10KSB 1 fdt10k99.txt DIATECT 1999 ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File number: 0-10147 DIATECT INTERNATIONAL CORPORATION (formerly APPLIED EARTH TECHNOLOGIES, INC.) ------------------------------------------- (Exact name of registrant as specified in charter) California 95-355578 ---------- --------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1134 North Orchard, Suite 206, Boise, Idaho 83706 ---------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (208) 342-2273 Securities registered pursuant to section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A ---- --- Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par Value ------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [ ] No [X] (2) Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] 2 State the issuer's revenues for its most recent fiscal year: $207,912 State the aggregate market value of the voting stock held by nonaffiliates of the registrant. At December 31, 1999, the aggregate market value of the voting stock held by nonaffiliates was $1,008,739. The average of the bid and asked price of such stock on December 31, 1999, was $0.07 per share. At December 31, 1999, the registrant had 19,535,231 shares of common stock, no par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the part of the form 10-KSB (e.g., part I, part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or other information statement; and (3) Any prospectus filed pursuant to rule 424(b) or (c) under the Securities Act of 1933: None 3 TABLE OF CONTENTS PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 11 ITEM 3. LEGAL PROCEEDINGS 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 14 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 15 ITEM 7. FINANCIAL STATEMENTS 19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 19 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 20 ITEM 10. EXECUTIVE COMPENSATION 23 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 29 4 PART I ITEM 1. BUSINESS IMPORTANT NOTICE TO THE READER ----------------------------- ON JUNE 4, 1998, APPLIED EARTH TECHNOLOGIES, INC., CHANGED ITS NAME TO DIATECT INTERNATIONAL CORPORATION. THIS REPORT IS BEING FILED ON OR ABOUT SEPTEMBER 8, 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 DECEMBER 31, 1999. HOWEVER, THE READER SHOULD RELY ON INFORMATION CONTAINED IN REPORTS FOR MORE RECENT PERIODS WHICH ARE EXPECTED TO BE FILED SUBSEQUENT TO THIS REPORT. General ------- Originally incorporated under the name of San Diego Bancorp, in the State of California on May 19, 1979, Diatect International Corporation (the"Company") has undergone two name changes. San Diego Bancorp was formed for the primary purpose of acting as a bank holding corporation. During 1986, management decided to discontinue all operating activities, and liquidate the remaining assets and liabilities. Thereafter, the Company had no material operations until September, 1993, when it acquired Enviro-Guard Corporation. On August 22, 1996, the Company changed its name to Applied Earth Technologies, Inc., to better reflect the business activities, which primarily consist of developing and marketing pesticide products. The State of California subsequently requested the Company to make another name change because the state had previously granted the name "Applied Earth Technologies, Inc." to an unrelated business entity. In response to this request, the Company changed its name to Diatect International Corporation effective June 5, 1998. The Company has developed a variety of insecticides which utilize so called "natural-killing agents" which are non-toxic to the environment as well as humans and other warm-blooded animal life. Whereas widely used conventional chemical synthesized insecticides are composed of highly dangerous, toxic chemicals that seep into the water table and are washed into rivers and lakes contaminating water and soil for decades, the Company's products are composed of natural elements such as diatomaceous earth ("DE") and pyrethrin, which degrade, leaving the environment unharmed. DE and pyrethrin have been used separately for years as alternatives to hazardous chemical insecticides, but were not as effective in treatment. By combining DE and pyrethrin in its products, the Company has achieved a synergy leading to far more effective insecticides than DE or pyrethrin individually. The Company has obtained EPA registrations and labels necessary for the production and marketing of its insecticides. The approval by the EPA of the Company's labels is significant due to the time and cost associated with EPA approval which can take years and cost millions of dollars. Due to the time it took to obtain EPA approval, the Company did not begin the commercial marketing of its products until late 1993. On September 21, 1993, the Company acquired 100% of the outstanding common stock of Enviro-Guard Corporation (a Utah corporation formed on May 30, 1991) from Enviro-Guard Holding Corporation (a Colorado corporation formed on June 10, 1987). This transaction was accounted for as a reverse acquisition whereby the acquired corporation (Enviro-Guard Corporation) gained controlling stockholder interest in the acquiring corporation (the Company). 5 Enviro-Guard Corporation had, through its subsidiaries, developed a line of organically-based insecticide products made from natural compounds with the objective of achieving environmentally-friendly, yet effective results. In August 1992, Enviro-Guard acquired 100% of the outstanding common stock of Diatect International, Inc. ("Diatect"), a Kansas corporation. Diatect has developed and owns the rights to three Environmental Protection Agency ("EPA") registered insecticides. Also in August 1992, Enviro-Guard acquired 100% of the outstanding common stock of D.S.D., Inc. ("D.S.D.", a Kansas corporation. The principal business activity of D.S.D. is the marketing and sale of cattle dusters and mineral feeders as well as the blending and sale of various agricultural related insecticides. Dr. Scratch Company, Inc., a subsidiary of D.S.D., manufactures cattle dusters, mineral feeders and animal-actuated insecticide applicators. On December 18, 1992, Enviro-Guard Corporation completed negotiations to acquire 90.14% of the outstanding common stock (891,250 shares) of White Mountain Mining and Manufacturing, Inc. ("White Mountain"), an Idaho Corporation. White Mountain owns 83 unpatented BLM mining claims located in Malheur County, Oregon. The purpose of this mining property acquisition was for the Company to have a source of insecticidal-quality DE, an important organic ingredient for the Company's products. On December 3, 1995, Enviro- Guard pledged the 705,873 shares of White Mountain stock it owned on a joint obligation of Enviro-Guard and the Company. On June 1, 1998, the noteholder foreclosed on the stock for failure to pay the indebtedness. The noteholder subsequently sold said shares to an affiliate of Environmental Products & Technology, Inc. ("EP&T"), a Utah corporation. This sale to EP&T had been arranged by the Company pursuant to an agreement with EP&T dated May 15, 1998, whereby EP&T would enter into a joint venture with the Company for the purpose of mining the White Mountain claims in consideration for which EP&T would convey the White Mountain stock to the Company, subject to a security interest in EP&T for the purchase price of said stock paid by EP&T (or its affiliates) to the noteholder. The Company claims that EP&T has breached this agreement. SEE ITEM 3, LEGAL PROCEEDINGS. The Company has a shortage of working capital, which is likely to continue unless the Company increases substantially its sales revenue or obtains additional working capital through equity sources. The report of the Company's auditor included with this annual report on Form 10-KSB contains a modification relating to the Company's ability to continue as a going concern. (See ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION and ITEM 7. FINANCIAL STATEMENTS. ) Industry -------- According to information published in the U.S. Department of Agriculture "Agriculture Statistics (1993)" and the U.S. Department of Commerce Statistical Abstract (119th ed.), over the past ten years, the worldwide market for pesticides grew by 30% as the total amount of acreage planted continued to increase in the United States and the world. Pesticide consumption in dollar terms is expected to grow 4.4% per year through 2003, compared with 3% during 1983-93. Agriculture is the largest end-user sector for insecticides, followed by commercial, industrial, home, garden and government applications. The United States spent approximately $3.3 billion in 1980 for agricultural pesticides and $8.8 billion in 1997, representing an increase of 267% over a 17-year period. Four markets---corn, cotton, vegetables, and fruit and nuts---account for 78% of the U.S. insecticide market. Japan is the second-largest market for pesticides in the world, by sales. Insecticides are the leading product category in the pesticide market, with 34% of the Japanese market. Western European insecticide sales amount to approximately 15% of total world insecticide sales. France, Spain and Italy are key markets for insecticides in Western Europe. Export demand for insecticide products take 59% of U.S. insecticide production. Export demand is expected to remain strong. 6 A 1996 Gallup poll reported that 92% of farmers want to use safer pesticides and 66% favored tougher enforcement of pesticide misapplication penalties. The nature of synthesized chemical pesticides has caused concern among the public and regulators particularly over the pesticides persisting in the environment, accumulating in soil and ground water and affecting surrounding wildlife such as fowl and fish. These concerns have led the EPA to require stricter guidelines on new pesticides. Additionally, the EPA has, in many instances, ordered new tests for previously approved products which must now meet the newer, more stringent standards. The additional testing is resulting in some companies electing to remove existing products from the market rather than subject the products to the newer standards. Over the past several years, chemical companies have voluntarily dropped the registration of approximately 28 active ingredients and 5,000 pesticide products that were in use at the time of cancellation. Additionally, since insecticides were first used in the 1940's, more than 600 insect species have developed resistance to many synthetic pesticides, leading the industry to constantly search for new products. Insecticide resistance have cost an estimated $1.4 billion a year in crop losses in the United States alone. Products -------- The Company recognizes the future demands for environmentally acceptable insecticide products in all agriculture-related industries worldwide. Its business plan calls for formulations which were natural in composition; components which, as stand-alone insecticides, were efficient, non-toxic, user and environmentally friendly, yet cost-effective. The active ingredients used in the Company's products are diatomaceous earth ("DE"), pyrethrin and piperonyl butoxide. DE is a naturally occurring mineral deposit resulting from microscopic single-celled plants called diatoms which took the minerals from the water and created protective shells for themselves. As they died and their shells drifted to the bottom of the sea beds, vast deposits were created. One of the numerous uses for DE is as a natural insecticide, since it causes severe mechanical cutting damage to insects akin to the damage of broken glass swallowed by humans. DE is taken from the earth and ground into a usable dust. It is, basically, an inert dust which does not react with other chemical compounds to form a new insecticidal compound. There are many varieties of diatoms, and the preponderance of the type in any given deposit gives that deposit certain characteristics. In the case of nontoxic insecticides, certain qualities make it possible to kill insects without harming animals, plants or humans. These rare deposits furnish a material that has two very important characteristics: (1) when fractured, the particle edges are very sharp and (2) each tiny particle has the ability to absorb liquid. In addition to cutting the covering of an insect's shell to cause dehydration, DE also absorbs the insect's covering and bodily fluids of the insect, further causing dehydration and eventual death. Moreover, DE causes extensive trauma to insects, both internally and externally. In order to not reduce or nullify its effectiveness as an insecticide, DE must be free of significant impurities. DE by itself can be used as an insecticide, but is generally slow to reduce insect populations and thus has limited effectiveness, especially against fast-breeding insects. For this reason, the Company's products combine DE with pyrethrin. 7 Pyrethrins are oily liquid esters extracted from the pyrethrum flower, the "African Daisy." The extract is a "botanical insecticide" and acts on insects with phenomenal speed causing paralysis. Research has determined that Pyrethrin is virtually harmless to mammals, i.e., warm-blooded life. Pyrethrin affects both the peripheral and central nervous system of the insect. Initially, it stimulates nerve cells to produce repetitive discharges, quickly leading to paralysis. Piperonyl Butoxide ("PBO"), an extract originally discovered in a variety of sassafras, has since been synthesized and made available in quantities greater than possible from plants. While early studies suggested that PBO is itself a natural insecticide, it is its use as a synergist that is particularly exciting and useful. A synergist is not generally considered toxic or insecticidal, but is a material used with insecticides to synergize or enhance the activity of the insecticides. PBO is the synergist used in the Company's products. It enhances the action of the fast knockdown provided by pyrethrin. Basically, PBO binds oxidative enzymes and prevents them from degrading the pyrethrin. Combined with small amounts of pyrethrin, it affords a rapid knockdown, a greater mortality, and a longer residual action than pyrethrin by itself. PBO has been found to be safe and free of any normal hazards of toxicity. It is well tolerated in large quantities by warm-blooded animals. Because PBO is substantially less expensive than pyrethrin, its use allows the Company to offer more economically priced products. The Company combines DE, pyrethrin and PBO by using surfactants to insure a good mix and greatly increase effectiveness and persistence. The combination of these active ingredients results in a compound much more effective than each ingredient individually. When using the ingredients together, DE breaks down the chitin, allowing the pyrethrin to act on the insects' nerve cells directly. The pyrethrin does not evaporate as quickly and is released for hours rather than minutes. PBO is used to increase the effectiveness of pyrethrin by as much as ten times. The Company's products consist of: Diatect D-20 Insecticide, EPA Registration No. 42850-1, Indoor Insecticide. Controls roaches, fleas, ants, silverfish, crickets, bedbugs, box elder bugs, and other insects. Use under sinks, behind furniture, in air vents, under tile, stairwells, and basements. Diatect Multi-Purpose Insecticide, EPA Registration No. 42850-2. Distributed in the agriculture market, the largest end-user market for insecticides; commercial; industrial; and government markets as "Diatect Multi-Purpose Insecticide." This insecticide is approved by the EPA for use in a wide variety of areas, e.g., edible growing crops, animal quarters, livestock, ornamentals, etc., under the least hazardous classification and is effective on a wide variety of insects. The insecticide can be applied as a dust or sprayed in solution with water and can be used on crops and fruits up to and including the day of harvest. The above product is distributed in the retail market for use in the home and garden markets under the trade name "Results" under the following retail labels: Results Ant and Insect. Controls ants, aphids, caterpillars, leafhoppers, lice, mites, mosquitoes, ticks, and other insects. 8 Results Tomato and Garden. Protects garden plants from many varieties of worms, beetles, leafhoppers, stink bugs, squash vine borers, and other insects. Results Rose and Floral. Protects azaleas, begonias, African violets, chrysanthemums, dogwood, elm, roses, tulips, and many other plants. Destroys insects such as mealybugs, fruit flies, white flies, and caterpillars that ruin the beauty of garden flowers and plants. Results Fire Ant Insecticide. Applying the insecticide directly to the fire ant mounds, provides quick, effective control in eliminating these aggressive, dangerous pests. Each year 10,000 Americans seek hospital treatment for venomous fire ant stings and two of those people die. Unlike bees, fire ants can sting repeatedly and have a very aggressive behavior. Diatect Pet Powder, EPA Registration No. 42850-3. Marketed on a retail basis under the trade name "Results." Diatect II Multi-Purpose Insecticide, EPA Registration No. 42850-4. The Diatect II product is formulated using a larger measure of pyrethrin (.2%) which provides a quicker, more positive knockdown. Designed and approved for use in the same applications as the No. 42850-2 formulation (which contains .1% pyrethrin), the user receives a significantly better return on their insecticide dollar using Diatect II because of its added knockdown strength. This insecticide product can be applied as a dust or sprayed in solution with water and can be used on crops and fruits up to and including the day of harvest. Diatect V Insecticide, EPA Registration No. 42850-5. The Diatect V product was designed and formulated to meet the needs of that part of the agriculture industry which requires insecticides with no synthetic ingredients. Using a powerful bug-killing measure of pyrethrin (.5%) blended with DE, one of natures best known insecticides, Diatect V becomes the product of choice for those users requiring a chemical free insecticide. The Company believes, the Diatect and Results products are far more effective than major competitive synthetic chemical products. Regulatory Approval ------------------- All insecticides, in general, purchased in stores today must, by law, have EPA-approved labels that disclose various required information about the product. These insecticide labels provide an extensive amount of information and indicate that the insecticide has been tested, evaluated, and regulated by the EPA. In fact, no insecticides can be legally registered, much less sold, without going through these procedures. Toxicity -------- Toxicity is the quality, state or degree of being poisonous. All too often people think of toxicity as poisoning that is caused by ingesting a small amount of some substance. However, almost any chemical is potentially toxic given enough of it and the right circumstances. In fact, every homeowner has cabinets in their bathroom, kitchen, or garage that contain bottles of substances, that if ingested, inhaled, or spread on the skin, may cause harm. Even something as seemingly innocuous as table salt, is potentially toxic, if sufficiently large quantities are ingested. 9 Toxicity is usually expressed as the lethal dose or LD50. The LD50 denotes the amount (single dosage of the substance by mouth) in milligrams per kilogram of body weight required to kill 50% of a group of test animals. LD50 denotes the potency of a substance; the lower the number, the less of that substance is required to kill an animal. Conversely, the higher the number, the more of that substance is required. For example, the LD50 for table salt is 3,300 (mg/kg) and for aspirin the LD50 is 750 (mg/kg). The LD50's of different substances can be easily compared and are represented on insecticide labels by the signal words DANGER or POISON, WARNING, or CAUTION. These signal words are associated with different ranges of LD50's and hence different degrees of toxicity as listed in the table below.
Toxicity Category Signal Words (required on Oral LD50 Probable Lethal an insecticide label by EPA) (mg/kg) Adult Human Dose (1) ----------------- ---------------------------- ---------- ------------------------- I--Highly Toxic DANGER or POISON, plus skull 0 to 50 A few drops to 1 teaspoon and crossbones symbol II--Moderately Toxic WARNING 50 to 500 1 teaspoon to 2 teaspoons III--Slightly Toxic CAUTION 500 to 5,000 1 ounce to 1 pint (1 pound) IV--Almost non-toxic CAUTION more than 5,000 1 ounce to 1 pint (1 pound) (1) Toxicity of Insecticides and Determining the LD50," Kenneth J. Stein and F. William Ravlin, Department of Entomology, Virginia Polytechnic Institute and State University, 1995
Oral toxicity testing on the Company's Products resulted in an LD50 of more than 5,000 mg/kg. The oral toxicity for the product is less than that for table salt or aspirin. (Because the product was mildly irritating to the eyes of New Zealand rabbits, the product does carry the Level III Signal Word "Caution" with the appropriate wording. However, it is of importance to note that this wording is because of the irritation to the eyes of the rabbits not the oral or dermal toxicity of the product.) As previously stated, all new insecticides must be "registered" with the EPA, which specifies the conditions of their use as part of its mandate under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). An insecticide user or manufacturer who fails to comply with FIFRA restrictions risks enforcement actions from both the EPA and state authorities, including, but not limited to, suspended product sales and fines. The Company's products comply with FIFRA restrictions and are registered with the EPA. The pesticide regulatory program instituted by Congress and implemented by the EPA is having a profound effect on the availability of old as well as new synthetic chemical pesticides. Many of the old pesticides were registered before their long-term health and environmental effects were fully understood. In 1972, Congress decreed that the EPA should reexamine the risks of all active ingredients in pesticides registered before modern testing methods became available. In 1988, impatient with the slow pace of the registration program, Congress imposed timetables on the EPA and levied fees on chemical companies wishing to re-register their products. Although the EPA has banned relatively few pesticides in recent years, the impact of Congress' action has been significant. As stated above, chemical companies have voluntarily dropped registration of 28 active ingredients and 5,000 pesticide products that were in use at the time of cancellation over the past 5 years. The cost of developing a new chemical for registration has also risen enormously in recent years, partially because of expensive tests 10 required to show that the chemical poses low environmental and human health risks. The typical pesticide is put through more than 100 tests and approval can take more than three years. Once approved, labeling instructions must be followed for proper use, handling, storage and disposal. The effect of these tighter restrictions and the removal of these active ingredients is to open the door for the Company and its products. The market for the Company's environmentally-safe products broadens with each synthetic chemical insecticide taken off the shelf. Competition ----------- The principal players in the U.S. plant care industry, particularly the insecticide industry, are major companies such as Dow, DuPont, Monsanto, Shell Oil and Ortho. Those companies all have more extensive resources than the Company and have established product recognition and loyalty. The Company believes, however, that by focusing on the non-synthetic insecticides, it is able to acquire market niches which have not been a focus of the larger, better established companies. The Company believes it has an advantage in the products and market niche it has identified in that it has already obtained EPA approval of its products and labels. The EPA approval is important due to the time and cost associated with receiving such approval which can take years and be extremely costly. Management Changes ------------------ In May, 1997, Ross S. Wolfley resigned as President of the Company and George H. Henderson was elected to that position. With the resignation of Dale Christiansen as Chief Financial Officer, Mr. Henderson assumed the responsibilities of Treasurer. When Elwynn S. Hewlett passed away in December, 1997, Mr. Henderson was elected Chairman of the Board. In August 1997, Robert B. Crouch resigned as the Secretary of the Company and was succeeded by John L. Runft. In December, 1997, Stewart Hyndman was elected to the Board of Directors. In March 1999, Jay W. Downs was appointed to the Board of Directors. In February 2000, Ross Wolfley resigned from the Board of Directors. Currently, the Board of Directors is made up of George H. Henderson, John L. Runft, Robert B. Crouch, Jay W. Downs, M. Stewart Hyndman, David J. Black, and Michael McQuade. Offices, Employees and Subsidiaries ----------------------------------- The Company's executive offices are located at 1134 North Orchard, Suite 208, Boise, Idaho 83706. George Henderson and John Runft provide administrative services to the Company on an as-needed basis. Diatect International, Inc., a Kansas corporation, is a wholly-owned subsidiary through which the Company's production operations are conducted. Its administrative offices are located at Highway 36 East, Smith Center, Kansas. The plant facility is located at 108 East Schoolhouse Road in Lebanon, Kansas. The plant facility utilizes two full time at-will employees, and hires additional laborers as needed. Magic International, Inc., a wholly-owned subsidiary, was acquired by the Company for the purposes of conducting the Company's marketing operations. Its executive offices are located at 1134 North Orchard, Suite 208, Boise, Idaho 83706. As of this filing, Magic International, Inc. has no employees. 11 ITEM 2. PROPERTIES DIC Corporate 1134 North Orchard, Suite 208 1,800 sq. ft. Lease Brick Executive Offices Boise, Idaho The lease on this property is for 3 years at a monthly rate of $720 in year 1, $738 in year 2, and $757 in year 3. DII Plant and 108 E. Schoolhouse Rd 25,000 sq. ft. Own Brick Facilities Lebanon, KS The Company owns this facility outright. See Note 4 to the financial statements. MII Same as DIC corporate offices Administration ITEM 3. 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. Results Insecticide, Inc. ------------------------- The Company entered into a distribution and marketing agreement on September 14, 1997 on behalf of its subsidiaries. Integrated into the agreement was a security agreement to secure a loan in the amount of $65,498 which Diatect borrowed from Results. The loan was evidenced by a promissory note payable November 5, 2000 and bearing interest at the rate of 10% per annum until paid. Under the agreement, Diatect pledged all of the issued and outstanding shares of stock in its subsidiary, Diatect International, Inc., as security for the loan. The pledged shares were delivered to Results. In May of 1998, legal counsel for Results alleged that Diatect was in breach of the agreement. Arbitration and litigation effectively terminated the distribution agreement and allowed Diatect to simply repay the note and sever all relationships with Results. This resulted in a loss of $96,711. 12 A.E. Smith Lawsuit ------------------ On March 15, 1996, following court ordered mediation, the Company transferred to A. E. Smith a note for $415,000. In return, the Company obtained two buildings and substantial equipment located in Smith Center and Lebanon, Kansas. The buildings were sold during 1998 and the note fully satisfied resulting in a gain of $30,724. The settlement also called for the cancellation of other receivables and payables between the Company and Mr. Smith. Mr. Smith also returned Enviro-Guard Holding Company common stock to the Company. In connection with the settlement, all assets located in the state of Kansas were pledged as collateral for the payment of the A.E. Smith settlement. These assets included all buildings located in Kansas. No gain or loss was realized as a result of this settlement. 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. 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, 1998 and 1999. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. 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 December 31, 1999 and 1998, $61,543 and $55,543 are included respectively in commitments and contingencies in these financial statements. To date, plaintiffs have made no attempt to collect on this judgment. Mid-America Venture Capital Fund, Inc. -------------------------------------- Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, Diatect has paid a total of $4,000 and is currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in the financial statements attached to this report. 13 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 attached to this report. 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 for this payment, the Company has issued a promissory note dated July 18, 1997 in the sum of $19,200 bearing interest at 12% . See Note 7 to the financial statements attached to this report. 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 December 31, 1999 and 1998 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $185,644 and $154,717, respectively. See Note 7 to the financial statements attached to this report. 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. The amount of $21,260 is including in notes payable and $355 is included in accrued interest in the financial statements attached to this report. 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 actions and the consequential judgments arose as a direct result of the inability of the Company to fund the operations and payments to all the Company's creditors. The collection judgments, which are substantially unpaid at December 31, 1999, total approximately $52,000, and are included in the Company's accounts payable and other obligations. The Company is not aware of any other threatened litigation against it or its subsidiaries. On the other hand, there remains a tangible possibility of litigation against Diatect and/or its subsidiaries being brought by creditors of Diatect, particularly those, which are holding delinquent accounts. Diatect is working with these creditors and, at this time, all creditors who have not already filed litigation appear to be forbearing and accepting the measures taken by the Company in addressing the indebtedness. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the respective periods indicated, the prices for the Company's common stock in the over-the-counter market as reported by a weekly reporting service and according to the OTC Bulletin Board and the National Quotation Bureau's "pink sheets". The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. At December 31, 1999, the Company's common stock was quoted under the symbol "DTCT" and had a high of $0.07 and a low of $0.07. All bid prices below have been rounded to the nearest whole cent. Bid Prices --------------- Fiscal Year Ended December 31, 1999 ----------------------------------- First Quarter $ 0.15 $ 0.05 Second Quarter $ 0.15 $ 0.08 Third Quarter $ 0.12 $ 0.07 Fourth Quarter $ 0.07 $ 0.03 Fiscal Year Ended December 31, 1998 ----------------------------------- First Quarter $ 0.08 $ 0.63 Second Quarter $ 0.31 $ 0.08 Third Quarter $ 0.15 $ 0.06 Fourth Quarter $ 0.10 $ 0.05 Fiscal Year Ended December 31, 1997 ----------------------------------- First Quarter $ 0.20 $ 0.10 Second Quarter $ 0.20 $ 0.10 Third Quarter $ 0.20 $ 0.10 Fourth Quarter $ 0.20 $ 0.10 The Company has not paid any dividends on its Common Stock, and the Company does not anticipate that it will pay dividends in the foreseeable future. The future payment of dividends, if any, on the common stock is within the discretion of the Board of Directors and will depend on the Company's earnings, its capital requirements, and financial condition and other relevant factors. At December 31, 1999, the Company had 1,042 shareholders of record based on information provided by the Company's transfer agent. 15 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Cautionary Statement Regarding Forward-looking Statements --------------------------------------------------------- This report may contain "forward-looking" statements. Examples of forward- looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about 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 -------------------- The Company believes it has resolved the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a minimum number of computer programs in its operations. The Company has completed its assessment, and currently believes that costs of addressing this issue have not and will not have a material adverse impact on the Company's financial position. However, if the Company and third parties upon which it relies experience further effects from this problem, it could result in a material financial risk to the Company. In order to assure that this does not occur, the Company plans to continue to monitor its computer systems. State of Readiness ------------------ The Company has completed an assessment of its operations. As far as its information technology systems ("IT"), the Company uses newer model desktop computers in its operations and all PCs are running commercial software with the patches and updates added as they are available. Certain non-IT microprocessors are used in the Company's operations, but the internal software which drives these systems has been assessed and changed where necessary. The Company does not utilize any other non-IT systems which could be affected by the Y2K problem. Costs of Y2K ------------ The Company has gradually replaced its IT systems in the ordinary course of business and therefore cannot attribute specific costs of such upgrades to Y2K. The costs of assessing potential non-IT problems have involved various supervisors' evaluation time which has likewise been incorporated into ordinary business costs. There have been no significant hardware costs directly attributable to Y2K. 16 Risks of Y2K ------------ The Company does not anticipate that Y2K problems pose substantial risks to its current operations other than those posed by the systems of its customers. The worst case scenario contemplated to date would involve a temporary suspension of its activities while its customer resolved its problem. It is doubtful that any such suspension of operations might have a significant adverse impact on the Company's overall revenues. At the date of this report the Company considers that any such event is unlikely. Contingency Plans ----------------- The Company does not have any contingency plans at this time and does not intend to prepare any such plan because December 31, 1999 has come and gone and the most critical factors in its worst case scenario are essentially beyond the Company's control. The Company intends to continue its maintenance and upgrades of its internal systems, and will continue to query its major customers concerning their respective experiences with Y2K problems. General - ------- The founders of the Company envisioned establishing a business venture built upon the creation, development, production and marketing of a quality line of natural, environmentally-friendly insecticide products. From those early times, work was undertaken to research the markets, to acquire the formulations and obtain related EPA labels covering those products then set about to form a company based upon those concepts. A great deal of time and effort was expended endeavoring to raise the funding to acquire the physical assets between the years 1991-1995. The Company had acquired most of the physical assets required to operate but the lack of markets, legal battles and the continued lack of financial resources placed the Company in under adverse operating conditions. In early 1997, the Board of Directors set forth a new business plan and made a number of changes in the management team. That new business plan called for a number of substantial actions to be initiated: -Focusing efforts and resources on the primary business of designing, developing, producing and marketing state-of-the-art environmentally-friendly insecticide products; -Divesting/spinning off of unrelated business ventures; -Creating and registering new insecticide products aimed at filling the needs of the ever broadening and growing agriculture industry; -Upgrading the plant facilities (capacity: 3,000 lbs. of product per day) and laboratory to be able to produce larger volumes of product per day; -Reducing the corporate indebtedness and liabilities; -Streamlining operations and reducing operating costs; -Re-establishing the credibility of the Company in the business community and financial markets; -Resolving outstanding litigation; -Forming up and maintaining a solid, knowledgeable management team; -Developing marketing strategies for the Company's various insecticide products. 17 Results of Operations --------------------- Year ended December 31, 1999 compared to year ended December 31, 1998 --------------------------------------------------------------------- Revenues. The Company had revenues of $207,912 and cost of sales of $110,385 with a gross profit of $97,527 for the period ending December 31, 1999, compared with revenues of $123,483 and cost of sales of $45,085 with a gross profit of $78,398 for the period ending December 31, 1998. The increase in revenues was attributable to increased sales. The increase in cost of sales as a percent of revenues, from 36.5% in 1998 to 53.1% in 1999 was attributable to increased costs of labor and marketing. Operating Expenses. For the year ended December 31, 1999, the Company had total operating expenses of $671,835, compared to $728,177 for the same period ending December 31, 1998. The decrease in operating expenses is attributable primarily to a decreases in salaries, wages and benefits of $54,577, and consulting fees of $31,984, offset by an increase in legal and professional fees of $33,112. Management expects operating expenses for the next twelve months to be significantly greater because of increased corporate activity. Other Income and Expense. Other expense for the year ended December 31, 1999 totaled $305,545, consisting primarily of interest expense of $210,962 and litigation settlement expense of $96,711. By contrast, other income totaled $59,774 for the year ended December 31, 1998, consisting of $215,692 gain on extinguishment of debt and $30,724 on the sale of assets, offset by interest expense of $179,642, and claim and miscellaneous fees of $2,500 and $4,500 respectively. Pending litigation at December 31, 1999 could result in additional settlement expenses in fiscal 2000. See PART I, Item 3, Legal Proceedings. The Company experienced a net loss of $879,853 for the year ended December 31, 1999 and a net loss of $653,895 for the year ended December 31, 1998. The basic loss per share for the year ended December 31, 1999 was $0.05, based on the weighted average number of shares outstanding of 19,535,231 shares, compared to $0.03 based on weighted average number of shares outstanding of 19,535,231 at December 31, 1998. While the working capital and equity funding continued to severely hamper the Company's management team from moving rapidly to conform the Company's business operations to the business plan, management believes that significant progress was made in the Company's fiscal year ended December 31, 1999. -One new registered EPA label was created and approved (Diatect V insecticide), providing the Company with larger potentially profitable Organic markets. -The Company spun off or divested itself of all unrelated businesses, leaving management to focus upon its core insecticide business. -The more modern updated plant and lab facility has the capability of producing 20,000 pounds of quality insecticide products during each 24-hour period. -The Company is on a solid operational footing with streamlined and effective production procedures in place, which management hopes will result in well controlled operating costs. 18 -Inventories of a variety of the Company's insecticide products are maintained for immediate shipment. -While work has been done in an effort to launch an effective marketing campaign, only modest success has been achieved at this point in time. A radical change in marketing strategy has been prepared and will be implemented when funding becomes available. The strategy which is being implemented is to expand into every aspect of the marketplace worldwide through the establishment of a network of dealers. Through this system, every consuming entity will be identified, contacted, and introduced to the benefits of the Results and other Company insecticide products. Currently, the Company has one exclusive area distribution agreement in place along with non-exclusive distributors. The ultimate objective is to eliminate the role of the exclusive distributors, removing one additional price break consideration, enhancing the overall profitability of the Company. In the immediate foreseeable future, the Company intends to implement a plan which will see all of the marketing/sales activities being handled by the parent company through a wholly-owned subsidiary. Through this new strategy, additional local dealers will be identified and signed on in each of the identified non-exclusive market areas, ensuring that the Company's products are represented worldwide through a solid distribution network. The Company believes the future will be controlled by those with the insight and capacity to run cost-effective and environmentally-friendly companies. The industry is rapidly developing new chemical compounds, many of them bio-engineered from natural raw materials. Manufacturers are racing to keep pace with advancements and older generation insecticide labels have begun to decline in sales. Management believes that the Company's future will be strong because all elements necessary to compete are in place. With the raw material needed for the next millennium already contracted, the Company is in a strong position to compete in future markets. With further development of product lines, based on these resources, management hopes that the Results and the Company's other insecticide product lines will be assured of a continued and growing presence in the market. Liquidity and Capital Resources ------------------------------- At December 31, 1999, the Company had current assets of $192,493, consisting of cash of $2,160, accounts receivable of $9,050, and inventories of $181,283, and current liabilities of $2,955,064 for a working capital deficit of $2,762,571. At December 31, 1999, the Company had property, plant and equipment assets totaling $54,782, net of depreciation, and other assets of $2,318,321, consisting primarily of the Company's investment in EPA labels, net of amortization. Cash used in operations for the year ended December 31, 1999 was $(199,750) compared to $(408,627) for the same period ended December 31, 1998. In 1999 and 1998, the Company's operations been funded primarily by sales of products and loans. Cash flows used by investing activities by the Company during the year ended December 31, 1999, was $23,238. Cash flows from financing activities during the year ended December 31, 1999 was $223,060. 19 As of the end of fiscal 1999, the Company may seek working capital from several sources, including the equity markets and private investors. In February 2000, the Company increased its authorized capital to allow for the issuance of additional shares of common stock. There is no assurance, however, that any fund raising efforts will be successful. 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 with additional cash to fund the advertising and marketing. ITEM 7. FINANCIAL STATEMENTS The financial statements of the Company are set forth immediately following the signature page to this Form 10-KSB. (See ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K for Index to Financial Statements.) ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no disagreements with its certified public accountants with respect to accounting practices or procedures or financial disclosure. 20 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth as of September 8, 2000, the name, age and position of each executive officer and director and the term of office of each director of the Company. Director and/or Name Age Position Officer Since ------------------- --- -------- --------------- George H. Henderson 71 Director February 1995 President May 1997 Treasurer August 1997 Chairman of the Board December 1997 John L. Runft 62 Director February 1995 Secretary August 1997 Robert B. Crouch 75 Director October 1993 David J. Black 49 Director July 1997 M. Stewart Hyndman 44 Director December 1997 Jay W. Downs 53 Director March 1999 Michael P. McQuade 44 Director February 1995 Each Director of the Company serves for a term of one year and until his or her successor is elected at the Company's annual shareholders meeting and is qualified, subject to removal by the Company's shareholders. All officers serve at the pleasure of the Board of Directors and until his or her successor is elected at the annual meeting of the Board of Directors and is qualified. As there are no employment agreements in place that covers officers/directors of the Company, none of the officers/directors are salaried employees. All services are provided pursuant to consulting agreements. Set forth below is certain biographical information regarding each of the Company's executive officers and directors. George H. (Herb) Henderson joined the Board of Directors in 1995 and was appointed to the posts of President and CEO in May, 1997. He was asked to assume the position of Chairman of the Board when Elwynn S. Hewlett passed away in December, 1997. Broadly skilled, Herb brings to Diatect International Corporation over forty years of senior management experience in domestic and international business. Our Chairman, President and CEO offers the Company the benefits of his hands-on management in numerous important mining and processing posts which include: An Tai Bao Mine/Plant Operation, Ping Shuo, China - Operations Manager Coal Valley Mine, Edson, Alberta, Canada - General Manager Marcona Mining Co., San Juan, Peru - Mine/Maintenance Superintendent Morrison-Knudsen Co., Canada and U.S.A. - Director, Mining Group Kaiser Resources, Ltd., Sparwood, B.C., Canada - General Superintendent He also played an important role in the development of the State of Idaho's expanded presence in the global marketplace by his efforts on behalf of Idaho commerce, agriculture and industry as Senior International Trade Specialist with the Idaho Department of Commerce. 21 John L. Runft has been practicing law since 1965, emphasizing business organizations and contracts, administrative law and business litigation. He received his BA. from Albertson's College of Idaho in 1962, and his J.D. from the University of Chicago School of Law in 1965 (Justice Jackson Award in Constitutional Law, 1965). John is a member of the Idaho Bar, is admitted to, and has appeared as lead counsel in litigation or appeals before the U.S. District Court of Idaho, the Court of Appeals for the Ninth Circuit, and the United States Claims Court, the United States Court of Appeals for the Federal Circuit, and the United States Supreme Court. He is a member of the Board of Litigation of the Mountain States Legal Foundation, is a member of the Idaho Law Foundation, served as a Director of the Idaho Community Foundation (1989- 1996), and has served as Civilian Aide to the Secretary of the Army of the United States for the State of Idaho (1988-1996). John is also President and Director of Karlinmar Corporation and Karlinmar Holding, LLC. David J. Black brings 25 years of experience in business operations to the Board of Directors, including planning and development. David received his B.S. in Mechanical Engineering (Magna Cum Laude) from the University of Utah, and his MBA from the University of Pittsburgh. He has designed, built and managed manufacturing facilities in Kansas, West Virginia, Texas and various Utah industries including refractory and insecticide manufacturing, electro/mechanical assembly operations and food processing. Most recently he has consulted with new and small businesses in need of his design and management skills to organize and implement computerized data base, accounting, purchasing, human resources customer service, production systems and quality assurance programs, and to develop operating guidelines and procedures, employee training and marketing plans, accounting and management systems for clients in industry, computer software, financial, retail and non- profit community services. Robert B. Crouch has served the Company and its predecessors as an Officer and Director for seven years. Bob received his BSCE degree from the University of Idaho in 1949 and his LL.B. degree from George Washington University in 1953. He has extensive experience in patent law with the U.S. Naval Bureau of Aeronautics, General Electric, IBM Corporation and Information Storage Systems. He now maintains a private law practice and has served as a corporate officer for Destination Development Corporation, the Enviro-Guard Corporation and Inisine Technologies, Inc. Dr. Michael McQuade practices dentistry in Richmond, VA. He was instrumental in obtaining initial capitalization of the Company's predecessor, San Diego Bancorp. Since then he has contributed time and substantial effort with respect to the Company's research and development program, seeking out valuable technical data, aimed at improving application and product utilization. 22 M. Stewart Hyndman is the President of Magic Miles Ltd, Inc., which is an export trading company specializing in the export of agricultural commodities and industrial products. Following his graduation from the University of Idaho, Stewart has continued to play an active role in industry, agriculture, marketing and business development. Jay W. Downs is the President of J.D. Hutton & Company, a well established mortgage company located in Salt Lake City, Utah which serves all of the Intermountain states. For many years, Jay has been closely associated with the Diatect product lines through his extensive knowledge of pyrethrin production and supply worldwide. Involvement in Certain Legal Proceedings ---------------------------------------- See ITEM 3. LEGAL PROCEEDINGS of this Form 10-KSB. Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Since the Company ceased operations in 1989 until October 1993, the Company knows of no person, who at any time during the subsequent fiscal years, was a director, officer, beneficial owner of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 ("Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a). Based upon a review of Forms 3 and 4 furnished to the Company during the fiscal year ended December 31,1999, other than disclosed below, the Company knows of no Reporting Person that failed to file the required reports during the 1999 fiscal year or prior years. The following table sets forth as of December 31, 1999, the name and position of each Reporting Person that failed to file on a timely basis any reports required pursuant to Section 16(a) during the 1999 fiscal year or prior years. Filings have been since made as indicated below. Name of Reporting Person Position Report Filed ------------------------ -------- ------------ George H. Henderson President/Treasurer/Director Chairman of the Board Form 3 John L. Runft Secretary/Director Form 3 Robert B. Crouch Director Form 3 Jay W. Downs Director Form 3 and 4 Ross S. Wolfley Director Form 4 M. Stewart Hyndman Director Form 3 and 4 Michael P. McQuade Director Form 4 David J. Black Director Form 4 23 ITEM 10. EXECUTIVE COMPENSATION The following tables set forth certain summary information concerning the compensation paid or accrued for each of the Company's last three completed fiscal years to the Company's chief executive officer and each of its other executive officers that received compensation in excess of $100,000 during such period (as determined at December 31, 1999, the end of the Company's last completed fiscal year):
Long Term Compensation ---------------------- Annual Compensation Awards Payouts Other Restricted Name and Annual Stock Options LTIP All other Principal Position Year Salary Bonus($) Compensation Awards /SARs Payout Compensation ------------------ ---- ------ -------- ------------ ------ ------- ------ ------------ Ross F. Wolfley 1999 $ -0- -0- -0- -0- -0- -0- -0- President (1) 1998 $ -0- -0- -0- -0- -0- -0- -0- 1997 $ 6,550 -0- -0- -0- -0- -0- -0- George H Henderson 1999 $ President (2) 1998 $ -0- -0- -0- -0- -0- -0- 14,400 1997 $ -0- -0- -0- -0- -0- -0- 6,815
(1) Ross Wolfley resigned as President in April 1997. (2) George Henderson was appointed as President in April 1997. At December 31, 1999, none of the officers/directors of the Company were employed by the Company in any capacity and therefore received no salary related compensation. Since 1997, the direction and operation of the Company has been provided by President Henderson and Secretary Runft on a part-time consulting basis. At such time as sufficient funding and/or income is being generated to carry on the Company's business, pay its bills, pay its employees and agents, the Company will attempt to put Employment Agreements into place with its key executives, replacing the Consulting Agreements. Board Compensation ------------------ The Company's officers and directors received no compensation or cost reimbursement for attendance at board meetings. 24 1995 Stock Option Plan ---------------------- Set forth below is a summary of the Company's 1995 Stock Option Plan (the "Plan"), which is qualified in its entirety by the actual provisions of the Plan. In November 1995, the board of directors adopted a Plan under which options to acquire stock of the Company may be granted from time to time to employees that are not "affiliates" of the Company or its subsidiaries. In addition, at the discretion of the board of directors, options to acquire stock of the Company may from time to time be granted under the Plan to other individuals, including consultants or advisors, who contribute to the success of the Company or its subsidiaries and are not employees of the Company, provided that, bonafide services shall be rendered and such services must not be in connection with the offer or sale of securities in a capital raising transaction. Administration of the Plan is to be determined by the board of directors, or by such committee as the board deems proper. Any option shall be approved by a majority vote of those board members in attendance at a meeting at which a quorum is present. No member of the board or duly authorized committee shall be liable for any action taken or determination made in good faith with respect to the Plan. If any right to acquire shares granted under the Plan is exercised by the delivery of other shares of common stock or the relinquishment of rights to shares of common stock, only the net shares Of common stock shall count against the total number of shares reserved for issuance under the terms of the Plan. The Company will reserve for issuance on the exercise of the options the number of shares of common stock subject to such option. The Company may reserve either authorized but unissued shares or issued shares that have been reacquired by the Company. Each option has a term established by the board of directors or duly authorized committee at the time the option is granted but in no event may an option have a term in excess of five (5) years. Options under the Plan shall vest and become exercisable at such time or times and on such terms as the board or duly authorized committee may determine at the time of the grant of the option. Options shall be non-transferable, except by will or the laws of descent and distribution. The exercise price of each option issued under the Plan shall be equivalent to either the fair market value of the common stock on the date of grant as determined by the board or duly authorized committee based on the average of the closing bid and asked price for the common stock over the 20 day trading period immediately prior to the grant or on the bid price on the date of grant (excluding the exercise of other options conversion rights or similar rights granted by the Company). The exercise of any option shall be contingent on receipt by the Company of cash, certified bank check to its order, or other consideration acceptable to the Company, provided, that at the discretion of the board or a duly authorized committee, the written provisions of the Option may provide the payment can be made in whole or in part in shares of common stock of the Company, which shares shall be valued at their then fair market value as determined by the board or a duly authorized committee, or by the surrender or cancellation of other rights to a common stock of the Company. 25 The Plan provides that in the event that the number of shares of common stock from time to time issued and outstanding is increased or decreased pursuant to a stock split or a stock dividend, the number of shares of common stock then covered by each outstanding option granted thereunder shall be increased or decreased proportionately, with no increase or decrease in the total purchase price of the shares then so covered, and the number of shares of common stock subject to the Plan shall be increased or decreased by the same proportion. The Plan may be abandoned or terminated at any time by the board or a duly authorized committee except with respect to any options then outstanding under the Plan. It shall otherwise terminate on the earlier of the date that is (i) ten years after the date the Plan is adopted by the board or (ii) ten years after the date the Plan is approved by the shareholders of the Company. The Plan may not be amended more than once during any six month period, other than to comport with changes in the Code or the Employees Retirement Income Security Act or the rule and regulations promulgated thereunder. The number of options outstanding and other information regarding the Plan are included in Note 13 and Note 17 to the Financial Statements included in this filing. [This space to the end of the page has been intentionally left blank] 26 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth as of December 31, 1999, the name and address and the number of shares of the Company's Common Stock, no par value per share, held of record or beneficially by each person who held of record, or was known by the Company to own beneficially, more than 5% of the 19,535,231 issued and outstanding shares of the Company's Common Stock, and the name and share holdings of the Company and its principal subsidiaries and of all officers and directors as a group. Security Ownership of Certain Beneficial Owners ----------------------------------------------- Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership of Class -------- ------------------- -------------------- -------- Common Mona Hewlett 2,022,220 shares 10.1 286 S. Pineview Drive Alpine, UT 84004 Common Cloward & Associates 1,953,537 shares 9.76 2696 N. University Avenue, Suite 290 Provo, UT 84604 Security Ownership of Officers and Directors -------------------------------------------- Title of Name and Position of Amount and Nature of Percent Class Officer and Director Beneficial Ownership of Class -------- -------------------- -------------------- -------- Common George H. Henderson 552,106 shares 2.7 Director/President/Treasurer/ Chairman of the Board Common John L. Runft, Director/Secretary 800,155 shares 4.0 Common Robert B. Crouch, Director 394,282 shares 1.97 Common Ross S. Wolfley, Director 607,800 shares 3.0 Common David J. Black, Director 537,000 shares 2.68 Common Michael P. McQuade, Director 17,300 shares .008 Common Jay W. Downs, Director 193,806 shares .096 Common M. Stewart Hyndman, Director 0 shares 0.00 ---------------- ------ All Officers/Directors as a Group (8 Persons) 3,102,449 shares 15.5 ================ ====== 27 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others --------------------------------------- Except as indicated below, and for the periods indicted, there were no material transactions, or series of similar transactions, since the beginning of the Company's last fiscal year, or any currently proposed transactions, or series of similar transactions, to which the Company was or is to be party, in which the amount involved exceeds $60,000, and in which any director or executive officer, or any security holder who is known by the Company to own of record or beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, has an interest. Certain Business Relationships ------------------------------ Except as indicated below, and for the periods indicated, there were no material relationships regarding directors that exist, or have existed during the Company's last fiscal year. Indebtedness of Management -------------------------- Except as indicated below, and for the periods indicated, there were no material transactions, or series of similar transactions, since the beginning of the Company's last fiscal year, or any currently proposed transactions, or series of similar transactions, to which the Company was or is to be a party, in which the amount involved exceeds $60,000 and in which any director or executive officer, or any security holder who is known to the Company to own of record or beneficially more than 5% of any class of the Company's common stock, or any member of the immediate family of any of the foregoing persons, has an interest. President and Chairman/Director Henderson is owed the sum of $182,076.74 for services rendered the Company in 1997, 1998 and 1999. Secretary/Director Runft is owed $182,563.13 for services rendered the Company in 1997, 1998, and 1999. Loans from Shareholders ----------------------- In November 1993, the Company gave a promissory note in the amount of $400,000 to Danny F.A.B. Wirken, a shareholder and consultant to the Company, for funds advanced to the Company to pay ongoing operating expenses. The promissory note bears interest at 8% annually, is unsecured, and payable on demand. At December 31, 1995, the principle and accrued interest totaled $449,508. However, the Company has a claim against Mr. Wirken which it plans to pursue to judgment with the objective of foreclosing on said note. See Item 3. Litigation. 28 Other shareholders have made loans to the Company which are still outstanding and for all of which promissory notes have been issued: Stockholder Amount of Note Date of Note -------------------- -------------- ------------- Robert B. Crouch $ 36,000 July 21, 1999 3,500 September 16, 1999 5,500 November 18, 1999 9,500 January 4, 2000 John L. Runft 50,000 January 15, 1999 20,000 February 11,2000 25,000 December 15, 1997 9,500 February 2, 1995 George H. Henderson 5,000 January 30, 1995 65,000 October 1, 1998 35,000 August 2, 1998 David J. Black 20,000 August 5, 1997 Jay W. Downs 19,200 November 26, 1997 M. Stewart Hyndman 12,000 January 17, 2000 L. Craig Hunt * * Dennis P. Nielsen 31,750 January 6, 1998 6,500 December 12, 1997 David N. Sim 6,500 Oct. 1, 1999 2,500 January 4, 2000 Jack S. Stites 8,800 September 1, 1999 20,000 February 25, 2000 Cloward & Associates 3,000 January 4, 2000 * Note rendered into a judgment for the amount of $61,543.31. 29 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements are included in this report: Title of Document Page ----------------- ---- Independent Auditors Report of Williams & Webster, P.S., Certified Public Accountant 31 Consolidated Statement of Financial Position as of December 31, 1999 and 1998 32 Consolidated Statement of Operations for the years ended December 31, 1999 and 1998 34 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999 and 1998 35 Consolidated Statement of Cash Flows for the years ended December 31, 1999 and 1998 36 Notes to Financial Statements 37 (a)(2) Financial Statement Schedules. Not applicable (a)(3)Financial Statements. The following exhibits are included in this report: SEC Exhibit Reference Number Number Title of Document Location ------- --------- ----------------- -------------------- 27 27 Financial Data Schedule This Filing (b) Reports on Form 8-K. The following reports on Form 8-K were filed with the Commission during the following quarters: None. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: DIATECT INTERNATIONAL CORPORATION Date: September 8, 2000 /s/ George H. Henderson,President/Treasurer /s/ John L. Runft, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated Date: September 8, 2000 /s/ George H. Henderson, Director /s/ John L. Runft, Director /s/ Robert B. Crouch, Director /s/ Jay W. Downs, Director /s/ M. Stewart Hyndman, Director /s/ Robert B. Corrigan, Director /s/ Michael P. McQuade, Director /s/ Larry D. Anderson, Director 31 Board of Directors Diatect International Corp. Boise, ID 83714 Independent Auditor's Report We have audited the accompanying consolidated balance sheets of Diatect International Corp. (formerly Applied Earth Technologies, Inc.), (formerly San Diego Bancorp), as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Diatect International Corp. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16, the Company has significant net operating losses, unsatisfied collection judgments and delinquencies in repaying its debt obligations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 16. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Williams & Webster, P.S. Certified Public Accountants Spokane, Washington August 22, 2000 32 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 ASSETS 1999 1998 ----------- ----------- Current Assets Cash $ 2,160 $ 2,088 Accounts receivable 9,050 - Inventories 181,283 100,000 ----------- ----------- Total Current Assets 102,088 102,088 ----------- ----------- Property and Equipment Building 23,501 23,501 Equipment 46,751 39,281 Less accumulated depreciation (15,470) (6,037) ----------- ----------- 54,782 56,745 Other Assets Deposits 3,000 - Investment in EPA labels, net of amortization 2,315,321 2,604,963 ----------- ----------- Total Other Assets 2,318,321 2,604,963 ----------- ----------- TOTAL ASSETS $ 2,565,596 $ 2,763,796 =========== =========== The accompanying notes are an integral part of these financial statements. 33 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) CONSOLIDATED BALANCE SHEETS (Continued) December 31, 1999 and 1998 LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ----------- ----------- Current Liabilities Accounts payable $ 429,262 $ 159,772 Advances from officers 5,168 2,168 Interest payable 751,690 540,728 Other accrued liabilities 1,641 22,500 Notes payable 1,767,303 1,544,243 ----------- ----------- Total Current Liabilities 2,955,064 2,269,411 ----------- ----------- Long-Term Debt, Less Current Portion - - ----------- ----------- Commitments and Contingencies 192,275 196,275 ----------- ----------- Stockholders' Equity Common stock, no par value, 20,000,000 shares authorized and 19,535,231 shares issued and outstanding 10,366,608 10,366,608 Common stock subscribed 186,238 186,238 Accumulated Deficit (11,134,589) (10,254,736) ----------- ----------- Total Stockholders' Equity (581,743) 298,110 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,565,596 $ 2,763,796 =========== =========== The accompanying notes are an integral part of these financial statements. 34 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999 and 1998 1999 1998 ------------- ---------------- REVENUES $ 207,912 $ 123,483 COST OF SALES 110,385 45,085 ------------- ---------------- GROSS PROFIT 97,527 78,398 ------------- ---------------- OPERATING EXPENSES Salaries, wages and benefits 52,307 106,884 Consulting 58,313 90,297 Depreciation and amortization 314,843 319,048 Legal and professional fees 132,507 99,395 Other operating expense 113,865 112,553 ------------- ---------------- Total Operating Expenses 671,835 728,177 ------------- ---------------- OPERATING LOSS $ (574,308) (649,779) ------------- ---------------- OTHER INCOME (EXPENSES) Gain on extinguishment of debt - 215,692 Interest Expense (210,962) (179,642) Gain (loss) on sale of assets - 30,724 Claim fees - (2,500) Litigation settlement (96,711) - Miscellaneous 2,128 (4,500) ------------- ---------------- Total Other Income (Expenses) (305,545) 59,774 ------------- ---------------- NET LOSS FROM CONTINUING OPERATIONS (879,853) (590,005) Loss on disposal of subsidiaries - (63,890) ------------- ---------------- NET LOSS $ (879,853) $ (653,895) ============= ================ BASIC AND DILUTED NET LOSS PER SHARE $ (0.05) $ (0.03) ============= ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 19,535,231 19,535,231 ============= ================ The accompanying notes are an integral part of these financial statements. 35 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1999 and 1998
Common Common Stock Stock Accumulated Shares Amount Subscribed Deficit Total ------------ ------------ ------------ ------------ ------------ Balances as of December 31, 1997 19,535,231 10,366,608 186,238 (9,600,841) 952,005 Net Loss for the year ended December 31, 1998 - - - (653,895) (653,895) ------------ ------------ ------------ ------------ ------------ 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, 1998 19,535,231 $ 10,366,608 $ 186,238 $(11,134,589) $ (581,743) ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 36 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) CONSOLIDATED CASH FLOW STATEMENTS For the Years Ended December 31, 1999 and 1998 1999 1998 ------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (879,853) $ (653,895) Adjustment to reconcile net income to net cash provided by operating activities Depreciation and amortization 314,843 319,048 Gain on extinguishment of debt - (215,692) Changes in assets and liabilities Accounts receivable (9,050) - Inventories (81,283 (13,497) Deposits (3,000) - Accounts payable 269,490 69,153 Advances from officers 3,000 (3,915) Interest payable 210,962 104,446 Other accrued liabilities (20,859) (98,441) Commitments and contingencies (4,000) 84,166 ------------- ---------------- NET CASH USED BY OPERATING ACTIVITIES (199,750) (408,627) ------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (7,470) - Investment in EPA label (15,768) - Disposal of property, plant and equipment - 134,731 ------------- ---------------- NET CASH PROVIDED BY (USED BY)INVESTING ACTIVITIES $ (23,238) $ 134,731 ------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Reduction of debt - - Net proceeds from notes payable 223,060 272,362 ------------- ---------------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 223,060 272,362 ------------- ---------------- NET INCREASE (DECREASE)IN CASH 72 (1,534) CASH AT BEGINNING OF YEAR 2,088 3,622 ------------- ---------------- CASH AT END OF YEAR $ 2,160 $ 2,088 ============= ================ SUPPLEMENTAL DISCLOSURES: Interest paid $ - $ 1,374 ============= ================ Income Tax Paid $ - $ - ============= ================ The accompanying notes are an integral part of these financial statements. 37 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 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. 38 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued) 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 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 11.) 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. Subsequent to its receipt of the $3,000 cash, the Company increased its authorized capital, issued the aforementioned stock and finalized the acquisition in March 2000. See Note 15. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Diatect International Corp. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 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. 39 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 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 in the nature of 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 years ended December 31, 1999 and 1998 was $9,433 and $13,638 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. Deferred Tax Liability ---------------------- At December 31, 1999, the Company had net operating loss carryforwards of approximately $11,134,000 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. 40 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Basic and Diluted Loss Per Share -------------------------------- Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Outstanding options were not included in the computation of loss per share because the exercise price of the outstanding options is higher than the market price of the stock, thereby causing the options to be antidilutive. Revenue Recognition Policy -------------------------- Revenues from sales of product are recognized when the product is shipped. Compensated Absences -------------------- Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. Due to the existence of a relatively high employee turnover rate, it is impractical to estimate the amount of compensation for future absences. Accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when actually paid to employees. Estimates --------- The preparation of financial statements, in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Impaired Asset Policy --------------------- The Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. The Company does not believe any adjustments are needed to the carrying value of its assets at December 31, 1999 and 1998. Fair Value of Financial Instruments ----------------------------------- The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. Derivative Instruments ---------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. At December 31, 1999, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. 41 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 3 INVENTORIES Inventories at December 31, 1999 and 1998 consist of the following: 1999 1998 ------------- -------------- Raw Materials $ 52,978 $ 44,496 Finished Goods 128,305 55,504 ------------- -------------- Total $ 181,283 $ 100,000 ============= ============== At December 31, 1998, the Company's inventories of $106,830 were offset by a reserve for obsolescence of $6,830. There was no reserve for obsolescence at December 31, 1999. NOTE 4 PROPERTY, PLANT AND EQUIPMENT The Company owns land and building in Lebanon, Kansas with a cost basis of $23,501. During 1998 the Company sold land and buildings located in Smith Center, Kansas for $65,000 cash resulting in a gain of $33,563. NOTE 5 MINERAL PROPERTIES At December 31, 1997 the Company owned a majority interest (89.125%) in White Mountain which had unpatented mining claims located in Malheur County, Oregon. During 1998, the Company lost its controlling interest in White Mountain stock, which had been pledged as collateral and was foreclosed on by note holders. (Note 9.) NOTE 6 INVESTMENT IN EPA LABELS The Company has acquired three 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 building; No. 42850-3 for use against fleas, ticks and lice on pets; and No. 42850-2 for use against over 60 insects on over 130 edible crops and plants. During 1999, the Company registered and was granted approval for label No. 42850-VI by the U.S. Environmental Protection Agency. [The remainder of this page is intentionally left blank] 42 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 7 NOTES PAYABLE Short-term notes payable consist of the following at December 31, 1999 and 1998: Creditor and Conditions 1999 1998 ----------------------- ----------- ------------- 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, delinquent. 10,000 10,000 Jeffrey Linabery, unsecured, interest at 14%, due on demand. 7,500 7,500 David Russell (a shareholder of the Company), unsecured, interest at 10%, due on demand. 15,000 15,000 David Russell, (a shareholder of the Company), unsecured, interest at 8%, due on demand. 25,000 25,000 Danny Wirken (a shareholder of the Company), unsecured, interest at 8%, dated December 31, 1993 due on demand. (See Note 11.) 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 --------- --------- Subtotal (carried forward) $ 614,610 $614,610 43 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 7 NOTES PAYABLE (Continued) Creditor and Conditions 1999 1998 ----------------------- ----------- ------------- Subtotal (Brought forward) $ 614,610 $ 614,610 J. D. Hutton, unsecured, interest at 10%, Dated March 10, 1996, due on October 10, 1999, delinquent. 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 25,000 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. 250,000 250,000 Dennis Nielsen, (a shareholder of the Company), interest at 10%, unsecured, dated May 20, 1997, delinquent. 31,750 31,750 --------- --------- Subtotal (Carried forward) $ 1,019,799 $1,028,299 44 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 7 NOTES PAYABLE (Continued) Creditor and Conditions 1999 1998 ----------------------- ----------- ------------- Subtotal (brought forward) $1,019,799 $1,028,299 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, delinquent. 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, delinquent. 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 ----------- ---------- Subtotal (Carried forward) $1,326,299 $1,334,799 45 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 7 NOTES PAYABLE (Continued) Creditor and Conditions 1999 1998 ----------------------- ----------- ------------- Subtotal (brought forward) $ 1,326,299 $1,334,799 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 10%, dated November 18, 1999, due on November 18, 1999, delinquent. 5,500 0 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated July 21, 1999, due on December 31, 1999. 36,000 0 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated September 16, 1999, due on May 16, 2000. 3,500 0 John L. Runft, (an officer and shareholder of The Company), unsecured, interest at 10%, Dated January 15, 1999, due on January 15, 2000. 50,000 0 David N. Sim, (a shareholder of the Company), unsecured, interest at 15%, dated October 1, 1999, due on December 31,1999 6,500 0 Jack S. Stites, (a shareholder of the Company), unsecured, interest at 15%, dated September 1, 1999, due on December 31, 1999. 8,800 0 Hopper Asset Management Company, unsecured, interest at 15%, dated January 11, 1999, due on December 31, 1999, delinquent. 50,000 0 --------- --------- Subtotal (Carried forward) $ 1,486,599 $1,334,799 46 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 7 NOTES PAYABLE (Continued) Creditor and Conditions 1999 1998 ----------------------- ----------- ------------- Subtotal (brought forward) $ 1,486,599 $1,334,799 Hopper Asset Management Company, unsecured, interest at 15%, dated June 19, 1999, due on December 31, 1999, delinquent. 50,000 0 Toxikon Corporation, unsecured, interest at 10%, dated November 1, 1999, due on January 31, 2000. 21,260 0 Futura Title Corporation dba Alliance Title & Escrow, Former shareholders of White Mountain Mining and Manufacturing, Inc., monthly payments of $18,000, 18% interest, secured by mining property, (later foreclosed) due September 1994. Delinquent. (See Note 11). 209,444 209,444 ----------- ------------ Total $ 1,767,303 $ 1,544,243 =========== ============ With payments on the notes to the former shareholders of White Mountain Mining and Manufacturing, Inc. in arrears, the Company has agreed to pay interest at the rate of 18% per annum on the unpaid balance beginning on May 1, 1993. The Company agreed to a one-time compounding of interest, effective June 21, 1995. The related principal and interest are delinquent at December 31, 1999 and 1998. NOTE 8 INCOME TAXES At December 31, 1999, the Company had net operating loss carryforwards of approximately $11,134,000 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 9 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 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. 47 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 9 LITIGATION (Continued) 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. Results Insecticide, Inc. The Company entered into a distribution and marketing agreement on September 14, 1997 on behalf of its subsidiaries. Integrated into the agreement was a security agreement to secure a loan in the amount of $65,498 which Diatect borrowed from Results. The loan was evidenced by a promissory note payable November 5, 2000 and bearing interest at the rate of 10% per annum until paid. Under the agreement, Diatect pledged all of the issued and outstanding shares of stock in its subsidiary, Diatect International, Inc., as security for the loan. The pledged shares were delivered to Results. In May of 1998, legal counsel for Results alleged that Diatect was in breach of the agreement. Arbitration and litigation effectively terminated the distribution agreement and allowed Diatect to simply repay the note and sever all relationships with Results. This resulted in a loss of $96,711. This resulted in a loss of $96,711. A.E. Smith Lawsuit On March 15, 1996, following court ordered mediation, the Company transferred to A. E. Smith a note for $415,000. (See Note 7.) In return, the Company obtained two buildings and substantial equipment located in Smith Center and Lebanon, Kansas. The buildings were sold during 1998 and the note fully satisfied resulting in a gain of $30,724. The settlement also called for the cancellation of other receivables and payables between the Company and Mr. Smith. Mr. Smith also returned Enviro-Guard Holding Company common stock to the Company. In connection with the settlement, all assets located in the state of Kansas were pledged as collateral for the payment of the A.E. Smith settlement. These assets included all buildings located in Kansas. No gain or loss was realized as a result of this settlement. 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. 48 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 9 LITIGATION (Continued) 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, 1998 and 1999. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. 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 December 31, 1999 and 1998, $61,543 and $55,543 are included respectively in commitments and contingencies in these financial statements. To date, plaintiffs have made no attempt to collect on this judgment. Mid-America Venture Capital Fund, Inc. Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, Diatect has paid a total of $4,000 and is currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in these financial statements. Mike Glazer A consultant allegedly rendered services to a Company subsidiary during 1996 in the amount of $17,230 and has brought action for this amount. The Company has chosen not to contest this case. Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary, Diatect International, Inc. are fully encumbered. The amount of $17,230 is included in commitments and contingencies in these financial statements. 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 for this payment, the Company has issued a promissory note dated July 18, 1997 in the sum of $19,200 bearing interest at 12% . (Note 7.) 49 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 9 LITIGATION (Continued) Danny Wirken The Company is considering litigation against Danny Wirkin, (one of the brokers involved in the selling of Diatect stock, which gave rise to 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 December 31, 1999 and 1998 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $185,644 and $154,717, respectively. See Note 7. 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. The amount of $21,260 is including in notes payable and $355 is included in accrued interest in these financial statements at December 31, 1999. 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 actions and the consequential judgments arose as a direct result of the inability of the Company to fund the operations and payments to all the Company's creditors. The collection judgments, which are substantially unpaid at December 31, 1999, total approximately $52,000, and are included in the Company's accounts payable and other obligations. The Company is not aware of any other threatened litigation against it or its subsidiaries. On the other hand, there remains a tangible possibility of litigation against Diatect and/or its subsidiaries being brought by creditors of Diatect, particularly those, which are holding delinquent accounts. Diatect is working with these creditors and, at this time, all creditors who have not already filed litigation appear to be forbearing and accepting the measures taken by the Company in addressing the indebtedness. NOTE 10 COMMON STOCK SUBSCRIBED As of December 31, 1999 and 1998, 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. 50 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 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 1999 and 1998: Number of Shares Price per Share ---------------- --------------- Outstanding at December 31,1997 1,694,626 $0.06 Granted 400,008 $0.06 Exercised or forfeited 0 $0.00 Expired (1,600,000) $0.06 Outstanding at December 31, 1998 494,634 $0.06 Granted 400,008 $0.06 Expired, exercised or forfeited 0 $0.00 Outstanding at December 31, 1999 894,642 $0.06 Exercise Date Number of Shares Price per Share ------------- ---------------- --------------- On or before September 15, 2000 458,339 $0.06 On or before October 25, 2000 436,116 $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 and 1998. See Note 15. 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. 51 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 13 COMMITMENTS AND CONTINGENCIES The Company is obligated to pay certain settlements under judgments awarded to outside parties. (Note 11.) These amounts are included in commitments and contingencies as follows: 1999 1998 ---------- ---------- L. Craig Hunt $ 61,543 $ 55,543 Mid-America Venture Capital Fund, Inc. 37,336 39,336 Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC 40,166 42,166 Ogilvy, Adams & Rinehart 36,000 36,000 Mike Glazer 17,230 17,230 ---------- ---------- $ 192,275 $ 196,275 ========== ========== Lease Commitments ----------------- The Company leases office facilities in Boise, Idaho from an individual. The lease is a month-to-month handshake agreement, which calls for monthly payments of $550. 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. 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 fifteen shareholders (including two officers) totaling $1,235,799 and $1,097,122 as of December 31, 1999 and 1998, respectively. The Company's corporate secretary performs services as the Company's main legal counsel. Legal services performed by this officer totaled $60,060 and $54,420 for 1999 and 1998 respectively, of which $60,060 and $64,815 is included in accrued expenses at December 31, 1999 and 1998, respectively. 52 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 15 SUBSEQUENT EVENTS Office Facilities ----------------- In April 2000, the Company entered into a lease agreement of 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. Commitments to Issue Stock -------------------------- In 1999, relating to 1999 transactions, The Company has committed to issue common stock for reasons stated as follows: Name Number of Shares Purpose ---------------- ---------------- ------- Michael McQuade 50,000 Services rendered and costs incurred Flori Ai 35,000 Settlement of potential claims David Andrus 28,000 Services rendered George Brinks 100,000 Contract for purchase of rights to EPA labels Steve Abboud 90,000 Services rendered and costs incurred Magic Miles, Ltd. 200,000 Purchase of all stock of Magic International, Inc. ---------------- Total 503,000 ================ All commitments to issue stock were conditional upon the Company's ability to increase its authorized capital and were guaranteed by officers of the Company with stock from their personal holdings. In February 2000, the Company increased its authorized capital to 50,000,000 shares of common stock to allow for issuance of these stock commitments. The Company has obtained additional loans in 1998 secured by the issuance of common stock as follows: Creditor Date Loan Amount Number of Shares --------------- ------------ ----------- ---------------- Andrew Dicharia June 8, 1998 $ 50,000 100,000 Hopper Asset Management Co. May 2, 1998 25,000 50,000 Jerry Isdore May 22, 1998 25,000 50,000 ----------- ---------------- Totals $ 100,000 200,000 =========== ================ 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 through National's plant) 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. 53 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 15 - SUBSEQUENT EVENTS (Continued) Acquisition of Magic International, Inc. ---------------------------------------- Subsequent to the date of these financial statements, in March 2000, the Company finalized the agreement to purchase Magic International, Inc. in exchange for $3,000 cash and 200,000 shares of Diatect International Corporation's common stock. (See Note 1). NOTE 16 GOING CONCERN As shown in the financial statements, the Company incurred a net loss of $879,853 for the year ended December 31, 1999 and has an accumulated deficit of $11,134,589. At December 31, 1999, 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, management plans to increase the Company's capital structure. Significant and imminent placement of resulting 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. See Notes 1 and 15. 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. The Company has reviewed its technology and processing systems and believes that the majority of its systems are already year 2000 compliant or can be made so with software updates. Based on preliminary assessments, the Company regards the costs associated with Year 2000 readiness to be immaterial. All costs associated with Year 2000 compliance are expensed when incurred. 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: [table appears on page following] 54 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 1998 NOTE 18 BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued) Fiscal Year December 31, 1999 ---------------------------------------------------- Kansas Idaho Eliminations Consolidated --------- -------- ------------ ------------- External revenue $ 207,912 $ 0 $ 0 $ 207,912 ========= ======== ============ ============= Operating income (loss) $ (18,667) $(555,641) $ 0 $ (574,308) ========= ======== ============ ============= Corporate expenses 0 Total operating ------------ income (loss) $ (574,308) ============= Depreciation and Amortization $ 317 $ 314,526 $ 0 $ 314,843 ========= ======== ============ ============= Interest expense and finance charges $ 0 $ 210,962 $ 0 $ 210,962 ========= ======== ============ ============= Identifiable assets $ 347,953 $2,365,429 $ (147,786) $ 2,565,596 ========= ========= =========== ============ General corporate assets 0 ------------ Total assets $ 2,565,596 ============ Fiscal Year December 31, 1998 ---------------------------------------------------- Kansas Idaho Eliminations Consolidated -------- -------- ------------ ------------- External revenue $ 123,483 $ 0 $ 0 $ 123,483 ========== ========= ============ ============ Operating income (loss) $(1,102,668) $ 251,606 $ 0 $ (851,062) =========== ========= ============ ============ Corporate expenses 0 Total operating ------------ income (loss) $ (851,062) ============ Depreciation and Amortization $ 135,011 $ 184,037 $ 0 $ 319,048 =========== ========= ============ ============ Interest expense and finance charges $ 390 $ 179,252 $ 0 $ 179,642 =========== ========= ============ ============ Identifiable assets $ 360,817 $ 2,786,721 $ (483,742) $ 2,663,796 =========== ========= ============ ============= General corporate assets 0 ------------- Total assets $ 2,663,796 ============= 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.