UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 |_| No |X|.
As of April 30, 2004, the number of shares outstanding of the registrant's sole
class of common stock, par value $0.01 per share was 13,974,087.
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...............................................10
Overview................................................................11
Results of Operations...................................................12
Three months ended March 31, 2004 compared with the three months
ended March 31, 2003..................................................13
Liquidity and Capital Resources.........................................14
Cash Flows..............................................................15
Recent Financial Accounting Standards Board Statements..................15
Special Note Regarding Forward-Looking Statements.......................15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........16
ITEM 4. CONTROLS AND PROCEDURES............................................16
PART II -- OTHER INFORMATION..................................................17
ITEM 1. LEGAL PROCEEDINGS..................................................17
ITEM 2. CHANGES IN SECURITIES..............................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................18
SIGNATURES.................................................................20
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Receivables $ 290,518 $ 284,648
Current portion of inventories 2,000,000 1,900,000
Prepaid expenses 391,005 565,450
----------- -----------
Total current assets 2,681,523 2,750,098
----------- -----------
LONG-TERM INVENTORIES, net of current portion 2,816,084 2,816,471
PROPERTY AND EQUIPMENT, net of accumulated depreciation 2,055,305 2,460,237
IDLE PROPERTY AND EQUIPMENT, net 867,221 916,355
OTHER ASSETS 214,733 240,851
----------- -----------
Total assets $ 8,634,866 $ 9,184,012
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 400,505 $ 481,496
Accounts payable 903,453 685,146
Commissions payable 815,771 878,258
Accrued payroll and related liabilities 244,152 296,506
Other accrued expenses 1,307,735 1,287,659
Current portion of long-term debt 2,088,474 2,074,229
Related party payable 884,419 746,747
----------- -----------
Total current liabilities 6,644,509 6,450,040
----------- -----------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 370,725 507,855
----------- -----------
Total liabilities 7,015,234 6,957,895
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series A convertible preferred stock - no par value; 4,175,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Series B convertible preferred stock - no par value; 800,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Undesignated preferred stock - no par value; 1,825,000 shares
authorized; none issued and outstanding in 2004 and 2003 -- --
Common stock - $.01 par value; in 2004 and 2003, 50,000,000 shares
authorized, 13,974,087 shares issued and outstanding 139,741 139,741
Additional paid-in capital 2,891,224 2,891,224
Retained earnings (1,411,333 (804,849
----------- -----------
Total shareholders' equity 1,619,632 2,226,116
----------- -----------
Total liabilities and shareholders' equity $ 8,634,866 $ 9,184,012
=========== ===========
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,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
REVENUE $ 5,267,054 $ 5,932,992
COST OF SALES 1,400,336 1,866,416
------------ ------------
GROSS PROFIT 3,866,718 4,066,675
COMMISSIONS 2,178,196 2,535,435
------------ ------------
GROSS PROFIT AFTER COMMISSIONS 1,688,522 1,531,141
SHIPPING AND HANDLING EXPENSES 346,498 383,450
SELLING EXPENSES 980,302 1,110,037
RESEARCH AND DEVELOPMENT 39,168 59,559
GENERAL AND ADMINISTRATIVE 863,136 478,888
------------ ------------
LOSS FROM OPERATIONS (540,582) (500,793)
OTHER INCOME (EXPENSE) 16,839 166,469
INTEREST EXPENSE (82,741) (164,727)
------------ ------------
NET LOSS (606,484) (499,051)
------------ ------------
BASIC AND DILUTED LOSS PER SHARE
$ (0.04) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
USED TO CALCULATE BASIC AND DILUTED LOSS PER SHARE 14,246,980 13,665,771
============ ============
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,
-----------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(606,484) $(499,051)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 496,370 264,882
Loss on sale of fixed assets (12,492) 53,787
Changes in assets and liabilities:
Receivables (5,870) 46,544
Inventories (99,613) 173,179
Prepaid expenses 174,445 187,655
Other assets 26,118 107,963
Accounts payable 218,307 2,190
Commissions payable (62,487) 26,997
Accrued payroll and payroll related liabilities (52,354) (52,035)
Other accrued expenses 20,076 (139,151)
--------- ---------
Net cash provided by operating activities 96,016 172,960
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (43,546) (81,134)
Proceeds from sale of equipment 13,734 55,677
--------- ---------
Net cash used for investing activities (29,812) (25,457)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (80,991) 209,059)
Net payments on long-term debt (122,885) (423,662)
Net proceeds from (payments for) related party debt 137,672 67,100
--------- ---------
Net cash used for financing activities (66,204) (147,503)
--------- ---------
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 $ 82,741 $ 164,727
========= =========
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" or "we" "us" "our") and The
New Algae Company, Inc. ("NAC"), collectively the "Company," are engaged in
producing and marketing food supplement and personal care products made with
blue-green algae harvested from Klamath Lake, Oregon. We use a multi-level
marketing network throughout the United States, the District of Columbia, Guam,
Puerto Rico, American Samoa, the Virgin Islands and Canada to distribute our
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 our management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair statement of our 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 we expect for
the fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in our annual report on Form
10-K/A for the year ended December 31, 2003.
GOING CONCERN
During 2002, we were able to obtain new financing that allowed us to repay the
borrowings under the former line of credit. As of March 31, 2004 we are 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 the first
three months of 2004 and prior years. Although management believes that it has
made progress during the first three months of 2004 on issues affecting our
ability to continue as a going concern, we have experienced recurring net losses
and have negative working capital at March 31, 2004. These conditions give rise
to substantial doubt about our ability to continue as a going concern. In their
report on our financial statements for the year ended December 31, 2003, our
independent certified public accountants included an explanatory paragraph
expressing 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 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 were available, whether the terms or conditions would
be acceptable to us.
BASIS OF CONSOLIDATION
Our accompanying consolidated financial statements include our accounts and our
subsidiary, NAC. We have eliminated intercompany transactions and balances on
consolidation.
4
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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
We recognize revenue from the sale of our products upon shipment, at which time
title passes. We estimate an allowance for sales returns based on historical
experience with product returns.
ACCOUNTING FOR STOCK OPTIONS
We have adopted the intrinsic value method of accounting for employee stock
options as permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS No. 123) and as amended by SFAS
No. 148. We disclose the pro forma effect on loss and loss per share as if we
had applied the fair value based method. For equity instruments, including stock
options issued to non-employees, the fair value of the equity instruments or the
fair value of the consideration received, whichever is more readily
determinable, is used to determine the value of services or goods received and
the corresponding charge to operations.
We have not disclosed the effect on loss and loss per share as if we had applied
the fair value recognition provision of SFAS No. 123 to stock-based employee
compensation because it is not significantly different from the historical
results.
COMMISSIONS
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. We pay commissions to our distributors as compensation for
sales and marketing activities and based on their personal sales volumes and the
sales of distributors they have recruited into our network. Accordingly, we
classify these expenses as a cost and not a reduction of revenue.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset," ("SFAS No. 144"), gives guidance
for impaired assets or long-lived assets to be disposed of and supercedes SFAS
No. 121. We account for the impairment of long-lived assets to be held and used,
when indications of impairment are present, by evaluating the carrying value in
relation to the operating performance and future undiscounted cash flows of the
underlying business. We report long-lived assets held for disposal at the lower
of their carrying value or fair value less costs to sell.
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the current
period presentation.
5
NOTE 2 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2004 2003
----------- -----------
Work in progress $ 6,522,186 $ 6,857,108
Finished goods 491,805 418,999
Sales aids 15,930 5,904
----------- -----------
7,029,921 7,282,011
Less reserve for potentially unsaleable inventories (2,213,837) (2,565,540)
----------- -----------
4,816,084 4,716,471
Less current portion (2,000,000) (1,900,000)
----------- -----------
$ 2,816,084 $ 2,816,471
=========== ===========
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 $2,213,837 and $2,565,540 at March 31, 2004 and December 31, 2003,
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 14,246,980 and 13,665,771
shares for the three months ended March 31, 2004 and 2003, 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 January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletins
("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46 clarifies
the application of ARB No. 51 to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We do not believe
the adoption of FIN 46 will have a material impact on our financial position and
results of operations.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB N0. 104). "Revenue Recognition," which codifies, revises
and rescinds certain section of SAB No. 101, "Revenue Recognition," in order to
make this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's results of operations,
financial position or cash flows.
6
NOTE 5 - LONG-TERM DEBT
In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an
assignment of our financing facility with Coast Business Credit. 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 would not declare a
default until June 30, 2003, when the entire principal would be due. La Jolla
Loans extended the forbearance period to June 30, 2004 by our payment of a
$75,000 renewal fee. Interest of $23,023 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 $23,023. The outstanding principal balance at March 31, 2004 was
$1,562,164. The Company is in compliance with all loan covenants as of March 31,
2004.
Additionally we have reached an agreement with La Jolla Loans to extend the
forbearance period one more year to June 30, 2005.
NOTE 6 - CONTINGENCIES
MICROCYSTIS
As a result of certain conditions, Microcystis, a toxic algae, occasionally
blooms in Klamath Lake at the same time aphanizomenon flos-aquae algae is
harvested. We regularly test the algae we harvest for possible contamination.
Algae that does not meet our 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 aphanizomenon flos-aquae algae. The Oregon
Department of Agriculture has raised no questions about our products under this
rule.
In some years, the presence of Microcystis may reduce the quantity of
aphanizomenon flos-aquae algae that we can harvest.
LITIGATION
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 were seeking monetary
damages of approximately $226,345 for all causes specified in our complaint. The
matter was settled in February 2004 resulting in the defendant paying us $80,000
for damages.
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that we, erroneously sued
as 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 us from making deceptive representations in its
advertising or literature disseminated in California and ordering us to refund
the purchase price paid by California customers for our 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, our 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, which judgment was entered in April 2003. 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, California Superior Court judge and agreed to submit a
proposed confidential settlement to the Superior Court within 60 days, which
they have done. The confidential settlement provides for making partial refunds
to certain of our California customers. The Superior Court approved the
confidential settlement and vacated the judgment on August 25, 2003. We do not
believe that the proposed refund to California customers will be in an amount
that would have a material adverse impact on our business and financial
position.
7
On February 19, 2002, Daryl Kollman, one of our principal shareholders, filed
two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta
Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among
other things, that we owe him approximately $705,693 in past due rent. Mr.
Kollman also claims that we owe 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 we are not entitled to remove our personal
property from the real property owned by him, Marta Carpenter and KCS and seeks
to subject our property to foreclosure proceedings. We intend to vigorously
defend against these liens. We cannot predict the amount of loss, if any, that
could result from these liens, but do not believe that an unfavorable outcome
would have a material adverse impact upon our financial condition, cash flow, or
results of operations.
On or about May 31, 2002, Daryl Kollman filed an action in the Circuit Court of
Klamath County (Case No. 02-01956CV) seeking to evict us from certain real
property owned by him and Marta Carpenter. Mr. Kollman later added a claim for
allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the
Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid
rent is currently pending. We 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.
On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the State of Oregon for Klamath County (Case No. 02-02040CV) to evict
us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we
have not paid approximately $1,050,000 in rent. We have voluntarily vacated all
of the KCS property we do not need to support our current operations. We contend
that we have paid all rents owing and intend to vigorously defend this lawsuit.
We 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.
On October 7, 2002, Daryl Kollman filed a lawsuit against us, certain of our
officers, directors and counsel in the Circuit Court for the State of Oregon for
Klamath County (Case No. 02-03774CV). The complaint makes a number of individual
and derivative claims. Mr. Kollman makes two claims against us. First, Mr.
Kollman alleges that we breached an agreement to register our stock for public
sale and seeks damages of an amount he must prove at trial, but not less than
$9,282,000. Second, Mr. Kollman claims that we conspired with Marta C. Carpenter
(formerly known as Marta C. Kollman), a principal stockholder and our President,
Chief Executive Officer and one of our directors; 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 no less than $32,931,976 against the defendants. Mr. Kollman also
seeks millions of dollars in damages on his own behalf and on behalf of us
against Marta Carpenter, Mr. Hateley and others based on a variety of legal
theories. We intend to vigorously defend the direct claims asserted in this
lawsuit, and we have filed a motion to disqualify Mr. Kollman as a proper
plaintiff for the derivative claims, which motion is currently pending. We
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 our
financial condition, cash flow, or results of operations.
All of the Kollman claims have been consolidated for a trial date that is
currently scheduled for July, 2004.
On March 27, 2002, the Nature Conservancy filed an action against us in the
Circuit Court for the State of Oregon for Klamath County, alleging, among other
things, that our 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. The parties signed a settlement agreement and the court action
was dismissed during the first quarter of 2003. The net effect of this was an
increase to net income of $161,956.
8
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
Our stock owned by Daryl Kollman and Marta C. Carpenter is subject to a tax lien
filed by the Internal Revenue Service. A trust holds the stock and the IRS will
release it upon satisfaction of federal income taxes owed by Mr. Kollman and Ms.
Carpenter. Mr. Kollman and Ms. Carpenter retain voting power over the stock held
in trust. Mr. Kollman and Ms. 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 Ms. Carpenter fail to make
such payments in a timely manner, 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 Ms.
Carpenter's tax liabilities. The IRS has subordinated its lien in favor of our
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, we agreed to issue common stock and warrants to purchase common stock
to Mr. Kazi if the consolidated stockholders' equity was less than $20,000,000
at December 31, 1999. As a result, penalty shares have accrued and we issued
3,333,192 shares of common stock to Mr. Kazi during the second quarter of 2003
and we converted the associated accrued liability of $624,860 to equity.
Warrants to purchase an additional 3,333,192 shares of common stock were also
due to Mr. Kazi on March 31, 2003. During the first quarter of 2004, an
additional liability was recognized under the agreement in the amount of $36,935
related to the issuance of these shares and warrants, based on the fair value of
the securities and has been accounted for in the financial statements.
Additionally, we were to register the shares originally sold to Mr. Kazi for
resale within 120 days of the sale. We have accrued and will continue to accrue
additional penalties until the shares are registered. The accrued liability at
March 31, 2004 was $119,472 and 634,035 shares and 634,035 warrants are issuable
to Mr. Kazi. We are also obligated to issue additional securities to Mr. Kazi
upon the effective date of our next registration statement.
9
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.
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 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 and Form 10-K/A for the year ended December 31, 2003.
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 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.
During 2002, we were able to obtain new financing that allowed us to repay the
borrowings under the former line of credit. As of March 31, 2004 we are 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 the first
three months of 2004 and prior years. Although management believes that it has
made progress during the first three months of 2004 on issues affecting our
ability to continue as a going concern, we have experienced recurring net losses
and have negative working capital at March 31, 2004. These conditions give rise
to substantial doubt about our ability to continue as a going concern. In their
report on our financial statements for the year ended December 31, 2003, our
independent certified public accountants included an explanatory paragraph
expressing substantial doubt about the company's ability to continue as a going
concern.
10
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 were available, whether the terms or conditions would
be acceptable to us.
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, 2004 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.
OVERVIEW
We are a natural and nutritional products company. We develop and distribute a
wide range of products made with Aphanizomenon flos-aquae (trade name Super Blue
Green(R)) Algae ("SBGA") and other nutrients and ingredients through a network
of independent Business Associates ("Business Associates"). We currently offer
over sixty products that are intended to appeal to health-conscious consumers.
We divide our products into three major product lines including nutritional
supplements and foods, skin and hair care products, and animal and plant care.
We harvest SBGA and manufacture several of our products at our modern production
facilities in Klamath Falls, Oregon. We market our products through independent
Business Associates located in all fifty states, the District of Columbia, Guam,
Puerto Rico, American Samoa, the Virgin Islands, Federated States of Micronesia,
Marshall Islands, Northern Mariana Islands, Palau and Canada. We encourage our
Business Associates to recruit interested people as new Business Associates for
our products. We place these recruits beneath the recruiting Business Associates
in the "network" and we refer to them as the associates' "downlines" or
"networks." Business Associates earn commissions on sales by their organizations
as well as on the sales they generate directly. We assist Business Associates in
establishing their own businesses and provide support programs such as a
comprehensive, information-packed website (www.celltech.com), audio and
videotapes for training, a national Training tour, Regional Sales Meetings,
seminars and an annual convention called the August Celebration.
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 plant, are subject to variation due to environmental conditions. The volumes
of annual harvests vary 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.
11
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
We record impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows we estimate to generate by those assets are less than
the carrying amount of those items. We base our cash flow estimates on
historical results adjusted to reflect our best estimate of future market and
operating conditions. We reduce the net carrying value of assets not recoverable
to fair value. Our estimates of fair value represent our best estimate based on
industry trends and reference to market rates and transactions. During 2003 we
recorded impairment expenses for various assets designated as held for sale. We
have not recorded any impairment expense in 2004.
COMMISSIONS
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. We pay commissions to our distributors as compensation for
sales and marketing activities and based on their personal sales volumes and the
sales of distributors they have recruited into our network. Accordingly, we
classify these expenses as a cost and not a reduction of revenue.
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,
----------------------------
2004 2003
------ ------
REVENUE 100.0% 100.0%
COST OF SALES 26.6 31.5
------ ------
GROSS PROFIT 73.4 68.5
COMMISSIONS 41.4 42.7
------ ------
SELLING PROFIT 32.0 25.8
SHIPPING AND HANDLING EXPENSES 6.6 6.5
SELLING EXPENSES 18.6 18.7
RESEARCH AND DEVELOPMENT 0.7 1.0
GENERAL AND ADMINISTRATIVE 16.4 8.1
------ ------
OPERATING INCOME (LOSS) (10.3) (8.4)
OTHER INCOME 0.3 2.8
INTEREST EXPENSE (1.6) (2.8)
------ ------
NET (LOSS) (11.5) (8.4)
------ ------
12
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2003
Net sales for the three months ended March 31, 2004 were $5,267,054, a decrease
of $665,938 or 11% from net sales of $5,932,992 for the three months ended March
31, 2003. The decrease in sales is directly related to a 14% decrease in orders
for the same period. Average order size increased to $125 from $123 over the
same period. The total number of Business Associates and Preferred Customers for
the three months ended March 31, 2004 decreased to an average of 32,510, which
was 14% lower than the average of 37,809 Business Associates and Preferred
Customers for the three months ended March 31, 2003. Sales of our products are
made through a multi-level marketing network of Business Associates. Sales are
positively linked with the total of Business Associates and their customers.
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 increased to 73.4% of net sales during the three
months ended March 31, 2004 from 68.5% of net sales during the same period in
2003. This increase was due to our efforts to reduce operating costs and to
eliminate nonproductive assets from overhead costs.
Gross profit after commissions represents gross profit less commission expense.
Commissions expense for the three months ended March 31, 2004 and 2003 was
$2,178,196 and $2,535,435, respectively, a decrease of $357,239 or 14%. We are a
multi-level marketing organization. Business Associates make up our sales force.
Business Associates buy algae products for their own consumption plus they
actively recruit other Business Associates and Preferred Customers into our
network. Business Associates are paid commissions based upon their personal
sales volumes and the sales of Business Associates beneath them in their
network. Commission expense as a percentage of sales was 41.4% and 42.7% during
the three months ended March 31, 2004 and 2003, respectively. The decrease in
the expense as a percentage of sales is due to the implementation of various
revisions to the commission system during 2003.
Operating expenses include shipping and handling expenses, selling expenses,
research and development expenses and general and administrative expenses. In
total, operating expenses increased $197,170 or 10% to $2,229,104 for the three
months ended March 31, 2004 from $2,031,934 for the three months ended March 31,
2003. The components of operating expenses are discussed below.
o Shipping and handling expenses include purchasing and receiving.
Shipping and handling expenses decreased $36,952 or 10%, to $346,498
in 2004 from $383,450 in 2003. The decrease was due to a decrease in
freight expense in 2004 corresponding with the decreased shipments
and orders. Shipping and handling expenses as a percent of net sales
increased to 6.6% for the three months ended March 31, 2004 from
6.5% for the three months ended March 31, 2003.
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 $129,735
between 2004 and 2003 to $980,302 from $1,110,037. This decrease was
primarily due to an decreases in costs associated with promotional
gift certificates of $53,000, consulting fees of $20,000, payroll
expense of $15,000 and insurance for product liability of $14,000.
Selling expenses as a percent of net sales were 18.6% for the three
months ended March 31, 2004 and 18.7% of sales for the three months
ended March 31, 2003.
o Research and development expenses decreased 34% to $39,168 in 2004
from $59,559 in 2003, which constituted 0.7% and 1.0% of net sales,
respectively. The decrease related to a decrease in laboratory
testing and depreciation.
o General and administrative expenses increased by $384,248 between
2004 and 2003 to $863,136 from $478,888. For the three months ended
March 31, 2004, general and administrative expenses averaged 16.4%
of sales while they were 8.1% of sales for the three months ended
March 31, 2003. The increase between 2004 and 2003 is primarily
attributable to increases in legal fees of $95,000 and of $300,000
in amortization of leasehold improvements relating to rented
properties being abandoned that have been used for shipping, selling
and administrative operations.
13
Other income decreased to $16,839 for the three months ended March 31, 2004 from
$166,469 of income for the three months ended March 31, 2003 primarily due to
the one time recognition of income of $162,000 as a result of the settlement
agreement with Nature Conservancy in 2003.
Net interest expense decreased to $82,741 for the three months ended March 31,
2004 from $164,727 for the three months ended March 31, 2003. This increase was
due primarily to reductions in principal balances owed to La Jolla Loan, Inc.
and Oregon Freeze Dry, Inc. in the combined amount of $1,119,000. Net Interest
expense represented 1.6% and 2.8% of sales for each of the three months ended
March 31, 2004 and 2003, respectively.
Net income decreased by $107,433 resulting in a loss of $606,484 for the three
months ended March 31, 2004 from a net loss of $499,051 for the comparable
period in 2003. As a percentage of net sales, net income decreased by 3.1% for
the three months ended March 31, 2004 resulting in a net loss of 11.5% from net
income of 8.4% for the comparable period in 2003. The decrease was due to the
decrease in net sales and by the increase in amortization of leasehold
improvements of $300,000.
LIQUIDITY AND CAPITAL RESOURCES
We had net losses of $5,651,029, $3,497,387 and $5,015,350 for the years ended
December 31, 2003, 2002 and 2001, respectively and had a working capital deficit
of $3,699,942 and $4,282,898 at December 31, 2003 and 2002, respectively. As a
result, our independent certified public accountants have included in our annual
report an explanatory paragraph covering those periods, which expresses
substantial doubt about our ability to continue as a going concern.
Working capital deficit at March 31, 2004 amounted to $3,962,986, which
represents a decrease in working capital of $263,044 from a working capital
deficit of $3,699,942 as of December 31, 2003. At March 31, 2004, we had a bank
overdraft of $400,505 versus a bank overdraft of $481,496 as of December 31,
2003.
In September 2002, the Company's financing facility with the financial
institution was purchased by and assigned to La Jolla Loans, Inc ("La Jolla
Loans"). In connection with this transaction, the financial institution'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 would not declare a
default until June 30, 2003, when the entire principal would be due. The
forbearance period was extended to June 30, 2004 by the Company's payment of a
$75,000 renewal fee in June 2003. Interest of $18,225 at an effective rate of
14% is payable monthly along with additional monthly impound payments of
approximately $19,000 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, 2004 is $1,562,164. The Company is in compliance with all loan
covenants as of March 31, 2004.
La Jolla Loan has agreed further extend the loan at June 30, 2004 upon payment
of approximately $100,000 in fees and associated expenses.
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:
14
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, 2004 amounted to $96,016 compared to cash flows provided by operations of
$172,960 for the three months ended March 31, 2003. The decrease in cash flows
generated by operations is primarily due to a $107,433 decrease in net income
between the three months ended March 31, 2004 and 2003 and changes in current
assets and liabilities.
Cash flows used in investing activities for the three months ended March 31,
2004 was $29,812, representing an increase of $4,355 from net cash used for
investing activities of $25,457 for the three months ended March 31, 2003.
Net cash flows used for financing activities was $66,204 for the three months
ended March 31, 2004 versus net cash used for financing activities of $147,503
during the same period in 2003. This change is principally due to an $80,991
improvement in our bank overdraft position during the three months ended March
31, 2004 versus deterioration in our bank overdraft position of $209,059 during
the three months ended March 31, 2003. Payments on long term debt were
substantially less in 2004 due to the legal settlement with The Nature
Conservancy during 2003.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletins
("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46 clarifies
the application of ARB No. 51 to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We do not believe
the adoption of FIN 46 will have a material impact on our financial position and
results of operations.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB N0. 104). "Revenue Recognition," which codifies, revises
and rescinds certain section of SAB No. 101, "Revenue Recognition," in order to
make this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's results of operations,
financial position or cash flows.
15
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.
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.
16
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 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 were seeking monetary
damages of approximately $226,345 for all causes specified in our complaint. The
matter was settled in February 2004 resulting in the defendant paying us $80,000
for damages.
In October of 2001, Teachers for Truth in Advertising filed an action in the
Superior Court of Tulare County, California alleging that we, erroneously sued
as 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 us from making deceptive representations in its
advertising or literature disseminated in California and ordering us to refund
the purchase price paid by California customers for our 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, our 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, which judgment was entered in April 2003. 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, California Superior Court judge and agreed to submit a
proposed confidential settlement to the Superior Court within 60 days, which
they have done. The confidential settlement provides for making partial refunds
to certain of our California customers. The Superior Court approved the
confidential settlement and vacated the judgment on August 25, 2003. We do not
believe that the proposed refund to California customers will be in an amount
that would have a material adverse impact on our business and financial
position.
On February 19, 2002, Daryl Kollman, one of our principal shareholders, filed
two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta
Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among
other things, that we owe him approximately $705,693 in past due rent. Mr.
Kollman also claims that we owe 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 we are not entitled to remove our personal
property from the real property owned by him, Marta Carpenter and KCS and seeks
to subject our property to foreclosure proceedings. We intend to vigorously
defend against these liens. We cannot predict the amount of loss, if any, that
could result from these liens, but do not believe that an unfavorable outcome
would have a material adverse impact upon our financial condition, cash flow, or
results of operations.
17
On or about May 31, 2002, Daryl Kollman filed an action in the Circuit Court of
Klamath County (Case No. 02-01956CV) seeking to evict us from certain real
property owned by him and Marta Carpenter. Mr. Kollman later added a claim for
allegedly unpaid rent exceeding $558,000. On or about October 31, 2002, the
Court dismissed Mr. Kollman's eviction claim. Mr. Kollman's claim for unpaid
rent is currently pending. We 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.
On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the State of Oregon for Klamath County (Case No. 02-02040CV) to evict
us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we
have not paid approximately $1,050,000 in rent. We have voluntarily vacated all
of the KCS property we do not need to support our current operations. We contend
that we have paid all rents owing and intend to vigorously defend this lawsuit.
We 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.
On October 7, 2002, Daryl Kollman filed a lawsuit against us, certain of our
officers, directors and counsel in the Circuit Court for the State of Oregon for
Klamath County (Case No. 02-03774CV). The complaint makes a number of individual
and derivative claims. Mr. Kollman makes two claims against us. First, Mr.
Kollman alleges that we breached an agreement to register our stock for public
sale and seeks damages of an amount he must prove at trial, but not less than
$9,282,000. Second, Mr. Kollman claims that we conspired with Marta C. Carpenter
(formerly known as Marta C. Kollman), a principal stockholder and our President,
Chief Executive Officer and one of our directors; 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 no less than $32,931,976 against the defendants. Mr. Kollman also
seeks millions of dollars in damages on his own behalf and on behalf of us
against Marta Carpenter, Mr. Hateley and others based on a variety of legal
theories. We intend to vigorously defend the direct claims asserted in this
lawsuit, and we have filed a motion to disqualify Mr. Kollman as a proper
plaintiff for the derivative claims, which motion is currently pending. We
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 our
financial condition, cash flow, or results of operations.
All of the Kollman claims have been consolidated for a trial date that is
currently scheduled for July, 2004.
On March 27, 2002, the Nature Conservancy filed an action against us in the
Circuit Court for the State of Oregon for Klamath County, alleging, among other
things, that our 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. The parties signed a settlement agreement and the court action
was dismissed during the first quarter of 2003. The net effect of this was an
increase to net income of $161,956.
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.
ITEM 2. CHANGES IN SECURITIES
None.
18
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.
31.1 Certification.
32.1 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, 2004.
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, 2004 /s/ Marta C. Carpenter
----------------------------------------
Marta C. Carpenter
President and Chief Executive Officer
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