10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NO. 0-21015 CELL TECH INTERNATIONAL INCORPORATED (Exact Name of Registrant as Specified in its Charter) Delaware 22-3345046 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 565 Century Court KLAMATH FALLS, OREGON 97601 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including area code: (541) 882-5406 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of July 31, 2003, the number of shares outstanding of the registrant's sole class of common stock, par value $0.01 per share was 13,974,087.

~~September~~TABLE ~~30,~~OF ~~December~~CONTENTS ~~31,~~PART ~~2002~~I ~~2001~~ -~~------------~~ ~~------------~~FINANCIAL ~~(Unaudited)~~INFORMATION....................................................................................1 ~~Assets~~ITEM ~~Current~~1. ~~assets~~FINANCIAL ~~Receivables~~STATEMENTS................................................................................1 $Consolidated ~~267,157~~Balance $Sheets..............................................................................1 ~~327,083~~Consolidated ~~Current~~Statements ~~portion~~ of ~~inventories~~ Operations....................................................................2~~,000,000~~ ~~2,000,000~~Consolidated ~~Prepaid~~Statements ~~expenses~~of ~~373,188~~Cash ~~460,860~~Flows....................................................................3 ~~-----------~~Notes ~~-----------~~to ~~Total~~Consolidated ~~current~~Financial ~~assets~~Statements...............................................................4 ~~2,640,345~~ITEM 2~~,787,943~~. ~~-----------~~MANAGEMENT'S ~~-----------~~DISCUSSION ~~Long-term~~AND ~~inventories,~~ANALYSIS ~~net~~OF ofFINANCIAL ~~current~~CONDITION ~~portion~~AND ~~3,772,135~~RESULTS ~~7,304,778~~OF ~~Property~~OPERATIONS...............10 ~~and~~Overview................................................................................................11 ~~equipment,~~Results ~~net~~ of ~~accumulated~~Operations...................................................................................13 ~~depreciation~~Three ~~9,102,617~~months ~~7,318,683~~ended ~~Property~~June ~~and~~30, ~~equipment~~2003 ~~held~~compared ~~for~~with ~~sale,~~the ~~net~~three --months ~~2,271,305~~ended ~~Other~~June ~~assets 593~~30,~~937~~ ~~292,092~~2002.....................13 ~~-----------~~Six ~~-----------~~months ~~Total~~ended ~~assets~~June ~~$16~~30,~~109,034~~ ~~$19,974,801~~2003 ~~===========~~compared ~~===========~~with ~~Liabilities~~the ~~and~~six ~~Shareholders'~~months ~~Equity~~ended ~~Current~~June ~~liabilities Bank overdraft $ 101~~30,~~008~~ $2002.........................15 ~~763,105~~Liquidity ~~Accounts~~and ~~payable~~Capital ~~2,576,730~~Resources.........................................................................16 ~~2,527,078~~Cash ~~Commissions~~Flows..............................................................................................17 ~~payable~~Recent ~~986,127~~Financial ~~1,219,136~~Accounting ~~Sales~~Standards ~~taxes~~Board ~~payable~~Statements..................................................17 ~~71,945~~Special ~~82,343~~Note ~~Accrued~~Regarding ~~payroll~~Forward-Looking ~~and~~Statements.......................................................18 ~~related~~ITEM ~~liabilities~~3. ~~349,245~~QUANTITATIVE ~~252,944~~AND ~~Other~~QUALITATIVE ~~accrued~~DISCLOSURES ~~expenses~~ABOUT ~~935,768~~MARKET ~~1,133,438~~RISK..........................................19 ~~Current~~ITEM ~~portion~~4. ofCONTROLS ~~long-term~~AND ~~debt~~PROCEDURES.............................................................................19 ~~2,413,790~~PART ~~2,160,986~~II ~~Related party payable 734,453 1,086,099~~ --~~---------~~ ~~-----------~~OTHER ~~Total~~INFORMATION....................................................................................20 ~~current~~ITEM ~~liabilities~~1. ~~8,169,066~~LEGAL ~~9,225,129~~PROCEEDINGS...................................................................................20 ~~-----------~~ITEM ~~-----------~~2. ~~Commitments~~CHANGES ~~and~~IN ~~contingencies~~SECURITIES...............................................................................21 ~~Shareholders'~~ITEM ~~equity~~3. ~~Series~~DEFAULTS AUPON ~~convertible~~SENIOR ~~preferred~~SECURITIES.....................................................................21 ~~stock~~ITEM -4. noSUBMISSION ~~par~~OF ~~value;~~MATTERS ~~4,175,000~~TO ~~shares~~A ~~authorized;~~VOTE ~~none~~OF ~~issued~~SECURITY ~~and~~HOLDERS.................................................21 ~~outstanding~~ITEM in5. ~~2002~~OTHER ~~and~~INFORMATION...................................................................................22 ~~2001~~ITEM --6. --EXHIBITS ~~Series~~AND BREPORTS ~~convertible~~ON ~~preferred~~FORM ~~stock~~ 8-K....................................................................22 noSIGNATURES..................................................................................................23 ~~par~~CERTIFICATION ~~value;~~PURSUANT ~~800,000~~TO ~~shares~~SECTION ~~authorized;~~302 ~~none~~(A) ~~issued~~OF ~~and~~THE ~~outstanding~~SARBANES-OXLEY inACT OF 2002......................................24 ~~and~~CERTIFICATION ~~2001~~PURSUANT --TO --SECTION ~~Undesignated~~302(A) ~~preferred~~OF ~~stock~~THE SARBANES-OXLEY noACT ~~par~~OF ~~value;~~2002.......................................25 ~~1,825,000~~CERTIFICATION ~~shares~~PURSUANT ~~authorized;~~TO ~~none~~18 ~~issued~~U.S.C. ~~and~~SECTION ~~outstanding~~1350 inAS ~~2001~~ADOPTED ~~and~~PURSUANT ~~2000~~TO --SECTION --906 ~~Common~~OF ~~stock~~THE SARBANES-OXLEY ~~$.01~~ACT ~~par~~OF ~~value; in~~ 2002.............................................................................................................26 ~~and~~CERTIFICATION ~~2001,~~PURSUANT ~~50,000,000~~TO ~~shares~~18 ~~authorized,~~U.S.C. ~~10,640,895~~SECTION ~~and~~1350 ~~10,640,895~~AS ~~shares~~ADOPTED ~~issued~~PURSUANT ~~and~~TO ~~outstanding~~SECTION ~~106,409~~906 ~~106,409~~OF ~~Additional~~THE ~~paid~~SARBANES-inOXLEY ~~capital~~ACT ~~2,299,696~~OF 2,299,696 Retained earnings 5,533,863 8,343,567 ----------- ----------- Total shareholders' equity 7,939,968 10,749,672 ----------- ----------- Total liabilities and shareholders' equity $16,109,034 $19,974,801 =========== ===========2002.............................................................................................................27

~~For~~CELL ~~the~~TECH ~~Nine~~INTERNATIONAL ~~Months~~INCORPORATED ~~Ended~~AND ~~For~~SUBSIDIARIES ~~the~~PART ~~Three~~I ~~Months~~- ~~Ended~~FINANCIAL ~~September~~INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS June 30, ~~September~~December 3031, 2003 2002 ------------- ------------------ (Unaudited) ASSETS CURRENT ASSETS Receivables $ 189,139 $ 372,011 Current portion of inventories 2,300,000 2,300,000 Prepaid expenses 289,397 586,662 ------------- ---------------- LONG--TERM ~~2002~~INVENTORIES, ~~2001~~net ~~2002~~of ~~2001~~current ~~------------~~portion 3,295,845 3,824,298 PROPERTY AND EQUIPMENT, net of accumulated depreciation 6,383,212 6,801,389 PROPERTY AND EQUIPMENT IDLE, net 701,287 1,382,570 OTHER ASSETS 360,395 546,846 ------------- ------------ ----~~--------~~ ~~(Unaudited)~~Total ~~(Unaudited)~~assets ~~(Unaudited)~~$ ~~(Unaudited)~~13,519,275 ~~Revenue~~ $ 2015,~~311~~813,~~470~~776 ============= ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank overdraft $ 22554,~~944,017~~885 $ 6468,~~450~~008 Accounts payable 761,~~651~~338 $594,329 7Commissions payable 899,~~278~~535 970,~~704~~315 ~~Cost~~Sales oftaxes ~~sales~~payable 857,~~573~~908 69,~~349~~797 7Accrued payroll and related liabilities 338,~~344~~518 291,~~044~~140 4Other accrued expenses 816,~~697~~615 1,~~137~~848,070 Current portion of long-term debt 2,~~319~~550,~~094~~600 2,872,145 Related party payable 573,002 427,767 ------------- ---------------- Total current liabilities 6,552,401 7,541,571 ------------- ---------------- ~~Gross~~LONG-TERM ~~profit~~LIABILITIES ~~11,738,122~~Long-term 15debt,~~599,973~~ ~~1,753,515~~net ~~4,959,610~~of ~~Commissions~~current ~~9,326,815~~portion 11(Note 5) 782,~~123,075~~262 21,~~819~~019,~~479~~920 3Other long-term liabilities 50,~~441,033~~000 - ------------- ---------------- Total liabilities 7,384,663 8,561,491 ------------- ---------------- ~~Gross~~COMMITMENTS ~~profit~~AND ~~(loss)~~CONTINGENCIES ~~after~~STOCKHOLDERS' ~~commissions~~EQUITY ~~2,411,307~~Series A convertible preferred stock - no par value; 4,~~476~~175,~~898~~000 ~~(1,065,964)~~shares ~~1,518,577~~authorized; ~~Operating~~none ~~Expenses:~~issued and outstanding in 2003 and 2002 - -~~Selling~~ ~~expenses~~Series ~~2,794,344~~B ~~3,087,538~~convertible ~~979,929~~preferred ~~991,955~~stock -~~-General~~ ~~and~~no ~~administrative~~par ~~1,020,668~~value; 1800,~~952,151~~000 ~~417,784~~shares ~~498,857~~authorized; none issued and outstanding in 2003 and 2002 - -~~Shipping~~ ~~and~~Undesignated ~~handling~~preferred ~~expenses~~stock ~~1,280,566~~- no par value; 1,~~364~~825,~~043~~000 ~~447,014~~shares ~~420,233~~authorized; ~~--Research~~none issued and ~~development~~outstanding ~~131,601~~in ~~153,290~~2003 ~~49,458~~and ~~45,225~~2002 -~~-----------~~ -~~-----------~~ ~~------------~~Common stock -~~-----------~~ ~~Operating~~$.01 ~~loss~~par (2value; in 2003 and 2002,~~815,872)~~ (250,~~080~~000,~~124)~~000 (2shares authorized,~~960~~ 13,~~149)~~974,087 ~~(437~~and 10,~~693)~~640,895 ~~Other~~shares ~~income~~issued ~~155,711~~and ~~372,578~~outstanding 42139,~~693~~741 ~~175~~106,~~580~~409 ~~Interest~~Additional ~~expense~~paid-in ~~(149~~capital 2,~~543)~~891,224 ~~(513~~2,~~220)~~299,696 ~~(53~~Retained earnings 3,~~808)~~103,647 ~~(161~~4,~~795)~~846,180 -------------- --------------- Total stockholders' equity 6,134,612 7,252,285 ------------- ---------------- ~~Net~~Total ~~loss~~liabilities $and ~~(2,809,704)~~stockholders' $equity ~~(2,220,766)~~ $ (213,~~971~~519,~~264)~~275 $ ~~(423~~15,908) ============ ============ ============ ============ Basic and diluted loss per share $ (0.22) $ (0.20) $ (0.23) $ (0.03) ============ ============ ============ ============ Weighted average number of common shares outstanding used to calculate basic and diluted loss per share 12813,~~645,653~~776 ~~10,640,895 12,959,649 10,640,895~~ ============ =~~===========~~ ============ ====~~========~~ 1

See accompanying notes to consolidated financial statements.

CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the ~~Nine~~Six Months Ended ~~September~~For the Three Months Ended June 30, June 30, ------------------------------- ~~2002 2001~~ ----------- ------------------------ ~~Cash~~2003 ~~flows~~2002 ~~from~~2003 ~~operating~~2002 ~~activities~~------------- ~~Net~~------------- ~~loss~~------------------ $------------- (~~2,809,704~~Unaudited) $(~~2,220,766~~Unaudited) ~~Adjustments~~(Unaudited) to(Unaudited) ~~reconcile~~REVENUE ~~net~~$ ~~loss~~11,600,925 to$ ~~cash~~13,860,819 ~~provided~~$ by5,667,933 ~~operating~~$ ~~activities: Depreciation and amortization 844~~6,~~224 2~~755,~~058,012~~115 ~~Reserve~~COST ~~for~~OF ~~potentially~~SALES ~~unsaleable inventories~~ 3,~~100~~628,~~000~~427 ~~-- Loss (gain) on sale of fixed assets~~ 3,~~381 (15~~967,~~175)~~740 ~~Changes in assets and liabilities: Receivables 59~~1,~~926 107~~762,~~425~~165 ~~Inventories 432,643~~ 1,~~433~~955,~~960~~816 ~~Prepaid~~------------- ~~expenses~~------------- ~~87,672~~------------------ ~~153,887~~------------- ~~Other~~GROSS ~~assets~~PROFIT ~~(301~~7,~~845) (3~~972,~~714)~~498 ~~Accounts payable 49~~9,~~652 65~~893,~~732~~079 ~~Commissions payable (233~~3,~~009)~~905,768 ~~(227~~4,~~231)~~799,299 ~~Sales~~COMMISSIONS ~~tax payable (10~~4,~~399)~~896,457 6,~~708 Accrued payroll and payroll related liabilities 96~~380,~~301~~258 322,~~213 Other accrued expenses (197~~361,~~670)~~022 ~~(229~~3,~~897)~~053,187 ------------- ------------- ~~Net cash provided by operating activities 1,121,172 1,161,154~~ ------------------ ------------- ~~Cash~~GROSS ~~flows~~PROFIT ~~from~~AFTER ~~investing~~COMMISSIONS ~~activities~~3,076,041 ~~Purchase~~3,512,821 of1,544,746 ~~property~~1,746,112 ~~and~~SHIPPING ~~equipment~~AND ~~(193~~HANDLING EXPENSES 747,~~868)~~012 ~~(229~~742,~~633)~~024 ~~Proceeds~~363,408 ~~from~~359,088 ~~disposals~~SELLING ofEXPENSES ~~equipment~~2,182,396 ~~700~~1,941,493 471,~~000~~072,359 ~~Additions~~990,060 toRESEARCH ~~construction~~AND inDEVELOPMENT ~~progress~~105,724 ~~(167~~82,~~066)~~143 46,165 46,263 GENERAL AND ADMINISTRATIVE 1,112,159 610,051 633,271 348,213 ASSET WRITE-DOWN 528,632 - 528,632 - ------------- ------------- ~~Net cash used for investing activities (360,234) (182,633)~~ ------------------ ------------- ~~Cash~~OPERATING ~~flows~~INCOME ~~from financing activities Bank overdraft~~ (~~662,097~~LOSS) (~~548~~1,~~427~~599,882) ~~Net~~137,110 ~~payments on long-term debt~~ (1,~~847~~099,~~195~~089) ~~(760~~2,~~380)~~488 ~~Proceeds~~OTHER ~~from~~INCOME ~~debt~~133,386 ~~financing~~120,185 2(33,~~100~~083) 98,~~000~~588 --INTEREST ~~Net~~EXPENSE ~~proceeds from~~ (~~repayment~~276,037) of(95,735) ~~related party debt~~ (~~351~~111,~~646~~310) ~~330~~(48,~~286~~589) ------------- ------------- ~~Net cash used for financing activities (760,938) (978,521)~~ ------------------ ------------- ~~Net~~NET ~~increase~~INCOME (~~decrease~~LOSS) in$ ~~cash~~(1,742,533) ~~and~~$ ~~cash~~161,560 ~~equivalents~~$ --(1,243,482) --$ ~~Cash~~52,487 ~~and~~============== ~~cash~~============== ~~equivalents,~~================== ~~beginning~~============== ofBASIC ~~year~~AND --DILUTED --INCOME ~~-----------~~(LOSS) ~~-----------~~PER ~~Cash~~SHARE ~~and~~$ ~~cash~~(0.13) ~~equivalents,~~$ ~~end~~0.01 of$ ~~year~~(0.09) $ --0.01 $============== --============== ================== ============== ~~Supplemental~~WEIGHTED ~~disclosure~~AVERAGE ofNUMBER ~~cash~~OF ~~flow~~COMMON ~~information~~SHARES ~~Cash~~OUTSTANDING ~~paid~~USED ~~during~~TO ~~the~~CALCULATE ~~period~~BASIC ~~for:~~AND ~~Interest~~DILUTED $LOSS ~~128~~PER SHARE 13,~~583~~790,519 $12,467,534 ~~479~~13,~~879~~790,519 12,467,534 ============== ============== ================== ==============

See accompanying notes to consolidated financial statements. 2

~~September~~CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, ~~December~~--------------------------------- ~~31,~~2003 2002 ~~2001~~ -------------- ------------- ~~Work~~CASH inFLOWS ~~progress~~FROM OPERATING ACTIVITIES Net income (loss) $ 9(1,~~067~~742,~~250~~533) $ 9161,~~524~~560 Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 519,~~882~~966 ~~Finished~~580,277 ~~goods~~Impairment ~~685~~of fixed assets and intangibles 528,~~656~~632 ~~654~~- Loss on sale of fixed assets 90,~~759~~498 3,381 Changes in assets and liabilities: Receivables 182,872 50,577 Inventories 528,453 631,155 Prepaid expenses 297,265 201,901 Other assets 186,451 (28,473) Accounts payable 167,009 (367,122) Commissions payable (70,780) (93,327) Sales ~~aids~~tax 19payable (11,~~229~~889) 25(12,~~137~~569) Accrued payroll and payroll related liabilities 47,378 (14,400) Other accrued expenses (356,595) 102,560 -------------- ------------- 9Net cash provided by operating activities 366,~~772,135~~727 101,~~204~~215,~~778~~520 ~~Less~~-------------- ~~reserve~~------------- ~~for~~CASH ~~potentially~~FLOWS ~~unsaleable~~FROM ~~inventories~~INVESTING ACTIVITIES Purchase of property and equipment (464,~~000~~724) (162,~~000~~417) Proceeds from disposals of equipment 75,116 700 Additions to construction in progress (~~900~~50,~~000~~028) (167,066) -------------- ------------- 5Net cash used for investing activities (39,~~772~~636) (328,~~135~~783) 9-------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft 86,~~304~~877 (567,~~778~~373) ~~Less~~Net ~~current~~payments ~~portion~~on long-term debt (2559,~~000~~203) (145,~~000~~311) Net proceeds from related party debt 145,235 (2174,~~000~~053) -------------- ------------- Net cash used for financing activities (327,~~000~~091) (886,737) -------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS, beginning of year - - -------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 3- $ - ================ ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 276,~~772~~037 $ 79,~~135~~075 ================ ============== NON-CASH FLOW TRANSACTIONS Par value of accrued penalty shares issued: $ 733,~~304~~332 $ - Additional paid-in capital related to accrued penalty shares issued $ 591,~~778~~528 $ - Decrease in other accrued expenses for accrued penalty shares issued $ (624,860) $ - ================ ============== See accompanying notes to consolidated financial statements.

3 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 ("Cell Tech" or "we" "us" "our") and The New Algae Company, Inc. ("NAC"), collectively the "Company," are engaged in producing and marketing food supplement products made with blue-green algae harvested from Klamath Lake, Oregon. We use a multi-level distributor network throughout the United States, the District of Columbia, Guam, Puerto Rico, American Samoa, the Virgin Islands and Canada to distribute our products. PRESENTATION OF INTERIM INFORMATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of our management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of our financial information as of and for the periods presented. The consolidated results of operations of any interim period are not necessarily indicative of the consolidated results of operations we expect for the fiscal year. For further information, refer to the consolidated financial statements and accompanying footnotes included in our annual report on Form 10-K and 10-K/A for the year ended December 31, 2002. GOING CONCERN During 2002, we were able to obtain new financing that allowed us to repay the borrowings under the former line of credit. As of June 30, 2003, we are in compliance with the loan covenants under the new loan agreement. Additionally, management has introduced several new products and advertising campaigns in order to increase revenues and reverse the trend of net losses in the first half of 2003 and prior years. Although management believes that it has made progress during the first half of 2003 on issues affecting our ability to continue as a going concern, we have experienced recurring net losses and have negative working capital at June 30, 2003. These conditions give rise to substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis. We are continuing our efforts to raise both debt and equity financing. However, there can be no assurance that we will be able to service additional financing, or that if such financing is available, whether the terms or conditions would be acceptable to us. 4 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF CONSOLIDATION Our accompanying consolidated financial statements include our accounts and our subsidiary, NAC. We have eliminated Intercompany transactions and balances on consolidation. USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. REVENUE RECOGNITION We recognize revenue from the sale of our products upon shipment, at which time title passes. We estimate an allowance for sales returns based on historical experience with product returns. ACCOUNTING FOR STOCK OPTIONS We have adopted the intrinsic value method of accounting for employee stock options as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123) and as amended by SFAS No. 148. It discloses the pro forma effect on loss and loss per share as if we had applied the fair value based method. For equity instruments, including stock options issued to non-employees, the fair value of the equity instruments or the fair value of the consideration received, whichever is more readily determinable, is used to determine the value of services or goods received and the corresponding charge to operations. We have not disclosed the effect on loss and loss per share as if we had applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation because it is not significantly different from the historical results. 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." In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which provides guidance on the income statement classification of consideration from a vendor to a reseller in connection with the reseller's purchase of the vendor's products or to promote sales of the vendor's products. We pay commissions to our distributors as compensation for sales and marketing activities as evidenced by downline growth and sales volume and accordingly classify these expenses as a cost, rather than as a reduction of revenue. There was no effect on the consolidated financial position, results of operations or cash flows as a result of implementation of this pronouncement. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but will be reviewed annually, or more frequently if impairment indicators arise, for impairment. We will continue to amortize, over their estimate useful lives of 10 years, other intangible assets with finite lives, consisting of trademarks with a carrying value of $57,302 at January 1, 2002. As of the date of the adoption of the new accounting standards, there was no remaining goodwill to be amortized. 5 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On January 1, 2002, we 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. We account for the impairment of long-lived assets to be held and used, when indications of impairment are present, by evaluating the carrying value in relation to the operating performance and future undiscounted cash flows of the underlying business. We report long-lived assets held for disposal at the lower of their carrying value or fair value less costs to sell. During the three months ended June 30, 2003, we identified certain assets for sale by auction and recorded an additional impairment of $528,632 in order to value the assets at their net realizable value. RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the current period presentation. NOTE 2 - INVENTORIES Inventories consist of the following: June 30, December 31, 2003 2002 ----------------- ---------------- Work in progress $ 8,447,041 $ 9,520,527 Finished goods 551,908 588,586 Sales aids 18,687 15,185 ----------------- ---------------- 9,017,636 10,124,298 Less reserve for potentially unsaleable inventories (3,421,791) (4,000,000) ----------------- ---------------- 5,595,845 6,124,298 Less current portion (2,300,000) (2,300,000) ----------------- ---------------- $ 3,295,845 $ 3,824,298 ----------------- ---------------- Certain of our inventory is marketable only to the agricultural market. Sales in this market have been less than anticipated and management has recognized that an impairment of inventory may exist. We have established reserves of $3,421,791 and $4,000,000 at June 30, 2003 and December 31, 2002, respectively. NOTE 3 -- EARNINGS PER SHARE COMPUTATION The computations of the weighted-average common shares used in the computation of basic and diluted net loss per share is based on 13,790,519 and 12,467,534 shares for the six months ended June 30, 2003 and 2002, respectively. Potential dilutive securities were not included in the EPS calculation since their effect would be antidilutive. Potential dilutive securities consisted of outstanding stock options and convertible preferred stock and common stock purchase warrants. 6 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of our agreements that we have determined are within the scope of FIN 45. Under our bylaws, we have agreed to indemnify our officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. We have a separate indemnification agreement with each of our directors that requires us, subject to certain exceptions, to indemnify him or her to the fullest extent authorized or permitted by our bylaws and the Delaware Corporation Code. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors and officer liability insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of December 31, 2002 or June 30, 2003. We enter into indemnification provisions under (i) our agreements with other companies in our ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) our agreements with investors. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, we have agreed to reimburse employees for certain expenses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2002 or June 30, 2003. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors (if any) do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We are required to apply FIN No. 46 to all new variable interest entities created or 7 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, we are required to apply FIN No. 46 beginning on July 1, 2003. We do not anticipate that FIN No. 46 will materially affect our consolidated financial statements. In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify the following financial instruments as liabilities (or assets in some circumstances) in its financial statements: instruments issued in the form of shares that are manditorily redeemable through the transfer of the issuer's assets at a specified date or upon an event that is likely to occur; an instrument (other than an outstanding share) that embodies an obligation to repurchase the issuer's equity shares and that requires or may require the issuer to settle the obligation through the transfer of assets; an instrument that embodies an unconditional obligation; or an instrument (other than an outstanding share) that embodies a conditional obligation that the issuer must or may settle by issuing a variable number of equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We are currently assessing the impact of this statement on our consolidated financial statements. NOTE 5 - LONG-TERM DEBT In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an assignment of our financing facility with Coast Business Credit. At the same time, we entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans will not declare a default until June 30, 2003, when the entire principal is due. La Jolla Loans extended the forbearance period to June 30, 2004 by payment of a $75,000 renewal fee. Interest of $24,208 at an effective rate of 14% is payable monthly along with additional monthly impound payments of approximately $65,000. La Jolla Loans will defer the difference between the minimum interest payment of $45,000 under the agreement with Coast Business Credit and the $24,500 minimum interest payments under the forbearance agreement for the forbearance period. If we fully perform under the terms and conditions of the forbearance agreement and no default occurs during the forbearance period, La Jolla Loans will release us from any obligation to pay that portion of the minimum monthly interest payments in excess of $24,208. The outstanding principal balance at June 30, 2003 was $2,075,000. NOTE 6 - CONTINGENCIES MICROCYSTIS As a result of certain conditions, Microcystis, a toxic algae, occasionally blooms in Klamath Lake at the same time aphanizomenon flos-aquae algae is harvested. We regularly test the algae we harvest for possible contamination. Algae that does not meet our standards is not used in products for human or animal consumption. In 1997, the Oregon Department of Agriculture issued an administrative rule that created a standard of 1 microgram per gram (1 ppm) of Microcystis in products for human consumption that contain aphanizomenon flos-aquae algae. The Oregon Department of Agriculture has raised no questions about our products under this rule. In some years, the presence of Microcystis may reduce the quantity of aphanizomenon flos-aquae algae that we can harvest. LITIGATION In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that we, erroneously sued as Cell Tech Products, Inc., engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a tentative decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting us from making deceptive representations in its advertising or literature disseminated in California and ordering us to refund the purchase price paid by California customers for our algae products from the date four years prior to the filing of the action through the trial date in November of 2002. In response to the tentative decision, our counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its Final Decision, which essentially affirms the tentative decision. Plaintiff has submitted a proposed judgment to the court consistent with the Tentative and Final Decisions. The parties mediated this matter on May 9, 2003 before a retired Orange County, California Superior Court judge and agreed to submit a proposed confidential settlement to the Superior Court within 60 days, which they have done. The Superior Court has scheduled a hearing on the matter in late August. We do not believe that the proposed refund to California customers will be in an amount that would have a material adverse impact on our business and financial position. 8 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTE 6 - CONTINGENCIES (CONTINUED) On February 19, 2002, Daryl Kollman filed two separate Notices of Claim of Lien upon Chattels against us, NAC and Marta Carpenter and others, in Klamath County, Oregon. Mr. Kollman alleges, among other things, that we owe him approximately $705,693 in past due rent. Mr. Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr. Kollman and Marta Carpenter, approximately $717,900 in past due rent. Mr. Kollman asserts that we are not entitled to remove our property from property owned by him, Marta Carpenter and KCS and seeks to subject our to foreclosure proceedings. We intend to vigorously defend against these liens. We cannot predict the amount of loss, if any, that could result from these liens, but do not believe that an unfavorable outcome would have a material adverse impact upon our financial condition, cash flow, or results of operations. On March 27, 2002, the Nature Conservancy filed an action against us in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that our wholly owned subsidiary, The New Earth Company, was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. We 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 action dismissed in January 2003. The net effect of this was to increase net income during the first quarter of 2003 by $161,956. On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit Court for the State of Oregon for Klamath County to evict us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we have not paid approximately $1,050,000 in rent. We have voluntarily vacated all of the KCS property we do not need to support our current operations. We contend that we have paid all rents owing and intend to vigorously defend this lawsuit. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. On October 7, 2002, Daryl Kollman, one of our principal shareholders, filed a lawsuit against us and certain of our 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 us. First, Mr. Kollman alleges that we breached an agreement to register our stock for public sale and seeks damages of an amount he must prove at trial, but not less than $9,282,000. Second, Mr. Kollman claims that we conspired with Marta C. Carpenter (formerly known as Marta C. Kollman), a principal stockholder and our President, Chief Executive Officer and one of our directors; Donald P. Hateley, our Chairman of the Board of Directors; and others to prevent the registration of Mr. Kollman's stock and to cause other financial injury to him. As a result, Mr. Kollman seeks $32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars in damages on his own behalf and on behalf of us against Marta Carpenter, Mr. Hateley and others based on a variety of legal theories, many of which either have been or are being litigated in other cases. We intend to vigorously defend the direct claims asserted in this lawsuit, and are currently evaluating the claims that Mr. Kollman has asserted on our behalf. We cannot predict the amount of loss, if any, which could result from this lawsuit and an unfavorable outcome could have a material adverse impact upon our financial condition, cash flow, or results of operations. LIEN ON COMPANY STOCK Our stock owned by Daryl Kollman and Marta C. Carpenter is subject to a tax lien filed by the Internal Revenue Service. A trust holds the stock and the IRS will release it upon satisfaction of federal income taxes owed by Mr. Kollman and Ms. Carpenter. Mr. Kollman and Ms. Carpenter retain voting power over the stock held in trust. Mr. Kollman and Ms. Carpenter have agreed to sell their shares as needed, and as allowed by federal securities laws, to make quarterly payments to the Internal Revenue Service. Should Mr. Kollman or Ms. Carpenter fail to make such payments in a timely manner, the Internal Revenue Service may seize the shares from the trust. The Internal Revenue Service would thereafter sell or judicially foreclose on some or all of the shares to satisfy Mr. Kollman and Ms. Carpenter's tax liabilities. The IRS has subordinated its lien in favor of our lender for receivable loans, advances and inventory loans, term loans, and equipment acquisition loans. 9 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES NOTE 6 - CONTINGENCIES (CONTINUED) COVENANTS RELATED TO THE PRIVATE PLACEMENT TO ZUBAIR KAZI In connection with the sale of common shares to a private investor, Zubair Kazi, in 1999, we agreed to issue common stock and warrants to purchase common stock to Mr. Kazi if the consolidated stockholders' equity was less than $20,000,000 at December 31, 1999. As a result, penalty shares have accrued and we issued 3,333,192 shares of common stock to Mr. Kazi during the second quarter of 2003 and we converted the associated accrued liability of $624,860 to equity. Warrants to purchase an additional 3,333,192 shares of common stock were also due to Mr. Kazi on March 31, 2003. During the 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 the financial statements. Additionally, we were to register the shares originally sold to Mr. Kazi for resale within 120 days of the sale. We have accrued and will continue to accrue additional penalties until the shares are registered. The 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 also obligated to issue additional securities to Mr. Kazi upon the effective date of our next registration statement. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Act provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements, other than statements of historical fact, that we make in this Quarterly Report on Form 10-Q are forward-looking. The words "anticipates," "believes," "expects," "intends," "will continue," "estimates," "plans," "projects," the negative of these terms and similar expressions are intended to identify forward-looking statements. However, the absence of these words does not mean the statement is not forward-looking. Our forward-looking statements are subject to certain risks, trends, and uncertainties that are difficult to predict and could cause actual results to vary materially from anticipated results. In particular, statements regarding market acceptance of our marketing and merchandising concepts, changes in market conditions, demand for and market acceptance of new and existing products, availability and development of raw materials and new products, increased competition, failure to attain satisfactory outside financing and adverse weather conditions at Upper Klamath Lake are forward-looking. The following factors, among others, could cause actual results to differ from those indicated in the forward-looking statements: o management's plans, objectives and budgets for its future operations and future economic performance; o capital budget and future capital requirements; o meeting future capital needs; o realization of any deferred tax assets; o the level of future expenditures; o impact of recent accounting pronouncements; o the outcome of regulatory and litigation matters; and o the assumptions described in this report underlying such forward-looking statements. Actual results and developments may materially differ from those expressed in or implied by such statements due to a number of factors, including: o those described in the context of such forward-looking statements; o future product development and manufacturing costs; o changes in our incentive plans; o timely development and acceptance of new products; 10 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES o the markets of our domestic and international operations; o the impact of competitive products and pricing; o the political, social and economic climate in which we conduct operations; and o the risk factors described in other documents and reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2002. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis. During 2002, we were able to obtain new financing that allowed us to repay the borrowings under the former line of credit. As of June 30, 2003, we are in compliance with the loan covenants under the new loan agreement. Additionally, management has introduced several new products and advertising campaigns in order to increase revenues and reverse the trend of net losses in the first half of 2003 and prior years. Although management believes that it has made progress during the first half of 2003 on issues affecting our ability to continue as a going concern, we have experienced recurring net losses and have negative working capital at June 30, 2003. These conditions give rise to substantial doubt about our ability to continue as a going concern. 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. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievement. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections to other forward-looking statements. We intend the following discussion to assist in the understanding of our financial position and our results of operations for the three and six months ended June 30, 2003 compared to the same period in 2002. You should refer to the Consolidated Financial Statements and related Notes in conjunction with this discussion. Unless stated otherwise, all financial information presented below, throughout this report and in the Consolidated Financial Statements and related Notes includes Cell Tech and NAC on a consolidated basis. OVERVIEW We develop and distribute products made with Aphanizomenon flos-aquae (trade name Super Blue Green(R) Algae, "SBGA") through a network of independent distributors. We currently offer 27 different products intended to appeal to health-conscious consumers. We divide our products into five product lines: Daily Health Maintenance, Digestive Health, Defensive Health, Powdered Drinks and Snacks, Animal and Plant Food and Personal Care. We harvest SBGA and manufacture some of our products at our production facilities in Klamath Falls, Oregon. We are a multi-level marketing organization. Independent distributors make up our sales force. We market our products through our distributors in all fifty states, the District of Columbia, Guam, Puerto Rico, American Samoa, the Virgin Islands and Canada. We encourage our distributors to recruit new distributors into our network. We place recruited distributors beneath the recruiting distributor in our network of distributors. We pay our distributors commissions based on their personal sales and the sales of distributors beneath them. We assist distributors in 11 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES establishing their own businesses and provide them with support programs such as audio and videotapes for training, seminars and an annual convention at our headquarters. We have approximately 35,608 active distributors as of June 30, 2003 compared to approximately 43,393 active distributors as of June 30, 2002. Active distributors are those who have purchased products in the last six months. Our loss per share was $0.12 for the six months ended June 30, 2003 compared to net income of $0.01 per share for the same period in 2002. We primarily relate the net loss for the six months ended June 30, 2003 of $1,632,533 to a decrease in revenue without corresponding decreases in administrative costs and selling expenses. Additionally, the write down in value of the assets we are holding for sale was substantial in the second quarter of 2003. CRITICAL ACCOUNTING POLICIES INVENTORY VALUATION We have a significant investment in algae inventory. Our sole source of blue-green algae is Klamath Lake. Algae grow naturally in Klamath Lake and like any plants are subject to variation due to environmental conditions. The volume of annual harvests varies depending on weather and precipitation conditions. As a result, we carry additional supplies of inventory to sustain operations through low yield harvest years. In addition, we regularly review the amount of blue-green algae on hand and evaluate the likelihood that we will be able to realize the value of our inventory. If we determine that we will not realize all or a portion of our inventory value, adjustments are made to the carrying value through a valuation allowance. The decision to write down a portion of the carrying value of inventory could have a significant adverse effect on our operating results. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS We utilize significant amounts of equipment in our operations to harvest and process blue-green algae from Klamath Lake. During 2001, we developed an alternative method of harvesting algae from Klamath Lake that yields raw algae at a lower total cost for the quantity harvested than the previous harvest method at the A Canal site. As a result, we have taken out of service certain equipment previously used to harvest algae from the canal site. We have written-off equipment taken out of service that we cannot remove from the canal site and has no other use. We have scheduled for auction in September most of the remaining idle equipment. We regularly review our property and equipment offered for sale and if we cannot realize any portion of the carrying value, we make adjustments to reduce the carrying value to its fair value. Due to the nature of auction sales, we are recognizing the potential decrease in value by writing off an additional $528,632 in equipment values during the second quarter. We also regularly review property and equipment used in our operation and test for impairment if conditions indicate we may not recover the carrying value of the property and equipment. If we determine that we will not recover the carrying value and that assets are impaired, we adjust the carrying value through a valuation allowance. The decision to write down a portion of the carrying value of property and equipment used in our operations or offered for sale could have a significant adverse effect on our operating results. SALES INCENTIVES In November 2001, the Emerging Issues Task Force (the "EITF") issued EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which provides guidance on the income statement classification of consideration from a vendor to a reseller in connection with the reseller's purchase of the vendor's products or to promote sales of the vendor's products. We pay commissions to our distributors as compensation for sales and marketing activities as evidenced by downline growth and sales volume and accordingly classify these expenses as a cost, rather than as a reduction of revenue. There was no effect on the consolidated financial position, results of operations or cash flows as a result of implementation of this pronouncement. 12 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES RESULTS OF OPERATIONS The following table summarizes our unaudited operating results as a percentage of net sales for each of the periods indicated.

~~Property~~Six ~~and~~Months ~~equipment~~Ended ~~consist~~June of30, ~~the~~Three ~~following:~~Months ~~September~~Ended June 30, ~~December~~--------------------------------- ~~31,~~---------------------------------- 2003 2002 ~~2001~~2003 2002 --------------- --------------- ~~Land~~--------------- ~~and~~---------------- ~~improvements~~REVENUE $100.0 ~~17,817~~% $100.0 ~~17,817~~% ~~Buildings~~100.0 ~~and~~% ~~improvements~~100.0 ~~6,254,180~~% COST OF SALES 31.3 28.6~~,403,785~~ ~~Furniture~~31.1 ~~and~~29.0 ~~fixtures~~--------------- ~~741,754~~--------------- ~~752,921~~--------------- ~~Machinery~~---------------- ~~and~~GROSS ~~equipment~~PROFIT 68.7 71.4 68.9 71.0 COMMISSIONS 42.2 46.0 41.7 45.2 --------------- --------------- --------------- ---------------- GROSS PROFIT AFTER COMMISSIONS 26.5 25.4 27.2 25.8~~,691,318~~ SHIPPING AND HANDLING EXPENSES 6.4 5.4 6.4 5.3 SELLING EXPENSES 18.8~~,228,088~~ ~~Idle~~14.0 ~~assets~~18.9 14.6 RESEARCH AND DEVELOPMENT 0.9 0.6 0.8~~,040,272~~ 0.7 GENERAL AND ADMINISTRATIVE 9.6 4.4 11.2 5.2 ASSET WRITE-DOWN 4.6 - 9.3 - --------------- --------------- ~~23,745,341~~--------------- ~~15,402,611~~---------------- ~~Less~~OPERATING ~~accumulated~~INCOME ~~depreciation~~ (~~14,642,724~~LOSS) (13.8~~,083,928~~) 1.0 (19.4) - OTHER INCOME 1.1 0.9 (0.6) 1.5 INTEREST EXPENSE (2.4) (0.7) (2.0) (0.7) --------------- --------------- $--------------- ---------------- NET INCOME (LOSS) BEFORE TAXES (15.0) 1.2 (21.9~~,102,617~~) $0.8 ~~7,318,683~~INCOME TAX BENEFIT - - - - --------------- --------------- --------------- ---------------- NET INCOME (LOSS) (15.0 ) 1.2 (21.9) 0.8 =============== =============== =============== ================

THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2002 Net sales for the three months ended June 30, 2003 were $5,667,933, a decrease of $1,087,182 or 16.1% from net sales of $6,755,115 for the three months ended June 30, 2002. We directly relate the decrease in sales to a 22.1% decrease in orders for the same period. Average order size increased to $126 from $118 over the same period. The average number of distributors for the three months ended June 30, 2003 decreased to an average of 36,124, which was 18.4% lower than the average of 44,260 distributors for the three months ended June 30, 2002. 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 68.9% of net sales during the three months ended June 30, 2003 from 71.0% of net sales during the same period in 2002. This decrease was due to continuing production and maintenance costs against a lower sales volume and the agreement with a vendor, which requires the payment of additional fees for use by us of another vendor to dry algae, resulting in a non-inventoriable expense during the period of $58,711. 13 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES Gross profit after commissions represents gross profit less commission expense. Commission expense for the three months ended June 30, 2003 and 2002 was $2,361,022 and $3,053,187, respectively, a decrease of $692,165 or 22.7%. 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. Commission expense as a percentage of sales was 41.7% and 45.2% during the three months ended June 30, 2003 and 2002, respectively. The decrease in the expense as a percentage of sales is due primarily to the implementation of revisions to the commission system in June of 2002. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses and general and administrative expenses. In total, operating expenses increased $900,211 or 51.6% to $2,643,835 for the three months ended June 30, 2003 from $1,743,624 for the three months ended June 30, 2002. We discuss the components of operating expenses discussed below. o Shipping and handling expenses increased $4,320 or 1.2%, to $363,408 in 2003 from $359,088 in 2002. The increase was due to an increase in payroll expenses in 2003. Shipping and handling expenses as a percent of net sales increased to 6.4% for the three months ended June 30, 2003 from 5.3% for the three months ended June 30, 2002. o Selling expenses includes order operator and distributor services expenses, marketing and promotion expenses, and the expenses of the Office of the President and CEO. Selling expenses increased $82,299 between 2003 and 2002 to $1,072,359 from $990,060. This increase was primarily due to an increase in insurance for product liability of $50,000, an increase in advertising expenses of $35,000, an increase in payroll expense of $20,000. We partially offset these increases by a decrease in the credit card merchant fees of $24,000. Selling expenses as a percent of net sales were 18.9% for the three months ended June 30, 2003 and 14.6% of sales for the three months ended June 30, 2002. o Research and development expenses remained constant at $46,165 during the three months ended June 30, 2003 from $46,263 during the same period in 2002, which constituted 0.8% and 0.7% of net sales, respectively. o General and administrative expenses increased by $285,058, or 81.8%, between 2003 and 2002 to $633,271 from $348,213. For the three months ended June 30, 2003, general and administrative expenses averaged 11.2% of sales while they were 5.2% of sales for the three months ended June 30, 2002. The increase between 2003 and 2002 is attributable to an increase in legal fees and costs of $258,000 and an increase in payroll costs of $24,000. o Asset write-down expense increased to $528,632 for the three months ended June 30, 2003 from no related expense in the three months ended June 30, 2002. The additional loss of value for the idle equipment was due to the decision to sell the equipment at auction rather than wait for opportunity to sell the equipment on the open market. Other income decreased by $131,671 to a net expense of $33,083 for the three months ended June 30, 2003 from income of $98,588 for the three months ended June 30, 2002 due primarily to a decrease in management fees charged to Klamath Cold Storage, Inc. of $34,000 and to the termination of a vendor service agreement that resulted in income of $77,000 in 2002 that was not recurring in 2003. Net interest expense increased to $111,310 for the three months ended June 30, 2003 from $48,589 for the three months ended June 30, 2002. This increase was due primarily to interest charges recorded in connection with the settlement of vendor litigation and the resulting note payable. Net interest expense represented 2.0% and 0.7% of sales for each of the three months ended June 30, 2003 and 2002, respectively. Net income decreased by $1,295,969 resulting in a loss of $1,243,482 for the three months ended June 30, 2003 from net income of $52,487 for the comparable period in 2002. As a percentage of net sales, net income decreased to a net loss 14 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES of 21.9% of revenue from net income of 0.8% of revenue for the comparable period in 2002. The decrease in net income was due to net sales decreasing by 16.1% and operating costs increasing by 51.6%. The write down of idle equipment was the largest contributing factor in the increased expenses. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002 Net sales for the six months ended June 30, 2003 were $11,600,925, a decrease of $2,259,894 or 16.3% from net sales of $13,860,819 for the six months ended June 30, 2002. We directly relate the decrease in sales to a 21.5% decrease in orders for the same period. Average order size increased to $124 from $119 over the same period. The average number of distributors for the six months ended June 30, 2003 decreased to an average of 37,809, which was 19% lower than the average of 46,902 distributors for the six months ended June 30, 2002. 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 68.7% of net sales during the six months ended June 30, 2003 from 71.4% of net sales during the same period in 2002. This decrease was due to continuing production and maintenance costs against a lower sales volume and our agreement with a vendor, which requires the payment of additional fees for use by us of another vendor to dry algae, resulting in a noninventoriable expense during the period of $169,911. Gross profit after commissions represents gross profit less commission expense. Commission expense for the six months ended June 30, 2003 and 2002 was $4,896,457 and $6,380,258, respectively, a decrease of $1,483,801 or 23%. 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. Commission expense as a percentage of sales was 42.2% and 46.0% during the six months ended June 30, 2003 and 2002, respectively. The decrease in the expense as a percentage of sales is due primarily to the implementation of revisions to the commission system in June of 2002 and continued revisions in 2003. Operating expenses include shipping and handling expenses, selling expenses, research and development expenses and general and administrative expenses. In total, operating expenses increased $1,300,212 or 38.5% to $4,675,923 for the six months ended June 30, 2003 from $3,375,711 for the six months ended June 30, 2002. We discuss the components of operating expenses discussed below. o Shipping and handling expenses increased $4,988 or 0.6%, to $747,012 in 2003 from $742,024 in 2002. The increase was due to an increase in payroll expenses in 2003. Shipping and handling expenses as a percent of net sales increased to 6.4% for the six months ended June 30, 2003 from 5.4% for the six months ended June 30, 2002. o Selling expenses includes order operator and distributor services expenses, marketing and promotion expenses, and the expenses of the Office of the President and CEO. Selling expenses increased $240,903 between 2003 and 2002 to $2,182,396 from $1,941,493. This increase was primarily due to an increase in insurance for product liability of $101,000, an increase in promotional expenses of $110,000, an increase in payroll expense of $63,000. We partially offset these increases by a decrease in the credit card merchant fees of $54,000. Selling expenses as a percent of net sales were 18.8% for the six months ended June 30, 2003 and 14.0% of sales for the six months ended June 30, 2002. o Research and development expenses increased 28.7% to $105,724 during the six months ended June 30, 2003 from $82,143 during the same period in 2002, which constituted 0.9% and 0.6% of net sales, respectively. The increase related to an increase in payroll cost and laboratory testing. o General and administrative expenses increased by $502,108 between 2003 and 2002 to $1,112,159 from $610,051. For the six months ended June 30, 2003, general and administrative expenses averaged 9.6% of sales while 15 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES they were 4.4% of sales for the six months ended June 30, 2002. The increase between 2003 and 2002 is primarily attributable to an increase in legal fees and costs of $271,000, increase in payroll costs of $45,000 and increase in loss on sale of assets of $87,000. o Asset write-down expense increased to $528,632 for the six months ended June 30, 2003 from no related expense in the six months ended June 30, 2002. The additional loss of value for the equipment we held for sale was due to the decision to sell the equipment at auction rather than wait for opportunity to sell the equipment on the open market. Other income increased by $13,201 to $133,386 for the six months ended June 30, 2003 from $120,185 for the six months ended June 30, 2002 due primarily to the settlement with The Nature Conservancy resulting in income of $161,000 offset by a decrease in management fees charged to Klamath Cold Storage, Inc. of $34,000 and to the termination of a vendor service agreement that resulted in income of $77,000 in 2002 that was not recurring in 2003. Net interest expense increased to $276,037 for the six months ended June 30, 2003 from $95,735 for the six months ended June 30, 2002. This increase was due primarily to interest charges recorded in connection with the settlement of the Oregon Freeze Dry litigation and the resulting note payable. Net Interest expense represented 2.4% and 0.7% of sales for each of the six months ended June 30, 2003 and 2002, respectively. Net income decreased by $1,904,093 resulting in a loss of $1,742,533 for the six months ended June 30, 2003 from net income of $161,560 for the comparable period in 2002. As a percentage of net sales, net income decreased by 16.2% for the six months ended June 30, 2003 resulting in a net loss of 15.0% of revenue from net income of 1.2% of revenue for the comparable period in 2002. The dollar decrease was due to net sales decreasing by 16.3% and by the increase in operating costs of 38.5%. LIQUIDITY AND CAPITAL RESOURCES We had net losses of $3,497,387, $5,015,350 and $2,783,939 for the years ended December 31, 2002, 2001 and 2000, respectively and had a working capital deficit of $4,282,898 and $6,437,186 at December 31, 2002 and 2001, respectively. As a result, our independent certified public accountants have included in our annual report an explanatory paragraph in their report covering those periods, which expresses substantial doubt about our ability to continue as a going concern. Working capital deficit at June 30, 2003 amounted to $3,773,865, which represents an increase in working capital of $509,033 from a working capital deficit of $4,282,898 as of December 31, 2002. At June 30, 2003, we had a bank overdraft of $554,885 versus a bank overdraft of $468,008 as of December 31, 2002. In September 2002, La Jolla Loans, Inc. ("La Jolla Loans") purchased and took an assignment of our financing facility with Coast Business Credit. At the same time, we entered into a Forbearance and Extension Agreement with La Jolla Loans. Under the terms of the forbearance agreement, La Jolla Loans agreed not to declare a default until June 30, 2003, when the entire principal is due. La Jolla Loans extended the forbearance period to June 30, 2004 by payment of a $75,000 renewal fee. Interest of $24,208 at an effective rate of 14% is payable monthly along with additional monthly impound payments of approximately $65,000. La Jolla Loans will defer the difference between the minimum interest payment of $45,000 under the agreement with Coast Business Credit and the $24,500 minimum interest payments under the forbearance agreement for the forbearance period. If we fully perform under the terms and conditions of the forbearance agreement and no default occurs during the forbearance period, La Jolla Loans will release us from any obligation to pay that portion of the minimum monthly interest payments in excess of $24,208. The outstanding principal balance at June 30, 2003 was $2,075,000. We believe that our existing capital resources and bank borrowings are adequate to fund our operations for at least the next 12 months. We have no present commitments or agreements with respect to any acquisitions or purchases of manufacturing facilities or new technologies. Any future changes in our operations could utilize our available capital resources faster than anticipated. Our capital requirements depend on numerous factors, including: 16 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES o the introduction of new products; o change in the number of distributors and the retention of our current distributor base; and o research and development efforts. If existing capital resources are insufficient to meet our capital requirements, we will be required to raise additional funds, which we cannot assure will be available on favorable terms, if at all, or reduce costs which could impair our ability to conduct ongoing business operations. CASH FLOWS Net cash flows provided by operating activities for the six months ended June 30, 2003 amounted to $366,727 compared to cash flows provided by operations of $1,215,520 for the six months ended June 30, 2002. The decrease in cash flows generated by operations is primarily due to a $1,904,093 decrease in net income between the six months ended June 30, 2003 and 2002 and changes in current assets and liabilities. Cash flows used in investing activities for the six months ended June 30, 2003 was $39,636, representing a decrease of $289,147 from net cash used for investing activities of $328,783 for the six months ended June 30, 2002, due to a decrease in equipment purchases during the six months ended June 30, 2003 offset by proceeds received from the sale of equipment previously identified as idle assets. Net cash flows used for financing activities was $327,091 for the six months ended June 30, 2003 versus net cash used for financing activities of $886,737 during 2002. This change is principally due to net repayments of long-term debt of $559,203 partially offset by decreases in the bank overdraft and related party debt. The decrease in long-term debt was due primarily to payments to a vendor and to the settlement with The Nature Conservancy. RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of our agreements that we have determined are within the scope of FIN 45. Under our bylaws, we have agreed to indemnify our officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. We have a separate indemnification agreement with each of our directors that requires us, subject to certain exceptions, to indemnify him or her to the fullest extent authorized or permitted by our bylaws and the Delaware Corporation Code. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors and officer liability insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and have no liabilities recorded for these agreements as of December 31, 2002 or June 30, 2003. We enter into indemnification provisions under (i) our agreements with other companies in our ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) our agreements with investors. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, we have agreed to reimburse employees for certain expenses. The maximum potential amount 17 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2002 or June 30, 2003. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors (if any) do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We are required to apply FIN No. 46 to all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, we are required to apply FIN No. 46 beginning on July 1, 2003. We do not anticipate that FIN No. 46 will materially affect our consolidated financial statements. In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify the following financial instruments as liabilities (or assets in some circumstances) in its financial statements: instruments issued in the form of shares that are manditorily redeemable through the transfer of the issuer's assets at a specified date or upon an event that is likely to occur; an instrument (other than an outstanding share) that embodies an obligation to repurchase the issuer's equity shares and that requires or may require the issuer to settle the obligation through the transfer of assets; an instrument that embodies an unconditional obligation; or an instrument (other than an outstanding share) that embodies a conditional obligation that the issuer must or may settle by issuing a variable number of equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We are currently assessing the impact of this statement on our consolidated financial statements. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of our statements under "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures about Market Risk," "Other Information," the Notes to Consolidated Financial Statements and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to certain events, risks and uncertainties that may be outside our control. Some of these forward-looking statements include statements of: o management's plans, objectives and budgets for its future operations and future economic performance; o capital budget and future capital requirements; o meeting future capital needs; o realization of any deferred tax assets; o the level of future expenditures; o impact of recent accounting pronouncements; o the outcome of regulatory and litigation matters; and o the assumptions described in this report underlying such forward-looking statements. Actual results and developments may materially differ from those expressed in or implied by such statements due to a number of factors, including: o those described in the context of such forward-looking statements; o future product development and manufacturing costs; o changes in our incentive plans; o timely development and acceptance of new products; o the markets of our domestic and international operations; o the impact of competitive products and pricing; o the political, social and economic climate in which we conduct operations; and o the risk factors described in other documents and reports filed with the Securities and Exchange Commission. 18 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES 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, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements and is under no duty to update any of the forward-looking statements after the date of this report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material. Our primary market risks include fluctuations in interest rates. Our management believes that fluctuation in interest rates in the near term would not materially affect our consolidated operating results, financial position or cash flows as we have limited risks related to interest rate fluctuations. Daryl Kollman and Marta C. Carpenter have sole voting and investment power with respect to their shares. The Internal Revenue Service has a security interest in all of their shares pursuant to a Notice of Determination dated June 18, 1999, under the terms of which a trust holds the shares and the trust will release the shares upon Mr. Kollman and Ms. Carpenter's payment of their federal income tax liabilities for various specified years. Mr. Kollman and Ms. Carpenter will sell their shares as needed and allowed by federal and state securities laws to make quarterly payments to the Internal Revenue Service. Mr. Kollman and Ms. Carpenter retain all voting rights incident to their shares while a trust holds the shares. The Internal Revenue Service may seize Mr. Kollman and Ms. Carpenter's shares from the trust if Mr. Kollman and Ms. Carpenter fail to timely cure a default upon their commitments to the Internal Revenue Service under the Notice of Determination. The Internal Revenue Service would thereafter proceed to sell or judicially foreclose some or all of the shares for payment of Mr. Kollman and Ms. Carpenter's tax liabilities as allowed by applicable law. ITEM 4. 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 such evaluation referenced in paragraph (a) above. 19 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In October of 2001, Teachers for Truth in Advertising filed an action in the Superior Court of Tulare County, California alleging that we, erroneously sued as Cell Tech Products, Inc., engaged in unfair business practices and misleading advertising. In January 2003, the Superior Court of Tulare County issued a tentative decision stating that Teachers for Truth in Advertising was entitled to an injunction prohibiting us from making deceptive representations in its advertising or literature disseminated in California and ordering us to refund the purchase price paid by California customers for our algae products from the date four years prior to the filing of the action through the trial date in November of 2002. In response to the tentative decision, our counsel filed a Request for Statement of Decision on January 23, 2003. On February 20, 2003, the Superior Court issued its final decision, which essentially affirms the tentative decision. Plaintiff has submitted a proposed judgment to the court consistent with the tentative and final Decisions. The parties mediated this matter on May 9, 2003 before a retired Orange County, California Superior Court judge and agreed to submit a proposed confidential settlement to the Superior Court within 60 days, which they have done. The Superior Court has scheduled a hearing on the matter in late August. We do not believe that the proposed refund to California customers will be in an amount that would have a material adverse impact on our business and financial position. On February 19, 2002, Daryl Kollman filed two separate Notices of Claim of Lien upon Chattels against, NAC, Marta Carpenter, others and us, in Klamath County, Oregon. Mr. Kollman alleges, among other things, that we owe him approximately $705,693 in past due rent. Mr. Kollman also claims that we owe Klamath Cold Storage, Inc. ("KCS"), a company owned by Mr. Kollman and Ms. Carpenter, approximately $717,900 in past due rent. Mr. Kollman asserts that we are not entitled to remove our property from property owned by him, Ms. Carpenter and KCS and seeks to subject our property to foreclosure proceedings. We intend to vigorously defend against these liens. We cannot predict the amount of loss, if any, that could result from these liens, but do not believe that an unfavorable outcome would have a material adverse impact upon our financial condition, cash flow, or results of operations. On March 27, 2002, the Nature Conservancy filed an action against us in the Circuit Court for the State of Oregon for Klamath County, alleging, among other things, that our wholly owned subsidiary, The New Earth Company, was in default on a promissory note and a trust deed. The Nature Conservancy was seeking $375,000, the principal amount due under the promissory note, plus interest and certain leasehold rights. We had previously recorded the net present value of the promissory note, which had a balance of $313,790 and had been included in the current portion of long-term debt in the December 31, 2002 consolidated balance sheet. The parties signed a settlement agreement and the court action dismissed in January 2003. The net effect of this is an increase to net income during the first quarter of 2003 by $161,956. On June 6, 2002, Daryl Kollman filed a lawsuit in the name of KCS in the Circuit Court for the State of Oregon for Klamath County to evict us from property owned by KCS. In this lawsuit, Mr. Kollman also alleges that we have not paid approximately $1,050,000 in rent. We have voluntarily vacated all of the KCS property, as we do not need it to support our current operations. We contend that we have paid all rents owing and intend to vigorously defend this lawsuit. We cannot predict the amount of loss, if any, that could result from this lawsuit but an unfavorable outcome could have a material adverse effect on our financial condition. On October 7, 2002, Daryl Kollman, one of our principal stockholders, filed a lawsuit against and certain of our officers, directors, counsel and us 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 us. First, Mr. Kollman alleges that we breached an agreement to register our stock for public sale and seeks damages of an amount he has to prove at trial, but not less than $9,282,000. Second, Mr. Kollman claims that we conspired with 20 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES Marta C. Carpenter (formerly known as Marta C. Kollman), a principal stockholder and our President, Chief Executive Officer and one of our directors; Donald P. Hateley, our Chairman of the Board of Directors; and others to prevent the registration of Mr. Kollman's stock and to cause other financial injury to him. As a result, Mr. Kollman seeks $32,931,976 against the defendants. Mr. Kollman also seeks millions of dollars in damages on his own behalf and on behalf of us against Ms. 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. We intend to vigorously defend the direct claims asserted in this lawsuit, and are currently evaluating the claims that Mr. Kollman has asserted on our behalf. We cannot predict the amount of loss, if any, which could result from this lawsuit, and an unfavorable outcome could have a material adverse impact upon our financial condition, cash flow, or results of operations. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Stockholders on July 25, 2003, we submitted and, by vote, our stockholders approved the following actions: (1) Election of five directors; (2) Ratification of the Board's selection of BDO Seidman LLP as our independent certified public accountants; and (3) Approval of our 2000 Stock Incentive Plan. A total of 8,899,875 shares (approximately 63%) of the issued and outstanding shares of the Company were represented by proxy or in person at the meeting. Our stockholders voted these shares on the matters described above as follows: 1. For the directors as follows: NUMBER OF SHARES NUMBER OF SHARES NAME FOR ABSTAINING/WITHHELD ------------------------------------ ------------- --------------------- Donald P. Hateley, Esq., CPA 8,886,575 3,300 Marta C. Carpenter 8,886,564 3,311 Justin Straus 8,886,575 3,300 Christopher J. Blaxland, D.V.M. 8,886,575 3,300 Donald M. Anderson, Ph.D. 8,886,575 3,300 2. For the ratification of the Board's selection of BDO Seidman LLP as our independent certified public accountants as follows: NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES FOR AGAINST ABSTAINING/WITHHELD ------------------ -------------------- ----------------------- 8,886,485 3,390 0 3. For the ratification of the Board's approval of our 2000 Stock Incentive Plan as follows: NUMBER OF NUMBER OF SHARES SHARES NUMBER OF SHARES FOR AGAINST ABSTAINING/WITHHELD -------------------- ------------------- ------------------------ 8,884,116 5,575 184 21 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K Exhibit Number Description 3.1 Certificate of Incorporation, as amended, incorporated by reference to the Registration Statement on Form SB-2 dated June 21, 1996. 3.2 Certificate of Amendment of Certificate of Incorporation, incorporated by reference to the Current Report on Form 8-K dated November 19, 1999. 3.3 Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock incorporated by reference to the Current Report on Form 8-K dated August 2, 1999. 3.4 Amended and Restated Bylaws incorporated by reference to the Registration Statement on Form SB-2 dated June 21, 1996. (31) 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* (b) Current Reports on Form 8-K On April 1, 2003, we filed a current report on Form 8-K to disclose the tentative decision of the Superior Court in the Teachers for Truthful Advertising lawsuit. * Filed herewith. 22 CELL TECH INTERNATIONAL INCORPORATED AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CELL TECH INTERNATIONAL INCORPORATED August 14, 2003 /s/ Marta C. Carpenter ---------------------- Marta C. Carpenter President and Chief Executive Officer 23

------------------------------------------------------------------- Nine Months ended September 30, Three Months ended September 30, 2001 2002 2001 2002 ------ ------ ------ ------ Revenue 100.0% 100.0% 100.0% 100.0% Cost of sales 32.0 42.2 31.9 72.8 ------ ------ ------ ------ Gross profit 68.0 57.8 68.1 27.2 Commissions 48.5 45.9 47.3 43.7 ------ ------ ------ ------ Selling profit (loss) 19.5 11.9 20.9 (16.5) Operating Expenses Selling expenses 13.5 13.8 13.6 15.2 General and administrative 8.5 5.0 6.9 6.5 Shipping and handling expenses 5.9 6.3 5.8 6.9 Research and development 0.7 0.6 0.6 0.8 ------ ------ ------ ------ Operating loss (9.1) (13.8) (6.0) (45.9) Other income 1.6 0.7 2.4 0.6 Interest expense 2.2 0.7 2.2 0.8 ------ ------ ------ ------ Net loss before taxes (9.7) (13.8) (5.8) (46.1) Income tax benefit -- -- -- -- ------ ------ ------ ------ Net loss (9.7) (13.8) (5.8) (46.1) ====== ====== ====== ======

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