10-Q 1 e-6783.txt QUARTERLY REPORT FOR THE QTR. ENDED 03/31/2001 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, 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 7 Part II Other Information and Signatures Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Signatures 17 ZICAM IS A TRADEMARK OF GEL TECH LLC. 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
March 31, 2001 December 31, 2000 -------------- ----------------- 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 ------------ ------------ Total Current Liabilities 3,690,248 5,703,842 ------------ ------------ 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) (22,750,452) ------------ ------------ Total Stockholders' Equity 11,675,214 11,384,609 ------------ ------------ 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 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 27,983 91,645 Interest expense (25,512) (409,426) ----------- ----------- Total Other Income (Expense) 2,471 (317,781) ----------- ----------- Income (Loss) Before Provision For Income Taxes and Minority Interest (347,543) (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) (590,088) (2,716,158) Preferred stock dividends -- 12,005 ----------- ----------- Net Income (Loss) Applicable to Common Shareholders $ (590,088) $(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 $ (0.06) $ (0.31) =========== =========== Diluted: Weighted Average Number of Common Shares Outstanding 9,094,359 8,704,148 =========== =========== Net Income (Loss) Per Share of Common Stock $ (0.06) $ (0.31) =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 GUM TECH INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, --------------------------------- 2001 2000 ----------- ----------- Cash Flows From Operating Activities: Net income (loss) $ (590,088) $(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 ----------- ----------- 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. 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 812,810 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 Gum Tech had a net loss and their effect would be anti-dilutive. 3. 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 ========== 4. 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. 5 5. 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 June 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 April 12, 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. 6 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 20,003 104,022 124,025 Interest expense 48,250 46 48,296 ------------ ------------ ------------ Income (loss) before income taxes and minority interest $ 604,142 $ (951,685) $ (347,543) ============ ============ ============ 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: 7 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. 8 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 104,022 16 44,641 5 Interest expense 46 -- 409,426 45 ----------- --- ----------- --- Income (loss) before income taxes and minority interest $ (951,685) (142)% $(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. 9 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 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 decreased slightly from approximately $6.5 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, net of a decrease in cash restricted for advertising, of approximately $700,000. 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. 10 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. 11 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 second 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. 12 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. 13 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. 14 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 15 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 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 Executive Vice President and Chief Financial Officer May 15, 2001