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2002
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 2002
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 |_| .
As of August 15, 2002, 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
Consolidated Balance Sheets......................................................................1
Consolidated Statements of Income (Loss).........................................................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......11
Overview........................................................................................11
Results of Operations...........................................................................12
Three months ended June 30, 2002 compared with the three months ended June 30, 2001.............12
Six months ended June 30, 2002 compared with the six months ended June 30, 2001.................14
Liquidity and Capital Resources.................................................................15
Cash Flows......................................................................................16
Recent Accounting Pronouncements................................................................16
Special Note Regarding Forward-Looking Statements...............................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................18
PART II - OTHER INFORMATION...........................................................................19
ITEM 1. LEGAL PROCEEDINGS..........................................................................19
ITEM 2. CHANGES IN SECURITIES......................................................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................21
ITEM 5. OTHER INFORMATION..........................................................................21
Dispute Between Principal Shareholders..........................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................22
SIGNATURES.........................................................................................27
ii
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
Part I - Financial Information
Item 1. Financial Statements
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
----------- ------------
Assets (Unaudited)
Current assets
Receivables $ 276,506 $ 327,083
Inventories, current portion 2,000,000 2,000,000
Prepaid expenses 258,959 460,860
----------- -----------
Total current assets 2,535,465 2,787,943
----------- -----------
Long-term inventories, net of current portion 6,673,623 7,304,778
Property and equipment, net of accumulated depreciation 7,078,221 7,318,683
Property and equipment held for sale, net 2,256,893 2,271,305
Other assets 320,565 292,092
----------- -----------
Total assets $18,864,767 $19,974,801
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Bank overdraft $ 195,732 $ 763,105
Accounts payable 2,159,956 2,527,078
Commissions payable 1,125,809 1,219,136
Sales taxes payable 69,774 82,343
Accrued payroll and related liabilities 238,544 252,944
Other accrued expenses 1,235,998 1,133,438
Current portion of long-term debt 2,015,675 2,160,986
Related party payable 912,046 1,086,099
----------- -----------
Total liabilities 7,953,534 9,225,129
----------- -----------
Commitments and contingencies
Shareholders' equity
Series A convertible preferred stock - no par value; 4,175,000 shares
authorized; none issued and outstanding in 2002 and 2001 -- --
Series B convertible preferred stock - no par value; 800,000 shares
authorized; none issued and outstanding in 2002 and 2001 -- --
Undesignated preferred stock - no par value; 1,825,000 shares
authorized; none issued and outstanding in 2002 and 2001 -- --
Common stock - $.01 par value; in 2002 and 2001, 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 8,505,127 8,343,567
----------- -----------
Total shareholders' equity 10,911,233 10,749,672
----------- -----------
Total liabilities and shareholders' equity $18,864,767 $19,974,801
=========== ===========
See accompanying notes to consolidated financial statements.
1
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Six Months Ended For the Three Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 13,860,819 $ 15,665,312 $ 6,755,115 $ 7,603,248
Cost of sales 3,876,212 5,024,949 1,910,217 2,446,618
Gross profit 9,984,607 10,640,363 4,844,898 5,156,630
Commissions 6,507,336 7,682,042 3,116,524 3,728,253
------------ ------------ ------------ ------------
Gross profit after commissions 3,477,271 2,958,321 1,728,374 1,428,377
Selling expenses 1,814,415 2,095,583 926,723 968,813
General and administrative 602,884 1,453,293 347,834 651,615
Shipping and handling expenses 833,552 943,811 404,686 476,423
Research and development 82,143 108,065 46,263 38,482
------------ ------------ ------------ ------------
Operating income (loss) 144,277 (1,642,431) 2,867 (706,956)
Other income 113,018 196,999 98,209 130,699
Interest expense (95,735) (351,425) (48,589) (172,337)
------------ ------------ ------------ ------------
Net income (loss) $ 161,560 $ (1,796,857) $ 52,487 $ (748,594)
Basic and diluted income (loss) per
share $ 0.01 $ (0.16) $ 0.01 $ (0.07)
Weighted average number of common
shares outstanding used to
calculate basic and diluted income
(loss) per share 12,467,534 10,640,895 12,467,534 10,640,895
============================================================================================================
See accompanying notes to consolidated financial statements.
2
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
----------------------------
2002 2001
----------- -----------
Cash flows from operating activities
Net income (loss) $ 161,560 $(1,796,857)
Adjustments to reconcile net income (loss) to cash
Provided by operating activities:
Depreciation and amortization 580,277 1,434,820
Loss (gain) on sale of fixed assets 3,381 (13,712)
Changes in assets and liabilities:
Receivables 50,577 181,280
Inventories 631,155 871,491
Prepaid expenses 201,901 184,701
Other assets (28,473) 9,476
Accounts payable (367,122) 564,374
Commissions payable (93,327) (370,229)
Sales tax payable (12,569) (20,371)
Accrued payroll and payroll related liabilities (14,400) (41,173)
Other accrued expenses 102,560 (99,881)
----------- -----------
Net cash provided by operating activities 1,215,520 903,919
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (162,417) (204,714)
Proceeds from sale of equipment 700 45,000
Additions to construction in progress (167,066) --
----------- -----------
Net cash used for investing activities (328,783) (159,714)
----------- -----------
Cash flows from financing activities
Bank overdraft (567,373) (316,237)
Payments on long-term debt (145,311) (685,038)
Net proceeds from (repayment of) related party debt (174,053) 257,070
----------- -----------
Net cash used for financing activities (886,737) (744,205)
----------- -----------
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 year for:
Interest $ 79,075 $ 333,562
=========== ===========
See accompanying notes to consolidated financial statements.
3
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Cell Tech International Incorporated ("Cell Tech") and The New Algae Company
("NAC"), collectively the "Company," are engaged in the production and marketing
of food supplement products made with blue-green algae harvested from Klamath
Lake, Oregon. The Company uses a multi-level distributor network throughout the
United States and Canada to distribute its products.
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 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, 2001.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As previously reported, the
Company has suffered recurring losses from operations and has negative working
capital. In addition, the Company is not in compliance with certain restrictive
covenants of its $15 million Line of Credit Agreement with a financial
institution. These factors raise substantial doubt about the Company's ability
to continue as a going concern.
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.
4
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company recognizes revenue from the sale of its products upon shipment. 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 as evidenced by downline growth
and sales volume and thus 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 indefinite life intangible assets 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.
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
Assets." SFAS No. 144, which addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of,
supercedes SFAS No. 121. The adoption of SFAS No. 144 did not have an effect on
the financial position or results of operations.
Shipping and Handling Cost
The Company adopted EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs", since December 15, 2000. All shipping and handling costs for goods
shipped by the Company to customers are included in shipping and handling
expenses in the statements of income (loss). Shipping and handling costs of
goods shipped by the Company to customers for the six months ended June 30, 2002
and 2001 were $833,658 and $943,811, respectively.
5
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 -- EARNINGS PER SHARE COMPUTATION
The computations of the weighted-average common shares used in the computation
of basic and diluted net income (loss) per share is based on 12,467,534 and
10,640,895 shares for the three months ended June 30, 2002 and 2001,
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 common stock purchase
warrants.
NOTE 3 -- RECENT ACCOUnTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." SFAS No.
143 establishes standards associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company has not yet assessed the impact of this standard on its financial
statements, but does not expect the impact to be material.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144,
which addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of, supercedes SFAS
No. 121. While the Company is currently evaluating the impact the adoption of
SFAS No. 144 will have on its financial position and results of operations, it
does not expect such impact to be material.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." SFAS 145 amends SFAS No 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sales-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. It is anticipated that the financial impact of SFAS 145 will not
have a material effect on the Company.
Statement of Financial Accounting Standards No. 146, Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"), requires the Company to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 replaces
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
6
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 -- CONTINGENCIES
Microcystis
As a result of certain conditions, a toxic strain of algae called Microcystis
occasionally blooms in Klamath Lake and contaminates a portion of the Company's
harvest of blue-green algae. In 1994, the Company began to test the algae
harvested at its facility for possible contamination. The existence of
Microcystis has been regularly measured at various levels. In the absence of
established regulatory criteria for determining an acceptable level of
Microcystin (the actual toxin), the Company sponsored an assessment of risk and
set its own standards for determining whether a particular batch of algae is
acceptable for human consumption. Algae, which does not meet the Company's
standards and cannot be used in alternative non-human consumable products is
isolated and not used in production.
On October 23, 1997, the Oregon Department of Agriculture issued an
Administrative Rule on the sale of blue-green algae, which stated that "the
agency has decided to adopt the 1 microgram per gram (1 ppm) level of
Microcystin in blue-green algae." This ruling may have an impact on the
Company's ability to process and distribute the raw algae harvested and finished
goods produced. Such ruling may also decrease the amount of salable inventory on
hand and may therefore have an adverse impact on the Company's ability to
realize the carrying value of its inventories. Management has recognized that an
impairment of its inventory may exist and therefore has recorded its best
estimate of the effect by establishing a reserve in the amount of $900,000 at
June 30, 2002 and December 31, 2001 for the possible effects of inventories
which may become unsaleable under this Rule. The Oregon Department of
Agriculture has raised no questions about the Company's products under this Rule
to date.
Litigation
The Company is 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.
On March 27, 2002, the Nature Conservancy, a nonprofit corporation (the
"Plaintiff"), filed an action against us in the Circuit Court of the State of
Oregon, for the County of Klamath, alleging among other things, that our wholly
owned subsidiary The New Earth Company ("NEC") has failed to pay the annual
payment due on a non-interest bearing promissory note (the "Note") executed and
delivered to Plaintiff and that NEC's failure to make the payment constitutes a
default under certain provisions of the Note and a trust deed (the "Trust Deed")
to secure payment under the Note. The Plaintiff is seeking $375,000 in principal
due under the Note plus interest from the date of default in addition to certain
leasehold rights that the Trust Deed grants to it. The Plaintiff is also seeking
injunctive relief to recover rent payments from any sublessees. We have retained
legal counsel to represent us in this matter. The Company has previously
recorded the net present value of the Note, which has a balance of $313,790
included in current portion of long-term debt in the consolidated balance sheet
at June 30, 2002
On January 28, 2002, the Company terminated its lease between NAC and Klamath
Cold Storage, Inc. ("KCS"), a corporation owned by some of its principal
shareholders, Daryl Kollman and Marta Kollman. On February 19, 2002, Daryl
Kollman, on behalf of himself and as an officer of KCS, filed two separate
Notice of Claim of Lien upon Chattels (the "Possessory Liens") against it and
its wholly owned subsidiary, NAC and/or NEC, in the County of Klamath, State of
Oregon, claiming a lien upon it and its wholly owned subsidiaries by alleging
among other things, that the Company owes him and Marta
7
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 -- CONTINGENCIES (continued)
Kollman approximately $497,525 in past due rent and that the Company owes KCS
approximately $511,432 in past due rent for its use of certain real property
owned by him and Marta Kollman, our President and Chief Executive Officer, and
KCS. Through the Possessory Liens, Daryl Kollman is claiming that the Company is
not entitled to remove any of its property from the premises and that the
properties will be subject to foreclosure proceedings. On or about June 6, 2002,
Daryl Kollman filed a lawsuit in the Circuit Court for the State Oregon, County
of Klamath, to evict the Company from the facilities it occupies that are owned
by Daryl Kollman and Marta Carpenter (formerly known as Marta Kollman), and has
also purported to file, in the name of Klamath Cold Storage, a separate lawsuit
to evict the Company from the premises it occupies that are owned by Klamath
Cold Storage. Marta Carpenter is seeking to stop the evictions and the Company
is resisting Daryl Kollman's attempt to evict it. The properties in question
include the Company's facilities for processing and storing its products. The
Company believes it could not easily obtain substitute facilities. If the
Company is evicted from the properties, it would have a material adverse impact
on the Company's financial condition and its ability to operate. The Company has
retained legal counsel to represent it in this matter and at the present time,
all parties have entered into mediation discussions and have voluntarily stayed
any further litigation.
In October 2001, Teachers for Truth in Advertising filed an action in the
Superior Court for the County of Tulare, State of California, alleging among
other things, that the Company's advertising is untrue or misleading, that the
Company's business practices are unlawful and fraudulent and unfair and that the
website contains misleading information about the products and the benefits that
a consumer may derive from their use. The plaintiff is seeking injunctive
relief, corrective advertising, and restitution to California consumers who
purchased the products. The parties have completed the discovery phase including
depositions. The plaintiff's motion for summary judgment was denied by the
court. The Company's summary judgment motion to dismiss is presently scheduled
for August 30. 2002 and, if it is denied, the matter is scheduled to proceed to
trial on September 30, 2002. The Company does not believe that the plaintiff's
complaint is meritorious and believes that it will prevail in this matter.
In 1996, the Company entered into an agreement with one of its vendors to
deliver 600,000 wet pounds of algae per month for processing for a five-year
period. The minimum monthly volume level increased in September 1996 to
1,000,000 wet pounds of algae. On or about February 6, 1998, the vendor filed a
complaint against the Company. The complaint alleges that the Company wrongfully
terminated a contract requiring the Company to provide to the vendor not less
than a contractually agreed amount of raw product for processing every month, or
pay a penalty based on the shortfall until the contract was validly terminated.
In its amended complaint, the vendor is seeking $780,930 in damages as of
February 1998, plus additional damages that allegedly are continuing to accrue,
plus prejudgment interest and prevailing party attorney fees as provided by the
contract. The Company counter-claimed for breach of contract, alleging
liquidated damages due, overcharges, and failure to deliver product,
consequential damage for failure to utilize quality control methods required by
the contract, prejudgment interest and attorney fees. In the first quarter of
2002, a settlement agreement was negotiated in which the parties have agreed to
dismiss the lawsuit and counter-claim and to enter into a new agreement for the
processing of algae for a five-year period. The parties have also agreed that
the Company will pay $1,656,000 (included in accounts payable at June 30, 2002)
to the vendor; $1 million of which will be paid in cash and $656,000 will be in
the form of a promissory note payable to the vendor with interest at 10.5% per
annum. As of June 30, 2002, the Company has not signed the processing and
settlement agreements. The agreements are expected to be executed upon the
Company's receipt of financing. In the first quarter of 2002, the parties have
reached an interim
8
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
arrangement whereby the Company will pay $0.15 per pound processed by the vendor
until a formal agreement is finalized.
NOTE 4 -- CONTINGENCIES (continued)
Lien on Company Stock
The Company stock owned by Daryl J. Kollman and Marta C. Kollman, is the subject
of a tax lien filed by the Internal Revenue Service for income taxes due from
them arising from taxable income attributed from the Company. The lien is
subordinated in favor of the lender for the Receivable Loans, Advances and
Inventory Loans, Term Loans, and Equipment Acquisition Loans.
Dispute Between Principal Shareholders
In December 1999, Daryl Kollman and Marta Kollman (now known as Marta
Carpenter), shareholders who together own approximately 82% of our outstanding
shares of common stock, filed divorce proceedings. Daryl Kollman and Marta
Kollman jointly, and their affiliate Klamath Cold Storage Co., are lessors of
substantially all of our facilities, including office space, processing and
freezer storage space. Although one lease is in effect until 2005, we lease the
rest of these facilities on a month-to-month or year-to-year basis. The
disposition of these properties pursuant to the divorce could have an adverse or
disruptive effect on our operations, if the party who receives a particular
property elects to significantly increase rents or terminate any such lease
arrangement at the end of the then current lease term. In addition, compliance
with discovery requests may also have a disruptive effect on our business and
operations, and it may be necessary for our Chief Executive Officer, Marta
Kollman, to spend a portion of her time devoted to handling matters related to
the divorce. Moreover, Daryl Kollman is no longer actively involved in
management and has been unwilling to execute personal guarantees on our behalf,
as he has done in the past. On May 14, 2001, Marta Kollman petitioned the
Circuit Court for the State of Oregon with a motion seeking, among other court
orders, to enjoin Daryl Kollman from interfering with any future loan
applications of Marta Kollman or us and a self executing judgment provision
whereby the court would sign a loan application on behalf of Daryl Kollman. The
court subsequently held that Daryl Kollman is to cease and desist from any such
endeavors of interfering with our loan applications during the pendency of the
dissolution proceedings and is prohibited from writing letters or communicating
orally with any lending institutions unless requested to do so by the
institution. The court also held that Daryl Kollman, if presented with loan
documents to sign and if he objects to those documents in form or content, he
must first raise it with the court.
On January 29, 2002, the Court issued its written Order after the matter was
heard before the court at trial on December 10, 11, and 12, 2001. The Court
ruled that Marta Kollman and Daryl Kollman were each entitled to an equal
division of their respective stock ownership in our Company, thus resulting in
no change in our current ownership. The Court also ruled Daryl Kollman and Marta
Kollman's joint ownership in certain real property assets leased by us from them
will be divided equally in each property and that they must sell the properties
and improvements to pay the indebtedness to the Internal Revenue Service. Any
remaining proceeds after the payment of Federal and State taxes applicable to
the sale will be shared equally.
The Company does not believe the Court Order issued on January 29, 2002, will
have a material impact on our business since we believe that we can maintain our
favorable leases in the event of the sale of the
9
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
properties or provide for an adequate transition to other properties for the
orderly continuation of our business.
NOTE 4 -- CONTINGENCIES (continued)
On May 20, 2002, a Judgment of Dissolution of Marriage was entered in the
Klamath County Circuit Court. The judgment did not change the property ownership
status between the parties.
Covenants Related to the Private Placement to Mr. Zubair Kazi
In connection with the sale of 1,157,895 common shares to a private investor in
1999, the Company made certain promises to the investor. In the event that the
consolidated shareholders' equity of the Company is less than $20,000,000 at
December 31, 1999 and the first reset date (see Annual Report on Form 10K for
the year ended December 31, 2000, incorporated herein by reference), the Company
shall immediately issue to Mr. Zubair Kazi ("Kazi") additional common stock and
warrants. The amount shall equal 1,157,895 multiplied by the percentage by which
the shareholders' equity is less than $20,000,000. The Company did not maintain
a shareholders' equity of $20,000,000 at December 31, 1999 and as a result,
2,206,766 shares and 2,206,766 warrants are due to Kazi as of June 30, 2002. The
accrued liability related to the issuance of these shares and warrants of
$437,661, based on the fair value of the securities, has been accounted for in
the financial statements. Additionally, the shares sold were to be registered
within 120 days of the sale. Additional penalties have accrued until such time
that the shares are registered. The additional expense in 2002, through June 30,
2002 was $112,422.
Also, if within one year after October 19, 1999, the Company sells its common
stock at a price less than $1.425 per share in an event other than in a
registered underwriting, the Company shall immediately issue to Kazi such
additional shares of common stock and warrants so that Kazi maintains his
percentage shareholdings as if he had purchased shares of common stock at the
reduced purchase price. The Company did not sell any common stock during the one
year period ended October 19, 2000 or for the year ended December 31, 2000. The
Company is obligated, upon the effective date of its next registration statement
(First reset date), to issue additional purchased securities in accordance with
certain reset rights. Since the Company has not yet filed its first registration
statement, the first reset date has not yet occurred.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
From time to time, our representatives or we have made or may make
forward-looking statements, orally or in writing, including in this Report. Such
forward-looking statements may be included in, without limitation, press
releases, oral statements made with the approval of one of our authorized
executive officers and filings with the Securities and Exchange Commission. The
words or phrases "anticipates," "believes," "expects," "intends," "will
continue," "estimates," "plans," "projects," or similar expressions are intended
to identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
Our forward-looking statements are subject to certain risks, trends, and
uncertainties that could cause actual results to vary materially from
anticipated results, including, without limitation, market acceptance of our
marketing and merchandising concepts, changes in political and general market
conditions, demand for and market acceptance of new and existing products,
availability and development of new products, increased competition, our failure
to attain satisfactory outside financing and adverse weather conditions at Upper
Klamath Lake. These factors are discussed in further detail below. Should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those discussed herein as expected, believed, estimated, intended or
anticipated. We undertake no obligation to revise or publicly release the
results of any revisions to these forward-looking statements.
The following discussion is intended to assist in the understanding of our
financial position and our results of operations for the six months ended June
30, 2002 compared to the same period in 2001. The Consolidated Financial
Statements and related Notes should be referred to 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 all of our subsidiaries on a consolidated basis.
Overview
We develop and distribute products made with Aphanizomenon flos-aquae (trade
name Super Blue Green(R) Algae) ("SBGA") through a network of independent
distributors ("Distributors"). We currently offer twenty different products
intended to appeal to health-conscious consumers. Our products are divided into
five product lines including Daily Health Maintenance, Digestive Health,
Defensive Health, Powdered Drinks and Snacks, and Animal and Plant Food.
We harvest SBGA and manufacture most of our products at our modern production
facilities in Klamath Falls, Oregon. We market our products through independent
Distributors located in all fifty states, the District of Columbia, Guam, Puerto
Rico, American Samoa, the Virgin Islands and Canada. We encourage our
Distributors to recruit interested people as new Distributors for our products.
These recruits are placed beneath the recruiting Distributor in the "network"
and are referred to as the distributor's "downline" or "organization."
Distributors earn commissions on sales by their organizations as well as retail
profits on the sales they generate directly. We assist Distributors in
establishing their own businesses and provide support programs such as audio and
videotapes for training, empowerment teams, seminars and an annual convention
called the August Celebration at our headquarters. We have approximately 43,393
active Distributors as of June 30, 2002 compared to approximately 54,528 active
Distributors as of June 30, 2001. We define an active Distributor as having
purchased products in the last six months.
Our income per share was $0.01 for the six months ended June 30, 2002 compared
to a loss of $0.16 per share in 2001. The net income for the six months ended
June 30, 2002 totaling $0.2 million is primarily
11
attributable to a decrease in costs, specifically due to our decision to no
longer record depreciation expense on the harvest site assets that have been
identified as being held for sale. The net loss for the six months ended June
30, 2001 totaling $1.8 million primarily related to the decrease in net sales.
Results of Operations
The following table summarizes our operating results as a percentage of
net sales for each of the periods indicated.
------------------------------------------------------------
Six Months ended June 30, Three Months ended June 30,
2002 2001 2002 2001
----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 28.0 32.1 28.3 32.2
----- ----- ----- -----
Gross profit 72.0 67.9 71.7 67.8
Commissions 46.9 49.0 46.1 49.0
----- ----- ----- -----
Gross profit after commissions 25.1 18.9 25.6 18.8
Shipping and handling expenses 6.0 6.0 6.0 6.3
Selling expenses 13.1 13.4 13.7 12.7
Research and development 0.6 0.7 0.7 0.5
General and administrative 4.3 9.3 5.1 8.6
----- ----- ----- -----
Operating income (loss) 1.0 (10.5) 0.0 (9.3)
Other income 0.8 1.3 1.5 1.7
Interest expense 0.7 2.2 0.7 2.3
----- ----- ----- -----
Net income (loss) before taxes 1.2 (11.5) 0.8 (9.8)
Income tax benefit -- -- -- --
----- ----- ----- -----
Net income (loss) 1.2 (11.5) 0.8 (9.8)
===== ===== ===== =====
Three months ended June 30, 2002 compared with the three months ended June 30,
2001
Net sales for the three months ended June 30, 2002 were $6.8 million, a
decrease of $0.8 million or 11.2% from net sales of $7.6 million for the three
months ended June 30, 2001. The decrease in sales is directly related to a 14.1%
decrease in orders for the same period. Average order size increased to $119
from $115 over the same period. The average number of distributors for the three
months ended June 30, 2002 decreased to an average of 44,260, which was 19%
lower than the average of 54,718 distributors for the three months ended June
30, 2001. 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 increased to 72% from 68% of net
sales between the three months ended June 30, 2002 and 2001, respectively. The
increase in the gross profit
12
margin is mainly due to the reduction in depreciation expenses associated with
the write-down of certain fixed assets.
Gross profit after commissions represents gross profit less commission
expense. Commission expense for the three months ended June 30, 2002 and 2001
was $3.1 million and $3.7 million, respectively, a decrease of $0.6 million, or
16.4%. 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 46% and 49% during the three months ended June 30, 2002 and 2001,
respectively, due to the implementation of a new commission structure in January
2001 and implementation of a revised commission structure during the three
months ended June 2002, in an attempt to attract and retain distributions. In
addition, the elimination of the grandfather clauses in the commission structure
began gradually in January 2001 and was completed by July 2001.
Operating expenses include shipping and handling expenses, selling
expenses, research and development expenses and general and administrative
expenses. In total, operating expenses decreased $0.4 million or 19.2% to $1.7
million for the three months ended June 30, 2002 from $2.1 million for the three
months ended June 30, 2001. The components of operating expenses are discussed
below.
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 $42,090,
or 4.3%, between 2002 and 2001 to $0.9 million from $1.0 million.
This decrease was primarily due to a decrease in salaries and
compensation, a decrease in consulting costs and a decrease in
utility costs. Selling expenses were 13.7% of sales for the three
months ended June 30, 2002 and 12.7% of sales for the three months
ended June 30, 2001.
o General and administrative expenses decreased by $0.3 million
between 2002 and 2001 to $0.3 million from $0.6 million. For the
three months ended June 30, 2002, general and administrative
expenses averaged 5.1% of sales while they were 8.6% of sales for
the three months ended June 30, 2001. The decrease between 2002 and
2001 is attributable to a decrease in payroll and related costs as a
result of the cost-cutting initiative we undertook, a decrease in
legal and consulting fees incurred during 2002, and a decrease in
costs associated with the consolidation of office space and leased
facilities that occurred during 2001.
o Shipping and handling expenses includes purchasing, receiving, and
materials management. Shipping and handling expenses decreased
$71,737 or 15.1%, to $0.4 million in 2002 from $0.5 million in 2001.
The decrease was due to a decrease in freight expenses in 2002 due
to the overall decrease in sales. Shipping and handling expenses as
a percent of net sales decreased to 6.0% for the three months ended
June 30, 2002 from 6.3% for the three months ended June 30, 2001 due
to a slight reduction in related payroll expenses.
o Research and development expenses increased 20% to $46,263 in 2002
from $38,482 in 2001, which constituted 0.7% and 0.5% of net sales,
respectively.
Other income decreased to $98,209 for the three months ended June 30, 2002
from $130,699 for the three months ended June 30, 2001 principally due to a
decrease in sundry income collected from Distributors offset by recording the
fair value cost of penalty shares and warrants to be issued to an investor in
the amount of $56,454. Net interest expense decreased to $48,589 for the three
months ended June 30, 2002 from approximately $172,000 for the three months
ended June 30, 2001. This decrease was due to various fees paid to the current
lender in 2001, offset by a decrease in interest expense due to a decrease in
outstanding debt in 2002 versus 2001. Net interest expense represented 0.7% and
2.3% of sales for each of the three months ended June 30, 2002 and 2001,
respectively.
13
Net loss decreased $801,081 or 107% to a net income of $52,487 for the
three months ended June 30, 2002 from a net loss of $748,594 for the comparable
period in 2001. As a percentage of net sales, net income was 0.8% for the three
months ended June 30, 2002 compared to a net loss of 10% for the comparable
period in 2001. The dollar increase was due to a decrease in selling expenses
and general and administrative expenses as a percentage of sales offset and a
decrease in commission expense as a percentage of sales.
Six months ended June 30, 2002 compared with the six months ended June 30, 2001
Net sales for the six months ended June 30, 2002 were $13,860,819, a
decrease of 11.5% from net sales of $15,665,312 for the six months ended June
30, 2002. The decrease in sales is directly related to a 13% decrease in orders
for the same period. Average order size increased to $119 from $116 over the
same period. The average number of distributors for the six months ended June
30, 2001 decreased to an average of 45,581, which was 17% lower than the average
of 54,928 distributors for the six months ended June 30, 2001. 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 increased to 72% from 68% of net
sales between the six months ended June 30, 2002 and 2001, respectively. The
increase in the gross profit margin is mainly due to the reduction of
depreciation expenses associated with the write down of certain fixed assets.
Gross profit after commissions represents gross profit less commission
expense. Commission expense for the six months ended June 30, 2002 and 2001 was
$6.5 million and $7.7 million, respectively, a decrease of $1.2 million, or
15.3%, respectively. We are a multi-level marketing organization. Distributors
make up our sales force. Distributors buy algae products for their own
consumption plus they actively recruit other distributors into our network.
Distributors are paid commissions based upon their personal sales volumes and
the sales of distributors beneath them in their network. During the six months
ended June 30, 2002, we implemented a new commission structure in an attempt to
attract and retain Distributors. Commission expense as a percentage of sales was
47% and 49% during the six months ended June 30, 2002 and 2001, respectively.
Operating expenses include shipping and handling expenses, selling
expenses, research and development expenses and general and administrative
expenses. In total, operating expenses decreased $1.3 million or 28% to $3.3
million for the six months ended June 30, 2002 from $4.6 million for the six
months ended June 30, 2001. The components of operating expenses are discussed
below.
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 $0.3
million between 2002 and 2001 to $1.8 million from $2.1 million.
This decrease was primarily due to a decrease in salaries and
compensation. Selling expenses were 13.1% of sales for the six
months ended June 30, 2002 and 13.4% of sales for the six months
ended June 30, 2001.
o General and administrative expenses decreased by $0.9 million
between 2002 and 2001 to $70.6 million from $1.5 million. For the
six months ended June 30, 2002, general and administrative expenses
averaged 4% of sales while they were 9.3% of sales for the six
months ended June 30, 2001. The decrease between 2002 and 2001 is
attributable to the penalties paid in 2001 relating
14
to the early repayment of the outstanding balance of the loan from
the former owner of Cell Tech, a decrease in legal and consulting
fees incurred during 2002, and a decrease in costs associated with
the consolidation of office space and leased facilities that
occurred in 2001.
o Shipping and handling expenses includes purchasing, receiving, and
materials management. Shipping and handling expenses decreased $0.1
million or 11.7%, to $.8 million in 2002 from $0.9 million in 2001.
The decrease was due to a decrease in freight expenses in 2002 due
to the overall decrease in sales. Shipping and handling expenses as
a percent of net sales was 6% for the six months ended June 30, 2002
and June 30, 2001, respectively.
o Research and development expenses decreased 24% to $82,143 in 2002
from $108,065 in 2001, which constituted 0.6% and 0.7% of net sales,
respectively.
Other income decreased to $0.1 million for the six months ended June 30,
2002 from $0.2 million for the six months ended June 30, 2001 principally due to
a decrease in sundry income collected from Distributors offset by recording the
fair value cost of penalty shares and warrants to be issued to an investor in
the amount of $112,422. Net interest expense decreased to $95,735 for the six
months ended June 30, 2002 from $351,425 for the six months ended June 30, 2001.
This decrease was due to a decrease in interest expense due to a decrease in
outstanding debt in 2002 versus 2001, and due to various fees paid to the lender
in 2001
Net loss decreased 109% to net income of $161,560 for the six months ended
June 30, 2002 from a net loss of $1,796,857for the comparable period in 2001. As
a percentage of net sales, net income was 1.2% for the six months ended June 30,
2002 compared to a net loss of 11.5% for the comparable period in 2001. The
dollar increase was due to net sales decreasing by 11.5%, offset by the
curtailment of various operating expenses.
Liquidity and Capital Resources
Working capital deficit at June 30, 2002 amounted to $5,418,069, a
decrease of $1,019,117 from a working capital deficit of $6,437,186 as of
December 31, 2001. At June 30, 2002, we had a bank overdraft of $195,732 versus
a bank overdraft of $763,105 as of December 31, 2001. In addition, we are not in
compliance with certain restrictive covenants of our $15 million Line of Credit
Agreement with a financial institution. As a result, at December 31, 2001 (our
fiscal year end), our independent certified public accountants have expressed
substantial doubt about our ability to continue as a going concern.
We believe that our future cash flows from operations, our existing
capital resources, bank borrowings and suspension of dividend payments to
shareholders, should be 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. As a
result of a resolution of the Board of Directors and, as set forth in a recent
court order regarding the dispute between Marta Carpenter and Daryl Kollman, we
are no longer paying Daryl Kollman consulting fees in the aggregate amount of
$120,000 per year. 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 the
current Distributor base; and
o research and development efforts.
15
We have an ample supply of algae inventory for the use in capsules and
tablets (10.2 month are frozen and 4.4 month are freeze-dried powder) and for
use with vendor products (160 months are frozen and 78 months are freeze-dried
powder). Accordingly, we do not anticipate a shortage of supply. This
availability of inventory usage is based on our current consumption levels and
our experts have informed us that the nutritional quality of our algae does not
change significantly as a result of our harvesting and storage methods. As a
result of the large volume of inventory on hand, a portion of the inventory has
been classified as a long-term asset. If existing capital resources are
insufficient to meet our capital requirements, we would be required to raise
additional funds, which we cannot assure will be available on favorable terms,
if at all.
Cash Flows
Net cash flows provided by operating activities for the six months ended
June 30, 2002 amounted to $1,215,520 compared to cash flows provided by
operations of $903,919for the six months ended June 30, 2001. The increase in
cash flows generated by operations is primarily due to changes in current assets
and liabilities and the increase in net income.
Cash flows used in investing activities for the six months ended June 30,
2002 was $328,783. This is an increase of $169,069 from net cash used for
investing activities of $159,714for the six months ended June 30, 2001, due to
an increase in construction in progress during the six months ended June 30,
2002 that were related to the construction of the barges to be used for
harvesting purposes.
Net cash flows used for financing activities was $886,737 for the six
months ended June 30, 2002 versus net cash used for financing activities of
$744,205 for the six months ended June 30, 2001. This change is principally due
to a decrease in our bank overdraft during 2002 versus 2001, the net payments on
long-term debt of $145,311 for the six months ended June 30, 2002, and an
increase in the repayment of related party borrowings.
Recent Accounting Pronouncements
Pronouncements Adopted
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 as evidenced by downline growth
and sales volume and thus 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, we adopted Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets (SFAS 142). Under SFAS
142, Goodwill and indefinite life intangible assets
16
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
10years.
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
Assets." SFAS No. 144, which addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of,
supercedes SFAS No. 121. The adoption of SFAS No. 144 did not have an effect on
the financial position or results of operations.
Pronouncements Not Yet Adopted
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." SFAS No.
143 establishes standards associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
We have not yet assessed the impact of this standard on our financial
statements, but do not expect the impact to be material.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144,
which addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of, supercedes SFAS
No. 121. While we are currently evaluating the impact the adoption of SFAS No.
144 will have on our financial position and results of operations, we do not
expect such impact to be material.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." SFAS 145 amends SFAS No 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sales-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. It is anticipated that the financial impact of SFAS 145 will not
have a material effect on us.
Statement of Financial Accounting Standards No. 146, Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"), requires us to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS 146 replaces Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS 146 are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
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,"
17
"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 our variable interest rates.
Our management believes that fluctuation in variable 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 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
18
released upon the payment of their federal income tax liabilities for various
specified years. Daryl Kollman and Marta Carpenter will sell their shares as
needed and allowed by federal and state securities laws to make quarterly
payments to the Internal Revenue Service. They retain all voting rights incident
to their shares while the shares are held in trust. The Internal Revenue Service
may seize their shares from the trust if they 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 their tax
liabilities as allowed by applicable law.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Other than as indicated below, there have been no material changes in, or
additions to, the legal proceedings previously reported in our Annual Report on
Form 10-K (File No. 0-21015) for year ended December 31, 2001 as filed with the
Commission on May 23, 2002.
On March 27, 2002, the Nature Conservancy, a nonprofit corporation (the
"Plaintiff"), filed an action against us in the Circuit Court of the State of
Oregon, for the County of Klamath, alleging among other things, that our wholly
owned subsidiary The New Earth Company ("NAC") has failed to pay the annual
payment due on a non-interest bearing promissory note (the "Note") executed and
delivered to Plaintiff and that NAC's failure to make the payment constitutes a
default under certain provisions of the Note and a trust deed (the "Trust Deed")
to secure payment under the Note. The Plaintiff is seeking $375,000 in principal
due under the Note plus interest from the date of default in addition to certain
leasehold rights that the Trust Deed grants to it. The Plaintiff is also seeking
injunctive relief to recover rent payments from any sublessees. We have retained
legal counsel to represent us in this matter. We have previously recorded the
net present value of the Note, which has a balance of $313,790 included in the
current portion of long-term debt in the consolidated balance sheet at June 30,
2002.
On January 28, 2002, we terminated our lease between NAC and Klamath Cold
Storage, Inc. ("KCS"), a corporation owned by our principal shareholders, Daryl
Kollman and Marta Carpenter (formerly known as Marta Kollman). On February 19,
2002, Daryl Kollman, on behalf of himself and as an officer of KCS, filed two
separate Notice of Claim of Lien upon Chattels (the "Possessory Liens") against
us and our wholly owned subsidiary, NAC and/or NEC, in the County of Klamath,
State of Oregon, claiming a lien upon us and our wholly owned subsidiaries by
alleging among other things, that we owe him and Marta Carpenter approximately
$508,246 in past due rent and that we owe KCS approximately $576,232 in past due
rent for our use of certain real property owned by him and Marta Carpenter, our
President and Chief Executive Officer, and KCS. Through the Possessory Liens,
Daryl Kollman is claiming that we are not entitled to remove any of our property
from the premises and that the properties will be subject to foreclosure
proceedings. On or about June 6, 2002, Daryl Kollman has a lawsuit in the
Circuit Court for the State Oregon, County of Klamath, to evict the Company from
the facilities it occupies that are owned by Daryl Kollman and Marta Carpenter,
and has also purported to file, in the name of Klamath Cold Storage, a separate
lawsuit to evict the Company from the premises it occupies that are owned by
Klamath Cold Storage. Marta Carpenter is seeking to stop the evictions and the
Company is resisting Daryl Kollman's attempt to evict it. The properties in
question include the Company's facilities for processing and storing its
products. The Company believes it could not easily obtain substitute facilities.
If the Company is evicted from the properties, it would have a material adverse
impact on the Company's financial condition and its ability to operate. We have
retained legal counsel to represent us in this matter and at the present time,
all parties have entered into mediation discussions and have voluntarily stayed
any further litigation.
19
In October 2001, Teachers for Truth in Advertising filed an action in the
Superior Court for the County of Tulare, State of California, alleging among
other things, that the Company's advertising is untrue or misleading, that the
Company's business practices are unlawful and fraudulent and unfair and that the
website contains misleading information about the products and the benefits that
a consumer may derive from their use. The plaintiff is seeking injunctive
relief, corrective advertising, and restitution to California consumers who
purchased the products. The parties have completed the discovery phase including
depositions. The plaintiff's motion for summary judgment was denied by the
court. The Company's summary judgment motion to dismiss is presently scheduled
for August 30. 2002 and, if it is denied, the matter is scheduled to proceed to
trial on September 30, 2002. The Company does not believe that the plaintiff's
complaint is meritorious and believes that it will prevail in this matter.
In 1996, the Company entered into an agreement with one of its vendors to
deliver 600,000 wet pounds of algae per month for processing for a five-year
period. The minimum monthly volume level increased in September 1996 to
1,000,000 wet pounds of algae. On or about February 6, 1998, the vendor filed a
complaint against the Company. The complaint alleges that the Company wrongfully
terminated a contract requiring the Company to provide to the vendor not less
than a contractually agreed amount of raw product for processing every month, or
pay a penalty based on the shortfall until the contract was validly terminated.
In its amended complaint, the vendor is seeking $780,930 in damages as of
February 1998, plus additional damages that allegedly are continuing to accrue,
plus prejudgment interest and prevailing party attorney fees as provided by the
contract. The Company counter-claimed for breach of contract, alleging
liquidated damages due, overcharges, and failure to deliver product,
consequential damage for failure to utilize quality control methods required by
the contract, prejudgment interest and attorney fees. In the first quarter of
2002, a settlement agreement was negotiated in which the parties have agreed to
dismiss the lawsuit and counter-claim and to enter into a new agreement for the
processing of algae for a five-year period. The parties have also agreed that
the Company will pay $1,656,000 (included in accounts payable at June 30, 2002)
to the vendor; $1 million of which will be paid in cash and $656,000 will be in
the form of a promissory note payable to the vendor with interest at 10.5% per
annum. As of June 30, 2002, the Company has not signed the processing and
settlement agreements. The agreements are expected to be executed upon the
Company's receipt of financing. In the first quarter of 2002, the parties have
reached an interim arrangement whereby the Company will pay $0.15 per pound
processed by the vendor until a formal agreement is finalized.
Dispute Between Principal Shareholders
In December 1999, Daryl Kollman and Marta Kollman (now known as Marta
Carpenter), shareholders who together own approximately 82% of our outstanding
shares of common stock, filed divorce proceedings. Daryl Kollman and Marta
Kollman jointly, and their affiliate Klamath Cold Storage Co., are lessors of
substantially all of our facilities, including office space, processing and
freezer storage space. Although one lease is in effect until 2005, we lease the
rest of these facilities on a month-to-month or year-to-year basis. The
disposition of these properties pursuant to the divorce could have an adverse or
disruptive effect on our operations, if the party who receives a particular
property elects to significantly increase rents or terminate any such lease
arrangement at the end of the then current lease term. In addition, compliance
with discovery requests may also have a disruptive effect on our business and
operations, and it may be necessary for our Chief Executive Officer, Marta
Kollman, to spend a portion of her time devoted to handling matters related to
the divorce. Moreover, Daryl Kollman is no longer actively involved in
management and has been unwilling to execute personal guarantees on our behalf,
as he has done in the past. On May 14, 2001, Marta Kollman petitioned the
Circuit Court for the State of Oregon with a motion seeking, among other court
orders, to enjoin Daryl Kollman from interfering with
20
any future loan applications of Marta Kollman or us and a self executing
judgment provision whereby the court would sign a loan application on behalf of
Daryl Kollman. The court subsequently held that Daryl Kollman is to cease and
desist from any such endeavors of interfering with our loan applications during
the pendency of the dissolution proceedings and is prohibited from writing
letters or communicating orally with any lending institutions unless requested
to do so by the institution. The court also held that Daryl Kollman, if
presented with loan documents to sign and if he objects to those documents in
form or content, he must first raise it with the court.
On January 29, 2002, the Court issued its written Order after the matter was
heard before the court at trial on December 10, 11, and 12, 2001. The Court
ruled that Marta Kollman and Daryl Kollman were each entitled to an equal
division of their respective stock ownership in our Company, thus resulting in
no change in our current ownership. The Court also ruled Daryl Kollman and Marta
Kollman's joint ownership in certain real property assets leased by us from them
will be divided equally in each property and that they must sell the properties
and improvements to pay the indebtedness to the Internal Revenue Service. Any
remaining proceeds after the payment of Federal and State taxes applicable to
the sale will be shared equally.
The Company does not believe the Court Order issued on January 29, 2002, will
have a material impact on our business since we believe that we can maintain our
favorable leases in the event of the sale of the properties or provide for an
adequate transition to other properties for the orderly continuation of our
business.
On May 20, 2002, a Judgment of Dissolution of Marriage was entered in the
Klamath County Circuit Court. The judgment did not change the property ownership
status between the parties.
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 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit Number Description
- -------------- -----------
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession
21
(2.1) Agreement and Plan of Reorganization, dated July 16,
1999, among the Company, Daryl J. Kollman and Marta C.
Kollman (filed as Exhibit 2.1 without schedules and
exhibits to the Current Report on Form 8-K on August
2, 1999 and incorporated by reference)
(3) Articles of Incorporation and Bylaws
(3.1) Certificate of Incorporation, as amended (filed as
Exhibit 3.1 to the Registration Statement for Small
Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(3.2) Certificate of Amendment of Certificate of
Incorporation (filed as Exhibit 3.1(a) to the Current
Report on Form 8-K on November 19, 1999 and
incorporated by reference)
(3.3) Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (filed as Exhibit
3.1 to the Current Report on Form 8-K on August 2,
1999 and incorporated by reference)
(3.4) Amended and Restated Bylaws (filed as Exhibit 3.2 to
the Registration Form for Small Business on Form SB-2
on June 21, 1996 and incorporated by reference)
(4) Instruments Defining the Rights of Security Holders
(4.1) Loan and Security Agreement, dated June 21, 1999, by
and among The New Earth Company, The New Algae Company
and Coast Business Credit (filed as Exhibit 4.1 to the
Current Report on Form 8-K on November 19, 1999 and
incorporated by reference)
(4.2) Continuing Guaranty, dated August 6, 1999 (filed as
Exhibit 4.2 to the Current Report on Form 8-K on
November 19, 1999 and incorporated by reference)
(4.3) Form of Common Stock Certificate (filed as Exhibit 4.1
to the Amendment to Registration Statement for Small
Business on Form SB-2/A on July 26, 1996 and
incorporated by reference)
(4.4) Form of Series A Preferred Stock Certificate (filed as
Exhibit 4.2 to the Amendment to Registration Statement
for Small Business on Form SB-2/A on July 26, 1996 and
incorporated by reference)
(4.5) Form of Warrant to Purchase Shares of Common Stock to
be issued to Andromeda Enterprises, Inc. or its
designees, Hateley & Hampton or its designees and
Wharton Capital Partners, Ltd. (filed as Exhibit 4.1
to the Current Report on Form 8-K on August 2, 1999
and incorporated by reference)
22
(4.6) Nonqualified Stock Option Agreement between the
Company and Physicians World Communications Group
(filed as Exhibit 4.9 to the Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998
and incorporated by reference)
(4.7) Warrant to Purchase Shares of Common Stock issued to
Scantek Medical, Inc. as of May 15, 1998 (filed as
Exhibit 4.7 to the Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998 and
incorporated by reference)
(4.8) Warrant to Purchase Shares of Common Stock issued to
Zigmed, Inc. as of May 15, 1998 (filed as Exhibit 4.8
to the Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998 and incorporated by
reference)
(4.9) Representative's Warrant Agreement between the Company
and Keane Securities Co., including Form of Warrant
Certificate (filed as Exhibit 4.3 to the Amendment to
Registration Statement for Small Business on Form
SB-2/A on July 26, 1996 and incorporated by reference)
(4.10) Form of Warrant Certificate for March Bridge Warrants
(filed as Exhibit 4.4 to the Registration Statement
for Small Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(4.11) Nonqualified Stock Option Agreements with Certain
Officers (Donald Brounstein, James Whidden, Whidden &
Associates, Inc., Amy Lewis, and Everett Lautin)
(filed as Exhibit 4.5 to the Registration Statement
for Small Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(4.12) Form of Private Warrants issued in connection with May
Private Placement (filed as Exhibit 4.6 to the
Registration Statement for Small Business on Form SB-2
on June 21, 1996 and incorporated by reference)
(10) Material Contracts
(10.1) General Release, dated January 25, 2000 between the
Company and Donald Brounstein (filed as Exhibit 10.1
to the Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated by reference)
(10.2) Settlement Agreement, dated May 15, 1998, between the
Company and Scantek Medical, Inc. (filed as Exhibit
10.16 to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 and incorporated
by reference)
23
(10.3) Settlement Agreement, dated May 15, 1998, between the
Company and Zigmed, Inc. (filed as Exhibit 10.17 to
the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 and incorporated by
reference)
(10.4) Employment Agreement between the Company and Dr. Chris
J. M. Blaxland, dated as of September 1, 1998 (filed
as Exhibit 10.18 to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998 and
incorporated by reference)
(10.5) Employment Agreement between the Company and Donald
Brounstein, dated January 1, 1996 (filed as Exhibit
10.8 to the Registration Statement for Small Business
on Form SB-2 on June 21, 1996 and incorporated by
reference)
(10.6) Employment Agreement between the Company and James J.
Whidden (filed as Exhibit 10.9 to the Registration
Statement for Small Business on Form SB-2 on June 21,
1996 and incorporated by reference)
(10.7) Employment Agreement between the Company and Kenneth
S. Hollander, dated June 3, 1996 (filed as Exhibit
10.10 to the Registration Statement for Small Business
on Form SB-2 on June 21, 1996 and incorporated by
reference)
(10.8) Consulting Agreement, dated March 1, 1996, between the
Company and Don Anderson (filed as Exhibit 10.8 to the
Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated by reference)
(10.9) Exclusive Supply and Distribution Agreement between
the Company and Physician Sales & Services, Inc., as
amended (filed as Exhibit 10.1 to the Amendment to
Registration Statement for Small Business on Form
SB-2/A on July 26, 1996 and incorporated by reference)
(10.10) License Agreement, dated October 20, 1995, between the
Company and Scantek Medical, Inc., as amended (filed
as Exhibit 10.2 to the Registration Statement for
Small Business on Form SB-2 on June 21, 1996 and
incorporated by reference)
(10.11) Construction Contract between the Company and Zigmed,
Inc. (filed as Exhibit 10.3 to the Registration
Statement for Small Business on Form SB-2 on June 21,
1996 and incorporated by reference)
(10.12) Lease, dated June 11, 1996, between the Company and
the Moen Organization, Inc. (filed as Exhibit 10.14 to
the Registration Statement for Small Business on Form
SB-2 on June 21, 1996 and incorporated by reference)
24
(10.13) Lease Termination Agreement, dated February 2, 1999,
between the Company and the Moen Organization, Inc.
(filed as Exhibit 10.13 to the Annual Report on Form
10-K for the year ended December 31, 2000 and
incorporated by reference)
(10.14) Intentionally omitted
(10.15) Commercial Lease Agreement, dated July 1, 1995,
between and among The New Earth Company, Daryl Kollman
and Marta Kollman (filed as Exhibit 10.15 to the
Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated by reference)
(10.16) Commercial Lease Agreement, dated August 15, 1995,
between and among The New Algae Company, Daryl Kollman
and Marta Kollman (filed as Exhibit 10.16 to the
Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated by reference)
(10.17) Ground Lease Agreement, dated December 9, 1995,
between and among The New Earth Company, Emil Nobel
and Mary Ann Nobel (filed as Exhibit 10.17 to the
Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated by reference)
(10.18) Commercial Lease Agreement, dated May 1, 1996, between
and among The New Algae Company, Daryl Kollman and
Marta Kollman (filed as Exhibit 10.18 to the Annual
Report on Form 10-K for the year ended December 31,
2000 and incorporated by reference)
(10.19) Commercial Lease Agreement, dated September 1, 1996,
between Klamath Cold Storage, Inc. and The New Earth
Company, including Sublease between The New Earth
Company and The New Algae Company (filed as Exhibit
10.19 to the Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated by reference)
(10.20) Voting and Stockholders' Rights Agreement, dated May
15, 1996 (filed as Exhibit 10.4 to the Registration
Statement for Small Business on Form SB-2 on June 21,
1996 and by this reference incorporated herein)
(10.21) Agreement to Issue Warrants, dated March 19, 1996,
between the Company and Udi Toledano (filed as Exhibit
10.5 to the Registration Statement for Small Business
on Form SB-2 on June 21, 1996 and by this reference
incorporated herein)
25
(10.22) Agreement to Issue Warrants, dated March 19,
1996, between the Company and Herbert V.
Turk (filed as Exhibit 10.6 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and by this
reference incorporated herein)
(10.23) Non-Negotiable Warrant Certificate between
the Company and Physician Sales & Service,
Inc. (filed as Exhibit 10.7 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and by this
reference incorporated herein)
(10.24) HumaScan, Inc. Non-Employee Director Stock
Option Plan (filed as Exhibit 10.12 to the
Registration Statement for Small Business on
Form SB-2 on June 21, 1996 and by this
reference incorporated herein)
(10.25) Form of Indemnification Agreement between
the Company and its Executive Officers and
Directors (filed as Exhibit 10.15 to the
Annual Report for Small Business on Form
10KSB40 for the fiscal year ended December
31, 1997 and by this reference incorporated
herein)
(10.26) The Company's 2000 Stock Incentive Plan
(filed as Exhibit 10.26 to the Annual Report
on Form 10-K for the year ended December 31,
2000 and incorporated by reference)
(16) Letter from KPMG, dated November 2, 1999, agreeing with the
statements contained in the Company's Form 8-K, dated November
2, 1999 (filed as Exhibit 16 to the Current Report on Form 8-K
on November 22, 1999 and by this reference incorporated
herein)
(99) Additional Exhibits
(99.1) Internal Revenue Service Notice of
Determination, dated July 18, 1999 (filed as
Exhibit 99.2 to the Current Report on Form
8-K on November 19, 1999 and by this
reference incorporated herein)
(99.2) Pledge and Escrow Agreement between and
among Daryl Kollman and Marta Kollman, the
Internal Revenue Service and West Coast
Trust Co., Inc. (filed as Exhibit 99.3 to
the Current Report on Form 8-K on November
19, 1999 and by this reference incorporated
herein)
(b) Reports on Form 8-K. None.
26
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Klamath
Falls, State of Oregon on August 19, 2002.
CELL TECH INTERNATIONAL INCORPORATED
Signature Title Date
--------- ----- ----
By: /s/ Marta C. Carpenter President and Chief Executive August 19, 2002
----------------------- Officer and Director
Marta C. Carpenter (principal executive officer,
principal financial officer and
principal accounting officer)
27
Certification pursuant to
18 U.S.C. Section 1350,
As adopted pursuant to
Section 906 of the Sarbanes-oxley act of 2002
In connection with the quarterly report of Cell Tech International
Incorporated (the "Company") on Form 10-Q for the period ending June 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Marta C. Carpenter, Chief Executive Officer and Chief Accounting
Officer of the Company, certify, to the best of my knowledge, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Marta C. Carpenter
---------------------------------
Marta C. Carpenter
Its: Chief Executive Officer and
Chief Accounting Officer
DATED: August 19, 2002
28