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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2000, 1999 and 1998
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 No. 0-21015
CELL TECH INTERNATIONAL INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3345046
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
565 Century Court
KLAMATH FALLS, OREGON 97601
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (541) 882-5406
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant (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 |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. The
aggregate market value of the 800,000 shares of registrant's voting stock held
by non-affiliates of the registrant was $160,000 as of August 24, 2001, based on
the closing price of the registrant's common stock on the National Quotation
Bureau's Pink Sheets or $0.20 per share.
The number of shares outstanding of the registrant's sole class of common stock,
par value $0.01 per share, as of August 24, 2001, the latest practicable date,
was 10,640,895.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CELL TECH INTERNATIONAL INCORPORATED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
TABLE OF CONTENTS
CELL TECH INTERNATIONAL INCORPORATED...........................................I
INTRODUCTION...................................................................4
PART I.........................................................................4
ITEM 1. BUSINESS. 4
ITEM 2. PROPERTIES. 20
ITEM 3. LEGAL PROCEEDINGS. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 21
PART II.......................................................................22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS. 22
ITEM 6. SELECTED FINANCIAL DATA. 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION. 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. 41
PART III......................................................................43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 43
ITEM 11. EXECUTIVE COMPENSATION. 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 55
PART IV.......................................................................57
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K 57
SIGNATURES....................................................................63
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Special Note Regarding Forward-Looking Statements
Some of our statements under "Business," "Properties," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Quantitative and Qualitative Disclosures about Market
Risk," the Notes to Consolidated Financial Statements and elsewhere in this
report constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements are subject to certain events, risks and uncertainties
that may be outside our control. Some of these forward-looking statements
include statements of:
o management's plans, objectives and budgets for its future operations
and future economic performance;
o capital budget and future capital requirements;
o meeting future capital needs;
o realization of any deferred tax assets;
o the level of future expenditures;
o impact of foreign currency translations;
o impact of recent accounting pronouncements;
o the outcome of regulatory and litigation matters; and
o the assumptions described in this report underlying such
forward-looking statements.
Actual results and developments may materially differ from those expressed
in or implied by such statements due to a number of factors, including:
o those described in the context of such forward-looking statements;
o future product development and manufacturing costs;
o changes in our incentive plans;
o timely development and acceptance of new products;
o the markets of our domestic and international operations;
o the impact of competitive products and pricing;
o the political, social and economic climate in which we conduct
operations; and
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o the risk factors described in other documents and reports filed with
the Securities and Exchange Commission.
In some cases, forward-looking statements are identified by terminology
such as "may," "will," "should," "could," "would," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "approximates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor anyone
else assumes responsibility for the accuracy and completeness of such statements
and is under no duty to update any of the forward-looking statements after the
date of this report.
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INTRODUCTION
As HumaScan Inc. ("HumaScan"), we suspended all of our business operations
in December 1998 and due to lack of resources, did not timely file a Form 10-K
for our years ended December 31, 2000, 1999, and 1998 or a Form 10-Q for either
of the quarters ended March 31, 2000, June 30, 2000, September 30, 2000, March
31, 1999, June 30, 1999 or September 30, 1999. As further described below in
"Business -- History of the Company," in August 1999 we concluded a
reorganization (the "Reorganization") whereby we acquired two related
privately-owned businesses, The New Earth Company, Inc. ("NEC") and The New
Algae Company, Inc. ("NAC") in exchange for the issuance of stock representing,
on August 6, 1999, approximately 92% (approximately 86% on a fully diluted
basis) of HumaScan's outstanding common stock. On August 10, 1999, we changed
our name to Cell Tech International Incorporated. Unless otherwise specifically
stated, references to "we" and "us" in this Form 10-K refer: (a) for periods
prior to the Reorganization, to the historical operations of HumaScan and (b)
for periods following the Reorganization, to the operations of Cell Tech
International Incorporated, including its wholly owned subsidiaries NEC and NAC.
This Form 10-K is filed for the fiscal years ended December 31, 2000, 1999
and December 31, 1998 and in lieu of separate Forms 10-K for such years and
Forms 10-Q for the first three fiscal quarters of 2000 and 1999. All share and
per share information in this Form 10-K have been adjusted to reflect the 1 for
10.8520933 stock split effected on August 10, 1999.
PART I
ITEM 1. BUSINESS.
Overview
We develop and distribute products made with Aphanizomenon flos-aquae
(trade name Super Blue Green(R) Algae) ("SBGA") through a network of independent
distributors ("Distributors"). We currently offer sixteen different products
intended to appeal to health-conscious consumers. Our products are divided into
five product lines including Daily Health Maintenance, Digestive Health,
Defensive Health, Powdered Drinks and Snacks, and Animal and Plant Food.
We harvest SBGA and manufacture most of our products at our modern
production facilities in Klamath Falls, Oregon. We market our products through
independent Distributors located in all fifty states, the District of Columbia,
Guam, Puerto Rico, American Samoa, the Virgin Islands and Canada. We encourage
our Distributors to recruit interested people as new Distributors for our
products. These recruits are placed beneath the recruiting Distributor in the
"network" and are referred to as the distributor's "downline" or "organization."
Distributors earn commissions on sales by their organizations as well as retail
profits on the sales they generate directly. We assist Distributors in
establishing their own businesses and provide support programs such as audio and
videotapes for training, empowerment teams, seminars and an annual convention
called the August Celebration at our headquarters. We are currently considering
establishing additional channels of distribution, such as marketing to TV
viewers through infomercials. On May 18, 2001, we began airing a limited number
of infomercials, on a
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test basis, as an additional marketing and distribution method. This additional
distribution method may create conflicts with our Distributors that could result
in the loss of many of our Distributors, which in turn would mean a decline in
our sales volume and would be detrimental to our business and result in losses
from our operations; however, our tests results, and the responses that we have
received from Distributors, indicate that there are no conflicts with our
present distribution methods.
History of the Company
We were formed under the name "HumaScan Inc." in 1994 to manufacture and
market in the United States and Canada a device called the BreastAlert(TM)
Differential Temperature Sensor, a non-invasive, easy to use, adjunctive test
for use as part of a breast disease monitoring program (the "BreastAlert
Device"). We commenced shipments of the BreastAlert Device in December 1997. In
November 1998, we announced that we were in the process of evaluating various
strategic alternatives, as we did not have adequate resources for the completion
of clinical trials and marketing of the BreastAlert Device. Before the end of
1998, as a result of the lack of adequate financing, we terminated all employees
and suspended all operations, focusing substantially all of our efforts on
obtaining new financing and/or restructuring the business. The Board of
Directors then entered into consulting agreements with three former key
employees to negotiate settlement agreements with Scantek Medical, Inc.
("Scantek") to terminate the license agreement and negotiate settlements with
other creditors, and explore the possibilities for restructuring and/or
reorganizing the business.
In March 1999, we concluded a settlement agreement with Scantek that
terminated the license for the technology used in the BreastAlert Device.
Certain assets related to the licensed business were transferred to Scantek and
additional shares of common stock were issued to Scantek and an affiliated
company as consideration for release of all obligations concerning the license
agreement. We also received a cash payment from Scantek, which was applied to
some of our other outstanding obligations.
On July 16, 1999, we entered into an Agreement and Plan of Reorganization
(the "Reorganization Agreement") with Daryl J. Kollman and Marta C. Kollman (the
"Kollmans"). The Reorganization Agreement provided for the exchange ("Exchange")
of all the outstanding shares of The New Earth Company, Inc. ("NEC") and The New
Algae Company, Inc. ("NAC") for shares of our common stock and preferred stock
that together represented, on August 6, 1999, approximately 92% of our
outstanding common stock (including the common stock issuable upon conversion of
the preferred stock). The reorganization was completed on August 6, 1999. On
August 10, 1999, we changed our name to Cell Tech International Incorporated.
Cell Tech, Inc. and NEC were formed in 1982 and 1988, respectively, to
develop and distribute products made from a unique natural strain of blue green
algae growing in massive quantities in Upper Klamath Lake in southern Oregon -
the algae we now call SBGA. In 1990, NAC was formed and acquired the assets of
Cell Tech, Inc. and began doing business under the trade name Cell Tech. Through
1999, NAC housed the sales organization, and provided the research and
development and administrative functions of our business, while NEC handled the
harvesting and manufacturing of our products. Beginning in 2000, NAC took over
these functions and NEC became inactive.
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Our principal executive offices are located at 565 Century Court, Klamath
Falls, Oregon 97601; our telephone number at that address is (541) 882-5406; and
our internet address is www.celltech.com.
Industry Overview
According to Nutrition Business Journal, total domestic retail sales of
nutritional supplements - including vitamins, herbs/botanicals, sports nutrition
minerals and meal supplements - during 2000 were approximately $16.7 billion.
According to Packaged Facts, the nutrition industry (which includes supplements)
has grown at a 15% compounded annual rate for the last four years and is
expected to grow at a 13% compounded annual rate from 1998 to 2003. According to
Packaged Facts, this growth stems from the passage of the Dietary Supplement and
Health Education Act of 1994, a growing body of scientific research showing the
benefits of vitamins, the introduction of new types of nutritional supplements,
increased consumer interest in nutritional and alternative medicine and changing
attitudes within the medical community. We believe, however, based on informal
discussions with industry professionals and our own experience that this rate of
growth will decline in 2001.
The primary distribution channels in the nutritional supplements industry
consist of mass-market retailers (including mass merchandisers, drug stores,
supermarkets, discount and convenience stores), health and natural food stores,
direct sales and mail order organizations, practitioners and the Internet.
Retail is the largest of these channels, accounting for 84% of sales during
2000, according to Nutrition Business Journal. The retail channel includes food
stores, drugstores, mass merchandisers and health/natural food stores. Direct
selling accounted for 16% of sales during 2000.
The Nutrition Business Journal also reports that the potential for natural
and healthier products to penetrate mainstream product categories looks
promising--and is still largely untapped. Dietary supplements sales of $16.7
billion are less than 10% of over-the-counter medicine and prescription drug
sales. Natural and organic food sales of $11.8 billion represent barely 2% of
the U.S. food industry (only 1.5% when food service is included). Functional
foods sales at $17.2 billion, even when broadly defined as manufactured foods
with any ingredient added specifically for health purposes, still account for
only 3.5% of the U.S. food industry. Natural personal care products, even more
loosely and broadly defined than natural food, had sales of $3.6 billion in 2000
and are just 10% of total health & beauty care spending. The $50 billion
nutrition industry accounted for just 7% of the $680 billion food, medicine,
health and personal care products market in the United States in 2000.
The international nutritional supplement market is more fragmented than
the domestic market. As a result, industry data is not readily available.
However, many of the demographic and other trends and events present in the
domestic market, are also present in the international market.
Growth Strategy
Public awareness of the positive effects of nutritional supplements on
health has been heightened in the last several years by widely publicized
reports and medical research findings indicating a correlation between the
consumption of nutrients and the reduced incidence of
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certain diseases. The United States government and universities generally have
increased sponsorship of research relating to nutritional supplements. For
example, Congress has established an Office of Alternative Medicine and an
Office of Dietary Supplements within the National Institutes of Health to foster
research into alternative medical treatment modalities and the role of dietary
supplements in maintaining health and preventing disease, respectively. However,
according to a published report in the Los Angeles Times on February 11, 2001,
nutritional supplement sales may decline as a result of questions about the
efficiency and safety of such supplements.
We believe that the aging of the United States population, together with a
corresponding increased focus on preventative health care measures, will
continue to result in increased demand for certain nutritional supplement
products despite negative publicity of the type described in the Los Angeles
Times article. According to the United States Bureau of the Census, the
35-and-older age group of consumers, which represents a large majority of the
regular users of vitamin and mineral supplements, is projected to grow
significantly faster than the general United States population through 2010.
Our growth strategy is to capitalize on the increased interest in
nutritional supplements described above by increasing product sales through
existing distribution channels in the U.S. and Canada and expanding into new
markets. In particular, we believe that the growth of our Company may be
achieved by achieving the following:
o We will introduce new products complementary to our current product
lines. Our product development strategy is to expand our existing
product lines to complement our current products. We will rely on
our own on-going research and development and results of university
research on the indications on human health of SBGA consumption.
o We intend to introduce alternative distribution channels through
infomercials. Our ability to establish distribution through
infomercials will be dependent upon our ability to increase our
working capital in order to pay for the costs associated with
infomercials.. Our product distribution strategy is to provide
complementary marketing methods for our Distributors. On May 18,
2001 we began airing a limited number infomercials, on a test basis,
as an additional marketing and distribution method.
o We have introduced an enhanced compensation plan and other promotion
and recognition programs to provide additional incentives to our
Distributors. Our ability to increase sales is significantly
dependent on our ability to attract, motivate and retain
Distributors. We utilize an innovative marketing program that we
believe is competitive with programs offered by many other network
marketing companies. This program provides financial incentives,
including several forms of commission (bonus), optional Distributor
training and support, no sign-up costs, inventory requirements, and
low monthly purchase requirements. We intend to reach potential new
Distributors through increased advertising, teleconferencing and
regional sales and training meetings. Successful management of
Distributors supports the retailing of products as well as the
recruitment of new Distributors.
o We will tackle international markets by entering into marketing
distribution agreements for Europe and Asia. We believe that growth
potential exists in international markets and will seek to enter
into international distribution agreements.
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o We will seek to enter into agreements and joint ventures with
strategic partners. We believe that opportunities exist with various
strategic partners that may improve our ability to market and
distribute our products, enter into new markets and provide our
Distributors with new products that complement our existing product
lines.
Products
Our product line consists primarily of consumable products that are
targeted to those consumers with an interest in natural alternatives for health
and nutrition. In developing our product line, we have emphasized quality,
purity, potency, and safety. We offer a line of approximately sixteen products
that can be divided into five categories, including Daily Health Maintenance,
Digestive Health, Defensive Health, Powdered Drinks and Snacks, and Animal and
Plant Food, as further described below the chart.
The following chart list our products and the categories targeted by each,
as of August 24, 2001:
--------------------------------------------------------------------------------------------------------------------------
Daily Health Digestive Defensive Powered Drinks Animal and
Maintenance Health Health and Snacks Plant Food
--------------------------------------------------------------------------------------------------------------------------
Super Blue Green(R) Alpha Sun(R) Energy for the X
Entire Body
--------------------------------------------------------------------------------------------------------------------------
Super Blue Green(R) Omega Sun(R) Energy for the X
Mind
--------------------------------------------------------------------------------------------------------------------------
Acidolphilus X
--------------------------------------------------------------------------------------------------------------------------
Bifudus X
--------------------------------------------------------------------------------------------------------------------------
Spectrabiotic(R) X
--------------------------------------------------------------------------------------------------------------------------
Internal Cleansing System X
--------------------------------------------------------------------------------------------------------------------------
Super Blue Green(R) Enzyme X
--------------------------------------------------------------------------------------------------------------------------
Super Sprouts & Algae X
--------------------------------------------------------------------------------------------------------------------------
Super Q10 X
--------------------------------------------------------------------------------------------------------------------------
Alpha Gold Promoting Physical Well-being X
--------------------------------------------------------------------------------------------------------------------------
Omega Gold Enhancing Mental Well-being X
--------------------------------------------------------------------------------------------------------------------------
Super Sun Smoothies X
--------------------------------------------------------------------------------------------------------------------------
Mazama Mix X
--------------------------------------------------------------------------------------------------------------------------
Cell Tech Essentials X X X
--------------------------------------------------------------------------------------------------------------------------
Super Blue Green(R)Animal Food X
--------------------------------------------------------------------------------------------------------------------------
PLANeT Food(R) X
--------------------------------------------------------------------------------------------------------------------------
Daily Health Maintenance
o Super Blue Green(R) Alpha Sun(R) Energy for the Entire Body. Alpha
Sun(R) is whole, complete algae. Because its cell walls contain a
high percentage of floridan starch, it
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provides natural sugars critical to the health and vitality of
tissues and cells. Alpha Sun(R) also contains high concentrations of
easily assimilated vital minerals. It is available in capsules and
tablets.
o Super Blue Green(R) Omega Sun(R) Energy for the Mind. Omega Sun(R)
is the heart of the algae with the cell wall carefully removed
through a special separation process. This super-concentrated food
contains a higher overall amino acid content than Alpha Sun(R). It
is a source of raw materials for building the neuro-peptides
associated with brain activity. It is available in capsules and
tablets.
o Cell Tech Essentials. Cell Tech Essentials, named for our most
essential products, is a repackaging of them. It attains a new level
of convenience and effectiveness and, at $40.00 per bag, a new level
of value. Each packet contains the following capsules: one Alpha
Sun(R), one Omega Sun(R), one Acidophilus, one Bifidus, and two
Enzymes.
Digestive Health
o Acidophilus. Acidophilus (Lactobacillus acidophilus) is the first of
our probiotic products and operates in the small intestine. Without
proper cleansing, the small intestine can fill with wastes and
harmful by-products that impair natural digestive functions. Our
Acidophilus helps process food quickly and eliminate waste. It is a
single-strain beneficial bacteria called DDS-1a Acidophilus, which
helps keep harmful bacteria out by colonizing the walls of the small
intestine and by secreting substances that prevent the growth of
unfriendly bacteria. Each capsule is carefully micro blended with 85
milligrams of Super Blue Green(R) Omega Sun(R) Algae.
o Bifidus. Bifidus (Bifidobacterium bifidum) is the second of our
probiotic products. While Acidophilus serves the small intestine,
Bifidus is for the large intestine. The large intestine absorbs the
water from food and passes the remaining waste out of the body. A
good intestinal flora in the large intestine can help prevent gas,
bloating and diarrhea. Our Bifidus helps repopulate the large
intestine with friendly bacteria, restoring the healthful
environment it needs to do its job well. Each capsule is micro
blended with 85 milligrams of Super Blue Green(R) Omega Sun(R)
Algae.
o Spectrabiotic(R). Spectrabiotic(R) is designed to complement
Acidophilus and Bifidus in providing a complete system for building
and maintaining healthy intestinal flora. In the Spectrabiotic(R)
formula, eight key "good bacteria" are micro blended with 85
milligrams of Super Blue Green(R) Omega Sun(R) Algae, providing the
entire digestive tract with probiotic support, especially when
combined with a regular program of Acidophilus and Bifidus.
Spectrabiotic(R) also contains Jerusalem artichoke, acerola, and
rose hips.
o Internal Cleansing System. The New Seasons Cleansing System is a
two-product program that is designed to assist the body's natural
elimination systems. The Herbal Formula supports the processes that
remove toxins from the tissues of the body; then the Fiber Formula
helps the body eliminate those toxins.
o Super Blue Green(R) Enzymes.Our Super Blue Green(R) Enzymes contains
a full range of food enzymes to help break down all types of foods,
including fats, carbohydrates, protein and fiber. Super Blue
Green(R) Enzymes is micro blended with 25 milligrams of Alpha
Sun(R), adding specific vitamins and minerals many enzymes need for
optimum functioning.
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o Super Sprouts & Algae. Super Sprouts & Algae is a unique product
combining the nutritional benefits of three "superfoods" from three
natural environments -- land, lake and sea: a super concentration of
custom-grown wheat sprouts; Super Blue Green(R) Alpha Sun(R) Algae;
and Super Red Beta Algae (Dunaleilla salina), a strain of marine
algae. These three superfoods together supply the body with
antioxidant nutrition to neutralize the effects of highly unstable,
reactive molecules known as free radicals. Two tablets of Super
Sprouts & Algae provide over 100% of the RDA for vitamin A. Each
tablet contains 540 milligrams of wheat sprouts, 60 milligrams of
Super Blue Green(R) Alpha Sun(R) Algae and 25 milligrams of Super
Red Beta Algae.
o Super Q10. Super Q10 contains Super Blue Green(R) Alpha Sun and a
special enzyme enhancer called coenzyme Q10. This nutrient has been
shown to be beneficial for functioning of the heart, muscles, and
the nervous and immune systems. It is especially important in
helping the mitochondria, or powerhouses of cells, to generate
energy. Super Q10 is a synergistic combination of pure premium
coenzyme Q10 with 85 milligrams of Super Blue Green(R) Alpha Sun(R)
Algae and is a way to assist cells in converting nutrients into
energy.
Defensive Health
o Alpha Gold. Promoting Physical Well-being. Alpha Gold contains a
carefully chosen group of ingredients, each with documented health
benefits, that works synergistically with Super Blue Green(R) Algae
to facilitate overall good health. Alpha Gold contains bee pollen to
increase stamina, vitality and athletic performance; noni to help
stimulate the immune system; turmeric to help protect against
environmental contaminants; and gluten-free sprouted wheat grass
juice, which contributes a variety of assimilative enzymes. This
product is available in capsules or powder.
o Omega Gold. Enhancing Mental Well-being. In addition to the
ingredients found in Alpha Gold, Omega Gold also contains ginkgo
biloba, which increases circulation to the brain and has effects
upon memory, clarity and mental alertness. Siberian ginseng is added
to stimulate both mental and physical performance. This product is
available in capsules or powder.
Powdered Drinks and Snacks
o Super Sun Smoothies. Super Sun Smoothies are all-vegetable powder
shake mixes. Super Sun Smoothies are made with premium ingredients,
are dairy free and contain no preservatives, yeast artificial
flavorings or colorings. They also provide the "superfood" benefits
of 500 milligrams of Super Blue Green(R) Alpha Sun(R) and 500
milligrams of Omega Sun(R) Algae blended into every scoop.
o Mazama Mix. Mazama Mix is a nutrient-rich green drink derived from
all-natural whole food sources. It contains minerals and trace
minerals that we believe are essential for the proper functioning of
the body. This product is designed to help enhance overall health,
vitality and energy levels.
Animal and Plant Food
o Super Blue Green(R) Animal Food. Super Blue Green(R) Animal Food is
a blend of coarse-grade Alpha Sun(R) and Omega Sun(R) Algae,
providing the fundamental building blocks for strengthening the
immune system of animals. The broad spectrum of organic minerals,
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vitamins, amino acids, enzymes and the supply of beta carotene and
chlorophyll found in Super Blue Green(R) Algae is readily absorbed
by animals. Super Blue Green(R) Animal Food is sprinkled over the
pets' food.
o PLANeT FOOD(R). PLANeT FOOD(R) is designed to add trace minerals and
other components to soils. It is a mixture of volcanic rock dust
from Colorado and algae from Klamath Lake and is sold for use on
potted plants, lawns, gardens, and trees and for composting.
Distributors and Our Network Marketing System
Our products are distributed through a network marketing system of
Distributors. Distributors are independent contractors who purchase products
directly from us for resale to retail consumers. Distributors may elect to work
on a full-time or a part-time basis. We believe that our network marketing
system is well suited to marketing our nutritional supplements and other
products because sales of such products are strengthened by ongoing personal
contact between retail consumers and Distributors, most of whom use our
products. Currently, we have Distributors in all fifty states, the District of
Columbia, Guam, Puerto Rico, American Samoa, Virgin Islands and Canada.
Each Distributor has the opportunity to sponsor additional Distributors,
which can enhance the original Distributor's income, as described below. Each
new Distributor that is sponsored, as well as his or her own "downline" groups,
becomes a member of the Distributor's organization or "downline."
Commission System
We currently offer two categories of membership. The first category is
called a "Distributor" and the other is called a "Preferred Customer."
Distributors are interested in receiving commissions for their own purchases as
well as for purchases made by members enrolled in their "downline." A Preferred
Customer ("PC") is a custormer who is interested in consuming our products, but
is not interested in the business opportunity we offer to our Distributors. Many
PCs eventually become Distributors. Both categories of membership purchase our
products at wholesale prices.
Distributors are compensated through a Distributor commission system that
encourages both retail selling and sales organization management. Distributors
may derive income from several sources. First, Distributors may receive revenues
by purchasing our products at wholesale prices and selling them to customers at
retail prices. Second, Distributors earn the right to receive bonuses
(commissions) based upon purchases by members of their "downline" or sales
marketing organization. Each new Distributor that a Distributor sponsors becomes
a member of his selling organization or "downline." The Distributors that a
Distributor directly sponsors are referred to as his "first generation" or first
level.
The first level is "Member" and the highest level is "Executive."
Distributors may attain "Member" status by purchasing any product from Cell
Tech. There are two intermediary levels between Member and Executive:
Representative and Leader. A Distributor achieves higher levels in the bonus
structure primarily through increased purchases by Distributors sponsored
directly by them (their first level) and in their personal group. The
requirements for a Distributor
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to reach the first "Executive" level are monthly personal purchases of at least
$100 and monthly group volume of $500. For each "Executive" level attained
thereafter, the Distributor must maintain monthly personal purchases of at least
$100 and monthly group volume of at least $500. The program is such that each
month a Distributor must qualify at that level to be paid at that level. The
advantage to this is that the Distributors must remain active in purchasing and
sponsoring to retain their bonuses, but if they do not qualify in a certain
month, their income is only reduced that one month.
The Distributor commission system includes three kinds of bonuses, as
described below:
Standard Bonus. The standard bonus is available to any Distributor who has
an "active" status with us. Distributors may attain the title of "Assistant
Leader" by purchasing a minimum of $50 of products in a month. The percentages
used to determine the bonus and the number of levels in the organization the
Distributor receives bonuses upon is based on the individual's title with us.
The standard bonus grants rebates to the Distributor as he consumes and sells
our products to others.
Executive Generation Bonus. A second form of bonus is available to those
who have Executives in their downline. Based on the number of "Executives" they
have at each level, and assuming certain minimum personal purchases each month,
Distributors receive a percentage of such Executives' standard bonus as an
additional bonus.
Blue-Green Diamond Bonus. Finally, those Executives attaining the highest
levels in our structure are eligible to receive an additional bonus called the
"Blue-Green Diamond Bonus" which is a percentage of the gross commissionable
sales volume for the year.
We believe that the opportunity of Distributors to earn bonuses
contributes significantly to our ability to retain our productive Distributors.
The Distributor commission system encourages promotion to higher commission
levels by enabling Distributors to earn commissions on a deeper sales base
(i.e., more levels of their organization). We believe that this will encourage
sponsoring growth (depth) in an organization and not just acquiring customers
personally.
To become a Distributor, a person must simply sign an agreement to comply
with our policies and procedures. No investment is necessary to become a
Distributor. We consider, as of August 24, 2001, approximately 51,151 of our
Distributors to be "active," that is, an individual Distributor who has ordered
at least $50 of our products during the preceding 6-month period.
Training
We regularly sponsor opportunity meetings in various key cities and
participate in motivational and training events in various market areas,
designed to inform prospective and existing Distributors about our product line
and selling techniques. Distributors give presentations relating to their
experiences with our products and the methods by which they have developed their
own organization of Distributors. Motivation is offered to participants in the
form of recognition, promotions, excursions and tours, which are intended to
foster an
12
atmosphere of excitement throughout the Distributor organization. Prospective
Distributors are educated about the structure, dynamics and benefits of our
network marketing system.
We continually develop marketing strategies and programs to motivate
Distributors. These programs are designed to increase Distributors' monthly
product sales and the recruiting of new Distributors.
Distributor Support
As part of our program to maintain constant communication with our
Distributor network, we offer the following support programs to our
Distributors:
o Associations/Teams/Advisory Board. Several associations and teams
support Distributors' efforts, including the Leadership Alliance, an
association of those Distributors having reached the top level of
our Marketing Plan, which was formed in order to allow interaction
among the Network's "top level" group for discussion of business
issues, development of solutions and methods to improve the sales
success and growth of downlines and the Network as a whole.
Distributor Empowerment Teams are locally organized teams that
communicate information, training tips and ideas throughout their
local Distributor network via one-hour conference calls that take
place every two weeks. In addition, the Field Advisory Board is an
advisory team representing the various Distributor Empowerment
Teams, and brings issues, recommendations, and other ideas to us for
discussion. The Field Advisory Board conducts bi-monthly
teleconferences with our marketing and operations executives.
o August Celebration. For the past twelve years we have sponsored and
held the August Celebration, which is our annual convention.
o Ordering Support. We offer a variety of methods to order product and
support materials, including toll-free telephone operator access,
"Order Express" (a toll-free automated telephone system that
Distributors can call 24 hours a day to place orders or to access
their records), and our website at http://www.celltech.com.
o Information Support. Distributors may learn more about our products,
our history, distributor organization building, management
techniques and related matters through our website. In addition, we
produce color catalogues and brochures for our Distributors and
produce a monthly publication called "Networker's Edge" focused on
business building. We also maintain our ATG Technologies Voice Mail
System, which includes options for broadcasting messages to our
Distributors via temporary, permanent and super groups. A direct
access telephone line allows Distributors to access our most recent
announcements sent through the ATG Technologies System to our
Network. Finally, a 24-hour toll-free "Fax-on-Demand system provides
Distributors with news bulletins, product literature and articles of
interest via facsimile.
Research and Development
We spent approximately $456,098 on research and development in 2000,
$1,453,371 in 1999 and $1,023,909 in 1998. We continually seek to identify,
develop and introduce innovative, effective and safe products. Twelve products
have been introduced since 1997. Management believes that our ability to
introduce new products increases our Distributors' product visibility
13
and competitiveness in the marketplace. We also continuously evaluate "existing"
products for viability and it is our policy to discontinue products that are not
selling satisfactorily.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, management, independent
consultants, and our sponsored university research projects. We maintain our own
quality assurance/quality control staff, consisting of 3 full time employees as
of August 24, 2001 and December 31, 2000, but rely upon independent research,
consultants and others for ingredient research, development and formulation
services. When we identify a new product concept or when an existing product
must be reformulated for introduction into a new or existing market, the new
product concept or reformulation is generally submitted to our suppliers for
technological development and implementation. In addition, prior to introducing
products into our markets, our scientific consultants, legal counsel and other
representatives investigate product formulation matters as they relate to
regulatory compliance and other issues.
We are currently considering some additional products including new
antioxidant, anti-aging, weight management, and energy products. In addition to
the introduction of single products, we are also focusing on promoting groups of
products to be taken in conjunction with each other to address the specific
needs an individual may have (such as weight loss, stress or daily wellness).
Product Warranties and Returns
Our product warranties and policy regarding returns of products are
similar to those of other companies in our industry. If a consumer of any of our
products is not satisfied with it, she/he may return it to the Distributor from
whom the purchase was made within 90 days of purchase. The Distributor is
required to refund the purchase price to the consumer. The Distributor may then
return the unused portion of the product to us for an exchange of equal value.
If a Distributor requests a refund in lieu of an exchange, we will issue a check
or credit the appropriate amount to the Distributor's credit card.
We warrant all of our products against defect.
Raw Materials and Suppliers
Our primary raw material is Aphanizomenon flos-aquae, which we harvest
from Upper Klamath Lake using modern technology. Upper Klamath Lake produces 200
million pounds of SBGA each year. When we need to harvest, we typically harvest
algae once or twice a year, timing our harvests to coincide with the greatest
density per square inch of algae. Processing of SBGA is a complex process
including the following:
o Pre-Screening. We filter fresh algae out of the water with fine mesh
screens.
o Primary Separation. Primary separators remove everything suspended
in the lake water, which concentrates the algae by removing
virtually all extracellular water.
o Freezing. We quickly freeze the algae, converting it into slabs at a
temperature of -30(degree) Fahrenheit.
14
o Nutri-Lock Freeze-Drying System. We gently remove all cellular water
in a low temperature vacuum environment, converting the algae into a
dry, stable medium that retains vital nutrients.
o Powdering and Bottling. We sift and grind the algae to a fine
powder, which can be encapsulated or tabletized and sealed to retain
freshness and viability.
In years when there has been no harvest, we rely on our freeze-dried and
frozen inventory of SBGA. As of December 31, 2000, we had 9 months of frozen
algae inventory for use in capsules and tablets and 30 months of frozen algae
for use with vendor products. We had not harvested algae since 1998 due to
excess inventory in relation to sales; however, in July 2001, we commenced
harvesting SBGA.
We believe that Upper Klamath Lake will provide sufficient SBGA for our
foreseeable needs. However, from time to time a toxic species of algae called
Microcystis aeruginosa blooms in Upper Klamath Lake and contaminates a portion
of our harvest of SBGA with microcystin, a toxin. We have worked with state and
federal agencies to establish prudent safety precautions, and test each batch of
algae we harvest for microcystin levels before releasing it for production. In
July 2001, we began our harvest by utilizing a vessel we designed and built,
that will gather the algae directly from the water on Upper Klamath Lake. We
believe that utilizing this method for 2001 will help us to minimize the amount
of Microcystis aeruginosa in the harvested material, thus increasing the total
amount of algae that we can release for production.
In addition to the encapsulating and bottling performed in-house, we also
purchase vitamins, nutritional supplements and other products and ingredients
from parties that manufacture such products to our specifications and standards.
During 1998, 1999, and 2000, one vendor supplied approximately 26%, 23%, and
27%, respectively, of the products that we purchased. This vendor is our source
of enzymes and probiotics. We place significant emphasis on quality control. All
nutritional supplements, raw materials and finished products are subject to
sample testing, weight testing and purity testing by independent laboratories.
We have no written agreements with any of our suppliers, although we intend to
implement written agreements. In the event of loss of any of our sources of
supply, we believe that suitable replacement sources of similar products and
product ingredients exist and are available to us.
Trademarks and Service Marks
Most products are packaged under our "private label." At December 31,
2000, we have six trademarks registered with the United States Patent and
Trademark Office and one trademark application pending, and three trademarks
registered and one application pending with the Canadian Intellectual Property
Office of Trade Marks. In addition, we have registered trademarks in eleven
foreign countries (and one application pending in a twelfth) for the mark
"Planet Food." While we believe customer identification with our name and brand
is important, we feel that our primary competitive edge arises from our
Distributor network and our strategic location which allows us to process algae
immediately after its harvest, and not from any proprietary technology.
15
We do not have a registered trademark for the name "Cell Tech." As of the
date of this Annual Report on Form 10-K, no other person has claimed
infringement based on our use of the name "Cell Tech," but there can be no
assurance that such a claim would not be made in the future. A British company
in a different business than ours has a United States trademark registration for
the name "Cell Tech" and it has not objected to our use of the name.
Competition
The nutritional supplements industry is large and intensely competitive.
We compete with other companies that manufacture and market retail nutritional
products to health-conscious consumers, including General Nutrition Companies,
Inc., Solgar Vitamin and Herb Company, Inc., Twinlab Corporation and Weider
Nutrition International, Inc. Many of our competitors in this market have longer
operating histories and greater name recognition and financial resources than
us.
In addition, nutritional supplements can be purchased in a wide variety of
distribution channels. While we believe that consumers appreciated the
convenience of ordering products from home through a sales person, the buying
habits of many consumers accustomed to purchasing products through traditional
retail channels are difficult to change. We offered our products, on a limited
test basis, via infomercials during May 2001. Our product offerings in each
product category are also relatively small compared to the wide variety of
products offered by many other nutritional product companies.
We compete with other companies for the supply of Upper Klamath Lake
algae. However, we are the largest harvester and the only one with access to the
"A" Canal, which along with the Link River, is the only outlet for Upper Klamath
Lake. Our exclusive lease on the "A" Canal offers us advantages in that it has
higher concentrations of SBGA than the "B" or "C" canals to which it branches,
and it is in close proximity to our canal harvesting and processing facility. In
July 2001, we began harvesting from an on-lake harvester. We also have access to
Upper Klamath Lake that is in close proximity to our freezer facility.
We also compete in the nutritional supplements market and for new
Distributors with other retail, multi-level marketing and direct selling
companies in the nutritional supplements industry by emphasizing the proprietary
nature, value, and the quality of our products and the convenience of our
distribution system. We also compete with other direct selling organizations,
many of which have longer operating histories and greater name recognition and
financial resources than us. They include Amway Corporation, Nu Skin
Enterprises, Inc., Body Wise International, Inc., ENVION International,
Herbalife International, Inc., Mannatech Incorporated, Rexall Showcase
International, and Forever Living Products, Inc. We compete for new Distributors
on the basis of our compensation plan and our proprietary and quality products.
We believe that many more direct selling organizations will enter the market
place as this channel of distribution expands over the next several years. We
also compete for the commitment of our Distributors. Given that the pool of
individuals interested in direct selling tends to be limited in each market, the
potential pool of Distributors for our products is reduced to the extent other
network marketing companies successfully recruit these individuals into their
businesses.
16
Government Regulation
We are subject to laws, governmental regulations, administrative
determinations, and court decisions on the federal, state, and local levels.
These regulations pertain to a variety of issues related to us. First, they
pertain to the formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of our products. Second, the regulations pertain
to product claims and advertising, both by us and by our Distributors, for whom
we are responsible. Finally, certain regulations pertain to our network
marketing system.
Product Regulation
Several governmental agencies regulate certain aspects of our products,
including formulation, manufacturing, packaging, storing, labeling, advertising,
distribution, and sales. These agencies include the FDA, the Federal Trade
Commission ("FTC"), the Consumer Products Safety Commission, the Department of
Agriculture, the Environmental Protection Agency, and the Postal Service. In
addition, various state and local agencies can regulate us in areas where our
products are manufactured, distributed, and sold.
The FDA regulates the formulation, manufacture, packaging, storage,
labeling, promotion, distribution, and sale of foods, dietary supplements, and
over-the-counter drugs, including those we distribute. With respect to the
preparation, packaging and storage of our supplements, FDA regulations require
that our suppliers and we meet relevant good manufacturing practice regulations.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised
certain provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA")
concerning the composition and labeling of dietary supplements. We believe that
DSHEA is generally favorable to the dietary supplement industry. The legislation
creates a new statutory class of "dietary supplements," which includes vitamins,
minerals, herbs, and amino acids. DSHEA applies with certain limitations to
dietary ingredients that were on the market before October 15, 1994. With
respect to dietary supplements that contain dietary ingredients not on the
market before October 15, 1994, DSHEA requires further evidence. This evidence
must show that the supplement contains only those ingredients that have been in
the food supply or other evidence of use or safety. Manufacturers of dietary
supplements must make a "statement of nutritional support," which is a statement
describing certain types of product performance characteristics. In making such
a statement, we must have substantiation that the statement is truthful and not
misleading and must make a disclaimer within the statement. Finally, we must
notify the FDA of the statement no later than 30 days after it is first made.
FFDCA classifies the majority of our products as "dietary supplements."
The FDA issued regulations governing the labeling and marketing of dietary
supplement products in September 1997. These regulations covered several issues.
First, they covered the identification of dietary supplements, as well as their
nutrition and ingredient labeling. Second, they covered the terminology to be
used for nutrient content claims, health content claims, and statements of
nutritional support. Third, they covered the labeling requirements for dietary
supplements that claim to be "high potency" and "antioxidant." Fourth, they
covered notification procedures for statements on dietary supplements. Finally,
the regulations covered the pre-market notification procedures for new dietary
ingredients in dietary supplements. The notification procedures
17
became effective in October 1997. The labeling requirements became effective in
March 1999 and we revised our product labels to reflect the new requirements. We
must continue to secure substantiation of our product performance claims and to
notify the FDA of certain types of performance claims made for our products. Our
substantiation program involves compiling and reviewing scientific literature,
including our own university research that is pertinent to the ingredients
contained in our products.
Dietary supplements are subject to the Nutrition, Labeling and Education
Act ("NLEA"), as well as the associated regulations. These regulate health
claims, ingredient labeling, and nutrient content claims, which characterize the
level of a nutrient in the product. NLEA prohibits the use of any health claim
for dietary supplements unless the claim is supported by significant scientific
agreement and is pre-approved by the FDA.
State Regulation
As a result of certain conditions, a toxic strain of algae called
Microcystis aeruginosa occasionally blooms in Klamath Lake and contaminates a
portion of our harvest of blue-green algae with microcystin, a toxin. In 1994,
we began to test the algae harvested at this facility for possible
contamination. The existence of Microcystis aeruginosa has been regularly
measured at various levels. In the absence of established regulatory criteria
for determining an acceptable level of microcystin (the actual toxin), we
sponsored an assessment of risk and set our own standards for determining
whether a particular batch of algae is acceptable for human consumption. Algae
that does not meet our standards and cannot be used in alternative non-human
consumable products is isolated and not used in production.
On October 23, 1997, the Oregon Department of Agriculture issued an
Administrative Rule on the sale of blue-green algae, which stated, "the agency
has decided to adopt the 1 microgram per gram (1 ppm) level of microcystin in
blue-green algae." This ruling may have an impact on our ability to process and
distribute the raw algae harvested and finished goods produced. Such ruling may
also decrease the amount of salable inventory and may, therefore, have an
adverse impact on our ability to realize the carrying value of our inventories.
We have recognized that an impairment of our inventory may exist and therefore
have recorded our best estimate of the effect by establishing a reserve in the
amount of $900,000, $900,000 and $500,000 at December 31, 2000, 1999 and 1998,
respectively, for the possible effects of inventories which may become
unsaleable under this Rule. The Oregon Department of Agriculture has raised no
questions about our products under this Rule to date.
Canadian Regulation
In 1999 Health Canada issued a warning about the safety of blue green
algae products due to concerns about microcystin. While we believe our products
are safe and comply with Canadian rules, the adverse publicity from the Health
Canada warning adversely affected our sales in Canada. Such warning may occur in
the future and could have an adverse affect on our business.
In Canada, both national and provincial law regulates our network
marketing system. Under Canada's Federal Competition Act, we must make sure that
any representations relating to Distributor compensation made to prospective
distributors constitute fair, reasonable and timely
18
disclosure and that it meets other legal requirements of the Federal Competition
Act. Our compensation plan is being reviewed and will be submitted to the
appropriate Canadian authorities. All Canadian provinces and territories, other
than Ontario have legislation requiring that we register or become licensed as a
direct seller within that province. Licensing is designed to maintain the
standards of the direct selling industry and to protect the consumer. Some
provinces require that both our distributors and we be licensed. We are in the
process of obtaining all of the required provincial or territorial direct
sellers' licenses.
Regulation of Advertising
We are unable to make any claim that any of our nutritional supplements
will diagnose, cure, mitigate, treat, or prevent disease. DSHEA, however,
permits substantiated, truthful, and non-misleading statements of nutritional
support to be made in labeling, such as statements describing general well-being
resulting from consumption of a dietary ingredient or the role of a nutrient or
dietary ingredient in affecting or maintaining a structure or a function of the
body. The FDA recently issued a proposed rule concerning these issues.
The FTC similarly requires that any claims be substantiated. The FTC
exercises jurisdiction over the marketing practices and advertising of all our
products. In years past, the FTC has instituted enforcement actions against
several dietary supplement companies for false and misleading marketing
practices. This has resulted in consent decrees and monetary payments by the
companies involved. We have not been the subject of FTC enforcement action with
respect to our advertising. However, there is no assurance that the FTC will not
subject us to inquiry in the future.
Network Marketing System Regulation
Our Distributor commission system constitutes a network marketing system.
A number of federal and state statutes and regulations apply to this system,
including those administered by the FTC. The legal requirements that apply to
network marketing organizations ensure that product sales are ultimately made to
consumers. Further, they ensure that advancement within the organizations be
based on the sales of products, rather than from the recruitment of additional
Distributors, investment in the organization, or non-retail sale criteria. Where
required by law, we must obtain regulatory approval of our network marketing
system. If such approval is not required, the favorable opinion of local counsel
will suffice. Finally, in addition to these regulations, the FTC regulates trade
practices related to network marketing systems.
Employees
At August 24, 2001, we employed approximately 84 persons, of which 7 were
part-time. None of our employees are represented by a union. We believe that our
relationship with our employees is good.
Industry Segments And Export Sales
We have no assets outside of the United States. Our business consists of
one industry segment and is grouped into two geographic areas: United States and
Canada. The following table (dollars in thousands), summarizes the product sales
revenues from customers in each of the two geographic regions:
19
(Dollars in
Thousands) 2000 1999 1998 1997
---- ---- ---- ----
United States $36,796 94.4% $51,385 94.3% $69,397 93.7% $116,891 93.7%
Canada $ 2,181 5.6% $ 3,103 5.7% $ 4,674 6.3% $ 7,896 6.3%
------- ----- ------- ----- ------- ----- -------- -----
TOTAL $38,977 100.0% $54,488 100.0% $74,071 100.0% $124,787 100.0%
======= ===== ======= ===== ======= ===== ======== =====
We believe that our profit margin on export sales is not significantly
different from that realized on sales in the United States. All foreign product
sales transactions are consummated in U.S. dollars.
ITEM 2. PROPERTIES.
HumaScan's principal executive offices were located in Cranford, New
Jersey. HumaScan and its lessor reached an agreement in the first quarter of
1999 to terminate the lease arrangement and no further obligations exist under
the lease.
Currently, our headquarters and all of our operating facilities are
located in Klamath Falls, Oregon. We lease approximately 250,000 square feet of
office, processing, freezer and storage space directly from our principal
shareholders or their affiliates. Most of these leases are year-to-year,
although we do rent some space on a month-to-month basis and one lease will
expire in 2005. We believe that the space leased from our shareholders and their
affiliate is rented to us at below or at fair market rates. We also lease an
additional 21 acres from an independent third party, on which we have built our
algae processing and storage facility. Our lease with the independent third
party will terminate in 2020, at which time we have the option to renew for an
additional 25 years. At the termination of such lease, ownership of the facility
will revert to the lessor.
We believe that the above-described properties will provide sufficient
space to meet our currently planned future needs.
ITEM 3. LEGAL PROCEEDINGS.
On March 11, 1999, HumaScan entered into a Settlement Agreement with
Scantek Medical, Inc., which provided for the termination of HumaScan's license
to use the BreastAlert Device. The Settlement provided for (a) the transfer of
certain assets related to the licensed business to Scantek and shares of
HumaScan common stock to Scantek and another company, (b) a cash payment from
Scantek to HumaScan and (c) a mutual release from all obligations.
In 1996, we entered into a five-year contract with Oregon Freeze Dry,
Inc., one of our vendors for freeze-drying services. We were to deliver one
million wet pounds of algae for freeze-drying each month. We unilaterally
canceled the agreement in January 1998. In February 1998 the vendor filed a
complaint against us in Linn County Circuit Court for the State of Oregon,
alleging wrongful termination. We counterclaimed for breach of contract,
alleging liquidated damages due, overcharges, and failure to deliver product,
consequential damages for failure to utilize quality control methods required
under the contract, prejudgment interest and attorneys fees. We are currently in
the process of negotiating an out-of court settlement with the
20
vendor under which we would pay $1,650,000. Although we cannot predict the
ultimate disposition of the claims and counterclaims, we believe the outcome
will not have a material adverse effect on our financial condition and results
of operations.
Mr. Robert Longo was our former Chief Financial Officer whose employment
was terminated on August 30, 1999. In September 1999, he asserted a claim that
we terminated his employment in violation of his employment contract. He also
asserted a wrongful discharge claim, alleging that he was fired because he
refused our request to manipulate our financial records. Mr. Longo had demanded
approximately $220,000 to settle his claims. Under his employment contract, Mr.
Longo's claims must be first mediated then arbitrated if mediation does not
settle the claims. Mediation took place on December 6, 1999 but was
unsuccessful. In December 2000, prior to our scheduled arbitration hearing, Mr.
Longo settled his claim with us for $55,000.
On May 13, 1998, Steven Oberski, Jane Bean (Oberski's spouse) and Laurel
Boyajian, filed a claim against our Company in Superior Court in the
Commonwealth of Massachusetts alleging, among other things, that we breached the
terms of our Distributor agreement with them by transferring the income benefits
associated with them to another Distributor and they are seeking monetary
damages of approximately $750,000. Although we have repeatedly offered to settle
this matter, Oberski, et. al. has insisted in proceeding forward with the case.
The case came to trial by jury on September 10, 2001 and on September 15, 2001,
although the court found that we did not engage in unfair or deceptive
practices, the jury issued a verdict in favor of Steven Oberski and Jane Bean in
the amount of $1,500 and a verdict in favor of Laurel Boyajian in the amount of
$1,300. We have decided to pay the $2,800 judgment.
In May 1999, John Adams filed an action in the Circuit Court of Klamath
County alleging, among other things, we breached our Distributor agreement by
refusing to reinstate him as a Distributor and that we made health claims and he
is seeking an unspecified amount of monetary damages. On June 22, 2001, we
received a written settlement offer from his legal counsel stating that Mr.
Adams is willing to settle the case by dropping all health related claims and a
payment of $5,000 for his damages and $7,000 for his legal fees and costs. We
have declined his offer. The matter is presently in the discovery phase and no
trial date has been scheduled.
On January 16, 2001, we filed an action against Glenn Foods in the Circuit
Court of Klamath County alleging, among other things, that Glenn Foods breached
an agreement with us for the manufacture of our SBG Square Meal Bars and BG
Bites by failing to produce our products according to our specifications,
refusing to turn over our formula, and failing to refund our money. We are
seeking monetary damages of approximately $226,345 for all causes specified in
our complaint. The matter is presently in the discovery phase and no trial date
has been scheduled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 14, 1996, HumaScan completed its initial public offering and our
common stock began trading on the NASDAQ Small Cap Market under the symbol
"HMSC." Prior to the IPO there was no established public trading market for our
common stock. On March 4, 1999, our common stock was delisted from the NASDAQ
Small Cap Market and commenced trading on the OTC Bulletin Board. On August 10,
1999, as part of the Reorganization, we executed a 1 for 10.8520933 reverse
stock split and changed our name to Cell Tech International Incorporated,
trading symbol "EFLI." The following table lists the bid prices at the end of
each period obtained from the NASDAQ Stock Market historical research service,
as adjusted for subsequent stock dividends and stock splits. Prices do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions. All share, per share, common stock, stock option and warrant
amounts herein have been restated to reflect the effects of the 1 for 10.8520933
reverse stock split effected on August 10, 1999.
High Bid Price for Low Bid Price for
Period ($) Period ($)
--------------------------------------
1998
First Quarter...................... 2.59 1.37
Second Quarter..................... 2.62 1.62
Third Quarter...................... 1.87 1.00
Fourth Quarter..................... 1.75 1.00
1999
First Quarter...................... 3.25 1.03
Second Quarter..................... 4.06 1.28
Third Quarter...................... 2.50 .96
Fourth Quarter..................... 2.44 1.00
2000
First Quarter...................... 2.25 1.03
Second Quarter..................... 1.40 .25
Third Quarter ..................... .56 .37
Fourth Quarter..................... 1.25 .15
2001
First Quarter...................... .30 .13
Second Quarter..................... .65 .14
Third Quarter (through August 24).. .68 .20
22
Subsequent Event
On July 24, 2000, trading in our common stock on the OTC Bulletin Board
was suspended due to the fact that our 1934 Act filings were past due. We plan
to reapply for listing as soon as practicable after we complete all periodic
filings that the Securities and Exchange Commission required from us to be in
compliance with its regulations. We believe our stock is presently, as of August
24, 2001, being quoted in the National Quotation Bureau's Pink Sheets, a
publication of the National Quotation Bureau, at $0.20 per share.
At August 24, 2001, we had approximately 120 holders of record of the
common stock.
Dividends
In 1999, before the Reorganization, we distributed certain real estate
valued at $1,050,000 to the Kollmans, and paid previously declared dividends of
$7.6 million to the Kollmans. We do not plan to pay dividends on our common
stock in the foreseeable future. The payment of dividends in the future will
depend on the evaluation by our Board of Directors of such factors as it deems
relevant at the time and restrictions imposed by the terms of our debt
obligations, if any. We are currently restricted from paying dividends pursuant
to a Loan and Security Agreement with Coast Business Credit, a division of
Southern Pacific Bank. Currently, the Board of Directors believes that all of
our earnings, if any, should be retained for the development of our business.
Recent Sales of Unregistered Securities
(1) On August 6, 1999, we issued warrants to purchase shares of our common
stock to the following parties for their services as follows:
Number of Exercise
Warrants Price Term
Andromeda Enterprises, Inc. 100,000 $1.3337 5 year
Hateley & Hampton, PC 300,000 $0.0749 5 year
Wharton Capital Partners, Ltd. 267,000 $0.0749 5 year
The transaction in (1) above involved three persons, all of whom were
sophisticated, had a prior relationship with us and did not involve a general
solicitation
(2) On October 19, 1999, we sold 1,157,895 shares of our common stock and
warrants to purchase 1,157,895 shares of our common stock (collectively,
the "Purchased Securities") in a private placement to Zubair Kazi ("Kazi")
for $1,515,625, net of fundraising costs of $134,375. In connection with
this transaction, we also issued warrants to purchase 150,000 and 100,000
shares of our common stock to Pacific Basin Capital and Richard Wade,
respectively. Each warrant has a 5-year term and an exercise price of
$1.425 per share. We also issued 50,000 shares of our common stock, at
fair market value that amounted to $134,375, to Pacific Basin Capital for
its services. The transaction in (2) above involved an investment by one
person who is an accredited investor, as that term is used in Regulation
D, and did not involve a general solicitation.
23
In the event that our consolidated shareholders' equity is less than
$20,000,000 at December 31, 1999, we shall immediately issue to Kazi additional
common stock and warrants. The amount shall equal 1,157,895 multiplied by the
percentage by which the shareholders' equity is less than $20,000,000. At
December 31, 1999, our consolidated stockholders' equity was $18,548,961 and
Kazi is entitled to have issued to him 84,005 additional Purchased Securities.
As of August 24, 2001, we have not issued these additional Purchased Securities
but have accrued the liability to their issuance in our financial statements.
Also, if within one year after October 19, 1999, we sold any of our common
stock at a price less than $1.425 per share in an event other than in a
registered underwriting, we were to immediately issue to Kazi such additional
shares of common stock and warrants so that Kazi maintains his percentage
shareholdings as if he had purchased shares of common stock at the reduced
purchase price. We did not sell any common stock during the one year period
ended October 19, 2000 or for the year ended December 31, 2000.
We are obligated to issue to Kazi additional Purchased Securities, as
penalties and interest, for any delay in filing our next registration statement
beyond 120 days after October 19, 1999. As of August 24, 2001, we have not filed
our next registration statement and Kazi is entitled to additional Purchased
Securities of 1,176,946. As of August 24, 2001, we have not yet issued to Kazi
any of these additional Purchased Securities but have accrued the liability to
their issuance in our financial statements.
We are obligated, upon the effective date of our next registration
statement (First reset date), to issue additional Purchased Securities to Kazi
in accordance with the following reset rights:
o If the ratio of $1.425 per share divided by the average closing bid
price for the last twenty trading days prior to the first reset date
(the first reset ratio) is greater than the ratio of $1.425 divided
by the average closing bid price for the last twenty days prior to
the execution of the Term Sheet, or September 13, 1999 (the Initial
Ratio), on the first reset date, then we shall issue to Kazi
additional Purchased Securities so that the initial ratio and the
first reset ratio are equal and pursuant to the following formula:
o Amount of Additional Purchased Securities = ((First
Reset Ratio)/(Initial Ratio)-1) times 1,157,895.
o In addition, if Kazi holds any Purchased Warrants for the period
covered by the last three reset dates, the exercise price of these
Purchased Warrants shall be reduced by the following formula:
o Exercise Price of Purchased Warrants = ((Initial
Ratio)/(First Reset Ratio)) times $1.425.
o Kazi is entitled to five additional reset dates which will occur as
follows:
o The next three reset dates will occur each three months
after the first reset date.
24
o The next two subsequent reset dates will occur each
six-month period thereafter.
Since we have not yet filed our first registration statement, the first
reset date has not yet occurred.
(3) Effective August 6, 1999, pursuant to an Agreement and Plan of
Reorganization, HumaScan, Inc ("HumaScan"), acquired all of the issued and
outstanding shares of two privately owned businesses, the New Algae
Company ("NAC") and The New Earth Company ("NEC") from Daryl J. Kollman
and Marta C. Kollman. In consideration of the shares of NAC and NEC,
HumaScan issued to Daryl J. Kollman and Marta C. Kollman (together the
"Kollmans") an aggregate of 13,000,000 shares of common stock of HumaScan
and an aggregate of 748,507 shares of Series B Preferred Stock ("Preferred
Stock") of HumaScan. Each share of preferred stock was converted into
108.520933 shares of HumaScan common stock (an aggregate of 81,228,723
shares). As of August 6, 1999, HumaScan had 8,139,070 shares of common
stock outstanding immediately prior to the reorganization and issuance to
the Kollmans, and had reserved 2,569,107 shares of common stock for
issuance upon the exercise of outstanding options and warrants or pursuant
to HumaScan's 1996 Stock Incentive Plan. On August 10, 1999, HumaScan
undertook a 1:10.8520933 reverse stock split. The transaction in (3) above
involved two persons, each whom is an accredited investor, as that term is
used in Regulation D, and did not involve a general solicitation.
All of the above transactions were effected pursuant to Section 4(2) of
the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
Years ended December 31,
2000 1999 1998 1997 1996
------- ------- ------- -------- --------
($ in thousands, except per share data)
RESULTS OF OPERATIONS
Revenue $38,977 $54,488 $74,071 $124,788 $212,612
Gross Profit 27,488 39,739 54,851 102,591 173,908
Selling Profit 9,855 15,306 21,026 42,314 69,791
Operating
Income/(Loss) from
operations (2,436) (4,439) 1,670 15,837 31,201
Net Income/(Loss)
before taxes (2,784) (4,141) 2,296 17,253 34,100
25
Net Income/(Loss) (2,784) (4,141) 2,296 17,253 34,100
Net Income/(loss) per
common share
Basic (0.26) (0.45) 0.26 1.99 3.92
Diluted (0.26) (0.45) 0.26 1.99 3.92
Weighted Average Shares
Outstanding
Basic 10,640,895 9,280,431 8,683,000 8,683,000 8,683,000
Diluted 10,640,895 9,280,431 8,683,000 8,683,000 8,683,000
SELECTED BALANCE SHEET DATA
Cash & Cash
Equivalents -- -- 1,502 -- 5,171
Current Assets 3,881 4,723 5,505 19,961 20,032
Total Assets 27,250 32,815 41,099 46,224 47,925
Current
Liabilities 11,223 13,938 8,577 21,653 12,526
Total
Liabilities 11,485 14,266 9,376 14,007 25,676
Shareholders'
Equity 15,765 18,549 31,723 32,217 22,249
Our Quarterly Data
The following table sets forth our unaudited consolidated quarterly
statement of income data for the periods indicated. In our opinion, this
information has been prepared on the same basis as our audited Consolidated
Financial Statements set forth in this report and includes all necessary
adjustments, consisting only of normal recurring adjustments, that are
considered necessary to present fairly this information in accordance with
generally accepted accounting principles. You should read this information in
conjunction with the Consolidated Financial Statements and related Notes in Item
14 of this report, beginning on page F-1. Our consolidated operating results for
any one quarter are not necessarily indicative of results for any future period.
Year Ended December 31, 2000
($ in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue 11,136 9,971 9,166 8,704
Operating Loss (287) (832) (487) (830)
26
Net Loss (314) (802) (630) (1,038)
Basic Net Loss per share (0.03) (0.07) (0.06) (0.10)
Diluted Net Loss per Share (0.03) (0.07) (0.06) (0.10)
Weighted Average Number of
Shares Outstanding
Basic 10,640,895 10,640,895 10,640,895 10,640,895
Diluted 10,640,895 10,640,895 10,640,895 10,640,895
Year Ended December 31, 1999
($ in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue 14,860 13,819 13,127 12,682
Operating Loss (175) (1,854) (1,003) (1,407)
Net Loss (39) (1,172) (1,086) (1,844)
Basic Net Loss per share (0.00) (0.13) (0.12) (0.17)
Diluted Net Loss per Share (0.00) (0.13) (0.12) (0.17)
Weighted Average Number of
Shares Outstanding
Basic 8,683,000 8,683,000 9,183,000 10,572,725
Diluted 8,683,000 8,683,000 9,183,000 10,572,725
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
From time to time, we or our representatives have made or may make
forward-looking statements, orally or in writing, including in this Report. Such
forward-looking statements may be included in, without limitation, press
releases, oral statements made with the approval of one
27
of our authorized executive officers and filings with the Securities and
Exchange Commission. The words or phrases "anticipates," "believes," "expects,"
"intends," "will continue," "estimates," "plans," "projects," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Our forward-looking statements are subject to certain risks, trends, and
uncertainties that could cause actual results to vary materially from
anticipated results, including, without limitation, market acceptance of our
marketing and merchandising concepts, changes in political and general market
conditions, demand for and market acceptance of new and existing products,
availability and development of new products, increased competition, our failure
to attain satisfactory outside financing and adverse weather conditions at Upper
Klamath Lake. These factors are discussed in further detail below under "Risks
and Uncertainties." Should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those discussed herein as expected, believed,
estimated, intended or anticipated. We undertake no obligation to revise or
publicly release the results of any revisions to these forward-looking
statements.
Business Restructuring
In November 1998, HumaScan announced that it was in the process of
evaluating various strategic alternatives, as it did not have adequate resources
for the completion of clinical trials and marketing of the BreastAlert Device
and believed it was prudent to devote the remaining resources to obtaining
further financing. Later that month, due to a lack of adequate financing,
HumaScan terminated the employment of all but three employees and ceased all
operations, focusing substantially all of its efforts on obtaining new financing
and/or restructuring its business. In December 1998, unable to obtain further
financing, HumaScan began the process of winding down its operations, including
terminating the remaining three employees. The Board of Directors approved
consulting agreements between HumaScan and the former CFO, President and
Operations Director of HumaScan to negotiate settlement agreements with Scantek
Medical, Inc. to terminate the license agreement, terminate the lease, negotiate
settlements with other creditors, and explore the possibilities for
restructuring and/or reorganizing the business.
On July 16, 1999, HumaScan entered into the Reorganization Agreement with
Daryl J. Kollman and Marta C. Kollman (together the "Kollmans"). Pursuant to the
Reorganization, which occurred on August 6, 1999, HumaScan acquired all the
assets of NEC and NAC in exchange for shares of HumaScan common stock and
convertible preferred stock, which upon conversion of the preferred stock in
August 1999, represented approximately 92% (approximately 86% on a fully diluted
basis) of the outstanding HumaScan common stock. Following the Reorganization,
on August 10, 1999, HumaScan changed its name to Cell Tech International
Incorporated. The Reorganization Agreement is more fully described in the Form
8-K filed with the SEC on August 2, 1999.
The Reorganization was accounted for as a reverse acquisition.
Accordingly, for accounting purposes, NEC and NAC record the transaction as an
acquisition of HumaScan, and the historical financial statements of NEC and NAC
have become our historical financial statements. For a summary description of
the results of operation of HumaScan in 1998, see "HumaScan Financial
Performance" below.
28
Results of Operations
The following discussion of results of operations relates to the combined
historical operations of NEC and NAC for periods before the Reorganization and
to Cell Tech International Incorporated for periods following the
Reorganization. The historical results of operations of HumaScan are described
under "HumaScan Financial Performance."
Fiscal 2000 Compared to Fiscal 1999
Net sales for the year ended December 31, 2000 were $38,976,663, a
decrease of 28% from net sales of $54,487,939 for the year ended December 31,
1999. The decrease in sales is directly related to a 29% decrease in orders for
the same period. Average order size increased to $127 from $124 over the same
period. The average number of distributors in 2000 decreased to an average of
60,899 in 2000, which was 22% lower than the average of 73,372 distributors in
1999. Sales of our food supplement products are made through a multi-level
marketing network of distributors, so sales are positively linked with the
number of distributors.
Gross profit represents net sales less the cost of goods sold, which
includes the cost of harvesting blue-green algae from Klamath Lake, the cost of
other materials, direct labor expenses, an allocation of overhead costs,
amortization, and depreciation. Gross profit decreased to 71% from 73% of net
sales between the years ended December 31, 2000 and 1999, respectively. The
decrease in the gross profit margin is due to the fixed cost component of cost
of goods sold being spread over a decreased revenue base.
Selling profit represents gross profit less commission expense. Commission
expense for 2000 and 1999 was 45% of net sales, respectively. We are a
multi-level marketing organization. Distributors make up our sales force.
Distributors buy algae products for their own consumption plus they actively
recruit other distributors into our network. Distributors are paid commissions
based upon their personal sales volumes and the sales of distributors beneath
them in their network.
Operating expenses include shipping and handling expenses, selling
expenses, research and development expenses and general and administrative
expenses. In total, operating expenses decreased $7,453,770 or 38% to
$12,292,009 for the twelve months ended December 31, 2000 from $19,745,779 for
the twelve months ended December 31, 1999. The components of operating expenses
are discussed below.
o Shipping and handling expenses includes purchasing, receiving, and
materials management. Shipping and handling expenses decreased
$1,801,992 or 46%, to $2,097,369 in 2000 from $3,899,361 in 1999.
The decrease was due to a $1,471,840 decrease in freight expenses in
2000 due to the overall decrease in sales. Shipping and handling
expenses as a percent of net sales decreased to 5% for the year
ended December 31, 2000 from 7% for the year ended December 31,
1999.
o Selling expenses includes order operator and distributor services
expenses, marketing and promotion expenses, and the expenses of the
Office of the President and CEO. Selling expenses decreased
$2,636,065 between 2000 and 1999 to $5,338,194 from $7,974,259. This
decrease was primarily due to a decrease in salaries and
compensation of
29
$1,589,380. Selling expenses were 14% of sales for the year ended
December 31, 2000 and 15% of sales for the year ended December 31,
1999.
o Research and development expenses decreased 69% to $456,098 in 2000
from $1,453,371 in 1999, which constituted 1% and 3% of net sales,
respectively.
o General and administrative expenses decreased by $2,018,440 between
2000 and 1999. For the year ended December 31, 2000, general and
administrative expenses averaged 11% of sales while they were 12% of
sales for the year ended December 31, 1999. The decrease between
2000 and 1999 is attributable to additional costs incurred in 1999
relating to the repayment of the outstanding balance of the loan
from the former owner of Cell Tech, a decrease in legal and
consulting fees incurred during 2000, and a decrease in costs
associated with the consolidation of office space and leased
facilities that occurred in 1999.
Other income decreased to $421,015 for the year ended December 31, 2000
from $1,012,660 for the year ended December 31, 1999 principally due to a
decrease in sundry income collected from Distributors offset by recording the
fair value cost of penalty shares and warrants to be issued to an investor in
the amount of $250,000. Interest expense increased slightly to $768,492 in 2000
from $714,025 in 1999. This increase was due to various fees paid to the current
lender, partially offset by a decrease in interest expense due to a decrease in
outstanding debt in 2000 versus 1999.
Prior to 1999, NEC and NAC were S corporations and the shareholders - not
NEC and NAC- were responsible for the payment of income taxes. During 1999, NEC
and NAC changed their tax status to that of a C corporation. Subsequent to the
change in the tax status, we did not incur any income tax liabilities for the
remainder of its fiscal years ended December 31, 1999 or 2000.
Fiscal 1999 Compared to Fiscal 1998
Net sales for the year ended December 31, 1999 were $54,487,939, a
decrease of 26% from net sales of $74,071,275 for the year ended December 31,
1998. The decrease in sales is directly related to a 25% decrease in orders for
the same period. Average order size increased from $123 to $127 over the same
period. The average number of distributors in 1999 decreased to an average of
73,372 in 1999, which was 33% lower than the average of 109,402 distributors in
1998. Sales of our food supplement products are made through a multi-level
marketing network of distributors, so sales are positively linked with the
number of distributors.
Gross profit represents net sales less the cost of goods sold, which
includes the cost of harvesting blue-green algae from Klamath Lake, the cost of
other materials, direct labor expenses, an allocation of overhead costs,
amortization, and depreciation. Gross profit decreased to 73% from 74% of net
sales between the years ended December 31, 1999 and 1998, respectively. The
decrease in the gross profit margin is due to the fixed cost component of cost
of goods sold being spread over a decreased revenue base.
Selling profit represents gross profit less commission expense. Commission
expense for 1999 and 1998 was 45% and 46% of net sales, respectively. We are a
multi-level marketing organization. Distributors make up our sales force.
Distributors buy algae products for their own
30
consumption plus they actively recruit other Distributors into our network.
Distributors are paid commissions based upon their personal sales volumes and
the sales of Distributors beneath them in their network.
Operating expenses include shipping and handling expenses, selling
expenses, research and development expenses and general and administrative
expenses. In total, operating expenses increased $390,249 or 2% to $19,745,779
for the twelve months ended December 31, 1999 from $19,355,531 for the twelve
months ended December 31, 1998. The components of Operating Expenses are
discussed below.
o Shipping and handling expenses includes purchasing, receiving, and
materials management. Shipping and handling expenses decreased
$874,163 or 18%, to $3,899,361 in 1999 from $4,773,524 in 1998. The
decrease was primarily due to a decrease in freight expenses in 1999
due to the overall decrease in sales. Shipping and handling expenses
as a percent of net sales increased to 7% for the year ended
December 31, 1999 from 6% for the year ended December 31, 1998.
o Selling expenses includes order operator and distributor services
expenses, marketing and promotion expenses, and the expenses of the
Office of the President and CEO. Selling expenses decreased
$1,260,074 between 1999 and 1998 to $7,974,259 from $9,234,333 and
increased as a percent of net sales. Selling expenses were 15% of
sales for the year ended December 31, 1999 compared to 12% of sales
for the year ended December 31, 1998.
o Research and development expenses increased 42% to $1,453,371 in
1999 from $1,023,909 in 1998, which constituted 3% and 1% of net
sales, respectively.
o General and administrative expenses increased by $2,095,023 between
1999 and 1998. For the year ended December 31, 1999, general and
administrative expenses averaged 12% of sales while they were 6% of
sales for the year ended December 31, 1998. The increase between
1999 and 1998 is attributable to additional costs incurred in 1999
relating to the repayment of the outstanding balance of the loan
from the former owner of Cell Tech, an increase in legal and
consulting fees incurred during 1999, and an increase in costs
associated with the consolidation of office space and leased
facilities in 1999.
o Other income increased to $1,012,660 for the year ended December 31,
1999 from $882,985 for the year ended December 31, 1998. This
increase was principally due to a $210,890 decrease in the loss on
the disposition of assets during 1999 versus 1998.
Prior to 1999, NEC and NAC were S corporations and the shareholders - not
NEC and NAC- were responsible for the payment of income taxes. During 1999, NEC
and NAC changed their tax status to that of a C corporation. Subsequent to the
change in tax status, we did not incur any income tax liabilities for the
remained of our fiscal year ended December 31, 1999.
Fiscal 1998 Compared to Fiscal 1997
Net sales between the years ended December 31, 1997 and 1998 decreased by
$50,716,483 or 41% to $74,071,275 for 1998 from $124,787,758 for1997. In 1998,
there were just under 900,000 orders placed compared to over 1.5 million orders
placed in 1997. However, average order size increased to $123 in 1998 compared
to $120 in 1997. Additionally, the average number of Distributors decreased to
109,402 in 1998, a 47% decrease from 207,965 in
31
1997. Sales of our food supplement products are made through a multi-level
marketing network of Distributors, so sales are positively linked with the
number of Distributors.
Gross profit as a percentage of sales decreased to 74% for 1998 compared
to 81% for 1997. The decrease in the gross profit margin is due to the fixed
cost component of cost of goods sold being spread over a decrease revenue base.
Selling profit is gross profit further reduced by commission expense paid
to our distributors. Commissions averaged 48% of sales in 1997. The average
commission decreased to 46% of sales in 1998 since we started paying the
commission based upon 90% of the wholesale price of our products rather than
100%.
Operating expenses decreased by $7,121,256 or 27% between the years ended
December 31, 1998 and 1997. The components of operating expenses are discussed
below:
o Shipping and handing expenses decreased by $2,852,430 or 37% between
1998 and 1997. In 1998 and 1997, shipping and handling expenses was
approximately 6% of sales. The decrease was primarily due to a
decrease in freight expenses in 1998 due to the overall decrease in
sales.
o Selling expenses decreased a total of $3,799,429, to $9,234,333 for
the year ended December 31, 1998 from $13,033,762 for the year ended
December 31, 1997. However, Selling Expenses increased as a
percentage of sales, to 12% in 1998 from 10% in 1997.
o Research and Development expenses increased 73% or $430,897 between
1998 and 1997 due to our support of algae based research projects at
various academic institutions.
o General and Administrative expenses for 1998 decreased $900,292 or
17% from its 1997 level. A decrease in payroll and related expense
in excess of $500,000 accounted for the most significant portion of
the decrease. In 1997, General and Administrative expenses were 4%
of sales and they were 6% of sales in 1998.
Other income decreased by $1,031,799 between 1998 and 1997. Decreases in
sundry income from Distributors and a loss on disposition of assets during 1998
are the primary sources of the 54% decrease in other income.
During 1998 and 1997, NEC and NAC were S corporations, thus no tax
provision was required.
Liquidity and Capital Resources
Cash Flows
Working capital deficit at December 31, 2000 amounted to $7,341,964, a
decrease of $2,122,505 from a working capital deficit of $9,214,469 as of
December 31, 1999. At December 31, 2000, we had an overdraft of $1,310,551
versus a bank overdraft of $247,584 as of December 31, 1999.
32
Net cash flows used by operating activities for the year ended December
31, 2000 amounted to $564,012 compared to cash flows provided by operations of
$4,510,888 for the year ended December 31, 1999. The decrease in cash flows
generated by operations is primarily due to a $5,450,803 decrease in selling
profit between the years ended December 31, 2000 and 1999 and changes in current
assets and liabilities.
Cash flows used in investing activities for the year ended December 31,
2000 was $141,399, net of $4,094 of proceeds from sales of equipment. This is
down $392,512 from net cash used for investing activities of $533,911 for the
year ended December 31, 1999, due to a decrease in equipment purchases during
the fiscal year ended December 31, 2000.
Net cash flows provided by financing activities was $705,411 for the year
ended December 31, 2000 versus net cash used for financing activities of
$5,479,087 during 1999. This change is principally due to $10,110,339 of
shareholder distributions made during 1999 versus $0 during 2000.
Working capital deficit at December 31, 1999 amounted to $9,214,469, an
increase of $6,143,201 from a working capital deficit of $3,071,268 as of
December 31, 1998. Cash and cash equivalents decreased over the same period by
$1,502,110, the cash balance at December 31, 1998. At December 31, 1999, we had
an overdraft of $247,584.
Net cash flows provided by operating activities for the year ended
December 31, 1999 amounted to $4,510,888 compared to cash flows provided by
operations of $6,565,979 for the year ended December 31, 1998. The decrease in
cash flows generated by operations is primarily due to a $5,719,496 decrease in
selling profit and an increase in operating costs of $390,248 between the years
ended December 31, 1999 and 1998. The decrease was offset in part by changes in
current assets and liabilities.
Net cash flows used for financing activities was $5,479,087 for the year
ended December 31, 1999 versus net cash used for financing activities of
$4,011,513 during 1998. This change is principally due to an increase in
shareholder distributions, from $10,110,339 during 1999 versus $2,790,000 during
1998, partially offset by $1,650,000 received from a 1999 sale of common stock
and warrants (See "Recent Sales of Unregistered Securities") and funding
received from our credit agreement established during 1999.
Working capital deficit at December 31, 1998 amounted to $3,071,268, an
increase of $5,741,385 from a working capital deficit of $8,812,653 as of
December 31, 1997. Cash and cash equivalents increased over the same period by
$1,502,110, the cash balance at December 31, 1998.
Net cash flows provided by operating activities for the year ended
December 31, 1998 amounted to $6,565,979 compared to cash flows provided by
operations of $3,605,063 for the year ended December 31, 1997. The increase in
cash flows generated by operations is primarily due to significant realizations
of assets into cash during 1998 versus a significant accumulation of assets and
reduction of liabilities during 1997.
33
Cash flows used in investing activities for the year ended December 31,
1998 was $1,052,356, net of $280,266 of proceeds from sales of equipment. This
is a decrease of $163,011 from net cash used for investing activities of
$1,215,367 for the year ended December 31, 1997. This change is principally due
to a decrease in equipment purchases in 1998 of $151,324.
Cash flows used by financing activities during the year ended December 31,
1998 decreased $3,549,265 from outflows of $7,560,778 in 1997 to $4,011,513 in
1998. This decrease was principally due to decreased distributions to
shareholders, which decreased to $2,790,000 during 1998 from $7,285,000 in 1997.
Line of Credit
In June 1999, we entered into a $15 million Line of Credit Agreement with
a financial institution. The agreement provides for: Receivable Loans and the
Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The
Receivable Loan and the Advances and Inventory Loans bear interest at a rate
equal to the prime rate plus 2.5% per annum and expire June 30, 2002. The
balance outstanding under the Receivable Loans and the Advances and Inventory
Loans at December 31, 2000 was $1,105,012. The Term Loans and Equipment
Acquisition Loans bear interest at a rate equal to the prime rate plus 2.75% and
are repayable in 60 monthly installments by July 1, 2004. The total balance
outstanding under the Term Loans and Equipment Acquisition Loans at December 31,
2000 was $1,691,541. We incur a minimum monthly interest charge for an amount
equal to all interest that would have been accrued had the daily aggregate
outstanding balance of all Loans been equal to 40% of the Maximum Dollar Debt.
The majority shareholders and substantially all of our assets guarantee
the Line of Credit Agreement. Certain restrictive covenants exist and we are not
in compliance with such covenants. In order to pay-off the outstanding balance
the lender began withholding funds in August 1999 from the daily collections and
applied such withholdings to the outstanding balance. These withholdings ceased
in February 2001. Our ability to borrow under the Line of Credit Agreement was
also restricted as a result of the lender reducing the availability under the
Line of Credit Agreement by the cumulative of the daily withholdings.
We incurred certain loan fees amounting to $864,505, upon closing of the
agreement. The Line of Credit incurs annual loan fees, a renewal fee and an
early termination fee.
Going Concern
We incurred a net loss of $2,783,939 before taxes in 2000. Additionally,
our current liabilities exceeded our current assets by $7,341,964 at December
31, 2000. We have a $15 million Line of Credit Agreement with a financial
institution as described and summarized in Note 7 to the Financial Statements.
We are not in compliance with certain restrictive covenants. Accordingly, the
entire amount outstanding under the Line of Credit Agreement of $2,796,553 as at
December 31, 2000 has been classified as a current liability. In order to payoff
the outstanding balance the lender began withholding funds from our daily
collections and applied such withholdings to the outstanding balance. Our
ability to borrow under the Line of Credit Agreement was also restricted as a
result of the lender reducing, the availability under the Line
34
of Credit Agreement by the cumulative of the daily withholdings. As a result, we
are experiencing difficulty in generating sufficient cash flows to meet our
obligations.
Our financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern. Our continuation as a going
concern is dependent upon our ability to generate sufficient cash flows to meet
our obligations on a timely basis.
We are continuing our efforts to raise both debt and equity financing.
However, there can be no assurance that we will be able to service additional
financing, or that if such financing is available, whether the terms or
conditions would be acceptable to us.
Quantitative and Qualitative Disclosures about Market Risk
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments. We believe our exposure to
market risk associated with other financial instruments is not material.
HumaScan Financial Performance
Due to the fact that HumaScan shut down its operations in December 1998, a
separate Form 10-K was never filed with respect to HumaScan's 1998 results. For
detailed information regarding HumaScan's financial performance, please refer to
HumaScan's financial statements attached to this Form 10-K.
HumaScan's net loss for the year ended December 31, 1998 was $10,756,608,
or a loss of $1.38 per share, compared to a loss of $4,150,325, or $0.54 per
share, for the period ended December 31, 1997. The increased loss for the year
was the result of expenditures incurred in connection with the unsuccessful U.S.
launch of the BreastAlert device that commenced on December 29, 1997, special
charges associated with provisions made to discontinue the business, start-up
costs associated with it's manufacturing efforts and increased general and
administrative costs associated with efforts to restructure and recapitalize the
business.
HumaScan had revenues of $0 in 1998 compared to $7,580 in 1997. Operating
expenses were $243,552 for the year ended December 31, 1998 as compared to
$4,732,821 for the year ended December 31, 1997, primarily due to decreases in
staffing, overhead levels, discontinued development costs for manufacturing, and
reduced marketing for the BreastAlert device. Interest income for the year ended
December 31, 1998 was $0 compared to $574,916 for the period ended December 31,
1997 due to the decreased cash position.
HumaScan's combined cash and cash equivalents totaled $214,567 at December
31, 1998, a decrease of $1,229,272 from December 31, 1997. This decrease
resulted from the net cash used in operating activities of $6,647,015 offset by
net cash provided in investing activities of $5,290,100 and an increase provided
by financing activities of $127,643. Total liquid
35
resources, including investments, as of December 31, 1998 were $214,567 compared
to $7,887,398 at December 31, 1997.
Risks and Uncertainties
Variability of Results
Our annual sales peaked at approximately $200 million in 1996. Subsequent
to 1996, sales have decreased annually. There can be no assurance that we will
return to generating profits on either a quarterly or annual basis. We have
experienced a continual downward trend in sales. While the rate of decrease has
shown signs of slowing, the downward trend may continue in future periods. Many
factors account for the decrease in sales, including low productivity of
independent distributors, loss of services of certain existing distributors, and
competition. Our inability to adjust our operating expenses to fully compensate
for the decrease in sales contributes to our small profit margins.
Consequently, we have experienced a significant decrease in working
capital since the end of 1998. We are facing difficulties generating sufficient
cash flow to timely meet our financial obligations, including complying with the
terms of the financing agreement for our Line of Credit.
Effects of Clinical Studies, Scientific Review, and Publicity
We believe that the increasing interest generally in vitamins, nutritional
supplements and similar products is driven by national media attention to recent
scientific research that highlights potential health benefits of consuming
certain vitamins and nutritional supplements. While we have concluded from
extensive independent research that SBGA, the principal ingredient in our
products, has significant nutritional value, consumer demands for nutritional
supplements are generally dependent on publicized scientific findings. Consumer
perception of the values of vitamins and nutritional supplements would be
greatly altered should future studies report that nutritional and alternative
medicine is in any way either harmful or not beneficial to health.
Moreover, any future publicity relating to illnesses or other adverse
effects resulting from consumers' use of certain nutritional products, which
existing and potential customers might associate with our products, could have
an adverse effect on our business. Media focus on the repercussions from
consumers' misuse or abuse of our products or other similar products, or from
consumers' failure to consume as we or other companies suggest could be equally
harmful to our operations. We cannot guarantee there will not be any future
unfavorable publicity or scientific findings about the effects of consumption of
vitamins and nutritional supplements. The previously referenced Los Angeles
Times article states that recent adverse publicity regarding the nutritional
supplement industry was adversely affecting sales of nutritional products.
Consumer Demand for New & Individual Products
Our ability to introduce safe, new and innovative products contributed to
the growth of our business in the nutritional supplement market. We have
expended and will expend a significant amount of resources on the research and
development of such products. The success of these products is, however,
conditioned upon different factors, including consumers' acceptance of
innovative products and our compliance with governmental regulatory laws. We
36
cannot be certain that sales of new products that we introduce into the markets
will achieve success in the future, as there is no assurance that consumers will
continue to accept such products or that we can obtain regulatory approvals for
them.
Supply of Raw Materials; Conditions Affecting Harvest
We harvest our own SBGA in Upper Klamath Lake, one of the few places in
the world where SBGA grows in massive quantities sufficient for harvesting.
Although we may not depend on third-party suppliers for sources, our reserve of
SBGA is determined by the growth of Aphanizomenon flos-aquae in the lake.
Aphanizomenon flos-aquae has flourished in Upper Klamath Lake because of Upper
Klamath Lake's protected environment, abundance of minerals, natural nitrogen,
clean water and regular sunshine. In 1996 the Klamath basin, which encompasses
the Upper Klamath Lake, experienced a drought. We do not believe that the 1996
drought had any effect on our harvest. A severe shortage of water at the lake
and a lack of funds precluded our harvest of SBGA for the 2000 season; however,
despite a water shortage in 2001, which precludes a harvest from the "A" canal,
we have commenced harvesting directly from Upper Klamath Lake in July 2001
through the use of a uniquely designed harvester . We cannot assure the absence
of future adverse weather conditions disturbing the growth of Aphanizomenon
flos-aquae.
Furthermore, a toxic strain of algae called Microcystis aeruginosa
occasionally blooms in Upper Klamath Lake and contaminates some of our harvest
of SBGA with microcystin, a toxin. In 1997, the Oregon Department of Agriculture
adopted an administrative rule establishing a maximum level of 1 microgram per
gram (1 ppm) of microcystin that may be present in blue-green algae to be sold
for human consumption. We have not been able to determine the potential impact
of the rule on our operations. Any future toxic algae blooms would diminish our
supply of SBGA, and the administrative rule may also have the effect of reducing
our inventory of usable SBGA for the manufacture of some of our products.
However, due to the fact that we have 9 months of frozen algae inventory for use
in capsules and tablets and 30 months of frozen algae for use with vendor
products we do not anticipate a shortage of supply resulting from the
microcystin problem.
We constructed a modern SBGA processing system that is continually
improved and updated. Potential unexpected system failures may, however,
interrupt production and reduce sales revenue. System failures may result from
events beyond our control, including natural disasters such as fires and
unexpected weather changes, intentional acts of break-ins and sabotage, and
similar misconduct.
Competition--Products, Pricing, and Marketing; Intellectual Property Protection
The market for nutritional supplements and personal care products is
highly competitive at all stages of distribution. Most of our competitors in the
business of development, manufacture, and marketing of vitamins and other
nutritional supplements, including large pharmaceutical companies, have greater
product offerings, longer operating histories in the markets and superior
financial capabilities than us. We face intense competition with numerous
companies in traditional retail channels, such as drug store chains, independent
drug stores, supermarkets, and health and natural food stores. Although the
practice of ordering products
37
from home is becoming increasingly popular, consumers are more accustomed to
purchasing products through these traditional sales channels.
Although we now have trademark protection for a number of our product
labels in the United States and in some foreign countries, and are currently
pursuing registration of other trademarks, we do not have trademark registration
for the name "Cell Tech." Moreover, we do not have patent protection for our
products. Any unlawful or lawful use of our trade names or the ingredient Super
Blue Green(R) Algae to manufacture similar products by competitors could have a
material adverse effect on our business.
Retention and Productivity of Distributors
We rely almost exclusively on a network marketing system of independent
Distributors to sell our products. The success of our operations depends on our
ability to attract new Distributors and maintain business relationships with
existing Distributors. We compete with other network marketing companies for
Distributors and can experience high turnover among our Distributors. Because
some of these companies may have a longer history of operations and superior
resources, their ability to appeal to a large base of Distributors is greater.
There can be no assurance that existing Distributors will not terminate their
services to us or that the number of Distributors for our products will remain
steady or increase.
Moreover, our revenue is dependent on the ability of the Distributors to
attract and retain customers. A decrease in the productivity of existing
Distributors would adversely affect our financial conditions. We cannot assure
you that the Distributors will maintain or increase their productivity. We also
cannot accurately predict the future productivity of the Distributors since
their operations depend on their ability to sponsor, train, and motivate new
Distributors.
Regulation of Distributors and Network Marketing System
Since the Distributors in the network marketing system are not our
employees, they are not subject to the same degree of supervision and management
as our employees. While the services of the Distributors to our business are
governed by certain contractual rules of conduct, it is difficult to monitor or
control the conduct of the sales associates of Distributors marketing our
products. Violations of our policies and rules by sales associates in dealing
with customers could reflect negatively on our products and operations, and harm
our business reputation.
Furthermore, extensive federal, state, and local laws that regulate direct
selling activities govern our network marketing system. We believe that our
marketing practices have been and are consistent with such laws, but we cannot
provide assurance that any future changes to laws and regulations of any
particular jurisdiction will not affect our operations. We could also be held
civilly or criminally accountable on the basis of vicarious liability as a
result of the actions of independent Distributors.
Departure of Distributors
A group of Distributors have severed their ties with us and are now
competing against us. This will adversely affect us in that these Distributors
will no longer be generating revenues for us and furthermore, the departing
Distributors can be expected to divert business to our competitors.
38
Alternative Channels of Distribution
On May 18, 2001, we commenced, on a limited test basis, sales through
infomercials. This alternative distribution strategy is designed to provide a
complementary marketing method for our Distributors. While we believe the
infomercials will complement the sales efforts of our Distributors, there can be
no assurance that it will have its intended effect with our Distributors and may
create conflicts with our Distributors that could result in the loss of many of
our Distributors, which in turn would mean a decline in our sales volume and
would be detrimental to our business and result in losses from our operations.
However, our tests results, and the responses that we have received from
Distributors, indicate that there are no conflicts with our present distribution
methods. Moreover, such a program requires an investment in producing the
infomercial videos. We have discontinued airing such infomercials until we have
sufficient funds to continue producing such videos.
Management of Operations
We may face difficulty in recruiting a permanent Chief Financial Officer.
Our limited ability to attract such personnel could be materially adverse to our
business and financial conditions.
Limitations on our ability to attract additional key management personnel
as we grow could be materially adverse to our business and financial conditions.
Our location in Klamath Falls, Oregon is a limiting factor on our ability to
attract key management personnel when we need it, particularly in the areas of
marketing and information systems.
In addition, since we will need additional managers who have key strategic
skills, we could be confronted with new personnel challenges as our business
expands. The future success of our business and financial conditions will depend
significantly on our ability to add key management personnel in a timely and
cost effective manner.
Dispute Between Principal Shareholders
Daryl and Marta Kollman, shareholders who together own approximately 82%
of our outstanding shares of common stock, have filed divorce proceedings. Daryl
Kollman and Marta Kollman jointly, and their affiliate Klamath Cold Storage Co.,
are lessors of substantially all of our facilities, including office space,
processing and freezer storage space. Although one lease is in effect until
2005, we lease the rest of these facilities on a month-to-month or year-to-year
basis. The disposition of these properties pursuant to the divorce could have an
adverse or disruptive effect on our operations, if the party who receives a
particular property elects to significantly increase rents or terminate any such
lease arrangement at the end of the then current lease term. In addition,
compliance with discovery requests may also have a disruptive effect on our
business and operations, and it may be necessary for our Chief Executive
Officer, Marta Kollman, to spend a portion of her time devoted to handling
matters related to the divorce. Moreover, Daryl Kollman is no longer actively
involved in management and has been unwilling to execute personal guarantees on
our behalf, as he has done in the past. On May 14, 2001, Marta Kollman
petitioned the Circuit Court for the State of Oregon with a motion seeking,
among other
39
court orders, to enjoin Daryl Kollman from interfering with any future loan
applications of Marta Kollman or us and a self executing judgment provision
whereby the court would sign a loan application on behalf of Daryl Kollman. The
court held that Daryl Kollman is to cease and desist from any such endeavors of
interfering with our loan applications during the pendency of the dissolution
proceedings and is prohibited from writing letters or communicating orally with
any lending institutions unless requested to do so by the institution. The court
also held that Daryl Kollman, if presented with loan documents to sign and if he
objects to those documents in form or content, he must first raise it with the
court. The court has yet to issue a ruling determining a number of issues in
this matter.
Impact of Government Regulation
The formulation, manufacture, labeling, and advertising of our products
are subject to extensive federal, state, and local governmental regulation. We
have, from time to time, received formal and informal inquiries from
governmental regulators about our business and compliance with existing laws. We
have on occasions altered our product formulas and revised our labeling and
promotion practices to comply with such laws. To enforce statutes and
regulations, governmental agencies may initiate investigations, issue warning
letters and cease and desist orders, impose corrective measures, seek injunctive
relief or product seizure, impose civil penalties, or pursue criminal
prosecution. Therefore, any future repeal, amendment, or narrow interpretations
of current statutes or regulations that render our current practices
noncompliant could substantially hinder our ability to maintain or increase our
stream of distribution, or to introduce new products into the markets. We cannot
predict the nature of any of such future laws, regulations, or interpretations,
or what kind of impact they might have on our business. Future laws and
regulations requiring the reformulation, discontinuance, or relabeling of any of
our products to comply with new standards could interrupt our product
distribution and potentially harm our business. Even if future governmental
actions or investigations in our business do not halt the manufacture of any of
our products, they could create negative publicity, thereby harming our
business.
Uncertainties in the International Markets
Our operation growth strategy involves expanding product sales into the
international markets in Europe and Asia. We believe that there is a potential
for growth internationally, but our ability to enter these markets effectively
may be limited by various factors, which include varying domestic regulations,
responsiveness of government authorities, cultural differences and political
uncertainties. We cannot provide assurance that consumers in any of our
potential new international markets will be receptive to our nutritional
supplement and personal care products. We also cannot assure you that we will be
able to reformulate our products or adjust our labeling and promotion practices
to comply with foreign laws and regulations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that our exposure to
market risk associated with other financial instruments is not material.
40
Our primary market risks include fluctuations in interest rates. Our
management believes that fluctuation in interest rates in the near term would
not materially affect our consolidated operating results, financial position or
cash flows as we have limited risks related to interest rate fluctuations.
The Kollmans have sole voting and investment power with respect to their
shares. The Internal Revenue Service has a security interest in all of their
shares pursuant to a Notice of Determination dated June 18, 1999, under the
terms of which the shares are held in trust and will be released upon the
Kollmans' payment of their federal income tax liabilities for various specified
years. The Kollmans will sell their shares as needed and allowed by federal and
state securities laws to make quarterly payments to the Internal Revenue
Service. The Kollmans retain all voting rights incident to their shares while
the shares are held in trust. The Internal Revenue Service may seize the
Kollmans' shares from trust if the Kollmans fail to timely cure a default upon
their commitments to the Internal Revenue Service under the Notice of
Determination. The Internal Revenue Service would thereafter proceed to sell or
judicially foreclose some or all of the shares for payment of the Kollmans' tax
liabilities as allowed by applicable law.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Financial Statements and Supplementary Data required by this Item 8
are included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 28, 1999, we determined to engage BDO Seidman LLP ("BDO") as
the principal accountant to audit our financial statements for the fiscal years
ending December 31, 1998 and 1999. Our Audit Committee of the Board of Directors
recommended the appointment of BDO. Prior to the retention of BDO, KPMG LLP was
our auditor.
The Report of KPMG LLP ("KPMG") on our financial statements for either of
the past two fiscal years in the period ended December 31, 1997 did not contain
an adverse opinion or disclaimer of opinion nor was it modified as to
uncertainty, audit scope or accounting principles. We do not believe that there
were any disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
during those past two fiscal years and the subsequent interim period through
September 30, 1997 which, if not resolved to KPMG's satisfaction, would have
caused KPMG to make reference to the subject matter of the disagreement(s) in
connection with its Reports.
During the two most recent fiscal years, there have been no reportable
events as defined in Regulation S-K Item 304(a)(1)(v). We have not had
discussions with our new independent public accountants regarding documentation
requirements on the above issue.
We requested KPMG to furnish a letter addressed to the Securities and
Exchange Commission stating whether it agrees with the statements made by us
and, if not, stating the respects in which it does not agree. A letter from KPMG
is included as Exhibit 16 to our report on Form 8-K dated November 11, 1999,
disclosing KPMG's decision not to proceed as our auditors and is incorporated by
reference herein.
41
Prior to its engagement as our independent accountant, BDO had not been
consulted by us either with respect to the application of accounting principles
to a specific transaction or the type of audit opinion that might be rendered on
our financial statements, with a written report or oral advice provided to us
that BDO concluded was an important factor considered by us in reaching a
decision as to the accounting, auditing or financial reporting issue, and BDO
had not been consulted by us as to any matter that was the subject of any prior
disagreement between us and our previous certifying accountant.
We requested BDO to review this disclosure and have provided BDO with the
opportunity to furnish us with a letter addressed to the Securities Exchange
Commission containing any new information, clarification of our expressions of
its views, or the respects to which it does not agree with the statements made
here. BDO has informed us that it has reviewed these disclosures and does not
intend to furnish us with such a letter.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers
Our directors and executive officers are as follows:
Name Age Position
---- --- -------------------------------------
Marta Carpenter Kollman (1)......... 55 Chief Executive Officer, President
and Director
Victor M. Bond...................... 50 Vice President, Marketing and
Strategy
Donald P. Hateley (2)............... 44 Chairman of the Board
Dr. Christopher J. Blaxland (1)(2).. 60 Director
Donald M. Anderson (1).............. 53 Director
Justin Straus (2)................... 30 Vice President, Customer Fulfillment
and Director
----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Marta Carpenter Kollman has served as our Chief Executive Officer,
President and as a director since August 1999. She co-founded NEC in 1988 and
NAC in 1990 and has served as their President and as a director of both
companies since that time. Prior to joining us, Ms. Kollman also researched,
harvested and marketed algae to consumers. Ms. Kollman has been a member of the
Board of Directors of the Dan O'Brien Foundation since 1995 and has served as
its Secretary since 1997.
Victor M. Bond has served as our Vice President, Marketing and Strategy
since October 1999. From 1991 to 1999, he was President of ChangeNet, which
developed and implemented change management services and communications programs
for corporations.
Donald P. Hateley has served as our Chairman of the Board since August
1999. From 1994 to the present, he has been the Managing Director of InterCap
Partners, a boutique investment banking firm located in Los Angeles, California
that specializes in corporate finance, mergers and acquisitions and financial
advisory matters for middle-market companies. From 1996 to the present, he has
been a partner with Hateley & Hampton, a Los Angeles-based law firm that
specializes in corporate, tax, real estate and securities law. Mr. Hateley is
also a California licensed certified public accountant and real estate broker.
Dr. Christopher J. Blaxland has served as one of our directors since
September 1998. He was Chief Executive Officer and a director of HumaScan from
September 1 to December 22, 1998; from December 22, 1998 to August 6, 1999 he
was Chief Executive Officer and director in a consultant capacity of HumaScan
until the Reorganization. Since May 1999, he has served as the Chief Operating
Officer of PTC Therapeutics, Inc., a development stage biopharmaceutical
company, and has also worked as a business consultant. He was the President of
Cell Pathways,
43
Inc., a development stage biopharmaceutical company, from September 1993 through
December 1997.
Dr. Donald M. Anderson. has served as one of our directors since August
1999. He has served as a consultant to NAC on scientific matters since 1993, and
became a director of NAC in July 1999. He is a Senior Scientist at the Woods
Hole Oceanographic Institution in Massachusetts, has served in that capacity
since 1991 and has been on the scientific staff since 1978, after receiving his
Ph.D. from the Massachusetts Institute of Technology. Dr. Anderson is a
recognized expert on toxic and harmful algal blooms and has been the director of
the U.S. National Office on Marine Biotoxins and Harmful Algal Blooms since
1993.
Justin Straus has served as one of our directors since August 1999 our
Vice President, Customer Fulfillment since October 1999. He has also fulfilled
the function of Chief Operationing Officer from October 1999 until the present.
He joined NAC in 1984 as a harvest site employee where he participated in the
design, construction and preparation of the NAC harvest site. After holding a
variety of positions in NAC, he served as the Vice President/Director of Sales
from December 1994 to January 1998. From January 1998 to October 1999, he was
the Vice President/Director of Marketing and Sales at NAC.
Board of Directors Meetings and Committees
During 2000, 1999 and 1998, our Board of Directors held 8, 5 and 19
meetings, respectively. We maintain a standing Audit Committee and Compensation
Committee, but do not maintain a standing nominating committee. Donald Hateley,
Chris Blaxland and Justin Straus serve on the Audit Committee. Marta Carpenter
Kollman, Chris Blaxland and Donald Anderson serve on the Compensation Committee.
There are no family relationships among our directors or executive officers,
except that Ms. Kollman is the mother of Mr. Straus.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, based solely on a review of Section 16(a) forms
furnished to us, we believe that our directors, executive officers and ten
percent beneficial owners complied with all Section 16(a) reporting requirements
during 1999 except for Daryl Kollman and Zubair Kazi.
44
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth, for the years ended December 31, 2000,
1999, 1998, and 1997, compensation paid by us to (a) each person serving as our
Chief Executive Officer during 2000, 1999, 1998 or 1997 and (b) each of our
other most highly compensated executive officers (the "named executive
officers") during 2000, 1999, 1998 or 1997 who served as an executive officer on
December 31, 2000, 1999, 1998 or 1997.
SUMMARY COMPENSATION TABLE (1)
Securities
Other Annual Underlying
Name and Principal Location Year Salary ($) Bonus ($) Compensation ($) Options (#)
--------------------------- ---- ---------- --------- ---------------- -----------
Marta Carpenter Kollman 2000 290,000 0 3,000 0
President and Chief Executive Officer 1999 350,000 0 3,000 (2) 0
(Beginning August 1999) 1998 NA NA N/A N/A
1997 N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------
Christopher J. Blaxland 2000 0 0 0 0
President and Chief Executive Officer 1999 0 0 0 0
(September 1998 through July 1999) 1998 137,019 6,000 (3) 13,822
1997 N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------
Elizabeth E. Tallett 2000 0 0 0 0
President and Chief Executive Officer 1999 0 0 0 0
(May 1998 through August 1998) 1998 35,769 18,000 (3) 5,989
----------------------------------------------------------------------------------------------------------
Donald B. Brounstein 2000 0 0 0 0
President and Chief Executive Officer 1999 0 0 0 0
(Through May 1998) 1998 91,915 0 (3) 0
1997 152,574 14,980 (3) 0
----------------------------------------------------------------------------------------------------------
Kenneth S. Hollander 2000 0 0 0 0
Chief Financial Officer 1999 0 0 0 0
(June 1996 through December 1999) 1998 144,577 18,375 (3) 921
1997 94,414 17,325 (3) 0
----------------------------------------------------------------------------------------------------------
Victor M. Bond 2000 180,000 0 0 0
Vice President, Marketing & Strategy 1999 45,000 0 0 0
(Beginning October 1999) 1998 N/A N/A N/A N/A
1997 N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------
Justin Straus 2000 110,000 0 0 0
Vice President, Customer Fulfillment 1999 110,000 0 0 0
1998 110,000 0 0 0
1997 85,000 0 0 0
------------
(1) The compensation information in this table reflects compensation
paid by HumaScan, NEC or NAC. The compensation information included
in this table for each executive officer who completed his or her
service as an executive officer and director on or before the August
6, 1999 closing of our reorganization pursuant to the Agreement and
Plan of Reorganization dated July 16, 1999 among HumaScan, Inc. and
Daryl J. Kollman and Marta C. Kollman (namely, Elizabeth Tallett,
Donald Brounstein and Kenneth Hollander) is solely based upon the
information provided
45
under the heading "Executive Compensation" in our Information
Statement filed pursuant to Section 14 (F) of the Exchange Act,
filed July 27, 1999.
(2) Estimated dollar value of 1995 Chevy truck sometimes driven by the
named executive officer.
(3) The named individual routinely received other benefits from us, the
amounts of which are customary in the industry. We have concluded,
after reasonable inquiry, which the aggregate amounts of such
benefits during the applicable year did not exceed the lesser of
$50,000 or 10% of the compensation set forth above as to the named
individual.
The following table summarizes the number of shares and the terms of stock
options we granted to the named executive officers in our 2000, 1999, 1998 and
1997 fiscal years.
OPTIONS/SAR GRANTS DURING YEARS ENDED
DECEMBER 31, 2000, 1999, 1998 and 1997
Individual Grants
---------------------------------- Potential Realizable
Number of % of Total Value at Assumed
Securities Options/SARs Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation
Options/SARs Employees in Base Price for Option Term
Name Year Granted (#) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
---- ---- ------------ ------------ ----------- --------------- ------ -------
Marta Carpenter Kollman 2000 0 0 N/A N/A N/A N/A
1999 0 0 N/A N/A N/A N/A
1998 0 0 N/A N/A N/A N/A
1997 0 0 0 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Christopher J. Blaxland 2000 15,000 33.3 2.50 2/14/10 23,583 59,765
1999 2,764 6.6 0.87 3/3/04 664 1,468
1998 13,822 44.3 9.83 (2) N/A N/A
1997 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
Elizabeth E. Tallett 2000 0 0 N/A N/A N/A N/A
1999 9,215 22.0 0.87 3/3/04 2,215 4,894
1998 1,382 4.0 98.68 3/13/08 85,750 217,307
4,607 13.3 35.59 5/19/08 103,139 261,374
1997 0 0 0 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Donald B. Brounstein 2000 0 0 N/A N/A N/A N/A
1999 0 0 N/A N/A N/A N/A
1998 0 0 N/A N/A N/A N/A
1997 0 0 0 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Kenneth S. Hollander 2000 0 0 N/A N/A N/A N/A
1999 2,764 6.6 0.81 3/3/04 664 1,467
1998 921 3.0 4.77 (2) N/A N/A
1997 0 0 0 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Victor M. Bond 2000 0 0 N/A N/A N/A N/A
1999 0 0 0 N/A N/A N/A
1998 0 0 0 N/A N/A N/A
1997 0 0 0 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
Justin Straus 2000 0 0 0 N/A N/A N/A
1999 0 0 0 N/A N/A N/A
46
1998 0 0 0 N/A N/A N/A
1997 0 0 0 N/A N/A N/A
----------
(1) These options terminated in March 1999 as a result of termination of
employment.
47
The following table sets forth information concerning the number and value
of unexercised options held by each of the named executive officers as of
December 31, 2000, 1999, 1998 and 1997. None of the named executive officers
exercised options in 2000, 1999, 1998 or 1997.
AGGREGATE YEAR-END OPTION VALUES
(DECEMBER 31, 2000, 1999, 1998 and 1997)
Number of securities underlying Value of unexercised in-the-money
unexercised options at fiscal year-end (#) options-at-fiscal year-end ($) (1)
------------------------------------------ ------------------------------------
Name Year Exercisable Unexercisable Exercisable Unexercisable
---- ---- ----------- ------------- ----------- -------------
Marta Carpenter Kollman 2000 0 0 0 0
1999 0 0 N/A N/A
1998 0 0 N/A N/A
1997 0 0 N/A N/A
------------------------------------------------------------------------------------------------------------------
Christopher J. Blaxland 2000 17,764 0 0 0
1999 2,764 0 0 0
1998 5,528 (2) 11,057 (3) 0 0
1997 0 0 N/A N/A
------------------------------------------------------------------------------------------------------------------
Elizabeth E. Tallett 2000 9,215 0 0 0
1999 9,215 0 0 0
1998 5,989 0 0 0
1997 0 0 N/A N/A
------------------------------------------------------------------------------------------------------------------
Donald B. Brounstein 2000 3,455 0 0 0
1999 3,455 0 0 0
1998 3,455 0 0 0
1997 3,409 0 $118,875 N/A
------------------------------------------------------------------------------------------------------------------
Kenneth S. Hollander 2000 3,801 0 0 0
1999 3,801 0 0 0
1998 4,860 (4) 1,244 0 0
1997 2,511 2,672 $75,663 $72,500
------------------------------------------------------------------------------------------------------------------
Victor M. Bond 2000 0 0 0 0
1999 0 0 N/A N/A
1998 0 0 N/A N/A
1997 0 0 N/A N/A
------------------------------------------------------------------------------------------------------------------
Justin Straus 2000 0 0 0 0
1999 0 0 N/A N/A
1998 0 0 N/A N/A
1997 0 0 N/A N/A
----------
(1) Represents the difference between the aggregate market value at
December 31, 2000 and 1999, as applicable, of our common stock
(based on a last sale price of $0.20 and $1.38 on each such date,
respectively) and the options' aggregate exercise price.
(2) 2,764 of these options terminated in March 1999 as a result of
termination of employment.
(3) These options terminated in March 1999 as a result of termination of
employment.
(4) Options for 4,146 shares terminated in March 1999 as a result of
termination of employment.
48
Board Committees; Compensation Committee Interlocks and Insider Participation
Our Audit Committee conducted one meeting during 1999 and no meetings in
2000 and 1998, respectively. The committee reviews the scope of the independent
annual audit, the independent public accountants' letter to the Board of
Directors concerning the effectiveness of our internal financial and accounting
controls and the Board of Directors' response to that letter, if deemed
necessary.
Our Compensation Committee oversees our executive compensation program and
makes recommendations to our full Board of Directors regarding changes in
compensation. It also administers our stock option plans. The committee held one
meeting during each of 2000, 1999 and 1998, respectively.
Marta Carpenter Kollman, our Chief Executive Officer, President and a
director served on the Compensation Committee in 2000 and 1999.
Compensation of Directors
Members of our Board of Directors who are our officers are not separately
compensated for serving on the Board of Directors. We pay directors who are not
our employees an annual retainer of $40,000 ($30,000 if the director does not
attend at least 3/4 of the Board meetings held), an additional $10,000 to the
Chairman of the Board, $5,000 for each Board committee on which the director
serves, a meeting fee of $1,500 ($500 if attendance is by telephone), and
reimbursement of reasonable expenses. In addition, in February 2000, we adopted
the 2000 Stock Incentive Plan that provides that each non-employee director will
receive on the date of each annual meeting of our stockholders options to
purchase 10,000 shares of our common stock under terms more fully described
below.
Upon the Board's adoption of our 2000 Stock Incentive Plan and under its
terms, we granted to each of Donald Hateley, Christopher Blaxland and Donald
Anderson a 10-year option to purchase 15,000 shares of our common stock at an
exercise price as provided by our Board of Directors which is equal to the fair
market value of our common stock on the date on which the options are granted.
These options are fully exercisable as of the date of their grant. Donald
Anderson provides consulting services to us. During our 2000, 1999 and 1998
fiscal years, Dr. Anderson received an aggregate of $30,750, $38,852 and $89,039
in consulting fees and expenses, respectively. Mr. Blaxland received an
aggregate of $0, $5,000 and $0 in consulting fees, respectively. In addition, we
paid Hateley & Hampton, a law firm of which Mr. Hateley is the Managing Partner,
aggregate legal fees of $0, $632,502 and $367,874 in 2000, 1999 and 1998,
respectively.
Stock Options
2000 Stock Incentive Plan. The Board of Directors adopted our 2000 Stock
Incentive Plan in February 2000 for the purpose of securing for us and our
shareholders the benefits arising from the ownership of restricted shares of our
common stock, stock appreciation rights, and stock options by directors who are
not employees (Donald Hateley, Christopher Blaxland and Donald Anderson are our
current non-employee directors), officers, other key employees and consultants
to us and our subsidiaries who are expected to contribute to our future growth
and success. We have not granted restricted shares or stock appreciation rights
under the plan. As
49
stated above, we have granted options under the plan for an aggregate of 45,000
shares to our eligible non-employee directors. We may not grant awards under the
plan after February 2010. The plan is subject to shareholders approval.
The plan provides for the issuance of up to 700,000 shares of our common
stock. Under the plan, we may grant awards to key employees and will annually
grant an option to purchase 10,000 shares of our common stock to our eligible
non-employee directors, as described below. The Board of Directors administers
the plan, which, subject to the terms of the plan, determines the key employees
who will receive awards and the terms of the awards granted.
Under the plan, provided that a sufficient number of shares remain
available for grant, non-employee directors serving on the Board of Directors
immediately following each annual meeting of shareholders (including those
elected at the meeting), are automatically granted a 10-year option to purchase
10,000 shares of our common stock at an exercise price equal to the fair market
of the common stock on the annual meeting date. These options become exercisable
with respect to 1/3 of the shares underlying the option on the date of grant,
2/3 of such shares one year later and all of such shares two years later, in
each case assuming the recipient's continuous service as a director during that
time.
1996 Stock Incentive Plan. HumaScan adopted a 1996 Stock Incentive Plan in
June 1996. The provisions of the 1996 plan were substantially similar to the
provisions of our 2000 Stock Incentive Plan except that the 1996 plan provides
for the issuance of up to 64,504 shares of our common stock. We will make no
further awards under the 1996 plan, but options to purchase 25,802 shares remain
outstanding and exercisable under the plan at a weighted average exercise price
of between $3.05 and $142.49 per share.
Other Options. We have issued options outside of our stock option plans to
certain officers, directors, employees and consultants. We granted options to
purchase (a) 13,131 shares in February 1996 with a five-year term and an
exercise price of $57.84 per share, (b) 1,382 shares in March 1998 with a
ten-year term and an exercise price of $98.69 per share, and (c) 4,607 shares to
a consultant with a 5 year term and an exercise price of $14.98. We granted
4,216 shares in prior years that have been exercised. All of these options,
except for the options exercised, remain outstanding and are fully exercisable.
In September 1996, we also granted options to purchase an aggregate of 691
shares with a 10-year term and an exercise price of $65.11 to five former
non-employee directors. These options are outstanding and exercisable.
Consulting Agreements
Donald Anderson has entered into a consulting agreement with us, the
principal terms of which are described in Certain Relationships and Related
Party Transactions. Victor Bond was on a monthly retainer of $15,000 per month
during 2000 until he was appointed by the Board of Directors as Vice President
of Marketing and Strategy on December 5, 2000.
Performance Measurement Comparison*
The rules and regulations of the SEC require the presentation of a line
graph since the Common Stock has been registered under Section 12 of the
Exchange Act comparing the yearly percentage change in our cumulative
stockholder return to (i) the cumulative total return of a
50
broad market equity index and (ii) the cumulative return of either a published
industry index or a self-constructed group of peer issuers that we believe is
relevant to a comparative understanding of its performance.
We have used the NASDAQ Market (U.S.) and a peer group. The
publicly-traded companies in our peer group are Mannatech, Inc., Market America,
Inc., Usana Health Sciences, Inc., Nature's Sunshine Products, Inc., Reliv
International, Inc. and Nu Skin Enterprises Inc.
----------
* The material in this graph is not "solicitation material", is not deemed
filed with the SEC, and is not incorporated by reference in any of our filings
under the Securities Act or the Exchange Act, whether made before or after the
date hereof and irrespective of any general incorporation language in any
filing. Research Data Group, Inc. has provided the information in the graph.
COMPARISON OF 52 MONTH CUMULATIVE TOTAL RETURN**
AMONG CELL TECH INTERNATIONAL INCORPORATED,
THE NASDAQ MARKET (U.S.) AND
A PEER GROUP
51
COMPARISON OF 52 MONTH CUMULATIVE TOTAL RETURN**
AMONG CELL TECH INTERNATIONAL INCORPORATED,
THE NASDAQ MARKET (U.S.) AND
A PEER GROUP
[GRAPHIC OMITTED]
[The following table was depicted as a line graph in the printed material.]
Cumulative Total Return
--------------------------------------------------------------
8/12/1996 12/96 12/97 12/98 12/99 12/00
CELL TECH INTERNATIONAL INCORPORATED 100.00 93.75 141.67 1.05 22.92 25.26
NASDAQ STOCK MARKET (U.S.) 100.00 113.14 138.57 195.37 363.08 218.37
PEER GROUP 100.00 76.04 74.79 61.21 32.32 18.28
----------
** $100 INVESTED ON 8/12/96 IN STOCK OR ON 7/31/96 IN INDEX -- INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
Cumulative Total Return
52
8/12/96 1996 1997 1998 1999 2000
Cell Tech
International
Incorporated 100 94 142 1 23 25
NASDAQ Stock
Market 100 113 139 195 363 218
Peer Group 100 76 75 61 32 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding ownership of
our capital stock as of August 24, 2001, by (i) each person known to us to
beneficially own more than 5% of the shares of our outstanding common stock,
(ii) each of our directors, (iii) each of the named executive officers, and (iv)
all of our directors and executive officers as a group.
53
Number of
Shares Percent of
Beneficially Shares
Name and Address of Beneficial Owner Owned (1) Outstanding
------------------------------------ --------- -----------
Marta Carpenter Kollman
565 Century Court
Klamath Falls, Oregon 97601 4,341,498(2) 40.8
Daryl J. Kollman
5248 Timber Branch Way
San Diego, CA 92130 4,341,498(3) 40.8
Victor M. Bond
565 Century Court
Klamath Falls, Oregon 97601 0 *
Donald P. Hateley
1800 Century Park East
Los Angeles, California 90067 315,000(4) 2.8
Dr. Christopher J. Blaxland
509 County Line Road
Radnor, Pennsylvania 19087 17,764(5) *
Donald M. Anderson
Biology Department
Mail Stop 32, Redfield 332
Woods Hole, Massachusetts 02543-1049 17,949(6) *
Justin Straus
565 Century Court
Klamath Falls, Oregon 97601 0 *
Zubair Kazi
3671 Sunswept Drive 4,837,691(7) 33.8
Studio City, California 91604
All executive officers and directors as a group (6 persons) 9,018,524(8) 84.4
----------
* Less than 1% of the outstanding shares.
(1) A person is considered to "beneficially own" any shares (a) over which
such person exercises sole or shared voting or investment power, or (b) of
which such person has the right to acquire ownership at any time within 60
days (e.g., through exercise of stock options). Voting and investment
power relating to the shares referenced in the table above is exercised
solely by the beneficial owner, except as indicated otherwise.
(2) Excludes 4,341,498 shares held by Ms. Kollman's spouse. Ms. Kollman has
sole voting and investment power with respect to her shares. The Internal
Revenue Service has a security interest in all of Ms. Kollman's shares
pursuant to a Notice of Determination dated June 18, 1999 under the terms
of which the shares are held in trust and will be released upon the
Kollmans' payment of their federal income tax liabilities for various
specified years. Ms. Kollman will sell her shares as needed and allowed by
federal and state securities laws to make quarterly payments to the
Internal Revenue Service. Ms. Kollman retains all voting rights incident
to her shares while the shares are held in trust. The Internal Revenue
Service may seize Ms. Kollman's shares from trust if the Kollmans fail to
timely cure a default upon their commitments
54
to the Internal Revenue Service under the Notice of Determination. The
Internal Revenue Service would thereafter proceed to sell or judicially
foreclose some or all of the shares for payment of the Kollmans' tax
liabilities as allowed by applicable law.
(3) Excludes 4,341,498 shares held by Mr. Kollman's spouse. Mr. Kollman has
sole voting and investment power with respect to his shares. The Internal
Revenue Service has a security interest in all of Mr. Kollman's shares
pursuant to a Notice of Determination dated June 18, 1999 under the terms
of which the shares are held in trust and will be released upon the
Kollmans' payment of their federal income tax liabilities for various
specified years. Mr. Kollman will sell his shares as needed and allowed by
federal and state securities laws to make quarterly payments to the
Internal Revenue Service. Mr. Kollman retains all voting rights incident
to his shares while the shares are held in trust. The Internal Revenue
Service may seize Mr. Kollman's shares from trust if the Kollmans fail to
timely cure a default upon their commitments to the Internal Revenue
Service under the Notice of Determination. The Internal Revenue Service
would thereafter proceed to sell or judicially foreclose some or all of
the shares for payment of the Kollmans' tax liabilities as allowed by
applicable law.
(4) Represents warrants to purchase 300,000 shares of common stock held by
Hateley & Hampton, a Professional Law Corporation of which Donald P.
Hateley is a President, co-founder and a shareholder and 15,000 shares Mr.
Hateley has the right to acquire pursuant to options exercisable within 60
days.
(5) Represents 17,764 shares Dr. Blaxland has the right to acquire pursuant to
options exercisable within 60 days.
(6) Includes 15,000 shares Mr. Anderson has the right to acquire pursuant to
options exercisable within 60 days.
(7) Includes 1,157,895 shares already issued to Kazi and an additional
1,260,951 issuable to Kazi under various covenants to his existing shares
and 1,157,895 issuable to Kazi upon the exercise of his warrants and
1,260,951 issuable to Kazi under various covenants upon the exercise of
his warrants.
(8) Includes 315,000 shares issuable upon the exercise of warrants and 32,764
shares issuable upon the exercise of options within 60 days. See footnotes
4 through 6 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Hateley & Hampton, a Professional Law Corporation of which Donald P.
Hateley is President, co-founder and a shareholder, received at the closing of
the Reorganization warrants to purchase an aggregate of 300,000 shares of our
common stock in consideration for providing legal and consulting services to NEC
and NAC. The warrants are fully exercisable at an exercise price of $.075 per
share and expire on August 5, 2004. The warrants contain certain demand and
"piggyback" registration rights for the warrants and the underlying common stock
We paid Hateley & Hampton, a law firm of which Mr. Hateley is the Chief
Executive Officer, aggregate legal fees of $0, $632,502 and $367,874 in 2000,
1999 and 1998, respectively.
We lease approximately 250,000 square feet of office, processing, freezer
and storage space directly from our principal shareholders or their affiliates.
Most of these leases are year-to-year, although we do rent some space on a
month-to-month basis and one lease will expires in 2005. We believe that the
space leased from our shareholders and their affiliates is rented to us at below
or at fair market values.
55
In June 1999, NAC and NEC entered into a Loan and Security Agreement with
Coast Business Credit (the "Coast Loan"), a division of Southern Pacific Bank,
in which Coast agreed to lend NAC and NEC up to $15 million, subject to the
Reorganization taking effect. The total loan amount consists of a loan against
our receivables, an advance against NAC's monthly net collections, an inventory
loan of up to $3 million, a term loan of up to $2.4 million and an equipment
acquisition loan of up to $2 million. The interest rate on the receivable loan,
advances and the inventory loan is equal to the prime rate plus 2.5% per annum.
The interest rate on the term loan and the equipment acquisition loan is equal
to the prime rate plus 2.75% per annum. The Coast Loan is secured by
substantially all of the assets of NAC and NEC and the personal guarantees of
Daryl and Marta Kollman. The net proceeds of the loan were used to pay a
previously declared dividend of $7.6 million to the Kollmans and to pay the
balance of $1,700,000 owed to the previous owner of NAC and NEC.
Donald Anderson has entered into a consulting agreement with us under
which we have agreed to pay Mr. Anderson $125 per hour for consulting services
defined from time to time by us.
In 1999, before the Reorganization, we also distributed certain real
estate valued at $1,050,000 to the Kollmans. We purchase promotional materials
from an entity owned by the Kollmans. Payments for promotional publications to
this entity for 2000, 1999, 1998 and 1997 aggregated $0, $15,360, $48,640 and
$115,577, respectively.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements. The Financial Statements and Schedules are
listed in the Index to Financial Statements on page F-2 of this Form 10-K.
(a)(3) Exhibits:
Exhibit Number Description
-------------- -----------
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
(2.1) Agreement and Plan of Reorganization, dated July
16, 1999, among the Company, Daryl J. Kollman
and Marta C. Kollman (filed as Exhibit 2.1
without schedules and exhibits to the Current
Report on Form 8-K on August 2, 1999 and
incorporated by reference)
(3) Articles of Incorporation and Bylaws
(3.1) Certificate of Incorporation, as amended (filed
as Exhibit 3.1 to the Registration Statement for
Small Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(3.2) Certificate of Amendment of Certificate of
Incorporation (filed as Exhibit 3.1(a) to the
Current Report on Form 8-K on November 19, 1999
and incorporated by reference)
(3.3) Certificate of Designations, Preferences and
Rights of Series B Convertible Preferred Stock
(filed as Exhibit 3.1 to the Current Report on
Form 8-K on August 2, 1999 and incorporated by
reference)
(3.4) Amended and Restated Bylaws (filed as Exhibit
3.2 to the Registration Form for Small Business
on Form SB-2 on June 21, 1996 and incorporated
by reference)
(4) Instruments Defining the Rights of Security Holders
(4.1) Loan and Security Agreement, dated June 21,
1999, by and among The New Earth Company, The
New Algae Company and Coast Business Credit
(filed as Exhibit 4.1
57
to the Current Report on Form 8-K on
November 19, 1999 and incorporated by
reference)
(4.2) Continuing Guaranty, dated August 6, 1999 (filed
as Exhibit 4.2 to the Current Report on Form 8-K
on November 19, 1999 and incorporated by
reference)
(4.3) Form of Common Stock Certificate (filed as
Exhibit 4.1 to the Amendment to Registration
Statement for Small Business on Form SB-2/A on
July 26, 1996 and incorporated by reference)
(4.4) Form of Series A Preferred Stock Certificate
(filed as Exhibit 4.2 to the Amendment to
Registration Statement for Small Business on
Form SB-2/A on July 26, 1996 and incorporated by
reference)
(4.5) Form of Warrant to Purchase Shares of Common
Stock to be issued to Andromeda Enterprises,
Inc. or its designees, Hateley & Hampton or its
designees and Wharton Capital Partners, Ltd.
(filed as Exhibit 4.1 to the Current Report on
Form 8-K on August 2, 1999 and incorporated by
reference)
(4.6) Nonqualified Stock Option Agreement between the
Company and Physicians World Communications
Group (filed as Exhibit 4.9 to the Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1998 and incorporated by
reference)
(4.7) Warrant to Purchase Shares of Common Stock
issued to Scantek Medical, Inc. as of May 15,
1998 (filed as Exhibit 4.7 to the Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1998 and incorporated by
reference)
(4.8) Warrant to Purchase Shares of Common Stock
issued to Zigmed, Inc. as of May 15, 1998 (filed
as Exhibit 4.8 to the Quarterly Report on Form
10-Q for the quarterly period ended September
30, 1998 and incorporated by reference)
(4.9) Representative's Warrant Agreement between the
Company and Keane Securities Co., including Form
of Warrant Certificate (filed as Exhibit 4.3 to
the Amendment to Registration Statement for
Small Business
58
on Form SB-2/A on July 26, 1996 and incorporated
by reference)
(4.10) Form of Warrant Certificate for March Bridge
Warrants (filed as Exhibit 4.4 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and incorporated by
reference)
(4.11) Nonqualified Stock Option Agreements with
Certain Officers (Donald Brounstein, James
Whidden, Whidden & Associates, Inc., Amy Lewis,
and Everett Lautin) (filed as Exhibit 4.5 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and incorporated by
reference)
(4.12) Form of Private Warrants issued in connection
with May Private Placement (filed as Exhibit 4.6
to the Registration Statement for Small Business
on Form SB-2 on June 21, 1996 and incorporated
by reference)
(10) Material Contracts
(10.1) General Release, dated January 25, 2000 between
the Company and Donald Brounstein *
(10.2) Settlement Agreement, dated May 15, 1998,
between the Company and Scantek Medical, Inc.
(filed as Exhibit 10.16 to the Quarterly Report
on Form 10-Q for the quarterly period ended June
30, 1998 and incorporated by reference)
(10.3) Settlement Agreement, dated May 15, 1998,
between the Company and Zigmed, Inc. (filed as
Exhibit 10.17 to the Quarterly Report on Form
10-Q for the quarterly period ended June 30,
1998 and incorporated by reference)
(10.4) Employment Agreement between the Company and Dr.
Chris J. M. Blaxland, dated as of September 1,
1998 (filed as Exhibit 10.18 to the Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1998 and incorporated by
reference)
(10.5) Employment Agreement between the Company and
Donald Brounstein, dated January 1, 1996 (filed
as Exhibit 10.8 to the Registration Statement
for Small
59
Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(10.6) Employment Agreement between the Company and
James J. Whidden (filed as Exhibit 10.9 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and incorporated by
reference)
(10.7) Employment Agreement between the Company and
Kenneth S. Hollander, dated June 3, 1996 (filed
as Exhibit 10.10 to the Registration Statement
for Small Business on Form SB-2 on June 21, 1996
and incorporated by reference)
(10.8) Consulting Agreement, dated March 1, 1996,
between the Company and Don Anderson *
(10.9) Exclusive Supply and Distribution Agreement
between the Company and Physician Sales &
Services, Inc., as amended (filed as Exhibit
10.1 to the Amendment to Registration Statement
for Small Business on Form SB-2/A on July 26,
1996 and incorporated by reference)
(10.10) License Agreement, dated October 20, 1995,
between the Company and Scantek Medical, Inc.,
as amended (filed as Exhibit 10.2 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and incorporated by
reference)
(10.11) Construction Contract between the Company and
Zigmed, Inc. (filed as Exhibit 10.3 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and incorporated by
reference)
(10.12) Lease, dated June 11, 1996, between the Company
and the Moen Organization, Inc. (filed as
Exhibit 10.14 to the Registration Statement for
Small Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(10.13) Lease Termination Agreement, dated February 2,
1999, between the Company and the Moen
Organization, Inc. *
(10.14) Intentionally omitted
60
(10.15) Commercial Lease Agreement, dated July 1, 1995,
between and among The New Earth Company, Daryl
Kollman and Marta Kollman *
(10.16) Commercial Lease Agreement, dated August 15,
1995, between and among The New Algae Company,
Daryl Kollman and Marta Kollman *
(10.17) Ground Lease Agreement, dated December 9, 1995,
between and among The New Earth Company, Emil
Nobel and Mary Ann Nobel *
(10.18) Commercial Lease Agreement, dated May 1, 1996,
between and among The New Algae Company, Daryl
Kollman and Marta Kollman *
(10.19) Commercial Lease Agreement, dated September 1,
1996, between Klamath Cold Storage, Inc. and The
New Earth Company, including Sublease between
The New Earth Company and The New Algae Company
*
(10.20) Voting and Stockholders' Rights Agreement, dated
May 15, 1996 (filed as Exhibit 10.4 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and by this reference
incorporated herein)
(10.21) Agreement to Issue Warrants, dated March 19,
1996, between the Company and Udi Toledano
(filed as Exhibit 10.5 to the Registration
Statement for Small Business on Form SB-2 on
June 21, 1996 and by this reference incorporated
herein)
(10.22) Agreement to Issue Warrants, dated March 19,
1996, between the Company and Herbert V. Turk
(filed as Exhibit 10.6 to the Registration
Statement for Small Business on Form SB-2 on
June 21, 1996 and by this reference incorporated
herein)
(10.23) Non-Negotiable Warrant Certificate between the
Company and Physician Sales & Service, Inc.
(filed as Exhibit 10.7 to the Registration
Statement for Small Business on Form SB-2 on
June 21, 1996 and by this reference incorporated
herein)
(10.24) HumaScan, Inc. Non-Employee Director Stock
Option Plan (filed as Exhibit 10.12 to the
Registration Statement
61
for Small Business on Form SB-2 on June 21,
1996 and by this reference incorporated herein)
(10.25) Form of Indemnification Agreement between the
Company and its Executive Officers and Directors
(filed as Exhibit 10.15 to the Annual Report for
Small Business on Form 10KSB40 for the fiscal
year ended December 31, 1997 and by this
reference incorporated herein)
(10.26) The Company's 2000 Stock Incentive Plan *
(16) Letter from KPMG, dated November 2, 1999, agreeing with the
statements contained in the Company's Form 8-K, dated November
2, 1999 (filed as Exhibit 16 to the Current Report on Form 8-K
on November 22, 1999 and by this reference incorporated
herein)
(21) List of the Company's Subsidiaries *
(23) Consent of BDO Seidman, LLP, Independent Accountants
(99) Additional Exhibits
(99.1) Internal Revenue Service Notice of
Determination, dated July 18, 1999 (filed as
Exhibit 99.2 to the Current Report on Form 8-K
on November 19, 1999 and by this reference
incorporated herein)
(99.2) Pledge and Escrow Agreement between and among
Daryl Kollman and Marta Kollman, the Internal
Revenue Service and West Coast Trust Co., Inc.
(filed as Exhibit 99.3 to the Current Report on
Form 8-K on November 19, 1999 and by this
reference incorporated herein)
* Filed herewith
(b) Reports on Form 8-K. The Company filed the following reports on Form 8-K
during the last fiscal quarters of 1998 and 1999: Form 8-K filed November 19,
1999 relating to the Reorganization and the Kollman's agreement with the
Internal Revenue Service, and two Form 8-Ks filed November 22, 1999 relating to
the Registrant's change in accountants.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Klamath
Falls, State of Oregon on October 22, 2001.
CELL TECH INTERNATIONAL
INCORPORATED.
By: /s/ Marta C. Kollman
-----------------------------------------
Marta C. Kollman, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities indicated
have signed this report below:
Signature Title Date
--------- ----- ----
By: /s/ Marta C. Kollman President and Chief Executive October 22, 2001
--------------------------------- Officer and Director
Marta C. Kollman (principal executive officer,
principal financial officer and
principal accounting officer)
By: /s/ Donald P. Hateley Chairman of the Board October 22, 2001
---------------------------------
Donald P. Hateley
By: /s/ Justin Straus Vice President of Customer October 22, 2001
--------------------------------- Fulfillment and Director
Justin Straus
Director
By: /s/ Chris J.M. Blaxland October 22, 2001
---------------------------------
Chris J.M. Blaxland
By: /s/ Donald M. Anderson Director October 22, 2001
---------------------------------
Donald M. Anderson
63
CELL TECH INTERNATIONAL
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
F-1
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Income (Loss) F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Cell Tech International Incorporated and Subsidiaries
Klamath Falls, Oregon
We have audited the accompanying consolidated balance sheets of Cell Tech
International Incorporated and Subsidiaries as of December 31, 2000, 1999 and
1998, and the related consolidated statements of income (loss), shareholders'
equity and cash flows for each of the years ended December 31, 2000, 1999, 1998
and 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates, made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cell Tech
International Incorporated and Subsidiaries as of December 31, 2000, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the years ended December 31, 2000, 1999, 1998 and 1997, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company experienced a net loss of $2,783,939 in 2000,
has a negative working capital of $7,341,964 at December 31, 2000, is
experiencing difficulty in generating sufficient cash flows to meet its
obligations and is in default of certain restrictive covenants on its line of
credit. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to these matters are
also described in Note 2. The accompanying financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Los Angeles, California
March 20, 2001
F-3
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------------
2000 1999 1998
=========== =========== ===========
Assets (Note 8)
Current assets
Cash and cash equivalents $ -- $ -- $ 1,502,110
Receivables (Note 3) 535,145 489,651 412,366
Current portion of inventories (Note 4) 2,500,000 3,500,000 2,650,000
Prepaid expenses 845,855 733,650 940,952
----------- ----------- -----------
Total current assets 3,881,000 4,723,301 5,505,428
----------- ----------- -----------
Property and equipment, net of accumulated depreciation (Note 5) 13,560,986 16,075,851 19,666,350
Long-term inventories, net of current portion (Note 4) 8,675,999 10,031,387 13,918,241
Other assets (Note 6) 1,131,661 1,983,982 2,009,347
----------- ----------- -----------
Total assets $27,249,646 $32,814,521 $41,099,366
=========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Bank overdraft $ 1,310,551 $ 247,584 $ --
Accounts payable 2,897,684 4,203,000 2,012,070
Commissions payable 1,869,135 4,396,375 4,169,804
Sales taxes payable 112,988 174,515 277,691
Accrued payroll and related liabilities 255,132 380,267 352,050
Other accrued expenses 1,173,321 640,450 1,074,988
Current portion of long-term debt (Notes 7 and 8) 2,862,683 3,895,579 690,093
F-4
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Related party payable (Note 15) 741,470 -- --
----------- ----------- -----------
Total current liabilities 11,222,964 13,937,770 8,576,696
----------- ----------- -----------
Long-term liabilities
Long-term debt, net of current portion (Note 8) 261,660 327,790 799,608
----------- ----------- -----------
Total liabilities 11,484,624 14,265,560 9,376,304
----------- ----------- -----------
Commitments and contingencies (Notes 12, 13 and 14)
Shareholders' equity
Series A convertible preferred stock - no par value; 4,175,000 shares
authorized; none issued and outstanding in 2000, 1999 and 1998 -- -- --
Series B convertible preferred stock - no par value; 800,000 shares
authorized; none issued and outstanding in 2000, 1999 and 1998 -- -- --
Undesignated preferred stock - no par value; 1,825,000 shares authorized;
none issued and outstanding in 2000, 1999 and 1998 -- -- --
Common stock - $.01 par value; in 2000, 1999 and 1998, 50,000,000 shares
authorized, 10,640,895 shares issued and outstanding in 2000 and 1999;
8,630,000 in 1998 (Notes 10 and 12) 106,409 106,409 86,830
Additional paid-in capital 2,299,696 2,299,696 192,213
Retained earnings 13,358,917 16,142,856 31,444,019
----------- ----------- -----------
Total shareholders' equity 15,765,022 18,548,961 31,723,062
----------- ----------- -----------
Total liabilities and shareholders' equity $27,249,646 $32,814,521 $41,099,366
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997
============= ============= ============= =============
Revenue $ 38,976,663 $ 54,487,939 $ 74,071,275 $ 124,787,758
Cost of sales 11,488,802 14,748,570 19,219,922 22,196,792
------------- ------------- ------------- -------------
Gross profit 27,487,861 39,739,369 54,851,353 102,590,966
Commissions 17,632,344 24,433,049 33,825,537 60,277,004
------------- ------------- ------------- -------------
Selling profit 9,855,517 15,306,320 21,025,816 42,313,962
Shipping and handling expenses 2,097,369 3,899,361 4,773,524 7,625,954
Selling expenses 5,338,194 7,974,259 9,234,333 13,033,762
Research and development 456,098 1,453,371 1,023,909 593,012
General and administrative 4,400,348 6,418,788 4,323,765 5,224,057
------------- ------------- ------------- -------------
Operating income (loss) (2,436,492) (4,439,459) 1,670,285 15,837,177
Other income (Note 16) 421,045 1,012,660 882,985 1,914,784
Interest expense (768,492) (714,025) (256,985) (498,703)
------------- ------------- ------------- -------------
Net income (loss) before taxes (2,783,939) (4,140,824) 2,296,285 17,253,258
Income tax benefit (Note 9) -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) $ (2,783,939) $ (4,140,824) $ 2,296,285 $ 17,253,258
============= ============= ============= =============
Basic and diluted income (loss) per share $ (0.26) $ (0.45) $ 0.26 $ 1.99
============= ============= ============= =============
Weighted average number of common shares
outstanding used to calculate basic and
diluted income (loss) per share 10,640,895 9,280,431 8,683,000 8,683,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-6
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock (Note 12) Additional
--------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
============ ============ ============ ============ =============
Balances, January 1, 1997 8,683,000 $ 86,830 $ 192,213 $ 21,969,476 $ 22,248,519
Distributions to shareholders -- -- -- (7,285,000) (7,285,000)
Net income -- -- -- 17,253,258 17,253,258
------------ ------------ ------------ ------------ ------------
Balances, January 1, 1998 8,683,000 86,830 192,213 31,937,734 32,216,777
Distributions to shareholders -- -- -- (2,790,000) (2,790,000)
Net income -- -- -- 2,296,285 2,296,285
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1998 8,683,000 86,830 192,213 31,444,019 31,723,062
Reorganization, recapitalization and
reverse stock split (Note 1) 750,000 7,500 69,562 -- 77,062
Issuance of common stock and warrants
for cash (Note 10) 1,157,895 11,579 1,504,046 -- 1,515,625
Common stock issued for services (Note 10) 50,000 500 133,875 -- 134,375
Warrants issued for services (Note 10) -- -- 400,000 -- 400,000
Distributions to shareholders -- -- -- (11,160,339) (11,160,339)
Net loss -- -- -- (4,140,824) (4,140,824)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1999 10,640,895 106,409 2,299,696 16,142,856 18,548,961
Net loss -- -- -- (2,783,939) (2,783,939)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 2000 10,640,895 $ 106,409 $ 2,299,696 $ 13,358,917 $ 15,765,022
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------------------------------------------
2000 1999 1998 1997
============ ============ ============ ============
Cash flows from operating activities
Net income (loss) $ (2,783,939) $ (4,140,824) $ 2,296,285 $ 17,253,258
Adjustments to reconcile net income (loss) to cash
provided by (used for)
operating activities:
Depreciation and amortization 3,347,670 2,621,377 2,898,649 3,090,365
Loss on sale of fixed assets 60,693 530,095 309,705 179,538
Impairment of fixed assets and intangibles 136,381 -- 861,865 --
Warrants issued for services -- 400,000 -- --
Changes in assets and liabilities:
Receivables (45,494) (77,285) (119,639) 250,707
Inventories 2,355,388 3,036,854 2,179,525 (5,133,164)
Prepaid expenses (112,205) 207,302 (20,787) (216,897)
Other assets (36,159) 25,365 1,569,395 (425,034)
Accounts payable (1,305,316) 2,190,930 815,457 (466,780)
Commissions payable (2,527,240) 226,571 (1,798,107) (4,414,202)
Sales tax payable (61,527) (103,176) (2,491,831) (6,545,939)
Accrued payroll and payroll related
liabilities (125,135) 28,217 12,910 (321,787)
Other accrued expenses 532,871 (434,538) 52,552 354,998
------------ ------------ ------------ ------------
Net cash provided by (used for) operating activities (564,012) 4,510,888 6,565,979 3,605,063
------------ ------------ ------------ ------------
F-8
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from investing activities
Purchase of property and equipment (145,493) (605,236) (1,332,622) (1,483,946)
Proceeds from sale of equipment 4,094 71,325 280,266 268,579
------------ ------------ ------------ ------------
Net cash used for investing activities (141,399) (533,911) (1,052,356) (1,215,367)
------------ ------------ ------------ ------------
Cash flows from financing activities
Bank overdraft 1,062,967 247,584 (492,809) 492,809
Payments on long-term debt (1,099,026) (22,451,347) (728,704) (768,587)
Proceeds from issuance of long-term debt -- 25,185,015 -- --
Net proceeds from related party debt 741,470 -- -- --
Proceeds from issuance of common stock -- 1,650,000 -- --
Distributions to shareholders -- (10,110,339) (2,790,000) (7,285,000)
------------ ------------ ------------ ------------
Net cash provided by (used for) financing activities 705,411 (5,479,087) (4,011,513) (7,560,778)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents -- (1,502,110) 1,502,110 (5,171,082)
Cash and cash equivalents, beginning of year -- 1,502,110 -- 5,171,082
------------ ------------ ------------ ------------
Cash and cash equivalents, end of year $ -- $ -- $ 1,502,110 $ --
============ ============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 779,424 $ 503,230 $ 989,859 $ 768,591
============ ============ ============ ============
Supplemental disclosure of non-cash transactions
Stock issued for fundraising activities $ -- $ 134,375 $ -- $ --
Distributions of fixed assets to shareholders -- 1,050,000 -- --
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-9
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Cell Tech International Incorporated, The New Algae Company (NAC), and The New
Earth Company (NEC), collectively the "Company", are engaged in the production
and marketing of food supplement products made with blue-green algae harvested
from Klamath Lake, Oregon. The Company uses a multi-level distributor network
throughout the United States and Canada to distribute its products. The Company
commenced operations as NAC in 1982 and subsequently formed NEC to further its
operations. In 1990 NAC purchased the assets of Cell Tech, Inc. and then began
doing business under the trade name "Cell Tech".
Effective August 6, 1999, pursuant to an Agreement and Plan of Reorganization,
HumaScan, Inc., a Delaware public shell corporation ("Holding Company"),
acquired all of the issued and outstanding shares of NAC and NEC ("Operating
Companies"). In consideration of the shares of Operating Companies, the Holding
Company issued to Daryl J. Kollman and Marta C. Kollman (together the
"Kollmans") an aggregate of 13,000,000 shares of common stock of the Holding
Company and an aggregate of 748,507 shares of Series B Preferred Stock
("Preferred Stock") of the Holding Company. Each share of preferred stock has
converted automatically into 108.520933 shares of the Holding Company common
stock (an aggregate of 81,228,723 shares). As of August 6, 1999, the Holding
Company had 8,139,070 shares of common stock outstanding immediately prior to
the reorganization and issuance to the Kollmans, and had reserved 2,569,107
shares of common stock for issuance upon the exercise of outstanding options and
warrants or pursuant to the Holding Company's 1996 Stock Incentive Plan. On
August 10, 1999, the Holding Company undertook a 1:10.8520933 reverse stock
split and amended its certificate of incorporation to increase its authorized
shares of common stock from 25,000,000 to 50,000,000 to provide a sufficient
number of shares of the Holding Company common stock to permit the conversion of
all of the preferred stock. All share data, including warrants and options for
the purchase of common stock has been restated to reflect the reverse stock
split.
For accounting purposes, the acquisition has been treated as a recapitalization
of the Operating Companies with the Operating Companies as the acquirer
("reverse acquisition"). The accompanying financial statements include the
accounts of the Operating Companies for all periods presented, and the accounts
of the Holding Company from August 6, 1999, the effective date of the merger.
On August 19, 1999, the Holding Company changed its name to "Cell Tech
International Incorporated." With effect from January 1, 2000, NAC and NEC were
combined into one company.
Basis of Consolidation
The accompanying consolidated financial statements of the Company include the
accounts of the Holding Company and its subsidiaries NAC and NEC. Intercompany
transactions and balances have been eliminated on consolidation.
F-10
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three
months or less to be cash equivalents.
Inventories
Work in progress, finished goods and sales aids inventories are stated at the
lower of cost or market. The Company uses a weighted average method to determine
cost for work in progress and finished goods based upon normal harvesting
volumes (see Note 4). Cost of work in progress and finished goods includes
direct labor and an allocation of overhead costs. Sales aids consist of video
tapes, audio tapes, brochures and other promotional items sold by the Company to
its distributors.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of 40 years for buildings
and 3 to 10 years for machinery and equipment as well as furniture and fixtures.
Additions, renewals and improvements are capitalized. Expenditures for
maintenance, repairs and minor renewals and improvements are charged to expense.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is recorded in operations.
Intangible Assets
Intangible assets included in other assets consist principally of lease rights
and the excess of purchase price over the fair value of the tangible assets of
Cell Tech, Inc., acquired in 1990 (see Note 13). These excess costs include a
licensing agreement to harvest algae on a certain canal, a noncompetition
agreement, product trade names and goodwill. Such intangibles are being
amortized using the straight-line method over 10 to 12 years.
F-11
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Instruments
The Company estimates the fair value of its monetary assets and liabilities
based upon the existing interest rates related to such assets and liabilities
compared to the current market rates of interest for instruments of a similar
nature and degree of risk. Cash and cash equivalents approximate fair value as
reported in the consolidated balance sheet. The fair value of debt is estimated
using discounted cash flow analyses, based on the Company's incremental
borrowing rates for similar types of borrowing arrangements. The fair value of
the Company's debt at December 31, 2000, 1999 and 1998 approximates the carrying
value. The Company records all other financial instruments, including accounts
receivable and accounts payable, at cost which approximates market value.
Revenue Recognition
The Company recognizes revenue when the risk of loss for the product sold passes
to the customer and any reserve for estimated returns can be quantified, which
is generally when goods are shipped.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB No. 101). SAB No. 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB No. 101 must be applied to the financial
statements no later than the quarter ending September 30, 2000. The adoption of
SAB No. 101 in 2000 did not have a material affect on the Company's financial
results.
Shipping and Handling Fees and Costs
The Company adopted EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs", since December 15, 2000. All shipping and handling costs for goods
shipped by the Company to customers are included in shipping and handling
expenses in the statements of income (loss). Shipping and handling costs of
goods shipped by the Company to customers for the years ended December 31, 2000,
1999, 1998 and 1997 were $1,333,359, $2,769,269, $3,796,461 and $5,745,613,
respectively.
Income Taxes
Effective October 11, 1990 and October 1, 1995, NAC and NEC elected S
Corporation status, respectively. Under the provisions of the Internal Revenue
Code for S Corporations, the Company was not liable for payment of federal or
state income taxes. Rather, the taxable income of the Company was attributed
directly to its shareholders. Because NEC had previously operated as a taxable
entity, it might be subject to potential "built-in gains" tax upon the sale of
its operating assets or its entire business.
On June 20, 1999, NAC and NEC elected to be taxed as a C-Corporation.
The Company accounts for income taxes by recognizing deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statements carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
F-12
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") establishes guidelines regarding when impairment losses on
long-lived assets, which include computer equipment, should be recognized and
how impairment losses should be measured.
The Company reviews the carrying values of its long-lived and identifiable
assets for possible impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be recoverable. Any
long-lived assets held for disposal are reported at the lower of their carrying
value or fair value less costs to sell. The financial statements for the year
ended December 31, 1998 include an adjustment due to the impairment of fixed
assets of $861,865. There was no adjustment due to the impairment of long-lived
assets during the year ended December 31, 1999. During the year ended December
31, 2000, the Company recorded an adjustment due to the impairment of fixed
assets of $136,381.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
disclosure in accordance with the provisions of SFAS No. 123 (Note 11).
Comprehensive Income
In June of 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130
"Reporting on Comprehensive Income," in response to concerns of users of
financial statements about the increasing number of comprehensive income items
that bypass the income statement. This statement is effective for all periods
beginning after December 15, 1997. Since the Company's only component of
comprehensive income is net income on loss from operations, the pronouncement
currently imposes no additional reporting requirements on the Company.
F-13
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Reporting
The Company has only identified one operating segment that being the production
and sale of food supplement products made from blue green algae.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") provides for the calculation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible preferred stock. The Company's potential
common shares, consisting of the stock options and warrants described in Note
11, have not been included in the calculation of diluted earnings per share for
any period as their effect is antidilutive.
Research and Development
All research and development costs are expensed as incurred.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (SFAS 133), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement of Financial Accounting
Standards No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the effective date of FASB Statement No. 133 - an amendment of
FASB Statement No. 133 ("SFAS 133"), defers the effective date of SFAS 133 to be
effective for financial statements ending after June 15, 2000. Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133, amended certain of the accounting and reporting standards of SFAS 133. The
adoption of SFAS No. 133 did not have a material effect on the financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The implementation of FIN 44 did not have a material effect on the Company's
financial position.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
F-14
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company does not believe
that implementation of the new pronouncements will have a material effect on the
financial position of the company.
Reclassification
Certain 1999, 1998 and 1997 amounts have been reclassified to conform to the
2000 consolidated financial statements presentation. These reclassifications
have no effect on previously reported net income.
NOTE 2--GOING CONCERN
The Company incurred a net loss of $2,783,939 in 2000. Additionally, the
Company's current liabilities exceeded its current assets by $7,341,964 at
December 31, 2000. The Company has a $15 million Line of Credit Agreement with a
financial institution as described and summarized in Note 7. The Company is not
in compliance with certain restrictive covenants of this line of credit.
Accordingly, the entire amount outstanding under the Line of Credit Agreement of
$2,796,553 as at December 31, 2000 has been classified as a current liability.
In order to pay-off the outstanding balance the lender began withholding funds
from the daily collections of the Company and applied such withholdings to the
outstanding balance. The ability of the Company to borrow under the Line of
Credit Agreement was also restricted as a result of the lender reducing the
availability under the Line of Credit Agreement by the cumulative amount of the
daily withholdings. As a result, the Company is experiencing difficulty in
generating sufficient cash flows to meet its obligations. These conditions give
rise to substantial doubt about the Company's ability to continue as a going
concern.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flows to meet its obligations on a timely basis.
The Company is continuing its efforts to raise both debt and equity financing.
However, there can be no assurance that the Company will be able to service
additional financing, or that if such financing is available, whether the terms
or conditions would be acceptable to the Company.
F-15
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 3 -- RECEIVABLES
As revenues are generally paid with credit cards and thereby collected prior to
shipment, the Company does not record trade accounts receivable. Receivables
consist of the following:
December 31,
------------------------------------
2000 1999 1998
======== ======== ========
Due from shareholders $ -- $ 55,102 $ 43,263
Credit card deposits in transit 437,832 325,530 --
Miscellaneous receivables 97,313 109,019 369,103
-------- -------- --------
$535,145 $489,651 $412,366
======== ======== ========
NOTE 4 -- INVENTORIES
Inventories consist of the following:
December 31,
--------------------------------------------
2000 1999 1998
============ ============ ============
Work in progress $ 11,172,105 $ 13,323,989 $ 15,087,107
Finished goods 884,208 1,049,612 1,894,473
Sales aids 19,686 57,786 86,661
------------ ------------ ------------
12,075,999 14,431,387 17,068,241
Less reserve for potentially
unsaleable inventories (Note 12) (900,000) (900,000) (500,000)
------------ ------------ ------------
11,175,999 13,531,387 16,568,241
Less current portion (2,500,000) (3,500,000) (2,650,000)
------------ ------------ ------------
$ 8,675,999 $ 10,031,387 $ 13,918,241
============ ============ ============
During 2000, 1999 and 1998, the Company curtailed the volume of algae harvested.
Accordingly, the Company experienced excess processing capacity which was not
fully utilized. As a result, the Company incurred costs aggregating $4.5
million, $3.7 million and $4.7 million, representing negative volume variances
in 2000, 1999 and 1998, respectively. Such costs are included in cost of sales
for 2000, 1999 and 1998. No volume variance was recorded in 1997.
F-16
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inventories that are in excess of the following year's estimated sales have been
classified as long-term inventories.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
--------------------------------------------
2000 1999 1998
============ ============ ============
Land and improvements $ 17,817 $ 17,817 $ 361,620
Buildings and improvements 6,479,846 6,203,127 6,734,518
Furniture and fixtures 754,235 811,141 821,967
Machinery and equipment 16,831,930 16,862,162 18,092,329
Non-commercial assets 1,084,521 1,501,889 1,120,016
------------ ------------ ------------
25,168,349 25,396,136 27,130,450
Less accumulated depreciation (11,607,363) (9,320,285) (7,464,100)
------------ ------------ ------------
$ 13,560,986 $ 16,075,851 $ 19,666,350
============ ============ ============
F-17
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 5 -- PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for 2000, 1999, 1998, and 1997 aggregated $2,459,190,
$2,719,335, $2,579,703 and $2,506,668, respectively.
Loss on sale of fixed assets for 2000, 1999, 1998, and 1997 aggregated $60,693,
$503,095, $309,705 and $179,538, respectively.
The Company also distributed fixed assets with a fair market value of $1,050,000
to the Kollmans in 1999. No fixed assets were distributed in 2000, 1998 and
1997.
Non-commercial assets include machinery and equipment held for sale with a cost
of $587,994, $1,061,524 and $648,584, and accumulated depreciation of $245,105,
$326,507 and $253,917 at December 31, 2000, 1999 and 1998, respectively. No
depreciation has been recorded on those assets since the date they were
identified as being held for sale. The financial statements for the years ended
December 31, 2000 and 1998 include an adjustment due to the impairment of fixed
assets of $136,381 and $861,865, respectively. There was no adjustment due to
the impairment of long-lived assets during the year ended December 31, 1999.
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
December 31,
-----------------------------------------
2000 1999 1998
=========== =========== ===========
Intangibles (Note 13):
Lease rights, net of accumulated
amortization of $682,972, $530,178
and $377,384 $ 844,955 $ 997,749 $ 1,150,543
Excess of purchase price over fair
value of tangible assets acquired,
net of accumulated amortization
of $1,690,056, $1,564,609 and $1,418,455 136,917 262,364 428,518
Loan fees, net of accumulated amortization
of $864,505 and $254,266 -- 610,239 --
Deposits 87,774 52,255 453,338
Other 156,845 156,205 71,780
----------- ----------- -----------
1,226,491 2,078,812 2,104,179
Less current portion of lease rights included
in prepaid expenses (94,830) (94,830) (94,832)
----------- ----------- -----------
$ 1,131,661 $ 1,983,982 $ 2,009,347
=========== =========== ===========
Amortization expense aggregated $888,480 for 2000, $573,214 for 1999 and
$318,946 for 1998 and 1997, respectively.
NOTE 7 -- LINE OF CREDIT AGREEMENT
In June 1999, the Company entered into a $15 million Line of Credit Agreement
with a financial institution. The agreement has four parts: Receivable Loans,
Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The
Receivable Loans and the Advances and Inventory Loans bear interest at a rate
equal to the prime rate plus 2.5% per annum, effectively 12% at December 31,
2000, and expires June 30, 2002. The balance outstanding under the Receivable
Loans and the Advances and Inventory Loans at December 31, 2000 and 1999 was
$1,105,012 and $1,631,710, respectively. The Term Loans and Equipment
Acquisition Loans bear interest at a rate equal to the prime rate plus 2.75%,
effectively 12.25% at December 31, 2000, and are repayable in 60 monthly
installments by July 1, 2004. The total balance outstanding under the Term Loans
and Equipment Acquisition Loans at December 31, 2000 and 1999 was $1,691,541 and
$2,169,739, respectively. The Company incurs a minimum monthly interest charge
for an amount equal to all interest that would have been accrued had the daily
aggregate outstanding balance of all Loans been equal to 40% of the Maximum
Dollar Debt.
F-18
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 7 -- LINE OF CREDIT AGREEMENT (CONTINUED)
The Line of Credit Agreement is guaranteed by the majority shareholders and
substantially all of the assets of the Company. Certain restrictive covenants
exist and the Company is not in compliance with such covenants.
In order to pay-off the outstanding balance the lender began withholding funds
in August 1999 until February 2001 from the daily collections and applied such
withholdings to the outstanding balance. The ability of the Company to borrow
under the Line of Credit Agreement was also restricted as a result of the lender
reducing the availability under the Line of Credit Agreement by the cumulative
of the daily withholdings. As of March 20, 2001, the Company had no availability
to draw on the line of credit.
The Company has classified all outstanding debt to the lender a part of current
liability.
The Company incurred certain loan fees amounting to $864,505, upon closing of
the agreement. The Line of Credit incurs annual loan fees, a renewal fee and an
early termination fee.
NOTE 8 -- LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-----------------------------------------
2000 1999 1998
=========== =========== ===========
Receivable loans, advances and inventory
loans, secured by substantially all
of the assets of the Company,
interest at the prime rate plus 2.5%
per annum (12% at December 31, 2000),
expiring June 30, 2002 (Note 7) $ 1,105,012 $ 1,631,710 $ --
Term loans and equipment acquisition
loans, secured by substantially all
of the assets of the Company,
interest at prime rate plus 2.75%
(12.25% at December 31, 2000) and
repayable in 60 monthly installments
by July 1, 2004 (Note 7) 1,691,541 2,169,739 --
Note payable to former owner of Cell
Tech, Inc. secured by all of the
assets and all of the issued and
outstanding stock of NAC, with
monthly payments of $65,942 including
interest at 19%, repaid during the
year ended December 31, 1999 (Note 13) -- -- 1,074,717
Note payable to a nonprofit
organization, secured by rights of
property and leasehold improvements,
with annual payments of $75,000
including interest at 6.25%, maturing
July 19, 2005 313,790 365,920 414,984
Note payable to a university with
monthly installments of $3,500 per
month to be paid in full by April
2001. The note does not bear interest
and is not secured 14,000 56,000 --
----------- ----------- -----------
3,124,343 4,223,369 1,489,701
Less current portion (Note 7) (2,862,683) (3,895,579) (690,093)
----------- ----------- -----------
$ 261,660 $ 327,790 $ 799,608
=========== =========== ===========
F-19
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 8 -- LONG-TERM DEBT (CONTINUED)
At December 31, 2000, scheduled maturities of debt are summarized as follows:
Years ending December 31, Amount
========================= ==========
2001 $2,862,683
2002 58,850
2003 62,528
2004 66,436
2005 73,846
----------
$3,124,343
==========
NOTE 9 -- INCOME TAX
The following summarizes the provision (benefit) for income taxes:
December 31,
-----------------------------------------
2000 1999 1998
=========== =========== ===========
Deferred:
Federal $ (729,319) $(1,771,318) $ --
State and local (93,217) (367,632) --
Valuation allowance 822,536 2,138,950 --
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
On June 20, 1999, NAC and NEC elected to change their tax status from an
S-Corporation to a C-Corporation. If NAC and NEC were taxed as a C-Corporation
effective as of January 1, 1999, 1998 and 1997, the Company's net income (loss)
and net income (loss) per share would have been changed to the unaudited pro
forma amounts indicated below:
1999 1998 1997
------------- ------------- --------------
Net income (loss):
As reported $ (4,140,824) $ 2,296,285 $ 17,253,258
Pro forma (4,140,824) 1,414,511 10,628,807
Net income (loss) per share:
As reported $ (0.45) $ 0.26 $ 1.99
Pro forma (0.45) 0.16 1.22
The foregoing unaudited pro forma disclosures are not necessarily reflective of
the actual results which would have been obtained had the election to change tax
status been made as of an earlier date, nor are they indicative of future
operating results.
The reconciliation of income tax from continuing operations computed at the
U.S., federal statutory tax rate to the Company's effective income tax rate is
as follows:
December 31,
===================================
2000 1999 1998 1997
====== ====== ===== ======
Tax at U.S. federal statutory rate (34.0) (34.0)% 34.0% 34.0%
Income not subject to corporate taxes -- -- (34.0)% (34.0)%
State and local income taxes, net of federal benefit (4.4) (4.4) -- --
Merger and acquisition costs -- (6.5 -- --
Other 5.9 (6.8 -- --
Valuation allowance against deferred tax assets 32.5 51.7 -- --
------ ------ ----- ------
--% --% --% --%
====== ====== ===== ======
F-20
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 9 -- INCOME TAX (CONTINUED)
At December 31, 2000, the Company had state and federal net operating loss
carryforwards available to offset future taxable income of approximately $7.7
million that expire at various dates through 2020.
The Company annually evaluates the realization of the net deferred tax asset,
taking into consideration prior earnings history, projected operating results
and the reversal of temporary tax differences. At December 31, 2000, the Company
recorded a valuation allowance on the net deferred tax asset as a result of the
uncertainty relating to the realizability of the net deferred asset.
The primary components of temporary differences which compose the Company's net
deferred tax assets and liabilities as of December 31, 2000, 1999 and 1998 are
as follows:
December 31,
=========================================
2000 1999 1998
=========== =========== ===========
Deferred tax assets (liability):
Inventory adjustments $ 644,832 $ 423,844 $ --
Accrued expenses 308,436 312,230 --
Litigation reserve 632,940 441,228 --
Other 38,047 64,484 --
----------- ----------- -----------
Current deferred tax assets 1,624,255 1,241,786 --
----------- ----------- -----------
Net operating losses and credits 2,982,305 1,384,713 --
Inventory adjustments -- 1,214,783 --
Depreciation (1,645,074) (2,178,239) --
Write down of equipment -- 335,159 --
Other -- 140,748 --
----------- ----------- -----------
Non-current deferred tax assets 1,337,231 897,164 --
----------- ----------- -----------
Net deferred tax assets 2,961,486 2,138,950 --
Less: valuation allowance (2,961,486) (2,138,950) --
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
NOTE 10 -- STOCKHOLDERS EQUITY
On August 6, 1999, the Company issued warrants to purchase shares of its common
stock to the following parties for their services as follows:
Number of Exercise
Warrants Price Term
========= ======== ======
Andromeda 100,000 $1.3337 5 year
Hateley & Hampton 300,000 $0.0749 5 year
Wharton Capital 267,000 $0.0749 5 year
The Company adopted SFAS No. 123 to account for the stock warrants granted to
non-employees using the Black Scholes pricing model to determine the fair value
of the warrants granted. The Company recognized $400,000 of costs for the
warrants granted to Andromeda and Hateley & Hampton.
F-21
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 10 -- STOCKHOLDERS EQUITY (CONTINUED)
The assumptions used in the Black Scholes pricing model were a discount rate of
5.16%, a volatility of 1%, a dividend yield of 1% and a term of l year.
On October 19, 1999, the Company sold 1,157,895 shares of its common stock and
warrants to purchase 1,157,895 shares of its common stock in a private placement
to Mr. Zubair Kazi for $1,515,625, net of fundraising costs of $134,375. In
connection with this transaction, the Company also issued warrants to purchase
150,000 and 100,000 shares of its common stock to Pacific Basin and Richard
Wade, respectively. Each warrant has a 5-year term and an exercise price of
$1.425 per share. The Company also issued 50,000 shares of its common stock, at
fair market value which amounted to $134,375, to Pacific Basin Capital for their
services. See Note 12.
NOTE 11 -- STOCK OPTIONS AND WARRANTS
All share data and per share information have been restated to account for the
reverse stock split (see Note 1).
In June 1996, the Company adopted the 1996 Stock Incentive Plan (the Plan)
pursuant to which the Company's Board of Directors may grant stock options to
officers, key employees, and consultants. The Plan authorizes grants of options
to purchase up to 64,504 shares of authorized but unissued common stock. Stock
options are granted with an exercise price equal to the stock's fair market
value at the date of grant. The stock option activity is as follows:
Shares Price
======= ===============
Outstanding, January 1, 1997 17,324 $62.40 - $65.11
Granted 9,740 65.11 - 142.49
Expired (207) 65.11 - 99.73
Exercised (1,659) 65.11
------- ---------------
Outstanding, December 31, 1997 25,198 62.40 - 142.49
Granted 29,649 4.77 - 58.38
Expired (12,601) 58.38 - 142.49
Exercised (461) 65.11
------- ---------------
Outstanding, December 31, 1998 41,785 4.77 - 142.49
Granted 16,126 3.05
Expired (32,109) 4.77 - 142.49
Exercised -- --
------- ---------------
Outstanding, December 31, 1999 25,802 3.05 - 142.49
Granted -- --
Expired -- --
Exercised -- --
------- ---------------
Outstanding, December 31, 2000 25,802 $3.05 - 142.49
======= ===============
The above options have a weighted average remaining contractual life of 3.4
years.
F-22
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 11 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
In addition to the options provided for in the aforementioned Plan, in early
1996, 13,131 options were issued to certain officers, employees and consultants
at an exercise price of $57.84 per share, each with a five-year term. 691
options were granted to certain former directors on September 25, 1996 to
replace certain options which terminated upon resignation of such directors in
connection with the Company's initial public offering. These 691 options have an
exercise price of $65.11 per share and a ten-year term. During 1998, 1,382 stock
options were issued to a director, at an exercise price of $98.65 per share and
a ten-year term. 4,607 stock options were issued to a consultant at an exercise
price of $14.98 and a five-year term. Also, 4,216 stock options granted in prior
years were exercised. Outstanding options at December 31, 2000 have a weighted
average remaining contractual life of 1.1 years.
The per share weighted-average fair value of stock options granted during 1999
was $2.60 on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: no expected dividend yield,
risk-free interest rate of 5.1%, volatility of 0%, and an expected life of 5
years. There were no stock options granted during the year ended December 31,
2000.
The Company applies APB Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
changed to the unaudited pro forma amounts indicated below:
2000 1999 1998 1997
============== ============== ============== ==============
Net income (loss):
As reported $ (2,783,939) $ (4,140,824) $ 2,296,285 $ 17,253,258
Pro forma (2,783,939) (4,140,824) 2,051,440 17,044,451
Net income (loss) per share:
As reported $ (0.26) $ (0.45) $ 0.26 $ 1.99
Pro forma (0.26) (0.45) 0.24 1.96
============== ============== ============== ==============
On February 14, 2000, the Board of Directors approved a new stock incentive plan
(The 2000 Plan). The stock incentive plan is for the benefit of employees,
consultants and non-employee directors of the Company and its subsidiaries. The
maximum number of shares with respect to which stock options or stock
appreciation rights may be grated or awarded as restricted stock under the stock
incentive plan will be 700,000 shares in aggregate of common stock of the
Company.
The 2000 Plan provides for options to purchase 15,000 shares of common stock of
the Company to be automatically granted to each Non-Employee Director who was
serving as a member of the Board of Directors on the date the 2000 Plan was
adopted (Initial Non-Employee Director Options). The 2000 Plan also provides for
10,000 shares of common stock of the Company to be automatically granted to each
Non-Employee Director, who is serving on or elected to the Board of Directors at
each annual meeting of the stockholders of the Company after the date the 2000
Plan is adopted (Regular Non-Employee Director Options). The options issued will
be Non-Qualified Options.
During the year ended December 31, 2000, 45,000 options were granted under the
2000 Plan subject to approval by the shareholders of the Company. These options
have a weighted average remaining contractual life of 9.17 years.
F-23
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 11 -- Stock options AND WARRANTS (CONTINUED)
Warrant activity during the years ended December 31, 2000, 1999 and 1998 is as
follows:
Shares Price
========= ==============
Outstanding at January 1, 1998 -- $ --
Warrants granted 193,429 7.27 - 84.65
--------- --------------
Outstanding at December 31, 1998 193,429 7.27 - 84.65
Warrants granted (Note 10) 2,074,895 0.075 - 1.425
--------- --------------
Outstanding at December 31, 1999 2,268,324 0.075 - 84.65
Warrants granted -- --
--------- --------------
Outstanding at December 31, 2000 2,268,324 $0.075 - 84.65
========= ==============
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Microcystis
As a result of certain conditions, a toxic strain of algae called Microcystis
occasionally blooms in Klamath Lake and contaminates a portion of the Company's
harvest of blue-green algae. In 1994, the Company began to test the algae
harvested at its facility for possible contamination. The existence of
Microcystis has been regularly measured at various levels. In the absence of
established regulatory criteria for determining an acceptable level of
Microcystin (the actual toxin), the Company sponsored an assessment of risk and
set its own standards for determining whether a particular batch of algae is
acceptable for human consumption. Algae, which does not meet the Company's
standards and cannot be used in alternative non-human consumable products is
isolated and not used in production.
On October 23, 1997, the Oregon Department of Agriculture issued an
Administrative Rule on the sale of blue-green algae, which stated that "the
agency has decided to adopt the 1 microgram per gram (1 ppm) level of
Microcystin in blue-green algae." This ruling may have an impact on the
Company's ability to process and distribute the raw algae harvested and finished
goods produced. Such ruling may also decrease the amount of salable inventory on
hand and may therefore have an adverse impact on the Company's ability to
realize the carrying value of its inventories. Management has recognized that an
impairment of its inventory may exist and therefore has recorded its best
estimate of the effect by establishing a reserve in the amount of $900,000 at
December 31, 2000 and 1999, and $500,000 at December 31, 1998, respectively, for
the possible effects of inventories which may become unsaleable under this Rule.
The Oregon Department of Agriculture has raised no questions about the Company's
products under this Rule to date.
F-24
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 12 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
In 1996, the Company entered into an agreement with one of its vendors to
deliver 600,000 wet pounds of algae per month for processing for a five-year
period. The minimum monthly volume level increased in September 1996 to
1,000,000 wet pounds of algae. On or about February 6, 1998, the vendor filed a
complaint against the Company. The complaint alleges that the Company wrongfully
terminated a contract requiring the Company to provide to the vendor not less
than a contractually agreed amount of raw product for processing every month, or
pay a penalty based on the shortfall until the contract was validly terminated.
In its amended complaint, the vendor is seeking $780,930 in damages as of
February 1998, plus additional damages that allegedly are continuing to accrue,
plus prejudgment interest and prevailing party attorney fees as provided by the
contract. The Company counter-claimed for breach of contract, alleging
liquidated damages due, overcharges, and failure to deliver product,
consequential damage for failure to utilize quality control methods required by
the contract, prejudgment interest and attorney fees. Subsequent to December 31,
2000, a settlement agreement was negotiated in terms of which the parties have
agreed to dismiss the lawsuit and counter-claim and have entered into a new
agreement for the processing of algae for a five-year period. In terms of the
settlement agreement, the Company also agreed to pay $1,656,000 to the vendor.
$1 million will be paid in cash and $656,000 will be in the form of a promissory
note payable to the vendor over 36 months and will incur interest at 10.5% per
annum.
The Company is also involved in various legal matters arising in the normal
course of business. In the opinion of management, the Company's liability, if
any, arising from legal proceedings related to these matters is not expected to
have a material effect on the consolidated financial statements of the Company.
Lien on Company Stock
The Company stock owned by Daryl J. Kollman and Marta C. Kollman, is the subject
of a tax lien filed by the Internal Revenue Service for income taxes due from
them arising from taxable income attributed from the Company. The lien is
subordinated in favor of the lender for the Receivable Loans, Advances and
Inventory Loans, Term Loans, and Equipment Acquisition Loans (Notes 7 and 8).
Covenants Related to the Private Placement to Mr. Zubair Kazi
In connection with the sale of 1,157,895 common shares to a private investor in
1999, the Company made certain warrants to the investor. In the event that the
consolidated shareholders' equity of the Company is less than $20,000,000 at
December 31, 1999 and the first reset date (see below), the Company shall
immediately issue to Mr. Zubair Kazi additional common stock and warrants. The
amount shall equal 1,157,895 multiplied by the percentage by which the
shareholders' equity is less than $20,000,000. The Company did not maintain a
shareholders' equity of $20,000,000 at December 31, 1999 and as a result,
681,798 shares and 681,798 warrants are due to Mr. Kazi as of December 31, 2000.
The accrued liability related to the issuance of these shares and warrants has
been accounted for in the financial statements.
Additionally, the shares sold were to be registered within 120 days of the sale.
Additional penalties will accrue until such time that the shares are registered.
Also, if within one year after October 19, 1999 the Company sells its common
stock at a price less than $1.425 per share in an event other than in a
registered underwriting, the Company shall immediately issue to Mr. Zubair Kazi
such additional shares of common stock and warrants so that Mr. Zubair Kazi
maintains his percentage shareholdings as if he had purchased shares of common
stock at the reduced purchase price. The Company did not sell any common stock
during the one year period ended October 19, 2000 or for the year ended December
31, 2000.
F-25
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 12 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
COVENANTS RELATED TO THE PRIVATE PLACEMENT TO MR. ZUBAIR KAZI (CONTD.)
The Company is obligated, upon the effective date of its' next registration
statement (First reset date), to issue additional purchased securities in
accordance with the following reset rights:
- If the ratio of $1.425 per share divided by the average closing bid price
for the last twenty trading days prior to the first reset date (the first
reset ratio) is greater than the ratio of $1.425 divided by the average
closing bid price for the last twenty days prior to the execution of the
Term Sheet, or September 13, 1999 (the Initial Ratio), on the first reset
date, then the Company shall issue to the investor additional purchased
securities so that the initial ratio and the first reset ratio are equal
and pursuant to the following formula:
o Amount of Additional Purchased Securities =
((First Reset Ratio)/(Initial Ratio)-1) times 1,157,895.
- In addition, if the investor holds any Purchased Warrants for the period
covered by the last three reset dates, the exercise price of these
Purchased Warrants shall be reduced by the following formula:
o Exercise Price of Purchased Warrants =
((Initial Ratio)/(First Reset Ratio)) times $1.425.
- The investor is entitled to five additional reset dates which will occur
as follows:
o The next three reset dates will occur each three months after the
first reset date.
o The next two subsequent reset dates will occur each six-month period
thereafter.
Since the Company has not yet filed its first registration statement, the first
reset date has not yet occurred.
Leases
The Company has noncancelable operating leases, primarily for facilities space,
vehicles and phone systems, which expire over the next five years and thereafter
(Note15). Future minimum lease payments under operating leases are summarized as
follows:
Years ending December 31, Amount
========================= ========
2001 $123,193
2002 98,922
2003 99,352
2004 99,795
2005 57,951
Thereafter 219,114
--------
$698,327
========
Rent expense for 2000, 1999, 1998 and 1997 aggregated $1,366,149, $1,447,101,
$1,591,240 and $2,589,773, respectively.
F-26
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 13 -- ACQUISITION OF THE ASSETS OF CELL TECH, INC.
On August 3, 1990, NAC acquired all of the assets of Cell Tech, Inc. in exchange
for cash and notes payable in the amount of $3,789,470. Cell Tech, Inc. was
engaged in the production and marketing of food supplement products made with
blue-green algae. In addition, the purchase agreement calls for contingent
considerations to be paid in installments ranging from zero to $54,261 per
month, based on a percentage of monthly sales. As the term of the contingent
payments matches the estimated life of the related intangibles, such payments
are charged to operating expense when determinable. Contingent payments made
totaled $1,030,957 in 1999 and $651,132 in each of 1998 and 1997. The
outstanding balance was repaid in full during the year ended December 31, 1999.
The Company accounted for the business combination as a purchase. The
acquisition resulted in excess of purchase price over fair value of tangible
assets of $1,846,973, which consists of a licensing agreement to harvest algae
on a certain canal, a non-competition agreement, product trade names, and
goodwill. Such intangibles are being amortized using the straight-line method
over 10 to 12 years.
NOTE 14 -- EMPLOYEE BENEFIT PLAN
Effective June 1, 1994, the Company established a 401(k) Employee Savings Plan
which allows eligible employees to contribute up to 15% of their compensation
annually. The plan allows for Company matching at the discretion of management.
Each employee receives a pro rata allocation of the discretionary matching based
on the employee's compensation in relation to the compensation of all
participants entitled to profit sharing contributions. The Company matching
aggregated $60,134, $99,315, $126,158 and $141,655 in 2000, 1999, 1998 and 1997,
respectively.
NOTE 15 -- RELATED PARTY TRANSACTIONS
The lease agreements described and summarized in Note 12 include certain
building and equipment leases in which the lessors are shareholders of the
Company. Rental payments to the shareholders for 2000, 1999, 1998 and 1997
aggregated $1,149,528, $1,197,152, $726,770 and $1,665,227, respectively.
The amount payable to a related party at December 31, 2000 is due to the
President of the Company and relates to unpaid rent on properties owned by the
President.
The Company purchases promotional publications from an entity with common
ownership. Payments for promotional publications to the shareholders for 2000,
1999, 1998 and 1997 aggregated $0, $15,360, $48,640 and $115,577, respectively.
The Company also received management fees and other income of $209,142 and
$160,867 from its shareholders during 2000 and 1999, respectively. No management
fees and other income were received from its shareholders during 1998 and 1997.
The Company paid consulting fees to a director of $32,500, $38,852 and $89,039
during 2000, 1999 and 1998, respectively.
The Company paid a law firm, which is owned by a director, legal fees of $0,
$632,502 and $367,874 during 2000, 1999 and 1998, respectively.
F-27
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE 16 -- OTHER INCOME
Other income insists of the following:
Years ended December 31, 2000 1999 1998 1997
========================================== =========== =========== =========== ===========
August celebration sales $ 27,750 $ 38,457 $ 135,127 $ 297,459
Genealogy fee income 163,648 234,739 408,293 745,651
Interest income 57,507 87,852 115,898 303,533
Miscellaneous income 286,916 683,767 533,372 747,679
Management fee income from a related party 195,917 66,660 -- --
Stock penalties (250,000) -- -- --
Loss on disposal of assets (60,693) (98,815) (309,705) (179,538)
----------- ----------- ----------- -----------
$ 421,045 $ 1,012,660 $ 882,985 $ 1,914,784
=========== =========== =========== ===========
NOTE 17 -- CONCENTRATION OF CUSTOMERS AND SUPPLIERS
No customers accounted for more than 10% of sales during the years ended
December 31, 2000, 1999 and 1998. One vendor supplied approximately 27%, 23% and
26% of the products that the Company purchases for the years then ended.
F-28