigns
and legal representatives; provided, however, that Borrower may not, without the
prior written consent of Lender, assign any rights, powers, duties or
obligations thereunder.
10.8 Entirety. The Credit Documents embody the entire agreement between the
parties and supersede all prior agreements and understandings, if any, relating
to the subject matter hereof and thereof.
10.9 Headings. Section headings are for convenience of reference only and
shall in no way affect the interpretation of this Credit Agreement.
10.10 Survival. All representations and warranties made by Borrower herein
shall survive delivery of the Note and the making of the Loans.
10.11 No Third Party Beneficiary. The parties do not intend the benefits of
this Credit Agreement to inure to any third party, nor shall this Credit
Agreement be construed to make or render Lender liable to any materialman,
supplier, contractor, subcontractor, purchaser or lessee of any property owned
by Borrower, or for debts or claims accruing to any such persons against
Borrower. Notwithstanding anything contained herein or in the Note, or in any
other Credit Document, or any conduct or course of conduct by any or all of the
parties hereto, before or after signing this Credit Agreement or any of the
other Credit Documents, neither this Credit Agreement nor any other Credit
Document shall be construed as creating any right, claim or cause of action
against Lender, or any of its officers, directors, agents or employees, in favor
of any materialman, supplier, contractor, subcontractor, purchaser or lessee of
any property owned by Borrower, nor to any other person or entity other than
Borrower.
10.12 Time. Time is of the essence hereof.
10.13 Reference Provision.
(a) Each controversy, dispute or claim ("Claim") between the parties
arising out of or relating to this Agreement and/or any of the Credit Documents,
which is not settled in writing within ten days after the "Claim Date" (defined
as the date on which a party gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in Los Angeles, California, in accordance with the provisions of Section 638 et
seq. of the California Code of Civil Procedure, or their successor section
("CCP"), which shall constitute the exclusive remedy for the settlement of any
Claim, including whether such Claim is subject to the reference proceeding and
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court of Los Angeles
-29-
<PAGE>
(the "Court"). The referee shall be a retired Judge selected by mutual agreement
of the parties, and if they cannot so agree with in thirty days (30) after the
Claim Date, the referee shall be selected by the Presiding Judge of the Court.
The referee shall be appointed to sit as a temporary judge, as authorized by
law. The referee shall (a) be requested to set the matter for hearing within
sixty (60) days after the Claim Date and (b) try any and all issues of law or
fact and report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP 644 in the
Court. All discovery permitted by this Agreement shall be completed no later
than fifteen (15) days before the first hearing date established by the referee.
The referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducing
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production of inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
(b) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject to the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
(c) No provision of Paragraphs (a) or (b) of this Section 10.13,
however, shall limit the right of Lender to bring action for possession of any
-30-
<PAGE>
collateral in any jurisdiction, wherever located, in accordance with the
provisions of the Security Documents.
10.14 Schedules and Exhibits Incorporated. All schedules and exhibits
attached hereto, if any, are hereby incorporated into this Credit Agreement by
each reference thereto as if fully set forth at each such reference.
10.15 Counterparts. This Credit Agreement may be executed in multiple
counterparts, each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.
10.16 Participations. Lender, at any time, shall have the right to sell,
assign, transfer, negotiate or grant participation interests in the Loans and in
any documents and instruments executed in connection herewith. Borrower hereby
acknowledges and agrees that any such disposition shall give rise to a direct
obligation of Borrower to each such assignee or participant. Lender is
authorized to furnish to any participant or prospective participant any
information or document that Lender may have or obtain regarding the Loans,
Borrower or any guarantor of the Loans.
IN WITNESS WHEREOF, the undersigned have executed this Credit Agreement as
of the day and year first above written.
GEL TECH, L.L.C., an Arizona limited
liability company
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
IMPERIAL BANK, a California banking
corporation
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
<PAGE>
EXHIBIT "A"
FORM OF ADVANCE NOTICE
Imperial Bank
One Arizona Center
400 East Van Buren, Suite 900
Phoenix, Arizona 85004
Attention: Edmund Ozorio
Telecopier: (602) 261-7881
Date:_____________
Time:______________
Dear Edmund:
The undersigned, Gel Tech, L.L.C., an Arizona limited liability company
("Borrower"), refers to the Credit Agreement dated as of January 11, 2000 (as it
may hereafter be amended, modified, extended or restated from time to time, the
"Credit Agreement"), between Borrower and Imperial Bank, a California banking
corporation. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Credit Agreement.
The Borrower hereby gives notice that it requests an Advance pursuant to
the Credit Agreement and sets forth below the terms of such requested Advance:
A. Date of Advance ____________________
B. Principal Amount of Advance ____________________
Sincerely,
GEL TECH, L.L.C., an Arizona limited
liability company
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
<PAGE>
EXHIBIT "B"
COMPLIANCE CERTIFICATE
FOR PERIOD ENDING
------------------
("REPORTING PERIOD")
Imperial Bank
400 East Van Buren, Suite 900
Phoenix, Arizona 85004
Attention: Edmund Ozorio
Telecopier: (602) 261-7881 Date: _____________
Dear Ladies and Gentlemen:
This Compliance Certificate refers to the Credit Agreement dated as of
January 11, 2000 (as it may hereafter be amended, modified, extended or restated
from time to time, the "Credit Agreement"), between Gel Tech, L.L.C., an Arizona
limited liability company (the "Borrower") and Imperial Bank, a California
banking corporation. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned to such terms in the Credit Agreement.
Pursuant to Section 7.1 of the Credit Agreement, the undersigned, hereby
certifies that:
1. To the best of the undersigned's knowledge, after a review of the
activities of Borrower during the Reporting Period, Borrower has observed,
performed and fulfilled each and every obligation and covenant contained in the
Credit Agreement and no "Event of Default" thereunder exists [or if so,
specifying the nature and extent thereof and any corrective actions taken or to
be taken].
2. All financial statements of Borrower delivered to Lender during the
Reporting Period, if any, to the undersigned's knowledge, fairly present in all
material respect the financial position of the Borrower and the results of its
operations at the dates and for the periods indicated and have been prepared in
accordance with GAAP.
3. As of the last day of the Reporting Period, the computations below were
true and correct:
<PAGE>
Section 8.9 - FINANCIAL COVENANTS:
(a) LIQUIDITY PERCENTAGE
Numerator: Cash on deposit with Lender $
plus: Funds invested with Lender $
equals: Eligible Deposit Amount A$
Denominator: RLC Balance B$
A divided by B equals A/B__________%
Minimum 30.0%
(b) NET INCOME (FISCAL QUARTER STARTING 3/31/00) (in thousands)
Actual $
------------ ------------ ------------ ------------
Minimum $ 0
------------
GEL TECH, L.L.C., an Arizona limited
liability company
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
<PAGE>
EXHIBIT "C"
BORROWING BASE CERTIFICATES
<PAGE>
EXHIBIT "D"
When recorded, return to:
Streich Lang, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
Attention: Henry A. Perras, Esq.
WAIVER/RELEASE OF LIEN RIGHTS
To induce IMPERIAL BANK, a California banking corporation, whose address is
400 East Van Buren, Suite 900, Phoenix, Arizona 85004 (hereinafter called
"Lender"), to grant and/or continue financial accommodations to GEL TECH,
L.L.C., an Arizona limited liability company, whose address is 246 East Watkins
Street, Phoenix, Arizona 85004 (hereinafter called "Debtor"), the undersigned
covenants and agrees as follows:
1. Debtor has executed a Security Agreement dated January 11, 2000
(hereinafter called the "Security Agreement"), granting to Lender a security
interest in that property of Debtor described in the Security Agreement and on
Schedule "A" attached hereto and made a part hereof (hereinafter called the
"Collateral"). The Collateral includes, but is not limited to, fixtures,
equipment, machinery, furniture and furnishings that are now or hereafter may be
installed, placed or located on the real property described on Schedule "B"
attached hereto (hereinafter called the "Real Property"), which is owned by the
undersigned or in which the undersigned has or claims a lien or interest.
2. The undersigned hereby consents to the Security Agreement and to all
liens, security interests and rights of Lender in the Collateral arising from
the Security Agreement and waives and releases all rights of levy for rent and
all liens, security interests, claims, rights and demands of every kind against
the Collateral.
3. The undersigned hereby grants permission to Lender, its officers, agents
and employees, to enter, at any time, the Real Property or any other premises
where the Collateral may be found and to remove the Collateral, provided that
Lender shall promptly reimburse the undersigned for the cost of repairing any
physical injury done to the Real Property as a result of the removal of the
Collateral.
<PAGE>
4. The Collateral shall at all times be personal property, shall not
constitute fixtures or be part of the Real Property and shall not be subject to
distraint or execution by the undersigned or to any claim of the undersigned.
5. The undersigned shall notify any purchaser of the Real Property, and any
subsequent mortgagee or other encumbrance holder or claimant, of the existence
of this Waiver/Release Agreement, which shall be binding upon the executors,
administrators, successors, assigns and transferees of the undersigned and shall
inure to the benefit of the successors and assigns of Lender.
6. In the event of any default under its lease or agreement with Debtor,
then prior to: (i) terminating its lease or agreement with Debtor, (ii)
incurring any attorneys' fees, or (iii) incurring any other expenses which it
would, but for this provision, charge Debtor, the undersigned shall notify
Lender in writing at the above address of such default and allow Lender 30 days
after receipt of such notice to remedy any such default on behalf of Debtor;
provided, however, that if the default cannot reasonably be remedied within that
30-day period, the undersigned shall not terminate its lease or agreement with
Debtor or incur any attorneys' fees or other expenses so long as Lender shall
commence to remedy the default within that 30-day period and thereafter
diligently prosecute the remedy to completion.
IN WITNESS WHEREOF, the undersigned has executed this Agreement this ____
day of ____________________.
-----------------------------------
-----------------------------------
By:
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
Address:
-----------------------------------
-----------------------------------
<PAGE>
STATE OF ____________________ )
) ss.
County of ___________________ )
The foregoing instrument was acknowledged before me this _____ day of
__________________________, by __________________________________________, the
____________________________ of ______________________________________________
_______________________, on behalf of said ________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------------------------
Notary Public
My commission expires:
- ----------------------
<PAGE>
SCHEDULE "A"
COLLATERAL DESCRIPTION
All of the property described below in, to or under which Debtor now
has or hereafter acquires any right, title or interest, whether present, future
or contingent, and in Debtor's expectancy to acquire such property (all of the
property described on this schedule is herein called the "Collateral"):
(a) All accounts, general intangibles, instruments, documents and
chattel paper (including all accounts receivable, notes, drafts, lease
agreements and security agreements), and all goods, if any, represented
thereby, whether now existing or hereafter acquired or created from time to
time in the course of Debtor's business;
(b) All inventory now owned or hereafter acquired, including all goods
held for sale or lease in Debtor's business, as now or hereafter conducted,
and all materials, work in process and finished goods used or to be
consumed in Debtor's business (whether or not the inventory is represented
by warehouse receipts or bills of lading or has been or may be placed in
transit or delivered to a public warehouse);
(c) All equipment now owned or hereafter acquired, including all
furniture, fixtures, furnishings, vehicles (whether titled or non-titled),
machinery, materials and supplies, wherever located, including but not
limited to such items described on the collateral schedule (if any)
attached hereto and by this reference made a part hereof, together with all
parts, accessories, attachments, additions thereto or replacements
therefor;
(d) All instruments, documents and chattel paper now held by or
hereafter delivered to Secured Party, together with all property rights and
security interests evidenced thereby, all increases thereof (including,
without limitation, stock dividends), all profits therefrom and all
transformations thereof, including but not limited to such items described
on the collateral schedule (if any) attached hereto and by this reference
made a part hereof (all hereinafter called the "Specific
Collateral-in-Possession");
(e) All tax refund claims, all policies or certificates of insurance
covering any of the Collateral, all contracts, agreements or rights of
indemnification, guaranty or surety relating to any of the Collateral, and
all claims, awards, loss payments, proceeds and premium refunds that may
become payable with respect to any such policies, certificates, contracts,
agreements or rights;
<PAGE>
(f) All ledger cards, invoices, delivery receipts, worksheets, books
of accounts, statements, correspondence, customer lists, files, journals,
ledgers and records in any form, written or otherwise, related to any of
the Collateral;
(g) Tradenames, trademarks, trademark applications, copyrights,
copyright applications, service marks and the entire goodwill of or
associated with the business now or hereafter conducted by the Debtor;
(h) All claims for loss or damage to or in connection with any of the
Collateral, all other claims in any form for the payment of money,
including tort claims, and all rights with respect to such claims and all
proceeds thereof;
(i) All accessions to any of the Collateral; and
(j) All products and proceeds of the Collateral, in any form,
including all proceeds received, due or to become due from any sale,
exchange or other disposition of any of the Collateral, whether such
proceeds are cash or noncash in nature or are represented by checks,
drafts, notes or other instruments for the payment of money.
All "Collateral Schedules," if any, attached hereto are hereby incorporated into
this collateral description as if set forth here and at each reference thereto.
<PAGE>
SCHEDULE "B"
REAL PROPERTY
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
of GumTech International, Inc.
We consent to the incorporation by reference in the following Registration
Statements of Gum Tech 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; (4) No. 333-38555 on Form S-3; (5) No. 333-82253 on Form S-3; (6) No.
333-91679 on Form S-3 and (7) No. 333-30194 on Form S-3 of our report dated
February 5, 2000, relating to the consolidated balance sheet of Gum Tech
International, Inc. as of December 31, 1999 and 1998 and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for the years ended December 31, 1999, 1998 and 1997, which report
appears or is incorporated by reference in the December 31, 1999 Annual Report
on Form 10-K of Gum Tech International, Inc.
/s/ Angell & Deering
Denver, Colorado
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,595,075
<SECURITIES> 0
<RECEIVABLES> 8,247,662
<ALLOWANCES> 50,482
<INVENTORY> 1,966,819
<CURRENT-ASSETS> 16,241,470
<PP&E> 5,135,125
<DEPRECIATION> 1,724,276
<TOTAL-ASSETS> 20,027,914
<CURRENT-LIABILITIES> 3,711,001
<BONDS> 2,240,959
0
1,000,000
<COMMON> 23,687,579
<OTHER-SE> (11,985,742)
<TOTAL-LIABILITY-AND-EQUITY> 20,027,914
<SALES> 15,500,024
<TOTAL-REVENUES> 15,500,024
<CGS> 7,341,362
<TOTAL-COSTS> 6,369,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 1,311,792
<INCOME-PRETAX> 600,496
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773,621)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
