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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 September 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 |_|.
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 September 30, 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.
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION ........................................... 3
ITEM 1. FINANCIAL STATEMENTS .......................................... 3
Consolidated Balance Sheets ........................................ 3
Consolidated Statements of Income (loss) ........................... 4
Consolidated Statements of Cash Flows .............................. 5
Notes to Consolidated Financial Statements ......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................. 13
OVERVIEW ........................................................... 14
Three months ended September 30, 2002 compared with the three
months ended September 30, 2001 .................................... 16
Nine months ended September 30, 2002 compared with the nine
months ended September 30, 2001 .................................... 18
Liquidity and Capital Resources .................................... 20
Cash Flows ......................................................... 21
Recent Accounting Pronouncements ................................... 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 22
Item 4. Controls and Procedures .................................... 22
PART II -- OTHER INFORMATION .............................................. 23
ITEM 1. LEGAL PROCEEDINGS ............................................. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 24
SIGNATURES ............................................................ 26
2
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
Assets
Current assets
Receivables $ 267,157 $ 327,083
Current portion of inventories 2,000,000 2,000,000
Prepaid expenses 373,188 460,860
----------- -----------
Total current assets 2,640,345 2,787,943
----------- -----------
Long-term inventories, net of current portion 3,772,135 7,304,778
Property and equipment, net of accumulated depreciation 9,102,617 7,318,683
Property and equipment held for sale, net -- 2,271,305
Other assets 593,937 292,092
----------- -----------
Total assets $16,109,034 $19,974,801
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Bank overdraft $ 101,008 $ 763,105
Accounts payable 2,576,730 2,527,078
Commissions payable 986,127 1,219,136
Sales taxes payable 71,945 82,343
Accrued payroll and related liabilities 349,245 252,944
Other accrued expenses 935,768 1,133,438
Current portion of long-term debt 2,413,790 2,160,986
Related party payable 734,453 1,086,099
----------- -----------
Total current liabilities 8,169,066 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 2001 and 2000 -- --
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 5,533,863 8,343,567
----------- -----------
Total shareholders' equity 7,939,968 10,749,672
----------- -----------
Total liabilities and shareholders' equity $16,109,034 $19,974,801
=========== ===========
See accompanying notes to consolidated financial statements.
3
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
Consolidated Statements of Income (loss)
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 20,311,470 $ 22,944,017 $ 6,450,651 $ 7,278,704
Cost of sales 8,573,349 7,344,044 4,697,137 2,319,094
------------ ------------ ------------ ------------
Gross profit 11,738,122 15,599,973 1,753,515 4,959,610
Commissions 9,326,815 11,123,075 2,819,479 3,441,033
------------ ------------ ------------ ------------
Gross profit (loss) after commissions 2,411,307 4,476,898 (1,065,964) 1,518,577
Operating Expenses:
--Selling expenses 2,794,344 3,087,538 979,929 991,955
--General and administrative 1,020,668 1,952,151 417,784 498,857
--Shipping and handling expenses 1,280,566 1,364,043 447,014 420,233
--Research and development 131,601 153,290 49,458 45,225
------------ ------------ ------------ ------------
Operating loss (2,815,872) (2,080,124) (2,960,149) (437,693)
Other income 155,711 372,578 42,693 175,580
Interest expense (149,543) (513,220) (53,808) (161,795)
------------ ------------ ------------ ------------
Net loss $ (2,809,704) $ (2,220,766) $ (2,971,264) $ (423,908)
============ ============ ============ ============
Basic and diluted loss
per share $ (0.22) $ (0.20) $ (0.23) $ (0.03)
============ ============ ============ ============
Weighted average number of
common shares outstanding
used to calculate basic and
diluted loss per share 12,645,653 10,640,895 12,959,649 10,640,895
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
CELL TECH INTERNATIONAL INCORPORATED
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
-----------------------------
2002 2001
----------- -----------
Cash flows from operating activities
Net loss $(2,809,704) $(2,220,766)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 844,224 2,058,012
Reserve for potentially unsaleable inventories 3,100,000 --
Loss (gain) on sale of fixed assets 3,381 (15,175)
Changes in assets and liabilities:
Receivables 59,926 107,425
Inventories 432,643 1,433,960
Prepaid expenses 87,672 153,887
Other assets (301,845) (3,714)
Accounts payable 49,652 65,732
Commissions payable (233,009) (227,231)
Sales tax payable (10,399) 6,708
Accrued payroll and payroll related liabilities 96,301 32,213
Other accrued expenses (197,670) (229,897)
----------- -----------
Net cash provided by operating activities 1,121,172 1,161,154
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (193,868) (229,633)
Proceeds from disposals of equipment 700 47,000
Additions to construction in progress (167,066) --
----------- -----------
Net cash used for investing activities (360,234) (182,633)
----------- -----------
Cash flows from financing activities
Bank overdraft (662,097) (548,427)
Net payments on long-term debt (1,847,195) (760,380)
Proceeds from debt financing 2,100,000 --
Net proceeds from (repayment of) related party debt (351,646) 330,286
----------- -----------
Net cash used for financing activities (760,938) (978,521)
----------- -----------
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 $ 128,583 $ 479,879
=========== ===========
See accompanying notes to consolidated financial statements.
5
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,
Inc. ("NAC"), collectively the "Company," are engaged in producing and marketing
food supplement products made with blue-green algae harvested from Klamath Lake,
Oregon. The Company uses a multi-level distributor network throughout the United
States and Canada to distribute its products.
Presentation of Interim Information
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the accompanying unaudited consolidated financial statements contain
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair statement of the Company's financial information as of and
for the periods presented. The consolidated results of operations of any interim
period are not necessarily indicative of the consolidated results of operations
to be expected for the fiscal year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Accordingly, the consolidated
financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities or any other adjustments that might be necessary
should the Company be unable 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.
6
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
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 and based on their personal
sales volumes and the sales of distributors they have recruited into the
Company's network. Accordingly, the Company classifies these expenses as a cost
and not a reduction of revenue. There was no effect on the consolidated
financial position, results of operations or cash flows as a result of
implementation of this pronouncement.
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under
SFAS 142, goodwill and intangible assets with indefinite lives are no longer
amortized but will be reviewed annually, or more frequently if impairment
indicators arise, for impairment. Other intangible assets with finite lives,
consisting of trademarks with a carrying value of $57,302 at January 1, 2002,
will continue to be amortized over their estimated useful lives of 10 years. As
of the date of the adoption of the new accounting standards, there was no
remaining goodwill to be amortized.
Impairment or Disposal of Long-Lived Assets
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Asset," ("SFAS No. 144"), which, for impaired assets or long-lived assets to be
disposed of, supercedes SFAS No. 121. The adoption of SFAS No. 144 did not
affect the financial position or results of operations.
7
Shipping and Handling Cost
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 nine months ended September 30, 2002 and 2001 were $833,658 and
$943,811, respectively.
NOTE 2 -- INVENTORIES
Inventories consist of the following:
September 30, December 31,
2002 2001
------------- ------------
Work in progress $ 9,067,250 $ 9,524,882
Finished goods 685,656 654,759
Sales aids 19,229 25,137
------------ ------------
9,772,135 10,204,778
Less reserve for potentially unsaleable inventories (4,000,000) (900,000)
------------ ------------
5,772,135 9,304,778
Less current portion (2,000,000) (2,000,000)
------------ ------------
$ 3,772,135 $ 7,304,778
============ ============
Certain of our inventory is 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
$4,000,000 and $900,000 at September 30, 2002 and December 31, 2001,
respectively.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following: September 30, December 31,
2002 2001
------------- ------------
Land and improvements $ 17,817 $ 17,817
Buildings and improvements 6,254,180 6,403,785
Furniture and fixtures 741,754 752,921
Machinery and equipment 8,691,318 8,228,088
Idle assets 8,040,272 --
------------ ------------
23,745,341 15,402,611
Less accumulated depreciation (14,642,724) (8,083,928)
------------ ------------
$ 9,102,617 $ 7,318,683
============ ============
During the year ended December 31, 2001, the Company determined that it would
cease utilizing the harvest site on the A Canal for an indefinite period of
time. The Company continues to utilize the building on adjacent leased property.
Certain harvest site equipment has been moved to other production areas. As a
result, the Company continues to record depreciation expense for these assets.
Certain of the equipment located at the canal site could not be used for other
purposes
8
and, because it could not be relocated or sold, was written off. Property and
equipment with a carrying value of $2,256,894, a cost of $9,983,070, a valuation
reserve of $1,942,798 and accumulated depreciation of $5,783,378 have been
listed for sale with a broker. As a result, the assets have been written down to
their fair value and no depreciation has been recorded on these assets since the
date they were identified as being held for sale. The assets held for sale have
not been separately classified as "Held for Sale" in accordance with SFAS 144
because management has concluded that, while a sale is probable, a transfer and
completed sale is not likely to occur within one year.
NOTE 4 -- 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 12,645,653 and 10,640,895
shares for the nine months ended September 30, 2002 and 2001, respectively.
Potential dilutive securities were not included in the 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 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 establishes standards
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 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.
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 sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects 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. It is not anticipated
that SFAS 145 will have a material effect on the Company.
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 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. It is not anticipated that SFAS 146 will have a material effect on the
Company.
9
NOTE 6 -- LONG-TERM DEBT
In September 2002, the Company's financing facility with Coast Business Credit
was purchased by and assigned to La Jolla Loans, Inc. In connection with this
transaction, Coast Business Credit's security interest in real and personal
property and all associated security and loan documents were assigned to La
Jolla Loans. At the same time, the Company entered into a Forbearance and
Extension Agreement with La Jolla Loans. Under the terms of the forbearance
agreement, La Jolla Loans will not declare a default until June 30, 2003, when
the entire principal is due. The forbearance period may be extended to June 30,
2004 if the Company pays a $75,000 renewal fee. Interest of $24,500 at an
effective rate of 14% is payable monthly along with additional monthly impound
payments of approximately $65,000 to be used to pay insurance, property taxes
and lease payments on collateralized property during the forbearance period. La
Jolla Loans has also agreed to defer, during the forbearance period, the
difference between the minimum interest payment of $45,000 under the agreement
with Coast Business Credit and the $24,500 minimum interest payments under the
forbearance agreement. If the Company fully performs under the terms and
conditions of the forbearance agreement and no default occurs during the
forbearance period, La Jolla Loans will release the Company from any obligation
to pay minimum monthly interest payments in excess of $24,500. The outstanding
principal balance at September 30, 2002 is $2,100,000.
NOTE 7 -- CONTINGENCIES
Microcystis
As a result of certain conditions, Microcystis, a toxic algae occasionally
blooms in Klamath Lake at the same time blue-green algae is harvested. The
Company regularly tests the algae it harvests for possible contamination. Algae
that does not meet the Company's standards is not used in products for human or
animal consumption.
In 1997, the Oregon Department of Agriculture issued an administrative rule that
created a standard of 1 microgram per gram (1 ppm) of Microcystis in products
for human consumption that contain blue-green algae. The Oregon Department of
Agriculture has raised no questions about the Company's products under this
rule.
In some years, the presence of Microcystis may reduce the quantity of algae that
the Company can harvest.
Litigation
On October 7, 2002, Daryl Kollman, one of Cell Tech's principal shareholders,
filed a lawsuit against Cell Tech and certain of its officers, directors and
counsel in the Circuit Court for the State of Oregon for Klamath County. The
complaint makes a number of individual and derivative claims. Mr. Kollman makes
two claims against Cell Tech. First, Mr. Kollman alleges that Cell Tech breached
an agreement to register its stock for public sale and seeks damages in an
amount to be proven at trial, but not less than $9,282,000. Second, Mr. Kollman
claims that Cell Tech conspired with Marta C. Carpenter (formerly known as Marta
C. Kollman), a principal shareholder and the President, Chief Executive Officer
and a director of Cell Tech; Donald P.
10
Hateley, Chairman of the Board of Directors of Cell Tech; and others to prevent
the registration of Mr. Kollman's stock and to cause other financial injury to
him. As a result, Mr. Kollman seeks $32,931,976 against the defendants. Mr.
Kollman also seeks millions of dollars in damages on his own behalf and on
behalf of Cell Tech against Marta Carpenter, Mr. Hateley and others based on a
variety of legal theories, many of which either have been or are being litigated
in other cases. The Company intends to vigorously defend the direct claims
asserted in this lawsuit, and is currently evaluating the claims that Mr.
Kollman has asserted on Cell Tech's behalf. The Company cannot predict the
amount of loss, if any, that could result from this lawsuit, but does not
believe that an unfavorable outcome would have a material adverse impact upon
its financial condition, cash flow, or results of operations.
On March 27, 2002, the Nature Conservancy filed an action against Cell Tech in
the Circuit Court for the State of Oregon for Klamath County, alleging, among
other things, that Cell Tech's wholly owned subsidiary, The New Earth Company,
was in default on a promissory note and a trust deed. The Nature Conservancy was
seeking $375,000, the principal amount due under the promissory note, plus
interest and certain leasehold rights. The Company has previously recorded the
net present value of the promissory note, which has a balance of $313,790 and
has been included in the current portion of long-term debt in the September 30,
2002 consolidated balance sheet. The Nature Conservancy has agreed to withdraw
its complaint against Cell Tech.
On February 19, 2002, Mr. Kollman filed two separate Notices of Claim of Lien
upon Chattels against Cell Tech, NAC, Marta Carpenter and others in Klamath
County, Oregon. Mr. Kollman alleges, among other things, that Cell Tech owes him
and Marta Carpenter approximately $705,693 in past due rent. Mr. Kollman also
claims that Cell Tech owes Klamath Cold Storage, Inc. ("KCS"), a company owned
by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr.
Kollman asserts that Cell Tech is not entitled to remove its property from
property owned by him, Marta Carpenter and KCS and seeks to subject the Cell
Tech property to foreclosure proceedings. The Company intends to vigorously
defend against these liens. The Company cannot predict the amount of loss, if
any, that could result from these liens, but does not believe that an
unfavorable outcome would have a material adverse impact upon its financial
condition, cash flow, or results of operations.
On May 31, 2002, Mr. Kollman filed a lawsuit in the Circuit Court for the State
of Oregon for Klamath County, to evict Cell Tech from certain property owned by
him and Marta Carpenter. On October 31, 2002, the court granted Cell Tech's
motion for summary judgment in this case.
On June 6, 2002, Mr. Kollman filed a lawsuit in the name of KCS in the Circuit
Court for the state of Oregon to evict Cell Tech from property owned by KCS. In
this lawsuit, Mr. Kollman also alleges that Cell Tech has not paid approximately
$1,050,000 in rent. Marta Carpenter is seeking to stop the evictions and the
Company is resisting Mr. Kollman's attempt to evict it. The Company intends to
vigorously defend this lawsuit. The Company cannot predict the amount of loss,
if any, that could result from this lawsuit, but an unfavorable outcome could
have a material adverse impact upon its financial condition.
In October 2001, Teachers for Truth in Advertising filed an action in the
Superior Court for the County of Tulare, State of California, alleging, that
Cell Tech engaged in unfair business
11
practices and misleading advertising. The plaintiff seeks corrective advertising
and restitution to California consumers who purchased the products. The case has
been tried. The trial judge ordered the plaintiff to file and serve a post trial
brief by December 2, 2002 and defendant to respond by December 7, 2002 and the
court will take the matter under submission. The Company cannot predict the
amount of loss, if any, that could result from this lawsuit, but does not
believe that the matter will have a material adverse effect on the Company's
financial condition, cash flow or results of operations.
On February 6, 1998, Oregon Freeze Dry, Inc. filed a complaint against Cell Tech
alleging that Cell Tech wrongfully terminated its contract with Oregon Freeze
Dry. Oregon Freeze Dry seeks $780,930 in damages plus additional damages that
allegedly are continuing to accrue and prejudgment interest and attorneys' fees.
Cell Tech filed a counter suit alleging breach of contract and seeking damages,
prejudgment interest and attorneys' fees. Cell Tech and Oregon Freeze Dry are
negotiating a settlement. The Company has accrued $1,656,000 (included in
accounts payable as of September 30, 2002) for this contingency. The eventual
settlement amount could be significantly higher and could have a material
adverse effect on the Company's financial condition, cash flow and results of
operations.
Lien on Company Stock
The Cell Tech stock owned by Daryl Kollman and Marta Carpenter is subject to a
tax lien filed by the Internal Revenue Service. The stock is held in trust and
will be released upon satisfaction of federal income taxes owed by Mr. Kollman
and Marta Carpenter. Mr. Kollman and Marta Carpenter retain voting power over
the stock held in trust. Mr. Kollman and Marta Carpenter have agreed to sell
their shares as needed, and as allowed by federal securities laws, to make
quarterly payments to the Internal Revenue Service. Should Mr. Kollman or Marta
Carpenter fail timely to make such payments, the Internal Revenue Service may
seize the shares from the trust. The Internal Revenue Service would thereafter
sell or judicially foreclose on some or all of the shares to satisfy Mr.
Kollman's and Marta Carpenter's tax liabilities. The lien is subordinated in
favor of Cell Tech's lender for receivable loans, advances and inventory loans,
term loans, and equipment acquisition loans.
Covenants Related to the Private Placement to Zubair Kazi
In connection with the sale of common shares to a private investor, Zubair Kazi,
in 1999, Cell Tech agreed to issue common stock and warrants to purchase common
stock to Mr. Kazi if the consolidated shareholders' equity was less than
$20,000,000 at December 31, 1999. As a result, 2,549,480 shares of common stock
and warrants to purchase and additional 2,549,480 shares of common stock were
due to Mr. Kazi on September 30, 2002. The $494,209 of accrued liability related
to the issuance of these shares and warrants, based on the fair value of the
securities, has been accounted for in the financial statements. Additionally,
the shares originally sold to Mr. Kazi were to be registered for resale within
120 days of the sale. Additional penalties have accrued and will continue to
accrue until the shares are registered. The additional expense for the first
nine months of 2002 was $168,970. Cell Tech is also obligated to issue
additional securities to Mr. Kazi upon the effective date of its next
registration statement.
12
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 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
13
o the risk factors described in other documents and reports filed with the
Securities and Exchange Commission, including our Annual Report on Form
10-K for the year ended December 31, 2001.
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 nine months ended
September 30, 2002 compared to the same period in 2001. 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 develop and distribute products made with Aphanizomenon flos-aquae
(trade name Super Blue Green(R) Algae, "SBGA") through a network of independent
distributors. We currently offer sixteen different products intended to appeal
to health-conscious consumers. We divide our products into five product lines:
Daily Health Maintenance, Digestive Health, Defensive Health, Powdered Drinks
and Snacks, and Animal and Plant Food.
We harvest SBGA and manufacture some of our products at our production
facilities in Klamath Falls, Oregon. We are a multi-level marketing
organization. Independent distributors make up our sales force. We market our
products through our distributors in all fifty states, the District of Columbia,
Guam, Puerto Rico, American Samoa, the Virgin Islands and Canada. We encourage
our distributors to recruit new distributors into our network. We place
recruited distributors beneath the recruiting distributor in the Company's
network of distributors. We pay our distributors commissions based on their
personal sales and the sales of distributors beneath them. We assist
distributors in establishing their own businesses and provide them with support
programs such as audio and videotapes for training, seminars and an annual
convention at our headquarters. We have approximately 42,083 active distributors
as of September 30, 2002 compared to approximately 51,360 active distributors as
of September 30, 2001. Active distributors are those who have purchased products
in the last six months.
Our loss per share was $0.22 for the nine months ended September 30, 2002
compared to $0.20 per share for the same period in 2001. The net loss for the
nine months ended September 30, 2002 totaled $2.8 million and was primarily
related to recording an additional provision for potentially excess and
unsaleable inventories of $3.1 million. The net loss for the nine months ended
September 30, 2001 totaled $2.2 million and was primarily related to a decrease
in net sales.
14
CRITICAL ACCOUNTING POLICIES
Inventory Valuation
We have a significant investment in algae inventory. Our sole source of
blue-green algae is Klamath Lake. Algae grow naturally in Klamath Lake and like
any plants are subject to variation due to environmental conditions. The volume
of annual harvests varies depending on weather and precipitation conditions. As
a result, we carry additional supplies of inventory to sustain operations
through low yield harvest years. In addition, we regularly review the amount of
blue-green algae on hand and evaluate the likelihood that we will be able to
realize the value of our inventory. If we determine that we will not realize all
or a portion of our inventory value, adjustments are made to the carrying value
through a valuation allowance. The decision to write down a portion of the
carrying value of inventory could have a significant adverse effect on our
operating results.
Impairment or Disposal of Long-Lived Assets
We utilize significant amounts of equipment in our operations to harvest
and process blue-green algae from Klamath Lake. During 2001, we developed an
alternative method of harvesting algae from Klamath Lake that yields raw algae
at a lower total cost for the quantity harvested than the previous harvest
method at the A Canal site.As a result, certain equipment previously used to
harvest algae from the canal site has been taken out of service. Equipment taken
out of service that we cannot remove from the canal site and has no other use
has been written off, and the remaining equipment has been offered for sale. We
regularly review our property and equipment offered for sale and if we cannot
realize any portion of the carrying value, adjustments are made to reduce the
carrying value to its fair value. We also regularly review property and
equipment used in our operation and test for impairment if conditions indicate
the carrying value of the property and equipment may not be recovered. If we
determine that we will not recover the carrying value and that assets are
impaired, we make adjustments to the carrying value through a valuation
allowance. The decision to write down a portion of the carrying value of
property and equipment used in our operations or offered for sale could have a
significant adverse effect on our operating results.
Sales Incentives
In November 2001, the Emerging Issues Task Force (the "EITF") issued EITF
Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products." In April 2001, the EITF reached a
consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," which provides
guidance on the income statement classification of consideration from a vendor
to a reseller in connection with the reseller's purchase of the vendor's
products or to promote sales of the vendor's products. We pay commissions to our
distributors as compensation for sales and marketing activities as evidenced by
downline growth and sales volume and accordingly classify these expenses as a
cost, rather than as a reduction of revenue. There was no
15
effect on the consolidated financial position, results of operations or cash
flows as a result of implementation of this pronouncement.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of
net sales for each of the periods indicated.
-------------------------------------------------------------------
Nine Months ended September 30, Three Months ended September 30,
2001 2002 2001 2002
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 32.0 42.2 31.9 72.8
------ ------ ------ ------
Gross profit 68.0 57.8 68.1 27.2
Commissions 48.5 45.9 47.3 43.7
------ ------ ------ ------
Selling profit (loss) 19.5 11.9 20.9 (16.5)
Operating Expenses
Selling expenses 13.5 13.8 13.6 15.2
General and administrative 8.5 5.0 6.9 6.5
Shipping and handling expenses 5.9 6.3 5.8 6.9
Research and development 0.7 0.6 0.6 0.8
------ ------ ------ ------
Operating loss (9.1) (13.8) (6.0) (45.9)
Other income 1.6 0.7 2.4 0.6
Interest expense 2.2 0.7 2.2 0.8
------ ------ ------ ------
Net loss before taxes (9.7) (13.8) (5.8) (46.1)
Income tax benefit -- -- -- --
------ ------ ------ ------
Net loss (9.7) (13.8) (5.8) (46.1)
====== ====== ====== ======
Three months ended September 30, 2002 compared with the three months ended
September 30, 2001
Net sales for the three months ended September 30, 2002 were $6.45
million, a decrease of $0.8 million or 11.4% from net sales of $7.2 million for
the three months ended September 30, 2001. The decrease in sales is directly
related to a 14.7% decrease in orders. Average order size increased to $122.76
from $115.00 over the same period. The average number of distributors for the
three months ended September 30, 2001 decreased to an average of 42,635, which
was 17.9% lower than the average of 51,964 distributors for the three months
ended September 30, 2001. The number of distributors directly effects our sales.
Gross profit decreased to 27.2% of net sales in the three months ended
September 30, 2002 from 68% of net sales in the three months ended September 30,
2001. The decrease is due to the recording of an additional reserve of $3.1
million for potentially unsaleable inventories. We determined that the sales of
our plant food and agricultural products was less than previously
16
anticipated and recorded this reserve against the carrying value of our
inventory designated for plant food and agricultural uses.
Commission expense for the three months ended September 30, 2002 and 2001
was $2.8 million or 43.7% of net sales and $3.4 million or 47.3% of net sales,
respectively, representing a decrease of $0.6 million, or 18.1%. During the
three months ended September 30, 2001, we implemented a new commission structure
in an attempt to attract and retain distributors. We revised this commission
structure on July 1, 2002, which had the effect of reducing the commission paid
to distributors.
Operating expenses decreased approximately $62,000 or 3.2% to $1.89
million for the three months ended September 30, 2002 from $1.95 million for the
three months ended September 30, 2001. We discuss the components of operating
expenses 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 approximately
$12,000, or 1.2%, between the three months ended September 30, 2001 and
the three months ended September 30, 2002. Selling expense was $0.98
million for the three months ended September 30, 2002 compared to $1.0
million for the same period in 2001. This decrease was primarily due to a
decrease in salaries and compensation, consulting expenses and utility
costs. Selling expenses were 15.2% of sales for the three months ended
September 30, 2002 and 13.6% of sales for the three months ended September
30, 2001. The increase in the expense as a percentage of sales is mainly
as a result of the decrease in sales revenue.
o General and administrative expense was $0.4 million for the three months
ended September 30, 2002 compared to $0.5 million for the comparable
period in 2001. This change represented a decrease of $81,000 or 16.3%.
General and administrative expenses averaged 6.5% of sales for the three
months ended September 30, 2002 compared to 6.9% for the three months
ended September 30, 2001. The decrease is attributable to a decrease in
payroll and related costs, a decrease in legal and consulting fees and a
decrease in costs associated with the consolidation of office space and
leased facilities that occurred during 2001.
o Shipping and handling expenses increased $27,000 or 6.4%, to $0.44 million
for the three months ended September 30, 2002 from $0.42 million for the
comparable period in 2001. Shipping and handling expenses, as a percent of
net sales, increased to 6.9% for the three months ended September 30, 2002
from 5.8% for the three months ended September 30, 2001. The increase was
due to increased freight expense and postal rates. This increase was
partially offset by a decrease in sales volume.
o Research and development expenses increased 9.4% to approximately $49,000
for the three months ended September 30, 2002 from approximately $45,000
for the comparable period in 2001. Research and development expense
constituted 0.8% and 0.6% of net sales in the three month periods ending
September 30 in 2001 and 2002, respectively.
Other income decreased to approximately $43,000 for the three months ended
September 30, 2002 from approximately $175,000 for the three months ended
September 30, 2001, principally due to a decrease in sundry income collected
from distributors, the recording of the
17
fair value cost of penalty shares and warrants to be issued to an investor in
the amount of $55,000, and a decrease in sub-lease rental income as a result of
termination of a lease agreement.
Interest expense decreased to approximately $54,000 for the three months
ended September 30, 2002 from approximately $162,000 for the three months ended
September 30, 2001. This decrease was due to a change in payments on our loan
facility from minimum interest payments during the third quarter of 2001 to
regular interest payments during the third quarter of 2002. Net interest expense
represented 0.8% and 2.2% of sales for the three months ended September 30, 2002
and September 30, 2001, respectively.
Net loss increased $2.5 million to $2,971,264 for the three months ended
September 30, 2002 from $423,908 for the comparable period in 2001. As a
percentage of net sales, net loss increased to 46% for the three months ended
September 30, 2002 from 6% for the comparable period in 2001. The increase was
due to our recording of an additional reserve of $3.1 million for potentially
unsaleable inventories offset by decreases in general and administrative
expenses and commission expenses. We recorded this reserve to reflect the
reduced marketability of a portion of our inventory that was better suited for
the agricultural market.
Nine months ended September 30, 2002 compared with the nine months ended
September 30, 2001
Net sales for the nine months ended September 30, 2002 were $20,311,470,
representing a decrease of 11.5% from net sales of $22,944,017 for the nine
months ended September 30, 2001. The decrease in sales is directly related to a
14.4% decrease in orders for the same period. Average order size increased to
$120 from $116 over the same period. The average number of distributors for the
nine months ended September 30, 2002 decreased to an average of 33,646, which
was 27.6% lower than the average of 46,491 distributors for the nine months
ended September 30, 2001.
Gross profit decreased to 57.8% for the nine months ended September 30,
2002 from 68% for the nine months ended September 30, 2001. The decrease is due
to the recording the additional reserve for potentially unsaleable inventories.
Commission expense for the nine months ended September 30, 2002 and
September 30, 2001 was $9.3 million or 45.9% of sales and $11.1 million or 48.5%
of sales, respectively, representing a decrease of $1.8 million, or 16.1%.
During the nine months ended September 30, 2001, we implemented a new commission
structure in an attempt to attract and retain distributors. We revised this
commission structure on July 1, 2002 to reduce the commission paid to
distributors.
18
Operating expenses decreased $1.3 million or 20.3% to $5.2 million for the
nine months ended September 30, 2002 from $6.5 million for the nine months ended
September 30, 2001. We discuss the components of operating expenses below.
o Selling expense 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 or 9.5% between
the nine months ended September 30, 2001 and same period in 2002. Selling
expenses for the nine-month period ended September 30, 2002 were $2.8
million compared to $3.1 million for the same period in 2001. This
decrease was primarily due to decreases in salaries, compensation,
consulting expenses and utility costs, because of our cost-cutting
initiatives. Selling expenses were 13.8% of sales for the nine months
ended September 30, 2002 and 13.5% of sales for the nine months ended
September 30, 2001.
o General and administrative expenses decreased by $0.9 million or 47.7%
between the nine months ended September 30, 2002 and the same period in
2001. General and administrative expenses were $1.0 million for the nine
months ended September 30, 2002 compared to $1.9 million for the same
period in 2001. For the nine months ended September 30, 2002, general and
administrative expenses averaged 5% of sales while they were 8.5% of sales
for the nine months ended September 30, 2001. The decrease between 2002
and 2001 is attributable to a decrease in payroll and related costs, 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 decreased approximately $83,000 or 6.1%, to
$1.3 million for the nine months ended September 30, 2002 from $1.4
million for the same period in 2001. The decrease was due to lower sales
volumes in the nine months ended September 30, 2002 partially offset by an
increase in the postal rates. Shipping and handling expenses as a percent
of net sales increased to 6.3% for the nine months ended September 30,
2002 from 5.9% for the nine months ended September 30, 2001.
o Research and development expenses decreased 14.1% to $131,601 for the nine
months ended September 30, 2002 compared to $153,290 for the same period
in 2001. Research and development expenses constituted 0.6% and 0.7% of
net sales in the nine months ended September 30, 2001 and 2002,
respectively.
Other income decreased to approximately $155,000 for the nine months ended
September 30, 2002 from approximately $373,000 for the nine months ended
September 30, 2001, principally due to a decrease in sundry income collected
from distributors and the recording of the fair value cost of penalty shares and
warrants to be issued to an investor in the amount of approximately $169,000. We
no longer earn sub-lease rental income as a result of cancellation of a lease
agreement.
Net interest expense decreased to approximately $149,000 for the nine
months ended September 30, 2002 from approximately $513,000 for the nine months
ended September 30, 2001. This decrease was due to a change in payments on our
loan facility from minimum interest payments during the first three quarters of
2001 to regular interest payments during the first three quarters of 2002. Net
interest expense represented 0.7% and 2.2% of sales for the nine months ended
September 30, 2002 and 2001, respectively.
19
Net loss increased 26.5% to $2.8 million for the nine months ended
September 30, 2002 from a loss of $2,220,766 for the comparable period in 2001.
As a percentage of net sales, net loss increased to 13.8% for the nine months
ended September 30, 2002 from 10% for the comparable period in 2001. The dollar
increase in the loss was due to the recording of a $3.1 million reserve for
potentially unsaleable inventories, offset by the curtailment of various
operating expenses.
Liquidity and Capital Resources
We had net losses of approximately $5,015,350, $2,783,939 and $4,140,824
for the years ended December 31, 2001, 2000 and 1999, respectively and had a
working capital deficit of $6,437,186 and $7,341,964 at December 31, 2001 and
2000, respectively. As a result, our independent certified public accountants
have included in our annual report an explanatory paragraph in their report
covering those periods, which expresses substantial doubt about our ability to
continue as a going concern.
Working capital deficit at September 30, 2002 amounted to $5,528,721,
which represents an increase in working capital of $908,465 from a working
capital deficit of $6,437,186 as of December 31, 2001. At September 30, 2002, we
had a bank overdraft of $101,008 versus a bank overdraft of $763,105 as of
December 31, 2001.
In September 2002, our financing facility with Coast Business Credit was
purchased by and assigned to La Jolla Loans, Inc. At the same time, we entered
into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms
of the forbearance agreement, La Jolla Loans will not declare a default until
June 30, 2003, when the entire principal is due. The forbearance period may be
extended to June 30, 2004 if we pay a $75,000 renewal fee. Interest of $24,500
at an effective rate of 14% is payable monthly along with additional monthly
impound payments of approximately $65,000. La Jolla Loans will defer the
difference between the minimum interest payment of $45,000 under the agreement
with Coast Business Credit and the $24,500 minimum interest payments under the
forbearance agreement for the forbearance period. If we fully perform under the
terms and conditions of the forbearance agreement and no default occurs during
the forbearance period, La Jolla Loans will release us from any obligation to
pay that portion of the minimum monthly interest payments in excess of $24,500.
The outstanding principal balance at September 30, 2002 was $2,100,000.
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
suspended dividend payments to our shareholders and have decreased our
consulting fees by $120,000 per year. We have no present commitments or
agreements with respect to any acquisitions or purchases of manufacturing
facilities or new technologies. Any future changes in our operations could
consume available capital resources faster than anticipated. Our capital
requirements depend on numerous factors, including:
o the introduction of new products;
20
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.
Cash Flows
Net cash provided by operating activities for the nine months ended
September 30, 2002 amounted to $1,121,172 compared to cash provided by
operations of $1,161,154 for the nine months ended September 30, 2001. The
decrease in cash generated by operations is primarily due to the increase in net
loss to $2,809,704 at September 30, 2002, from a net loss of $2,220,766 at
September 30, 2001, and a decrease in inventory offset by an increase in other
assets as a result of capitalizing loan costs associated with new borrowings.
Cash used in investing activities for the nine months ended September 30,
2002 was $360,234, representing an increase of $177,601 from net cash used for
investing activities of $182,633 for the nine months ended September 30, 2001.
This increase resulted from the purchase of equipment during the nine months
ended September 30, 2002 related to the construction of a new on-lake barge.
Net cash used for financing activities was $760,938 in the nine months
ended September 30, 2002 versus $978,521 of net cash provided by financing
activities in the nine months ended September 30, 2001. This change is
principally due to a $113,670 increase in our bank overdraft during the first
three quarters of 2002 and increased net payments on long-term debt and related
party debt for the nine months ended September 30, 2002 compared to the same
period in 2001.
Recent Accounting Pronouncements
Pronouncements Not Yet Adopted
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 establishes standards
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 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.
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
21
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects 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. We do not anticipate that SFAS 145 will have a material effect on us.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not invest in derivative financial instruments or derivative
commodity instruments and believe that our exposure to market risk associated
with other financial instruments is immaterial.
Our primary market risks include fluctuations in our variable interest
rates. We have limited risk related to interest rate fluctuations. Consequently,
we believe that fluctuation in variable interest rates in the near term would
not materially affect our consolidated operating results.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out by our Chief Executive Officer and Chief Accounting Officer of
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-14 under the Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Accounting Officer concluded that these
disclosure controls and procedures were effective to ensure that material
information relating to us and our consolidated subsidiary required to be
included in our Exchange Act reports would be made known to them by others
within these entities. No significant changes were made in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation, nor were there any significant deficiencies or
material weaknesses in such internal controls. As a result, no corrective
actions were required or taken.
Our Chief Executive Officer and Chief Accounting officer do not expect
that our disclosure controls or our internal controls will prevent all error and
all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the
22
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also
is based partly on certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On October 7, 2002, Daryl Kollman, one of Cell Tech's principal
shareholders, filed a lawsuit against Cell Tech and certain of its officers,
directors and counsel in the Circuit Court for the State of Oregon for Klamath
County. The complaint makes a number of individual and derivative claims. Mr.
Kollman makes two claims against Cell Tech. First, Mr. Kollman alleges that Cell
Tech breached an agreement to register its stock for public sale and seeks
damages of an amount to be proven at trial, but not less than $9,282,000.
Second, Mr. Kollman claims that Cell Tech conspired with Marta C. Carpenter
(formerly known as Marta C. Kollman), a principal shareholder and the President,
Chief Executive Officer and one or our director; Donald P. Hateley, our Chairman
of the Board of Directors; and others to prevent the registration of Mr.
Kollman's stock and to cause other financial injury to him. As a result, Mr.
Kollman seeks $32,931,976 against the defendants. Mr. Kollman also seeks
millions of dollars in damages on his own behalf and on behalf of Cell Tech
against Marta Carpenter, Mr. Hateley and others based on a variety of legal
theories, many of which either have been or are being litigated in other cases.
The Company intends to vigorously defend the direct claims asserted in this
lawsuit, and is currently evaluating the claims that Mr. Kollman has asserted on
Cell Tech's behalf. The Company cannot predict the amount of loss, if any, that
could result from this lawsuit, but does not believe that an unfavorable outcome
would have a material adverse impact upon its financial condition, cash flow, or
results of operations.
On March 27, 2002, the Nature Conservancy filed an action against Cell
Tech in the Circuit Court for the State of Oregon for Klamath County, alleging,
among other things, that Cell Tech's wholly owned subsidiary, The New Earth
Company, was in default on a promissory note and a trust deed. The Nature
Conservancy was seeking $375,000, the principal amount due under the promissory
note, plus interest and certain leasehold rights. The Company has previously
recorded the net present value of the promissory note, which has a balance of
$313,790 and has been included in the current portion of long-term debt in the
September 30, 2002 consolidated balance sheet. The Nature Conservancy has agreed
to withdraw its complaint against us.
On February 19, 2002, Mr. Kollman filed two separate Notices of Claim of
Lien upon Chattels against Cell Tech, NAC and Marta Carpenter and others, in
Klamath County, Oregon. Mr. Kollman alleges, among other things, that Cell Tech
owes him approximately $705,693 in past due rent. Mr. Kollman also claims that
Cell Tech owes Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr.
Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr.
Kollman asserts that Cell Tech is not entitled to remove its property from
property
23
owned by him, Marta Carpenter and KCS and seeks to subject the Cell Tech
property to foreclosure proceedings. The Company intends to vigorously defend
against these liens. The Company cannot predict the amount of loss, if any, that
could result from these liens, but does not believe that an unfavorable outcome
would have a material adverse impact upon its financial condition, cash flow, or
results of operations.
On May 31, 2002, Mr. Kollman filed a lawsuit in the Circuit Court for the
State Oregon for Klamath County to evict Cell Tech from certain property owned
by him and Marta Carpenter. On October 31, 2002, the court granted Cell Tech's
motion for summary judgment in this case.
On June 6, 2002, Mr. Kollman filed a lawsuit in the name of KCS in the
Circuit Court for the State of Oregon for Klamath County to evict Cell Tech from
property owned by KCS. In this lawsuit, Mr. Kollman also alleges that Cell Tech
has not paid approximately $1,050,000 in rent. Marta Carpenter is seeking to
stop the evictions and the Company is resisting Mr. Kollman's attempt to evict
it. The Company intends to vigorously defend this lawsuit. The Company cannot
predict the amount of loss, if any, that could result from this lawsuit but an
unfavorable outcome could have a material adverse effect on our financial
condition.
In October 2001, Teachers for Truth in Advertising filed an action in the
Superior Court for the County of Tulare, State of California, alleging, that
Cell Tech engaged in unfair business practices and misleading advertising. The
plaintiff seeks corrective advertising and restitution to California consumers
who purchased the products. The case has been tried. The trial judge ordered the
plaintiff to file and serve a post trial brief by December 2, 2002 and for Cell
Tech to respond by December 7, 2002 and the court will take the matter under
submission. The Company cannot predict the amount of loss, if any, that could
result from this lawsuit, but does not believe that the matter will have a
material adverse effect on the Company's financial condition, cash flow or
results of operations.
On February 6, 1998, Oregon Freeze Dry filed a complaint against Cell Tech
alleging that Cell Tech wrongfully terminated its contract with Oregon Freeze
Dry. Oregon Freeze Dry seeks $780.930 in damages plus additional damages that
allegedly are continuing to accrue and prejudgment interest and attorneys' fees.
Cell Tech filed a counter suit alleging breach of contract and seeking damages,
prejudgment interest and attorneys' fees. Cell Tech and Oregon Freeze Dry are
negotiating a settlement. The Company has accrued $1,656,000 (included in
accounts payable as of September 30, 2002) for this contingency. The eventual
settlement amount could be significantly higher and could have a material
adverse effect on the Company's financial condition, cash flow and results of
operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
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Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation, as amended, incorporated by
reference to the Registration Statement on Form SB-2, dated
June 21, 1996.
3.2 Certificate of Amendment of Certificate of Incorporation
incorporated by reference to the Current Report on Form 8-K
dated November 19, 1999.
3.3 Certificate of Designations, Preferences and Rights of Series
B Convertible Preferred Stock incorporated by reference to the
Current Report on Form 8-K dated August 2, 1999.
3.4 Amended and Restated Bylaws incorporated by reference to the
Registration Statement on Form SB-2 dated June 21, 1996.
99.1 Certificate of Marta C. Carpenter pursuant to 18 U.S.C Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Current Reports on Form 8-K. None.
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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
December 5, 2002 /s/ Marta C. Carpenter
----------------------------------------
Marta C. Carpenter
President and Chief Executive Officer
26
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Marta C. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cell Tech
International Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
CELL TECH INTERNATIONAL INCORPORATED
/s/ Marta C. Carpenter
----------------------------------------
Marta C. Carpenter
Chief Executive Officer and Chief
Accounting Officer,
DATED: December 5, 2002
27