-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ELFvUhDLhLoI01AAIlMVaiNYWRCjr18lJdQGnSiFB6BsRoWMyZ5CFIwK8HYP6AfH ROQ6DUripPeuVtJBYuUNnQ== 0001144204-03-004611.txt : 20030814 0001144204-03-004611.hdr.sgml : 20030814 20030814160434 ACCESSION NUMBER: 0001144204-03-004611 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELL TECH INTERNATIONAL INC CENTRAL INDEX KEY: 0001015194 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 223345046 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21015 FILM NUMBER: 03847736 BUSINESS ADDRESS: STREET 1: 565 CENTURY COURT CITY: KLAMATH FALLS STATE: OR ZIP: 97601 BUSINESS PHONE: 5418825406 MAIL ADDRESS: STREET 1: 565 CENTURY COURT CITY: KLAMATH FALLS STATE: OR ZIP: 97601 FORMER COMPANY: FORMER CONFORMED NAME: HUMASCAN INC DATE OF NAME CHANGE: 19960523 10-K/A 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 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 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 per Share (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the 800,000 shares of registrant's voting stock held by non-affiliates of the registrant as of June 30, 2002 (the last day of the registrant's most recently completed second fiscal quarter) was approximately $176,000 based on the closing price of the registrant's common stock on the National Quotation Bureau's Pink Sheets or $0.22 per share. The number of shares outstanding of the registrant's sole class of common stock, par value $0.01 per share, as of July 25, 2003, the latest practicable date, was 13,974,087. DOCUMENTS INCORPORATED BY REFERENCE None.
CELL TECH INTERNATIONAL INCORPORATED FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 TABLE OF CONTENTS PART I............................................................................................................1 ITEM 1. BUSINESS..............................................................................................1 Item 2. Properties...........................................................................................16 ITEM 3. LEGAL PROCEEDINGS....................................................................................16 Item 4. Submission of Matters to a Vote of Securities Holders................................................17 PART II..........................................................................................................17 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................17 Item 6. Selected Financial Data..............................................................................19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.................20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................31 PART III.........................................................................................................31 Item 10. Directors and Executive Officers of the Registrant...................................................31 Item 11. Executive Compensation..............................................................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................38 Item 13. Certain Relationships and Related Transactions......................................................39 ITEM 14. CONTROLS AND PROCEDURES..............................................................................39 PART IV..........................................................................................................40 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K...................................40 SIGNATURES.......................................................................................................44 i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of our statements under "Business," "Properties," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures about Market Risk," the Notes to Consolidated Financial Statements and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to certain events, risks and uncertainties that may be outside our control. Some of these forward-looking statements include statements of: o management's plans, objectives and budgets for its future operations and future economic performance; o capital budget and future capital requirements; o meeting future capital needs; o realization of any deferred tax assets; o the level of future expenditures; o impact of recent accounting pronouncements; o the outcome of regulatory and litigation matters; and o the assumptions described in this report underlying such forward-looking statements. o 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. ii PART I ITEM 1. BUSINESS OVERVIEW We are a natural and nutritional products company and we develop and distribute a wide range of products made with Aphanizomenon flos-aquae (trade name Super Blue Green(R)) Algae ("SBGA") and other nutrients and ingredients through a network of independent distributors ("Distributors"). We currently offer twenty-two different products intended to appeal to health-conscious consumers. We divide our products 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 several 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, Federated States of Micronesia, Marshall Islands, Northern Mariana Islands, Palau and Canada. We encourage our Distributors to recruit interested people as new Distributors for our products. We place these recruits beneath the recruiting Distributor in the "network" and we refer to them as the distributor's "downline" or "network." 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 a comprehensive, information-packed website (www.celltech.com), audio and videotapes for training, empowerment teams, seminars and an annual convention called the August Celebration. HISTORY AND ORGANIZATION Unless otherwise specifically stated, references to "we" and "us" in this Form 10-K/A (the "Report") refer: (a) for periods prior to our reorganization, to the historical operations of HumaScan and (b) for periods following our reorganization, to the operations of Cell Tech International Incorporated, including its wholly owned subsidiaries The New Earth Company, Inc. ("NEC") and The New Algae Company, Inc. ("NAC"). NEC is now an inactive corporation. We were formed under the name "HumaScan Inc." in 1994 to manufacture and market in the United States and Canada a device called the BreastAlert(TM) Differential Temperature Sensor, a non-invasive, easy to use, adjunctive test for use as part of a breast disease monitoring program (the "BreastAlert Device"). We commenced shipments of the BreastAlert(TM) Device in December 1997. In November 1998, we announced that we were in the process of evaluating various strategic alternatives, as we did not have adequate resources for the completion of clinical trials and marketing of the BreastAlert Device. Before the end of 1998, because of the lack of adequate financing, we terminated all employees and suspended all operations, focusing substantially all of our efforts on obtaining new financing and/or restructuring the business. The Board of Directors then entered into consulting agreements with three former key employees to negotiate settlement agreements with Scantek Medical, Inc. ("Scantek") to terminate the license agreement and negotiate settlements with other creditors, and explore the possibilities for restructuring and/or reorganizing the business. In March 1999, we concluded a settlement agreement with Scantek that terminated the license for the technology used in the BreastAlert Device. We transferred certain assets related to the licensed business to Scantek and we issued additional shares of common stock to Scantek and an affiliated company as consideration for release of all obligations concerning the license agreement and equipment supply agreements. We also received a cash payment from Scantek, which we applied to some of our other outstanding obligations. On July 16, 1999, we entered into an Agreement and Plan of Reorganization with Daryl J. Kollman and Marta C. Carpenter (formerly known as Marta C. Kollman). The agreement provided for the exchange of all the outstanding shares of NEC and NAC for shares of our common stock and preferred stock that together represented, on August 6, 1999, approximately 92% of our outstanding common stock (including the common stock issuable upon conversion of the preferred stock). We completed the reorganization on August 6, 1999. On August 10, 1999, we changed our name to Cell Tech International Incorporated. 1 Marta C. Carpenter and Daryl J. Kollman formed Cell Tech, Inc. and NEC in 1982 and 1988, respectively, to develop and distribute products made from a unique natural strain of blue green algae growing in massive quantities in Upper Klamath Lake in southern Oregon - the algae we now call SBGA. In 1990, Ms. Carpenter and Mr. Kollman formed NAC, acquired the assets of Cell Tech, Inc. and began doing business under the trade name Cell Tech. Through 1999, NAC housed the sales organization, and provided the research and development and administrative functions of our business, while NEC handled the harvesting and manufacturing of our products. Beginning in 2000, NAC took over these functions and NEC became inactive. EXECUTIVE OFFICES Our principal executive offices are located at 565 Century Court, Klamath Falls, Oregon 97601, and our telephone number at that address is (541) 882-5406. Our internet address is www.celltech.com, however, the information on our website does not constitute part of this Annual Report on Form 10-K/A and is not incorporated herein. You may obtain, free of charge, our annual, quarterly and current reports, and any amendments thereto on the Securities and Exchange Commission's website at www.sec.gov. INDUSTRY OVERVIEW The Natural Foods Merchandiser reports that the natural foods and nutrition industry topped $64 billion in 2002. The Nutrition Business Journal has predicted that the nutritional products industry will continue to grow at 4% to 6% annually through 2004. The Natural Foods Merchandiser has also reported that overall sales of natural foods and nutritional products grew approximately 7% in 2002. Most of this growth was in the functional foods sector (including nutrition bars and drinks) and the sports nutrition sector. The growth of traditional supplements, including herbals, continued to decline in 2002. The primary distribution channels in the nutritional supplements industry consist of mass-market retailers (including mass merchandisers, drug stores, supermarkets, discount and convenience stores), health and natural food stores, direct sales and mail order organizations, practitioners and the Internet. Natural foods retail is the largest of these channels, accounting for almost 50% of total sales, according to The Natural Foods Merchandiser. The Mass-market retail channel includes food stores, drugstores and mass merchandisers. Direct selling accounted for about 15% of sales during 2002. The Nutrition Business Journal also reported that the potential for natural and healthier products to penetrate mainstream product categories looks promising--and is still largely untapped. Dietary supplements sales of $16.7 billion are less than 10% of over-the-counter medicine and prescription drug sales. Natural and organic food sales of $11.8 billion represent barely 2% of the U.S. food industry (only 1.5% when food service is included). Functional foods sales at $17.2 billion, even when broadly defined as manufactured foods with any ingredient added specifically for health purposes, still account for only 3.5% of the U.S. food industry. Natural personal care products, even more loosely and broadly defined than natural food, had sales of $3.6 billion in 2000 and are just 10% of total health & beauty care spending. The $50 billion nutrition industry accounted for just 7% of the $680 billion food, medicine, health and personal care products market in the United States in 2000. Due to the greater fragmentation that exists in the international nutritional supplement market compared to the domestic market, industry data is not readily available. However, many of the demographic and other trends and events present in the domestic market are also present in the international market. GROWTH STRATEGY In the last several years, widely publicized reports and medical research findings, indicating a correlation between the consumption of nutrients and the reduced incidence of certain diseases, have heightened the public awareness of the positive effects of nutritional supplements on health. The United States 2 government and universities generally have increased sponsorship of research relating to nutritional supplements. For example, Congress has established an Office of Alternative Medicine and an Office of Dietary Supplements within the National Institutes of Health to foster research into alternative medical treatment modalities and the role of dietary supplements in maintaining health and preventing disease, respectively. However, questions about the efficacy and safety of nutritional supplement may have and may continue to affect sales of such supplements. The recent controversies over the efficacy of St. John's Wort and Kava, and the recent concerns about the safety of Ephedra illustrate this point. However, we believe that the aging of the United States population, together with a corresponding increased focus on preventative health care measures, will continue to result in increased demand for certain nutritional supplement products despite negative publicity of the type described above. The United States Bureau of the Census, projects the 35-and-older age group of consumers, which represents a large majority of the regular users of vitamin and mineral supplements, to grow significantly faster than the general United States population through 2010. Our growth strategy is to capitalize on the increased interest in nutritional supplements described above by increasing product sales through existing distribution channels in the U.S. and Canada and by expanding into new markets. In particular, we believe that we may realize our growth by achieving the following: o We will introduce new products complementary to our current product lines. Our product development strategy is to expand our existing product lines to complement our current products. We have introduced five new products; the BG Bar, NaturaLight(TM) (for healthy weight management), ImmuSun(TM) (for immune system support), Contain(TM) (for the relief of occasional heartburn) and OsteoSun(TM) (for healthy bone support) and we are actively working on introducing additional products. o We intend to introduce alternative distribution channels through infomercials. Our ability to establish distribution through infomercials will be dependent upon our ability to increase our working capital in order to pay for the costs associated with infomercials. Our product distribution strategy is to provide complementary marketing methods for our Distributors (as defined below). o We have introduced a revised compensation plan and other promotion and recognition programs to provide additional incentives to our Distributors. Our ability to increase sales is significantly dependent on our ability to attract, motivate and retain Distributors. We utilize an innovative marketing program that we believe is competitive with programs offered by many other network marketing companies. This program provides financial incentives, including several forms of commission (bonus), optional Distributor training and support, no sign-up costs, inventory requirements, and low monthly purchase requirements. We intend to reach potential new Distributors through increased advertising, teleconferencing and regional sales and training meetings. Successful management of Distributors supports the marketing of products as well as the recruitment of new Distributors. o We intend to tackle international markets by entering into marketing distribution agreements for Europe and Asia. We believe that growth potential exists in international markets and will seek to enter into international distribution agreements. o We intend to engage government relations personnel to assist our international expansion. We will engage government relations personnel throughout the world who will take a systematic, proactive approach to working with government and licensing agencies in new markets to ensure that our products and distribution model comply with all local laws and regulations. We will utilize outside market consultants and work with private organizations throughout the world to prepare for introducing our products in diverse markets. o We intend to seek to enter into agreements and joint ventures with strategic partners. We believe that opportunities exist with various strategic partners that may improve our ability to market and distribute our products, enter into new markets and provide our Distributors with new products that complement our existing product lines. PRODUCT OVERVIEW Our product line consists primarily of consumable products that we target to 3 consumers interested in natural alternatives for health and nutrition. In developing our product line, we have emphasized quality, purity, potency, and safety. We offer a line of approximately twenty-two products that we divide into five categories, including Daily Health Maintenance, Digestive Health, Defensive Health, Powdered Drinks and Snacks, and Animal and Plant Food, as further described below the chart. The following chart lists our products and the categories targeted by each, as of March 31, 2003
Daily Health Digestive Defensive Powered Drinks Animal and Maintenance Health Health and Snacks Plant Food -------------- ----------- ----------- ----------------- ------------ Super Blue Green(R)Alpha Sun(R) x X Super Blue Green(R)Omega Sun(R) x X Acidolphilus x Bifudus x Spectrabiotic(R) x Internal Cleansing System x Super Blue Green(R)Enzyme x SBG Anytime X X X Super Q10 X x x Super Sprouts & Algae X x X Alpha Gold Promoting Physical Well-being X x Omega Gold Enhancing Mental Well-being X x Super Sun Smoothies x Mazama Mix X Cell Tech Essentials X X X Super Blue Green(R)Animal Food X NaturaLight(TM) X X OsteoSun(TM) X ImmuSun(TM) X Contain(TM) X BG Bar X X X X PLANeT Food(R) X
DAILY HEALTH MAINTENANCE o SUPER BLUE GREEN(R) ALPHA SUN(R). Super Blue Green(R)Alpha Sun(R) is whole, complete algae. Because its cell walls contain a high percentage of floridan starch, it provides natural sugars critical to the health and vitality of tissues and cells. Super Blue Green(R) Alpha Sun(R) also contains high concentrations of easily assimilated vital minerals. It is available in capsules and tablets. o SUPER BLUE GREEN(R) OMEGA SUN(R). Super Blue Green(R) Omega Sun(R) is the heart of the algae with the cell wall carefully removed through a special separation process. This super-concentrated food contains a higher overall amino acid content than Super Blue Green(R) Alpha Sun(R). It is a source of raw materials for building the neuro-peptides associated with brain activity. It is available in capsules and tablets. o CELL TECH ESSENTIALS. Cell Tech Essentials, named for our most essential products, is a repackaging of such products. It attains a new level of convenience and effectiveness and a new level of 4 value. Each bag contains 30 packets and each packet contains the following capsules: one Super Blue Green(R) Alpha Sun(R), one Super Blue Green(R) Omega Sun(R), one Acidophilus, one Bifidus, and two Super Blue Green(R) Enzymes. o NATURALIGHT(TM). NaturaLight(TM) is a herbal supplement designed to work with the metabolism to help users reach their weight loss goals. Formulated with enzymes, botanicals, and other complementary ingredients, this product works with user's metabolisms to help them reach their weight loss goals. We believe that consumers can use this herbal supplement exclusively, or use it in concert with any other weight loss program. We believe that, combined with proper diet and exercise, NaturaLight(TM) can help reduce cravings, increase energy, and improve mental clarity and attitude. The goal of this new product is to help the body reduce fat and lose weight while maintaining lean muscle mass. It is available in capsules. o SBGANYTIME. SBGAnytime supplies Super Blue Green(R) Algae in a convenient chewable form, providing support to body and mind any time. It's designed for people on the go, young (and not-so-young) finicky eaters, and those who have difficulty swallowing capsules and tablets. Each wafer contains a 150 mg mix of Super Blue Green(R) Alpha Sun(R) and Super Blue Green(R) Omega Sun(R) Algae, orange juice, honey, and other natural sweeteners. o BG BAR. BG Bar is a food bar made with quality organic ingredients, fortified with sprouted grains, greens, and Super Blue Green(R) Algae. It has an almond butter texture with minced almonds on top. We believe that consumers will find it attractive and a useful source of nutrition. Each bar weighs 56 grams. DIGESTIVE HEALTH o ACIDOPHILUS. Acidophilus (Lactobacillus acidophilus) is the first of our probiotic products and operates in the small intestine. Without proper cleansing, the small intestine can fill with wastes and harmful by-products that impair natural digestive functions. Our Acidophilus helps process food quickly and eliminate waste. It is a single-strain beneficial bacterium called DDS-1a Acidophilus, which helps keep harmful bacteria out by colonizing the walls of the small intestine and by secreting substances that prevent the growth of unfriendly bacteria. Each capsule is carefully micro blended with 85 milligrams of Super Blue Green(R) Omega Sun(R) Algae. o BIFIDUS. Bifidus (Bifidobacterium bifidum) is the second of our probiotic products. While Acidophilus serves the small intestine, Bifidus is for the large intestine. The large intestine absorbs the water from food and passes the remaining waste out of the body. A good intestinal flora in the large intestine can help prevent gas, bloating and diarrhea. Our Bifidus helps repopulate the large intestine with friendly bacteria, restoring the healthful environment it needs to do its job well. Each capsule is micro blended with 85 milligrams of Super Blue Green(R) Omega Sun(R) Algae. o SPECTRABIOTIC(R). Spectrabiotic(R) is designed to complement Acidophilus and Bifidus in providing a complete system for building and maintaining healthy intestinal flora. In the Spectrabiotic(R) formula, eight key "good bacteria" are micro blended with 85 milligrams of Super Blue Green(R) Omega Sun(R) Algae, providing the entire digestive tract with probiotic support, especially when combined with a regular program of Acidophilus and Bifidus. Spectrabiotic(R) also contains Jerusalem artichoke, acerola, and rose hips. o INTERNAL CLEANSING SYSTEM. The New Seasons Cleansing System is a two-product program that is designed to assist the body's natural elimination systems. The Herbal Formula supports the processes that remove toxins from the tissues of the body; then the Fiber Formula helps the body eliminate those toxins. o SUPER BLUE GREEN(R) ENZYMES. Our Super Blue Green(R) Enzymes contains a full range of food enzymes to help break down all types of foods, including fats, carbohydrates, protein and fiber. Super Blue Green(R) Enzymes is micro blended with 25 milligrams of Super Blue Green(R) Alpha Sun(R), adding specific vitamins and minerals many enzymes need for optimum functioning. 5 o SUPER SPROUTS & ALGAE. Super Sprouts & Algae is a unique product combining the nutritional benefits of three "superfoods" from three natural environments -- land, lake and sea: a super concentration of custom-grown wheat sprouts; Super Blue Green(R) Alpha Sun(R) Algae; and Super Red Beta Algae (Dunaleilla salina), a strain of marine algae. These three superfoods together supply the body with antioxidant nutrition to neutralize the effects of highly unstable, reactive molecules known as free radicals. Two tablets of Super Sprouts & Algae provide over 100% of the RDA for vitamin A. Each tablet contains 540 milligrams of wheat sprouts, 60 milligrams of Super Blue Green(R) Alpha Sun(R) Algae and 25 milligrams of Super Red Beta Algae. o SUPER Q10. Super Q10 contains Super Blue Green(R) Alpha Sun(R) and a special enzyme enhancer called coenzyme Q10. This nutrient has been shown to be beneficial for functioning of the heart, muscles, and the nervous and immune systems. It is especially important in helping the mitochondria, or powerhouses of cells, to generate energy. Super Q10 is a synergistic combination of pure premium coenzyme Q10 with 85 milligrams of Super Blue Green(R) Alpha Sun(R) Algae and is a way to assist cells in converting nutrients into energy. DEFENSIVE HEALTH o ALPHA GOLD PROMOTING PHYSICAL WELL-BEING. Alpha Gold contains a carefully chosen group of ingredients, each with documented health benefits, that works synergistically with Super Blue Green(R) Algae to facilitate overall good health. Alpha Gold contains bee pollen to increase stamina, vitality and athletic performance; noni to help stimulate the immune system; turmeric to help protect against environmental contaminants; and gluten-free sprouted wheat grass juice, which contributes a variety of assimilative enzymes. This product is available in capsules or powder. o OMEGA GOLD ENHANCING MENTAL WELL-BEING. In addition to the ingredients found in Alpha Gold, Omega Gold also contains ginkgo biloba, which increases circulation to the brain and has effects upon memory, clarity and mental alertness. We add Siberian ginseng to stimulate both mental and physical performance. This product is available in capsules or powder. o IMMUSUN(TM). A natural part of the human diet for thousands of years, the complex carbohydrate WGP(TM) beta glucan used in ImmuSun(TM) has been shown to fortify the immune system. o CONTAIN(TM). For occasional heartburn, consumers now have a healthy choice. Contain(TM) is formulated with a superior combination of alginate (from seaweed), Super Blue Green(R) Algae, enzymes, and other soothing natural ingredients. o OSTEOSUN(TM). A new, natural, unique and scientifically proven non-calcium dietary supplement, formulated to promote bone health.1 POWDERED DRINKS AND SNACKS o SUPER SUN SMOOTHIES. Super Sun Smoothies are all-vegetable powder shake mixes. We make Super Sun Smoothies with premium ingredients that are dairy free and contain no preservatives, yeast artificial flavorings or colorings. They also provide the "superfood" benefits of 500 milligrams of Super Blue Green(R) Alpha Sun(R) and 500 milligrams of Super Blue Green(R) Omega Sun(R) Algae blended into every scoop. o MAZAMA MIX. Mazama Mix is a nutrient-rich green drink derived from all-natural whole food sources. It contains minerals and trace minerals that we believe are essential for the proper functioning of the body. We designed this product to help enhance overall health, vitality and energy levels. _________ 1The Food and Drug Administration has not evaluated the statements we make regarding any of our products. We do not intend any of our products to diagnose, treat, cure, or prevent any disease. 6 ANIMAL AND PLANT FOOD o SUPER BLUE GREEN(R) ANIMAL FOOD. Super Blue Green(R) Animal Food is a blend of coarse-grade Super Blue Green(R) Alpha Sun(R) and Super Blue Green(R) Omega Sun(R) Algae, providing the fundamental building blocks for strengthening the immune system of animals. The broad spectrum of organic minerals, vitamins, amino acids, enzymes and the supply of beta carotene and chlorophyll found in Super Blue Green(R) Algae is readily absorbed by animals. Super Blue Green(R) Animal Food is sprinkled over the pets' food. o PLANeT FOOD(R). We designed PLANeT FOOD(R) to add trace minerals and other components to soils. It is a mixture of volcanic rock dust from Colorado and algae from Klamath Lake for use on potted plants, lawns, gardens, and trees and for composting. DISTRIBUTORS AND OUR NETWORK MARKETING SYSTEM We distribute our products through a network marketing system of Distributors. Distributors are independent contractors who purchase products directly from us for resale to retail consumers. Distributors may elect to work on a full-time or a part-time basis. We believe that our network marketing system is well suited to marketing our nutritional supplements and other products because ongoing personal contact between retail consumers and Distributors, most of whom use our products, strengthen sales of such products. Currently, we have Distributors in all fifty states, the District of Columbia, Guam, Puerto Rico, American Samoa, Virgin Islands and Canada. Each Distributor has the opportunity to sponsor additional Distributors, which can enhance the original Distributor's income, as described below. Each new sponsored Distributor, as well as his or her own "downline" groups, becomes a member of the Distributor's network or "downline." COMMISSION SYSTEM We currently offer two categories of membership. We call the first category a "Distributor" and the other a "Preferred Customer." Distributors are interested in receiving commissions for their own purchases as well as for purchases made by members enrolled in their "downline." A Preferred Customer is a customer who is interested in consuming our products, but is not interested in the business opportunity we offer to our Distributors. Many Preferred Customers eventually become Distributors. Both categories of membership purchase our products at wholesale prices. We compensate our Distributors through a Distributor commission system that encourages both retail selling and sales organization management. Distributors may derive income from several sources. First, Distributors may receive revenues by purchasing our products at wholesale prices and selling them to customers at retail prices. Second, Distributors earn the right to receive bonuses (commissions) based upon purchases by members of their "downline" or sales marketing organization. Each new Distributor that a Distributor sponsors becomes a member of his selling organization or "downline." We refer to the Distributors that a Distributor directly sponsors as his "first generation" or "first level." In June 2002, we revised our commission system to better suit our long-term growth objectives of attracting new Distributors and appropriately rewarding the Distributors that work to increase their business with us. Our goal was to redistribute our commission expense to those Distributors who demonstrate to us that they are actively contributing to our growth. We believe we have designed a commission system that is suited to achieve these goals as is demonstrated by the decrease in commission expense from 47.8% of revenue in 2001 to 44.6% of revenue in 2002. The changes to our system that took effect in June 2002, are as follows: o We reduced the personal volume percentage paid to Members to 5% from 10%. This change did not affect titles above Member. Once a Member reaches the title of Representative, the commission on personal volume is 15% and 5% on any volume of Members in the Representative's network. 7 o We reduced generation 4, 5, and 6 payout percentages to 3%, 2%, and 1% from 4%, 3%, and 2%, respectively. We did not affect the titles of Amethyst, Ruby and Sapphire by this change. The first level is "Member" and the highest level is "Executive." Distributors may attain "Member" status by purchasing any product from us. There are two intermediary levels between Member and Executive: Representative and Leader. A Distributor achieves higher levels in the bonus structure primarily through increased purchases by Distributors sponsored directly by them (their first level) and in their personal group. The requirements for a Distributor to reach the first "Executive" level are monthly personal purchases of at least $100 and monthly group volume of $500. For each "Executive" level attained thereafter, the Distributor must maintain monthly personal purchases of at least $100 and monthly group volume of at least $500. The program is such that each month a Distributor must qualify at that level for us to pay at that level. The advantage to this is that the Distributors must remain active in purchasing and sponsoring to retain their bonuses, but if they do not qualify in a certain month, we only reduce their income that one month. The Distributor commission system includes three kinds of bonuses, as described below: o STANDARD BONUS. The standard bonus is available to any Distributor who has an "active" status with us. Distributors may attain the title of "Assistant Leader" by purchasing a minimum of $50 of products in a month. We base the percentages used to determine the bonus and the number of levels in the organization the Distributor receives bonuses upon on the individual's title with us. The standard bonus grants rebates to the Distributor as he consumes and sells our products to others. o EXECUTIVE GENERATION BONUS. A second form of bonus is available to those who have Executives in their downline. Based on the number of "Executives" they have at each level, and assuming certain minimum personal purchases each month, Distributors receive a percentage of such Executives' standard bonus as an additional bonus. o BLUE-GREEN DIAMOND BONUS. Finally, those Executives attaining the highest levels in our structure are eligible to receive an additional bonus called the "Blue-Green Diamond Bonus" which is a percentage of the gross commissionable sales volume for the year. We believe that the opportunity of Distributors to earn bonuses contributes significantly to our ability to retain our productive Distributors. The Distributor commission system encourages promotion to higher commission levels by enabling Distributors to earn commissions on a deeper sales base (i.e., more levels of their organization). We believe this will encourage sponsoring growth (depth) in an organization and not just acquiring customers personally. To become a Distributor, a person must simply sign an agreement to comply with our policies and procedures. No investment is necessary to become a Distributor. We consider, as of February 28, 2003, approximately 37,000 of our Distributors to be "active," that is, an individual Distributor who has ordered at least $50 of our products during the preceding six-month period. TRAINING We support opportunity meetings in various key cities and participate in motivational and training events in various market areas, designed to inform prospective and existing Distributors about our product line and selling techniques. Distributors give presentations relating to their experiences with our products and the methods by which they have developed their own organization of Distributors. We offer motivation to participants in the form of recognition, promotions, excursions and tours, which we intend to foster an atmosphere of excitement throughout the Distributor organization. Prospective Distributors are educated about the structure, dynamics and benefits of our network marketing system. We continually develop marketing strategies and programs to motivate Distributors. We design these programs to increase Distributors' monthly product sales and the recruiting of new Distributors. 8 DISTRIBUTOR SUPPORT As part of our program to maintain constant communication with our Distributor network, we offer the following support programs to our Distributors: o ASSOCIATIONS/TEAMS/ADVISORY BOARD. Several associations and teams support Distributors' efforts, including the Leadership Alliance, an association of those Distributors having reached the top levels of our Marketing Plan, which was formed in order to allow interaction among the Network's "top level" group for discussion of business issues, development of solutions and methods to improve the sales success and growth of downlines and the Network as a whole. In addition, the Field Advisory Board is an advisory team representing the entire field organization and brings issues, recommendations, and other ideas to us for discussion. The Field Advisory Board participates in bi-monthly teleconferences with our marketing and operations executives. o AUGUST CELEBRATION. For the past thirteen years, we have sponsored and held the August Celebration, which is our annual convention. o ORDERING SUPPORT. We offer a variety of methods to order product and support materials, including toll-free telephone operator access, "Order Express" (a toll-free automated telephone system that Distributors can call 24 hours a day to place orders or to access their records), and our website at http://www.celltech.com. o INFORMATION SUPPORT. Distributors may learn more about our products, our history, distributor organization building, management techniques and related matters through our website. In addition, we produce color catalogues and brochures for our Distributors and produce a monthly publication called "Networker's Edge" focused on business building. We also maintain our ATG Technologies Voice Mail System, which includes options for broadcasting messages to our Distributors via temporary, permanent and super groups. A direct access telephone line allows Distributors to access our most recent announcements sent through the ATG Technologies System to our Network. Finally, a 24-hour toll-free "Fax-on-Demand" system provides Distributors with news bulletins, product literature and articles of interest via facsimile. RESEARCH AND DEVELOPMENT We spent approximately $193,310 on research and development in 2002, $190,884 in 2001 and $456,098 in 2000. We continually seek to identify, develop and introduce innovative, effective and safe products. We have introduced sixteen new products since 1997. Management believes that our ability to introduce new products increases our Distributors' product visibility and competitiveness in the marketplace. We also continuously evaluate "existing" products for viability and it is our policy to discontinue products that are not selling satisfactorily. We derive new product ideas from a number of sources, including trade publications, scientific and health journals, management, independent consultants, and our sponsored university research projects. We maintain our own quality assurance/quality control staff, consisting of two full time employees as of March 31, 2002 and December 31, 2001, but rely upon independent research, consultants and others for ingredient research, development and formulation services. When we identify a new product concept or when we must reformulate an existing product for introduction into a new or existing market, we generally submit the new product concept or reformulation to our suppliers for technological development and implementation. In addition, prior to introducing products into our markets, our scientific consultants, legal counsel and other representatives investigate product formulation matters as they relate to regulatory compliance and other issues. In 2002, we began formulating and testing three new products, ImmuSun(TM), Contain(TM) and OsteoSun(TM), designed to compliment our existing product line and began selling them to our Distributors in June 2002, October 2002 and February 2003, respectively. 9 IMMUSUN(TM). ImmuSun(TM), an all-natural supplement, contains the active ingredient WGP(TM) beta glucan, a patented form of the complex carbohydrate beta glucan, which is found in the cell walls of baker's yeast (Saccharomyces cerevisiae). Scientists discovered the immune-boosting properties of beta glucan in the 1960s. Since then, they have documented its potential as an immunity booster in numerous studies conducted at such prestigious research institutions as Massachusetts Institute of Technology, Harvard University, and Johns Hopkins University. These studies have proven WGP(TM) beta glucan's ability to activate macrophages, a type of white blood cell that is the body's first line of defense. Macrophages circulate throughout the body engulfing and digesting foreign antigens, thus triggering a cascading effect that mobilizes the body's arsenal of defenses. The result is a stronger immune system. CONTAIN(TM). Contain(TM)'s orange-flavored chewable tablets are made with a superior combination of alginate (from seaweed), Super Blue Green(R) Algae, enzymes, and other soothing natural ingredients that join forces to help "contain" stomach acid. Upon contact with gastric juices, the proprietary blend of plant extracts and other natural ingredients creates a temporary gel barrier that helps keep gastric contents from seeping into the esophagus. Meanwhile, the enzymes in the formulation work in the stomach to aid in the efficient breakdown of food, helping to minimize occasional indigestion at the outset. Contain(TM) differs from similar products on the market because it is formulated with enzymes to help reduce indigestion and also Contain(TM) includes Super Blue Green(R) Omega Sun(R) algae for added nutritional value. Contain(TM) acts only mildly to neutralize stomach acid--rather, it relieves symptoms of occasional heartburn naturally, by forming a protective buffer to help keep stomach acid where it belongs. Contain(TM) offers an ideal combination of beneficial ingredients that can help alleviate the stressful effects of occasional heartburn. OSTEOSUN(TM). Calcium alone is often not enough to maintain bone health. Studies have shown that OsteoSun(TM) can significantly increase bone mineral density. OsteoSun(TM)'s ingredients include a patented formulation of red yeast rice, a natural food product that - in this formulation only - the International Bone Laboratories have certified as "bone active." This is the only certified formulation of this natural product for bone health. OsteoSun(TM) also contains Super Blue Green(R) Omega Sun(R) algae, which, in addition to all its other benefits, aids the assimilation of red yeast rice and other helpful nutrients. We are currently developing additional products, including new antioxidants, weight management, and energy products. In addition to the introduction of single products, we are also focusing on promoting groups of products to be taken in conjunction with each other to address the specific needs an individual may have (such as weight loss, stress or daily wellness). PRODUCT WARRANTIES AND RETURNS Our product warranties and policy regarding returns of products are similar to those of other companies in our industry. Any consumer, who is not satisfied with any of our products, may return it to the Distributor from whom they purchased it from within 90 days of their purchase. The Distributor is required to refund the purchase price to the consumer. The Distributor may then return the unused portion of the product to us for an exchange of equal value. If a Distributor requests a refund in lieu of an exchange, we will issue a check or credit the appropriate amount to the Distributor's credit card. We warrant all of our products against defect. RAW MATERIALS AND SUPPLIERS Our primary raw material is Aphanizomenon flos-aquae, which we harvest from Upper Klamath Lake using modern technology. Upper Klamath Lake produces approximately 200 million pounds of SBGA each year. When we need to harvest, we typically harvest algae once or twice a year, timing our harvests to coincide with the greatest density of algae. 10 In 2001, for the first time ever, we began harvesting on Upper Klamath Lake by the use of a unique (patent pending) on-lake harvester. Because of this method of harvesting, we can gather Aphanizomenon flos-aquae directly from the lake. This development of our harvesting techniques made harvesting possible in a drought year when the availability of water in the canals was nonexistent or questionable, because of the nationally reported water crisis in the Klamath Basin. We believe that harvesting directly from Upper Klamath Lake is both cost-effective and provides us with excellent yields, utilizing the new harvester that we conceived, designed and built. We have applied for a design patent on our harvester, as we believe that the technology utilized with this new harvest system is effective, special and unique. Processing of SBGA is a complex process including the following: o SCREENING. We filter fresh algae out of the water with fine mesh screens. o PRIMARY SEPARATION. Primary separators remove everything suspended in the lake water, which concentrates the algae by removing virtually all extracellular water. o FREEZING. We quickly freeze the algae, converting it into slabs at a temperature of -30(Degree) Fahrenheit. o DRYING. We gently remove all cellular water in a low temperature environment, converting the algae into a dry, stable medium that retains vital nutrients. o POWDERING AND BOTTLING. We sift and grind the algae to a fine powder, which we can encapsulate or tabletize and seal to retain freshness and viability. In years when there has been no harvest, we rely on our inventory of frozen and freeze-dried SBGA. As of December 31, 2002, we had 900,157 pounds of frozen algae inventory for use in capsules and tablets and 1,660,511 pounds of frozen algae for use with vendor products. We had not harvested algae since 1998 due to excess inventory in relation to sales; however, in July 2001, we commenced harvesting SBGA and in 2002, we expanded our harvesting capacity ten-fold. We believe that our present rate of inventory consumption only partially reflects the demand that we anticipate as we implement our growth strategy. Although the availability of new algae that we may harvest from Upper Klamath Lake may change from year to year, we believe that our existing inventory is adequate for several years. From time to time, a toxic species of algae called Microcystis aeruginosa blooms in Upper Klamath Lake and can contaminate a portion of our harvest of SBGA with microcystin, a toxin. We have worked with state and federal agencies to establish prudent safety precautions, and test each batch of algae we harvest for microcystin levels before releasing it for production. We believe our harvest methods help us to minimize the amount of Microcystis aeruginosa in the harvested material, thus increasing the total amount of algae that we can release for production. We encapsulate and bottle algae in-house. We also purchase vitamins, nutritional supplements and other products and ingredients from parties that manufacture such products to our specifications and standards. During 2002, 2001 and 2000, one vendor supplied approximately 45%, 55% and 27%, respectively, of the products that we purchased. This vendor was our source of enzymes and probiotics. We place significant emphasis on quality control with all of our products. All nutritional supplements, raw materials and finished products are subject to sample testing, weight testing and purity testing by independent laboratories. In the event of loss of any of our sources of supply, we believe that suitable replacement sources of similar products and product ingredients exist and are available to us. TRADEMARKS AND SERVICE MARKS We package most products under our "private label." At December 31, 2002, we have six trademarks registered with the United States Patent and Trademark Office and one trademark application pending, and three trademarks registered and one application pending with the Canadian Intellectual Property Office of Trade Marks. In addition, we have registered trademarks in eleven foreign countries (and one application pending in a twelfth) for the mark "PLANeT Food." While we believe customer identification with our name and brand is important, we feel that our primary competitive edge arises from our Distributor network and our strategic location, which allows us to process algae immediately after its harvest, and not from any proprietary technology. 11 We do not have a registered trademark for the name "Cell Tech." As of the date of this Annual Report on Form 10-K/A, no other person has claimed infringement based on our use of the name "Cell Tech," but there can be no assurance that it would not make such a claim in the future. A British company in a different business than ours has a United States trademark registration for the name "Cell Tech" and it has not objected to our use of the name. COMPETITION The nutritional supplements industry is large and intensely competitive. We compete with other companies that manufacture and market retail nutritional products to health-conscious consumers, including General Nutrition Companies, Inc., Solgar Vitamin and Herb Company, Inc., Twinlab Corporation and Weider Nutrition International, Inc. Many of our competitors in this market have longer operating histories, greater name recognition and financial resources than us. In addition, consumers can purchase nutritional supplements in a wide variety of distribution channels. While we believe that many consumers appreciate the convenience of ordering products from home through a sales person, the buying habits of many consumers accustomed to purchasing products through traditional retail channels are difficult to change. We offered our products, on a limited test basis, via infomercials in May 2001 and suspended them in July 2001 due to a lack of financial resources. We intend to resume airing infomercials when we have adequate financial resources. Our product offerings in each product category are also relatively small compared to the wide variety of products offered by many other nutritional product companies. Several companies harvest algae from the Upper Klamath Lake. However, we are the largest harvester and the supply of algae is substantially more than the total amount harvested by all companies. We also have access to Upper Klamath Lake that is in close proximity to our freezer facility. We also compete in the nutritional supplements market and for new Distributors with other retail, multi-level marketing and direct selling companies in the nutritional supplements industry by emphasizing the proprietary nature, value, and the quality of our products and the convenience of our distribution system. We also compete with other direct selling organizations, many of which have longer operating histories and greater name recognition and financial resources than us. They include Amway Corporation, Nu Skin Enterprises, Inc., Body Wise International, Inc., Herbalife International, Inc., Mannatech Incorporated, Rexall Showcase International, and Forever Living Products, Inc. We compete for new Distributors based on our compensation plan and our proprietary and quality products. We believe that many more direct selling organizations will enter the market place as this channel of distribution expands over the next several years. We also compete for the commitment of our Distributors. Given that the pool of individuals interested in direct selling tends to be limited in each market, the potential pool of Distributors for our products is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. GOVERNMENT REGULATION General We are subject to laws, governmental regulations, administrative determinations, and court decisions on the federal, state, and local levels. These regulations pertain to a variety of issues related to us. First, they pertain to the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products and taxation of our Distributors, which in some instances may impose an obligation on us to collect the taxes and maintain appropriate records. Second, the regulations pertain to product claims and advertising, both by us and by our Distributors, for whom we are responsible. Finally, certain regulations pertain to our network marketing system. PRODUCT REGULATION Several governmental agencies regulate certain aspects of our products, including formulation, manufacturing, packaging, storing, labeling, advertising, distribution, and sales. These agencies include the Food and Drug Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer Products Safety Commission, the Department of Agriculture, the Environmental Protection Agency, and the Postal Service. In addition, various state and local agencies can regulate us in areas where we manufacture, distribute and sell our products. 12 The FDA regulates the formulation, manufacture, packaging, storage, labeling, promotion, distribution, and sale of foods, dietary supplements, and over-the-counter drugs, including those we distribute. With respect to the preparation, packaging and storage of our supplements, FDA regulations require that our suppliers and we meet relevant good manufacturing practice regulations. The Dietary Supplement Health and Education Act of 1994 ("DSHEA") revised certain provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning the composition and labeling of dietary supplements. We believe that DSHEA is generally favorable to the dietary supplement industry. The legislation creates a new statutory class of "dietary supplements," which includes vitamins, minerals, herbs, and amino acids. DSHEA applies with certain limitations to dietary ingredients that were on the market before October 15, 1994. With respect to dietary supplements that contain dietary ingredients not on the market before October 15, 1994, DSHEA requires further evidence. This evidence must show that the supplement contains only those ingredients that have been in the food supply or other evidence of use or safety. Manufacturers of dietary supplements must make a "statement of nutritional support," which is a statement describing certain types of product performance characteristics. In making such a statement, we must have substantiation that the statement is truthful and not misleading and must make a disclaimer within the statement. Finally, we must notify the FDA of the statement no later than 30 days after we make it. In January 2000, the FDA published a final rule that defines the types of statements companies can make concerning the effect of a dietary supplement on the structure or function of the body pursuant to the DSHEA. Under the DSHEA, dietary supplement labeling may bear "structure/function" claims, which are claims that the products affect the structure or function of the body, without prior FDA review. Without prior FDA review, a product may not bear a claim that it can prevent, treat, cure, mitigate or diagnose disease (a disease claim). The new final rule describes how the FDA will distinguish disease claims from structure/function claims. In February 2001, the FDA issued a notice requesting comments on the types of information that should be included in guidance on applying the regulations on statements made for dietary supplements concerning the effect of a dietary supplement on the structure or function of the body. To date, the FDA has not issued a guidance document, and we have continued our ongoing efforts to ensure that our dietary supplement product labeling complies with the requirements of the "Structure/Function" final rule, which became effective in February of 2000. FFDCA classifies the majority of our products as "dietary supplements." The FDA issued regulations governing the labeling and marketing of dietary supplement products in September 1997. These regulations covered several issues. First, they covered the identification of dietary supplements, as well as their nutrition and ingredient labeling. Second, they covered the use of terminology for nutrient content claims, health content claims, and statements of nutritional support. Third, they covered the labeling requirements for dietary supplements that claim to be "high potency" and "antioxidant." Fourth, they covered notification procedures for statements on dietary supplements. Finally, the regulations covered the pre-market notification procedures for new dietary ingredients in dietary supplements. The notification procedures became effective in October 1997. The labeling requirements became effective in March 1999 and we revised our product labels to reflect the new requirements. We continue to secure substantiation of our product performance claims and to notify the FDA of certain types of performance claims made for our products. Our substantiation program involves compiling and reviewing scientific literature, including our own university research that is pertinent to the ingredients contained in our products. Dietary supplements are subject to the Nutrition, Labeling and Education Act ("NLEA"), as well as the associated regulations. These regulate health claims, ingredient labeling, and nutrient content claims, which characterize the level of a nutrient in the product. NLEA prohibits the use of any health claim for dietary supplements unless significant scientific agreement supports the claim and the FDA pre-approves it. 13 STATE REGULATION As a result of certain conditions, a toxic strain of algae called Microcystis aeruginosa occasionally blooms in Klamath Lake and can contaminate a portion of our harvest of blue-green algae with microcystin, a toxin. In 1994, we began to test the algae harvested at this facility for possible contamination. We have regularly measured, at various levels, the existence of Microcystis aeruginosa. In the absence of established regulatory criteria for determining an acceptable level of microcystin (the actual toxin), we sponsored an assessment of risk and set our own standards for determining whether a particular batch of algae is acceptable for human consumption. Algae that does not meet our standards and that we cannot use in alternative non-human consumable products is isolated and not used in production. On October 23, 1997, the Oregon Department of Agriculture issued an Administrative Rule on the sale of blue-green algae, which stated, "the agency has decided to adopt the 1 microgram per gram (1 ppm) level of microcystin in blue-green algae." This ruling may have an impact on our ability to process and distribute the raw algae harvested and finished goods produced. Such ruling may also decrease the amount of salable inventory and therefore, may have an adverse impact on our ability to realize the carrying value of our inventories. We have recognized that an impairment of our inventory may exist and therefore have recorded our best estimate of the effect by establishing a reserve for $4,000,000 at December 31, 2002, for the possible effects of inventories, which may become unsaleable under this Rule. The Oregon Department of Agriculture has taken no regulatory actions against our products under this Rule to date. FOREIGN MARKETS In Canada, both national and provincial law regulates our network marketing system. Under Canada's Federal Competition Act, we must make sure that any representations relating to Distributor compensation made to prospective distributors constitute fair, reasonable and timely disclosure and that it meets other legal requirements of the Federal Competition Act. After a review of our revised compensation plan, we will submit it to the appropriate Canadian authorities. All Canadian provinces and territories, other than Ontario have legislation requiring that we register, or become licensed as a direct seller, within that province. They design the licensing to maintain the standards of the direct selling industry and to protect the consumer. Some provinces require licenses for both our Distributors and us. We are in the process of obtaining all of the required provincial or territorial direct sellers' licenses. In 1999, Health Canada issued a warning about the safety of blue green algae products due to concerns about microcystin. While we believe our products are safe and comply with Canadian rules, the adverse publicity from the Health Canada warning adversely affected our sales in Canada. Such warning may occur in the future and could have an adverse affect on our business. REGULATION OF ADVERTISING We are unable to make any claim that any of our nutritional supplements will diagnose, cure, mitigate, treat, or prevent disease. DSHEA, however, permits substantiated, truthful, and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or a function of the body. The FDA recently issued a proposed rule concerning these issues. The FTC similarly requires the substantiation of any claims. The FTC exercises jurisdiction over the marketing practices and advertising of all our products. In years past, the FTC has instituted enforcement actions against several dietary supplement companies for false and misleading marketing practices. This has resulted in consent decrees and monetary payments by the companies involved. We have not been the subject of FTC enforcement action with respect to our advertising. However, there is no assurance that the FTC will not subject us to inquiry in the future. 14 Through our manuals, seminars and other training materials and programs, we attempt to educate our Distributors as to the scope of permissible and impermissible activities in each market. We also investigate allegations of Distributor misconduct. However, our Distributors generally are independent contractors, and we are unable to monitor directly all of their activities. Consequently, we cannot be sure that our Distributors comply with applicable regulations. Misconduct by Distributors could have a material adverse effect on us in a particular market or in general. We are unable to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. However, they could require: (1) the reformulation of some products we may not able to reformulate; (2) imposition of additional record keeping requirements; (3) expanded documentation of the properties of some products; (4) expanded or different labeling; and (5) additional scientific substantiation regarding product ingredients, safety or usefulness. NETWORK MARKETING SYSTEM REGULATION Our Distributor commission system constitutes a network marketing system. A number of federal and state statutes and regulations apply to this system, including those administered by the FTC. The legal requirements that apply to network marketing organizations ensure the ultimate sale of products to consumers. Further, they ensure that advancement within the organizations be based on the sales of products, rather than from the recruitment of additional Distributors, investment in the organization, or non-retail sale criteria. Where required by law, we must obtain regulatory approval of our network marketing system. If such approval is not required, the favorable opinion of local counsel will suffice. Finally, in addition to these regulations, the FTC regulates trade practices related to network marketing systems. EMPLOYEES At February 28, 2003, we employed approximately 85 persons, of which 4 were part-time. These numbers do not include our Distributors, who are generally independent contractors rather than our employees. None of our employees are represented by a labor union and we have never experienced any business interruption as a result of any labor disputes. We believe that our relationship with our employees is good. INDUSTRY SEGMENTS AND EXPORT SALES We have no assets outside of the United States. Our business consists of one industry segment and we group it into two geographic areas: United States and Canada. The following table (dollars in thousands), summarizes the product sales revenues from customers in each of the two geographic regions:
(DOLLARS IN THOUSANDS) 2001 2001 2000 ---- ---- ---- United States $26,696 94.3% $28,310 94.3% $36,796 94.4% Canada $1,498 5.7% $1,702 5.7% $2,181 5.6% ------ ---- ------ ---- ------ ---- Total $26,194 100.0% $30.012 100.0% $38,977 100.0% ======= ====== ======= ====== ======= ======
We believe that our profit margin on export sales is not significantly different from that realized on sales in the United States. We consummate all foreign product sales transactions in U.S. dollars. 15 ITEM 2. PROPERTIES. Currently, our headquarters and all of our operating facilities are located in Klamath Falls, Oregon. We lease approximately 250,000 square feet of office, processing, freezer and storage space directly from our principal stockholders or their affiliates. Most of these leases are year-to-year, although we do rent some space on a month-to-month basis and one lease will expire in 2005. We believe that we lease the space from our shareholders and their affiliate at below or at fair market rates. We also lease an additional 21 acres from an independent third party, on which we have built our algae processing and storage facility. Our lease with the independent third party will terminate in 2020, at which time we have the option to renew for an additional 25 years. At the termination of such lease, ownership of the facility will revert to the lessor. We believe that the above-described properties will provide sufficient space to meet our currently planned future needs and that comparable space is readily available to meet any unforeseen circumstances. ITEM 3. LEGAL PROCEEDINGS. On February 6, 1998, Oregon Freeze Dry, Inc., a vendor, filed a complaint against us alleging that we wrongfully terminated a contract with it. On December 20, 2002, the parties signed a settlement agreement and they dismissed the lawsuit. The parties agreed that we will pay $1,885,917 to it. Payments are to be $50,000 per month. No interest will accrue to this note as long as we are timely in the note payments. $1,478,275 is included in notes payable at December 31, 2002. As of December 31, 2002, we are current on the payment obligations to them. Additionally, we are obligated to use them for all of our freeze-drying needs. If we chooses to use a bulk drying method other than freeze-drying, then we will pay a fee of 25 cents per pound to them for a period of up to 10 years, but not to exceed $2,500,000 for algae dried using such alternative method. On January 16, 2001, we filed an action against Glenn Foods in the Circuit Court of Klamath County alleging, among other things, that Glenn Foods breached an agreement with us for the manufacture of our SBG Square Meal Bars and BG Bites by failing to produce our products according to our specifications, refusing to turn over our formula, and failing to refund our money. We are seeking monetary damages of approximately $226,345 for all causes specified in our complaint. The matter is presently in the discovery phase and the court has not set a trial date. In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that we, erroneously sued as Cell Tech Products, Inc., engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a tentative decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting us from making deceptive representations in its advertising or literature disseminated in California and ordering us to refund the purchase price paid by California customers for our algae products from the date four years prior to the filing of the action through the trial date in November of 2002. In response to the tentative decision, our previous counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its final decision, which essentially affirms the tentative decision. Plaintiff has submitted a proposed judgment to the court consistent with the tentative and final decisions. The parties agreed to mediate this matter on May 9, 2003, before a retired Orange County, California Superior Court judge, reached a confidential settlement, and have agreed to submit the proposed confidential settlement to the Court for approval within 60 days. The parties have filed a motion with the Court to approve the terms of the confidential settlement, vacate the judgment and seal portions of the Court's file. Should the Court fail to approve the terms of the confidential settlement, and upon notice of entry of judgment, we intend to file post-judgment motions to vacate the judgment and for new trial. Should the court deny those motions, we intend to file an appeal. If we are required to make the refund to California customers, in accordance with the final decision, it will be in an amount that would have a material adverse impact on our business and financial position. On January 28, 2002, we terminated our lease between NAC and Klamath Cold Storage, Inc., a corporation owned by our principal stockholders, Daryl Kollman and Marta C. Carpenter. On February 19, 2002, Mr. Kollman, on behalf of himself and as an officer of Klamath Cold Storage, Inc., 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 16 other things, that we owe him and Ms. Carpenter approximately $508,246 in past due rent and that we owe Klamath Cold Storage, Inc. approximately $576,232 in past due rent for our use of certain real property owned by him and Ms. Carpenter, our President and Chief Executive Officer, and Klamath Cold Storage, Inc. Through the possessory liens, Mr. 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. We do not believe that Mr. Kollman will prevail in this matter and we have retained legal counsel to represent us. On March 27, 2002, the Nature Conservancy filed an action against us in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that our wholly owned subsidiary, The New Earth Company (which is now inactive), was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. We have previously recorded the net present value of the promissory note, which has a balance of $313,790 and has been included in the current portion of long-term debt in the December 31, 2002 consolidated balance sheet. The parties signed a settlement agreement and the court dismissed the action in January 2003. The net effect of this will be to increase net income during the first quarter of 2003 by $161,956. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK On August 14, 1996, HumaScan completed its initial public offering and our common stock began trading on the NASDAQ Small Cap Market under the symbol "HMSC." Prior to the IPO there was no established public trading market for our common stock. On March 4, 1999, the NASDAQ Small Cap Market delisted our common stock and it commenced trading on the OTC Bulletin Board. On August 10, 1999, as part of our reorganization, we executed a 1 for 10.8520933 reverse stock split and changed our name to Cell Tech International Incorporated, trading symbol "EFLI." On July 24, 2000, the NASD suspended trading in our common stock on the OTC Bulletin Board because our 1934 Act filings were past due and the National Quotation Bureau's Pink Sheets subsequently quoted our common stock. The following table lists the bid prices at the end of each period obtained from the National Quotation Bureau's Pink Sheet service and is adjusted for subsequent stock dividends and stock splits. Prices do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions. Trading in our common stock is limited and sporadic and you should not deem such quotations to constitute an established public trading market. HIGH BID PRICE LOW BID PRICE FOR PERIOD ($) FOR PERIOD ($) -------------------- ------------------ 2002 First Quarter................ .40 .20 Second Quarter............... .45 .20 Third Quarter ............... .52 .17 Fourth Quarter............... .50 .20 2001 First Quarter................ .30 .13 Second Quarter............... .65 .14 Third Quarter ............... .68 .20 Fourth Quarter............... .52 .14 At July 31, 2003, 13,974,087 shares of our common stock were issued and outstanding and approximately 141 stockholders of record held our stock. 17 DIVIDENDS In 1999, before our reorganization, we distributed certain real estate valued at $1,050,000 to Marta C. Carpenter and Daryl J. Kollman, and paid previously declared dividends of $7.6 million to Ms. Carpenter and Mr. Kollman. We do not plan to pay dividends on our common stock in the foreseeable future. The payment of dividends in the future will depend on the evaluation by our Board of Directors of such factors, as it deems relevant at the time and restrictions imposed by the terms of our debt obligations, if any. Currently, the Board of Directors believes that we should retain all of our earnings, if any, for the development of our business. RECENT SALES OF UNREGISTERED SECURITIES On October 19, 1999, we sold 1,157,895 shares of our common stock and warrants to purchase 1,157,895 shares of our common stock in a private placement to Zubair Kazi for $1,515,625, net of fundraising costs of $134,375. In connection with this transaction, we also issued warrants to purchase 150,000 and 100,000 shares of our common stock to Pacific Basin Capital and Richard Wade, respectively. Each warrant has a 5-year term and an exercise price of $1.425 per share. We also issued 50,000 shares of our common stock, at fair market value that amounted to $134,375, to Pacific Basin Capital for its services. The transaction above involved an investment by one person who is an accredited investor, as defined by Regulation D of the Securities Act of 1933, as amended, and did not involve a general solicitation. We effected the above transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended. We are obligated to issue to Mr. Kazi additional Purchased Securities, as penalties and interest, for any delay in filing our next registration statement beyond 120 days after October 19, 1999. As of June 30, 2003, we had not filed a registration statement and consequently, Mr. Kazi was entitled to an additional 3,333,192 penalty shares of common stock and warrants. During the second quarter of 2003, we issued to Mr. Kazi 3,333,192 shares of common stock and we converted the accrued liability of $624,860 to equity. Warrants to purchase an additional 3,333,192 shares of common stock are also due to Mr. Kazi and have not yet been issued .During the second quarter of 2003, an additional liability was recognized under the agreement in the amount of $22,974 related to the issuance of these shares and warrants, based on the fair value of the securities and has been accounted for in our second quarter financial statements. We have accrued and will continue to accrue additional penalties until the shares are registered. The additional expense for the three months ended June 30, 2003, was $22,974 and 222,092 shares and 222,092 warrants are issuable to Mr. Kazi. We are obligated, upon the effective date of our next registration statement (First reset date), to issue additional securities to Mr. Kazi in accordance with the following reset rights: o If the ratio of $1.425 per share divided by the average closing bid price for the last twenty trading days prior to the first reset date (the first reset ratio) is greater than the ratio of $1.425 divided by the average closing bid price for the last twenty days prior to the execution of the Term Sheet, or September 13, 1999 (the Initial Ratio), on the first reset date, then we shall issue to Mr. Kazi additional securities so that the initial ratio and the first reset ratio are equal and pursuant to the following formula: - Amount of additional purchased securities = ((First Reset Ratio)/(Initial Ratio)-1) times 1,157,895. In addition, if Kazi holds any purchased warrants for the period covered by the last three reset dates, the exercise price of these purchased warrants shall be reduced by the following formula: o Exercise price of purchased warrants = ((Initial Ratio)/(First Reset Ratio)) times $1.425. Kazi is entitled to five additional reset dates that will occur as follows: o The next three reset dates will occur each three months after the first reset date. o The next two subsequent reset dates will occur each six-month period thereafter. Since we have not yet filed our first registration statement, the first reset date has not yet occurred. 18 EQUITY COMPENSATION PLANS Below represents information concerning our equity compensation plans as of December 31, 2002:
(A) (B) (C) ----------------------- --------------------- --------------------- NUMBER OF SECURITIES AVAILABLE FOR FUTURE NUMBER OF SECURITIES TO WEIGHTED-AVERAGE ISSUANCE UNDER EQUITY BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) ----------------------- --------------------- --------------------- Equity Compensation Plans Approved by Shareholders............. 25,802 $3.05 - $142.49 38,702 Equity Compensation Plans Not Approved by Shareholders............. 135,000 $0.15 - $0.50 565,000 ------- ------- Total................................... 160,802 603,702 ======= ======= ITEM 6. SELECTED FINANCIAL DATA. We have derived the selected financial data as of and for the five years ended December 31, 2002 from our audited consolidated financial statements and related notes. You should read the selected financial and operating data in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the consolidated financial statements and related notes. Years ended December 31, ------------- ------------ ------------- ----------- ------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- ($ in thousands, except per share data) RESULTS OF OPERATIONS Revenue $26,194 $30,012 $38,977 $54,488 $74,071 Gross Profit 16,731 20,488 27,488 39,739 54,581 Gross Profit after Commissions 5,040 6,146 9,855 15,306 21,026 Operating Income (Loss) from Operations (3,518) (5,000) (2,436) (4,439) 1,670 Net Income (Loss) before Taxes (3,497) (5,015) (2,784) (4,141) 2,296 Net Income (Loss) (3,497) (5,015) (2,784) (4,141) 2,296 Net Income (Loss) per common share Basic (0.27) (0.47) (0.26) (0.45) 0.26 Diluted (0.27) (0.47) (0.26) (0.45) 0.26 Weighted Average Shares Outstanding Basic 12,864,643 10,640,895 10,640,895 9,280,431 8,683,000 Diluted 12,864,643 10,640,895 10,640,895 9,280,431 8,683,000 Cash dividend per common share 0.00 0.00 0.00 0.82(1) 0.00 SELECTED BALANCE SHEET DATA Cash & Cash Equivalents - - - - 1,502 Current Assets 3,259 2,788 3,881 5,505 19,961 Total Assets 15,814 19,975 27,250 41,099 46,224 Current Liabilities 7,542 9,225 11,223 8,577 12,526 Total Liabilities 8,561 9,225 11,485 14,266 9,376 Shareholders' Equity 7,252 10,750 15,765 18,549 31,723 - ------------------------- (1) In 1999, before our reorganization, we paid a previously declared dividend of $7.6 million to Marta C. Carpenter and Daryl J. Kollman. See "Dividends."
19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. 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. We discuss these factors in further detail below under "Risks and Uncertainties." Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those discussed herein as expected, believed, estimated, intended or anticipated. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. CRITICAL ACCOUNTING POLICIES We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K/A, beginning on page F-8. Note that our preparation of this Annual Report on Form 10-K/A requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. - IMPAIRMENTS OF LONG-LIVED ASSETS We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows we estimate to generate by those assets are less than the carrying amount of those items. We base our cash flow estimates on historical results adjusted to reflect our best estimate of future market and operating conditions. We reduce the net carrying value of assets not recoverable to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. - INVENTORY We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the future. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. 20 Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. We have experienced, and may continue to experience, significant fluctuations in sales and operating - results from quarter to quarter. - 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. We pay commissions to our distributors as compensation for sales and marketing activities and based on their personal sales volumes and the sales of distributors they have recruited into our network. Accordingly, we classify these expenses as a cost and not a reduction of revenue. - CONTINGENCIES We determine whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable and where reasonable estimates can be made of the amount of potential loss, of the materiality of the loss contingency, in accordance with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), "Accounting for Contingencies." We develop our assessment in consultation with outside advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgments that are inherently subjective and frequently involve matters that are in litigation, which by its nature is unpredictable. We believe that our loss contingency assumptions are sound, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, our assumptions may prove to be incorrect, which could materially impact our consolidated financial statements in future periods. GENERAL We are a network marketing company and we develop and distribute a wide range of products made with Aphanizomenon flos-aquae (trade name Super Blue Green(R) Algae) and other nutrients and ingredients through a network of independent distributors ("Distributors"). We currently offer twenty-two different products intended to appeal to health-conscious consumers. We divide our products into five product lines including Daily Health Maintenance, Digestive Health, Defensive Health, Powdered Drinks and Snacks, and Animal and Plant Food. RESULTS OF OPERATIONS Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods, which depend upon numerous factors including our ability to attract and retain new Distributors, enter new markets and to introduce additional and new products into our markets. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Net sales for the year ended December 31, 2002 were $26,193,747, a decrease of 12.7% from net sales of $30,012,076 for the year ended December 31, 2001. We directly relate the decrease in sales to a decrease in orders for the same period partially offset by an increase in the average order size to $123 from $116 over the same period. The number of distributors in 2002 decreased to an average of 43,761, which was 17% lower than the average of 52,761 distributors in 2001. We make sales of our food supplement products through a multi-level marketing network of distributors, so we positively link sales with the number of distributors. 21 Gross profit represents net sales less the cost of goods sold, which includes the cost of harvesting blue-green algae from Klamath Lake, the cost of other materials, direct labor expenses, an allocation of overhead costs, amortization, and depreciation. Gross profit decreased to 64% from 68% of net sales between the years ended December 31, 2002 and 2001, respectively. The decrease in the gross profit margin 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 anticipated and recorded this reserve against the carrying value of our inventory designated for plant food and agricultural uses. The decrease in the gross profit margin as a result of recording the additional reserve for potentially unsaleable inventory was offset by a decrease in depreciation expense previously recorded on the harvest site fixed assets. We suspended this depreciation expense when management made the decision to cease harvesting of algae on the A-Canal and classifying certain of the fixed assets as "held for sale". The related depreciation expense that we did not record in 2002 was $1,144,370. In addition, because of our harvesting algae in 2002, we have capitalized certain harvest costs in ending inventory whereas in prior years when no harvesting of algae took place, we expensed such costs. Costs capitalized in ending inventory in 2002 were approximately $585,450. Gross profit after commissions represents gross profit less commission expense. Commission expense for 2002 and 2001 was 45% and 48% of net sales, respectively. We are a multi-level marketing organization. Distributors make up our sales force. Distributors buy algae products for their own consumption plus they actively recruit other distributors into our network. Distributors are paid commissions based upon their personal sales volumes and the sales of distributors beneath them in their network. During the year ended December 31, 2001, we implemented a new commission structure in an attempt to attract and retain new Distributors. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses and general and administrative expenses. In total, operating expenses decreased $2,539,392 or 22.8% to $8,606,309 for the twelve months ended December 31, 2002 from $11,145,701 for the twelve months ended December 31, 2001. We discuss the components of operating expenses below. o Shipping and handling expenses includes purchasing, receiving, and materials management. Shipping and handling expenses decreased $160,352 or 9%, to $1,703,807 in 2002 from $1,864,159 in 2001. The decrease was due to a decrease in freight expenses and supplies in 2002 due to the overall decrease in sales volumes, partially offset by an increase in postal rates. Shipping and handling expenses as a percent of net sales increased to 7% for the year ended December 31, 2002 from 6% for the year ended December 31, 2001. 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 $269,286 or 7% between 2002 and 2001 to $3,790,696 from $4,059,982. This decrease was primarily due to a decrease in leased equipment costs, consulting expenses, merchant expense, utilities and depreciation costs of $324,518 partially offset by an increase in insurance expense of $79,852. Selling expenses were 14% of sales for the years ended December 31, 2002 and December 31, 2001, respectively. o Research and development expenses increased 1% to $193,310 in 2002 from $190,884 in 2001, which constituted 0.7% and 0.6% of net sales, respectively. o General and administrative expenses decreased by $443,682 or 18% between 2002 and 2001 to $1,997,054 from $2,440,736. General and administrative expenses averaged 7.6% and 8.1% of sales for the years ended December 31, 2002 and December 31, 2001, respectively. The decrease between 2002 and 2001 is attributable to a decrease of $479,751 in costs associated with licenses, insurance and depreciation expense partially offset by an increase in legal fees of $102,475. o Asset write-downs decreased by $1,716,412 or 66% from $2,589,940 for the year ended December 31, 2001 to $873,528 for the year ended December 31, 2002. An additional reserve was recorded during the year ended December 31, 2002 to adequately reserve for the deteriorating value of fixed assets identified as being held for sale, and was ascertained by having an independent appraisal done of that equipment. 22 Other income decreased to $285,661 for the year ended December 31, 2002 from $606,962 for the year ended December 31, 2001 principally due to a decrease in sundry income collected from Distributors and by the additional recording of fair value cost of penalty shares and warrants we owe to an investor for $243,120. Interest expense decreased to $265,047 in 2002 from $622,235 in 2001. This decrease was due to the assignment of our previous financing facility to La Jolla Loans during the third quarter ended September 30, 2002, resulting in the elimination of previously required minimum interest payments. Net loss for 2002 decreased 30% to $3,497,387 from $5,015,350 reported in the prior year or a loss of $0.27 per share for 2002 compared to a loss of $0.43 per share for 2001. The decrease was primarily due to reduced commission expense because of the changes to the commission structure during 2002, reduced operating expenses because of the cost-cutting efforts of management in 2002, and the reduced asset write-down expense of approximately $1.7 million during 2002. We offset the decrease in these expenses by the increase in cost of sales as previously described. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net sales for the year ended December 31, 2001 were $30,012,076, a decrease of 23.0% from net sales of $38,976,663 for the year ended December 31, 2000. We directly relate the decrease in sales to a decrease in orders for the same period with a decrease in the average order size to $116 from $124 over the same period. The average number of distributors in 2001 decreased to an average of 52,948 in 2001, which was 13% lower than the average of 60,899 distributors in 2000. We make sales of our food supplement products through a multi-level marketing network of distributors, so we positively link sales with the number of distributors. Gross profit represents net sales less the cost of goods sold, which includes the cost of harvesting blue-green algae from Klamath Lake, the cost of other materials, direct labor expenses, an allocation of overhead costs, amortization, and depreciation. Gross profit decreased to 68% from 71% of net sales between the years ended December 31, 2001 and 2000, respectively. The decrease in the gross profit margin is due to spreading out the fixed cost component of cost of goods sold over a decreased revenue base. Gross profit after commissions represents gross profit less commission expense. Commission expense for 2001 and 2000 was 48% and 45% of net sales, respectively. We are a multi-level marketing organization. Distributors make up our sales force. Distributors buy algae products for their own consumption and 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 year ended December 31, 2001, we implemented a new commission structure in an attempt to attract and retain new Distributors. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses and general and administrative expenses. In total, operating expenses decreased $1,146,316 or 9.3% to $11,145,701 for the twelve months ended December 31, 2001 from $12,292,017 for the twelve months ended December 31, 2000. We discuss the components of operating expenses below. o Shipping and handling expenses includes purchasing, receiving, and materials management. Shipping and handling expenses decreased $233,210 or 11%, to $1,864,159 in 2001 from $2,097,369 in 2000. The decrease was due to a decrease in freight expenses in 2001 due to the overall decrease in sales. Shipping and handling expenses as a percent of net sales increased to 6% for the year ended December 31, 2001 from 5% for the year ended December 31, 2000. o Selling expenses includes order operator and distributor services expenses, marketing and promotion expenses, and the expenses of the Office of the President and CEO. Selling expenses decreased $1,278,212 or 24% between 2001 and 2000 to $4,059,982 from $5,338,194. This decrease was primarily due to a decrease in salaries and compensation, consulting expenses and utility costs of $1,102,406. Selling expenses were 14% of sales for the years ended December 31, 2001 and December 31, 2000, respectively. 23 o Research and development expenses decreased 58% to $190,884 in 2001 from $456,098 in 2000, which constituted 0.6% and 1% of net sales, respectively. o General and administrative expenses decreased by $1,823,231 or 43% between 2001 and 2000 to $2,440,736 from $4,263,967. For the year ended December 31, 2001, general and administrative expenses averaged 8% of sales while they were 11% of sales for the year ended December 31, 2000. The decrease between 2001 and 2000 is attributable to additional costs incurred in 2000 relating 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 2001, and a decrease in costs associated with the consolidation of office space and leased facilities that occurred in 2000. o Asset write-downs increased by $2,453,559 or 1,799% from $136,381 to $2,589,940. The increase is due to management's decision not to utilize certain equipment located at the canal harvest site in the foreseeable future and represents the costs of the unnecessary assets and license rights that relate to the Harvest Site. Other income increased to $606,962 for the year ended December 31, 2001 from $421,045 for the year ended December 31, 2000 principally due to an increase in sundry income collected from Distributors offset by recording the fair value cost of penalty shares and warrants we owe to an investor for $117,000. Interest expense decreased slightly to $622,235 in 2001 from $768,492 in 2000. This decrease was due to various fees paid to the current lender, partially offset by a decrease in interest expense resulting from a decrease in the outstanding debt in 2001 versus 2000. Net loss for 2001 increased 80% to $5 million from $2.8 million reported in the prior year or $0.47 per share for 2001 compared to $0.26 per share for 2000. The increase was primarily due to: (1) decreases in retail sales and (2) the write-down of approximately $2.6 million in assets, which contributed $0.24 per share of the total $0.47 per share loss. LIQUIDITY AND CAPITAL RESOURCES We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash provided by operating activities. CASH FLOWS Net cash flows provided by operating activities for the year ended December 31, 2002 amounted to $1,277,926 compared to cash flows provided by operations of $1,372,836 for the year ended December 31, 2001. The decrease in cash flows provided by operations is primarily due to sales revenue decreasing at a faster rate than the associated expenses and working capital requirements to sustain those revenues. Cash flows used for investing activities for the year ended December 31, 2002 was $577,301, net of $7,250 of proceeds from sales of equipment. This is an increase of $370,639 from net cash used for investing activities of $206,662 for the year ended December 31, 2001, due to an increase in equipment purchases related to the construction of the on-lake harvester during the fiscal year ended December 31, 2002. Net cash flows used for financing activities was $700,625 for the year ended December 31, 2002 versus net cash provided by financing activities of $1,166,174 during 2001. This change is principally due to a decrease in the bank overdraft balance at December 31, 2002 of $295,097, and an increase in proceeds of debt, net of repayments, offset by an increase in payment of related party debt. We do not plan to pay dividends on our common stock in the foreseeable future. The payment of dividends in the future will depend on the evaluation by our Board of Directors of such factors, as it deems relevant at the time and restrictions imposed by the terms of our debt obligations, if any. We are currently restricted from paying dividends pursuant to a Loan and Security Agreement with La Jolla Loans. Currently, the Board of Directors believes that we should retain all of our earnings, if any, for the development of our business. 24 Working capital deficit at December 31, 2002 amounted to $4,282,898, a decrease of $2,154,288 from a working capital deficit of $6,437,186 as of December 31, 2001. At December 31, 2002, we had a bank overdraft of $468,008 versus a bank overdraft of $763,105 as of December 31, 2001. LINE OF CREDIT In June 1999, we entered into a $15 million Line of Credit Agreement with a financial institution. The agreement has four parts: Receivable Loans, Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The Receivable Loans and the Advances and Inventory Loans incurred interest at a rate equal to the prime rate plus 2.5% per annum, effectively 7.5% at December 31, 2001, and expired June 30, 2002. The Term Loans and Equipment Acquisition Loans incurred interest at a rate equal to the prime rate plus 2.75% at December 31, 2002, and were repayable in 60 monthly installments by July 1, 2004. In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an assignment of our financing facility with Coast Business Credit. In connection with this transaction, Coast Business Credit assigned its security interest in real and personal property and assigned all associated security and loan documents to La Jolla Loans. 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. We may extend the forbearance period 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 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 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 minimum monthly interest payments in excess of $24,500. The outstanding principal balance at December 31, 2002 is $2,100,000. We are in compliance with all loan covenants as of March 31, 2003. We have classified all outstanding debt to the lender as a current liability. GOING CONCERN We have experienced recurring net losses and have negative working capital at December 31, 2002 and March 31, 2003. In September 2002, La Jolla Loans purchased and took an assignment of our financing facility with Coast Business Credit. At the same time, we entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans will not declare a default until June 30, 2003, when the entire principal is due. We may extend the forbearance period to June 30, 2004 if we pay a $75,000 renewal fee. There can be no assurance that additional financing will be available when the extension period ends. We are also experiencing some difficulty in generating sufficient cash flows to meet our obligations on a month-to-month basis. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis. We are continuing our efforts to raise both debt and equity financing. However, there can be no assurance that we will be able to service additional financing or that if such financing is available, whether the terms or conditions would be acceptable to us. 25 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, Financial Accounting Standards Board (FASB) issued Statement No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. The Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it incurs it. When we initially record the liability, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, we accrete the liability to its present value each period, and we depreciate the capitalized cost over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations. In April 2002, FASB issued Statement No. 145 (SFAS No. 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" effective on or after May 15, 2002. This Statement rescinds SFAS No. 4 and an amendment of that Statement, and SFAS No. 64. This Statement also rescinds SFAS No. 44. This Statement amends SFAS No. 13, to eliminate an inconsistency between the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 did not have a material effect on our financial position or results of operations. In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or Disposal Activities," effective for activities that we initiate after December 31, 2002, with early application encouraged. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies 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)." We do not expect the adoption of SFAS No. 146 to have a material effect on our financial position or results of operations. In October 2002, FASB issued Statement No. 147 (SFAS No. 147), "Acquisitions of Certain Financial Institutions, An Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," effective for acquisitions on or after October 1, 2002. SFAS No. 72, and FASB Interpretation No. 9, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS No. 72 and FASB Interpretation 9 and requires that we account for those transactions in accordance with SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5 of SFAS No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor-and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement 144 requires for other long-lived assets that we hold and use. The adoption of SFAS No. 147 did not have a material effect on our financial position or results of operations. In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. We do not expect the adoption of SFAS No. 148 to have a material effect on our financial position or results of operations. 26 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have not entered into any transactions using derivative financial instruments or derivative commodity instruments. We believe our exposure to market risk associated with other financial instruments is not material. RISKS AND UNCERTAINTIES Variability of Results Our annual sales peaked at approximately $200 million in 1996. Subsequent to 1996, sales have decreased substantially each year. There can be no assurance that we will return to generating profits on either a quarterly or annual basis. We have experienced a continual downward trend in sales although the rate of decline is less than in previous years. Many factors accounted for the past decrease in sales, including low productivity of independent distributors, loss of services of certain existing distributors, and competition. Our inability to adjust our operating expenses to compensate fully for the decrease in sales contributes to our small profit margins. Consequently, we have experienced a significant decrease in working capital since the end of 1998. We are facing difficulties generating sufficient cash flow to timely satisfy our financial obligations. EFFECTS OF CLINICAL STUDIES, SCIENTIFIC REVIEW, AND PUBLICITY We believe that the national media attention to recent scientific research that highlights potential health benefits of consuming certain vitamins and nutritional supplements drives the increasing interest generally in vitamins, nutritional supplements and similar products. While we have concluded from extensive independent research that SBGA, the principal ingredient in our products, has nutritional value, consumer demands for nutritional supplements are generally dependent on publicized scientific findings. Consumer perception of the values of vitamins and nutritional supplements would be altered should future studies report that nutritional and alternative medicine is in any way either harmful or not beneficial to health. Moreover, any future publicity relating to illnesses or other adverse effects resulting from consumers' use of certain nutritional products, which existing and potential customers might associate with our products, could have an adverse effect on our business. CONSUMER DEMAND FOR NEW & INDIVIDUAL PRODUCTS Our ability to introduce safe, new and innovative products contributed to the growth of our business in the nutritional supplement market. We have expended and will expend a significant amount of resources on the research and development of such products. However, different factors, including consumers' acceptance of innovative products and our compliance with governmental regulatory laws, conditions the success of these products. We cannot be certain that sales of new products that we introduce into the markets will achieve success in the future, as there is no assurance that consumers will continue to accept such products or that we can obtain regulatory approvals for them. SUPPLY OF RAW MATERIALS; CONDITIONS AFFECTING HARVEST We harvest our own SBGA in Upper Klamath Lake, the only place in the world where SBGA grows in the massive quantities sufficient for harvesting. Although we may not depend on third-party suppliers for sources, we determine our reserve of SBGA by the growth of Aphanizomenon flos-aquae in the lake. Aphanizomenon flos-aquae has flourished in Upper Klamath Lake because of Upper Klamath Lake's protected environment, abundance of minerals, natural nitrogen, clean water and regular sunshine. Despite a water shortage in 2000 and 2001, which precluded a harvest from the "A" canal, we began harvesting directly from Upper Klamath Lake in July 2001 with a uniquely designed harvester. In 2002, we added additional harvest capacity to increase our ability to harvest directly from Upper Klamath Lake. We cannot assure the absence of future adverse weather conditions disturbing the growth of Aphanizomenon flos-aquae. 27 As a result of certain conditions Microcystis, a toxic algae, occasionally blooms in Klamath Lake at the same time blue-green algae is harvested. We regularly test the algae we harvest for possible contamination. Algae that does not meet our standards is not used in products for human or animal consumption. In 1997, the Oregon Department of Agriculture issued an administrative rule that created a standard of 1 microgram per gram (1 ppm) of Microcystis in products for human consumption that contain blue-green algae. The Oregon Department of Agriculture has raised no questions about our products under this rule. In some years, the presence of Microcystis may reduce the quantity of algae that we can harvest. We constructed a modern SBGA processing system that is continually improved and updated. Potential unexpected system failures may, however, interrupt production and reduce sales revenue. System failures may result from events beyond our control, including natural disasters such as fires and unexpected weather changes, intentional acts of break-ins and sabotage, and similar misconduct. COMPETITION--PRODUCTS, PRICING, AND MARKETING; INTELLECTUAL PROPERTY PROTECTION The market for nutritional supplements and personal care products is highly competitive at all stages of distribution. Most of our competitors in the business of development, manufacture, and marketing of vitamins and other nutritional supplements, including large pharmaceutical companies, have greater product offerings, longer operating histories in the markets and superior financial capabilities than us. We face intense competition with numerous companies in traditional retail channels, such as drug store chains, independent drug stores, supermarkets, and health and natural food stores. Although the practice of ordering products from home is becoming increasingly popular, consumers are more accustomed to purchasing products through these traditional sales channels. Although we now have trademark protection for a number of our product labels in the United States and in some foreign countries, and are currently pursuing registration of other trademarks, we do not have trademark registration for the name "Cell Tech." Moreover, we do not have patent protection for our products. Any unlawful or lawful use of our trade names or the ingredient Super Blue Green(R) Algae to manufacture similar products by competitors could have a material adverse effect on our business. RETENTION AND PRODUCTIVITY OF DISTRIBUTORS We rely almost exclusively on a network marketing system of independent Distributors to sell our products. The success of our operations depends on our ability to attract new Distributors and maintain business relationships with existing Distributors. We compete with other network marketing companies for Distributors and can experience high turnover among our Distributors. Because some of these companies may have a longer history of operations and superior resources, their ability to appeal to a large base of Distributors is greater. There can be no assurance that existing Distributors will not terminate their services to us or that the number of Distributors for our products will remain steady or increase. Moreover, our revenue is dependent on the ability of the Distributors to attract and retain customers. A decrease in the productivity of existing Distributors would adversely affect our financial conditions. We cannot assure you that the Distributors will maintain or increase their productivity. We also cannot accurately predict the future productivity of the Distributors since their operations depend on their ability to sponsor, train, and motivate new Distributors. REGULATION OF DISTRIBUTORS AND NETWORK MARKETING SYSTEM Since the Distributors in the network marketing system are not our employees, they are not subject to the same degree of supervision and management as our employees. While certain contractual rules of conduct govern the services of the Distributors to our business, it is difficult to monitor or control the conduct of the sales associates of Distributors marketing our products. Violations of our policies and rules by sales associates in dealing with customers could reflect negatively on our products and operations, and harm our business reputation. 28 Furthermore, extensive federal, state, and local laws that regulate direct selling activities govern our network marketing system. We believe that our marketing practices have been and are consistent with such laws, but we cannot provide assurance that any future changes to laws and regulations of any particular jurisdiction will not affect our operations. A court could also hold us civilly or criminally accountable based on vicarious liability because of the actions of independent Distributors. We are not aware of any such actions of independent distributors. DEPARTURE OF DISTRIBUTORS Certain Distributors have severed their ties with us and are now competing against us. This will adversely affect us in that these Distributors will no longer be generating revenues for us and furthermore, we can expect the departing Distributors to divert business to our competitors. ALTERNATIVE CHANNELS OF DISTRIBUTION On May 18, 2001, we commenced, on a limited test basis, sales through infomercials and discontinued them on July 1, 2001 due to our limited financial resources. We designed this alternative distribution strategy to provide a complementary marketing method for our Distributors. While we believe the infomercials will complement the sales efforts of our Distributors, there can be no assurance that it will have its intended effect with our Distributors and could create conflicts with our Distributors that could result in the loss of many of our Distributors, which in turn would mean a decline in our sales volume and would be detrimental to our business and result in losses from our operations. However, our tests results, and the responses that we have received from Distributors, indicate that there are no conflicts with our present distribution methods. Moreover, such a program requires an investment in producing the infomercial videos. We have discontinued airing such infomercials until we have sufficient funds to continue broadcasting. MANAGEMENT OF OPERATIONS Limitations on our ability to attract additional key management personnel as we grow could be materially adverse to our business and financial conditions. Our location in Klamath Falls, Oregon is a limiting factor on our ability to attract key management personnel when we need it, particularly in the areas of marketing and information systems. For similar reasons, we may face difficulty in recruiting a permanent Chief Financial Officer. Our limited ability to attract such personnel could be materially adverse to our business and financial conditions. In addition, since we will need additional managers who have key strategic skills, new personnel challenges could confront us as our business expands. The future success of our business and financial conditions will depend significantly on our ability to add key management personnel in a timely and cost effective manner. LIEN ON CARPENETER'S AND KOLLMAN'S STOCK Our common stock owned by majority shareholders Daryl J. Kollman and Marta C. Carpenter, 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 NEC and NAC prior to our reorganization. The Internal Revenue Service has subordinated the lien in favor of the lender for the Term Loan. DISPUTE BETWEEN PRINCIPAL SHAREHOLDERS Daryl Kollman and Marta C. Carpenter, shareholders who together own approximately 82% of our outstanding shares of common stock, have filed divorce proceedings. Mr. Kollman and Ms. Carpenter 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. Mr. Kollman is no longer actively involved in management and has been unwilling to execute 29 personal guarantees on our behalf, as he has done in the past. On May 14, 2001, Ms. Carpenter petitioned the Circuit Court for the State of Oregon with a motion seeking, among other court orders, to enjoin Mr. Kollman from interfering with any future loan applications of Ms. Carpenter or us and a self executing judgment provision whereby the court would sign a loan application on behalf of Mr. Kollman. The court held that Mr. Kollman is to cease and desist from any such endeavors of interfering with our loan applications during the pendency of the dissolution proceedings and the order prohibits him from writing letters or communicating orally with any lending institutions unless requested to do so by the institution. The court also held that Mr. 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 court heard the matter at trial on December 10, 11, and 12, 2001. The Court ruled that Marta Carpenter and Daryl Kollman were each entitled to an equal division of their respective stock ownership in our common stock, thus resulting in no change in our current ownership. The Court also ruled Mr. Kollman and Ms. Carpenter will equally divide their joint ownership in certain real property assets leased by us from them in each property and that they must sell the properties and improvements to pay the indebtedness to the Internal Revenue Service. They will equally share any remaining proceeds after the payment of Federal and State taxes applicable to the sale. We do 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. IMPACT OF GOVERNMENT REGULATION The formulation, manufacture, labeling, and advertising of our products are subject to extensive federal, state, and local governmental regulation. From time to time, we have received formal and informal inquiries from governmental regulators about our business and compliance with existing laws. On occasions, we have altered our product formulas and revised our labeling and promotion practices to comply with such laws. To enforce statutes and regulations, governmental agencies may initiate investigations, issue warning letters and cease and desist orders, impose corrective measures, seek injunctive relief or product seizure, impose civil penalties, or pursue criminal prosecution. Therefore, any future repeal, amendment, or narrow interpretations of current statutes or regulations that render our current practices noncompliant could substantially hinder our ability to maintain or increase our stream of distribution, or to introduce new products into the markets. We cannot predict the nature of any of such future laws, regulations, or interpretations, or what kind of impact they might have on our business. Future laws and regulations requiring the reformulation, discontinuance, or re-labeling of any of our products to comply with new standards could interrupt our product distribution and potentially harm our business. Even if future governmental actions or investigations in our business do not halt the manufacture of any of our products, they could create negative publicity, thereby harming our business. UNCERTAINTIES IN THE INTERNATIONAL MARKETS Our operations growth strategy involves expanding product sales into the international markets in Europe and Asia. We believe that there is a potential for growth internationally, but various factors, which include varying domestic regulations, responsiveness of government authorities, cultural differences and political uncertainties may limit our ability to enter effectively these markets. We cannot provide assurance that consumers in any of our potential new international markets will be receptive to our nutritional supplement and personal care products. We also cannot assure you that we will be able to reformulate our products or adjust our labeling and promotion practices to comply with foreign laws and regulations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material. Our primary market risks include fluctuations in interest rates. Our management believes that fluctuation in interest rates in the near term would not materially affect our consolidated operating results, financial position or cash flows as we have limited risks related to interest rate fluctuations. 30 Marta C. Carpenter and Daryl J. Kollman 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 a trust holds the shares and the Internal Revenue Service will release them upon the payment of Ms. Carpenter and Mr. Kollman's federal income tax liabilities for various specified years. Ms. Carpenter and Mr. Kollman will sell their shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. Ms. Carpenter and Mr. Kollman retain all voting rights incident to their shares while the trust holds the shares. The Internal Revenue Service may seize Marta C. Carpenter and Daryl J. Kollman's shares from trust if Ms. Carpenter and Mr. Kollman 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 Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our Consolidated Financial Statements together with the Report thereon of BDO Seidman, LLP, independent auditors, and the Supplementary Data required by this Item 8, are included elsewhere in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows:
NAME AGE POSITION Marta C. Carpenter 57 Chief Executive Officer, President, Chief Accounting Officer and Director Justin Straus (2) 32 Chief Operating Officer and Director Victor M. Bond 51 Vice President, Marketing and Strategy Donald P. Hateley (1)(2) 45 Chairman of the Board Christopher J. Blaxland (1)(2) 61 Director Donald M. Anderson (1)(2) 54 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. MARTA C. CARPENTER has served as our Chief Executive Officer, President and as a director since August 1999. She co-founded NEC in 1988 and NAC in 1990 and has served as their President and as a director of both companies since that time. Prior to joining us, Ms. Carpenter also researched, harvested and marketed algae to consumers. Ms. Carpenter has been a member of the Board of Directors of the Dan O'Brien Foundation since 1995 and has served as its Secretary since 1997. JUSTIN STRAUS has served as a director since August 1999 and has served as our Chief Operating Officer from August 2000 to the present. From January 1998 to August 2000, he served as our Vice President and Director of Sales and from October 1999 to August 2000, he served as our Vice President of Customer Fulfillment and fulfilled the function of Chief Operating Officer until his appointment to that position. He joined NAC in 1984 as a harvest site employee 31 where he participated in the design, construction and preparation of the NAC harvest site. After holding a variety of positions in NAC, he served as the Vice President/Director of Sales from December 1994 to January 1998. VICTOR M. BOND has served as our Vice President of Marketing and Strategy since January 2001. From October 1999 to December 2000, he was a consultant to us that performed the functions of the Office of Vice President, Marketing and Strategy. From 1991 to 1999, he was President of ChangeNet, which developed and implemented change management services and communications programs for corporations and his clients included Xerox, Otis Elevator, and Dura Pharmaceuticals. Prior to ChangeNet, he worked with and held executive positions with International Business Machines Corporation including Director of Marketing and Director of Strategy. DONALD P. HATELEY has served as our Chairman of the Board since August 1999. From 1994 to the present, he has been the Managing Director of InterCap Partners, a boutique investment banking firm located in Los Angeles, California that specializes in corporate finance, mergers and acquisitions and financial advisory matters. From 1996 to the present, he has been an attorney with Hateley & Hampton, a Los Angeles-based law firm that specializes in corporate, tax, real estate and securities law. Mr. Hateley is also a California licensed certified public accountant and real estate broker. DR. CHRISTOPHER J. BLAXLAND has served as a director since September 1998. He was Chief Executive Officer and a director of HumaScan from September 1 to December 22, 1998; from December 22, 1998 to August 6, 1999, he was Chief Executive Officer and director in a consultant capacity of HumaScan until the Reorganization. From May 1999 until December 2001, Dr. Blaxland served as the Chief Operating Officer of PTC Therapeutics, Inc., a development stage biopharmaceutical company, and has worked as a business consultant. From September 1993 through December 1997, he was the President of Cell Pathways, Inc., a development stage biopharmaceutical company. DR. DONALD M. ANDERSON has served as a director since August 1999. He has served as a consultant to NAC on scientific matters since 1993, and became a director of NAC in July 1999. He is a Senior Scientist at the Woods Hole Oceanographic Institution in Massachusetts, has served in that capacity since 1991 and has been on the scientific staff since 1978, after receiving his Ph.D. from the Massachusetts Institute of Technology. Dr. Anderson is a recognized expert on toxic and harmful algal blooms and has been the director of the U.S. National Office on Marine Biotoxins and Harmful Algal Blooms since 1993. BOARD OF DIRECTORS MEETINGS AND COMMITTEES Our Board of Directors held ten meetings in 2002, four meetings in 2001 and eight meetings in the year 2000. We maintain a standing Audit Committee and Compensation Committee, but do not maintain a standing nominating committee. Donald Hateley, Chris Blaxland and Donald Anderson serve on the Audit Committee and on the Compensation Committee. There are no family relationships among our directors or executive officers, except that Ms. Carpenter is the mother of Mr. Straus. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE To our knowledge, based solely on a review of Section 16(a) forms furnished to us, we believe that our directors, executive officers and ten percent beneficial owners complied with all Section 16(a) reporting requirements during 2002 except for Daryl Kollman who has not filed his initial Form 3. 32 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth, for the year ended December 31, 2002, compensation paid by us to (a) each person serving as our Chief Executive Officer during 2002 and (b) each of our other most highly compensated executive officers (the "named executive officers") during 2002 who served as an executive officer on December 31, 2002.
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ------------------------- ------------ ANNUAL COMPENSATION AWARDS PAYOUTS ------------ ------------ ------------ ------------ ------------ ------------ (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER NAME ANNUAL RESTRICTED SECURITIES ALL OTHER AND COMPEN- STOCK UNDERLYING LTIP COMPEN- PRINCIPAL SATION AWARD(S) OPTIONS/ PAYOUTS SATION POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) ($) ($) - ------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -------- Marta C. Carpenter 2002 290,000 0 0 0 0 0 0 Chief Executive Officer 2001 290,000 0 3,000(1) 0 0 0 0 & President 2000 290,000 0 3,000 0 0 0 0 Victor Bond 2002 180,000 0 0 0 0 0 0 Vice President of 2001 180,000 0 0 0 0 0 0 Marketing & Strategy 2000 180,000 0 0 0 0 0 0 Justin Straus 2002 114,529 0 0 0 0 0 0 Chief Operating Officer 2001 100,000 0 0 0 0 0 0 2000 100,000 0 0 0 0 0 0 - ----------------------- (1) Estimated dollar value of pickup truck owned by us and used by Ms. Carpenter. The following table summarizes the number of shares and the terms of stock options we granted to the names executive officers in our 2002 fiscal year. OPTIONS/SARS GRANTS DURING YEAR ENDED DECEMBER 31, 2002 POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(4) -------------------------------------------------- ------------------------- NUMBER OF % OF SECURITIES TOTAL UNDERLYING OPTIONS/ OPTIONS/ SARS EXERCISE SARS GRANTED TO OR BASE GRANTED EMPLOYEES PRICE EXPIRATION NAME (#)(1)(2) IN FISCALYEAR ($/SH)(3) DATE 5% ($) 10% ($) - -------------------------------------- ---------- ------------- ----------- ------------ ---------- ----------- Marta C. 0 0 N/A N/A N/A N/A Carpenter......................... Justin 0 0 N/A N/A N/A N/A Straus.................................... Victor 0 0 N/A N/A N/A N/A Bond....................................
The following table sets forth information concerning the number and valie of unexercised option held by each of the names executive officers as of December 31, 2002. None of the named executive officers exercised options in 2002. 33
AGGREGATE YEAR END OPTION VALUES (DECEMBER 31, 2002) NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT 12/31/02 12/31/02 ($)(1) ---------------------------- --------------------------- SHARES ACQUIRED ON EXERCISE VALUE NAME (#) REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE - ----------------------------------- ---------- ----------- -------------- ------------ ------------- ------------ Marta C. 0 0 0 0 0 0 Carpenter.................... Justin 0 0 0 0 0 0 Straus............................... Victor 0 0 0 0 0 0 Bond...............................
(1) Represents the difference between the aggregate market value at December 31, 2002 and 2001, as applicable, of our common stock (based on a last sale price of $0.20 and $0.16 on each such date, respectively) and the options' aggregrate exercise price. BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our Audit Committee conducted four meetings during 2002 and no meetings in 2001 and 2000, respectively. The committee reviews the scope of the independent annual audit, the independent public accountants' letter to the Board of Directors concerning the effectiveness of our internal financial and accounting controls and the Board of Directors' response to that letter, if deemed necessary. Our Compensation Committee oversees our executive compensation program and makes recommendations to our full Board of Directors regarding changes in compensation. It also administers our stock option plans. The committee held one meeting during each of 2001 and 2000 and we did not hold any compensation committee meetings in 2002. Donald P. Hateley, Chairman of the Board of Directors, Chris Blaxland, a director and Dr. Donald M. Anderson, a director, served on the Compensation Committee in 2002. Marta C. Carpenter, our Chief Executive Officer, President and a director, Chris Blaxland, a director and Dr. Donald M. Anderson, a director, served on the Compensation Committee in 2001. INTRODUCTION TO REPORT OF COMPENSATION COMMITTEE The Compensation Committee of the Board of Directors (the "Committee") is composed of Messrs. Blaxland, Anderson and Hateley. The Committee is responsible for the establishment and oversight of our executive compensation programs. The following report of the Committee discusses generally our executive compensation objectives and policies and their relationship to our performance in 2002. EXECUTIVE COMPENSATION PHILOSOPHY AND OBJECTIVES We designed our executive compensation program to attract, retain and motivate highly effective executives and to reward sustained corporate and individual performance with an appropriate base annual salary and incentive compensation. We seek to increase management ownership of our common stock and to link executive compensation with stockholder value, achievement of business objectives and corporate profitability. Our compensation philosophy is to compensate our executive officers at market-competitive levels for achieving planned performance. Market comparisons include general industry norms, nutritional supplements manufacturers companies, and a selected group of direct selling companies that are approximately the same size as us. We place more emphasis on general industry rather than the nutritional supplement industry norms. 34 COMPENSATION PROGRAM COMPONENTS Consistent with our executive compensation objectives, our compensation for our senior management, including the Chief Executive Officer, consists of three components: an annual base salary, annual cash incentive awards and long-term incentive awards. During the year ended December 31, 2002, our compensation of our senior executives consisted of annual base salary. We did not pay any cash incentive awards in 2002. ANNUAL BASE SALARY. Base salaries for executive officers are determined with reference to a salary range for each position. We determine salary ranges by evaluating a particular employee's position and comparing it with what were believe to be representative prevailing norms for similar positions in similarly sized companies. Within this salary range, an executive's initial salary level is determined largely through Committee judgment, based on the experience of our members. Salaries were set at a level to attract, retain and motivate superior executives. LONG-TERM INCENTIVE AWARDS. We will provide Long-term incentive compensation by the grant of options to purchase shares of our common stock under the 2000 Plan, if amended, or a successor or additional stock option plan that our Board of Directors will approve. In considering the awards, the Committee takes into account such factors as prevailing norms for the ratio of options outstanding to total shares outstanding, the effect on maximizing long-term stockholder value, and vesting and expiration dates of each executive's outstanding options. THE COMPENSATION COMMITTEE Donald P. Hateley Chris J.M. Blaxland Donald M. Anderson COMPENSATION OF DIRECTORS We do not separately compensate members of our Board of Directors who are our officers for serving on the Board of Directors. We pay directors who are not our employees an annual retainer of $40,000 ($30,000 if the director does not attend at least 3/4 of the Board meetings held), an additional $10,000 to the Chairman of the Board, $5,000 for each Board committee on which the director serves, a meeting fee of $1,500 ($500 if attendance is by telephone), and reimbursement of reasonable expenses. In addition, in February 2000, we adopted the 2000 Stock Incentive Plan that provides that each non-employee director will receive on the date of each annual meeting of our stockholders options to purchase 10,000 shares of our common stock under terms more fully described below. Upon the Board's adoption of our 2000 Stock Incentive Plan, again in 2002 for our fiscal year ended December 31, 2001, and under its terms, we granted to each of Donald Hateley, Christopher Blaxland and Donald Anderson a 10-year option to purchase 15,000 shares of our common stock, in each of 2000, 2001 and 2002, at an exercise price as provided by our Board of Directors which is equal to the fair market value of our common stock on the date on which the options are granted. These options are fully exercisable as of the date of their grant. 35 STOCK OPTIONS 2000 STOCK INCENTIVE PLAN. The Board of Directors adopted our 2000 Stock Incentive Plan in February 2000 for the purpose of securing for us and our shareholders the benefits arising from the ownership of restricted shares of our common stock, stock appreciation rights, and stock options by directors who are not employees (Donald Hateley, Christopher Blaxland and Donald Anderson are our current non-employee directors), officers, other key employees and consultants to us and our subsidiaries who are expected to contribute to our future growth and success. We have not granted restricted shares or stock appreciation rights under the plan. As stated above, we have granted options under the plan for an aggregate of 90,000 shares to our eligible non-employee directors. We may not grant awards under the plan after February 2010. The plan is subject to shareholders approval. The plan provides for the issuance of up to 700,000 shares of our common stock. Under the plan, we may grant awards to key employees and will annually grant an option to purchase 10,000 shares of our common stock to our eligible non-employee directors, as described below. The Board of Directors administers the plan, which, subject to the terms of the plan, determines the key employees who will receive awards and the terms of the awards granted. Under the plan, provided that a sufficient number of shares remain available for grant, non-employee directors serving on the Board of Directors immediately following each annual meeting of shareholders (including those elected at the meeting), are automatically granted a 10-year option to purchase 10,000 shares of our common stock at an exercise price equal to the fair market of the common stock on the annual meeting date. These options become exercisable with respect to 1/3 of the shares underlying the option on the date of grant, 2/3 of such shares one year later and all of such shares two years later, in each case assuming the recipient's continuous service as a director during that time. 1996 STOCK INCENTIVE PLAN. HumaScan adopted a 1996 Stock Incentive Plan in June 1996. The provisions of the 1996 plan were substantially similar to the provisions of our 2000 Stock Incentive Plan except that the 1996 plan provides for the issuance of up to 64,504 shares of our common stock. We will make no further awards under the 1996 plan, but options to purchase 25,802 shares remain outstanding and exercisable under the plan at a weighted average exercise price of between $3.05 and $142.49 per share. OTHER OPTIONS. We have issued options outside of our stock option plans to certain officers, directors, employees and consultants. We granted options to purchase (a) 13,131 shares in February 1996 with a five-year term and an exercise price of $57.84 per share, (b) 1,382 shares in March 1998 with a ten-year term and an exercise price of $98.69 per share, and (c) 4,607 shares to a consultant with a 5 year term and an exercise price of $14.98. 4,216 shares that we granted in prior years have been exercised. All of these options, except for the options exercised, remain outstanding and are fully exercisable. In September 1996, we also granted options to purchase an aggregate of 691 shares with a 10-year term and an exercise price of $65.11 to five former non-employee directors. These options are outstanding and exercisable. 36 PERFORMANCE MEASUREMENT COMPARISON* The rules and regulations of the SEC require the presentation of a line graph since the common stock has been registered under Section 12 of the Exchange Act comparing the yearly percentage change in our cumulative stockholder return to (i) the cumulative total return of a broad market equity index and (ii) the cumulative return of either a published industry index or a self-constructed group of peer issuers that we believe is relevant to a comparative understanding of its performance. We have used the NASDAQ Market (U.S.) and a peer group. The publicly traded companies in our peer group are Mannatech, Inc., Market America, Inc., Usana Health Sciences, Inc., Nature's Sunshine Products, Inc., Reliv International, Inc. and Nu Skin Enterprises Inc. [GRAPHIC OMITTED][GRAPHIC OMITTED] * The material in this graph is not "solicitation material," is not deemed filed with the SEC, and is not incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filing. Research Data Group, Inc. has provided the information in the graph.
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 -------- -------- -------- -------- -------- -------- Cell Tech International Incorporated................. 100.00 0.74 16.18 17.83 2.46 2.46 NASDAQ Stock Market (U.S.)......................... 100.00 140.99 261.49 157.77 125.16 86.53 Peer Group......................... 100.00 84.43 38.10 21.26 36.12 48.70 - ---------------------
37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding ownership of our capital stock as of July 25, 2003, by (i) each person known to us to beneficially own more than 5% of the shares of our outstanding common stock, (ii) each of our directors, (iii) each of the named executive officers, and (iv) all of our directors and executive officers as a group.
PERCENT OF NUNBER SHARES OF BENEFICIALLY SHARES NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OUTSTANDING - -------------------------------------------------------------------------- -------------- --------------- Marta C. Carpenter 23.3% 4,341,498(2) 565 Century Court Klamath Falls, Oregon 97601 Daryl J. Kollman 23.3% 4,341,498(3) 5534 South Sixth Street, PMB #225 Klamath Falls, Oregon 97603 Victor Bond * 0 565 Century Court Klamath Falls, Oregon 97601 Donald P. Hateley 1.9% 345,000(4) 1800 Century Park East Los Angeles, California 90067 Dr. Christopher J. Blaxland * 47,764(5) 509 County Line Road Radnor, Pennsylvania 19087 Dr. Donald M. Anderson * 47,949(6) 6 Arrowhead Lane Marion, Massachusetts 02738 Justin Straus * 0 565 Century Court Klamath Falls, Oregon 97601 Zubair Kazi 48.3% 8,982,174(7) 3671 Sunswept Drive Studio City, California 91604 All executive officers and directors as a group (6 persons) 53.9% 4,782,211(8) - ----------------------- * Less than one percent. (1) A person is considered to "beneficially own" any shares (a) over which such person exercises sole or shared voting or investment power, or (b) of which such person has the right to acquire ownership at any time within 60 days (e.g., through exercise of stock options). Except as otherwise indicated, voting and investment power relating to the shares referenced in the table above is exercised solely by the beneficial owner.
38 (2) The Internal Revenue Service has a security interest in all of Marta C. Carpenter's shares pursuant to a Notice of Determination dated June 18, 1999 under the terms of which the shares are held in trust and will be released upon the payment of Ms. Carpenter and Daryl J. Kollman's federal income tax liabilities for various specified years. Ms. Carpenter will sell her shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. While the trust holds the shares Ms. Carpenter retains all voting rights incident to her shares. The Internal Revenue Service may seize Ms. Carpenter's shares from trust if Ms. Carpenter and Daryl J. Kollman 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 Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. (3) The Internal Revenue Service has a security interest in all of Daryl J. Kollman's shares pursuant to a Notice of Determination dated June 18, 1999 under the terms of which the trust holds the shares and, upon Marta C. Carpenter and Mr. Kollman's payment of their federal income tax liabilities for various specified years, will be released. Mr. Kollman will sell his shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. Mr. Kollman retains all voting rights incident to his shares while the trust holds the shares. The Internal Revenue Service may seize Mr. Kollman's shares from trust if Ms. Carpenter and Mr. Kollman 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 Ms. Carpenter and Mr. Kollman's tax liabilities as allowed by applicable law. (4) Represents warrants to purchase 300,000 shares of common stock held by Hateley & Hampton, a Professional Law Corporation of which Donald P. Hateley is a President, co-founder and a shareholder and 45,000 shares Mr. Hateley has the right to acquire pursuant to options exercisable within 60 days of July 25, 2003. (5) Represents 45,764 shares Dr. Blaxland has the right to acquire pursuant to options exercisable within 60 days of July 25, 2003. (6) Includes 45,000 shares Mr. Anderson has the right to acquire pursuant to options exercisable within 60 days of July 25, 2003. (7) Includes 4,491,087 shares already issued to Kazi and and 4,491,087 issuable to Mr. Kazi upon the exercise of his warrants. (8) Includes 345,000 shares issuable upon the exercise of warrants and 47,764 shares issuable upon the exercise of options within 60 days of July 25, 2003. See footnotes 4 through 6 above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. We lease approximately 250,000 square feet of office, processing, freezer and storage space directly from Marta C. Carpenter and Daryl Kollman, our principal shareholders, or their affiliate, Klamath Cold Storage, Inc. Most of these leases are year-to-year, although we do rent some space on a month-to-month basis and one lease will expires in 2005. We believe that the space we lease from Ms. Carpenter and Mr. Kollman and Klamath Cold Storage, Inc and the rent we pay to them is at below or at fair market values. Rental payments to Ms. Carpenter and Mr. Kollman or Klamath Cold Storage, Inc in 2002 were $740,097. We currently owe Ms. Carpenter and Mr. Kollman or Klamath Cold Storage, Inc $531,146 in accrued rental payments and we show it on our balance sheet as a related party payable. In 2002, we also received $192,762 in management fees and other income from Klamath Cold Storage, Inc. 39 ITEM 14. CONTROLS AND PROCEDURES. (a) Under the supervision and with the participation of our management, including our chief executive officer and chief accounting officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within the 90 day period prior to the filing date of this report. Based on this evaluation, our chief executive officer and chief accounting officer concluded that our disclosure controls and procedures were effective as of that date. (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K (a)(1) and (2) Financial Statements. We have listed the Financial Statements and Schedules in the Index to Financial Statements on page F-1 of this Form 10-K/A. (a)(3) Exhibits: Exhibit Number Description - -------------- -------------- (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession (2.1)Agreement and Plan of Reorganization, dated July 16, 1999, among the Company, Daryl J. Kollman and Marta C. Kollman (filed as Exhibit 2.1 without schedules and exhibits to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) (3) Articles of Incorporation and Bylaws (3.1)Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (3.2)Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.1(a) to the Current Report on Form 8-K on November 19, 1999 and incorporated by reference) (3.3)Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (filed as Exhibit 3.1 to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) (3.4)Amended and Restated Bylaws (filed as Exhibit 3.2 to the Registration Form for Small Business on Form SB-2 on June 21, 1996 and incorporated by reference) (4) Instruments Defining the Rights of Security Holders (4.1)Loan and Security Agreement, dated June 21, 1999, by and among The New Earth Company, The New Algae Company and Coast Business Credit (filed as Exhibit 4.1 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) 40 (4.4)Form of Series A Preferred Stock Certificate (filed as Exhibit 4.2 to the Amendment to Registration Statement for Small Business on Form SB-2/A on July 26, 1996 and incorporated by reference) (4.5)Form of Warrant to Purchase Shares of Common Stock to be issued to Andromeda Enterprises, Inc. or its designees, Hateley & Hampton or its designees and Wharton Capital Partners, Ltd. (filed as Exhibit 4.1 to the Current Report on Form 8-K on August 2, 1999 and incorporated by reference) (4.6)Nonqualified Stock Option Agreement between the Company and Physicians World Communications Group (filed as Exhibit 4.9 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.7)Warrant to Purchase Shares of Common Stock issued to Scantek Medical, Inc. as of May 15, 1998 (filed as Exhibit 4.7 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.8)Warrant to Purchase Shares of Common Stock issued to Zigmed, Inc. as of May 15, 1998 (filed as Exhibit 4.8 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998 and incorporated by reference) (4.9)Representative's Warrant Agreement between the Company and Keane Securities Co., including Form of Warrant Certificate (filed as Exhibit 4.3 to the Amendment to Registration Statement for Small Business 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) (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) 41 (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) (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) 42 (10.20) Voting and Stockholders' Rights Agreement, dated May 15, 1996 (filed as Exhibit 10.4 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.21) Agreement to Issue Warrants, dated March 19, 1996, between the Company and Udi Toledano (filed as Exhibit 10.5 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.22) Agreement to Issue Warrants, dated March 19, 1996, between the Company and Herbert V. Turk (filed as Exhibit 10.6 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.23) Non-Negotiable Warrant Certificate between the Company and Physician Sales & Service, Inc. (filed as Exhibit 10.7 to the Registration Statement for Small Business on Form SB-2 on June 21, 1996 and by this reference incorporated herein) (10.24) HumaScan, Inc. Non-Employee Director Stock Option Plan (filed as Exhibit 10.12 to the Registration Statement 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) (21) List of the Company's Subsidiaries (filed as Exhibit 21 to the Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated by reference) (31) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.1) Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Cell Tech International Incorporated* (31.2) Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Accounting Officer of Cell Tech International Incorporated* (32) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Cell Tech International Incorporated* (32.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Accounting Officer of Cell Tech International Incorporated* 43 (99) Additional Exhibits (99.1) Internal Revenue Service Notice of Determination, dated July 18, 1999 (filed as Exhibit 99.1 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 99.2 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. * Filed herewith. 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 14, 2003. CELL TECH INTERNATIONAL INCORPORATED By: /s/ Marta C. Carpenter ---------------------------- Marta C. Carpenter, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities indicated have signed this report below:
SIGNATURE TITLE DATE By:/s/ Marta C. Carpenter President and Chief Executive August 14, 2003 ----------------------- Officer and Director Marta C. Kollman (principal executive officer and principal accounting officer) By: /s/ Donald P. Hateley Chairman of the Board August 14, 2003 --------------------- Donald P. Hateley By: /s/ Justin Straus Chief Operating Officer August 14, 2003 ----------------- Justin Straus By: /s/ Chris J.M. Blaxland Director August 14, 2003 ----------------------- Chris J.M. Blaxland By: /s/ Donald M. Anderson Director August 14, 2003 ---------------------- Donald M. Anderson
44 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 F-1 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants F-3 Consolidated Financial Statements Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 F-2 Report of Independent Certified Public Accountants To the Shareholders of Cell Tech International Incorporated and Subsidiaries Klamath Falls, Oregon We have audited the accompanying consolidated balance sheets of Cell Tech International Incorporated and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates, made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cell Tech International Incorporated and Subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring losses, has a negative working capital at December 31, 2002, is experiencing difficulty in generating sufficient cash flows to meet its obligations and faces potential significant adverse litigation. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Los Angeles, California February 28, 2003 F-3
CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, --------------------------------- 2002 2001 -------------- -------------- ASSETS (Note 7) CURRENT ASSETS Receivables (Note 3) $ 372,011 $ 327,083 Current portion of inventories (Note 4) 2,300,000 2,000,000 Prepaid expenses 586,662 460,860 -------------- -------------- Total current assets 3,258,673 2,787,943 LONG-TERM INVENTORIES, net of current portion (Note 4) 3,824,298 7,304,778 PROPERTY AND EQUIPMENT, net of accumulated depreciation (Note 5) 6,801,389 7,318,683 IDLE PROPERTY AND EQUIPMENT HELD FOR SALE, net (Note 5) 1,382,570 2,271,305 OTHER ASSETS (Note 6) 546,846 292,092 -------------- -------------- Total assets $ 15,813,776 $ 19,974,801 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft $ 468,008 $ 763,105 Accounts payable 594,329 2,527,078 Commissions payable 970,315 1,219,136 Sales taxes payable 69,797 82,343 Accrued payroll and related liabilities 291,140 252,944 Other accrued expenses 1,848,070 1,133,438 Current portion of long-term debt (Note 7) 2,872,145 2,160,986 Related party payable (Note 12) 427,767 1,086,099 -------------- -------------- Total current liabilities 7,541,571 9,225,129 -------------- -------------- LONG-TERM LIABILITIES Long-term debt, net of current portion (Note 7) 1,019,920 - -------------- -------------- Total liabilities 8,561,491 9,225,129 -------------- -------------- COMMITMENTS AND CONTINGENCIES (Notes 9 and 10) SHAREHOLDERS' EQUITY Series A convertible preferred stock - no par value; 4,175,000 shares authorized; none issued and outstanding - - Series B convertible preferred stock - no par value; 800,000 shares authorized; none issued and outstanding - - Undesignated preferred stock - no par value; 1,825,000 shares authorized; none issued and outstanding - - Common stock - $.01 par value; 50,000,000 shares authorized, 10,640,895 shares issued and outstanding (Notes 9 and 10) 106,409 106,409 Additional paid-in capital 2,299,696 2,299,696 Retained earnings 4,846,180 8,343,567 -------------- -------------- Total shareholders' equity 7,252,285 10,749,672 -------------- -------------- Total liabilities and shareholders' equity $ 15,813,776 $ 19,974,801 -------------- --------------
See accompanying notes to condolidated financial statements. F-4
CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, -------------------------------------------------- 2002 2001 2000 ------------- ------------ -------------- SALES $ 26,193,747 $ 30,012,076 $ 38,976,663 COST OF SALES 9,462,601 9,524,517 11,488,802 ------------- ------------ -------------- GROSS PROFIT 16,731,146 20,487,559 27,487,861 COMMISSIONS 11,690,752 14,341,935 17,632,344 ------------- ------------ -------------- GROSS PROFIT AFTER COMMISSIONS 5,040,394 6,145,624 9,855,517 SHIPPING AND HANDLING EXPENSES 1,703,807 1,864,159 2,097,369 SELLING EXPENSES 3,790,696 4,059,982 5,338,194 RESEARCH AND DEVELOPMENT 193,310 190,884 456,098 GENERAL AND ADMINISTRATIVE 1,997,054 2,440,736 4,263,967 ASSET WRITE-DOWN (NOTES 5 AND 6) 873,528 2,589,940 136,389 ------------- ------------ -------------- OPERATING LOSS (3,518,001) (5,000,077) (2,436,492) OTHER INCOME (NOTE 13) 285,661 606,962 421,045 INTEREST EXPENSE (265,047) (622,235) (768,492) ------------- ------------ -------------- NET LOSS $ (3,497,387) $ (5,015,350) $ (2,783,939) ------------- ------------ -------------- BASIC AND DILUTED LOSS PER SHARE $ (0.27) $ (.43) $ (0.26) ------------- ------------ -------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING USED TO CALCULATE BASIC AND DILUTED LOSS PER SHARE 12,864,643 11,755,888 10,640,895 ------------- ------------ --------------
See accompanying notes to consolidated financial statements. F-5
CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional --------------------------- Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity ------------- ---------- ----------- -------------- -------------- BALANCES, December 31, 1999 10,640,895 $ 106,409 $ 2,299,696 $ 16,142,856 $ 18,548,961 Net loss - - - (2,783,939) (2,783,939) ------------- ---------- ----------- -------------- -------------- BALANCES, December 31, 2000 10,640,895 106,409 2,299,696 13,358,917 15,765,022 Net loss - - - (5,015,350) (5,015,350) ------------- ---------- ----------- -------------- -------------- BALANCES, December 31, 2001 10,640,895 106,409 2,299,696 8,343,567 10,749,672 Net~loss - - - (3,497,387) (3,497,387) ------------- ---------- ----------- -------------- -------------- BALANCES, December 31, 2002 10,640,895 $ 106,409 $ 2,299,696 $ 4,846,180 $ 7,252,285 ------------- ---------- ----------- -------------- --------------
See accompanying notes to consolidated financial statements. F-6
CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW Years ended December 31, -------------------------------------------------- 2002 2001 2000 --------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (3,497,387) $ (5,015,350) $ (2,783,939) Adjustments to reconcile net loss to cash provided by (used for) operating activities: Depreciation and amortization 1,162,726 2,607,668 3,347,670 (Gain) loss on sale of fixed assets (1,827 ) (15,175 ) 60,693 Reserve for potentially unsaleable inventories 3,100,000 - - Impairment of fixed assets and intangibles 873,528 2,589,940 136,381 Changes in assets and liabilities: Receivables (44,928 ) 208,062 (45,494) Inventories 80,480 1,871,221 2,355,388 Prepaid expenses (125,802 ) 290,165 (112,205) Other assets (305,851 ) (70,374 ) (36,159) Accounts payable (454,474 ) (370,606 ) (1,305,316) Commissions payable (248,821 ) (649,999 ) (2,527,240) Sales tax payable (12,546 ) (30,645 ) (61,527) Accrued payroll and payroll related liabilities 38,196 (39,883 ) (125,135) Other accrued expenses 714,632 (2,188 ) 532,871 --------------- ------------- ------------- Net cash provided by (used for) operating activities 1,277,926 1,372,836 (564,012) --------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (584,551 ) (253,662 ) (145,493) Proceeds from sale of equipment 7,250 47,000 4,094 --------------- ------------- ------------- Net cash used for investing activities (577,301 ) (206,662 ) (141,399) --------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft (295,097 ) (547,446 ) 1,062,967 Payments on long-term debt (1,847,196 ) (963,357 ) (1,099,026) Proceeds from debt financing 2,100,000 - - Net proceeds (repayments) from related party debt (658,332 ) 344,629 741,470 --------------- ------------- ------------- Net cash provided by (used for) financing activities (700,625 ) (1,166,174 ) 705,411 --------------- ------------- ------------- 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 $ 250,190 $ 602,570 $ 779,424 =============== ============== =============
See accompanying notes to consolidated financial statements. F-7 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS Cell Tech International Incorporated, The New Algae Company (NAC), and The New Earth Company (NEC), collectively the "Company," are engaged in the production and marketing of food supplement products made with blue-green algae harvested from Klamath Lake, Oregon. The Company uses a multi-level distributor network throughout the United States and Canada to distribute its products. The Company commenced operations as NAC in 1982 and subsequently formed NEC to further its operations. In 1990 NAC purchased the assets of Cell Tech, Inc. and then began doing business under the trade name "Cell Tech". BASIS OF CONSOLIDATION The accompanying consolidated financial statements of the Company include the accounts of the Holding Company and its subsidiaries NAC and NEC. Intercompany transactions and balances have been eliminated on consolidation. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. CASH AND CASH EQUIVALENTS The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Work in progress, finished goods and sales aids inventories are stated at the lower of cost or market. The Company uses a weighted average method to determine cost for work in progress and finished goods based upon normal harvesting volumes (see Note 4). Cost of work in progress and finished goods includes direct labor and an allocation of overhead costs. Sales aids consist of video tapes, audio tapes, brochures and other promotional items sold by the Company to its distributors. Inventory which is not anticipated to be sold within the subsequent year is classified as a non-current asset. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of 40 years for buildings and 3 to 10 years for machinery and equipment as well as furniture and fixtures. Additions, renewals and improvements are capitalized. Expenditures for maintenance, repairs and minor renewals and improvements are charged to expense. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is recorded in operations. The Company evaluates impairment of its property and equipment on an individual asset basis or by logical groupings of assets whenever circumstances indicate that the carrying value may not be recoverable. Assets deemed to be impaired are F-8 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS written down to their fair value using discounted future cash flows and, if available, comparable market values. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as assets held for sale. 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. FINANCIAL INSTRUMENTS The Company estimates the fair value of its monetary assets and liabilities based upon the existing interest rates related to such assets and liabilities compared to the current market rates of interest for instruments of a similar nature and degree of risk. The fair value of debt is estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's debt at December 31, 2002 and 2001 approximates carrying value. REVENUE RECOGNITION The Company recognizes revenue from the sale of its products upon shipment, at which time title passes. The Company estimates an allowance for sales returns based on historical experience with product returns. SHIPPING AND HANDLING FEES AND COSTS The Company bills customers for shipping and handling costs. The amounts billed are included in sales and totaled $1,263,622, $1,443,692 and $1,711,031 in 2002, 2001 and 2000, respectively. The related costs for shipping and handling goods shipped by the Company to customers are included in a separate caption, shipping and handling expenses, in the statements of operations. 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. F-9 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES The Company accounts for income taxes using the liability method whereby the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. IMPAIRMENT 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. The Company accounts for the impairment of long-lived assets to be held and used, when indications of impairment are present, by evaluating the carrying value in relation to the operating performance and future undiscounted cash flows of the underlying business. Long-lived assets held for disposal are reported at the lower of their carrying value or fair value less costs to sell (see Notes 5 and 6). STOCK OPTION PLAN Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" (APB No. 25), and related Interpretations. Accordingly, for employee options, the Company records expense in an amount equal to the quoted market price on the grant date over the option price. The Company provides pro forma disclosures of net earning and earnings per share, as if the fair value based method of accounting had been applied. Stock based compensation paid to non-employees is recorded at fair value using the Black Scholes options pricing model (see Note 9). SEGMENT REPORTING The Company operates in one segment, which is the production and sale of food supplement products made from blue green algae. EARNINGS PER SHARE The computations of the weighted-average common shares used in the computation of basic and diluted net income (loss) per share is based on 12,864,643, 11,755,888 and 10,640,895 shares for the years ended December 31, 2002, 2001 and 2000. Potential dilutive securities were not included in the EPS calculation since their effect would be antidilutive. In accordance with SFAS No. 128, "Earnings Per Share," the Company has included in weighted average common shares 2,923,273 shares for the year ended December 31, 2002 earned by Mr. Zubair Kazi but not yet issued (see Note 10). Potential dilutive securities consisted of outstanding stock options and convertible preferred stock and common stock purchase warrants. F-10 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, Financial Accounting Standards Board (FASB) issued Statement No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. The Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial position or results of operations. In April 2002, FASB issued Statement No. 145 (SFAS No. 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" effective on or after May 15, 2002. This Statement rescinds SFAS No. 4 and an amendment of that Statement, and SFAS No. 64. This Statement also rescinds SFAS No. 44. This Statement amends SFAS No. 13, to eliminate an inconsistency between the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of SFAS No. 145 did not have a material effect on the Company's financial position or results of operations. In June 2002, FASB issued Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or Disposal Activities," effective for activities that are initiated after December 31, 2002, with early application encouraged. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies 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 adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. The adoption of SFAS No. 148 is not expected to have a material effect on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affect leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. F-11 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. The Company has determined that there has been no impact due to the application of FIN No. 45 on our financial position and results of operations. NOTE 2--GOING CONCERN During 2002 the Company was able to obtain new financing that allowed it to repay the borrowings under the former line of credit. As of December 31, 2002 the Company is in compliance with 'the loan covenants under the new loan agreement. Additionally, management has introduced several new products and advertising campaigns in order to increase revenues and reverse the trend of net losses in 2002 and prior years. Although management believes that progress was made during 2002 on issues affecting the Company's ability to continue as a going concern, the Company has experienced recurring net losses, has negative working capital at December 31, 2002 and faces potential significantly adverse litigation (Note 10). These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis. The Company is continuing its efforts to raise both debt and equity financing. However, there can be no assurance that the Company will be able to service additional financing, or that if such financing is available, whether the terms or conditions would be acceptable to the Company. NOTE 3 -- RECEIVABLES As revenues are generally paid with credit cards and thereby collected at the time of shipment, the Company does not record trade accounts receivable. Receivables consist of the following: December 31, ------------------------------ 2002 2001 ------------- ------------ Credit card deposits in transit $ 303,746 $ 239,618 Miscellaneous receivables 68,265 87,465 ------------- ------------ $ 372,011 $ 327,083 ============= ============ F-12 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 -- INVENTORIES
Inventories consist of the following: December 31, ------------------------------ 2002 2001 ------------- ------------ Work in progress $ 9,520,527 $ 9,524,882 Finished goods 588,586 654,759 Sales aids 15,185 25,137 ------------- ------------ 10,124,298 10,204,778 Less reserve for potentially unsaleable inventories (Note 12) (4,000,000) (900,000) ------------- ------------ 6,124,298 9,304,778 Less current portion (2,300,000) (2,000,000) ------------- ------------ $ 3,824,298 $ 7,304,778 ============= ============ During 2001 and 2000, the Company curtailed the volume of algae harvested. Accordingly, the Company experienced excess processing capacity that was not fully utilized. As a result, the Company incurred costs aggregating $4.1 million and $4.5 million, representing negative volume variances in 2001 and 2000, respectively. During 2002 the Company resumed the harvest of algae. Accordingly, the negative volume variance was reduced to $1.6 million in 2002. Such costs are included in cost of sales for 2002, 2001 and 2000. Certain of the Company's 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 December 31, 2002 and 2001, respectively. Inventories that are in excess of the following year's estimated sales have been classified as long-term inventories. NOTE 5 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following: December 31, --------------------------------- 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 8,894,246 8,228,088 --------------- -------------- 15,907,997 15,402,611 Less accumulated depreciation (9,106,608) (8,083,928) --------------- -------------- $ 6,801,389 $ 7,318,683 =============== ==============
Depreciation expense aggregated $1,111,629, $2,386,418 and $2,459,190, for 2002, 2001 and 2000, respectively. F-13 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has ceased utilizing the harvest site on the A canal of the Klamath Irrigation District (KID) for an indefinite period of time. The Company will continue to utilize the building on the adjacent leased property and certain of the equipment in other production areas and will continue to record depreciation expense for these assets. Some of the equipment located on the canal site cannot be relocated or used for other purposes and has been written-off. Certain other equipment is being held for sale. Idle property and equipment consists of machinery and equipment with a carrying value of $1,382,570 and $2,271,305, a cost of $9,981,028 and $7,338,735, and accumulated depreciation and valuation reserve of $8,598,458 and $5,067,430 at December 31, 2002 and 2001, respectively. The Company is actively attempting to sell these assets and 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 No. 144 because management has concluded that, while a sale is probable, a transfer and completed sale is not likely to occur within one year. The financial statements for the years ended December 31, 2002 and 2001 include adjustments due to the impairment of fixed assets of $873,529 and $2,589,940, respectively. NOTE 6 -- OTHER ASSETS
Other assets consist of the following: December 31, ---------------------------------- 2002 2001 ------------- ------------- Trademarks, net of accumulated amortization of $38,978 and $33,623 $ 57,196 $ 57,302 Deposits 55,441 75,466 Restricted cash 198,963 159,324 Loan Fees 235,246 - ------------- ------------- $ 546,846 $ 292,092 ============== ============= Amortization expense aggregated $51,097, $221,250 and $888,480 for 2002, 2001 and 2000, respectively.
F-14 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- LONG-TERM DEBT Long-term debt consists of the following: December 31, ---------------------------------- 2002 2001 ------------ ------------- Receivable loans, advances and inventory loans, secured by substantially all of the assets of the Company, interest at the prime rate plus 2.5% per annum (7.5% at December 31, 2001), repaid in 2002 $ - $ 633,852 Term loans and equipment acquisition loans, secured by substantially all of the assets of the Company, interest at prime rate plus 2.75% (7.75% at December 31, 2001) and repaid in 60 monthly installments - 1,213,344 Term loan secured by substantially all of the assets of the Company, effective rate of interest is 14%. Payment is due in full in June 2003. It can be extended for one year at that date if the Company is in compliance with all loan covenants. 2,100,000 - Note payable to a nonprofit organization, secured by rights of property and leasehold improvements, with annual payments of $75,000 including interest at 6.25%, maturing July 19, 2005 (see Note 10). 313,790 313,790 Note payable to vendor issued in exchange for cancellation of accounts payable to vendor. Note requires 37 monthly payments of $50,000 that began on October 11, 2002 and a final payment of $35,917 due on November 1, 2005, with an implied discount rate of 11.13%. 1,478,275 - ------------ ------------- 3,892,065 2,160,986 Less current portion (2,872,145) (2,160,986) ------------ ------------- $ 1,019,920 $ - ============ =============
In June 1999, the Company entered into a $15 million Line of Credit Agreement with a financial institution. The agreement has four parts: Receivable Loans, Advances and Inventory Loans, Term Loans, and Equipment Acquisition Loans. The Receivable Loans and the Advances and Inventory Loans incurred interest at a rate equal to the prime rate plus 2.5% per annum and expired June 30, 2002. The Term Loans and Equipment Acquisition Loans incurred interest at a rate equal to the prime rate plus 2.75% and were repayable in monthly installments. F-15 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2002 is $2,100,000. The Company is in compliance with all loan covenants as of December 31, 2002. The Company has classified all outstanding debt to the lender as a current liability. NOTE 8 -- INCOME TAX The Company is subject to Federal income taxes subsequent to June 20, 1999. As the Company has experienced operating losses for the years 2002, 2001 and 2000, no income tax has been provided for. At December 31, 2002, the Company had state and federal net operating loss carryforwards available to offset future taxable income of approximately $11.5 million that expire at various dates through 2022. The primary components of temporary differences which compose the Company's net deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows: December 31, ------------------------------- 2002 2001 -------------- ------------- Deferred tax assets (liability): Inventory adjustments $ 1,600,000 $ 645,000 Accrued expenses 211,000 308,000 Litigation reserve 595,000 633,000 Other 18,000 38,000 -------------- ------------- Current deferred tax assets, net 2,424,000 1,624,000 -------------- ------------- Net operating losses and credits 4,150,000 3,790,000 Property and equipment (695,000) (464,000) -------------- ------------- Non-current deferred tax assets, net 4,845,000 3,326,000 -------------- ------------- Net deferred tax assets 7,269,000 4,950,000 Less: valuation allowance (7,269,000) (4,950,000) -------------- ------------- $ - $ - ============== ============= F-16 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company annually evaluates the realization of the net deferred tax asset, taking into consideration prior earnings history, projected operating results and the reversal of temporary tax differences. At December 31, 2002 and 2001, the Company recorded a valuation allowance as a result of the uncertainty relating to the realizability of the net deferred tax asset. NOTE 9 -- STOCK OPTIONS AND WARRANTS WARRANTS On August 6, 1999, the Company issued warrants to purchase shares of its common stock to the following parties for their services as follows: Number of Exercise Term Warrants Price ------------ ------------ ------------ Andromeda 100,000 $1.3337 5 year Hateley & Hampton 300,000 $0.0749 5 year Wharton Capital 267,000 $0.0749 5 year On October 19, 1999, the Company sold 1,157,895 shares of its common stock with warrants to purchase 1,157,895 shares of its common stock in a private placement to Mr. Zubair Kazi (see Note 12) for $1,515,625, net of fundraising costs of $134,375. In connection with this transaction, the Company also issued warrants to purchase 150,000 and 100,000 shares of its common stock to Pacific Basin and Richard Wade, respectively. Each warrant has a 5-year term and an exercise price of $1.425 per share. The Company also issued 50,000 shares of its common stock, at fair market value which amounted to $134,375, to Pacific Basin Capital for their services. Warrant activity during the years ended December 31, 2001, 2000 and 1999 is summarized as follows: Shares Price ---------------- ---------------- Outstanding at December 31, 1999 2,268,324 $ 0.075 - 84.65 Granted - - ---------------- ---------------- Outstanding at December 31, 2000 2,268,324 0.075 - 84.65 Granted - - Expired (128,926) - ---------------- ---------------- Outstanding at December 31, 2001 2,139,398 0.075 - 84.65 Granted - - Expired - - ---------------- ---------------- Outstanding at December 31, 2002 2,139,398 $ 0.075 - 84.65 ---------------- ---------------- The above warrants have a weighted average remaining contractual life of 1.6 years. F-17 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1996 STOCK INCENTIVE PLAN In June 1996, the Company adopted the 1996 Stock Incentive Plan (the 1996 Plan) pursuant to which the Company's Board of Directors may grant stock options to officers, key employees, and consultants. The 1996 Plan authorizes grants of options to purchase up to 64,504 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. The stock option activity is as follows: Shares Price ----------- ----------------- Outstanding, December 31, 1999 25,802 $ 3.05 - 142.49 Granted - - Expired - - Exercised - - ----------- ----------------- Outstanding, December 31, 2000 25,802 3.05 - 142.49 Granted - - Expired -- - Exercised - - ----------- ----------------- Outstanding, December 31, 2001 25,802 3.05 - 142.49 Granted - - Expired - - Exercised - - ----------- ----------------- Outstanding, December 31, 2002 25,802 $ 3.05 - 142.49 =========== ================= The above options have a weighted average remaining contractual life of 2.5 years. In addition to the options provided for in the 1996 Plan, in early 1996, 13,131 options were issued to certain officers, employees and consultants at an exercise price of $57.84 per share, each with a five-year term. All the outstanding options related to these grants expired in 2001. The Company granted 691 options to certain former directors on September 25, 1996 to replace certain options, which terminated upon resignation of such directors in connection with the Company's initial public offering. These 691 options have an exercise price of $65.11 per share and a ten-year term. During 1998, 1,382 stock options were issued to a director, at an exercise price of $98.65 per share and a ten-year term. During 1998, 4,607 stock options were issued to a consultant at an exercise price of $14.98 and a five-year term. Outstanding options at December 31, 2002 have a weighted average remaining contractual life of 1.54 years. THE 2000 STOCK INCENTIVE PLAN On February 14, 2000, the Board of Directors approved a new stock incentive plan (the 2000 Plan). The 2000 Plan is for the benefit of employees, consultants and non-employee directors of the Company and its subsidiaries. The maximum number of shares with respect to which stock options or stock appreciation rights may be granted or awarded as restricted stock under the 2000 Plan is 700,000 shares in aggregate of common stock of the Company. F-18 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The 2000 Plan provides for options to purchase 15,000 shares of common stock of the Company to be automatically granted to each Non-Employee Director who was serving as a member of the Board of Directors on the date the 2000 Plan was adopted (Initial Non-Employee Director Options). The 2000 Plan also provides for 10,000 shares of common stock of the Company to be automatically granted to each Non-Employee Director, who is serving on or elected to the Board of Directors at each annual meeting of the stockholders of the Company after the date the 2000 Plan is adopted (Regular Non-Employee Director Options). The options issued are Non-Qualified Options. During December 2002, 45,000 options were granted to Non-Employee Directors under the 2000 Plan. These options have an exercise price of not less than 100% of the fair market value of the stock at the date of the grant. PRO FORMA DISCLOSURE The pro forma net loss and net loss per share as if compensation cost was computed based on the fair value at the grant date computed under SFAS No. 123 for employee stock options has not been presented because it is not significantly different from the historical results. NOTE 10 -- COMMITMENTS AND 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 February 6, 1998, Oregon Freeze Dry, Inc. (OFD), a vendor, filed a complaint against the Company alleging that the Company wrongfully terminated its contract with OFD. On December 20, 2002 a settlement agreement between the parties was signed and the lawsuit was dismissed. The parties agreed that the Company will pay $1,885,917 to OFD. Payments are to be $50,000 per month. The settlement has been accounted for in terms of SFAS I5 and as a result the original payable has been retained as the liability and interest has been imputed on the note at 11.13% per annum. $1,478,275 is included in notes payable at December 31, 2002. As of December 31, 2002, the Company is current on its payment obligations to OFD. Additionally, the Company is obligated to use Oregon Freeze Dry, Inc for all of its freeze-drying needs. If the Company chooses to use a bulk drying method other than freeze drying, then the Company will pay a fee of 25 cents per pound to OFD for a period of up to 10 years, but not to exceed $2,500,000 for each pound of algae dried using such alternative method. F-19 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 16, 2001, the Company filed an action against Glenn Foods in the Circuit Court of Klamath County alleging, among other things, that Glenn Foods breached an agreement with the Company for the manufacture of SBG Square Meal Bars and BG Bites by failing to produce products according to Company specifications, refusing to turn over the formula, and failing to refund the money. The Company is seeking monetary damages of approximately $226,345 for all causes specified in the complaint. The matter is presently in the discovery phase and no trial date has been scheduled. In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that Cell Tech Products, Inc. engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a Tentative Decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting Cell Tech from making deceptive representations in its advertising or literature disseminated in California and ordering Cell Tech to refund the purchase price paid by California customers for Cell Tech's algae products from the date four years prior to the filing of the action through the trial date in November 2002. In response to the Tentative Decision, Cell Tech's counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its Final Decision, which essentially affirms the Tentative Decision. Plaintiff has submitted a proposed judgment to the court consistent with the Tentative and Final Decisions. Upon entry of judgment, Cell Tech intends to file post-judgment motions and an appeal. The refund of California customers, if required to be made in accordance with the Final Decision, will be in an amount that would have a material adverse impact on Cell Tech's business and financial position. On January 28, 2002, the Company terminated its lease with Klamath Cold Storage, Inc. ("KCS"), a corporation owned by the principal shareholders, Daryl Kollman and Marta Carpenter. 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 the Company and its wholly owned subsidiary, NAC and/or NEC, in the County of Klamath, State of Oregon, claiming a lien upon them by alleging among other things, that the Company owes him and Marta Carpenter approximately $508,246 in past due rent and that the Company owes KCS approximately $576,232 in past due rent for the use of certain real property owned by him and Marta Carpenter, the Company's 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 our property from the premises and that the properties will be subject to foreclosure proceedings. The Company does not believe that Daryl Kollman will prevail in this matter and has retained legal counsel to represent the Company. 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, which could result from this lawsuit, but an unfavorable outcome could have a material adverse impact upon its financial condition. On March 27, 2002, the Nature Conservancy filed an action against Cell Tech in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that Cell Tech's wholly owned subsidiary, The New Earth Company, was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. The Company has previously recorded the net present value of the promissory note, which has a balance of $313,790 and has been included in the current portion of long-term debt in the December 31, 2002 consolidated balance sheet. An agreement was signed and the court action dismissed in January 2003. The net effect of this will be to increase net income during the first quarter of 2003 by $161,956. F-20 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On October 7, 2002, Daryl Kollman, one of Cell Tech's principal shareholders, filed a lawsuit against Cell Tech and certain of its officers, directors and counsel in the Circuit Court for the State of Oregon for Klamath County. The complaint makes a number of individual and derivative claims. Mr. Kollman makes two claims against Cell Tech. First, Mr. Kollman alleges that Cell Tech breached an agreement to register its stock for public sale and seeks damages in an amount to be proven at trial, but not less than $9,282,000. Second, Mr. Kollman claims that Cell Tech conspired with Marta C. Carpenter (formerly known as Marta C. Kollman), a principal shareholder and the President, Chief Executive Officer and a director of Cell Tech; Donald P. Hateley, Chairman of the Board of Directors of Cell Tech; and others to prevent the registration of Mr. Kollman's stock and to cause other financial injury to him. As a result, Mr. Kollman seeks $32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars in damages on his own behalf and on behalf of Cell Tech against Marta Carpenter, Mr. Hateley and others based on a variety of legal theories, many of which either have been or are being litigated in other cases. The Company intends to vigorously defend the direct claims asserted in this lawsuit, and is currently evaluating the claims that Mr. Kollman has asserted on Cell Tech's behalf. The Company cannot predict the amount of loss, if any, 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. The Company is also involved in various legal matters arising in the normal course of business. In the opinion of management, the Company's liability, if any, arising from legal proceedings related to these matters is not expected to have a material effect on the consolidated financial statements of the Company. LIEN ON COMPANY STOCK The Company stock owned by majority shareholders Daryl J. Kollman and Marta C. Carpenter, 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 Term Loan (Note 7). DISPUTE BETWEEN PRINCIPAL SHAREHOLDERS Daryl Kollman and Marta C. Carpenter, shareholders who together own approximately 82% of our outstanding shares of common stock, divorced during 2002. Daryl Kollman and Marta Carpenter 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 Court ruled Daryl Kollman and Marta Carpenter's joint ownership in these real property assets 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. The disposition of these properties pursuant to the divorce could have an adverse or disruptive effect on our operations, if the party who purchases 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 Carpenter, to spend a portion of her time devoted to handling matters related to the divorce decree. 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 Carpenter 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 Carpenter 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. F-21 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Carpenter 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. Any remaining proceeds from the sale of real estate 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. 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 below), the Company shall immediately issue to Mr. Zubair Kazi additional common stock and warrants. The amount shall equal 1,157,895 multiplied by the percentage by which the shareholders' equity is less than $20,000,000. The Company did not maintain a shareholders' equity of $20,000,000 at December 31, 1999 and as a result, 681,798 shares and 681,798 warrants were due to Mr. Kazi as of December 31, 2000. As of December 31, 2002, there were 2,923,273 shares and 2,923,273 warrants due to Mr. Kazi. The accrued liability related to the issuance of these shares and warrants is $568,359and has been accounted for in the financial statements. The shares sold were to be registered within 120 days of the sale. Additional penalties will accrue until such time that the shares are registered. Also, if within one year after October 19, 1999 the Company sells its common stock at a price less than $1.425 per share in an event other than in a registered underwriting, the Company shall immediately issue to Mr. Zubair Kazi such additional shares of common stock and warrants so that Mr. Zubair Kazi maintains his percentage shareholdings as if he had purchased shares of common stock at the reduced purchase price. The Company did not sell any common stock during the one year period ended October 19, 2000 or for the year ended December 31, 2000. The Company is obligated, upon the effective date of its' next registration statement (First reset date), to issue additional purchased securities in accordance with the following reset rights: o If the ratio of $1.425 per share divided by the average closing bid price for the last twenty trading days prior to the first reset date (the first reset ratio) is greater than the ratio of $1.425 divided by the average closing bid price for the last twenty days prior to the execution of the Term Sheet, or September 13, 1999 (the Initial Ratio), on the first reset date, then the Company shall issue to the investor additional purchased securities so that the initial ratio and the first reset ratio are equal and pursuant to the following formula: o Amount of Additional Purchased Securities = ((First Reset Ratio)/(Initial Ratio)-1) times 1,157,895. o In addition, if the investor holds any Purchased Warrants for the period covered by the last three reset dates, the exercise price of these Purchased Warrants shall be reduced by the following formula: o Exercise Price of Purchased Warrants = ((Initial Ratio)/(First Reset Ratio)) times $1.425. F-22 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS o The investor is entitled to five additional reset dates which will occur as follows: o The next three reset dates will occur each three months after the first reset date. o The next two subsequent reset dates will occur each six-month period thereafter. Since the Company has not filed its first registration statement, the first reset date has not yet occurred. LEASES The Company has noncancelable operating leases (Note12), primarily for facilities space, office equipment and phone systems, which expire over the next five years and thereafter. Future minimum lease payments under operating leases are summarized as follows: Years ending December 31, AMOUNT - -------------------------------- -------------- 2003 $ 157,322 2004 101,863 2005 54,300 Thereafter 3,000 -------------- $ 316,485 -------------- Rent expense for 2002, 2001 and 2000 aggregated $841,712, $1,178,496 and $1,366,149, respectively. NOTE 11 -- EMPLOYEE BENEFIT PLAN Effective June 1, 1994, the Company established a 401(k) Employee Savings Plan which allows eligible employees to contribute up to 15% of their compensation annually. The plan allows for Company matching at the discretion of management. Each employee receives a pro rata allocation of the discretionary matching based on the employee's compensation in relation to the compensation of all participants entitled to profit sharing contributions. The Company matching aggregated $47,459, $52,614 and $60,134 in 2002, 2001 and 2000, respectively. NOTE 12 -- RELATED PARTY TRANSACTIONS The lease agreements described and summarized in Note 12 include certain building and equipment leases in which the lessors are shareholders of the Company. Rental payments to the shareholders for 2002, 2001 and 2000 aggregated $766,910, $1,127,855 and $1,149,528, respectively. The amount payable to a related party at December 31, 2002 and 2001 is due to the President of the Company and relates to unpaid rent on properties owned by the President. The Company also received management fees and other income of $192,762 and $196,218 from its shareholders during 2002 and 2001, respectively, which is included in other income in the consolidated statement of operations. The Company paid consulting fees to a director of $31,873, $32,500 and $32,500 during 2002, 2001 and 2000, respectively. F-23 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 -- OTHER INCOME Other income insists of the following:
Years ended December 31, ------------------------------------------------ 2002 2001 2000 ------------- ------------ ------------- August celebration sales $ 18,024 $ 16,058 $ 27,750 Genealogy fee income 74,811 102,924 163,648 Interest income 32,831 37,981 57,507 Miscellaneous income (expense) 208,526 313,846 286,916 Management fee income from a related party 192,762 196,217 195,917 Stock penalties (243,120) (75,239) (250,000) Gain (loss) on disposal of assets 1,827 15,175 (60,693) ------------- ------------ ------------- $ 285,661 $ 606,962 $ 421,045 ============= ============ ============= NOTE 14 -- CONCENTRATION OF CUSTOMERS AND SUPPLIERS No customers accounted for more than 10% of sales during the years ended December 31, 2002, 2001 and 2000. One vendor supplied approximately 45%, 55% and 27% of the products that the Company purchased for the years then ended. NOTE 15 -- QUARTERLY RESULTS (UNAUDITED) Quarterly results for the years ended December 31, 2002 and 2001 are reflected below: FIRST SECOND THIRD(A) FOURTH(B) ------------------------------------------------------------------------------------------------------------------ 2002 Revenue $ 7,105,704 $ 6,755,115 $ 6,450,651 $ 5,882,277 Operating income/(loss) $ 141,410 $ 2,867 $ (2,960,149) $ (702,129) Net income/(loss) $ 109,073 $ 52,487 $ (2,971,264) $ (687,683) Net income/(loss) per share - basic and diluted $ .01 $ .01 $ (.23) $ (.05) 2001 Revenue $ 8,062,064 $ 7,603,248 $ 7,278,704 $ 7,068,060 Operating loss $ (935,474) $ (706,956) $ (437,693) $ (2,919,954) Net loss $ (1,048,261) $ (748,594) $ (423,908) $ (2,794,587) Net loss per share - basic and diluted $ (.09) $ (.06) $ (.04) $ (.24)
(a) Includes third quarter adjustments. During the third quarter of 2002, the Company recorded an adjustment that decreased its net income by $3,100,000. The adjustment was to record an additional provision for unsaleable inventories. F-24 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) Includes fourth quarter adjustments. During the fourth quarter of 2002, the Company recorded an adjustment that increased its net loss by $873,529. The adjustment was a charge to Write-down expense for the impairment of certain Property, Plant & Equipment. F-25 EX-31.1 3 doc2.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Marta C. Carpenter, certify that: 1. I have reviewed this Annual Report on Form 10-K/A of Cell Tech International Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles: c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. CELL TECH INTERNATIONAL INCORPORATED Dated: August 14, 2003 /s/ Marta C. Carpenter ---------------------- Marta C. Carpenter, Chief Executive Officer EX-31.2 4 doc3.txt Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Marta C. Carpenter, certify that: 1. I have reviewed this Annual Report on Form 10-K/A of Cell Tech International Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles: c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and d) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. CELL TECH INTERNATIONAL INCORPORATED Dated: August 14, 2003 /s/ Marta C. Carpenter ---------------------- Marta C. Carpenter, Chief Accounting Officer EX-32.1 5 doc4.txt Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 As adoptedpursuant to Section 906 of the Sarbanes-oxley act of 2002 In connection with the Annual Report of Cell Tech International Incorporated (the "Company") on Form 10-K/A for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K/A"), I, Marta C. Carpenter, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-K/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Form 10-K/A fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Marta C. Carpenter ------------------------ Marta C. Carpenter Chief Executive Officer DATED: August 14, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Cell Tech International Incorporated and will be retained by Cell Tech International Incorporated and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 doc5.txt Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 As adoptedpursuant to Section 906 of the Sarbanes-oxley act of 2002 In connection with the Annual Report of Cell Tech International Incorporated (the "Company") on Form 10-K/A for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K/A"), I, Marta C. Carpenter, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Form 10-K/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (4) The information contained in the Form 10-K/A fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Marta C. Carpenter ------------------------- Marta C. Carpenter Chief Accounting Officer DATED: August 14, 2003 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Cell Tech International Incorporated and will be retained by Cell Tech International Incorporated and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----