UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(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, 2001
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.
(Name of registrant as specified in its charter)
UTAH 87-0482806
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
246 EAST WATKINS STREET
PHOENIX, AZ 85004
(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 9,226,251 shares of the registrant's common stock, no par value,
outstanding as of May 10, 2001.
GUM TECH INTERNATIONAL, INC.
FORM 10-Q
INDEX
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Balance Sheet
as of March 31, 2001 and December 31, 2000 1
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II Other Information and Signatures
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Signatures 18
ZICAM IS A TRADEMARK OF GEL TECH LLC.
Gum Tech International has restated its financial statements for the year ended
December 31, 2000 and for the three months ended March 31, 2001 to amortize a
payment of $1,625,000 that was received in November 2000 for the extension of a
contract over the three month term of the extension. The $1,625,000 was
originally recorded as income in 2000. For further information, please see Note
2 in the Notes to Condensed Consolidated Financial Statements beginning on Page
5.
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, 2001 December 31, 2000
-------------- -----------------
Current Assets:
Cash and cash equivalents $ 5,091,176 $ 3,485,204
Restricted cash 20,935 1,187,114
Accounts receivable:
Trade, net allowance for doubtful
accounts of $357,537 and $306,835 2,509,162 4,198,731
Employees -- 911
Inventories 2,154,512 3,056,782
Prepaid expenses and other 72,678 119,715
Interest receivable 4,110 --
Note receivable 150,000 150,000
------------ ------------
Total Current Assets 10,002,573 12,198,457
------------ ------------
Property and Equipment, at cost:
Machinery and equipment 5,857,076 5,255,308
Office furniture and equipment 370,164 350,076
Leasehold improvements 595,214 553,288
------------ ------------
Total Property and Equipment 6,822,454 6,158,672
Less accumulated depreciation (2,276,874) (2,166,093)
------------ ------------
Net Property and Equipment 4,545,580 3,992,579
------------ ------------
Other Assets:
Deposits and other 952,307 789,868
------------ ------------
Total Other Assets 952,307 789,868
------------ ------------
Total Assets $ 15,500,460 $ 16,980,904
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
1
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 2000
As Adjusted
March 31, 2001 (Note 2)
-------------- -----------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,896,509 $ 3,780,264
Customer deposits 134,455 64,862
Sales returns and allowances 659,283 855,760
Notes payable 1,000,000 1,000,000
Current portion of long-term debt 1 2,956
Deferred revenue -- 936,141
------------ ------------
Total Current Liabilities 3,690,248 6,639,983
------------ ------------
Long-Term Debt, net of current portion above:
Obligations under capital leases 1 2,956
Less current portion above (1) (2,956)
------------ ------------
Total Long-Term Debt -- --
------------ ------------
Minority interest in consolidated affiliate 134,998 (107,547)
------------ ------------
Stockholders' Equity:
Preferred stock: no par value, 1,000,000
shares authorized: Series A preferred stock,
$1,000 stated value, 2,000 shares authorized,
none issued and outstanding -- --
Common stock: no par value, 20,000,000 shares
authorized, 9,189,547 and 9,047,047 shares
issued and outstanding 31,314,225 30,459,362
Additional paid in capital 3,701,529 3,675,699
Accumulated deficit (23,340,540) (23,686,593)
------------ ------------
Total Stockholders' Equity 11,675,214 10,448,468
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,500,460 $ 16,980,904
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
2
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
--------------------------------
2001
As Adjusted
(Note 2) 2000
----------- -----------
Net sales $ 7,140,419 $ 4,026,980
Cost of sales 2,576,504 2,170,868
----------- -----------
Gross Profit 4,563,915 1,856,112
Operating expenses 4,654,525 5,003,343
Research and development 259,404 242,981
----------- -----------
Income (Loss) From Operations (350,014) (3,390,212)
----------- -----------
Other Income (Expense):
Interest and other income 964,124 91,645
Interest expense (25,512) (409,426)
----------- -----------
Total Other Income (Expense) 938,612 (317,781)
----------- -----------
Income (Loss) Before Provision For Income Taxes
and Minority Interest 588,598 (3,707,993)
Provision for income taxes -- 8,585
Minority interest in earnings (loss) of
consolidated affiliate 242,545 (1,000,420)
----------- -----------
Net Income (Loss) 346,053 (2,716,158)
Preferred stock dividends -- 12,005
----------- -----------
Net Income (Loss) Applicable to Common Shareholders $ 346,053 $(2,728,163)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 9,094,359 8,704,148
=========== ===========
Net Income (Loss) Per Share of Common Stock $ 0.04 $ (0.31)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 9,201,249 8,704,148
=========== ===========
Net Income (Loss) Per Share of Common Stock $ 0.04 $ (0.31)
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
3
GUM TECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
---------------------------------
2001
As Adjusted
(Note 2) 2000
----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $ 346,053 $(2,716,158)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 110,781 113,483
Amortization -- 160,659
Amortization of discount on notes payable -- 212,500
Compensation from issuance of warrants 25,830 --
Minority interest in earnings of consolidated affiliate 242,545 (1,000,420)
Changes in assets and liabilities:
Restricted cash 1,166,179 (1,763,168)
Accounts receivable 1,689,569 5,533,002
Employee receivable (3,199) 56,237
Inventories 902,270 (2,080,963)
Prepaid expenses and other 47,037 79,028
Deposits and other -- (162,655)
Accounts payable and accrued expenses (1,883,755) 2,517,601
Sales returns and allowances (196,477) 108,836
Customer deposits 69,593 99,950
Deferred revenue (936,141) --
----------- -----------
Net Cash Provided By Operating Activities 1,580,285 1,157,932
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (663,782) (86,787)
Deposits and other (162,439) (11,039)
----------- -----------
Net Cash (Used) By Financing Activities (826,221) (97,826)
----------- -----------
Cash Flows From Financing Activities:
Principal payments on notes payable (2,955) (862,087)
Issuance of common stock upon exercise of
options and warrants 854,863 2,568,968
Dividend distribution of subsidiary -- (145,000)
Dividends paid on preferred stock -- (12,005)
----------- -----------
Net Cash Provided By Financing Activities 851,908 1,549,876
----------- -----------
Net Increase in Cash and Cash Equivalents 1,605,972 2,609,982
Cash and Cash Equivalents at Beginning of Period 3,485,204 5,595,075
----------- -----------
Cash and Cash Equivalents at End of Period $ 5,091,176 $ 8,205,057
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 68,612 $ 36,268
Income taxes -- --
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Conversion of notes payable into common stock $ -- $ 2,000,000
Issuance of common stock to redeem preferred stock $ -- $ 1,000,000
The accompanying notes are an integral part of
these 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, 2001 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 2001. 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, 2000 previously filed with the Securities and
Exchange Commission.
2. The Company has restated its financial statements for the year ended
December 31, 2000 and for the three months ended March 31, 2001 to amortize
a payment of $1,625,000 that was received in November 2000 for the
extension of a contract over the three month term of the extension. The
$1,625,000 was originally recorded as income in 2000.
In the opinion of management, all material adjustments necessary to correct
the financial statements have been recorded. The impact of these
adjustments on the Company's financial results as originally reported is
summarized below:
Three Months Ended March 31, 2001
---------------------------------
As Reported As Restated
----------- -----------
Interest and other income $ 27,983 $ 964,124
Net income (loss) (590,088) 346,053
Net income (loss) per share (0.06) 0.04
3. 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.
The schedule below summarizes the elements included in the calculation of
basic and diluted net income (loss) per common share for the three months
ended March 31, 2001 and 2000. Options, warrants and other incremental
shares to purchase 744,246 and 1,225,096 shares of common stock at March
31, 2001 and 2000, respectively, were not included in the computation of
diluted earnings per share because their effect would be anti-dilutive.
Three Months Ended March 31,
----------------------------
2001 2000
----------- -----------
Net income (loss) applicable to common shareholders $ 346,053 $(2,728,163)
=========== ===========
Weighted average common shares outstanding:
Weighted average common shares
outstanding - Basic 9,094,359 8,704,148
Dilutive securities 106,890 --
----------- -----------
Weighted average common shares
outstanding - Diluted 9,201,249 8,704,148
=========== ===========
Net income (loss) per common share:
Basic $ 0.04 $ (0.31)
Dilutive $ 0.04 $ (0.31)
5
4. Inventories consisted of the following at March 31, 2001:
Raw materials and packaging $1,437,861
Work in progress 163,228
Finished goods 705,723
Less reserve for obsolescence (152,301)
----------
Total $2,154,511
==========
5. In September 2000, the Emerging Issues Task Force ("EITF") reached a
consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs," which requires any shipping and handling costs billed to
customers in a sale transaction to be classified as revenue. The Company
adopted Issue 00-10 in the fourth quarter of 2000 and has restated its 2000
financial statements to conform to the new financial statement
presentation.
6
6. Recent Developments
On March 14, 2001, Gum Tech entered into a definitive Asset Purchase
Agreement with Wm. Wrigley Jr. Company ("Wrigley"), a Delaware corporation,
which contemplates the sale of substantially all of Gum Tech's assets
related to its gum operations to Wrigley in exchange for $25,000,000 in
cash and other consideration. Gum Tech would retain certain assets,
including cash, accounts receivable, its 60% interest in Gel Tech, LLC,
which markets and distributes Zicam Cold Remedy and Zicam Allergy Relief,
and its 49% interest in a joint venture with Swedish Match to develop and
market a non-tobacco nicotine gum. Gum Tech's Board of Directors has
elected to submit the proposed sale of assets to Gum Tech's stockholders
for approval at a special meeting currently scheduled for July 19, 2001.
Management believes that the proposed sale of assets to Wrigley is in the
best interests of Gum Tech and its stockholders and will improve Gum Tech's
financial performance in the long-term. Since inception, Gum Tech has been
unable to achieve profitability with respect to its gum operations and
unable to obtain sufficient capital to effectively develop, market and
distribute its own brands. Furthermore, due to Gum Tech's inability to
increase sales attributable to its gum operations, Gum Tech has not been
able to maintain full capacity of its manufacturing plant. Additionally,
sales attributable to Gum Tech's contract manufacturing gum operations have
declined significantly due to financial difficulties encountered by several
of its major customers.
Gum Tech anticipates that the proceeds of the proposed sale of assets will
enable it to shed an unprofitable component of its operations and allow Gum
Tech to focus on marketing and promoting the Zicam line of products.
Furthermore, Gum Tech believes that it will be better positioned to pursue
other potential opportunities in the market for innovative nutrient and
drug delivery systems and provide financial support, if necessary, to our
joint ventures with Zensano, Inc. and Swedish Match AB.
Gum Tech intends to distribute a proxy statement to stockholders of record
on June 20, 2001 in connection with the special meeting. The proxy
statement will contain additional information about the proposed sale of
assets, including the Board's recommendation with respect to the Wrigley
transaction and the reasons underlying its recommendation. The proposed
sale of assets to Wrigley is subject to a number of closing conditions,
including, but not limited to, approval by Gum Tech's stockholders and
satisfaction or waiver of a number of conditions.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Gum Tech has a 60% interest in the capital and profits of Gel Tech, LLC but
reports financial results of Gel Tech, LLC on a consolidated basis. The
information that follows is an analysis of the Company's two business
segments--Zicam operations and chewing gum operations. Corporate expenses not
directly related to either of the Company's current business segments are
reflected in chewing gum operations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2000
The following table details certain financial information for our Zicam and
chewing gum operations for the three months ended March 31, 2001:
ZICAM CHEWING GUM CONSOLIDATED*
------------ ------------ ------------
Net sales $ 6,472,190 $ 668,229 $ 7,140,419
Cost of sales 1,613,320 963,184 2,576,504
------------ ------------ ------------
Gross profit 4,858,870 (294,955) 4,563,915
Operating expenses 4,130,542 597,241 4,727,783
Research and development 95,939 163,465 259,404
------------ ------------ ------------
Income (loss) from operations 632,389 (1,055,661) (423,272)
Interest and other income 20,003 1,040,163 1,060,166
Interest expense 48,250 46 48,296
------------ ------------ ------------
Income (loss) before income
taxes and minority interest $ 604,142 $ (15,544) $ 588,598
============ ============ ============
Net assets $ 6,498,470 $ 9,001,990 $ 15,500,460
- ----------
* Consolidated income statement is prior to the elimination of intercompany
transactions.
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,
---------------------------------------
2001 2000
----------------- ------------------
Net sales $ 6,472,190 100% $ 3,102,853 100%
Cost of sales 1,613,320 25 1,141,518 37
----------- --- ----------- ---
Gross profit 4,858,870 75 1,961,335 63
Operating expenses 4,130,542 64 4,460,483 144
Research and development 95,939 1 40,322 1
----------- --- ----------- ---
Income (loss) from operations 632,389 10 (2,539,470) (82)
Interest and other income 20,003 -- 47,004 2
Interest expense 48,250 1 -- --
----------- --- ----------- ---
Income (loss) before income
taxes and minority interest $ 604,142 9% $(2,492,466) (80)%
=========== === =========== ===
NET SALES. Net Zicam sales increased to approximately $6.5 million in the
three months ended March 31, 2001, or 109% above the $3.1 million sales level
the prior year. Approximately two-thirds of 2001 sales relate to Zicam Cold
Remedy and one-third to Zicam Allergy Relief. All of the sales in the first
quarter of 2000 relate to Zicam Cold Remedy. Sales of Zicam Cold Remedy
increased 35% above the prior year period, primarily due to increased customer
awareness and acceptance of the product resulting from Gel Tech's extensive
advertising and public relations efforts during the 2000-2001 cold season. The
difference in the severity and timing of cold seasons between the two years also
impacts the sales comparison. The 1999-2000 cold season peaked very early and
subsequently dropped off rapidly in the first quarter of 2000, whereas the
2000-2001 cold season began very slowly, but continued at a higher level into
the first quarter of 2001, resulting in a higher level of sales in the first
quarter of 2001.
Sales of Zicam Allergy Relief, which was introduced in early 2000,
benefited from the extensive advertising campaign for Zicam Cold Remedy. Zicam
Allergy Relief has not achieved the level of publicity or marketing attention as
Zicam Cold Remedy. Consequently, the Company intends to focus its marketing and
public relations efforts in the second and third quarters of 2001, during the
peak of the allergy season, on Zicam Allergy Relief.
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 operations realized a gross profit of $4.9 million
versus the prior year amount of approximately $2.0 million.
OPERATING EXPENSES. Operating expenses decreased to approximately $4.1
million from $4.5 million the prior year primarily due to a decrease in
advertising expenses.
RESEARCH AND DEVELOPMENT. Research and development expense primarily
reflects continuing research on both allergy and cold relief products.
9
INTEREST EXPENSE. Gel Tech recorded interest expense on its bank borrowing
facility and on loans from its two equity partners, which were repaid by March
31, 2001.
INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST. Gel Tech LLC
recorded income of approximately $600,000 versus a loss of approximately $2.5
million the prior year, primarily due to the higher sales level.
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,
-------------------------------------------
2001 2000
------------------- -------------------
Net sales $ 668,229 100% $ 924,127 100%
Cost of sales 963,184 144 1,029,350 111
----------- --- ----------- ---
Gross profit (294,955) (44) (105,223) (11)
Operating expenses 597,241 89 542,860 59
Research and development 163,465 25 202,659 22
----------- --- ----------- ---
Income (loss) from operations (1,055,661) (158) (850,742) (92)
Interest and other income 1,040,163 156 44,641 5
Interest expense 46 -- 409,426 45
----------- --- ----------- ---
Income (loss) before income
taxes and minority interest $ (15,544) (2)% $(1,215,527) (132)%
=========== === =========== ===
NET SALES. Net gum sales declined to approximately $668,000 from $924,000
the prior year. Although sales to the Company's existing gum customers will
fluctuate from period to period, the Company does not expect any significant
continuing growth in sales to result from these customers. Consequently, growth
in sales from gum operations is dependent upon the addition of new customers,
including the joint venture established with Swedish Match, and potential
relationships to develop and market gum products with other major consumer
products companies. There can be no assurance, however, that the Company will
finalize these or any other contractual arrangements, or that any of these
relationships will ultimately prove successful.
COST OF SALES. Cost of sales declined reflecting the lower sales level, but
increased as a percentage of sales due to the high level of fixed manufacturing
costs relative to the level of sales.
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.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
primarily due to differences between the two periods of amounts expended and
billed to the joint venture with Swedish Match for nicotine gum research.
10
INCOME (LOSS) FROM OPERATIONS. Gum operations lost approximately $1.1
million. 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 and other income increased primarily
due to amortization of deferred revenue from extension of a contract with P&G in
2000 of $936,000 and income realized by gum operations for barter credits used
by the Zicam operations in conjunction with the Zicam advertising program.
INTEREST EXPENSE. Interest expense decreased from the prior year period due
to the repayment of the gum operations debt in the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Gum Tech's working capital increased slightly from approximately $5.6
million at December 31, 2000 to approximately $6.3 million at March 31, 2001.
During the three-month period ended March 31, 2001, Gum Tech experienced an
increase in cash from operating activities of approximately $1.6 million, due
primarily to decreases in accounts receivable and inventories of approximately
$1.7 million and $900,000, respectively, offset in part by a decrease in
accounts payable and deferred revenue, net of a decrease in cash restricted for
advertising, of approximately $1,600,000.
Investing activities used cash of approximately $800,000 for capital
expenditures, while financing activities provided cash of approximately $900,000
through the issuance of stock upon exercise of options and warrants.
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
This report includes statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act") and Gum Tech claims the protection of the safe-harbor
for forward-looking statements contained in the Reform Act. These
forward-looking statements are often characterized by the terms "may,"
"believes," "projects," "expects," or "anticipates" and do not reflect
historical facts. Specific forward-looking statements contained in this report
include, but are not limited to (i) the expectation that the proposed sale of
assets to Wrigley will enable Gum Tech to improve its financial performance in
the long-term; (ii) the belief that Gum Tech will be better positioned following
the proposed sale of assets to Wrigley to pursue other potential opportunities
in the market for innovative nutrient and drug delivery systems; (iii) the
expectation that the use of proceeds from the proposed sale of assets to Wrigley
to increase the marketing of the Zicam line of products will result in
significant growth and revenue from sales of those products; (iv) the belief
that the joint venture with Swedish Match will lead to development of a
non-tobacco nicotine product that will substantially increase revenue to Gum
Tech; and (v) the Company's belief that it will be able to satisfy all the
closing conditions to the proposed sale of assets to Wrigley on a timely basis.
11
Forward-looking statements involve risks, uncertainties, and other factors
that may cause actual results, performance, or achievements to be materially
different from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially from Gum
Tech's expectations include, but are not limited to, the following: (i) failure
to close the sale of assets to Wrigley due to the inability to satisfy one or
more closing conditions; (ii) less than anticipated demand for our chewing gum
or nasal gel products, including Zicam Cold Remedy and Zicam Allergy Relief;
(iii) lack of market acceptance for or uncertainties concerning the efficacy of
the Zicam line of products; (iv) fluctuations in seasonal demand for the Zicam
line of products; (v) difficulties in increasing production to meet unexpectedly
high demand in the short term; (vi) a decrease in the level of reorders from
existing customers; (vii) financial difficulties encountered by one or more of
our principal customers; (vii) difficulties in obtaining additional capital for
marketing, research and development, and other expenses; (ix) the possibility of
material charges that may be incurred as a result of prior activities; (x)
unavailability of third-party material products at reasonable prices; (xi)
inventory obsolescence due to shifts in market demand; and (xii) material
litigation involving patent and contractual claims, product liabilities and
consumer issues.
WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS
We have recorded losses in each of the last several years and 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
business that has not yet achieved profitable operations, the significant
changes in strategy in early 1998 and 2000, the significant change in operations
that will result from the proposed sale of assets to Wrigley, and the
development and marketing of Zicam Cold Remedy and Zicam Allergy Relief, both
relatively new products.
OUR RELIANCE UPON A FEW GUM CUSTOMERS HAS NEGATIVELY IMPACTED 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. In 1999, we achieved some success in building gum
sales through the addition of and increased sales to Herbalife, BreathAsure,
Ranir, Heritage Consumer Products and PharmaGreen. However, sales to these
customers dropped significantly in 2000, primarily due to financial difficulties
experienced by certain of these customers. Further, Heritage Consumer Products
ceased operations in late 2000 and BreathAsure filed for reorganization under
the bankruptcy statutes. While sales to new customers, including the successor
companies to Heritage and BreathAsure, may offset some or all of this decline,
Gum Tech will continue to be dependent on the financial resources and marketing
capabilities of third parties for its gum operations. Further, we are at risk
for their non-payment or late payment for amounts owed to us. Assuming we are
unable to complete the sale of assets to Wrigley, we intend to add to this
portfolio of customers to reduce the risk of non-performance by any single
customer, and to focus on the addition of larger, more established consumer
companies, although we have not yet been successful in these efforts.
12
IF THE PROPOSED SALE OF ASSETS TO WRIGLEY IS COMPLETED, WE MAY ENCOUNTER
DIFFICULTIES IN EXPANDING OUR OPERATIONS
Assuming the proposed sale to Wrigley is completed as expected in the third
quarter of 2001, there can be no guarantee that Gum Tech will not encounter
difficulties in expanding its remaining operations. If completed, the sale of
assets will require Gum Tech to replace or continue without its research and
development personnel and capabilities, including the full-time services of Gary
Kehoe, sublease or obtain a new lease for its principal executive offices, and
determine how to most effectively apply the proceeds received from the sale of
assets. There can be no assurance that Gum Tech will be successful in addressing
these issues.
IF ZICAM COLD REMEDY AND ZICAM ALLERGY RELIEF DO NOT GAIN MARKET WIDESPREAD
ACCEPTANCE, OUR ANTICIPATED SALES AND RESULTS OF OPERATIONS WILL SUFFER
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 widespread 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 future operating results would be adversely affected. In
addition, Zicam Allergy Relief has only been recently introduced and as yet has
not achieved the success enjoyed by Zicam Cold Remedy. There is no assurance
that demand for these products will continue to grow.
WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS
To the extent Zicam Cold Remedy or Zicam Allergy Relief 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 sales of the two Zicam products to peak.
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 or new products
in the innovative nutrient and drug delivery system market on a timely basis,
our business, operating results, and financial condition could be materially
adversely affected.
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OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES
The marketing of certain of our nasal gel and chewing gum products,
including both Zicam products, involves claims that these products reduce the
duration of the common cold, relieve allergy symptoms, assist in weight loss,
and promote dental hygiene, among other claims. 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 nasal gel and chewing gum products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. 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 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 our chewing gum
brands and the Zicam line of 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.
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.
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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 our 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. In addition, if the proposed sale of assets to Wrigley is
completed, Wrigley will purchase 200,000 shares of our common stock and will
have the right to sell that stock after the six-month anniversary of the closing
subject to certain volume limitations. The decision by Wrigley to sell a
substantial amount of these shares in a short period of time also could
adversely affect the market 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.
PATENT LITIGATION CLAIM BY QUIGLEY COULD RESULT IN DAMAGES OR INJUNCTION.
The Quigley Corporation ("Quigley"), in a complaint filed against us and
Gel Tech, alleges that the sale of Zicam infringes on a patent licensed to
Quigley. Although we believe in the merits of our defense against this complaint
and intend to vigorously defend this action, we could be subject to substantial
damages or an injunction preventing us from selling Zicam Cold Remedy if the
decision in the case is unfavorable to us. In such case, our business and
results could be materially and adversely affected until the May 2002 expiration
of their patent.
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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 ruling dismissing Gum Tech and certain
other plaintiffs has been appealed to the U.S. Court of Appeals for the Ninth
Circuit. We 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.).
Following a private placement we completed in June 1999, DJ sent us a letter
demanding a placement fee based on an agreement between the parties dated
December 1996. Our complaint sought a declaratory judgment that DJ was not owed
any fee under this agreement. 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 November 9, 1999, The Quigley Corporation commenced a civil action
against Gum Tech and Gel Tech, LLC 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. This case is scheduled for trial
before the district court in June 2001. Each of the defendants denies the
allegations of the complaint and intends to vigorously defend this action.
On November 8, 2000, Gel Tech, LLC filed a complaint in the U.S. District
Court for the District of Arizona against AccuMed, Inc. CIV 00-141-PHX-PGR. Our
complaint alleges claims of patent infringement, copyright infringement, and
unfair competition concerning a cold remedy product manufactured and distributed
by AccuMed. We seek compensatory damages and injunctive relief.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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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).
10.1 Asset Purchase Agreement between Gum Tech and Wm. Wrigley Jr.
Company (incorporated by reference to the Registrant's Report on
Form 10-K for the year ending December 31, 2000 filed April 2,
2001, file number 000-27646).
B. REPORTS ON FORM 8-K
None
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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
Executive Vice President and
Chief Financial Officer
June 13, 2001
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