UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission File number 0-27646 GUM TECH INTERNATIONAL, INC. (Exact name of small business issuer as specified in it charter) UTAH 87-0482806 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 246 EAST WATKINS STREET PHOENIX, AZ 85004 (Address of principal executive offices) (602) 252-1617 (Issuer's telephone number) Check whether the issuer (1) has 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 [ ] There were 8,914,761 shares of the registrant's common stock, no par value, outstanding as of May 10, 2000. GUM TECH INTERNATIONAL, INC. FORM 10-Q INDEX Part I Financial Information Page Item 1. Condensed Consolidated Balance Sheet as of March 31, 2000 and December 31, 1999 1 Condensed Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II Other Information and Signatures Item 1. Legal Proceedings 14 Item 2. Changes in Securities 15 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 ZICAM IS A TRADEMARK OF GEL TECH LLC GUM TECH INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, December 31, 2000 1999 ------------ ------------ Current Assets: Cash and cash equivalents $ 8,205,057 $ 5,595,075 Restricted cash 2,034,046 270,878 Accounts receivable: Trade, net allowance for doubtful accounts of $44,687 and $50,482 2,664,178 8,197,180 Employees -- 56,237 Inventories 4,047,782 1,966,819 Prepaid expenses and other 76,253 155,281 ------------ ------------ Total Current Assets 17,027,316 16,241,470 ------------ ------------ Property and Equipment, at cost: Machinery and production equipment 4,512,490 4,455,694 Office furniture and equipment 312,344 295,577 Leasehold improvements 397,078 383,854 ------------ ------------ Total Property and Equipment 5,221,912 5,135,125 Less accumulated depreciation (1,837,759) (1,724,276) ------------ ------------ Net Property and Equipment 3,384,153 3,410,849 ------------ ------------ Other Assets: Intangible assets, net of accumulated amortization of $709,403 and $548,744 -- 160,659 Deposits and other 388,630 214,936 ------------ ------------ Total Other Assets 388,630 375,595 ------------ ------------ Total Assets $ 20,800,099 $ 20,027,914 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. 1 GUM TECH INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 2000 1999 ------------ ------------ Current Liabilities: Accounts payable and accrued expenses $ 4,595,959 $ 2,078,358 Customer deposits 110,450 10,500 Sales returns and allowances 1,310,936 1,202,100 Current portion of long-term debt 11,415 420,043 ------------ ------------ Total Current Liabilities 6,028,760 3,711,001 ------------ ------------ Long-Term Debt, net of current portion above: Financial institutions and other -- 2,646,897 Obligations under capital leases 11,415 14,105 Less current portion above (11,415) (420,043) ------------ ------------ Total Long-Term Debt -- 2,240,959 ------------ ------------ Minority interest in consolidated affiliate 373,697 1,374,117 ------------ ------------ Stockholders' Equity: Preferred stock: no par value, 1,000,000 shares authorized: Series A preferred stock, $1,000 stated value, 2,000 shares authorized, 0 and 1,000 shares issued and outstanding -- 1,000,000 Common stock: no par value, 20,000,000 shares authorized, 8,873,161 and 8,320,705 shares issued and outstanding 29,256,547 23,687,579 Additional paid in capital 3,551,766 3,551,766 Accumulated deficit (18,410,671) (15,537,508) ------------ ------------ Total Stockholders' Equity 14,397,642 12,701,837 ------------ ------------ Total Liabilities and Stockholders' Equity $ 20,800,099 $ 20,027,914 ------------ ------------ The accompanying notes are an integral part of these condensed consolidated financial statements. 2 GUM TECH INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, ----------------------------- 2000 1999 ----------- ----------- Net sales $ 4,016,011 $ 2,445,556 Cost of sales 2,063,560 1,840,879 ----------- ----------- Gross Profit 1,952,451 604,677 Operating expenses 5,099,682 951,171 Research and development 242,981 119,769 ----------- ----------- Income (Loss) From Operations (3,390,212) (466,263) ----------- ----------- Other Income (Expense): Interest and other income 91,645 8,769 Interest expense (409,426) (110,154) ----------- ----------- Total Other Income (Expense) (317,781) (101,385) ----------- ----------- Income (Loss) Before Provision For Income Taxes and Minority Interest (3,707,993) (567,648) Provision for income taxes 8,585 -- Minority interest in earnings (loss) of consolidated affiliate (1,000,420) -- ----------- ----------- Net Income (Loss) (2,716,158) (567,648) Preferred stock dividends 12,005 -- ----------- ----------- Net Income (Loss) Applicable to Common Shareholders $(2,728,163) $ (567,648) =========== =========== Net Income (Loss) Per Share of Common Stock: Basic: Weighted Average Number of Common Shares Outstanding 8,704,148 6,999,928 =========== =========== Net Income (Loss) Per Share of Common Stock $ (0.31) $ (0.08) =========== =========== Diluted: Weighted Average Number of Common Shares Outstanding 8,704,148 6,999,928 =========== =========== Net Income (Loss) Per Share of Common Stock $ (0.31) $ (0.08) =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 3 GUM TECH INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended March 31, --------------------------- 2000 1999 ----------- ----------- Cash Flows From Operating Activities: Net income (loss) $(2,716,158) $ (567,648) Adjustments to reconcile net income (loss) to net cash (used) by operating activities: Depreciation 113,483 113,676 Amortization 160,659 41,653 Amortization of discount on notes payable 212,500 -- Minority interest in earnings of consolidated affiliate (1,000,420) -- Changes in assets and liabilities: Restricted cash (1,763,168) -- Accounts receivable 5,533,002 (562,332) Employee receivable 56,237 -- Inventories (2,080,963) 310,394 Prepaid expenses and other 79,028 245 Deposits and other (162,655) (234,599) Accounts payable and accrued expenses 2,517,601 (235,110) Sales returns and allowances 108,836 81,790 Customer deposits 99,950 13,404 ----------- ----------- Net Cash (Used) By Operating Activities 1,157,932 (1,038,527) ----------- ----------- Cash Flows From Investing Activities: Capital expenditures (86,787) (151,840) Deposits and other (11,039) -- ----------- ----------- Net Cash Provided (Used) By Financing Activities (97,826) (151,840) ----------- ----------- Cash Flows From Financing Activities: Principal payments on notes payable (862,087) (91,892) Issuance of common stock upon exercise of options and warrants 2,568,968 1,010,671 Dividend distribution of subsidiary (145,000) -- Dividends paid on preferred stock (12,005) -- ----------- ----------- Net Cash Provided (Used) By Financing Activities 1,549,876 918,779 ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 2,609,982 (271,588) Cash and Cash Equivalents at Beginning of Period 5,595,075 517,852 ----------- ----------- Cash and Cash Equivalents at End of Period $ 8,205,057 $ 246,264 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 36,268 $ 72,212 Income taxes -- -- Supplemental Disclosure of Non Cash Investing and Financing Activities: Conversion of notes payable into common stock $ 2,000,000 $ 499,995 Issuance of common stock to redeem preferred stock $ 1,000,000 $ -- The accompanying notes are an integral part of these condensed consolidated financial statements. 4 GUM TECH INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying financial information of Gum Tech is prepared in accordance with the rules prescribed for filing condensed interim financial statements and, accordingly, does not include all disclosures that may be necessary for complete financial statements prepared in accordance with generally accepted accounting principles. The disclosures presented are sufficient, in management's opinion, to make the interim information presented not misleading. All adjustments, consisting of normal recurring adjustments, which are necessary so as to make the interim information not misleading, have been made. Results of operations for the three months ended March 31, 2000 are not necessarily indicative of results of operations that may be expected for the year ending December 31, 2000. It is recommended that this financial information be read with the complete financial statements included in Gum Tech's Annual Report on Form 10-K for the year ended December 31, 1999 previously filed with the Securities and Exchange Commission. 2. As of December 31, 1997, Gum Tech adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method of computation, presentation and disclosure of 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. Options, warrants and other incremental shares to purchase 1,225,096 and 1,371,668 shares of common stock at March 31, 2000 and 1999, respectively, were not included in the computation of diluted earnings per share because Gum Tech had a net loss and their effect would be anti-dilutive. 3. Inventories consist of the following at March 31, 2000: Raw materials and packaging $1,173,036 Work in progress 452,769 Finished goods 2,446,701 Less reserve for obsolescence (24,724) ---------- Total $4,047,782 ========== 5 ITEM 2. 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 targets 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. Through a joint venture with BioDelivery Technologies, Inc., Gum Tech also manufactures, markets and distributes Zicam Cold Remedy, a nasal gel formula that reduces the duration and severity of the common cold. 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. In March 2000, Gel Tech LLC announced a new product, Zicam Allergy Relief, a homeopathic nasal gel that provides relief to allergy sufferers. Gel Tech LLC did not record any sales of Zicam Allergy Relief in the three months ended March 31, 2000. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 The following table details certain financial information for our chewing gum and Zicam operations for the three months ended March 31, 2000: 6 Chewing Gum Zicam Consolidated ------------ ----------- ------------ Net sales $ 915,508 $ 3,100,503 $ 4,016,011 Cost of sales 1,014,205 1,049,355 2,063,560 ------------ ----------- ------------ Gross profit (98,697) 2,051,148 1,952,451 Operating expenses 549,386 4,550,296 5,099,682 Research and development 202,659 40,322 242,981 ------------ ----------- ------------ Income (Loss) from operations (850,742) (2,539,470) (3,390,212) Interest and other income 44,641 47,004 91,645 Interest expense 409,426 -- 409,426 ------------ ----------- ------------ Income (Loss) before income taxes and minority interest $ (1,215,527) $(2,492,466) $ (3,707,993) ============ =========== ============ Net assets $ 11,038,284 $ 9,761,815 $ 20,800,099 ============ =========== ============ 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: Three Months Ended March 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Net sales $ 915,508 100% $ 2,077,464 100% Cost of sales 1,014,205 111 1,661,193 80 ----------- ---- ----------- ---- Gross profit (98,697) (11) 416,271 20 Operating expenses 549,386 60 622,562 30 Research and development 202,659 22 119,769 6 ----------- ---- ----------- ---- Income (Loss) from operations (850,742) (93) (326,060) (16) Interest and other income 44,641 5 8,769 -- Interest expense 409,426 45 110,154 5 Provision (benefit) for income taxes -- -- -- -- ----------- ---- ----------- ---- Net income (loss) $(1,215,527) (133)% $ (427,445) (21)% =========== ==== =========== ==== NET SALES. Net gum sales declined to less than half of the prior year's level as sales to all of the five principal gum customers declined. Although sales to these customers will fluctuate from quarter to quarter, the Company does not expect any significant continuing growth in sales to result from these customers. Consequently, growth in sales from gum operations are dependent upon the addition of new customers, including the previously announced relationship with Swedish Match to develop and market a nicotine gum and a potential relationship with a major consumer products company to develop and market an oral care gum. However, there can be no assurance that the Company will finalize these and or any other contractual arrangements, or that any of these relationships will ultimately prove successful. 7 COST OF SALES. Cost of sales declined reflecting the lower sales level. However, cost of sales increased as a percentage of sales due to the impact of fixed manufacturing overhead expenses relative to the low production level. GROSS PROFIT. Gross profit declined as a result of the lower sales level and an increase in cost of sales as a percentage of sales. OPERATING EXPENSES. Operating expenses declined approximately $73,000 primarily as a result of charging administrative and warehousing expenses to Gel Tech LLC. RESEARCH AND DEVELOPMENT. Research and development expenses increased due to research and development efforts related to Gum Tech's nicotine gum project with Swedish Match. Pursuant to an agreement with Swedish Match, research and development expenses incurred since December 1999 will be charged to and reimbursed from the joint venture following its initial capitalization, which is expected in the second quarter of 2000. INCOME (LOSS) FROM OPERATIONS. The increase in the loss from operations is due primarily to the decline in gum sales. Gum Tech does not anticipate gum operations to become profitable unless and until sales from new contractual relationships are realized in future periods. There can be no guarantee that any new contractual relationship will be successful. INTEREST AND OTHER INCOME. Interest income increased as a result of the higher cash position for gum operations. INTEREST EXPENSE. Interest expense increased over the prior year period primarily due to the accelerated amortization of remaining interest charges associated with the repayment of the Citadel financing. During the first quarter of 2000, the Corporation redeemed the Citadel financing through the issuance of additional common stock. In addition, Gum Tech repaid the outstanding balance of its term loan with Textron Financial Corp. As a result of these two actions, Gum Tech's gum operations should not record any significant interest expense in future periods. ZICAM OPERATIONS Certain information is set forth below for our Zicam operations expressed in dollars and as a percentage of net sales for the periods indicated: 8 Three Months Ended March 31, ----------------------------------------- 2000 1999 ------------------- ----------------- Net sales $ 3,100,503 100% $ 368,092 100% Cost of sales 1,049,355 34 179,686 49 ----------- ---- --------- ---- Gross profit 2,051,148 66 188,406 51 Operating expenses 4,550,296 147 328,609 89 Research & development 40,322 1 -- -- ----------- ---- --------- ---- Income (Loss) from operations (2,539,470) (82) (140,203) (38) Interest and other income 47,004 2 -- -- Interest expense -- -- -- -- ----------- ---- --------- ---- Income (Loss) before income taxes and minority interest $(2,492,466) (80)% $(140,203) (38)% =========== ==== ========= ==== NET SALES. Net sales of Zicam Cold Remedy increased to $3.1 million in the three months ended March 31, 2000 from approximately $368,000 in the prior year period. Due to the difficulty of meeting the unexpectedly high demand for Zicam Cold Remedy in late 1999, this product was on back order until mid-January 2000. As a result of Zicam Cold Remedy being introduced in stores relatively late in the cold season, coupled with a relatively short cold season, Gel Tech LLC experienced a lower than anticipated level of reorders in the first quarter of 2000. To increase retail sales and increase Zicam brand recognition prior to the end of the cold season, Gel Tech LLC conducted an extensive advertising campaign beginning in early February and that continued through the end of the quarter, resulting in increased advertising expenses. Since Zicam Cold Remedy is a highly seasonal product, Gel Tech LLC does not anticipate significant sales of this product prior to retailers' restocking of cold products, which is expected in the third quarter. Gel Tech LLC does anticipate sales of Zicam Allergy Relief in the second and third quarters of 2000, which should mitigate this decrease in sales. COST OF SALES. Cost of sales increased from last year reflecting the higher level of sales, but decreased as a percentage of sales due to decreases in cost of materials and production. GROSS PROFIT. Zicam produced a gross profit of $2.1 million versus the prior year amount of approximately $188,000. OPERATING EXPENSES. Operating expenses increased to approximately $4.55 million primarily due to advertising expense of $3.59 million in the first quarter of 2000. Gel Tech LLC does not anticipate incurring any significant advertising expense for Zicam Cold Remedy until the next cold season. RESEARCH AND DEVELOPMENT. Research and development expense in this period primarily reflects initial research for Zicam Allergy Relief. Gel Tech is conducting a variety of studies on both Zicam Cold Remedy and Zicam Allergy Relief and anticipates this will result in greater research and development expense in subsequent periods. 9 INCOME (LOSS) FROM OPERATIONS. Gel Tech LLC recorded a loss from operations of approximately $2.5 million primarily due to the relatively large advertising expense recorded in the period. INTEREST EXPENSE. Gel Tech LLC currently does not have any debt outstanding but may borrow in the future under its $1.0 million revolving credit facility. NET INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST. The loss before income taxes and minority interest of $2.5 million is attributable to the large advertising expense relative to the level of sales in the period. LIQUIDITY AND CAPITAL RESOURCES Gum Tech's working capital declined from $12.5 million at December 31,1999 to $11.0 million at March 31, 2000. During the three-month period ended March 31, 2000, Gum Tech experienced an increase in cash from operating activities of approximately $1.2 million, due primarily to a decrease in accounts receivable of $5.5 million and an increase in accounts payable of $2.5 million. These increases were partially offset by the net loss from operations of $2.7 million, an increase in Zicam inventory of $2.1 million and increase in restricted cash of $1.8 million to cover advertising expenditures. Net cash flows from investing activities provided cash of approximately $1.55 million, consisting of $2.6 million from the exercise of options and warrants to purchase common stock, offset in part by approximately $800,000 of cash used to redeem the term loan with Textron. During this period, Gum Tech also paid off the remainder of the Citadel financing ($2.0 million of Senior Secured Notes and $1.0 million of Series A preferred stock) by issuing a total of 193,477 shares of common stock. As of the end of the period, neither Gum Tech nor Gel Tech LLC had any debt or preferred stock outstanding. Gel Tech LLC entered into a $1.0 million revolving credit facility with Imperial Bank in January 2000. Gel Tech has received from the lender a waiver from an earnings covenant included in the credit facility. Although no borrowings are currently outstanding, Gel Tech may borrow under the facility in the future. 10 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 Cold Remedy and Zicam Allergy Relief, lack of market acceptance for or uncertainties concerning the efficacy of both Zicam products, fluctuations in seasonal demand for Zicam Cold Remedy and Zicam Allergy Relief, difficulties inherent in securing a relationship with consumer products companies to develop and market nicotine and oral care gum products, including the failure to secure such relationships or to meet anticipated deadlines, 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 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 our 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. 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 and for the three months ended March 31, 2000 and we may not be profitable in the future. 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 Cold Remedy and Zicam Allergy Relief, two relatively new products. 11 IF OUR ZICAM PRODUCTS DO 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 Cold Remedy. Although studies have indicated that Zicam Cold Remedy can significantly reduce the duration and severity of the common cold, there is no guarantee that the product will achieve continuing acceptance by the market. If any unanticipated problem arises concerning the efficacy of Zicam Cold Remedy or the product fails to achieve widespread market acceptance for any reason, our prospects for our anticipated future operating results would be adversely affected. In addition, we recently launched a homeopathic allergy relief nasal gel known as Zicam Allergy Relief. If Zicam Allergy Relief does not achieve widespread market acceptance, our anticipated sales growth in the future would be adversely affected. WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS To the extent Zicam Cold Remedy 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 and allergy seasons, when we expect demand for Zicam Cold Remedy and Zicam Allergy Relief to peak, respectively. 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 immediate gum sales growth on a few customers. These customers include Herbalife, Breath Asure, Ranir, Heritage Consumer Products and PharmaGreen. While the decision to contract 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 the Zicam products, involves claims that these products assist in weight loss, promote dental hygiene, reduce the duration of the common cold, provide allergy relief, among others. Under FDA and FTC rules, we are required 12 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. 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 the Zicam products. 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. 13 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 16, 1996, a lawsuit was filed against Gum Tech International 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 judge's ruling on the motion for summary judgment is not yet final, and once final, will be subject to appeal. 14 On January 27, 1999, an action was filed against Gum Tech International 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. On June 2, 1999, Gum Tech 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 Gum Tech International 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 Bio Delivery Technology individuals to Gum Tech in 1996. BioDelivery 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 International, Inc. and Gel-Tech, L.L.C. in the United States District Court for the Eastern District of Pennsylvania. The complaint alleges that Zicam Cold Remedy infringes on a patent licensed to The Quigley Corporation. The complaint seeks compensatory damages and injunctive relief. In a ruling on April 20, 2000, the judge in the case denied a motion for preliminary injunctive relief and in an amended order on May 12, 2000, certified three issues of law for immediate appeal to the United States Court of Appeals for the Federal District. Each of the defendants denies the allegations of the complaint. ITEM 2. CHANGES IN SECURITIES None 15 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Registrant's Quarterly Report on Form 10-QSB for the period ending March 31, 1999, file number 000-27646). 3.2 Amended Bylaws of the Company (incorporated by reference to Registrant's Quarterly Report on Form 10-QSB for the period ending March 31, 1999, file number 000-27646. 3.3 Certificate of Designations, Preference and Rights of Series A Preferred Stock of Gum Tech International, Inc. (incorporated by reference to Registrant's Current Report on Form 8-K filed June 9, 1999, file number 000-27646). 27 Financial Data Schedule B. REPORTS ON FORM 8-K Gum Tech filed a report on Form 8-K on May 9, 2000 announcing the denial of Quigley's motion for a preliminary injunction in its patent infringement suit. 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Gum Tech International, Inc. /s/ Gary S. Kehoe ---------------------------------------- Gary S. Kehoe President and Chief Operating Officer /s/ William J. Hemelt ---------------------------------------- William J. Hemelt Chief Financial Officer, Treasurer & Secretary May 15, 2000 17