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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
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 X No .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No .
--- ---
As of April 30, 2003, the number of shares outstanding of the registrant's sole
class of common stock, par value $0.01 per share was 10,640,895.
TABLE OF CONTENTS
Part I - Financial Information................................................................................... 1
ITEM 1. FINANCIAL STATEMENTS.................................................................................. 1
Consolidated Balance Sheets................................................................................ 1
Consolidated Statements of Operations...................................................................... 2
Consolidated Statements of Cash Flows...................................................................... 3
Notes to Consolidated Financial Statements................................................................. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 9
Overview................................................................................................... 11
Results of Operations...................................................................................... 12
Three months ended March 31, 2003 compared with the three months ended March 31, 2002...................... 13
Liquidity and Capital Resources............................................................................ 14
Cash Flows................................................................................................. 15
Recent Financial Accounting Standards Board Statements..................................................... 15
Special Note Regarding Forward-Looking Statements.......................................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 17
ITEM 4. CONTROLS AND PROCEDURES............................................................................... 17
PART II -- OTHER INFORMATION..................................................................................... 17
ITEM 1. LEGAL PROCEEDINGS..................................................................................... 17
ITEM 2. CHANGES IN SECURITIES................................................................................. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................... 19
SIGNATURES.................................................................................................... 20
Cell Tech International Incorporated
and Subsidiaries
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
Assets
Current assets
Receivables $ 325,467 $ 372,011
Current portion of inventories 2,300,000 2,300,000
Prepaid expenses 399,007 586,662
----------- -----------
Total current assets 3,024,474 3,258,673
----------- -----------
Long-term inventories, net of current portion 3,651,119 3,824,298
Property and equipment, net of accumulated depreciation 6,615,882 6,801,389
Idle Property and equipment, net 1,274,865 1,382,570
Other assets 438,883 546,846
----------- -----------
Total assets $15,005,223 $15,813,776
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Bank overdraft $ 677,067 $ 468,008
Accounts payable 596,519 594,329
Commissions payable 997,312 970,315
Sales taxes payable 73,545 69,797
Accrued payroll and related liabilities 239,105 291,140
Other accrued expenses 1,705,171 1,848,070
Current portion of long-term debt 2,571,229 2,872,145
Related party payable 494,867 427,767
----------- -----------
Total current liabilities 7,354,815 7,541,571
----------- -----------
Long-term liabilities
Long-term debt, net of current portion 897,174 1,019,920
----------- -----------
Total liabilities 8,251,989 8,561,491
----------- -----------
Commitments and contingencies
Shareholders' equity
Series A convertible preferred stock - no par value; 4,175,000 shares
authorized; none issued and outstanding in 2003 and 2002 -- --
Series B convertible preferred stock - no par value; 800,000 shares
authorized; none issued and outstanding in 2003 and 2002 -- --
Undesignated preferred stock - no par value; 1,825,000 shares
authorized; none issued and outstanding in 2003 and 2002 -- --
Common stock - $.01 par value; in 2003 and 2002, 50,000,000 shares
authorized, 10,640,895 and 10,640,895 shares issued and outstanding 106,409 106,409
Additional paid-in capital 2,299,696 2,299,696
Retained earnings 4,347,129 4,846,180
----------- -----------
Total shareholders' equity 6,753,234 7,252,285
----------- -----------
Total liabilities and shareholders' equity $15,005,223 $15,813,776
=========== ===========
See accompanying notes to consolidated financial statements.
1
Cell Tech International Incorporated
and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended
March 31,
-------------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Revenue $ 5,932,992 $ 7,105,704
Cost of sales 1,815,918 1,965,995
------------ ------------
Gross profit 4,117,074 5,139,709
Commissions 2,535,435 3,390,812
------------ ------------
Gross profit after commissions 1,581,639 1,748,897
Shipping and handling expenses 433,948 428,866
Selling expenses 1,110,037 951,433
Research and development 59,559 35,880
General and administrative 425,140 191,308
------------ ------------
Operating income (447,045) 141,410
Other income (expense) 112,721 14,809
Interest expense (164,727) (47,146
------------ ------------
Net loss (499,051) 109,073
------------ ------------
Basic and diluted loss per share
$ (.04) $ 0.01
------------ ------------
Weighted average number of common shares outstanding
used to calculate basic and diluted loss per share 13,665,771 12,317,783
------------ ------------
See accompanying notes to consolidated financial statements.
2
Cell Tech International Incorporated
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities
Net income (loss) $(499,051) $ 109,073
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 264,882 303,786
Loss on sale of fixed assets 53,787 3,381
Impairment of fixed assets and intangibles --
Changes in assets and liabilities:
Receivables 46,544 42,109
Inventories 173,179 329,556
Prepaid expenses 187,655 65,883
Other assets 107,963 (37,158)
Accounts payable 2,190 289
Commissions payable 26,997 61,679
Sales tax payable 3,748 4,940
Accrued payroll and payroll related liabilities (52,035) 33,617
Other accrued expenses (142,899) (223,633)
--------- ---------
Net cash provided by operating activities 172,960 693,522
--------- ---------
Cash flows from investing activities
Purchase of property and equipment (81,134) (156,395)
Proceeds from sale of equipment 55,677 700
--------- ---------
Net cash used for investing activities (25,457) (155,695)
--------- ---------
Cash flows from financing activities
Bank overdraft 209,059 (343,650)
Net payments on long-term debt (423,662) (118,656)
Net proceeds from (payments for) related party debt 67,100 (75,521)
--------- ---------
Net cash used for financing activities (147,503) (537,827)
--------- ---------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents, beginning of year -- --
--------- ---------
Cash and cash equivalents, end of year $ -- $ --
========= =========
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 164,727 $ 47,146
========= =========
See accompanying notes to consolidated financial statements.
3
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Cell Tech International Incorporated ("Cell Tech") and its subsidiary. The New
Algae Company, Inc. ("NAC"), collectively the "Company," are engaged in
producing and marketing 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, the District of Columbia, Guam, Puerto
Rico, American Samoa, the Virgin Islands and Canada to distribute its products.
Presentation of Interim Information
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the accompanying unaudited consolidated financial statements contain
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair statement of the Company's financial information as of and
for the periods presented. The consolidated results of operations of any interim
period are not necessarily indicative of the consolidated results of operations
to be expected for the fiscal year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
Going Concern
During 2002, the Company was able to obtain new financing that allowed it to
repay the borrowings under the former line of credit. As of December 31, 2002,
the Company is in compliance with the loan covenants under the new loan
agreement. Additionally, management has introduced several new products and
advertising campaigns in order to increase revenues and reverse the trend of net
losses in first quarter 2003 and prior years. Although management believes that
progress was made during the first quarter of 2003 on issues affecting the
Company's ability to continue as a going concern, the Company has experienced
recurring net losses, has negative working capital at March 31, 2003 and faces
potential significantly adverse litigation (Note 6). 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.
4
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Consolidation
The accompanying consolidated financial statements of the Company include the
accounts of Cell Tech and its subsidiary, NAC. Intercompany transactions and
balances have been eliminated on consolidation.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ
materially from those estimates.
Revenue Recognition
The Company recognizes revenue from the sale of its products upon shipment, at
which time title passes. The Company estimates an allowance for sales returns
based on historical experience with product returns.
Sales Incentives
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products," which addresses the accounting for
consideration given by a vendor to a customer or a reseller of the vendor's
products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products," which provides guidance on the income statement
classification of consideration from a vendor to a reseller in connection with
the reseller's purchase of the vendor's products or to promote sales of the
vendor's products. The Company pays commissions to its distributors as
compensation for sales and marketing activities and based on their personal
sales volumes and the sales of distributors they have recruited into the
Company's network. Accordingly, the Company classifies these expenses as a cost
and not a reduction of revenue. There was no effect on the consolidated
financial position, results of operations or cash flows as a result of
implementation of this pronouncement.
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under
SFAS 142, goodwill and intangible assets with indefinite lives are no longer
amortized but will be reviewed annually, or more frequently if impairment
indicators arise, for impairment. Other intangible assets with finite lives,
consisting of trademarks with a carrying value of $57,302 at January 1, 2002,
will continue to be amortized over their estimated useful lives of 10 years. As
of the date of the adoption of the new accounting standards, there was no
remaining goodwill to be amortized.
5
Impairment or Disposal of Long-Lived Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Asset," ("SFAS No. 144"), which, for impaired assets or long-lived assets to be
disposed of, supercedes SFAS No. 121. The adoption of SFAS No. 144 did not
affect the financial position or results of operations.
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2003 2002
------------ ------------
Work in progress $ 9,335,112 $ 9,520,527
Finished goods 540,399 588,586
Sales aids 19,394 15,185
------------ ------------
9,894,905 10,124,298
Less reserve for potentially unsaleable inventories (3,943,786) (4,000,000)
------------ ------------
5,951,119 6,124,298
Less current portion (2,300,000) (2,300,000)
------------ ------------
$ 3,651,119 $ 3,824,298
------------ ------------
Certain of our inventory are marketable only to the agricultural market. Sales
in this market have been less than anticipated and management has recognized
that an impairment of inventory may exist. The Company has established reserves
of $3,943,786 and $4,000,000 at March 31, 2003 and December 31, 2002,
respectively.
NOTE 3 - EARNINGS PER SHARE COMPUTATION
The computations of the weighted-average common shares used in the computation
of basic and diluted net loss per share is based on 13,665,771 and 12,317,783
shares for the three months ended March 31, 2003 and 2002, respectively.
Potential dilutive securities were not included in the EPS calculation since
their effect would be antidilutive. Potential dilutive securities consisted of
outstanding stock options and convertible preferred stock and common stock
purchase warrants.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the additional
disclosures required by SFAS No. 148 in its annual financial statements for the
year ended December 31, 2002 and must also provide the disclosures in its
quarterly reports containing condensed financial statements for interim periods
beginning with the quarterly period ended March 31, 2003. The Company has
decided to retain the intrinsic value method to account for employee stock based
compensation and accordingly tThe adoption of SFAS No. 148 did is not expected
to have a material effect on the Company's financial position or results of
operations.
6
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
FIN No. 45 will affect leasing transactions involving residual guarantees,
vendor and manufacturer guarantees, and tax and environmental indemnities. All
such guarantees will need to be disclosed in the notes to the financial
statements starting with the period ending after December 15, 2002. For
guarantees issued after December 31, 2002, the fair value of the obligation must
be reported on the balance sheet. Existing guarantees will be grandfathered and
will not be recognized on the balance sheet.
Under its bylaws, the Company has agreed to indemnify its officers and directors
for certain events or occurrences arising as a result of the officer or
director's serving in such capacity. The term of the indemnification period is
for the officer's or director's lifetime. The Company has a separate
indemnification agreement with its directors that requires it, subject to
certain exceptions, to indemnify them to the fullest extent authorized or
permitted by its bylaws and the Delaware Corporations Code. The maximum
potential amount of future payment the Company could be required to make under
these indemnification agreements is unlimited. The Company has a directors and
officer liability insurance policy that may limit its exposure and enable it to
recover a portion of any future amounts paid. As a result of its insurance
policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of December 31, 2002.
NOTE 5 - LONG-TERM DEBT
In September 2002, the Company's financing facility with Coast Business Credit
was purchased by and assigned to La Jolla Loans, Inc. In connection with this
transaction, Coast Business Credit's security interest in real and personal
property and all associated security and loan documents were assigned to La
Jolla Loans. At the same time, the Company entered into a Forbearance and
Extension Agreement with La Jolla Loans. Under the terms of the forbearance
agreement, La Jolla Loans will not declare a default until June 30, 2003, when
the entire principal is due. The forbearance period may be extended to June 30,
2004 if the Company pays a $75,000 renewal fee. Interest of $24,500 at an
effective rate of 14% is payable monthly along with additional monthly impound
payments of approximately $65,000 to be used to pay insurance, property taxes
and lease payments on collateralized property during the forbearance period. La
Jolla Loans has also agreed to defer, during the forbearance period, the
difference between the minimum interest payment of $45,000 under the agreement
with Coast Business Credit and the $24,500 minimum interest payments under the
forbearance agreement. If the Company fully performs under the terms and
conditions of the forbearance agreement and no default occurs during the
forbearance period, La Jolla Loans will release the Company from any obligation
to pay minimum monthly interest payments in excess of $24,500. The outstanding
principal balance at March 31, 2003 is $2,100,000.
NOTE 6 - CONTINGENCIES
Microcystis
As a result of certain conditions, Microcystis, a toxic algae occasionally
blooms in Klamath Lake at the same time blue-green algae is harvested. The
Company regularly tests the algae it harvests for possible contamination. Algae
that does not meet the Company's standards is not used in products for human or
animal consumption.
In 1997, the Oregon Department of Agriculture issued an administrative rule that
created a standard of 1 microgram per gram (1 ppm) of Microcystis in products
for human consumption that contain blue-green algae. The Oregon Department of
Agriculture has raised no questions about the Company's products under this
rule.
In some years, the presence of Microcystis may reduce the quantity of algae that
the Company can harvest.
7
Litigation
On October 7, 2002, Daryl Kollman, one of Cell Tech's principal shareholders,
filed a lawsuit against Cell Tech and certain of its officers, directors and
counsel in the Circuit Court for the State of Oregon for Klamath County. The
complaint makes a number of individual and derivative claims. Mr. Kollman makes
two claims against Cell Tech. First, Mr. Kollman alleges that Cell Tech breached
an agreement to register its stock for public sale and seeks damages in an
amount to be proven at trial, but not less than $9,282,000. Second, Mr. Kollman
claims that Cell Tech conspired with Marta C. Carpenter (formerly known as Marta
C. Kollman), a principal shareholder and the President, Chief Executive Officer
and a director of Cell Tech; Donald P. Hateley, Chairman of the Board of
Directors of Cell Tech; and others to prevent the registration of Mr. Kollman's
stock and to cause other financial injury to him. As a result, Mr. Kollman seeks
$32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars
in damages on his own behalf and on behalf of Cell Tech against Marta Carpenter,
Mr. Hateley and others based on a variety of legal theories, many of which
either have been or are being litigated in other cases. The Company intends to
vigorously defend the direct claims asserted in this lawsuit, and is currently
evaluating the claims that Mr. Kollman has asserted on Cell Tech's behalf. The
Company cannot predict the amount of loss, if any, which could result from this
lawsuit. An unfavorable outcome could have a material adverse impact upon its
financial condition, cash flow, or results of operations.
On March 27, 2002, the Nature Conservancy filed an action against Cell Tech in
the Circuit Court for the State of Oregon for Klamath County, alleging, among
other things, that Cell Tech's wholly owned subsidiary, The New Earth Company,
was in default on a promissory note and a trust deed. The Nature Conservancy was
seeking $375,000, the principal amount due under the promissory note, plus
interest and certain leasehold rights. The Company has previously recorded the
net present value of the promissory note, which has a balance of $313,790 and
has been included in the current portion of long-term debt in the December 31,
2002 consolidated balance sheet. An agreement was signed and the court action
dismissed in January 2003. The net effect of this was to increase net income
during the first quarter of 2003 by $161,956.
On February 19, 2002, Mr. Kollman filed two separate Notices of Claim of Lien
upon Chattels against Cell Tech, NAC, Marta Carpenter and others in Klamath
County, Oregon. Mr. Kollman alleges, among other things, that Cell Tech owes him
and Marta Carpenter approximately $705,693 in past due rent. Mr. Kollman also
claims that Cell Tech owes Klamath Cold Storage, Inc. ("KCS"), a company owned
by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr.
Kollman asserts that Cell Tech is not entitled to remove its property from
property owned by him, Marta Carpenter and KCS and seeks to subject the Cell
Tech property to foreclosure proceedings. The Company intends to vigorously
defend against these liens. The Company cannot predict the amount of loss, if
any, that could result from these liens, but does not believe that an
unfavorable outcome would have a material adverse impact upon its financial
condition, cash flow, or results of operations.
On June 6, 2002, Mr. Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the state of Oregon to evict Cell Tech from property owned by KCS. In
this lawsuit, Mr. Kollman also alleges that Cell Tech has not paid approximately
$1,050,000 in rent. Marta Carpenter is seeking to stop the evictions and the
Company is resisting Mr. Kollman's attempt to evict it. The Company intends to
vigorously defend this lawsuit. The Company cannot predict the amount of loss,
if any, that could result from this lawsuit, but an unfavorable outcome could
have a material adverse impact upon its financial condition.
8
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that Cell Tech Products,
Inc. engaged in unfair business practices and misleading advertising. In January
2003, the Superior Court of Tulare County issued a Tentative Decision stating
that Teachers for Truth in Advertising was entitled to an injunction prohibiting
Cell Tech from making deceptive representations in its advertising or literature
disseminated in California and ordering Cell Tech to refund the purchase price
paid by California customers for Cell Tech's algae products from the date four
years prior to the filing of the action through the trial date in November of
2002. In response to the Tentative Decision, Cell Tech's counsel filed a Request
for Statement of Decision on January 23, 2003. On February 20, 2003, the
Superior Court issued its Final Decision, which essentially affirms the
Tentative Decision. Plaintiff has submitted a proposed judgment to the court
consistent with the Tentative and Final Decisions. The parties mediated this
matter on May 9, 2003 before a retired Orange County Superior Court judge and
have agreed to submit a proposed confidential settlement to the Superior Court
within the next 60 days. The Company does not believe that the proposed offer to
refund to certain California customers will be in an amount that would have a
material adverse impact on Cell Tech's business and financial position.
Lien on Company Stock
The Cell Tech stock owned by Daryl Kollman and Marta C. Carpenter is subject to
a tax lien filed by the Internal Revenue Service. The stock is held in trust and
will be released upon satisfaction of federal income taxes owed by Mr. Kollman
and Marta C. Carpenter. Mr. Kollman and Marta C. Carpenter retain voting power
over the stock held in trust. Mr. Kollman and Marta C. Carpenter have agreed to
sell their shares as needed, and as allowed by federal securities laws, to make
quarterly payments to the Internal Revenue Service. Should Mr. Kollman or Marta
C. Carpenter fail timely to make such payments, the Internal Revenue Service may
seize the shares from the trust. The Internal Revenue Service would thereafter
sell or judicially foreclose on some or all of the shares to satisfy Mr. Kollman
and Marta C. Carpenter's tax liabilities. The lien is subordinated in favor of
Cell Tech's lender for receivable loans, advances and inventory loans, term
loans, and equipment acquisition loans.
Covenants Related to the Private Placement to Zubair Kazi
In connection with the sale of common shares to a private investor, Zubair Kazi,
in 1999, Cell Tech agreed to issue common stock and warrants to purchase common
stock to Mr. Kazi if the consolidated shareholders' equity was less than
$20,000,000 at December 31, 1999. As a result, 3,333,192 shares of common stock
and warrants to purchase and additional 3,333,192 shares of common stock were
due to Mr. Kazi on March 31, 2003. The $624,859 of accrued liability related to
the issuance of these shares and warrants, based on the fair value of the
securities, has been accounted for in the financial statements. Additionally,
the shares originally sold to Mr. Kazi were to be registered for resale within
120 days of the sale. Additional penalties have accrued and will continue to
accrue until the shares are registered. The additional expense for the three
months ended March 31, 2003 was $56,500. Cell Tech is also obligated to issue
additional securities to Mr. Kazi upon the effective date of its next
registration statement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The Act
provides a safe harbor for forward-looking statements to encourage companies to
provide prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements, other than statements of historical fact,
that we make in this Quarterly Report on Form 10-Q are forward-looking. The
words "anticipates," "believes," "expects," "intends," "will continue,"
"estimates," "plans," "projects," the negative of these terms and similar
expressions are intended to identify forward-looking statements. However, the
absence of these words does not mean the statement is not forward-looking.
9
Our forward-looking statements are subject to certain risks, trends, and
uncertainties that are difficult to predict and could cause actual results to
vary materially from anticipated results. In particular, statements regarding
market acceptance of our marketing and merchandising concepts, changes in market
conditions, demand for and market acceptance of new and existing products,
availability and development of raw materials and new products, increased
competition, failure to attain satisfactory outside financing and adverse
weather conditions at Upper Klamath Lake are forward-looking.
The following factors, among others, could cause actual results to differ from
those indicated in the forward-looking statements:
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
o the risk factors described in other documents and reports filed with
the Securities and Exchange Commission, including our Annual Report on
Form 10-K for the year ended December 31, 2002.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, performance or achievement.
We undertake no obligation to revise or publicly release the results of any
revisions to these forward-looking statements. If we do update or correct one or
more forward-looking statements, investors and others should not conclude that
we will make additional updates or corrections to other forward-looking
statements.
We intend the following discussion to assist in the understanding of our
financial position and our results of operations for the three months ended
March 31, 2003 compared to the same period in 2002. You should refer to the
Consolidated Financial Statements and related Notes in conjunction with this
discussion. Unless stated otherwise, all financial information presented below,
throughout this report and in the Consolidated Financial Statements and related
Notes includes Cell Tech and NAC on a consolidated basis.
10
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. We currently offer twenty-two different products intended to
appeal to health-conscious consumers. We divide our products into five product
lines: Daily Health Maintenance, Digestive Health, Defensive Health, Powdered
Drinks and Snacks, and Animal and Plant Food.
We harvest SBGA and manufacture some of our products at our production
facilities in Klamath Falls, Oregon. We are a multi-level marketing
organization. Independent distributors make up our sales force. We market our
products through our distributors in all fifty states, the District of Columbia,
Guam, Puerto Rico, American Samoa, the Virgin Islands and Canada. We encourage
our distributors to recruit new distributors into our network. We place
recruited distributors beneath the recruiting distributor in the Company's
network of distributors. We pay our distributors commissions based on their
personal sales and the sales of distributors beneath them. We assist
distributors in establishing their own businesses and provide them with support
programs such as audio and videotapes for training, seminars and an annual
convention at our headquarters. We have approximately 37,082 active distributors
as of March 31, 2003 compared to approximately 46,065 active distributors as of
March 31, 2002. Active distributors are those who have purchased products in the
last six months.
Our loss per share was $0.04 for the three months ended March 31, 2003 compared
to net income of $0.01 per share for the same period in 2002. The net loss for
the three months ended March 31, 2003 totaled $499,051 and was primarily related
to a decrease in revenue and to increases in administrative costs and selling
expense.
CRITICAL ACCOUNTING POLICIES
Inventory Valuation
We have a significant investment in algae inventory. Our sole source of
blue-green algae is Klamath Lake. Algae grow naturally in Klamath Lake and like
any plants are subject to variation due to environmental conditions. The volume
of annual harvests varies depending on weather and precipitation conditions. As
a result, we carry additional supplies of inventory to sustain operations
through low yield harvest years. In addition, we regularly review the amount of
blue-green algae on hand and evaluate the likelihood that we will be able to
realize the value of our inventory. If we determine that we will not realize all
or a portion of our inventory value, adjustments are made to the carrying value
through a valuation allowance. The decision to write down a portion of the
carrying value of inventory could have a significant adverse effect on our
operating results.
Impairment or Disposal of Long-Lived Assets
We utilize significant amounts of equipment in our operations to harvest and
process blue-green algae from Klamath Lake. During 2001, we developed an
alternative method of harvesting algae from Klamath Lake that yields raw algae
at a lower total cost for the quantity harvested than the previous harvest
method at the A Canal site. As a result, certain equipment previously used to
harvest algae from the canal site has been taken out of service. Equipment taken
out of service that we cannot remove from the canal site and has no other use
has been written off, and the remaining equipment has been offered for sale. We
regularly review our property and equipment offered for sale and if we cannot
realize any portion of the carrying value, adjustments are made to reduce the
carrying value to its fair value. We also regularly review property and
equipment used in our operation and test for impairment if conditions indicate
the carrying value of the property and equipment may not be recovered. If we
determine that we will not recover the carrying value and that assets are
impaired, we make adjustments to the carrying value through a valuation
allowance. The decision to write down a portion of the carrying value of
property and equipment used in our operations or offered for sale could have a
significant adverse effect on our operating results.
11
Sales Incentives
In November 2001, the Emerging Issues Task Force (the "EITF") issued EITF Issue
No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products." In April 2001, the EITF reached a consensus
on EITF Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," which provides
guidance on the income statement classification of consideration from a vendor
to a reseller in connection with the reseller's purchase of the vendor's
products or to promote sales of the vendor's products. We pay commissions to our
distributors as compensation for sales and marketing activities as evidenced by
downline growth and sales volume and accordingly classify these expenses as a
cost, rather than as a reduction of revenue. There was no effect on the
consolidated financial position, results of operations or cash flows as a result
of implementation of this pronouncement.
Results of Operations
The following table summarizes our unaudited operating results as a percentage
of net sales for each of the periods indicated.
Three Months Ended March 31,
----------------------------
2003 2002
------ ------
Revenue 100.0% 100.0%
Cost of sales 30.6 27.7
------ ------
Gross profit 69.4 72.3
Commissions 42.7 47.7
------ ------
Selling profit 26.7 24.6
Shipping and handling expenses 7.3 6.0
Selling expenses 18.7 13.4
Research and development 1.0 .5
General and administrative 7.2 2.7
------ ------
Operating income (loss) (7.5) 2.0
Other income 1.9 0.1
Interest expense (2.8) (0.6)
------ ------
Net Income (loss) before taxes (8.4) 1.5
Income tax benefit --
------ ------
Net Income (loss) (8.4) 1.5
------ ------
12
Three months ended March 31, 2003 compared with the three months ended March 31,
2002
Net sales for the three months ended March 31, 2003 were $5,932,992, a decrease
of $1,172,712 or 16.5% from net sales of $7,105,704 for the three months ended
March 31, 2002. The decrease in sales is directly related to a 20% decrease in
orders for the same period. Average order size increased to $123 from $119 over
the same period. The average number of distributors for the three months ended
March 31, 2003 decreased to an average of 37,809, which was 19% lower than the
average of 46,902 distributors for the three months ended March 31, 2002. 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 69.4% of net sales during the three
months ended March 31, 2003 from 72.3% of net sales during the same period in
2002. This decrease was due to continuing production and maintenance costs
against a lower sales volume and the Oregon Freeze Dry agreement for the current
drying of algae of $111,200.
Gross profit after commissions represents gross profit less commission expense.
Commissions expense for the three months ended March 31, 2003 and 2002 was
$2,535,435 and $3,390,812, respectively, a decrease of $855,377 or 25%. 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. Commission expense as a percentage of sales was 42.7% and
47.7% during the three months ended March 31, 2003 and 2002, respectively. The
decrease in the expense as a percentage of sales is due to the implementation of
revisions to the commission system in June of 2002.
Operating expenses include shipping and handling expenses, selling expenses,
research and development expenses and general and administrative expenses. In
total, operating expenses increased $421,197 or 26% to $2,028,684 for the three
months ended March 31, 2003 from $1,607,487 for the three months ended March 31,
2002. The components of operating expenses are discussed below.
o Shipping and handling expenses includes purchasing, receiving, and
materials management. Shipping and handling expenses increased $5,082
or 1.1%, to $433,948 in 2003 from $428,866 in 2002. The increase was
due to an increase in payroll expenses in 2003. Shipping and handling
expenses as a percent of net sales increased to 7.3% for the three
months ended March 31, 2003 from 6.0% for the three months ended March
31, 2002.
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 increased $158,604
between 2003 and 2002 to $1,110,037 from $951,433. This increase was
primarily due to an increase in insurance for product liability of
$51,000 and an increase in promotion expense of $119,000. Selling
expenses as a percent of net sales were 18.7% for the three months
ended March 31, 2003 and 13.4% of sales for the three months ended
March 31, 2002.
o Research and development expenses increased 66% to $59,559 in 2003
from $35,880 in 2002, which constituted 1.0% and .5% of net sales,
respectively. The increase related to an increase in payroll cost and
laboratory testing.
13
o General and administrative expenses increased by $233,832 between 2003
and 2002 to $425,140 from $191,308. For the three months ended March
31, 2003, general and administrative expenses averaged 7.2% of sales
while they were 2.7% of sales for the three months ended March 31,
2002. The increase between 2003 and 2002 is attributable to an
increase in legal fees of $103,000 and the recording in 2002 of a
$77,000 credit adjustment to license expense related to the
termination of the canal harvesting license in 2002 that was not a
recurring adjustment in 2003.
Other income increased to $112,721 for the three months ended March 31, 2003
from approximately $14,809 of income for the three months ended March 31, 2002
principally due to income of $161,956 recorded as a result of the settlement
agreement with Nature Conservancy.
Net interest expense increased to $164,727 for the three months ended March 31,
2003 from $47,146 for the three months ended March 31, 2002. This increase was
due primarily to interest charges recorded in connection with the settlement of
the Oregon Freeze Dry litigation and the resulting note payable. Net Interest
expense represented 2.8% and 0.6% of sales for each of the three months ended
March 31, 2003 and 2002, respectively.
Net income decreased by $608,124 resulting in a loss of $499,051 for the three
months ended March 31, 2003 from net income of $109,073 for the comparable
period in 2002. As a percentage of net sales, net income decreased by 9.9% for
the three months ended March 31, 2003 resulting in a net loss of 8.4% from net
income of 1.5% for the comparable period in 2002. The dollar decrease was due to
net sales decreasing by 16.5% and by the increase in operating costs of 26%.
Liquidity and Capital Resources
We had net losses of $3,497,387, $5,015,350 and $2,783,939 for the years ended
December 31, 2002, 2001 and 2000, respectively and had a working capital deficit
of $4,282,898 and $6,437,186 at December 31, 2002 and 2001, respectively. As a
result, our independent certified public accountants have included in our annual
report an explanatory paragraph in their report covering those periods, which
expresses substantial doubt about our ability to continue as a going concern.
Working capital deficit at March 31, 2003 amounted to $4,330,341, which
represents a decrease in working capital of $47,443 from a working capital
deficit of $4,282,898 as of December 31, 2002. At March 31, 2003, we had a bank
overdraft of $677,067 versus a bank overdraft of $468,008 as of December 31,
2002.
In September 2002, our financing facility with Coast Business Credit was
purchased by and assigned to La Jolla Loans, Inc. At the same time, we entered
into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms
of the forbearance agreement, La Jolla Loans will not declare a default until
June 30, 2003, when the entire principal is due. The forbearance period may be
extended to June 30, 2004 if we pay a $75,000 renewal fee. Interest of $24,500
at an effective rate of 14% is payable monthly along with additional monthly
impound payments of approximately $65,000. La Jolla Loans will defer the
difference between the minimum interest payment of $45,000 under the agreement
with Coast Business Credit and the $24,500 minimum interest payments under the
forbearance agreement for the forbearance period. If we fully perform under the
terms and conditions of the forbearance agreement and no default occurs during
the forbearance period, La Jolla Loans will release us from any obligation to
pay that portion of the minimum monthly interest payments in excess of $24,500.
The outstanding principal balance at March 31, 2003 was $2,100,000.
14
We believe that our existing capital resources and bank borrowings are adequate
to fund our operations for at least the next twelve months. We have no present
commitments or agreements with respect to any acquisitions or purchases of
manufacturing facilities or new technologies. Any future changes in our
operations could consume available capital resources faster than anticipated.
Our capital requirements depend on numerous factors, including:
o the introduction of new products;
o change in the number of distributors and the retention of our current
distributor base; and
o research and development efforts.
If existing capital resources are insufficient to meet our capital requirements,
we will be required to raise additional funds, which we cannot assure will be
available on favorable terms, if at all, or reduce costs which could impair our
ability to conduct ongoing business operations.
Cash Flows
Net cash flows provided by operating activities for the three months ended March
31, 2003 amounted to $172,960 compared to cash flows provided by operations of
$693,522 for the three months ended March 31, 2002. The decrease in cash flows
generated by operations is primarily due to a $608,124 decrease in net income
between the three months ended March 31, 2003 and 2002 and changes in current
assets and liabilities.
Cash flows used in investing activities for the three months ended March 31,
2003 was $25,457, representing a decrease of $130,238 from net cash used for
investing activities of $155,695 for the three months ended March 31, 2002, due
to a decrease in equipment purchases during the three months ended March 31,
2003 offset by proceeds from the sale of idle equipment.
Net cash flows used for financing activities was $147,503 for the three months
ended March 31, 2003 versus net cash used for financing activities of $537,827
during 2002. This change is principally due to a $209,059 increase in our bank
overdraft during 2003 versus 2002 offset by net repayments of long-term debt of
$423,662. The decrease in long-term debt was due primarily to payments to Oregon
Freeze Dry and to the settlement with The Nature Conservancy.
Recent Financial Accounting Standards Board Statements
In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company is required to follow the prescribed format and provide the additional
disclosures required by SFAS No. 148 in its annual financial statements for the
year ended December 31, 2002 and must also provide the disclosures in its
quarterly reports containing condensed financial statements for interim periods
beginning with the quarterly period ended March 31, 2003. The Company has
decided to retain the intrinsic value method to account for employee stock based
compensation and accordingly the adoption of SFAS No. 148 did is not expected to
have a material effect on the Company's financial position or results of
operations.
15
In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FIN 34." The following is a summary of the Company's
agreements that the Company has determined are with the scope of FIN 45.
Under its bylaws, the Company has agreed to indemnify its officers and directors
for certain events or occurrences arising a result of the officer or director's
serving in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The Company has a separate indemnification
agreement with its directors that requires it, subject to certain exceptions, to
indemnify them to the fullest extent authorized or permitted by its bylaws and
the Delaware Corporations Code. The maximum potential amount of future payments
the Company could be required to make under these indemnification agreements is
unlimited.
Special Note Regarding Forward-Looking Statements
Some of our statements under "Legal Proceedings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Quantitative and
Qualitative Disclosures about Market Risk," "Other Information," 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
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.
16
Item 3. 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.
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.
Daryl Kollman and Marta C. Carpenter 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
Daryl Kollman and Marta C. Carpenter's payment of their federal income tax
liabilities for various specified years. Daryl Kollman and Marta C. Carpenter
will sell their shares as needed and allowed by federal and state securities
laws to make quarterly payments to the Internal Revenue Service. Daryl Kollman
and Marta C. Carpenter retain all voting rights incident to their shares while
the shares are held in trust. The Internal Revenue Service may seize Daryl
Kollman and Marta C. Carpenter's shares from the trust if Daryl Kollman and
Marta C. Carpenter 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 Daryl Kollman and Marta C. Carpenter's tax liabilities
as allowed by applicable law.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The term "disclosures controls and procedures" refers to the controls and
procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under
Rules 13a - 14 of the Securities and Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported within the required
time periods. Within 90 days prior to the date of filing this report (the
"Evaluation date"), we carried out an evaluation under the supervision and
with participation of our Chief Executive Officer of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer has concluded that, as of the Evaluation Date, such
controls and procedures were effective in ensuring that required information
will be disclosed on a timely basis in our periodic reports filed under the
Exchange Act.
(b) Changes in internal controls
There were no significant changes to our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of such evaluation, and there were no corrective actions required with
regard to significant deficiencies and weaknesses.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 7, 2002, Daryl Kollman, one of Cell Tech's principal shareholders,
filed a lawsuit against Cell Tech and certain of its officers, directors and
counsel in the Circuit Court for the State of Oregon for Klamath County. The
complaint makes a number of individual and derivative claims. Mr. Kollman makes
17
two claims against Cell Tech. First, Mr. Kollman alleges that Cell Tech breached
an agreement to register its stock for public sale and seeks damages of an
amount to be proven at trial, but not less than $9,282,000. Second, Mr. Kollman
claims that Cell Tech conspired with Marta C. Carpenter (formerly known as Marta
C. Kollman), a principal shareholder and the President, Chief Executive Officer
and one of our director; Donald P. Hateley, our Chairman of the Board of
Directors; and others to prevent the registration of Mr. Kollman's stock and to
cause other financial injury to him. As a result, Mr. Kollman seeks $32,931,976
against the defendants. Mr. Kollman also seeks millions of dollars in damages on
his own behalf and on behalf of Cell Tech against Marta Carpenter, Mr. Hateley
and others based on a variety of legal theories, many of which either have been
or are being litigated in other cases. The Company intends to vigorously defend
the direct claims asserted in this lawsuit, and is currently evaluating the
claims that Mr. Kollman has asserted on Cell Tech's behalf. The Company cannot
predict the amount of loss, if any, which could result from this lawsuit, and an
unfavorable outcome could have a material adverse impact upon its financial
condition, cash flow, or results of operations.
On March 27, 2002, the Nature Conservancy filed an action against Cell Tech in
the Circuit Court for the State of Oregon for Klamath County, alleging, among
other things, that Cell Tech's wholly owned subsidiary, The New Earth Company,
was in default on a promissory note and a trust deed. The Nature Conservancy was
seeking $375,000, the principal amount due under the promissory note, plus
interest and certain leasehold rights. We had previously recorded the net
present value of the promissory note, which had a balance of $313,790 and had
been included in the current portion of long-term debt in the December 31, 2002
consolidated balance sheet. An agreement was signed and the court action
dismissed in January 2003. The net effect of this is an increase to net income
during the first quarter of 2003 by $161,956.
On February 19, 2002, Mr. Kollman filed two separate Notices of Claim of Lien
upon Chattels against Cell Tech, NAC and Marta Carpenter and others, in Klamath
County, Oregon. Mr. Kollman alleges, among other things, that Cell Tech owes him
approximately $705,693 in past due rent. Mr. Kollman also claims that Cell Tech
owes Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr. Kollman and
Marta Carpenter, approximately $717,900 in past due rent. Mr. Kollman asserts
that Cell Tech is not entitled to remove its property from property owned by
him, Marta Carpenter and KCS and seeks to subject the Cell Tech property to
foreclosure proceedings. The Company intends to vigorously defend against these
liens. The Company cannot predict the amount of loss, if any, that could result
from these liens, but does not believe that an unfavorable outcome would have a
material adverse impact upon its financial condition, cash flow, or results of
operations.
On May 31, 2002, Mr. Kollman filed a lawsuit in the Circuit Court for the State
Oregon for Klamath County to evict Cell Tech from certain property owned by him
and Marta Carpenter. On October 31, 2002, the court granted Cell Tech's motion
for summary judgment in this case.
On June 6, 2002, Mr. Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the State of Oregon for Klamath County to evict Cell Tech from
property owned by KCS. In this lawsuit, Mr. Kollman also alleges that Cell Tech
has not paid approximately $1,050,000 in rent. Marta Carpenter is seeking to
stop the evictions and the Company is resisting Mr. Kollman's attempt to evict
it. The Company intends to vigorously defend this lawsuit. The Company cannot
predict the amount of loss, if any, that could result from this lawsuit but an
unfavorable outcome could have a material adverse effect on our financial
condition.
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that Cell Tech Products,
Inc. engaged in unfair business practices and misleading advertising. In January
2003, the Superior Court of Tulare County issued a Tentative Decision
18
stating that Teachers for Truth in Advertising was entitled to an injunction
prohibiting Cell Tech from making deceptive representations in its advertising
or literature disseminated in California and ordering Cell Tech to refund the
purchase price paid by California customers for Cell Tech's algae products from
the date four years prior to the filing of the action through the trial date in
November of 2002. In response to the Tentative Decision, Cell Tech's counsel
filed a Request for Statement of Decision on January 23, 2003. On February 20,
2003, the Superior Court issued its Final Decision, which essentially affirms
the Tentative Decision. Plaintiff has submitted a proposed judgment to the court
consistent with the Tentative and Final Decisions. The parties mediated this
matter on May 9, 2003 before a retired Orange County Superior Court judge and
have agreed to submit a proposed confidential settlement to the Superior Court
within the next 60 days. The Company does not believe that the proposed offer to
refund to certain California customers will be in an amount that would have a
material adverse impact on Cell Tech's business and financial position.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, as amended, incorporated by reference to
the Registration Statement on Form SB-2, dated June 21, 1996.
3.2 Certificate of Amendment of Certificate of Incorporation incorporated
by reference to the Current Report on Form 8-K dated November 19,
1999.
3.3 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock incorporated by reference to the Current
Report on Form 8-K dated August 2, 1999.
3.4 Amended and Restated Bylaws incorporated by reference to the
Registration Statement on Form SB-2 dated June 21, 1996.
99.1 Certificate of Marta C. Carpenter pursuant to 18 U.S.C Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K. We did not file any currents
reports on Form 8-K during the quarter ended March 31, 2003.
On April 1, 2003, we filed a current report on Form 8-K to
disclose the tentative decision of the Superior Court in the
Teachers for Truthful Advertising lawsuit.
19
Signatures
Pursuant to the requirements 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.
CELL TECH INTERNATIONAL INCORPORATED
May 15, 2003 ---------------------------------------
Marta C. Carpenter
President and Chief Executive Officer
20
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Marta C. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cell Tech
International Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am the registrant's certifying officer and am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
CELL TECH INTERNATIONAL INCORPORATED
--------------------------------
Marta C. Carpenter
Chief Executive Officer and
Chief Accounting Officer,
DATED: May 15, 2003
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