<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _______________
Commission File Number 0-21092
OCTUS, INC.
(Exact 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, CALIFORNIA 92121
(Address of principal executive offices)
619-824-1185
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
November 10, 1998 Common Stock, no par value 4,222,922
(Date) (Class) (Number of Shares)
Series C Preferred Stock 250,000
(Class) (Number of Shares)
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
OCTUS, INC.
FORM 10-QSB
FOR THE PERIOD ENDED September 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets at September 30, 1998 and December 31,
1997 3
Condensed Statements of Operations for the three months ended
September 30, 1998 and 1997 4
Condensed Statements of Operations for the nine months ended
September 30, 1998 and 1997 5
Condensed Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 6
Notes to Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
PART II. OTHER INFORMATION 16
SIGNATURES 17
2
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCTuS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 0 $ 0
Accounts receivable 0 0
Other current assets 0 0
------------ ------------
TOTAL CURRENT ASSETS 0 0
Property and equipment 0 0
------------ ------------
TOTAL ASSETS $ 0 $ 0
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 22,000 $ 34,300
Accrued liabilities 36,000 39,300
Convertible note payable 0 25,000
Advances Payable 441,000 261,800
------------ ------------
TOTAL CURRENT LIABILITIES 499,000 360,400
------------ ------------
TOTAL LIABILITIES 499,000 360,400
------------ ------------
Shareholders' Equity:
Preferred Stock - authorized 2,000,000 151,000 151,000
Common stock, no par value,
20,000,000 shares authorized, 4,222,922 shares issued
and outstanding 21,967,000 21,966,600
Common Stock Warrants 0 0
Accumulated deficit (22,616,000) (22,478,000)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY (499,000) (360,400)
------------ ------------
$ 0 $ 0
============ ============
</TABLE>
See notes accompanying financial statements
<PAGE> 4
OCTuS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Net sales $ 0 $ 0
Royalties & Technology Income 0 20,000
Interest 0 0
----------- -----------
0 20,000
----------- -----------
Costs and expenses:
Cost of sales $ 0 $ 13,000
Selling, general and administrative 44,000 64,000
Research and development 0 0
Interest 1,000 1,000
----------- -----------
45,000 78,000
----------- -----------
Net loss before income taxes (45,000) (58,000)
----------- -----------
Net loss ($45,000) ($58,000)
=========== ===========
Net loss per common share ($0.01) ($0.01)
=========== ===========
Shares used in per share calculation 4,222,922 4,222,922
=========== ===========
</TABLE>
See notes accompanying financial statements
4
<PAGE> 5
OCTuS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Net sales $ 0 $ 0
Royalties & Technology Income 10,000 40,000
Interest 0 0
----------- -----------
10,000 40,000
----------- -----------
Costs and expenses:
Cost of sales $ 10,000 $ 34,000
Selling, general and administrative 134,000 173,000
Research and development 0 0
Interest 4,000 4,000
----------- -----------
148,000 211,000
----------- -----------
Net loss before income taxes ($138,000) ($171,000)
=========== ===========
Net loss ($138,000) ($171,000)
=========== ===========
Net loss per common share ($0.03) ($0.04)
=========== ===========
Shares used in per share calculation 4,222,922 4,222,922
=========== ===========
</TABLE>
See notes accompanying financial statements
5
<PAGE> 6
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net loss ($138,000) ($171,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 0 2,000
Loss on disposal of property and equipment 0 0
(Decrease) increase in accounts receivable 0 0
Decrease (increase) in inventories 0 0
Decrease (increase) in other current assets 0 0
Decrease in other noncurrent assets 0 0
Increase in accounts payable (12,000) (1,000)
Decrease in accrued liabilities 18,000 6,000
Decrease in deferred revenue 0 ($5,000)
--------- ---------
Net cash used by operating activities ($132,000) ($162,000)
--------- ---------
Cash flow from investing activities:
Expenditures for property and equipment $ 0 $ 2,000
Loans to officers 0 0
Proceeds from sale of fixed assets 0 0
--------- ---------
Net cash provided by investing activities $ 0 $ 2,000
--------- ---------
Cash flow from financing activities:
Proceeds from borrowings 132,000 152,000
Payments of capital leases and long-term debt 0 (2,000)
--------- ---------
Net cash provided by financing activities $ 132,000 $ 150,000
========= =========
Net decrease in cash and cash equivalents 0 (10,000)
Cash and cash equivalents at beginning of period 0 13,000
--------- ---------
Cash and cash equivalents at end of period $ 0 $ 0
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,000 $ 3,000
========= =========
</TABLE>
See notes accompanying financial statements
6
<PAGE> 7
OCTUS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial information has been prepared by OCTuS, Inc. (the
"Company") without audit, in accordance with the instructions to Form 10-QSB
and, therefore, does not necessarily include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in accordance with generally accepted accounting principles.
In management's opinion, the accompanying unaudited financial statements
contain all adjustments (which include only normal, recurring adjustments)
necessary to present fairly its financial position at September 30, 1998 and
December 31, 1997, and the results of operations for the three months ended
September 30, 1998 and 1997, and the results of operations for the six months
ended September 30, 1998 and 1997, and its cash flows for the nine months ended
September 30, 1998 and 1997. Although the Company believes that the disclosures
made in this report are adequate to make the information not misleading, these
financial statements should be read in connection with the financial statements
and notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1997.
NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT
CAPTIONS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- ------------
<S> <C> <C>
Accounts receivable:
Trade accounts receivable: $ 0 $ 0
Other 0 0
-------- --------
$ 0 $ 0
-------- --------
Property and equipment:
Computer and test equipment $ 13,000 $ 13,000
Furniture and fixtures 19,000 19,000
-------- --------
32,000 32,000
Less accumulated depreciation (32,000) (32,000)
-------- --------
$ 0 $ 0
======== ========
Accrued liabilities:
Compensation and employee benefits $ 36,000 $ 10,000
Other 0 0
======== ========
$ 36,000 $ 10,000
======== ========
</TABLE>
7
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OCTUS, INC.
NOTE 3. AGREEMENT FOR DISTRIBUTION OF RETAIL PRODUCT IN NORTH AMERICA
In March 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 March 1997, Cintech elected not to renew its license to distribute
OCTuS PTA.
NOTE 2. EUROPEAN LICENSING AGREEMENT
On September 5, 1995, the Company entered into a product development and
license agreement with Ascom Telecommunications Limited ("Ascom") of the United
Kingdom. The agreement provides Ascom with an exclusive license to manufacture
and sell to distributors, resellers and end users in Europe a special version of
OCTuS PTA which has been modified to operate through the personal computer's
serial port with Ascom's proprietary telephone. Said exclusivity shall continue
for so long as Ascom sells or otherwise pays OCTuS a specified minimum royalty
on a quarterly basis. The agreement provides that Ascom shall pay the Company a
total of $65,000 for the required modifications to the standard OCTuS PTA
product. To date, the Company has received $60,000 of that amount from Ascom as
payment for the required modifications to the standard OCTuS PTA program. Under
the agreement, Ascom has the right to access the source code of the product in
the event the Company becomes insolvent or is otherwise unable to support the
product. In March 1998, Ascom terminated further development of the OCTuS PTA.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not related to historical
results are forward looking statements. Actual results may differ materially
from those projected or implied in the forward statements. Further, certain
forward-looking statements are based upon assumptions of future events, which
may not prove to be accurate. These forward-looking statements involve risks and
uncertainties including but not limited to those referred to below.
This information should be read in conjunction with the financial statements
and notes thereto included in Item 1 of this report for the quarter ended
September 30, 1998. Additionally, the financial statements and notes thereto and
Management's Discussion and Analysis in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 will provide additional information.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth certain revenue and expense classifications as
percentage of revenues (unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30
1998 1997
----- -----
<S> <C> <C>
Revenues:
Net sales -- --
Royalties -- 100.0%
----- -----
-- 100.0%
----- -----
Costs and expenses:
Cost of sales -- 65.0%
Selling, general and administrative -- 320.0%
Interest -- 5.0%
----- -----
-- 390.0%
Loss before income taxes -- (290.0%)
----- -----
Net loss -- (290.0%)
===== ======
Cost of sales as a percent
of net sales -- --
===== ======
</TABLE>
Net Sales. There were no net sales for the three months ended September 30,
1998, which represented no change, from the same period in 1997. This lack of
sales 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.
Royalties. There was no royalty income recorded for the three months ended
September 30, 1998, which represented a reduction of $20,000 or 100%, from the
same period in 1997. The amount for the three month period ended September 30,
1997 represented royalty income received from Ascom Telecommunications Limited
of the United Kingdom ("Ascom"), which in September 1995, executed a license
agreement with the Company 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 March 1998, Ascom terminated the agreement
and no royalties were earned during the three months ended September 30, 1998.
Cost of Sales. The Company recorded $0 cost of sales for the three months
ended September 30, 1998; a reduction of $13,000 from the same period in 1997.
The decrease reflects the completion of the development work performed under
contract with the Company's licensee Ascom.
Selling, General and Administrative. The Company recorded $44,000 for
selling, general and administrative expenses for the three months ended
September 30, 1998, a decrease of $20,000, or 31.0 %, from the same period in
1997. This decrease from the prior period is due primarily to the continued
downsizing of the Company and the shift from a sales organization to a licensing
organization.
Net Loss. Net loss for the three months ended September 30, 1998 was
$45,000, as compared to a $58,000 loss for the same period in 1997.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth certain revenue and expense classifications as
percentage of revenues (unaudited):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Net sales -- --
Royalties 100.0% 100.0%
----- -----
100.0% 100.0%
----- -----
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C>
Costs and expenses:
Cost of sales 100.0% 85.0%
Selling, general and administrative 675.0%- 432.0%
Interest 40.0%- 10.0%
------- ------
-- 527.0%
Loss before income taxes (725.0%-) (427.0%)
Net loss (725.0%) (427.0%)
------- ======
Cost of sales as a percent of net
sales 100.0% --
======= ======
</TABLE>
Net Sales. There were no net sales for the nine months ended September 30,
1998, which represented no change, from the same period in 1997. This lack of
sales 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.
Royalties. There was $ 10,000 royalty income recorded for the nine months
ended September 30, 1998, which represented a reduction of $30,000 or 75%, from
the same period in 1997. The amount for the nine month period ended September
30, 1998 represents royalty income received from Ascom Telecommunications
Limited of the United Kingdom ("Ascom"), which in September 1995, executed a
license agreement with the Company 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 March 1998, Ascom terminated the
agreement and no royalties were earned during the three months ended September
30, 1998.
Cost of Sales. The Company recorded $10,000 for cost of sales for the nine
months ended September 30, 1998; a decrease of $24,000 from the $34,000 recorded
from the same period in 1997. The decrease reflects the completion of the
development efforts associated with the upgrading of the OCTuS technology to
conform to requirements set by the Company's licensee Ascom.
Selling, General and Administrative. The Company recorded $134,000 for
selling, general and administrative expenses for the nine months ended September
30, 1998, a decrease of $39,000, or 23.0 %, from the same period in 1997. This
decrease from the prior period is due primarily to the continued downsizing of
the Company and the shift from a sales organization to a licensing organization.
Net Loss. Net loss for the nine months ended September 30, 1998 was
$138,000, as compared to a $171,000 loss for the same period in 1997.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES.
For the nine months ended September 30, 1998, the Company posted a net loss of
$ 138,000. The Company's operating and investing activities used cash of
$132,000. Cash on hand on September 30, 1998 was $0. For the year ended December
31, 1997 the Company incurred a net loss of $219,101. In March 1997, Cintech
elected not to renew its license to distribute OCTuS PTA. In March 1998, Ascom
terminated further development of the OCTuS PTA program. 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 through the rest of 1998. 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 Advanced Technologies International, Ltd. ("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 $151,000 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 ATI. The loan balance,
$441,000 as of September 30, 1998, 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. Until September 30, 1998 ATI advanced funds, on a
monthly basis, to the Company to meet its current cash requirements. There is no
commitment from ATI to continue these advances and no funds have been advanced
from ATI since that date. Should the Company be unable to obtain additional
revenues and/or raise additional capital, it could be forced to cease business
activities altogether.
RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS
HISTORY OF OPERATING LOSSES
For the calendar year ended December 31, 1997, the Company recorded a
loss of $219,100. For the calendar year ended December 31 1996, the Company
recorded a loss of $191,000.
At September 30, 1998, the Company had no tangible assets, no working
capital, an accumulated deficit of $22,616,500 and a shareholder' deficit of
$499,929. With both the Cintech and the Ascom transactions terminated, and due
to the absence of a significant level of sales of the Company's products, either
as stand-alone retail units or incorporated into third party products, the
Company will continue to generate significant losses. It is unlikely that the
Company's existing operations will be successful or will be profitable in the
future.
NEED FOR ADDITIONAL CAPITAL
The Company's cash on hand as of September 30, 1998 was $0, 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, which is unlikely. While operations to date are being funded by loans
from 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 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 when and as needed, it could
be forced to cease business activities altogether. It is unlikely that the
Company will be able to raise additional capital without dramatically diluting
the existing equity ownership of the Company's Common stockholders.
RESTRUCTURING OF OPERATIONS
The Company underwent 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
September 30, 1994) to one
11
<PAGE> 12
employee (as of July 1, 1997) as well as relocation of its headquarters to
another facility with lower operating costs. 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 $151,000 and issued warrants to purchase up to an
additional 3,000,000 shares of the Company's Common Stock at an exercise price
according to the following schedule: $0.43 per share for the first 1,000,000
shares, $0.50 per share for the second 1,000,000 shares, and $0.75 per share for
the final 1,000,000 shares.
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,
which is unlikely, the Company will be required to cease its business operations
altogether.
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 has 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, it is unlikely 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 successfully implement a program to license the product to companies in the
personal computer and telecommunications industry for incorporation into their
respective products. Due to the limited funds available to the Company, it is
unlikely that the Company will be able to succeed in such a program.
DEPENDENCE ON THIRD PARTY SOFTWARE
The Company's products are designed for use with Microsoft(R)
Windows(TM). Although the product functions with Windows 98, 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 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 it
is unlikely that the Company will be capable of conducting any such
improvements, which could affect the Company's ability to continue as a going
concern. Further, the rapid pace of hardware platform advances and the inability
of the Company to update the OCTuS PTA software to meet such new hardware
standards significantly hinder the software's compatibility with new computers
sold today. It is therefore unlikely that the Company will be able to upgrade
the OCTuS PTA software to insure compatibility with today's and future computing
platforms.
12
<PAGE> 13
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. Given its limited
resources, it is unlikely 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.
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. 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 $151,000 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 ATI. The loan balance, $261,811 as
of December 31, 1997, 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. The loans are month to month loans and the continued operations
of the Company are wholly dependent on such loans from ATI. There is no
assurance that ATI will continue to fund Company or that ATI will exercise its
warrants to enable Company to repay such loans to ATI. Should the Company be
unable to obtain additional revenues, which is unlikely, and/or raise additional
capital, it could be forced to cease business activities altogether. ATI ceased
advancing funds effective September 30, 1998.
13
<PAGE> 14
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 was 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. The note was paid in full on March 3, 1998 from funds advanced
by ATI.
The Company currently has been meeting its additional liquidity needs
through loans from ATI. The loan balance, $441,000 as of September 30, 1998, 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. The
loans are month to month loans and the continued operations of the Company are
wholly dependent on such loans from ATI. There is no assurance that ATI will
continue to fund Company or that ATI will exercise its warrants to enable
Company to repay such loans to ATI. ATI ceased advancing funds effective
September 30, 1998
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. 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 4,222,922
shares of common stock outstanding, all of which are freely tradeable within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"). In
addition, as of September 30, 1998, there were outstanding stock options and
warrants to purchase 3,439,799 shares of common stock. These shares, when and if
issued will be available for public sale pursuant to Rule 144 under the
securities act.
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
14
<PAGE> 15
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company
presently believes that its existing computer programs do not have
date-sensitive software that may recognize a date using "00" as the year 1900
rather than the year 2000.
Based on a recent assessment, the Company has determined it has no
exposure to contingencies related to the Year 2000 Issue for the products it has
sold.
ITEM 3. 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 does not maintain any other leases for office space and
owns no real property.
ITEM 4. LEGAL PROCEEDINGS.
None.
ITEM 5. 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.
15
<PAGE> 16
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Exhibit List and Exhibits, beginning on page 18.
(b) No reports on Form 8-K were filed with the SEC during the period covered by
this report.
16
<PAGE> 17
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: November 10, 1998
/s/ JOHN C. BELDEN
-----------------------------------------
John C. Belden
President & CEO/
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION NUMBERED 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. ++
3.2 Amended Bylaws !
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 +
10.5 Form of Stock Option Agreement, Non-Qualified Options, 1987
Plan *
10.6 Amended and Restated 1988 Nonstatutory Stock Option Plan *
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 Mistek Investment
Group and OCTuS, Inc. for 8352 Clairemont Mesa Blvd., 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 ++
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 *
10.17 401(k) Plan Document *
10.18 Form of Unit Certificate *
10.19 Directors 1993 Stock Option Plan + Form of Stock Option
Agreement, Non-Qualified Options, 1993 Directors Stock Option
Plan **
10.20 Warrant, Caledonian European Securities Ltd., dated July 15,
1993 **
10.21 Warrant, Neil Haverty, dated July 15, 1993 **
10.22 Warrant, Maroon Bells Capital Partners, Inc., dated July 15,
1993 **
10.23 Promissory Note of Nolan K. Bushnell, dated as of February 8,
1993, payable to OCTuS, Inc. **
10.24 Stock Pledge Agreement by Nolan K. Bushnell in favor of OCTuS,
Inc., dated February 8, 1993, as amended October 7, 1993 **
10.25 Purchase and Sale Agreement dated September 14, 1993 by and
between OCTuS, Inc. and National Computer Systems, Inc. **
10.26 Letter Agreement dated January 26, 1995 by and between OCTuS,
Inc. and National Computer Systems, Inc. #
10.27 Purchase and License Agreement dated March 7, 1995 by and
between Cintech Tele-Management Systems, Inc. and OCTuS, Inc.,
as amended May 16, 1995 +++
10.28 Product Development and License Agreement dated September 5,
1995 by and between Ascom Telecommunications Limited and
OCTuS, Inc. !
10.29 Promissory Note dated December 1, 1995 from OCTuS, Inc. to
Maroon Bells Capital Partners, Inc. &
10.30 Stock and Warrant Purchase Agreement dated June 24, 1997 by
and between OCTuS, Inc. and Advanced Technologies
International, Ltd. ++
10.31 Warrant to Purchase Common Stock from OCTuS, Inc. to Advanced
Technologies International, Ltd. dated June 24, 1997 ++
10.32 Agreement dated as of August 8, 1997 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, 1997 from Price Waterhouse to the
Securities and Exchange Commission ~
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION NUMBERED PAGE
------ -------------------- ------------
<S> <C> <C>
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.
** Incorporated by reference from the Company's Annual Report on Form
10-KSB for the calendar year ended December 31, 1993.
+ 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.
! Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the period ended September 30, 1995 filed with the SEC
November 13, 1995.
~ Incorporated by reference from the Company's Form 8-K filed with the
Securities and Exchange Commission on March 12, 1997.
& Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 as filed with the SEC on
September 30, 1997.
++ Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the period ended September 30, 1997 filed with the SEC on
August 12, 1997.
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-01-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 499,000
<BONDS> 0
0
0
<COMMON> 21,966,600
<OTHER-SE> (22,616,000)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> (44,000)
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> (45,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,000)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
