10KSB 1 octus_10k-123105.txt ================================================================================ 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, 2005 0-21092 OCTuS, INC. ----------- (Name Of Small Business Issuer As Specified In Its Charter) Nevada 33-0013439 ------ ---------- (State Or Other Jurisdiction Of (I.R.S. Employer Incorporation Or Organization) Identification No.) Ave. Balboa Edificio Los Defines 100 Mezanina Panama City, Panama ------------------- (Address Of Principal Executive Offices) Issuer's telephone number, including area code: (011) (507) 265-1555 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. (1) YES [X] NO [ ] 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. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Issuer's revenue for the most recent fiscal year: $ -0- The aggregate market value of the voting stock held by nonaffiliates of the Issuer: $1,895,560.80 as of April 10, 2006. 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, $0.001 Par Value: 13,437,072 shares outstanding at December 31, 2005 Documents Incorporated by Reference: None. ================================================================================ TABLE OF CONTENTS PART I 3 ------ Item 1. Description of Business 3 Item 2. Description of Property 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II 6 ------- Item 5. Market for Common Equity and Related Stockholder Matters 6 Item 6. Management's Discussion and Analysis or Plan of Operations 8 Item 7. Consolidated financial statements 11 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 12 Item 8A. Controls and Procedures 12 Item 8B. Other Information 12 PART III 12 -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 12 Item 10. Executive Compensation 13 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 14 Item 12. Certain Relationships and Related Transactions 15 Item 13. Exhibits 15 Item 14. Principal Accountant Fees and Services 17 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. INTRODUCTION OCTuS, Inc. ("we," the "Company" or "OCTuS") was incorporated in October 1983 under the laws of the State of California. On December 29, 2001, a majority of the shareholders voted to change our state of incorporation from California to Nevada. In December 2003, this change was completed and we became a Nevada corporation. In December 1991, in connection with our shift in focus from the laser printer to the computer-telephone integration market, we changed our name from Office Automation Systems, Inc. to OCTuS, Inc. In January 1993, we completed an initial public offering of 100,000 units each consisting of one share of Common Stock and one Warrant to purchase one share of Common Stock. Our Common Stock (OCTS), Warrants (OCTSW) and Units (OCTSU) have traded on the OTC Bulletin Board until February 2000 when it started trading on Pink Sheets. Currently, only our Common Stock is eligible for quotation on the OTC Bulletin Board under the symbol OCTI. The core of our technology from our inception until 1991 was comprised of software for use in controllers for laser printers and related imaging devices. We incorporated this technology into our own LaserPro(R) laser printer products and also licensed the technology to third parties. In 1991, because of low margins and competition, we shifted our primary focus from laser printer controller technology to the development of the OCTuS PTA product line. As of this date, we are actively seeking such alternative business opportunities, which may include acquisition of other software products, or acquisition of some other technology. Although we are seeking such opportunities, it is unlikely that we will be able to consummate any such transaction, which would generate sufficient revenues to sustain our operations. We anticipate that additional capital will likely have to come from issuing additional equity interest, which cannot occur without dramatically diluting the existing equity ownership of our Common stockholders. On February 22, 2005, we executed a non-binding Letter of Intent to effectuate a business combination with MicroSlate Inc., a Canadian corporation ("MicroSlate"). However, as of December 31, 2005 the negotiations had been terminated with no further obligations remaining for either party. INTELLECTUAL PROPERTY. We do not own any patents, trademarks, domain names, copyrights, licenses, concessions or royalty rights. GOVERNMENT REGULATION. We do not believe that any governmental regulations impact our current operations, as they are minimal. These include federal, state and local health, environmental, labor relations, sanitation, building, zoning, fire and safety departments . OUR RESEARCH AND DEVELOPMENT. We are not currently conducting any research and development activities and do not anticipate conducting such activities in the near future. EMPLOYEES As of December 31, 2005, we have no employees. We did not add to our workforce during the year ended December 31, 2005; our former President, John C. Belden, resigned on December 15, 2004. At that time, Josie Ben Rubi was appointed by the Board of Directors to replace Mr. Belden to serve as President. FACTORS THAT MAY AFFECT FUTURE RESULTS. HISTORY OF OPERATING LOSSES For the calendar year ended December 31, 2005, we recorded a net loss of $69,792. For the calendar year ended December 31, 2004, we recorded a net loss of $58,979. At December 31, 2005, we had no tangible assets, negative working capital of ($350,807), an accumulated deficit of $23,221,716 and a total stockholders' deficit of $(350,807). Considering that at this time, we have no product available for sale, we will continue to generate losses. Unless we acquire a new technology or product it is unlikely that we will be profitable in the future. 3 NEED FOR ADDITIONAL CAPITAL Our cash on hand as of December 31, 2005 was $0, which is inadequate to meet our budgeted operating requirements. Additional cash resources are required to sustain our operations. Since September 2000 Grupo Dynastia S.A, a Panamanian company, our principal shareholder has funded our operations through loans. It should be noted that we have 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 us. Should we be unable to obtain additional capital when and as needed, we could be forced to cease business activities altogether. It is unlikely that we will be able to raise additional capital without dramatically diluting the existing equity ownership of our common stockholders. RESTRUCTURING OF OPERATIONS We have undergone substantial restructuring in recent years, primarily as a result of continued operating losses. This restructuring included a substantial reduction in our workforce to one employee as well as relocation of its headquarters to another facility with lower operating costs. Until December 15, 2004, Mr. John Belden was our sole executive officer. Mr. Ronald A. Newcomb joined the Board of Directors in December 1998 and served as Chairman of the Board until December 29, 2001 at which time he did not stand for re-election and was replaced on the Board of Directors by Bradley W. Nemeth. Mr. Belden was appointed to serve as President. Director Nemeth resigned on August 31, 2004 and was not replaced. On December 15, 2004, Robert A Freeman resigned as our Director and Secretary and: John C. Belden resigned as our President, CEO and CFO. Concurrent with the resignation of Directors Freeman and Belden, Mr. Josie Ben Rubi was appointed our President, CEO, CFO and Secretary. Although this restructuring effected a major reduction in our operating expenses, our cash on hand continues to be insufficient to meet our present operating expenses. Without a substantial infusion of capital or generation of revenue, we will be required to cease our business operations altogether. TRANSACTIONS WITH AFFILIATES We have been a party to certain transactions with related persons and affiliates. We believe that all such transactions were in our best interests and on terms no less favorable to us 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, we sold 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) to Advanced Technologies International, Ltd. ("ATI") for $151,000, and issued warrants to purchase up to an additional 150,000 shares of our Common Stock at an exercise price according to the following schedule: $8.60 per share for the first 50,000 shares, $10.00 per share for the second 50,000 shares, and $15.00 per share for the final 50,000 shares. We had been meeting our liquidity needs through loans from ATI until August 1998 when ATI ceased funding us and subsequently declared bankruptcy. During 2000, the note, stock and warrants were transferred in to Grupo Dynastia S. A., a Panamanian company. There is no assurance that Grupo Dynastia S. A. or subsequent owners of the notes and warrants will continue to fund us or that exercise of the warrants will enable us to repay such loans. Should we be unable to obtain additional revenues, and/or raise additional capital, it could be forced to cease business activities altogether. On April 25, 2001, the Grupo Dynastia S. A. negotiated a lower exercise price of $0.40 per share, and 150,000 options were exercised in payment of a note payable and accrued interest totaling $60,000. Grupo Dynastia S.A. has advanced operating funds to OCTuS since that time under a note agreement that bears interest at 10% and is due on demand. The loan balance as of December 31, 2005 was $101,568. In June 2005, we converted the 250,000 shares of Series C 6% cumulative preferred stock owned by Grupo Dynastia S.A. into 500,000 shares of our common stock. Upon conversion, the accumulated dividends on this series of preferred stock became due and payable; the total due on the conversion date was $81,185. 4 NOTES AND ADVANCES PAYABLE >From September 2000 through December 2004, Grupo Dynastia S. A. advanced us $88,271 which was secured by notes bearing interest at the rate of 10% per annum. During the year ended December 31, 2005, Grupo Dynastia advanced us a total of $13,297, bringing the total balance due to $101,568. TRADING MARKET/DELISTING FROM NASDAQ SMALLCAP MARKET/VOLATILITY OF STOCK PRICE In January 1993, we completed an initial public offering of 100,000 Units, each unit comprised of one share of Common Stock and one Common Stock Purchase Warrant. These securities were quoted on the NASDAQ Small Cap Market until February 1, 1995, at which time they were delisted because we were unable to meet that market's minimum capital and surplus requirements. The securities now trade on the Over-The-Counter Bulletin Board, maintained by the National Quotation Bureau, Inc., which are generally considered to be less efficient markets. While we intend to reapply for listing on the NASDAQ Small Cap Market if conditions are favorable for us to do so, there can be no assurance that our application for relisting our securities will be accepted by the NASDAQ Small Cap Market. The market price of our 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 our operating results, announcements of technological innovations or new products by us or our competitors, developments in our 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." EFFECT OF CERTAIN ANTI-TAKEOVER CHARTER AND BYLAW PROVISIONS Certain provisions of our 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 us, or could discourage a third party from attempting to acquire, control of us. 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 us 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 our 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, or could discourage a third party from attempting to acquire, control of the board. ITEM 2. DESCRIPTION OF PROPERTY PROPERTY HELD. As of December 31, 2005, we held no property. OUR FACILITIES. Since December 15, 2004, our offices have been located at Ave. Balboa Edificio Los Defines 100 Mezanina, Panama City, Panama. 5 We pay no rent, which would be negligible, for the use of this space. We do not maintain any other leases for office space and owns no real property. We believe these facilities are adequate for our requirements. ITEM 3. LEGAL PROCEEDINGS. We are not currently involved in any legal proceedings and have no legal proceedings pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the shareholders during the year ended December 31, 2005. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. REPORTS TO SECURITY HOLDERS. We are a reporting company with the Securities and Exchange Commission, or SEC. The public may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. MARKET INFORMATION. Our common stock is eligible for quotation on the Over-the-Counter Bulletin Board under the symbol "OCTI". Our Common Stock, Units and Warrants were previously quoted on the NASDAQ Small-Cap Market under the symbols OCTS, OCTSU and OCTSW, respectively, upon completion of our initial public offering on January 15, 1993 until February 1, 1995. On February 1, 1995, our securities were delisted from the NASDAQ Small-Cap Market because we were unable to meet that market's minimum capital and surplus requirements. Since February 1, 1995, our securities have eligible for quotation on the OTC Bulletin Board. We were listed under the symbol OCTU until our forward split which we effected in June 2005. Set forth below are the ranges of high and low bid prices for each quarter for the Common Stock as reported by NASDAQ for the periods from January 1, 2003 through December 31, 2005. Quotations reflect interdealer prices without retail markup, markdown, or commissions and may not represent actual transactions. COMMON STOCK ------------ QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 2003 .04 .04 June 30, 2003 .05 .05 September 30, 2003 .05 .05 December 31, 2003 .06 .06 March 31, 2004 .15 .15 June 30, 2004 .54 .54 September 30, 2004 .51 .12 December 31, 2004 .06 .06 March 31, 2005 1.50* June 30, 2005 .12* September, 30, 2005 .15* December 31, 2005 .15* *closing price at quarter end; due to lack of trading volume on those dates, no historical high and low prices are available. 6 Trading on our Common Stock is extremely limited and sporadic. Therefore, prices are not an accurate indication of the market value of our Common Stock. The closing price of our Common Stock on the OTC Bulletin Board was $0.15 per share on April 3, 2006, the last date of reported trading activity. DIVIDENDS. We have never declared or paid cash dividends on its Common Stock and has no current intention to declare or pay any dividends on our Common Stock in the foreseeable future. We intend to retain its earnings, if any, for the development of our business. On January 15, 1998, public and underwriter's 5-year warrants, issued pursuant to our initial public offering lapsed and expired. DESCRIPTION OF CAPITAL STOCK. Our authorized capital stock consists of the following: o Common stock, $0.001 par value, 100,000,000 shares authorized, 13,437,072 shares issued and outstanding o Series A preferred stock, $0.001 par value, 300,000 shares authorized, no shares issued or outstanding o Series B preferred stock, $0.001 par value, 910,000 shares authorized, no shares issued or outstanding o Series C 6.0% cumulative preferred stock, $0.001 par value, 250,000 shares authorized, no shares issued and outstanding o Undesignated preferred stock, $0.001 par value, 540,000 shares authorized, no shares issued or outstanding Holders of shares of our common stock are entitled to receive dividends when and as declared by our Board of Directors from funds legally available therefore. All the shares of our common stock have equal voting rights and are nonassessable. Each shareholder of our common stock is entitled to share ratably in any assets available for distribution to holders our equity securities upon our liquidation. Holders of our common stock do not have preemption rights. As of April 7, 2006, there were approximately 280 holders of our Common Stock, our only outstanding class of securities. RECENT SALES OF UNREGISTERED SECURITIES. We did not sell any equity securities during the period covered by this report that were not registered under the Securities Act. EQUITY COMPENSATION PLANS. We have no securities authorized for issuance under any equity compensation plans. PENNY STOCK REGULATION. Shares of our common stock are subject to rules adopted by the Securities and Exchange Commission that regulate broker-dealer practices in connection with transactions in "penny stocks". Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, which contains the following: o a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; o a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities' laws; o a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the "bid" and "ask" price; o a toll-free telephone number for inquiries on disciplinary actions; o definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and 7 o such other information and is in such form (including language, type, size and format), as the Securities and Exchange Commission shall require by rule or regulation. Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following: o the bid and offer quotations for the penny stock; o the compensation of the broker-dealer and its salesperson in the transaction; o the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and o monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS ARE NOT BASED ON HISTORICAL FACT. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS. THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. 8 CRITICAL ACCOUNTING POLICY AND ESTIMATES. Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate amounts to accrue for accounting and legal expenses. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2005. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the audited consolidated financial statements and notes thereto which begin on page F-1 of this report as of December 31, 2005 and for the years ended December 31, 2005 and 2004. OVERVIEW OCTuS was incorporated in 1983 to develop a low cost controller for laser printers. By the end of 1985, we had developed a laser printer controller with a proprietary page description language, which we incorporated into laser printers and marketed under the LaserPro(R) trademark. We were also licensing our 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 we cannot guarantee this will be the case, we do not expect the foregoing factors to significantly affect the OCTuS PTA line of products because we believe that software products do not rely so heavily on component parts supplied by other manufacturers. While royalties from printer licensing agreements provided working capital, we began to suffer operating losses in 1989, which have continued through the present. In early 1991, we began shifting its emphasis from laser printer controller products to the development of its new product line. Since 1991, we have made significant changes to our business, management and operations. However, until September 1993, substantially all of our revenues were derived from business activities involving our laser printer technology and technology licensing agreements. In September 1993, we sold substantially all of the assets and inventory of the laser printer business to National Computer Systems, Inc. ("NCS"). Since that time, we have not generated significant revenues from sales of our OCTuS PTA product due to poor product sales and lack of broad market acceptance. As a result, in 1994, we needed to significantly downsize our staff and reduce our 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, we 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, we have focused our efforts on the licensing our 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 our technology, we have not entered into any significant licensing arrangements to date, nor can we give assurance that the revenue from any such licensing agreements will be sufficient to sustain our operations. In such case, we will be required to curtail business altogether. In March of 1997, Cintech elected not to renew its agreement with us, thereby leaving us without a current means of distributing our products. See Part I, "Description of Business," "--OCTuS PTA", 9 The discussion and analysis set forth below covers the following comparative periods: the calendar years ended December 31, 2005 and 2004. LIQUIDITY AND CAPITAL RESOURCES For the year ended December 31, 2005 we incurred a net loss of $69,792. Cash on hand as of December 31, 2005 was $0. Management believes that without an influx of significant new funds, we will not be able to sustain our operations through the rest of 2006. Although we have actively been pursuing new investment, we cannot give assurance that we will enter into any new investment, or that the terms of any such agreements will be on terms favorable to us. There is no assurance that Grupo Dynastia S.A., or subsequent controlling owners, will continue to fund us. On February 22, 2005, we executed a non-binding Letter of Intent to effectuate a business combination with MicroSlate Inc., a Canadian corporation ("MicroSlate"). However, as of December 31, 2005 the negotiations had been terminated with no further obligations remaining for either party. During the year, Microslate paid $20,774 in expenses on our behalf; those amounts were recorded as a capital contribution. Should we be unable to obtain additional revenues, which is likely, and/or raise additional capital, we could be forced to cease business activities altogether. See Part I, Description of Business, "OCTuS PTA," "Strategic Alliances and Market Reception," and "General Distribution Strategy." RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 INCOME. We had no income during the years ended December 31, 2005 and 2004. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the year ended December 31, 2005 were $60,097, as compared to $51,594 for the year ended December 31, 2004. The increased expenses were primarily due to higher legal and accounting fees. INTEREST EXPENSE. Interest expense for the year ended December 31, 2005 increased $2,310 from $7,385 to $9,695. The primary reason for the increase was higher notes payable balances during 2005 compared to 2004. NET LOSS/INCOME. We experienced a net loss of $69,792 for the year ended December 31, 2005. This reflects an increase of $10,813 over the loss of $58,979 for the year ended December 31, 2004. LIMITATIONS ON NET OPERATING LOSS AND CREDIT CARRYFORWARDS As of December 31, 2005, we had significant tax credit and research carry forwards for federal tax reporting purposes that expire through 2009. Additionally, we have federal and state net operating loss carry forwards, expiring through 2024. Because of a substantial change in our ownership resulting from an initial public offering, an annual limitation of approximately $600,000 has been placed on utilization of the loss carry forwards generated prior to our initial public offering. OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS. Management believes that without an influx of significant new funds, we will not be able to sustain our operations through the rest of 2006. Although we have actively been pursuing new investment, we cannot give assurance that we will enter into any new investment, or that the terms of any such agreements will be on terms favorable to us. There is no assurance that Grupo Dynastia S.A., or subsequent controlling owners, will continue to fund us. Should we be unable to obtain additional revenues, which is likely, and/or raise additional capital, we could be forced to cease business activities altogether. As of this date, we are actively seeking alternative business opportunities, which may include acquisition of other software products, or acquisition of some other technology. Although we are seeking such opportunities, it is unlikely that we will be able to consummate any such transaction, which would generate sufficient revenues to sustain our operations. We anticipate that additional capital will likely have to come from issuing additional equity interest, which cannot occur without dramatically diluting the existing equity ownership of our Common stockholders. 10 On February 22, 2005, we executed a non-binding Letter of Intent to effectuate a business combination with MicroSlate Inc., a Canadian corporation ("MicroSlate"). However, as of December 31, 2005 the negotiations had been terminated with no further obligations remaining for either party. See Part I, Description of Business, "OCTuS PTA," "Strategic Alliances and Market Reception," and "General Distribution Strategy." OFF-BALANCE SHEET ARRANGEMENTS. There are no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS. OCTUS, INC. Table of Contents Page ---- Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheet F-2 Consolidated Statements of Operations F-3 Consolidated Statement of Changes in Stockholders' (Deficit) F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 - F-12 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and Board of Directors OCTuS, Inc. We have audited the accompanying consolidated balance sheet of OCTuS, Inc. as of December 31, 2005, and the related consolidated statements of operations, changes in stockholders' (deficit), and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States.) Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OCTuS, Inc. as of December 31, 2005, and the results of its operations, and its cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has working capital and stockholders' deficits. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Stark Winter Schenkein & Co., LLP Denver, Colorado April 6, 2006 F-1 OCTUS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2005 ASSETS CURRENT ASSETS Cash $ -- ============ LIABILITIES AND STOCKHOLDERS' (DEFICIT) CURRENT LIABILITIES Accounts payable $ 26,071 Accounts payable - related parties 19,916 Accrued interest - related party 25,067 Accrued dividends payable 81,185 Notes payable - related parties 198,568 ------------ Total current liabilities 350,807 ------------ STOCKHOLDERS' (DEFICIT) Series A preferred stock, $0.001 par value, 300,000 shares authorized, no shares issued or outstanding -- Series B preferred stock, $0.001 par value, 910,000 shares authorized, no shares issued or outstanding -- Series C 6.0% cumulative preferred stock, $0.001 par value, 250,000 shares authorized, no shares issued or outstanding -- Undesignated preferred stock, $0.001 par value, 540,000 shares authorized, no shares issued or outstanding -- Common stock, $0.001 par value, 100,000,000 shares authorized, 13,437,072 shares issued and outstanding 13,437 Paid-in capital 22,857,472 Accumulated (deficit) (23,221,716) ------------ Total stockholders' (deficit) (350,807) ------------ $ -- ============ The accompanying notes are an integral part of these consolidated financial statements. F-2 OCTUS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 2005 2004 ------------ ------------ Revenues $ -- $ -- ------------ ------------ General and administrative expenses 60,097 51,594 ------------ ------------ (Loss) from operations (60,097) (51,594) Interest expense (9,695) (7,385) ------------ ------------ Net (loss) (69,792) (58,979) Preferred dividends 4,500 9,000 ------------ ------------ Net (loss) attributable to common stockholders $ (74,292) $ (67,979) ============ ============ Per share information - basic and fully diluted: Weighted average shares outstanding 13,202,825 12,937,072 ============ ============ Net (loss) per common share $ (0.01) $ (0.00) ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 OCTUS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2005 SERIES C PREFERRED STOCK COMMON STOCK TOTAL --------------------------- -------------------------- PAID-IN ACCUMULATED STOCKHOLDERS' NUMBER AMOUNT NUMBER AMOUNT CAPITAL (DEFICIT) (DEFICIT) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2003 250,000 $ 151,000 12,937,072 $ 12,937 $ 22,686,198 $(23,011,760) $ (161,625)) Net (loss) -- -- -- -- -- (58,979) (58,979) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2004 250,000 151,000 12,937,072 12,937 22,686,198 (23,070,739) (220,604) Conversion of Series C Preferred Stock into common stock (250,000) (151,000) 500,000 500 150,500 -- -- Dividends payable -- -- -- -- -- (81,185) (81,185) Capital contributed by former merger candidate -- -- -- -- 20,774 -- 20,774 Net (loss) -- -- -- -- -- (69,792) (69,792) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2005 -- $ -- 13,437,072 $ 13,437 $ 22,857,472 $(23,221,716) $ (350,807) ============ ============ ============ ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-4 OCTUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 2005 2004 --------- --------- OPERATING ACTIVITIES Net (loss) $ (69,792) $ (58,979) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Increase (decrease) in accounts payable 26,071 (1,238) Increase in accounts payable and accrued expenses-related party 9,440 31,405 --------- --------- Net cash (used in) operating activities (34,281) (28,812) --------- --------- INVESTING ACTIVITIES Net cash (used in) investing activities -- -- --------- --------- FINANCING ACTIVITIES Proceeds from capital contribution 20,774 -- Proceeds from notes payable - related party 13,297 29,000 --------- --------- Net cash provided by financing activities 34,071 29,000 --------- --------- Net increase (decrease) in cash (210) 188 CASH AT BEGINNING OF YEAR 210 22 --------- --------- CASH AT END OF YEAR $ -- $ 210 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ -- $ -- ========= ========= Cash for income taxes $ -- $ -- ========= ========= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of note payable for services to related party $ -- $ 12,000 ========= ========= Conversion of preferred stock into common stock $ 151,000 $ -- ========= ========= Declaration of preferred dividends payable $ 81,185 $ -- ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-5
OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION OCTuS, Inc. (the "Company") was formed as a California corporation in 1983. On December 29, 2001, a majority of the shareholders voted to change the Company's state of incorporation from California to Nevada. In December 2003, the change was completed and the Company became a Nevada corporation. The Company was involved in the development of various printer controller technologies. However, the Company currently has no revenue generating operations and is currently seeking strategic alternatives. PRINCIPLES OF CONSOLIDATION All of the subsidiaries of the Company are inactive. All significant intercompany transactions and balances, if any, have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates. CASH AND CASH EQUIVALENTS For the purpose of the statements of cash flows, all highly liquid investments with the maturity of three months or less are considered to be cash equivalents. REVENUE RECOGNITION The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2005. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include accounts payable, accrued expenses and notes payable. Fair values were assumed to approximate carrying values because these financial instruments are short term, their carrying amounts approximate fair values, or they are payable on demand. F-6 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 EARNINGS (LOSS) PER SHARE The Company follows Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share." Basic earnings (loss) per common share ("EPS") calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the periods presented common stock equivalents were not considered, as their effect would be anti-dilutive. STOCK-BASED COMPENSATION The Company accounts for equity instruments issued to employees for services based on the fair value of the equity instruments issued and accounts for equity instruments issued to other than employees based on the fair value of the consideration received or the fair value of the equity instruments, whichever is more reliably measurable. The Company accounts for stock based compensation in accordance with SFAS 123, "Accounting for Stock-Based Compensation." The provisions of SFAS 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans. As of December 31, 2005 and 2004, the Company had no stock based compensation. SEGMENT INFORMATION The Company follows SFAS 131, "Disclosure about Segments of an Enterprise and Related Information". Certain information is disclosed, per SFAS 131, based on the way management organizes financial information for making operating decisions and assessing performance. The Company currently operates in one business segment and will evaluate additional segment disclosure requirements as it expands operations. RECENT PRONOUNCEMENTS In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for, and reporting of, a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. F-7 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It will only affect the financial statements of the Company if there is a change any accounting principle. At this time, no such changes are contemplated or anticipated. In February 2006, the FASB issues SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140." This amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." This Statement: a. Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation b. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133 c. Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation d. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives e. Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of the fiscal year, provided financial statement have not yet been issued, including financial statements for any interim period, for that fiscal year. Provisions of this Statement may be applied to instruments held at the date of adoption on an instrument-by-instrument basis. The Company is currently reviewing the effects of adoption of this statement but it is not expected to have a material impact on its financial statements. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets--an amendment of FASB Statement No. 140," with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement: 1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. 2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. 3. Permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. 4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. F-8 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. Adoption of this Statement is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material impact on the Company's financial statements. RECLASSIFICATIONS Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. NOTE 2 - GOING CONCERN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has working capital and shareholders' deficits of $350,807 and an accumulated deficit of $23,221,716 as of December 31, 2005. In addition, the Company has generated recurring losses, aggregating $69,792 and $58,979 in 2005 and 2004, respectively, and has no revenue generating operations. The Company is currently seeking a viable business to merge with and, in addition, is seeking equity capital. However, 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. The Company is reliant on a related party to provide working capital. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. NOTE 3 - STOCKHOLDERS' (DEFICIT) Common stock ------------ In December 2003, the Company changed its state of incorporation from California to Nevada. In so doing, the Company also changed its authorized no par value common stock to $0.001 par value common stock. For the purposes of financial statement presentation, all share and per share information has been restated to reflect the effect of the designated par value. On May 24, 2005, the Board of Directors authorized a two-for-one forward stock split which was effective June 21, 2005. Accordingly, all share and per share amounts have been restated for all periods presented. F-9 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 Preferred stock --------------- As of December 31, 2003, effective with the Company's incorporation in the state of Nevada, the Company had authorized a total of 2,000,000 shares of $0.001 par value preferred stock. Of the Series A Preferred Stock, 300,000 shares are authorized and of the Series B Preferred Stock, 910,000 shares are authorized. There are no Series A or Series B shares outstanding. The Cumulative Series C Preferred Stock had 250,000 shares authorized, issued and outstanding. The Series classification of the remaining authorized preferred shares has not yet been determined and such designation is at the discretion of the board of directors. Effective June 20, 2005, the 250,000 outstanding shares of convertible Series C 6% cumulative, $.001 par value preferred stock were converted into 500,000 (post-split) shares of $.001 par value common stock of the Company. Upon conversion, the accumulated dividends became due and payable to the preferred shareholder. The total accumulated preferred dividends at the date of conversion were $81,185. Compensatory Stock Option Plans ------------------------------- The Company has a stock option plan for option grants to directors, officers, employees and consultants of the Company. Such options are granted at fair value, vest over three to five years, and expire not more than ten years from date of grant. As of December 31, 2005, the Company has reserved a total of 225,000 shares of common stock for exercise under the stock option plan. SFAS 123 requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS 123. The fair value of the option grants is estimated on the date of grant utilizing the Black-Scholes option-pricing model. No options have been granted during the years ended December 31, 2005 and 2004. All outstanding stock options as of December 31, 2003, had an exercise price of $5.00 per share. Of the 12,500 outstanding options as of December 31, 2003, all expired in 2004 because the option holders resigned as officers and directors of the company. Transactions under all stock option plans are summarized as follows: NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Outstanding at December 31, 2003 12,500 $ 5.00 Options granted -- -- Options expired (12,500) 5.00 --------------------------------- Outstanding at December 31, 2004 -- $ -- Options granted -- -- Options expired -- -- --------------------------------- Outstanding at December 31, 2005 -- $ -- ================================= F-10 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 NOTE 4 - NOTES PAYABLE - RELATED PARTIES Notes payable - related parties consists of the following: o Unsecured revolving promissory note, principal balance of $101,568, interest at 10%, interest and principal due on demand, payable to the majority shareholder o Unsecured promissory note, principal balance of $85,000, no interest, due on demand, issued for accrued consulting fees payable, payable to former President and Chief Executive Officer o Unsecured promissory note, principal balance of $12,000, no interest, due on demand, issued for accrued consulting fees payable to a former director Interest expense for the years ended December 31, 2005 and 2004, on the notes payable was $9,695 and $7,385, respectively. Related accrued interest payable as of December 31, 2005 was $25,067. NOTE 5 - INCOME TAXES The Company accounts for income taxes under SFAS 109, "Accounting for Income Taxes," which requires use of the liability method. SFAS 109 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized. Reconciliation of the Federal statutory income tax rate of 34% to the effective rate is as follows: Federal statutory income tax rate 34.00 % Valuation allowance (34.00)% ----------- --% =========== The tax effects of temporary differences and net operating losses that give rise to significant portions of deferred tax assets and liabilities consisted of the following: 2005 ------------ Deferred tax assets (liabilities) Net operating loss carry forward $ 7,830,000 Less valuation allowance (7,830,000) ------------- Net deferred tax asset $ -- ============= At December 31, 2005, the Company has a Federal net operating loss carry forward of approximately $23,000,000, which expires through 2025 and a state net operating loss carry forward of approximately $360,000, which expires through 2009. The change in the valuation allowance for the deferred tax asset during the year ended December 31, 2005, was $26,000. F-11 OCTUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2005 NOTE 6 - RELATED PARTY TRANSACTIONS During the years ended December 31, 2005 and 2004, the Company incurred consulting fees payable to a former officer and director of $3,000 and $12,000, respectively. Total amounts due to the former officer and director are $16,747 and are included in accounts payable, related parties. During the year ended December 31, 2004, the Company issued a note payable in the amount of $12,000 payable to a former director in recognition of years of service. A former officer and director paid certain expenses on behalf of the Company. As of December 31, 2005, amounts owed to this individual totaled $3,169 and are included in accounts payable, related parties. NOTE 7 - TERMINATED POTENTIAL ACQUISITION On February 22, 2005, the Company executed a non-binding Letter of Intent to effectuate a business combination with MicroSlate Inc., a Canadian corporation ("MicroSlate"). Subject to customary due diligence and further negotiations, the business combination between the Company and MicroSlate was to be effectuated by reverse merger, reorganization or asset purchase. As of December 31, 2005, the negotiations had been terminated with no further obligations remaining for either party. During the year ended December 31, 2005, expenses totaling $20,774 have been paid by MicroSlate on behalf of the Company. All such amounts have been recorded as a capital contribution. NOTE 8 - SUBSEQUENT EVENTS Subsequent to year end, the majority shareholder advanced $21,424 in payments to vendors, suppliers and professional fees on behalf of the Company. The amounts increase the balance of the note payable to the majority shareholder. F-12 ITEM 8. ACCOUNTING AND FINANCIAL DISCLOSURE. There were no disagreements with the accountants regarding accounting principles or reporting required to be disclosed pursuant to Item 304 of Regulation S-B. ITEM 8A. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005, the date of this annual report. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subject to their evaluation. ITEM 8B. OTHER INFORMATION. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. INFORMATION REGARDING DIRECTORS The information set forth below as to our sole officer and director was provided by that individual: NAME PRESENT POSITION WITH THE COMPANY DIRECTOR SINCE AGE ---- --------------------------------- -------------- --- Josie Ben Rubi President and Chief Executive Officer; 2004 36 Chief Financial Officer; Director Josie Ben Rubi is a citizen and resident of the Republic of Panama. Mr. Ben Rubi is a practicing attorney specializing in Mergers and Acquisitions, Corporate Law, Immigration Law, International Business Transactions, Labor law, Intellectual Property, and Tax Law. He graduated from Santa Maria La Antigua University, Republic of Panama (School of Law, 1996) and was Admitted to bar in 1997, Republic of Panama. Mr. Ben Rubi is a partner in the law firm of Ben Rubi & Miro. He is a member of Panama Bar Association, International Bar Association, and The International Association of Jewish Lawyers and Jurists. He is fluent in Spanish, English and Hebrew. On December 15, 2004, Mr. Ben Rubi was appointed Chairman, Chief Executive Office and Chief Financial Officer of OCTuS, Inc. 12 There are no orders, judgments, or decrees of any governmental agency or administrator, or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining any of our officers or directors from engaging in or continuing any conduct, practice or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security, or any aspect of the securities business or of theft or of any felony. Nor are any of the officers or directors of any corporation or entity affiliated with us so enjoined. AUDIT COMMITTEE AND FINANCIAL EXPERT. Because our Board of Director currently consists of only one member and we do not have the resources to expand our management at this time, we do not have an audit committee, nor do we have a financial expert on our Board of Directors as that term is defined by Item 401(e)2. Our Board of Directors is performing the functions of the audit committee until an audit committee is established. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Act of 1934 requires our directors, executive officers, and any persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. SEC regulation requires executive officers, directors and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2005, that none of our executive officers, directors, or greater than 10% stockholders complied with any applicable filing requirements. CODE OF ETHICS In March 2004, we adopted a Code of Ethics. We do not currently have a website. Therefore, we will provide a copy, free of charge, to those writing to the corporate office located at Ave. Balboa Edificio Los Defines 100 Mezanina, Panama City, Panama. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal years ending December 31, 2005 and 2004, the accrued compensation we paid, as well as certain other compensation paid or accrued for those years, to Mr. Belden, who served as our Chief Executive Officer. We did not employ any officers in 2005 or 2004 that earned over $100,000 in annual salary and bonuses (the "named executive officers"). Mr. Belden resigned on December 15, 2004. Mr. Ben Rubi, appointed to serve as President and CEO effective December 15, 2004, did not receive compensation in 2005 or 2004. ACCRUED ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS --------------------------- ----------------------------- (A) (G) NAME AND (E) (F) SECURITIES (H) PRINCIPAL (B) (C) (D) OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION -------- ---- ------ ----- ------------ ------------ ------- ------------ John C. Belden 2004 $ 12,000 0 0 0 0 0 Former President & CEO Josi Ben Rubi 2004 0 0 0 0 0 0 President & CEO 2005 0 0 0 0 0 0
COMPENSATION OF DIRECTORS. Our current directors are also our employees and receive no extra compensation for their service on our board of directors. COMPENSATION OF OFFICERS. As of April 12, 2006, our officers have received no compensation for their services provided to us, other than stock issued for services as indicated in the table above. 13 EMPLOYMENT CONTRACTS. We do not currently have any employment contracts in place. STOCK OPTION GRANTS TABLE We did not grant any stock options to our named executive officers during fiscal 2005 or 2004. We do not have any outstanding stock appreciation rights. OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table provides information with respect to the named executive officers, concerning the exercise of stock options during fiscal 2005 and 2004 and unexercised options held as of the end of fiscal 2005 and 2004 NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END(#) FY-END($) --------- --------- SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- ------------- ------------- John C. Belden 2003 0 0 10,000/0 0/0 John C. Belden 2004 0 0 0 0/0 Josi Ben Rubi 2004 0 0 0 0 Josi Ben Rubi 2005 0 0 0 0 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of our Voting Stock as of April 12, 2006, by (i) each of our named executive officers and directors; (ii) our named executive officers and directors as a group; and (iii) shareholders known by us to beneficially own more than 5% of any class of our voting securities. The beneficial ownership of securities is defined in accordance with the rules of the Securities and Exchange Commission and means generally the power to vote or exercise investment discretion with respect to securities, regardless of any economic interests therein. Except as otherwise indicated, we believe that the beneficial owners of the securities listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Unless otherwise indicated, the business address for each of the individuals or entities listed below is c/o OCTuS, Inc., Ave. Balboa Edificio Los Defines 100 Mezanina, Panama City, Panama. NUMBER OF SERIES NUMBER OF C PREFERRED COMMON SHARES SHARES BENEFICIALLY BENEFICIALLY PERCENT OF NAME OWNED OWNED CLASS ---- ----- ----- ----- Josie Ben Rubi, President & CEO, Director 0 0 0% Grupo Dynastia S.A.(1) 800,000 0 6.0% OFFICERS AND DIRECTORS AS A GROUP 0 0 0%
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees. Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them. 14 CHANGES IN CONTROL. Our management is not aware of any arrangements which may result in "changes in control" as that term is defined by the provisions of Item 403(c) of Regulation S-B. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED PARTY TRANSACTIONS. We entered into an unsecured revolving promissory note with Grupo Dynastia S.A, principal balance of $101,568, interest at 10%, interest and principal due on demand. Accrued interest related to this note payable as of December 31, 2005 is $25,067 and is included in Accounts payable and accrued expenses - related parties. During the year ended December 31, 2005, we incurred consulting fees payable to our former officer and director of $3,000. During the year ended December 31, 2004, we incurred $12,000 of consulting expense related to an employment-consulting agreement to this individual, our former President and Chief Executive Officer, for which he was to provide consulting services at a monthly rate of $1,000. The agreement was terminated on December 31, 2004. As of December 31, 2005, $101,747 of expenses related to this agreement were unpaid of which $16,747 is included in accounts payable - related parties. The balance of $85,000 is included in Notes Payable - related parties. During the year ended December 31, 2004, we recorded $12,000 in accrued director's fees payable to Robert A. Freeman which are included in Notes payable - related parties. An officer and a former director paid certain bills on our behalf. As of December 31, 2005, amounts owed to these related parties totaled $3,169, are included in Accounts payable - related parties. With regard to any future related party transactions, we plan to fully disclose any and all related party transactions, including, but not limited to, the following: o disclose such transactions in prospectuses where required; o disclose in any and all filings with the Securities and Exchange Commission, where required; o obtain disinterested directors consent; and o obtain shareholder consent where required. ITEM 13. EXHIBITS EXHIBIT NUMBER DESCRIPTION ------ ----------- 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 ! 3.3 Certificate of Amendment to Articles of Incorporation ## 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 ++ 15 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, 1996 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, 1996 ++ 10.32 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 +++ 14 Code of Ethics *** 16.1 Letter dated March 13, 1996 from Price Waterhouse to the Securities and Exchange Commission ~ 31.1 Section 302 Certification Annual Report on Form 10-KSB 32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
* 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, 1996. & Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 as filed with the SEC on March 31, 1997. 16 ++ 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. *** Incorporated by reference from the Company's Annual Report on Form 10-KSB for the calendar year ended December 31, 1993. ## Incorporated by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on June 16, 2005 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Our board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Stark Winter Schenkein & Co., LLP as our independent accountants, the board of directors considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by Stark Winter Schenkein & Co., LLP, in 2005, were approved by the board of directors. AUDIT FEES The aggregate fees billed by for professional services for the audit of our annual financial statements and the reviews of the financial statements included in our quarterly reports on Form 10-QSB for 2005 and 2004 were $17,900 and $12,650, respectively, net of expenses. AUDIT-RELATED FEES There were no other fees billed by Stark Winter Schenkein & Co., LLP during the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and not reported under "Audit Fees" above. TAX FEES The aggregate fees billed during the last two fiscal years for professional services rendered for tax compliance for 2005 and 2004 were $1,500 and $1,100 respectively. ALL OTHER FEES There were no other fees billed by Stark Winter Schenkein & Co., LLP during the last two fiscal years for products and services provided. 17 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: April 12, 2006 /s/ Josie Ben Rubi ------------------- Josie Ben Rubi Chief Executive 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 April 12, 2006. Signature Title Date --------- ----- ---- /s/ Josie Ben Rubi President (Principal Executive April 12, 2006 ------------------ Officer, Principal Financial & Josie Ben Rubi Accounting Officer), Director 18