As filed with the Securities and Exchange Commission on July 7, 2000
Registration Statement No. 333-36404
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
US MICROBICS, INC.
------------------
(Name of Small Business Issuer in Its Charter)
Colorado 325414 84-0990371
-------- ------ ----------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
5922-B Farnsworth Court
Carlsbad, CA 92008
(760) 918-1860
--------------
(Address and telephone number of principal executive offices
and principal place of business)
Robert C. Brehm
Chief Executive Officer
U.S. Microbics, Inc.
5922-B Farnsworth Court
Carlsbad, CA 92008
(760) 918-1860
--------------
(Name, address and telephone number of Agent for Service)
Copy to:
Amar Budarapu, Esq.
Baker & McKenzie
Chevron Tower
1301 McKinney Street, Suite 3300
Houston, Texas 77010
(713) 427-5000
Approximate Date of Commencement of Proposed Sale to the Public:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. :___X____
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. : ________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. : ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. :________
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. :________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine. :________
<PAGE>
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commissio n is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 7, 2000
Prospectus
U.S. Microbics Inc.
20,094,921 shares of Common Stock
This prospectus relates to the resale by the selling shareholders of up to
20,094,921 shares of common stock, $.0001 par value per share, of U.S. Microbics
Inc. The selling shareholders may sell the stock from time to time in the
over-the-counter market at the prevailing market price or in negotiated
transactions. The selling price of the shares will be determined by market
factors at the time of their resale. Of the shares offered,
o up to 20,000,000 shares are issuable to Swartz Private Equity, LLC
based on an Investment Agreement dated as of March 14, 2000, including
250,000 shares on exercise of the commitment warrants and up to
2,576,087 shares on exercise of the put warrants, and
o up to 94,921 shares are issuable to Brobeck Phleger & Harrison LLP for
legal services.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we may receive up to $35 million of proceeds from the
sale of shares to Swartz, and we may receive additional proceeds from the sale
to Swartz of shares issuable upon the exercise of any warrants that may be
exercised by Swartz.
Our common stock is quoted on the over-the-counter Electronic Bulletin
Board under the symbol BUGS. On June 23, 2000, the average of the bid and asked
prices of the common stock on the Bulletin Board was $1.12 per share.
Investing in our common stock involves a high degree of risk. You should
invest in our common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 2000
<PAGE>
-----------------------
Please read this prospectus carefully. It describes our company, finances,
products and services. Federal and state securities laws require that we include
in this prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained or incorporated by
reference in this prospectus to make your investment decision. We have not
authorized anyone to provide you with different information. The selling
shareholders are not offering these securities in any state where the offer is
not permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus.
Some of the statements contained in this prospectus, including statements
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Business," are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and may involve a number of risks and
uncertainties. Actual results and future events may differ significantly based
upon a number of factors, including:
o significant historical losses and the expectation of continuing
losses;
o rapid technological change in the bioremediation industry;
o reliance on key strategic relationships and accounts;
o the impact of competitive products and services and pricing;
o and uncertain protection of our intellectual property.
Please do not put undue reliance on these forward-looking statements, which
speak only as of the date of this prospectus.
In this prospectus, we refer to U.S. Microbics Inc. as we or U.S.
Microbics. We refer to our subsidiaries as Subsidiaries and to Swartz Private
Equity, LLC as Swartz.
<PAGE>
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................1
Summary Financial Data.........................................................3
Risk Factors...................................................................4
Forward-Looking Statements....................................................13
Use of Proceeds...............................................................14
Price Range of Common Stock...................................................14
Dividend Policy...............................................................15
Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................16
Business .....................................................................22
Management....................................................................34
Principal Shareholders........................................................39
Selling Shareholders..........................................................42
Investment Agreement..........................................................43
Plan of Distribution..........................................................46
Description Of Securities.....................................................46
Legal Matters.................................................................47
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................................47
Experts .....................................................................47
Where You Can Find More Information...........................................48
Signatures..................................................................II-5
-i-
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Prospectus Summary
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section.
Business
U.S. Microbics Inc. is a Colorado corporation. We were originally
incorporated in 1984 in Colorado under the name Venture Funding Corporation. On
June 3, 1993, the name was changed to Global Venture Funding, Inc., and we
changed to our present name of U.S. Microbics Inc. on May 25, 1998.
We intend to build an environmental biotech company utilizing the
proprietary microbial technology, bioremediation patents, knowledge, processes
and unique microbial culture collection developed over 30 years by the late
George M. Robinson and his daughter Mery C. Robinson. We create and market
proprietary microbial technologies that provide natural solutions to many of
today's environmental problems, including oil, diesel, certain toxic waste, and
certain water and soil contamination.
Our principal executive offices are located at 5922-B Farnsworth Court,
Carlsbad, California 92008 and our telephone number is (760) 918-1860. Our home
page on the Internet can be located at http://www.bugsatwork.com
Investment Agreement
On March 14, 2000, we entered into an Investment Agreement with Swartz to
raise up to $35 million through a series of sales of our common stock to Swartz.
Under the terms and conditions of the Investment Agreement, we have the right,
at our sole discretion, to put shares of our common stock to Swartz for a dollar
amount of up to $2 million in each put, subject to additional limitations on the
timing of our exercise of put rights and on the number of shares Swartz is
obligated to purchase. The dollar amount of each sale is also limited by our
common stock's trading volume. A minimum period of time must occur between
sales. In turn, Swartz will either sell our stock in the open market, sell our
stock to other investors through negotiated transactions or hold our stock in
its own portfolio. This prospectus covers the resale of our stock by Swartz
either in the open market or to other investors. For more information on the
Investment Agreement, see "Investment Agreement."
The Offering
Total shares outstanding prior to the
offering ...................................... 8,543,247 as of June 23, 2000
Shares being offered for resale to the
public........................................ 20,094,921 (Maximum)
Total shares outstanding after the offering.... 28,638,168
Price per share to the public.................. Market price at time of resale
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Total proceeds raised by offering.............. None; however, we may receive up
to $35 million from the sale of
shares to Swartz, and we may
receive additional amounts from
the sale to Swartz of shares
issuable upon the exercise of
any warrants issued to Swartz
pursuant to the Investment
Agreement.
Use of proceeds from the sale
of the shares to Swartz........................ We plan to use the proceeds for
working capital and general
corporate purposes.
OTC Bulletin Board Symbol...................... BUGS
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Summary Financial Data The information set forth below for the years ended
September 30, 1998 and 1999 and for the six months ended March 31, 1999 and 2000
are derived from the financial statements included elsewhere in this prospectus.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended March 31,
September 30, (unaudited)
----------------------- -----------------------
Statement of Operations Data: 1998 1999 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ........................................... $ -- $ 66,900 $ 51,728 $ 13,894
Operating Expenses ................................. 1,378,200 2,775,700 1,161,079 1,076,823
Net Loss ........................................... 1,411,800 2,932,500 1,118,516 1,061,547
Loss per common share .............................. $ 0.78 $ 0.58 $ 0.35 $ 0.17
Weighted average number of common shares outstanding 1,802,481 5,084,676 3,220,511 6,205,704
</TABLE>
March 31,
(Unaudited)
---------------------------
Balance Sheet Data: 1999 2000
--------- ---------
Working capital ............................ $(301,916) $(554,814)
Total assets ............................... 604,352 366,122
Total liabilities .......................... 516,441 666,537
Shareholders' equity (deficit) ............. $ 212,911 $(300,415)
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Risk Factors
An investment in the common stock offered hereby involves a high degree of
risk. In addition to the other information in this prospectus, the following
risk factors should be considered carefully in evaluating U.S. Microbics Inc.
and its business. This prospectus contains forward-looking statements within the
meaning of Section 27a of the Securities Act of 1933, as amended, and Section
21e of the Securities Exchange Act of 1934, as amended. All forward-looking
statements are inherently uncertain as they are based on current expectations
and assumptions concerning future events or future performance of U.S.
Microbics. Do not place undue reliance on these forward-looking statements,
which are only predictions and speak only as of the date hereof. In evaluating
such statements, prospective investors should review carefully various risks and
uncertainties identified in this prospectus, including the matters set below and
in our other SEC filings. These risks and uncertainties could cause our actual
results to differ materially from those indicated in the forward-looking
statements. We undertake no obligation to update or publicly announce revisions
to any forward-looking statements to reflect future events or developments.
Our ability to continue operations is dependent on a number of factors.
U.S. Microbics Inc. and its subsidiaries are startup companies with a
business plan based on microbial technology and one year of operating
experience. We have experienced annual operating losses and negative operating
cash flow since our incorporation in 1984. As of September 30, 1999, we had an
accumulated deficit of $6,640,100. In addition, we generated no revenues during
fiscal year 1998, and had reported revenues of $66,900 for fiscal year 1999. We
will need to raise additional capital to continue as a going concern. Our
auditors have indicated uncertainty concerning our ability to continue as a
going concern.
Accordingly, there can be no assurance that we will commercialize any
products and services based on microbial technology or manage the related
manufacturing, marketing, sales, licensing and customer support operations in a
profitable manner. In particular, our prospects must be considered in light of
the problems, delays, expenses and difficulties encountered by any company in
the startup stage, many of which may be beyond our control. These problems,
delays, expenses and difficulties include unanticipated problems relating to
product development and formulation, testing, quality control, production,
inventory management, sales and marketing and additional costs and competition,
any of which could have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that our proposed
products and services, if fully developed, can be successfully marketed or that
we will ever achieve significant revenues or profitable operations.
Our ability to become profitable will depend on a variety of factors,
including the following:
o price, volume and timing of product sales;
o variations in gross margins on our products, which may be affected by
the sales mix and competitive pricing pressures;
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o regulatory approvals for using our bioremediation products, including
permits for soil recycling center sites, water quality permits, air
quality permits, and other permits as required by particular
jurisdictions;
o changes in our levels of research and development, including the
timing of any demonstration projects for regulatory approval; and
o acquisitions of products, technology or companies.
Our long-term success also will be affected by expenses, difficulties
and/or delays encountered in developing and selling microbial technology,
competition, and the often burdensome environmental regulations associated with
permitting hydrocarbon remediation sites.
We will need additional financing to fully implement our business plan.
Since August 1997, we have focused our efforts on developing our business
in the environmental biotechnology sector. We will need to raise additional
capital to implement fully our business plan and establish adequate
manufacturing, marketing, sales, licensing and customer support operations.
There can be no assurance that additional public or private financing, including
debt or equity financing, will be available as needed, or, if available, on
terms favorable to us. Any additional equity financing may be dilutive to our
stockholders and such additional equity securities may have rights, preferences
or privileges that are senior to those of our existing common or preferred
stock. Furthermore, debt financing, if available, will require payment of
interest and may involve restrictive covenants that could impose limitations on
our operating flexibility. Our failure to successfully obtain additional future
funding may jeopardize our ability to continue our business and operations.
Our technology has not gained full market acceptance.
Microbial technology has not been fully utilized in any particular market.
Market acceptance of our products and services will depend in large part upon
our ability to demonstrate the technical and operational advantages and cost
effectiveness of our products and services as compared to alternative, competing
products and services, and our ability to train customers concerning the proper
use and application of our products. There can be no assurance that our products
and services will achieve a level of market acceptance that will be profitable
for us.
Due to lack of market acceptance and other factors, we may not be able to
distribute our products through the retail channel via strategic relationships
with existing distributors and joint ventures enacted for domestic and
international business.
We may be subject to future environmental liabilities that could affect our
results of operations or financial condition.
We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous materials and
waste products. We currently maintain a supply of several hazardous materials at
our facilities. While we currently meet these environmental requirements, there
is no assurance that future laws and regulations will not impose significant
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compliance costs. If there is an accident, we could be held liable for any
damages that result and the liability could exceed our resources. In addition,
the use of our BIO-RAPTOR(TM) requires permits to treat contaminated soil.
Permit issues may delay the implementation and installation of our products,
including the BIO-RAPTOR(TM).
If we are unable to manage future growth, our business may be negatively
affected.
We intend to pursue a strategy of rapid growth, and plan to expand
significantly our manufacturing capability and devote substantial resources to
our marketing, sales, administrative, operational, financial and other systems
and resources. Such expansion will place significant demands on our marketing,
sales, administrative, operational, financial and management information
systems, controls and procedures. Accordingly, our performance and profitability
will depend on the ability of our officers and key employees to:
o manage our business and our subsidiaries as a cohesive enterprise;
o manage expansion through the timely implementation and maintenance of
appropriate administrative, operational, financial and management
information systems, controls and procedures;
o add internal capacity, facilities and third-party sourcing
arrangements as and when needed;
o maintain service quality controls; and
o attract, train, retain, motivate and manage effectively our employees.
There can be no assurance that we will integrate and manage successfully
new systems, controls and procedures for our business, or that our systems,
controls, procedures, facilities and personnel, even if successfully integrated,
will be adequate to support our projected future operations. Any failure to
implement and maintain such systems, controls and procedures, add internal
capacity, facilities and third-party sourcing arrangements or attract, train,
retain, motivate and manage effectively our employees could have a material
adverse effect on our business, financial condition and results of operations.
In addition, we may incur substantial expenses identifying, investigating
and developing appropriate products and services based on microbial technology
in the global environmental, manufacturing, agricultural, natural resource and
other potential markets. There can be no assurance that any expenditures
incurred in identifying, investigating and developing such products and services
will ever be recouped.
We may face strong competition from larger, established companies.
We likely will face intense competition from other environmental biotech
companies, virtually all of which can be expected to have longer operating
histories, greater name recognition, larger installed customer bases and
significantly more financial resources, R&D facilities and manufacturing and
marketing experience than U.S. Microbics. There can be no assurance that
developments by our current or potential competitors will not render our
proposed products or services obsolete.
6
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In addition, we expect to face additional competition from new entrants
into our targeted industry segments. As the demand for products and services
based on microbial technology grows and new markets are exploited, we expect
that competition will become more intense, as current and future competitors
begin to offer an increasing number of diversified products and services.
Although we believe that we have certain technical advantages over certain
of our competitors, including, without limitation, the development of
technological innovations that will make the BIO-RAPTOR(TM) and the use of our
microbial blends more economical and efficient than other bioremediation
methods, maintaining such advantages will require a continued high level of
investment by U.S. Microbics in R&D, marketing, sales and customer support. We
may not have sufficient resources to maintain our R&D, marketing, sales and
customer support efforts on a competitive basis. Additionally, we may not be
able to make the technological advances necessary to maintain a competitive
advantage with respect to our products and services. Increased competition could
result in price reductions, fewer product orders, obsolete technology and
reduced operating margins, any of which could materially and adversely affect
our business, financial condition and results of operations.
We may be subject to future product liability claims.
The development, marketing, sale and/or licensing of products based on
microbial technology entail liability risks in the event of product failure or
claim of harm caused by product operation. While we are not aware of any claim
against us based upon the use or failure of our products, end users of any of
our proposed products and services could assert claims against us. Although we
maintain product liability insurance against any such claims, there can be no
assurance that such insurance will be sufficient to cover all potential
liabilities, or that we will be able to continue to obtain insurance coverage in
an amount that we believe to be adequate. If there is a successful suit against
us, lack or insufficiency of insurance coverage would have a material adverse
effect on our business, financial condition and results of operations.
Our ability to manufacture our products may be limited.
Our future performance will depend to a substantial degree upon our ability
to manufacture, market and deliver the products and services based on microbial
technology in an efficient and profitable manner. In this regard, we have leased
production facilities for our microbial products operation, and have partially
implemented our manufacturing operations at the facility. However, we have no
prior experience in maintaining a facility that will manufacture our products in
the quantities required for profitable operations. Accordingly, there can be no
assurance that:
o we will be able to complete the facility in a timely manner;
o the cost of completing the facility will not exceed management's
current estimates;
o the facility's capacity will not exceed the demand for our products;
or
o such additional capacity will achieve satisfactory levels of
manufacturing efficiency in a timely manner or at a level of quality
control that meets competitive demands.
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In addition, the implementation of our manufacturing operations at the
facility presents risks that, singly or in any combination, could have a
material adverse effect on our business, financial condition and results of
operations. These risks include, but are not limited to:
o production delays associated with products based on the microbial
technology;
o unavailability of required capital equipment and qualified personnel;
o raw material shortages, higher-than-expected overhead or operational
costs;
o lack of sufficient quality control over the products; and
o order backlogs.
In addition, our development of our internal manufacturing capacity will
depend in large part on our ability to raise sufficient capital for this
purpose. We may not be able to develop adequate manufacturing capacity or raise
sufficient capital, the failure of either of which could have a material adverse
effect on our business, financial condition, results of operations and possibly
on our relationships with our customers. We may consider third-party outsourcing
arrangements for the manufacture and supply of certain products during the
period in which we expand our internal manufacturing capacity. These outsourcing
arrangements are subject to various risks, including, without limitation,
production delays or interruptions, inferior product quality, misappropriation
of trade secrets and lower profit margins.
Our success depends in large part on our ability to attract and retain key
employees and management.
Our success and execution of our business strategy will depend
significantly upon the continuing contributions of, and on our ability to
attract, train and retain qualified management, marketing, sales, operational,
production, administrative and technical personnel. In this regard, we are
particularly dependent upon the services of Robert C. Brehm, our President and
Chief Executive Officer, and Mery C. Robinson, our Chief Operating Officer and
Secretary and the President of XyclonyX. The loss of the services of one or more
of our key employees and the failure to attract, train and retain additional
qualified personnel in a timely manner could have a material adverse effect on
our business, financial condition and results of operations.
Our results of operations may highly fluctuate from quarter to quarter as we
continue to grow.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods in which to base our planned
operating expenses. Our expense levels are based in part on our projections as
to future revenues that are expected to increase. It is anticipated that as we
mature, our sales and operating results may fluctuate from quarter to quarter
and from year to year due to a combination of factors, including, among others:
o the volume, timing of, and ability to fulfill customer orders;
o the demand for our products and services;
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o the number, timing and significance of product enhancements and new
product introductions by us and our competitors;
o changes in the pricing policies by U.S. Microbics or our competitors;
o changes in the level of operating expenses;
o expenses incurred in connection with our plans to fund greater levels
of sales and marketing activities and operations, develop new
distribution channels, broaden our customer support capabilities and
continue our R&D activities;
o personnel changes;
o product defects and other product or service quality problems; and
o general domestic and international legal, economic and political
conditions.
Any unfavorable changes in these or other factors could have a material adverse
effect on our business, financial condition and results of operation.
If we are unable to keep up with technological developments, our business could
be negatively affected.
The markets for our products and services based on microbial technology are
generally characterized by rapid technological change and are highly competitive
with respect to timely innovations. Accordingly, we believe that our ability to
succeed in the sale of our products and services will depend significantly upon
the technological quality of our products and services relative to those of our
competitors, and our ability to continue to develop and introduce new and
enhanced products and services at competitive prices and in a timely and
cost-effective manner.
In particular, our future success is dependent upon our BIO-RAPTOR(TM),
Remediline(TM), Wasteline(TM) and Bi-Agra(TM) product lines, each of which is
new and has not achieved market acceptance. In order to develop such new
products and services, we will depend upon close relationships with existing
customers that previously utilized microbial technology in the bioremediation,
agricultural and waste treatment industries, and our ability to continue to
develop and introduce new and enhanced products and services at competitive
prices and in a timely and cost-effective manner. There can be no assurance that
our customers will provide us with timely access to such information or that we
will be able to develop and market our new products and services successfully or
respond effectively to technological changes or new product and services of our
competitors. We may not be able to develop the required technologies, products
and services on a cost-effective and timely basis, and any inability to do so
could have a material adverse effect on our business, financial condition and
results of operations.
We may not be able to protect our intellectual property.
We rely on patent, trademark, trade secret and copyright protection to
protect our technology. We believe that technological leadership in microbial
technology will be achieved through additional factors such as the technological
and creative skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance. Nevertheless,
our ability to compete effectively depends in part on our ability to develop and
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maintain proprietary aspects of our technology, such as those patents currently
licensed by our subsidiary, XyclonyX. We may not secure future patents and
patents may become invalid and may not provide meaningful protection for our
product innovations. In addition, the laws of some foreign countries do not
protect our intellectual property rights to the same extent as do the laws of
the United States. Furthermore, there can be no assurance that competitors will
not independently develop similar products, "reverse engineer" our products, or,
if patents are issued to us, design around such patents.
We also rely upon a combination of copyright, trademark, trade secret and
other intellectual property laws to protect our proprietary rights by entering
into confidentiality or license agreements with our employees, consultants and
vendors, and by controlling access to and distribution of our technology,
documentation and other proprietary information. There can be no assurance,
however, that the steps taken by us will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide a competitive
advantage to us. Any such circumstance could have a material adverse effect on
our business, financial condition and results of operations.
While we are not currently engaged in any intellectual property litigation
or proceedings, there can be no assurance that we will not become so involved in
the future or that our products do not infringe any intellectual property or
other proprietary right of any third party. Such litigation could result in
substantial costs, the diversion of resources and personnel, and subject us to
significant liabilities to third parties, any of which could have a material
adverse effect on our business, financial condition and results of operations.
We also rely on certain technology which we license from third parties,
including microbial technology which is integrated with internally developed
products and used in the XyclonyX product line to perform key functions. There
can be no assurance that the patents underlying such third party technology
licenses will continue to remain unchallenged or that we will not have to defend
them, along with the licensors, to continue their commercial viability to us.
The loss of or inability to maintain any of these technology licenses could
result in delays or reductions in product shipments which could materially
adversely affect our business, financial condition or results of operations.
We may not be able to protect our tradenames and domain names.
We may not be able to protect our tradenames and domain names against all
infringers, which could decrease the value of our brand name and proprietary
rights. We currently hold the Internet domain name "bugsatwork.com" and we use
"U.S. Microbics" as a tradename. Domain names generally are regulated by
Internet regulatory bodies and are subject to change and may be superceded, in
some cases, by laws, rules and regulations governing the registration of
tradenames and trademarks with the United States Patent and Trademark Office and
certain other common law rights. If the domain registrars are changed, new ones
are created or we are deemed to be infringing upon another's tradename or
trademark. In such event, we could be unable to prevent third parties from
acquiring or using, as the case may be, our domain name, tradenames or
trademarks, which could adversely affect our brand name and other proprietary
rights.
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Our management is able to exercise significant influence over all matters
requiring shareholder approval.
Our existing directors, executive officers, and their respective affiliates
are the beneficial owners of approximately 62.59% of the outstanding shares of
common stock and common stock equivalents, including convertible preferred stock
and stock options. As a result, our existing directors, executive officers,
principal shareholders and their respective affiliates, if acting together,
would be able to exercise significant influence over all matters requiring
shareholder approval, including the election of directors and the approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of our company.
These shareholders may have interests that differ from our other
shareholders, particularly in the context of potentially beneficial acquisitions
of us by another company. For example, to the extent that these shareholders are
our employees, they may be less inclined to vote for acquisitions of us by
another company involving termination of their employment or diminution of their
responsibilities or compensation.
The trading price of our common stock may decrease due to factors beyond our
control.
The trading price of our common stock is subject to significant
fluctuations in response to numerous factors, including:
o variations in anticipated or actual results of operations;
o announcements of new products or technological innovations by us or
our competitors;
o changes in earnings estimates of operational results by analysts;
o results of product demonstrations;
o inability of market makers to combat short positions on the stock;
o inability of the market to absorb large blocks of stock sold into the
market;
o developments or disputes concerning our patents, trademarks or
proprietary rights; and
o comments about us or our markets posted on the Internet.
Moreover, the stock market from time to time has experienced extreme price
and volume fluctuations, which have particularly affected the market prices for
emerging growth companies and which often have been unrelated to the operating
performance of the companies. These broad market fluctuations may adversely
affect the market price of our common stock. If our shareholders sell
substantial amounts of their common stock in the public market, the price of our
common stock could fall. These sales also might make it more difficult for us to
sell equity or equity related securities in the future at a price we deem
appropriate.
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Our business may be harmed if it becomes subject to securities class action
litigation.
In the past, following periods of volatility in the market price of a
company's common stock, securities class action litigation has been brought
against the issuing company. This type of litigation could be brought against us
in the future. The litigation could be expensive and divert management's
attention and resources, which could adversely affect our business and results
of operations whether or not our defense is successful. If the litigation is
determined against us, then we could be subject to significant liabilities.
We have a shareholder derivative lawsuit proceeding pending which, if
decided against us, could require a substantial cash payment or repurchase of
stock from the market. We have been sued by James A. Merriam in a shareholder
derivative suit. We intend to defend the suit vigorously. However, the
litigation process is inherently uncertain and we may not prevail. Our defense
of this litigation, regardless of its outcome, has and will continue to consume
management and financial resources. If we do not prevail, we could be subject to
material financial liabilities. See "Business-Legal Proceedings."
We may issue additional shares of common stock which may dilute the value of our
common stock to current shareholders and may adversely affect the market price
of our common stock.
Within the next 24 months from the date of this prospectus, the holders of
a majority of our preferred stock and certain warrant and option holders will
have the right to convert their respective interests into approximately 10.3
million shares of our common stock. If such holders of preferred stock, warrants
and options exercise their conversion rights, the holders of our common stock
then issued and outstanding may experience immediate and substantial dilution in
the net tangible book value of their shares if earnings and other factors do not
compensate for the increased number of shares of such common stock.
Limited public market for our common stock may affect our shareholders' ability
to sell our common stock.
Our common stock currently is traded on the OTC Bulletin Board, which is
generally considered to be a less efficient market than national exchanges such
as NASDAQ. Consequently, the liquidity of our securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, difficulties in obtaining price
quotations, reduction in security analysts' and the new media's coverage of us,
if any, and lower prices for our securities than might otherwise be attained.
This circumstance could have an adverse effect on the ability of an investor to
sell any shares of our common stock as well as on the selling price for such
shares. In addition, the market price of our common stock may be significantly
affected by various additional factors, including, but not limited to, our
business performance, industry dynamics or changes in general economic
conditions.
We could suffer losses from exchange rate fluctuations.
Because we intend to market our products internationally, a portion of our
expected international revenue may be denominated in foreign currencies in the
future, which will subject us to risks associated with fluctuations in the
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foreign currencies. An increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and therefore less
competitive in foreign markets.
Applicability of "penny stock rules" to broker-dealer sales of our common stock
could have a negative effect on the liquidity and market price of our common
stock.
Our common stock is subject to the "penny stock rules" adopted pursuant to
Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, which apply
to non-NASDAQ companies whose common stock trades at less than $5.00 per share
or which has a tangible net worth of less than $5,000,000 -- or $2,000,000 if we
have been operating for three or more years. The penny stock rules impose
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and institutional
accredited investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
Consequently, the penny stock rules affect the ability of broker-dealers to sell
shares of our common stock and may affect the ability of shareholders to sell
their shares in the secondary market if such a market should ever develop, as
compliance with such rules may delay and/or preclude certain trading
transactions. The penny stock rules could have an adverse effect on the
liquidity and/or market price of our common stock.
Forward-Looking Statements
This prospectus includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995,
and we desire to take advantage of the "safe harbor" provisions in those laws.
Therefore, we are including this statement for the express purpose of availing
ourselves of the protections of these safe harbor provisions with respect to all
of the forward-looking statements we make. The forward-looking statements in
this prospectus, including statements under "Prospectus Summary," "Risk
Factors," "Management Discussion and Analysis of Financial Condition and Results
of Operation" and "Business," reflect our current views with respect to possible
future events and financial performance. They are subject to certain risks and
uncertainties, including specifically the absence of significant revenues,
financial resources, a history of losses, significant competition, the
uncertainty of patent and proprietary rights, trading risks of low-priced stocks
and those other risks and uncertainties discussed herein that could cause our
actual results to differ materially from our historical results or those we hope
to achieve. In this prospectus, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify certain forward-looking
statements. You are cautioned to consider the specific risk factors described in
"Risk Factors" and elsewhere in this prospectus and not to place undue reliance
on the forward-looking statements contained in this prospectus. We undertake no
obligation to announce publicly revisions we make to these forward-looking
statements to reflect the effect of events or circumstances that may arise after
the date of this prospectus. All written and oral forward-looking statements
made subsequent to the date of this prospectus and attributable to us or persons
acting on our behalf are expressly qualified in their entirety by this section.
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Use of Proceeds
We will not receive any proceeds from the sale of the shares by the selling
securityholders. However, we will receive up to $35 million from Swartz upon
Swartz's purchase of the shares from us and we may receive additional proceeds
from the sale to Swartz of shares issuable upon the exercise of warrants issued
or to be issued to Swartz pursuant to an investment agreement. We intend to use
the proceeds from the sale of the shares to Swartz and the exercise of warrants
by Swartz for working capital and general corporate purposes, including
acquisitions. To the extent we deem appropriate, we may acquire fully developed
products or businesses that, in our opinion, facilitate our growth and/or
enhance the market penetration or reputation of our products and services. To
the extent that we identify any such opportunities, an acquisition may involve
the expenditure of significant cash and/or the issuance of our capital stock. We
currently have no commitments, understandings or arrangements with respect to
any such acquisition.
Price Range of Common Stock
Our common stock is traded on the OTC Electronic Bulletin Board under the
symbol "BUGS." The following table sets forth the high and low bid prices of our
common stock for each quarter for the years 1997, 1998 and 1999, and the first,
second and third quarters-through June 23, 2000-of 2000. As of March 31, 2000,
there were approximately 700 holders of record of our common stock. We have
never paid any dividends.
The quotations set forth below reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
High Low
---- ---
1997
First Quarter ...................................... $ 75.00 $ 17.00
Second Quarter ..................................... 10.50 35.00
Third Quarter ...................................... 11.20 1.20
Fourth Quarter (July 1 through August 20) .......... 2.00 1.60
Fourth Quarter (August 21 through September 30)
(after a 1-for-20 reverse split) .............. 1.94 1.06
High Low
---- ---
1998
First Quarter ...................................... $ 2.06 $ 0.13
Second Quarter ..................................... 2.03 1.33
Third Quarter ...................................... 2.47 1.22
Fourth Quarter ..................................... 1.94 1.06
High Low
---- ---
1999
First Quarter ...................................... $ 4.87 $ 0.91
Second Quarter ..................................... 5.44 3.63
Third Quarter ...................................... 4.81 3.00
Fourth Quarter ..................................... 3.88 2.75
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High Low
---- ---
2000
First Quarter ...................................... $ 3.88 $ 1.56
Second Quarter ..................................... 2.03 2.00
Third Quarter (through June 23, 2000) .............. 1.13 1.00
Dividend Policy
We have not paid any dividends on our common stock during the past two
years. We expect to continue to retain all earnings generated by our operations
for the development and growth of our business, and do not anticipate paying any
cash dividends to our shareholders in the foreseeable future. The payment of
future dividends on our common stock and the rate of such dividends, if any,
will be determined by our board of directors in light of our earnings, financial
condition, capital requirements and other factors.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the financial condition and results of
operations of U.S. Microbics should be read in conjunction with the financial
statements and related notes thereto included in this prospectus. The following
discussion contains certain forward-looking statements that involve risks and
uncertainties. U.S. Microbics' actual results could differ materially from those
discussed herein. Factors that could cause or contribute to the differences are
discussed in "Risk Factors" and elsewhere in this prospectus. U.S. Microbics
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
Overview
During fiscal year ended September 30, 1999, U.S. Microbics' efforts were
directed to developing its biotechnology product line, fund raising, building
organizational infrastructure and the continued construction of manufacturing
facilities for production and shipment of microbes for remediation of
hydrocarbons, sewage treatment and agriculture applications and for the
retrofitting and shipment of the BIO-RAPTOR(TM). U.S. Microbics conducted
product demonstrations to show the efficacy of the microbial products in
hydrocarbon applications, odor control, waste management, manure and green-waste
conversion to compost, and restaurant and hotel applications. A technical
support team consisting of hydrocarbon, sewage and agriculture specialists was
hired and trained, a catalogue of products was produced in printed and Internet
downloadable form, training courses were developed and given for new users and a
sales and marketing training program was developed.
U.S. Microbics' powder blending facility is now complete and its expected
production capacity for its microbial blends is 200,000 units per month. U.S.
Microbics has implemented its in-house fermentation production and is increasing
capacity to supply sufficient microbes to meet sales projections for fiscal year
2000.
The Soil Recycling Center business plan has been developed and defined with
specific steps for obtaining government permits, environmental approvals and
funding and beginning operations. U.S. Microbics ran a demonstration center
using manure and green-waste to demonstrate product efficacy, develop operator
training techniques, determine BIO-RAPTOR(TM) operational logistics, manpower
requirements, water application and control procedures, loading and unloading,
and land farming and windrow optimization. These results were used in the Signal
Hill Petroleum demonstration program that demonstrated bioremediation of heavy
crude oil hydrocarbons to non-detectable levels within a six-week time frame.
U.S. Microbics does not have an existing backlog of sales orders and has
not generated significant sales or revenues to date related to its Microbial
Technology. Further, there can be no assurance that projected production and
sales volumes or sales prices will be achieved.
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Plan of Operations for the Fiscal Year Ending September 30, 2000
U.S. Microbics intends to generate revenue during fiscal year 2000 by
focusing on sales of its three product lines, Remediline(TM), Wasteline(TM) and
Bi-Agra(TM) and the sale of the BIO-RAPTOR(TM) and related consulting services
for microbial application. U.S. Microbics plans to sell its products to new and
existing end-user prospects, to soil recycling center licensees, and through
domestic and foreign distributors. Sales of BIO-RAPTORS(TM) for soil recycling
center applications could be limited by land use permit lead times and local
permitting for water use, air quality control, and conditional use. U.S.
Microbics also plans to distribute its product through the retail channel via
strategic relationships with existing distributors and joint ventures created
for domestic and international business.
With additional equity capital, U.S. Microbics plans to identify profitable
candidates for acquisition where the product lines acquired are complimentary or
add new distribution channels, and the companies provide synergistic
opportunities for economies of scale.
U.S. Microbics intends to raise additional capital to fund operations
through September 2000, and anticipates that cash generated from financings and
projected revenues will enable it to fulfill cash needs for fiscal year 2000
operations. There can be no assurance that U.S. Microbics will be able to raise
such funds on terms acceptable to it, if at all, or to generate such revenues.
There can be no assurance that U.S. Microbics will receive such financing or
generate revenues in the time frame anticipated, if at all.
If U.S. Microbics receives sufficient financing or generates significant
revenues, then U.S. Microbics intends to expand its fermentation capacity and
sales and marketing efforts during fiscal year 2000. During the first quarter of
fiscal year 2000, U.S. Microbics is building infrastructure (i.e., personnel,
procedures and systems) and intends to establish initial sales and marketing
operations. Research and development costs are projected to be under $1,000,000,
which will be associated primarily with specific product case study results for
generating sales and marketing collateral material. U.S. Microbics plans to
increase the number of employees to approximately 40 by the end of the fiscal
2000.
Results of Operations
For the six months ended March 31, 2000 compared to the six months ended
March 31, 1999
U.S. Microbics' revenues decreased 73%, or $37,834, to $13,894 for the six
months ended March 31, 2000, from $51,728 for the same period in fiscal 1999
primarily as a result of a decrease in licenses revenue. Revenues for the six
months ended March 31, 2000 consisted primarily of bio-remediation of
hydro-carbons in contaminated soil for an oil company and sales of microbial
blends for grease trap remediation.
Selling, general and administrative ("SG&A") expenses decreased 7%, or
$84,256, to $1,076,823 for the six months ended March 31, 2000, from $1,161,079
for the same period in fiscal 1999 primarily as a result of a reduction in
consulting expenses. SG&A expenses for the six months ended March 31, 2000,
consisted primarily of occupancy, payroll, accounting, legal, consulting, and
public relations expenses.
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U.S. Microbics incurred a net loss of $1,061,547 and had negative cash
flows from operations of $1,091,250 for the six months ended March 31, 2000
compared to a net loss of $1,118,516 and negative cash flows from operations of
$885,204 for the six months ended March 31, 1999. Basic and diluted net loss per
share was $.17 for the six months ended March 31, 2000 compared to $.35 for the
six months ended March 31, 1999. The decrease was due to the increase in average
shares outstanding of 6,205,704 for the six months ended March 31, 2000 compared
to 3,220,511 for the corresponding six months ended March 31, 1999.
Although U.S. Microbics believes revenues will increase during the last
half of fiscal 2000, based on the current financial condition of U.S. Microbics,
additional capital will be required in order for U.S. Microbics to maintain its
ongoing operations. In order to continue implementing U.S. Microbics' strategic
plan, U.S. Microbics is planning on raising up-to an additional $200,000 from
private placements during the third and fourth quarters of fiscal 2000. The
funds are targeted to expand the fermentation manufacturing operation and the
staffing of sales subsidiaries. There can be no assurance that U.S. Microbics
will be able to raise such capital on terms acceptable to U.S. Microbics, if at
all. U.S. Microbics' failure to obtain adequate financing may jeopardize its
existence. See "Liquidity and Capital Resources."
Environmental Reclamation, Inc. Joint Venture
On March 27, 2000, U.S. Microbics entered into a letter of intent with
Environmental Reclamation Inc., ("ERI") that provided that U.S. Microbics and
ERI will establish a joint venture to engage in bioremediating contaminated
properties, and operate soil recycling centers in one or more major U.S. cities.
U.S. Microbics is to supply the bioremediation technology and ERI is to act as
the contractor for bioremediation projects or as the operator for the soil
recycling centers. It is expected that the definitive agreement will provide
that:
o U.S. Microbics and Sub-Surface Waste Management (SSWM), a wholly owned
subsidiary engaged in the manufacturing and distribution of
bioremediation products will
(1) provide the BIO-RAPTOR(TM) and bioremediation technology,
products and services;
(2) support the use of the technology, products and services with
technical support services;
(3) leverage its business and political relationships to secure
bioremediation contracts or clean-up opportunities; and
(4) arrange financing to acquire the soil recycling centers and the
development of its proprietary technology.
The soil recycling centers will be setup to process hydrocarbon, including MTBE,
and pesticide contaminated soil, greenwaste, animal waste, kitchen grease,
contaminated railroad ties and telephone poles, and other waste materials as
dictated by local market conditions.
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o ERI will be responsible for
(1) managing and operating the Soil Recycling Centers, including
interacting with various federal, state and local environmental
authorities and private environmental companies involved in
overseeing and administering clean-up efforts;
(2) overseeing, managing and administering the clean-up of
contaminated sites or properties remediated by the joint venture;
(3) identifying, bidding and acquiring contracts for bio-remediation
of contaminated sites/properties or other projects that have
potential for profitable contribution to the joint venture; and
(4) locating sites in various municipalities suitable for soil
recycling centers.
LG Enterprises Joint Venture
In December 1999, U.S. Microbics announced that it will establish and
operate a jointly-owned company with LG Enterprises and Global Environmental
Inc., that will engage in bioremediation businesses and initiatives, including
acquiring and bioremediating contaminated properties, establishing and operating
soil recycling centers in one or more major U.S. cities, licensing its
technology in Mexico and establishing companies in Mexico to engage in
bioremediation of Mexican properties.
The agreement provides that:
o SSWM will:
(1) provide the BIO-RAPTOR(TM) and bioremediation technology,
products and services;
(2) manage and operate the soil recycling centers including
interacting with various federal, state and local environmental
authorities and private environmental companies overseeing and
administering clean-up efforts; and
(3) oversee, manage and administer the clean-up of contaminated sites
acquired by the joint venture.
o Global Environmental, Inc. will identify and secure a variety of
contaminated sites and properties that have the potential for
commercially viable redevelopment.
o LG Enterprises, an affiliate of LandGrant Corporation which is a full
service real estate operating company headquartered in San Diego,
California, will assist in the development of a number of projects
containing contaminated soil that must be remediated. U.S. Microbics
believes that LandGrant's financial expertise, developed through our
financing of acquisition and construction projects, will benefit U.S.
Microbics.
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Liquidity and Capital Resources
Cash and cash equivalents totaled $ 0.00 and $125,400 at March 31, 2000 and
September 30, 1999, respectively. U.S. Microbics had net bank overdrafts of
$25,300 as of March 31, 2000. Net cash used in operations was $1,091,250 for the
six months ended March 31, 2000, compared to $885,204 for the comparable period
in fiscal 1999.
During the six months ended March 31, 2000, U.S. Microbics raised $939,350
net of placement fees, of approximately $35,400, from private placements of
Series C preferred stock. As of March 31, 2000, U.S. Microbics has negative
working capital of $554,814 as compared to negative working capital of $554,800
as of September 30, 1999. U.S. Microbics will need to continue to raise funds by
various financing methods such as private placements to maintain its operations
until such time as cash generated by operations is sufficient to meet its
operating and capital requirements. There can be no assurance that U.S.
Microbics will be able to raise such capital on terms acceptable to it, if at
all.
To date, U.S. Microbics has financed its operations principally through
private placements of equity securities and debt. Subsequent to March 31, 2000,
U.S. Microbics has raised approximately $245,250, net of placement fees.
However, U.S. Microbics will have to raise an additional $100,000 either from
the sale of equity securities, debt or operating revenues to continue its
operations through June 30, 2000. U.S. Microbics anticipates that cash generated
from anticipated private placements and projected revenues during the third and
fourth quarters of fiscal 2000 will enable it to fulfill cash needs for fiscal
2000. However, there can be no assurance that any such private placements will
be completed or that any such revenues will materialize, either of which could
have a material adverse effect on U.S. Microbics.
In January 2000, U.S. Microbics signed a term sheet with Swartz Private
Equity, LLC of Atlanta, Georgia for up to a $35 million equity line. The term
sheet calls for a private equity line for the purchase of Common Stock, subject
to registration and certain other conditions and limited to a percentage of
dollar trading volume. On January 27, 2000, U.S. Microbics issued a warrant to
Swartz for the purchase of up to 250,000 shares of Common Stock in connection
with the proposed equity line. Warrants for 100,000 shares of Common Stock will
be exercisable upon the end of the final document review period, 75,000 shares
will be exercisable upon the execution of the equity line documents, and 75,000
shares will be exercisable upon the earlier of (i) July 10, 2000 or (ii) the
date on which the related registration is declared effective. Each warrant has
an exercise price equal to $2.00 per share, subject to adjustment. On March 14,
2000, U.S. Microbics completed an Investment Agreement with Swartz for the
equity line up to $35 million (the "Investment Agreement"). See "Investment
Agreement."
U.S. Microbics will need additional capital to continue its operations and
will endeavor to raise funds through the sale of equity shares and revenues from
operations. There can be no assurance that U.S. Microbics will obtain sufficient
capital or generate revenues on acceptable terms, if at all. Failure to obtain
such capital or generate such revenues would have an adverse impact on U.S.
Microbics' financial position and results of operations and ability to continue
as a going concern.
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Assuming U.S. Microbics raised projected capital during the last half of
fiscal 2000, U.S. Microbics projects expenditures for plant and equipment of
approximately $3,000,000 and research and development costs of less than
$1,000,000. Research and development costs will be associated primarily with
BIO-RAPTOR(TM) configuration for specific applications. U.S. Microbics also
plans to increase its number of employees to approximately 40 by the end of
fiscal year 2000.
U.S. Microbics' operating and capital requirements during the next fiscal
year and thereafter will vary based on a number of factors, including:
o the rate at which microbial products are shipped and generate profits;
o the necessary level of sales and marketing activities for
environmental products; and
o the level of effort needed to develop additional distribution channels
to the point of commercial viability.
There can be no assurance that additional private or public financing,
including debt or equity financing, will be available as needed, or, if
available, on terms favorable to U.S. Microbics. Any additional equity financing
may be dilutive to shareholders and such additional equity securities may have
rights, preferences or privileges that are senior to those of U.S. Microbics'
existing common or preferred stock. Furthermore, debt financing, if available,
will require payment of interest and may involve restrictive covenants that
could impose limitations on the operating flexibility of U.S. Microbics. The
failure of U.S. Microbics to successfully obtain additional future funding may
jeopardize its ability to continue its business and operations.
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Business
Overview
U.S. Microbics intends to build an environmental biotech company utilizing
the proprietary microbial technology, bioremediation patents, knowledge,
processes and unique microbial culture collection developed over 30 years by the
late George M. Robinson and his daughter Mery C. Robinson (collectively, the
"Microbial Technology"). U.S. Microbics creates and markets proprietary
microbial technologies that provide natural solutions to many of today's
environmental problems. U.S. Microbics' microbes or "bugs" can be used to break
down various substances, including oil, diesel, fuel, arsenic, certain toxic
waste, and certain water and soil contamination. U.S. Microbics intends to
leverage the products, applications and customer contacts developed by the
Robinsons to apply, develop, license and commercialize the Microbial Technology.
U.S. Microbics believes that it can build the foundation for the international
commercialization of its proprietary products based on the Microbial Technology
for applications in the global environmental, manufacturing, agricultural and
natural resource markets. Unlike certain other start-up companies that need to
develop a product or technology and find a market and customers, U.S. Microbics
already has advanced, proprietary technology, as well as products that have been
utilized in various environmental and agricultural applications worldwide. U.S.
Microbics is in the process of determining and obtaining the capital, personnel
and manufacturing and distribution capacity necessary to commercialize the
Microbial Technology.
U.S. Microbics' initial objective is to establish itself as a leading
provider of environmental technology and products to companies in the United
States through the licensing of technology that meets governmental standards, is
environmentally friendly, is easy to manufacture and apply and yields profit for
its licensees. To achieve this objective, U.S. Microbics intends to focus its
strategy on the following three elements:
o licensing its bioremediation technology to high-volume end-users for
hydrocarbon waste cleanup;
o developing a manufacturing center for its proprietary microbial
blends; and
o licensing its technology to entities for use in specific vertical
markets and territories, site clean-up and maintenance products,
agricultural growth enhancement and aquaculture/mariculture
applications.
U.S. Microbics' achievement of its objectives is highly dependent, among
other factors, on its ability to raise the necessary capital to build the
production facility that will supply potential new customers and satisfy the
potential demand from prior customers that previously utilized products based on
the Microbial Technology. U.S. Microbics intends to raise additional working
capital through the sale of shares of its Common Stock ("Common Stock") and
preferred stock or debt and through potential licensing arrangements. There can
be no assurance that U.S. Microbics will raise such capital on terms acceptable
to it, if at all. U.S. Microbics' failure to obtain adequate financing may
jeopardize its existence. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
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Business Development
U.S. Microbics was incorporated in the State of Colorado on December 7,
1984 under the name "Venture Funding Corporation" and has been engaged in a
variety of operations since inception. U.S. Microbics amended its Articles of
Incorporation in June 1993 to change its name to Global Venture Funding, Inc.
U.S. Microbics amended its Articles of Incorporation in May 1998, changing its
name to U.S. Microbics, Inc. and its stock trading symbol on the
Over-The-Counter Bulletin Board to "BUGS." U.S. Microbics' fiscal year ends on
September 30.
U.S. Microbics has six wholly-owned subsidiaries:
o XyclonyX;
o West Coast Fermentation Center ("WCFC");
o Sub Surface Waste Management, Inc. ("SSWM");
o Sol Tech Corporation, d.b.a. Wasteline Performance Corporation ("Sol
Tech");
o Bio-Con Microbes ("Bio-Con"); and
o Applied Microbic Technologies, Inc. ("AMTI").
WCFC's primary business is to cultivate microbial cultures that are to be
sold to other subsidiaries of U.S. Microbics. SSWM's business is to assemble and
sell BIO-RAPTOR(TM) and hydrocarbon treatment products using technology licensed
from XyclonyX. Sol Tech and Bio-Con are companies formed to service the waste
treatment and agriculture markets, respectively. AMTI intends to sell products
to oil and gas operators that use microbial blends that are specially formulated
for Microbially Enhanced Oil Recovery (MEOR). U.S. Microbics' strategy is to
maintain the Microbial Technology formulas with the technology experts at
XyclonyX, produce the microbe blends and formulations in its WCFC fermentation
facility and utilize sales subsidiaries to sell and license the microbe
solutions to targeted customers.
U.S. Microbics intends to obtain private financing for additional equity to
provide working capital for current overhead costs as well as to finance startup
costs for its wholly-owned subsidiaries and to fund potential acquisitions.
Organizational Structure
U.S. Microbics has developed an organizational structure of multiple
corporations for the purpose of segmenting its operations into distinct units
for proprietary microbe or "bug" production, research and development ("R&D"),
licensing and patent protection and the intended sale and licensing of microbial
products to specific market segments. As the public holding company, U.S.
Microbics intends to coordinate the deployment of the Microbial Technology to
its subsidiaries that in turn will license the technology and sell products to
end users. Several of U.S. Microbics' subsidiaries utilize corporate names that
have been used successfully by predecessor companies selling the Microbial
Technology.
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U.S. Microbics and its subsidiaries are described more fully below:
U.S. Microbics, Inc.
U.S. Microbics intends to profitably orchestrate the operations of its
subsidiaries and to provide administrative functions at beneficial economies of
scale. U.S. Microbics initially intends to acquire the capital needed to fund
the production plant, to acquire the necessary personnel and facilities and to
operate the individual subsidiaries. U.S. Microbics then intends to allocate its
resources among the subsidiaries so that they can operate profitably within the
organizational structure. Also, U.S. Microbics will provide to its subsidiaries
public relations, accounting, legal, human resources, capital acquisition and
merger and acquisition services.
XyclonyX
XyclonyX intends to research, develop, formulate, protect, apply, acquire,
license and transfer its technologies, consisting of patents, proprietary
knowledge, products, processes and personnel, in the environmental,
petrochemical, agriculture and waste treatment marketplaces. XyclonyX has
developed a formulation for mass producing proprietary microbial blends in
liquid and powder forms that U.S. Microbics believes is highly concentrated,
cost effective and difficult to replicate.
West Coast Fermentation Center
WCFC manufactures microbial blends by using fermentation technology, powder
blending techniques and combinatorial liquifaction including microbial blends
for the Remediline(TM), Wasteline(TM) and Bi-Agra(TM) product lines. WCFC
intends to build a larger microbe laboratory, pilot plant and quality control
center to meet projected production demands in fiscal year 2000 if additional
funds are generated from sales and/or equity/debt funding.
Sub-Surface Waste Management, Inc.
SSWM intends to license patented BIO-RAPTOR(TM) processes, hydrocarbon
microbial blends (Remediline(TM)) and associated technical services to solve
customer environmental problems within the United States. SSWM has delivered
microbial blends to remove hydrocarbons from soil and has successfully
demonstrated crude oil bioremediation at an oil refinery in Southern California.
SSWM is working with environmental consultants, remediation contractors, and
commercial developers to place the BIO-RAPTOR(TM) into commercial operation as
either a transportable unit or as a fixed unit in a soil-recycling center. SSWM
also has successfully demonstrated the BIO-RAPTOR(TM) in greenwaste and
composting applications with typical processing times that will be substantially
faster than processing using natural conversion. Sales to the soil recycling
centers will be performed by in-house sales personnel in conjunction with
third-party joint venture partners that are experienced in government relations
and external project financing. SSWM also has developed a bioremediation
training course for use by new licensees and BIO-RAPTOR(TM) users.
24
<PAGE>
Sol Tech Corporation
Sol Tech has delivered limited quantities of waste treatment and odor
control products (Wasteline(TM)) to customers in the hospitality, energy
generation, restaurant and assisted living markets. Sol Tech also has provided
technical support services to customers in these markets. U.S. Microbics has
submitted sales proposals for municipal waste treatment in California and
Florida, prison system use in Texas, municipal solid waste treatment in
Massachusetts and composting use in Central California. In addition, Sol Tech
has developed a training course for customer support and training for new
licensees of waste treatment and odor control products.
Bio-Con Microbes, Inc.
Bio-Con has delivered limited quantities of Bi-Agra(TM) products to
customers in the United States for agricultural uses, including animal manure
remediation, greenwaste compost applications and bio-dynamic soil amendments for
vineyards, and has provided related technical support services. Bio-Con intends
to generate sales and support for customers with agricultural operations. In
addition, Bio-Con will need to implement a customer support and training program
as the number of new licensees and customers increases.
Applied Microbic Technology, Inc.
AMTI intends to license customers in the United States to use microbial
blends that are specially formulated for Microbially Enhanced Oil Recovery
(MEOR) and to provide related technical support services.
Product/Service Profile
U.S. Microbics intends to license its patented technology, manufacture and
sell its proprietary blends and educate and train customers concerning the
proper use and application of its products. U.S. Microbics' major products and
processes include the following:
o in-situ bioremediation of underground contaminants;
o surface enclosed and open bioremediation of contaminants;
o open-water-both fresh and marine-containment/treatment bioremediation;
o habitat restoration of environmentally "challenged" areas;
o increased agriculture/aquaculture and mariculture food production; and
o decreased water and fertilizer use in agricultural applications.
In addition, the Microbial Technology and related products can be used in
niche markets, such as agriculture, decorative water landscape maintenance and
restaurant grease traps. With services and products covering a variety of
potential applications, U.S. Microbics believes that it is positioned to offer
customer-driven applications that are cost effective and beneficial to its
future customers.
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<PAGE>
The SSWM BIO-RAPTOR(TM) is a patented bioremediation shredder, sprayer and
conveyor system for the cleanup of hydrocarbon contaminated soils. It treats
soil contamination on-site, reducing costs, increasing material treatment
surface area and aeration, reducing retention time, and lowering potential
liability through on-site treatment and the elimination of risks relating to
contaminant transportation and site downtime. The BIO-RAPTOR(TM) consists of the
Microbial Application System(TM) (MAS) which is comprised of the sprayer, pump
and activation system, and a separate shredder and conveyor system. The MAS can
be adapted to existing shredder/conveyor systems of prospective customers.
In addition to the above ground BIO-RAPTOR(TM) process, U.S. Microbics
offers in-situ treatment for hydrocarbon reduction, a process that does not
require soil excavation. The in-situ and BIO-RAPTOR(TM) processes for waste
decomposition use non-genetically-engineered blends of naturally-occurring
microbes, which are effective in hard-to-reach contaminated areas and/or
environmentally sensitive locations.
U.S. Microbics' blends and bioprocessing treatment systems also are
available for agricultural yield enhancement, odor control, waste pretreatment
and stabilization, sewer/drain preventive maintenance, and fly control for
dairies and feedlots and feedlot waste cogeneration. U.S. Microbics also offers
a drain maintenance and grease trap program for restaurants, hotels, resorts and
the hospitality industry. With the current emphasis on water and resource
conservation, another application involves algae control for decorative ponds
and golf course lakes and the use of reclaimed water for site irrigation.
Customer Profile
U.S. Microbics plans to license its technology and sell its products to
customers that previously utilized the Microbial Technology in the
bioremediation, agricultural and waste treatment industries. U.S. Microbics
believes that many customers require natural solutions for
"better-faster-cheaper" waste treatment, increased food production and lower
water and natural resource consumption. U.S. Microbics further believes that
future customers could include contractors, insurance companies, petrochemical
manufactures, land fill operators, farmers, nurseries, food processors,
restaurants, municipalities, state and federal governments, golf courses, water
districts, fisheries, banks and financial institutions.
U.S. Microbics has shipped, through May 31, 2000, products to customers in
diverse industries such as hospitality--restaurant and hotel; wine--vineyard
growth; oil refinery--crude oil bioremediation; and assisted living--odor
control.
Technology Overview
Product Lines. U.S. Microbics currently has four product lines that are
defined in the following table:
Product Line Description of Typical Use
------------ --------------------------
BIO-RAPTOR(TM) BIO-RAPTOR(TM) and Microbial Application
System(TM)
Wasteline(TM) Anaerobic and Aerobic Waste Treatment Products
Remediline(TM) Hydrocarbon Treatment Products
Bi-Agra(TM) Agricultural, Aquaculture and Mariculture
Treatment Products, Biological Pesticides, Bio-
Dynamic Products
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<PAGE>
Patents. The process patents to be licensed by XyclonyX include the
following: decontamination of hydrocarbon contaminated soil--U.S. patent
#5,039,415; and oil contamination clean up by use of microbes and air--U.S.
patent 5,334,533. XyclonyX also owns the Australian patent #652103 entitled
"Decomposition of Hydrocarbon Contaminated Soil."
Culture Collection. U.S. Microbics, through XyclonyX, has the rights to use
a culture collection developed by George M. Robinson and Mery C. Robinson during
the past 30 years. The proprietary culture collection consists of 30 microbes
that are combined into unique consortiums to solve particular environmental
problems, increase agricultural production, reduce water consumption or increase
oil production. The unique collection of microbes and the specific combinations
of bacteria comprise the products to be manufactured by WCFC.
Research and Technical Notes. The research and technical notes of George M.
Robinson consist of 30 years of theoretical and empirical research leading to
the successful formulae for microbe separation, ultra-high yield fermentation,
consortium formulations for specific problem solving tasks, long term storage of
microorganism and completion of field-successful applications.
Research and Development. During each of the last two fiscal years, U.S.
Microbics has incurred minimal R&D expenditures relating to its activities for
microbial blends and associated processes.
Market Segments Targeted
U.S. Microbics has identified the following nine market segments in which
its product lines have been sold successfully by predecessor companies. U.S.
Microbics and its subsidiaries plan to sell products to the same market
segments.
--------------------------------------------------------------------------------
Product Line Series Designation
--------------------------------------------------------------------------------
Market Description BIO- Remediline Wasteline Bi-
RAPTOR (TM) (TM) Agra(TM)
(TM)
--------------------------------------------------------------------------------
Commercial - Retail Customer X X X
Outlets
--------------------------------------------------------------------------------
Commercial - Wholesale to X X X
Commercial
Accounts
--------------------------------------------------------------------------------
Industrial Industrial X X X X
Accounts
--------------------------------------------------------------------------------
Municipal City, State and X X X X
Federal
Governments
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
Agricultural Food/Non-Food X X X X
Growers
--------------------------------------------------------------------------------
Manufacturing Food Processors, X X X
Lumber, Textile
--------------------------------------------------------------------------------
Military Armed Services X X X X
--------------------------------------------------------------------------------
Healthcare Hospitals, X X X
Clinics, Surgi-
centers
--------------------------------------------------------------------------------
Energy Oil & Gas X X X X
Operators
--------------------------------------------------------------------------------
Human Resources
As of June 23, 2000, U.S. Microbics had 13 full-time employees and 10
full-time and part-time consultants, for a combined total of 23 employees and
consultants. U.S. Microbics' personnel are employed as follows: 4 in
administrative functions; 12 in production support and manufacturing; 2 in
promotion; and 5 in sales. During fiscal year 2000, U.S. Microbics intends to
hire additional consultants and employees in the areas of manufacturing,
administration, sales and marketing, and customer support. In particular,
Microbics must recruit qualified personnel for key positions in its microbial
manufacturing and sales operations, including qualified personnel for product
management, quality control functions, web design and maintenance, and
experienced sales consultants. U.S. Microbics' failure to effectively recruit,
hire, train and manage qualified personnel could have a material adverse effect
on its business, financial condition and results of operations. See "Risk
Factors-Our success depends in large part on our ability to attract and retain
key employees and management."
Technical Advisory Group
XyclonyX has assembled the following team of technical advisors to assist
with its operations:
o Kary Mullis, Ph.D.-Nobel Laureate, inventor/biochemist, recognized
expert of the PCR (Polymerase Chain Reaction) technology;
o Robert B. "Jones" Grubbs, Ph.D.-bioaugmentation expert and President
and CEO of Solmar Corporation, a leading marketer of biologicals to
municipalities and industry located in Vista, California;
o Zak Hassanian, Ph.D.-recognized expert in industrial-scale biological
fermentation, manufacturing and production and President and CEO of
Prima Pharma, a pharmaceutical biotechnology reagent company;
o Dominic Colasito, Ph.D.-microbiologist and co-patent holder of
BIO-RAPTOR(TM) with extensive fermentation and field application
experience; and
o Jack Smith-co-patent holder of BIO-RAPTOR(TM) with extensive field
experience in microbial bioremediation for various applications
including agricultural use.
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<PAGE>
Sales and Marketing
Marketing and Licensing
U.S. Microbics believes that it is well positioned to exploit numerous
market opportunities through a controlled licensing and microbial production
program. This program will allow U.S. Microbics to direct resources to research
and marketing rather than to heavy equipment manufacturing.
Marketing Plan
U.S. Microbics' marketing plan employs several strategies:
Direct Sales by U.S. Microbics' Employees. U.S. Microbics' marketing
personnel have identified, contacted and shipped products to U.S.-based
companies in the oil refining, waste treatment, hospitality, wine and
agricultural industries. U.S. Microbics sells a technology-licensing package to
interested companies, using exclusive and non- exclusive agreements depending
upon the technology and geographic area licensed.
Independent Distributors. Independent distributors specialize in specific
vertical markets where products based on the Microbial Technology augment
existing distributed products. As an additional revenue source, U.S. Microbics
will distribute the products based on the Microbial Technology under territory
licenses and sell them at wholesale to distributors.
Internet Commerce. U.S. Microbics currently uses the Internet for
distributing information about its products and application results. U.S.
Microbics currently plans to offer certain products via the Internet directly to
end-users and consumers in fiscal year 2000.
Other. U.S. Microbics intends to engage in direct advertising, professional
conference participation and humanitarian support of environmentally responsible
projects. U.S. Microbics has placed advertising in various trade publications
and has participated in Brownfield conferences, and was a co-sponsor of the In
situ and Onsite Bioremediation Symposium in 1999. In addition, U.S. Microbics'
products have been showcased in Waste Treatment Technology News, Landscape
Contractor Magazine, San Diego Business Journal and the San Diego Daily
Transcript.
Market Opportunities
U.S. Microbics plans to build sales both geographically and along product
lines through two strategies. First, U.S. Microbics plans to generate sales of
its proposed products and services based on the Microbial Technology in as many
countries and product lines as possible. Second, U.S. Microbics intends to
develop additional technologies based on its existing technology and market such
technologies to existing and new customers.
Key Benefits
U.S. Microbics intends to provide profitable niche opportunities for
various companies in the bioremediation, petroleum production, hazardous/toxic
waste reduction, municipal waste, landfill mitigation, agricultural and
aqua/mariculture markets. U.S. Microbics believes that the key benefits of its
products and services based on the Microbial Technology include:
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<PAGE>
o proprietary mass production techniques that can be used in third world
countries;
o high "bug density count" offering efficient products;
o unique microbial cultures developed over multiple years;
o utilization of naturally occurring bacteria;
o environmentally friendly products and services that meet governmental
standards and are easy to apply;
o efficient results at affordable prices;
o ease of shipment using regular carriers;
o potential for on-site growth of products for special applications;
o applications of products by low skilled workers; and
o protected market opportunities through patent protection.
U.S. Microbics believes that the foregoing benefits affect significantly
replacement, retrofit and new applications in its identified markets. In
addition, if new applications in prospective markets become economically
feasible, then U.S. Microbics will offer these applications to companies that
wish to exploit such opportunities. U.S. Microbics believes that the products
and services based on the Microbial Technology, when licensed and offered by
U.S. Microbics, will combine well with recent technological developments that
have focused on micro-miniaturization, low energy/high efficiency requirements
and environmentally friendly and high profit relationships.
Strategic Alliances
On March 27, 2000, U.S. Microbics entered into a letter of intent with
Environmental Reclamation Inc., ("ERI") that provided that U.S. Microbics and
ERI will establish a joint venture to engage in bioremediating contaminated
properties, and operate soil recycling centers in one or more major U.S. cities.
U.S. Microbics is to supply the bioremediation technology and ERI is to act as
the contractor for bioremediation projects or as the operator for the soil
recycling centers. The soil recycling centers will be set up to process
hydrocarbon, including MTBE, and pesticide contaminated soil, greenwaste, animal
waste, kitchen grease, contaminated railroad ties and telephone poles, and other
waste materials as dictated by local market conditions.
In addition, during the first quarter of fiscal year 2000, U.S. Microbics
announced that it will enter into a series of joint ventures with LG Enterprises
to engage in a number of bioremediation businesses and initiatives. U.S.
Microbics also announced a strategic alliance with Manufacturers Direct
Services, a marketing and distribution company, which will assist U.S. Microbics
in marketing its products to new customers. U.S. Microbics also has signed a
letter of intent with Commercial Foody's Ltda. for distribution of its
Wasteline(TM) products in Chile. U.S. Microbics believes that these alliances
30
<PAGE>
may provide endorsements for the Microbial Technology, technical validation and
measurement of its applications and financial rewards for the involved parties
in terms of licenses and technology exploitation.
Endorsements
U.S. Microbics is engaged in educational and advocacy-building activities
that it believes will lead to professional, educational, business, environmental
and utility-provider endorsements. U.S. Microbics believes that these entities
will endorse its products and services as they are further introduced to the
merits of the Microbial Technology under development, its wide application
potential and related environmental and energy production enhancement and cost
savings.
Predecessor Companies Customer Base
The predecessor companies of Bio-Con, AMTI and SSWM had customers in the
agricultural, aquaculture, municipal, financial, energy, military and commercial
market segments. U.S. Microbics intends to pursue orders from these customers.
Manufacturing
U.S. Microbics opened its new facility for the production of microbial
blends in September 1998 and commenced shipments and inventory buildup in
December 1999. During fiscal year 1999, U.S. Microbics expanded its
manufacturing capacity to supply the potential demand for its products at its
leased facility located in Carlsbad, California. U.S. Microbics also shipped
products for waste treatment, odor control, bioremediation and agricultural use
during fiscal year 1999.
U.S. Microbics may continue third-party outsourcing arrangements for the
manufacture and supply of certain products and/or components to augment its
internal manufacturing capacity. U.S. Microbics currently performs fermentation,
blending, packaging and shipping activities at its Carlsbad facility. U.S.
Microbics' development of its internal manufacturing capacity depends in large
part on its ability to raise sufficient capital for this purpose. There can be
no assurance, however, that U.S. Microbics will raise sufficient capital or that
it will develop adequate manufacturing capacity, the failure of either of which
could have a material adverse effect on U.S. Microbics' business, financial
condition and results of operations.
Licenses
XyclonyX has granted exclusive marketing licenses to its sister
subsidiaries for use of the Microbial Technology in the United States. These
licenses were granted to Bio-Con-agriculture and aqua/mariculture, SSWM
(BIO-RAPTOR(TM)), and Sol Tech -- sewage treatment. A U.S. manufacturing license
was granted to WCFC. The MEOR technology was licensed to AMTI during fiscal year
1999.
Environmental Matters
U.S. Microbics believes that its operations currently comply in all
material respects, with applicable federal, state and local laws, rules,
regulations and ordinances regarding the discharge of materials into the
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<PAGE>
environment. U.S. Microbics does not believe that maintaining such compliance
will have a material impact on its capital expenditures, future earnings and
competitive position. No material capital expenditures for environmental control
facilities presently are planned. Although the environmental technology
opportunities are numerous and U.S. Microbics has shipped products and has
licensed its technology, the ability to finance, build and profitably
manufacture the microbial blends has not yet been achieved. U.S. Microbics'
failure to operate such a plant in a profitable manner could materially affect
the financial results and the amount of capital required to operate the business
in the future.
Government Approvals
U.S. Microbics is not aware of any additional government approvals that are
needed for its products or services other than permits associated with the use
of the BIO-RAPTOR(TM) on a specific site. These permits may include a
conditional use permit, to compost or treat contaminated soil, and permits for
water usage, air quality, and toxic substances to be treated. The lead-time for
permits can vary from several weeks to a year or more depending on site-specific
circumstances. These lead times may prevent U.S. Microbics from delivering
BIO-RAPTOR(TM) on a timely basis for specific site applications including soil
recycling centers and/or transportable BIO-RAPTOR(TM) applications.
Property
Since September 1998, U.S. Microbics has occupied 22,000 square feet of
manufacturing and administration office space in the Carlsbad Research Center in
Carlsbad, California. U.S. Microbics has a five-year lease commitment with a
five-year option and right of first refusal on adjacent space. U.S. Microbics
believes that this facility should provide adequate space for the next three
years, at which time one or more of the subsidiaries may have to relocate to
other space.
Legal Proceedings
In March 1999, U.S. Microbics was served with a shareholder derivative
lawsuit titled Merriam v. U.S. Microbics, et. al, Marin County Superior Court,
Case No. 991288. This lawsuit alleges, among other things, that certain stock
was improperly issued to the President of U.S. Microbics and to certain
consultants for services. U.S. Microbics formed a special independent committee
of the Board of Directors to investigate these claims. U.S. Microbics has
engaged outside legal counsel to represent it in this matter and intends to
vigorously defend this action. Although management believes the lawsuit to be
without merit, an unfavorable ruling would have a material adverse impact on
U.S. Microbics' financial position and results of operations.
On December 16, 1999, Extec USA, Inc. filed a lawsuit against U.S.
Microbics in the Riverside County Superior Court, Case No. 336732. This lawsuit
asserts that U.S. Microbics failed to pay the full purchase price for certain
shredding equipment. U.S. Microbics has reached an out of court settlement with
Extec USA to increase the deposit on the equipment by $30,000.
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<PAGE>
On December 17, 1999, Red Mountain Pacific, LLC filed a lawsuit against
U.S. Microbics in the San Diego County Superior Court, Case No. N002193. This
lawsuit asserts that U.S. Microbics failed to pay the full rental price for
certain equipment. U.S. Microbics has fulfilled its obligation under this
agreement.
33
<PAGE>
Management
The directors and executive officers of U.S. Microbics and their ages at
June 30, 2000 are as follows:
Name Age Position
---- --- --------
Robert C. Brehm 52 President, Chief Executive Officer and Chairman
of the Board
Mery C. Robinson 49 Chief Operating Officer, Secretary and Director
Roger K. Knight 76 Vice President, Director
Conrad Nagel 59 Chief Financial Officer
Steven C. Hopkins 57 Director
Robert Key 54 Director
The Bylaws of U.S. Microbics provide for a minimum of three directors and a
maximum of 11. Each director of U.S. Microbics holds office until the next
annual meeting of shareholders and until his or her successor has been elected
and qualified. Each executive officer holds office at the pleasure of the board
of directors of U.S. Microbics ("Board of Directors") and until his or her
successor has been elected and qualified. A brief background of each Director
and Executive Officer is provided below:
Robert C. Brehm has served as U.S. Microbics' Chief Executive Officer,
President and Chairman of the Board since July 1997. He also served as its Vice
President from November 1996 to January 1997 and as a consultant to U.S.
Microbics through Robert C. Brehm Consulting, Inc, an investment banking,
investor relations and strategic planning company. From July 1994 through the
present, Mr. Brehm has served as the President of Robert C. Brehm Consulting,
Inc. From 1991 to 1994, he was the President of Specialty Financing
International, Inc., a finance procurement company. Mr. Brehm has owned computer
hardware, software, finance and consulting companies. Mr. Brehm has a double
engineering degree in electrical engineering and computer science and an MBA in
Finance and Accounting from U.C. Berkeley.
Mery C. Robinson has served as a Director of U.S. Microbics since September
1997 and Executive Vice President and Secretary since September 1997. Ms.
Robinson was appointed Chief Operating Officer on October 1, 1998. Ms. Robinson
is the founder of XyclonyX and has served as its President and Chief Executive
Officer since August 1997. Ms. Robinson was the President of predecessor
corporation Sub-Surface Waste Management from 1992 to 1995 and President of
Omega Resources Management from 1995 to 1997. From 1986 to 1992, she served as
the Vice President of Finance and Administration of Westside Telephone Systems
in Santa Monica, California, a telephone interconnect service and equipment
sales company. Ms. Robinson has held various other positions in operating and
start up high-tech engineering and biotech companies. She received her BS in
Journalism from California Polytechnic State University, San Luis Obispo, a
Masters of Science in Environmental Science/Engineering from California State
University, Dominguez Hills, and has attended the NFWBO-sponsored/Wharton
Graduate School of Business/Entrepreneurial Mini-MBA program.
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Roger K. Knight has served as a Director of U.S. Microbics since February
1990 and Vice President-Business Development since July 1997. Mr. Knight has
significant experience in identifying business candidates for acquisitions, and
served as U.S. Microbics' President from January 1995 through October 1996. Mr.
Knight retired from the U.S. Navy as a Captain in July 1965, and has been
involved in retail operations since the mid-1970s.
Conrad Nagel has served as U.S. Microbics' Chief Financial Officer since
July 1998. Mr. Nagel was previously hired as the Chief Financial Officer of
Global Venture Funding, Inc. in April 1997, and served U.S. Microbics as a
consultant from September 15, 1997 through June 1998. Mr. Nagel has an MS degree
in Accounting, Kansas University (1964), a BS degree in Business, University of
Kansas (1963) and a CPA since 1966. Mr. Nagel has been associated with SEC work,
auditing, and finance operations for the past 30 years including Audit Manager
for Touche Ross (now Deloitte & Touche), Vice President of Finance - Decision
Incorporated, Internal Audit Manager for Kaiser Aetna, CFO for Calusa Financial
Medical, Inc., Vice President of Finance for Medical Capital Corporation and
over fifteen years CPA practice specializing in taxation and SEC work.
Stephen C. Hopkins has served as a Director of U.S. Microbics since July
1998. Mr. Hopkins is the President of Hopkins Real Estate Group, Inc., a
commercial real estate development company located in Newport Beach, California.
Founded in 1972, Mr. Hopkins' company specializes in the acquisition and
development of shopping centers in urban landfill and redevelopment areas. He
received his BA in Public Service from the University of California, Los Angeles
in 1964.
Robert H. Key is Chairman and Chief Executive Officer of Arivest
Corporation, a real estate investment and development firm, located in Phoenix,
Arizona. Arivest Corporation is the parent corporation of Corporate Realty
Advisors, Inc., a commercial real estate brokerage firm. Mr. Key joined Arivest
Corporation as president upon its formation in April, 1979. He holds a Bachelor
of Science degree from Arizona State University, Tempe, Arizona, (1972) with a
major in Business Administration. Mr. Key has been a general partner, real
estate broker, consultant or developer of a large number of commercial real
estate projects. Robert H. Key began serving as a Director of U.S. Microbics on
July 18, 1999.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
U.S. Microbics' executive officers, directors and persons who beneficially own
more than 10% of U.S. Microbics' Common Stock to file reports of their
beneficial ownership and changes in ownership-Forms 3, 4 and 5, and any
amendment thereto-with the SEC. U.S. Microbics believes, based solely on review
of the copies of such reports furnished to it and written representations that
no other reports were required, that its officers, directors and greater than
ten percent (10%) shareholders complied with all applicable Section 16(a) filing
requirements, except for: (i) one Form 4 and one Form 5 filed late by Robert C.
Brehm, the President, Chief Executive Officer and Chairman of the Board of U.S.
Microbics; (ii) one Form 4 and one Form 5 filed late by Mery C. Robinson, the
Chief Operating Officer, Secretary and Director of U.S. Microbics; (iii) one
Form 4 of U.S. Microbics and one Form 5 filed late by Roger K. Knight, the Vice
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<PAGE>
President and Director of U.S. Microbics; (iv) one Form 4 of U.S. Microbics and
one Form 5 filed late by Conrad Nagel, Chief Financial Officer of U.S.
Microbics; (v) one Form 4 and one Form 5 filed late by Steven C. Hopkins, a
Director of U.S. Microbics and (vi) one Form 3 and one form 5 filed late by
Robert H. Key, a Director of U.S. Microbics. U.S. Microbics has filed all
delinquent Forms 3, 4 and 5.
Executive Compensation
Summary of Compensation
The following executive compensation disclosure reflects all compensation
awarded to, earned by or paid to the Named Executive Officers, as defined below,
for the fiscal years ended September 30, 1999, 1998 and 1997. The named
executive officers (the "Named Executive Officers") are U.S. Microbics' Chief
Executive Officer, regardless of compensation level, and the other executive
officers of U.S. Microbics who each received in excess of $100,000 in total
annual salary and bonus for fiscal year 1999. Compensation is shown in the
following table:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------------- --------------------------------------------------
Awards Payouts
----------------------------------- ------------
Securities
Name and Principal Other Annual Restricted Stock Underlying All Other
Position Fiscal Year Salary ($) Compensation Awards ($) Options/SARs (#) Compensation
-------- ----------- ---------- ------------ ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Brehm(1) 1999 191,166 -- 1,500,000 --
President 1998 75,675 -- 90,000(3) 550,000 --
1997 15,000 -- -- 125,000 --
Mery C. Robinson(2) 1999 191,231 -- 1,500,000 --
Chief Operating 1998 55,000 -- 80,000(4) 550,000 --
Officer 1997 -- -- -- -- --
----------
</TABLE>
(1) Mr. Brehm's employment with U.S. Microbics commenced in July 1997.
(2) Ms. Robinson's employment with U.S. Microbics commenced in September 1997.
(3) During fiscal year 1998, Mr. Brehm received the following shares as bonus
compensation: 2,000 shares of Series D Preferred Stock valued at $5.00 per
share in October 1997, 7,000 shares of Series D Preferred Stock valued at
$10.00 per share in November 1997, and 500 shares of Series D Preferred
Stock valued at $20.00 per share in May 1998. Pursuant to an employment
contract dated October 1, 1998, Mr. Brehm received options to purchase
1,000,000 shares of Common Stock; as of April 30, 2000, 300,000 shares have
vested at a total value of $363,000.
(4) During fiscal year 1998, Ms. Robinson received the following shares as
bonus compensation: 7,000 shares of Series D Preferred Stock valued at
$10.00 per share in November 1997, and 500 shares of Series D Preferred
Stock valued at $20.00 per share in May 1998. In addition, on October 19,
1998, the Board of Directors authorized the issuance of an additional 5,000
shares of Series D Preferred Stock to Ms. Robinson as compensation.
Pursuant to an employment contract dated October 1, 1998, Ms. Robinson
received options to purchase 1,000,000 shares of Common Stock; as of April
30, 2000, 300,000 shares have vested at a total value of $363,000.
36
<PAGE>
Stock Option Grants
The following table shows all individual grants of stock options to the
Named Executive Officers during the fiscal year ended September 30, 1999.
Option/SAR Grants in Last Fiscal Year
Number of Percent of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/SH) Date
---- ----------- ----------- ------------ ----
Robert C. Brehm 500,000(1) 31.2% 1.00 10/19/03
1,000,000(2) 15.6% 1.25 10/01/03
Mery C. Robinson 500,000(1) 31.2% 1.00 10/19/03
1,000,000(2) 15.6% 1.25 10/01/03
-------------------
(1) These options are completely vested and may be exercised at any time.
(2) These options vest over a period of 60 months. If a specified corporate
transaction such as a dissolution, merger or other reorganization of U.S.
Microbics in which more than 50% of U.S. Microbics' stock is exchanged,
vesting on such options shall be accelerated unless the surviving
corporation assumes the options outstanding, substitutes similar rights for
outstanding options or the options shall continue.
Option Exercises in Last Fiscal Year and Fiscal-End Option Values
Set forth below is information with respect to exercises of stock options
by the Named Executive Officers during the fiscal year ended September 30, 1999,
and the fiscal year-end value of all unexercised stock options held by such
persons.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying
Unexercised Value of Unexercised,
Options Held at In-the-Money Options at
Fiscal Year-End# Fiscal Year-End ($)(1)
------------------------------- ---------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Brehm -- -- 1,275,000 900,000 $1,100,000 $1,575,000
Mery C. Robinson -- -- 1,150,000 900,000 $850,000 $1,575,000
----------
</TABLE>
37
<PAGE>
(1) Based on the closing price of $3.00 for the shares of Common Stock of U.S.
Microbics traded on the OTC Bulletin Board as of September 30, 1999.
Employment and Consulting Agreements
Effective October 1, 1998, U.S. Microbics entered into an employment
agreement with Robert C. Brehm, U.S. Microbics' President and Chief Executive
Officer. Mr. Brehm's employment agreement provides for a term of five years, an
initial annual base salary of $180,000, salary increases of $30,000 per annum
and discretionary incentive bonuses. Pursuant to the employment agreement, U.S.
Microbics granted to Mr. Brehm stock options covering 1,000,000 shares of Common
Stock exercisable at $1.25 per share. These stock options will vest in ten equal
installments of 100,000 shares commencing on April 1, 1999 and on the first day
of each six-month period thereafter. If the ownership or control of U.S.
Microbics is changed with respect to over 30% of the issued and outstanding
shares of Common Stock, Mr. Brehm will have the right to exercise 100% of his
unvested stock options. All unvested stock options are subject to cancellation
by U.S. Microbics if Mr. Brehm's employment with U.S. Microbics is terminated at
any time prior to the term of the employment agreement.
Effective October 1, 1998, U.S. Microbics entered into an employment
agreement with Mery C. Robinson, its Chief Operating Officer. Ms. Robinson's
employment agreement provides for a term of five years, an initial annual base
salary of $180,000, salary increases of $30,000 per annum and discretionary
incentive bonuses. Pursuant to the employment agreement, U.S. Microbics granted
to Ms. Robinson stock options covering 1,000,000 shares of Common Stock
exercisable at $1.25 per share. These stock options will vest in ten equal
installments of 100,000 shares commencing on April 1, 1999 and on the first day
of each six-month period thereafter. If the ownership or control of U.S.
Microbics is changed with respect to over 30% of the issued and outstanding
shares of Common Stock, Ms. Robinson will have the right to exercise 100% of her
unvested stock options. All unvested stock options are subject to cancellation
by U.S. Microbics if Ms. Robinson's employment with U.S. Microbics is terminated
at any time prior to the term of the employment agreement.
U.S. Microbics has entered into consulting agreements for various services,
including public relations, marketing, technology transfer and engineering
services. U.S. Microbics typically has compensated its consultants through stock
options and share issuances.
Compensation of Directors
Members of the Board of Directors are not compensated for serving as
directors of U.S. Microbics.
38
<PAGE>
Principal Shareholders
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 23, 2000 by (i) each person who is
known by U.S. Microbics to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director of U.S. Microbics, (iii)
each of the Chief Executive Officer and the four (4) most highly compensated
executive officers who earned in excess of $100,000 for all services in all
capacities (collectively, the "Named Executive Officers") and (iv) all directors
and executive officers of U.S. Microbics as a group. Unless otherwise indicated
below, to the knowledge of U.S. Microbics, all persons listed below have sole
voting and investing power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable community property
laws, and, unless otherwise stated, their address is 5922-B Farnsworth Court,
Carlsbad, California 92008.
Name and Address of Beneficial Owner Number of Shares(1) Percent
------------------------------------ ------------------- -------
Robert C. Brehm 3,283,612 (2) 32.28%
President, Chief Executive Officer and
Chairman of the Board
Mery C. Robinson 3,175,000 (3) 30.55%
Chief Operating Officer,
Secretary and Director
Stephen Hopkins 800,000 (4) 8.56%
Director
Roger K. Knight 634,575 (5) 7.30%
Director
Conrad Nagel 252,860 (6) 2.91%
Chief Financial Officer
Robert Key 64,000 0.74%
Director
All Officers and Directors 8,160,047 (7) 62.59%
as a group (6 persons)
Other 5% Shareholders:
39
<PAGE>
Name and Address of Beneficial Owner Number of Shares(1) Percent
------------------------------------ ------------------- -------
Scott Sabins 761,667 (8) 8.48%
514 Avenida La Costa
San Clemente, CA 92672
John Feighner 500,000 (9) 5.53%
P.O. Box 1875
Rancho Santa Fe, CA 92067
----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options, warrants or convertible securities exercisable or convertible
within 60 days of June 23, 2000, are deemed outstanding for computing the
percentage of the person or entity holding such options, warrants or
convertible securities but are not deemed outstanding for computing the
percentage of any other person.
(2) Includes: (i) 250,000 shares of Common Stock owned by Robert C. Brehm
Consulting, Inc., of which Robert C. Brehm is the President; and (ii)
1,475,000 shares of Common Stock issuable under stock options exercisable
within 60 days of June 23, 2000.
(3) Includes: (i) 5,000 shares of Series D Preferred Stock convertible into
500,000 shares of Common Stock; and (ii) 1,350,000 shares of Common Stock
issuable under stock options exercisable within 60 days of June 23, 2000.
(4) Includes: (i) 6,000 shares of Series C Preferred Stock convertible into
600,000 shares of Common Stock; and (ii) 300,000 shares of Common Stock
issuable under stock options exercisable within 60 days of June 23, 2000.
(5) Includes: (i) 665 shares of Series B Preferred Stock convertible into 3,325
shares of Common Stock; (ii) 1,250 shares of Common Stock owned by First
Venture Group Inc., an affiliated company of Roger K. Knight; and (iii)
150,000 shares of Common Stock issuable under stock options exercisable
within 60 days of June 23, 2000.
(6) Includes (i) 119 shares of Series II Preferred Stock convertible into 1,190
shares of Common Stock; (ii) 214 shares of Series B Preferred Stock
convertible into 1,070 shares of Common Stock owned by Kathrina B. Nagel,
wife of Conrad Nagel; (iii) 600 shares of Common Stock owned by Kathrina B.
Nagel; and (iv) and 150,000 shares of Common Stock issuable under stock
options exercisable within 60 days of June 23, 2000.
(7) Includes 4,495,585 shares of Common Stock issuable under stock options,
warrants or convertible securities held by directors and executive officers
exercisable or convertible within 60 days of June 23, 2000.
40
<PAGE>
(8) Consists of (i) 6,250 shares of Series C Preferred Stock convertible into
625,000 shares of Common Stock and (ii) 166,667 shares of Common Stock
issuable under stock options exercisable within 60 days of June 23, 2000.
(9) Consists of 5,000 shares of Series C Preferred stock convertible into
500,000 shares of Common Stock.
41
<PAGE>
Selling Shareholders
The following table provides certain information with respect to the
selling shareholders' beneficial ownership of Common Stock as of May 19, 2000,
and as adjusted to give effect to the sale of all of the shares offered hereby.
None of the selling shareholders currently is an affiliate of U.S. Microbics,
and none of them has had a material relationship with U.S. Microbics during the
past three years. None of the selling shareholders are or were affiliated with
registered broker-dealers. See "Plan of Distribution." The selling shareholders
possess sole voting and investment power with respect to the securities shown.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned After
Offering(2)
Number of Shares ----------------------
Beneficially Owned Number of Shares Number of
Name Before Offering Being Offered Shares Percentage
---- --------------- ------------- ------ ----------
<S> <C> <C> <C> <C>
Brobeck Phleger & Harrison LLP 94,921 94,921 0 0
Swartz Private Equity, LLC 250,000 Up to 20,000,000(1) 0 0
----------
</TABLE>
(1) Represents the maximum number of shares of Common Stock that U.S. Microbics
may sell to Swartz pursuant to the Investment Agreement and upon the
exercise by Swartz of options issued or issuable in connection with the
Investment Agreement. It is expected that Swartz will not own beneficially
more than 9.9% of U.S. Microbics outstanding Common Stock at any time.
(2) Assumes that all shares will be resold by the selling shareholders and none
will be held by the selling shareholders for their own accounts.
42
<PAGE>
Investment Agreement
On March 14, 2000, U.S. Microbics entered into an amended and restated
Investment Agreement with Swartz. The amended and restated Investment Agreement
entitles U.S. Microbics to issue and sell its Common Stock to Swartz for up to
an aggregate of $35 million from time to time during the three-year period
ending on March 14, 2003. Each election by U.S. Microbics to sell stock to
Swartz is referred to as a put right.
Put rights. In order to invoke a put right, U.S. Microbics must have an
effective registration statement on file with the SEC registering the resale of
the shares of common stock that may be issued as a consequence of the exercise
of that put right. U.S. Microbics must also give at least 10 but not more than
20 business days' advance notice to Swartz of the date on which U.S. Microbics
intends to exercise a particular put right, and U.S. Microbics must indicate the
maximum number of shares of Common Stock that U.S. Microbics intends to sell to
Swartz. At its option, U.S. Microbics may also designate a maximum dollar amount
of Common Stock that it will sell under the put and/or a minimum purchase price
per common share at which Swartz may purchase shares under the put. The minimum
purchase price for a given put, if U.S. Microbics chooses to designate one, may
not exceed 85% of the closing bid price of its Common Stock on the date on which
U.S. Microbics gives Swartz advance notice of its exercise of a put right. The
number of the common shares sold to Swartz may not exceed the lesser of 15% of
the aggregate daily reported trading volume during a period that begins on the
business day immediately following the day U.S. Microbics exercises the put
right and ends on and includes the day that is 20 business days after the date
U.S. Microbics exercises the put right, or 9.99% of the total number of shares
of Common Stock that would be outstanding upon completion of the put.
For each share of Common Stock, Swartz will pay U.S. Microbics the lesser
of:
o the market price for such share, minus $.10, or
o 92% of the market price for the share;
provided, however, that Swartz may not pay U.S. Microbics less than the
designated minimum per share price, if any, that U.S. Microbics indicates in its
notice.
Market price is defined as the lowest closing bid price for the Common
Stock on its principal market during the pricing period. The pricing period is
defined as the 20 business days immediately following the day U.S. Microbics
exercises the put right.
Warrants. Within five business days after the end of each pricing period,
U.S. Microbics is required to issue and deliver to Swartz a warrant to purchase
a number of shares of Common Stock equal to 15% of the common shares issued to
Swartz in the applicable put. Each warrant will be exercisable at a price that
will initially equal 110% of the market price on the date on which U.S.
Microbics exercised the put right. Each warrant will be immediately exercisable
and have a term beginning on the date of issuance and ending five years
thereafter.
Limitations and conditions precedent to our put rights. Swartz is not
required to acquire and pay for any shares of Common Stock with respect to any
particular put for which, between the date U.S. Microbics gives advance notice
of an intended put and the date the particular put closes, U.S. Microbics has:
43
<PAGE>
o announced or implemented a stock split or combination of its Common
Stock;
o paid a common stock dividend;
o made a distribution of all or any portion of its assets or evidences
of indebtedness to the holders of its Common Stock; or
o consummated a major transaction, such as a sale of all or
substantially all of its assets or a merger or tender or exchange
offer that results in a change of control of U.S. Microbics.
Short Sales. Swartz and its affiliates are prohibited from engaging in
short sales of U.S. Microbics' Common Stock unless Swartz has received a put
notice and the amount of shares involved in the short sale does not exceed the
number of shares specified in the put notice.
Cancellation of Puts. U.S. Microbics must cancel a particular put between
the date of the advance put notice and the last day of the pricing period if:
o U.S. Microbics discovers an undisclosed material fact relevant to
Swartz's investment decision;
o the registration statement registering resales of the common shares
becomes ineffective; or
o U.S. Microbics' shares are delisted from the then primary exchange.
If a put is canceled, it will continue to be effective, but the pricing
period for the put will terminate on the date notice of cancellation of the put
is given to Swartz. Because the pricing period will be shortened, the number of
shares Swartz will be required to purchase in the canceled put will be smaller
than it would have been had the put not been canceled.
Shareholder Approval. Under the Investment Agreement, U.S. Microbics may
sell Swartz a number of shares that is more than 20% of its shares outstanding
on the date of this prospectus. If U.S. Microbics becomes listed on The Nasdaq
Small Cap Market or Nasdaq National Market, U.S. Microbics may be required to
obtain shareholder approval to issue some or all of the shares to Swartz. As
U.S. Microbics is currently a Bulletin Board company, it does not need
shareholder approval.
Termination of Investment Agreement. U.S. Microbics may terminate its right
to initiate further puts or terminate the Investment Agreement at any time by
providing Swartz with notice of such intention to terminate. However, any such
termination will not affect any other rights or obligations U.S. Microbics has
concerning the Investment Agreement or any related agreement.
Restrictive Covenants. During the term of the Investment Agreement and for
a period of ninety (90) days after the Investment Agreement is terminated, U.S.
Microbics is prohibited from engaging in certain transactions. These include the
issuance of any equity securities, or debt securities convertible into equity
44
<PAGE>
securities, for cash in a private transaction without obtaining the prior
written approval of Swartz. U.S. Microbics is also prohibited from entering into
any private equity line type agreements similar to the Investment Agreement
without obtaining Swartz's prior written approval.
Right of First Refusal. Swartz has a right of first refusal, subject to
another first refusal obligation for which U.S. Microbics is contractually
obligated, to participate in any private capital raising transaction of equity
securities that closes from the date of the Investment Agreement -- March 14,
2000 -- through one (1) year after the Investment Agreement is terminated.
Swartz's Right of Indemnification. U.S. Microbics has agreed to indemnify
Swartz, including its stockholders, officers, directors, employees, investors
and agents, from all liability and losses resulting from any misrepresentations
or breaches U.S. Microbics makes in connection with the Investment Agreement,
its registration rights agreement, other related agreements, or the registration
statement.
45
<PAGE>
Plan of Distribution
Each selling shareholder is free to offer and sell his or her common shares
at such times, in such manner and at such prices as he or she may determine. The
types of transactions in which the common shares are sold may include
transactions in the over-the-counter market, including block transactions,
negotiated transactions, the settlement of short sales of common shares or a
combination of such methods of sale. The sales will be at market prices
prevailing at the time of sale or at negotiated prices. Such transactions may or
may not involve brokers or dealers. The selling shareholders have advised U.S.
Microbics that they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares. The selling shareholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of the common shares.
Swartz may sell its shares directly to purchasers or to or through
broker-dealers, which may act as agents or principals. These broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the selling shareholders. They may also receive compensation from the purchasers
of common shares for whom such broker-dealers may act as agents or to whom they
sell as principal, or both, which compensation as to a particular broker-dealer
might be in excess of customary commissions. Swartz is, and any broker-dealer
that assists in the sale of the Common Stock may be deemed to be, an underwriter
within the meaning of Section 2(a)(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the common
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions.
Because Swartz is deemed to be an "underwriter" within the meaning of
Section 2(a)(11) of the Securities Act, Swartz will be subject to prospectus
delivery requirements.
U.S. Microbics has informed Swartz that the anti-manipulation rules of the
SEC, including Regulation M promulgated under the Securities and Exchange Act,
may apply to their sales in the market and has provided the selling shareholders
with a copy of such rules and regulations.
Swartz also may resell all or a portion of the common shares in open market
transactions in reliance upon Rule 144 under the Securities Act, provided they
meet the criteria and conform to the requirements of such Rule. U.S. Microbics
is responsible for all costs, expenses and fees incurred in registering the
shares offered hereby. Swartz is responsible for brokerage commissions, if any,
attributable to the sale of such securities.
Description Of Securities
Common Stock
The certificate of incorporation of U.S. Microbics authorizes it to issue
up to 150,000,000 shares of Common Stock, par value $.0001 per share. Of the
150,000,000 shares of Common Stock authorized, 8,543,247 shares are issued and
outstanding as of June 23, 2000.
46
<PAGE>
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available for such
dividends. U.S. Microbics may not pay any dividends on the Common Stock until
cumulative dividends on the preferred stock have been paid in full. Upon
liquidation, holders of shares of Common Stock are entitled to a pro rata share
in any distribution available to holders of Common Stock. The holders of Common
Stock have one vote per share on each matter to be voted on by stockholders, but
are not entitled to vote cumulatively. Holders of Common Stock have no
preemptive rights. All of the outstanding shares of Common Stock are, and all of
the shares of Common Stock offered for resale in connection with this prospectus
will be, validly issued, fully paid and non-assessable.
Warrants
There are outstanding warrants to purchase 250,000 shares of Common Stock
at a price of $2.00 per share. These warrants were issued to Swartz on January
24, 2000 in consideration of Swartz's commitment to enter into the Investment
Agreement. The warrants expire on January 24, 2005. The holders of the warrants
have the right to have the Common Stock issuable upon exercise of the warrants
included on any registration statement U.S. Microbics files, other than a
registration statement covering an employee stock plan or a registration
statement filed in connection with a business combination or reclassification of
its securities.
Legal Matters
The legality of the securities offered hereby has been passed upon by Baker
& McKenzie, Houston, Texas.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On March 12, 1999, U.S. Microbics dismissed Bradshaw, Smith & Co. as its
independent certifying accountants, and engaged Arthur Andersen LLP as its
independent certified accountants. On November 22, 1999, U.S. Microbics
dismissed Arthur Andersen, LLP and re-engaged Bradshaw, Smith & Co., LLP as its
independent certified accountants. The change in independent certifying
accountant was approved by the Board of Directors of U.S. Microbics on November
22, 1999. Neither change was made because of any disagreements with either firm.
Experts
The Balance Sheets as of September 30, 1999 and 1998 and the statements of
operations, stockholders' (deficit) equity and cash flows for the years ended
September 30, 1999 and 1998, included in this prospectus, have been included
herein in reliance on the report of Bradshaw, Smith & Co., LLP, independent
auditors, which includes an explanatory paragraph on U.S. Microbics' ability to
continue as a going concern, given on the authority of that firm as experts in
accounting and auditing.
47
<PAGE>
Where You Can Find More Information
U.S. Microbics files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
U.S. Microbics' SEC filings are available to the public over the Internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any document
U.S. Microbics files at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549, Seven World Trade Center, 13th Floor, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference room. U.S. Microbics has filed with the SEC a registration statement
on Form SB-2 under the Securities Act with respect to the securities offered
under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement, certain items of which are omitted in accordance with
the rules and regulations of the SEC. Statements contained in this prospectus as
to the contents of any contract or other documents are not necessarily complete
and in each instance reference is made to the copy of such contract or documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding U.S. Microbics and the securities
offered under this prospectus, U.S. Microbics refers you to the registration
statement and such exhibits and schedules which may be obtained from the SEC at
its principal office in Washington, D.C. upon payment of the fees prescribed by
the SEC.
48
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
(AUDITED)
AND FOR THE SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
CONTENTS
PAGE
Independent auditors' report.............................................F-2
Consolidated financial statements:
Balance sheets......................................................F-3
Statements of operations............................................F-5
Statements of changes in stockholders' (deficit) equity.............F-6
Statements of cash flows............................................F-7
Notes to financial statements.......................................F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
U.S. Microbics Inc. and Subsidiaries
Carlsbad, California
We have audited the accompanying consolidated balance sheets of U.S.
Microbics Inc. and Subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders'
(deficit) equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Microbics Inc. and Subsidiaries as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered significant
recurring losses from operations and has a net stockholders' deficit at
September 30, 1999. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding these matters also
are described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Bradshaw, Smith & Co., LLP
------------------------------
Bradshaw, Smith & Co., LLP
Las Vegas, Nevada
January 28, 2000
(Except for Note 6 as to which the date is February 4, 2000)
F-2
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
-------------------------- March 31,
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 316,600 $ 125,400 $ --
Accounts receivable -- -- 2,929
Prepaid expenses and other assets 10,000 22,100 33,185
Inventories (Note 2) -- 68,600 72,516
----------- ----------- -----------
Total current assets 326,600 216,100 108,630
Property and equipment, (Note 3) 99,100 239,700 231,382
Deposits (Note 4) 17,500 27,300 26,110
Deferred Tax Assets (Note 7) -- -- --
----------- ----------- -----------
Total assets $ 443,200 $ 483,100 $ 366,122
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 206,300 $ 766,000 $ 658,492
Current portion of obligations under capital lease (Note 5) -- 4,900 4,952
----------- ----------- -----------
Total current liabilities 206,300 770,900 663,444
Capital lease obligation, net of current portion (Note 5) -- 5,300 3,093
----------- ----------- -----------
Total liabilities 206,300 776,200 666,537
----------- ----------- -----------
Commitments and contingencies (Note 10) -- -- --
Stockholders' equity (deficit) (Note 6):
Convertible preferred stock, $.10 par value; 20,000,000 shares authorized:
Series II; 500,000 shares authorized; 21,507, 17,163 and 12,608
shares issued and outstanding; aggregate liquidation preference of
$21,507, $17,163 and $12,608 2,200 1,700 1,261
Series B; 500,000 shares authorized; 15,915, 13,969 and 8,007
shares issued and outstanding; aggregate liquidation preference of
$15,915, $13,969 and $8,007 1,600 1,400 801
Series C; 500,000 shares authorized; 15,357, 40,110 and 45,227
shares issued and outstanding; aggregate liquidation preference of
$1,535,700, $4,011,000 and $4,522,700 1,500 4,000 4,523
Series D; 500,000 shares authorized; 20,438, 4,725 and 5,525
shares (no liquidation preference) 2,000 500 553
----------- ----------- -----------
7,300 7,600 7,138
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
-------------------------- March 31,
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Common stock; $.0001 par value; 150,000,000 shares authorized;
3,447,554, 6,010,380 and 7,138,190 shares issued and
outstanding 400 600 714
Additional paid-in capital 3,068,000 6,212,900 6,810,193
Stock options and warrants 868,800 963,400 1,526,830
Treasury stock -- (33,300) --
Stock subscription, notes receivable -- (804,200) (943,665)
Accumulated deficit (3,707,600) (6,640,100) (7,701,625)
----------- ----------- -----------
236,900 (293,100) (300,415)
----------- ----------- -----------
$ 443,200 $ 483,100 $ 366,122
=========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended Six Months Ended
September 30, March 31,
-------------------------- --------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues (including $50,000 from related parties in 1999, $ -- $ 66,900 $ 51,728 $ 13,894
Note 9)
Cost of revenues -- 192,600 17,744 38,638
----------- ----------- ----------- -----------
Gross (loss) profit -- (125,700) 33,984 (24,744)
Selling, general and administrative expenses 1,378,200 2,775,700 1,161,079 1,076,823
----------- ----------- ----------- -----------
Loss from operations (1,378,200) (2,901,400) (1,127,095) (1,101,567)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 6,800 72,800 8,579 40,020
Interest expense (34,800) (1,600) -- --
Impairment of property and equipment (Note 3) -- (102,300) -- --
----------- ----------- ----------- -----------
(28,000) (31,100) 8,579 40,020
----------- ----------- ----------- -----------
Net loss from continuing operations before tax (1,406,200) (2,932,500) (1,118,516) (1,061,547)
Provision for income taxes (Note 7) -- -- -- --
Net loss from continuing operations (1,406,200) (2,932,500) (1,118,516) (1,061,547)
----------- ----------- ----------- -----------
Discontinued operations (Note 8)
Loss on disposal of Houston, Texas telecommunication store
(no income tax benefit) (5,600) -- -- --
----------- ----------- ----------- -----------
Net loss $(1,411,800) $(2,932,500) $(1,118,516) $(1,061,547)
=========== =========== =========== ===========
Net loss per common share (basic and diluted):
Net loss from continuing operations $ (0.78) $ (0.58) $ (0.35) $ (0.17)
Loss on disposal of Houston, Texas telecommunications store (NIL) -- -- --
----------- ----------- ----------- -----------
Net loss $ (0.78) $ (0.58) $ (0.35) $
=========== =========== =========== ===========
(0.17)
Weighted average common shares outstanding 1,802,481 5,084,676 3,220,511 6,205,704
=========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
Preferred Stock common stock
-------------------------- -------------------------- Additional
Shares Amount Shares Amount paid-in
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 61,552 $ 6,200 1,447,929 $ 200 $ 1,928,000
Issuance of stock in exchange for
extinguishment of debt (Note 6) 920 100 -- -- 52,700
Conversion of preferred stock (Note 6) (18,780) (1,900) 1,526,625 200 1,700
Issuance of stock options and warrants
in exchange for services (Note 6) -- -- -- -- --
Exercise of stock options and warrants
(Note 6) -- -- 30,000 -- 31,800
Issuance of stock and stock options in
private placement (Note 6) 12,225 1,200 -- -- 480,400
Issuance of stock in exchange for services
(Note 6) 17,300 1,700 493,000 -- 556,100
Retirement of treasury stock -- -- (50,000) -- (1,000)
Expiration of stock options and warrants
(Note 6) -- -- -- -- 18,300
Net loss for the year -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 73,217 7,300 3,447,554 400 3,068,000
Conversion of preferred stock (Note 6) (29,636) (3,000) 2,387,826 200 2,800
Issuance of stock options and warrants in
exchange for services (Note 6) -- -- -- -- --
Exercise of stock options and warrants
(Note 6) -- -- 170,000 -- 368,200
Issuance of stock and stock options in
private placement (Note 6) 29,597 3,000 -- -- 2,417,700
Issuance of stock in exchange for services
(Note 6) 2,789 300 5,000 -- 151,500
Expiration of stock optionswarrants
(Note 6) -- -- -- -- 204,700
Return of shares issued (Note 6) -- -- -- -- --
Net loss for the year -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1999 75,967 7,600 6,010,380 600 6,212,900
Conversion of preferred stock (Note 6)
(unaudited) (19,870) (1,989) 1,008,146 101 1,888
Issuance of stock options and warrants
in exchange for services (Note 6)
(unaudited) 5,000 500 105,000 11 175,354
Exercise of stock options and warrants
(Note 6) (unaudited) -- -- 48,000 5 38,395
Issuance of stock and stock options in
private placement (Note 6) (unaudited) 10,270 1,027 -- -- 1,033,971
Costs in conjunction with equity offering
(unaudited) -- -- -- -- (619,368)
Interest-stock subscription notes receivable
(unaudited) -- -- -- -- --
Expiration of stock options and warrants
(unaudited) -- -- -- -- 350
Retirement of treasury stock (unaudited) -- -- (33,336) (3) (33,297)
Net loss for the six month period (unaudited) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 71,367 $ 7,138 7,138,190 $ 714 $ 6,810,193
=========== =========== =========== =========== ===========
Table continues on following page.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY (CONTINUED)
Stock
subscriptions Total
Stock options Treasury notes Accumulated stockholders'
and warrants stock receivables deficit (deficit) equity
----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $ 187,700 $ (1,000) $ -- $(2,295,800) $ (174,700)
Issuance of stock in exchange for
extinguishment of debt (Note 6) -- -- -- -- 52,800
Conversion of preferred stock (Note 6) -- -- -- -- --
Issuance of stock options and warrants
in exchange for services (Note 6) 429,700 -- -- -- 429,700
Exercise of stock options and warrants
(Note 6) (28,800) -- -- -- 3,000
Issuance of stock and stock options in
private placement (Note 6) 298,500 -- -- -- 780,100
Issuance of stock in exchange for services
(Note 6) -- -- -- -- 557,800
Retirement of treasury stock -- 1,000 -- -- --
Expiration of stock options and warrants
(Note 6) (18,300) -- -- -- --
Net loss for the year -- -- -- (1,411,800) (1,411,800)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 868,800 -- -- (3,707,600) 236,900
Conversion of preferred stock (Note 6) -- -- -- -- --
Issuance of stock options and warrants in
exchange for services (Note 6) 258,300 -- -- -- 258,300
Exercise of stock options and warrants
(Note 6) (289,000) -- -- -- 79,200
Issuance of stock and stock options in
private placement (Note 6) 330,000 -- (804,200) -- 1,946,500
Issuance of stock in exchange for services
(Note 6) -- -- -- -- 151,800
Expiration of stock optionswarrants
(Note 6) (204,700) -- -- -- --
Return of shares issued (Note 6) -- (33,300) -- -- (33,300)
Net loss for the year -- -- -- (2,932,500) (2,932,500)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1999 963,400 (33,300) (804,200) (6,640,100) (293,100)
Conversion of preferred stock (Note 6)
(unaudited) -- -- -- -- --
Issuance of stock options and warrants
in exchange for services (Note 6)
(unaudited) -- -- -- -- 175,865
Exercise of stock options and warrants
(Note 6) (unaudited) (31,200) -- -- -- 7,200
Issuance of stock and stock options in
private placement (Note 6) (unaudited) -- -- (95,648) -- 939,350
Costs in conjunction with equity offering
(unaudited) 594,980 -- -- -- (24,388)
Interest-stock subscription notes receivable
(unaudited) -- -- (43,817) -- (43,817)
Expiration of stock options and warrants
(unaudited) (350) -- -- -- --
Retirement of treasury stock (unaudited) -- 33,300 -- -- --
Net loss for the six month period (unaudited) -- -- -- (1,061,525) (1,061,525)
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 $ 1,526,830 $ -- $ (943,665) $(7,701,625) $ (300,415)
=========== =========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements
F-6(a)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, Six Months Ended March 31,
--------------------------- ---------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,411,800) $(2,932,500) $(1,118,516) $(1,061,547)
Adjustment to reconcile net loss to cash used in operating activities:
Depreciation 1,600 39,700 14,376 22,283
Stock, stock options, and warrants in exchange for services 987,500 410,100 87,050 76,900
Impairment of property and equipment -- 102,300 -- --
Loss on disposal of discontinued operation 5,600 -- -- --
Change in net liabilities of discontinued operation (82,500) -- -- --
Decrease (increase) in:
Accounts receivable -- -- (3,074) (2,929)
Prepaid expenses and other assets 18,000 (12,100) (79,249) (9,895)
Inventories -- (68,600) (139,519) (3,916)
Deposits (17,500) (9,800) -- --
Increase (decrease) in:
Accounts payable and accrued liabilities 118,000 559,700 353,728 (112,146)
----------- ----------- ----------- -----------
Net cash used in operating activities (381,100) (1,911,200) (885,204) (1,091,250)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (64,500) (267,700) (235,213) (14,000)
----------- ----------- ----------- -----------
Net cash used in investing activities (64,500) (267,700) (235,213) (14,000)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Repayment of obligation under capital lease -- (4,700) -- --
Repayment of notes payable (22,600) -- -- --
Issuance of preferred stock and stock options in private placements 780,100 1,946,500 808,227 939,350
Cancellation of treasury stock -- -- -- 33,300
Exercise of stock options 3,000 45,900 15,250 7,200
----------- ----------- ----------- -----------
Net cash provided by financing activities 760,500 1,987,700 823,477 979,850
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 314,900 (191,200) (296,940) (125,400)
Cash and cash equivalents, beginning of period 1,700 316,600 316,600 125,400
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 316,600 $ 125,400 $ 19,660 $ --
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ -- $ -- $ --
=========== =========== =========== ===========
Cash paid for interest $ 1,400 $ 1,600 $ 276 $ 3,007
=========== =========== =========== ===========
Schedule of non-cash investing and financing activities:
Property and equipment acquired through capital lease (Note 5) $ -- $ 14,900 $ 14,900 $ --
=========== =========== =========== ===========
Conversion of preferred stock to common stock (Note 6) $ 1,700 $ 2,800 $ -- $ --
=========== =========== =========== ===========
Stock issued in exchange for extinguishment of debt (Note 6) $ 52,800 $ -- $ -- $ --
=========== =========== =========== ===========
The Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
</TABLE>
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
1. Basis of presentation and accounting policies:
Organization and basis of presentation:
The Company was organized December 7, 1984 under the laws of the State of
Colorado as Venture Funding Corporation. The Company amended its Articles
of Incorporation in June, 1993 changing its name to Global Venture Funding,
Inc. The Company amended its Articles of Incorporation in May, 1998
changing its name to U.S. Microbics Inc. (the "Company"). The Company has
been engaged in a variety of operations since inception.
During July, 1997, the Company opened a store in Houston, Texas that was
engaged in the business of selling cellular phone products. Effective
October 31, 1997, the Company sold this business.
During August, 1997, the Company acquired the assets of Xyclonyx, a company
founded to develop, apply and license patented toxic and hazardous waste
treatment and recovery processes as well as to license and apply
microbially enhanced oil recovery technologies and products.
During the year ended September 30, 1998, the Company created four
subsidiaries: West Coast Fermentation Center, Sub Surface Waste Management,
Inc., Sol Tech Corporation, and Bio-Con Microbes. West Coast Fermentation
Center's primary business is to cultivate microbial cultures that are to be
sold to other subsidiaries of the Company. Sub Surface Waste Management's
business is to assemble and sell products using technology licensed from
Xyclonyx. Sol Tech Corporation and Bio-Con Microbes are companies formed to
service the sewage treatment and agriculture markets, respectively. All
four subsidiaries have entered into technology license agreements with
Xyclonyx. These agreements are ten years in length and call for license
fees and royalties as specified in the agreement.
In November, 1998, the Company created a new subsidiary, Applied Microbic
Technology, Inc. Applied Microbic Technology's primary business is to
license customers to use microbial blends for oil remediation applications.
The Company has experienced losses from continuing operations of $2,932,500
and $1,406,200 for the years ended September 30, 1999 and 1998,
respectively. Additionally, the Company had a net stockholder's deficit of
$293,100 as of September 30, 1999. The Company is planning on raising
additional capital through the issuance of additional stock in a private
placement or public offering. The Company is also currently developing
business opportunities and operations through its wholly-owned
subsidiaries. Based upon the current status of the Company, additional
capital will be required in order for the Company to complete any
F-8
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
1. Basis of presentation and accounting policies (continued):
development or to maintain their ongoing operations. These matters raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result from the outcome of this uncertainty.
Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions
have been eliminated in consolidation.
Discontinued operations:
On December 30, 1997, the Company formally disposed of its Houston, Texas
cellular phone product store. The sale was effective as of October 31, 1997
with the buyer assuming all liabilities for products or services entered
into from November 1, 1997 and forward. In accordance with the Financial
Accounting Standards Board Emerging Issue Task Force 95-18, when the
measurement date for a discontinued operation, as defined in APBO No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" occurs after the balance sheet date but
before the financial statements for the prior period have been issued, the
estimated loss on disposal should be recognized and the segments operating
results should be presented as a discontinued operation in the not yet
released financial statements. As such, the estimated loss on disposal was
recognized and the operating results were presented as a discontinued
operation in the September 30, 1997 financial statements.
Cash and cash equivalents:
The Company considers highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Inventories:
Inventories consist of materials and equipment used to make products which
treat hazardous waste and are valued at the lower of cost (first-in,
first-out) or market.
Property and equipment:
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
F-9
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
1. Basis of presentation and accounting policies (continued):
Impairment of long-lived assets:
Inaccordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), assets are evaluated in making a
determination as to whether asset values are impaired. At each year-end,
the Company reviews its long-lived assets for impairment based on estimated
future nondiscounted cash flows attributable to the assets. In the event
such cash flows are not expected to be sufficient to recover the recorded
value of the assets, the assets are written down to their estimated fair
value.
Income taxes:
The Company has implemented the provisions on Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires that income tax accounts be computed using the liability
method. Deferred taxes are determined based upon the estimated future tax
effects of differences between the financial reporting and tax reporting
bases of assets and liabilities given the provisions of currently enacted
tax laws.
Net loss per common share:
The Company computes earnings per share under Financial Accounting Standard
No. 128, "Earnings Per Share" (SFAS 128). Net loss per common share is
computed by dividing net loss by the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
year. Dilutive common stock equivalents consist of shares issuable upon
conversion of convertible preferred shares and the exercise of the
Company's stock options and warrants (calculated using the treasury stock
method). During 2000, 1999 and 1998, common stock equivalents are not
considered in the calculation of the weighted average number of common
shares outstanding because they would be anti-dilutive, thereby decreasing
the net loss per common share.
Pervasiveness of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-10
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
1. Basis of presentation and accounting policies (continued):
Fair value of financial instruments:
Based on the borrowing rates currently available to the Company, the
carrying value of the obligation under capital lease at September 30, 1999
and March 31, 2000 approximates fair value.
Comprehensive Income:
In June, 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 130 "Reporting Comprehensive Income"(SFAS 130).
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. This Statement requires that
an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company does not have any items of
other comprehensive income and, as such, the adoption of SFAS 130 did not
impact reporting in the Company's financial statements.
Interim Financial Statements:
The balance sheet as of March 31, 2000 and the related statement of
operations, shareholders' equity and cash flows for the six month period
ended March 31, 2000 are unaudited. However, in the opinion of management
these interim financial statements include all adjustments (consisting of
only normal recurring adjustments) which are necessary for the fair
presentation of the results for the interim period presented. The results
of operations for the unaudited six month period ended March 31, 2000 are
not necessarily indicative of the results which may be expected for the
entire 2000 fiscal year.
2. Inventories:
Inventories:
Inventories consisted of the following: September 30, March 31,
1999 2000
------- -------
(unaudited)
Raw materials (microbial cultures and related items) $ 3,600 $ 5,315
Finished goods (equipment used for soil remediation) 65,000 67,201
------- -------
$68,600 $72,516
======= =======
F-11
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
3. Property and equipment:
Property and equipment consisted of the following:
September September March 31, 2000
30, 1998 30, 1999 (unaudited)
--------- --------- ---------
Office furniture and equipment $ 57,400 $ 128,300 $ 128,300
Leasehold improvements 7,100 17,700 17,700
Production equipment 36,200 135,000 149,000
--------- --------- ---------
100,700 281,000 295,000
Less accumulated depreciation (1,600) (41,300) (63,618)
--------- --------- ---------
$ 99,100 $ 239,700 $ 231,382
========= ========= =========
Depreciation expense for the years ended September 30, 1998 and 1999 was
$1,600 and $39,700, respectively. Depreciation expense for the six month
period ended March 31, 2000 was $22,283.
The Company periodically reviews the recorded value of its long-lived
assets to determine if the future cash flows to be derived from these
assets will be sufficient to recover the remaining recorded asset values.
In accordance with SFAS 121, during the year ended September 30, 1999,
based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a charge of $102,300 related to the write-down of a
portion of the recorded asset values of the Company's production equipment
and leasehold improvements as of September 30, 1999.
4. Deposits:
Deposits at September 30, 1998 and 1999, and March 31, 2000 consisted of a
security deposit on the Company's building lease, a utility company
deposit, a state sales and use tax deposit, and a software consulting
contract deposit.
5. Obligation under capital lease:
The Company leases certain production equipment under a capital lease which
runs through the year 2001. The asset and liability under the capital lease
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The asset is amortized over the
lower of its related lease term or its estimated productive life.
Depreciation of the asset under capital lease is included in depreciation
expense for 1999. The implicit interest rate on the capital lease is 10.8%.
F-12
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
5. Obligation under capital lease (continued):
The cost and related depreciation of equipment under the capital lease,
which is included in the property and equipment referred to in Note 3, are
as follows:
March 31,
September 30, 2000
1999 (Unaudited)
-------- --------
Production equipment $ 21,200 $ 21,200
Less accumulated depreciation (2,300) (3,800)
-------- --------
$ 18,900 $ 17,400
======== ========
At March 31, 2000, the future minimum payments under the capital lease
consisted of the following:
2000 $ 3,445
2001 5,800
2002 400
-------
Total minimum lease payments 9,645
Less amount representing interest (1,600)
-------
Present value of future minimum lease payments 8,045
Less current portion (4,952)
-------
Obligations under capital lease, net of current $ 3,093
=======
The interest charged to expense for the capital lease for the year ended
September 30, 1999 and the six months ended March 31, 2000 was $600 and
$200 respectively. The depreciation charged to expense for the capital
lease for the year ended September 30, 1999 and the six months ended March
31, 2000 was $2,300 and $1,500 respectively.
6. Stockholders'(deficit) equity:
On August 20, 1997, the Board of Directors authorized a one-for-twenty
(1:20) reverse stock split of all shares of outstanding common and
preferred stock. The effect was a reduction in the number of issued and
outstanding common shares from 11,173,898 to 558,695 and preferred shares
from 843,599 to 42,180. All references in the accompanying financial
statements to the number of common and preferred shares and per share
amounts have been restated to reflect the above reverse stock split.
During 1999, the Company learned that the securities laws in the state of
Colorado required that the reverse stock split had to be put to a
stockholder vote for approval. The Company filed a proxy statement and
F-13
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
scheduled a specific meeting of stockholders for February 4, 2000 to vote
on the reverse stock split. The reverse stock split was approved by the
stockholders during the meeting on February 4, 2000.
Preferred stock:
The Company's preferred stock may be divided into such series as may be
established by the Board of Directors. The Board of Directors may fix and
determine the relative rights and preferences of the shares of any series
established. All convertible preferred shares are noncumulative,
nonparticipating and do not carry any voting privileges.
In October, 1991, the Board of Directors authorized the issuance of 500,000
shares of Series II Convertible Preferred Stock. Each share of Series II
preferred stock is entitled to preference upon liquidation of $1.00 per
share for any unconverted shares. Each Series II preferred share may be
converted to common stock after a specified holding period as follows:
after one year, two shares of common stock; after two years, five shares of
common stock; after three years, ten shares of common stock. In November,
1996, the Board of Directors changed the conversion schedule as follows:
commencing January 1, 1997, each shareholder shall be entitled to convert
an initial amount of 250 shares to 2,500 shares of common stock. The
shareholder shall be entitled to convert the balance of their Series II
Preferred shares in increments of 475 shares during each six-month period
thereafter beginning July 1, 1997.
In March, 1992, the Board of Directors authorized the issuance of 500,000
shares of Series B Convertible Preferred Stock. Each share of Series B
preferred stock is entitled to preference upon liquidation of $1.00 per
share for any unconverted shares. Each Series B preferred share may be
converted to common stock after a specified holding period as follows:
after one year, two shares of common stock; after two years, five shares of
common stock. In November, 1996, the Board of Directors changed the
conversion schedule as follows: Commencing January 1, 1997, each
shareholder shall be entitled to convert an initial amount of 250 shares to
1,250 shares of common stock. The shareholder shall be entitled to convert
the balance of their Series B Preferred shares in increments of 475 shares
during each six-month period thereafter beginning July 1, 1997.
In June, 1992, the Board of Directors authorized the issuance of 50,000
shares of Series C Convertible Preferred Stock. Each share of Series C
preferred stock is entitled to preference upon liquidation of $100 per
share for any unconverted shares, and the liquidation preference is junior
only to that of all previously issued preferred shares. Each Series C
preferred share may be converted to 100 shares of common stock after a
specified holding period of one year.
F-14
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
In June, 1992, the Board of Directors authorized the issuance of 50,000
shares of Series D Convertible Preferred Stock. The Series D preferred
stock carries no liquidation preferences. Each Series D preferred share may
be converted to 100 shares of common stock after a specified holding period
of one year. The Series D preferred stock is also subject to forfeiture at
any time prior to conversion if the recipient thereof fails or refuses to
perform such reasonable duties as may be assigned to them from time to time
by the Board of Directors. The Series D preferred stock may not be sold,
transferred, or conveyed to any other person and is subject to redemption
at a price of $.001 per share in the event of death, disability, or
incompetency of the original holder or the attempted transfer or conveyance
of the shares to any other person.
The Company has reserved 17,500,000 shares of its $.0001 par value common
stock for conversion of preferred stock issuances. As of March 31, 2000,
there were 12,608 shares of Series II preferred stock, 8,007 shares of
Series B preferred stock, 45,227 shares of Series C preferred stock, and
5,525 shares of Series D preferred stock issued and outstanding. Conversion
of all issued and outstanding convertible preferred stock to common stock
would result in an additional 5,241,315 shares of common stock.
Preferred stock transactions:
All valuations of preferred stock issued for services were based upon the
value the services performed or the value of the preferred stock, whichever
was more reliably measurable. If the value of the preferred stock was used,
it was based upon the closing price of the Company's common stock on the
date of the agreement. This amount was then multiplied by the applicable
conversion rate and then discounted by management. These discounts are
based upon the restrictive nature of the stock, block size and other
factors.
Preferred stock transactions during the six months ended March 31, 2000:
In November of 1999 the Company issued 5,000 shares of series D preferred
stock to the Chief Operating officer in exchange for services which were
provided in the year ended September 30, 1998. This transaction was valued
at approximately $20.00 a share.
During the six months ended March 31, 2000, certain stockholders exercised
their preferred stock conversion rights and the Company issued 1,008,146,
shares of common stock in exchange for cancellation of 4,554 shares of
series II preferred stock, 5,962 shares of series B preferred stock, 5,154
shares of series C preferred stock and 4,200 shares of series D preferred
stock. Throughout the interim period ended March 31, 2000, the Company sold
10,270 shares of series C preferred stock pursuant to a private placement
offering as provided under regulation D of the Securities Act of 1933
related to transactions not involving a public offering. The net proceeds
to the Company after issuing costs of $35,400 was $939,350.
F-15
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
Preferred stock transactions during the year ended September 30, 1999:
During December, 1998, the Company issued 500 shares of Series D preferred
stock to the President of the company, 500 shares of Series D preferred
stock to the Chief Operating Officer of the Company and 200 shares of
Series D preferred stock to the Vice-President of the Company in lieu of
cash salary payments. All transactions were valued at approximately $20 per
share.
During March, 1999, the Company issued 1,589 shares of Series C preferred
stock to consultants for services. All exchanges were valued at
approximately $75 per share.
Throughout the year ended September 30, 1999, certain stockholders
exercised their preferred stock conversion rights and the Company issued
2,387,826 shares of common stock in exchange for cancellation of 4,344
shares of Series II preferred stock, 1,946 shares of Series B preferred
stock, 6,433 shares of Series C preferred stock, and 16,913 shares of
Series D preferred stock.
Throughout the year ended September 30, 1999, the Company sold 29,597
shares of Series C preferred stock pursuant to a private placement offering
as provided under regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the
Company after issuing costs of $206,800 was $1,946,500. Of these sales,
7,950 shares of Series C preferred stock were sold subject to stock
subscriptions notes receivable. The notes are short term in nature, bear
interest at 10 percent per annum, and are collateralized by the stock. The
Company is currently holding these stock certificates and will release them
upon payment of the notes.
Preferred stock transactions during the year ended September 30, 1998:
During October, 1997, the Company issued 2,000 shares of Series D preferred
stock to the President of the Company in lieu of a cash salary payment and
100 shares of Series D preferred stock to a consultant for services. All
exchanges were valued at approximately $5 per share.
During November, 1997, the Company issued 7,000 shares of Series D
preferred stock to the President of the Company and 7,000 shares of Series
D preferred stock to the Chief Operating Officer of the Company in lieu of
cash salary payments. All transactions were valued at approximately $10 per
share.
During December, 1997, the Company issued 920 shares of Series C preferred
stock to various creditors in exchange for debt owed by the Company in the
amount of $52,800. All exchanges were valued at approximately $57 per
share.
F-16
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
Preferred stock transactions during the year ended September 30, 1998:
During May, 1998, the Company issued 500 shares of Series D preferred stock
to the President of the Company, 500 shares of Series D preferred stock to
the Chief Operating Officer of the Company, and 200 shares of Series D
preferred stock to the Vice President of the Company in lieu of cash salary
payments. All transactions were valued at approximately $20 per share.
Throughout the year ended September 30, 1998, certain stockholders
exercised their preferred stock conversion rights and the Company issued
1,526,625 shares of common stock in exchange for cancellation of 1,012
shares of Series II preferred stock, 2,740 shares of Series B preferred
stock, 1,028 shares of Series C preferred stock, and 14,000 shares of
Series D preferred stock.
Throughout the year ended September 30, 1998, the Company sold 12,225
shares of Series C preferred stock pursuant to a private placement offering
as permitted under Regulation D of the Securities Act of 1933 related to
transactions not involving a public offering. The net proceeds to the
Company after issuing costs of $104,600 was $780,100. In conjunction with a
5,000 shares issuance of Series C preferred stock to an individual, an
option to purchase 300,000 shares of common stock at prices ranging from
$2.00 to $2.50 per share was granted to this individual. This individual is
now on the Company's Board of Directors.
Common stock transactions:
All valuations of common stock issued for services were based upon the
closing price of the Company's common stock on the date of the agreement.
In the event restricted common stock was issued, the value of the service
was based upon the value of the services performed or the value of the
restricted common stock, whichever was more reliably measurable. If the
value of the restricted common stock was used, a discount was applied by
management. These discounts are based upon the restrictive nature of the
stock, block size, and other factors.
Common stock transactions during the interim period ended March 31, 2000:
During February and March of 2000 the Company issued 105,000 shares of
common stock in exchange for various services. These exchanges were valued
from $.65 to $2.38 per share.
Common stock transactions during the year ended September 30, 1999:
During November, 1998, the Company issued 5,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$1.00 per share.
F-17
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
Common stock transactions during the year ended September 30, 1998:
During December, 1997, the Company issued 320,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$.38 to $1.32 per share.
During April, 1998, the Company issued 23,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$.75 to $1 per share.
In July, 1998, the Company issued 150,000 shares of common stock in
exchange for various services. The exchanges were valued at approximately
$1.25 per share.
At September 30, 1999 the Company was holding 33,336 shares of common stock
in treasury awaiting return to the transfer agent. The stock was returned
to the Company by a consultant who failed to completely perform the agreed
services. The shares are valued at $1 per share.
Stock options and warrants:
The Company issued options and warrants during the years ended September
30, 1999 and 1998 and for the six months ended March 31, 2000 for
consulting services, fees in connection with obtaining financing, and
various other services.
Stock options and warrants summary information:
Activity of options and warrants granted is as follows:
Options and Warrants
Outstanding
-----------------------
Weighted
average
Shares exercise price
---------- --------------
Balance, September 30, 1997 270,500 $ 3.55
Granted 2,523,000 2.63
Exercised (30,000) 0.10
Expired (38,150) 0.43
---------- ---------
Balance September 30, 1998 2,725,350 $ 2.78
Granted 3,575,000 1.34
Exercised (150,000) 0.28
Expired (589,350) 2.46
---------- ---------
Balance September 30, 1999 5,561,000 $ 2.37
Granted (unaudited) 250,000 2.00
Exercised (unaudited) (48,000) 0.15
Expired (unaudited) (5,000) 20.00
---------- ---------
Balance March 31, 2000 (unaudited) 5,758,000 2.35
---------- ---------
Exercisable, March 31, 2000 (unaudited) 4,358,000 $ 2.84
========== =========
F-18
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
The following is a summary of options and warrants outstanding at March 31,
2000 (unaudited):
Options and warrants
Options and warrants outstanding exercisable
--------------------------------------------------------- ---------------------
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life (years) (price) exercisable price
--------------------------------------------------------- ---------------------
$ 1-5 5,650,000 3.94 2.20 4,250,000 2.65
10 103,000 3.97 10.00 103,000 10.00
20 5,000 2.00 20.00 5,000 20.00
--------- ---- ------ --------- ------
5,758,000 3.94 $ 2.35 4,358,000 $ 2.84
========= ==== ====== ========= ======
Options and warrants granted during the year ended September 30, 1999
consisted of 3,100,000 to officers and directors, 250,000 in conjunction
with a private placement offering and 225,000 to consultants for services.
The Company accounts for stock compensation under the provisions of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". SFAS 123 provides that companies may elect to
account for employee stock options using a fair value-based method or
continue to apply the intrinsic value-based method prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25").
Under the fair value-based method prescribed by SFAS 123, all employee
stock option grants are considered compensatory. Compensation cost is
measured at the date of grant based on the estimated fair value of the
options determined using an option pricing model. The model takes into
account the stock price at the grant date, the exercise price, the expected
life of the option, the volatility of the stock, expected dividends on the
stock and the risk-free interest rate over the expected life of the option.
Under APB 25, generally only stock options that have intrinsic value at the
date of grant are considered compensatory. Intrinsic value represents the
excess, if any, of the market price of the stock at the grant date over the
exercise price of the options.
As permitted by SFAS 123, the Company accounts for these employee stock
options under APB 25, under which no compensation cost has been recognized
because the exercise price of the options was equal to or exceeded the
market price of the stock on the date of grant.
F-19
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
6. Stockholders' (deficit) equity (continued):
The following table discloses the Company's pro forma net loss per share
assuming compensation cost for employee stock options had been determined
using the fair value-based method prescribed by SFAS 123:
Year Ended Six Month Ended
September 30, March 31, 2000
1999 (unaudited)
------------- --------------
Net loss:
As reported $ (2,932,500) $ (1,061,525)
Pro forma (4,194,500) (1,182,525)
Net loss per common share
(basic and diluted):
As reported $ (0.58) $ (0.17)
Pro forma (0.83) (0.19)
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option pricing model. The following assumptions
were used to estimate the fair value:
March 31,
Sept. 30, Sept. 30, 2000
1998 1999 (unaudited)
---- ---- -----------
Expected stock price volatility 243.08% 99.69% 194.42%
Expected option/warrant lives 1-5 years 1-5 years 1-5 years
Expected dividend yields -- -- --
Risk-free interest rates 4.70 - 5.72% 4.52 - 5.94% 6.6%
Weighted average fair value of
options/warrants granted 0.51 1.10 2.00
7. Income taxes:
The benefit for income taxes from continuing operations is different than
the amount computed by applying the statutory federal income tax rate to
net loss before taxes. A reconciliation of income tax benefit follows:
F-20
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
7. Income taxes (continued):
March 31,
Sept. 30, Sept. 30, 2000
1998 1999 (unaudited)
--------- --------- ---------
Computed tax benefit at federal
statutory rate $ 480,000 $ 977,100 361,000
Equity issuances for services (122,000) (60,000) --
Change in valuation allowance (358,000) (917,100) (361,000)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
The provision for federal and state income taxes consisted of the
following:
March 31,
2000
1998 1999 (unaudited)
----------- ----------- -----------
Current $ -- $ -- $ --
Deferred -- -- --
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
The deferred tax asset consisted
of the following:
Net operating loss carryforwards $ 1,985,300 $ 1,046,300 2,346,300
Valuation allowance (1,985,300) (1,046,300) (2,346,300)
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
At September 30, 1999 the Company has net operating loss carryforwards
("NOL's") for federal income tax reporting purposes of approximately
$5,839,300. The NOL's expire at various times through 2014.
Included in the above NOL's are net operating loss carryforwards which may
be subject to substantial limitations in accordance with various provisions
of the Internal Revenue Code. The Company has not yet determined the amount
and nature of these limitations.
8. Discontinued Operations:
On October 31, 1997, the Company adopted a formal plan to sell its Houston,
Texas cellular phone products store. The sale was effective as of October
31, 1997 with the buyer assuming all liabilities for products or services
entered into from November 1, 1997 forward. The assets of this operation
consisted of inventories, deposits and leasehold improvements.
F-21
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
8. Discontinued Operations (continued):
For the year ended September 30, 1997, the Company estimated a loss on
disposal of the discontinued operation of $42,220 (no income tax benefit)
which included a provision for expected operating losses of $11,900 (no
income tax benefit) during the phase-out period. The actual loss on the
disposal of the assets exceeded the estimate by $5,600 (no income tax
benefit). Accordingly, the accompanying statement of operations for the
year ended September 30, 1998 includes an additional loss of $5,600.
Net sales of the discontinued operation were $23,200 for the one month
ended October 31, 1997. This amount is not included in sales in the
accompanying statement of operations for this period.
The disposal was completed upon the asset and liability exchange and the
exchange of 80,000 shares of the Company's common stock in December, 1998.
9. Related party transactions:
Revenues:
Included in the consolidated statement of operations is $50,000 in sales to
two members of the Company's Board of Directors. The sales are in the form
of license agreements whereby the licensee acquired the right to use the
Company's products and trademarks for use with their customers. The
licenses are five years in duration and require royalty payments to the
Company based upon gross sales.
Office space and computer usage:
During the year ended September 30, 1998, the Company was provided office
space and computer usage at a cost of $9,500 to the Company by the
President of the Company.
Legal fees:
Certain stockholders of the Company are affiliated with firms who currently
provide or have provided legal services to the Company in prior years.
During the years ended September 30, 1999 and 1998, fees and other expenses
charged by these firms totaled approximately $5,700 and $24,400,
respectively. As of September 30, 1999 and 1998, amounts due these firms
totaled $0 and $400, respectively.
Preferred Stock Conversions:
The President, Chief Operating Officer and Chief Financial Officer of the
Company each converted 1,000 shares of series D preferred stock into
100,000 shares of common stock during November of 1999. A director also
converted 200 shares of series D preferred stock into 20,000 shares of
common stock.
F-22
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
10. Commitments and contingencies:
Employment agreements:
On October 1, 1998, the Company entered into employment agreements with its
President and Chief Operating Officer. Both of the new agreements are for
five years and provide for minimum salary levels, incentive bonuses, and
specified benefits. Additionally, the President and Chief Operating Officer
each received options to purchase 1,000,000 shares of common stock at a
price of $1.25 per share as part of their employment agreements. These
options vest over a five year period. The aggregate commitment for future
salaries, excluding bonuses and benefits, from these employment agreements
is $2,040,000 as of September 30, 1999.
Technology license agreement:
Xyclonyx, a wholly-owned subsidiary of the Company, has a technology
license agreement with three individuals including the Chief Operating
Officer of the Company. The agreement is for seventeen years or the life of
the patents, which ever is greater, and specifies royalties in the amount
of six percent of gross revenues subject to certain adjustments as
specified in the agreement.
Litigation:
In March 1999, the Company was served with a stockholder derivative lawsuit
titled Merriam v. U.S. Microbics, et al. This lawsuit alleges, among other
things, that certain stock was improperly issued to the President of the
Company and to certain consultants for services. The Company has formed a
special independent committee of the Board of Directors to investigate
these claims. The Company has engaged outside legal counsel to represent it
in this matter and intends to vigorously defend this action. Although
management believes the lawsuit to be without merit, an unfavorable ruling
would have a material adverse impact on the Company's financial position
and results of operations.
In December, 1999, the Company was served with a lawsuit by one of its
suppliers for nonpayment of various purchases.
Purchase commitment:
During the year ended September 30, 1999, the Company entered into an
agreement with a supplier to purchase certain inventories at a total cost
of $194,000. The Company made deposits totaling $29,400. The Company has
not completed the purchase transaction and the supplier has sued the
Company for performance under the purchase agreement.
F-23
<PAGE>
U.S. MICROBICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
10. Commitments and contingencies (continued):
Building lease:
During the year ended September 30, 1999, the Company began leasing office
and warehouse space under an operating lease expiring in August, 2003. The
Company has an option to extend the lease for five more years if it so
desires. Minimum future rental payments under this lease for each of the
next five years is as follows:
Year ending
September 30,
-------------
2000 $192,000
2001 199,300
2002 207,700
2003 197,500
--------
$796,500
========
Rent expense totaled $217,700 during the year ended September 30, 1999, and
$110,200 for the six months ended March 31, 2000.
11. Subsequent events:
Private placement:
During the period from April 1, 2000 to June 23, 2000, the Company raised
approximately $245,250 after issuing costs, pursuant to a private placement
offering as permitted under Regulation D of the Securities Act of 1933
related to transactions not involving a public offering.
F-24
<PAGE>
Part II
Information not Required in Prospectus
Item 24. Indemnification of Directors and Officers.
U.S. Microbics' Bylaws and the Colorado General Corporation Law provide for
indemnification of directors and officers against certain liabilities. Officers
and Directors of U.S. Microbics are indemnified generally against expenses
actually and reasonably incurred in connection with proceedings, whether civil
or criminal, provided that it is determined that they acted in good faith, were
not found guilty, and, in any criminal matter, had reasonable cause to believe
that their conduct was not unlawful.
U.S. Microbics' Certificate of Incorporation further provides that a
director of U.S. Microbics shall not be personally liable for monetary damages
of U.S. Microbics or its shareholders for breach of any fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to U.S. Microbics or its stockholders, (ii) for acts or omissions not in
good faith or which involve misconduct or a knowing violation of law; (iii) for
the lawful payments of dividends or stock redemption by U.S. Microbics; or (iv)
for any transaction from which the director derives an improper personal
benefit.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of the estimated amounts of all expenses
payable by the registrant in connection with the registration of the Common
Stock offered hereby:
Amount
-------
SEC filing fee........................ $ 9,240
Blue sky fees and expenses............ 2,000
Legal fees............................ 20,000
Accounting fees and expenses.......... 8,000
Miscellaneous......................... 2,500
-------
Total........................ $41,740
=======
Item 26. Recent Sales of Unregistered Securities.
Private placement:
During the period from April 1, 2000 to June 23, 2000, U.S. Microbics raised
approximately $245,250 after issuing costs, pursuant to a private placement
offering as permitted under Regulation D of the Securities Act of 1933 related
to transactions not involving a public offering.
II-1
<PAGE>
Item 27. Exhibits.
Number Description
------ -----------
3.1(1) Articles of Incorporation, as amended
3.2(1) Bylaws, as amended
5.1(5) Legal Opinion of Baker & McKenzie
10.1(1) Lease Agreement, dated as of July 14, 1998, by and among U.S.
Microbics and each of Ridgecrest Properties, R and B Properties
and Hindry West Development
10.2(1)(2) Employment Agreement, effective as of October 1, 1998, between
Robert C. Brehm and the Registrant
10.3(1)(2) Employment Agreement, effective as of October 1, 1998, between
Mery C. Robinson and the Registrant
10.4(1) Stock for Stock Acquisition Agreement, effective as of August
31, 1997, among XyclonyX, Mery C. Robinson and the Registrant
10.5(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and West Coast Fermentation Center
10.6(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Sub-Surface Waste Management, Inc.
10.7(1) Technology License Agreement, effective as of August 21, 1997,
among XyclonyX and Mery C. Robinson, Dominic J. Colasito and
Alvin J. Smith
10.8(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Bio-Con Microbes, Inc.
10.9(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Sol-Tech Corporation
10.10(3) Product Line License Agreement effective May 24, 1999, between
Sub-Surface Waste Management, Inc. and Builders Referral, Inc.
10.11(4) Investment Agreement, dated March 14, 2000, by and between U.S.
Microbics and Swartz Private Equity, LLC.
10.12(4) Warrant to Purchase Common Stock, dated as of January 27, 2000,
issued to Swartz Private Equity, LLC.
10.13(4) Registration Rights Agreement, dated as of March 14, 2000, by
and between U.S. Microbics and Swartz Private Equity, LLC.
21(1) Subsidiaries of the Registrant
23.1(5) Consent of Bradshaw, Smith & Co., LLP
23.2(5) Consent of Baker & McKenzie (included in Exhibit 5)
----------
II-2
<PAGE>
(1) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 10-KSB (File No. 000-14213) filed with the SEC on
February 8, 1999.
(2) Identifies a management contract or compensatory plan or arrangement of the
Registrant.
(3) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 10-QSB (File No. 000-14213) filed with the SEC on
August 16, 1999.
(4) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 8-K (File No. 000-14213) filed with the SEC on April
10, 2000.
(5) Filed herewith.
ITEM 28. Undertakings.
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii)Include any additional or changed material information on the
plan of distribution;
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
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<PAGE>
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1)
or (4) or 497 (h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
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<PAGE>
Signatures
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in Carlsbad, California
on July 7, 2000.
U.S. MICROBICS INC.
By: /s/ Robert C. Brehm
-----------------------
Robert C. Brehm, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated. Each
person whose signature to this Registration Statement appears below hereby
constitutes and appoints Robert C. Brehm or Conrad Nagel as his or her true and
lawful attorney-in-fact and agent, with full power of substitution, to sign on
his or her behalf, individually and in the capacities stated below, and to file
(i) any and all amendments and post-effective amendments to this registration
statement and (ii) any registration statement relating to the same offering
pursuant to Rule 462(b) under the Securities Act of 1933, which amendment or
amendments or registration statement may make such changes and additions as such
attorney-in-fact may deem necessary or appropriate, and to perform any acts
necessary to be done in order to file such amendment.
Name Title Date
---- ----- ----
/s/ Robert C. Brehm President, Chief Executive July 7, 2000
------------------- Officer and Chairman of
Robert C. Brehm the Board (principal executive
officer)
/s/ Mery C. Robinson Director July 7, 2000
--------------------
Mery C. Robinson
/s/ Roger K. Knight Director July 7, 2000
-------------------
Roger K. Knight
/s/ Conrad Nagel Chief Financial Officer July 7, 2000
---------------- (principal financial and accounting
Conrad Nagel officer)
/s/ Steven C. Hopkins Director July 7, 2000
---------------------
Steven C. Hopkins
/s/ Robert Key Director July 7, 2000
--------------
Robert Key
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<PAGE>
Index of Exhibits
Number Description
------ -----------
3.1(1) Articles of Incorporation, as amended
3.2(1) Bylaws, as amended
5.1(5) Legal Opinion of Baker & McKenzie
10.1(1) Lease Agreement, dated as of July 14, 1998, by and among U.S.
Microbics and each of Ridgecrest Properties, R and B Properties
and Hindry West Development
10.2(1)(2) Employment Agreement, effective as of October 1, 1998, between
Robert C. Brehm and the Registrant
10.3(1)(2) Employment Agreement, effective as of October 1, 1998, between
Mery C. Robinson and the Registrant
10.4(1) Stock for Stock Acquisition Agreement, effective as of August
31, 1997, among XyclonyX, Mery C. Robinson and the Registrant
10.5(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and West Coast Fermentation Center
10.6(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Sub-Surface Waste Management, Inc.
10.7(1) Technology License Agreement, effective as of August 21, 1997,
among XyclonyX and Mery C. Robinson, Dominic J. Colasito and
Alvin J. Smith
10.8(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Bio-Con Microbes, Inc.
10.9(1) Technology License Agreement, effective as of March 1, 1998,
between XyclonyX and Sol-Tech Corporation
10.10(3) Product Line License Agreement effective May 24, 1999, between
Sub-Surface Waste Management, Inc. and Builders Referral, Inc.
10.11(4) Investment Agreement, dated March 14, 2000, by and between U.S.
Microbics and Swartz Private Equity, LLC.
10.12(4) Warrant to Purchase Common Stock, dated as of January 27, 2000,
issued to Swartz Private Equity, LLC.
10.13(4) Registration Rights Agreement, dated as of March 14, 2000, by
and between U.S. Microbics and Swartz Private Equity, LLC.
21(1) Subsidiaries of the Registrant
<PAGE>
23.1(5) Consent of Bradshaw, Smith & Co., LLP
23.2(5) Consent of Baker & McKenzie (included in Exhibit 5)
----------
(1) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 10-KSB (File No. 000-14213) filed with the SEC on
February 8, 1999.
(2) Identifies a management contract or compensatory plan or arrangement of the
Registrant.
(3) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 10-QSB (File No. 000-14213) filed with the SEC on
August 16, 1999.
(4) Incorporated by reference to the similarly described exhibit included with
the registrant's Form 8-K (File No. 000-14213) filed with the SEC on April
10, 2000.
(5) Filed herewith.
