<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: Commission File Number:
December 31, 1996 0-21092
OCTUS, INC.
(Name Of Small Business Issuer As Specified In Its Charter)
California 33-0013439
- ---------------------------------- --------------------------
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
4520 EXECUTIVE DRIVE, PLAZA TWO
SAN DIEGO, CA 92121
(Address Of Principal Executive Offices)
Issuer's telephone number, including area code:
(619) 824-1185
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units consisting of one Share of Common Stock and one Warrant
to purchase Common Stock (Title of Class)
Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained in this Form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Issuer:
$607,091 based on the average bid and asked prices of such stock on March 25,
1997.
The number of shares outstanding of each of the Issuer's class of common stock,
as of the close of the period covered by this report:
Class: Common Stock, No Par Value
Outstanding at December 31, 1996: 4,222,922 shares
Documents Incorporated by Reference: Portions of Registrant's definitive
Proxy Statement for its forthcoming Annual Meeting of Shareholders are
incorporated herein by reference into Part III of this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
OCTuS, Inc. (the "Company" or "OCTuS") was incorporated in October
1983 under the laws of the State of California. In December 1991, in
connection with its shift in focus from the laser printer to the
computer-telephone integration market, the Company's name was changed from
Office Automation Systems, Inc. to OCTuS, Inc. In January 1993, the Company
completed an initial public offering of 2,000,000 units each consisting of one
share of Common Stock and one Warrant to purchase one share of Common Stock.
The Company's Common Stock (OCTS), Warrants (OCTSW) and Units (OCTSU) are
currently traded on the OTC Bulletin Board.
From 1991 to early 1995, the Company was engaged primarily in the
design and development of computer software and associated hardware products
focused on the integration of the personal computer and the telephone. During
that time, the Company has developed a software product called OCTuS PTA(TM)
("Personal Telephone Assistant"), which incorporates a Microsoft Windows(TM)
graphical user interface ("GUI") and enables users to operate and integrate
telecommunications, facsimile transmission and receipt, telephone and personal
voice mail from a desktop or portable computer using the "point and click" of a
hand-held mouse. The Company shipped the first retail version of OCTuS PTA in
December 1993.
In March 1995, the Company engaged a third-party distributor, Cintech
Tele-Management Systems, Inc. ("Cintech") to exclusively manufacture,
distribute and sell the retail version of OCTuS PTA in North America. Since
that time, the Company has focused its efforts on the licensing of its OCTuS
PTA technology to third parties for incorporation by such parties into their
own respective product lines. Although several companies have expressed
interest in licensing the Company's technology, no significant licensing
arrangements have been entered into to date, nor can there be any assurance
that the revenue from any such licensing agreements will be sufficient to
sustain the Company's operations. In such case, the Company may be required to
curtail business altogether.
The core of the Company's technology from its inception until 1991 was
comprised of software for use in controllers for laser printers and related
imaging devices. The Company incorporated this technology into its own
LaserPro(R) laser printer products and also licensed the technology to third
parties.
In 1991, because of low margins and competition, the Company shifted
its primary focus from laser printer controller technology to the development
of the OCTuS PTA product line. From early 1991 to the beginning of 1994, the
Company had been engaged in the development and testing of its new products.
From early 1994 to March 1995, the Company was focused on marketing and
licensing its new CTI products. Upon execution of the Cintech agreement in
March 1995, the Company shifted its focus to a plan of pursuing licensing of
the components of OCTuS PTA to third parties for use in their respective
products. However, no such agreements have been entered into to date and
there can be no assurance that any such agreements will generate sufficient
revenue to sustain the Company's business operations.
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OCTUS PTA
OCTuS PTA Computer Telephone Integration. OCTuS PTA was one of the
first products to fully integrate telephone communications with the personal
computer. The product replaces some of the many traditional desktop tools
frequently used by managers and professionals, such as a name and address book;
fax machine; answering machine; advanced feature phone, and speed dialer with
one integrated system that operates with familiar "point and click" mouse
commands. The product is designed to work with Centrex(R) telephone service as
well as standard business/residential telephone lines, and other analog lines
utilizing a Private Branch Exchange ("PBX").
OCTuS PTA, which is accessible from within any Microsoft Windows
application, permits users (who have installed the appropriate hardware devices
in their personal computer system) to use their hand-held mouse to visually
select icons on their computer screen (depending on the features provided by
their telephone service) to place and receive calls, transfer, forward and
pick-up calls, access OCTuS PTA voice mail, place conference calls, record
messages and notes, send and receive faxes (even while talking, if a separate
fax line version is available), review contact histories, and access an
integrated addressbook.
The Company believes that one of the unique strengths of the product
is its incoming call processing capabilities. OCTuS PTA provides a "pop-up"
message with a button bar that allows the user to decide how to respond to the
call. The user may select from several options, including forwarding the call
to OCTuS PTA's voice mail, having OCTuS PTA play and/or take a message; putting
the caller on hold after OCTuS PTA plays a user-recorded message; going
directly into OCTuS PTA to review notes from earlier calls, or simply answering
the call. The call may be answered by lifting the handset or by clicking on
the on-screen "Answer" button in the pop-up message and using a speakerphone.
If Caller ID is available, OCTuS PTA can also display caller
information supplied by the user's telephone company. If the caller's name and
number was previously entered in the user's OCTuS PTA addressbook database,
OCTuS PTA will automatically display the contact history while the phone is
still ringing. This "soft interrupt" is designed to improve worker
productivity by selectively allowing less important calls to be answered
automatically and then returned at a more convenient time.
The Company accomplishes the physical connection between the personal
computer and the telephone in the current OCTuS PTA product by using a
proprietary external PC-telephone interface, the OCTuLINK(TM). The OCTuLINK
connects to the parallel port on the user's personal computer and contains
jacks for the connection with a sound card (required for full voice and
messaging capability). The OCTuLINK's "pass-through" design allows the user
to connect a printer to one end of the OCTuLINK, and print and do call control
simultaneously.
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In addition, OCTuS PTA has been enhanced to support TAPI, the
telephony application program interface developed by Microsoft and Intel. The
TAPI version of OCTuS PTA, was released in July 1995, and works with any
TAPI-compliant, third-party telephone interface.
Cintech Tele-Management Systems, Inc. ("Cintech") is the exclusive
distributor in North America of the retail version of OCTuS PTA software
packaged with the OCTuLINK. The Company retains the right to distribute other
configurations of the OCTuS PTA product, as well as rights to distribute the
retail version of the product outside North America. See "General Distribution
Strategy."
For added capability, the user may purchase the Personal Fax and
Personal Voice-Mail add-on modules, the retail versions of which are also sold
in North America by Cintech. The Personal Fax module works with standard
fax-modem cards and the personal Voice Mail module works with Sound
Blaster(TM)-compatible soundcards.
STRATEGIC ALLIANCES AND MARKET RECEPTION
The Company's initial marketing plan had focused on developing
strategic relationships with certain RBOC's to further developing its OCTuS PTA
line of products with a view to having its products distributed by the RBOCs.
To that end, the Company reached marketing agreements with Pacific Bell and
Bell Atlantic. Additionally, in March 1995, the Company entered into an
agreement with Cintech Tele-Management Systems, Inc. ("Cintech") whereby
Cintech was granted exclusive rights, upon payment of per unit royalty fees,
to distribute the retail version of OCTuS PTA in North America, including
distribution of the product to the RBOCs.
In addition, in September, 1995, the Company executed a license
agreement with Ascom Telecommunications Limited of the United Kingdom ("Ascom")
whereby the Company granted exclusive rights to Ascom to manufacture and
distribute a special serial-port version of the OCTuS PTA software to the
European market.
However, in May 1995, Pacific Bell released the Company from all
remaining obligations to deliver OCTuS PTA units to its customers under its
product delivery agreement. In addition, none of the other foregoing
agreements have generated significant revenue to date and are not expected to
provide revenue at levels sufficient to sustain the operations of the Company.
Although several companies have expressed an interest in licensing the
Company's technology and the Company has actively pursued such leads, there can
be no assurance that any such licensing arrangements will be entered into, or
that the revenues from such arrangements will be sufficient to sustain the
operations of the Company.
GENERAL DISTRIBUTION STRATEGY
Retail Distribution of OCTuS PTA. In March 1995, the Company entered
into a distribution agreement with Cintech Tele-Management Systems ("Cintech")
of Cincinnati, Ohio whereby Cintech acquired the exclusive rights, upon payment
of a per unit royalty, to distribute the retail version of OCTuS PTA (with the
OCTuLINK) in North America. Under the agreement, the product will be
manufactured, sold and supported by Cintech through its direct sales force and
extensive reseller network in the United States and Canada. This license
expired on March 6, 1997, and while Cintech has the option to renew such
license, it has not yet exercised this option.
Distribution through OEM's. Following the execution of the Cintech
agreement, the Company began to focus its efforts on the licensing of OCTuS PTA
and the OCTuLINK to original equipment manufacturers ("OEMs") in the
telecommunications and computer industries for use in their respective
products. Several companies have expressed an interest in licensing part or
all of the product and the Company is actively pursuing further discussions
with such companies. However, there can be no assurance that any such
agreements will be executed, or that they will generate revenues at levels
sufficient to sustain the operations of the Company.
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COMPETITION
The desktop computer telephony market is a relatively recent
development and is highly competitive and rapidly changing. The Company
expects competition to become more intense as the market grows and matures.
Companies with products similar to OCTuS PTA have developed different
market strategies and technological thrusts. The strategic points of
differentiation among competitive products are the type of telecommunications
and computer hardware on which the product operates, the ability of the product
to operate on a local area network ("LAN") as well as for single users, and
software features.
In addition, some or all of these competitors have capital, name
recognition and financial, personnel, and other resources substantially greater
than those of the Company. The success of the Company's product in the
marketplace will depend upon the success of the third party licensees in
marketing the product, as well as how well the product's features,
price/performance, technology, and reliability compares with that of the
competition. There can be no assurance that the Company, in light of its
limited financial resources, will be able to continue research and development
to keep the product competitive.
EMPLOYEES
The Company did not add to its workforce during the year ended December
31, 1996; as of March 31, 1997, the Company had one employee, President John C.
Belden, who is based at the Company's San Diego, California headquarters. In
1996, the Company also engaged three former employees as independent contractors
from time to time to provide it with assistance in various areas (including
research and development) on an "as needed" basis. See "Risk Factors Which May
Affect Future Results - Restructuring of Operations."
ITEM 1A. RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS.
HISTORY OF OPERATING LOSSES
For the calendar year ended December 31, 1996, the Company recorded a
loss of $191,056. For the calendar year ended December 31, 1995, the Company
recorded a gain of $586,000; however, such gain primarily reflects one-time
receipts of revenue by the Company in connection with its transition from a
sales and marketing company to a licensing organization as well as a reduction
in expenses associated with substantial reductions in force and other operating
costs necessitated by lack of significant product sales and resultant decreases
in available cash resources.
At December 31, 1996, the Company had working capital of negative
$146,507, an accumulated deficit of $22,067,802 and a shareholders' deficit of
$101,225. Although the Company has reduced its operating expenses through the
assignment of the North American retail channel to Cintech which has allowed the
Company to focus its efforts on licensing of the product to other third party
manufacturers, which entails significantly lower expenditures and has the
potential for increasing the Company's revenues through establishment of
possible new sources of income, the Company does not believe that the Cintech
agreement, by itself, will be sufficient to provide for the continued viability
and operations of the Company. See "Business - Strategic Alliances and Market
Reception."
In any case, the absence of a significant level of sales of the
Company's products, either as standalone retail units or incorporated into
third party products will cause the Company to continue to generate significant
losses. There is no assurance that the Company's operations will be successful
or will be profitable in the future.
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NEED FOR ADDITIONAL CAPITAL
The Company's cash on hand as of March 31, 1997 was $5,000, which is
inadequate to meet the Company's budgeted operating requirements. Additional
cash resources are required to sustain the Company's operations unless adequate
revenues from sales and licensing of the Company's OCTuS PTA product line
develop, of which there can be no assurance. While operations to date are being
funded by loans from Basic Research Corporation ("Basic Research"), a subsidiary
of Advanced Technologies International, Ltd. ("ATI"), one of the Company's
principal shareholders, it should be noted that the Company has no commitment
from any party to provide additional capital or loans and there is no assurance
that such funding will be available when needed or, if available, that its terms
will be favorable or acceptable to the Company. Should the Company be unable to
obtain additional capital or loans when and as needed, it could be forced to
curtail operations or cease business activities altogether.
RESTRUCTURING OF OPERATIONS
The Company undertook a substantial restructuring in 1994 and 1995,
primarily as a result of continued operating losses. This restructuring
included a substantial reduction in the Company's workforce from 46 employees
(as of March 31, 1994) to one employee (as of March 31, 1997) as well as
relocation of its headquarters to another facility with lower operating costs.
See Item 2, "Description of Property." In addition, Ray M. Healy became the
Company's President and Chief Executive Officer in November 1994. However, Mr.
Healy resigned as the Company's President and Chief Executive Officer on May 31,
1995 in order to pursue other opportunities and Mr. Belden was re-appointed to
that position. Mr. Belden is the sole remaining executive officer of the
Company. Mr. Donald O. Aldridge, a director of the Company since June 1995, was
appointed Chairman of the Board of the Company in October 1995. In June 1996,
the Company sold to ATI 250,000 shares of Series C Preferred Stock (which votes
with the Company's Common Stock with each share of Series C Preferred Stock
having ten votes) for $150,000 and issued warrants to purchase up to an
additional 3,000,000 shares of the Company's Common Stock at an additional
exercise price of $0.43 per share.
Although this restructuring effected a major reduction in the
Company's operating expenses, the Company's cash on hand continues to be
insufficient to meet its present operating expenses. Without a substantial
increase in revenues, the Company will be required to make additional
reductions in expenses, which will affect the Company's ability to continue
its operations.
NEED FOR PRODUCT ACCEPTANCE
The Company's ability to complete the development and testing of
future revisions and/or improvements to OCTuS PTA is uncertain due to lack of
sufficient financial resources. As such, there is no assurance that the
Company's testing and development schedules for such future versions will ever
be met. The Company's inability to complete such development and testing
could have a material adverse effect on the Company's financial condition and
results of operations, and could raise questions as to the Company's ability to
continue as a going concern.
In addition, because the computer industry is characterized by rapid
technological change, there can be no assurance that the Company's products
will not be rendered obsolete as a result of technological developments before
or after their introduction. The Company's limited resources have impaired the
Company's ability to quickly introduce its new products, continually improve
such products and develop other products in order to compete effectively in
this industry. Accordingly, there is no assurance that the Company will be
able to complete the development of such new products or improvements on a
timely basis, if at all.
MARKETING/DEPENDENCE ON OTHERS FOR DISTRIBUTION
In order to generate significant revenues from OCTuS PTA, the Company
must generate sufficient royalty income from Cintech as well as successfully
implement a program to license the product to companies in the personal
computer and telecommunications industry for incorporation into their
respective products.
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DEPENDENCE ON THIRD PARTY SOFTWARE
The Company's products are designed for use with Microsoft(R)
Windows(TM). Although the product functions with Windows 95, the Company will
likely have to revise its product for use with newer versions of that product
as well as for each different combination of computers and telephone systems.
In addition, since the Company's products will operate in conjunction with
these other operating systems and applications, changes to such systems will
require the Company to adapt its products accordingly. The Company's ability to
perform such ongoing development has been impaired by its present financial
condition and there can be no assurance that the Company will be capable of
conducting any such improvements, which could affect the Company's ability to
continue as a going concern.
HIGHLY COMPETITIVE INDUSTRY
The computer industry is highly competitive and rapidly changing.
There are other companies that are engaged in marketing and development of
products similar to certain of the Company's products that employ similar
technologies which directly compete or could compete with the remainder of the
Company's products. Many of these competitors have significantly greater
financial, technical, manufacturing, and marketing resources and greater name
recognition than the Company. The Company believes that due to the
nonproprietary nature of its products and the relatively low barriers to entry
to its markets that, unless it establishes a significant installed base before
its competitors, the Company will not have any sustainable long-term advantage
over its competitors. The Company believes that its ability to compete depends
on elements both within and outside its control, including the success and
timing of new product development by the Company and its competitors, product
performance and price, productivity enhancement, distribution and customer
support. There is no assurance that the Company will be able to compete
successfully with respect to these factors or others.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may vary significantly from period to
period depending on factors such as the timing of new product introductions by
the Company and its competitors, product mix, changes in distribution channels,
increased competition, changes in product demand resulting from seasonal
fluctuations in business activity, and changes in operating and material costs.
As a result of these and other factors, the Company could experience
significant fluctuations in results of operations in future periods.
INTELLECTUAL PROPERTY
The Company generally relies on confidentiality agreements with its
employees and consultants to protect its proprietary information. There is no
assurance that existing or future patents, copyrights, trademarks and
confidentiality agreements will afford protection from material infringement.
There is also no assurance that the Company's technologies and products will
not infringe upon patents or copyrights of others. Management of the Company
believes that because of the rapid pace of technological change in its
industry, patent and copyright protection is less significant than the ability
of the Company to develop and market new products.
GENERAL ECONOMIC AND MARKET CONDITIONS
Demand for the Company's products depends largely upon the overall
demand for computer and communications products. Demand for such products
fluctuates from time to time based on numerous factors, including capital
spending levels and general economic conditions. There is no assurance that
there will not be a decline in overall demand for computer and communications
products as a result of general economic conditions or otherwise, and any such
decline could have a material adverse effect on the Company's business.
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TRANSACTIONS WITH AFFILIATES
The Company has been a party to certain transactions with related
persons and affiliates. The Company believes that all such transactions were
in its best interests and on terms no less favorable to the Company than could
have been obtained from unaffiliated third parties and each transaction was
approved by disinterested and independent members of the Board of Directors.
However, such agreements were not always reached as the result of arms-length
negotiations.
TRADING MARKET/DELISTING FROM NASDAQ SMALLCAP MARKET/VOLATILITY OF
STOCK PRICE
In January 1993, the Company completed an initial public offering of
2,000,000 Units, each unit comprised of one share of Common Stock and one
Common Stock Purchase Warrant. These securities were quoted on the Nasdaq
SmallCap Market until February 1, 1995, at which time they were delisted due to
the Company's inability to meet that market's minimum capital and surplus
requirements. The securities now trade on the OTC Bulletin Board (commonly
referred to as the "pink sheets"), maintained by the National Quotation Bureau,
Inc., which are generally considered to be less efficient markets. While the
Company intends to reapply for listing on the Nasdaq SmallCap Market if
conditions are favorable for it to do so, there can be no assurance that the
Company's securities will be accepted by the Nasdaq SmallCap Market upon
application by the Company for relisting.
The market price of the Common Stock, Units, and Warrants, like that
of the securities of many other high technology companies, has been highly
volatile. Factors such as fluctuation in the Company's operating results,
announcements of technological innovations or new products by the Company or
its competitors, developments in the Company's strategic alliances with other
companies, and general market conditions may have a significant effect on the
market price of the Common Stock, Units, and Warrants. See table in Part II,
Item 5, "Market for Common Equity and Related Stockholder Matters."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock in the public market
could have an adverse effect on the price of the publicly-traded Units, Common
Stock and the Warrants and could potentially adversely affect the Company's
ability to raise additional funds. At December 31, 1996, 189,799 stock options
held by Mr. Belden at the time of the January 1993 initial public offering, are
subject to a lockup agreement with RAS Securities Corp., the underwriter of the
initial public offering, whereby such persons have agreed not to sell, contract
to sell, or otherwise dispose of such shares of Common Stock, without the
consent of RAS Securities Corp., until the date the Company has $1.0 million or
more in earnings after taxes in any fiscal year as certified by the Company's
independent accountants.
EFFECT OF CERTAIN ANTI-TAKEOVER CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Bylaws could have the effect of making it
more difficult for a third party to acquire, or could discourage a third party
from attempting to acquire, control of the Company. Such provisions may limit
or reduce the price that investors might be willing to pay for shares of the
Common Stock. Certain of such provisions allow the Company to issue preferred
stock with rights senior to those of the Common Stock and impose various
procedural and other requirements that could make it more difficult for
shareholders to effect certain corporate actions. The Articles also provide
for a classified board in the event the Company's shares are traded on a
national securities exchange or the Nasdaq National Market. A classified board
could make it more difficult for a third party to acquire control, or could
discourage a third party from attempting to acquire, control of the board.
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ITEM 2. DESCRIPTION OF PROPERTY.
In October, 1996, the Company moved its offices to a 400 square foot
office suite in an area of northern San Diego known as the "Golden Triangle".
The new facility is approximately eight miles north of the Company's former
site in Kearny Mesa. The Company occupies this space on a month-to-month
basis for approximately $100 per month. The Company subleased the former
Kearny Mesa facility, a 500-square foot space, between July 1995 and October
1996 from the primary tenant of such facility, which was an unrelated third
party. The sublease was on a month-to-month basis, with a lease payment of
approximately $270 per month. From April 1995 to July 1995, the Company was
situated in a 12,400 square foot facility in the Clairemont Mesa section of San
Diego. The Company occupied these premises from on a month-to-month basis as
well, with a monthly lease payment of $2,500.
From April 1994 to April 1995, the Company's headquarters were located
in 13,240 square-foot space in a commercial area of San Diego known as Sorrento
Mesa. This site was immediately adjacent to a 45,000 square foot facility
which served as the Company's headquarters from 1988 to 1994. The Company's
monthly lease and expense payments (which included common area maintenance,
taxes and insurance costs passed on to the Company by the landlord) on the
13,240 square-foot facility were approximately $11,200. The Company
negotiated an agreement with the landlord of that facility to permit the
leasing of the premises to an unrelated third party, beginning in April 1995.
In the event such third party's tenancy terminates prior to the termination of
the Company's lease in February 1998, the Company will have the option to re-
occupy or sublet the premises for the remainder of the Company's lease term
unless the landlord elects to terminate the Company's lease, in which event the
Company would be completely released from any further obligations under its
lease for such premises.
The Company does not maintain any other leases for office space and owns no
real property.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, Units and Warrants were quoted on the
Nasdaq Small-Cap Market under the symbols OCTS, OCTSU and OCTSW, respectively,
upon completion of the Company's initial public offering on January 15, 1993
until February 1, 1995. On February 1, 1995, the Company's securities were
delisted from the Nasdaq Small-Cap Market due to the Company's inability to
meet that market's minimum capital and surplus requirements. Since February 1,
1995, the Company's securities have been traded on the OTC Bulletin Board (the
"pink sheets").
Set forth below are the ranges of high and low bid prices for the
Common Stock as reported by Nasdaq since the commencement of trading on January
18, 1993 through March 31, 1997. Quotations reflect interdealer prices without
retail markup, markdown, or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK
QUARTER ENDED HIGH LOW
------------- ------------ -----
<S> <C> <C>
March 31, 1993(1) 5-5/8 3-3/8
June 30, 1993(1) 6-1/2 4-1/8
September 30, 1993(1) 7-3/4 4-1/4
December 31, 1993(1) 9-1/2 6-5/8
March 31. 1994(1) 8-3/4 5-1/2
June 30, 1994(1) 6 2-3/8
September 30, 1994(1) 3-3/16 1-1/4
December 31, 1994(1) 2-1/2 1-3/8
March 31, 1995(2) 5/8 7/16
June 30, 1995(2) 1/2 1/8
September 30, 1995(2) 17/32 15/32
December 31, 1995(2) 3/16 3/32
March 31, 1996(2) 5/16 5/32
June 30, 1996(3) 3/4 3/16
September 30, 1996(3) 7/16 3/16
December 31, 1996(3) 5/16 3/16
March 31, 1997(3) 1/4 1/16
</TABLE>
(1) Monthly Statistical Reports, January 1993 through December 1994
prepared by the Nasdaq Stock Market.
(2) Compuserve Stock Quotes, 1995
(3) America Online Stock Quotes, 1996
On March 25, 1997, the closing price of the Company's Common Stock on
the OTC Bulletin Board was $0.156 per share.
The Company has never declared or paid cash dividends on its Common
Stock and has no current intention to declare or pay any dividends on its
Common Stock in the foreseeable future. The Company intends to retain its
earnings, if any, for the development of its business.
As of March 31, 1997, there were approximately 900 holders of the
Company's Common Stock, and one holder of the Company's Series C Preferred
Stock, the Company's only outstanding classes of securities.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This information should be read in conjunction with the unaudited
financial statements and notes thereto which begin on page F-1 of this report
for the years ended December 31, 1996 and 1995, respectively.
OVERVIEW
OCTuS was incorporated in 1983 to develop a low cost controller for
laser printers. By the end of 1985, the Company had developed a laser printer
controller with a proprietary page description language which it incorporated
into laser printers and marketed under the LaserPro(R) trademark. The Company
was also licensing its laser printer controller technology. This strategy
produced increasing sales and profits until mid-1989 when profits began to
decline primarily as a result of low margins and other competitive reasons
caused by the high cost of the necessary component parts in relation to the
competitive market price and the dominant market position of larger high-volume
competitors. Although there is no assurance, the Company does not expect the
foregoing factors to significantly affect the OCTuS PTA line of products
because software products do not rely so heavily on component parts supplied by
other manufacturers. While royalties from printer licensing agreements
provided working capital, the Company began to suffer operating losses in 1989,
which have continued through the present.
In early 1991, the Company began shifting its emphasis from laser
printer controller products to the development of its new product line. Since
1991, the Company has made significant changes to its business, management and
operations. However, until September 1993, substantially all of the Company's
revenues were derived from business activities involving the Company's laser
printer technology and technology licensing agreements. In September 1993,
the Company sold substantially all of the assets and inventory of the laser
printer business to National Computer Systems, Inc. ("NCS"). Since that
time, the Company has not generated significant revenues from sales of its
OCTuS PTA product due to poor product sales and lack of broad market
acceptance. As a result, in 1994, the Company was required to significantly
downsize its staff and reduce its operating expenses, which continued into
1995. See Part I, "Description of Business," "-- Employees," and "--Factors
Which May Affect Future Results," "---Restructuring of Operations."
In March 1995, the Company engaged a third-party distributor, Cintech
Tele-Management Systems, Inc. ("Cintech") to exclusively manufacture,
distribute and sell the retail version of OCTuS PTA in North America. Since
that time, the Company has focused its efforts on the licensing of its OCTuS
PTA technology to third parties for incorporation by such parties into their
own respective product lines. Although several companies have expressed
interest in licensing the Company's technology, no significant licensing
arrangements have been entered into to date, nor can there be any assurance
that the revenue from any such licensing agreements will be sufficient to
sustain the Company's operations. In such case, the Company may be required to
curtail business altogether. See Part I, "Description of Business," "--OCTuS
PTA", "--Strategic Alliances and Market Reception," and "--General Distribution
Strategy."
The discussion and analysis set forth below covers the following
comparative periods: the calendar years ended December 31, 1996 and December
31, 1995; and the calendar years ended December 31, 1995 and December 31, 1994.
11
<PAGE> 12
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The following table sets forth certain revenue and expense
classifications as a percentage of revenues:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995
<S> <C> <C>
Revenues:
Net sales --- 21.2%
Royalties and technology income 100.0% 62.5%
Income from release agreement 16.1%
Interest --- .2%
---------------------------------------------
100.0% 100.0%
---------------------------------------------
Costs and expenses:
Cost of sales --- 12.8%
Selling, general and administrative 498.8% 47.8%
Interest 14.8% .2%
---------------------------------------------
513.6% 60.8%
---------------------------------------------
Gain (Loss) before income taxes (433.39%) 39.2%
Income tax benefit 20.6% 2.3%
Net income (loss) before extraordinary item (412.79%) 41.5%
Extraordinary item 30.7% 3.3%
Net income (loss) (382.11%) 44.8%
---------------------------------------------
Cost of sales as a percent of net sales --- 60.3%
---------------------------------------------
</TABLE>
CALENDAR YEAR 1996 COMPARED TO CALENDAR YEAR 1995
NET SALES. There were no net sales for the year ending December 31,
1996, compared with $317,000 for the same period in 1995. This decrease is
primarily the result of the completion of the Company's shift, begun in 1995,
from selling its OCTuS PTA product through retail channels to one of promoting
its technology through licensing. A substantial portion of the 1995 net sales
was due to revenue received by the Company from Cintech Tele-Management
Systems, Inc. ("Cintech") with respect to Cintech's purchase of the Company's
retail OCTuS PTA inventory pursuant to an agreement executed with the Company
in March 1995. In addition, in September, 1995, the Company executed a
license agreement with Ascom Telecommunications Limited of the United Kingdom
("Ascom") whereby the Company granted exclusive rights to Ascom to manufacture
and distribute a special serial-port version of the OCTuS PTA software to the
European market. In connection with that agreement, Ascom agreed to pay the
Company $65,000 in order to develop the modified version of the product. To
date, the Company has received $55,000 of such amount. It should be noted,
however, that although the above-referenced agreements provide for payment of
royalties to the Company by the aforementioned licensees with respect to OCTuS
PTA units manufactured and distributed by them, no such royalties have been
earned by the Company to date and there can be no assurance that substantial
royalties will develop from these sources (or under any other similar licensing
arrangements which have yet to be established), if at all.
ROYALTY AND TECHNOLOGY INCOME. Royalty and technology income
decreased $885,720, or 94.7%, from $935,720 for the fiscal year ending
December 31, 1995 to $50,000 for the fiscal year ending December 31, 1996. The
royalty revenue for the year ending December 31, 1996 represents licensing
payments the Company received from two licensee(s) with respect to the
licensing of OCTuS PTA
12
<PAGE> 13
INTEREST INCOME. There was no interest income for the fiscal year
ending December 31, 1996, compared with $3,432, for the prior year ended
December 31, 1995, representing a decrease of $3,432, or 100%. The decrease
resulted from the Company's use of cash to on hand to fund operating expenses
in the fiscal year ending December 31, 1996 and lack of cash reserves due to
poor operating cash flow.
COST OF SALES. There was no cost of sales for the fiscal year ending
December 31, 1996, compared with $191,000 for the fiscal year ending December
31, 1995. Cost of sales as a percentage of net sales for the fiscal year ending
December 31, 1996 was zero compared to 60.3% for the fiscal year ending
December 31, 1995. The decrease relates to lack of product sales in the fiscal
year ending December 31, 1996 as compared to the fiscal year ending December
31, 1995 and resultant lower inventory requirements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for calendar year 1996 decreased $452,537, from $701,913
in the fiscal year ending December 31, 1995 to $249,376 in the fiscal year
ending December 31, 1996. The decrease of 64.5% reflects primarily a lack of
significant sales which resulted in the Company expending its limited cash
resources in order to fund operating expenses.
RESEARCH AND DEVELOPMENT. There were no significant research and
development expenses for the fiscal years ending December 31, 1996 and 1995; as
such, these expenses were recorded as general and administrative expenses for
the fiscal year ending December 31, 1996 and 1995. Research and development
expenses in the fiscal year ending December 31, 1994 were $2,347,000. The
decrease reflects the Company's curtailment of resources with respect to the
development of its OCTuS PTA product line as the product transitioned from
development to marketing stage. In addition, due to reduced capital
resources, the Company eliminated or suspended certain future projects and
eliminated its research and development staff.
NET LOSS/GAIN. The Company experienced a net loss of $191,056 for the
fiscal year ended December 31, 1996. However, net gain for the fiscal year
ended December 31, 1995 was $670,000. It should be noted that the net gain
recorded for the fiscal year ended December 31, 1995 primarily reflects
one-time receipts of revenue by the Company in connection with its transition
from a sales and marketing company to a licensing organization as well as a
reduction in expenses associated with substantial reductions in force and other
operating costs necessitated by lack of significant product sales and resultant
decreases in available cash resources.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
The following table sets forth certain revenue and expense
classifications as a percentage of revenues:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994
<S> <C> <C>
Revenues:
Net sales 21.2% 8.0%
Royalties and technology income 62.5% 86.0%
Income from release agreement 16.1% ---
Interest .2% 6.0%
---------------------------------------------
100% 100%
---------------------------------------------
Costs and expenses:
Cost of sales 12.8%% 24.5%
Selling, general and administrative 47.8% 329.6%
Research and development --- 194.0%
Interest .2% 1.2%
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
-----------------------------------------
60.8% 549.3%
-----------------------------------------
Gain (Loss) before income taxes 39.2% (449.3%)
Income tax benefit 2.3% ---
-----------------------------------------
Extraordinary item 3.3% ---
Net income (loss) 44.8% (449.3%)
=========================================
Cost of sales as a percent of net sales 60.3% 306.2%
=========================================
</TABLE>
CALENDAR YEAR 1995 COMPARED TO CALENDAR YEAR 1994
NET SALES. Net sales for the year ending December 31, 1995 were
$317,000 representing an increase of $220,000, or 226.8% from the $97,000 for
the same period in 1994. A substantial portion of this increase was due to
revenue received by the Company from Cintech Tele-Management Systems, Inc.
("Cintech") with respect to Cintech's purchase of the Company's retail OCTuS PTA
inventory pursuant to an agreement executed with the Company in March 1995. In
addition, in September, 1995, the Company executed a license agreement with
Ascom Telecommunications Limited of the United Kingdom ("Ascom") whereby the
Company granted exclusive rights to Ascom to manufacture and distribute a
special serial-port version of the OCTuS PTA software to the European market. In
connection with that agreement, Ascom agreed to pay the Company $65,000 in order
to develop the modified version of the product. To date, the Company has
received $55,000 of such amount. It should be noted, however, that although the
above-referenced agreements provide for payment of royalties to the Company by
the aforementioned licensees with respect to OCTuS PTA units manufactured and
distributed by them, no such royalties have been earned by the Company to date
and there can be no assurance that substantial royalties will develop from these
sources (or under any other similar licensing arrangements which have yet to be
established), if at all.
ROYALTY AND TECHNOLOGY INCOME. Royalty and technology income decreased
$106,000, or 10.2%, from $1,041,000 for the fiscal year ending December 31, 1994
to $935,000 for the fiscal year ending December 31, 1995. Such royalty and
technology income was earned primarily from a single licensee, which, at the
time the payments were made, was a shareholder of the Company. The Company
negotiated a $3,000,000 gross lump sum prepayment with the licensee in September
1992. As a result, no further royalty payments will be made to the Company
under the agreement. The royalty revenue for the year ending December 31, 1995
represents the pro rata recognition of the prepayment for the year. The Company
amortized this payment up through August 1995, when the original license
agreement expired.
INTEREST INCOME. Interest income for the fiscal year ending December
31, 1995 was $3,000, representing a decrease of $69,000, or 95.8% from the
$72,000 received for the comparable period for the fiscal year ending December
31, 1994. The decrease resulted from the Company's use of cash to on hand to
fund operating expenses in the fiscal year ending December 31, 1995 and lack of
cash reserves due to poor operating cash flow.
COST OF SALES. Cost of sales for the fiscal year ending December 31,
1995 of $191,000 represents a decrease of $106,000, or 35.7%, from $297,000 for
the fiscal year ending December 31, 1994. Cost of sales as a percentage of net
sales for the fiscal year ending December 31, 1995 was 60.3% compared to
- --117.5% (after adjusting for inventory provisions) for the fiscal year ending
December 31, 1994. The decrease relates primarily to lack of significant
product sales in the fiscal year ending December 31, 1995 as compared to the
fiscal year ending December 31, 1994 and resultant lower inventory
requirements. In addition, the Company took certain inventory writedowns of
its computer-telephony inventory due to low product sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for calendar year 1995 decreased 82.1%, from $3,989,000
in the fiscal year ending December 31, 1994 to
14
<PAGE> 15
$715,000 in the fiscal year ending December 31, 1995. The decrease of
$3,274,000 reflects primarily a shift in expenses related to significant
restructuring and downsizing of the Company which took place during the 1994
and 1995 calendar years due to lack of significant sales which resulted in the
Company expending its limited cash resources in order to fund operating
expenses.
RESEARCH AND DEVELOPMENT. There were no significant research and
development expenses for the fiscal year ending December 31, 1995; as such,
these expenses were recorded as general and administrative expenses for the
fiscal year ending December 31, 1995. Research and development expenses in the
fiscal year ending December 31, 1994 were $2,347,000. The decrease reflects
the Company's curtailment of resources with respect to the development of its
OCTuS PTA product line as the product transitioned from development to
marketing stage. In addition, due to reduced capital resources, the Company
eliminated or suspended certain future projects and eliminated its research and
development staff.
NET GAIN. Net gain for the fiscal year ended December 31, 1995 was
$670,000, as compared to a net loss of $5,437,000 for the same period in 1994.
The net change of $6,107,000, or 112.3%, primarily reflects one-time receipts of
revenue by the Company in connection with its transition from a sales and
marketing company to a licensing organization as well as a reduction in expenses
associated with substantial reductions in force and other operating costs
necessitated by lack of significant product sales and resultant decreases in
available cash resources. As such, there is no assurance that such revenue will
continue to be received by the Company, and it is unlikely that such net gains
will continue to be posted.
15
<PAGE> 16
LIMITATIONS ON NET OPERATING LOSS AND CREDIT CARRYFORWARDS
As of December 31, 1996 the Company had significant tax credit and
research carryforwards for federal tax reporting purposes which expire through
2008. Additionally, the Company has federal and state net operating loss
carryforwards, expiring through 2008. Because of a substantial change in the
Company's ownership resulting from an initial public offering, an annual
limitation of approximately $600,000 has been placed on utilization of the loss
carryforwards generated prior to the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996 the Company incurred a net loss of
$191,056. The Company's operating and investing activities used cash of
$210,437. Cash on hand as of March 31, 1997 was $5,000. Cintech has not
indicated whether it will renew its royalty agreement in 1997. The Cintech
agreement notwithstanding, management believes that without an influx of
significant new revenues from the licensing of the Company's products, the
Company's cash on hand and revenues from operations will not be sufficient to
sustain its operations in 1997. Although the Company has actively been pursuing
such licensing arrangements and new investment, there can be no assurance that
any licensing agreements and/or new investment will be entered into by the
Company, or that the terms of any such agreements will be on terms favorable to
the Company. In June 1996, the Company sold to ATI 250,000 shares of Series C
Preferred Stock (which votes with the Common Stock with each share of Series C
Preferred Stock having ten votes) for $150,000 and issued warrants to purchase
up to an additional 3,000,000 shares of the Company's Common Stock at an initial
exercise price of $0.43 per share. The Company currently has been meeting its
additional liquidity needs through loans from Basic Research. The loan balance
has been increasing at approximately $15,000 per month. The Company pays 10.0%
simple interest on such loans and the loan is due within five (5) days of the
Company's receiving sufficient funds from the exercise of warrants by ATI.
Should the Company be unable to obtain additional revenues and/or raise
additional capital, it could be forced to curtail operations or cease business
activities altogether. See Part I, Description of Business, "OCTuS PTA,"
"Strategic Alliances and Market Reception," and "General Distribution Strategy."
ITEM 7. FINANCIAL STATEMENTS.
The full text of the Company's unaudited financial statements for the
fiscal year ended December 31, 1996 begins on page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On February 19, 1996, Price Waterhouse LLP resigned as the Company's
independent accountants. The Company's Board of Directors accepted Price
Waterhouse LLP's resignation at a Board Meeting on February 27, 1996.
The report of Price Waterhouse LLP on the Company's financial
statements as of and for the years ended December 31, 1994 and 1993 contained
an explanatory paragraph indicating that there was substantial doubt about the
Company's ability to continue as a going concern. Such report, which was dated
May 4, 1995, contained no adverse opinion or disclaimer of opinion and, except
for such explanatory paragraph, was not qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with audits for the two most recent fiscal years and
through February 19, 1996, there were no disagreements with Price Waterhouse
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Price Waterhouse LLP, would have caused Price Waterhouse
LLP to make reference thereto in their report on the financial statements for
such years.
On March 12, 1996, the Company's Board of Directors engaged Hollander,
Gilbert & Co. as the Company's principal accountant to audit its financial
statements.
16
<PAGE> 17
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Directors and Executive Officers" in
the Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 1997 which information is incorporated herein.
Item 10. Executive Compensation.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for its 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 1997 which information is incorporated herein.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's difinitive proxy statement
for its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 1997 which information is
incorporated herein.
Item 12. Certain Relationships and Related Transactions.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's difinitive proxy statement for its 1997 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1997 which information is incorporated herein.
Item 13. Exhibits and Reports on Form 8-K
(a) See Exhibit List and Exhibits, beginning on page __.
(b) The Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
17
<PAGE> 18
OCTuS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the small business issuer has duly caused this report to be signed on its behalf
by the undersigned thereunto authorized.
OCTuS, INC.
Date: March 26, 1997 /s/ John C. Belden
_______________________________________
John C. Belden
President & CEO/Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 26, 1997.
<TABLE>
<CAPTION>
Signature Title Date
_________ _____ ____
<S> <C> <C>
/s/John C. Belden President (Principal Executive Officer, March 26, 1997
________________________ Principal Financial and Principal
John C. Belden Accounting Officer) Director, and
Chairman of the Board
/s/Donald O. Aldrige Director March 26, 1997
________________________
Donald O. Aldrige
/s/Robert A. Freeman Director March 26, 1997
________________________
Robert A. Freeman
/s/Gilbert Holloway Director March 26, 1997
________________________
Gilbert Holloway
/s/Lucille Lansing Director March 26, 1997
________________________
Lucille Lansing
/s/Lawrence Taggart Director March 26, 1997
________________________
Lawrence Taggart
</TABLE>
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation *
3.1.1 Certificate of Determination of Preferences of Series C Preferred
Stock of OCTuS, Inc. o
3.2 Amended Bylaws f
9 Irrevocable Proxy from Tokyo Electric Co., Ltd. (included in Exhibit
10.26.1) *
10.3 Sample Warrant *
10.4 Amended and Restated 1987 Nonstatutory Stock Option Plan s
10.5 Form of Stock Option Agreement, Non-Qualified Options,
1987 Plan *
10.6 Amended and Restated 1988 Nonstatutory Stock Option Plan s
10.7 Form of Stock Option Agreement, Non-Qualified Options, 1988
Plan *
10.8 Amended and Restated 1992 Key Executive Stock Purchase Plan *
10.9 Lease dated April 7, 1995 by and between Mistck Investment Group
and OCTuS, Inc. for 8352 Clairemont Mesa Boulevard, San Diego,
CA 92111 _
10.10 Standard Industrial Net Lease dated July 29, 1994 by and between
Sorrento Corporate Center and OCTuS, Inc., for 9944 Barnes
Canyon Road , Suite A, San Diego CA 92121 s
10.11 Lease Surrender Agreement dated April 8, 1995 (as amended May 31,
1995), by and between Sorrento Corporate Center and OCTuS, Inc., for
9944 Barnes Canyon Road, Suite A, San Diego, CA 92121 _
10.12 Employment Agreement dated June 1, 1992 by and between OCTuS,
Inc. and John C. Belden, as amended May 14, 1993 and February 16,
1995 #
10.16 Form of Indemnification Agreements entered into by and between
OCTuS, Inc. and its officers and directors *
10.17 Agreement by and between Maroon Bells Capital Partners, Inc. and
OCTuS, Inc. dated January 19, 1995 #
10.18 Agreement dated September 8, 1992 by and between Kyocera
Corporation and OCTuS, Inc. *
10.19 Memorandum dated February 4, 1992 by and between OCTuS, Inc.
and Tokyo Electric Co., Ltd. *
10.19.1 Agreement and Release dated as of December 31, 1991 by and
between OCTuS, Inc. and Tokyo Electric Co., Ltd. *
10.19.2 New Shares Agreement dated as of December 31, 1991 by and
between OCTuS, Inc. and Tokyo Electric Co., Ltd. *
10.19.3 License Agreement dated as of December 31, 1991 by and between
OCTuS, Inc. and Tokyo Electric Co., Ltd. *
10.19.3.1 TEC/OASYS License Agreement - 01, dated August 22, 1986 by and
between Office Automation Systems, Inc. and Tokyo Electric Co., Ltd. *
10.19.3.2 Agreement dated August 22, 1986 by and between Tokyo Electric
Co., Ltd. and Office Automation Systems, Inc. *
10.20 401(k) Plan Document
10.23 Form of Unit Certificate *
10.24 Directors 1993 Stock Option Plan s
Form of Stock Option Agreement, Non-Qualified Options, 1993
Directors Stock Option Plan v
10.25 Warrant, Caledonian European Securities Ltd., dated July 15, 1993
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
10.26 Warrant, Neil Haverty, dated July 15, 1993 v
10.27 Warrant, Maroon Bells Capital Partners, Inc., dated July 15, 1993 v
10.28 Promissory Note of Nolan K. Bushnell, dated as of February 8, 1993,
payable to OCTuS, Inc. v
10.28.1 Stock Pledge Agreement by Nolan K. Bushnell in favor of OCTuS, Inc.,
dated February 8, 1993, as amended October 7, 1993 v
10.31 Purchase and Sale Agreement dated September 14, 1993 by and
between OCTuS, Inc. and National Computer Systems, Inc. v
10.31.1 Letter Agreement dated January 26, 1995 by and between OCTuS, Inc.
and National Computer Systems, Inc. #
10.34 Product Development and License Agreement dated November 10, 1993
by and between OCTuS, Inc. and Spectrum Signal Processing, Inc., as
amended November 14, 1994 v
10.35 Purchase and License Agreement dated March 7, 1995 by and between
Cintech Tele-Management Systems, Inc. and OCTuS, Inc., as amended
May 16, 1995 _
10.36 Product Development and License Agreement dated September 5, 1995
by and between Ascom Telecommunications Limited and OCTuS, Inc. f
10.37 Promissory Note dated December 1, 1995 from OCTuS, Inc. to Maroon
Bells Capital Partners, Inc. _
10.38 Stock and Warrant Purchase Agreement dated June 24, 1996 by and
between OCTuS, Inc. and Advanced Technologies International, Ltd. o
10.39 Warrant to Purchase Common Stock from OCTuS, Inc. to Advanced
Technologies International, Ltd. dated June 24, 1996 o
10.40 Agreement dated as of August 8, 1996 relating to settlement of
claims among OCTuS Parties and RAS/TAG Parties
11 Statements re: computation of (loss) earnings per share and shares
used in per share calculation _
16.1 Letter dated March 13, 1996 from Price Waterhouse to the Securities
and Exchange Commission k
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference from the Company's Form S-1, as amended, bearing
the SEC registration number 33-51862, which was declared effective January
15, 1993.
v Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the calendar year ended December 31, 1993.
s Incorporated by reference from the Company's Post-Effective Amendment No. 1
on Form S-3 to Form S-1, bearing the SEC registration number 33-51862,
which was declared effective January 6, 1995.
# Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the calendar year ended December 31, 1994 filed with the SEC April 17,
1995.
_ Incorporated by reference from the Company's amended Annual Report on Form
10-KSB/A for the calendar year ended December 31, 1994 filed with the SEC
July 6, 1995.
20
<PAGE> 21
f Incorporated by reference from the Company's Quarterly Report on Form10-QSB
for the period ended September 30, 1995 filed with the SEC November 13, 1995.
v Incorporated by reference from the Company's Form 8-K filed with the
Securities and Exchange Commission on March 12, 1996. Incorporated by
reference from the Company's Quarterly Report on Form 10-QSB for the period
ended March 31, 1996 filed with the SEC on April 30, 1996.
o Incorporated by reference from the Company's Quarterly Report on Form 10-QSB
for the period ended June 30, 1996 filed with the SEC on August 12, 1996.
21
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Balance Sheets as of December 31, 1995 and 1996 F-2
Statements of Operations - F-3
Years Ended December 31, 1995 and 1996
Statement of Changes in Shareholders' Deficiency - F-4
Years Ended December 31, 1995 and 1996
Statements of Cash Flows - F-5
Years Ended December 31, 1995 and 1996
Notes to Financial Statements F-6
</TABLE>
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
OCTuS, Inc.
We have audited the accompanying balance sheets of OCTuS, Inc. as of December
31, 1995 and 1996, and the related statements of operations, changes in
shareholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OCTuS, Inc. as of December 31,
1995 and 1996, and the results of operations, shareholders' deficiency and cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has a working capital deficiency of $146,507 and a shareholders'
deficiency of $141,281 as of December 31, 1996. As discussed in Note 2 to the
financial statements, these conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Hollander, Gilbert & Co.
Los Angeles, California
March 11, 1997
<PAGE> 24
OCTUS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,593 $ 12,902
Receivables 12,275
Prepaid expenses and other 752
---------------- ----------------
TOTAL CURRENT ASSETS 15,620 12,902
PROPERTY AND EQUIPMENT, Net (Note 3) 13,475 5,226
---------------- ----------------
$ 29,095 $ 18,128
================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 83,667 $ 28,636
Accrued liabilities 11,565 23,891
Convertible note payable (Note 5) 25,000
Advances payable (Note 5) 70,000
Current portion of capitalized lease obligations (Note 10) 3,466 1,882
Due to officer 4,050
Unearned royalty 10,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 102,748 159,409
NONCURRENT LIABILITIES
Convertible note payable (Note 5) 25,000
Capitalized lease obligations,
net of current portion (Note 10) 2,572
---------------- ----------------
TOTAL LIABILITIES 130,320 159,409
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' DEFICIENCY (Notes 6 and 7)
Preferred Stock - authorized 2,000,000
shares, issued and outstanding
250,000 shares 151,000
Common Stock - no par value;
authorized 20,000,000 shares,
issued and outstanding 4,222,922 shares 21,966,577 21,966,577
Accumulated deficit (22,067,802) (22,258,858)
TOTAL SHAREHOLDERS' DEFICIENCY (101,225) (141,281)
---------------- ----------------
$ 29,095 $ 18,128
================ ================
</TABLE>
F-2
<PAGE> 25
OCTUS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C> <C>
REVENUES
Net sales $ 316,828 $
Royalties and technology income (Notes 1 and 4) 935,720 50,000
Income from release agreement (Note 1) 239,693
Interest 3,432
---------------- ----------------
TOTAL REVENUES 1,495,673 50,000
---------------- ----------------
COSTS AND EXPENSES
Cost of sales 190,726
Selling, general and administrative 701,913 249,376
Depreciation and amortization 14,138 9,902
Interest 2,581 7,423
---------------- ----------------
TOTAL COSTS AND EXPENSES 909,358 266,697
---------------- ----------------
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 586,315 (216,697)
INCOME TAX BENEFIT (Note 9) 33,700 10,300
---------------- ----------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 620,015 (206,397)
EXTRAORDINARY ITEM - Gain from forgiveness of debt,
net of income taxes of $33,700 and $10,300 in 1995
and 1996, respectively (Note 11) 50,375 15,341
---------------- ----------------
NET INCOME (LOSS) $ 670,390 $ (191,056)
================ ================
PRIMARY EARNING (LOSS) PER COMMON SHARE
Net income (loss) before extraordinary item $ .15 $ (.05)
Extraordinary gain .01
---------------- ----------------
NET INCOME (LOSS) $ .16 $ (.05)
================ ================
AVERAGE NUMBER OF COMMON SHARES
USED IN PRIMARY CALCULATIONS 4,222,922 4,222,922
================ ================
FULLY-DILUTED EARNINGS PER COMMON SHARE
Net income before extraordinary item $ .14
Extraordinary gain .01
----------------
NET INCOME $ .15
================
AVERAGE NUMBER OF COMMON SHARES
USED IN FULLY-DILUTED CALCULATIONS 4,322,922 None
================ ================
</TABLE>
F-3
<PAGE> 26
OCTUS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- ---------------------- Accumulated
Shares Amount Shares Amount Deficit Amount
------- --------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 4,222,922 21,966,577 $(22,738,192) $(771,615)
Net income 670,390 670,390
------- --------- --------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1995 4,222,922 21,966,577 (22,067,802) (101,225)
Issuance of preferred stock 250,000 151,000 151,000
Net loss (191,056) (191,056)
------- --------- --------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1996 250,000 $ 151,000 4,222,922 $21,966,577 $(22,258,858) $(141,281)
======= ========= ======== ========== ============= =========
</TABLE>
F-4
<PAGE> 27
OCTUS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 670,390 $ (191,056)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 14,138 9,902
Gain on disposal of property and equipment (64,084) (5,629)
Gain from forgiveness of debt (84,075) (25,641)
Officer loan charged to compensation 54,000
Changes in operating assets and liabilities:
Receivables (278) 12,275
Inventories 138,655
Prepaid expenses and other 46,638 752
Deposits and other 47,349
Accounts payable 22,698 (29,390)
Accrued liabilities (400,922) 12,326
Advances for undelivered product (239,693)
Deferred revenue (715,722) 10,000
---------------- ----------------
NET CASH USED BY OPERATING ACTIVITIES (510,906) (206,461)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (5,399) (3,368)
Proceeds from disposition of fixed assets 81,797 7,344
---------------- ----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 76,398 3,976
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital leases (21,219) (4,156)
Proceeds from borrowings 25,000 70,000
Loans from officers 4,050 (4,050)
Proceeds from issuance of preferred stock 151,000
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,831 212,794
---------------- ----------------
NET INCREASE (DECREASE) IN CASH (426,677) 10,309
CASH AT BEGINNING OF YEAR 429,270 2,593
---------------- ----------------
CASH AT END OF YEAR $ 2,593 $ 12,902
================ ================
OTHER CASH INFORMATION
Interest paid $ 2,581 $ 4,923
================ ================
Interest received $ 3,432 nil
================ ================
</TABLE>
F-5
<PAGE> 28
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business - OCTuS Inc. (the "Company") was formed as
a California corporation in 1983. From incorporation to 1991, the
Company's principal business activities involved the design,
development and distribution of controllers for nonimpact printers and
related laser printer products. In 1991, the Company became primarily
engaged in the design, development, marketing and distribution of
hardware and software products for use in the computer telephone
integration (CTI) market. The Company's products are focused on the
unification of the personal computer and the telephone in the office
environment.
In September 1993, the Company sold the assets and certain of the
liabilities related to its printer products line to National Computer
Services ("NCS") for approximately $900,000 and NCS assumed
liabilities of approximately $200,000 for prepaid maintenance. NCS
also agreed to pay OCTuS royalties for future sales of printer
products for a five year period only to the extent that cumulative
royalties exceed $258,000. The Company recognized a loss on the sale
of the printer products line of $225,000. In February 1995, the
Company and NCS negotiated a buy-out of the royalty requirement in
exchange for $160,000.
In February 1995, the Company entered into a three-year agreement with
Cintech Tele-Management Systems, Inc. ("Cintech") granting Cintech
exclusive rights to distribute the retail version of OCTuS PTA in
North America. In connection with the agreement, Cintech also
purchased all of the Company's retail OCTuS PTA inventory and obtained
the rights to manufacture additional units of the product.
In May 1995, Pacific Bell released the Company from all remaining
obligations to deliver OCTuS PTA units to its customers under its
product delivery agreement. This includes $239,693 of advance payments
for undelivered products recorded as a liability on the Company's
balance sheet at December 31, 1994.
In the future, the Company hopes to license its products to outside
parties for manufacturing and marketing.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Property and Equipment - Property and equipment are recorded at cost
and depreciated over their estimated useful lives of two to five years
using the straight-line method. Depreciation expense includes
amortization of assets under capital lease arrangements.
Revenue Recognition - Revenue from product sales is recognized when
goods are shipped and royalties are recognized as earned over the
respective contract terms.
Research and Development - Research and development costs are expensed
in the period incurred.
Earnings (Loss) Per Common Share - Earnings (loss) per common share is
based upon the weighted average number of common shares, including
common share equivalents, outstanding during the periods. Common share
equivalents, when anti-dilutive, are excluded from weighted average
number of shares outstanding for all periods presented.
Reclassifications - Certain 1995 balances have been reclassified to
conform with current year's presentation.
Effects of Recent Accounting Pronouncements - The Financial Accounting
Standards Board (FASB) has issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement requires that the Company review for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in
circumstances indicate that the
F-6
<PAGE> 29
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
carrying amount of an asset may not be recoverable. SFAS No. 121 was
effective for the Company's fiscal year beginning January 1, 1996.
The adoption of this statement did not have a material impact on the
Company's financial position or result of operations for the fiscal
year ended December 31, 1996. The FASB also issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company was required to
adopt SFAS No. 123 for the fiscal year beginning January 1996. This
statement establishes accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt
the new fair value-based accounting method or continue the intrinsic
value-based method and provide pro forma disclosures of net income and
earnings per share as if the fair value accounting provisions of this
statement had been adopted. The Company adopted only the disclosure
requirements of SFAS No. 123; therefore such adoption had no effect on
the Company's financial position or results of operations for the
fiscal year ended December 31, 1996. Nonetheless, due to the limited
volume of trading in the Company's Common Stock, such disclosures are
not determinable by the Company.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company incurred a net loss before extraordinary item of $206,397
for the year ended December 31, 1996, and has an accumulated deficit
of $22,258,858 at December 31, 1996. Due to the Company's increasing
capital constraints, management has focused its effort on licensing
the Company's core technology and curtailing further research and
development. Management believes that the potential establishment of
revenue-generating license agreements, combined with potential
additional financing, would enable it to meet the liquidity
requirements of the Company; however, at present the Company has no
commitments for significant licensing agreements and does not believe
its current licensing agreements are sufficient to provide for the
continued viability and operations of the Company. Furthermore, the
Company has no commitment from any party to provide additional capital
and there is no assurance that such funding will be available when
needed, or if available, that its terms will be favorable or
acceptable to the Company. Should management be unable to enter into
significant licensing agreements and obtain additional capital when
and as needed, it could be forced to cease the Company's business
activities altogether and liquidate the Company's net assets.
Additionally, there is no assurance the Company will not require
additional capital resources in the conduct of its planned business
activities. In the absence of the establishment of significant revenue
generating licensing agreements and general market acceptance of the
Company's technology, there is no assurance that the Company will have
the ability to continue as a going concern.
3. PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following at December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------------- ----------------
<S> <C> <C>
Computer equipment $ 26,347 $ 16,290
Furniture and fixtures 19,122 19,122
---------------- ----------------
45,469 35,412
Less accumulated depreciation and amortization (31,994) (30,186)
---------------- ----------------
$ 13,475 $ 5,226
================ ================
</TABLE>
4. RELATED PARTY BALANCES AND TRANSACTIONS
Due from Officers - In 1993, the Company loaned $150,000 to Nolan K.
Bushnell, then Chairman of the Board, with one year promissory notes
payable to the Company executed at prime plus 1% in the amounts of
$100,000 and $50,000, respectively. Both notes were secured by common
stock in an unrelated company. In May 1995, the Company and Mr.
Bushnell negotiated a settlement of the $100,000 note and accrued
interest due from Mr. Bushnell for $30,000. The $30,000 was paid
during 1995.
F-7
<PAGE> 30
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
In October 1993, the Company loaned $50,000 to John Belden, Chairman
of the Board (its then President), with a $50,000 one-year unsecured
promissory note payable to the Company executed at the indexed rate
for the Federal Home Loan Bank of San Francisco for the Eleventh
Federal Home Loan Bank District plus 2%. In February 1995, the Company
forgave the loan in consideration of Mr. Belden's agreement to a
$75,000 reduction in his annual salary and a shortening of the term of
his employment agreement with the Company by five months.
Merger and Acquisition Consulting Agreement - In January 1995, the
Company engaged Maroon Bells Capital Partners, Inc. ("MBC"), a company
managed by Theodore Swindells, former director of OCTuS, to perform
certain merger and acquisition consulting services for OCTuS. OCTuS
agreed to pay MBC a specified percentage of the cash value of any
transaction resulting from MBC's services (see Note 5).
Royalty Income from Shareholder - In September 1992 the Company granted
a perpetual non-exclusive and unlimited technology license, involving
certain laser printer technology, to a shareholder with whom it had a
pre-existing technology license agreement in exchange for a one-time
royalty cash payment, net of foreign taxes, of $2.7 million. Royalty
income from the license was recognized using the straight-line method
over the remaining term of the technology license agreement which
expired in August 1996. During the year ended December 31, 1995,
royalty income of $685,732 was recognized pursuant to the agreement.
5. NOTES AND ADVANCES PAYABLE
On December 1, 1995, Maroon Bells Capital Partners, Inc. (Note 4)
advanced $25,000 to the Company for working capital purposes. The note
bears interest at 8% and is due with accrued interest on November 30,
1997. Additionally, the note may be converted at any time into shares
of the Company's Common Stock at the rate of $.25 per share. The note
also contains certain acceleration and anti-dilution clauses upon
conversion. Maroon Bells was also granted 25,000 warrants with a
nominal fair market value, to purchase the Company's Common Stock at a
price per share of $.25. The warrants are for a five-year period.
During November and December of 1996, an affiliate of the Company's
Series C Preferred Stock holder advanced to the Company a total of
$70,000 for working capital purposes. Such advances bear interest at
10% and are due and payable, with accrued interest, upon the Company
receiving sufficient funds from the exercise of the common stock
warrants held by the Series C Preferred Stock holder.
6. SHAREHOLDERS' EQUITY
Common Stock - On January 15, 1993, the Company completed an offering
of 2,000,000 units at the initial public offering price of $6.00 per
unit. Each unit consisted of one share of Common Stock, no par value,
and one common stock purchase warrant.
Each warrant entitles the registered holder to purchase one share of
Common Stock from the Company until January 15, 1998. The holders of
the warrants have certain anti-dilution protection upon the occurrence
of certain events. Due to completion of a private offering of
unregistered Common Stock in July 1994, the Company adjusted the
exercise price of the warrants and the number of shares. Accordingly,
the exercise price of one share of Common Stock purchased pursuant to
each warrant decreased from $7.00 per share to $6.49 per share. In
addition, the total number of warrants increased from 2,000,000 to
2,157,660.
The Company's Common Stock, units and warrants were delisted from the
NASDAQ Small-Cap Market as of February 1, 1995 due to the Company's
inability to meet that markets minimum capital and surplus
requirements. Since that time, the Company's securities have been
trading on the OTC Bulletin Board.
In connection with the initial public offering described above, the
Company sold to the underwriter, for a nominal consideration, five
year warrants to purchase Common Stock of the Company. The
underwriter's warrants contain anti-dilution provisions providing for
adjustment of the exercise price and the number and type of securities
issuable upon exercise of the underwriter's warrants upon the
occurrence of certain events. As of December 31, 1996, underwriter's
warrants provide for the acquisition of 438,484 shares of the
Company's Common Stock.
F-8
<PAGE> 31
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
During 1995 and 1996, the Company also issued warrants to purchase the
Company's Common Stock to a consultant (Note 5) and to the purchaser
of the Company's Series C Preferred Stock in connection with the
transaction described below.
Preferred Stock - In July, 1996 the Company issued 250,000 of its
Series C Preferred Stock and one five year warrant to purchase up to
3,000,000 shares of its Common Stock to one investor for a total
investment of $151,000. With respect to the warrant, such shares may
be exercised at a price of $0.43 par share. However, such exercise
price is subject to adjustment from time to time as described in the
warrant agreement. The Company has granted piggyback and demand
registration rights to the investor with respect to the shares of
Common Stock underlying such warrant. The Company has further agreed
to nominate two (2) individuals designated by such investor to the
Company's board of directors.
The Series C Preferred Stock, as established by the Company, consists
of a total of 250,000 shares and is senior in preference and priority
in all manners whatsoever with respect to the Company's Common Stock
and any and all classes of the Company's Preferred Stock. The holder
of the Series C Preferred Stock is entitled to receive cumulative
dividends at the annual rate of $0.036 per share payable in cash when,
as and if declared by the Company's board of directors out of any
funds legally available therefor. Such dividends shall accrue on a
cumulative basis on each share of Series C Preferred Stock from day,
to day, whether or not declared or paid. Such shares of Series C
Preferred Stock shall not be convertible into Common Stock of the
Company or any other of the Company's securities. The holder of each
share of Series C Preferred Stock shall be entitled to 10 votes per
share, entitled to vote on all matters which come before the Company's
shareholders for which a vote is taken or any written consent of the
Company's shareholders is solicited, such votes to be counted together
with all other shares of the Company's securities having general
voting power and not separately as a class. The Company has the right
to call and redeem all (but not less than all) of the outstanding
shares of Series C Preferred Stock for an aggregate price equal $0.63
per share of Series C Preferred Stock, plus any and all then accrued
but unpaid dividends, provided however, that the Company shall have no
right to call or redeem any shares of Series C Preferred Stock prior
to June 30, 1999 without the express prior written consent of the
holder of 100% of the then outstanding shares of the Series C
Preferred Stock, which consent may be withheld or denied in the sole
and absolute discretion of the holder of the Series C Preferred Stock
for any reason or no reason whatsoever.
Cumulative dividends, unpaid on Series C Preferred Stock amounted to
$4,685 at December 31, 1996.
7. STOCK OPTION PLANS
The Company has various stock option plans and has reserved a total of
1,045,423 shares of common stock at December 31, 1996, for option
grants to directors, officers, employees, consultants of the Company
and any subsidiary or parent of the Company. Such options are
generally granted at current values, vest over three to five years,
and expire not more than five years from date of grant.
Transactions under all stock option plans are summarized as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
-------- --------------
<S> <C> <C>
Outstanding at December 31, 1994 821,629 $1.13 - $ 8.57
Options granted 100,000 $ .13 - $ .25
Options expired (528,767) $1.13 - $ 8.57
-------- --------------
Outstanding at December 31, 1995 392,862 $ .13 - $ 6.38
Options granted 200,000 $.25
Options expired (128,063) $ .13 - 6.38
-------- --------------
Outstanding at December 31, 1996 464,799 $ .25 - $ 3.68
======== ==============
</TABLE>
At December 31, 1996, options for 264,799 shares of Common Stock were
exercisable under all option plans.
F-9
<PAGE> 32
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. EMPLOYEE BENEFIT PLAN
The Company has an Internal Revenue Code Section 401(k) savings and
retirement plan to provide employees with retirement benefits through
a program of regular savings supplemented by Company contributions.
The Company's funding policy is to make matching contributions in a
range from 0% to 100% of employee contributions, pursuant to the plan,
up to a maximum of 6% of a participant's gross earnings. For the years
ended December 31, 1995 and 1996, the Company made matching
contributions to the plan of $6,000 and $4,400 respectively.
9. INCOME TAXES
There was no current provision for Federal or state income taxes in
1995 and 1996 due to taxable losses. Deferred tax assets at December
31, 1995 and 1996 are comprised of the following:
<TABLE>
<CAPTION> 1995 1996
---------------- ----------------
<S> <C> <C>
NOL carryforwards $ 8,529,700 $ 8,736,400
Foreign and research tax credits 1,687,400 1,083,705
Depreciation 2,700
Other 2,700 1,300
---------------- ----------------
10,219,800 9,824,100
Less valuation allowance (10,219,800) (9,824,100)
---------------- ----------------
$ -- $ --
================ ================
</TABLE>
As of December 31, 1996, the Company has federal net operating loss
carryforwards of approximately $22,808,000, available to reduce future
federal taxable income which expire through 2011. The Company also has
foreign tax credit and research credit carryforwards for federal tax
reporting purposes totalling approximately $881,000, which expire
through 2008. Because of a substantial change in the Company's
ownership resulting from the consummation of an initial public
offering on January 15, 1993, an annual limitation of approximately
$243,600 has been placed on the amount of tax credit and net operating
loss carryforwards generated prior to the public offering which can be
utilized.
In certain circumstances which are specified in Section 382 of the
Internal Revenue Code, a 50% or more ownership change to any
combination of significant shareholders (those owning 5% or more of
the Company's outstanding stock) of the Company during any three-year
period would result in a limitation on the Company's ability to
utilize its net operating loss carryforward and realize the benefit of
future tax deductions. the last application of Section 382 was in
connection with the initial public offering. Subsequent significant
changes in ownership could trigger additional limitations on the
utilization of the Company's operating loss carryforwards.
10. COMMITMENTS AND CONTINGENCIES
Facilities - During 1995, the Company relocated its headquarters
resulting in a substantial reduction in its monthly rent. The current
facility is occupied on a month-to-month basis.
The Company leases certain equipment under noncancelable capital
leases, which are included in property and equipment. Future minimum
payments under capital leases were $1,882 as of December 31, 1996:
Rent expense was $62,348 and $3,473 for the years ended December 31,
1995 and 1996, respectively.
Employment Agreement - Effective July 17, 1996, the Board of Directors
authorized and approved a two year Employment Agreement for its Chief
Executive Officer, John Belden, at a monthly rate of $8,000. The
Agreement provides that in the event the Company does not have
sufficient funds to meet its payroll obligations, the Company is not
obligated to pay Mr. Belden any balance due under this Agreement.
Concurrently, the Board of Directors granted Mr. Belden an option to
purchase 200,000 shares of the Company's Common Stock pursuant to
F-10
<PAGE> 33
OCTUS, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
the Company's 1988 Non-Statutory Stock Option Plan. The grant is at an
option price of $.25 per share and vests at the rate of 50,000 shares
per year over a four-year period.
11. EXTRAORDINARY ITEM
During 1995, the Company was able to negotiate a settlement of
approximately $121,000 in accounts payable for approximately $37,000
in cash. Such settlement resulted in a gain from forgiveness of debt
of $84,075, which is reflected on the accompanying statement of
operations as an extraordinary gain of $50,375, net of income taxes of
$33,700.
During 1996 additional payables were settled for less than their face
amount resulting in an extraordinary gain of $15,341, net on income
taxes of $10,300.
F-11
<PAGE> 1
EXHIBIT 10.40
AGREEMENT
This AGREEMENT is made as of August 8, 1996 (the "Effective Date") by
and among John Belden, an individual ("Belden"), Robert Freeman, an individual
("Freeman"), Donald Aldridge, an individual ("Aldridge"), Lucile Lansing, an
individual ("Lansing"), (the latter four individuals, collectively, the "Non-RAS
Directors"), OCTuS, Inc., a California corporation (the "Company") (the latter
five Parties, collectively, the "OCTuS Parties"), TAG Acquisition Corp., a New
York corporation ("TAG"), TAG Acquisition Group, LLC, a New York limited
liability company ("TAG LLC"), RAS Securities Corp., a New York corporation
("RAS"), Norman Fuchs, an individual ("Fuchs"), Eric Bashford, an individual
("Bashford"), Shai Sasson, an individual ("Sasson"), Fred Schulman, an
individual ("Schulman") (the latter seven Parties collectively the "RAS/TAG
Parties"). The OCTuS Parties and the RAS/TAG Parties are collectively referred
to herein as the "Parties" and individually as a "Party").
RECITALS
WHEREAS, issues have been raised between the OCTuS Parties and the
RAS/TAG Parties regarding an equity investment by TAG and/or TAG LLC in the
Company and with respect to other matters involving the Company.
WHEREAS, RAS and the Company had previously entered into an
Underwriting Agreement dated January 15, 1993 (the "Underwriting Agreement").
WHEREAS, TAG and the Company had previously entered into a Stock
Purchase Agreement dated May 6, 1996 (the "Stock Purchase Agreement") under
which TAG has assigned certain of its rights to TAG LLC.
WHEREAS, each of the Parties wish to settle all claims arising between
the Parties as set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the promises, mutual covenants and
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by each of the Parties
hereto, and intending to be legally bound hereby, each of the Parties hereby
agrees as follows:
1
<PAGE> 2
SECTION 1
REPRESENTATIONS
1.1 Representations and Warranties of The OCTuS Parties. The
OCTuS Parties and each of them represent and warrant to the RAS/TAG Parties as
follows:
The OCTuS Parties have the requisite legal power and authority
to execute, deliver and carry out this Agreement and the transactions
contemplated hereby and have taken all requisite corporate, partnership and/or
trust action to authorize the execution, delivery and performance of this
Agreement and the transactions contemplated hereby.
1.2 Representations and Warranties of RAS/TAG Parties. The
RAS/TAG Parties and each of them represent and warrant to the OCTuS Parties as
follows:
The RAS/TAG Parties have the requisite legal power and
authority to execute, deliver and carry out this Agreement and the transactions
contemplated hereby and have taken all necessary corporate, partnership and/or
trust action to authorize the execution, delivery and performance of this
Agreement and the transactions contemplated hereby. The RAS/TAG Parties no
longer have any interest in any proxy issued by George Haywood to vote any
shares of OCTuS Common Stock.
SECTION 2
ACTIONS OF THE PARTIES
2.1 Upon the execution of this Agreement by all parties hereto,
the Company will reimburse Bashford the sum of $9,000 paid by Bashford to the
Company's accountants.
2.2 Fuchs has previously resigned as an OCTuS Board Member on June
24, 1996. Fuchs acknowledges and agrees that the circumstances of such
resignation were not the result of any dispute with the Company which would
give rise to a reporting obligation under the Securities Exchange Act of 1934,
as amended.
SECTION 3
MUTUAL GENERAL RELEASES
3.1 Mutual Releases.
(a) The OCTuS Parties, and each of them, and each of
their Affiliates, and predecessors, and all other entities which an OCTuS Party
controls or as to which the OCTuS Parties, or any of them, have the power to
grant a release, hereby release and discharge the
2
<PAGE> 3
RAS/TAG Parties and their respective officers, directors, shareholders,
employees, advisors, accountants, lawyers (including but not limited to Broad
and Cassel), agents, successors, predecessors, assignees, siblings, spouses,
children, partners, and trusts associated with the RAS/TAG Parties, parents,
subsidiaries and Affiliates from any and all manner of claims, actions,
demands, damages, accounts, sums of money, debts, liabilities, promises,
obligations, costs and expenses (including but not limited to attorneys' fees
or awards of attorneys' fees and/or costs), causes of action or suits, at law
or in equity, of whatsoever kind or nature, whether now known or unknown,
suspected or unsuspected (collectively "Claims"), which any of the OCTuS
Parties have or may have had or may have or hereafter shall or may have, by
reason of any matter, cause or thing, from the beginning of the world to the
Effective Date. Without in any way limiting the generality of the foregoing
release, such release specifically includes, but is not limited to, any Claims
relating to the Stock Purchase Agreement, the Underwriting Agreement, and/or
any Claims arising out of or in any way connected with any act or omission
committed or omitted by the RAS/TAG Parties prior to the Effective Date.
(b) The RAS/TAG Parties, and each of them, and each of
their Affiliates, and predecessors, and all other entities which the RAS/TAG
Parties control or as to which the RAS/TAG Parties, or any of them, have the
power to grant a release, hereby release and discharge the OCTuS Parties and
their respective officers, directors, employees, advisors, accountants, lawyers
(including but not limited to Latham & Watkins), shareholders, agents,
successors, predecessors, assignees, siblings, spouses, children, partners,
trusts and foundations associated with the OCTuS Parties, parents, subsidiaries
and Affiliates from any and all Claims which any of the RAS/TAG Parties have or
may have had or may have or hereafter shall or may have, by reason of any
matter, cause or thing, from the beginning of the world to the Effective Date.
Without in any way limiting the generality of the foregoing release, such
release specifically includes, but is not limited to, any Claims relating to
the Stock Purchase Agreement, the Underwriting Agreement, any proxy contest or
demand for a meeting of shareholders, and/or any Claims arising out of or in
any way connected with any act or omission committed or omitted by the OCTuS
Parties prior to the Effective Date.
3.2 Waiver of Section 1542. Section 1542 of the California Civil
Code provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM IT MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Each of the Parties expressly waives and relinquishes all rights and benefits
afforded by Section 1542 of the California Civil Code. Each Party understands
that the actual facts
3
<PAGE> 4
pertaining to the events alleged or otherwise relevant to the making of this
Agreement may be different from what each Party believes to be true, and each
Party hereby accepts and assumes the risk of the facts and assumptions turning
out to be different and agrees that this Agreement shall be and remain in all
respects effective and not subject to termination or rescission by virtue of
any such difference.
3.3 No Assignment of Claims. The Parties each represent and
warrant that he, she or it has not assigned or otherwise transferred to any
person or entity any of the Claims released hereunder and shall indemnify and
hold harmless any released Parties from every cost or expense, including
without limitation, attorneys' fees and experts' fees and costs of suit,
incurred in defending, settling or satisfying any and all suits or judgments
relating to Claims which were assigned or otherwise transferred.
3.4 No Solicitation of Shareholder Claims. The RAS/TAG Parties
each represent and warrant that he, she or it has not in the past and will not
solicit or otherwise encourage any present or past shareholders of the Company
to pursue shareholder litigation or Claims or derivative litigation or Claims
against the Company and shall indemnify and hold harmless any released Parties
from every cost or expense, including without litigation, attorneys' fees and
expert fees and costs of suit, incurred in defending, settling or satisfying
any and all such suits or judgments relating to any such litigation or Claims
which has been solicited or otherwise encouraged by the RAS/TAG Parties.
3.5 No Admission of Liability. Each Party acknowledges that
nothing contained in this Agreement shall be construed as an admission of
liability by or on behalf of any Party.
3.6 No Unstated Reliance. Each Party to this Agreement hereby
acknowledges that he, she and/or it and their attorneys have investigated the
facts and the law as they relate to the claims asserted and the nature of this
Agreement. No Party (nor any agent or attorney for any Party) has made any
statement or representation to any other Party regarding any fact relied upon
in entering into this Agreement, and each Party does not rely upon any
statement, representation or promise of any other Party (or of any agent or
attorney for any other Party) in executing this Agreement, or in making the
settlement provided for herein, except as expressly stated in this Agreement.
SECTION 4
CERTAIN OTHER AGREEMENTS
4.1 Confidentiality. The Parties shall keep the terms of this
Agreement confidential, except as may be necessary to provide information to
their respective tax, legal and financial advisors or as may be required by law
or court order. No Party to this Agreement nor any of their respective
Affiliates or representatives shall initiate the release of
4
<PAGE> 5
any oral or written statement to a member of the press or any other public
media, or to any other person with the intention that such statement be
communicated to or disseminated by the press or other public media, concerning
this Agreement. Notwithstanding the preceding two sentences, nothing contained
herein shall affect any Party's ability or right to make a factual statement
about himself or herself or his or her career that does not reflect adversely
on any other Party and does not express any adverse opinion about any other
Party. Each Party further agrees not to publicly make any disparaging
statements regarding any of the other Parties to this Agreement.
4.2 Challenges to Agreement. Each Party hereto shall not, and
shall use its best efforts to cause each of its Affiliates and representatives
not to, challenge the validity of any provisions of this Agreement.
SECTION 5
MISCELLANEOUS
5.1 Entire Agreement. This Agreement constitutes the entire
agreement and understanding of the Parties and supersedes all prior agreements,
understandings and undertakings both written and oral, between or among the
OCTuS Parties, or any of them, on the one hand, and RAS/TAG Parties, or any of
them on the other hand, with respect to the subject matter hereof and may be
amended only by an agreement in writing executed by all the Parties hereto.
5.2 Headings. Descriptive headings are for convenience only and
shall not control or affect the meaning or construction of any provision of
this Agreement.
5.3 Counterparts. For the convenience of the Parties, any number
of counterparts of this Agreement may be executed by the Parties, and each such
executed counterpart shall be an original instrument.
5.4 Notices. All notices, deliveries, consents, requests,
instructions, approvals and other communications provided for in this Agreement
shall be validly given, made or served, if in writing and delivered personally,
by hand (except for the delivery of payments or assets) or by telecopy, or sent
by registered mail postage paid, if to the address set forth below, or to such
other address or telecopy number as any Party may, from time to time, designate
in a written notice given in a like manner. Notice given by hand or by
telecopy shall be deemed given on the date on which so hand delivered or
telecopied. Notice given by mail as set out above shall be deemed delivered
five business days after the date the same is postmarked.
5
<PAGE> 6
(a) To: Any OCTuS Party
c/o John Belden
OCTuS, Inc.
P. O. Box 232397
San Diego, CA 92193-2397
Telecopy No: (619) 268-5175
with a copy to:
Thomas A. Edwards, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, CA 92101-8197
Telecopy No: (619) 696-7419
(b) To: Any RAS/TAG Parties
c/o RAS Securities Corp.
2 Broadway
New York, NY 10004-2801
Attention: Eric A. Bashford
Telecopy No: (212) 635-3050
with a copy to:
Jeff Robinson, Esq.
Broad and Cassel
201 South Biscayne Boulevard
Miami, FL 33131
Telecopy No: (305) 373-9493
and
Norman Fuchs
5 Flagpole Street
Setauket, NY 11733
Telecopy No: (516) 689-5752
5.5 Successors and Assigns. This Agreement shall bind the
successors and assigns of the Parties, and inure to the benefit of any
successor or assign of any of the parties.
5.6 Governing Law. This Agreement shall be governed by and
constructed and enforced in accordance with the internal laws of the State of
California, without giving effect to the conflict of the laws principles
thereof.
6
<PAGE> 7
5.7 Certain Terms. As used herein, the term "Affiliate" shall
have the meaning set forth in Rule 12b-2 under the Securities Exchange Act of
1934, as amended.
5.8 Survival of Representations. All representations, warranties
and agreements made in this Agreement or pursuant hereto shall survive the date
hereof through the term of this Agreement.
5.9 No Waiver. Any waiver by any party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision
of this Agreement. The failure of a Party to insist upon strict adherence to
any term of this Agreement on one or more occasions shall not be considered a
waiver or deprive that Party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement.
5.10 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
7
<PAGE> 8
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed as of the date first referred to above.
THE OCTUS PARTIES
Dated: July 31, 1996 OCTuS, INC.
By: /s/ John C. Belden
--------------------------
Its: President & CEO
-------------------------
Dated: July 31, 1996 /s/ John C. Belden
----------------------------
John Belden, individually and
as director of OCTuS, Inc.
Dated: August 8, 1996 /s/ Robert A. Freeman
----------------------------
Robert Freeman, individually
and as director of OCTuS, Inc.
Dated: August 5, 1996 /s/ Donald O. Aldridge
----------------------------
Donald Aldridge, individually
and as director of OCTuS, Inc.
Dated: July 31, 1996 /s/ Lucile Lansing
----------------------------
Lucile Lansing, individually
and as director of OCTuS, Inc.
RAS/TAG PARTIES
Dated: July 31, 1996 TAG ACQUISITION CORP.,
By: /s/ Shai Sasson
--------------------------
Its: President
-------------------------
8
<PAGE> 9
Dated: July 31, 1996 TAG ACQUISITION GROUP, LLC,
By: /s/ Shai Sasson
--------------------------
Its: President
-------------------------
Dated: July 31, 1996 RAS SECURITIES CORP.,
By: /s/ Robert A. Schneider
--------------------------
Its: Chairman
-------------------------
Dated: July 31, 1996 /s/ Norman Fuchs
-----------------------------
Norman Fuchs, individually
Dated: July 31, 1996 /s/ Eric Bashford
-----------------------------
Eric Bashford, individually
Dated: July 31, 1996 /s/ Shai Sasson
-----------------------------
Shai Sasson, individually
Dated: July 31, 1996 /s/ Fred Schulman
-----------------------------
Fred Schulman, individually
APPROVED AS TO FORM AND CONTENT:
BROAD AND CASSEL
By /s/ A. Jeffrey Robinson
_______________________________
Jeff Robinson, Partner
Attorneys for the RAS/TAG Parties
9
<PAGE> 10
LATHAM & WATKINS
By /s/ Thomas A. Edwards
________________________________
Thomas A. Edwards, Partner
Attorneys for the OCTuS Parties
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FISCAL YEAR
END FINANCIAL STATEMENTS AS PREPARED BY HOLLANDER, GILBERT & CO. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10KSB FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,902
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,902
<PP&E> 5,226
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,128
<CURRENT-LIABILITIES> 159,409
<BONDS> 0
<COMMON> 21,966,577
151,000
0
<OTHER-SE> (22,258,858)
<TOTAL-LIABILITY-AND-EQUITY> (141,281)
<SALES> 50,000
<TOTAL-REVENUES> 50,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 266,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (216,697)
<INCOME-TAX> 10,300
<INCOME-CONTINUING> (206,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 15,341
<CHANGES> 0
<NET-INCOME> (191,056)
<EPS-PRIMARY> (.05)
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