AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 2000
REGISTRATION STATEMENT NO. [[_____]]
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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U.S. MICROBICS INC.
(Name of Small Business Issuer in Its Charter)
COLORADO 325414 84-0990371
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5922-B FARNSWORTH COURT
CARLSBAD, CA 92008
(760) 918-1860
(Address and telephone number of principal executive offices
and principal place of business)
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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)
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COPIES TO:
Joseph W. Secondine, Esq.
Baker & McKenzie
101 West Broadway
San Diego, California 92101
(619) 236-1441
(619) 236-0429--Facsimile
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
THE PUBLIC: AS SOON AS PRACTICABLE 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.
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. :________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. :________
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 20,094,921 $1.75 $35,000,000 $9,240
Total........................... $9,240
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</TABLE>
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PROSPECTUS
U.S. MICROBICS INC.
5922-B FARNSWORTH COURT
CARLSBAD, CA 92008
(760) 918-1860
THE RESALE OF 20,094,921 SHARES OF COMMON STOCK
THE SELLING PRICE OF THE SHARES WILL BE DETERMINED BY MARKET FACTORS AT
THE TIME OF THEIR RESALE.
This prospectus relates to the resale by the selling shareholders of up
to 20,094,921 shares of common stock. 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. 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,
o up to 94,921 shares are issuable to Brobeck Phleger & Harrision 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 April 27, 2000, the average of the bid and asked
prices of the common stock on the Bulletin Board was $1.75 per share.
Investing in the common stock involves a high degree of risk. You
should invest in the common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 7 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved 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 MAY 5, 2000
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.
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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....................................................... 6
Summary Financial Data................................................... 7
Risk Factors............................................................. 8
Use of Proceeds..........................................................14
Price Range of Common Stock..............................................15
Dividend Policy..........................................................15
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................16
Properities..............................................................20
Selling Shareholders.....................................................20
Investment Agreement.....................................................21
Plan of Distribution.....................................................22
Management...............................................................23
Executive Compensation...................................................24
Principal Shareholders...................................................27
Legal Matters............................................................30
Experts..................................................................30
Where You Can Find More Information......................................30
Index to Financial Statements............................................31
Undertakings.............................................................53
Independent Auditors' Consent............................................55
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 U.S. Microbics Inc. on March 25, 1998.
Our principal executive offices are located at 5922-B Farnsworth Court,
Carlsbad, California and our telephone number is (760) 918-1860.
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 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 our significant historical losses and the expectation of continuing
losses;
o rapid technological change in the bioremediation industry;
o our reliance on key strategic relationships and accounts;
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o the impact of competitive products and services and pricing; and
o uncertain protection of our intellectual property.
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.
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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 the common stock. You should
read the entire prospectus carefully, including the "Risk Factors" section.
OUR BUSINESS
OUR INVESTMENT AGREEMENT
We have entered into an Investment Agreement with Swartz to raise up to
$35 million through a series of sales of our common stock to Swartz. The dollar
amount of each sale is 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.
KEY FACTS
Total shares outstanding prior to the offering 7,138,190 as of March 31, 2000
Shares being offered for resale to the public 20,094,921 (Maximum)
Total shares outstanding after the offering 27,233,111
Price per share to the public Market price at time of resale
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 We plan to use the proceeds for
to Swartz working capital and general
corporate purposes.
OTC Bulletin Board Symbol BUGS
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SUMMARY FINANCIAL DATA
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)
------------------------ ----------------------
1998 1999 1999 2000
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<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 $ .35 $ .17
Weighted average number of common shares outstanding........... 1,802,481 5,084,676 3,220,511 6,205,704
<CAPTION>
March 31,
(Unaudited)
-----------------------------
BALANCE SHEET DATA: 1999 2000
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<S> <C> <C>
Working capital............................................................ $ (301,916) $ (554,814)
Total assets............................................................... 604,352 366,122
Total liabilities.......................................................... 516,441 666,537
Stockholders' equity (deficit)............................................. $ 212,911 $ (300,415)
</TABLE>
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING U.S. MICROBICS INC. AND ITS
BUSINESS. THIS REPORT 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. FORWARD-LOOKING STATEMENTS USUALLY CONTAIN
THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "PLAN," "EXPECT," OR SIMILAR
EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
REVIEW CAREFULLY VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED IN THIS REPORT,
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.
STARTUP COMPANY/HISTORY OF LOSSES/UNCERTAIN PROFITABILITY. 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 The 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;
o Regulatory approvals for using our bioremediation products,
including permitting 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.
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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.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR WORKING CAPITAL AND
ADDITIONAL FINANCING. 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 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 the operating flexibility of us. The failure of us to successfully obtain
additional future funding may jeopardize our ability to continue our business
and operations.
LACK OF 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.
In addition, 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 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.
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.
ABILITY TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS. 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
compliance costs. In the event of an accident, we could be held liable for any
resulting 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).
ABILITY TO MANAGE GROWTH. 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 (i) manage our business and our subsidiaries as a cohesive
enterprise, (ii) manage expansion through the timely implementation and
maintenance of appropriate administrative, operational, financial and management
information systems, controls and procedures, (iii) add internal capacity,
facilities and third-party sourcing arrangements as and when needed, (iv)
maintain service quality controls, and (v) 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,
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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.
COMPETITION. We likely will face intense competition from other
environmental biotech companies, virtually all of which can be expected to be
have longer operating histories, greater name recognition, larger installed
customer bases and have 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. 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
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, or that we
will 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.
PRODUCT LIABILITY. 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. In the event of 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.
LIMITED SERVICE AND MANUFACTURING FACILITIES. 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 has 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
we will be able to complete the facility in a timely manner, that the cost of
completing the Facility will not exceed management's current estimates, that the
facility's capacity will not exceed the demand for our products or that 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. 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, production delays
associated with products based on the microbial technology, unavailability of
required capital equipment and qualified personnel, raw material shortages,
higher-than-expected overhead or operational costs, lack of sufficient quality
control over the products and 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.
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DEPENDENCE ON KEY PERSONNEL. 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.
NO DIVIDENDS. We have never declared nor paid cash dividends on our
capital stock. We currently intend to retain any earnings for funding growth
and, therefore, do not intend to pay any cash dividends in the foreseeable
future.
FLUCTUATIONS IN QUARTERLY RESULTS. 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: (i) the volume, timing of, and ability to
fulfill customer orders; (ii) the demand for our products and services; (iii)
the number, timing and significance of product enhancements and new product
introductions by us and our competitors; (iv) changes in the pricing policies by
U.S. Microbics or our competitors; (v) changes in the level of operating
expenses; (vi) 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; (vi) personnel changes; (vii) product defects and other
product or service quality problems; and (viii) 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.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. 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.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY. Although 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
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
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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 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, then 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.
CONCENTRATION OF STOCK OWNERSHIP. Our existing directors, executive
officers, and their respective affiliates are the beneficial owners of
approximately 70.15% of the outstanding shares of Common Stock and common stock
equivalents (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 us.
These shareholders may have interests that differ from other
shareholders of us, particularly in the context of potentially beneficial
acquisitions of us. For example, to the extent that these shareholders are
employees of us, they may be less inclined to vote for acquisitions of us
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 the 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.
-12-
<PAGE>
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.
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 "Legal Proceedings."
UNCERTAINTY OF CONVERSION EFFECTS. Within the next 24 months from the
date of this Report, 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 10,999,315 shares of Common Stock. In
the event that such holders of Preferred Stock, warrants and options exercise
their conversion rights, the holders of the 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. The 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.
APPLICABILITY OF "PENNY STOCK RULES" TO BROKER-DEALER SALES OF COMPANY
COMMON STOCK. Our Common Stock is subject to the "penny stock rules" (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
-13-
<PAGE>
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.
DESCRIPTION OF PROPERTY
Since September 1998, we have occupied 22,000 square feet of
manufacturing and administration office space in the Carlsbad Research Center in
Carlsbad, California. We have a five-year lease commitment with a five-year
option and a right of first refusal on adjacent space. We believe 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, we were 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. We have formed a special independent committee of the Board of
Directors to investigate these claims. We have engaged outside legal counsel to
represent us 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 our financial position and
results of operations.
On December 16, 1999, Extec USA, Inc. filed a lawsuit against us in the
Riverside County Superior Court, Case No. 336732. This lawsuit asserts that we
failed to pay the full purchase price for certain shredding equipment.
On December 17, 1999, Red Mountain Pacific, LLC filed a lawsuit against
us in the San Diego County Superior Court, Case No. N002193. This lawsuit
asserts that we failed to pay the full rental price for certain equipment. A
settlement has been negotiated and all liabilities regarding this lawsuit have
been paid.
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 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.
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
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<PAGE>
additional proceeds from the sale to Swartz of shares issuable upon the exercise
of warrants issued or to be issued to Swartz pursuant to the 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. The
following table sets forth the high and low bid prices of our common stock for
each quarter for the years 1997 and 1998 and the first, second and third
quarters of 1999 through September 24, 1999. 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.
<TABLE>
<CAPTION>
High Low
-------- -------
1997
<S> <C> <C>
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
High Low
-------- -------
2000
First Quarter....................................................................... $ 3.88 $ 1.56
Second Quarter...................................................................... 2.03 2.00
Third Quarter (through April 12, 2000).............................................. 1.94 1.94
</TABLE>
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
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<PAGE>
anticipate paying any cash dividends to our shareholders in the foreseeable
future. The payment of future dividends on the 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
THIS REPORT 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 US. READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH ARE ONLY
PREDICTIONS AND SPEAK ONLY AS OF THE DATE HEREOF. FORWARD-LOOKING STATEMENTS
USUALLY CONTAIN THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "EXPECT," OR
SIMILAR EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY REVIEW VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED BELOW, AS WELL AS
THE MATTERS SET FORTH IN OUR ANNUAL REPORT ON 10-KSB FOR THE YEAR ENDED
SEPTEMBER 30, 1999 AND 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.
THE COMPANY
U.S. Microbics Inc. 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"). We create and market proprietary
microbial technologies that provide natural solutions to many of today's
environmental problems. Our microbes or "bugs" can be used to break down various
substances, including oil, diesel, fuel, arsenic, certain toxic waste, and
certain water and soil contaminants. We intend to leverage the products,
applications and customer contacts developed by the Robinsons to apply, develop,
license and commercialize microbial technology. We believe that we can build the
foundation for the international commercialization of proprietary products based
on 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, USMX already has advanced, proprietary technology, as well
as products that have been utilized in various environmental and agricultural
applications worldwide. We are in the process of determining and obtaining the
capital, personnel and manufacturing and distribution capacity necessary to
commercialize microbial technology.
Our initial objective is to establish ourselves 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, we intend to focus our strategy on the
following three elements: (i) licensing our bioremediation technology to
high-volume end-users for hydrocarbon waste cleanup; (ii) developing a
manufacturing center for our proprietary microbial blends; and (iii) licensing
our technology to entities for use in specific vertical markets and territories,
site clean-up and maintenance products, agricultural growth enhancement and
aquaculture/mariculture applications.
Our achievement of our objectives is highly dependent, among other
factors, on our 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 microbial
technology. We intend to raise additional working capital through the sale of
common and preferred stock or debt and through potential licensing arrangements.
There can be no assurance that we will raise such capital on terms acceptable to
us, if at all. Our failure to obtain adequate financing may jeopardize our
existence. See "Liquidity and Capital Resources."
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<PAGE>
OVERVIEW
During fiscal year ended September 30, 1999, our efforts were directed
to developing our 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). We conducted product
demonstrations to show the efficacy of the microbial products in hydrocarbon
applications, odor control, waste management, manure and greenwaste 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.
Our powder blending facility is now complete and our expected
production capacity for our microbial blends is 200,000 units per month. We have
implemented our in-house fermentation production and processes are 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 government permitting, environmental approvals, funding
and operations. We ran a demonstration center using manure and greenwaste to
demonstrate product efficacy, develop operator training techniques, determine
Bio-Raptor(TM) operational logistics, manpower requirements, water application
and control procedures, and loading, 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.
We do not have an existing backlog of sales orders and have not
generated significant sales or revenues to date related to our microbial
technology. Further, there can be no assurance that projected production and
sales volumes or sales prices will be achieved.
PLAN OF OPERATIONS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2000
We intend to generate revenue during fiscal year 2000 by focusing on
sales of our 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. We plan to sell our 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. We also plan to distribute our
product through the retail channel via strategic relationships with existing
distributors and joint ventures created for domestic and international business.
With additional equity capital, we plan 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.
We intend to raise additional capital to fund operations through
September 2000, and anticipate that cash generated from financings and projected
revenues will enable us to fulfill cash needs for fiscal year 2000 operations.
There can be no assurance that we will be able to raise such funds on terms
acceptable to us, if at all, or to generate such revenues. There can be no
assurance that we will receive such financing or generate revenues in the time
frame anticipated, if at all.
If we receive sufficient financing or generate significant revenues,
then we intend to expand our fermentation capacity and sales and marketing
efforts during fiscal year 2000. During the first and second quarters of fiscal
year 2000, we are building infrastructure (i.e., personnel, procedures and
systems) and establishing 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. We plan to increase the number of employees to
approximately 50 by the end of the fiscal 2000.
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<PAGE>
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO THE SIX MONTHS ENDED MARCH
31, 1999
We had revenues of $13,894 during the six months ended March 31, 2000,
as compared to $51,728 of revenues for the same period in fiscal 1999. Revenues
for the six months ended March 31, 1999 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 for first two
quarters of fiscal 2000 totaled $1,076,823 compared to $1,161,079 for the same
period in fiscal year 1999. SG&A expenses for the first two quarters of fiscal
year 2000 consisted of occupancy, payroll, accounting, legal, consulting, and
public relations expenses.
We 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 the Company is expecting to increase revenues during the last
half of fiscal 2000, based on the current financial condition of the Company,
additional capital will be required in order for the Company to maintain its
ongoing operations. There can be no assurance that we will be able to raise such
capital on terms acceptable to us, if at all.
In order to continue implementing our strategic plan, we are planning
on raising up-to an additional $5,000,000 from private placements during the
second and third quarters of fiscal 2000. The funds are targeted to expand the
fermentation manufacturing operation and the staffing of sales subsidiaries.
LG ENTERPRISES JOINT VENTURE
In December 1999, we announced that we 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 our technology in
Mexico and establishing companies in Mexico to engage in bioremediation of
Mexican properties.
The agreement provides that:
o SSWM will (i) provide the Bio-Raptor(TM) and bioremediation
technology, products and services; (ii) 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 (iii)
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
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projects containing contaminated soil that must be remediated. We
believe that LandGrant's financial expertise, developed through our
financing of acquisition and construction projects, will benefit us.
MANUFACTURER'S DIRECT SERVICES RETAIL DISTRIBUTION AGREEMENT
On December 22, 1999, we signed an agreement with Manufacturers' Direct
Services, Inc., (MDS) of San Diego, to develop new channels of distribution and
market products in the automotive, rail, aviation, marine, trucking,
recreational vehicle and sporting goods industries. MDS is a full service, sales
and marketing company that specializes in assisting companies seeking sales
growth through multiple channels of distribution.
Under the terms of the agreement, MDS will develop and design retail
packaging, wholesale and retail pricing structures, promotional and advertising
campaigns, and identify and solicit retailers and oversee distribution. We will
provide MDS with product costing and performance information and identify and
develop products for retail/consumer use.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents totaled $ 0.00 and $125,400 at March 31, 2000
and September 30, 1999, respectively. The Company had net bank overdrafts of
$25,341 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, the Company raised $939,350
net of placement fees of approximately $35,400, from private placements of
Series C preferred stock. As of March 31, 2000, the Company has negative working
capital of $554,814 as compared to negative working capital of $554,800 as of
September 30, 1999. The Company will need to continue to raise funds by various
financing methods such as private placements to maintain our operations until
such time as cash generated by operations is sufficient to meet our operating
and capital requirements. There can be no assurance that we will be able to
raise such capital on terms acceptable to us, if at all.
To date, we have financed our operations principally through private
placements of equity securities and debt. Subsequent to March 31, 2000, we have
raised approximately $65,000, net of placement fees. We believe that we will
have sufficient cash to continue our operations through June 30, 2000, and
anticipate that cash generated from anticipated private placements and projected
revenues during the third and fourth quarters of fiscal 2000 will enable us to
fulfill cash needs for fiscal 2000 and through fiscal 2003 operations.
In January 2000 we 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 our Common Stock, subject to
registration and certain other conditions and limited to a percentage of trading
volume. On January 27, 2000, we issued a Warrant to Swartz for the purchase of
up to 250,000 shares of Common stock in connection with the proposed equity
line. Of the warrants issued, 100,000 shares of Common stock became exercisable
upon the end of the final document review period, 75,000 shares became
exercisable upon the execution of the equity line documents, and 75,000 shares
shall be exercisable upon the earlier of (i) July 10, 2000 or (ii) the date on
which the related registration is declared effective. The warrant's exercise
price will initially equal the lesser of (i) the lowest closing bid price for
the five trading days prior to January 10, 2000, as subject to an exercise price
adjustment set forth in the warrant or (ii) the lowest closing bid price for
five trading days prior to the date of execution of all of the equity line
documents, subject to reset. On March 14, 2000, we entered into an amended and
restated Investment Agreement with Swartz. The Investment Agreement entitles us
to issue and sell our common stock to Swartz for up to an aggregate of $35
million from time to time during the three-year period following the
effectiveness of this registration statement. Each election by us to sell stock
to Swartz is referred to as a put right.
We will need additional capital to continue our operations and will
endeavor to raise funds through the sale of equity shares and revenues from
operations. There can be no assurance that we will obtain sufficient
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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 our
financial position and results of operations and ability to continue as a going
concern.
During the last half of fiscal 2000, we project expenditures for plant
and equipment of approximately $5,000,000 and research and development costs of
less than $1,000,000, assuming we raise projected capital. Research and
development costs will be associated primarily with Bio-Raptor(TM) configuration
for specific applications. We also plan to increase our number of employees to
approximately 50 by the end of fiscal year 2000.
Our operating and capital requirements during the next fiscal year and
thereafter will vary based on a number of factors, including: (i) the rate at
which microbial products are shipped and generate profits; (ii) the necessary
level of sales and marketing activities for environmental products; and (iii)
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 us. 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 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 the operating flexibility of us. The failure of U.S. Microbics to
successfully obtain additional future funding may jeopardize our ability to
continue our business and operations.
PROPERTIES
Our subsidiaries lease the following properties: NONE
SELLING SHAREHOLDERS
The following table provides certain information with respect to the
selling shareholders' beneficial ownership of our common stock as of April 27,
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
ours, and none of them has had a material relationship with us 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
Number of Shares Owned After Offering(2)
Beneficially Owned --------------------------------
Name Before Offering Number of Shares Number of Shares Percentage
- ---------------------------------- ------------------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Brobeck 94,921 0 0 0
Swartz 250,000 Up to 20,000,000(1) 0 0
</TABLE>
- -----------------------------
(1) Represents the maximum number of shares of common stock that we 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 our
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.
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<PAGE>
INVESTMENT AGREEMENT
On March 14, 2000, we entered into an amended and restated Investment
Agreement with Swartz. The amended and restated Investment Agreement entitles us
to issue and sell our 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 us to sell stock to Swartz is referred to as a put right.
PUT RIGHTS. In order to invoke a put right, we 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. We must also give at least 10 but not more than 20 business days' advance
notice to Swartz of the date on which we intend to exercise a particular put
right and we must indicate the maximum number of shares of common stock that we
intend to sell to Swartz. At our option, we may also designate a maximum dollar
amount of common stock that we 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 we choose to designate one, may not
exceed 85% of the closing bid price of our common stock on the date on which we
give Swartz advance notice of our exercise of a put right. The number of 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 we exercise the put right and ends on and includes
the day that is 20 business days after the date we exercise 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 us 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 us less than the designated minimum
per share price, if any, that we indicate in our notice.
Market price is defined as the lowest closing bid price for the common
stock on our principal market during the pricing period. The pricing period is
defined as the 20 business days immediately following the day we exercise the
put right.
WARRANTS. Within five business days after the end of each pricing
period, we are 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 we 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 we give advance notice of an intended
put and the date the particular put closes:
o we have announced or implemented a stock split or combination of our
common stock;
o we have paid a common stock dividend;
o we have made a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock; or
o we have consummated a major transaction, such as a sale of all or
substantially all of our 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 our 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.
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<PAGE>
CANCELLATION OF PUTS. We must cancel a particular put between the date
of the advance put notice and the last day of the pricing period if:
o we discover an undisclosed material fact relevant to Swartz's
investment decision;
o the registration statement registering resales of the common shares
becomes ineffective; or
o our 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, we may sell
Swartz a number of shares that is more than 20% of our shares outstanding on the
date of this prospectus. If we become listed on The Nasdaq Small Cap Market or
Nasdaq National Market, we may be required to obtain shareholder approval to
issue some or all of the shares to Swartz. As we are currently a Bulletin Board
company, we do not need shareholder approval.
TERMINATION OF INVESTMENT AGREEMENT. We may terminate our 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 we have 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,
we are prohibited from engaging in certain transactions. These include the
issuance of any equity securities, or debt securities convertible into equity
securities, for cash in a private transaction without obtaining the prior
written approval of Swartz. We are 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 we are 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. We have agreed to indemnify Swartz
(including its stockholders, officers, directors, employees, investors and
agents) from all liability and losses resulting from any misrepresentations or
breaches we make in connection with the Investment Agreement, our registration
rights agreement, other related agreements, or the registration statement.
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
us 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
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<PAGE>
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.
We have 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. We are
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.
MANAGEMENT
The directors and executive officers of U.S. Microbics and their ages
at April 30, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert C. Brehm 51 President, Chief Executive Officer and Chairman of the Board
Mery C. Robinson 43 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
</TABLE>
Our Bylaws 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
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 our Chief Executive Officer, President
and Chairman of the Board since July 1997. He also served as our 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 UC Berkeley.
MERY C. ROBINSON has served as a Director since September 1997 and our
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
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<PAGE>
interconnect service and equipment sales company. Ms. Robinson has held various
other positions in operating and starting 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
and has attended the NFWBO-sponsored/Wharton Graduate School of
Business/Entrepreneurial Mini-MBA program.
ROGER K. KNIGHT has served as a Director since February 1990 and our
Vice President-Business Development since July 1997. Mr. Knight has significant
experience in identifying business candidates for acquisitions, and served as
our 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 our 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 Office 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. Directors are elected for a period of one year. Robert H. Key
began serving as a director on July 18, 1999.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representation that no other reports were required,
our officers, directors and greater than ten percent (10%) shareholders complied
with all applicable Section 16(a) filing requirements, except for: (i) one Form
4s 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 4s and one
Form 5 filed late by Mery C. Robinson, the Chief Operating Officer, Secretary
and Director of U.S. Microbics; (iii) one Form 4s and one Form 5s filed late by
Roger K. Knight, the Vice President and Director of U.S. Microbics; (iv) one
Form 4s and one Form 5s filed late by Conrad Nagel, Chief Financial Officer of
U.S. Microbics; and (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 by
Robert H. Key a director of U.S. Microbics. We have 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 the Company's Chief
Executive Officer, regardless of compensation level, and the other executive
officers of the Company who each received in excess of $100,000 in total annual
salary and bonus for fiscal year 1999. Compensation is shown in the following
table:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term Compensation
----------------------
Annual Compensation Awards
------------------------------------------------------------------- --------------------------------
Securities
Name and Principal Restricted Stock Underlying Other Annual All Other
Position Fiscal Year Salary ($) Awards ($) Options/SARS (#) Compensation 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 the Company commenced in July 1997.
(2) Ms. Robinson's employment with the Company 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 employment contract dated 10/1/98, Mr. Brehm received
options to purchase 1,000,000 shares of common stock; as of April 30,
2000, 300,000 shares have vested at 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 employment contract dated 10/1/98,
Ms. Robinson received options to purchase 1,000,000 shares of common
stock; as of April 30, 2000, 300,000 shares have vested at total value
of $363,000.
STOCK OPTION GRANTS
The following table shows all individual grants of stock options to the Named
Executive Officers during the fiscal year ended September 30, 1999.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Total
Options/SARs
Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) Fiscal Year Price ($/SH) Date
- ------------------ ----------------------- ---------------------- ------------------------ ------------------
<S> <C> <C> <C> <C>
Robert C. Brehm 500,000 31.2% 1.00 10/19/03
1,000,000 15.6% 1.25 10/01/03
Mery C. Robinson 500,000 31.2% 1.00 10/19/03
1,000,000 15.6% 1.25 10/01/03
</TABLE>
(1) These options are completely vested and may be exercised at any time.
Vesting may be accelerated and the options may be re-priced at the
discretion of the Board of Directors. In the event of a specified
corporate transaction such as a dissolution, merger or other
reorganization of the Company in which more than 50% of the Company's
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 SIX MONTHS ENDED MARCH 31, 2000
Set forth below is information with respect to exercises of stock options by the
Named Executive Officers during the six months ended March 31, 2000, and the
fiscal year-end value of all unexercised stock options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised,
Options Held At Fiscal In-the-Money Options At
March 31, 2000 March 31, 2000 ($)
---------------------------------- ---------------------------------
Shares
Acquired On Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ----------------- ---------------- -------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Robert C. Brehm -- -- 1,475,000 700,000 $850,000 $525,000
Mery C. Robinson -- -- 1,350,000 700,000 $725,000 $525,000
</TABLE>
- --------------------------------
(1) Based on the closing price of $2.00 for the shares of Common Stock of the
Company traded on the OTC Bulletin Board as of March 31, 2000.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective October 1, 1998, the Company entered into an employment agreement with
Robert C. Brehm, the Company's 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, the
Company 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
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<PAGE>
equal installments of 100,000 shares commencing on April 1, 1999 and on the
first day of each six-month period thereafter. In the event that the ownership
or control of the Company 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 the Company in the event that Mr. Brehm's employment with the
Company is terminated at any time prior to the term of the employment agreement.
Effective October 1, 1998, the Company entered into an employment agreement with
Mery C. Robinson, the Company's 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, the Company 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. In the event that the ownership or control of the
Company 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 the Company in the event that Ms. Robinson's employment with the Company is
terminated at any time prior to the term of the employment agreement.
The Company has entered into consulting agreements for various services,
including public relations, marketing, technology transfer and engineering
services. The Company 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 THE COMPANY
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of April 27, 2000 by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director of the Company, (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 the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, 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.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount(1) Percent
- ----------------------------------------------------- --------------------------------- --------------------------
<S> <C> <C>
Robert C. Brehm 3,283,612 (2) 37.54%
President, Chief Executive Officer and
Chairman of the Board
Mery C. Robinson 3,175,000 (3) 35.32%
Chief Operating Officer, Secretary and
Director
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<PAGE>
Stephen Hopkins 800,000(4) 10.08%
Director
Roger K. Knight 634,575(5) 8.70%
Director
Conrad Nagel 252,860(6) 3.47%
Chief Financial Officer
Robert Key 65,000(7) .90%
Director
All Officers and Directors 8,161,047(8) 70.15%
As a group (6 persons)
Other 5% Shareholders:
Scott Sabins 761,667(9) 9.98%
514 Avenida La Costa
San Clemente, CA 92672
John Feighner 500,000(10) 6.55%
P.O. Box 1875
Rancho Santa Fe, CA 92067
</TABLE>
- --------------------------
(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 January 10, 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 JANUARY 10, 2000.
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<PAGE>
(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 ISSUABLE OF
COMMON STOCK UNDER STOCK OPTIONS EXERCISABLE WITHIN 60 DAYS OF January
10, 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 January 10,
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 January 10, 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 January 10,
2000.
(7) Consists of 650 shares of Series C Preferred Stock convertible into
65,000 shares of Common Stock.
(8) Includes 4,495,585 shares issuable under stock options, warrants or
convertible securities held by directors and executive officers
exercisable or convertible within 60 days of January 10, 2000.
(9) 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
January 10, 2000.
(10) CONSISTS OF 5,000 SHARES OF SERIES C PREFERRED STOCK CONVERTIBLE INTO
500,000 SHARES OF COMMON STOCK.
(11) INCLUDES 175,000 SHARES OF COMMON STOCK ISSUABLE UNDER STOCK OPTIONS
EXERCISABLE WITHIN 60 DAYS OF JANUARY 10, 2000.
DESCRIPTION OF SECURITIES
COMMON STOCK
Our certificate of incorporation authorizes us 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, 7,138,190 shares are issued and
outstanding as of March 31, 2000.
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. We 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
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<PAGE>
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 our 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 we file, other than a
registration statement covering an employee stock plan or a registration
statement filed in connection with a business combination or reclassification of
our securities.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon by
Baker & McKenzie, San Diego, California.
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 our ability to continue as a
going concern, given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. Our 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 we file 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. We have
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, we
refer 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.
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<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 32
Consolidated financial statements:
Balance sheets 33
Statements of operations 34
Statements of changes in stockholders' (deficit) equity 35-36
Statements of cash flows 37
Notes to financial statements 38-53
-31-
<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
Las Vegas, Nevada
January 28, 2000
(Except for Note 6 as to which the date is February 4, 2000)
-32-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1998 1999 2000
------------ -------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
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 2,200 1,700 1,261
shares issued and outstanding; aggregate liquidation preference
of $21,507, $17,163 and $12,608
Series B; 500,000 shares authorized; 15,915, 13,969 and 8,007 1,600 1,400 801
shares issued and outstanding; aggregate liquidation preference
of $15,915 , $13,969 and $8,007
Series C; 500,000 shares authorized; 15,357, 40,110 and 45,227 1,500 4,000 4,523
shares issued and outstanding; aggregate liquidation preference
of $1,535,700, $4,011,000, $4,522,700
Series D; 500,000 shares authorized; 20,438, 4,725, 5,525 2,000 500 553
shares (no liquidation preference) ------------ -------------- -------------
7,300 7,600 7,138
Common stock; $.0001 par value; 150,000,000 shares authorized; 3,447,554, 400 600 714
6,010,380 and 7,138,190 shares issued and
outstanding
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 subscriptions, 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
============ ============== =============
</TABLE>
The Notes to Consolidated Statements are an integral part of these statements.
33
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
September 30, March 31,
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES (INCLUDING $50,000 FROM RELATED PARTIES IN 1999,
Note 9) $ -- $ 66,900 $ 51,728 $ 13,894
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 intergral part of these statements
</TABLE>
-34-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Stock
------------------- --------------------- Paid-in Options and
Shares Amount Shares Amount Capital Warrants
------ ------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 61,552 $ 6,200 1,447,929 $ 200 $ 1,928,000 $ 187,700
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) -- -- -- -- -- 429,700
Exercise of stock options and warrants
(Note 6) -- -- 30,000 -- 31,800 (28,800)
Issuance of stock and stock options in
private placement (Note 6) 12,225 1,200 -- -- 480,400 298,500
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 (18,300)
Net loss for the year -- -- -- -- -- --
-------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 73,217 7,300 3,447,554 400 3,068,000 868,800
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) -- -- -- -- -- 258,300
Exercise of stock options and warrants
(Note 6) -- -- 170,000 -- 368,200 (289,000)
Issuance of stock and stock options in
private placement (Note 6) 29,597 3,000 -- -- 2,417,700 330,000
Issuance of stock in exchange for
services (Note 6) 2,789 300 5,000 -- 151,500 --
Expiration of stock options and warrants
(Note 6) -- -- -- -- 204,700 (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 6,212,900 963,400
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 (31,200)
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) 594,980
Interest-stock subscription notes
receivable (unaudited) -- -- -- -- -- --
Expiration of stock options and warrants
(unaudited) -- -- -- -- 350 (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 $ 1,526,830
=====================================================================================
-35-
<PAGE>
<CAPTION>
Stock Total
Treasury Subscriptions Accumulated Stockholders'
Stock Notes Receivables Deficit (Deficit) Equity
-------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 $ (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
Exercise of stock options and warrants
(Note 6) -- -- -- 3,000
Issuance of stock and stock options in
private placement (Note 6) -- -- -- 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) -- -- -- --
Net loss for the year -- -- (1,411,800) (1,411,800)
--------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 -- -- (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
Exercise of stock options and warrants
(Note 6) -- -- -- 79,200
Issuance of stock and stock options in
private placement (Note 6) -- (804,200) -- 1,946,500
Issuance of stock in exchange for
services (Note 6) -- -- -- 151,800
Expiration of stock options and warrants
(Note 6) -- -- -- --
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 (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) -- -- -- 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) -- -- -- (24,388)
Interest-stock subscription notes
receivable (unaudited) (43,817) (43,817)
Expiration of stock options and warrants
(unaudited) -- -- -- --
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 $ -- $ (943,665) $ (7,701,625) $ (300,415)
==============================================================
</TABLE>
-36-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, Six Months Ended March 31,
1998 1999 1999 2000
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
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 $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-37-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
-38-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
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.
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.
-39-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
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.
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.
-40-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
2.INVENTORIES:
Inventories:
<TABLE>
<CAPTION>
Inventories consisted of the following: March 31,
September 30, 2000
1999 (unaudited)
------------- ----------
<S> <C> <C>
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
===============================
<CAPTION>
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
March 31,
September 30, September 30, 2000
1998 1999 (unaudited)
--------------- ------------------ -----------------
<S> <C> <C> <C>
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
========================================================
</TABLE>
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 %.
-41-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
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:
<TABLE>
<CAPTION>
March 31,
September 2000
30, 1999 (unaudited)
-------------- -------------
<S> <C> <C>
Production equipment $ 21,200 $ 21,200
Less accumulated depreciation (2,300) (3,800)
------------ ------------
$ 18,900 $ 17,400
============ ============
<CAPTION>
At March 31, 2000, the future minimum payments under the capital lease
consisted of the following:
<S> <C>
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 portion $ 3,093
=================
</TABLE>
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
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.
-42-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (continued):
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.
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
-43-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (continued):
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.
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.
Preferred stock transactions during the year ended September 30, 1998
-44-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (continued):
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.
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.
-45-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
Treasury stock:
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:
<TABLE>
<CAPTION>
Options and Warrants Outstanding
------------------------------------
Weighted
Average
Shares Exercise Price
--------------- ----------------
<S> <C> <C>
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) .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
=============== ================
</TABLE>
The following is a summary of options and warrants outstanding at March
31, 2000 (unaudited):
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
----------------------------------------------------------------------- -------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Exercise Number Contractual Average Average
Prices Outstanding Life (Years) Exercise Price Number Exercisable Exercise Price
------------------------------------- ----------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 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
================ ================ ============== ================== ================
</TABLE>
-46-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
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.
The following table discloses the Company's proforma net loss per share
assuming compensation cost for employee stock options had been determined
using the fair value-based method prescribed by SFAS 123:
<TABLE>
<CAPTION>
Year Ended Six Months
September 30, Ended March 31,
1999 2000
(unaudited)
--------------- ----------------
<S> <C> <C>
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)
<CAPTION>
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:
Sept. 30, Sept. 30, March 31,
1998 1999 2000
(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
</TABLE>
-47-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
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:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, March 31,
1998 1999 2000
(unaudited)
--------------- ------------ --------------
<S> <C> <C> <C>
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)
--------------- ------------ --------------
$ -- $ -- $ --
=============== ============ ==============
<CAPTION>
The provision for federal and state income taxes
consisted of the following:
March 31,
1998 1999 2000
(unaudited)
--------------- ------------- --------------
<S> <C> <C>
Current $ -- $ -- --
Deferred -- -- --
--------------- ------------ --------------
$ -- $ -- $ --
<CAPTION>
=============== ============ ==============
March 31,
1998 1999 2000
(unaudited)
--------------- ------------- --------------
The deferred tax asset consisted of the following:
<S> <C> <C> <C>
Net operating loss carryforwards $ 1,046,300 $ 1,985,300 $ 2,346,300
Valuation allowance (1,046,300) (1,985,300) (2,346,300)
--------------- ------------ --------------
Net deferred tax asset $ -- $ -- $ --
=============== ============ ==============
</TABLE>
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.
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.
-48-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
DISCONTINUED OPERATIONS (CONTINUED):
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.
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.
-49-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
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.
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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.
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.
-50-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
11. SUBSEQUENT EVENTS:
Private placement:
During the period from April 1, 2000 to April 26, 2000, the Company raised
approximately $65,000 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.
-51-
<PAGE>
U.S. MICROBICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, AND 1999 FOR THE SIX MONTHS ENDED
MARCH 31, 2000 INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 22, 1999, the Company dismissed Bradshaw, Smith & Co. as its
independent certifying accountants, and engaged Arthur Andersen LLP as its
independent certified accountants. On November 21, 1999, the Company dismissed
Arthur Andersen, LLP and re-engaged Bradshaw, Smith & Co., LLP as its
independent certified accountants. Neither change was made because of any
disagreements with either firm.
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 April 26, 2000, the Company raised
approximately $65,000 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.
ITEM 27. EXHIBITS
Financial Statements included in body of this prospectus.
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ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To 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
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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) To 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 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
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.
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 the City of Ft.
Lauderdale, Florida on September 22, 1999.
U.S. MICROBICS INC.
By: /s/ Robert C. Brehm
-------------------------------------
Robert C. Brehm, President and
Chief Executive Officer
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U.S. MICROBICS INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
U.S. Microbics, Inc. and Subsidiaries
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 28, 2000 (except for Note 6 as to which the date
the date is February 4, 2000) in the Registration Statement (Form SB-2) and the
related prospectus of U.S. Microbics, Inc. and Subsidiaries for the
registration of 20,094,921 shares of its common stock.
/s/ BRADSHAW, SMITH & CO., LLP
Las Vegas, Nevada
May 3, 2000
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