<PAGE> 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, 2000
[ ] 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
(formerly APPLIED EARTH TECHNOLOGIES, INC.)
----------------------------------------------
(Name of Small Business Issuer in its charter)
California 95-3555778
------------------------------- --------------------------
(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 21,688,398
-------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of June 30, 2000
THIS REPORT IS BEING FILED ON OR ABOUT NOVEMBER 9, 2000, WHICH IS BEYOND THE
DATE ON WHICH THE REPORT WOULD HAVE BEEN TIMELY FILED AND MAY NOT CONTAIN
INFORMATION CONCERNING THE MORE RECENT ACTIVITIES OF THE COMPANY. THE
FOOTNOTES TO THE FINANCIAL STATEMENTS INCLUDED WITH THIS REPORT MAY CONTAIN
INFORMATION REGARDING THE COMPANY THAT OCCURRED SUBSEQUENT TO JUNE 30, 2000.
HOWEVER, THE READER SHOULD RELY ON INFORMATION CONTAINED IN REPORTS FOR MORE
RECENT PERIODS WHICH ARE EXPECTED TO BE FILED SUBSEQUENT TO THIS REPORT.
<PAGE>
<PAGE> 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.
<PAGE>
<PAGE> 3
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30, December 31,
2000 1999
------------ ------------
CURRENT ASSETS (Unaudited)
Cash $ 5,189 $ 2,160
Accounts receivable 12,580 9,050
Prepaid finance charges 46,844 -
Inventory 166,127 181,283
------------ ------------
Total Current Assets 230,740 192,493
------------ ------------
PROPERTY PLANT AND EQUIPMENT
Building 23,501 23,501
Equipment 49,195 46,751
Less accumulated depreciation (20,498) (15,470)
------------ ------------
Total Property, Plant and Equipment 52,198 54,782
------------ ------------
OTHER ASSETS
Deposits - 3,000
Goodwill 23,000 -
Investment in EPA labels, net of amortization 2,174,061 2,318,321
------------ ------------
TOTAL ASSETS $ 2,479,999 $ 2,565,596
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES
Accounts payable $ 177,847 $ 196,397
Accounts payable-related parties 140,073 232,865
Advances from officers 5,168 5,168
Line of credit 90,000 -
Interest payable 838,138 751,690
Other accrued liabilities 20,176 1,641
Notes payable 1,885,214 1,767,303
------------ ------------
Total Current Liabilities 3,156,616 2,955,064
------------ ------------
COMMITMENTS AND CONTINGENCIES 192,275 192,275
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value: 50,000,000 shares
authorized, 21,688,398 and 19,535,231
shares issued and outstanding 10,589,983 10,366,608
Stock options 51,370 -
Common stock subscribed 186,238 186,238
Accumulated deficit (11,696,483) (11,134,589)
------------ ------------
Total Stockholders' Equity (Deficit) (868,892) (581,743)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 2,479,999 $ 2,565,596
============ ============
See accompanying notes.
<PAGE>
<PAGE> 4
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the Six
Quarters Ended Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $ 33,182 $ 72,010 $ 74,927 $ 165,447
COST OF SALES 20,021 44,143 39,804 83,060
---------- ---------- ---------- ----------
GROSS PROFIT 13,161 27,867 35,123 82,387
---------- ---------- ---------- ----------
OPERATING EXPENSES
Salaries, wages and benefits 80,685 15,302 91,880 26,698
Consulting 62,639 42,671 62,639 77,381
Depreciation and amortization 78,643 78,584 157,287 157,096
Legal and professional fees 9,942 24,926 123,726 63,525
Other operating expenses 19,463 41,920 37,654 77,000
---------- ---------- ---------- ----------
Total Operating Expenses 251,372 203,403 473,186 401,700
---------- ---------- ---------- ----------
OPERATING LOSS (238,211) (175,536) (438,063) (319,313)
---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Interest expense (78,665) (52,249) (125,119) (103,797)
Miscellaneous income 886 279 1,313 341
Donations (25) (195) (25) (195)
---------- ---------- ---------- ----------
Total Other Income (Loss) (77,804) (52,165) (123,831) (103,651)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (316,015) (227,701) (561,894) (422,964)
INCOME TAXES - - - -
---------- ---------- ---------- ----------
NET LOSS $ (316,015) $ (227,701) $ (561,894) $ (422,964)
========== ========== ========== ==========
NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.03) $ (0.02)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 21,346,369 19,535,231 20,562,042 19,535,231
========== ========== ========== ==========
</TABLE>
See the accompanying notes.
<PAGE>
<PAGE> 5
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Periods Ended June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
Common
Common Stock Stock Stock Accumulated
Shares Amount Options Subscribed Deficit Total
------------ ------------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 $.10 per share 500,000 50,000 - - - 50,000
Issuance of shares to
contractors for services
at $0.25 per share 203,000 50,750 - - - 50,750
Issuance of shares for
purchase of investment
at $0.10 per share 200,000 20,000 - - - 20,000
Issuance of shares for
purchase of rights to
EPA labels at $0.10
per share 110,000 11,000 - - - 10,000
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 1,017,667 61,000 - - - 61,000
Options granted to
officers as bonus for
new contract - - 51,370 - - 51,370
Net loss for the
quarter ended June 30,
2000 - - - - (561,894) (561,894)
------------ ------------ -------- ------------ ------------ -----------
Balances as of June 30,
2000 (Unaudited) 21,688,398 $ 10,589,983 $ 51,370 $ 186,238 $(11,696,483) $ (868,892)
============ ============ ======== ============ ============ ===========
</TABLE>
See accompanying notes.
<PAGE>
<PAGE> 6
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(561,894) $(422,964)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 157,287 157,096
Issuance of common stock for services 50,750 -
Issuance of stock options for services 51,370 -
Issuance of common stock for finance charges 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 (3,530) 12,321
Prepaid finance charges (46,844) -
Inventories 15,156 54,112
Deposits 3,000 -
Accounts payable (18,550) 102,344
Accounts payable-related parties (92,792) -
Interest payable 86,448 103,797
Other accrued liabilities 18,535 (20,994)
Commitments and contingencies - 2,000
-------- -------
NET CASH FLOWS PROVIDED BY (USED BY)
OPERATING ACTIVITIES (199,439) (149,154)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (2,443) (5,558)
Registration of EPA label - (12,858)
Purchase of goodwill (3,000) -
-------- -------
NET CASH FLOWS (USED) BY INVESTING ACTIVITIES (5,443) (18,416)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 90,000 -
Net proceeds from notes payable 117,911 166,500
-------- -------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 207,911 166,500
-------- -------
NET INCREASE (DECREASE)IN CASH 3,029 (1,070)
CASH AT BEGINNING OF PERIOD 2,160 2,088
-------- -------
CASH AT END OF PERIOD $ 5,189 $ 1,018
======== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ - -
======== =======
Income taxes paid $ - -
======== =======
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for finance charges $ 50,000 $ -
Issuance of common stock for services $ 50,750 $ -
Issuance of common stock for investment $ 20,000 $ -
Issuance of common stock for rights to
EPA labels $ 11,000 $ -
Issuance of common stock for payment of
accrued expenses $ 61,000 $ -
Issuance of common stock for forbearance
of notes payable $ 30,625 $ -
Issuance of stock options for services $ 51,370 $ -
See accompanying notes.
<PAGE>
<PAGE> 7
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
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
<PAGE>
<PAGE> 8
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
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.
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.
Accounting Method
-----------------
The Company's financial statements are prepared using the accrual method of
accounting.
Year End
--------
The Company has elected a December year end.
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.
Provision 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
<PAGE>
<PAGE> 9
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
June 30, 2000 and the year ended December 31, 1999 was $5,027 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 June 30, 2000 and
December 31, 1999 were $152,260 and $305,410, respectively.
Deferred Tax Liability
----------------------
At June 30, 2000, the Company had net operating loss carryforwards of
approximately $11,645,000 that may be offset against future taxable income
through 2013. The Company believes there is a chance that all or part of the
net operating loss carryforwards will expire unused. Accordingly, the tax
benefit has been fully offset by an allowance of equal amount.
Basic and Diluted Loss Per Share
--------------------------------
Loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding during the year. The weighted average number of
shares was calculated by taking the number of shares outstanding and weighting
them by the amount of time they were outstanding. Diluted net loss per share
is the same as basic net loss per share as the inclusion of the common stock
equivalents would be antidilutive.
<PAGE>
<PAGE> 10
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 June 30, 2000,
and December 31, 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.
Interim Financial Statements
----------------------------
The interim financial statements as of and for the three months included
herein have been prepared for the Company, without audit. They reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the results of operations for these periods. All such adjustments are
normal recurring adjustments. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full fiscal year.
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 June 30, 2000, the Company has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
<PAGE>
<PAGE> 11
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 3 INVENTORIES
Inventories at June 30, 2000 and December 31, 1999 consist of the following:
June 30, 2000 December 31, 1999
------------------ -----------------
Raw Materials $ 54,662 $ 52,978
Consigned Products 9,977 -
Finished Goods 101,488 128,305
------------- --------------
Total $ 166,127 $ 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 June 30, 2000 and
December 31, 1999:
June 30, December 31,
Creditor and Conditions 2000 1999
----------------------- --------- ------------
Ross S. Wolfley, (a shareholder of the Company),
unsecured, variable interest, due on demand. $ 165,529 $ 165,529
DeLynn Heaps, unsecured, interest at 10%, due on
July 15, 1999. 10,000 10,000
Jeffrey Linabery, unsecured, interest at 14%, due
on demand. 7,500 7,500
---------- -------------
Subtotal (carried forward) $ 183,029 $ 183,029
---------- -------------
<PAGE>
<PAGE> 12
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 7 NOTES PAYABLE Continued
Short-term notes payable consist of the following at June 30, 2000 and
December 31, 1999:
June 30, December 31,
Creditor and Conditions 2000 1999
----------------------- ----------- -------------
Subtotal (brought forward) $ 183,029 $ 183,029
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 5,000
J. D. Hutton, unsecured, interest at 10%, Dated
March 10, 1996, due on October 10, 1999,.
22,500 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 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 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) $ 989,049 $ 988,049
----------- -------------
<PAGE>
<PAGE> 13
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 7 NOTES PAYABLE (Continued)
June 30, December 31,
Creditor and Conditions 2000 1999
----------------------- ----------- -------------
Subtotal (Brought forward) $ 989,049 $ 988,049
Dennis Nielsen, (a shareholder of the Company),
interest at 10%, unsecured, dated May 20,
1997, delinquent. 31,750 31,750
Dennis Nielsen, (a shareholder of the Company),
interest at 12%, unsecured, dated December 12,
1997, delinquent. 6,500 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. 50,000 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. 25,000 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 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 65,000
Hopper Asset Management Company,
unsecured, interest at 15%, dated
August 20, 1998, due on December 20, 1998,
delinquent. 100,000 100,000
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,
delinquent. 5,500 5,500
Robert B. Crouch, (a shareholder of the
Company), unsecured, interest at 15%, dated
July 21, 1999, due on December 31, 1999, delinquent. 36,000 36,000
Robert B. Crouch, (a shareholder of the
Company), unsecured, interest at 15%, dated
September 16, 1999, due on May 16, 2000, delinquent. 3,500 3,500
----------- -------------
Subtotal (carried forward) $ 1,372,299 $ 1,371,299
----------- -------------
<PAGE>
<PAGE> 14
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 7 NOTES PAYABLE (Continued)
June 30, December, 31
Creditor and Conditions (Continued) 2000 1999
----------------------- ----------- -------------
Subtotal (Brought forward) $ 1,372,299 $ 1,371,299
John L. Runft, (an officer and shareholder of
The Company), unsecured, interest at 10%,
Dated January 15, 1999, due on January 15, 2000,
delinquent 50,000 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 50,000
Hopper Asset Management Company,
unsecured, interest at 15%, dated
January 11, 1999, due on December 31,
1999, delinquent. 50,000 50,000
Steward Hyndman, unsecured, interest at 10%,
dated January 17, 2000, due on May 17, 2000,
delinquent. 12,000 -
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 -
John L. Runft, (an officer and shareholder of
The Company), unsecured, interest at 10%,
Dated February 11, 2000, due on June 11, 2000,
delinquent. 20,000 -
Robert B. Crouch (a shareholder of the
Company), unsecured, interest at 10%, dated
January 4, 2000, due on May 2, 2000, delinquent 9,500 -
Toxicon Corporation, unsecured, interest at
15%, dated June 19, 1999, due on December 31, 1999. - 21,260
----------- -----------
Subtotal (carried forward) $ 1,601,599 $ 1,557,859
<PAGE>
<PAGE> 15
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 7 NOTES PAYABLE (Continued)
June 30, December, 31
Creditor and Conditions (Continued) 2000 1999
----------------------- ----------- -------------
Subtotal (Brought forward) $1,601,599 $ 1,557,859
George H. Henderson, (a shareholder and
officer of the Company), unsecured, interest
at 10%, dated April 14, 2000, due on
December 31, 2000. 74,171 -
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 8). 209,444 209,444
----------- ------------
Total $1,885,214 $1,767,303
=========== ============
NOTE 6 - LINE OF CREDIT
At June 30, 2000, the Company had $90,000 outstanding (on a line of credit)
utilizing a director's personal line of credit. This credit facility is
unsecured, has no stated maturity, and bears interest at 12%.
NOTE 7 INCOME TAXES
At June 30, 2000, the Company had net operating loss carryforwards of
approximately $11,645,000 that may be offset against future taxable income
through 2013. No tax benefit has been reported in the financial statements as
the Company believes there is a 50% or greater chance the net operating loss
carryforwards will expire unused. Accordingly, the potential tax benefits of
the net operating loss carryforwards are offset by a valuation allowance of
the same amount.
NOTE 8 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.
<PAGE>
<PAGE> 16
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 8 LITIGATION (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
------------------------------------------------
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 June 30, 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 June 30, 2000 and December 31,
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. Since the judgment must be renewed within the next twelve months,
the Company anticipates some activity in this matter in the near future.
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 June 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.
<PAGE>
<PAGE> 17
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 8 LITIGATION (Continued)
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 June 30, 2000 and December 31,
1999 in the principal amount of $386,581 with accrued interest included in
interest payable for the amounts of $195,282 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.
<PAGE>
<PAGE> 18
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 8 LITIGATION (Continued)
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 June 30, 2000, total approximately $52,000, and are
included in the Company's accounts payable.
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 being brought by creditors holding delinquent
accounts. Diatect is working with these creditors and, at this time, all
creditors, who have not filed litigation appear to accept the measures taken
by the Company in addressing the indebtedness.
NOTE 9 - COMMON STOCK
In February 2000, the Company increased its authorized capital to 50,000,000
shares. During the six months ended June 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.; and 110,000
shares of its common stock valued at $11,000 for rights to EPA labels. The
Company also issued 203,000 shares of its common stock valued at $50,750 for
services. The stock was issued at its market value on the transaction date.
Two officers also exercised options to purchase 1,017,667 shares of the
Company's common stock valued at $61,000 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 10 COMMON STOCK SUBSCRIBED
As of June 30, 2000 and December 31, 1999, the following individuals agreed to
convert outstanding debt, accrued wages and marketing expenses into common
stock, although at the dates of this financial statement report, these shares
were yet unissued:
Debt Reduction
--------------
Ross S. Wolfley $ 22,500
G. Reeve 163,738
-----------
Total $ 186,238
===========
Subsequent to the date of these financial statements, the Company agreed to
issue 200,000 shares of its common stock to G. Reeve in full settlement of
stock subscribed.
<PAGE>
<PAGE> 19
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 11 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 six months
ended June 30, 2000 and the year December 31, 1999:
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 1,000,000 $0.06
Exercised (1,017,667) $0.06
Expired or forfeited - -
--------- -----
Outstanding at June 30, 1999 976,971 $0.06
========= =====
Weighted Average
Exercise Date Number of Shares Price per Share
------------- ---------------- ---------------
On or before April 15, 2003 491,405 $0.06
On or before April 25, 2003 152,233 $0.06
April 25, 2001 through April 15, 2003 166,666 $0.06
April 25, 2002 through April 25, 2003 166,666 $0.06
The issuance of new stock during 1997, along with these outstanding options,
placed the Company in jeopardy of over-capitalization at December 31, 1999.
This was resolved during February 2000 through the increase in authorized
capital.
Stock options granted to two officers of the Company for 1,017,667 shares at a
price of $0.06 were exercised in April 2000. In April 2000, two officers of
the Company received 1,000,000 stock options in payment of bonuses for signing
new contracts for services with the Company. In accordance with Statement of
Financial Accounting Standard No. 123, the fair value of the options was
estimated using the Black Scholes Option Price Calculation. The following
assumptions were made to value the stock options: strike price at $0.10, risk
free interest rate of 6%, expected life of 3 years, and expected volatility of
30%. At June 30, 2000, the Company recorded $51,370 ($0.0514 per option) to
compensation for the value of these options based upon these Black Scholes
assumptions.
<PAGE>
<PAGE> 20
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 12 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 has
experienced a severe drought with no relief in sight thus causing the
pyrethrum supply to greatly diminish. Due to these circumstances, the Company
now has one supplier whose pyrethrum is substantially non-African.
NOTE 13 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 June 30, 2000 and December 31, 1999 as follows:
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
----------
$ 192,275
==========
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 $720 during the first
year, $738 during the second year and $757 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.
Directors' Compensation
-----------------------
In June 2000, the Company adopted a plan for the annual compensation of
directors. This plan provides for seven directors to be compensated at the
rate of $50,000 per year. The compensation is payable either in money or in
common stock of the Company. No amounts have been accrued in the accompanying
financial statements under the terms of this agreement.
<PAGE>
<PAGE> 21
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 13 COMMITMENTS AND CONTINGENCIES (Continued)
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 14 RELATED PARTY TRANSACTIONS
Applied Earth Technologies, Inc. has notes payable to sixteen shareholders
(including two officers) totaling $1,341,970 and $1,235,799 as of June 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 $29,150 and $60,060 for the
periods ended June 30, 2000 and December 31, 1999 respectively, of which
$141,073 and $146,923 are included in accounts payable-related party at June
30, 2000 and December 31, 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 June 30, 2000 and December 31, 1999, respectively. Included in
accounts payable-related party is $85,942 at December 31, 1999.
<PAGE>
<PAGE> 22
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 15 SUBSEQUENT EVENTS
Acquisition of National Diatect
-------------------------------
Subsequent to the date of these financial statements and prior to their
issuance, in July 2000, the Company signed a letter of intent and memorandum
of understanding to acquire National Diatect, Inc.(National) in exchange for
400,000 shares of the Company's common stock, $120,000 in future royalties
(based on $0.10 per pound of products produced) and a promissory note in the
amount of $110,000 (based on the stated value of National's inventory and
equipment). The agreement is subject to final ratification by the Company's
board of directors.
Litigation
----------
In September 2000, subsequent to the date of these financial statements, but
prior to their issuance, 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.
NOTE 16 GOING CONCERN
As shown in the financial statements, the Company incurred a net loss of
$510,524 for the six months ended June 30, 2000 and has an accumulated deficit
of $11,645,113 at June 30, 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
cannot continue existence. Management's plans for ensuring the Company's
continued viability are as follows:
Upon the Company's ability to reestablish compliance with S.E.C. regulations,
significant and imminent placement of new stock issuance 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 17 YEAR 2000 ISSUES
Like other companies, Diatect International Corp. could be adversely affected
if the computer systems the Company, its suppliers or customers use do not
properly process and calculate date-related information and data from the
period surrounding and including January 1, 2000. This is commonly known as
the "Year 2000" issue.
Additionally, this issue could impact non-computer systems and devices such as
production equipment and elevators, etc. At this time there have been no
known problems related to the Year 2000 issue. Any costs associated with Year
2000 compliance are expensed when incurred.
<PAGE>
<PAGE> 23
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 18 - 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:
Six Months Ended June 30, 2000
------------------------------------------------------
Kansas Idaho Eliminations Consolidated
--------- ---------- ------------ -------------
External revenue $ 74,927 $ 31,897 $ (31,897) $ 74,927
========= ========== ============ ==============
Operating income
(loss) $ 1,064 $ (543,485) $ (31,897) $ (510,524)
========= ========== ============
Corporate expenses -
Total operating --------------
income (loss) $ (510,524)
==============
Depreciation and
Amortization $ 272 $ 157,015 $ - $ 157,287
========= ========== ============ ==============
Interest expense
and finance
charges $ - $ 125,119 $ - $ 125,119
========= ========== ============ ==============
Identifiable
assets $ 343,095 $2,294,129 $ (157,225) $ 2,479,999
========= ========== ============
General corporate
assets -
--------------
Total assets $ 2,479,999
==============
<PAGE>
<PAGE> 24
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
NOTE 18 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued)
Six Months ended June 30, 1999
----------------------------------------------------
Kansas Idaho Eliminations Consolidated
--------- -------- ------------ -------------
External revenue $ 165,447 $ - $ - $ 165,447
========= ======== ============ =============
Operating income
(loss) $(202,592) $(220,372) $ - $ (422,964)
========= ========= ============
Corporate expenses -
Total operating ------------
income (loss) $ (422,964)
=============
Depreciation and
Amortization $ 47 $ 157,049 $ - $ 157,096
========= ========= ============= =============
Interest expense
and finance
charges $ - $ 103,797 $ - $ 103,797
========= ========== ============ =============
Identifiable
assets $ 478,714 $2,705,859 $ (494,094) $ 2,690,479
========= ========== ============
General corporate
assets -
-------------
Total assets $ 2,690,479
=============
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.
<PAGE>
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-looking Statements
---------------------------------------------------------
This report may contain "forward-looking" statements. The Company is
including this cautionary statement for the express purpose of availing itself
of the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to: (a) projections of revenues, capital expenditures, growth,
prospects, dividends, capital structure and other financial matters; (b)
statements of plans and objectives of the Company or its management or Board
of Directors; (c) statements of future economic performance; (d) statements of
assumptions underlying other statements and statements about the Company and
its business relating to the future; and (e) any statements using the words
"anticipate," "expect," "may," "project," "intend" or similar expressions.
Year 2000 Disclosure
--------------------
This report is being filed on or about November 6, 2000. To date, the Company
has not experienced any year 2000 problems.
Results of Operations
---------------------
Three and Six Month Periods ended June 30, 2000 compared to June 30, 1999
-------------------------------------------------------------------------
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. During the three and
six month periods ended June 30, 1999 the Company had total revenues of
$72,010 and $165,447, respectively, with costs of sales of $44,143 and
$83,060, respectively, or approximately 61% and 50% of revenues. The
substantial decrease in revenues for the periods ended June 30, 2000 compared
to same periods in the preceding year is due to the fact that one of the
Company's principal distributors ceased operations during the first quarter of
2000. The Company believes this decrease in revenues is not indicative of
results to be expected during the next twelve months because management
expects to be able to find other distributors to handle the territory
previously covered by the defunct distributor. Subsequent to the date of the
periods reported herein but prior to the filing of this report, in July 2000,
the Company found alternative distribution channels to replace the lost
distributor.
Corporate Expense. For the three and six months ended June 30, 2000 total
operating expenses were $251,372, consisting of salaries, wages and benefits
of $80,685 and $91,880, consulting expenses 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. For the three and six months ended June 30, 1999 total
operating expenses were $203,403 and $401,700, respectively, consisting of
salaries, wages and benefits of $15,302 and $26,698, consulting expenses of
$42,671 and $77,381, depreciation and amortization expenses of $78,584 and
$157,096, legal and professional fees of $24,926 and $63,525, and other
expenses of $41,920 and $77,000, resulting in a loss from operations of
$175,536 and $319,313, respectively.
Other Income and Expense. Interest expense for the three and six months ended
June 30, 2000 was $78,655 and $125,119, respectively, compared to $52,249 and
$103,797 for the same periods in the preceding year. The increase in interest
expense for the periods ended June 30, 2000 over the prior year periods
reflects the increase in the Company's borrowing through notes payable and a
line of credit.
<PAGE>
<PAGE> 26
The Company had net loss 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. For the three and six months ended June 30, 1999, the
Company had a net loss of $227,701 and $422,964, respectively, and basic loss
per share was $0.01 and $0.02.
Liquidity and Capital Resources
-------------------------------
At June 30, 2000, the Company had current assets of $230,740, consisting of
cash of $5,189, accounts receivable of $12,580, prepaid finance charges
relating to a line of credit of $49,195, and inventory of $166,127, and
current liabilities of $3,156,616 for a working capital deficit of $2,925,876.
At June 30, 2000, the Company had property, plant and equipment assets
totaling $52,198, net of depreciation, and other assets of $2,174,061,
consisting of the Company's investment in EPA labels, net of amortization, and
goodwill associated therewith.
Cash used in operations for the period ended June 30, 2000 was $199,439
compared to $149,154 for the same period ended June 30, 1999. In 2000 and
1999, the Company's operations have been funded primarily by accounts
receivable and loans. Cash used in operations for the period ended June 30,
2000 included the issuance of common stock for services in the amount of
$50,750, 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 $61,000, the issuance of stock for payment of
finance charges in the amount of $30,625, and the issuance of common stock for
prepaid finance charges in the amount of $50,000 in order to obtain a line of
credit.
Cash flows used by investing activities by the Company during the period ended
June 30, 2000, was $5,443. Cash flows from financing activities during the
period ended June 30, 2000 was $207,911, which includes $117,911 in notes
payable and $90,000 obtained through the line of credit above-referenced.
At June 30, 2000, the Company may seek working capital from several sources,
including the equity markets and private investors. There is no assurance,
however, that any fund raising efforts will be successful. The Company
believes that it will increase revenues from operations as it continues to
move from the development stage of its products to a full marketing and sales
program. With the Company's products in the marketplace, the Company
anticipates revenues to offset ongoing expenses. The Company is uncertain,
however, as to whether there will be sufficient revenue to cover past
obligations.
The Company's lack of cash will also affect the ability to effectively market
its products. The Company believes two of the largest and most important
markets for its products are the agricultural and home and garden markets.
The Company plans to conduct affordable advertising and maintain a sales force
that can effectively reach these markets. This marketing strategy will
require funds to be fully effective. Accordingly, although the Company
anticipates more revenue from its products than it has received in the past,
it will not be as profitable as it could be without additional cash to fund
the advertising and marketing.
Impact of Inflation
-------------------
The Company does not anticipate that inflation will have a material impact on
its current or proposed operations.
Seasonality
-----------
The Company has not experience significant variations in sales of products
attributable to seasonal factors.
<PAGE>
<PAGE> 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. LEGAL PROCEEDINGS
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 the White Mountain collateral on June 1, 1998 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. The action was not contested and 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 June 30, 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, 1999 and June 30,
2000. Since mid-1996, there has been no communication with the plaintiff or
its attorneys, nor has the plaintiff made any attempt to satisfy or settle
this case. Since the judgment must be renewed within the next twelve months,
the Company anticipates some activity in this matter in the near future.
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 and is included in
commitments and contingencies in these financial statements. To date,
plaintiffs have made no attempt to collect on this judgment.
<PAGE>
<PAGE> 28
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 the 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 the 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 June 30, 2000 and December 31,
1999 in the principal amount of $386,581 with accrued interest included in
interest payable for the amounts of $204,920 and $185,644, respectively. See
Note 5 to the financial statements.
International School of Kenya
The International School of Kenya was awarded a judgment 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 for $19,200. The note bears interest at 12% . See Note 5 to the
financial statements.
Toxikon, Inc.
Toxikon, Inc. filed suit in 1999 to collect on an unpaid trade account. In
March 2000, the debt was paid in full and the case was dismissed.
Subsequent Event
----------------
In September 2000, subsequent to the date of these financial statements, but
prior to their issuance, 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.
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 March 31, 2000, total approximately $52,000, and are
included in the Company's accounts payable.
<PAGE>
<PAGE> 29
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 being brought by creditors holding delinquent
accounts. Diatect is working with these creditors and, at this time, all
creditors, who have not filed litigation appear to accept the measures taken
by the Company in addressing the indebtedness.
ITEM 2. CHANGES IN SECURITIES
In February 2000, the Company increased its authorized capital to 50,000,000
shares. During the period ended June 30, 2000, the Company issued 500,000
shares of its common stock valued at $50,000 for the guarantee of a line of
credit; 200,000 shares of its common stock valued at $20,000 for purchase of
all outstanding stock of Magic International, Inc.; 110,000 shares of its
common stock valued at $11,000 for rights to EPA labels; 122,500 shares of its
common stock valued at $30,625 for forbearance of notes payable; and 1,017,667
shares of its common stock valued at $61,000 to two officers for the exercise
of existing options. The Company also issued 203,000 shares of its common
stock valued at $50,750 for services. In addition, the Company issued
1,000,000 options exercisable at $0.06 per share to two officers as bonus
compensation for signing new contracts to provide services to the Company.
See Item 5, OTHER INFORMATION.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In April 2000, David J. Black resigned from the board of directors. Also in
April 2000, Robert B. Corrigan and Larry D. Anderson were appointed to the
board of directors.
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 includes a salary of $90,000 per year, 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 the Company's 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.
On April 25, 2000, John L. Runft signed a new retainer to act as the Company's
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, which options vest over
a three year period.
In June 2000, the Company adopted a plan for the annual compensation of
directors. This plan provides for seven directors to be compensated at the
rate of $50,000 per year. The compensation is payable either in money or in
common stock of the Company. No amounts have been accrued in the accompanying
financial statements under the terms of this agreement.
<PAGE>
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIATECT INTERNATIONAL CORPORATION
Date: November 9, 2000
/s/ George H. Henderson, President/Treasurer
/s/ John L. Runft, Secretary
