UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No.1)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
Commission file number:
HOUSTON OPERATING COMPANY
(Name of Small Business Issuer in Its Charter)
Delaware 76-0307819
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
67 Federal Road, Building A
Suite 300
Brookfield, CT 06804
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
(203) 775-1178
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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.
|X| YES |_| NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. |_|
State issuer's revenues for its most recent fiscal year: $612
The aggregate market value of the voting stock held by non-affiliates per the
closing stock price of December 31, 2004 is $6,921,822.
As of December 31, 2004, 35,652,204 shares of common stock of the issuer were
outstanding.
EXPLANATORY NOTE
This amendment No.1 to our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004 filed with Securities and Exchange Commission on March
31, 2005 is filed solely to: (i) amend Part I, Item 1 and 2; (ii) amend Part II,
Item 6; (iii) revise footnotes to the financial statements and (iv) amend Part
III, Item 10 and 11. Included herewith are certifications filed as Exhibit 31.1,
31.2, 32.1 and 32.2, which have been re executed as of the date of this
amendment.
This amendment does not include any material changes in our financial statements
other than expanded footnote disclosure. All other information in the originally
filed Form 10-KSB was presented as of March 31, 2005 filing date, or earlier as
indicated, and has not been updated in this amended filing.
TABLE OF CONTENTS
PART I................................................................................................................- 1 -
ITEM 1. DESCRIPTION OF BUSINESS...........................................................................- 1 -
RISK FACTORS..........................................................................................................- 6 -
ITEM 2. DESCRIPTION OF PROPERTY...........................................................................- 9 -
ITEM 3. LEGAL PROCEEDINGS.................................................................................- 9 -
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS................................................- 9 -
PART II...............................................................................................................- 9 -
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................- 9 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............- 11 -
ITEM 7. FINANCIAL STATEMENTS.............................................................................- 16 -
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............- 16 -
ITEM 8A. CONTROLS AND PROCEDURES..........................................................................- 16 -
PART III.............................................................................................................- 17 -
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....................................- 17 -
BOARD OF DIRECTORS...................................................................................................- 18 -
ITEM 10. EXECUTIVE COMPENSATION...........................................................................- 19 -
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................- 20 -
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................- 22 -
ITEM 13. EXHIBITS AND REPORTS.............................................................................- 22 -
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................................................- 22 -
SIGNATURES...........................................................................................................- 24 -
FINANCIAL STATEMENTS....................................................................................................F-1
i
PART I
From time to time, including in this annual report on Form 10-KSB, Houston
Operating Company (the "Company" or "we") may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, future operations, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, we note that a variety of factors could cause our
actual results to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of our business include, without limitation, the following: general
economic and business conditions, both nationally and in our markets; our
expectations and estimates concerning future financial performance, financing
plans, acquisitions or mergers, and the impact of competition; our ability to
implement our acquisition and growth strategy; anticipated trends in our
business; advances in technologies; and, other risk factors set forth under
"Risk Factors" beginning on page 15 in this report.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Houston Operating Company ("HOC") was incorporated in Delaware in August
of 1989, and has not had operations since before 2002. NetFabric Corporation
("NetFabric") was incorporated in the State of Delaware on December 17, 2002, as
a new corporation and not as a result of a material re-classification, merger,
consolidation, purchase or divestiture. On December 9, 2004, HOC entered into an
acquisition agreement with all of the stockholders of NetFabric in a transaction
that was accounted for as a reverse merger whereby NetFabric was treated as the
accounting acquirer. At the closing, which occurred at the same time as the
execution of the acquisition agreement, HOC acquired all of the issued and
outstanding capital stock of NetFabric from the Stockholders in exchange for an
aggregate of 32,137,032 newly-issued shares of the Company's common stock . In
this report, "we," "us," "our company," "the Company," and "our" refer to
Houston Operating Company and its consolidated subsidiary NetFabric unless the
context requires otherwise.
Immediately prior to the NetFabric merger, the directors of Houston
Operating Company were Wesley F. Whiting and Redgie Green. The officers were,
Wesley F. Whiting - President and Redgie Green - Secretary. The directors of
NetFabric were Jeff Robinson (Chairman), Richard Howard and Charlotte Denenberg.
The officers of NetFabric were, Jeff Robinson - Chief Executive Officer, Walter
Carozza - Chief Financial Officer, Philip Barak - Vice President of Finance,
Victoria Desidero - Vice President of Marketing.
Description of Business
We develop and sell voice-over internet platforms and services to small to
mid-sized businesses that we believe are designed to simplify the incorporation
of telephone systems into a company's infrastructure. We believe our products
deliver productivity gains to small and medium sized businesses and are intended
to provide cost reductions
We develop and sell a family of IP appliances that simplify the
incorporation of any telephone system into a company's IP infrastructure while
reducing the cost of telephone calls. Our products deliver productivity gains to
small and medium sized businesses with cost reductions while maintaining PSTN
class reliability and ease of use.
We have found that the market requires a turnkey solution. A solution that
bundles all of the necessary hardware and the VoIP service into a single product
offering. We have called this new product Fusion+ and have implemented the VoIP
service component by establishing a relationship with third party VoIP transport
provider. This service will be privately labeled by NetFabric.
Our plan of operations over the next 12 months is to the VoIP revenues by
creating a solution that bundles the service as well all necessary equipment for
a turnkey solution. To this end the company has partnered with VoIP providers
and other VoIP equipment manufactures to rapid grow the scope of the product
family.
- 1 -
Market Size
The size of the U.S. small and medium sized business market for our
products is estimated to be in excess of $3.0 billion for hardware products and
$1 billion in monthly recurring revenues for the VoIP service. The market was
estimated using the government's census on US business demographics.
(http://www.census.gov/epcd/www/smallbus.html). From the population
density for various businesses we then performed our own analysis of the
following:
1.Used industry "rule of thumb" metrics that relate to the ration of phone
lines coming into a company to the number of employees in that company.
2.Estimating typical industry pricing for from VoIP equipment and VoIP
transport service in the SMB market.
VoIP HW Cost Per Trunk $150 Our Estimate
Employees Per
Employees Number of Firms Total Employees Trunk(1) Trunks (1) Revenues
--------- --------------- --------------- -------- ---------- --------
1 to 4 2,697,839 5,630,017 1 5,630,017 $ 844,502,550
5 to 9 1,019,105 6,698,077 1.5 4,465,385 $ 669,807,700
10 to 19 616,064 8,274,541 2 4,137,271 $ 620,590,575
20 to 99 518,258 20,370,447 3 6,790,149 $ 1,018,522,350
Totals 4,851,266 40,973,082 TAM for VoIP $ 3,153,423,175
Equipment
Source: US Government 2001 Business Census.
VoIP Service Cost per Month Per
Trunk $50 (Our Estimate)
Employees Per
Employees Number of Firms Total Employees Trunk(1) Trunks (1) Revenues
--------- --------------- --------------- -------- ---------- --------
Line/(1) Trunks (1) Revenues
1 to 4 2,697,839 5,630,017 1 5,630,017 $ 281,500,850
5 to 9 1,019,105 6,698,077 1.5 4,465,385 $ 223,269,233
10 to 19 616,064 8,274,541 2 4,137,271 $ 206,863,525
20 to 99 518,258 20,370,447 3 6,790,149 $ 339,507,450
Totals 4,851,266 40,973,082 TAM for monthly $ 1,051,141,058
VoIP Service
Recurring
Revenue
Please note that we will only penetrate a percentage of these
multi-billion dollar markets, as not every potential end-user customer is going
to purchase our product. Nonetheless this analysis serves to illustrate the
financial size of the markets we address.
The Company's Products
There are currently two products available, one for 4 trunk phone systems,
the other for 8 trunk phone systems. New products are constantly in development;
others are being obtained by partnering with other telecom manufacturers. We
would anticipate releasing several new hardware and software products before the
end of this year. The completion costs on the most immediate products are in the
range of $500K to $1M. The risks associated with these developments can be
reduced to ones effecting the development cost and timing of the release and are
inherent in the development of any new product of consequence.
- 2 -
NetFabric has developed two product lines: FUSION 4x4 and 12x8. NetFabric
completed development and certification of the FUSION 4x4 product line - the
product is currently available for sale. Development on the FUSION 12x8 is
complete and NetFabric is in the process of CSA product safety certification
(CSA 22.2#60950) to UL standard (UL60950). The certification process will cost
approximately $12,000. The company expects certification to be completed in.
Immediately following product certification of the FUSION 12x8, the company will
begin volume production and begin booking revenue.. However, if the FUSION 12x8
fails certification, the company will have to redesign the product layout and
resubmit for certification - a process that could take three to four months and
cost approximately $20,000. Failing certification will delay product revenue,
increase development costs, and refocus sales efforts for FUS1ON 4x4 product
line.
Our FUSION product, which today includes the FUSION 4x4, FUSION 12x8, and
the Fusion Voice VoIP service, collectively provides a turnkey solution to the
deployment of VoIP to the SMB. The Fusion hardware products attach to an
existing business phone system and in an inexpensive and straightforward manner
provide for the upgrade of the system to use VoIP. The Fusion 4x4 handles phone
systems with up to 4 trunks, while the Fusion 12 x 8 handles phone systems of up
to 8 trunks. We believe the product family distinguishes itself by:
1. Avoiding the issues surrounding the E911 service over VoIP.
2. Transparently handling different dial plans for different service
providers.
3. Handling the issue of variable quality of service (QOS) with WAN
services from cable and DSL providers.
Emergency services are difficult to deliver using VoIP. We believe that it
is difficult because there is no hard connection between a telephone number and
a physical location. This has been a major issue and risk with VoIP deployment.
With the Fusion units 911 calls are automatically routed across the Public
Switched Telephone Network and thus the service works without issue. This is a
major reduction in liability that businesses find very attractive.
Finally the amount of traffic on the WAN connection to a small business
can vary enormously throughout the day. If no attention is paid to this then
certain VoIP calls can be of very poor quality with a lot of distortion and
dropout. We believe the Fusion units make dynamic measurements of the delays on
the WAN and under poor conditions will route the calls across the PSTN instead.
Product Strategy
Our efforts in moving forward will be to integrate more and more of the
functionality required to deliver VoIP and other services to the small and
medium size business. Through this integration we believe we will drive down
cost and further simplify the installation and maintenance of our products.
Sales and Distribution Strategy
We are starting to engage in recruiting systems integrators and service
providers to sell NetFabric's products and services. NetFabric is also
assembling two tiers of distributors that target SMB telecom and data resellers,
as well as service providers.
Organization of Sales and Business Development
Our sales and business development teams focus on channel and strategic
accounts with short and long term sales cycles respectively. The sales team
consists of channel managers that have experience in recruiting, developing and
managing telecom and data VARs. NetFabric is recruiting telecom VARs that
primarily sell key/hybrid systems to the SMB market. We believe we are
delivering a bundled solution with VoIP service that, when added to the VAR's
current offering, will provide a unique solution for our customers. NetFabric is
focusing recruitment efforts on resellers and distributors that sell
market-leading telecom products such as Avaya, Nortel, NEC, Panasonic, Toshiba,
and Intertel.
We offer what we believe is a unique value proposition to traditional
telecom VARs that fall into three categories: those who have not made the switch
to marketing VoIP products and services, those who have customers that are
reluctant to upgrade their telecom infrastructure to utilize VoIP, and VARs
already selling VoIP and data solutions.
- 3 -
We believe we are positioning NetFabric's products as a solution that
saves money on customers' long distance bills and adds advanced IP applications
with out the costly forklift upgrades - offering compelling savings. Forklift
upgrade refers to the complete replacement of an existing telephone system with
a new one.
We believe our solution increases the revenue to the VAR on each new sale
by 20% and provides recurring commission through the sale of VoIP services. We
believe VARs are looking for reasons to go back to their customer base to
re-engage and sell additional services. We believe we provide these additional
services.
Channel managers are responsible for recruiting new VARs every month. We
are hiring channel managers from telecom vendors like Avaya, Nortel, Toshiba,
and NEC and Data vendors like Cisco, Nortel, Extreme, and 3Com that have
existing VAR relationships to assist with the partner recruitment process. The
team is supported by inside sales personnel, who have an overlay quota, to
assist with VAR recruitment and management. The sales team is compensated by a
base salary plus commission for attaining revenue targets.
We generate revenue through VARs, Value Added Resellers, by selling
NetFabric's products and services to the VAR to be part of a solution to an
enterprise customer. Likewise, NetFabric will generate revenue by selling
products and services to Service Providers to provide their enterprise customers
a VoIP solution. OEM relationships will generate sales by selling directly to
manufactures so the OEM may sell NetFabric's products as their own. Finally,
direct consultative sales will generate revenue by selling direct to large
enterprises by existing sales personnel.
NetFabric's revenue model consists of selling indirect to small and medium
enterprise customers through channels such as VARs, service providers, and OEMs
as well as direct to Large Enterprises when the opportunity arises. However,
NetFabric's model is mainly focused on serving the needs of small and medium
businesses. Therefore, the sales organization is focused on supporting the
channel to sell products and services to the small and medium size business.
Distributors
We have a written agreement with Williams, whereby Williams purchases and
resells our products to end-users and VARS, and for use in conjunction with its
own customer product offerings. Under the terms of the agreement, Williams
orders products directly from us. We ship those products as directed by Williams
and invoices Williams on a net 30 day basis. Williams offers a full range of
products and services and also resells to 1,000 dealers in Canada and 500
dealers in the US.
We currently have a verbal distribution agreement with ABP, whereby ABP
purchases and resells our products to VARS and small service providers. Under
the terms of that agreement, ABP orders products directly from us. We ship those
products as directed by ABP and invoices ABP on a net 30 day basis. We chose ABP
for its expertise in IP networking, specifically VoIP products. ABP is currently
a distributor for companies such as AudioCodes, Ltd. and SNOM technology AG and
would have the capability to bundle our products for more complete solutions.
We currently have a non-binding verbal distribution agreement with
CoMatrix, whereby CoMatrix purchases and resells our products to Interconnects,
integrators and VARS. Under the terms of that agreement, CoMatrix orders
products directly from us. We ship those products as directed by CoMatrix and
invoices CoMatrix on a net 30 day basis. We have selected CoMatrix as a
distributor for our products because CoMatrix is largely focused on the
traditional telephony Interconnect. Our product is the first IP appliance
CoMatrix has successfully installed at an end-user customer site. CoMatrix works
with approximately 4,000 VARS and Interconnects and plans major mailing efforts
and training sessions for its customers regarding IP telephony.
Manufacturing and Component Supply
We use Kimchuk, Inc. for our manufacturing operations. Our relationship
with Kimchuk is not formalized in a written agreement, but is determined by the
parties on a manufacturing lot-by-lot basis. We provide Kimchuk with a
non-binding rolling 90-day forecast of its manufacturing needs. Each month, we
communicate by purchase order to Kimchuk the products and number of our units
Kimchuk should manufacture for us for the month. When Kimchuk has manufactured
those units and placed them in its inventory, Kimchuk invoices us on a net 30
day basis. The price of the units is also determined on a lot-by-lot basis.
- 4 -
Dependence On Specific Customers
We believe that our revenue will be dependent on critical sales channels
rather than specific end-user customers. We are creating a relatively small
number of business relationships with major service providers and equipment
vendors. We believe that the revenue that will ensue from these relationships
will form a large percentage of our total revenue.
Competition
We believe our approach in using CPE to elevate consumer grade VoIP
services to business class service is unique. The Company believes it is also
unique in providing an applications platform for the improved distribution of a
host of telephony related services. Thus, the Company is not aware of any direct
competition to its products. However there are a number of companies that have
VoIP gateways and that can intelligently route calls between the PSTN and VoIP.
The most notable of these is Quintum Technologies, Inc. The Quintum
product is principally focused on the traditional VoIP gateway application,
namely the construction of an internal enterprise VoIP telephone system. Quintum
can reroute to the PSTN during the telephone call, whereas the Company cannot.
However, Quintum requires installation of its proprietary hardware at both ends
of the call, which prohibits its use with the majority of the current VoIP
service providers. Also, the Quintum product does not contain an applications
platform. Other notable companies with routing capabilities to the PSTN would
include Better Online Solutions, Ltd., also known as BOScom and Multi-Tech
Systems, Inc., also known as MultiTech.
Other than Quintum, BOScom, MultiTech and similar companies with solutions
that can deliver hybrid PSTN/VOIP solutions, there is also the general adoption
of pure IP telephone systems, which have the potential to provide similar
capabilities to those of the Company products but at much greater initial
expense and risk.
Intellectual Property
We have two patents pending on the technology used in our products. The
patents were designed by Jeff Robinson, our current CEO, during the development
of FUSION 4x4. In late 2002, Mr. Robinson discovered a new process to manage
remote IP appliances resulting in our request for NetFabric's first patent. And
in early 2003, Mr. Robinson developed a call routing technique that is used in
FUSION 4x4 to intelligently route calls between the PSTN and VoIP.
Employees
As of December 31, 2004, the Company directly employs approximately 12
people in the United States of America. Our employees are not represented by
labor unions or collective bargaining agreements. We have not experienced any
work stoppages anywhere, and consider our relations with our employees to be
good.
- 5 -
RISK FACTORS
We Are Subject To Various Risks That May Materially Harm Our Business, Financial
Condition And Results Of Operations
You should carefully consider the risks and uncertainties described below
and the other information in this filing before deciding to purchase our common
stock. If any of these risks or uncertainties actually occurs, our business,
financial condition or operating results could be materially harmed. In that
case, the trading price of our common stock could decline and you could lose all
or part of your entire investment.
Risks Related To Our Business
We Have Historically Lost Money And Losses May Continue In The Future, Which May
Cause Us To Curtail Our Operations
Since our inception we have not been profitable and have lost money. For
the year ended December 31, 2004 we incurred a net loss of $1,502,260. Future
losses are likely to occur, as we are dependent on spending money to pay for our
operations. No assurances can be given that we will be successful in reaching or
maintaining profitable operations. Accordingly, we may experience liquidity and
cash flow problems. If our losses continue, our ability to operate may be
severely impacted.
We Have Been The Subject Of A Going Concern Opinion By Our Independent
Registered Public Accountants Which Have Raised Substantial Doubt As To Our
Ability To Continue As a Going Concern
Our Independent Registered Public Accountants have added an explanatory
paragraph to their audit opinions issued in connection with our consolidated
financial statements which states that our financial statements raise
substantial doubt as to our ability to continue as a going concern. We have
experienced net losses from operations of $1,502,260 for the year ended December
31, 2004. In addition, we had a working capital deficit of $853,317 at December
31, 2004. These factors, among others, raise substantial doubt about our ability
to continue as a going concern. Our consolidated financial statements do not
include any adjustment that might result from the outcome of this uncertainty.
Assurances cannot be given that adequate financing can be obtained to meet our
capital needs. If we are unable to generate profits and unable to continue to
obtain financing to meet our working capital requirements, we may have to
curtail our business sharply or cease operations altogether. Our continuation as
a going concern is dependent upon our ability to generate sufficient cash flow
to meet our obligations on a timely basis to retain our current financing, to
obtain additional financing, and, ultimately, to attain profitability. Should
any of these events not occur, we will be adversely effected and we may have to
cease operations.
We Had A Working Capital Deficit, Which Means That Our Current Assets On
December 31, 2004 were Not Sufficient To Satisfy Our Current Liabilities And,
Therefore, Our Ability To Continue Operations Is At Risk
We had a working capital deficit of $853,317 at December 31, 2004, which
means that our current liabilities exceeded our current assets on December 31,
2004 by $853,317. Current assets are assets that are expected to be converted to
cash within one year and, therefore, may be used to pay current liabilities as
they become due. Our working capital deficit means that our current assets on
December 31, 2004 were not sufficient to satisfy all of our current liabilities
on those dates. If our ongoing operations do not begin to provide sufficient
profitability to offset the working capital deficit, we may have to raise
additional capital or debt to fund the deficit or curtail future operations.
One Of Our Principal Stockholders Has The Right To Designate 40% Of Our Board Of
Directors Which Means That Such Stockholder Could Exercise Certain Control Over
The Decisions Made By The Board
NetFabric has granted Fred Nazem and his affiliates the right to designate
40% of the nominees to our Board of Directors, for as long as Mr. Nazem and his
affiliates own in the aggregate at least twenty five percent of the voting
shares outstanding of NetFabric. Which means that Mr. Nazam has the ability to
exercise significant influence over the decisions made by our Board of
Directors.
- 6 -
We May Incur Significant Operating Losses In The Future Which Could Adversely
Affect Our Business And Cause Us To Cease Operations
Our business does not have an established record of profitability and we
may not be profitable in the future. In addition, we expect our operating
expenses to increase in the future as we, among other things:
o hire additional personnel, including sales and marketing personnel,
engineers and other technical staff;
o hire senior executives and members of our senior management team;
o expand our selling and marketing activities;
o expand our product and service offerings;
o expand the number of locations around the world where we conduct
business;
o increase our research and development efforts to upgrade our
existing products and services and develop new products, services
and technologies; and,
o upgrade our operational and financial systems, procedures and
controls.
If our revenue does not grow to offset these expected increased expenses,
we will not be profitable. You should not consider past revenue and earnings as
indicative of our future performance. In future quarters, our revenue or
earnings could decline or fail to grow. Furthermore, if our operating expenses
exceed our expectations, our financial performance will be adversely affected.
Our Need To Invest In Research And Development Could Harm Our Operating Results
And Prevent Us From Obtaining Additional Financing Based On Those Results
NetFabric's industry is characterized by the need for continued investment
in research and development. If we fail to invest sufficiently in research and
development, our products may become less attractive to potential customers,
resulting in a material adverse effect on NetFabric's results of operations and
financial condition. As a result of our need to maintain or increase our
spending levels in this area, our operating results could be materially harmed
if NetFabric's revenue falls below expectations. In addition, as a result of the
need for research and development and technological innovation, our operating
costs may increase in the future. If our operating results become too high our
operation could become unattractive to investors or financial institutions which
we may rely on for capital to fund our operations.
Defects In NetFabric's Products May Adversely Affect NetFabric's Sales And
Expose NetFabric To Costly Legal Claims
NetFabric's business strategy calls for the development of new products
and product enhancements which may from time to time contain defects or result
in a failure that NetFabric did not detect or anticipate when introducing such
products or enhancements to the market. In addition, the markets in which
NetFabric's products are used are characterized by a wide variety of standard
and non-standard configurations and by errors, failures and bugs in third-party
platforms that can impede proper operation of NetFabric's products. Despite
product testing by NetFabric, defects may still be discovered in some new
products or enhancements after the products or enhancements are delivered to
customers. The occurrence of these defects could result in product returns,
adverse publicity, loss of or delays in market acceptance of NetFabric's
products, delays or cessation of service to NetFabric's customers or legal
claims by customers against NetFabric.
To the extent that contractual provisions that limit NetFabric's exposure
to legal claims are unenforceable or such claims are not covered by insurance, a
successful product liability claim could have a material adverse effect on
NetFabric's business, results of operations and financial condition.
Our Dependence On Contract Manufacturers And Suppliers May Result In Product
Delivery Delays Which Could Harm Our Business If These Delays Result in Customer
Dissatisfaction or Litigation
We currently use contract manufacturers to manufacture our products.
NetFabric's reliance on contract manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of, or
interruptions in access to necessary manufacturing processes and reduced control
- 7 -
over delivery schedules. If NetFabric's manufacturers are unable or unwilling to
continue manufacturing NetFabric's products and components in required volumes,
NetFabric will have to identify one or more acceptable alternative
manufacturers. Furthermore, the use of new manufacturers may cause significant
interruptions in supply if the new manufacturers have difficulty manufacturing
products to NetFabric's specifications. Further, the introduction of new
manufacturers may increase the variance in the quality of NetFabric's products.
In addition, NetFabric relies upon third-party suppliers of specialty
components, some of which are single-sourced and intellectual property used in
its products. It is possible that a component needed to complete the manufacture
of NetFabric's products may not be available at acceptable prices or on a timely
basis, if at all. Inadequate supplies of components, or the loss of intellectual
property rights, may affect NetFabric's ability to deliver products to its
customers. Any significant interruption in the supply of NetFabric's products
could result in the reduction of product sales to customers, which in turn could
permanently harm NetFabric's reputation in the industry or result in litigation
which we would be forced to spend money to defend.
If NetFabric Must Make Design Changes To Its Product Lines, Then NetFabric's
Sales Are Likely To Suffer, And NetFabric May Be Exposed To Legal Claims
NetFabric's business strategy calls for the development of new products
and product enhancements which may from time-to-time be subject to design
changes that NetFabric did not anticipate when introducing such products or
enhancements to the market. In addition, the markets in which NetFabric's
products are used are characterized by a wide variety of standard and
non-standard configurations and by errors, failures and bugs in third-party
platforms that can impede proper operation of NetFabric's products. Despite
product testing by NetFabric, design changes may still be required in some new
products or enhancements after the products or enhancements are delivered to
customers. The need for these changes could result in product returns, adverse
publicity, loss of or delays in market acceptance of NetFabric's products,
delays or cessation of service to NetFabric's customers or legal claims by
customers against NetFabric.
We Are Subject To Significant Regulations Enforced By The United States Federal
Communications Commission If We Do Not Comply With These Regulations The Federal
Communications Commission Could Force Us To Forfeit Our License And Subject Us
To Penalties, Fines and Related Costs, Any Of Which Could Force Us to
Significantly Curtail Or Even Cease Operations
In the United States, we are subject to varying degrees of federal, state
and local regulation and licensing, including that of the Federal Communications
Commission. At each of these levels, there are significant regulations imposed
on the provision of telecommunications services in our business. We cannot
assure you that the applicable U.S. regulatory agencies will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations. If authority
is not obtained or if our pricing and/or terms or conditions of service are not
filed or are not updated, or otherwise do not fully comply with the rules of
these agencies, third parties or regulators could challenge these actions and we
could be subject to forfeiture of our license, penalties, fines, fees and costs.
It is uncertain when or how such regulation would affect us; nor is it
understood if other countries will follow suit. If additional regulation does
occur, the FCC, any state or any country may impose surcharges, taxes or
additional regulations upon providers of Voice Over Internet Protocol, or VoIP,
related services. In addition any failure on our part to comply with these
regulations could make us liable under these regulations and could force us to
forfeit our license or pay additional fees, charges, taxes and regulation which
could materially increase our costs and may limit or eliminate our ability to do
business.
We May Not Be Able To Increase Sales Or Otherwise Successfully Operate Our
Business, Which Could Have A Significant Negative Impact On Our Financial
Condition
We believe that the key to our success is to increase sales of our
services and product offerings and thereby increase our revenues and available
cash. Our success in this regard will depend in large part on widespread market
acceptance of our services and product offerings and our efforts to educate
potential customers and sell our services. There can be no assurance that we
will be able to increase our sales or effectively operate our business. To the
extent we are unable to achieve growth in sales; we may continue to incur
losses. We cannot assure you that we will be successful or make progress in the
growth and operation of our business. Our current and future expense levels are
based on our operating plans and estimates of future sales and revenues and are
subject to increase as we implement our strategy. Even if our sales grow, we may
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in revenues would
likely have an immediate material adverse effect on our business, operating
results and financial condition. Further, if we should substantially increase
our operating expenses to increase sales and marketing, and such expenses are
not subsequently followed by increased revenues, our operating performance and
results would be adversely effected and, if sustained, could have a material
adverse effect on our business. To the extent we implement cost reduction
efforts to align our costs with revenue; our revenue could be adversely
affected.
- 8 -
Our Information Systems Are Critical To Our Business And A Failure Of Those
Systems Could Materially Harm Us
We depend on our ability to store, retrieve, process and manage a
significant amount of information. If our information systems fail to perform as
expected, or if we suffer an interruption, malfunction or loss of information
processing capabilities, it could have a material adverse effect on our
business.
We May Be Unable To Manage Growth, Which May Impact Our Potential Profitability
Successful implementation of our business strategy requires us to manage
our growth. Growth could place an increasing strain on our management and
financial resources. To manage growth effectively, we will need to:
Establish definitive business strategies, goals and objectives.
Maintain a system of management controls.
Attract and retain qualified personnel, as well as, develop, train and
manage management-level and other employees.
If we fail to manage our growth effectively, our business, financial
condition or operating results could be materially harmed, and our stock price
may decline.
ITEM 2. DESCRIPTION OF PROPERTY
Description of Property
Our headquarters are located at 67 Federal Road, Building A, Suite 300, in
Brookfield, CT. We lease office space under a two-year operating lease with
Silvermine Investors, LLC ("Silvermine"), which expires on December 31, 2005 and
the lease provides us an option to extend the term for a period of one year.
Under the terms of the Lease, the Company has paid one dollar and issued 200,000
shares of common stock to Silvermine as consideration for use of the office
space during the term of the Lease. Prior to 2004, the Company operated
rent-free from the primary residence of Jeff Robinson, co-founder and current
CEO and Chairman, and the offices of Fred Nazem, co-founder and former Chairman
and CEO.
ITEM 3. LEGAL PROCEEDINGS
Legal Proceedings
The Company is currently not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. Our Common Stock is quoted on the NASD's Over-the-Counter Bulletin
Board under the trading symbol "HOOC" The Company was formed in Delaware in
August 1989, and has been quoted on the NASD's Over-the-Counter Bulletin Board
since March of 2001. The following table sets forth the range of high and low
closing sales prices (based on transaction data as reported by The NASDAQ
SmallCap Market and the NASD's Over-the-Counter Bulletin Board) for each fiscal
quarter during the periods indicated.
- 9 -
High Low
---- ---
YEAR ENDING DECEMBER 31, 2004
First Quarter $0.20 $0.20
Second Quarter $0.20 $0.20
Third Quarter $0.20 $0.20
Fourth Quarter $3.20 $0.20
YEAR ENDED DECEMBER 31, 2003
First Quarter $0.35 $0.35
Second Quarter $0.35 $0.35
Third Quarter $0.35 $0.20
Fourth Quarter $0.20 $0.20
At December 31, 2004, the number of stockholders of record was
approximately 434 (excluding beneficial owners and any shares held in street
name or by nominees).
We have not paid any dividends upon our common stock. The payment of
common stock dividends, if any, in the future rests within the discretion of our
board of directors and will depend, among other things, upon our earnings,
capital requirements and financial condition, as well as other relevant factors.
Recent Sales of Unregistered Securities; Use of Proceeds From Registered
Securities
During the three months ended December 31, 2004;
On October 14, 2004, we entered into a loan agreement with Macrocom which
was amended on December 2, 2004, whereby Macrocom agreed to loan an additional
$500,000 to us, due on April 10, 2005 at an annual interest rate of 5%. At the
option of Macrocom, Macrocom can convert the principal of the loan into
1,000,000 shares of our common stock or demand repayment of the principal in
cash. In addition, NetFabric agreed to issue to Macrocom 250,000 shares of
common stock as additional consideration to Macrocom for the loan.
On December 9, 2004, we entered into an acquisition agreement with all of
the stockholders of NetFabric in a transaction that was accounted for as a
reverse merger whereby NetFabric was treated as the accounting acquirer.
Pursuant to the acquisition agreement we acquired all of the issued and
outstanding capital stock of NetFabric from the stockholders in exchange for an
aggregate of 32,137,032 newly-issued shares of our common stock.
In December 2004 Macrocom entered into a commitment with us to purchase
our common stock under certain terms. Pursuant to this financing commitment, in
two separate closings in January and March 2005 the Company sold 1,000,000
shares of common stock to Macrocom and 1,000,000 shares of common stock to
Michael Millon resulting in aggregate proceeds of $1,000,000 or for $0.50 per
share. Additionally, under this arrangement, Macrocom received 250,000 shares of
common stock and warrants to purchase 2,000,000 shares of common stock at a
purchase price of $1,500,000. The warrants expire in December of 2006. We also
issued 250,000 shares to Michael Millon as consideration for arranging the
Macrocom financing.
The foregoing shares were issued pursuant to exemptions from registration
under Sections 3(a)(9) and 4(2) of the Securities Act of 1933.
Equity Plan Compensation Information
The following table sets forth information as of December 31, 2004
regarding compensation plans under which our equity securities are authorized
for issuance.
- 10 -
Number of Securities
Remaining Available for
Number of Securities Future Issuance Under
to be Issued Upon Weighted Average Equity Compensation
Exercise of Exercise Price of Plans (Excluding
Outstanding Options, Outstanding Options, Securities Reflected in
Warrants and Rights Warrants and Rights Column (a))
Plan Category (a) (b) (c)
------------------- ------------------- -----------
Equity Compensation Plans(1) 4,008,889 $0.15 4,991,111
Equity compensation plans not approved by
equity holders(2) 1,153,637 0.15 0
------------------- ------------------- -----------
Total 5,162,526 $0.15 4,991,111
=================== =================== ===========
(1) Pursuant to the NetFabric's 2005 Stock Option Plan
(2) Outstanding warrants to acquire shares of common stock. The warrants
expire at various times through 2008 and warrant holders have
anti-dilution rights.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Review of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and accompanying notes and the other financial information
appearing elsewhere in this report and reports included herein by reference. The
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements.
Our independent registered public accounting firm has indicated in their
report dated March 30, 2005 on our December 31, 2004 financial statements that
we are in the development stage, have had net losses from inception and has
working capital and net capital deficiencies. Their report indicates that these
matters raise substantial doubt about our ability to continue on a going
concern. Our plan with regard to this matter is discussed elsewhere in this
document. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Corporate History
Houston Operating Company was incorporated in Delaware in August of 1989,
and has not had operations since before 2002. NetFabric was incorporated in the
State of Delaware on December 17, 2002, as a new corporation and not as a result
of a material re-classification, merger, consolidation, purchase or divestiture.
On December 9, 2004, we entered into an acquisition agreement with all of the
stockholders of NetFabric in a transaction that was accounted for as a reverse
merger whereby NetFabric was treated as the accounting acquirer. Pursuant to the
acquisition agreement we acquired all of the issued and outstanding capital
stock of NetFabric from the stockholders in exchange for an aggregate of
32,137,032 newly-issued shares of our common stock.
Overview
We are a provider of hardware and services to the burgeoning sector of the
telecom industry that utilizes the Internet for telephone and data
communications. Specifically, we offer distributed Voice over Internet Protocol
(VoIP) platforms, as well as Services over IP (SoIP) solutions, that provide
small to mid-sized Businesses (SMBs) and Enterprise Branch Offices (EBOs) with a
flexible migration path to an all-IP infrastructure. We market and sell our
products to SMBs through Value Added Resellers (VARs), Service Providers and OEM
relationships, and will sell to Fortune 500 Enterprise Branch Office (EBO)
customers, through a direct consultative sales organization. To date, our
operations have generated very minimal revenues. Further, there can be no
assurance that we will generate meaningful revenues from our VoIP operations in
the future.
- 11 -
Results of Operations Year Ended December 31, 2004 Compared To 2003
As previously noted, the December 9, 2004 acquisition has been accounted
for as a reverse merge whereby NetFabric was treated as the accounting acquirer.
A summary of the results for the years ended December 31, 2004 and 2003 is as
follows:
2004 2003
---------- ----------
Revenues $ 612 $ 0
Cost of Goods Sold 3,126 0
Expenses 1,499,746 18,565
Net Loss 1,502,260 18,565
Net Loss per Common Share $ 0.05 $ 0.00
Our operating activities to date have consisted primarily of developing
our VoIP telephony products for the marketplace. This included the acceleration
of research and development activities, hiring of additional personnel
(primarily for research and development, but also sales and marketing
personnel), development of sales and marketing programs, and filing of product
patents.
Revenue. For the twelve months ending December 31, 2004, we generated $612
in revenue compared to $0 for the twelve months ending December 31, 2003. We are
still in the stages of early product development and do not plan to generate
significant revenue from its various product lines until the fourth quarter of
2005.
Total Expenses. Total expenses for the twelve months ending December 31,
2004 were $1,499,746 compared to $18,565 for the twelve months ending December
31, 2003. This is related to our accelerating our research and development and
marketing and sales activities in 2004. The expenses incurred for 2004, and as
compared to 2003, are set forth in greater detail below and in the accompanying
consolidated financial statements attached.
Research and Development expenses for the twelve months ending December
31, 2004 were $395,452 compared to $0 for the twelve months ending December 31,
2003. These expenses mainly represented the product development costs for the
FUSION 4x4 and the 12x8 voice routers including associated engineering wages.
General and Administrative expenses for the twelve months ending December
31, 2004 were $638,330 compared to $8,720 for the twelve months ending December
31, 2003. This is primarily due to our hiring significant new personnel in
management, marketing, and sales among others. In addition, we began maintaining
office space in early 2004, and incurred costs associated with this activity,
such as telecom, office supplies and insurance.
Selling expenses for the twelve months ending December 31, 2004 were
$189,150 compared to $3,500 for the twelve months ending December 31, 2003. This
is related primarily to our personnel, participation in certain industry and
trade shows as well as the development and production of marketing materials and
FUSION evaluation units.
Legal and professional fees for the twelve months ending December 31, 2004
were $93,238 compared to $6,097 for the twelve months ending December 31, 2003.
These expenses related to patent protection filings, legal and accounting costs
associated with the preparation of financial statements, and related to the
acquisition.
Interest and bank charges of $175,365 for the twelve months ended December
31, 2004, represented interest accrued on bridge loans as well as the
amortization of discounts on such loans arising from the allocation of a portion
of the proceeds to the value of equity issued in connection with the loan
agreements.
Net Loss. For the year ended 2004, we had a net loss of $1,502,260 as
compared to a net loss of $18,565 for 2003. The loss increased as we began
full-fledged operations in 2004, and increased our employee headcount, operating
expenses and legal and professional fees. Net loss per common share increased
from $0.00 for 2003 to $0.05 for 2004.
Liquidity and Capital Resources. As of December 31, 2004 we had cash of
approximately $68,000. Our operating activities used approximately $1,014,000 of
cash for the year ended 2004 as opposed to approximately $17,000 for the same
period in 2003. The primary reason for this increase was our net loss for the
year ended 2004 of approximately $1,500,000. In addition, during 2004, we
purchased approximately $180,000 of equipment and raised approximately
$1,240,000 from various bridge loans and shareholder financing. During 2003,
there were no fixed asset purchases and our financing activities were
insignificant. As a result of the above activities, we had an increase in cash
of approximately $50,000 for the year ended 2004. In order to execute our
business plan and achieve our objectives for the near future management believes
it will require approximately $3,000,000 over the next 12 months.
- 12 -
On July 22, 2004, we entered into a financing agreement which was amended
on December 2, 2004 with Macrocom Investors, LLC, whereby Macrocom provided a
loan to us in the amount of $500,000 for a period of 180 days from the original
date of the financing agreement at an annual simple interest rate of 5%. In
January 2005, in accordance with the terms of the financing agreement, we
elected to repay the principal amount of the loan in kind by issuing 1,000,000
shares of common stock.
On November 30, 2004, Littlehampton Investments, LLC purchased 7,030,000
shares from our shareholders. As part of the acquisition agreement with
NetFabric, Littlehampton Investments, LLC cancelled 6,030,000 shares of common
stock and was granted registration rights on 1,000,000 shares it still held.
On October 14, 2004, we entered into a loan agreement with Macrocom which
was amended on December 2, 2004, whereby Macrocom agreed to loan an additional
$500,000 to us, due on April 10, 2005 at an annual interest rate of 5%. At the
option of Macrocom, Macrocom can convert the principal of the loan into
1,000,000 shares of our common stock or demand repayment of the principal in
cash. In addition, NetFabric agreed to issue to Macrocom 250,000 shares of
common stock as additional consideration to Macrocom for the loan. We are in
negotiation with Macrocom to extend the maturity of the loan.
In December 2004 Macrocom entered into a commitment with us to purchase
our common stock under certain terms. Pursuant to this financing commitment, in
two separate closings in January and March 2005 the Company sold 1,000,000
shares of common stock to Macrocom and 1,000,000 shares of common stock to
Michael Millon resulting in aggregate proceeds of $1,000,000 or for $0.50 per
share. Additionally, under this arrangement, Macrocom received 250,000 shares of
common stock and warrants to purchase 2,000,000 shares of common stock at a
purchase price of $1,500,000. The warrants expire in December of 2006. We also
issued 250,000 shares to Michael Millon as consideration for arranging the
Macrocom financing.
Our business strategy calls for growth internally as well as through
acquisitions. To this end, we intend to invest substantial funds to increase its
sales and marketing resources in order to grow revenues. In order to implement
this strategy, we will require additional funding for personnel, capital
expenditures and other expenses, as well as for working capital purposes. If
adequate funds are not available on acceptable terms, then we may not be able to
meet our business objectives for expansion.
Our ability to continue as a going concern and future success are
dependent upon its ability to raise capital in the near term to: (1) satisfy its
current obligations, (2) continue its research and development efforts, and (3)
the successful wide scale development, approval, deployment and marketing of its
products and services.
Management's plans in this regard include, but are not limited to current
discussions and negotiations with a number of additional financing alternatives,
one or more of which it believes will be able to successfully close to provide
necessary working capital, while maintaining sensitivity to shareholder dilution
issues. However, there can be no assurance that we will generate sufficient
revenues to provide positive cash flows from operations or that sufficient
capital will be available, when required or at terms favorable to us, to permit
us to realize our plans. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
To fund the Company's operations for the remainder of fiscal 2005, we need
to raise additional financing and generate cash flows from its operations.
Should additional cash flows not be available, we believe that we would have the
ability to restructure our operations and if necessary initiate significant
reductions in expenses. In addition, we will have to negotiate with its lenders
to extend the repayment dates of our indebtedness. There can be no assurance,
however, that we will be able to successfully restructure our operations or debt
obligations in the event we fail to obtain additional financing.
Critical Accounting Policies
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable and long-lived assets. We
base our estimates on historical experience and on various other assumptions
that it believes to be reasonable under the current circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
- 13 -
We believes the following critical accounting policies affect our judgment
and estimates used in preparation of our consolidated financial statements.
Revenue Recognition
We derive revenue from the sale of its communication equipment products
and as a provider of information technology consulting and infrastructure
development services.
In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition," revenue is recognized when persuasive evidence of an arrangement
exists, delivery of the product or services has occurred, the fee is fixed and
determinable, collectibility is reasonably assured, contractual obligations have
been satisfied, and title and risk of loss have been transferred to the
customer.
To date our communication equipment products have been marketed only
through a network of distributors and value-added resellers ("VAR"). In the VAR
channel, we recognize revenue at the time of shipment if all other contractual
obligations to the VAR have been satisfied. In the distributor channel, we
recognizes revenue when the distributor sells and ships our products to their
own VARs, resellers or end-user customers, provided we have satisfied all other
the terms and conditions with the distributor. Accordingly, we receive
distribution sales and inventory information regarding our products from our
distributors for the purpose of determining the appropriate timing of revenue
recognition.
Both VARs and distributors have limited rights to return products to us
but must obtain prior approval from us before returning products, consistently
with common industry practice. We have no obligation to accept the return of any
unsold products. If required, we accrue a provision for estimated sales returns
and other allowances and deferrals as a reduction of revenue at the time of
revenue recognition. To date no sales have been made and as such, no provisions
for estimated sales returns and other allowances have been recognized. We have
no obligation to provide service, repair, counseling or other assistance to any
customers of the VARs or distributors unless we have a specific agreement
directly with such customer.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
estimated losses will be based upon historical bad debts, specific customer
creditworthiness and current economic trends. If the financial condition of a
customer deteriorates, resulting in the customer's inability to make payments
within approved credit terms, additional allowances may be required. We perform
credit evaluations of its customers' financial condition on a regular basis, and
has not experienced any material bad debt losses to date.
Inventory
Inventory consist primarily of finished goods and purchased electronic
components, and are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out method.
Research and Development
Research and development ("R&D") costs are expensed as incurred. These
expenses include the cost of the Company's proprietary R&D efforts as well as
costs incurred in connection with our third-party collaboration efforts. The
amounts charged to R&D in 2004 and 2003 were $395,452 and $0, respectively.
Warranties
We provide a basic limited warranty for its products for one year. We will
estimate the costs that may be incurred under its basic limited warranty and
record a liability in the amount of such costs at the time product revenue is
recognized. Factors that affect our warranty liability include the number of
installed units, historical and anticipated rates of warranty claims and cost
per claim. We will periodically assess the adequacy of its recorded warranty
liabilities and adjust the amounts as necessary.
- 14 -
Stock-Based Compensation
We account for stock options granted to employees using the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25"), and related interpretations. As such, compensation expense to be
recognized over the related vesting period is generally determined on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income (loss) disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. We have elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosures required by SFAS No. 123.
Recent Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity" ("SFAS No. 150"). The provisions of SFAS No. 150
are effective for financial instruments entered into or modified after May 31,
2003, and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. We have not issued any financial instruments
with such characteristics.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities" ("FIN No. 46R"),
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN No. 46R replaces FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities", which was
issued in January 2003. Companies are required to apply FIN No. 46R to variable
interests in variable interest entities ("VIEs") created after December 31,
2003. For variable interests in VIEs created before January 1, 2004, the
Interpretation is applied beginning on January 1, 2005. For any VIEs that must
be consolidated under FIN No. 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially are
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. We do not have any interest in any VIE.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004),
"Share-Based Payment", which amends FASB Statement No. 123 and will be effective
for public companies for interim or annual periods beginning after June 15,
2005. The new standard will require entities to expense employee stock options
and other share-based payments. The new standard may be adopted in one of three
ways - the modified prospective transition method, a variation of the modified
prospective transition method or the modified retrospective transition method.
We are evaluating how it will adopt the standard and evaluating the effect that
the adoption of SFAS 123(R) will have on our financial position and results of
operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
"...under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges..." SFAS No. 151 requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS 151 shall be
applied prospectively and are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for inventory costs incurred during fiscal years beginning after the date this
Statement was issued. The adoption of SFAS No. 151 is not expected to have a
material impact on our financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
- 15 -
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position and
results of operations.
Our business faces risks. These risks include those described below and
may include additional risks of which we are not currently aware or which we
currently do not believe are material. If any of the events or circumstances
described in the following risks actually occurs, our business, financial
condition or results of operations could be adversely affected. These risks
should be read in conjunction with the other information set forth in this
report.
ITEM 7. FINANCIAL STATEMENTS
The financial statements appear in a separate section of this report
following Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As a consequence of the change in management, resulting from the
acquisition of NetFabric, on March 28, 2005 Michael Johnson & Co. LLC was
dismissed as the independent registered public accounting firm for Houston
Operating Company by the Audit Committee of its Board of Directors.
Michael Johnson reports on Houston's financial statements for the past two
fiscal years did not contain an adverse opinion, disclaimer of opinion, nor were
they qualified or modified as to audit scope or accounting principles. The
report was qualified as to uncertainty about the Houston's ability to continue
as a going concern unless it was able to generate sufficient cash flow to meet
its obligations and sustain its operations.
During Houston's two most recent fiscal years and through March 28, 2005,
there were no disagreements with Michael Johnson on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Michael
Johnson, would have caused it to make reference to the subject matter of the
disagreements in connection with this report. No reportable events of the type
described in Item 304(a)(1)(iv)(B) of Regulation S-B occurred during the two
most recent fiscal years.
Houston has provided Michael Johnson with a copy of this disclosure and
requested that they furnish Houston with a letter addressed to the Commission
stating whether it agrees or disagrees with the statements by the Company in
this report and, if not, stating the respects in which it does not agree. A
letter from MJC to such effect is attached hereto as Exhibit 16.1.
Also effective March 28, 2005, J.H. Cohn LLP was appointed as the new
independent registered public accounting firm for Houston.
During its two most recent fiscal years and through March 28, 2005,
Houston has not consulted with J.H. Cohn on any matter that (i) involved the
application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on the
Houston's financial statements, in each case where written or oral advice was
provided, that was an important factor considered by Houston in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii)
was either the subject of a disagreement or event, as that term is described in
Item 304(a)(1)(iv)(A) of Regulation S-B. J.H. Cohn are currently the auditors
for NetFabric, a wholly-owned operating subsidiary of the Company.
ITEM 8A. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. The Company's disclosure controls and procedures are designed to
provide a reasonable level of assurance of achieving the Company's disclosure
control objectives. The Company's Principal Executive Officer and Principal
Financial Officer have concluded that the Company's disclosure controls and
procedures are, in fact, effective at this reasonable assurance level as of the
period covered. In addition, the Company reviewed its internal controls, and
there have been no changes in its internal controls during the Company's last
fiscal quarter or in other factors that have materially affected, or are
reasonably likely to materially affect those controls subsequent to the date of
their last evaluation or from the end of the reporting period to the date of
this Form 10-KSB/A.
- 16 -
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's fourth fiscal quarter ended December 31, 2004, the
Company's Principal Executive Officer and Principal Financial Officer have
determined that there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of our directors and officers, their ages,
all positions and offices that they hold with us, the period during which they
have served as such, and their business experience during at least the last five
years.
Name Age Position Held Experience
- ---- --- ------------- ----------
Jeff I. Robinson 52 Chairman, Mr. Robinson is a co-founder of NetFabric and has been a Director
President and and President since December 2002 and its Chairman and CEO since
CEO November 2004. He has served on the Board of Directors of NetFabric
since 2002. Mr. Robinson is an experienced entrepreneur and
technologist. He was the CEO of IQ NetSolutions from June 1994 to
July 2002, a company that created one of the first voice-over-packet
systems with an emphasis on ease of installation. During the period
from October 1987 to July 1994, he was the Chairman and CTO of Star
Semiconductor, the company that created the world's first
commercially available multi-processor DSP. During the period from
December 1982 to September 1987, Mr. Robinson was the Director of
VLSI at General DataComm, and an IC Design Manager at Texas
Instruments. Mr. Robinson is the owner or co-owner of over 30
patents.
Richard R. Howard 55 Director Mr. Howard has been a Director of the Company since November 2004.
He received a BS in Economics and Corporate Finance from the Wharton
School at the University of Pennsylvania. Since 2004, he has been
the President of Flagship Healthcare Management, Inc. From 2003 to
2004, was the Managing Director of BLH Strategies, a consulting firm
that provides management services to companies and nonprofit
organizations. From 1985 to 2003, he worked for Genesis Health
Ventures, Inc. At various times during his seventeen years with
Genesis he served as Vice Chairman, President and Chief Operating
Officer. He also served as a member of the Board of Directors for
all seventeen years. While with Genesis, the company grew from a
private company operating twelve skilled nursing centers to a $2.5
billion publicly traded company employing over 45,000 people.
Charlotte G. Denenberg 58 Director Ms. Denenberg has been a Director of the Company since November
2004. She received a BA in Psychology and Mathematics with Highest
Distinction, Phi Beta Kappa, from Northwestern University, and an MS
and a PhD in Mathematics from the Illinois Institute of Technology.
For the past two years she has consulted to a variety of companies
in the telecommunications industry. From 1998 to 2002, she worked
for Metromedia Fiber Network Services, Inc. (MFN) as Vice President,
Optical Infrastructure (December 1998 to June 2000) and as Vice
President and Chief Technology Officer (July 2000 to June 2002).
Metromedia Fiber Network Services was engaged in design,
installation and maintenance of inner-city and intra-city optical
networks.
- 17 -
Madelyn M. DeMatteo 57 Director Ms. Madelyn DeMatteo has been a Director of the Company since
January 2005. Ms. DeMatteo is a retired executive and has been
retired since 2001. From 1978 through 1999, Ms. DeMatteo was
employed by Southern England Telecommunications Corporation. During
her employment, she held the positions of Senior Vice President,
General Counsel and Corporate Secretary and Vice President, General
Counsel & Corporate Secretary from 1992-2000.In 2000 she provided
consulting services to SBC Communications regarding litigation and
other legal matters. Ms. DeMatteo received her BA from Connecticut
College in 1970 and her JD from University of Connecticut in 1973.
Walter Carozza(1) 50 Chief Financial Mr. Carozza has been the Chief Financial Officer of NetFabric since
Officer August 2004. Mr. Carozza received his BA and JD degrees from The
University of Wisconsin. He is admitted to practice before the
Court of International Trade, the U.S. Supreme Court, and the
District of Columbia Court of Appeals. He is a member of the DC and
Wisconsin Bars. For the past five years he has been employed as a
Manager of the General Partner of East River Ventures, a venture
capital firm based in New York City.
Philip Barak(1) 52 VP Finance Mr. Barak has been the VP of Finance of NetFabric since January
2003. He holds a BS in Accounting from Rider University and is a
Certified Public Accountant and a member of the AICPA and NYSSCPA.
For the past five years he has been employed as a General Partner
and Chief Financial Officer of Nazem & Company, a venture capital
firm founded in 1976.
Victoria Desidero 44 VP Marketing Ms. Desidero has been the VP Marketing of NetFabric since June
2004. For the past five years she had been employed as the VP
Marketing for Merlot Communications.
(1) These individuals are part-time employees of the Company. The Company
intends to hire a full time CFO and/or other individuals by the end of the
second quarter of 2005 to replace these individuals.
BOARD OF DIRECTORS
Our directors are elected annually to serve until the next annual meeting
of shareholders or until successors are duly elected and qualified. Our board of
directors has created a Compensation Committee and an Audit Committee.
Audit Committee
The Audit Committee is responsible for making recommendations to the board
of directors as to the selection and independence of our external auditor,
maintaining communication between the board of directors and the independent
auditor, reviewing the annual audit report submitted by the independent auditor
and determining the nature and extent of problems, if any, presented by such
audit warranting consideration by our board of directors. The current members of
the Audit Committee are Ms. DeMatteo and Mr. Howard. Membership on the Audit
Committee is intended to be restricted to directors who are independent of
management and free from any relationship that, in the opinion of the board of
directors, could interfere with the exercise of independent judgment as a
committee member.
- 18 -
Code of Ethics
We have adopted a Code of Ethics for all our employees. We shall, without
charge, provide to any person, upon request, a copy of its Code of Ethics. All
such requests should be mailed to: 67 Federal Road, Building A, Suite 300,
Brookfield, CT 06804.
Compensation of Directors
Our independent Directors will receive an initial grant of Stock Options
to purchase 125,000 shares of Stock with an exercise price equal to the Fair
Market Value. The Option shall vest 15,625 shares on the date of grant and
thereafter 15,625 shares every three months for as long as the Board member is a
member of the Board as of such date. The Option shall have a term of ten years
from the date of grant. They all also received a similar bi-annual grant.
Independent Director's are also reimbursed for out-of-pocket expenses in
connection with attendance at Board of Directors' and/or committee meetings.
Compensation Committee
The Compensation Committee is authorized to review and make
recommendations to the board of directors on all matters regarding the
remuneration of our executive officers, including the administration of our
compensation plans. The Compensation Committee is intended to be comprised of at
least three members. Currently, the Compensation Committee is comprised of: Ms.
Charlotte G. Denenberg (Chairman) and Mr. Richard Howard.
ITEM 10. Executive Compensation
The following table sets forth, for the fiscal year ended December 31,
2004, information regarding the compensation earned by our Chief Executive
Officer and each of our most highly compensated executive officers whose
aggregate annual salary and bonus exceeded $100,000 for each year indicated,
with respect to services rendered by such persons to us and our subsidiary
Summary Compensation Table
Annual
Compensation Long-Term Compensation
------------ ----------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position (1) ($) ($) ($) ($) (#) ($) ($)
------------------ --- --- --- --- --- --- --- ---
Fred Nazem
Chief Executive Officer
(2) 2004 175,000 0 0 0 0 0 0
Jeff Robinson
Chief Executive Officer
(3) 2004 175,000 0 0 0 0 0 0
Walter Carozza, Chief
Financial Officer 2004 60,000 0 0 0 998,832 0 0
Philip Barak, VP Finance 2004 0 0 0 0 494,416 0 0
Victoria Desidero,
VP Marketing 2004 110,000 0 0 0 395,533 0 0
William Meltzer
Director, Software 2004 120,000 0 0 0 164,805 0 0
(1) No compensation was paid in 2002 and 2003 by NetFabric. NetFabric was
incorporated in December 2002 and began business operations in January
2004.
(2) Effective November 30, 2004 Fred Nazem resigned as Chairman and CEO.
(3) Effective November 30, 2004 Jeff Robinson was appointed CEO and elected
Chairman.
The following table sets forth information concerning individual grants of
stock options in 2004 to the Named Executive Officers:
- 19 -
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF % TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ---- ----------- ----------- ------ ---------------
Walter Carozza 988,832 33.90% $0.152 January 1, 2014
Philip Barak 494,416 16.95% $0.152 January 1, 2014
Victoria Desidero 395,533 13.56% $0.152 June 14, 2014
William Meltzer 164,805 5.65% $0.152 January 1, 2014
Joseph Welfeld 148,325 5.08% $0.152 April 26, 2014
Dominick Zumbo 158,325 5.08% $0.152 August 16, 2014
Long-Term Incentive Plans - Awards in Last Fiscal Year
The following table sets forth information with respect to awards made to
persons named in the Summary Compensation Table pursuant to a long-term
incentive plan in the fiscal year ending December 31, 2004.
Number of % of Total
Securities Options Granted
Underlying to Employees in Exercise Price
Name Options Granted Fiscal Period per Share Expiration Date
---- --------------- ------------- --------- ---------------
Walter Carozza 988,832 33.90% $0.152 January 1, 2014
Philip Barak 494,416 16.95% $0.152 January 1, 2014
Victoria Desidero 395,533 13.56% $0.152 June 14, 2014
William Meltzer 164,805 5.65% $0.152 January 1, 2014
Joseph Welfeld 148,325 5.08% $0.152 April 26, 2014
Dominick Zumbo 158,325 5.08% $0.152 August 16, 2004
On March 3, 2005, our Board of Directors adopted the 2005 Stock Option and
Grant Plan (the "Plan"). The purpose of the Plan is to encourage and enable our
employees, directors and consultants upon whose judgment, initiative and efforts
we largely depend for the successful conduct of our business to acquire a
proprietary interest in the Company. On the acquisition date all NetFabric
outstanding stock options were exchanged for our options., Prior to that we not
maintain a stock option plan. As a of the acquisition, our the board of
directors and the shareholders have approved the creation of a stock option plan
as an incentive for, and to encourage share ownership by, its officers,
directors and other key employees and/ or consultants and potential management
of possible future acquired companies. On March 22, 2005, the Company filed Form
14C with the SEC to, among other things, adopt the Company's 2005 Stock Option
Plan. This adoption will be effective April 15, 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth information regarding beneficial ownership
of our common stock as of March 24, 2005 (i) by each person who is known by us
to beneficially own more than 5% of our common stock; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors as a
group:
- 20 -
Name & Address of Amount & Nature of
Beneficial Owner Office, If Any Beneficial Ownership Percent of Class
---------------- -------------- -------------------- ----------------
Jeff Robinson
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 Chairman and CEO 14,832,476(1) 39.4.4%
Fred Nazem
44 East 73rd Street
New York, New York 10021 14,832,477(1) 39.4%
Walter Carozza
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 CFO 824,026(2) 2.20%
Philip Barak
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 VP Finance 247,208(3) *
Victoria Desidero
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 VP Marketing 98,883(4) *
Madelyn M. DeMatteo
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 Director 15,625(5) *
Charlotte G. Denenberg
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 Director 15,625(5) *
Richard F. Howard
c/o NetFabric Corporation
67 Federal Road
Building A, Suite 300
Brookfield, CT 06804 Director 15,625(5) *
Macrocom Investors, LLC
1365 York Avenue, 28B
New York, NY 10021 3,750,000(6) 9.2%
All Directors and
Officers as a Group (7 Persons) 16,049,468 (7) 41.4%
- ---------------
* Less than 1%.
(1) Includes 6,592,212 shares held by the Fred F. Nazem Children's' Trust,
whose trustees are Alexander Nazem, Farhad Nazem and Sohelya Gharib. Fred
Nazem disclaims beneficial ownership of these securities.
(2) Includes 494,416 shares issuable upon exercise of options and 164,805
shares issuable upon exercise of warrants.
(3) Includes 247,208 shares issuable upon exercise of options.
- 21 -
(4) Includes 98,883 shares issuable upon exercise of options.
(5) Includes 15,625shares issuable upon exercise of options.
(6) Includes 2,000,000 shares issuable upon exercise of warrants and 1,000,000
shares issuable upon conversion of convertible debentures.
(7) Includes 887,382 shares issuable upon exercise of options 164,805 shares
issuable upon exercise warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS
A. Exhibits
- ------------ ---------------------------------------------------------
Exhibit 2 Share Exchange Agreement between the Company, NetFabric,
NetFabric's shareholders and Littlehampton LLC, dated
December 9, 2004 #
Exhibit 10.1 Letter Agreement between Houston Operating Company and
NetFabric Corporation and Macrocom Investors, LLC and
Littlehampton Investments, LLC, dated March 25, 2005 *
Exhibit 10.2 Financing Agreement between NetFabric and Macrocom, dated
July 22, 2004 #
Exhibit 10.3 Loan Agreement between NetFabric and Macrocom, dated October
14, 2004 #
Exhibit 10.4 Amendment to Financing and Loan Agreement between NetFabric
and Macrocom, dated
December 2, 2004 #
Exhibit 10.5 Distribution Agreement between NetFabric and Williams,
dated November 29, 2004 #
Exhibit 10.6 Lease Agreement between NetFabric and Silvermine, dated
January 1, 2004 #
Exhibit 10.7 2005 Stock Option Plan ##
Exhibit 14.1 Code of Business Conduct and Ethics *
Exhibit 21.1 Subsidiaries of the Registrant *
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)*
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)*
Exhibit 32.1 Section 1350 Certification (CEO)*
Exhibit 32.2 Section 1350 Certification (CFO)*
* Filed herewith.
# Filed as an Exhibit to the Company's 8-K filed on December 15, 2004.
## Filed with Schedule 14C Information on March 21, 2005.
B. Reports:
Form 8K was filed by the Company with the SEC on December 15, 2004 to
announce the acquisition between it and NetFabric Corporation.
Form 8K/A was filed by the Company with the SEC on February 24, 2005 to
provide the financial statements of NetFabric Corporation as they related to the
Acquisition.
Form 14C was filed by the Company with the SEC on March 22, 2005 to adopt
the 2005 Stock Option Plan.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed by our independent
auditors, Michael Johnson and Company and J.H. Cohn, LLP for the fiscal years
ended December 31, 2004 and 2003:
- 22 -
FY 2004 FY 2003
------- -------
Audit fees and quarterly reviews $ 61,000
All other fees:
Tax return preparation 0
Audit related services 0
--------- --------
Non-audit related services
Total Fees $ 61,000 $ --
========= ========
The Audit Committee considered and determined that the services performed
for "financial information systems design and implementation fees" and "all
other fees" are compatible with maintaining the independence of the independent
auditors.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor
The Audit Committee is responsible for pre-approving all audit and
permitted non-audit services to be performed for us by our independent auditor
as outlined in its Audit Committee charter. Prior to engagement of the
independent auditor for each year's audit, management or the independent auditor
submits to the Audit Committee for approval an aggregate request of services
expected to be rendered during the year, which the Audit Committee pre-approves.
During the year, circumstances may arise when it may become necessary to engage
the independent auditor for additional services not contemplated in the original
pre-approval. In those circumstances, the Audit Committee requires specific
pre-approval before engaging the independent auditor. The Audit Committee does
not delegate to management its responsibility to pre-approve services performed
by the independent auditor.
- 23 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 19, 2005 /s/ JEFF ROBINSON
-----------------
Jeff Robinson Chairman,
President and Chief
Executive Officer
(principal 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 and on the dates indicated.
Date: December 19, 2005 /s/ JEFF ROBINSON
-----------------
Jeff Robinson Chairman,
President and Chief
Executive Officer
(principal executive
officer)
Date: December 19, 2005 /s/ VASAN THATHAM
-----------------
Vasan Thatham, Chief
Financial Officer
(principal accounting
officer)
Date: December 19, 2005 /s/ MADELYN DEMATTEO
--------------------
Madelyn DeMatteo, Director
Date: December 19, 2005 /s/ CHARLOTTE G. DENENBERG
--------------------------
Charlotte G. Denenberg,
Director
Date: December 19, 2005 /s/ FAHAD SYED
--------------
Fahad Syed, Director
- 24 -
HOUSTON OPERATING COMPANY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm of F-2
J.H. Cohn LLP
Consolidated financial statements:
Consolidated Balance Sheets, December 31, 2004 and 2003 F-3
Consolidated Statements of Operations, for the years
ended December 31, 2004 and 2003 and for the period from
inception (January 1, 2003) to December 31, 2004 F-4
Consolidated Statements of Stockholders' Equity
(Deficit), for the years ended December 31, 2004 and 2003 and
for the period from inception (January 1, 2003) to December
31, 2004 F-5
Consolidated Statements of Cash Flows, for the years
ended December 31, 2004 and 2003 and for the period from
inception (January 1, 2003) to December 31, 2004 F-6
Notes to Consolidated financial statements F-7 - F-19
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Houston Operating Company
We have audited the accompanying consolidated balance sheets of Houston
Operating Company (a development stage company) as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the years then ended, and for the
period from inception (January 1, 2003) to December 31, 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 audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 consolidated financial position of Houston
Operating Company as of December 31, 2004 and 2003, and its consolidated results
of operations and cash flows for each of the years then ended, and for the
period from inception (January 1, 2003) to December 31, 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 1 to the
consolidated financial statements, the Company is in the development stage, has
had net losses from inception and has working capital and net capital
deficiencies. These matters raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ J.H. Cohn LLP
- -----------------------------------------------------
Jericho, New York
March 30, 2005, (except for Note 12, as to which the date is April 7, 2005)
F-2
Houston Operating Company
(A Development Stage Company)
Consolidated Balance Sheets
December 31, December 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 67,719 $ 18,053
Trade accounts receivable, net 18,284 --
Inventory 72,025 --
Due from stockholders -- 90
Prepaid expenses 70,626 2,354
----------- -----------
Total Current Assets 228,654 20,497
Property and equipment, net 171,931 --
Other assets 43,053 5,665
Deferred offering costs 368,683 --
----------- -----------
TOTALS $ 812,321 $ 26,162
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bridge loans, net of unamortized discount $ 749,659 $ --
Loans payable to stockholder 32,639 10,000
Accounts payable and accrued liabilities 281,389 248
Deferred revenue 18,284 --
----------- -----------
Total Current Liabilities 1,081,971 10,248
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Deficit)
Common Stock, $.001 par value, 50,000,000 shares authorized 34,652,204 and
29,829,758 shares issued and outstanding, respectively
34,652 29,830
Additional paid-in capital 1,216,523 4,649
Deficit accumulated during the development stage (1,520,825) (18,565)
----------- -----------
Total stockholders' equity (deficit) (269,650) 15,914
----------- -----------
TOTALS $ 812,321 $ 26,162
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
Houston Operating Company
(A Development Stage Company)
Consolidated Statements of Operations for the
Years Ended December 31, 2004 and 2003
and the Period From Inception (January 1, 2003) to December 31, 2004
For the Period
from inception
(January 1,
2003) to
December 31,
2002 2003 2004
------------ ---------- ------------
Revenues $ 612 $ -- $ 612
Cost of Goods Sold 3,126 -- 3,126
------------ ---------- ------------
Gross Loss (2,514) -- (2,514)
Expenses:
Research and development 395,452 -- 395,452
Selling expenses 189,150 3,500 192,650
General and administrative expenses 638,330 8,720 647,050
Legal and professional expense 93,238 6,097 99,335
Interest and bank charges 175,365 248 175,613
Depreciation and amortization 8,211 -- 8,211
------------ ---------- ------------
Loss before provision for income taxes $ (1,502,260) $ (18,565) $ (1,520,825)
Provision for income taxes -- -- --
------------ ---------- ------------
Net Loss $ (1,502,260) $ (18,565) $ (1,520,825)
============ ============ ============
Net loss per common share, basic and diluted $ (0.05) $ (0.00)
============ ============
Weighted average number of shares outstanding, basic and diluted 31,362,838 29,678,950
============ ============
See Notes to Consolidated Financial Statements.
F-4
Houston Operating Company
(A Development Stage Company)
Consolidated Statements Of Stockholders' Equity (Deficit)
For The Years Ended December 31, 2004 And 2003
And For The Period From Inception (January 1, 2003) To December 31, 2004
Deficit
Accumulated Total
Common Stock During the Stockholders'
------------------------ Additional Development Equity
Shares Par Value Paid-In Capital Stage (Deficit)
---------- ----------- ----------- ----------- -----------
BALANCES AT JANUARY 1, 2003 (INCEPTION) -- $ -- $ -- $ -- $ --
Sale of common stock to founders at $0.000
per share 29,664,953 29,665 (29,575) -- 90
Sale of common stock to investor at $0.152
per share 164,805 165 24,835 -- 25,000
Issuance of options to purchase common
stock to non-employees for services -- -- 9,389 -- 9,389
Net loss -- -- -- (18,565) (18,565)
---------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2003 29,829,758 29,830 4,649 (18,565) 15,914
Sale of common stock to investors at $0.152
per share 1,648,053 1,648 248,352 -- 250,000
Issuance of common stock to landlord in
lieu of rent at $0.152 per share 659,221 659 99,341 -- 100,000
Issuance of options to purchase common
stock to non-employees for services -- -- 115,719 -- 115,719
Common stock issued in connection with
share exchange at $0.001 per share 1,765,172 1,765 (30,874) -- (29,109)
Allocation of proceeds from bridge loans to
common stock at $0.823 per share 500,000 500 410,903 -- 411,403
Value of shares and warrants issued in
connection with financing commitment at
$1.475 per share 250,000 250 368,433 -- 368,683
Net loss -- -- -- (1,502,260) (1,502,260)
---------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2004 34,652,204 $ 34,652 $ 1,216,523 $(1,520,825) $ (269,650)
========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements
F-5
Houston Operating Company
(A Development Stage Company)
Consolidated Statements Of Cash Flows
For The Years Ended December 31, 2004 And 2003
And For The Period From Inception (January 1, 2003) To December 31, 2004
For the Period
From Inception
(January 1,
2003) to
December 31,
2004 2003 2004
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(1,502,260) $ (18,565) $(1,520,825)
Adjustments to reconcile net loss to net cash used in operating
activities:
Issuance of common stock for services 100,000 -- 100,000
Amortization of options issued to non-employees for services 60,059 1,370 61,429
Amortization of debt discount 161,062 -- 161,062
Depreciation and amortization 8,211 -- 8,211
Changes in operating assets and liabilities:
Inventory (72,025) -- (72,025)
Trade accounts receivable (18,284) -- (18,284)
Prepaid expenses (50,000) -- (50,000)
Accounts payable and accrued liabilities 281,141 248 281,389
Deferred revenue 18,284 -- 18,284
----------- ----------- -----------
Net cash used in operating activities (1,013,812) (16,947) (1,030,759)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (180,142) -- (180,142)
Decrease (Increase) in due from stockholder 90 (90) --
----------- ----------- -----------
Net cash used in investing activities (180,052) (90) (180,142)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 250,000 25,090 275,090
Repayment of loan payable to stockholder (6,470) 10,000 3,530
Proceeds from bridge loans 1,000,000 -- 1,000,000
----------- ----------- -----------
Net cash provided by financing activities 1,243,530 35,090 1,278,620
----------- ----------- -----------
NET INCREASE IN CASH 49,666 18,053 67,719
CASH AT BEGINNING OF PERIOD 18,053 -- --
----------- ----------- -----------
CASH AT END OF PERIOD $ 67,719 $ 18,053 $ 67,719
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense $ -- $ -- $ --
=========== =========== ===========
Cash paid for income taxes $ -- $ -- $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Net liabilities of Houston Operating Company assumed in share
exchange $ (29,109) $ -- $ (29,109)
=========== =========== ===========
Fair value of options issued to non-employees for services initially
deferred $ 115,719 $ 9,389 $ 125,108
=========== =========== ===========
Imputed discount on bridge loans relating to warrants issued and
beneficial conversion feature $ 411,403 $ -- $ 411,403
=========== =========== ===========
Value of shares and warrants issued in connection with financing
commitment $ 368,683 $ -- $ 368,683
=========== =========== ===========
See Notes to Consolidated Financial Statements
F-6
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Houston Operating Company ("HOC") was incorporated under the laws of the State
of Delaware on August 31, 1989. On December 9, 2004, HOC entered into an
Exchange Agreement (the "Acquisition Agreement" or "Share Exchange") with all of
the stockholders of NetFabric Corporation ("NetFabric") (see Note 7) whereby HOC
issued common stock and acquired all of the issued and outstanding common stock
of NetFabric and NetFabric became a wholly-owned subsidiary of HOC (HOC and
NetFabric are referred to collectively as the "Company"). Upon the completion of
merger the NetFabric stockholders controlled approximately 95% of the then
issued and outstanding common stock, NetFabric's business activities were the
activities of the merged Company and HOC was a shell corporation without any
operations. As a result of these factors, this transaction has been treated as a
reverse merger, and a capital transaction, equivalent to the issuance of stock
by NetFabric for HOC's net assets and accordingly the historical financial
statements prior to December 9, 2004 are those of NetFabric. All shares and per
share data prior to the merger have been restated to reflect the stock issuances
and related recapitalization. HOC, as the Registrant, has applied to change its
name to NetFabric, Inc. (Note 11).
All the share and per share amounts have been retroactively adjusted to reflect
the 3.2961 to 1 exchange of shares occurring in connection with the merger of
HOC and NetFabric.
NetFabric, a Delaware corporation incorporated on December 17, 2002, began
operations in July 2003. As no activities occurred for the period from December
17, 2002 through December 31, 2002, the presentation of the accompanying
consolidated financial statements commences on January 1, 2003. NetFabric
develops and markets a family of Internet Protocol ("IP") appliances that
simplifies the integration of standard telephone systems with an IP
infrastructure. NetFabric's products deliver productivity gains and significant
cost reductions, while maintaining Public Switched Telephone Network ("PSTN")
class reliability and ease of use. NetFabric is in the process of obtaining
patents for the underlying technology. NetFabric provides progressive upgrades
in both the PSTN and Voice Over Internet Protocol ("VoIP")" solutions
principally used in the large residential marketplace and small and medium sized
businesses. NetFabric develops and sells IP Telephony Service Adaptors ("IP
TSA"), products that connect to the trunk side of existing standard phone
systems and provide the functionality of an IP phone system, at a fraction of
the cost with virtually no risk of system failure. FUSION, NetFabric's principal
product line, uses an external VoIP gateway to facilitate its use with any
service provider utilizing any protocol.
NetFabric has not generated significant revenue and is considered to be a
development stage company and as such the consolidated financial statements
presented herein are presented in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 7.
The accompanying consolidated financial statements have been prepared on a going
concern basis. As shown in the accompanying consolidated financial statements,
the Company has incurred losses in the development stage totaling $1,520,825 and
has a working capital deficit of $853,317 at December 31, 2004. These factors,
among others, indicate that the Company may be unable to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Management recognizes that the Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to allow the Company
to continue the development of its business plan and satisfy its obligations on
a timely basis. Management believes that such cash flows will be funded by
additional equity and/or debt financings through the time in which the Company
evolves from the development stage and generates sufficient positive cash flows
from its operations. However, there can be no assurance that management's plans
will be able to be achieved.
F-7
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Basis of Presentation of Consolidated Financial Statements
The consolidated financial statements include the accounts of HOC and its
wholly-owned subsidiary. All significant intercompany transactions and balances
have been eliminated. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles in the United States
of America ("GAAP") 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The accounting estimates that require management's most
difficult and subjective judgments include provisions for bad debts,
depreciable/amortizable lives, impairment of long-lived assets, the fair value
of common stock and options issued for services as well as the allocation of
proceeds from the bridge loan to equity instruments and other reserves. Because
of the uncertainty inherent in such estimates, actual results may differ from
these estimates.
Revenue Recognition
The Company derives revenue from the sale of its communication equipment
products. In accordance with SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition," revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and determinable, collectibility
is reasonably assured, contractual obligations have been satisfied, and title
and risk of loss have been transferred to the customer.
To date the Company's products have been sold only through a network of
distributors and value-added resellers ("VAR"). In the VAR channel, NetFabric
recognizes revenue at the time of shipment if all other contractual obligations
to the VAR have been satisfied. In the distributor channel, NetFabric recognizes
revenue when the distributor sells and ships NetFabric products to its own VARs,
resellers or end-user customers, provided the Company has satisfied all other
the terms and conditions with the distributor. Accordingly, NetFabric receives
distribution sales and inventory information regarding its products from its
distributors for the purpose of determining the appropriate timing of revenue
recognition.
Both VARs and distributors have limited rights to return products to the Company
but must obtain prior approval from NetFabric before returning products. This
policy is a common practice within the industry. NetFabric has no obligation to
accept the return of any unsold products. If required, the Company accrues a
provision for estimated sales returns and other allowances and deferrals as a
reduction of revenue at the time of revenue recognition. To date no provisions
for estimated sales returns and other allowances have been recognized. The
Company has no obligation to provide service, repair, counseling or other
assistance to any customers of the VARs or distributors unless NetFabric has a
specific agreement directly with such customer.
Allowance for Doubtful Accounts
The Company will maintain allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. These
estimated losses will be based upon historical bad debts, specific customer
creditworthiness and current economic trends. If the financial condition of a
customer deteriorates, resulting in the customer's inability to make payments
within approved credit terms, additional allowances may be required. The Company
performs credit evaluations of its customers' financial condition on a regular
basis, and has not experienced any material bad debt losses to date.
F-8
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
Inventory
Inventory consists primarily of finished goods and purchased electronic
components, and is stated at the lower of cost or market. Cost is determined by
using the first-in, first-out method.
Cash and Cash Equivalents
The company considers all investments purchased with an original maturity of
three months or less to be cash equivalents.
Property and Equipment
Property and equipment, consisting principally of computer equipment and
capitalized purchased software programs, are recorded at cost. Depreciation and
amortization are provided for on a straight line basis over the following useful
lives:
Equipment 3 years
Purchased software 3 years
Repairs and maintenance are charged to operations as incurred.
Internal Use Software
The Company has adopted Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This statement
requires that certain costs incurred or purchasing or developing software for
internal use be capitalized as internal use software development costs and are
included in fixed assets. Amortization begins when the software is ready for its
intended use. During the year ended December 31, 2004 the Company incurred
$90,250 of internal use software development costs which is included in property
and equipment on the accompanying balance sheet.
Long-Lived Assets
Long-lived assets, including property and equipment and intangible assets with
finite lives, are monitored and reviewed for impairment in value whenever events
or changes in circumstances indicate that the carrying amount of any such asset
may not be recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the use of an asset
and its eventual disposition. The estimated cash flows are based upon, among
other things, certain assumptions about expected future operating performance,
growth rates and other factors. Estimates of undiscounted cash flows may differ
from actual cash flows due to factors such as technological changes, economic
conditions, and changes in the Company's business model or operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
below the carrying value, an impairment loss is recognized, measured as the
amount by which the carrying value exceeds the fair value of the asset. Through
December 31, 2004, no write-downs of long-lived assets have been recognized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
reduces credit risk by placing its temporary cash and investments with major
financial institutions with high credit ratings. At times, such amounts may
exceed federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful accounts.
F-9
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The fair values of the Company's assets and liabilities that qualify as
financial instruments under statement of financial accounting standards ("SFAS")
No. 107 approximate their carrying amounts presented in the balance sheets at
December 31, 2004 and 2003.
Research and Development
Research and development ("R&D") costs are expensed as incurred. These expenses
include the cost of the Company's proprietary R&D efforts as well as costs
incurred in connection with the Company's third-party collaboration efforts. The
amounts charged to R&D in 2004 and 2003 were $395,452 and $0, respectively.
Warranties
The Company provides a basic limited warranty for its products for one year. The
Company will estimate the costs that may be incurred under its basic limited
warranty and record a liability in the amount of such costs at the time product
revenue is recognized. Factors that affect the Company's warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims and cost per claim. The Company will periodically assess the
adequacy of its recorded warranty liabilities and adjust the amounts as
necessary.
Stock-Based Compensation
The Company accounts for stock options granted to employees using the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25"), and related interpretations. As such, compensation expense to be
recognized over the related vesting period is generally determined on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income (loss) disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied.
F-10
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
The Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosures required by SFAS No. 123. If
compensation expense for stock options awarded to employees had been determined
in accordance with SFAS No. 123, the Company's pro forma net loss would have
been as follows:
Year ended December 31,
2004 2003
------------ ----------
Pro forma net loss, as reported $ (1,502,260) $ (18,565)
Stock-based employee compensation expense determined under fair value method 128,486 -
------------ ----------
Pro forma net loss, as adjusted $ (1,630,746) $ (18,565)
============ ==========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: For the year ended December 31, 2004, dividend
yield of 0%, risk-free interest rate of 3.50%, volatility of 100% and expected
life of approximately five years. For the year ended December 31, 2003, dividend
yield of 0%, risk-free interest rate of 2.27%, volatility of 100% and expected
life of approximately five years. The estimated value of the options is
amortized over their vesting periods of one to four years for pro forma
disclosure only.
In accordance with SFAS No. 123, the Company will also recognize the cost of
shares, options, warrants and other equity instruments issued to nonemployees as
consideration for services as expense over the periods in which the related
services are rendered by a charge to compensation cost and a corresponding
credit to additional paid-in capital. Generally, cost will be determined based
on the fair value of the equity instruments at the date of issuance, estimated
based on the Black-Scholes option-pricing model, which meets the criteria set
forth in SFAS No. 123, and the assumption that all of the options or other
equity instruments will ultimately vest. The effect of actual forfeitures will
be recognized as they occur.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that the tax benefits will not
be realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
F-11
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
Earnings (Loss) Per Share
The Company calculates earnings (loss) per share in accordance with SFAS No.
128, "Earnings per Share." SFAS No. 128 computes basic earnings (loss) per share
by dividing the net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of common stock outstanding during the period plus the effects of any
dilutive securities. Diluted earnings (loss) per share considers the impact of
potentially dilutive securities except in periods in which there is a loss
because the inclusion of the potential common shares would have an anti-dilutive
effect. The Company's potentially dilutive securities include common shares
which may be issued upon exercise of its stock options, exercise of warrants or
conversion of convertible debt.
Diluted earnings (loss) per share for the years ended December 31, 2004 and 2003
exclude potentially issuable common shares of approximately 6,162,526 and
247,208, respectively, primarily related to the Company's outstanding stock
options, warrants and convertible debt, because the assumed issuance of such
potential common shares is antidilutive.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and presentation of comprehensive income (loss) and its components in
a full set of financial statements. The statement requires additional
disclosures in the consolidated financial statements for certain items; it does
not affect the Company's financial position or results of operations. The
Company had no items for Comprehensive Income during 2004 and 2003.
Segment Reporting
The Company determines and discloses its segments in accordance with SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which uses a "management" approach for determining segments.
The management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of a company's reportable segments. SFAS No. 131 also requires
disclosures about products or services, geographic areas and major customers.
The Company's management reporting structure provides for only one reportable
segment and accordingly, no separate segment information is presented.
Recent Accounting Pronouncements Issued, Not Adopted
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS No. 150"). The provisions of SFAS No. 150
are effective for financial instruments entered into or modified after May 31,
2003, and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. The Company has not issued any financial
instruments with such characteristics.
F-12
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN No. 46R"), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN No. 46R replaces FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities", which was
issued in January 2003. Companies are required to apply FIN No. 46R to variable
interests in variable interest entities ("VIEs") created after December 31,
2003. For variable interests in VIEs created before January 1, 2004, the
Interpretation is applied beginning on January 1, 2005. For any VIEs that must
be consolidated under FIN No. 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially are
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The Company does not have any interest in any VIE.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies that are small business issuers for interim or annual periods
beginning after December 15, 2005. The new standard will require entities to
expense employee stock options and other share-based payments. The new standard
may be adopted in one of three ways - the modified prospective transition
method, a variation of the modified prospective transition method or the
modified retrospective transition method. The Company is evaluating how it will
adopt the standard and evaluating the effect that the adoption of SFAS 123(R)
will have on our financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for inventory
costs incurred during fiscal years beginning after the date this Statement was
issued. The adoption of SFAS No. 151 is not expected to have a material impact
on the Company's financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on the Company's financial
position and results of operations.
F-13
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following at December 31, 2004:
2004
--------
Equipment $ 14,452
Purchased software 75,440
Internal use software 90,250
--------
180,142
Less: Accumulated depreciation and amortization 8,211
--------
$171,931
========
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at December
31, 2004 and 2003:
2004 2003
-------- --------
Trade accounts payable $185,638 $ 248
Accrued professional fees 74,273 --
Accrued interest payable 13,796 --
Advances from customers 7,682 --
-------- --------
$281,389 $ 248
======== ========
F-14
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 5. BRIDGE LOANS
Bridge loans consist of the following as of December 31, 2004:
2004
-----------
Loan I, due January 18, 2005 $ 500,000
Loan II, due April 12, 2005 500,000
-----------
1,000,000
Less: Unamortized debt discount (250,341)
-----------
$ 749,659
===========
On July 22, 2004, NetFabric entered into a Financing Agreement which was amended
on December 2, 2004 (the "Financing Agreement") with Macrocom Investors, LLC,
("Macrocom") whereby Macrocom provided a loan to NetFabric in the amount of
$500,000 ("Loan I") for a period of 180 days from the original date of the
Financing Agreement ("Due Date") at an annual simple interest rate of 5%. On the
Due Date, the Company has the option to repay the principal of Loan I in cash or
in kind by issuing 1,000,000 shares of common (Note 11). In either event, the
interest on Loan I is payable in cash on the Due Date. In connection with the
Financing Agreement the Company issued to Macrocom 250,000 shares of common
stock as additional consideration for Loan I in December 2004.
On October 14, 2004, NetFabric and Macrocom entered into a loan agreement which
was amended on December 2, 2004 (the "Loan Agreement"), whereby Macrocom agreed
to loan an additional $500,000 to NetFabric ("Loan II" or the "Second Loan"),
due 180 days from the original date of the Loan Agreement ("Second Due Date") at
an annual simple interest rate of 5%. On the Second Due Date, at the option of
Macrocom, Macrocom can convert the principal of the Second Loan into 1,000,000
shares of common stock or demand repayment of the principal in cash. In either
event, the interest on the Second Loan is payable in cash on the Second Due
Date. In addition, in December 2005 the Company issued to Macrocom 250,000
shares of common stock as additional consideration for the Second Loan.
Since the actual issuance and availability of HOC common stock at the time of
the NetFabric Financing and Loan Agreements was contingent upon the consummation
of a share exchange transaction with a then unidentified entity, the Post
Closing Stock, as defined, issued as additional consideration was initially
valued based on the estimate of the value of the entity that would result after
such a merger. The Company allocated the proceeds of each loan to the computed
relative value of the debt and equity components of each bridge loan. The
initial amount allocated to the equity component was recorded as a debt discount
at the date of issuance of the respective notes and is amortized to interest
expense using the effective interest method over the stated terms of the
respective notes. Upon consummation of the Share Exchange, the contingency
regarding the issuance of the Post Closing Stock relating to the Financing
Agreement and Loan Agreement was resolved and a final value was computed for the
additional consideration, and the debt discount recorded was revised and is
being amortized over the remaining terms of the respective notes. In addition,
as a result of the debt discount and the conversion feature, which is at
Macrocom's option, Loan II had a beneficial conversion feature embedded in the
security, which beneficial conversion feature had a value that was also
contingent upon the consummation of a share exchange transaction.
F-15
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
A further discount to the debt was recorded for the value of the beneficial
conversion feature upon the resolution of the contingency when the Post Closing
Stock became available for possible conversion. As a result of these
transactions, total debt discounts for the bridge loans, including the value of
the beneficial conversion feature, of $411,403 were recorded, of which $161,062
was amortized into interest expense during the year ended December 31, 2004 and
$250,341 is recorded as a discount on the debt and offset against the carrying
value as of December 31, 2004, which remaining discount will be amortized into
interest expense over the remaining terms of the respective notes.
In addition to the bridge loan transactions described above, Macrocom has also
entered into a commitment to purchase common stock of HOC subsequent to the
Closing Date, under certain terms. Under this arrangement, Macrocom received
250,000 shares of common stock and a six-month warrant to purchase 2,000,000
shares of common stock at a purchase price of $1,500,000, provided that the
closing price of the merged entity's common stock on the day immediately
preceding the exercise of the warrant is less than $2.00 per share. The value of
the additional consideration paid to Macrocom as part of this financing
commitment, totaling $368,683, has been record as deferred offering costs as of
December 31, 2004 on the accompanying consolidated balance sheet, and will be
offset against the proceeds of the additional purchases of common stock as they
occur in 2005.
Under the terms of the Financing Agreement, the Company also agreed, at its
cost, to file a registration statement for the registration of the Macrocom
stock with the Securities and Exchange Commission as soon as practicable but no
later than 90 days following the Closing Date. If the registration statement
relating to the Macrocom stock is not effective within 180 days of the Closing
Date for reasons not beyond the Company's control, HOC will pay Macrocom
liquidated damages of 45,000 shares of the common stock of the Company for each
month or any portion thereof, until such registration statement is effective.
NOTE 6. INCOME TAXES
A reconciliation of the statutory U.S. federal income tax rate to the Company's
effective tax was as follows:
For The Year Ended
December 31, December 31,
2004 2003
-------- --------
Statutory U.S. rate 34.0% 34.0%
State income taxes, net of federal benefit 4.0% 4.0%
Effect of valuation allowance (38.0%) (38.0%)
-------- --------
Total income tax expense (benefit) 0.0% 0.0%
======== ========
F-16
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
Significant components of the Company's future tax assets at December 31, 2004
and 2003 are as follows:
December 31, December 31,
2004 2003
--------- ---------
Tax effect of operating loss carryforwards $ 672,000 $ 8,400
Effect of valuation allowance (672,000) (8,400)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
At December 31, 2004, the Company had net operating loss ("NOL") carry-forwards
of approximately $1.5 million which expire through 2024, subject to certain
limitations. A full valuation allowance has been established because of the
uncertainty regarding the Company's ability to generate income sufficient to
utilize the tax losses during the carry-forward period.
NOTE 7. STOCKHOLDERS' EQUITY
In December 2003, the Company sold 164,805 shares of the Company's common stock
along with a warrant to purchase 164,805 shares of common stock, at an exercise
purchase price of approximately $0.1517 per share, resulting in aggregate
proceeds of $25,000. The warrants are immediately exercisable and terminate on
the earlier of (i) the fifth anniversary of the issue date or (ii) the
consummation of a Qualified Public Offering, as defined.
The Company sold an additional 1,648,053 shares of common stock at various dates
through April 20, 2004. In connection with the sale of certain of these shares
to other investors the Company issued 988,832 warrants on the same terms and
conditions as described in the preceding paragraph. In 2004, the Company also
issued 659,221 shares of common stock (valued at $100,000) as payment for
certain expenses.
On December 9, 2004, (the "Closing Date") HOC completed the Share Exchange with
all of the stockholders (the "Stockholders") of NetFabric. At the closing, which
occurred at the same time as the execution of the Acquisition Agreement, HOC
acquired all of the issued and outstanding common stock of NetFabric from the
Stockholders in exchange for an aggregate of 32,137,032 newly-issued shares of
the HOC's common stock. Since the Stockholders of NetFabric received
approximately 95% of the shares in the Company and HOC had no significant assets
and liabilities or operations prior to the merger and the NetFabric management
team continued in their existing roles at HOC, for accounting purposes the
acquisition has been treated as a recapitalization of NetFabric with NetFabric
as the acquirer, a reverse acquisition. Since HOC prior to the merger was a
public shell corporation with no significant operations, pro-forma information
giving effect to the merger is not presented.
NOTE 8. STOCK-BASED COMPENSATION
From time to time, the Company issued stock-based compensation to its officers,
directors, employees and consultants. The maximum term of options granted is
generally 10 years and generally options vest over a period of one to four
years. However, the Board of Directors of the Company may and has approved other
vesting schedules. The Company has issued options to employees and non-employees
under stock option agreements. Options may be exercised in whole or in part.
F-17
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
The exercise price of the stock options granted is the fair market value of the
Company's common stock as determined by the Board of Directors on the date of
grant, considering factors such as the sale of stock, results of operations, and
consideration of the fair value of comparable private companies in the industry.
Accordingly, no charges were recognized.
During the years ended December 31, 2004 and 2003 the Company recognized
nonemployee compensation expense of $60,059 and $1,370 as a result of issuing
options, respectively, which is included in general and administrative expenses
on the accompanying consolidated statements of operations. The unamortized value
of such stock issuances are included in prepaid expenses (for the current
portion) and other assets (for the noncurrent portion) on the accompanying
consolidated balance sheets. Such amounts will be amortized into expense over
the respective vesting periods of the options.
The following is a summary of the Company's stock option activity for the years
ended December 31, 2004 and 2003:
Weighted Weighted
Average Average
Options Exercise Price Fair Value
--------- ------------ ------------
Options outstanding January 1, 2003 -- $ -- $ --
Options granted 82,403 0.15 0.15
Options exercised -- -- --
Options cancelled -- -- --
--------- ------------ ------------
Outstanding, December 31, 2003 82,403 $ 0.15 $ 0.15
Options granted 3,926,486 0.15 0.15
Options exercised -- -- --
Options cancelled -- -- --
--------- ------------ ------------
Outstanding, December 31, 2004 4,008,889 $ 0.15 $ 0
========= ============ ============
Exercisable, December 31, 2004 1,320,502 $ 0.15 $ 0.15
========= ============ ============
Exercisable, December 31, 2003 -- $ 0.15 $ 0.15
========= ============ ============
The options outstanding at December 31, 2004 have an exercise price of
approximately $0.1517 per share and have a weighted average remaining
contractual life of approximately 9.25 years. No options have been exercised to
date.
On the Closing Date of the Share Exchange all NetFabric outstanding stock
options were exchanged for options in HOC. Prior to the Share Exchange, HOC did
not maintain a stock option plan. As a result of the Share Exchange, the board
of directors has approved the creation of an HOC stock option plan as an
incentive for, and to encourage share ownership by, its officers, directors and
other key employees and/ or consultants and potential management of possible
future acquired companies (Note 11).
F-18
Houston Operating Company
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under an operating lease, which covers a period
from January 1, 2004 through December 31, 2005, subject to certain renewal
options. In accordance with the terms of the lease agreement, the Company issued
659,221 shares of common stock to the landlord in lieu of rent payments for the
entire lease period. The value of one half of such shares of $50,000,
representing one half of the lease period, was recorded as rent expense for the
year ended December 31, 2004. The remaining value of $50,000 was recorded as
prepaid rent expense and will be charged to the consolidated statement of
operations in 2005.
Litigation
From time to time, in the normal course of business, the Company may be involved
in certain litigation and/or proceedings. The Company is not aware of any
matters pending that could have a material adverse effect on the Company's
financial condition or results of operations.
NOTE 10. RELATED PARTY TRANSACTIONS
Loans payable to stockholders on the accompanying consolidated balance sheets at
December 31, 2004 and 2003 represent amounts owed to stockholders of the Company
for expenses paid on behalf of the Company.
NOTE 11. SUBSEQUENT EVENTS
In January 2005, in accordance with the terms of the Financing Agreement, the
Company elected to repay the principal of Loan I by issuing 1,000,000 shares of
common stock. Pursuant to a financing commitment (Note 5), in two separate
closings in January and March 2005 the Company sold an aggregate of 2,000,000
shares of common stock to Macrocom resulting in aggregate proceeds of $1,000,000
or $0.50 per share. The deferred offering costs totaling $368,683 (Note 5)
included on the accompanying balance sheet as of December 31, 2004, has been
recorded as offering costs and offset against the proceeds of the additional
purchases of common stock during the three months ended March 31, 2005.
In March 2005, the Company's board of directors approved several actions,
including i) a change of the Company's name to NetFabric, Inc., ii) new bylaws
for the Company, which among other things increased the Company's authorized
common stock to 100 million shares, and iii) approved the adoption of an HOC
stock option plan. Such actions will become effective upon required notification
and approval of stockholders.
NOTE 12. SUBSEQUENT DISPUTE UNDER FINANCING AGREEMENT
The Company received a notice on March 31, 2005 from certain of the Macrocom
investors alleging that the Company is in default a filing registration
statement. If the registration statement relating to the Macrocom stock is not
effective within 180 days of the Closing Date for reasons not beyond NetFabric's
control, NetFabric will pay Macrocom liquidated damages of 45,000 shares of the
common stock of the Company for each month or any portion thereof, until such
registration statement is effective. The Company believes it is not in default
based upon oral extensions granted to it by Macrocom and believes the filing of
the registration statement will cure any alleged default. Management believes
that it will not have any material effects in subsequent periods on the
Company's consolidated financial position, results of operations or cash flows
based on or as a result of the outcome from this matter.
F-19
Exhibit 10.1
67 Federal Road
Building A, Suite 300
Brookfield
CT 06804
March 25, 2005
Via Email
Mr. Michael Millon
Macrocom Investors, LLC
Dear Michael:
This letter will confirm our understanding with respect to the Finance Agreement
between Macrocom Investors, LLC and NetFabric Corporation ("NetFabric") of July
22, 2004 ("Agreement") with respect to the shell company that you brought to us.
Specifically, under the terms of that agreement, it was agreed and understood
that Macrocom Investors, LLC or a company formed by you would either bring to
NetFabric a shell for purchase or purchase a shell and propose it to NetFabric
as a vehicle for merger or acquisition. In either event, the shell was subject
to acceptance by NetFabric after it conducted its own due diligence, and you
were to be compensated in post-closing stock of the shell company used for such
merger or acquisition.
As it happened, Littlehampton Investments, LLC, ("Littlehampton") a company
formed by you, purchased a controlling interest in Houston Operating Company
("HOC") and proposed HOC as the company for merger with NetFabric. We conducted
our due diligence, agreed to merge with HOC and proceeded to closing on December
9, 2004. At the time of the merger, Littlehampton had and retained 1,000,000
shares of post-closing stock of HOC as a result of its previous purchase of the
shell, which purchase NetFabric was not a party to, and you received no other
compensation for the providing the shell to NetFabric.
As a result, you have received all compensation due to you under the terms of
the Agreement for bringing the company, HOC, to NetFabric for purposes of the
merger transaction.
Please confirm your above understanding of the above by signing a copy of this
letter and returning an original to me for our files.
Sincerely,
Walter Carozza
CFO, Houston Operating Company and NetFabric Corporation
Understood and agreed to:
- ------------------------------
Michael Millon, for Macrocom Investors, LLC
and Littlehampton Investments, LLC
Exhibit 14.1
HOUSTON OPERATING COMPANY
CODE OF BUSINESS CONDUCT AND ETHICS
Adopted March 3, 2005
TABLE OF CONTENTS
INDEX 2
INTRODUCTION 4
COMPLIANCE IS EVERYONE'S BUSINESS 5
YOUR RESPONSIBILITIES TO THE COMPANY AND ITS STOCKHOLDERS 6
General Standards of Conduct 6
Applicable Laws 6
Conflicts of Interest 6
Employment/Outside Employment 7
Outside Directorships 7
Business Interests 7
Related Parties 7
Other Situations 8
Corporate Opportunities 8
Protecting the Company's Confidential Information 8
Proprietary Information and Invention Agreement 8
Disclosure of Company Confidential Information 8
Requests by Regulatory Authorities 9
Company Spokespeople 9
Obligations Under Securities Laws -"Insider" Trading 9
Prohibition Against Short Selling of Company Stock 10
Use of Company's Assets 10
General 10
Physical Access Control 10
Company Funds 11
Computers and Other Equipment 11
Software 11
Electronic Usage 11
Maintaining and Managing Records 12
Records on Legal Hold 12
Payment Practices 12
Accounting Practices 12
Political Contributions 13
Prohibition of Inducements 13
Foreign Corrupt Practices Act 13
Export Controls 14
RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS 14
Customer Relationships 14
Payments or Gifts from Others 14
Publications of Others 14
Handling the Confidential Information of Others 15
Appropriate Nondisclosure Agreements 15
Need-to-Know 15
Notes and Reports 15
Competitive Information 15
Selecting Suppliers 16
Government Relations 16
2
TABLE OF CONTENTS
Lobbying 16
Government Contracts 16
Free and Fair Competition 17
Industrial Espionage 17
WAIVERS 18
DISCIPLINARY ACTIONS 18
ACKNOWLEDGMENT OF RECEIPT OF DOCUMENTS 19
3
I. INTRODUCTION
This Code of Business Conduct and Ethics helps ensure compliance with legal
requirements and our standards of business conduct. All Company employees are
expected to read and understand this Code of Business Conduct and Ethics, uphold
these standards in day-to-day activities, comply with all applicable policies
and procedures, and ensure that all agents and contractors are aware of,
understand and adhere to these standards.
Because the principles described in this Code of Business Conduct and Ethics are
general in nature, you should also review all applicable Company policies and
procedures for more specific instruction, and contact the Human Resources
Department if you have any questions.
Nothing in this Code of Business Conduct and Ethics, in any company policies and
procedures, or in other related communications (verbal or written) creates or
implies an employment contract or term of employment.
We are committed to continuously reviewing and updating our policies and
procedures. Therefore, this Code of Business Conduct and Ethics is subject to
modification. This Code of Business Conduct and Ethics supersedes all other such
codes, policies, procedures, instructions, practices, rules or written or verbal
representations to the extent they are inconsistent.
Please sign the acknowledgment form at the end of this Code of Business Conduct
and Ethics and return the form to the Human Resources Department indicating that
you have received, read, understand and agree to comply with the Code of
Business Conduct and Ethics.
The signed acknowledgment form will be located in your personnel file.
4
II. COMPLIANCE IS EVERYONE'S BUSINESS
Ethical business conduct is critical to our business. As an employee, your
responsibility is to respect and adhere to these practices. Many of these
practices reflect legal or regulatory requirements. Violations of these laws and
regulations can create significant liability for you, the Company, its
directors, officers, and other employees.
Part of your job and ethical responsibility is to help enforce this Code of
Business Conduct and Ethics. You should be alert to possible violations and
report possible violations to the Human Resources Department.
You must cooperate in any internal or external investigations of possible
violations.
Reprisal, threats, retribution or retaliation against any person who has in good
faith reported a violation or a suspected violation of law, this Code of
Business Conduct or other Company policies, or against any person who is
assisting in any investigation or process with respect to such a violation, is
prohibited.
Violations of law, this Code of Business Conduct and Ethics, or other Company
policies or procedures should be reported to the Human Resources Department.
t 0 0 Violations of law, this Code of Business Conduct and Ethics or other
Company policies or procedures by Company employees can lead to disciplinary
action up to and including termination.
In trying to determine whether any given action is appropriate, use the
following test. Imagine that the words you are using or the action you are
taking is going to be fully disclosed in the media with all the details,
including your photo. If you are uncomfortable with the idea of this information
being made public, perhaps you should think again about your words or your
course of action.
In all cases, if you are unsure about the appropriateness of an event or action,
please seek assistance in interpreting the requirements of these practices by
contacting the Human Resources Department.
5
III. YOUR RESPONSIBILITIES TO THE COMPANY AND ITS STOCKHOLDERS
A. General Standards of Conduct
The Company expects all employees, agents and contractors to exercise good
judgment to ensure the safety and welfare of employees, agents and contractors
and to maintain a cooperative, efficient, positive, harmonious and productive
work environment and business organization. These standards apply while working
on our premises, at offsite locations where our business is being conducted, at
Company-sponsored business and social events, or at any other place where you
are a representative of the Company. Employees, agents or contractors who engage
in misconduct or whose performance is unsatisfactory may be subject to
corrective action, up to and including termination. You should review our
employment handbook for more detailed information.
B. Applicable Laws
All Company employees, agents and contractors must comply with all applicable
laws, regulations, rules and regulatory orders. Company employees located
outside of the United States must comply with laws, regulations, rules and
regulatory orders of the United States, including the Foreign Corrupt Practices
Act and the U.S. Export Control Act, in addition to applicable local laws. Each
employee, agent and contractor must acquire appropriate knowledge of the
requirements relating to his or her duties sufficient to enable him or her to
recognize potential dangers and to know when to seek advice from your
supervisors on specific Company policies and procedures. Violations of laws,
regulations, rules and orders may subject the employee, agent or contractor to
individual criminal or civil liability, as well as to discipline by the Company.
Such individual violations may also subject the Company to civil or criminal
liability or the loss of business.
C. Conflicts of Interest
Each of us has a responsibility to the Company, our stockholders and each other.
Although this duty does not prevent us from engaging in personal transactions
and investments, it does demand that we avoid situations where a conflict of
interest might occur or appear to occur. The Company is subject to scrutiny from
many different individuals and organizations.
We should always strive to avoid even the appearance of impropriety.
t 0 0 What constitutes conflict of interest? A conflict of interest exists where
the interests or benefits of one person or entity conflict with the interests or
benefits of the Company.
Examples include:
(i) Employment/Outside Employment. In consideration of your employment with the
Company, you are expected to devote your full attention to the business
interests of the Company. You are prohibited from engaging in any activity that
interferes with your performance or responsibilities to the Company or is
otherwise in conflict with or prejudicial to the Company. Our policies prohibit
any employee from accepting simultaneous employment with a Company supplier,
customer, developer or competitor, or from taking part in any activity that
enhances or supports a competitor's position. Additionally, you must disclose to
the Company any interest that you have that may conflict with the business of
the Company. If you have any questions on this requirement, you should contact
your supervisor or the Human Resources Department.
6
(ii) Outside Directorships. It is a conflict of interest to serve as a director
of any company that competes with the Company. Although you may serve as a
director of a Company supplier, customer, developer, or other business partner,
our policy requires that you first obtain approval from the Company's Human
Resources Department before accepting a directorship. Any compensation you
receive should be commensurate to your responsibilities. Such approval may be
conditioned upon the completion of specified actions.
(iii) Business Interests. If you are considering investing in a Company
customer, supplier or competitor, you must first take great care to ensure that
these investments do not compromise your responsibilities to the Company. Many
factors should be considered in determining whether a conflict exists, including
the size and nature of the investment; your ability to influence the Company's
decisions; your access to confidential information of the Company or of the
other company; and the nature of the relationship between the Company and the
other company.
(iv) Related Parties. As a general rule, you should avoid conducting Company
business with a relative or significant other, or with a business in which a
relative or significant other is associated in any significant role. Relatives
include spouse, sister, brother, daughter, son, mother, father, grandparents,
aunts, uncles, nieces, nephews, cousins, step relationships, and in-laws.
Significant others include persons living in a spousal (including same sex) or
familial fashion with an employee.
If such a related party transaction is unavoidable, you must fully disclose the
nature of the related party transaction to the Company's Chief Financial
Officer. If determined to be material to the Company by the Chief Financial
Officer, the Company's Audit Committee must review and approve in writing in
advance such related party transactions. The most significant related party
transactions, particularly those involving the Company's directors or executive
officers, must be reviewed and approved in writing in advance by the Company's
Board of Directors. The Company must report all such material related party
transactions under applicable accounting rules, federal securities laws, and SEC
rules and regulations, and securities market rules. Any dealings with a related
party must be conducted in such a way that no preferential treatment is given to
this business.
The Company discourages the employment of relatives and significant others in
positions or assignments within the same department and prohibits the employment
of such individuals in positions that have a financial dependence or influence
(e.g., an auditing or control relationship, or a supervisor/subordinate
relationship). The purpose of this policy is to prevent the organizational
impairment and conflicts that are a likely outcome of the employment of
relatives or significant others, especially in a supervisor/subordinate
relationship. If a question arises about whether a relationship is covered by
this policy, the Human Resources Department is responsible for determining
whether an applicant or transferee's acknowledged relationship is covered by
this policy. The Human Resources Department shall advise all affected applicants
and transferees of this policy. Willful withholding of information regarding a
prohibited relationship/reporting arrangement may be subject to corrective
action, up to and including termination. If a prohibited relationship exists or
develops between two employees, the employee in the senior position must bring
this to the attention of his/her supervisor. The Company retains the prerogative
to separate the individuals at the earliest possible time, either by
reassignment or by termination, if necessary.
7
(v) Other Situations. Because other conflicts of interest may arise, it would be
impractical to attempt to list all possible situations. If a proposed
transaction or situation raises any questions or doubts in your mind you should
consult the Human Resources Department.
D. Corporate Opportunities
Employees, officers and directors may not exploit for their own personal gain
opportunities that are discovered through the use of corporate property,
information or position unless the opportunity is disclosed fully in writing to
the Company's Board of Directors and the Board of Directors declines to pursue
such opportunity.
E. Protecting the Company's Confidential Information
The Company's confidential information is a valuable asset. The Company's
confidential information includes our database of customer contacts; details
regarding our equipment procurement sources; names and lists of customers,
suppliers and employees; and financial information. This information is the
property of the Company and may be protected by patent, trademark, copyright and
trade secret laws. All confidential information must be used for Company
business purposes only. Every employee, agent and contractor must safeguard it.
THIS RESPONSIBILITY INCLUDES NOT DISCLOSING THE COMPANY CONFIDENTIAL INFORMATION
SUCH AS INFORMATION REGARDING THE COMPANY'S PRODUCTS OR BUSINESS OVER THE
INTERNET.
You are also responsible for properly labeling any and all documentation shared
with or correspondence sent to the Company's counsel as "Attorney-Client
Privileged". This responsibility includes the safeguarding, securing and proper
disposal of confidential information in accordance with the Company's policy on
Maintaining and Managing Records set forth in Section III.I of this Code of
Business Conduct and Ethics. This obligation extends to confidential information
of third parties, which the Company has rightfully received under Non-Disclosure
Agreements. See the Company's policy dealing with Handling Confidential
Information of Others set forth in Section IV.D of this Code of Business Conduct
and Ethics.
(i) Proprietary Information and Invention Agreement. When you joined the
Company, you signed an agreement to protect and hold confidential the Company's
proprietary information. This agreement remains in effect for as long as you
work for the Company and after you leave the Company. Under this agreement, you
may not disclose the Company's confidential information to anyone or use it to
benefit anyone other than the Company without the prior written consent of an
authorized Company officer.
(ii) Disclosure of Company Confidential Information. To further the Company's
business, from time to time our confidential information may be disclosed to
potential business partners. However, such disclosure should never be done
without carefully considering its potential benefits and risks. If you determine
in consultation with your manager and other appropriate Company management that
disclosure of confidential information is necessary, you must then contact your
supervisor to ensure that an appropriate written nondisclosure agreement is
signed prior to the disclosure. The Company has standard nondisclosure
agreements suitable for most disclosures. You must not sign a third party's
nondisclosure agreement or accept changes to the Company's standard
nondisclosure agreements without review and approval by your supervisor. In
addition, all Company materials that contain Company confidential information,
including presentations, must be reviewed and approved by your supervisor prior
to publication or use.
8
Furthermore, any employee publication or publicly made statement that might be
perceived or construed as attributable to the Company, made outside the scope of
his or her employment with the Company, must be reviewed and approved in writing
in advance by your supervisor and must include the Company's standard disclaimer
that the publication or statement represents the views of the specific author
and not of the Company.
(iii) Requests by Regulatory Authorities. The Company and its employees, agents
and contractors must cooperate with appropriate government inquiries and
investigations. In this context, however, it is important to protect the legal
rights of the Company with respect to its confidential information. All
government requests for information, documents or investigative interviews must
be referred to the Company's Chief Financial Officer. No financial information
may be disclosed without the prior approval of the Chief Financial Officer.
(iv) Company Spokespeople. Specific policies have been established regarding who
may communicate information to the press and the financial analyst community.
All inquiries or calls from the press and financial analysts should be referred
to the Chief Financial Officer or Investor Relations Department. The Company has
designated its CEO, CFO and Investor Relations Department as official Company
spokespeople for financial matters. The Company has designated its Investor
Relations Department as official Company spokespeople for marketing, technical
and other such information. These designees are the only people who may
communicate with the press on behalf of the Company.
F. Obligations Under Securities Laws -"Insider" Trading
Obligations under the U.S. securities laws apply to everyone. In the normal
course of business, officers, directors, employees, agents, contractors and
consultants of the Company may come into possession of significant, sensitive
information. This information is the property of the Company you have been
entrusted with it. You may not profit from it by buying or selling securities
yourself, or passing on the information to others to enable them to profit or
for them to profit on your behalf. The purpose of this policy is both to inform
you of your legal responsibilities and to make clear to you that the misuse of
sensitive information is contrary to Company policy and U.S. securities laws.
Insider trading is a crime, penalized by fines of up to $5,000,000 and 20 years
in jail for individuals. In addition, the SEC may seek the imposition of a civil
penalty of up to three times the profits made or losses avoided from the
trading. Insider traders must also disgorge any profits made, and are often
subjected to an injunction against future violations. Finally, insider traders
may be subjected to civil liability in private lawsuits.
Employers and other controlling persons (including supervisory personnel) are
also at risk under U.S. securities laws. Controlling persons may, among other
things, face penalties of the greater of $5,000,000 or three times the profits
made or losses avoided by the trader if they recklessly fail to take preventive
steps to control insider trading.
Thus, it is important both to you and the Company that insider-trading
violations not occur. You should be aware that stock market surveillance
techniques are becoming increasingly sophisticated, and the chance that U.S.
federal or other regulatory authorities will detect and prosecute even
small-level trading is significant. Insider trading rules are strictly enforced,
even in instances when the financial transactions seem small. You should contact
the Chief Financial Officer if you are unsure as to whether or not you are free
to trade.
9
The Company has imposed a trading blackout period on members of the Board of
Directors, executive officers and certain designated employees who, as a
consequence of their position with the Company, are more likely to be exposed to
material nonpublic information about the Company. These directors, executive
officers and employees generally may not trade in Company securities during the
blackout periods.
For more details, and to determine if you are restricted from trading during
trading Blackout periods, you should review the Company's Insider Trading
Compliance Program. You can request a copy of this policy from the Human
Resources Department. You should take a few minutes to read the Insider Trading
Compliance Program carefully, paying particular attention to the specific
policies and the potential criminal and civil liability and/or disciplinary
action for insider trading violations. Employees, agents and contractors of the
Company who violate this Policy are also be subject to disciplinary action by
the Company, which may include termination of employment or of business
relationship. All questions regarding the Company's Insider Trading Compliance
Program should be directed to the Company's Chief Financial Officer.
G. Prohibition Against Short Selling of Company Stock
No Company director, officer or other employee, may, directly or indirectly,
sell any equity security, including derivatives, of the Company if he or she (1)
does not own the security sold, or (2) if he or she owns the security, but does
not deliver it against such sale (otherwise known as a "short sale against the
box") within twenty days thereafter, or does not within five days after such
sale deposit it in the mails or other usual channels of transportation. No
Company director, officer or other employee, may engage in short sales. A short
sale, as defined in this policy, means any transaction whereby one may benefit
from a decline in the Company's stock price. While law from engaging in short
sales of Company's securities does not prohibit employees who are not executive
officers or directors, the Company has adopted as policy that employees may not
do so.
H. Use of Company's Assets
(i) General. Protecting the Company's assets is a key fiduciary responsibility
of every employee, agent and contractor. Care should be taken to ensure that
assets are not misappropriated, loaned to others, or sold or donated, without
appropriate authorization. All Company employees, agents and contractors are
responsible for the proper use of Company assets, and must safeguard such assets
against loss, damage, misuse or theft.
Employees, agents or contractors who violate any aspect of this policy or who
demonstrate poor judgment in the manner in which they use any Company asset may
be subject to disciplinary action, up to and including termination of employment
or business relationship at the Company's sole discretion. Company equipment and
assets are to be used for Company business purposes only. Employees, agents and
contractors may not use Company assets for personal use, nor may they allow any
other person to use Company assets. Employees who have any questions regarding
this policy should bring them to the attention of the Company's Human Resources
Department.
(ii) Physical Access Control. The Company has and will continue to develop
procedures covering physical access control to ensure privacy of communications,
maintenance of the security of the Company communication equipment, and
safeguard Company assets from theft, misuse and destruction. You are personally
responsible for complying with the level of access control that has been
implemented in the facility where you work on a permanent or temporary basis.
You must not defeat or cause to be defeated the purpose for which the access
control was implemented.
10
(iii) Company Funds. Every Company employee is personally responsible for all
Company funds over which he or she exercises control. Company agents and
contractors should not be allowed to exercise control over Company funds.
Company funds must be used only for Company business purposes. Every Company
employee, agent and contractor must take reasonable steps to ensure that the
Company receives good value for Company funds spent, and must maintain accurate
and timely records of each and every expenditure. Expense reports must be
accurate and submitted in a timely manner. Company employees, agents and
contractors must not use Company funds for any personal purpose.
(iv) Computers and Other Equipment. The Company strives to furnish employees
with the equipment necessary to efficiently and effectively do their jobs. You
must care for that equipment and to use it responsibly only for Company business
purposes. If you use Company equipment at your home or off site, take
precautions to protect it from theft or damage, just as if it were your own. If
the Company no longer employs you, you must immediately return all Company
equipment. While computers and other electronic devices are made accessible to
employees to assist them to perform their jobs and to promote Company's
interests, all such computers and electronic devices, whether used entirely or
partially on the Company's premises or with the aid of the Company's equipment
or resources, must remain fully accessible to the Company and, to the maximum
extent permitted by law, will remain the sole and exclusive property of the
Company.
Employees, agents and contractors should not maintain any expectation of privacy
with respect to information transmitted over, received by, or stored in any
electronic communications device owned, leased, or operated in whole or in part
by or on behalf of the Company. To the extent permitted by applicable law, the
Company retains the right to gain access to any information received by,
transmitted by, or stored in any such electronic communications device, by and
through its employees, agents, contractors, or representatives, at any time,
either with or without an employee's or third party's knowledge, consent or
approval.
(v) Software. All software used by employees to conduct Company business must be
appropriately licensed. Never make or use illegal or unauthorized copies of any
software, whether in the office, at home, or on the road, since doing so may
constitute copyright infringement and may expose you and the Company to
potential civil and criminal liability. In addition, use of illegal or
unauthorized copies of software may subject the employee to disciplinary action,
up to and including termination. The Company's IT Department will inspect
Company computers periodically to verify that only approved and licensed
software has been installed. Any non-licensed/supported software will be
removed.
(vi) Electronic Usage. The purpose of this policy is to make certain that
employees utilize electronic communication devices in a legal, ethical, and
appropriate manner. This policy addresses the Company's responsibilities and
concerns regarding the fair and proper use of all electronic communications
devices within the organization, including computers, e-mail, connections to the
Internet, intranet and extranet and any other public or private networks, voice
mail, video conferencing, facsimiles, and telephones. Posting or discussing
information concerning the Company's products or business on the Internet
without the prior written consent of the Company's Chief Financial Officer is
prohibited. Any other form of electronic communication used by employees
currently or in the future is also intended to be encompassed under this policy.
It is not possible to identify every standard and rule applicable to the use of
electronic communications devices. Employees are therefore encouraged to use
sound judgment whenever using any feature of our communications systems. You are
expected to review, understand and follow such policies and procedures.
11
I. Maintaining and Managing Records
t 0 0 The purpose of this policy is to set forth and convey the Company's
business and legal requirements in managing records, including all recorded
information regardless of medium or characteristics. Records include paper
documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm
or all other media. Local, state, federal, foreign and other applicable laws,
rules and regulations to retain certain records and to follow specific
guidelines in managing its records require the Company. Civil and criminal
penalties for failure to comply with such guidelines can be severe for
employees, agents, contractors and the Company, and failure to comply with such
guidelines may subject the employee, agent or contractor to disciplinary action,
up to and including termination of employment or business relationship at the
Company's sole discretion. All original executed documents that evidence
contractual commitments or other obligations of the Company must be forwarded to
the Chief Financial Officer promptly upon completion. Such documents will be
maintained and retained in accordance with the Company's record retention
policies
J. Records on Legal Hold.
A legal hold suspends all document destruction procedures in order to preserve
appropriate records under special circumstances, such as litigation or
government investigations. The Company's counsel determines and identifies what
types of Company records or documents are required to be placed under a legal
hold. Every Company employee, agent and contractor must comply with this policy.
Failure to comply with this policy may subject the employee, agent or contractor
to disciplinary action, up to and including termination of employment or
business relationship at the Company's sole discretion.
The Chief Financial Officer or counsel will notify you if a legal hold is placed
on records for which you are responsible. You then must preserve and protect the
necessary records in accordance with instructions from the Company's Chief
Financial Officer.
RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST
NOT BE DESTROYED, ALTERED OR MODIFIED UNDER ANY CIRCUMSTANCES.
A legal hold remains effective until it is officially released in writing by the
Company's counsel or Chief Financial Officer.
If you are unsure whether a document has been placed under a legal hold, you
should preserve and protect that document while you check with the Company's
counsel or Chief Financial Officer. If you have any questions about this policy
you should contact the Company's counsel of Chief Financial Officer.
K. Payment Practices
(i) Accounting Practices. The Company's responsibilities to its stockholders and
the investing public require that all transactions be fully and accurately
recorded in the Company's books and records in compliance with all applicable
laws. False or misleading entries, unrecorded funds or assets, or payments
without appropriate supporting documentation and approval are strictly
prohibited and violate Company policy and the law.
12
Additionally, all documentation supporting a transaction should fully and
accurately describe the nature of the transaction and be processed in a timely
fashion.
(ii) Political Contributions. The Company reserves the right to communicate its
position on important issues to elected representatives and other government
officials. It is the Company's policy to comply fully with all local, state,
federal, foreign and other applicable laws, rules and regulations regarding
political contributions. The Company's funds or assets must not be used for, or
be contributed to, political campaigns or political practices under any
circumstances without the prior written approval of the Company's Chief
Financial Officer and, if required, the Board of Directors.
(iii) Prohibition of Inducements. Under no circumstances may employees, agents
or contractors offer to pay, make payment, promise to pay, or issue
authorization to pay any money, gift, or anything of value to customers,
vendors, consultants, etc. that is perceived as intended, directly or
indirectly, to improperly influence any business decision, any act or failure to
act, any commitment of fraud, or opportunity for the commission of any fraud.
Inexpensive gifts, infrequent business meals, celebratory events and
entertainment, provided that they are not excessive or create an appearance of
impropriety, do not violate this policy. Questions regarding whether a
particular payment or gift violates this policy should be directed to Human
Resources.
L. Foreign Corrupt Practices Act.
The Company requires full compliance with the Foreign Corrupt Practices Act
(FCPA) by all of its employees, agents, and contractors.
The anti-bribery and corrupt payment provisions of the FCPA make illegal any
corrupt offer, payment, promise to pay, or authorization to pay any money, gift,
or anything of value to any foreign official, or any foreign political party,
candidate or official, for the purpose of: influencing any act or failure to
act, in the official capacity of that foreign official or party; or inducing the
foreign official or party to use influence to affect a decision of a foreign
government or agency, in order to obtain or retain business for anyone, or
direct business to anyone.
All Company employees, agents and contractors whether located in Canada or the
United States or abroad, are responsible for FCPA compliance and the procedures
to ensure FCPA compliance. All managers and supervisory personnel are expected
to monitor continued compliance with the FCPA to ensure compliance with the
highest moral, ethical and professional standards of the Company. FCPA
compliance includes the Company's policy on Maintaining and Managing Records in
Section III.I of this Code of Business Conduct and Ethics.
Laws in most countries outside of the United States also prohibit or restrict
government officials or employees of government agencies from receiving
payments, entertainment, or gifts for the purpose of winning or keeping
business. No contract or agreement may be made with any business in which a
government official or employee holds a significant interest, without the prior
approval of the Company's General Counsel.
13
M. Export Controls
A number of countries maintain controls on the destinations to which products or
software may be exported. Some of the strictest export controls are maintained
by the United States against countries that the U.S. government considers
unfriendly or as supporting international terrorism. The U.S. regulations are
complex and apply both to exports from the United States and to exports of
products from other countries, when those products contain U.S.-origin
components or technology. Software created in the United States is subject to
these regulations even if duplicated and packaged abroad. In some circumstances,
an oral presentation containing technical data made to foreign nationals in the
United States may constitute a controlled export. The Chief Financial Officer
can provide you with guidance on which countries are prohibited destinations for
Company products or whether a proposed technical presentation to foreign
nationals may require a U.S. Government license.
IV. RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS
A. Customer Relationships
If your job puts you in contact with any Company customers or potential
customers, it is critical for you to remember that you represent the Company to
the people with whom you are dealing. Act in a manner that creates value for our
customers and helps to build a relationship based upon trust. The Company and
its employees have provided products and services for many years and have built
up significant goodwill over that time. This goodwill is one of our most
important assets, and the Company employees, agents and contractors must act to
preserve and enhance our reputation.
B. Payments or Gifts from Others
Under no circumstances may employees, agents or contractors accept any offer,
payment, promise to pay, or authorization to pay any money, gift, or anything of
value from customers, vendors, consultants, etc. that is perceived as intended,
directly or indirectly, to influence any business decision, any act or failure
to act, any commitment of fraud, or opportunity for the commission of any fraud.
Inexpensive gifts, infrequent business meals, celebratory events and
entertainment, provided that they are not excessive or create an appearance of
impropriety, do not violate this policy. Questions regarding whether a
particular payment or gift violates this policy are to be directed to Human
Resources.
Gifts given by the Company to suppliers or customers or received from suppliers
or customers should always be appropriate to the circumstances and should never
be of a kind that could create an appearance of impropriety. The nature and cost
must always be accurately recorded in the Company's books and records.
C. Publications of Others
The Company subscribes to many publications that help employees do their jobs
better. These include newsletters, reference works, online reference services,
magazines, books, and other digital and printed works. Copyright law generally
protects these works, and their unauthorized copying and distribution constitute
copyright infringement. You must first obtain the consent of the publisher of a
publication before copying publications or significant parts of them. When in
doubt about whether you may copy a publication, consult the Chief Financial
Officer.
14
D. Handling the Confidential Information of Others
The Company has many kinds of business relationships with many companies and
individuals. Sometimes, they will volunteer confidential information about their
products or business plans to induce the Company to enter into a business
relationship. At other times, we may request that a third party provide
confidential information to permit the Company to evaluate a potential business
relationship with that party. Whatever the situation, we must take special care
to handle the confidential information of others responsibly. We handle such
confidential information in accordance with our agreements with such third
parties. See also the Company's policy on Maintaining and Managing Records in
Section III.I of this Code of Business Conduct and Ethics.
(i) Appropriate Nondisclosure Agreements. Confidential information may take many
forms. An oral presentation about a company's product development plans may
contain protected trade secrets. A customer list or employee list may be a
protected trade secret. A demo of an alpha version of a company's new software
may contain information protected by trade secret and copyright laws.
You should never accept information offered by a third party that is represented
as confidential, or which appears from the context or circumstances to be
confidential, unless an appropriate nondisclosure agreement has been signed with
the party offering the information.
THE CHIEF FINANCIAL OFFICER CAN PROVIDE NONDISCLOSURE AGREEMENTS TO FIT ANY
PARTICULAR SITUATION, AND WILL COORDINATE APPROPRIATE EXECUTION OF SUCH
AGREEMENTS ON BEHALF OF THE COMPANY.
Even after a nondisclosure agreement is in place, you should accept only the
information necessary to accomplish the purpose of receiving it, such as a
decision on whether to proceed to negotiate a deal. If more detailed or
extensive confidential information is offered and it is not necessary, for your
immediate purposes, it should be refused.
(ii) Need-to-Know. Once a third party's confidential information has been
disclosed to the Company, we have an obligation to abide by the terms of the
relevant nondisclosure agreement and limit its use to the specific purpose for
which it was disclosed and to disseminate it only to other Company employees
with a need to know the information. Every employee, agent and contractor
involved in a potential business relationship with a third party must understand
and strictly observe the restrictions on the use and handling of confidential
information. When in doubt, consult the Chief Financial Officer.
(iii) Notes and Reports. When reviewing the confidential information of a third
party under a nondisclosure agreement, it is natural to take notes or prepare
reports summarizing the results of the review and, based partly on those notes
or reports, to draw conclusions about the suitability of a business
relationship. Notes or reports, however, can include confidential information
disclosed by the other party and so should be retained only long enough to
complete the evaluation of the potential business relationship. Subsequently,
they should be either destroyed or turned over to the Chief Financial Officer
for safekeeping or destruction. They should be treated just as any other
disclosure of confidential information is treated: marked as confidential and
distributed only to those the Company employees with a need to know.
(iv) Competitive Information. You should never attempt to obtain a competitor's
confidential information by improper means, and you should especially never
contact a competitor regarding their confidential information. While the Company
may, and does, employ former employees of competitors, we recognize and respect
the obligations of those employees not to use or disclose the confidential
information of their former employers.
15
E. Selecting Suppliers
The Company's suppliers make significant contributions to our success. To create
an environment where our suppliers have an incentive to work with the Company,
they must be confident that they will be treated lawfully and in an ethical
manner. The Company's policy is to purchase supplies based on need, quality,
service, price and terms and conditions. The Company's policy is to select
significant suppliers or enter into significant supplier agreements though a
competitive bid process where possible. Under no circumstances should any
Company employee, agent or contractor attempt to coerce suppliers in any way.
The confidential information of a supplier is entitled to the same protection as
that of any other third party and must not be received before an appropriate
nondisclosure agreement has been signed. A supplier's performance should never
be discussed with anyone outside the Company. A supplier to the Company is
generally free to sell its products or services to any other party, including
competitors of the Company. In some cases where the products or services have
been designed, fabricated, or developed to our specifications the agreement
between the parties may contain restrictions on sales.
F. Government Relations
It is the Company's policy to comply fully with all applicable laws and
regulations governing contact and dealings with government employees and public
officials, and to adhere to high ethical, moral and legal standards of business
conduct. This policy includes strict compliance with all local, state, federal,
foreign and other applicable laws, rules and regulations.
If you have any questions concerning government relations you should contact the
Company's Chief Financial Officer.
G. Lobbying
Employees, agents or contractors whose work requires lobbying communication with
any member or employee of a legislative body or with any government official or
employee in the formulation of legislation must have prior written approval of
such activity from the Company's General Counsel. Activity covered by this
policy includes meetings with legislators or members of their staffs or with
senior executive branch officials. Preparation, research, and other background
activities that are done in support of lobbying communication are also covered
by this policy even if the communication ultimately is not made.
H. Government Contracts
It is the Company's policy to comply fully with all applicable laws and
regulations that apply to government contracting. It is also necessary to
strictly adhere to all terms and conditions of any contract with local, state,
federal, foreign or other applicable governments.
The Company's Chief Financial Officer must review and approve all contracts with
any government entity.
16
I. Free and Fair Competition
Most countries have well-developed bodies of law designed to encourage and
protect free and fair competition. The Company is committed to obeying both the
letter and spirit of these laws. The consequences of not doing so can be severe
for all of us.
These laws often regulate the Company's relationships with its distributors,
resellers, dealers, and customers. Competition laws generally address the
following areas: pricing practices (including price discrimination),
discounting, terms of sale, credit terms, promotional allowances, secret
rebates, exclusive dealerships or distributorships, product bundling,
restrictions on carrying competing products, termination, and many other
practices.
Competition laws also govern, usually quite strictly, relationships between the
Company and its competitors. As a general rule, contacts with competitors should
be limited and should always avoid subjects such as prices or other terms and
conditions of sale, customers, and suppliers. Employees, agents or contractors
of the Company may not knowingly make false or misleading statements regarding
its competitors or the products of its competitors, customers or suppliers.
Participating with competitors in a trade association or in a standards creation
body is acceptable when the association has been properly established, has a
legitimate purpose, and has limited its activities to that purpose.
t 0 0 No employee, agent or contractor shall at any time or under any
circumstances enter into an agreement or understanding, written or oral, express
or implied, with any competitor concerning prices, discounts, other terms or
conditions of sale, profits or profit margins, costs, allocation of product or
geographic markets, allocation of customers, limitations on production, boycotts
of customers or suppliers, or bids or the intent to bid or even discuss or
exchange information on these subjects. In some cases, legitimate joint ventures
with competitors may permit exceptions to these rules as may bona fide purchases
from or sales to competitors on non-competitive products, but the Company's
Chief Financial Officer must review all such proposed ventures in advance. These
prohibitions are absolute and strict observance is required.
Collusion among competitors is illegal, and the consequences of a violation are
severe. Although the spirit of these laws, known as "antitrust," "competition,"
or "consumer protection" or unfair competition laws, is straightforward, their
application to particular situations can be quite complex. To ensure that the
Company complies fully with these laws, each of us should have a basic knowledge
of them and should involve our Human Resources Department early on when
questionable situations arise.
J. Industrial Espionage
It is the Company's policy to lawfully compete in the marketplace. This
commitment to fairness includes respecting the rights of our competitors and
abiding by all applicable laws in the course of competing. The purpose of this
policy is to maintain the Company's reputation as a lawful competitor and to
help ensure the integrity of the competitive marketplace. The Company expects
its competitors to respect our rights to compete lawfully in the marketplace,
and we must respect their rights equally. Company employees, agents and
contractors may not steal or unlawfully use the information, material, products,
intellectual property, or proprietary or confidential information of anyone
including suppliers, customers, business partners or competitors.
17
V. WAIVERS
t 0 0 Any waiver of any provision of this Code of Business Conduct and Ethics
for a member of the Company's Board of Directors or an executive officer must be
approved in writing by the Company's Board of Directors and promptly disclosed.
Any waiver of any provision of this Code of Business Conduct and Ethics with
respect any other employee, agent or contractor must be approved in writing by
the Company's Chief Financial Officer.
VI. DISCIPLINARY ACTIONS
The matters covered in this Code of Business Conduct and Ethics are of the
utmost importance to the Company, its stockholders and its business partners,
and are essential to the Company's ability to conduct its business in accordance
with its stated values. We expect all of our employees, agents, contractors and
consultants to adhere to these rules in carrying out their duties for the
Company.
The Company will take appropriate action against any employee, agent, contractor
or consultant whose actions are found to violate these policies or any other
policies of the Company. Disciplinary actions may include immediate termination
of employment or business relationship at the Company's sole discretion. Where
the Company has suffered a loss, it may pursue its remedies against the
individuals or entities responsible. Where laws have been violated, the Company
will cooperate fully with the appropriate authorities.
* * *
18
VII. ACKNOWLEDGMENT OF RECEIPT OF CODE OF BUSINESS CONDUCT AND ETHICS
I have received and read the Company's Code of Business Conduct and Ethics. I
understand the standards and policies contained in the Company Code of Business
Conduct and Ethics and understand that there may be additional policies or laws
specific to my job. I further agree to comply with the Company Code of Business
Conduct and Ethics.
If I have questions concerning the meaning or application of the Company Code of
Business Conduct and Ethics, any Company policies, or the legal and regulatory
requirements applicable to my job, I know I can consult my manager, the Human
Resources Department or the Chief Financial Officer, knowing that my questions
or reports to these sources will be maintained in confidence. I acknowledge that
I may report violations of the Code of Business Conduct and Ethics to the Human
Resources Department or the Chief Financial Officer.
Signature: _____________________________
Name:
Date:
Please sign and return this form to the Human Resources Department.
19
Exhibit 21
Subsidiary of Houston Operating Company
Name Jurisdiction of incorporation
NETFABRIC CORPORATION Delaware
31.1
RULE 13A-14(a)/15D-14(a)
CERTIFICATION
I, Jeff Robinson, President and Chief Executive Officer, certify that:
1. I have reviewed this 10-KSB/A Report of Netfabric, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under NetFabric's supervision,
to ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under NetFabric's
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report NetFabric's conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed,
based on NetFabric's most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
controls over financial reporting.
December 19, 2005 By: /s/ Jeff Robinson
-------------------------------------
Jeff Robinson
President and Chief Executive Officer
EXHIBIT 31.2
RULE 13A-14(a)/15D-14(a)
CERTIFICATION
I, Vasan Thatham, Chief Financial Officer certify that:
1. I have reviewed this 10-KSB/A Report of NetFabric, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under NetFabric's supervision, to ensure
that material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under NetFabric's
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report NetFabric's conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed,
based on Netfabric's most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
controls over financial reporting.
December 19, 2005 By: /s/ Vasan Thatham
-----------------------
Vasan Thatham
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of NetFabric, Inc. (the "Company") on
Form 10-KSB/A for the year ended December 31, 2004 as filed with the United
States Securities and Exchange Commission on the date hereof (the "Report"). I,
Jeff Robinson, President and Chief Executive Officer of the Company, certify,
pursuant to 18 USC section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) I am the certifying Officer and I have reviewed the report being filed;
(2) Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer, as of,
and for, the periods presented in the report.
(4) I and the other certifying officers are responsible for establishing and
maintaining disclosure controls and procedures (as such term is defined in
paragraph (c) of this section) for the issuer and have:
i. Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made know to them by others within those entities, particularly
during the period in which the periodic reports are being prepared;
ii. Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the report
("Evaluation Date"); and
iii. Presented in the report their conclusions about the effectiveness of
the disclosure controls and procedures based on their evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the Board
of Directors (or persons fulfilling the equivalent function);
i. All significant deficiencies in the design or operation of t 6 0
internal controls which could adversely affect the issuer's ability to record,
process, summarize and report financial data and have identified for the
issuer's auditors any material weaknesses in internal controls; and ii. Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the issuer's internal controls; and
(6) I and the other certifying officers have indicated in the report whether or
not there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
December 19, 2005 By: /s/ Jeff Robinson
------------------------------------
Jeff Robinson
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF DISCLOSURE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of NetFabric, Inc. (the "Company") on
Form 10-KSB/A for the year ended December 31, 2004 as filed with the United
States Securities and Exchange Commission on the date hereof (the "Report"). I,
Vasan Thatham, Chief Financial Officer of the Company, certify, pursuant to 18
USC section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, that to the best of my knowledge and belief:
(1) I am the certifying Officer and I have reviewed the report being filed;
(2) Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
(3) Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer, as of,
and for, the periods presented in the report.
(4) I and the other certifying officers are responsible for establishing and
maintaining disclosure controls and procedures (as such term is defined in
paragraph (c) of this section) for the issuer and have:
i. Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its consolidated
subsidiaries, is made know to them by others within those entities, particularly
during the period in which the periodic reports are being prepared;
ii. Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the report
("Evaluation Date"); and
iii. Presented in the report their conclusions about the effectiveness of
the disclosure controls and procedures based on their evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on their most
recent evaluation, to the issuer's auditors and the audit committee of the Board
of Directors (or persons fulfilling the equivalent function);
i. All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and ii. Any fraud,
whether or not material, that involves management or other employees who have a
significant role in the issuer's internal controls; and
(6) I and the other certifying officers have indicated in the report whether or
not there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
December 19, 2005 By: /s/ Vasan Thatham
-----------------------
Vasan Thatham
Chief Financial Officer