-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WllaNdy6PqFUl4iz4J11hmXZjoBKpPKMB8g771pLZ4lXoCGJBClhORtGsvvkkqzN 7bhO8Awlo7L3BdcHxbR5Kg== 0001012895-01-500053.txt : 20010410 0001012895-01-500053.hdr.sgml : 20010410 ACCESSION NUMBER: 0001012895-01-500053 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIATECT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000319124 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 953555738 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-10147 FILM NUMBER: 1592586 BUSINESS ADDRESS: STREET 1: 221A WEST 37TH STREET CITY: BOISE STATE: ID ZIP: 83714 BUSINESS PHONE: 2083422273 MAIL ADDRESS: STREET 1: 221A WEST 37TH ST CITY: BOISE STATE: ID ZIP: 83714 FORMER COMPANY: FORMER CONFORMED NAME: SAN DIEGO BANCORP DATE OF NAME CHANGE: 19931124 EX-10 1 ex10-1.txt ACQUISITION AGREEMENT 1 Exhibit 10.01 ACQUISITION AGREEMENT THIS ACQUISITION AGREEMENT ("Agreement") is hereby entered into and made effective this 15th day of December 2000, by and between DIATECT INTERNATIONAL CORPORATION ("Diatect"), a California corporation, and INTERNATIONAL TECHNOLOGIES AND MINERALS, INC., a Utah corporation ("ITM"). RECITALS A. Diatect is a public corporation trading under the symbol DTCT, with its principal place of business located at 1134 North Orchard, Suite 206, Boise, Idaho 83706. Diatect is engaged in the business of natural resource products development, manufacturing, sales and marketing, including, but not limited to, insecticide products approved by the U.S. Environmental Protection Agency ("EPA"); B. ITM is a privately held Utah corporation with its principal place of business located at 5505 South 9th East, Suite 220, Salt Lake City, Utah 84117. ITM is primarily engaged in natural resources development, including, but not limited to, mining, refining, manufacturing, sales and marketing of natural resource products. C. Diatect and ITM desire to combine and expand their respective businesses by and through certain business combinations, investments and acquisitions as set forth hereinbelow and whereby Diatect will be funded by approximately $2,500,000 of private placement investment by certain designated shareholders of ITM and whereby, following mutual asset evaluation, ITM will be acquired by Diatect and become a wholly-owned subsidiary of Diatect. The transaction is contemplated as a two-step process: the purchase of Diatect stock to be followed by the acquisition of ITM by Diatect. NOW, THEREFORE, in consideration of the foregoing recitals and of the terms, conditions and warranties hereinafter contained, the parties hereto agree as follows: 1. FINAL AGREEMENT AND FURTHER DOCUMENTATION. This agreement is final and effective and the parties will act thereon, subject to the approval and ratification of the board of directors of each party. The parties intend to further document this agreement and to make express in writing further detail of this agreement in order to meet corporate and regulatory requirements necessary to perfect the intent of the parties hereto. 2. STOCK PURCHASE. For the hereinafter described consideration to be provided by certain stockholders of ITM (said stockholders to be designated in writing by ITM at the execution of this Agreement), Diatect shall issue and deliver at closing restricted common stock of Diatect in specific amounts to certain said ITM stockholders as designated by ITM. The aggregate amount of said stock to be issued and delivered to said designated ITM stockholders shall be six million (6,000,000) shares. Said stock shall be issued and delivered at closing subject to the following conditions: (a) The parties hereto understand that said stock has not been registered under the Securities Act of 1933, as amended ("Securities Act"), but is being acquired by reason of a specific exemption under Section 4(2) of the Securities Act allowing private placements of stock as well as under certain state statutes for transactions by an issuer not involving any public offering. 2 (b) At closing, each of said designated ITM stockholders who are purchasers of said Diatect stock will be required to sign the following documents related to their acquisition of said Diatect stock: (i) A subscription agreement; (ii) A suitability letter; (iii) An investment letter. Forms of these documents have been provided to ITM. (c) The parties hereto understand and represent that said stock is not being acquired by said designated ITM shareholders for resale, but rather as an investment, and that said stock are "restricted securities" within the meaning of Rule 144 promulgated pursuant to the Securities Act. 3. CONSIDERATION FOR PURCHASE OF STOCK. In consideration for the purchase by and issuance to said designated ITM shareholders of Diatect restricted common stock, the following assets will be delivered to Diatect at the following times: (a) Twenty-five thousand dollars ($25,000 US) upon the execution of this Agreement; (b) A corporate bond issued to Diatect by Quantum Trust, of Phoenix, Arizona, having a face value of five million dollars ($5,000,000 US) shall be delivered to Diatect at closing, which bond shall be capable of immediately collateralizing a commercial business loan in the amount of [approximately] two million five hundred thousand dollars ($2,500,000 US) with a national bank, insurance company or other financial institution acceptable to Diatect. 4. PERFORMANCE PRIOR TO CLOSING. (a) ITM shall show the original corporate bond to an officer of Diatect and provide him with a copy. (b) On behalf of said designated stockholders of ITM, ITM shall arrange for financing Diatect against said bond as above provided and arrange for verification of same by an officer of Diatect. If said financing is acceptable to Diatect, then ITM shall assist Diatect in obtaining a written commitment for said financing from the subject financial institution. (c) ITM shall provide Diatect with the names, addresses, social security numbers of said designated ITM stockholders and further designate the number of shares to be issued to each said shareholder. (d) Upon receipt of the information regarding the designated ITM shareholders, Diatect shall deliver to ITM for distribution to said designated ITM shareholders the required subscription agreements, suitability letters, and investment letters for execution by said designated shareholders; and shall cause the subject Diatect stock to be issued and Diatect will then advise ITM that said stock has been issued and is ready for delivery at closing. (e) Prior to closing, ITM shall gather the required subscription agreements, suitability letters, and investment letters from said designated stockholders and deliver said documents to Diatect for review and acceptance by Diatect pending closing. (f) Upon the execution of this Agreement, Diatect shall deliver to ITM a certificate of resolution of the Diatect Board of Directors approving this transaction. 3 (g) At such time as the foregoing performance obligations have been accomplished, they will set a mutually acceptable date for closing. 4. CLOSING. (a) Closing pursuant to this agreement shall occur on a mutually acceptable date, as above provided. (b) At or before closing, Diatect shall deliver to ITM: (i) Six million (6,000,000) shares of restricted Diatect common stock issued in the names of the respective ITM shareholders, as required by this agreement; (ii) Copies of Articles of Incorporation and Bylaws of Diatect; (c) At or before closing, ITM shall deliver to Diatect: (i) The corporate bond issued to Diatect by Quantum Trust having a face value of $5,000,000, as above provided; (ii) Copies of the Articles of Incorporation and Bylaws of ITM. 5. POST-CLOSING (a) As soon as practicable following closing, Diatect's Board of Directors will convene and appoint four new directors to the Diatect Board of Directors to fill four existing vacancies, namely, Lamar N. Jensen, Douglas Goff, Jeff Bates, and Sherman Jensen. (b) ITM will proceed immediately to finalize its acquisition of certain assets including, but not limited to, the exclusive, long-term lease on the Dry Creek [and Salt Creek] Gypsum Mines property near Cedar City, Utah; title to the Dry Creek [and Salt Creek] Gypsum Mines; and the total, exclusive right, title and interest in and to the proprietary knowledge, plans, specifications, agreements, and all other aspects of the entrepreneurial opportunity in any way relating to the development, construction, operation and ownership of a wallboard plant proposed to be constructed near Cedar City, Utah, to utilize, inter alia, gypsum produced by the Dry Creek [and Salt Creek] Gypsum Mines. (c) Diatect shall be advised of and have the right to know all facts relating to the acquisition of said assets, both before and after said acquisition. 6. ACQUISITIONS OF ASSETS BY ITM. It is the express intent of the parties that Diatect will acquire ITM upon ITM's acquisition of title to the assets described above and any other assets the parties mutually agree should be acquired. Said acquisition of ITM by Diatect shall be subject to the following conditions: (a) Approval by the boards of directors and the stockholders of both parties; (b) All acquisitions of assets by ITM shall be subject to the written approval of the Board of Directors of Diatect; (c) All assets acquired by ITM shall be independently audited by Value NetX of Salt Lake City, Utah, so as to qualify for filing 10 KSB reports for publicly reporting corporations: (d) At such time as the parties mutually desire to proceed with the acquisition of ITM by Diatect, the assets of both corporations shall be evaluated by Value NetX in accordance with NACVA (National Association of Certified Valuation Analysts) at least thirty (30) days prior to closing said 4 acquisition. Said evaluation of both parties shall form the final ratio for stock issuance of Diatect stock to the shareholders of ITM for Diatect's acquisition of ITM, as set forth in the following subsection. (e) Upon the completion of the valuation of the assets of 1TM and Diatect as provided for hereinafter, Diatect will issue to said ITM shareholders such further restricted, common shares of Diatect, if any, so that the total of said stock (including the above referenced six million shares) issued to said ITM shareholders bears the same ratio to the total shares of Diatect issued and outstanding immediately prior to closing, that the value of the ITM assets acquired pursuant to this Agreement bears to the value of the assets of Diatect per said evaluation, the evaluation of which assets shall be done by Value NetX of Salt Lake City using NACVA standards. 7. WARRANTIES AND REPRESENTATIONS OF DIATECT. As a material inducement to ITM to execute and perform its obligations under this agreement, Diatect represents and warrants to ITM as follows: (a) Diatect is a corporation duly organized, validly existing, and in good standing under the laws of the State of California with corporate power and authority to own property and carry on its business as it is now being conducted. Diatect is qualified to transact business as a foreign corporation and is in good standing in all jurisdictions in which its principal properties are located and business is transacted, or is not required to be qualified as a foreign corporation to transact business in any other jurisdiction. (b) Diatect warrants and represents that it is a publicly traded corporation in full compliance with SEC regulations for the filing of 10KSB and 10Q reports and that its trading symbol is DTCT. (c) Diatect warrants and represents that it has authorized capital of fifty million (50,000,000) shares at no par value of which approximately twenty-seven million (27,000~000) shares are issued and outstanding or committed for issuance before December 1, 2000. (d) Diatect's Board of Directors has, pursuant to a special telephonic meeting with all directors consenting, approved this agreement in principal and authorized and directed its officers to execute this agreement. Further, at the request of the Board of Directors, the President and the Secretary have contacted over fifty-one percent (51%) of the shareholders who have verbally committed to support ratification of this agreement. (e) Diatect warrants that all necessary procedures under the requirements of federal and California securities laws and the related supervisory commissions shall be followed to ensure that this agreement is properly processed to comply with all federal and state registration requirements. This acquisition shall proceed as a private placement pursuant to Reg. D. The ITM shareholders shall execute subscription agreements and the transactions shall be filed pursuant to Form D with the SEC. 8. WARRANTIES AND REPRESENTATIONS OF ITM. As a material inducement to Diatect to execute and perform its obligations under this agreement, 1TM represents and warrants to Diatect as follows: (a) ITM is a corporation duly organized, validly existing, and in good standing under the laws of the State of Utah, with power and authority to own, lease, and operate property and carry on its business as it is now being conducted. ITM is qualified to transact business as a corporation and will be in good standing as of the time of closing in all jurisdictions in which its 5 principal properties are located and business is transacted or is not required to be qualified as a foreign corporation to transact business in any other jurisdiction. (b) ITM shall furnish Diatect with ITM's balance sheet as of the date of closing of said acquisition of ITM by Diatect and the related audited statement of income for the one (1) month ending prior to closing. The financial statements referred to in this subparagraph (b): (i) Shall be in accordance with the books and records of ITM; (ii) Fairly represent the financial condition of ITM as of the described dates and the results of its operations as of and for the periods specified, all prepared in accordance with generally accepted accounting principles, applied on a basis consistent with prior accounting periods; and (iii) Contain and reflect, in accordance with generally accepted accounting principles consistently applied, (A) reserves for all liabilities and costs in excess of expected receipts and (B) all discounts and refunds in respect of service and products already rendered or sold that are reasonably anticipated and based on events or circumstances in existence or likely to occur in the future with respect to any of ITM's contracts or commitments. Specifically, but not by way of limitation, the balance sheet discloses in accordance with generally accepted accounting principles all of the debts, liabilities and obligations of any nature, whether absolute, accrued, or contingent, or ITM at the balance sheet date, including appropriate reserves for all taxes due at such date but not yet payable. (c) ITM has not been delinquent in the payment of any tax, assessment, or governmental charge. ITM has never had any tax deficiency proposed or assessed against it. Neither the federal income tax returns nor state franchise tax returns of ITM have ever been audited by governmental authorities. (d) ITM shall deliver to Diatect a correct and complete list of the names of all its shareholders and the allocation of said shares of Diatect to said shareholders, so that said shares can be delivered at closing to said shareholders of ITM. (e) From the date of this Agreement to the closing of the ITM acquisition, there shall not be any material adverse change in the financial condition, business, and assets or other properties of ITM that alters or impairs its ability to conduct its business, including labor difficulties, market conditions, or any other event of any character. Any operating loss incurred by ITM since the balance sheet date that does not exceed five thousand dollars ($5,000) will not be deemed to be a material adverse change. (f) To its knowledge, no actions, suits, or other legal proceedings are or shall be pending or threatened against ITM, its subsidiaries, or its shareholders before any federal, state or municipal court, department, board, bureau, or agency at the time of the closing of the acquisition of ITM. 9. CLOSING OF ACQUISITION OF ITM BY DIATECT. (a) Closing pursuant to this agreement shall occur on a mutually acceptable date. (b) At closing, Diatect shall deliver to ITM: (i) The requisite number of shares of restricted Diatect common stock issued in the names of the ITM shareholders, as required by this agreement; 6 (ii) Certificate of resolution of board of directors and stockholders approving and ratifying this agreement; (c) At closing, ITM shall deliver to Diatect: (i) All issued and outstanding stock of ITM, which stock shall be endorsed over in the name of Diatect; (ii) Certificate of resolution of directors and stockholders of ITM approving and ratifying this agreement; (iii) Copies of all corporate books and records of ITM, including, but not limited to, the minute book, stock books, Articles of Incorporation, and Bylaws; (iv) Balance sheet and related audited financial statement as required by Section 8(b) above. 10. PENDING CLOSING OF ACQUISITION OF ITM BY DIATECT. (a) Pending closing of this agreement, each of the parties will carry on its business in substantially the same manner as prior to the date of this agreement and will use its best efforts to maintain its business organization intact, to retain its present employees, stockholders or officers and to maintain its good will in relationships with suppliers and others transacting business with the entity. (b) Except with the prior consent in writing of Diatect pending closing of this agreement, ITM will not: (i) Declare or pay any dividend or make any other distribution on its shares; (ii) Create or issue any indebtedness for borrowed money; (iii) Enter into any transaction other than those involved in carrying on its ordinary course of business. 11. NOTICES. Except as otherwise provided for herein, all notices required by this agreement shall be given by certified mail (or equivalent), to the respective parties at the following addresses indicated below or to any change of address given by one party to the other pursuant to written notice. DIATECT: Diatect International Corporation 1134 North Orchard, Suite 206 Boise, Idaho 83706 ITM: 5505 South 9th East, Suite 220, Salt Lake City, Utah 84117 12. DISPUTE RESOLUTION. Any disputes arising under this agreement shall be resolved exclusively under and pursuant to the rules of the American Arbitration Association. Venue is exclusively vested in Boise, Idaho. The laws of California shall apply. The prevailing party shall be entitled to recover its attorney fees and costs incurred in resolving any dispute. 13. GENERAL PROVISIONS. (a) Except as permitted by paragraph 1 above, this Agreement constitutes the total and complete agreement between the parties, superseding all other prior agreements. (b) No party to this agreement shall be entitled to assign its interest in this agreement, unless approved in writing by the other party. 7 (c) Each of the parties agrees to execute any other documents reasonably required to fully perform the intent of this agreement. (d) This agreement shall inure to and be binding upon the parties hereto, their agents, employees, successors, and assigns. (e) The failure of one party to insist upon strict performance or observance of this agreement shall not be a waiver of any future breach or of any terms or conditions of this agreement. (f) In the event any provision or article of this agreement conflicts with the applicable law, such conflicts shall not affect the provisions of this agreement which can be given effect without the conflicting provision. WHEREFORE, this Acquisition Agreement is hereby executed and made effective the day and year first above written. DIATECT: DIATECT INTERNATIONAL CORPORATION By /S/GEORGE H. HENDERSON, its President ATTEST: /S/ JOHN L RUNFT, Secretary ITM: INTERNATIONAL TECHNOLOGIES AND MINERALS, INC. By /S/ LAMAR JENSEN, its President ATTEST: /S/ ROBERT C. CROUCH, Secretary 8 FIRST ADDENDUM TO ACQUISITION AGREEMENT This First Addendum to Acquisition Agreement ("Addendum") is hereby entered into and made effective this 19th day of February, 2001, by Diatect International Corporation, a California corporation ("Diatect") and International Technology & Minerals, Inc., a Utah corporation ("ITM") and hereby amends that certain Acquisition Agreement entered into by and between Diatect and ITM on December 15, 2000, as follows: 1. The parties hereto acknowledge that the mutual consideration for this Addendum constitutes adequate consideration. 2. With regard to the provision in Section 3 (A) of the Acquisition Agreement which provides that ITM will pay the sum of Twenty Five Thousand Dollars ($25,000) to Diatect upon execution of the Acquisition Agreement, the parties hereto acknowledge that of said sum, the sum of Twenty Thousand Dollars ($20,000) has been paid and the parties hereby agree that any requirement for payment of the balance of Five Thousand Dollars ($5,000) of said required sum is hereby waived. The parties further agree that said Twenty Thousand Dollars ($20,000) so paid to Diatect by ITM shall be and is herewith agreed to be a loan and that such loan shall be repaid by Diatect to ITM as follows: (a) If closing of the purchase of Diatect stock for the asset backed bond occurs on or before April 1, 2001, then, in that event, said Twenty Thousand Dollars ($20,000) shall be repaid, without interest, from the proceeds of the contemplated loan against said asset backed bond; or, (b) If the purchase of Diatect stock by said asset backed bond does not occur on or before April 1, 2001, then said Twenty Thousand Dollars ($20,000) loan shall be reduced to a one year promissory note by Diatect to ITM in the sum of Twenty Thousand Dollars ($20,000) and shall bear interest from that date at the rate of ten percent (10%) per annum and any other funds loaned or advanced to Diatect by ITM or ITM's associates, including, but not limited to, Pacific Nakon International, Inc., a Washington corporation, and/or Lamarr N. Jensen, a resident of Kirkland, Washington, shall as of April 1, 2001 be reduced to one year promissory notes for the repayment of said loans or advances and shall bear interest from that date at the rate of ten percent (10%) per annum. 3. This Addendum incorporates herewith in full the entire provisions of said Acquisition Agreement and amends said Acquisition Agreement only as specifically provided hereinabove, subject to the provision that, in the event a conflict arises between this Addendum and the Acquisition Agreement, the provisions of this Addendum shall prevail. IN WITNESS WHEREOF, the parties hereto have executed this Addendum the day and year first above written. DIATECT: Diatect International Corporation By /S/ George H. Henderson, President ATTEST: /S/ John L. Runft, Secretary ITM: International Technology & Minerals, Inc. By /S/ Lamarr N. Jensen, President ATTEST: /S/ Robert C. Crouch, Secretary 10KSB 2 f00d10k.txt DECEMBER 2000 FORM 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File number: 0-10147 DIATECT INTERNATIONAL CORPORATION ------------------------------------------- (Exact name of registrant as specified in charter) California 95-355578 ---------- --------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1134 North Orchard, Suite 206, Boise, Idaho 83706 - ---------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (208) 342-2273 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A ---- --- Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par Value ------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] 2 State the issuer's revenues for its most recent fiscal year: $161,364 State the aggregate market value of the voting stock held by nonaffiliates of the registrant. At March 28, 2001, the aggregate market value of the voting stock held by nonaffiliates was $2,653,112 The average of the bid and asked price of such stock on March 28, 2001, was $0.11 per share. At March 29, 2001, the registrant had 34,716,073 shares of common stock, no par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the form 10-KSB (e.g., part I, part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or other information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) under the Securities Act of 1933: None 3 PART I ITEM 1. BUSINESS General - ------- We are Diatect International Corporation and were incorporated in California in May 19, 1979. We produce a variety of insecticides which utilize so called "natural-killing agents" which are non-toxic to the environment as well as humans and other warm-blooded animal life. Whereas widely used conventional chemical synthesized insecticides are composed of highly dangerous, toxic chemicals that seep into the water table and are washed into rivers and lakes, contaminating water and soil for decades, our products are composed of diatomaceous earth ("DE") and Pyrethrin that degrade after application leaving the environment unharmed. DE and Pyrethrin have been used separately for years as adequate alternatives to hazardous chemical insecticides. By putting these two natural insecticides together in our products, we have created a powerful synergy that leads to more effective insect control than either DE or Pyrethrin can provide individually. We have obtained EPA registrations and labels necessary for the production and marketing of five insecticides. The approval by the EPA of our labels is significant since EPA approval can be a lengthy and expensive process. Due to the long time it took to obtain EPA approval for our labels, we did not actually begin commercial marketing of our products until late 1993. Industry - -------- According to information published in the U.S. Department of Agriculture "Agriculture Statistics (1993)" and the U.S. Department of Commerce Statistical Abstract (119th ed.), over the previous ten years the worldwide market for pesticides grew by 30% as the total amount of acreage planted continued to increase in the United States and the world. Pesticide consumption in dollar terms is expected to grow 4.4% per year through 2003, compared with 3% during 1983-93. Agriculture is the largest end-user sector for insecticides, followed by commercial, industrial, home, garden and government applications. The United States spent approximately $3.3 billion in 1980 for agricultural pesticides and estimated $320 billion in 2000, representing an growing increase over a 17-year period. Four markets---corn, cotton, vegetables, and fruit and nuts---account for 78% of the U.S. insecticide market. Japan is the second-largest market for pesticides in the world, by sales. Insecticides are the leading product category in the pesticide market, with 34% of the Japanese market. Western European insecticide sales amount to approximately 15% of total world insecticide sales. France, Spain and Italy are key markets for insecticides in Western Europe. Export demand for insecticide products take 59% of U.S. insecticide production. Export demand is expected to remain strong. A 1996 Gallup poll reported that 92% of farmers want to use safer pesticides and 66% favored tougher enforcement of pesticide misapplication penalties. The nature of synthesized chemical pesticides has caused concern among the public and regulators particularly over the pesticides persisting in the environment, accumulating in soil and ground water and affecting surrounding wildlife such as fowl and fish. These concerns have led the EPA to require stricter guidelines on new pesticides. Additionally, the EPA has, in many instances, ordered new tests for previously approved products which must now 4 meet the newer, more stringent standards. The additional testing is resulting in some companies electing to remove existing products from the market rather than subject the products to the newer standards. Over the past several years, chemical companies have voluntarily dropped the registration of approximately 28 active ingredients and 5,000 pesticide products that were in use at the time of cancellation. Additionally, since insecticides were first used in the 1940's, more than 600 insect species have developed resistance to many synthetic pesticides, leading the industry to constantly search for new products. Insecticide resistance has cost an estimated $1.4 billion a year in crop losses in the United States alone. Products - -------- We recognize the future demands for environmentally acceptable insecticide products in all agriculture-related industries worldwide. Our business plan calls for formulations which are natural in composition; components which, as stand-alone insecticides, are efficient, non-toxic, user and environmentally friendly, yet cost-effective. The active ingredients used in our products are diatomaceous earth ("DE"), pyrethrin and piperonyl butoxide. DE is a naturally occurring mineral deposit resulting from microscopic single-celled plants called diatoms which took the minerals from the water and created protective shells for themselves. As they died and their shells drifted to the bottom of the sea beds, vast deposits were created. One of the numerous uses for DE is as a natural insecticide, since it causes severe mechanical cutting damage to insects akin to the damage of broken glass swallowed by humans. DE is mined from the earth and ground into usable particles. There are many varieties of diatoms, and the preponderance of the type in any given deposit gives that deposit certain characteristics. In the case of nontoxic insecticides, certain qualities make it possible to kill insects without harming animals, plants or humans. These rare deposits furnish a material that has two very important characteristics (1) when fractured, the particle edges are very sharp and (2) each tiny particle has the ability to absorb liquid. In addition to cutting the covering of an insect's shell to cause dehydration, DE also absorbs the insect's covering and bodily fluids further causing dehydration and eventual death. Moreover, DE causes extensive trauma to insects, both internally and externally. In order to be effective as an insecticide, DE must be free of significant impurities. Additionally, DE is generally slow to reduce insect populations and thus has limited effectiveness, especially against fast-breeding insects. For this reason, our products combine DE with pyrethrin. Pyrethrins are oily liquid esters extracted from the pyrethrum flower, the "African Daisy." The extract is a "botanical insecticide" and acts on insects with phenomenal speed, causing paralysis. Research has determined that Pyrethrin is virtually harmless to mammals. Pyrethrin affects both the peripheral and central nervous system of the insect. Initially, it stimulates nerve cells to produce repetitive discharges, quickly leading to paralysis. Piperonyl Butoxide ("PBO"), the third ingredient in our insecticides, is an extract originally discovered in a variety of sassafras, which has since been synthesized and made available in quantities greater than possible from plants. While early studies suggested that PBO is itself a natural insecticide, it is its use as a synergist that is particularly exciting. A synergist is not generally considered toxic or insecticidal, but 5 is a material used to enhance the activity of the insecticides. PBO is the synergist used in our products. Basically, PBO binds oxidative enzymes and prevents them from degrading the pyrethrin. Combined with small amounts of pyrethrin, it affords a rapid knockdown, a greater mortality, and a longer residual action than pyrethrin by itself. PBO has been found to be safe and free of any normal hazards of toxicity. It is well tolerated in large quantities by warm-blooded animals. Because PBO is substantially less expensive than pyrethrin, its use allows us to offer more competitively priced products. We combine DE, pyrethrin and PBO by using surfactants to ensure a good mix and greatly increase effectiveness and persistence. The combination of these active ingredients results in a compound much more effective than each ingredient individually. When using the ingredients together, DE breaks down the chitin, allowing the pyrethrin to act on an insect's nerve cells directly. The pyrethrin does not evaporate as quickly and is released for hours rather than minutes. PBO increase's the effectiveness of the pyrethrin by as much as ten times. Our products consist of five fully registered EPA Labels: 1. Diatect D-20 Insecticide, EPA Registration No. 42850-1, Indoor Insecticide. Controls roaches, fleas, ants, silverfish, crickets, bedbugs, box elder bugs, and other insects. For use under sinks, behind furniture, in air vents, under tile, stairwells, and basements. 2. Diatect Multi-Purpose Insecticide, EPA Registration No. 42850-2. Distributed in the agriculture market, the largest end-user market for insecticides; commercial; industrial; and government markets as "Diatect Multi-Purpose Insecticide." This insecticide is approved by the EPA for use in a wide variety of areas, e.g., edible growing crops, animal quarters, livestock, ornamentals, etc., under the least hazardous classification and is effective on a wide variety of insects. This insecticide can be applied as a dust or sprayed in solution with water and can be used on crops and fruits up to and including the day of harvest. 3. Diatect Pet Powder, EPA Registration No. 42850-3. Marketed on a retail basis under the trade name "Results." 4. Diatect II Multi-Purpose Insecticide, EPA Registration No. 42850-4. The Diatect II product is formulated using a larger measure of pyrethrin (.2%) which provides a quicker, more positive knockdown. Designed and approved for use in the same applications as the No. 42850-2 formulation (which contains .1% pyrethrin), the user receives a significantly better return on their insecticide dollar using Diatect II because of its added knockdown strength. This insecticide can be applied as a dust or sprayed in solution with water and can be used on crops and fruits up to and including the day of harvest. The above product is distributed in the retail market for use in the home and garden markets under the trade name "Results" under the following retail labels: - Results Fire Ant Insecticide. Applying the insecticide directly to fire ant mounds provides quick, effective control in eliminating these aggressive, dangerous pests. Each year 65,000 Americans seek hospital treatment for venomous fire ant stings and two of those people die. Unlike bees, fire ants can sting repeatedly and have a very aggressive behavior. 6 - Results Ant and Insect. Controls ants, aphids, caterpillars, leafhoppers, lice, mites, mosquitoes, ticks, and other insects. - Results Tomato and Garden. Protects garden plants from many varieties of worms, beetles, leafhoppers, stink bugs, squash vine borers, and other insects. - Results Rose and Floral. Protects azaleas, begonias, African violets, chrysanthemums, dogwood, elm, roses, tulips, and many other plants. Destroys insects such as mealybugs, fruit flies, white flies, and caterpillars that ruin the beauty of garden flowers and plants. 5. Diatect V Insecticide, EPA Registration No. 42850-5. The Diatect V product was designed and formulated to meet the needs of the organic food industry which requires insecticides with no synthetic ingredients. Using a powerful bug-killing measure of pyrethrin (.5%) blended with DE, one of Nature's best known insecticides, Diatect V becomes the product of choice for those users requiring an organic certification. We believe the Diatect and Results products are far more effective than major competitive synthetic chemical products. Regulatory Approval - ------------------- In general all insecticides, purchased in stores today must, have EPA-approved labels that disclose various required information about the product. These insecticide labels provide an extensive amount of information and indicate that the insecticide has been tested, evaluated, and regulated by the EPA. In fact, no insecticides can be legally registered, much less sold, without going through these procedures. Toxicity - -------- Toxicity is the quality, state or degree of being poisonous. All too often people think of toxicity as poisoning that is caused by ingesting a small amount of some substance. However, almost any chemical is potentially toxic given enough of it and the right circumstances. In fact, every homeowner has cabinets in their bathroom, kitchen, or garage that contain bottles of substances which, if ingested, inhaled, or spread on the skin, may cause harm. Even something as seemingly innocuous as table salt is toxic, if sufficiently large quantities are ingested. Toxicity is usually expressed as the lethal dose or LD50. The LD50 denotes the amount (single dosage of the substance by mouth) in milligrams per kilogram of body weight required to kill 50% of a group of test animals. LD50 denotes the potency of a substance; the lower the number, the less of that substance is required to kill an animal. Conversely, the higher the number, the more of that substance is required. For example, the LD50 for table salt is 3,300 (mg/kg) and for aspirin the LD50 is 750 (mg/kg). The LD50's of different substances can be easily compared and are represented on insecticide labels by the signal words DANGER or POISON, WARNING, or CAUTION. These signal words are associated with different ranges of LD50's and hence different degrees of toxicity as listed in the table below. 7
Toxicity Category Signal Words (required on Oral LD50 Probable Lethal an insecticide label by EPA) (mg/kg) Adult Human Dose (1) - ----------------- ---------------------------- ---------- ------------------------- I--Highly Toxic DANGER or POISON, plus skull 0 to 50 A few drops to 1 teaspoon and crossbones symbol II--Moderately Toxic WARNING 50 to 500 1 teaspoon to 2 teaspoons III--Slightly Toxic CAUTION 500 to 5,000 1 ounce to 1 pint (1 pound) IV--Almost non-toxic CAUTION more than 5,000 1 ounce to 1 pint (1 pound) (1) Toxicity of Insecticides and Determining the LD50," Kenneth J. Stein and F. William Ravlin, Department of Entomology, Virginia Polytechnic Institute and State University, 1995
Oral toxicity testing on our Products resulted in an LD50 of more than 5,000 mg/kg. The oral toxicity for the product is less than that for table salt or aspirin. (Because the product was mildly irritating to the eyes of New Zealand rabbits, the product does carry the Level III Signal Word "Caution" with the appropriate wording. However, it is of importance to note that this wording is because of the irritation to the eyes of the rabbits, not the oral or dermal toxicity of the product.) As previously stated, all new insecticides must be "registered" with the EPA, which specifies the conditions of their use as part of its mandate under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). An insecticide user or manufacturer who fails to comply with FIFRA restrictions risks enforcement actions from both the EPA and state authorities, including, but not limited to, suspended product sales and fines. Our products comply with FIFRA restrictions and are registered with the EPA. The pesticide regulatory program instituted by Congress and implemented by the EPA is having a profound effect on the availability of old as well as new synthetic chemical pesticides. Many of the old pesticides were registered before their long-term health and environmental effects were fully understood. In 1972, Congress decreed that the EPA should reexamine the risks of all active ingredients in pesticides registered before modern testing methods became available. In 1988, impatient with the slow pace of the registration program, Congress imposed timetables on the EPA and levied fees on chemical companies wishing to re-register their products. Although the EPA has banned many unsafe pesticides in recent years, we believe the impact of Congress' action has been significant. As stated above, chemical companies have voluntarily dropped registration of 68 active ingredients and 12,000 pesticide products that were in use at the time of cancellation over the past 2 years. The cost of developing a new chemical for registration has also risen enormously in recent years, partially because of expensive tests required to show that the chemical poses low environmental and human health risks. The typical pesticide is put through more than 6000 tests and approval can take more than eight to ten years. Once approved, labeling instructions must be followed for proper use, handling, storage and disposal. The effect of these tighter restrictions and the removal of these active ingredients is to open the door for our products. 8 Competition in the Insecticide Industry - ----------- The principal players in the U.S. plant care industry, particularly the insecticide industry, are major companies such as Dow, duPont, Monsanto, Shell Oil and Chevron. Those companies all have more extensive resources than we do and have established product recognition and loyalty. We believe, however, that by focusing on the non-synthetic insecticides, we are able to acquire market niches which have not been a focus of the larger, better established companies. We believe we have an advantage in the products and market niche we have identified in that we have already obtained EPA approval of our products and labels. The EPA approval is important due to the time and cost associated with receiving such approval which can take years and be extremely costly. Management Changes - ------------------ In February 2000 David J Black resigned from the Board of Directors. In April 2000 Larry D. Anderson and Robert Corrigan were elected to the Board of Directors. In November 2000 Michael McQuade, Larry D. Anderson and Robert Corrigan resigned from the board of Directors. In December 2000, Lamar N. Jensen, Sherman B. Jensen, Douglas K. Goff and Jeff Bates were elected to the Board as Directors. Currently, our Board of Directors is made up of: George H. Henderson, Chairman & Director John L. Runft, Secretary & Director (Corporate Counsel) Robert B. Crouch, Director Jay W. Downs, Director M. Stewart Hyndman, Director Lamar N. Jensen, Director Sherman B. Jensen, Director Jeff R. Bates, Director Douglas K. Goff, Director Offices, Employees and Subsidiaries - ----------------------------------- The Company's executive offices are located at 1134 North Orchard, Suite 206, Boise, Idaho 83706. Our officers are: George H. Henderson, CEO & President, Boise, ID. Jean Montgomery, Office Manager, Smith Center, KS. Rydal Tuxhorn, Plant Manager, Lebanon, KS. We have the following operating subsidiaries: Diatect International, Inc., a Kansas corporation, is a wholly-owned subsidiary through which our production operations are conducted. Its administrative offices are located at Highway 36 East, Smith Center, Kansas. The plant facility is located at 108 East Schoolhouse Road in Lebanon, Kansas. Magic International, Inc., a wholly-owned subsidiary, was acquired by us for the purposes of conducting our marketing operations. Its executive offices are located at 1134 North Orchard, Suite 206, Boise, Idaho 83706. As of this filing, Magic International, Inc. has no employees. 9 ITEM 2. PROPERTIES Diatect International Corporation, 1134 North Orchard, Suite 206 Boise, Idaho. Executive Offices - 1,800 sq. ft. - Lease. The lease on this property is for 3 years at a monthly rate of $820 in year 1, $838 in year 2, and $857 in year 3. Diatect International, Inc., East Hwy 36, Smith Center, Kansas. Production Offices - 750 sq. ft. - Month to month rent. Monthly rent of $200. Lebanon Production Plant, 108 E. Schoolhouse Rd., Lebanon, Kansas. 25,000 sq. ft. - Brick. We own this facility outright. See Note 4 to the financial statements. ITEM 3. 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 is approximately $36,000 and has been included in commitments and contingencies at December 31, 1998 and 1999. 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, 1999 and 1998, $61,543 and $55,543 are included respectively in commitments and contingencies in these financial statements. 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 in the financial statements attached to this report. 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 in the financial statements attached to this report. 10 Danny Wirken - ------------ We are considering litigation against Danny Wirkin, (one of the brokers involved in the selling of our stock (which gave rise to the previously reported litigation with Gruntal & Co.), 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 and 1999 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $216,570 and $185,644, respectively. See Note 7 to the financial statements attached to this report. 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, 1999 and 2000. George Brinks - ------------- George Brinks 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 in the financial statements attached to this report. 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 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the respective periods indicated, the prices for our common stock in the over-the-counter market as reported by a weekly reporting service and according to the OTC Bulletin Board. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. At March 28, 2001, our common stock was quoted under the symbol "DTCT" and had a high of $0.12 and a low of $0.08. All bid prices below have been rounded to the nearest whole cent. Bid Prices --------------- Fiscal Year Ended December 31, 2000 ----------------------------------- First Quarter $ 0.10 $ 0.04 Second Quarter $ 0.13 $ 0.06 Third Quarter $ 0.24 $ 0.08 Fourth Quarter $ 0.18 $ 0.08 Fiscal Year Ended December 31, 1999 ----------------------------------- First Quarter $ 0.15 $ 0.07 Second Quarter $ 0.15 $ 0.10 Third Quarter $ 0.12 $ 0.08 Fourth Quarter $ 0.10 $ 0.06 Fiscal Year Ended December 31, 1998 ----------------------------------- First Quarter $ 0.08 $ 0.07 Second Quarter $ 0.31 $ 0.08 Third Quarter $ 0.18 $ 0.06 Fourth Quarter $ 0.10 $ 0.05 We have not paid any dividends on our Common Stock, and we do not anticipate that we will pay dividends in the foreseeable future. The future payment of dividends, if any, on the common stock is within the discretion of the Board of Directors and will depend on our earnings, if any, our capital requirements and financial condition, and other relevant factors. At March 28, 2001, we had approximately 1,080 shareholders of record based on information provided by our transfer agent. 12 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 us and our business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. General - ------- Our founders envisioned establishing a business venture built upon the creation, development, production and marketing of a quality line of natural, environmentally-friendly insecticide products. From those early times, work was undertaken to research the markets, to acquire the formulations and obtain related EPA labels covering those products, then set about to form a company based upon those concepts. A great deal of time and effort was expended endeavoring to raise the funding to acquire the physical assets between the years 1991-1995. We acquired most of the physical assets required to operate but the limited markets, legal battles and the continued lack of financial resources placed us under adverse operating conditions. In early 1997, the Board of Directors set forth a new business plan and made a number of changes in the management team. That new business plan called for several substantial actions to be initiated: -Focusing efforts and resources on the primary business of designing, developing, producing and marketing state-of-the-art environmentally-friendly insecticide products; -Divesting/spinning off of unrelated business ventures; -Creating and registering new products aimed at filling the needs of the ever broadening and growing agriculture industry; -Upgrading the insecticide plant facilities (capacity: 50,000 lbs. of product per day) and laboratory to be able to produce larger volumes of product per day; -Reducing corporate indebtedness and liabilities; -Streamlining operations and reducing operating costs; -Re-establishing our credibility in the business community and financial markets; -Resolving outstanding litigation; -Forming up and maintaining a solid, knowledgeable management team; -Continuing to develop market strategies for our various products. 13 Results of Operations - --------------------- Year ended December 31, 2000 compared to year ended December 31, 1999 - --------------------------------------------------------------------- Revenues. We had revenues of $161,364 and cost of sales of $91,938 with a gross profit of $69,426 for the period ending December 31, 2000, compared with revenues of $207,912 and cost of sales of $110,385 with a gross profit of $97,527 for the period ending December 31, 1999. The decrease in revenues was directly attributable to decreased sales. Our decrease in sales in fiscal 2000 from 1999 was a result of the lack of financial resources to mount and pursue an aggressive marketing program. The small increase in cost of sales as a percent of revenues, from 53.1% in 1999 to 56.9% in 2000 was attributable to relative increases in the costs of labor and marketing. Operating Expenses. For the year ended December 31, 2000, we had total operating expenses of $1,138,196, compared to $671,835 for the same period ending December 31, 1999. The significant increase in operating expenses is attributable to a increases in executive compensation of $115,120, consulting fees of $203,243, and legal and professional fees of $161,776. The increase in executive compensation, consulting, and legal and professional fees is a result of our entering into an employment agreement with our President and his related signing bonus, option grants to key executives and legal counsel, as well as the increased cost of regulatory compliance during the period. (See the Executive Compensation section in this report). Management expects operating expenses for the next twelve months to be significantly greater because of increased corporate activity and the cost of the marketing program. Other Income and Expense. Other expense for the year ended December 31, 2000 totaled $321,697, consisting primarily of interest expense of $234,284, loan incentive and guarantee fees of $80,625, and litigation settlement expense of $8,750. Other expense for the year ended December 31, 1999 totaled $305,545, consisting primarily of interest expense of $210,962 and litigation settlement expense of $96,711. We experienced a net loss of $1,390,467 for the year ended December 31, 2000 and a net loss of $879,853 for the year ended December 31, 1999. The basic loss per share for the year ended December 31, 2000 was $0.06, based on the weighted average number of shares outstanding of 22,950,545 shares, compared to $0.05 based on weighted average number of shares outstanding of 19,535,231 at December 31, 1999. Lack of working capital and equity funding continued to severely hamper our ability rapidly implement our business plan, however, we believe that we still made significant progress during the fiscal year ended December 31, 2000. -One new registered EPA label was created and approved (Diatect V insecticide), providing us with larger potentially profitable Organic markets. -We spun off or divested ourselves of all unrelated businesses, to let us focus on our core insecticide business. -Our more modern updated plant and lab facility has the capability of producing 20,000 pounds of quality insecticide products during each 24-hour period. -We believe we are on a solid operational footing with streamlined and effective production procedures in place, which we hope will result in well controlled operating costs. -Our Product inventories are maintained for immediate shipment. 14 -While work has been done in an effort to launch an effective marketing campaign, only modest success has been achieved at this point in time. A radical change in marketing strategy has been prepared and will be implemented when funding becomes available. The strategy which is being implemented is to expand into every aspect of the marketplace worldwide through the establishment of a network of dealers. Through this system, every consuming entity will be identified, contacted, and introduced to the benefits of the Results and our other insecticide products. Currently, we have agreements with non-exclusive dealers. Our ultimate objective is to eliminate the role of the exclusive distributors, removing one additional price break consideration, enhancing our overall profitability. In the immediate foreseeable future, we intend to implement a plan which will see all of our marketing/sales activities being handled by one of our wholly- owned subsidiaries. Through this new strategy, additional local dealers will be identified and signed on in each of the identified non-exclusive market areas, ensuring that our products are represented worldwide through a solid distribution network. We believe our future success will be dictated by our ability to run a cost- effective and environmentally-friendly company. Our industry is rapidly developing new chemical compounds, many of them bio-engineered from natural raw materials. Manufacturers are racing to keep pace with advancements and older generation insecticide labels have begun to decline in sales. We believe our future will be strong because many elements necessary to compete are under contract and in place. We believe we are in a strong position to compete in future markets. With further development of product lines, based on these resources, we hope that the Results and our other insecticide product lines will be assured of a continued and growing presence in the market. Liquidity and Capital Resources - ------------------------------- At December 31, 2000, we had current assets of $265,423, consisting of cash of $3,384, accounts receivable of $58,014, prepaid interest of $42,550, prepaid royalties of $37,500, and inventories of $123,975, and current liabilities of $2,485,263 for a working capital deficit of $2,219,840. At December 31, 2000, we had property, plant and equipment assets totaling $47,123, net of depreciation, and other assets of $2,196,584, consisting primarily of our investment in EPA labels, net of amortization of $2,019,534, plus deposits of $150,000 and goodwill, net of amortization of $27,050. Cash used in our operations for the year ended December 31, 2000 was $292,243 compared to $196,750 for the same period ended December 31, 1999. In 2000 and 1999, our operations were funded primarily by funds received from loans and sales of our products. Our cash flows used by investing activities during the year ended December 31, 2000, was $2,444. Our cash flows from financing activities during the year ended December 31, 2000 was $292,911. 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. 15 Subsequent to the date of these financial statements, we have received the initial $20,000 loan and 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 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and Note 15 to the attached 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. ITEM 7. FINANCIAL STATEMENTS Our financial statements are set forth immediately following the signature page to this Form 10-KSB. (See ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K for Index to Financial Statements.) ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no disagreements with our certified public accountants with respect to accounting practices or procedures or financial disclosure. 16 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth as of March 28, 2001, the name, age and position of each of our executive officers and directors and their respective terms of office. Director and/or Name Age Position Officer Since - ------------------- --- -------- --------------- George H. Henderson 72 Director February 1995 President May 1997 Treasurer August 1997 Chairman of the Board December 1997 John L. Runft 63 Director February 1995 Secretary August 1997 Robert B. Crouch 76 Director October 1993 M. Stewart Hyndman 45 Director December 1997 Jay W. Downs 54 Director March 1999 Lamar N. Jensen 45 Director December 2000 Sherman B. Jensen 51 Director December 2000 Jeff R. Bates 48 Director December 2000 Douglas K. Goff 52 Director December 2000 Our directors serve for a term of one year or until his or her successor is elected at our annual shareholders meeting, subject to removal by our Company's shareholders. All officers serve at the pleasure of the Board of Directors or until his or her successor is elected at the annual meeting of the Board of Directors. Set forth below is certain biographical information regarding each of our executive officers and directors. George H. (Herb) Henderson joined the Board of Directors in 1995 and was appointed to the posts of President and CEO in May, 1997. He was asked to assume the position of Chairman of the Board when Elwynn S. Hewlett passed away in December, 1997. Broadly skilled, Herb brings us over forty years of senior management experience in domestic and international business. Our Chairman, President and CEO offers shareholders the benefits of his hands-on management in numerous important mining and processing posts which include: An Tai Bao Mine/Plant Operation, Ping Shuo, China - Operations Manager Coal Valley Mine, Edson, Alberta, Canada - General Manager Marcona Mining Co., San Juan, Peru - Mine/Maintenance Superintendent Morrison-Knudsen Co., Canada and U.S.A. - Director, Mining Group Kaiser Resources, Ltd., Sparwood, B.C., Canada - General Superintendent He also played an important role in the development of the State of Idaho's expanded presence in the global marketplace by his efforts on behalf of Idaho commerce, agriculture and industry as Senior International Trade Specialist with the Idaho Department of Commerce. 17 John L. Runft has been practicing law since 1965, emphasizing business organizations and contracts, administrative law and business litigation. He received his BA from Albertson's College of Idaho in 1962, and his J.D. from the University of Chicago School of Law in 1965 (Justice Jackson Award in Constitutional Law, 1965). John is a member of the Idaho Bar, is admitted to, and has appeared as lead counsel in litigation or appeals before the U.S. District Court of Idaho, the Court of Appeals for the Ninth Circuit, and the United States Claims Court, the United States Court of Appeals for the Federal Circuit, and the United States Supreme Court. He is a member of the Board of Litigation of the Mountain States Legal Foundation, is a member of the Idaho Law Foundation, served as a Director of the Idaho Community Foundation (1989- 1996), and has served as Civilian Aide to the Secretary of the Army of the United States for the State of Idaho (1988-1996). Robert B. Crouch been an Officer and Director for seven years. Bob received his BSCE degree from the University of Idaho in 1949 and his LL.B. degree from George Washington University in 1953. He has extensive experience in patent law with the U.S. Naval Bureau of Aeronautics, General Electric, IBM Corporation and Information Storage Systems. He now maintains a private law practice in the state of Utah. M. Stewart Hyndman is the President of Magic Miles Ltd; Inc., Meridan, Idaho, an export trading company established in 1995 specializing in the export of agricultural commodities and industrial products. Following his graduation from the University of Idaho, Stewart has continued to play an active role in industry, agriculture, marketing and business development. Jay W. Downs, since 1995, has been the President of J.D. Hutton & Company, a well established mortgage company located in Salt Lake City, Utah which serves all of the Intermountain states. For 17 years, Jay has been closely associated with the Diatect product lines through his extensive knowledge of pyrethrin production and supply worldwide. Lamar N. Jensen has a wide range of business experience encompassing over 20 years of national and international leadership positions in both public and private companies. His work includes consulting companies throughout the United States and internationally including Australia, Thailand, China, Myanmar and Singapore, Korea, Laos and South America. Lamar has been President of Pacific Nakon International Corporation since 1995. He holds a Master of Business Administration and has extensive experience in securities, real estate and insurance. Sherman B. Jensen has been President of Alpine Enterprises Inc., a general contracting firm, since 1988. With over 20 years of business experience, Sherman's marketing, construction and planning expertise are expected to be of significant importance to the future of the company. Sherman holds an undergraduate degree in marketing with a Master's Degree in Communications. Jeff R. Bates has been the president of Castle Corp., a privately owned Vancouver, Washington company, since 1989. Jeff has a long career in the business of finance, commercial banking, real estate, insurance and construction. In addition to holding a general contractors license, Jeff holds a real estate broker's license and owns a real estate appraisal firm. He has over 20 years of hands on experience following his post-graduate studies in banking and finance. His knowledge and expertise relating to corporate business and operations is extensive. 18 Douglas K. Goff brings over 25 years of hands-on experience to the company in the areas of securities, mergers, acquisitions, real estate, mortgage and business operations. Since 1994, Doug has been a corporate officer in J.D. Hutton and Company, a Salt Lake City based mortgage company. Doug holds a degree in business, finance and marketing. He has extensive knowledge about Diatect, its products and operations. Involvement in Certain Legal Proceedings - ---------------------------------------- See ITEM 3. LEGAL PROCEEDINGS of this Form 10-KSB. Compliance with Section 16(a) of the Exchange Act - ------------------------------------------------- Other than those disclosed below, we know of no person, who at any time during the subsequent fiscal years, was a director, officer, beneficial owner of more than 10 percent of any class of our equity securities registered pursuant to Section 12 ("Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a). None. ITEM 10. EXECUTIVE COMPENSATION The following tables set forth certain summary information concerning the compensation paid or accrued for each of our last three completed fiscal years to our chief executive officer and each of our other executive officers that received compensation in excess of $100,000 during such period (as determined at December 31, 2000, the end of our last completed fiscal year):
Long Term Compensation ---------------------- Annual Compensation Awards Payouts Other Restricted Name and Annual Stock Options LTIP All other Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation - ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------ George H Henderson 2000 $ -0- -0- -0- -0- -0- -0- 19,000 President (1) 1999 $ -0- -0- -0- -0- -0- -0- 14,400 1998 $ -0- -0- -0- -0- -0- -0- 6,815
(1) George Henderson was appointed as President in April 1997. On April 15, 2000, George H. Henderson became a full-time employee in his capacity as President and CEO. His employment contract is for a term of three years and included a salary of $90,000 per year, which was increased to $120,000 per year effective January 1, 2001, a signing bonus of 500,000 options for the purchase of shares of common stock at $0.06 per share, 50,000 incentive stock options under a to-be-formulated Incentive Stock Option Plan, and provisions for bonus pay based on 1% of our gross sales receipts as determined on a quarterly basis. Mr. Henderson had been serving on a part- time consulting basis prior to the execution of the employment agreement. At December 31, 2000, Mr. Henderson had exercised all his outstanding options. 19 On April 25, 2000, John L. Runft signed a new retainer to act as our legal counsel. Mr. Runft received a signing bonus of 500,000 options for the purchase of shares of common stock at $0.06 per share. The options vest over a three year period. At December 31, 2000, the 166,666 options have been exercised, 166,666 options are exercisable in 2001, and 166,667 options will be exercisable in 2002. At such time as sufficient funding and/or income is being generated to carry on our business, pay our bills, and pay our employees and agents, we will attempt to put additional Employment Agreements into place with our key executives. Subsequent Event - ---------------- On January 1, 2001, Jay Downs became a full-time employee in his capacity as Executive Vice-president. His employment contract is for a term of three years and includes a salary of $120,000 per year, 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 Option Plan, and provisions for bonus pay based on 1% of our gross sales receipts as determined on a quarterly basis. Mr. Downs had been serving on a part-time consulting basis prior to the execution of the employment agreement. Board Compensation - ------------------ In June 2000, the Board proposed a plan for the annual compensation of directors. This plan provided for seven directors to be compensated at the rate of $50,000 or 50,000 shares of our common stock, whichever is less. Subsequently, the Board agreed to abandon the proposed plan. No shares were issued or amounts ever paid or accrued pursuant to this plan. As of the date of this report, our Board members are not compensated for services performed in connection with their duties as Board members. 20 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth as of March 28, 2001, the name and address and the number of shares of our Common Stock, held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the 34,716,073 issued and outstanding shares, and the name and share holdings of all officers and directors as a group. Security Ownership of Certain Beneficial Owners - ----------------------------------------------- Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership of Class - -------- ------------------- -------------------- -------- Common Jeff Bates 4,100,000 shares (1) 11.81 10800 NW 13th Place. Vancouver, WA 98685 Common CMS Management LLC 3,300,000 shares (1) 9.51 10800 NW 13th Place. Vancouver, WA 98685 Common George H. Henderson 1,995,096 shares 5.75 1134 North Orchard, Suite 206 Boise, Idaho 83706 Common John L. Runft 2,047,039 shares (2) 5.87 1134 North Orchard, Suite 206 and options Boise, Idaho 83706 Security Ownership of Officers and Directors - -------------------------------------------- Title of Name and Position of Amount and Nature of Percent Class Officer and Director Beneficial Ownership of Class - -------- -------------------- -------------------- -------- Common George H. Henderson -see above- Director/President/Treasurer/ Chairman of the Board Common John L. Runft, Director/Secretary -see above- Common Lamar N. Jensen, Director 800,000 shares (3) 2.30 Common Jeff Bates, Director -see above- Common Robert B. Crouch, Director 776,801 shares 2.24 Common Jay W. Downs, Director 1,093,806 shares (4) 3.12 and options Common M. Stewart Hyndman, Director 300,800 shares 0.87 Common Douglas Goff, Director 0 shares Common Sherman Jensen, Director 0 shares ---------------- All Officers/Directors as a Group (9 persons) 11,113,542 31.54 shares and options ================ ====== Notes on the above table appear on the next page 21 In the preceding table: - - beneficial ownership share numbers assume the exercise of any options; - - % of Class assumes the exercise of any options and is calculated based on the concomitant increase in the number of issued and outstanding shares. In addition, the following numbered notes referenced in the table apply: (1) Represents 800,000 shares held of record by Jeff Bates and 3,300,000 shares held of record by CMS Management LLC, a limited liability company of which Mr. Bates is the principal. All of the above shares have been issued but are being held in escrow pending the successful closing of the Acquisition Agreement. See ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, and ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (2) Represents 1,880,373 shares held of record by John Runft and 166,666 options currently exercisable under a retainer agreement. See ITEM 10. EXECUTIVE COMPENSATION. (3) Represents shares issued but held in escrow pending the successful closing of the Acquisition Agreement. See ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, and ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (4) Represents 743,806 shares held of record by Jay Downs and 350,000 options currently exercisable under an employment agreement. See ITEM 10. EXECUTIVE COMPENSATION. 22 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management - ---------------------------- Except as indicated below, and for the periods indicted, there were no material transactions, or series of similar transactions, since the beginning of our last fiscal year, or any currently proposed transactions, or series of similar transactions, to which we are a party, in which the amount involved exceeds $60,000, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest. In December 2000, we signed an agreement with the principals of International Technologies & Minerals Inc., a Utah corporation ("ITM"). ITM is a privately held Utah corporation, primarily engaged in natural resources development, including, but not limited to, mining, refining, manufacturing, sales and marketing of natural resource products. We and ITM desired to combine and expand our respective businesses by and through certain business combinations, investments and acquisitions. The Agreement encompasses two parts or stages. According to the Agreement, in part one we are to be funded by approximately $2,500,000 of private placement investment by certain designated shareholders of ITM, in the form of a loan against an asset backed bond. In part two, following mutual asset evaluation, ITM will be acquired by us and become a wholly-owned subsidiary. The following summary of the two parts of the Agreement is qualified in its entirety by reference to the text of the complete Agreement and the Addendum thereto which is included as an exhibit to this filing. Part 1. STOCK PURCHASE. We will issue and deliver at closing 6,000,000 shares of our restricted common stock for consideration of the following: (1) A $20,000 cash loan to us to be repaid as follows: (a) If closing of the purchase of our stock occurs on or before April 1, 2001, then, in that event, said $20,000 shall be repaid, without interest, from the proceeds of the contemplated loan against the above mentioned asset backed bond; or, (b) If closing of the purchase of our stock does not occur on or before April 1, 2001, then the $20,000 loan shall be reduced to a one year promissory note payable to ITM and will bear interest from that date at the rate of ten percent (10%) per annum and any other funds loaned or advanced to us by ITM or ITM's associates, shall as of April 1, 2001 be reduced to one year promissory notes for the repayment of said loans or advances and shall bear interest from that date at the rate of ten percent (10%) per annum. (2) A corporate bond issued to us by Quantum Trust, of Phoenix, Arizona, having a face value of $5,000,000 shall be delivered to us at closing, which bond shall be capable of immediately collateralizing a commercial business loan in the amount of approximately $2,500,000 with a national bank, insurance company or other financial institution acceptable to us. ITM will assist us in obtaining a written commitment for said financing from the subject financial institution. 23 (3) Four ITM nominees will be appointed to our Board of Directors, namely, Lamar N. Jensen, Douglas Goff, Jeff Bates, and Sherman Jensen. At the date of this filing, we have received the $20,000 loan, appointed the ITM nominees to our board, and received the corporate bond. Now we are involved in securing the loan against the bond. Part 2. ACQUISITION OF ITM. Upon the successful completion of the loan and the closing described in Part 1 above, the parties will proceed as follows: (1) ITM will finalize its acquisition of certain assets including, but not limited to, the exclusive, long-term lease on the Dry Creek and Salt Creek Gypsum Mines property near Cedar City, Utah; title to the Dry Creek and Salt Creek Gypsum Mines; and the total, exclusive right, title and interest in and to the proprietary knowledge, plans, specifications, agreements, and all other aspects of the entrepreneurial opportunity in any way relating to the development, construction, operation and ownership of a wallboard plant proposed to be constructed near Cedar City, Utah, to utilize, inter alia, gypsum produced by the Dry Creek and Salt Creek Gypsum Mines. (2) We will be advised of and have the right to know all facts relating to the acquisition of the assets, both before and after said acquisition. It is the express intent of the parties that we will acquire ITM upon ITM's acquisition of title to the assets described above and any other assets the parties mutually agree should be acquired, subject to the following conditions: (a) Approval by the boards of directors and the stockholders of both parties; (b) All acquisitions of assets by ITM shall be subject to the written approval of our Board of Directors; (c) All assets acquired by ITM shall be independently audited by Value NetX of Salt Lake City, Utah, in accordance with the applicable rules and regulations for U.S. reporting companies; (d) At such time as the parties mutually desire to proceed with the acquisition of ITM, the assets of both corporations shall be evaluated by Value NetX in accordance with NACVA (National Association of Certified Valuation Analysts) at least thirty (30) days prior to closing said acquisition. Said evaluation of both parties shall form the final ratio for stock issuance of our stock to the shareholders of ITM for the acquisition of ITM, as set forth in the following subsection; (e) Upon the completion of the valuation of the assets of ITM, we will issue to ITM shareholders additional shares of our restricted, common shares, if any, so that the total shares (including the above referenced 6,000,000 shares) issued to ITM shareholders bears the same ratio to our total shares issued and outstanding immediately prior to closing, that the value of the ITM assets acquired pursuant to this Agreement bears to the value of our assets per an evaluation performed Value NetX of Salt Lake City using NACVA standards. At the date of this filing, no action has been taken on Part 2 of the Agreement, pending the completion of Part 1 and the successful closing. If Part 1 is not completed, i.e., we fail to secure the loan against the bond and complete the closing, the Agreement will be canceled. If Part 1 is completed but Part 2 is not completed, ITM will have an opportunity to acquire other assets acceptable to our Board in lieu of the assets contemplated by the current Agreement. 24 Certain Business Relationships - ------------------------------ Except as indicated, and for the periods indicated, there were no material relationships regarding directors that exist, or have existed during our last fiscal year. Indebtedness of Management - -------------------------- Except as indicated below, and for the periods indicated, there were no material transactions, or series of similar transactions, since the beginning of our last fiscal year, or any currently proposed transactions, or series of similar transactions, to which we are a party, in which the amount involved exceeds $60,000 and in which any director or executive officer, or any security holder who is known to us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest. At December 31, 2000, our President and Chairman/Director Herb Henderson is owed the sum of $57,665 for services rendered to us during the fiscal year 2000, and our Secretary/Director John Runft is owed $28,167 for services rendered to us during the same period 25 Loans from Shareholders - ----------------------- In November 1993, we gave a promissory note in the amount of $400,000 to Danny F.A.B. Wirken, a shareholder and consultant, for funds advanced to us to pay ongoing operating expenses. The promissory note bears interest at 8% annually, is unsecured, and payable on demand. At December 31, 1995, the principle and accrued interest totaled $449,508. However, we have a claim against Mr. Wirken which we plan to pursue to judgment with the objective of foreclosing on said note. See Item 3. Litigation. Other shareholders have made loans to us which are still outstanding and for all of which promissory notes have been issued: Stockholder Amount of Note Date of Note - -------------------- -------------- ------------- Robert B. Crouch $ 1,000 November 7, 2000 4,000 November 17, 2000 John L. Runft 50,000 January 15, 1999 20,000 February 11,2000 22,554 December 15, 1997 George H. Henderson 42,590 October 1, 2000 David J. Black 10,000 August 5, 1997 David N. Sim 6,500 Oct. 1, 1999 2,500 January 4, 2000 Jack S. Stites 3,000 December 1, 2000 Cloward & Associates 3,000 January 4, 2000 During the quarter ended December 31, 2000, the Board of Directors implemented a program to reduce our debt through a debt-for-stock exchange. To that end the following transactions occurred where in certain qualified debt holders requested to convert all or part of the debt owed to them at a conversion rate of .25 per share of our restricted common stock. Notes converted to stock Stockholder Total Amount of Notes Shares common stock issued - -------------------- -------------- ------------- Jay W. Downs $ 41,700 257,986 Delyan Heaps 10,000 65,864 Dennis Nielson 38,250 205,876 Hopper Asset Management 193,424 773,696 John Runft 182,563 730,252 Andrew Dicharia 50,000 268,000 Jerry Isdore 25,000 134,360 George H. Henderson 106,580 426,323 Dennis Miller 30,000 120,000 Lowell Hahn 28,224 112,897 Ross Wolfley 165,529 1,009,138 David Black 10,000 96,000 Robert Crouch 54,500 248,789 Stewart Hyndman 12,700 50,800 Michael McQuade 40,584 162,334 Ross Wolfley 22,500 90,000 George Reeve 50,000 200,000 Steve Abboud 5,239 90,000 26 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements are included in this report: Title of Document Page - ----------------- ---- Independent Auditors Report of Williams & Webster, P.S., Certified Public Accountant 28 Consolidated Balance Sheets as of December 31, 2000 and 1999 29 Consolidated Statement of Operations for the years ended December 31, 2000 and 1999 31 Consolidated Statement of Stockholders' Equity for the years ended December 31, 2000 and 1999 32 Consolidated Statement of Cash Flows for the years ended December 31, 2000 and 1999 33 Notes to Financial Statements 35 (a)(2) Financial Statement Schedules. Not applicable (a)(3)Financial Statements. The following exhibits are included in this report: SEC Exhibit Reference Number Number Title of Document Location - ------- --------- ----------------- -------------------- 10.1 10 Acquisition Agreement This Filing and Addendum (b) Reports on Form 8-K. The following reports on Form 8-K were filed with the Commission during the quarter ended December 31, 2000 None. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: DIATECT INTERNATIONAL CORPORATION Date: March 29, 2001 /s/ George H. Henderson, President/Treasurer /s/ John L. Runft, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated Date: March 29, 2001 /s/ George H. Henderson, Director /s/ John L. Runft, Director /s/ Robert B. Crouch, Director /s/ Jay W. Downs, Director /s/ M. Stewart Hyndman, Director /s/ Lamar N. Jensen, Director /s/ Sherman B. Jensen, Director /s/ Jeff Bates, Director /s/ Douglas W. Goff, Director 28 Board of Directors Diatect International Corp. Boise, ID 83714 Independent Auditor's Report We have audited the accompanying consolidated balance sheets of Diatect International Corp. as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Diatect International Corp. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14, the Company has significant operating losses, negative equity, unsatisfied collection judgments and delinquencies in repaying its debt obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 16 to the financial statements, certain errors were made on the 1999 audited financial statement, which resulted in the understatement of prepaid royalties and notes payable in the amount of $37,500. These financial statements have been restated correcting the errors. Williams & Webster, P.S. Certified Public Accountants Spokane, Washington March 20, 2001 29 DIATECT INTERNATIONAL CORP. CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 ASSETS 2000 1999 ----------- ----------- Current Assets Cash $ 3,384 $ 2,160 Accounts receivable 58,014 9,050 Prepaid interest 42,550 - Prepaid royalties 37,500 37,500 Inventories 123,975 181,283 ----------- ----------- Total Current Assets 265,423 229,993 ----------- ----------- Property, Plant and Equipment Building 23,501 23,501 Equipment 49,195 46,751 Less accumulated depreciation (25,573) (15,470) ----------- ----------- Total Property, Plant and Equipment 47,123 54,782 ----------- ----------- Other Assets Deposits 150,000 3,000 Goodwill, net of amortization 27,050 - Investment in EPA labels, net of amortization 2,019,534 2,315,321 ----------- ----------- Total Other Assets 2,196,584 2,318,321 ----------- ----------- TOTAL ASSETS $ 2,509,130 $ 2,603,096 =========== =========== The accompanying notes are an integral part of these financial statements. 30 DIATECT INTERNATIONAL CORP. CONSOLIDATED BALANCE SHEETS (Continued) December 31, 2000 and 1999 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2000 1999 ----------- ----------- Current Liabilities Accounts payable $ 234,871 $ 196,397 Accounts payable - related parties 30,795 232,865 Advances from officers - 5,168 Deposit payable 20,000 - Line of credit 97,000 - Interest payable 725,465 751,690 Other accrued liabilities 1,021 1,641 Notes payable 1,376,111 1,804,803 ----------- ----------- Total Current Liabilities 2,485,263 2,992,564 =========== =========== Commitments and Contingencies 263,923 192,272 ----------- ----------- Stockholders' Equity (Deficit) Common stock, no par value, 28,716,231 shares authorized and 19,535,231 shares issued and outstanding, respectively 12,260,630 10,366,608 Common stock subscribed - 186,238 Stock options 51,370 - Accumulated deficit (12,525,056) (11,134,589) ----------- ----------- Total Stockholders' Equity (Deficit) (213,056) (581,743) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,509,130 $ 2,603,096 (Deficit) =========== =========== The accompanying notes are an integral part of these financial statements. 31 DIATECT INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2000 and 1999 2000 1999 ------------- ---------------- REVENUES $ 161,364 $ 207,912 COST OF SALES 91,938 110,385 ------------- ---------------- GROSS PROFIT 69,426 97,527 ------------- ---------------- OPERATING EXPENSES Salaries, wages and benefits 46,014 52,307 Executive compensation 115,120 - Consulting 261,556 58,313 Depreciation and amortization 316,890 314,843 Legal and professional fees 294,283 132,507 Other operating expense 104,333 113,865 ------------- ---------------- Total Operating Expenses 1,138,196 671,835 ------------- ---------------- OPERATING LOSS $ (1,068,770) $ (574,308) ------------- ---------------- OTHER INCOME (EXPENSES) Interest expense (234,284) (210,962) Loan incentive and guarantee fees (80,625) - Litigation settlement (8,750) (96,711) Miscellaneous 1,962 2,128 ------------- ---------------- Total Other Income (Expenses) (321,697) (305,545) ------------- ---------------- LOSS BEFORE INCOME TAXES (1,390,467) (879,853) INCOME TAXES - - ------------- ---------------- NET LOSS $ (1,390,467) $ (879,853) ============= ================ BASIC AND DILUTED NET LOSS PER SHARE $ (0.06) $ (0.05) ============= ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 22,950,545 19,535,231 ============= ================ The accompanying notes are an integral part of these financial statements. 32 DIATECT INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 2000 and 1999
Common Common Stock Stock Stock Accumulated Shares Amount Options Subscribed Deficit Total ------ ------ ------- ------------ ------------ ----- ---------- ---------- ------- --------- ------------ ------------ Balances as of December 31, 1998 19,535,231 $10,366,608 - $ 186,238 $(10,254,736) $ 298,110 Net loss for the year ended December 31, 1999 - - - - (879,853) (879,853) ---------- ---------- ------- --------- ------------ ------------ 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 of 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)
The accompanying notes are an integral part of these financial statements. 33 DIATECT INTERNATIONAL CORP. CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 2000 and 1999 2000 1999 ------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (1,390,467) $ (879,853) Adjustment to reconcile net loss to net cash used by operating activities: Depreciation and amortization 316,890 314,843 Issuance of stock for services 316,058 - Issuance of stock options for services 51,370 - Issuance of stock for finance charges and interest 400,096 - Prepaid finance charges paid by issuance of stock 50,000 - Stock issued for payment of accrued expenses 170,527 - Changes in assets and liabilities: Accounts receivable (53,014) (9,050) Prepaid finance charges (42,550) - Inventories 57,308 (81,283) Accounts payable 38,474 269,490 Accounts payable - related parties (202,070) - Advances from officers (5,168) 3,000 Deposit received 20,000 - Interest payable (26,225) 210,962 Other accrued liabilities (620) (20,859) Commitments and contingencies 7,148 (4,000) ------------- ---------------- NET CASH USED BY OPERATING ACTIVITIES (292,243) (196,750) ------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,443) (7,470) Investment in EPA label - (15,768) ------------- ---------------- Disposal of property, plant and equipment - 134,731 ------------- ---------------- NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES $ (2,444) $ (23,238) ------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit $ 97,000 $ - Net proceeds from notes payable 195,911 223,060 ------------- ---------------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 292,911 223,060 ------------- ---------------- NET INCREASE (DECREASE)IN CASH (1,776) 3,072 CASH AT BEGINNING OF YEAR 5,160 2,088 ------------- ---------------- CASH AT END OF YEAR $ 3,384 $ 5,160 ============= ================ 34 DIATECT INTERNATIONAL CORP. CONSOLIDATED CASH FLOW STATEMENTS (Continued) For the Years Ended December 31, 2000 and 1999 2000 1999 ---- ---- SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ - $ 1,374 ======== ======= Income Tax Paid $ - $ - ======== ======= NON-CASH FINANCING ACTIVITIES: Issuance of common stock for prepaid finance charges $ 50,000 $ - Issuance of common stock for services $316,058 $ - 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 $170,527 $ - Issuance of common stock for forbearance of notes payable, finance charges and interest $400,096 $ - Issuance of stock options for services $ 51,370 $ - Issuance of common stock for debt $724,971 $ - Issuance of note payable for investment deposit $110,000 $ - Issuance of note payable for prepaid royalties $ - $37,500 The accompanying notes are an integral part of these financial statements. 35 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 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 business activities of the Company, which primarily consist of developing and marketing pesticide products. The Company later became informed that another corporation already had 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. Enviro-Guard Corporation - ------------------------ On September 21, 1993, SDBC acquired 100% of the outstanding common stock (4,438,400 shares) of Enviro-Guard Corporation (a Utah corporation) in exchange for 3,594,953 shares of SDBC common stock valued at $1.75 per share. This transaction was accounted for as a reverse acquisition whereby Enviro- Guard Holding Corporation, (Holding) as the former parent of the acquired corporation (Enviro-Guard) gained a controlling stockholder interest in the acquiring corporation (SDBC). Immediately prior to the reverse acquisition, Holding transferred all of its assets to Enviro-Guard including White Mountain stock owned by Holding. In August 1992, Enviro-Guard acquired Diatect International, Inc. (Diatect) (incorporated in Kansas) for 120,000 shares of common stock of Enviro-Guard valued at $5 per share and $100,000 in notes payable. The transaction was valued at $700,000 and accounted for as a purchase. Diatect has developed and owns the rights to three EPA registered insecticides. Also in August 1992, Enviro-Guard acquired D.S.D., Inc. ("DSD") (incorporated in Kansas) in exchange for 520,000 shares of the common stock of Enviro-Guard valued at $5 per share and the assumption by Enviro-Guard of a $448,360 note payable due to DSD from a shareholder of DSD. This transaction was valued at $3,048,360 and accounted for as a purchase. On May 2, 1998, the Company's board of directors abandoned Enviro-Guard and its wholly owned subsidiary, D.S.D., Inc., following the transfer of all Enviro-Guard assets to the Company. In consideration for payment of the transferred assets, the Company assumed all indebtedness of the subsidiary corporations and any indemnification against the liabilities of the subsidiaries. Transfer of D.S.D.'s assets included the transfer of all stock of D.S.D.'s wholly owned subsidiary, Doctor Scratch, Inc., a Kansas corporation. As the sole shareholder of Doctor Scratch, the Company sold all the assets of Doctor Scratch and allowed it to become dormant. White Mountain Mining & Manufacturing, Inc. - ------------------------------------------- On December 18, 1992, Holding entered into a contract to acquire 89.125% of the outstanding common stock (891,250 shares) of White Mountain Mining in exchange for 260,375 shares of common stock (at a value of $6 per share) of Holding, at that time the parent company of Enviro-Guard, plus $25,000 in cash 36 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued) and $346,616 in notes payable. As a result of the transaction, a total of 705,873 shares of White Mountain common stock was transferred to Holding with the remaining 185,377 shares remaining in escrow against payment of the promissory notes. In August 1993, all of Holding's stock in White Mountain was transferred along with other assets to Enviro-Guard preparatory to the reverse acquisition by SDBC on September 21, 1993. This acquisition, accounted for as a purchase and valued at $3,458,400, was intended to provide the Company with a source of diatomaceous earth, an important organic ingredient for its pesticide products sold by its subsidiaries. Pursuant to a promissory note dated March 12, 1995, Enviro-Guard pledged its shares of White Mountain Stock. On June 1, 1998, the holder of the promissory note foreclosed on the stock for failure to pay the indebtedness (Note 8). This transaction resulted in a gain of $215,692. Magic International, Inc. - ------------------------- On May 24, 1999, the Company entered into an agreement to purchase Magic International, Inc. in exchange for $3,000 cash and 200,000 shares of Diatect International Corporation's common stock. 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. National Diatect, Inc. - ---------------------- In July 2000, the Company signed a letter of intent to purchase National Diatect, Inc. in exchange for 400,000 shares of its common stock, royalties in the amount of $120,000 payable at the rate of $0.10 per pound of products produced through the plant as Results or Diatect products and a note payable in the amount of $110,000 bearing interest at 12% for inventory and equipment. 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 December 31, 2000. See Note 15 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 generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 37 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 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 and majority-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 a 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 period ended September 30, 2000 and the year ended December 31, 1999 was $7,649 and $9,433, respectively. Intangible Assets - ----------------- 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 periods ending September 30, 2000 and December 31, 1999 were $210,872 and $305,410, respectively. 38 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes - ------------ At December 31, 2000, the Company had net operating loss carryforwards of approximately $12,525,056 that may be offset against future taxable income through 2020. The Company believes that 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 the exercise price of the outstanding options is higher than the market price of the stock, thereby causing the options to 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 generally accepted accounting principles 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 December 31, 2000 and 1999. 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. 39 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Derivative Instruments - ---------------------- In June 1998, the Financial Accounting Standards Board issued 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 December 31, 2000, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. NOTE 3 INVENTORIES Inventories at December 31, 2000 and 1999 consist of the following: 2000 1999 ------------------ ----------------- Raw Materials $ 26,171 $ 52,978 Finished Goods 97,804 128,305 ------------- -------------- Total $ 123,975 $ 181,283 ============= ============== NOTE 4 INVESTMENT IN EPA LABELS The Company has acquired five product registrations or ("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; and 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 Short-term notes payable consist of the following at December 31, 2000 and 1999: Creditor and Conditions 2000 1999 - ----------------------- --------- ------------ Ross S. Wolfley, (a shareholder of the Company), unsecured, variable interest, due on demand. $ - $ 165,529 DeLynn Heaps, unsecured, interest at 10%, due on July 15, 1999. - 10,000 --------- ------------- Subtotal carried forward $ - $ 175,000 --------- ------------- 40 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31,2000 NOTE 5 NOTES PAYABLE (Continued) Creditor and Conditions 2000 1999 - --------------------------------- ----------- ------------- Subtotal (brought forward) $ - $ 175,000 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 Note 8). 386,581 386,581 George Henderson (a shareholder and officer of the Company), unsecured, interest at 9%, dated January 30, 1995, delinquent. - 5,000 J. D. Hutton, unsecured, interest at 10%, dated March 10, 1996, due on October 10, 1999, delinquent - 22,500 John Runft, (a shareholder and officer of the Company), unsecured, interest at 10%, dated December 15, 1997, due on December 15, 1999, delinquent - 16,500 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 Jay Downs, (a shareholder of the Company), unsecured, interest at 12%, dated November 26, 1997, due on July 18, 1998, delinquent. - 19,200 Greg Cloward, (a shareholder of the Company), unsecured, interest at 15%, dated January 6, 1997, due on demand. 251,000 250,000 ----------- ------------- Subtotal (carried forward) $ 750,320 $ 965,020 ----------- ------------- 41 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 5 NOTES PAYABLE (Continued) Creditor and Conditions 2000 1999 - --------------------------------- ----------- ------------- Subtotal (Brought forward) $ 750,320 $ 965,020 Dennis Nielsen, (a shareholder of the Company), interest at 10%, unsecured, dated May 20, 1997, delinquent. - 31,750 Dennis Nielsen, (a shareholder of the Company), interest at 12%, unsecured, dated December 12, 1997, due December 12, 1998, delinquent. - 6,500 Andrew Dicharia, conditionally secured by 100,000 shares Diatect International Corp. common stock, interest at 15%, dated June 8, 1998, due June 8, 1999, delinquent. - 50,000 Jerry Isdore, conditionally secured by 50,000 shares Diatect International Corp. common stock. Interest at 15%, dated May 22, 1998, due May 22, 1999, delinquent. - 25,000 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 12%, dated August 2, 1998, due on demand. - 35,000 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 12%, dated October 1, 1998, due on demand. - 65,000 Hopper Asset Management Company, unsecured, interest at 15%, dated August 20, 1998, due on December 20, 1998, delinquent. - 100,000 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 Robert B. Crouch (a shareholder of the Company), unsecured, interest at 10%, dated November 18, 1999, due on November 18, 1999. - 5,500 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated July 21, 1999, due on December 31, 1999. - 36,000 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated September 16, 1999, due on May 16, 2000. - 3,500 ----------- ------------- Subtotal (carried forward) $ 775,320 $ 1,348,270 ----------- ------------- 42 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 5 NOTES PAYABLE (Continued) Creditor and Conditions 2000 1999 - --------------------------------- ----------- ------------- Subtotal (Brought forward) $ 775,320 $ 1,348,270 John L. Runft, (an officer and shareholder of The Company), unsecured, interest at 10%, Dated January 15, 1999, due on January 15, 2000. - 50,000 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 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 Hopper Asset Management Company, unsecured, interest at 15%, dated January 11, 1999, due on December 31, 1999, delinquent. 50,000 50,000 David N. Sim, (a shareholder of the Company), unsecured, interest at 10%, dated January 4, 1999, due on May 4, 2000, delinquent. 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 - Toxikon Corporation, unsecured, interest at 15%, dated June 19, 1999, due on December 31, 1999. - 21,260 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 10%, dated April 14, 2000, due on December 31, 2000. 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 ---------- ----------- Subtotal (carried forward) $ 986,077 $ 1,534,830 ---------- ----------- 43 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 5 NOTES PAYABLE (Continued) ----------- ------------ Creditor and Conditions 2000 1999 - --------------------------------- ----------- ------------ Subtotal (Brought forward) $ 986,077 $ 1,534,830 effective June 21, 1995, secured by mining property, (later foreclosed)due September 1994. Delinquent. (See Note 8). 209,444 209,444 George Brink (shareholder of the Company), unsecured, interest at 10% $10,000 due on August 1, 1999, balance due on August 1, 2000, delinquent - 37,500 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 - K&R "Stuff" LC, unsecured, interest at 12%, dated August 22, 2000, due on August 22, 2001. 50,000 - Joseph E. Pigg, Jr., unsecured, interest at 10%, dated September 8, 2000, due on September 8, 2001. 10,000 - Joseph E. Pigg, Jr., unsecured, interest at 10%, dated September 25, 2000, due on September 25, 2001. 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 - 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. 4,000 - Jack Stites, (shareholder of the Company), unsecured, interest at 12%, dated December 22, 2000, due on demand. 3,000 - ---------- ---------- Totals $1,376,111 $1,804,803 ========== ========== 44 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 6 - LINE OF CREDIT At December 31, 2000, 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 represents 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 - ------------------------------------------------ An action, commenced on November 17, 1998 by the Company's former legal counsel to collect legal fees and costs, was not contested. In November 1999, the plaintiff 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 in commitments and contingencies at December 31, 1999 and 2000. 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 in commitments and contingencies at December 31, 2000 and 1999. 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. 45 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 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 September 30, 2000 and December 31, 1999, $61,543 is included in commitments and contingencies in these financial statements. 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. Mike Glazer - ----------- A consultant allegedly 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. 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 the above-reported litigation with Gruntal & Co.) 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 September 30, 2000 and December 31, 1999 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $208,839 and $185,644, respectively. (See Note 7). International School of Kenya - ----------------------------- The International School of Kenya was awarded a judgment against the Company in the amount of $20,143 on October 13, 1995. During 1997, this was paid down to $19,200. The balance was fully paid by director Jay Downs on July 18, 1997. In order to reimburse Mr. Downs, the Company executed an uncollateralized promissory note in 1997 in the sum of $19,200. The note bears interest at 12%. (Note 7). Toxikon, Inc. - ------------- Toxikon, Inc. filed suit to collect on an unpaid trade account. In March 2000, the debt was paid in full and the case was dismissed. The amount of $21,260 is included in the notes payable and $355 is included in accrued interest in these financial statements at December 31, 1999. 46 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Terrance Dunne - -------------- Subsequent to the date of these financial statements, 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 Brinks - ------------- During December 2000, George Brinks 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. Creditors' Judgments - -------------------- During 1994 and 1995, the Company was sued by a number of creditors, which actions the Company allowed to go to judgment. These judgments arose as a direct result of the inability of the Company to fund the operations and payments to all the Company's creditors. The collection judgments, which are substantially unpaid at December 31, 2000, total approximately $52,000, and are included in the Company's accounts payable. 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 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 three former officers that they intend to bring action for nonpayment of back wages. The amount in dispute totals $111,095 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. During the nine months ended September 30, 2000, the Company issued 500,000 shares of its common stock valued at $50,000 for the guarantee of a line of credit; 122,500 shares of its common stock valued at $30,625 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 47 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 8 COMMON STOCK continued 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 1,244,231 shares of its common stock valued at $311,058 for services, and 2,585,302 shares of its common stock valued at $646,326 for debt at $0.25 per share. The stock was issued at its market value on the transaction date. 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. During the year ended December 31, 1999, the Company had no stock issuances. 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. 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 nine months ended December 31, 2000: Weighted Average Number of Shares Price per Share ---------------- --------------- Outstanding at December 31,1998 494,634 $0.06 Granted 400,002 $0.06 Expired - - --------- ----- 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 June 30, 1999 499,304 $0.06 ========= ===== 48 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 10 STOCK OPTIONS continued 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 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 6 percent. The weighted average fair value at date of grant for options granted to employees in the period ended September 30, 2000 was $0.05 per option. Compensation cost charged to operations was $51,370 during the period ended December 31, 2000. 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. 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 pyrethurm 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 8.) These amounts are included in commitments and contingencies as of December 31, 2000 and 1999, are as follows: 2000 1999 ---- ---- L. Craig Hunt $ 61,543 $ 61,543 Mid-America Venture Capital Fund, Inc. 37,336 37,336 Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC 40,166 40,166 Ogilvy, Adams & Rinehart 36,000 36,000 Mike Glazer 17,230 17,230 George Brink 44,648 0 --------- -------- $236,923 $192,275 ======== ======== 49 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Lease Commitments - ----------------- The Company leased office facilities in Boise, Idaho from an individual through March 2000. The lease is a month-to-month handshake agreement, which called for monthly payments of $550. In April 2000, the Company entered into a lease agreement for new office facilities in Boise, Idaho. The agreement is a three-year lease and calls for 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, KS from an individual. The lease is a month-to-month handshake agreement, which calls for 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 (including two officers) totaling $981,027 and $1,235,799 as of September 30, 2000 and December 31, 1999, respectively. The Company's secretary performs services as the Company's main legal counsel. Legal services performed by this officer totaled $70,807 and $60,060 for the periods ended December 31, 2000 and 1999,respectively, of which $28,167 and $146,923 are included in accounts payable-related party at December 31, 2000 and 1999, respectively. The Company's president performs consulting services for the Company. Consulting services by this officer totaled $20,560 and $73,772 for the periods ending December 31, 2000 and 1999,respectively. Included in accounts payable-related party is $2,628 and $85,942 at December 31, 2000 and 1999, respectively. NOTE 14 GOING CONCERN As shown in the financial statements, the Company incurred a net loss of $1,390,697 for the nine months ended December 31,2000, and has an accumulated deficit of $12,525,056 at December 31, 2000. The Company has 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 50 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 14 GOING CONCERN (Continued) 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. The table below presents information about the Company's reportable segments: Year 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 operating -------------- 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 ============== 51 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 NOTE 15 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued) Year December 31, 1999 ------------------------------------------------------ Kansas Idaho Eliminations Consolidated --------- -------- ------------ ------------- External revenue $ 207,912 $ - $ - $ 207,912 ========= ======== ============ ============= Operating income (loss) $ (18,667) $(555,641) $ - $ (574,308) ========= ========= ============ Corporate expenses - Total operating ------------ income (loss) $ (574,308) ============= Depreciation and Amortization $ 137 $ 314,526 $ - $ 314,843 ========= ========= ============= ============= Interest expense and finance charges $ - $ 210,962 $ - $ 210,962 ========= ========== ============ ============= Identifiable assets $ 347,953 $2,402,929 $ (147,786) $ 2,603,069 ========= ========== ============ General corporate assets - ------------- Total assets $ 2,603,096 ============= Kansas operations, the first reportable segment, derives revenues from its mixing and distribution of pesticide products. Idaho operations, the second reportable segment, presently generates no revenues and is dependent on revenues generated from the Kansas segment. 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 December 31, 2000. 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. 52 DIATECT INTERNATIONAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 Note 17 - CORRECTION OF AN ERROR - -------------------------------- The accompanying financial statements for 1999 have been restated to correct an error, conversion of an ongoing royalty agreement to a promissory note for final prepayment of future royalties, made in 1998. This resulted in understatement of prepaid royalties and notes payable in the amount of $37,500. The restatement involved balance sheet accounts only and had no effect on net income for 1999. -----END PRIVACY-ENHANCED MESSAGE-----