1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended: March 31, 2001
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from _____________ to ____________
Commission File Number 0-10147
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DIATECT INTERNATIONAL CORPORATION
----------------------------------------------
(Name of Small Business Issuer in its charter)
California 95-355578
- ------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1134 North Orchard, Suite 206, Boise, Idaho 83706
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(208) 342-2273
----------------------------------------------------
(Registrant's telephone number, including area code)
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.
(1) Yes X No (2) Yes X No
--- --- --- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, No Par Value 28,716,073
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of March 31, 2001
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIATECT INTERNATIONAL CORP.
FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements have been prepared by the
Company, without audit, in accordance with the instructions to Form 10-QSB
pursuant to the rules and regulations of the Securities and Exchange
Commission and, therefore may not include all information and footnotes
necessary for a complete presentation of the financial position, results of
operations, cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(which include only normal recurring accruals) necessary to present fairly the
financial position and results of operations for the periods presented have
been made. These financial statements should be read in conjunction with the
accompanying notes, and with the historical financial information of the
Company.
3
DIATECT INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 596 $ 3,384
Accounts receivable 20,485 58,014
Prepaid interest 40,158 42,550
Prepaid royalties 35,745 37,500
Prepaid expenses 424 -
Inventories 172,563 123,975
----------- -----------
Total Current Assets 269,971 265,423
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Building 23,501 23,501
Equipment 49,195 49,195
Less accumulated depreciation (28,127) (25,573)
----------- -----------
Total Property, Plant and Equipment 44,569 47,123
----------- -----------
OTHER ASSETS
Deposits 150,000 150,000
Goodwill, net of amortization 27,050 27,050
Investment in EPA labels, net of amortization 1,948,732 2,019,534
----------- -----------
Total Other Assets 2,125,782 2,196,584
----------- -----------
TOTAL ASSETS $ 2,440,322 $ 2,509,130
=========== ===========
See accompanying notes.
4
DIATECT INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS (Continued)
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 336,007 234,871
Accounts payable - related parties 43,234 30,795
Deposit payable 20,000 20,000
Line of credit 97,000 97,000
Interest payable 541,663 725,465
Settlements payable 219,693 -
Accrued salaries 56,306 -
Stockholder advance 48,990 -
Other accrued liabilities 2,137 1,021
Notes payable 989,529 1,376,111
----------- -----------
Total Current Liabilities 2,354,559 2,485,263
----------- -----------
COMMITMENTS AND CONTINGENCIES 620,382 236,923
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 28,716,073 shares
issued and outstanding 12,260,630 12,260,630
Stock options 70,260 51,370
Accumulated deficit (12,865,509) (12,525,056)
----------- -----------
Total Stockholders' Equity (Deficit) (534,619) (213,056)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,440,322 $ 2,509,130
=========== ===========
See accompanying notes.
5
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
2001 2000
(Unaudited) (Unaudited)
------------ ------------
REVENUES $ 58,492 $ 41,745
COST OF SALES 29,411 19,783
------------ ------------
GROSS PROFIT 29,081 21,962
------------ ------------
OPERATING EXPENSES
Salaries, wages and benefits 11,066 11,195
Executive compensation 87,755 -
Distributor expense 38,276 -
Registration fees 11,720 -
Depreciation and amortization 73,356 78,644
Legal and professional fees 70,817 113,784
Other operating expense 39,520 18,191
------------ ------------
Total Operating Expenses 332,510 221,814
------------ ------------
OPERATING LOSS $ (303,429) $ (199,852)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense (37,382) (46,454)
Miscellaneous 358 427
------------ ------------
Total Other Income (Expenses) (37,024) (46,027)
------------ ------------
LOSS BEFORE INCOME TAXES (340,453) (245,879)
INCOME TAXES - -
------------ ------------
NET LOSS $ (340,453) $ (245,879)
============ ============
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 28,716,073 19,777,715
============ ============
See accompanying notes.
6
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the periods ended March 31, 2001 and December 31, 2000
Common
Common Stock Stock Stock Accumulated
Shares Amount Options Subscribed Deficit Total
---------- ---------- ------- ---------- ----------- ---------
Balances as of December 31, 1999 19,535,231 $10,366,608 $ - $ 186,238 $(11,134,589) $ (581,743)
Issuance of shares for guarantee
of line of credit at $0.10 per
share 500,000 50,000 - - - 50,000
Issuance of shares to
contractors, directors and
others for services at $0.25
per share 1,399,591 342,398 - - - 342,398
Issuance of shares for purchase
of investment at $0.20 per
share 600,000 60,000 - - - 60,000
Issuance of shares for purchase
of rights to EPA labels at
$0.10 per share 110,000 11,000 - - - 11,000
Issuance of shares for
forbearance of notes payable
at $0.25 per share 122,500 30,625 - - - 30,625
Issuance of shares to officers
for exercise of options at
$0.06 per share 1,517,667 91,049 - - - 91,049
Issuance of shares subscribed 290,000 186,238 - (186,238) - -
Issuance of shares for debt
at $0.25 per share 4,291,084 1,072,712 - - - 1,072,712
Issuance of shares for loan
incentive at prices ranging
from $0.10 to $0.25 per share 350,000 50,000 - - - 50,000
Options granted to officers as
bonus for new contracts - - 51,370 - - 51,370
Net loss for the year ended,
December 31, 2000 - - - - (1,390,467) (1,390,467)
---------- ---------- ------- ---------- ----------- ---------
Balances as of December 31, 2000 28,716,073 12,260,630 51,370 - (12,525,056) (213,056)
Options granted to officer as
bonus for contract - - 18,890 - - 18,890
Net loss for the three months
ended, March 31, 2001
(Unaudited) - - - - (340,453) (340,453)
---------- ---------- ------- ---------- ----------- ---------
Balances as of March 31, 2001
(Unaudited) 28,716,073 $ 12,260,630 $ 70,260 $ - $(12,865,509) $ (534,619)
========== ========== ======= ========== =========== =========
7
DIATECT INTERNATIONAL CORP.
CONSOLIDATED CASH FLOW STATEMENTS
For the Three Months Ended
March 31,
2001 2000
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (340,453) $ (245,879)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 73,356 78,644
Issuance of stock for services - 50,750
Issuance of stock options for services 18,890 -
Prepaid finance charges paid by issuance
of stock - 50,000
Changes in assets and liabilities:
Accounts receivable 37,529 (9,425)
Prepaid interest 2,392 (49,471)
Prepaid royalties 1,755 -
Prepaid expenses (424) -
Inventories (48,588) (5,814)
Deposits - 3,000
Accounts payable 101,136 (35,854)
Accounts payable - related parties 12,439 20,751
Interest payable 32,768 44,315
Accrued salaries 56,306 -
Stockholder advance 48,990 -
Other accrued liabilities 1,116 493
------------ ------------
NET CASH FLOWS USED BY OPERATING ACTIVITIES (2,788) (98,490)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment - (2,160)
Purchase of goodwill - (3,000)
------------ ------------
NET CASH FLOWS USED BY INVESTING ACTIVITIES - (5,160)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit - 80,000
Net proceeds from notes payable - 43,740
------------ ------------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES - 123,740
------------ ------------
NET INCREASE (DECREASE) IN CASH (2,788) 20,090
CASH AT BEGINNING OF YEAR 3,384 2,160
------------ ------------
CASH AT END OF YEAR $ 596 $ 22,250
============ ============
See accompanying notes.
8
DIATECT INTERNATIONAL CORP.
CONSOLIDATED CASH FLOW STATEMENTS (Continued)
For the Three Months Ended
March 31,
2001 2000
(Unaudited) (Unaudited)
------------ ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ - $ -
Income taxes paid $ - $ -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for
prepaid finance charges $ - $ 50,000
Issuance of common stock for services $ - $ 50,750
Issuance of common stock for investment $ - $ 20,000
Issuance of common stock for rights
to EPA labels $ - $ 10,000
Issuance of stock options for services $ 18,890 $ -
See accompanying notes.
9
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Diatect International Corp. (formerly Applied Earth Technologies, Inc.)
(formerly San Diego Bancorp) (SDBC) was incorporated in California in 1979 as
a bank holding corporation. During 1986, the Company liquidated its
subsidiaries and became a dormant "shell" corporation.
On August 22, 1996, the Company changed its name from San Diego Bancorp to
Applied Earth Technologies, Inc. to better reflect the Company's principal
business activities, which primarily consist of developing and marketing
pesticide products. The Company later became informed that another
corporation already had been authorized to use the name Applied Earth
Technologies, Inc. and approval of this name had been granted in error. In
response to this information, the Company changed its name to Diatect
International Corp. on June 5, 1998.
The Company's wholly owned subsidiaries consist of Magic international, Inc.,
Enviro-Guard Corporation, Diatect International, Inc. and D.S.D., Inc. Apart
from Diatect International, Inc. and Magic International, Inc., the Company's
subsidiaries are inactive.
Magic International, Inc.
- -------------------------
On May 24, 1999, the Company entered into an agreement to purchase Magic
International, Inc. ("Magic") in exchange for $3,000 cash, effective payment
of an outstanding obligation in the amount of $4,050 and 200,000 shares of
Diatect International Corporation's common stock. This transaction was valued
at $27,050. At the time of the transaction, the authorized level of the
Company's capitalization did not permit an issuance of 200,000 shares of
stock. The Company increased its authorized capital, issued the aforementioned
stock and finalized the acquisition in March 2000, at which time Magic became
a wholly owned subsidiary.
National Diatect, Inc.
- ----------------------
In July 2000, the Company signed a letter of intent to purchase National
Diatect, Inc. in a transaction which requires the issuance of 400,000 shares
of the Company's common stock, payment of future royalties in the amount of
$120,000 payable at the rate of $0.10 per pound of certain products and
assumption of a note payable in the amount of $110,000 (bearing interest at
12% and collateralized by inventory and equipment). Although 400,000 shares
of stock have been issued by Diatect, the agreement is subject to ratification
by the board of directors and has not been finalized as of the date of these
financial statements. See Note 13.
International Technologies and Minerals, Inc.
- ---------------------------------------------
In December 2000, the Company signed and ratified an acquisition agreement
with International Technologies and Minerals, Inc. (ITM). Terms of the
agreement have not been completed as of March 31, 2001. See Note 15.
10
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Diatect International Corp.
is presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the
United States of America and have been consistently applied in the preparation
of the financial statements.
Accounting Method
- -----------------
The Company's financial statements are prepared using the accrual method of
accounting.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and all of its wholly owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with maturity of three months or less to
be cash equivalents.
Allowance for Doubtful Accounts
- -------------------------------
Provision for losses on trade accounts receivable is made in amounts required
to maintain an adequate allowance to cover anticipated bad debts. Accounts
receivable are charged against the allowance when it is determined by the
Company that payment will not be received.
Inventories
- -----------
Inventories consist primarily of raw materials and finished product and are
valued at the lower of cost (first in, first out) or market.
Property and Equipment
- ----------------------
Property, plant and equipment are stated at cost including the allocable
purchase price applicable to the respective assets of purchased subsidiaries.
All expenditures for improvements, replacements and additions are added to the
asset accounts at cost.
Expenditures for normal repairs and maintenance are charged against earnings
as incurred. The cost and related accumulated depreciation are eliminated
from the accounts and the resulting gain or loss is reflected in the
statements of operations when depreciable assets are retired or otherwise
disposed. Depreciation is provided for by the use of straight-line and
accelerated methods over the estimated useful lives of the assets. Depletion
is computed using the unit-of-production method, for any mining property
placed in production. Depreciation expense for the three months ended March
31, 2001 and 2000 was $2,553 and $2,514, respectively.
11
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
- -----------------
Most intangible assets are amortized over the remaining useful life on a
straight-line basis, which ranges from 15 to 17 years. EPA labels are
amortized on a straight-line basis over a 15-year life, commencing with the
beginning of product sales. Goodwill is amortized on a straight-line basis
over a fifteen-year life. Amortization expense for the three months ending
March 31, 2001 and 2000 was $70,803 and $76,130, respectively.
Income Taxes
- ------------
At March 31, 2001, the Company had net operating loss carryforwards of
approximately $12,865,000 that may be offset against future taxable income
through 2020. The Company believes there is a chance that all or part of the
net operating loss carryforwards will expire unused. Accordingly, the tax
benefit has been fully offset by an allowance of equal amount.
Basic and Diluted Loss Per Share
- --------------------------------
Loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding during the year. The weighted average number of
shares was calculated by taking the number of shares outstanding and weighting
them by the amount of time they were outstanding. Outstanding options were not
included in the computation of loss per share because they would be
antidilutive.
Revenue Recognition Policy
- --------------------------
Revenues from sales of product are recognized when the product is shipped.
Compensated Absences
- --------------------
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and
other factors. Due to the existence of a relatively high employee turnover
rate, it is impractical to estimate the amount of compensation for future
absences. Accordingly, no liability has been recorded in the accompanying
financial statements. The Company's policy is to recognize the costs of
compensated absences when actually paid to employees.
Estimates
- ---------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America and requires
management to make estimates and assumptions that affect the reported assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Impaired Asset Policy
- ---------------------
The Company reviews its long-lived assets quarterly to determine if any events
or changes in circumstances have transpired which indicate that the carrying
value of its assets may not be recoverable. The Company does not believe any
adjustments are needed to the carrying value of its assets at March 31, 2001
and 2000.
12
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
- -----------------------------------
The Company has adopted the fair value accounting rules to record all
transactions in equity instruments for goods or services.
Derivative Instruments
- ----------------------
In June 1998, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
At March 31, 2001, the Company has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
NOTE 3 - INVENTORIES
Inventories at March 31, 2001 and December 31, 2000 consist of the following:
March 31, December 31,
2001 2000
---------- ----------
Raw Materials $ 47,455 $ 26,171
Finished Goods 125,108 97,804
---------- ----------
Total $ 172,563 $ 123,975
========== ==========
NOTE 4 - INVESTMENT IN EPA LABELS
The Company has acquired five product registrations ("labels") approved by the
U.S. Environmental Protection Agency granting federal clearance to
manufacture, market and sell specified insecticide products. Included are:
No. 42850-1 for use against flies, roaches, ants, etc., in and around homes
and commercial buildings; No. 42850-2 for use in grain storage; No. 42850-3
for use against fleas, ticks and lice on pets; No. 42850-4 for use against
over 60 insects on over 130 edible crops and plants; and No. 42850-5 (approved
November 23, 1999) for use in the organic market to control all major pest
problems.
NOTE 5 - NOTES PAYABLE
All of the Company's notes payable are considered short-term. At March 31,
2001 and December 31, 2000, notes payable consisted of the following:
13
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2001 2000
- ----------------------- ---------- ------------
Jeffrey Linabery, unsecured, interest
at 14%, due on demand. $ 7,500 $ 7,500
David Russell (a shareholder of the Company),
unsecured, interest at 10%, due on demand. 15,000 15,000
David Russell, (a shareholder of the Company),
unsecured, interest at 8%, due on demand. 25,000 25,000
Danny Wirken (a shareholder of the Company),
unsecured, interest at 8%, dated December 31,
1993 due on demand. (See Notes 8 and 12.) - 386,581
Max Burdick, unsecured, interest at 18%, dated
November 6, 1996, due February 15, 1997,
delinquent. 40,000 40,000
Shining Star Investment, Inc., a Nevada corporation,
(a shareholder of the Company), unsecured, interest
at 14%, dated July 14, 1995, due December 31, 1995,
delinquent. 5,239 5,239
David J. Black, (a shareholder of the Company),
unsecured, interest at 10%, dated August 5, 1997,
due on demand. 20,000 20,000
Greg Cloward, (a shareholder of the Company),
unsecured, interest at 15%, dated January 6, 1997,
due on demand. 251,000 250,000
Hopper Asset Management Company,
conditionally secured by 50,000 shares
Diatect International Corporation common
stock, interest at 15%, dated May 22, 1998,
due May 5, 1999, delinquent. 25,000 25,000
---------- ------------
Subtotal (carried forward) $ 388,739 $ 775,320
---------- ------------
14
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2001 2000
- ----------------------- ---------- ------------
Subtotal (Brought forward) $ 388,739 $ 775,320
David N. Sim, (a shareholder of the Company),
unsecured, interest at 15%, dated October 1, 1999,
due on December 31, 1999, delinquent. 6,500 6,500
Jack S. Stites, (a shareholder of the Company),
unsecured, interest at 15%, dated September 1, 1999,
due on December 31, 1999, delinquent. 8,800 8,800
Hopper Asset Management Company, unsecured
Interest at 15%, dated June 19, 1999, due on
December 31, 1999, delinquent. 50,000 50,000
D. N. Sim, (a shareholder of the Company)
unsecured, interest at 10%, dated January 4,
2000, due on May 4, 2000, delinquent. 2,500 2,500
Johnny and Jack Stites, (a shareholder of
the Company) unsecured , interest at 10%,
dated February 25, 2000, due on May 1, 2000,
delinquent. 20,000 20,000
George H. Henderson, (a shareholder and
officer of the Company), unsecured,
interest at 10%, dated April 14, 2000,
due on December 31, 2000, delinquent. 72,957 72,957
Futura Title Corporation dba Alliance Title
& Escrow, former shareholders of White
Mountain Mining and Manufacturing, Inc.,
monthly payments of $18,000, 18% interest
with a one-time compounding of interest
effective June 21, 1995, secured by mining
property, (later foreclosed) due September
1994. Delinquent. (See Note 7). 209,444 209,444
---------- ------------
Subtotal (carried forward) $ 758,940 $ 1,145,521
---------- ------------
15
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 5 - NOTES PAYABLE (Continued)
March 31, December 31,
Creditor and Conditions 2001 2000
- ----------------------- ---------- ------------
Subtotal (Brought forward) $ 758,940 $ 1,145,521
Robert L. Drake and Sandra K Drake,
(shareholders of the Company), secured by
sale of inventory, interest at 12%, dated
July 12, 2000, due on July 12, 2001. 110,000 110,000
K & R "Stuff" LC, unsecured, interest at
12%, dated August 22, 2000, due on
August 22, 2001. 50,000 50,000
Joseph E. Pigg, Jr., unsecured, interest at
10%, dated September 8, 2000, due on
September 8, 2001. 10,000 10,000
Joseph E. Pigg, Jr., unsecured, interest at
10%, dated September 25, 2000, due on
September 25, 2001. 10,000 10,000
George H. Henderson, (shareholder and
officer of the Company), unsecured,
interest at 12%, dated October 1, 2000,
due on October 1, 2001. 42,590 42,590
Robert B. Crouch, (shareholder of the
Company), unsecured, interest at 12%,
dated November 7, 2000, due on demand. 1,000 1,000
Robert B. Crouch, (shareholder of the
Company), unsecured, interest at 12%,
dated November 16, 2000, due on demand. 4,000 4,000
Jack Stites, (shareholder of the
Company), unsecured, interest at 12%,
dated December 22, 2000, due on demand. 3,000 3,000
---------- ------------
Totals $ 989,530 $ 1,376,111
========== ============
16
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 6 - LINE OF CREDIT
At March 31, 2001, the Company had $97,000 borrowed on an outstanding line of
credit. The line of credit was extended to the Company by a director
utilizing his personal line of credit. This credit facility is unsecured, has
no stated maturity, and bears interest at 12%.
NOTE 7 - LITIGATION
John Wilding Lawsuit
- --------------------
On July 19, 1996, John Wilding sued the Company for collection on a delinquent
promissory note, which was secured by stock of White Mountain Mining and
Manufacturing, Inc. As of December 31, 1997, the balance owed was $142,323
plus accrued interest in the amount of $63,885. Subsequent negotiations
resulted in foreclosure on June 1, 1998 on the White Mountain collateral in
full payment of the note to Mr. Wilding. The foreclosed stock represented a
majority of the total outstanding shares of White Mountain. Wilding
subsequently sold all shares of the White Mountain stock to an affiliate of
Environmental Products & Technology, Inc. (EP&T), a Utah corporation which
signed an agreement calling for EP&T to enter into a joint venture with
Diatect for purposes of mining the White Mountain mineral claims of
diatomaceous earth.
EP&T was contractually obligated to convey the White Mountain stock back to
Diatect subject to a security interest for the purchase price of said stock
paid by EP&T (or its affiliates) to Wilding. In 1998, it became apparent that
EP&T would not honor its agreement with Diatect. The possibility exists that
Diatect will bring a breach of contract action against Environmental Products
and Technology, Inc. and its affiliates for its failure to transfer the shares
of White Mountain stock to Diatect pursuant to agreement.
Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC
- -------------------------------------------------
In November 1999, the Company's former legal counsel was awarded a default
judgment against the Company in the amount of $42,166 plus post-judgment
interest. This judgment remains outstanding and unpaid and is included as a
liability on the Company's balance sheet in commitments and contingencies at
December 31, 2000. During the period ended March 31, 2001, the Company
reclassified this amount to settlements payable.
Ogilvy, Adams & Rinehart
- ------------------------
Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on
November 1, 1995 in the sum of $24,346. The entire judgment amount plus
attorney's fees and interest thereon is approximately $36,000 and has been
included on the Company's balance sheet in commitments and contingencies at
December 31, 2000. During the period ended March 31, 2001, the Company
reclassified this amount to settlements payable. Since mid-1996, there has
been no communication with the plaintiff or its attorneys, nor has the
plaintiff made any attempt to satisfy or settle this case.
17
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 7- LITIGATION (Continued)
L. Craig Hunt
- -------------
L. Craig Hunt brought action on January 14, 1998 against Diatect for damages
and breach of contract on a promissory note for the sum of $42,750 plus
interest, penalties and attorney's fees. Judgment against Diatect
International Corp. was rendered on February 1, 1999 in the sum of $61,543.
This judgment is presently outstanding and unpaid. At December 31, 2000,
$61,543 is included in commitments and contingencies in these financial
statements. During the period ended March 31, 2001, the Company reclassified
this amount to settlements payable. To date, plaintiffs have made no attempt
to collect on this judgment.
Mid-America Venture Capital Fund, Inc.
- --------------------------------------
Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997
against the Company for failure to pay loans on two promissory notes totaling
$35,000. Judgment was awarded on August 4, 1997 for a total of $39,336
including principal, interest, and attorney's fees and costs. Since that
time, Diatect has paid a total of $4,000 and is currently in arrears on the
payment schedule. The balance owing is included in commitments and
contingencies in these financial statements at December 31, 2000. During the
period ended March 31, 2001, the Company reclassified this amount to
settlements payable.
Mike Glazer
- -----------
A consultant rendered services to a Company subsidiary during 1996 in the
amount of $17,230 and has brought action for this amount. The Company has
chosen not to contest this case. Settlement efforts are expected to be
undertaken after entry of judgment and demonstration that the assets of the
subsidiary, Diatect International, Inc., are fully encumbered. The amount of
$17,230 is included in commitments and contingencies in these financial
statements at March 31, 2001 and December 31, 2000.
Danny Wirken
- ------------
The Company is considering litigation against Danny Wirkin, (one of the
brokers involved in the selling of Diatect stock, which gave rise to certain
litigation for stock manipulation) with the objective of obtaining a judgment
for damages and foreclosing on the Company's obligation under its note to Mr.
Wirkin. This note is reflected at December 31, 2000 in the principal amount
of $386,581, with accrued interest included in interest payable for the amount
of $216,570. As of March 31, 2001, the Company reclassified this note and the
interest accrued thereon to commitments and contingencies with no further
interest accruing. (See Notes 5 and 12.)
Toxikon, Inc.
- -------------
Toxikon, Inc. filed suit in 1999 to collect on an unpaid trade account in the
amount of $21,260 plus accrued interest. The debt was paid in full in March
2000 and the case was dismissed.
Terrance Dunne
- --------------
Terrance Dunne, the Company's former auditor initiated action against the
Company for payment of unpaid fees. In response to the allegations, the
Company has countersued for reimbursement of fees paid for work not performed.
The outcome of this action is uncertain and, accordingly, no amounts have been
accrued in these financial statements.
18
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 7 - LITIGATION (Continued)
George Brink
- ------------
During December 2000, George Brink was awarded a default judgment in the total
amount of $44,648, including interest and legal fees, for the balance due on a
promissory note. At this time, active collection on the judgment has not been
pursued. The outstanding and unpaid amount is included as a liability on the
Company's balance sheet in commitments and contingencies at December 31, 2000.
During the period ended March 31, 2001, the Company reclassified this amount
to settlements payable.
Creditors' Judgments
- --------------------
During 1994 and 1995, the Company was sued by a number of creditors, whose
lawsuits were allowed to go to judgment. These judgments were a result of the
inability of the Company to fund operations and payments to the Company's
creditors. The collection judgments, which are substantially unpaid at March
31, 2001 and December 31, 2000, total approximately $52,000, and are included
in the Company's accounts payable and other obligations.
Environmental Protection Agency
- -------------------------------
During October 2000, the Company joined other plaintiffs represented by a
public interest law firm in filing action against the Environmental Protection
Agency (EPA). The action seeks relief from the EPA's practice of using
certain guidelines as a basis for hazard classification and risk assessments
pursuant to the Federal Insecticide, Fungicide and Rodenticide Act.
Plaintiffs claim that the EPA must use final guidelines promulgated for such
reviews. The outcome of the case is uncertain as of the date of these
financial statements.
Former Officers and Consultant
- ------------------------------
In September 2000, the Company received notice from two former officers and a
former consultant that they intend to bring action for nonpayment of back
wages. Subsequent to the date of these financial statements, in May 2001, the
Company issued 188,000 shares of its common stock to one former officer valued
at $47,000 ($0.25 per share) in full settlement. The remaining amount in
dispute totals $64,095 and the Company plans to contest the claims. These
amounts are not recorded in the accompanying financial statements.
The Company is not aware of any other threatened litigation against it or its
subsidiaries. However, there remains a possibility of litigation against
Diatect and/or its subsidiaries by creditors.
NOTE 8 - COMMON STOCK
In February 2000, the Company increased its authorized capital to 50,000,000
shares of common stock. During the year ended December 31, 2000, the Company
issued 500,000 shares of its common stock valued at $50,000 for the guarantee
of a line of credit, 472,500 shares of its common stock valued at $80,625 for
forbearance on notes payable, 200,000 shares of its common stock valued at
$20,000 for purchase of all outstanding stock of Magic International, Inc.
400,000 shares of its common stock valued at $40,000 for partial purchase of
National Diatect, Inc. and 110,000 shares of its common stock valued at
$11,000 for rights to EPA labels at $0.10 per share. The Company also issued
1,399,591 shares of its common stock valued at $342,398 for services and
19
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 8 - COMMON STOCK (Continued)
4,291,084 shares of its common stock valued at $1,072,712 for debt at $0.25
per share. The stock was valued at its market value on the date of issuance.
Two officers also exercised options to purchase 1,517,667 shares of the
Company's common stock valued at $91,049 at $0.06 per share for partial
payment of accrued consulting and legal fees.
NOTE 9 - COMMON STOCK SUBSCRIBED
In 1996, the Company agreed to convert outstanding debt to the following
individuals into common stock. This common stock was not issued until August
2000 and has been treated as common stock subscribed but not issued. The
following individuals were owed common stock to satisfy the amount of these
debts:
Ross S. Wolfley $ 22,500
G. Reeve 163,738
----------
Total $ 186,238
==========
During August 2000, the Company issued 200,000 shares of its common stock to
G. Reeve and 90,000 shares of its common stock to Ross S. Wolfley in full
payment of the above subscriptions.
NOTE 10 - STOCK OPTIONS
The Company has a 1995 Stock Option Plan, which was initiated in order to aid
the Company in maintaining and developing a management team, attracting
qualified officers and employees. A total of 3,000,000 shares of stock may be
subject to, or issued pursuant to the terms of the plan.
Following is a summary of the status of these performance-based options during
the years ended December 31, 2000 and 1999:
Weighted Average
Number of Shares Price per Share
---------------- ----------------
Outstanding at December 31, 1999 894,636 $ 0.06
Granted 1,122,335 0.06
Exercised (1,517,667) 0.06
Expired or forfeited - -
---------- -----------
Outstanding December 31, 2000 499,304 $ 0.06
========== ===========
20
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 10 - STOCK OPTIONS (Continued)
Weighted Average
Number of Shares Price per Share
---------------- ----------------
Outstanding at December 31, 2000 499,304 $0.06
Granted 500,000 0.10
Exercised, expired or forfeited - -
--------- ---------
Outstanding at March 31, 2001 999,304 $0.08
========= =========
Weighted Average
Exercise Date Number of Shares Price per Share
------------- ---------------- ---------------
On or before October 25, 2000 13,738 $0.06
On or before April 25, 2003 152,233 $0.06
April 25, 2001 through April 25, 2003 166,666 $0.06
April 25, 2002 through April 25, 2003 166,667 $0.06
On or before December 31, 2004 500,000 $0.10
SFAS No. 123 requires the Company to provide pro forma information regarding
net loss and loss per share as if compensation cost for the Company's stock
option plan had been determined in accordance with the fair value based method
prescribed by SFAS No. 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used: dividend yield of zero
percent; expected volatility of thirty percent; risk-free interest rate of six
percent. The weighted average fair value at date of grant for options granted
to employees in the periods ended March 31, 2001 and December 31, 2000 was
$0.10 and $0.06 per option, respectively. Compensation cost charged to
operations was $18,890 and $51,370 during the periods ended March 31, 2001 and
December 31, 2000, respectively.
NOTE 11 - CONCENTRATION OF RISK
Credit
- ------
The Company is a wholesale supplier of products and grants credit to its
customers, a substantial portion of which are retailers of agricultural
products throughout the country.
21
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 11 - CONCENTRATION OF RISK (Continued)
Raw Materials
- -------------
The Company uses pyrethrum as a main ingredient in its production process.
Pyrethrum is a plant by-product primarily imported from Africa. Africa in the
past has experienced severe drought, thus causing the pyrethrum supply to
greatly diminish. Due to these circumstances, the Company now has one
supplier whose pyrethrum is primarily obtained from non-African sources.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is obligated to pay certain settlements under judgments awarded to
outside parties. (Note 7.) These amounts, included in commitments and
contingencies as of March 31, 2001 and December 31, 2000, are as follows:
March 31, 2001 December 31, 2000
-------------- -----------------
L. Craig Hunt $ - $ 61,543
Mid-America Venture
Capital Fund, Inc. - 37,336
Sloan, Listrom, Eisenbarth,
Sloan & Glassman, LLC - 40,166
Ogilvy, Adams & Rinehart - 36,000
Mike Glazer 17,230 17,230
George Brink - 44,648
Danny Wirkin 603,152 -
--------- ---------
$ 620,923 $ 236,923
========= =========
In the quarter ending March 31, 2001, the Company recognized $219,693 in
commitments as outstanding settlements payable.
Lease Commitments
- -----------------
The Company leased office facilities in Boise, Idaho from an individual
through March 2000. The lease was a month-to-month handshake agreement, with
payments of $550. In April 2000, the Company entered into a lease agreement
for new office facilities in Boise. The agreement is a three-year lease with
monthly payments of $820 during the first year, $838 during the second year
and $857 during the third year. The Company occupied these facilities on May
1, 2000.
The Company also leases operating facilities in Smith Center, Kansas from an
individual. The lease is a month-to-month handshake agreement, with monthly
payments of $273.
National Diatect, Inc.
- ----------------------
In July 2000, the Company signed a letter of intent to purchase National
Diatect, Inc. The agreement is subject to ratification by the board of
directors and has not been finalized as of the date of these financial
statements. See Note 1.
Other Contingencies
- -------------------
The production of pesticides is subject to complex environmental regulations.
As of the date of these financial statements and the date of this report, the
Company is unaware of any pending environmentally related litigation or of any
specific past or prospective matters involving environmental concerns which
could impair the marketing of its products.
22
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 13 - RELATED PARTY TRANSACTIONS
Diatect International Corp. has notes payable to sixteen shareholders
(including two officers) totaling $1,119,167 as of March 31, 2001 and December
31, 2000, respectively.
The Company's secretary performs services as the Company's main legal counsel.
Legal services performed by this officer totaled $17,067 and $12,250 for the
three months ended March 31, 2001 and 2000, respectively, of which $43,234 and
$28,167 are included in accounts payable - related party at March 31, 2001 and
December 31, 2000, respectively.
The Company's president performed consulting services for the Company during
the first quarter of 2000. Consulting services preformed by this officer
totaled $17,360 for the quarter ending March 31, 2000. Included in accounts
payable - related party is $2,628 at December 31, 2000.
The Company has employment contracts to pay the Company's president and
vice-president annual compensation in the amount of $120,000 each. During
January 2001, the Company's vice-president received a signing bonus of 350,000
option for the purchase of shares of common stock. See note 10. Executive
compensation totaled $87,755 for the period ended March 31, 2001 and $56,306
is included in accrued salaries at March 31, 2001.
NOTE 14 - GOING CONCERN
As shown in the financial statements, the Company incurred a net loss of
$348,184 for the three months ended March 31, 2001 and has an accumulated
deficit of $12,873,240 at March 31, 2001. The Company has negative equity,
negative working capital, unsatisfied collection judgments, and is delinquent
in repaying its debt obligations.
These factors indicate that the Company may be unable to continue in
existence. The financial statements do not include any adjustments related to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue existence. Management's plans for ensuring the Company's
continued viability are as follows:
Management's plans are the sale of new stock issuances, which are expected to
raise the capital needed to satisfy collection judgments and repay debt
obligations. Through the acquisition of Magic International, Inc., management
has taken measures to increase product markets.
NOTE 15 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA
The Company's operations are classified into two principal reporting segments
based upon geographical location. Separate accounting for each segment is
required due to varying strategies used by the Company in each location.
23
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 15 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued)
The table below presents information about the Company's reportable segments:
Three Months Ended March 31, 2001
Kansas Idaho Eliminations Consolidated
========= ========== ============ ============
External revenue $ - $ 58,492 $ - $ 58,492
========= ========== ========= ===========
Operating income
(loss) $ (17,482) $ (322,971) $ - $ (340,453)
========= ========== =========
Corporate expenses -
-----------
Total operating
income (loss) $ (340,453)
===========
Depreciation and
Amortization $ 152 $ 73,204 $ - $ 73,356
========= ========== ========= ===========
Interest expense
and finance
charges $ - $ 45,113 $ - $ 45,113
========= ========== ========= ===========
Identifiable assets $ 284,884 $ 2,433,953 $ (278,515) $ 2,440,322
========= ========== =========
General corporate
assets -
-----------
Total assets $ 2,440,322
===========
Year Ended December 31, 2000
Kansas Idaho Eliminations Consolidated
========= ========== ============ ============
External revenue $ 158,770 $ 120,772 $ (118,178) $ 161,364
========= ========== ========= ===========
Operating income
(loss) $ (6,563) $(1,185,397) $ (118,178) $ (1,073,782)
========= ========== =========
Corporate Expenses (316,685)
-----------
Total net income
(Loss) $ (1,390,467)
===========
Depreciation and
Amortization $ 903 $ 315,987 $ - $ 316,890
========= ========== ========= ===========
Interest expense and
finance charges $ 1,209 $ 308,688 $ - $ 309,897
========= ========== ========= ===========
Identifiable assets $ 307,295 $ 2,377,645 $ (175,810) $ 2,509,130
========= ========== =========
General corporate
assets -
-----------
Total assets $ 2,509,130
===========
Kansas operations, the first reportable segment, performs services including
mixing and distribution of pesticide products. Idaho operations, the second
reportable segment, generates sales revenues and is dependent on services
provided by the Kansas segment.
24
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 16 - SUBSEQUENT EVENTS
International Technologies and Minerals, Inc.
- ---------------------------------------------
In December 2000, the Company signed and ratified an acquisition agreement
with International Technologies and Minerals, Inc. (ITM). In exchange for
6,000,000 shares of its common stock, Diatect will receive $25,000, a
corporate bond having a face value of $5,000,000 and all issued and
outstanding stock of ITM. The bond is to be capable of immediately
collateralizing a commercial business loan in the amount of $2,500,000.
Further terms of the agreement call for the replacement of four directors to
the Diatect board of directors by ITM and the acquisition of certain assets by
ITM including a long-term lease agreement on gypsum mines properties in Utah,
and a wallpaper plant to be constructed in Utah to utilize the gypsum produced
by the mines. Terms of the agreement have not been completed as of March 31,
2001. Subsequent to the date of these financial statements, the Company is
actively seeking finalization of the acquisition and no closing date has been
set. See Note 1.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
- ---------------------------------------------------------
This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Quarter ended March 31, 2001 compared to March 31, 2000
- -------------------------------------------------------
During the quarter ended March 31, 2001, our revenues were $58,492 and direct
sales costs were $29,411 or approximately 50.3% of revenues. During the
quarter ended March 31, 2000, revenues were $41,745 and direct sales costs
were $19,783 or approximately 47.4% of revenues. The increase in revenues for
the period ended March 31, 2001 compared to same period in the preceding year
is due to our more successful sales efforts. We believe this increase is
indicative of a positive trend in sales which should accelerate through the
balance of the fiscal year. Subsequent to the date of the attached financial
statements, we received a listing with the Organic Materials Review Institute
for its Diatect V product. We anticipate that this listing will be seen
positively by our potential customers and hope that it results in a
substantial increase in orders in the near future.
Corporate Expense. For the quarter ended March 31, 2001 total operating
expenses were $332,510, consisting of salaries, wages and benefits of $11,396,
executive compensation of $87,755, distributor expense of $38,276,
registration fees of $11,720,depreciation and amortization expenses of
$73,356, legal and professional fees of $70,817, and other expenses of
$39,520, resulting in a loss from operations of $303,429. For the quarter
ended March 31, 2000 total operating expenses were $221,814, consisting of
salaries, wages and benefits of $11,195, depreciation and amortization
expenses of $78,644, legal and professional fees of $113,784, and other
expenses of $18,191, resulting in a loss from operations of $199,852. The
operating expenses for the period ended March 31, 2001 were higher than the
prior year period primarily due to increases in executive compensation,
distributor expense, registration fees and other operating expenses, offset by
a decrease in legal and professional fees. These expenses are expected to
remain relatively consistent during the balance of the fiscal year, however,
we anticipate that our overall operating expenses may increase as our sales
volume increases due to additional production and distribution expenses.
Other Income and Expense. Interest expense for the quarter ended March 31,
2001 was $37,382, offset by miscellaneous income of $358, compared to $46,454,
offset by miscellaneous income of $427 for the same period in the preceding
year.
For the quarter ended March 31, 2001, we had a net loss of $340,453, and loss
per share was $0.01 per share. For the quarter ended March 31, 2000, we had a
net loss of $245,879, and loss per share was $0.01.
26
Liquidity and Capital Resources
- -------------------------------
At March 31, 2001, we had current assets of $269,971, consisting of primarily
of accounts receivable, prepaid interest, royalties, and expenses, and
inventory. We had current liabilities of $2,354,559, consisting primarily of
accounts payable, a line of credit, interest payable and notes payable, for a
working capital deficit of $2,084,588. At March 31, 2001, we had property,
plant and equipment totaling $44,569, net of depreciation, and other assets of
$2,125,782, consisting primarily of our investment in EPA labels.
Cash used in operations for the quarter ended March 31, 2001 was $2,788. In
2001, our operations have been funded primarily by a stockholder advance,
accruing salaries and increases in accounts payable. Cash used in operations
for the period ended March 31, 2001 included the issuance of stock options for
services in the amount of $18,890.
In December 2000, we signed and ratified an acquisition agreement with
International Technologies and Minerals, Inc. (ITM). In exchange for
6,000,000 shares of our common stock, we will receive a $20,000 cash loan, a
corporate bond having a face value of $5,000,000 and all issued and
outstanding stock of ITM. The corporate bond is to be capable of
collateralizing a commercial business loan in the amount of $2,500,000. We are
seeking to complete the collateralization of the corporate bond. Until the
collateralization is successful, no closing date will be set and we cannot
guarantee when of if the additional capital will be available to us. See Note
16 to the financial statements.
During fiscal year 2001, we may seek working capital from several sources,
including the equity markets and private investors. In February 2000, we
increased our authorized capital to allow for the issuance of additional
shares of common stock. There is no assurance, however, that any fund raising
efforts will be successful. We believe that we will increase revenues from
operations as we continue to move from the development stage of our products
to a full marketing and sales program. With our products in the marketplace,
we anticipate revenues to offset ongoing expenses. We are uncertain, however,
as to whether there will be sufficient revenue to cover past obligations,
therefore, we will continue to attempt to make offers in settlement and
compromise on such obligations in an effort to reduce our contingent and other
liabilities.
We lack working capital and that affects our ability to effectively market our
products. We believe two of the largest and most important markets for our
products are the agricultural and home and garden markets. When we obtain
sufficient working capital, we plan to conduct affordable advertising and
maintain a sales force that can effectively reach these markets. Accordingly,
although we anticipate more revenue from the sale of our products than we have
received in the past, we will not be as profitable without additional cash to
fund our advertising and marketing campaign.
Impact of Inflation
- -------------------
We do not anticipate that inflation will have a material impact on our current
or proposed operations.
Seasonality
- -----------
We have not experienced significant variations in sales of products
attributable to seasonal factors.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ogilvy, Adams & Rinehart
- ------------------------
Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against us on November
1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's
fees and interest thereon has been included in commitments and contingencies
at December 31, 2000 and in settlements payable at March 31, 2001. Since mid-
1996, there has been no communication with Ogilvy or its attorneys, nor has
Ogilvy made any attempt to satisfy or settle this case.
L. Craig Hunt
- -------------
L. Craig Hunt brought action on January 14, 1998 against us for damages and
breach of contract on a promissory note for the sum of $42,750 plus interest,
penalties and attorney's fees. Mr. Hunt received a judgment against us on
February 1, 1999 in the sum of $61,543. This judgment is presently
outstanding and unpaid. At December 31, 2000, the amount owed is included in
commitments and contingencies, and in settlements payable at March 31, 2001.
To date, Mr. Hunt has made no attempt to collect on this judgment.
Mid-America Venture Capital Fund, Inc.
- --------------------------------------
Mid-America Venture Capital Funds, Inc. ("Mid America") brought action on July
23, 1997 against us for failure to pay loans on two promissory notes totaling
$35,000. Mid America was awarded a judgment against us on August 4, 1997 for
a total of $39,336 including principal, interest, and attorney's fees and
costs. Since that time, we have paid a total of $4,000, but we are currently
in arrears on the payment schedule. The balance owing is included in
commitments and contingencies at December 31, 2000 and in settlements payabel
at March 31, 2001.
Mike Glazer
- -----------
A consultant allegedly rendered services to one of our subsidiaries during
1996 in the amount of $17,230 and has brought an action to recover that
amount. We have chosen not to contest this case. Settlement efforts are
expected to be undertaken after entry of judgment and demonstration that the
assets of our subsidiary, Diatect International, Inc., are fully encumbered.
The amount of $17,230 is included in commitments and contingencies at December
31, 2000 and March 31, 2001.
Danny Wirken
- ------------
We are considering litigation against Danny Wirkin, (one of the brokers
involved in the selling of our stock (which gave rise to certain litigation
for stock manipulation), with the objective of obtaining a judgment for
damages and foreclosing on our obligation under our note to Mr. Wirkin. This
note is reflected at December 31, 2000 in the principal amount of $386,581
with accrued interest included in interest payable for the amount of $216,570.
At March 31, 2001, this note has been reclassified as a contingency. See
Notes 5 and 12 to the financial statements.
28
Sloan, Listrom, Eisenbarth, Sloan & Glassman,LLC
- ------------------------------------------------
An action, commenced on November 17, 1998 by our former legal counsel to
collect legal fees and costs, was not contested. In November 1999, the
plaintiff was awarded a default judgment against us in the amount of $42,166
plus post-judgment interest. This judgment remains outstanding and unpaid and
is included as a liability in commitments and contingencies at December 31,
2000 and in settlements payable at March 31, 2001.
George Brink
- ------------
George Brink filed suit against us in the year 2000 to collect on a promissory
note in the amount of $ 37,500. We have chosen not to contest this case.
Settlement efforts are expected to be undertaken after entry of judgment and
demonstration that the assets of our subsidiary, Diatect International, Inc.
are fully encumbered. The amount of $37,500 is included in commitments and
contingencies at December 31, 2000 and in settlements payable at March 31,
2001.
Terrance Dunne
- --------------
Terrance Dunne, a former auditor initiated action against us for payment of
unpaid fees. In response to the allegations, we have countersued for
reimbursement of fees paid for work not performed. The outcome of this action
is uncertain and, accordingly, no amounts have been accrued in these financial
statements.
Former Officers and Consultant
- ------------------------------
In September 2000, we received notice from two former officers and a former
consultant that they intended to bring action for nonpayment of back wages.
In May 2001, we issued 188,000 shares of our common stock valued at $47,000 in
full settlement with on former officer. The remaining amount in dispute
totals $64,095 and we plan to contest the claims. These amounts are not
recorded in the accompanying financial statements.
Creditors' Judgments
- --------------------
During 1994 and 1995, we were sued by a number of creditors, which actions we
allowed to go to judgment. These actions and the consequential judgments
arose as a direct result of our inability to fund our operations and make
payments to our creditors. The collection judgments, which are substantially
unpaid at March 31, 2001 and December 31, 2000, total approximately $52,000,
and are included in our accounts payable and other obligations.
Environmental Protection Agency
- -------------------------------
During October 2000, we joined other plaintiffs represented by a public
interest law firm in filing action against the Environmental Protection Agency
(EPA). The action seeks relief from EPA's practice of using certain
guidelines as a basis for hazard classification and risk assessments pursuant
to the Federal Insecticide, Fungicide and Rodenticide Act. Plaintiffs claim
that the EPA must use final guidelines promulgated for such reviews. The
outcome of the case is uncertain as of the date of these financial statements.
We are not aware of any other threatened litigation against us or our
subsidiaries. On the other hand, there remains a tangible possibility of
litigation against us and/or our subsidiaries being brought by our creditors,
particularly those, which are holding delinquent accounts. We are working
with these creditors and, at this time, all creditors who have not already
filed litigation appear to be forbearing and accepting the measures taken by
us in addressing the indebtedness.
29
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Executive Vice President
On January 1, 2001, Jay Downs, Director, became a full-time employee in the
capacity of Executive Vice President. His employment Agreement spans a three
year period at an annual salary of $120,000, a signing bonus of 350,000
options for the purchase of shares of common stock at $0.10 per share, 50,000
incentive stock options under a to-be-formulated Incentive Stock Plan, and
provisions for a bonus pay based upon 1% of gross sales receipts as determined
on a quarterly basis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
None.
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.
DIATECT INTERNATIONAL CORPORATION
Date: May 14, 2001
/s/ George H. Henderson, President/Treasurer
/s/ John L. Runft, Secretary