10QSB 1 f01j10q.txt JUNE 30, 2001 FORM 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended: June 30, 2001 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____________ to ____________ Commission File Number 0-10147 ------- DIATECT INTERNATIONAL CORPORATION ---------------------------------------------- (Name of Small Business Issuer in its charter) California 95-355578 ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 1134 North Orchard, Suite 206, Boise, Idaho 83706 ----------------------------------------------------- (Address of principal executive offices and Zip Code) (208) 342-2273 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No (2) Yes X No --- --- --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value 29,945,593 -------------------------------- ---------------------------- Title of Class Number of Shares Outstanding as of June 30, 2001 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIATECT INTERNATIONAL CORP. FINANCIAL STATEMENTS (UNAUDITED) The accompanying financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-QSB pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore may not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. These financial statements should be read in conjunction with the accompanying notes, and with the historical financial information of the Company. 3 Diatect International Corp. Consolidated Balance Sheets ASSETS June 30, 2001 December 31, (Unaudited) 2000 ----------- ------------ CURRENT ASSETS Cash $ 5,940 $ 3,384 Accounts receivable 193,662 58,014 Employee receivable 2,750 - Prepaid interest 44,733 42,550 Prepaid royalties 35,329 37,500 Prepaid expenses 424 - Inventories 133,694 123,975 ----------- ------------ Total Current Assets 416,532 265,423 ----------- ------------ PROPERTY, PLANT AND EQUIPMENT Building 23,501 23,501 Equipment 49,195 49,195 Less accumulated depreciation (30,680) (25,573) ----------- ------------ Total Property, Plant and Equipment 42,016 47,123 ----------- ------------ OTHER ASSETS Deposits 150,000 150,000 Goodwill, net of amortization 27,050 27,050 Investment in EPA labels, net of amortization 1,877,928 2,019,534 ----------- ------------ Total Other Assets 2,054,978 2,196,584 ----------- ------------ TOTAL ASSETS $ 2,513,526 $ 2,509,130 =========== ============ See accompanying notes. 4 Diatect International Corp. Consolidated Balance Sheets (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) June 30, 2001 December 31, (Unaudited) 2000 ----------- ------------ CURRENT LIABILITIES Accounts payable $ 294,537 $ 234,871 Accounts payable - related parties 43,234 30,795 Deposit payable 20,000 20,000 Line of credit 97,000 97,000 Interest payable 543,167 725,465 Settlements payable 219,693 - Accrued salaries 98,184 - Stockholder advance 120,980 - Other accrued liabilities 2,843 1,021 Notes payable 1,049,530 1,376,111 ----------- ------------ Total Current Liabilities 2,489,168 2,485,263 ----------- ------------ COMMITMENTS AND CONTINGENCIES 17,230 236,923 ----------- ------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock, no par value; 50,000,000 shares authorized; 29,945,593 and 28,716,073 shares issued and outstanding 12,459,510 12,260,630 Stock options 70,260 51,370 Accumulated deficit (12,522,642) (12,525,056) ----------- ------------ Total Stockholders' Equity (Deficit) 7,128 (213,056) ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,513,526 $ 2,509,130 =========== ============ See accompanying notes. 5 Diatect International Corp. Consolidated Statements of Operations
For the Three Months Ended For the Six Months Ended June 30, June 30, 2001 2000 2001 2000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- REVENUES $ 180,490 $ 33,182 $ 238,982 $ 74,927 ----------- ----------- ----------- ----------- COST OF SALES 80,621 20,021 110,032 39,804 ----------- ----------- ----------- ----------- GROSS PROFIT 99,869 13,161 128,950 35,123 ----------- ----------- ----------- ----------- OPERATING EXPENSES Salaries, wages and benefits 10,793 80,685 21,859 91,880 Executive compensation 107,000 62,639 194,755 62,639 Distributor expense - - 38,276 - Registration fees 160 - 11,880 - Depreciation and amortization 73,357 78,643 146,713 157,287 Legal and professional fees 72,161 9,942 142,978 123,726 Other operating expense 36,175 19,463 75,695 37,654 ----------- ----------- ----------- ----------- Total Operating Expenses 299,646 251,372 632,156 473,186 ----------- ----------- ----------- ----------- OPERATING LOSS (199,777) (238,211) (503,206) (438,063) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSES) Interest expense (66,620) (78,665) (104,002) (125,119) Miscellaneous (1,913) 886 (1,555) 1,313 Donations (75) (25) (75) (25) ----------- ----------- ----------- ----------- Total Other Income (Expenses) (68,608) (77,804) (105,632) (123,831) ----------- ----------- ----------- ----------- LOSS BEFORE EXTRAORDINARY ITEM (268,385) (316,015) (608,838) (561,894) ----------- ----------- ----------- ----------- EXTRAORDINARY ITEM Gain from debt forgiveness 8,100 - 8,100 - Gain from debt restructure 603,152 - 603,152 - ----------- ----------- ----------- ----------- Total Extraordinary Items 611,252 - 611,252 - ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 342,867 (316,015) 2,414 (561,894) ----------- ----------- ----------- ----------- INCOME TAXES - - - - ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 342,867 $ (316,015) $ 2,414 $ (561,894) =========== =========== =========== =========== BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.01 $ (0.01) $ Nil $ (0.03) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 29,539,020 21,346,369 29,130,648 20,562,042 =========== =========== =========== ===========
See accompanying notes. 6 DIATECT INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Stock Stock Stock Accumulated Shares Amount Options Subscribed Deficit Total ---------- ---------- ------- ---------- ----------- --------- Balances as of December 31, 1999 19,535,231 $10,366,608 $ - $ 186,238 $(11,134,589) $ (581,743) Issuance of shares for guarantee of line of credit at $0.10 per share 500,000 50,000 - - - 50,000 Issuance of shares to contractors, directors and others for services at $0.25 per share 1,399,591 342,398 - - - 342,398 Issuance of shares for purchase of investment at $0.20 per share 600,000 60,000 - - - 60,000 Issuance of shares for purchase of rights to EPA labels at $0.10 per share 110,000 11,000 - - - 11,000 Issuance of shares for forbearance of notes payable at $0.25 per share 122,500 30,625 - - - 30,625 Issuance of shares to officers for exercise of options at $0.06 per share 1,517,667 91,049 - - - 91,049 Issuance of shares subscribed 290,000 186,238 - (186,238) - - Issuance of shares for debt at $0.25 per share 4,291,084 1,072,712 - - - 1,072,712 Issuance of shares for loan incentive at prices ranging from $0.10 to $0.25 per share 350,000 50,000 - - - 50,000 Options granted to officers as bonus for new contracts - - 51,370 - - 51,370 Net loss for the year ended, December 31, 2000 - - - - (1,390,467) (1,390,467) ---------- ---------- ------- ---------- ----------- --------- Balances as of December 31, 2000 28,716,073 12,260,630 51,370 - (12,525,056) (213,056) Issuance of shares for debt at $0.25 per share 291,520 72,880 - - - 72,880 Issuance of shares for guarantee of debt and line of credit at $0.10 per share 350,000 35,000 - - - 35,000 Issuance of shares for cash at $0.10 to $0.12 per share 400,000 44,000 - - - 44,000 Issuance of share in settlement of salary claim at $0.25 per share 188,000 47,000 - - - 47,000 Options granted to officer as bonus for contract - - 18,890 - - 18,890 Net income for the six months ended, June 30, 2001 (Unaudited) - - - - 2,414 2,414 ---------- ---------- ------- ---------- ----------- --------- Balances as of June 30, 2001 (Unaudited) 29,945,593 $ 12,459,510 $ 70,260 $ - $(12,522,642) $ 7,128 ========== ========== ======= ========== =========== =========
See accompanying notes. 7 Diatect International Corp. Consolidated Cash Flow Statements For the Six Months Ended June 30, 2001 2000 (Unaudited) (Unaudited) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,414 $ (561,894) Adjustments to reconcile net loss to net cash used by operating activities: Gain from debt restructure (603,152) - Gain from debt forgiveness (8,100) - Depreciation and amortization 146,713 157,287 Issuance of stock for services 47,000 50,750 Issuance of stock options for services 18,890 51,370 Issuance of stock for finance charges 35,000 30,625 Prepaid finance charges paid by issuance of stock - 50,000 Stock issued for payment of accrued expenses - 61,000 Changes in assets and liabilities: Accounts receivable (135,648) (3,530) Employee receivable (2,750) - Prepaid interest (2,183) (46,844) Prepaid royalties 2,171 - Prepaid expenses (424) - Inventories (9,719) 15,156 Deposits - 3,000 Accounts payable 59,666 (18,550) Accounts payable - related parties 12,439 (92,792) Interest payable 79,263 86,448 Accrued salaries 98,184 - Stockholder advance 120,980 - Other accrued liabilities 1,822 18,535 ----------- ----------- NET CASH FLOWS USED BY OPERATING ACTIVITIES (137,434) (199,439) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment - (2,443) Purchase of goodwill - (3,000) ----------- ----------- NET CASH FLOWS USED BY INVESTING ACTIVITIES - (5,443) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit - 90,000 Proceeds from sale of stock 44,000 - Net proceeds from notes payable 95,990 117,911 ----------- ----------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 139,990 207,911 ----------- ----------- NET INCREASE (DECREASE) IN CASH 2,556 3,029 ----------- ----------- CASH AT BEGINNING OF YEAR 3,384 2,160 ----------- ----------- CASH AT END OF PERIOD $ 5,940 $ 5,189 =========== =========== See accompanying notes. 8 Diatect International Corp. Consolidated Cash Flow Statements (Continued) For the Six Months Ended June 30, 2001 2000 (Unaudited) (Unaudited) ----------- ----------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest expense paid $ - $ - Income taxes paid $ - $ - NON-CASH FINANCING ACTIVITIES: Issuance of common stock for prepaid finance charges $ 10,000 $ 50,000 Issuance of common stock for services $ 47,000 $ 50,750 Issuance of common stock for investment $ - $ 20,000 Issuance of common stock for rights to EPA labels $ - $ 11,000 Issuance of common stock for payment of accrued expenses $ - $ 61,000 Issuance of common stock for forbearance of notes payable and line of credit $ 25,000 $ 30,625 Issuance of stock options for services $ 18,890 $ 51,370 Issuance of common stock for debt $ 72,880 $ - See accompanying notes. 9 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Diatect International Corp. (formerly Applied Earth Technologies, Inc.) (formerly San Diego Bancorp) (SDBC) was incorporated in California in 1979 as a bank holding corporation. During 1986, the Company liquidated its subsidiaries and became a dormant "shell" corporation. On August 22, 1996, the Company changed its name from San Diego Bancorp to Applied Earth Technologies, Inc. to better reflect the Company's principal business activities, which primarily consist of developing and marketing pesticide products. The Company later became informed that another corporation already had been authorized to use the name Applied Earth Technologies, Inc. and approval of this name had been granted in error. In response to this information, the Company changed its name to Diatect International Corp. on June 5, 1998. The Company's wholly owned subsidiaries consist of Magic international, Inc., Enviro-Guard Corporation, Diatect International, Inc. and D.S.D., Inc. Apart from Diatect International, Inc. and Magic International, Inc., the Company's subsidiaries are inactive. Magic International, Inc. ------------------------- On May 24, 1999, the Company entered into an agreement to purchase Magic International, Inc. ("Magic") in exchange for $3,000 cash, effective payment of an outstanding obligation in the amount of $4,050 and 200,000 shares of Diatect International Corporation's common stock. This transaction was valued at $27,050. At the time of the transaction, the authorized level of the Company's capitalization did not permit an issuance of 200,000 shares of stock. The Company increased its authorized capital, issued the aforementioned stock and finalized the acquisition in March 2000, at which time Magic became a wholly owned subsidiary. National Diatect, Inc. ---------------------- In July 2000, the Company signed a letter of intent to purchase National Diatect, Inc. in a transaction which requires the issuance of 400,000 shares of the Company's common stock, payment of future royalties in the amount of $120,000 payable at the rate of $0.10 per pound of certain products and assumption of a note payable in the amount of $110,000 (bearing interest at 12% and collateralized by inventory and equipment). Although 400,000 shares of stock have been issued by Diatect, the agreement is subject to ratification by the board of directors and has not been finalized as of the date of these financial statements. See Note 13. International Technologies and Minerals, Inc. --------------------------------------------- In December 2000, the Company signed and ratified an acquisition agreement with International Technologies and Minerals, Inc. (ITM). Terms of the agreement were not completed as of June 30, 2001 and the Company is seeking to rescind the agreement during August 2001. See Note 16. 10 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Diatect International Corp. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements. Accounting Method ----------------- The Company's financial statements are prepared using the accrual method of accounting. Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents ------------------------- For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with maturity of three months or less to be cash equivalents. Allowance for Doubtful Accounts ------------------------------- Provision for losses on trade accounts receivable is made in amounts required to maintain an adequate allowance to cover anticipated bad debts. Accounts receivable are charged against the allowance when it is determined by the Company that payment will not be received. Inventories ----------- Inventories consist primarily of raw materials and finished product and are valued at the lower of cost (first in, first out) or market. Property and Equipment ---------------------- Property, plant and equipment are stated at cost including the allocable purchase price applicable to the respective assets of purchased subsidiaries. All expenditures for improvements, replacements and additions are added to the asset accounts at cost. Expenditures for normal repairs and maintenance are charged against earnings as incurred. The cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the statements of operations when depreciable assets are retired or otherwise disposed. Depreciation is provided for by the use of straight-line and accelerated methods over the estimated useful lives of the assets. Depletion is computed using the unit-of-production method, for any mining property placed in production. Depreciation expense for the six months ended June 30, 2001 and 2000 was $5,106 and $5,027, respectively. 11 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Intangible Assets ----------------- Most intangible assets are amortized over the remaining useful life on a straight-line basis, which ranges from 15 to 17 years. EPA labels are amortized on a straight-line basis over a 15-year life, commencing with the beginning of product sales. Goodwill is amortized on a straight-line basis over a fifteen-year life. Amortization expense for the six months ending June 30, 2001 and 2000 was $141,607 and $152,260, respectively. Income Taxes ------------ Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset. At June 30, 2001, the Company had net deferred tax assets of approximately $1,878,000, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2001. At June 30, 2001, the Company has net operating loss carryforwards of approximately $12,522,000, which expire in the years 2011 through 2021. Basic and Diluted Loss Per Share -------------------------------- Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding options were not included in the computation of loss per share because they would be antidilutive. Revenue Recognition Policy -------------------------- Revenues from sales of product are recognized when the product is shipped. Compensated Absences -------------------- Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. Due to the existence of a relatively high employee turnover rate, it is impractical to estimate the amount of compensation for future absences. Accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when actually paid to employees. 12 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Estimates --------- The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 June 30, 2001. Fair Value of Financial Instruments ----------------------------------- The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. Derivative Instruments ---------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which is effective for the Company as of January 1, 2001. This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes. At June 30, 2001, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. 13 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements -------------------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), and No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS 130 establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. SFAS 131 establishes standards for the way that companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements. Both SFAS 130 and SFAS 131 are effective for periods beginning after December 15, 1997. The Company adopted these new accounting standards, and their adoption had no effect on the Company's financial statements and disclosures. In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities and also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000, and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company believes that the adoption of this standard will not have a material effect on the Company's results of operations or financial position. NOTE 3 - INVENTORIES Inventories at June 30, 2001 and December 31, 2000 consist of the following: June 30, December 31, 2001 2000 ---------- ------------- Raw Materials $ 26,612 $ 26,171 Finished Goods 107,082 97,804 ---------- ------------- Total $ 133,694 $ 123,975 ========== ============= NOTE 4 - INVESTMENT IN EPA LABELS The Company has acquired five product registrations ("labels") approved by the U.S. Environmental Protection Agency granting federal clearance to manufacture, market and sell specified insecticide products. Included are: No. 42850-1 for use against flies, roaches, ants, etc., in and around homes and commercial buildings; No. 42850-2 for use in grain storage; No. 42850-3 for use against fleas, ticks and lice on pets; No. 42850-4 for use against over 60 insects on over 130 edible crops and plants; and No. 42850-5 (approved November 23, 1999) for use in the organic market to control all major pest problems. 14 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 5 - NOTES PAYABLE All of the Company's notes payable are considered short-term. At June 30, 2001 and December 31, 2000, notes payable consisted of the following: June 30, December 31, Creditor and Conditions 2001 2000 ----------------------- ----------- ------------ Jeffrey Linabery, unsecured, interest at 14%, due on demand. $ 7,500 7,500 David Russell (a shareholder of the Company), unsecured, interest at 10%, due on demand. 15,000 15,000 David Russell, (a shareholder of the Company), unsecured, interest at 8%, due on demand. 25,000 25,000 Danny Wirken (a shareholder of the Company), unsecured, interest at 8%, dated December 31, 1993 due on demand. (See Notes 7 and 16.) - 386,581 Max Burdick, unsecured, interest at 18%, dated November 6, 1996, due February 15, 1997, delinquent. - 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 ----------- ------------ Subtotal (carried forward) $ 52,739 $ 479,320 ----------- ------------ 15 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 5 - NOTES PAYABLE (Continued) June 30, December 31, Creditor and Conditions 2001 2000 ----------------------- ----------- ------------ Subtotal (Brought forward) $ 52,739 $ 479,320 David J. Black, (a shareholder of the Company), unsecured, interest at 10%, dated August 5, 1997, due on demand. 20,000 20,000 Greg Cloward, (a shareholder of the Company), unsecured, interest at 15%, dated January 6, 1997, due on demand. 251,000 251,000 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 David N. Sim, (a shareholder of the Company), unsecured, interest at 15%, dated October 1, 1999, due on December 31, 1999, delinquent. 6,500 6,500 Jack S. Stites, (a shareholder of the Company), unsecured, interest at 15%, dated September 1, 1999, due on December 31, 1999, delinquent. 8,800 8,800 Hopper Asset Management Company, unsecured Interest at 15%, dated June 19, 1999, due on December 31, 1999, delinquent. 50,000 50,000 D. N. Sim, (a shareholder of the Company) unsecured, interest at 10%, dated January 4, 2000, due on May 4, 2000, delinquent. 2,500 2,500 Johnny and Jack Stites, (a shareholder of the Company) unsecured , interest at 10%, dated February 25, 2000, due on May 1, 2000, delinquent. 20,000 20,000 ----------- ------------ Subtotal (carried forward) $ 436,539 $ 863,120 ----------- ------------ 16 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 5 - NOTES PAYABLE (Continued) June 30, December 31, Creditor and Conditions 2001 2000 ----------------------- ----------- ------------ Subtotal (Brought forward) $ 436,539 $ 863,120 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 10%, dated April 14, 2000, due on December 31, 2000, delinquent. 72,957 72,957 Futura Title Corporation dba Alliance Title & Escrow, former shareholders of White Mountain Mining and Manufacturing, Inc., monthly payments of $18,000, 18% interest with a one-time compounding of interest effective June 21, 1995, secured by mining property, (later foreclosed) due September 1994. Delinquent. (See Note 7). 209,444 209,444 Robert L. Drake and Sandra K Drake, (shareholders of the Company), secured by sale of inventory, interest at 12%, dated July 12, 2000, due on July 12, 2001. 110,000 110,000 K & R "Stuff" LC, unsecured, interest at 12%, dated August 22, 2000, due on August 22, 2001. 50,000 50,000 Joseph E. Pigg, Jr., unsecured, interest at 10%, dated September 8, 2000, due on September 8, 2001. 10,000 10,000 Joseph E. Pigg, Jr., unsecured, interest at 10%, dated September 25, 2000, due on September 25, 2001. 10,000 10,000 George H. Henderson, (shareholder and officer of the Company), unsecured, interest at 12%, dated October 1, 2000, due on October 1, 2001. 42,590 42,590 ----------- ------------ Subtotal (carried forward) $ 941,530 $ 1,368,111 ----------- ------------ 17 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 5 - NOTES PAYABLE (Continued) June 30, December 31, Creditor and Conditions 2001 2000 ----------------------- ----------- ------------ Subtotal (Brought forward) $ 941,530 $ 1,368,111 Robert B. Crouch, (shareholder of the Company), unsecured, interest at 12%, dated November 7, 2000, due on demand. 1,000 1,000 Robert B. Crouch, (shareholder of the Company), unsecured, interest at 12%, dated November 16, 2000, due on demand. 4,000 4,000 Jack Stites, (shareholder of the Company), unsecured, interest at 12%, dated December 22, 2000, due on demand. 3,000 3,000 Robinson Family, LLC, (shareholders of the Company), unsecured, interest at 12%, dated April 1, 2001, due on October 1, 2001. 100,000 - ----------- ------------ Totals $ 1,049,530 $ 1,376,111 =========== ============ NOTE 6 - LINE OF CREDIT At June 30, 2001, the Company had $97,000 borrowed on an outstanding line of credit. The line of credit was extended to the Company by a director utilizing his personal line of credit. This credit facility is unsecured, has no stated maturity, and bears interest at 12%. NOTE 7 - LITIGATION John Wilding Lawsuit -------------------- On July 19, 1996, John Wilding sued the Company for collection on a delinquent promissory note, which was secured by stock of White Mountain Mining and Manufacturing, Inc. As of December 31, 1997, the balance owed was $142,323 plus accrued interest in the amount of $63,885. Subsequent negotiations resulted in foreclosure on June 1, 1998 on the White Mountain collateral in full payment of the note to Mr. Wilding. The foreclosed stock represented a majority of the total outstanding shares of White Mountain. Wilding subsequently sold all shares of the White Mountain stock to an affiliate of Environmental Products & Technology, Inc. (EP&T), a Utah corporation which signed an agreement calling for EP&T to enter into a joint venture with Diatect for purposes of mining the White Mountain mineral claims of diatomaceous earth. 18 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 7 - LITIGATION (Continued) John Wilding Lawsuit (Continued) -------------------------------- EP&T was contractually obligated to convey the White Mountain stock back to Diatect subject to a security interest for the purchase price of said stock paid by EP&T (or its affiliates) to Wilding. In 1998, it became apparent that EP&T would not honor its agreement with Diatect. The possibility exists that Diatect will bring a breach of contract action against Environmental Products and Technology, Inc. and its affiliates for its failure to transfer the shares of White Mountain stock to Diatect pursuant to agreement. Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC ------------------------------------------------- In November 1999, the Company's former legal counsel was awarded a default judgment against the Company in the amount of $42,166 plus post-judgment interest. This judgment remains outstanding and unpaid and is included as a liability on the Company's balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, the Company reclassified this amount to settlement payable. Ogilvy, Adams & Rinehart ------------------------ Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on November 1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included on the Company's balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, the Company reclassified this amount to settlements payable. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. During the period ended June 30, 2001, the Company reclassified this amount to settlement payable. L. Craig Hunt ------------- L. Craig Hunt brought action on January 14, 1998 against Diatect for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees. Judgment against Diatect International Corp. was rendered on February 1, 1999 in the sum of $61,543. This judgment is presently outstanding and unpaid. At December 31, 2000, $61,543 is included in commitments and contingencies in these financial statements. During the period ended June 30, 2001, the Company reclassified this amount to settlements payable. To date, plaintiffs have made no attempt to collect on this judgment. Mid-America Venture Capital Fund, Inc. -------------------------------------- Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, Diatect has paid a total of $4,000 and is currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in these financial statements at December 31, 2000. During the period ended June 30, 2001, the Company reclassified this amount to settlements payable. 19 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 7 - LITIGATION (Continued) Mike Glazer ----------- A consultant rendered services to a Company subsidiary during 1996 in the amount of $17,230 and has brought action for this amount. The Company has chosen not to contest this case. Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary, Diatect International, Inc., are fully encumbered. The amount of $17,230 is included in commitments and contingencies in these financial statements at June 30, 2001 and December 31, 2000. Danny Wirken ------------ The Company is considering litigation against Danny Wirkin, (one of the brokers involved in the selling of Diatect stock, which gave rise to certain litigation for stock manipulation) with the objective of obtaining a judgment for damages and foreclosing on the Company's obligation under its note to Mr. Wirkin. This note is reflected at December 31, 2000 in the principal amount of $386,581, with accrued interest included in interest payable for the amount of $216,570. During June 2001, the Company declared this note and the interest accrued thereon as invalid and void. Legal counsel for the Company further asserted that the obligation has passed the statute of limitations for collection thereon. This resulted in a gain from debt restructure, which is reflected in the financial statements at June 30, 2001 as an extraordinary item. (See Notes 5, 12 and 16.) Toxikon, Inc. ------------- Toxikon, Inc. filed suit in 1999 to collect on an unpaid trade account in the amount of $21,260 plus accrued interest. The debt was paid in full in March 2000 and the case was dismissed. Terrance Dunne -------------- Terrance Dunne, the Company's former auditor initiated action against the Company for payment of unpaid fees. In response to the allegations, the Company has countersued for reimbursement of fees paid for work not performed. The outcome of this action is uncertain and, accordingly, no amounts have been accrued in these financial statements. George Brink ------------ During December 2000, George Brink was awarded a default judgment in the total amount of $44,648, including interest and legal fees, for the balance due on a promissory note. At this time, active collection on the judgment has not been pursued. The outstanding and unpaid amount is included as a liability on the Company's balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, the Company reclassified this amount to settlements payable. 20 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 7 - LITIGATION (Continued) Creditors' Judgments -------------------- During 1994 and 1995, the Company was sued by a number of creditors, whose lawsuits were allowed to go to judgment. These judgments were a result of the inability of the Company to fund operations and payments to the Company's creditors. The collection judgments, which are substantially unpaid at June 30, 2001 and December 31, 2000, total approximately $52,000, and are included in the Company's accounts payable and other obligations. Environmental Protection Agency ------------------------------- During October 2000, the Company joined other plaintiffs represented by a public interest law firm in filing action against the Environmental Protection Agency (EPA). The action seeks relief from the EPA's practice of using certain guidelines as a basis for hazard classification and risk assessments pursuant to the Federal Insecticide, Fungicide and Rodenticide Act. Plaintiffs claim that the EPA must use final guidelines promulgated for such reviews. The outcome of the case is uncertain as of the date of these financial statements. Former Officers and Consultant ------------------------------ In September 2000, the Company received notice from two former officers and a former consultant that they intend to bring action for nonpayment of back wages. During May 2001, the Company issued 188,000 shares of its common stock to one former officer valued at $47,000 ($0.25 per share) in full settlement. This amount is included in executive compensation in the attached financial statement. The remaining amount in dispute totals $64,095 and the Company plans to contest the claims. This amount is not recorded in the accompanying financial statements. The Company is not aware of any other threatened litigation against it or its subsidiaries. However, there remains a possibility of litigation against Diatect and/or its subsidiaries by creditors. NOTE 8 - COMMON STOCK In February 2000, the Company increased its authorized capital to 50,000,000 shares of common stock. During the year ended December 31, 2000, the Company issued 500,000 shares of its common stock valued at $50,000 for the guarantee of a line of credit, 472,500 shares of its common stock valued at $80,625 for forbearance on notes payable, 200,000 shares of its common stock valued at $20,000 for purchase of all outstanding stock of Magic International, Inc. 400,000 shares of its common stock valued at $40,000 for partial purchase of National Diatect, Inc. and 110,000 shares of its common stock valued at $11,000 for rights to EPA labels at $0.10 per share. The Company also issued 1,399,591 shares of its common stock valued at $342,398 for services and 4,291,084 shares of its common stock valued at $1,072,712 for debt at $0.25 per share. The stock was valued at its market value on the date of issuance. Two officers also exercised options to purchase 1,517,667 shares of the Company's common stock valued at $91,049 at $0.06 per share for partial payment of accrued consulting and legal fees. 21 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 8 - COMMON STOCK (Continued) During April and May of 2001, the Company issued 100,000 shares of its common stock valued at $10,000 in consideration for a note payable, 291,520 shares of its common stock valued at $72,880 for debt, 188,000 shares of its common stock valued at $47,000 to a former officer for back wages (Note 7) and 250,000 share of its common stock valued at $25,000 in consideration of extension on a line of credit. The Company also sold 400,000 shares of its common stock at prices ranging from $0.10 to $0.12 per share. NOTE 9 - COMMON STOCK SUBSCRIBED In 1996, the Company agreed to convert outstanding debt to the following individuals into common stock. This common stock was not issued until August 2000 and has been treated as common stock subscribed but not issued. The following individuals were owed common stock to satisfy the amount of these debts: Ross S. Wolfley $ 22,500 G. Reeve 163,738 ---------- Total $ 186,238 ========== During August 2000, the Company issued 200,000 shares of its common stock to G. Reeve and 90,000 shares of its common stock to Ross S. Wolfley, in full payment of the above subscriptions. NOTE 10 - STOCK OPTIONS The Company has a 1995 Stock Option Plan, which was initiated in order to aid the Company in maintaining and developing a management team, attracting qualified officers and employees. A total of 3,000,000 shares of stock may be subject to, or issued pursuant to the terms of the plan. Following is a summary of the status of these performance-based options during the period ended June 30, 2001 and the year ended December 31, 2000: Weighted Average Number of Shares Price per Share ---------------- ---------------- Outstanding at December 31, 1999 894,636 0.06 Granted 1,122,335 0.06 Exercised (1,517,667) 0.06 Expired or forfeited - - ---------------- ---------------- Outstanding at December 31, 2000 499,304 $0.06 Granted 500,000 0.10 Exercised, expired or forfeited - - ---------------- ---------------- Outstanding at June 30, 2001 999,304 $0.08 ================ ================ 22 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 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 On or before December 31, 2004 500,000 $0.10 SFAS No. 123 requires the Company to provide pro forma information regarding net loss and loss per share as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed by SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used: dividend yield of zero percent; expected volatility of thirty percent; risk-free interest rate of six percent. The weighted average fair value at date of grant for options granted to employees in the periods ended June 30, 2001 and December 31, 2000 was $0.10 and $0.06 per option, respectively. Compensation cost charged to operations was $18,890 and $51,370 during the periods ended June 30, 2001 and December 31, 2000, respectively. NOTE 11 - CONCENTRATION OF RISK Credit ------ The Company is a wholesale supplier of products and grants credit to its customers, a substantial portion of which are retailers of agricultural products throughout the country. Raw Materials ------------- The Company uses pyrethrum as a main ingredient in its production process. Pyrethrum is a plant by-product primarily imported from Africa. Africa in the past has experienced severe drought, thus causing the pyrethrum supply to greatly diminish. Due to these circumstances, the Company now has one supplier whose pyrethrum is primarily obtained from non-African sources. NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company is obligated to pay certain settlements under judgments awarded to outside parties. (Note 7.) These amounts, included in commitments and contingencies as of June 30, 2001 and December 31, 2000, are as follows: 23 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued) June 30, December 31, 2001 2000 ---------- ------------ L. Craig Hunt $ - $ 61,543 Mid-America Venture Capital Fund, Inc. - 37,336 Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC - 40,166 Ogilvy, Adams & Rinehart - 36,000 Mike Glazer 17,230 17,230 George Brink - 44,648 ---------- ------------ $ 17,230 $ 236,923 ========== ============ In the period ending June 30, 2001, the Company recognized $219,693 in commitments as outstanding settlements payable. Lease Commitments ----------------- The Company leased office facilities in Boise, Idaho from an individual through March 2000. The lease was a month-to-month handshake agreement, with payments of $550. In April 2000, the Company entered into a lease agreement for new office facilities in Boise. The agreement is a three-year lease with monthly payments of $820 during the first year, $838 during the second year and $857 during the third year. The Company occupied these facilities on May 1, 2000. The Company also leases operating facilities in Smith Center, Kansas from an individual. The lease is a month-to-month handshake agreement, with monthly payments of $273. National Diatect, Inc. ---------------------- In July 2000, the Company signed a letter of intent to purchase National Diatect, Inc. The agreement is subject to ratification by the board of directors and has not been finalized as of the date of these financial statements. See Note 1. Other Contingencies ------------------- The production of pesticides is subject to complex environmental regulations. As of the date of these financial statements and the date of this report, the Company is unaware of any pending environmentally related litigation or of any specific past or prospective matters involving environmental concerns which could impair the marketing of its products. 24 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 13 - RELATED PARTY TRANSACTIONS Diatect International Corp. has notes payable to sixteen shareholders (including two officers) totaling $712,586 and $1,119,167 as of June 30, 2001 and December 31, 2000, respectively. See Note 5. The Company's secretary performs services as the Company's main legal counsel. Legal services performed by this officer totaled $26,107 and $29,150 for the six months ended June 30, 2001 and 2000, respectively, of which $43,234 and $28,167 are included in accounts payable - related party at June 30, 2001 and December 31, 2000, respectively. The Company's president performed consulting services for the Company during the first quarter of 2000. Consulting services preformed by this officer totaled $20,560 for the six months ending June 30, 2000. Included in accounts payable - related party is $2,628 at December 31, 2000. The Company has employment contracts to pay the Company's president, vice-president of operations, and vice president of sales and marketing annual compensation in the amounts of $120,000, $75,000 and $120,000 respectively. During January 2001, the Company's vice-president of sales and marketing received a signing bonus of 350,000 options for the purchase of shares of common stock. See Note 10. Executive compensation totaled $194,755 for the period ended June 30, 2001 and $98,184 is included in accrued salaries at June 30, 2001. NOTE 14 - GOING CONCERN As shown in the financial statements, the Company incurred a net loss before extraordinary item of $608,838 for the six months ended June 30, 2001 and has an accumulated deficit of $12,522,642 at June 30, 2001. The Company has negative equity, negative working capital, unsatisfied collection judgments, and is delinquent in repaying its debt obligations. These factors indicate that the Company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue existence. Management's plans for ensuring the Company's continued viability are as follows: Management's plans are the sale of new stock issuances, which are expected to raise the capital needed to satisfy collection judgments and repay debt obligations. Through the acquisition of Magic International, Inc., management has taken measures to increase product markets. NOTE 15 - 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: 25 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 15 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued)
Six Months Ended June 30, 2001 Kansas Idaho Eliminations Consolidated --------- ----------- ------------- ------------ External revenue $ - $ 238,982 $ - $ 238,982 ========= =========== ============= ============ Operating income (loss) $ (25,803) $ (583,035) $ - $ (608,838) ========= =========== ============= Corporate expenses - Total operating ------------ income (loss) $ (608,838) ============ Depreciation and Amortization $ 305 $ 146,408 $ - $ 146,713 ========= =========== ============= ============ Interest expense and finance charges $ - $ 104,002 $ - $ 104,002 ========= =========== ============= ============ Identifiable assets $ 178,115 $ 2,507,565 $ (172,154) $ 2,513,526 ========= =========== ============= General corporate assets - ------------ Total assets $ 2,513,526 ============ Year Ended December 31, 2000 Kansas Idaho Eliminations Consolidated ========= =========== ============ ============ External revenue $ 158,770 $ 120,772 $ (118,178) $ 161,364 ========= =========== ============ ============ Operating income (loss) $ (6,563) $(1,185,397) $ (118,178) $ (1,073,782) ========= =========== ============ Corporate Expenses (316,685) ------------ Total net income (loss) $ (1,390,467) ============ Depreciation and Amortization $ 903 $ 315,987 $ - $ 316,890 ========= =========== ============ ============ Interest expense and finance charges $ 1,209 $ 308,688 $ - $ 309,897 ========= =========== ============ ============ Identifiable assets $ 307,295 $ 2,377,645 $ (175,810) $ 2,509,130 ========= =========== ============ General corporate assets - ------------ Total assets $ 2,509,130 ============
Kansas operations, the first reportable segment, performs services including mixing and distribution of pesticide products. Idaho operations, the second reportable segment, generates sales revenues and is dependent on services provided by the Kansas segment. 26 Diatect International Corp. Notes to the Consolidated Financial Statements June 30, 2001 NOTE 16 - EXTRAORDINARY ITEMS In June 2001, a former supplier agreed to write off a balance owed them in the amount of $8,100. This is reflected in the financial statement as gain from debt forgiveness. During June 2001, the Company also declared a note payable to Danny Wirken and the interest accrued thereon as invalid and void. Legal counsel for the Company further asserted that the obligation has passed the statute of limitations for collection thereon. This resulted in a gain from debt restructure, which is reflected in the financial statements at June 30, 2001 as an extraordinary item. (See Notes 5, 12 and 16.) NOTE 17 - 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 June 30, 2001. Subsequent to the date of these financial statements, the Company is actively seeking to rescind the agreement during August 2001. See Note 1. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-looking Statements --------------------------------------------------------- This report may contain "forward-looking" statements. The Company is including this cautionary statement for the express purpose of availing itself of the protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. Three and Six Month Periods ended June 30, 2001 compared to June 30, 2000 ------------------------------------------------------------------------- During the three and six month periods ended June 30, 2001, we had total revenues of $180,490 and $238,982, respectively, with costs of sales of $80,621 and $110,032, respectively, or approximately 45% and 46% of revenues, respectively. Our total revenues for the three and six month periods ended June 30, 2000 were $33,182 and $74,927 with costs of sales of $20,021 and $39,804, or approximately 60% and 53%, respectively, of revenue. The substantial increase in revenues for the periods ended June 30, 2001 compared to same periods in the preceding year reflects the success of our marketing efforts. We believe this increase is indicative of a positive trend which we expect to continue through the balance of the fiscal year. Corporate Expense. For the three and six months ended June 30, 2001 total operating expenses were $299,646 and $632,156, respectively, consisting of salaries, wages and benefits of $10,793 and $21,859, executive compensation of $107,000 and $194,755, depreciation and amortization expenses of $73,357 and $146,713, legal and professional fees of $72,161 and $142,978, and other expenses of $36,175 and $75,695, plus distributor expenses and registration fees totaling $50,156 (for the six month period) resulting in a loss from operations of $199,777 and $503,206, respectively. For the three and six months ended June 30, 2000 total operating expenses were $251,372 and $473,186, consisting of salaries, wages and benefits of $80,685 and $91,880, executive compensation of $62,639 and $62,639, depreciation and amortization expenses of $78,643 and $157,287, legal and professional fees of $9,942 and $123,726, and other expenses of $19,463 and $37,654, resulting in a loss from operations of $238,211 and $438,063, respectively. The operating expenses for the periods ended June 30, 2001 were higher than the prior year period primarily due to increases in executive compensation, distributor expense, registration fees and other operating expenses, plus an increase in legal and professional fees. These expenses are expected to remain relatively consistent during the balance of the fiscal year, however, we anticipate that our overall operating expenses may increase as our sales volume increases due to additional production and distribution expenses. Other Income and Expense. Interest expense for the three and six months ended June 30, 2001 was $66,620 and $104,002, respectively, compared to $78,655 and $125,119, respectively, for the same periods in the preceding year. The decrease in interest expense for the periods ended June 30, 2001 over the prior year periods reflects the our commitment to lower our indebtedness from notes payable and lines of credit. 28 For the three and six months ended June 30, 2001, we had a loss before extraordinary items of $268,385 and $608,838, respectively. In June 2001, a former supplier of ours agreed to write off a balance owed them in the amount of $8,100, reflected in the financial statements as an extraordinary item as gain from debt forgiveness. Also during June 2001, on the advice of our main legal counsel, we declared a note payable and the interest accrued thereon as invalid and void. Our main legal counsel further asserted that the obligation has passed the statute of limitations for collection. This action resulted in a gain of $603,152 from debt restructure, which is reflected in our financial statements at June 30, 2001 as an extraordinary item. Due to the $611,252 gain from the debt restructure and debt forgiveness, for the three and six month periods we had net income of $342,867 and $2,414, respectively, and basic income per share was $0.01 and $0.00. For purposes of comparison, our losses before the extraordinary items are consistent with prior periods. For the comparable prior year period, we had net losses of $316,015 and $561,894 for the three and six months ended June 30, 2000, and basic loss per share for the periods was $0.01 and $0.03, respectively. Liquidity and Capital Resources ------------------------------- At June 30, 2001, we had current assets of $416,532, consisting of cash of $5,940, accounts receivable of $193,662, an employee receivable of $2,750, prepaid interest of $44,733, prepaid royalties of $35,329, prepaid expenses of $424, and inventories of $133,694, and current liabilities of $2,489,168 for a working capital deficit of $2,072,636. At June 30, 2001, we had property, plant and equipment assets totaling $42,016, net of depreciation, and other assets of $2,054,978, consisting of deposits of $150,000 and our investment in EPA labels, net of amortization, and goodwill associated therewith. Cash used in operations for the period ended June 30, 2001 was $137,434 compared to $199,439 for the same period ended June 30, 2000. In 2001, our operations have been funded primarily by a stockholder advance, accruing salaries and increases in accounts payable. Cash used in operations for the period ended June 30, 2001 included the issuance of common stock for services in the amount of $47,000, the compensation expense for the issuance of bonus stock options to two officers for services, the issuance of stock for payment of accrued expenses in the amount of $18,890, and the issuance of stock for payment of finance charges in the amount of $35,000. Cash from financing activities totaled $139,990, consisting of $44,000 from the sale of stock and $95,990 in proceeds from notes payable. In December 2000, we signed and ratified an acquisition agreement with International Technologies and Minerals, Inc. (ITM). In exchange for 6,000,000 shares of our common stock, we were to receive a $20,000 cash loan, a corporate bond having a face value of $5,000,000 and all issued and outstanding stock of ITM. The corporate bond was to be capable of collateralizing a commercial business loan in the amount of $2,500,000. We have sought to complete the collateralization of the corporate bond without any success to date. Because the process has been drawn out so long, we intend to rescind the agreement during August 2001. See Note 17 to the financial statements. 29 During fiscal year 2001, we intend to 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 of our fund raising efforts will be successful. We believe that we will increase revenues from operations as we continue to move from the development stage of our products to a full marketing and sales program. With our products in the marketplace, we anticipate our revenues will eventually offset our operating expenses. We are uncertain, however, as to how long this will take and whether we will have sufficient revenue to begin reducing our past obligations, therefore, we will continue to attempt to make offers in settlement and compromise on such obligations in an effort to decrease our contingent and other liabilities. We believe two of the largest and most important markets for our products are the agricultural and home and garden markets. However, we lack working capital and that affects our ability to effectively market our products in these areas. When we obtain sufficient working capital, we plan to conduct affordable advertising and maintain a sales force that can effectively reach these markets. Accordingly, although we anticipate more revenue from the sale of our products than we have received in the past, we will not be as profitable without additional cash to fund our advertising and marketing campaign. Impact of Inflation ------------------- We do not anticipate that inflation will have a material impact on our current or proposed operations. Seasonality ----------- We have not experienced significant variations in sales of products attributable to seasonal factors. 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS John Wilding Lawsuit -------------------- On July 19, 1996, John Wilding sued us for collection on a delinquent promissory note, which was secured by stock of White Mountain Mining and Manufacturing, Inc. As of December 31, 1997, the balance owed was $142,323 plus accrued interest in the amount of $63,885. Subsequent negotiations resulted in foreclosure on June 1, 1998 on the White Mountain collateral in full payment of the note to Mr. Wilding. The foreclosed stock represented a majority of the total outstanding shares of White Mountain. Wilding subsequently sold all shares of the White Mountain stock to an affiliate of Environmental Products & Technology, Inc. (EP&T), a Utah corporation which signed an agreement calling for EP&T to enter into a joint venture with Diatect for purposes of mining the White Mountain mineral claims of diatomaceous earth. EP&T was contractually obligated to convey the White Mountain stock back to us 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 us. The possibility exists that we 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 us pursuant to agreement. Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC ------------------------------------------------- In November 1999, our former legal counsel was awarded a default judgment against us in the amount of $42,166 plus post-judgment interest. This judgment remains outstanding and unpaid and is included as a liability on the our balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, we reclassified this amount to settlement payable. Ogilvy, Adams & Rinehart ------------------------ Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against us on November 1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included on our balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, we reclassified this amount to settlements payable. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. L. Craig Hunt ------------- L. Craig Hunt brought action on January 14, 1998 against us for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees. Judgment against us was rendered on February 1, 1999 in the sum of $61,543. This judgment is presently outstanding and unpaid. At December 31, 2000, $61,543 is included in commitments and contingencies in these financial statements. During the period ended June 30, 2001, we reclassified this amount to settlements payable. To date, plaintiffs have made no attempt to collect on this judgment. 31 Mid-America Venture Capital Fund, Inc. -------------------------------------- Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against us for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, we have paid a total of $4,000 and are currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in the financial statements at December 31, 2000. During the period ended June 30, 2001, we reclassified this amount to settlements payable. Mike Glazer ----------- A consultant rendered services to a subsidiary during 1996 in the amount of $17,230 and has brought action for this amount. We have chosen not to contest this case. Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary are fully encumbered. The amount of $17,230 is included in commitments and contingencies in these financial statements at June 30, 2001 and December 31, 2000. Danny Wirken ------------ We have been considering litigation against Danny Wirkin, (one of the brokers involved in the selling of Diatect stock, which gave rise to certain litigation for stock manipulation) with the objective of obtaining a judgment for damages and precluding Mr. Wirkin from foreclosing on our obligation under our note to Mr. Wirkin. This note is reflected at December 31, 2000 in the principal amount of $386,581, with accrued interest included in interest payable for the amount of $216,570. In June 2001, we declared this note and the interest accrued thereon as invalid and void based on advice from our main legal counsel. Our main legal counsel further asserted that our obligation has passed the statute of limitations for Mr. Wirkin to bring an action for collection thereon. Our decision to declare the note null and void resulted in a gain from debt restructure, which is reflected in the financial statements at June 30, 2001 as an extraordinary item. (See Notes 5, 12 and 16.) Terrance Dunne -------------- Terrance Dunne, a former auditor, initiated action against us for payment of unpaid fees. In response to the allegations, we have countersued for reimbursement of fees paid for work not performed. The outcome of this action is uncertain and, accordingly, no amounts have been accrued in these financial statements. George Brink ------------ During December 2000, George Brink was awarded a default judgment in the total amount of $44,648, including interest and legal fees, for the balance due on a promissory note. At this time, active collection on the judgment has not been pursued. The outstanding and unpaid amount is included as a liability on our balance sheet in commitments and contingencies at December 31, 2000. During the period ended June 30, 2001, we reclassified this amount to settlements payable. 32 Creditors' Judgments -------------------- During 1994 and 1995, we were sued by a number of creditors, whose lawsuits were allowed to go to judgment. These judgments were a result of our inability to fund operations and payments to our creditors. The collection judgments, which are substantially unpaid at June 30, 2001 and December 31, 2000, total approximately $52,000, and are included in our accounts payable and other obligations. Environmental Protection Agency ------------------------------- During October 2000, we joined other plaintiffs represented by a public interest law firm in filing action against the Environmental Protection Agency (EPA). The action seeks relief from the EPA's practice of using certain guidelines as a basis for hazard classification and risk assessments pursuant to the Federal Insecticide, Fungicide and Rodenticide Act. Plaintiffs claim that the EPA must use final guidelines promulgated for such reviews. The outcome of the case is uncertain as of the date of these financial statements. Former Officers and Consultant ------------------------------ In September 2000, we received notice from two former officers and a former consultant that they intend to bring action for nonpayment of back wages. During May 2001, we issued 188,000 shares of its common stock to one former officer valued at $47,000 ($0.25 per share) in full settlement. This amount is included in executive compensation in the attached financial statement. The remaining amount in dispute totals $64,095 and we plan to contest the claims. This amount is not recorded in the accompanying financial statements. We are not aware of any other threatened litigation against us or our subsidiaries. However, there remains a possibility of litigation against us and/or our subsidiaries by creditors. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. --------- None. (b) Reports on Form 8-K. -------------------- None. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIATECT INTERNATIONAL CORPORATION Date: August 20, 2001 /s/ George H. Henderson, President/Treasurer /s/ John L. Runft, Secretary