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: September 30, 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 33,887,416
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 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 Sheets
ASSETS
September 30,
2001 December 31,
(Unaudited) 2000
----------- ------------
CURRENT ASSETS
Cash $ 4,373 $ 3,384
Accounts receivable 410,034 58,014
Employee receivable 3,555 -
Prepaid interest 76,113 42,550
Prepaid royalties 27,220 37,500
Prepaid expenses 374 -
Inventories 126,389 123,975
----------- ------------
Total Current Assets 648,058 265,423
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
Mining property 540 -
Building 23,501 23,501
Equipment 50,749 49,195
Less accumulated depreciation (33,235) (25,573)
----------- ------------
Total Property, Plant and Equipment 41,555 47,123
----------- ------------
OTHER ASSETS
Deposits 40,000 150,000
Goodwill, net of amortization 27,050 27,050
Investment in EPA labels, net of
amortization 1,807,707 2,019,534
----------- ------------
Total Other Assets 1,874,757 2,196,584
----------- ------------
TOTAL ASSETS $ 2,564,370 $ 2,509,130
=========== ============
See accompanying notes.
4
Diatect International Corp.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30,
2001 December 31,
(Unaudited) 2000
----------- ------------
CURRENT LIABILITIES
Accounts payable $ 248,561 $ 234,871
Accounts payable - related parties 114,990 30,795
Bank overdraft 14,430 -
Deposit payable - 20,000
Line of credit 97,000 97,000
Interest payable 279,569 725,465
Settlements payable 218,193 -
Other accrued liabilities 4,687 1,021
Notes payable 1,048,172 1,376,111
----------- ------------
Total Current Liabilities 2,025,602 2,485,263
----------- ------------
COMMITMENTS AND CONTINGENCIES 466,606 236,923
----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 50,000,000
shares authorized; 33,887,416 and
28,716,073 shares issued and outstanding 12,865,124 12,260,630
Stock options 70,260 51,370
Accumulated deficit (12,863,222) (12,525,056)
----------- ------------
Total Stockholders' Equity (Deficit) 72,162 (213,056)
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,564,370 $ 2,509,130
=========== ============
See accompanying notes.
5
Diatect International Corp.
Consolidated Statements of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
REVENUES $ 271,600 $ 31,646 $ 510,582 $ 106,573
COST OF SALES 74,542 9,601 184,574 49,405
----------- ----------- ----------- -----------
GROSS PROFIT 197,058 22,045 326,008 57,168
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries, wages and benefits 7,807 23,558 29,666 115,438
Consulting 4,112 236,762 4,112 299,401
Executive compensation 166,720 - 361,475 -
Distributor expense 112,642 - 150,918 -
Registration fees 240 - 12,120 -
Depreciation and amortization 72,776 61,234 219,489 218,521
Legal and professional fees 24,821 97,872 167,799 221,598
Other operating expense 41,518 46,811 117,290 84,490
----------- ----------- ----------- -----------
Total Operating Expenses 430,636 466,237 1,062,869 939,448
----------- ----------- ----------- -----------
OPERATING LOSS (233,578) (444,192) (736,861) (882,280)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest expense (106,991) (108,643) (210,993) (233,762)
Miscellaneous (9) 491 (1,564) 1,804
----------- ----------- ----------- -----------
Total Other Income (Expenses) (107,000) (108,152) (212,557) (231,958)
----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (340,578) (552,344) (949,418) (1,114,238)
EXTRAORDINARY ITEMS
Gain from debt forgiveness - - 8,100 -
Gain from debt restructure - - 603,152 -
----------- ----------- ----------- -----------
Total Extraordinary Items - - 611,252 -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 340,578 (552,344) (338,166) (1,114,238)
----------- ----------- ----------- -----------
INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 340,578 $ (552,344) $ (338,166) $ (1,114,238)
=========== =========== =========== ===========
BASIC AND DILUTED
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.02) $ (0.01) $ (0.05)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 30,520,707 23,135,128 29,520,707 21,425,998
=========== =========== =========== ===========
See accompanying notes.
6
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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)
---------- ---------- ------- ---------- ----------- ---------
7
DIATECT INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Common
Common Stock Stock Stock Accumulated
Shares Amount Options Subscribed Deficit Total
---------- ---------- ------- ---------- ----------- ---------
Balances as of December 31, 2000 28,716,073 12,260,630 51,370 - (12,525,056) (213,056)
Issuance of shares for debt at
$0.15 to $0.25 per share 1,408,343 266,619 - - - 266,619
Issuance of shares for guarantee of
debt and line of credit at $0.08 to
$0.10 per share 875,000 74,375 - - - 74,375
Issuance of shares for cash at $0.10
to $0.12 per share 400,000 44,000 - - - 44,000
Issuance of shares in settlement of
salary claim at $0.25 per share 188,000 47,000 - - - 47,000
Issuance of shares for consulting
at $0.08 per share 50,000 3,750 - - - 3,750
Issuance of shares to officers for
services at $0.08 per share 1,250,000 93,750 - - - 93,750
Issuance of shares for settlement
of distributor agreement and
severance agreement at $0.08
per share 1,000,000 75,000 - - - 75,000
Options granted to officer as
bonus for contract - - 18,890 - - 18,890
Net income for the nine months
ended September 30, 2001
(Unaudited) - - - - (338,166) (338,166)
---------- ---------- ------- ---------- ----------- ---------
Balances as of September 30,
2001 (Unaudited) 33,887,416 $ 12,865,124 $ 70,260 $ - $(12,863,222) $ 72,162
========== ========== ======= ========== =========== =========
See accompanying notes.
8
Diatect International Corp.
Consolidated Cash Flow Statements
For the Nine Months Ended
September 30,
2001 2000
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (338,166) $ (1,114,238)
Adjustments to reconcile net loss to net cash
used by operating activities:
Gain from debt restructure (603,152) -
Gain from debt forgiveness (8,100) -
Depreciation and amortization 219,489 218,521
Issuance of stock for services 144,500 311,058
Issuance of stock options for services 18,890 51,370
Issuance of stock for finance charges and interest 74,375 224,071
Issuance of stock for settlements 75,000 -
Issuance of stock for debt 266,619 -
Prepaid finance charges paid by issuance of stock - 50,000
Stock issued for payment of accrued expenses - 144,187
Note payable issued for distributor expense 50,000 -
Changes in assets and liabilities:
Accounts receivable (352,020) (19,960)
Employee receivable (3,555) -
Prepaid interest (33,563) (44,945)
Prepaid royalties 10,280 -
Prepaid expenses (374) -
Inventories (2,414) 20,712
Deposits 110,000 -
Accounts payable 13,690 (10,223)
Accounts payable - related parties 84,195 (161,489)
Bank overdraft 14,430 -
Deposit payable (20,000) -
Interest payable (108,812) 31,330
Commitments and contingencies (17,230) -
Other accrued liabilities 3,666 30,039
----------- -----------
NET CASH FLOWS USED BY OPERATING
ACTIVITIES (402,252) (269,567)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,094) (2,443)
----------- -----------
NET CASH FLOWS USED BY INVESTING ACTIVITIES (2,094) (2,443)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit - 90,000
Proceeds from sale of stock 44,000 -
Net proceeds from notes payable 361,335 187,911
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 405,335 284,911
----------- -----------
NET INCREASE (DECREASE) IN CASH 989 12,901
----------- -----------
CASH AT BEGINNING OF PERIOD 3,384 2,160
----------- -----------
CASH AT END OF PERIOD $ 4,373 $ 15,061
=========== ===========
See accompanying notes.
9
Diatect International Corp.
Consolidated Cash Flow Statements (Continued)
For the Nine Months Ended
September 30,
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 $ 50,375 $ 50,000
Issuance of common stock for services $ 182,000 $ 311,058
Issuance of common stock for investment $ - $ 60,000
Issuance of common stock for rights to EPA labels $ - $ 11,000
Issuance of common stock for payment of accrued
expenses $ - $ 144,187
Issuance of common stock for forbearance of
notes payable and line of credit $ 25,000 $ 224,070
Issuance of stock options for services $ - $ 51,370
Issuance of common stock for debt $ 266,619 $ 373,373
Issuance of note payable for investment deposit $ - $ 110,000
Issuance of common stock for settlement of
distributor agreement $ 37,500 $ -
Issuance of note payable for distributor expense $ 50,000 $ -
See accompanying notes.
10
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 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). The Company has issued
400,000 shares and the agreement has been ratified by the board of directors
to a mutually agreed upon reduced note payable balance of $70,419 as of the
date of these financial statements. See Note 13.
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.
11
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 nine months ended
September 30, 2001 and 2000 was $7,662 and $7,649, respectively.
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 nine months ending
September 30, 2001 and 2000 was $211,827 and $210,872, respectively.
12
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
Income taxes are provided based upon the liability method of accounting
pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach,
deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end. A valuation allowance is
recorded against deferred tax assets if management does not believe the
Company has met the "more likely than not" standard imposed by SFAS No. 109 to
allow recognition of such an asset.
At September 30, 2001, the Company had net deferred tax assets of
approximately $1,929,000, principally arising from net operating loss
carryforwards for income tax purposes. As management of the Company cannot
determine that it is more likely than not that the Company will realize the
benefit of the net deferred tax asset, a valuation allowance equal to the net
deferred tax asset has been established at September 30, 2001.
At September 30, 2001, the Company has net operating loss carryforwards of
approximately $12,863,000, which expire in the years 2011 through 2021.
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 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.
13
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 September 30,
2001.
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
- ----------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which is effective for the
Company as of January 1, 2001. 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 consolidated balance sheet and measure those instruments at
fair value.
If certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to
the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At September 30, 2001, the Company has not engaged in any transactions that
would be considered derivative instruments or hedging activities.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), and No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"). SFAS 130 establishes standards for
reporting and displaying comprehensive income, its components and accumulated
balances. SFAS 131 establishes standards for the way that companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements. Both SFAS 130 and SFAS 131 are effective for periods
beginning after December 15, 1997. The Company adopted these accounting
standards, and their adoption had no effect on the Company's financial
statements and disclosures.
14
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
- -------------------------------------------
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Company believes that the adoption of this standard
will not have a material effect on the Company's results of operations or
financial position.
NOTE 3 - INVENTORIES
Inventories at September 30, 2001 and December 31, 2000 consist of the
following:
September 30, December 31,
2001 2000
------------ -----------
Raw Materials $ 48,115 $ 26,171
Finished Goods 78,274 97,804
------------ -----------
Total $ 126,389 $ 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.
15
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 5 - NOTES PAYABLE
All of the Company's notes payable are considered short-term. At September
30, 2001 and December 31, 2000, notes payable consisted of the following:
September 30, 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 7 and 17.) - 386,581
Max Burdick, unsecured, interest at 18%, dated
November 6, 1996, due February 15, 1997,
delinquent. - 40,000
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. 251,000 251,000
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
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
------------- ------------
Subtotal (carried forward) $ 330,239 $ 756,820
------------- ------------
16
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 5 - NOTES PAYABLE (Continued)
September 30, December 31,
Creditor and Conditions (Continued) 2001 2000
- ----------------------- ------------- ------------
Subtotal (Brought forward) $ 330,239 $ 756,820
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. 10,000 25,000
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
George H. Henderson, (a shareholder
of the Company), unsecured, interest
at 10%, dated April 14, 2000, due on
December 31, 2000, delinquent. 60,303 72,957
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. 70,420 110,000
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
------------- ------------
Subtotal (carried forward) $ 552,262 $ 1,046,077
------------- ------------
17
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 5 - NOTES PAYABLE (Continued)
September 30, December 31,
Creditor and Conditions (Continued) 2001 2000
- ----------------------- ------------- ------------
Subtotal (Brought forward) $ 552,262 $ 1,046,077
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
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
Robert B. Crouch, (shareholder of the
Company), unsecured, interest at 12%,
dated November 7, 2000, due on demand. - 1,000
Robert B. Crouch, (shareholder of the
Company), unsecured, interest at 12%,
dated November 16, 2000, due on demand. 2,910 4,000
George H. Henderson, (shareholder of the
Company), unsecured, interest at 12%,
dated October 1, 2000, due on
October 1, 2001. - 42,590
------------ ------------
Subtotal (carried forward) $ 625,172 $ 1,373,111
------------ ------------
18
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 5 - NOTES PAYABLE (Continued)
September 30, December 31,
Creditor and Conditions (Continued) 2001 2000
- ----------------------- ------------- ------------
Subtotal (Brought forward) $ 625,172 $ 1,373,111
Jack Stites, (shareholder of the
Company), unsecured, interest at 12%,
dated December 22, 2000, due on demand. 3,000 3,000
Venture Creations, Inc. (shareholders of the
Company), unsecured, interest at 10%,
dated September 20, 2001, due on
October 1, 2003. 50,000 -
Gary Hanson (shareholder of the Company),
unsecured, interest at 12%, dated July 24, 2001,
due on October 24, 2001. 20,000 -
Bruce L. and Kim Shannon, (shareholders of the
Company), unsecured, interest at 10%, dated
September 19, 2001, due on October 21, 2001. 50,000 -
Ed L. Shannon, Jr. and Bruce L Shannon,
(shareholders of the Company), unsecured,
interest at 12%, dated August 1, 2001, due on
August 1, 2002. 200,000 -
Robinson Family, LLC, (shareholders of the
Company), unsecured, interest at 12%, dated
April 1, 2001, due on October 1, 2001. 100,000 -
------------- ------------
Totals $ 1,048,172 $ 1,376,111
============= ============
NOTE 6 - LINE OF CREDIT
At September 30, 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%.
19
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 7 - LITIGATION
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 September 30, 2001, the Company
reclassified this amount to settlement payable in the amount of $40,166.
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 June 30, 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.
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 September 30, 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 September 30, 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 December 31, 2000 and was paid in full during the period ended
September 30, 2001.
20
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 7 - LITIGATION (Continued)
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. During June 2001, the Company declared this note and the
interest accrued thereon as invalid and void. Legal counsel for the Company
further asserted that the obligation has passed the statute of limitations for
collection thereon. This resulted in a gain from debt restructure, which is
reflected in the financial statements at September 30, 2001 as an
extraordinary item. (See Notes 5, and 17.)
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.
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 September 30, 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
September 30, 2001 and December 31, 2000, total approximately $52,000, and are
included in the Company's accounts payable and other obligations. A
settlement has been approved whereby this liability is scheduled to be paid in
full on or before March 31, 2002.
21
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 7 - LITIGATION (Continued)
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. During 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.
This amount is included in executive compensation in the attached financial
statement. The remaining amount in dispute totals $64,095. Because the
Company plans to contest the related claims, the amount disputed is 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
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.
22
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 8 - COMMON STOCK (Continued)
During the period ended September 2001, the Company issued 525,000 shares of
its common stock valued at $41,875 in consideration for a note payable,
1,408,343 shares of its common stock valued at $266,619 for debt, 188,000
shares of its common stock valued at $47,000 to a former officer for back
wages (Note 7), 1,300,000 shares of its common stock valued at $97,500 for
services to officers and others, 500,000 shares of its common stock valued at
$37,500 in settlement of a distributor agreement, 500,000 shares of its common
stock valued at $37,500 as a severance bonus to the Company's former president
and 350,000 shares of its common stock valued at $32,500 in consideration of
extension on a line of credit. The shares were valued at their fair market
value on the date of issuance. The Company also sold 400,000 shares of its
common stock at prices ranging from $0.10 to $0.12 per share.
NOTE 9 - COMMON STOCK SUBSCRIBED
In 1996, the Company agreed to convert outstanding debts to certain
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.
23
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 10 - STOCK OPTIONS (Continued)
Following is a summary of the status of these performance-based options during
the period ended September 30, 2001 and the year ended December 31, 2000:
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 at December 31, 2000 499,304 0.06
Granted 500,000 0.10
Expired (13,738) 0.06
Exercised or forfeited - -
---------------- ----------------
Outstanding at September 30, 2001 999,304 $0.08
================ ================
Weighted Average
Exercise Date Number of Shares Price per Share
------------- ---------------- ----------------
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
24
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 10 - STOCK OPTIONS (Continued)
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 September 30, 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 September 30, 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.
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 December 31, 2000, are as follows:
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
George Brink 44,648
------------
$ 236,923
============
In the period ending September 30, 2001, the Company reclassified $219,693 in
commitments as outstanding settlements payable. The remaining $17,230 was
paid in full during the period ended September 30, 2001.
25
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Futura Title Corporation
- ------------------------
During the period ended September 30, 2001, the Company reclassified a note
payable to Futura Title Corporation dba Alliance Title & Escrow plus interest
accrued thereon to commitments and contingencies in the total amount of
$466,606. The Company is currently negotiating a settlement agreement on this
liability. Although the outcome is uncertain, the Company expects to settle
for considerably less.
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 called 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
from May 1, 2000 through October 1, 2001. Subsequent to these financial
statements, the Company is negotiating a settlement on the remaining lease.
The Company leased operating facilities in Smith Center, Kansas from an
individual through July 2001. The lease was 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.
NOTE 13 - RELATED PARTY TRANSACTIONS
Diatect International Corp. has notes payable to sixteen shareholders totaling
$910,672 and $1,119,167 as of September 30, 2001 and December 31, 2000,
respectively. See Note 5.
The Company's secretary performs services as the Company's main legal counsel.
Legal services performed by this officer totaled $39,919 and $42,640 for the
nine months ended September 30, 2001 and 2000, respectively, of which $48,942
and $28,167 are included in accounts payable - related party at September 30,
2001 and December 31, 2000, respectively.
26
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 13 - RELATED PARTY TRANSACTIONS (Continued)
The Company's former president performed consulting services for the Company
during the first quarter of 2000. Consulting services preformed by this
former officer totaled $20,560 for the nine months ending September 30, 2000.
Included in accounts payable - related party is $2,628 at December 31, 2000.
No consulting services were preformed by the Company's former president during
the nine months ending September 2001.
The Company has employment contracts to pay the Company's president and
vice-president of operations annual compensation in the amounts of $120,000
and $75,000 respectively. During January 2001, the Company's president
received a signing bonus of 350,000 options for the purchase of shares of
common stock. The Company also had an employment contract to pay the
Company's former president annual compensation of $120,000. See Note 10.
Executive compensation totaled $361,475 for the period ended September 30,
2001 and $66,048 is included in accounts payable - related parties at
September 30, 2001.
NOTE 14 - GOING CONCERN
As shown in the financial statements, the Company incurred a net loss before
extraordinary item of $949,418 for the nine months ended September 30, 2001
and has an accumulated deficit of $12,863,222 at September 30, 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 - MINING PROPERTY
The Company formerly owned a majority interest (89.125%) in White Mountain,
which had unpatented mining claims located in Malheur County, Oregon. During
1998, the Company lost its controlling interest in White Mountain stock,
including the mining claims, which had been pledged as collateral and was
foreclosed on by note holders. (Note 7.) During September 2001, the Company
was able to reacquire title to these unpatented mining claims by paying the
filing fees, which had become delinquent.
27
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 16 - 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.
The table below presents information about the Company's reportable segments:
Nine Months Ended September 30, 2001
Kansas Idaho Eliminations Consolidated
------------ ------------ -------------- ------------
External revenue $ - $ 510,582 $ - $ 510,582
============ ============ ============== ============
Operating income (loss) $ (20,005) $ (929,413) $ - $ (949,418)
============ ============ ==============
Corporate expenses -
Total operating
income (loss) $ (949,418)
============
Depreciation and
Amortization $ 456 $ 219,033 $ - $ 219,489
============ ============ ============== ============
Interest expense
and finance
charges $ - $ 210,993 $ - $ 210,993
============ ============ ============== ============
Identifiable assets $ 160,618 $ 2,558,676 $ (154,924) $ 2,564,370
============ ============ ==============
General corporate
assets -
============
Total assets $ 2,564,370
============
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
============
28
DIATECT INTERNATIONAL CORP.
NOTES TO THE CONSOLIDATE FINANCIAL STATEMENTS
September 30, 2001
NOTE 16 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued)
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.
NOTE 17 - EXTRAORDINARY ITEMS
In June 2001, a former supplier agreed to write off a balance owed in the
amount of $8,100. This is reflected in the financial statement as gain from
debt forgiveness. During June 2001, the Company also declared a note payable
to Danny Wirken and the interest accrued thereon as invalid and void. Legal
counsel for the Company further asserted that the obligation has passed the
statute of limitations for collection thereon. This resulted in a gain from
debt restructure, which is reflected in the financial statements at September
30, 2001 as an extraordinary item. (See Notes 5, and 12.)
NOTE 18 - SUBSEQUENT EVENTS
Purchase of Facilities
During October 2001, the Company relocated its office and operating facilities
to Heber City, Utah. The Company is currently negotiating the purchase of its
new facilities at $825,000 and under terms of the agreement, may continue
occupying the facilities with no charge until closing occurs but not longer
than July 2002. Other terms of the agreement call for a down payment of
$28,500, escrow deposit in the amount of $384,000 and a letter of credit in
the amount of $412,500. The Company occupied the facilities on October 10,
2001 and closing is scheduled to occur in February 2002.
29
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. 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.
Three and Nine Month Periods ended September 30, 2001 compared to September
30, 2000
- ---------------------------------------------------------------------------
During the three and nine month periods ended September 30, 2001, we had total
revenues of $271,600 and $510,582, respectively, with costs of sales of
$74,542 and $184,574, respectively, or approximately 27% and 36% of revenues,
respectively. Our total revenues for the three and nine month periods ended
September 30, 2000 were $31,646 and $106,573 with costs of sales of $9,601 and
$49,405, or approximately 30% and 46%, respectively, of revenue. The
substantial increase in revenues and decrease in the cost of sales as a
percentage of revenues for the periods ended September 30, 2001 compared to
same periods in the preceding year reflects our increased marketing efforts.
We believe the increase in sales is indicative of a positive trend which we
expect to continue through the balance of the fiscal year. We anticipate that
our cost of sales as a percentage of sales will continue to decrease as our
sales volume rises. However, we cannot accurately estimate our ultimate cost
of sales as a percentage of sales until we have maintained a steady revenue
stream over an extended period of time.
Corporate Expense. For the three and nine months ended September 30, 2001,
total operating expenses were $430,636 and $1,062,869, respectively,
consisting of salaries, wages and benefits of $7,807 and $29,666, consulting
expenses of $4,112 and $4,112, executive compensation of $166,720 and
$361,475, distributor expense of $112,642 and $150,918, registration fees of
$240 and $12,120, depreciation and amortization expenses of $72,776 and
$219,489, legal and professional fees of $24,821 and $167,799, and other
expenses of $41,518 and $117,290, resulting in a loss from operations of
$233,578 and $736,861, respectively. For the three and nine months ended
September 30, 2000 total operating expenses were $466,237 and $939,448,
consisting of salaries, wages and benefits of $23,558 and $115,438, consulting
expenses of $236,762 and $299,401, depreciation and amortization expenses of
$61,234 and $218,521, legal and professional fees of $97,872 and $221,598, and
other expenses of $46,811 and $84,490, resulting in a loss from operations of
$444,192 and $882,280, respectively. During the three and nine month periods
ended September 30, 2001, certain expenses booked as consulting expenses in
the prior year comparative periods were booked as executive compensation.
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 three and nine months
ended September 30, 2001 was $106,991 and $210,993, respectively, compared to
$108,643 and $233,762, respectively, for the same periods in the preceding
year. The decrease in interest expense for the periods ended September 30,
2001 over the prior year periods reflects the our commitment to lower our
indebtedness from notes payable and lines of credit.
30
For the three and nine months ended September 30, 2001, we had a loss before
extraordinary items of $340,578 and $949,418, respectively. In June 2001, a
former supplier of ours agreed to write off a balance owed them in the amount
of $8,100, reflected in the financial statements as an extraordinary item as
gain from debt forgiveness. Also during June 2001, on the advice of our main
legal counsel, we declared a note payable and the interest accrued thereon as
invalid and void. Our main legal counsel further asserted that the obligation
has passed the statute of limitations for collection. This action resulted in
a gain of $603,152 from debt restructure, which is reflected in our financial
statements at September 30, 2001 as an extraordinary item. Including the
$611,252 gain from the debt restructure and debt forgiveness, for the three
and nine month periods we had a net loss of $340,578 and $338,166,
respectively, and basic loss per share was $0.01 and $0.01. For purposes of
comparison, our losses before the extraordinary items are comparable with
prior periods. For the comparable prior year period, we had net losses of
$552,344 and $1,114,238 for the three and nine months ended September 30,
2000, and basic loss per share for the periods was $0.02 and $0.05,
respectively.
Liquidity and Capital Resources
- -------------------------------
At September 30, 2001, we had current assets of $648,058, consisting of cash
of $4,373, accounts receivable of $410,034, an employee receivable of $3,555,
prepaid interest of $76,113, prepaid royalties of $27,220, prepaid expenses of
$374, and inventories of $126,389, and current liabilities of $2,025,602 for a
working capital deficit of $1,377,544. At September 30, 2001, we had
property, plant and equipment assets totaling $41,555, net of depreciation,
and other assets of $1,874,757, consisting of deposits of $40,000 and our
investment in EPA labels, net of amortization, and goodwill associated
therewith.
Cash used in operations for the period ended September 30, 2001 was $402,252
compared to $269,567 for the same period ended September 30, 2000. In 2001,
our operations have been funded primarily by accounts receivable and proceeds
from notes payable and the sale of stock. Cash used in operations for the
period ended September 30, 2001 included the issuance of common stock for
services in the amount of $144,500, issuance of stock for finance charges and
interest in the amount of $74,375, issuance of stock for settlements in the
amount of $75,000, issuance of stock for debt in the amount of $266,619, and
the issuance of a note payable for distributor expense in the amount of
$50,000.
Cash from financing activities totaled $405,335, consisting of $44,000 from
the sale of stock and $361,335 in proceeds from notes payable.
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 were to 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 was to be capable of
collateralizing a commercial business loan in the amount of $2,500,000. We
have sought to complete the collateralization of the corporate bond without
any success to date. In August 2001, because the process has been drawn out
so long, we rescinded the agreement.
29
During fiscal year 2001, we intend to seek working capital from several
sources, including the equity markets and private investors. There is no
assurance, however, that any of our 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 our revenues
will eventually offset our operating expenses. Although we have seen
substantial increases in revenues for the three and nine months ended
September 30, 2001, we are uncertain how long it will take until we will have
sufficient revenue to begin reducing our past obligations. We intend to
continue to attempt to make offers in settlement and compromise on such
obligations in an effort to decrease our contingent and other liabilities.
We believe two of the largest and most important markets for our products are
the agricultural and home and garden markets. However, we lack working capital
and that affects our ability to effectively market our products in these
areas. 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.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC
- -------------------------------------------------
In November 1999, our former legal counsel was awarded a default judgment
against us in the amount of $42,166 plus post-judgment interest. This
judgment remains outstanding and unpaid.
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 is approximately $36,000 and has been included on
our balance sheet in commitments and contingencies at December 31, 2000.
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.
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. Judgment against us was rendered on February
1, 1999 in the sum of $61,543. This judgment is presently outstanding and
unpaid. 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 us 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, we have
paid a total of $4,000 and are currently in arrears on the payment schedule.
Mike Glazer
- -----------
A consultant rendered services to a subsidiary during 1996 in the amount of
$17,230 and has brought action for this 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 the subsidiary are fully
encumbered.
Danny Wirken
- ------------
We have been 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 precluding Mr. Wirkin from foreclosing on our obligation under
our note to Mr. Wirkin. In June 2001, we declared this note and the interest
accrued thereon as invalid and void based on advice from our main legal
counsel. Our main legal counsel further asserted that our obligation has
passed the statute of limitations for Mr. Wirkin to bring an action for
collection thereon.
33
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.
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.
Creditors' Judgments
- --------------------
During 1994 and 1995, we were sued by a number of creditors, whose lawsuits
were allowed to go to judgment. These judgments were a result of our
inability to fund operations and payments to our creditors. The collection
judgments are substantially unpaid at September 30, 2001.
Former Officers and Consultant
- ------------------------------
In September 2000, we received notice from two former officers and a former
consultant that they intend to bring action for nonpayment of back wages.
During May 2001, we 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 we plan to contest the claims.
We are not aware of any other threatened litigation against us or our
subsidiaries. However, there remains a possibility of litigation against us
and/or our subsidiaries by creditors.
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 2001, we have issued an aggregate
of 5,171,343 shares of our common stock for cash, settlement of debt,
services, and bonus compensation at prices per share ranging from $0.08 to
$0.25. These securities have been issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
(See Consolidated Statements of Stockholders' Equity in the financial
statements and the notes thereto.)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In the period ended September 30, 2001, Jay W. Downs was appointed as
chairman, president and chief executive officer following the retirement of
George H. ``Herb'' Henderson as chairman, president and CEO. Lamar Jensen,
Jeff Bates, Sherman Jensen, and Doug Goff also resigned from the board of
directors. David Andrus, Vice President of Operations, was elected to the
board.
34
ITEM 5. OTHER INFORMATION (Continued)
During October 2001, we relocated our office and operating facilities to Heber
City, Utah. We are currently negotiating the purchase of our new facilities.
(See NOTE 18 - SUBSEQUENT EVENTS in the financial statements). Both the Idaho
and Kansas offices and operations have been consolidated at the new facility.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
None.
(b) Reports on Form 8-K.
--------------------
On September 6, 2001, we filed a Current Report on Form 8-K announcing the
recission and termination of our December 2000 acquisition agreement with
International Technologies and Minerals, Inc. (ITM).
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: November 14, 2001
/S/ Jay W. Downs, President
[Principal Executive
and Accounting Officer]