10QSB 1 f00j10q.txt JUNE 2000 FORM 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended: June 30, 2000 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____________ to ____________ Commission File Number 0-10147 ------- DIATECT INTERNATIONAL CORPORATION (formerly APPLIED EARTH TECHNOLOGIES, INC.) ---------------------------------------------- (Name of Small Business Issuer in its charter) California 95-3555778 ------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 1134 North Orchard, Suite 206, Boise, Idaho 83706 ----------------------------------------------------- (Address of principal executive offices and Zip Code) (208) 342-2273 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No (2) Yes X No --- --- --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value 21,688,398 -------------------------------- ---------------------------- Title of Class Number of Shares Outstanding as of June 30, 2000 THIS REPORT IS BEING FILED ON OR ABOUT NOVEMBER 9, 2000, WHICH IS BEYOND THE DATE ON WHICH THE REPORT WOULD HAVE BEEN TIMELY FILED AND MAY NOT CONTAIN INFORMATION CONCERNING THE MORE RECENT ACTIVITIES OF THE COMPANY. THE FOOTNOTES TO THE FINANCIAL STATEMENTS INCLUDED WITH THIS REPORT MAY CONTAIN INFORMATION REGARDING THE COMPANY THAT OCCURRED SUBSEQUENT TO JUNE 30, 2000. HOWEVER, THE READER SHOULD RELY ON INFORMATION CONTAINED IN REPORTS FOR MORE RECENT PERIODS WHICH ARE EXPECTED TO BE FILED SUBSEQUENT TO THIS REPORT. 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIATECT INTERNATIONAL CORP. FINANCIAL STATEMENTS (UNAUDITED) The accompanying financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-QSB pursuant to the rules and regulations of the Securities and Exchange Commission and, therefore may not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. These financial statements should be read in conjunction with the accompanying notes, and with the historical financial information of the Company. 3 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) CONSOLIDATED BALANCE SHEETS ASSETS ------ June 30, December 31, 2000 1999 ------------ ------------ CURRENT ASSETS (Unaudited) Cash $ 5,189 $ 2,160 Accounts receivable 12,580 9,050 Prepaid finance charges 46,844 - Inventory 166,127 181,283 ------------ ------------ Total Current Assets 230,740 192,493 ------------ ------------ PROPERTY PLANT AND EQUIPMENT Building 23,501 23,501 Equipment 49,195 46,751 Less accumulated depreciation (20,498) (15,470) ------------ ------------ Total Property, Plant and Equipment 52,198 54,782 ------------ ------------ OTHER ASSETS Deposits - 3,000 Goodwill 23,000 - Investment in EPA labels, net of amortization 2,174,061 2,318,321 ------------ ------------ TOTAL ASSETS $ 2,479,999 $ 2,565,596 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------- CURRENT LIABILITIES Accounts payable $ 177,847 $ 196,397 Accounts payable-related parties 140,073 232,865 Advances from officers 5,168 5,168 Line of credit 90,000 - Interest payable 838,138 751,690 Other accrued liabilities 20,176 1,641 Notes payable 1,885,214 1,767,303 ------------ ------------ Total Current Liabilities 3,156,616 2,955,064 ------------ ------------ COMMITMENTS AND CONTINGENCIES 192,275 192,275 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock, no par value: 50,000,000 shares authorized, 21,688,398 and 19,535,231 shares issued and outstanding 10,589,983 10,366,608 Stock options 51,370 - Common stock subscribed 186,238 186,238 Accumulated deficit (11,696,483) (11,134,589) ------------ ------------ Total Stockholders' Equity (Deficit) (868,892) (581,743) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,479,999 $ 2,565,596 ============ ============ See accompanying notes. 4 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the For the Six Quarters Ended Months Ended June 30, June 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- REVENUES $ 33,182 $ 72,010 $ 74,927 $ 165,447 COST OF SALES 20,021 44,143 39,804 83,060 ---------- ---------- ---------- ---------- GROSS PROFIT 13,161 27,867 35,123 82,387 ---------- ---------- ---------- ---------- OPERATING EXPENSES Salaries, wages and benefits 80,685 15,302 91,880 26,698 Consulting 62,639 42,671 62,639 77,381 Depreciation and amortization 78,643 78,584 157,287 157,096 Legal and professional fees 9,942 24,926 123,726 63,525 Other operating expenses 19,463 41,920 37,654 77,000 ---------- ---------- ---------- ---------- Total Operating Expenses 251,372 203,403 473,186 401,700 ---------- ---------- ---------- ---------- OPERATING LOSS (238,211) (175,536) (438,063) (319,313) ---------- ---------- ---------- ---------- OTHER INCOME (LOSS) Interest expense (78,665) (52,249) (125,119) (103,797) Miscellaneous income 886 279 1,313 341 Donations (25) (195) (25) (195) ---------- ---------- ---------- ---------- Total Other Income (Loss) (77,804) (52,165) (123,831) (103,651) ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAXES (316,015) (227,701) (561,894) (422,964) INCOME TAXES - - - - ---------- ---------- ---------- ---------- NET LOSS $ (316,015) $ (227,701) $ (561,894) $ (422,964) ========== ========== ========== ========== NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.03) $ (0.02) ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 21,346,369 19,535,231 20,562,042 19,535,231 ========== ========== ========== ==========
See the accompanying notes. 5 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Periods Ended June 30, 2000 and December 31, 1999
Common Common Stock Stock Stock Accumulated Shares Amount Options Subscribed Deficit Total ------------ ------------ -------- ------------ ------------ ------------ Balances as of December 31, 1998 19,535,231 $ 10,366,608 $ - $ 186,238 $(10,254,736) $ 298,110 Net Loss for the year ended December 31, 1999 - - - - (879,853) (879,853) ------------ ------------ -------- ----------- ------------ ----------- Balances as of December 31, 1999 19,535,231 10,366,608 - 186,238 (11,134,589) (581,743) Issuance of shares for guarantee of line of credit at $.10 per share 500,000 50,000 - - - 50,000 Issuance of shares to contractors for services at $0.25 per share 203,000 50,750 - - - 50,750 Issuance of shares for purchase of investment at $0.10 per share 200,000 20,000 - - - 20,000 Issuance of shares for purchase of rights to EPA labels at $0.10 per share 110,000 11,000 - - - 10,000 Issuance of shares for forbearance of notes payable at $0.25 per share 122,500 30,625 - - - 30,625 Issuance of shares to officers for exercise of options at $0.06 per share 1,017,667 61,000 - - - 61,000 Options granted to officers as bonus for new contract - - 51,370 - - 51,370 Net loss for the quarter ended June 30, 2000 - - - - (561,894) (561,894) ------------ ------------ -------- ------------ ------------ ----------- Balances as of June 30, 2000 (Unaudited) 21,688,398 $ 10,589,983 $ 51,370 $ 186,238 $(11,696,483) $ (868,892) ============ ============ ======== ============ ============ ===========
See accompanying notes. 6 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2000 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(561,894) $(422,964) Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 157,287 157,096 Issuance of common stock for services 50,750 - Issuance of stock options for services 51,370 - Issuance of common stock for finance charges 30,625 - Prepaid finance charges paid by issuance of stock 50,000 - Stock issued for payment of accrued expenses 61,000 - Changes in assets and liabilities: Accounts receivable (3,530) 12,321 Prepaid finance charges (46,844) - Inventories 15,156 54,112 Deposits 3,000 - Accounts payable (18,550) 102,344 Accounts payable-related parties (92,792) - Interest payable 86,448 103,797 Other accrued liabilities 18,535 (20,994) Commitments and contingencies - 2,000 -------- ------- NET CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES (199,439) (149,154) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (2,443) (5,558) Registration of EPA label - (12,858) Purchase of goodwill (3,000) - -------- ------- NET CASH FLOWS (USED) BY INVESTING ACTIVITIES (5,443) (18,416) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit 90,000 - Net proceeds from notes payable 117,911 166,500 -------- ------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 207,911 166,500 -------- ------- NET INCREASE (DECREASE)IN CASH 3,029 (1,070) CASH AT BEGINNING OF PERIOD 2,160 2,088 -------- ------- CASH AT END OF PERIOD $ 5,189 $ 1,018 ======== ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ - - ======== ======= Income taxes paid $ - - ======== ======= NON-CASH FINANCING ACTIVITIES: Issuance of common stock for finance charges $ 50,000 $ - Issuance of common stock for services $ 50,750 $ - Issuance of common stock for investment $ 20,000 $ - Issuance of common stock for rights to EPA labels $ 11,000 $ - Issuance of common stock for payment of accrued expenses $ 61,000 $ - Issuance of common stock for forbearance of notes payable $ 30,625 $ - Issuance of stock options for services $ 51,370 $ - See accompanying notes. 7 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS Diatect International Corp. (formerly Applied Earth Technologies, Inc.) (formerly San Diego Bancorp) (SDBC) was incorporated in California in 1979, as a bank holding corporation. During 1986, the Company liquidated its subsidiaries and became a dormant shell corporation. On August 22, 1996, the Company changed its name from San Diego Bancorp to Applied Earth Technologies, Inc. to better reflect the business activities of the Company, which primarily consist of developing and marketing pesticide products. The Company later became informed that another corporation already had the name Applied Earth Technologies, Inc. and approval of this name had been granted in error. In response to this information, the Company changed its name to Diatect International Corp. on June 5, 1998. Enviro-Guard Corporation ------------------------ On September 21, 1993, SDBC acquired 100% of the outstanding common stock (4,438,400 shares) of Enviro-Guard Corporation (a Utah corporation) in exchange for 3,594,953 shares of SDBC common stock valued at $1.75 per share. This transaction was accounted for as a reverse acquisition whereby Enviro- Guard Holding Corporation, (Holding) as the former parent of the acquired corporation (Enviro-Guard) gained a controlling stockholder interest in the acquiring corporation (SDBC). Immediately prior to the reverse acquisition, Holding transferred all of its assets to Enviro-Guard including White Mountain stock owned by Holding. In August 1992, Enviro-Guard acquired Diatect International, Inc. (Diatect) (incorporated in Kansas) for 120,000 shares of common stock of Enviro-Guard valued at $5 per share and $100,000 in notes payable. The transaction was valued at $700,000 and accounted for as a purchase. Diatect has developed and owns the rights to three EPA registered insecticides. Also in August 1992, Enviro-Guard acquired D.S.D., Inc. ("DSD") (incorporated in Kansas) in exchange for 520,000 shares of the common stock of Enviro-Guard valued at $5 per share and the assumption by Enviro-Guard of a $448,360 note payable due to DSD from a shareholder of DSD. This transaction was valued at $3,048,360 and accounted for as a purchase. On May 2, 1998, the Company's board of directors abandoned Enviro-Guard and its wholly owned subsidiary, D.S.D., Inc., following the transfer of all Enviro-Guard assets to the Company. In consideration for payment of the transferred assets, the Company assumed all indebtedness of the subsidiary corporations and any indemnification against the liabilities of the subsidiaries. Transfer of D.S.D.'s assets included the transfer of all stock of D.S.D.'s wholly owned subsidiary, Doctor Scratch, Inc., a Kansas corporation. As the sole shareholder of Doctor Scratch, the Company sold all the assets of Doctor Scratch and allowed it to become dormant. White Mountain Mining & Manufacturing, Inc. ------------------------------------------- On December 18, 1992, Holding entered into a contract to acquire 89.125% of the outstanding common stock (891,250 shares) of White Mountain Mining in exchange for 260,375 shares of common stock (at a value of $6 per share) of Holding, at that time the parent company of Enviro-Guard, plus $25,000 in cash 8 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued) and $346,616 in notes payable. As a result of the transaction, a total of 705,873 shares of White Mountain common stock was transferred to Holding with the remaining 185,377 shares remaining in escrow against payment of the promissory notes. In August 1993, all of Holding's stock in White Mountain was transferred along with other assets to Enviro-Guard preparatory to the reverse acquisition by SDBC on September 21, 1993. This acquisition, accounted for as a purchase and valued at $3,458,400, was intended to provide the Company with a source of diatomaceous earth, an important organic ingredient for its pesticide products sold by its subsidiaries. Pursuant to a promissory note dated March 12, 1995, Enviro-Guard pledged its shares of White Mountain Stock. On June 1, 1998, the holder of the promissory note foreclosed on the stock for failure to pay the indebtedness (Note 8). This transaction resulted in a gain of $215,692. Magic International, Inc. ------------------------- On May 24, 1999, the Company entered into an agreement to purchase Magic International, Inc. in exchange for $3,000 cash and 200,000 shares of Diatect International Corporation's common stock. At the time of the transaction, the authorized level of the Company's capitalization did not permit an issuance of 200,000 shares of stock. The Company increased its authorized capital, issued the aforementioned stock and finalized the acquisition in March 2000. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Diatect International Corp. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Accounting Method ----------------- The Company's financial statements are prepared using the accrual method of accounting. Year End -------- The Company has elected a December year end. Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned and majority-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents ------------------------- For purposes of the statement of cash flows, the Company considers all short- term debt securities purchased with a maturity of three months or less to be cash equivalents. Provision for Doubtful Accounts ------------------------------- Provision for losses on trade accounts receivable is made in amounts required to maintain an adequate allowance to cover anticipated bad debts. Accounts 9 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) receivable are charged against the allowance when it is determined by the Company that payment will not be received. Inventories ----------- Inventories consist primarily of raw materials and finished product and are valued at the lower of cost (first in, first out) or market. Property and Equipment ---------------------- Property, plant and equipment are stated at cost including the allocable purchase price applicable to the respective assets of purchased subsidiaries. All expenditures for improvements, replacements and additions are added to the asset accounts at cost. Expenditures for normal repairs and maintenance are charged against earnings as incurred. The cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the statements of operations when depreciable assets are retired or otherwise disposed. Depreciation is provided for by the use of straight-line and accelerated methods over the estimated useful lives of the assets. Depletion is computed using the unit-of-production method, for any mining property placed in production. Depreciation expense for the period ended June 30, 2000 and the year ended December 31, 1999 was $5,027 and $9,433, respectively. Intangible Assets ----------------- Intangible assets are amortized over the remaining useful life on a straight- line basis which ranges from 15 to 17 years. EPA labels are amortized on a straight-line basis over a 15-year life, commencing with the beginning of product sales. Goodwill is amortized on a straight-line basis over a fifteen- year life. Amortization expense for the periods ending June 30, 2000 and December 31, 1999 were $152,260 and $305,410, respectively. Deferred Tax Liability ---------------------- At June 30, 2000, the Company had net operating loss carryforwards of approximately $11,645,000 that may be offset against future taxable income through 2013. The Company believes there is a chance that all or part of the net operating loss carryforwards will expire unused. Accordingly, the tax benefit has been fully offset by an allowance of equal amount. Basic and Diluted Loss Per Share -------------------------------- Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Diluted net loss per share is the same as basic net loss per share as the inclusion of the common stock equivalents would be antidilutive. 10 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Policy -------------------------- Revenues from sales of product are recognized when the product is shipped. Compensated Absences -------------------- Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. Due to the existence of a relatively high employee turnover rate, it is impractical to estimate the amount of compensation for future absences. Accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when actually paid to employees. Estimates --------- The preparation of financial statements, in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Impaired Asset Policy --------------------- The Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. The Company does not believe any adjustments are needed to the carrying value of its assets at June 30, 2000, and December 31, 1999. Fair Value of Financial Instruments ----------------------------------- The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. Interim Financial Statements ---------------------------- The interim financial statements as of and for the three months included herein have been prepared for the Company, without audit. They reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations for these periods. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year. Derivative Instruments ---------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. At June 30, 2000, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. 11 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 3 INVENTORIES Inventories at June 30, 2000 and December 31, 1999 consist of the following: June 30, 2000 December 31, 1999 ------------------ ----------------- Raw Materials $ 54,662 $ 52,978 Consigned Products 9,977 - Finished Goods 101,488 128,305 ------------- -------------- Total $ 166,127 $ 181,283 ============= ============== NOTE 4 INVESTMENT IN EPA LABELS The Company has acquired five product registrations or ("labels") approved by the U.S. Environmental Protection Agency granting federal clearance to manufacture, market and sell specified insecticide products. Included are: No. 42850-1 for use against flies, roaches, ants, etc., in and around homes and commercial buildings; No. 42850-2 for use in grain storage; No. 42850-3 for use against fleas, ticks and lice on pets; and No. 42850-4 for use against over 60 insects on over 130 edible crops and plants; and No. 42850-5 (approved November 23, 1999) for use in the organic market to control all major pest problems. NOTE 5 NOTES PAYABLE Short-term notes payable consist of the following at June 30, 2000 and December 31, 1999: June 30, December 31, Creditor and Conditions 2000 1999 ----------------------- --------- ------------ Ross S. Wolfley, (a shareholder of the Company), unsecured, variable interest, due on demand. $ 165,529 $ 165,529 DeLynn Heaps, unsecured, interest at 10%, due on July 15, 1999. 10,000 10,000 Jeffrey Linabery, unsecured, interest at 14%, due on demand. 7,500 7,500 ---------- ------------- Subtotal (carried forward) $ 183,029 $ 183,029 ---------- ------------- 12 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 7 NOTES PAYABLE Continued Short-term notes payable consist of the following at June 30, 2000 and December 31, 1999: June 30, December 31, Creditor and Conditions 2000 1999 ----------------------- ----------- ------------- Subtotal (brought forward) $ 183,029 $ 183,029 David Russell (a shareholder of the Company), unsecured, interest at 10%, due on demand. 15,000 15,000 David Russell, (a shareholder of the Company), unsecured, interest at 8%, due on demand. 25,000 25,000 Danny Wirken (a shareholder of the Company), unsecured, interest at 8%, dated December 31, 1993 due on demand (See Note 8). 386,581 386,581 George Henderson (a shareholder and officer of the Company), unsecured, interest at 9%, dated January 30, 1995, delinquent. 5,000 5,000 J. D. Hutton, unsecured, interest at 10%, Dated March 10, 1996, due on October 10, 1999,. 22,500 22,500 John Runft, (a shareholder and officer of the Company), unsecured, interest at 10%, dated December 15, 1997, due on December 15, 1999, delinquent 16,500 16,500 Max Burdick, unsecured, interest at 18%, dated November 6, 1996, due February 15, 1997, delinquent. 40,000 40,000 Shining Star Investment, Inc., a Nevada corporation, (a shareholder of the Company), unsecured, interest at 14%, dated July 14, 1995, due December 31, 1995, delinquent. 5,239 5,239 David J. Black, (a shareholder of the Company), unsecured, interest at 10%, dated August 5, 1997, due on demand. 20,000 20,000 Jay Downs, (a shareholder of the Company), unsecured, interest at 12%, dated November 26, 1997, due on July 18, 1998, delinquent. 19,200 19,200 Greg Cloward, (a shareholder of the Company), unsecured, interest at 15%, dated January 6, 1997, due on demand. 251,000 250,000 ----------- ------------- Subtotal (carried forward) $ 989,049 $ 988,049 ----------- ------------- 13 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 7 NOTES PAYABLE (Continued) June 30, December 31, Creditor and Conditions 2000 1999 ----------------------- ----------- ------------- Subtotal (Brought forward) $ 989,049 $ 988,049 Dennis Nielsen, (a shareholder of the Company), interest at 10%, unsecured, dated May 20, 1997, delinquent. 31,750 31,750 Dennis Nielsen, (a shareholder of the Company), interest at 12%, unsecured, dated December 12, 1997, delinquent. 6,500 6,500 Andrew Dicharia, conditionally secured by 100,000 shares Diatect International Corp. common stock, interest at 15%, dated June 8, 1998, due June 8, 1999. 50,000 50,000 Jerry Isdore, conditionally secured by 50,000 shares Diatect International Corp. common stock. Interest at 15%, dated May 22, 1998, due May 22, 1999. 25,000 25,000 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 12%, dated August 2, 1998, due on demand. 35,000 35,000 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 12%, dated October 1, 1998, due on demand. 65,000 65,000 Hopper Asset Management Company, unsecured, interest at 15%, dated August 20, 1998, due on December 20, 1998, delinquent. 100,000 100,000 Hopper Asset Management Company, conditionally secured by 50,000 shares Diatect International Corporation common stock, interest at 15%, dated May 22, 1998, due May 5, 1999, delinquent. 25,000 25,000 Robert B. Crouch (a shareholder of the Company), unsecured, interest at 10%, dated November 18, 1999, due on November 18, 1999, delinquent. 5,500 5,500 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated July 21, 1999, due on December 31, 1999, delinquent. 36,000 36,000 Robert B. Crouch, (a shareholder of the Company), unsecured, interest at 15%, dated September 16, 1999, due on May 16, 2000, delinquent. 3,500 3,500 ----------- ------------- Subtotal (carried forward) $ 1,372,299 $ 1,371,299 ----------- ------------- 14 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 7 NOTES PAYABLE (Continued) June 30, December, 31 Creditor and Conditions (Continued) 2000 1999 ----------------------- ----------- ------------- Subtotal (Brought forward) $ 1,372,299 $ 1,371,299 John L. Runft, (an officer and shareholder of The Company), unsecured, interest at 10%, Dated January 15, 1999, due on January 15, 2000, delinquent 50,000 50,000 David N. Sim, (a shareholder of the Company), unsecured, interest at 15%, dated October 1, 1999, due on December 31,1999, delinquent. 6,500 6,500 Jack S. Stites, (a shareholder of the Company), unsecured, interest at 15%, dated September 1, 1999, due on December 31, 1999, delinquent. 8,800 8,800 Hopper Asset Management Company, unsecured, interest at 15%, dated June 19, 1999, due on December 31, 1999, delinquent. 50,000 50,000 Hopper Asset Management Company, unsecured, interest at 15%, dated January 11, 1999, due on December 31, 1999, delinquent. 50,000 50,000 Steward Hyndman, unsecured, interest at 10%, dated January 17, 2000, due on May 17, 2000, delinquent. 12,000 - David N. Sim, (a shareholder of the Company), unsecured, interest at 10%, dated January 4, 1999, due on May 4, 2000, delinquent. 2,500 - Johnny and Jack Stites (a shareholder of the Company) unsecured, interest at 10%, dated February 25, 2000, due on May 1, 2000, delinquent. 20,000 - John L. Runft, (an officer and shareholder of The Company), unsecured, interest at 10%, Dated February 11, 2000, due on June 11, 2000, delinquent. 20,000 - Robert B. Crouch (a shareholder of the Company), unsecured, interest at 10%, dated January 4, 2000, due on May 2, 2000, delinquent 9,500 - Toxicon Corporation, unsecured, interest at 15%, dated June 19, 1999, due on December 31, 1999. - 21,260 ----------- ----------- Subtotal (carried forward) $ 1,601,599 $ 1,557,859 15 DIATECT INTERNATIONAL CORP. (Formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 7 NOTES PAYABLE (Continued) June 30, December, 31 Creditor and Conditions (Continued) 2000 1999 ----------------------- ----------- ------------- Subtotal (Brought forward) $1,601,599 $ 1,557,859 George H. Henderson, (a shareholder and officer of the Company), unsecured, interest at 10%, dated April 14, 2000, due on December 31, 2000. 74,171 - Futura Title Corporation dba Alliance Title & Escrow,Former shareholders of White Mountain Mining and Manufacturing, Inc., monthly payments of $18,000,18% interest with a one-time compounding of interest effective June 21, 1995, secured by mining property, (later foreclosed)due September 1994. Delinquent. (See Note 8). 209,444 209,444 ----------- ------------ Total $1,885,214 $1,767,303 =========== ============ NOTE 6 - LINE OF CREDIT At June 30, 2000, the Company had $90,000 outstanding (on a line of credit) utilizing a director's personal line of credit. This credit facility is unsecured, has no stated maturity, and bears interest at 12%. NOTE 7 INCOME TAXES At June 30, 2000, the Company had net operating loss carryforwards of approximately $11,645,000 that may be offset against future taxable income through 2013. No tax benefit has been reported in the financial statements as the Company believes there is a 50% or greater chance the net operating loss carryforwards will expire unused. Accordingly, the potential tax benefits of the net operating loss carryforwards are offset by a valuation allowance of the same amount. NOTE 8 LITIGATION John Wilding Lawsuit -------------------- On July 19, 1996, John Wilding sued the Company for collection on a delinquent promissory note, which was secured by stock of White Mountain Mining and Manufacturing, Inc. As of December 31, 1997, the balance owed was $142,323 plus accrued interest in the amount of $63,885. Subsequent negotiations resulted in foreclosure on June 1, 1998 on the white Mountain collateral in full payment of the note to Mr. Wilding. The foreclosed stock represents a majority of the total outstanding shares of White Mountain. Wilding subsequently sold all shares of the White Mountain stock to an affiliate of Environmental Products & Technology, Inc. (EP&T), a Utah corporation which signed an agreement calling for EP&T to enter into a joint venture with Diatect for purposes of mining the White Mountain mineral claims of diatomaceous earth. 16 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 8 LITIGATION (Continued) EP&T was contractually obligated to convey the White Mountain stock back to Diatect subject to a security interest for the purchase price of said stock paid by EP&T (or its affiliates) to Wilding. In 1998, it became apparent that EP&T would not honor its agreement with Diatect. The possibility exists that Diatect will bring a breach of contract action against Environmental Products and Technology, Inc. and its affiliates for its failure to transfer the shares of White Mountain stock to Diatect pursuant to agreement. Sloan, Listrom, Eisenbarth, Sloan & Glassman,LLC ------------------------------------------------ An action, commenced on November 17, 1998 by the Company's former legal counsel to collect legal fees and costs, was not contested. In November 1999, the plaintiff was awarded a default judgment against the Company in the amount of $42,166 plus post-judgment interest. This judgment remains outstanding and unpaid and is included as a liability in commitments and contingencies at December 31, 1999 and June 30, 2000. Ogilvy, Adams & Rinehart ------------------------ Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on November 1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included in commitments and contingencies at June 30, 2000 and December 31, 1999. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. Since the judgment must be renewed within the next twelve months, the Company anticipates some activity in this matter in the near future. L. Craig Hunt ------------- L. Craig Hunt brought action on January 14, 1998 against Diatect for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees. Judgment against Diatect International Corp. was rendered on February 1, 1999 in the sum of $61,543. This judgment is presently outstanding and unpaid. At June 30, 2000 and December 31, 1999, $61,543 is included in commitments and contingencies in these financial statements. To date, plaintiffs have made no attempt to collect on this judgment. 17 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 8 LITIGATION (Continued) Mid-America Venture Capital Fund, Inc. -------------------------------------- Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, Diatect has paid a total of $4,000 and is currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in these financial statements. Mike Glazer ----------- A consultant allegedly rendered services to a Company subsidiary during 1996 in the amount of $17,230 and has brought action for this amount. The Company has chosen not to contest this case. Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary, Diatect International, Inc. are fully encumbered. The amount of $17,230 is included in commitments and contingencies in these financial statements. Danny Wirken ------------ The Company is considering litigation against Danny Wirkin, (one of the brokers involved in the selling of Diatect stock, which gave rise to the above-reported litigation with Gruntal & Co.) with the objective of obtaining a judgment for damages and foreclosing on the Company's obligation under its note to Mr. Wirkin. This note is reflected at June 30, 2000 and December 31, 1999 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $195,282 and $185,644, respectively. (See Note 7). International School of Kenya ----------------------------- The International School of Kenya was awarded a judgment against the Company in the amount of $20,143 on October 13, 1995. During 1997, this was paid down to $19,200. The balance was fully paid by director Jay Downs on July 18, 1997. In order to reimburse Mr. Downs, the Company executed an uncollateralized promissory note in 1997 in the sum of $19,200. The note bears interest at 12%. (Note 7). Toxikon, Inc. ------------- Toxikon, Inc. filed suit to collect on an unpaid trade account. In March 2000, the debt was paid in full and the case was dismissed. The amount of $21,260 is included in the notes payable and $355 is included in accrued interest in these financial statements at December 31, 1999. 18 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 8 LITIGATION (Continued) Creditors' Judgments -------------------- During 1994 and 1995, the Company was sued by a number of creditors, which actions the Company allowed to go to judgment. These judgments arose as a direct result of the inability of the Company to fund the operations and payments to all the Company's creditors. The collection judgments, which are substantially unpaid at June 30, 2000, total approximately $52,000, and are included in the Company's accounts payable. The Company is not aware of any other threatened litigation against it or its subsidiaries. However, there remains a possibility of litigation against Diatect and/or its subsidiaries being brought by creditors holding delinquent accounts. Diatect is working with these creditors and, at this time, all creditors, who have not filed litigation appear to accept the measures taken by the Company in addressing the indebtedness. NOTE 9 - COMMON STOCK In February 2000, the Company increased its authorized capital to 50,000,000 shares. During the six months ended June 30, 2000, the Company issued 500,000 shares of its common stock valued at $50,000 for the guarantee of a line of credit; 122,500 shares of its common stock valued at $30,625 for forbearance on notes payable; 200,000 shares of its common stock valued at $20,000 for purchase of all outstanding stock of Magic International, Inc.; and 110,000 shares of its common stock valued at $11,000 for rights to EPA labels. The Company also issued 203,000 shares of its common stock valued at $50,750 for services. The stock was issued at its market value on the transaction date. Two officers also exercised options to purchase 1,017,667 shares of the Company's common stock valued at $61,000 at $0.06 per share for partial payment of accrued consulting and legal fees. During the year ended December 31, 1999, the Company had no stock issuances. NOTE 10 COMMON STOCK SUBSCRIBED As of June 30, 2000 and December 31, 1999, the following individuals agreed to convert outstanding debt, accrued wages and marketing expenses into common stock, although at the dates of this financial statement report, these shares were yet unissued: Debt Reduction -------------- Ross S. Wolfley $ 22,500 G. Reeve 163,738 ----------- Total $ 186,238 =========== Subsequent to the date of these financial statements, the Company agreed to issue 200,000 shares of its common stock to G. Reeve in full settlement of stock subscribed. 19 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 11 STOCK OPTIONS The Company has a 1995 Stock Option Plan, which was initiated in order to aid the Company in maintaining and developing a management team, attracting qualified officers and employees. A total of 3,000,000 shares of stock may be subject to, or issued pursuant to the terms of the plan. Following is a summary of the status of these performance-based options during the six months ended June 30, 2000 and the year December 31, 1999: Weighted Average Number of Shares Price per Share ---------------- --------------- Outstanding at December 31,1998 494,634 $0.06 Granted 400,002 $0.06 Expired - - --------- ----- Outstanding at December 31, 1999 894,636 $0.06 Granted 1,000,000 $0.06 Exercised (1,017,667) $0.06 Expired or forfeited - - --------- ----- Outstanding at June 30, 1999 976,971 $0.06 ========= ===== Weighted Average Exercise Date Number of Shares Price per Share ------------- ---------------- --------------- On or before April 15, 2003 491,405 $0.06 On or before April 25, 2003 152,233 $0.06 April 25, 2001 through April 15, 2003 166,666 $0.06 April 25, 2002 through April 25, 2003 166,666 $0.06 The issuance of new stock during 1997, along with these outstanding options, placed the Company in jeopardy of over-capitalization at December 31, 1999. This was resolved during February 2000 through the increase in authorized capital. Stock options granted to two officers of the Company for 1,017,667 shares at a price of $0.06 were exercised in April 2000. In April 2000, two officers of the Company received 1,000,000 stock options in payment of bonuses for signing new contracts for services with the Company. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.10, risk free interest rate of 6%, expected life of 3 years, and expected volatility of 30%. At June 30, 2000, the Company recorded $51,370 ($0.0514 per option) to compensation for the value of these options based upon these Black Scholes assumptions. 20 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 12 CONCENTRATION OF RISK Credit ------ The Company is a wholesale supplier of products and grants credit to its customers, a substantial portion of which are retailers of agricultural products throughout the country. Raw Materials ------------- The Company uses pyrethrum as a main ingredient in its production process. Pyrethrum is a plant by-product primarily imported from Africa. Africa has experienced a severe drought with no relief in sight thus causing the pyrethrum supply to greatly diminish. Due to these circumstances, the Company now has one supplier whose pyrethrum is substantially non-African. NOTE 13 COMMITMENTS AND CONTINGENCIES The Company is obligated to pay certain settlements under judgments awarded to outside parties. (Note 8.) These amounts are included in commitments and contingencies as of June 30, 2000 and December 31, 1999 as follows: L. Craig Hunt $ 61,543 Mid-America Venture Capital Fund, Inc. 37,336 Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC 40,166 Ogilvy, Adams & Rinehart 36,000 Mike Glazer 17,230 ---------- $ 192,275 ========== Lease Commitments ----------------- The Company leased office facilities in Boise, Idaho from an individual through March 2000. The lease is a month-to-month handshake agreement, which called for monthly payments of $550. In April 2000, the Company entered into a lease agreement for new office facilities in Boise, Idaho. The agreement is a three-year lease and calls for monthly payments of $720 during the first year, $738 during the second year and $757 during the third year. The Company occupied these facilities on May 1, 2000. The Company also leases operating facilities in Smith Center, KS from an individual. The lease is a month-to-month handshake agreement, which calls for monthly payments of $273. Directors' Compensation ----------------------- In June 2000, the Company adopted a plan for the annual compensation of directors. This plan provides for seven directors to be compensated at the rate of $50,000 per year. The compensation is payable either in money or in common stock of the Company. No amounts have been accrued in the accompanying financial statements under the terms of this agreement. 21 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 13 COMMITMENTS AND CONTINGENCIES (Continued) Other Contingencies ------------------- The production of pesticides is subject to complex environmental regulations. As of the date of these financial statements and the date of this report, the Company is unaware of any pending environmentally related litigation or of any specific past or prospective matters involving environmental concerns, which could impair the marketing of its products. NOTE 14 RELATED PARTY TRANSACTIONS Applied Earth Technologies, Inc. has notes payable to sixteen shareholders (including two officers) totaling $1,341,970 and $1,235,799 as of June 30, 2000 and December 31, 1999, respectively. The Company's secretary performs services as the Company's main legal counsel. Legal services performed by this officer totaled $29,150 and $60,060 for the periods ended June 30, 2000 and December 31, 1999 respectively, of which $141,073 and $146,923 are included in accounts payable-related party at June 30, 2000 and December 31, 1999, respectively. The Company's president performs consulting services for the Company. Consulting services by this officer totaled $20,560 and $73,772 for the periods ending June 30, 2000 and December 31, 1999, respectively. Included in accounts payable-related party is $85,942 at December 31, 1999. 22 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 15 SUBSEQUENT EVENTS Acquisition of National Diatect ------------------------------- Subsequent to the date of these financial statements and prior to their issuance, in July 2000, the Company signed a letter of intent and memorandum of understanding to acquire National Diatect, Inc.(National) in exchange for 400,000 shares of the Company's common stock, $120,000 in future royalties (based on $0.10 per pound of products produced) and a promissory note in the amount of $110,000 (based on the stated value of National's inventory and equipment). The agreement is subject to final ratification by the Company's board of directors. Litigation ---------- In September 2000, subsequent to the date of these financial statements, but prior to their issuance, the Company received notice from three former officers that they intend to bring action for nonpayment of back wages. The amount in dispute totals $111,095 and the Company plans to contest the claims. These amounts are not recorded in the accompanying financial statements. NOTE 16 GOING CONCERN As shown in the financial statements, the Company incurred a net loss of $510,524 for the six months ended June 30, 2000 and has an accumulated deficit of $11,645,113 at June 30, 2000. The Company has negative working capital, unsatisfied collection judgments, and is delinquent in repaying its debt obligations. These factors indicate that the Company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue existence. Management's plans for ensuring the Company's continued viability are as follows: Upon the Company's ability to reestablish compliance with S.E.C. regulations, significant and imminent placement of new stock issuance are expected to raise the capital needed to satisfy collection judgments and repay debt obligations. Through the acquisition of Magic International, Inc., management has taken measures to increase product markets. NOTE 17 YEAR 2000 ISSUES Like other companies, Diatect International Corp. could be adversely affected if the computer systems the Company, its suppliers or customers use do not properly process and calculate date-related information and data from the period surrounding and including January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally, this issue could impact non-computer systems and devices such as production equipment and elevators, etc. At this time there have been no known problems related to the Year 2000 issue. Any costs associated with Year 2000 compliance are expensed when incurred. 23 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 18 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA The Company's operations are classified into two principal reporting segments based upon geographical location. Separate accounting for each segment is required due to varying strategies used by the Company in each location. The table below presents information about the Company's reportable segments: Six Months Ended June 30, 2000 ------------------------------------------------------ Kansas Idaho Eliminations Consolidated --------- ---------- ------------ ------------- External revenue $ 74,927 $ 31,897 $ (31,897) $ 74,927 ========= ========== ============ ============== Operating income (loss) $ 1,064 $ (543,485) $ (31,897) $ (510,524) ========= ========== ============ Corporate expenses - Total operating -------------- income (loss) $ (510,524) ============== Depreciation and Amortization $ 272 $ 157,015 $ - $ 157,287 ========= ========== ============ ============== Interest expense and finance charges $ - $ 125,119 $ - $ 125,119 ========= ========== ============ ============== Identifiable assets $ 343,095 $2,294,129 $ (157,225) $ 2,479,999 ========= ========== ============ General corporate assets - -------------- Total assets $ 2,479,999 ============== 24 DIATECT INTERNATIONAL CORP. (formerly Applied Earth Technologies, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and December 31, 1999 NOTE 18 - BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (Continued) Six Months ended June 30, 1999 ---------------------------------------------------- Kansas Idaho Eliminations Consolidated --------- -------- ------------ ------------- External revenue $ 165,447 $ - $ - $ 165,447 ========= ======== ============ ============= Operating income (loss) $(202,592) $(220,372) $ - $ (422,964) ========= ========= ============ Corporate expenses - Total operating ------------ income (loss) $ (422,964) ============= Depreciation and Amortization $ 47 $ 157,049 $ - $ 157,096 ========= ========= ============= ============= Interest expense and finance charges $ - $ 103,797 $ - $ 103,797 ========= ========== ============ ============= Identifiable assets $ 478,714 $2,705,859 $ (494,094) $ 2,690,479 ========= ========== ============ General corporate assets - ------------- Total assets $ 2,690,479 ============= Kansas operations, the first reportable segment, derives revenues from its mixing and distribution of pesticide products. Idaho operations, the second reportable segment, presently generates no revenues and is dependent on revenues generated from the Kansas segment. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-looking Statements --------------------------------------------------------- This report may contain "forward-looking" statements. The Company is including this cautionary statement for the express purpose of availing itself of the protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. Year 2000 Disclosure -------------------- This report is being filed on or about November 6, 2000. To date, the Company has not experienced any year 2000 problems. Results of Operations --------------------- Three and Six Month Periods ended June 30, 2000 compared to June 30, 1999 ------------------------------------------------------------------------- Total revenues for the three and six month periods ended June 30, 2000 were $33,182 and $74,927 with costs of sales of $20,021 and $39,804, or approximately 60% and 53%, respectively, of revenue. During the three and six month periods ended June 30, 1999 the Company had total revenues of $72,010 and $165,447, respectively, with costs of sales of $44,143 and $83,060, respectively, or approximately 61% and 50% of revenues. The substantial decrease in revenues for the periods ended June 30, 2000 compared to same periods in the preceding year is due to the fact that one of the Company's principal distributors ceased operations during the first quarter of 2000. The Company believes this decrease in revenues is not indicative of results to be expected during the next twelve months because management expects to be able to find other distributors to handle the territory previously covered by the defunct distributor. Subsequent to the date of the periods reported herein but prior to the filing of this report, in July 2000, the Company found alternative distribution channels to replace the lost distributor. Corporate Expense. For the three and six months ended June 30, 2000 total operating expenses were $251,372, consisting of salaries, wages and benefits of $80,685 and $91,880, consulting expenses of $62,639 and $62,639, depreciation and amortization expenses of $78,643 and $157,287, legal and professional fees of $9,942 and $123,726, and other expenses of $19,463 and $37,654, resulting in a loss from operations of $238,211 and $438,063, respectively. For the three and six months ended June 30, 1999 total operating expenses were $203,403 and $401,700, respectively, consisting of salaries, wages and benefits of $15,302 and $26,698, consulting expenses of $42,671 and $77,381, depreciation and amortization expenses of $78,584 and $157,096, legal and professional fees of $24,926 and $63,525, and other expenses of $41,920 and $77,000, resulting in a loss from operations of $175,536 and $319,313, respectively. Other Income and Expense. Interest expense for the three and six months ended June 30, 2000 was $78,655 and $125,119, respectively, compared to $52,249 and $103,797 for the same periods in the preceding year. The increase in interest expense for the periods ended June 30, 2000 over the prior year periods reflects the increase in the Company's borrowing through notes payable and a line of credit. 26 The Company had net loss of $316,015 and $561,894 for the three and six months ended June 30, 2000, and basic loss per share for the periods was $0.01 and $0.03, respectively. For the three and six months ended June 30, 1999, the Company had a net loss of $227,701 and $422,964, respectively, and basic loss per share was $0.01 and $0.02. Liquidity and Capital Resources ------------------------------- At June 30, 2000, the Company had current assets of $230,740, consisting of cash of $5,189, accounts receivable of $12,580, prepaid finance charges relating to a line of credit of $49,195, and inventory of $166,127, and current liabilities of $3,156,616 for a working capital deficit of $2,925,876. At June 30, 2000, the Company had property, plant and equipment assets totaling $52,198, net of depreciation, and other assets of $2,174,061, consisting of the Company's investment in EPA labels, net of amortization, and goodwill associated therewith. Cash used in operations for the period ended June 30, 2000 was $199,439 compared to $149,154 for the same period ended June 30, 1999. In 2000 and 1999, the Company's operations have been funded primarily by accounts receivable and loans. Cash used in operations for the period ended June 30, 2000 included the issuance of common stock for services in the amount of $50,750, the compensation expense for the issuance of bonus stock options to two officers for services, the issuance of stock for payment of accrued expenses in the amount of $61,000, the issuance of stock for payment of finance charges in the amount of $30,625, and the issuance of common stock for prepaid finance charges in the amount of $50,000 in order to obtain a line of credit. Cash flows used by investing activities by the Company during the period ended June 30, 2000, was $5,443. Cash flows from financing activities during the period ended June 30, 2000 was $207,911, which includes $117,911 in notes payable and $90,000 obtained through the line of credit above-referenced. At June 30, 2000, the Company may seek working capital from several sources, including the equity markets and private investors. There is no assurance, however, that any fund raising efforts will be successful. The Company believes that it will increase revenues from operations as it continues to move from the development stage of its products to a full marketing and sales program. With the Company's products in the marketplace, the Company anticipates revenues to offset ongoing expenses. The Company is uncertain, however, as to whether there will be sufficient revenue to cover past obligations. The Company's lack of cash will also affect the ability to effectively market its products. The Company believes two of the largest and most important markets for its products are the agricultural and home and garden markets. The Company plans to conduct affordable advertising and maintain a sales force that can effectively reach these markets. This marketing strategy will require funds to be fully effective. Accordingly, although the Company anticipates more revenue from its products than it has received in the past, it will not be as profitable as it could be without additional cash to fund the advertising and marketing. Impact of Inflation ------------------- The Company does not anticipate that inflation will have a material impact on its current or proposed operations. Seasonality ----------- The Company has not experience significant variations in sales of products attributable to seasonal factors. 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 2. LEGAL PROCEEDINGS John Wilding Lawsuit On July 19, 1996, John Wilding sued the Company for collection on a delinquent promissory note, which was secured by stock of White Mountain Mining and Manufacturing, Inc. As of December 31, 1997, the balance owed was $142,323 plus accrued interest in the amount of $63,885. Subsequent negotiations resulted in foreclosure on the White Mountain collateral on June 1, 1998 in full payment of the note to Mr. Wilding. The foreclosed stock represents a majority of the total outstanding shares of White Mountain. Wilding subsequently sold all shares of the White Mountain stock to an affiliate of Environmental Products & Technology, Inc. (EP&T), a Utah corporation which signed an agreement calling for EP&T to enter into a joint venture with Diatect for purposes of mining the White Mountain mineral claims of diatomaceous earth. EP&T was contractually obligated to convey the White Mountain stock back to Diatect subject to a security interest for the purchase price of said stock paid by EP&T (or its affiliates) to Wilding. In 1998, it became apparent that EP&T would not honor its agreement with Diatect. The possibility exists that Diatect will bring a breach of contract action against Environmental Products and Technology, Inc. and its affiliates for its failure to transfer the shares of White Mountain stock to Diatect pursuant to agreement. Sloan, Listrom, Eisenbarth, Sloan & Glassman, LLC An action commenced on November 17, 1998 by the Company's former legal counsel to collect legal fees and costs. The action was not contested and in November 1999, the plaintiff was awarded a default judgment against the Company in the amount of $42,166 plus post-judgment interest. This judgment remains outstanding and unpaid and is included as a liability in commitments and contingencies at December 31, 1999 and June 30, 2000. Ogilvy, Adams & Rinehart Ogilvy, Adams & Rinehart (Ogilvy) obtained a judgment against Diatect on November 1, 1995 in the sum of $24,346. The entire judgment amount plus attorney's fees and interest thereon is approximately $36,000 and has been included in commitments and contingencies at December 31, 1999 and June 30, 2000. Since mid-1996, there has been no communication with the plaintiff or its attorneys, nor has the plaintiff made any attempt to satisfy or settle this case. Since the judgment must be renewed within the next twelve months, the Company anticipates some activity in this matter in the near future. L. Craig Hunt L. Craig Hunt brought action on January 14, 1998 against Diatect for damages and breach of contract on a promissory note for the sum of $42,750 plus interest, penalties and attorney's fees. Judgment against Diatect International Corp. was rendered on February 1, 1999 in the sum of $61,543. This judgment is presently outstanding and unpaid and is included in commitments and contingencies in these financial statements. To date, plaintiffs have made no attempt to collect on this judgment. 28 Mid-America Venture Capital Fund, Inc. Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997 against the Company for failure to pay loans on two promissory notes totaling $35,000. Judgment was awarded on August 4, 1997 for a total of $39,336 including principal, interest, and attorney's fees and costs. Since that time, Diatect has paid a total of $4,000 and is currently in arrears on the payment schedule. The balance owing is included in commitments and contingencies in the financial statements. Mike Glazer A consultant allegedly rendered services to a Company subsidiary during 1996 in the amount of $17,230 and has brought action for this amount. The Company has chosen not to contest this case. Settlement efforts are expected to be undertaken after entry of judgment and demonstration that the assets of the subsidiary, Diatect International, Inc. are fully encumbered. The amount of $17,230 is included in commitments and contingencies in the financial statements. Danny Wirken The Company is considering litigation against Danny Wirkin, (one of the brokers involved in the selling of Diatect stock, which gave rise to the above-reported litigation with Gruntal & Co.) with the objective of obtaining a judgment for damages and foreclosing on the Company's obligation under its note to Mr. Wirkin. This note is reflected at June 30, 2000 and December 31, 1999 in the principal amount of $386,581 with accrued interest included in interest payable for the amounts of $204,920 and $185,644, respectively. See Note 5 to the financial statements. International School of Kenya The International School of Kenya was awarded a judgment in the amount of $20,143 on October 13, 1995. During 1997, this was paid down to $19,200. The balance was fully paid by director Jay Downs on July 18, 1997. In order to reimburse Mr. Downs, the Company executed an uncollateralized promissory note in 1997 for $19,200. The note bears interest at 12% . See Note 5 to the financial statements. Toxikon, Inc. Toxikon, Inc. filed suit in 1999 to collect on an unpaid trade account. In March 2000, the debt was paid in full and the case was dismissed. Subsequent Event ---------------- In September 2000, subsequent to the date of these financial statements, but prior to their issuance, the Company received notice from three former officers that they intend to bring action for nonpayment of back wages. The amount in dispute totals $111,095 and the Company plans to contest the claims. These amounts are not recorded in the accompanying financial statements. Creditors' Judgments During 1994 and 1995, the Company was sued by a number of creditors, which actions the Company allowed to go to judgment. These judgments arose as a direct result of the inability of the Company to fund the operations and payments to all the Company's creditors. The collection judgments, which are substantially unpaid at March 31, 2000, total approximately $52,000, and are included in the Company's accounts payable. 29 The Company is not aware of any other threatened litigation against it or its subsidiaries. However, there remains a possibility of litigation against Diatect and/or its subsidiaries being brought by creditors holding delinquent accounts. Diatect is working with these creditors and, at this time, all creditors, who have not filed litigation appear to accept the measures taken by the Company in addressing the indebtedness. ITEM 2. CHANGES IN SECURITIES In February 2000, the Company increased its authorized capital to 50,000,000 shares. During the period ended June 30, 2000, the Company issued 500,000 shares of its common stock valued at $50,000 for the guarantee of a line of credit; 200,000 shares of its common stock valued at $20,000 for purchase of all outstanding stock of Magic International, Inc.; 110,000 shares of its common stock valued at $11,000 for rights to EPA labels; 122,500 shares of its common stock valued at $30,625 for forbearance of notes payable; and 1,017,667 shares of its common stock valued at $61,000 to two officers for the exercise of existing options. The Company also issued 203,000 shares of its common stock valued at $50,750 for services. In addition, the Company issued 1,000,000 options exercisable at $0.06 per share to two officers as bonus compensation for signing new contracts to provide services to the Company. See Item 5, OTHER INFORMATION. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION In April 2000, David J. Black resigned from the board of directors. Also in April 2000, Robert B. Corrigan and Larry D. Anderson were appointed to the board of directors. On April 15, 2000, George H. Henderson became a full-time employee in his capacity as President and CEO. His employment contract is for a term of three years and includes a salary of $90,000 per year, a signing bonus of 500,000 options for the purchase of shares of common stock at $0.06 per share, 50,000 incentive stock options under a to-be-formulated Incentive Stock Option Plan, and provisions for bonus pay based on 1% of the Company's gross sales receipts as determined on a quarterly basis. Mr. Henderson had been serving on a part- time consulting basis prior to the execution of the employment agreement. On April 25, 2000, John L. Runft signed a new retainer to act as the Company's legal counsel. Mr. Runft received a signing bonus of 500,000 options for the purchase of shares of common stock at $0.06 per share, which options vest over a three year period. In June 2000, the Company adopted a plan for the annual compensation of directors. This plan provides for seven directors to be compensated at the rate of $50,000 per year. The compensation is payable either in money or in common stock of the Company. No amounts have been accrued in the accompanying financial statements under the terms of this agreement. 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. --------- Exhibit 27. Financial Data Schedule (b) Reports on Form 8-K. -------------------- None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIATECT INTERNATIONAL CORPORATION Date: November 9, 2000 /s/ George H. Henderson, President/Treasurer /s/ John L. Runft, Secretary