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: September 30, 1999
[ ] 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
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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 No X (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 19,535,231
- -------------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of September 30, 1999
THIS REPORT IS BEING FILED ON OR ABOUT OCTOBER 7, 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 SEPTEMBER 30,
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.
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
------
September 30 December 31,
1999 1998
------------ ------------
CURRENT ASSETS (Unaudited)
Cash $ 718 $ 2,088
Accounts receivable 20,676 -
Inventories 191,564 100,000
------------ ------------
Total Current Assets 213,021 102,088
------------ ------------
PROPERTY PLANT AND EQUIPMENT
Building 23,501 23,501
Equipment 46,052 39,281
Less accumulated depreciation (12,923) (6,037)
------------ ------------
Total Property, Plant and Equipment 56,630 56,745
------------ ------------
OTHER ASSETS
Investment in EPA labels, net of amortization 2,388,868 2,604,963
------------ ------------
TOTAL ASSETS $ 2,658,519 $ 2,763,796
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 307,212 $ 159,772
Advances from officers 2,168 2,168
Interest payable 692,856 540,728
Other accrued liabilities 4,002 22,500
Notes payable 1,734,043 1,544,243
------------ ------------
Total Current Liabilities 2,740,281 2,269,411
------------ ------------
COMMITMENTS AND CONTINGENCIES 194,275 196,275
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value: 20,000,000 shares
authorized, 19,535,231 shares issued and
outstanding 10,366,608 10,366,608
Common stock subscribed 186,238 186,238
Accumulated deficit (10,828,883) (10,254,736)
------------ ------------
Total Stockholders' Equity (276,037) 298,110
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 2,658,519 $ 2,763,796
============ ============
See accompanying notes.
4
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the Nine
Quarters Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
REVENUES $ 16,591 $ 51,750 $ 182,038 $ 119,670
COST OF SALES 8,381 42,070 91,441 95,223
---------- ---------- ---------- ----------
GROSS PROFIT 8,210 9,680 90,597 24,447
---------- ---------- ---------- ----------
OPERATING EXPENSES
Salaries, wages and benefits 18,189 16,277 44,887 44,021
Consulting 1,677 27,016 79,058 77,348
Depreciation and amortization 74,944 76,286 232,040 236,726
Legal and professional fees 14,306 33,828 77,831 81,953
Other operating expenses 3,120 21,266 80,120 83,432
---------- ---------- ---------- ----------
Total Operating Expenses 112,236 174,673 513,936 523,480
---------- ---------- ---------- ----------
OPERATING LOSS (104,026) (164,993) (432,339) (499,033)
---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Gain on extinguishment of debt - 151,869 - 151,869
Interest expense (48,331) (50,398) (152,128) (133,773)
Claim fees - (2,500) - (2,500)
Miscellaneous income 1,299 - 1,640 -
Donations (125) - (320) -
Gain (loss) on sale of assets - 6,261 - 33,563
---------- ---------- ---------- ----------
Total Other Income (Loss) (47,157) 105,232 (150,808) 49,159
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (151,183) (59,761) (574,147) (449,874)
---------- ---------- ---------- ----------
Loss on disposal of subsidiaries - - - (5,922,967)
---------- ---------- ---------- ----------
NET LOSS (151,183) (59,761) (574,147) (6,373,841)
========= ========= ========= ==========
NET LOSS PER SHARE $ NIL $ NIL $ (0.03) $ (0.02)
========= ========= ========= ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 19,535,231 19,535,231 19,535,231 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 September 30, 1999 and December 31, 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 nine months ended
June 30, 1999 - - - (574,147) (574,147)
------------ ------------ ------------ ------------ ------------
Balances as of September 30, 1999 19,535,231 $ 10,366,608 $ 186,238 $(10,828,883) $ (276,037)
============ ============ ============ ============ ============
See accompanying notes.
6
DIATECT INTERNATIONAL CORP.
(Formerly Applied Earth Technologies, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (574,147) $(6,372,841)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 232,040 236,726
Loss on disposal of subsidiaries - 5,922,967
Gain on extinguishment of debt - (151,869)
Changes in assets and liabilities:
Accounts receivable (20,676) -
Inventories (91,564) -
Accounts payable 147,440 7,427
Advances from officers - 2,641
Interest payable 152,128 121,169
Other accrued liabilities (18,498) 12,848
Commitments and contingencies (2,000) 5,000
---------- ----------
NET CASH FLOWS USED BY OPERATING
ACTIVITIES (175,277) (215,932)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,771) -
Registration of EPA label (9,059) -
Transfer of property, plant and equipment - (24,351)
---------- ----------
NET CASH FLOWS PROVIDED BY INVESTING
ACTIVITIES (15,830) (24,351)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of debt - (35,204)
Net proceeds from notes payable 189,800 238,000
---------- ----------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES 189,800 247,796
---------- ----------
NET INCREASE (DECREASE) IN CASH (1,307) 7,513
CASH, BEGINNING OF PERIOD 2,088 3,622
---------- ----------
CASH, END OF PERIOD $ 781 $ 11,135
========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ - $ -
========== ==========
Income taxes paid $ - $ -
========== ==========
See accompanying notes.
7
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 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.
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
September 30,1999 and December 31, 1998
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 9.)
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,(reflected as a deposit in these financial statements), 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.
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.
9
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 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 period ended
September 30, 1999 and the year ended December 31, 1998 was $6,886 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, 1998, the Company had net operating loss carryforwards of
approximately $10,800,000 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
- --------------------------------
10
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 September 30,
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.
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.
11
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
At September 30, 1999, the Company has not engaged in any transactions that
would be considered derivative instruments or hedging activities.
NOTE 3 INVENTORIES
Inventories at September 30, 1999 and December 31, 1998 consist of the
following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials $ 63,920 $ 44,496
Finished Goods 129,138 55,504
------------- --------------
Total $ 191,564 $ 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
September 30, 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.
NOTE 7 NOTES PAYABLE
Short-term notes payable consist of the following at September 30, 1999 and
December 31, 1998:
September 30, December 31,
Creditor and Conditions 1999 1998
- ----------------------- ----------- -------------
Ross S. Wolfley, (a shareholder of the Company),
unsecured, variable interest, due on demand. $ 165,529 $ 165,529
----------- -------------
Subtotal (carried forward) $ 165,529 $ 165,529
12
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 7 NOTES PAYABLE CONTINUED
Short-term notes payable consist of the following at September 30, 1999 and
December 31, 1998:
September 30, December 31,
Creditor and Conditions 1999 1998
- ----------------------- ----------- -------------
Subtotal (brought forward) $ 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 9.) 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,
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
----------- -------------
Subtotal (carried forward) $ 698,849 $ 707,349
13
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 7 NOTES PAYABLE (Continued)
September 30, December 31,
Creditor and Conditions 1999 1998
- ----------------------- ----------- -------------
Subtotal (Brought forward) $ 698,849 $ 707,349
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
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
June 11, 1999, due on December 31,
1999, delinquent. 50,000 0
----------- -------------
Subtotal (carried forward) $ 1,251,299 $ 1,209,799
14
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 7 NOTES PAYABLE (Continued)
September 30, December 31,
Creditor and Conditions 1999 1998
- ----------------------- ----------- -------------
Subtotal (brought forward) $ 1,251,299 $ 1,209,799
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
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
Robert B. Crouch, (a shareholder of the
Company), unsecured, interest at 15%, dated
July 21, 1999, due on December 31, 1999. 36,000 0
Hopper Asset Management Company,
unsecured, interest at 15%, dated
June 19, 1999, due on December 31,
1999. 50,000 0
Jack S. Stites, unsecured, interest at 15%
dated September 1, 1999, due on
December 31, 1999 8,800 0
Robert B. Crouch (a shareholder of the
Company, unsecured, interest at 10%
dated September 16, 1999, due on
March 16, 2000. 3,500 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 9). 209,444 209,444
----------- ------------
Total $ 1,734,043 $ 1,544,243
=========== ============
15
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 8 INCOME TAXES
At September 30, 1999, the Company had net operating loss carryforwards of
approximately $10,800,000 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.
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.
16
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 9 LITIGATION (Continued)
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, 1998 and September 30, 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 September
30,1999. 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 September 30, 1999 and
December 31, 1998, $61,543 is included in commitments and contingencies in
these financial statements. To date, plaintiffs have made no attempt to
collect on this judgment.
Mid-America Venture Capital Fund, Inc.
- --------------------------------------
Mid-America Venture Capital Funds, Inc. brought action on July 23, 1997
against the Company for failure to pay loans on two promissory notes totaling
$35,000. Judgment was awarded on August 4, 1997 for a total of $39,336
including principal, interest, and attorney's fees and costs. Since that
17
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 9 LITIGATION (Continued)
time, Diatect has paid a total of $4,000 and is currently in arrears on the
payment schedule. The balance owing is included in commitments and
contingencies in these financial statements.
Mike Glazer
- -----------
A consultant allegedly rendered services to a Company subsidiary during 1996
in the amount of $17,230 and has brought action for this amount. The Company
has chosen not to contest this case. Settlement efforts are expected to be
undertaken after entry of judgment and demonstration that the assets of the
subsidiary, Diatect International, Inc. are fully encumbered. The amount of
$17,230 is included in commitments and contingencies in these financial
statements.
Danny Wirken
- ------------
The Company is considering litigation against Danny Wirkin, (one of the
brokers involved in the selling of Diatect stock, which gave rise to the
above-reported litigation with Gruntal & Co.) with the objective of obtaining
a judgment for damages and foreclosing on the Company's obligation under its
note to Mr. Wirkin. This note is reflected at September 30,1999 and December
31, 1998 in the principal amount of $386,581 with accrued interest included in
interest payable for the amounts of $177,912 and $154,717, respectively.
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.
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
uncollaterailized promissory note in 1997 in the sum of $19,200. The note
bears interest at 12%. (Note 7.)
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.
18
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
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 September 30, 1999 and December 31, 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.
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 periods
ended September 30, 1999 and December 31, 1998:
Weighted Average
Number of Shares Price per Share
---------------- ---------------
Outstanding at December 31,1997 1,694,447 $0.06
Granted 400,000 $0.06
Expired (1,600,000) $0.06
--------- -----
Outstanding at December 31, 1998 494,447 $0.06
Granted 200,004 $0.06
Expired, exercised or forfeited 0 $0.00
--------- -----
Outstanding at September 30, 1999 794,453 $0.06
========= =====
19
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 11 STOCK OPTIONS (Continued)
Exercise Date Number of Shares Price per Share
------------- ---------------- ---------------
On or before September 15, 2000 409,338 $0.06
On or before October 25, 2000 387,115 $0.06
The issuance of new stock during 1997, along with these outstanding options,
placed the Company in jeopardy of over-capitalization at September 30, 1999
and December 31, 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.
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company is obligated to pay certain settlements under judgments awarded to
outside parties. (Note 9.) These amounts are included in commitments and
contingencies as follows:
September 30, December 31,
1999 1998
---------- ----------
L. Craig Hunt $ 61,543 $ 61,543
Mid-America Venture
Capital Fund, Inc. 37,336 39,336
Sloan, Listrom, Eisenbarth,
Sloan & Glassman, LLC 42,166 42,166
Ogilvy, Adams & Rinehart 36,000 36,000
Mike Glazer 17,230 17,230
---------- ----------
$ 194,275 $ 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.
20
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
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 $1,049,560 as of September
30, 1999 and December 31, 1998, respectively.
The Company's vice president performs services as the Company's main legal
counsel. Legal services performed by this officer totaled $43,200 and $54,420
for the periods ended September 30, 1999 and December 31, 1998 respectively,
of which $58,015 and $64,815 are included in accounts payable at September 30,
1999 and December 31, 1998, respectively.
NOTE 15 SUBSEQUENT EVENTS
Acquisition of Magic International, Inc.
- ----------------------------------------
Subsequent to the date of these financial statements, in March 2000, the
Company finalized the acquisition of Magic International, Inc. (See Note 1).
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 have been guaranteed by officers of the
Company with stock from their personal holdings.
NOTE 15 SUBSEQUENT EVENTS
The Company has obtained additional loans in 1998 secured by the issuance of
common stock as follows:
21
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 15 SUBSEQUENT EVENTS Continued
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
=========== ================
EPA Label
- ---------
Subsequent to the date of these financial statements and prior to their
issuance, the Company registered EPA label 42850-5 on October 25, 1999.
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.
Office Facilities
- -----------------
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.
NOTE 16 GOING CONCERN
As shown in the financial statements, the Company incurred a net loss of
$574,147 and $1,792,229 for the period ended September 30, 1999 and December
31, 1998,respectively, and has an accumulated deficit of $10,828,883. At
September 30, 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 Note 15.
22
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
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 internal systems and has
determined that there will be no adverse effects to the Company's operation
regarding the Year 2000 issues. Management also believes that Year 2000
issues should not adversely affect the ability of its clients and customers to
conduct business with the Company. Any 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:
Nine Months Ended September 30, 1999
----------------------------------------------------
Kansas Idaho Eliminations Consolidated
--------- -------- ------------ -------------
External revenue $ 182,038 $ 0 $ 0 $ 182,038
========= ======== ============ =============
Operating income
(loss) $(241,377) $(332,770) $ 0 $ (574,147)
========= ========= ============
Corporate expenses 0
Total operating ------------
income (loss) $ (574,147)
=============
Depreciation and
Amortization $ 130 $ 231,910 $ 0 $ 232,040
========= ========= ============ =============
Interest expense
and finance
charges $ 0 $ 152,128 $ 0 $ 152,128
========= ========== ============ =============
Identifiable
assets $ 561,038 $2,642,213 $ (544,732) $ 2,658,519
========= ========== ============
General corporate
assets 0
-------------
Total assets $ 2,658,519
============
Fiscal Year December 31, 1998
----------------------------------------------------
Kansas Idaho Eliminations Consolidated
-------- -------- ------------ -------------
23
DIATECT INTERNATIONAL CORP.
(formerly Applied Earth Technologies, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
NOTE 18 BUSINESS SEGMENT AND GEOGRAPHICAL AREA DATA (continued)
External revenue $ 123,483 $ 0 $ 0 $ 123,483
========== ========= ============ ============
Operating income
(loss) $ (905,501) $ 251,606 $ 0 $ (653,895)
========== ========= ============
Corporate expenses 0
Total operating ------------
income (loss) $ (653,895)
============
Depreciation and
Amortization $ 135,011 $ 184,037 $ 0 $ 319,048
========== ========= ============ ============
Interest expense
and finance
charges $ 390 $ 179,252 $ 0 $ 179,642
=========== ========= ============ ============
Identifiable
assets $ 460,817 $ 2,786,721 $ (483,742) $ 2,763,796
=========== ========= ============
General corporate
assets 0
-------------
Total assets $ 2,763,796
=============
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.
24
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 September 30, 2000. To date, the
Company has not experienced any year 2000 problems.
Results of Operations
- ---------------------
Three and Nine Month Periods ended September 30, 1999 compared to September
30, 1998
- -------------------------------------------------------------------------
During the three and nine month periods ended September 30, 1999 the Company
had total revenues of $16,591 and $182,038, respectively, with costs of sales
of $8,381 and $91,441, respectively, or approximately 51% and 50% of revenues.
Total revenues for the three and six month periods ended September 30, 1998
were $51,750 and $119,670 with costs of sales of $42,070 and $95,223, or
approximately 81% and 80%, respectively, of revenue. The increase in
revenues and decrease in the costs of sales for the nine month period ended
September 30, 1999 compared to same period in the preceding year is the result
of the Company's success in product promotion and cost control.
Corporate Expense. For the three and nine months ended September 30, 1999
total operating expenses were $112,236 and $513,936, respectively, consisting
of salaries, wages and benefits of $18,189 and $44,887, consulting expenses of
$1,667 and $79,058, depreciation and amortization expenses of $74,944 and
$232,040, legal and professional fees of $14,306 and $77,831, and other
expenses of $3,120 and $80,120, resulting in a loss from operations of
$104,026 and $423,339, respectively. For the three and nine months ended
September 30, 1998 total operating expenses were $174,673 and $523,480,
respectively, consisting of salaries, wages and benefits of $16,277 and
$44,021, consulting expenses of $27,016 and $77,348, depreciation and
amortization expenses of $76,286 and $236,726, legal and professional fees of
$33,828 and $81,953, and other expenses of $21,266 and $83,432, resulting in a
loss from operations of $164,993 and $499,033, respectively.
Other Income and Expense. Other expense for the three and nine months ended
September 30, 1999 was $47,157 and $150,808, respectively, compared to income
of $105,232 and $49,159 for the same periods in the preceding year. The
income in 1998 was attributable to gains on the extinguishment of debt and the
sales of assets. There were no corresponding sales of assets in the same
periods for 1999.
Loss from Continuing Operations. The Company had losses from continuing
operations of $151,183 and $574,147 in the three and nine month periods ended
September 30, 1999. During the three and nine months ended September 30, 1998
the Company had losses of $59,761 and $449,874 respectively. For the nine
months ended September 30, 1998, the Company also recognized a loss on
disposal of subsidiaries of $5,922,967.
25
For the three and nine months ended September 30, 1999, the Company had a net
loss of $151,183 and $574,147, respectively, and basic loss per share was
$0.00 and $0.03. Including the loss on disposal of subsidiaries, the Company
had net loss of $59,761 and $6,372,841 for the three and nine months ended
September 30, 1998, and basic loss per share for the periods was $0.00 and
$0.02, respectively.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had current assets of $213,021, consisting
of cash of $781, accounts receivable of $20,676, and inventories of $191,564,
and current liabilities of $2,740,281, for a working capital deficit of
$2,527,260. At September 30, 1999, the Company had property, plant and
equipment assets totaling $56,630, net of depreciation, and other assets of
$2,388,868, consisting of the Company's investment in EPA labels, net of
amortization.
Cash used in operations for the period ended September 30, 1999 was $175,277
compared to $215,932 for the same period ended September 30, 1998. In 1999
and 1998, the Company's operations have been funded primarily by sales of
products and loans.
Cash flows used by investing activities by the Company during the period ended
September 30, 1999, was $15,830. Cash flows from financing activities during
the period ended September 30, 1999 was $189,800.
At September 30 1999, 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.
26
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 September 1, 1998
in full payment of the note to Mr. Wilding. The foreclosed stock represented
a majority of the total outstanding shares of White Mountain.
Wilding subsequently sold all shares of the White Mountain stock to an
affiliate of Environmental Products & Technology, Inc. (EP&T), a Utah
corporation which signed an agreement calling for EP&T to enter into a joint
venture with Diatect for purposes of mining the White Mountain mineral claims
of diatomaceous earth.
EP&T was contractually obligated to convey the White Mountain stock back to
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. In connection with the agreement,
Diatect borrowed $65,498 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.
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.
27
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, 1998 and September 30, 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 September
30, 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 and is included in
commitments and contingencies in the attached 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.
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 attached 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 7 to the
financial statements.
28
Danny Wirken
The Company is considering litigation against Danny Wirkin, (one of the
brokers involved in the selling of Diatect stock, which gave rise to the
above-reported litigation with Gruntal & Co.) with the objective of obtaining
a judgment for damages and foreclosing on the Company's obligation under its
note to Mr. Wirkin. This note is reflected at September 30, 1999 and December
31, 1998 in the principal amount of $386,581 with accrued interest included in
interest payable for the amounts of $177,912 and $154,717, respectively. See
Note 7 to the financial statements.
Toxikon, Inc.
Subsequent to the date of these financial statements, in 1999, 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.
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 September 30,
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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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Exhibit 27. Financial Data Schedule
29
(b) Reports on Form 8-K.
--------------------
Current Report on Form 8-K, filed with the Commission on July 14, 2000.
Amendment to the Form 8-K, filed with the Commission on July 25, 2000.
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: September 30, 2000
/s/ George H. Henderson,President/Treasurer
/s/ John L. Runft, Secretary