SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MarkOne) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from to
Commission File Number 0-19726
CAMBIO, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3022377
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6006 North Mesa Street, Suite 515
El Paso, Texas 79912
(Address of principal executive offices)
(915) 581-5828
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
As of February 16, 1998, 3,832,411 shares of Class A Common Stock, no shares of
Class B Common Stock, and 14,823 shares of Series A Convertible Preferred Stock
were outstanding.
CAMBIO, INC.
Form 10-QSB
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance
Sheet as of December 31, 1998 1
Condensed Consolidated Statements
of Operations for the three months and
six months ended December 31, 1998 and 1997 2
Condensed Consolidated Statements
of Cash Flows for the six months
ended December 31, 1998 and 1997 3
Notes to Financial Statements 4 - 5
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 6 - 12
Part II. Other Information and Signatures 13 - 14
CAMBIO, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 27,000
Restricted cash ............................... 144,000
Accounts receivable - net of allowance
for doubtful accounts of $291,000 ........... 139,000
Prepaids and deposits ......................... 77,000
Net assets of discontinued operations
(net receivables and other assets of
$1,330,000 less liabilities and estimated
accrued disposal costs of $1,160,000) 170,000
--------------
Total current assets ....................... 557,000
Property and equipment, net 141,000
Other assets:
Goodwill ...................................... 4,526,000
--------------
Total assets .............................. $ 5,224,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes payable ....... $ 1,147,000
Accounts payable - trade ...................... 1,455,000
Accrued expenses .............................. 214,000
Deferred revenue and customer deposits 153,000
--------------
Total current liabilities ................. 2,969,000
Long term obligations .......................... 1,008,000
Stockholders' equity:
Common stock: $0.01 par value -
Class A; 22,500,000 shares authorized; 2,672,911
shares issued and outstanding 26,000
Class B; 7,500,000 shares authorized; 1,159,500
shares issued and outstanding ....... ....... 12,000
Paid in capital ............................... 18,212,000
Accumulated deficit ........................... (17,003,000)
--------------
Total stockholders' equity ............... 1,247,000
--------------
Total liabilities and stockholders' equity $ 5,224,000
==============
The accompanying notes are an integral part of this statement
- 1 -
CAMBIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net revenue ............................................ $ 267,000 $ -- $ 387,000 $ --
Cost of sales .......................................... 63,000 -- 73,000 --
----------- ----------- ----------- -----------
Gross profit ...................................... 204,000 -- 314,000 --
Selling, general and administrative expenses ........... 1,438,000 240,000 2,083,000 393,000
Research and development expense ....................... 178,000 -- 253,000 --
Depreciation and amortization .......................... 297,000 12,000 397,000 24,000
----------- ----------- ----------- -----------
Loss from operations .............................. (1,709,000) (252,000) (2,419,000) (417,000)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ............................. -- 41,000 -- 81,000
Interest expense ...................................... (27,000) (4,000) (27,000) (13,000)
----------- ----------- ----------- -----------
Total other income (expense) ...................... (27,000) 37,000 (27,000) 68,000
----------- ----------- ----------- -----------
Loss before discontinued operations ............... (1,736,000) (215,000) (2,446,000) (349,000)
----------- ----------- ----------- -----------
Income (loss ) from operations of
discontinued businesses ......................... -- (10,000) -- 793,000
----------- ----------- ----------- -----------
Net income (loss) ................................. $(1,736,000) $ (225,000) $(2,446,000) $ 444,000
=========== =========== =========== ===========
Basic and diluted net (loss) per common share -
continuing operations ................................ $ (0.45) $ (0.07) $ (0.74) $ (0.12)
=========== =========== =========== ===========
Basic and diluted net income per common
share - discontinued operations ...................... $ -- $ -- $ -- $ 0.27
=========== =========== =========== ===========
Basic and diluted net income (loss) per
common share ........................................ $ (0.45) $ (0.08) $ (0.74) $ 0.15
=========== =========== =========== ===========
Weighted average shares outstanding .................... 3,832,411 2,895,366 3,313,983 2,895,366
=========== =========== =========== ===========
- 2 -
The accompanying notes are an integral part of these statements
CAMBIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
---------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) ................................................... $(2,446,000) $ 444,000
Adjustments to reconcile net income (loss) to net cash
provided (used) by operations:
Income from discontinued operations .............................. -- (793,000)
Depreciation and amortization .................................... 397,000 141,000
Changes in operating assets and
liabilities:
Net assets of discontinued operations .......................... 632,000 26,000
Accounts receivable ............................................ 120,000 --
Prepaids and deposits .......................................... -- --
Accounts payable and accrued expenses .......................... 74,000 18,000
Deferred revenue and prepaid deposits .......................... (72,000) --
----------- -----------
Net cash provided (used) by operating activities ................ (1,295,000) (164,000)
Cash flows from investing activities:
Capital expenditures ................................................ -- --
Cash advance to acquired company .................................... (638,000) --
Costs related to acquisition ........................................ (100,000) --
Discontinued operations, net ........................................ -- 678,000
----------- -----------
Net cash provided (used) by investing activities ................ (752,000) 678,000
----------- -----------
Cash flows from financing activities:
Short-term borrowing ................................................ 584,000 300,000
Long-term borrowings ................................................ 8,000 --
Decrease in restricted cash ......................................... 158,000 3,000
----------- -----------
Net cash provided by financing activities ....................... 750,000 303,000
----------- -----------
Net change in cash and cash equivalents ......................... (1,297,000) 817,000
Cash and cash equivalents at beginning of period ................ 1,324,000 2,929,000
----------- -----------
Cash and cash equivalents at end of period ...................... $ 27,000 $ 3,746,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 22,000 $ 45,000
Income taxes ..................................................... 10,000 17,000
Supplemental disclosure of noncash investing and financing activities:
Purchase of Cambio Networks, Inc. ...................................
Common stock issued to sellers .................................... $ 619,000
Liabilities assumed ............................................... 4,658,000
Acquisition costs ................................................. 100,000
-----------
Assets acquired (including goodwill of $4,875,000) ............... 5,377,000
===========
- 3 -
The accompanying notes are an integral part of these statements
CAMBIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of the Company for
the six months ended December 31, 1998 and 1997 have been prepared on
the same basis as the audited financial statements. In the opinion of
management, such unaudited information includes all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of this interim information. Operating results and cash
flows for interim periods are not necessarily indicative of results for
the entire year. The information included in this report should be read
in conjunction with the Company's audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB
for the year ended June 30, 1998 previously filed with the Securities
and Exchange Commission.
2. Cambio, Inc., formerly Meadowbrook Rehabilitation Group, Inc. and its
subsidiaries (collectively, the "Company") have undergone significant
operating changes in fiscal years 1997 and 1998. As of June 30, 1998,
the Company had closed or was in the process of closing all of its
operating facilities. The Company previously provided outpatient
rehabilitation services and acute and sub-acute care in several states.
After considering continued losses and a diminishing market for the
Company's services, the Company's Board of Directors decided in the
fourth quarter of fiscal 1998 to close the Company's remaining
operations. Previously, several of the Company's service locations and
units had been sold or otherwise disposed. All operations had
substantially ceased as of June 30, 1998. The Company's administrative
operations are continuing to pursue the collection of receivables and
to monitor the closing process.
In connection with the decision to close, the Company recorded a charge
relating to the disposal of the discontinued operations of $1,563,000.
This charge includes the estimated losses on disposal, write-off of
tangible and intangible assets, and accrual for termination benefits
and other closing costs. Prior to the decision to discontinue the
operations, several facilities were sold, resulting in a net gain of
$1,771,000 for the year ended June 30, 1998. These facilities were sold
for cash and notes amounting to $2,126,000. Prior years' consolidated
financial statements and notes were restated to reflect the
discontinued operations.
At December 31, 1998, net assets of discontinued operations consist of
the following:
Receivables ........................... $ 1,275,000
Other current assets .................. 55,000
Trade Payables, accrued liabilities and
estimated accrued disposal costs ..... (1,160,000)
-----------
$ 170,000
===========
Results of discontinued operations for the six months ended December
31, 1998 and 1997 are as follows:
Six Months Ended
December 30,
--------------------------
1998 1997
---- ----
Net revenues ................ $ 66,000 $ 5,000,000
Net expenses ................ (373,000) (4,207,000)
Accrued expenses ............ 307,000 --
----------- -----------
Net income from operations of
discontinued businesses ... $ -- $ 793,000
=========== ===========
- 4 -
3. On September 14, 1998, the Company acquired Cambio Networks, Inc., a
software development company, pursuant to an Agreement and Plan of
Merger, dated as of April 3, 1998, as amended by the Agreement of
Amendment, dated as of July 27, 1998 (collectively, the "Agreement").
Under the terms of the Agreement, Cambio's shareholders received an
aggregate 1,238,842 of shares of the Company's Class A Common Stock
representing approximately 32.3% of the outstanding Class A and Class B
Common Stock with a fair market value of $619,000. In addition, the
Company assumed $4,658,000 in liabilities and incurred $100,000 in
transaction costs. The acquisition was accounted for using the purchase
method of accounting. From September 1998, the Company's operations
consist solely of the operations of Cambio Networks, Inc., a
wholly-owned subsidiary of the Company. Goodwill in the amount of
$4,875,000 was recorded as a result of the acquisition and is being
amortized on a straight line basis over five years.
The following table presents the unaudited proforma results of
operations as if the acquisition had occurred at the beginning of each
period. This proforma information does not purport to be indicative of
the results that actually would have been obtained if the operations
had been combined during the periods presented and is not intended to
be a projection of future results.
Six Months Ended
December 31,
--------------------------
1998 1997
---- ----
Net revenues ................. $ 607,000 $ 2,195,000
Net loss ..................... $ (3,515,000) $(1,432,000)
============ ===========
Net loss per share:
Basic ....................... $ (0.92) $ (0.35)
============ ===========
Diluted ..................... $ (0.92) $ (0.35)
============ ===========
Weighted average common shares
outstanding ................ 3,832,411 4,134,208
============ ===========
The unaudited proforma results of operations include adjustments for
amortization of goodwill, depreciation and other proforma adjustments.
4. Effective July 1, 1998, the Company adopted the provisions of Statement
No. 130, Reporting Comprehensive Income that modifies the financial
statement presentation of comprehensive income and its components.
Adoption of this Statement had no effect on the Company's financial
position or operating results.
Comprehensive income (loss) for the six months ended December 31, 1998
and 1997, representing all changes in Stockholders' deficit during the
period other than changes resulting from the Company's stock, was
$(2,446,000) and $444,000, respectively.
- 5 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT EVENTS
Disposition of Healthcare Operations
Prior to June 30, 1998, Cambio, Inc., formerly Meadowbrook Rehabilitation
Group, Inc. and its subsidiaries (collectively, the "Company" or "Cambio")
provided outpatient, home health, and traditional acute, sub-acute and
post-acute comprehensive rehabilitation services. Since the beginning of Fiscal
1997, and as a result of poor operating results and poor prospects for growth in
their respective markets, the Company has sold or closed all of its healthcare
operating assets. As of June 30, 1998, the Company's assets consisted almost
exclusively of cash and accounts receivable.
The termination of the Company's healthcare operations was completed during
the fourth quarter of Fiscal 1998 after its Board of Directors approved the
closure or disposal of its home health agencies in Colorado and Kansas and
physical therapy clinics in Colorado. The closing and/or sale of such operations
was substantially completed on June 30, 1998.
Home health agencies have traditionally received Medicare reimbursements
based on actual reasonable allowable costs subject to per visit limitations. As
a result of regulations adopted by the Health Care Financing Administration
effective July 1, 1998, such reimbursements were subject to new aggregate annual
per-beneficiary limitations. The decision to close its healthcare operations was
prompted by the receipt of Medicare's notice to the Company of the new
per-beneficiary cost limits for each of its locations. These reimbursement
amounts fell far below the Company's per-beneficiary operating expense. In order
for the Company to decrease its operating losses and be able to retain as much
capital as possible for its acquisition strategy, the Company decided to dispose
of its healthcare operations.
The estimated loss on the disposition of these facilities reflected in the
Company's statements of operations for the year ended June 30, 1998 ("Fiscal
1998") includes the writedown of property and equipment to market value, the
writeoff of goodwill, closedown expenses and the operating losses through the
disposition date.
Acquisition of Cambio Networks, Inc.
On September 14, 1998, the Company acquired Cambio Networks, Inc. ("Cambio
Networks"), pursuant to an Agreement and Plan of Merger, dated as of April 3,
1998, as amended by the Agreement of Amendment, dated as of July 27, 1998
(collectively, the "Agreement"). Under the terms of the Agreement, Cambio's
shareholders received an aggregate 1,238,842 of shares of the Company's Class A
Common Stock representing approximately 32.3% of the outstanding Class A and
Class B Common Stock.. From the date of the acquisition, the Company's
operations consist solely of the operations of Cambio, a wholly-owned subsidiary
of the Company. Accordingly, the Company's historical results of operations will
not be comparable to its future operating results.
Delisting of Class A Common Stock From Nasdaq
On October 20, 1998, the Company received notice of a decision by the
Nasdaq Stock Market to delist the Company's Class A Common Stock from the Nasdaq
National Market effective with the close of business on October 20, 1998.
Additionally, at that time, the Company did not meet the requirements to
transfer its listing to the Nasdaq SmallCap Market. Accordingly, trading in the
Company's Class A Common Stock is being conducted on the OTC Bulletin Board.
Name and Trading Symbol Change
On October 20, 1998, Meadowbrook Rehabilitation Group, Inc.
("Meadowbrook"), changed its name to Cambio, Inc. The name change was effected
by merging its wholly owned subsidiary, Cambio Acquisition Corporation into
Meadowbrook, and simultaneously changing its name to Cambio, Inc. In addition,
the trading symbol changed to CAMB and its new CUSIP number is 13200N 10 0. The
name change will serve to better reflect the development plans, current business
model, and future objectives of the organization.
- 6 -
Sale of Preferred Stock
On January 31, 1999, the Company's Board of Directors (the "Board")
approved the issuance of up to 37,500 shares of a newly created Series A
Convertible Preferred Stock (the "Preferred Stock") for $100.00 per share, an
aggregate consideration of up to $3,750,000. Each share of Preferred Stock is
convertible into 500 shares of the Company's Class A Common Stock or $0.20 per
share and is entitled to receive dividends in an amount equal to the equivalent
per share dividend declared on the Class A Common Stock when and as declared by
the Board of Directors. On February 3, 1999, Frederick Adler and Euro-America
II, L.P. (collectively the "Investor Group") converted certain indebtedness
owing to them from the Company in the aggregate amount of $1,057,318 into 10,573
shares of the Company's Preferred Stock. Upon conversion the Investor Group
would be issued an equivalent of 5,286,590 shares of the Company's Class A
Common Stock. The Investor Group also purchased an additional $425,000 or 4,250
shares of Preferred Stock, which upon conversion the Investor Group would be
issued an equivalent of 2,125,000 shares of the Company's Class A Common Stock.
The Company anticipates that it will be able to issue the additional amount of
up to $2,267,682 through additional debt conversions and outside investment.
Management Changes
On February 3, 1999, Harvey Wm. Glasser, ("Dr. Glasser") the Company's
former Chairman and Chief Executive Officer, exchanged each share of Class B
Common Stock held by him for one share of Class A Common Stock of the Company,
and resigned from his position as Chief Executive Officer and Chairman of the
Board. Dr. Glasser remains as a director of the Company. On that same day, Mr.
Ali Al-Dahwi was appointed Chief Executive Officer and Mr. John P. McCracken
resigned from the Board. The Company has yet to appoint a Chairman of the Board.
Forward-looking Statements
In addition to the historical information contained herein, this Form
10-QSB contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties,
including risks and uncertainties set forth in this Form 10-QSB, that may cause
actual results to differ materially. These forward-looking statements speak only
as of the date hereof. The Company disclaims any intent or obligation to update
these forward-looking statements.
RESULTS OF OPERATIONS
Three months ended December 31, 1998
as Compared to Three months ended December 30, 1997
Net revenues from continuing operations for the three months ended December
31, 1998 ("Second Quarter Fiscal 1999") were $267,000. Revenues for the same
period last year were comprised only of discontinued operations. The net loss
for the Second Quarter Fiscal 1999 was $1,736,000 or $0.45 per share and was
primarily due to expenses associated with the development and introduction of
the Company's new flagship product, netRunner.
Six months ended December 31, 1998
as Compared to Six months ended December 31, 1997
Net revenues for the Six Months Fiscal 1999 were $387,000. Revenues for the
same period last year were comprised only of discontinued operations. Revenues
for the current period include five months of Cambio Networks operations
following its acquisition in September 1998.
During the month of January 1999 the Company entered into two agreements to
license its netRunner operations support system with two global
telecommunications companies. These agreements will generate over $1,000,000 in
revenues comprised of license, professional services and support fees over the
next 15 months. Cambio first introduced its flagship product, netRunner, in late
October 1998, and a few months later was selected by Hewlett-Packard, a leading
global provider of computing solutions, as a subcontractor to provide the
software and professional services in connection with these projects. The
Company believes it will continue to see more orders from Hewlett-Packard in the
near future as it cultivates and solidifies its global presence.
- 7 -
netRunner is designed to run under Windows 95, 98 or NT operating systems
using current development technologies. Extensions to netRunner are continuously
being developed to allow the product to integrate and interphase to other
commonly used third party network element management products, help desks and
data bases allowing the Company's customers to economically implement the plan
and design of their network and manage increasing network costs effectively.
Immediately following the acquisition of Cambio Networks in September 1998,
the Company implemented a restructuring plan involving the closing and
relocating of Cambio Networks' headquarters from Belleview, Washington to an
already existing office in Dallas, Texas. In addition, the Company moved its
research and development offices to El Paso, Texas and it assimilated Cambio
Networks' finance and accounting functions into its already existing
capabilities in Emeryville, California. The Company maintained its sales and
service offices domestically in Parsippany, New Jersey until its closure in
December 1998, and internationally in Egypt and the United Kingdom. In an effort
to further consolidate its operations, in February 1999 it decided to close its
Emeryville, California office and move all finance and accounting functions to
its El Paso, Texas office.
Selling, general and administrative ("SG&A") expenses for the Six Months
Fiscal 1999 were $2,083,000, a 430% increase from SG&A expenses of $393,000 for
the Six Months Fiscal 1998. The increase in SG&A expenses was primarily due to
increased expenses associated with developing and launching a new product
coupled with the closure and or relocation of its offices as described above. In
addition, SG&A expenses for the Six Months Fiscal 1998 include only the
administrative costs not associated with the discontinued operations.
Research and development ("R&D") expense for the Six Months Fiscal 1999 was
$253,000. The Company incurred R&D expenses primarily as a result of its new
product development.
Depreciation and amortization ("D&A") expense for the Six Months Fiscal
1999 was $ 397,000, a 1,554% increase from D&A expense of $24 ,000 for the Six
Months Fiscal 1998. The increase in D&A expense is primarily due to the five
months amortization of the goodwill in the amount of $4,875,000 which was
recorded as a result of the Cambio Networks acquisition in September 1998.
Goodwill is being amortized on a straight line basis over five years.
Net interest expense for the Six Months Fiscal 1999 was $27,000 as compared
to a net interest income of $68,000 for the Six Months Fiscal 1998. For the Six
Months Fiscal 1999 five months of Cambio Networks' interest expense on its
existing debt was recorded.
The costs associated with the discontinued operations for the Six Months
Fiscal 1999 were accrued at June 30, 1998. Therefore, no income or loss
associated with discontinued operations is reported. For the Six Months Fiscal
1998, the Company generated $793,000 in net income from operations of
discontinued businesses, which is primarily the result of the Company recording
a gain of $1,172,000 on the sale of its Kansas operations.
As a result of the foregoing, net loss for the Six Months Fiscal 1999 was
$2,446,000, an increase in loss of $2,890,000 from a net income of $444,000 for
the Six Months Fiscal 1998. The decrease in net loss is primarily due to the one
time gain recorded during the Six Months Fiscal 1998 related to the sale of its
Kansas operations.
Basic and diluted loss per share was $0.74 for the Six Months Fiscal 1999
as compared to a net income of $0.15 per share for the same period in the prior
fiscal year.
- 8 -
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had negative working capital of
$2,412,000, compared to working capital of $2,176,000 at June 30, 1998. The
Company's working capital position decreased following the acquisition of Cambio
Networks due to the consolidation of accounts and the elimination receivables
from the subsidiary . The Company had cash and cash equivalents of $27,000 at
December 31, 1998, as compared to $1,324,000 at June 30, 1998. The Company's
cash position decreased due to loans made to Cambio Networks prior to the
closing of the acquisition and the continued funding of the operations after the
closing of the acquisition.
During the Six Months Fiscal 1999, the Company's operating activities used
cash of $1,295,000, as compared to cash used by operating activities of $164,000
during the same period in the prior fiscal year. The cash used for operating
activities during the Six Months Fiscal 1999 is primarily the result of the
losses incurred by the continuing operations including five months of Cambio
Networks' operations.
As of June 30, 1998, the Company had net operating loss carryforwards of
approximately $8,500,000. Availability of the Company's net operating loss
carryforwards if not utilized will expire at various dates through the year
2013. Utilization of net operating loss carryforwards may be limited due to the
sale of its preferred stock in February 3, 1999.
The Company's assets of discontinued operations include $1,275,000 in net
patient accounts receivable and amounts due from Medicare intermediaries. The
Company's amount due from Medicare intermediaries includes amounts the Company
anticipates that it will receive in connection with cost report settlements for
its Colorado home health agencies and its final cost report for the Company's
former Gardner, Kansas facility. Medicare reimbursement is generally based upon
reasonable direct and indirect allowable costs incurred in providing services.
There can be no assurance that the Company will collect in full the amounts it
has requested or intends to request, nor can there be any assurance as to the
timing of any such collection. On Febuary 3, 1999, the Company entered into an
agreement with Imperial Loan Management Corporation ("Imperial"), whereby
Imperial assumed control over certain subsidiaries related to the discontinued
operations of the Company and agreed to use its best efforts to collect their
assets (principally accounts receivable due from Medicare).
In December 1997, U.S. Trust Company of Florida Savings Bank ("U.S. Trust")
provided Cambio Networks with a Line of Credit of up to $2,000,000 (the "Loan").
Cambio Networks agreed to pay U.S. Trust interest on the average outstanding
principal amount of the Loan at a per annum rate of 7% and the Loan was due in
February 1999. The Loan was guaranteed by Frederick R. Adler and Euro-America II
L.P (collectively the "Investor Group"). On September 14, 1998, the Investor
Group repaid $1,000,000 in principal to U.S. Trust and converted it into shares
of Cambio Networks' common stock. In January, 1999, the Investor Group repaid
the remaining $1,000,000 in principal due to U.S. Trust and on February 3, 1999
it converted an aggregate amount of $1,057,318 in principal and interest due to
them from the Company into 10,573 shares of the Company's Preferred Stock.
In September and November 1996, Cambio Networks borrowed $750,000 from
Greylock Equity L.P., Highland Capital Partners II L.P. and other investment
groups evidenced by promissory notes bearing 7% interest per annum and due on
demand after September 1997. The Company agreed to the repayment of these notes
in four quarterly principal and interest payments commencing December 1998. As
of February 16, 1999, the outstanding balance on the notes was $250,000.
In March 1998, Western Bank ("Western") provided the company with a line of
credit of up to $150,000 (the "Western Loan"). Cambio Networks agreed to pay
Western interest on the average outstanding principal amount of the Loan at a
per annum rate of 8.75% and the Western Loan is due in March 1999. The Western
Loan is guaranteed by Ms. Gari Grimm, Cambio Networks' former President and CEO,
and a current member of the Company's Board of Directors. As of February 16,
1999, the outstanding balance on the Western Loan was $150,000.
As of December 31, 1998, the parent company had loaned Cambio Networks
$2,979,000 to fund its business activities prior and subsequent to the closing
of the acquisition. Such loans are evidenced by Secured Bridge Financing Notes
bearing interest at 8% per annum.
On October 14, 1998, the Company borrowed $800,000 from Imperial Loan
Management Corporation ("Imperial") under the terms of a promissory note (the
"Note") bearing interest at a per annum rate of prime plus 2.25%, due in full on
October 13, 1999. The Note is secured by a first position security interest on
all of the accounts receivable of the Company. In addition, the Note is backed
by a personal guarantee from Dr. Glasser, the Company's former Chairman and
Chief Executive Officer, to Imperial Bank, the source of funds for the Imperial
- 9 -
Loan. On February 3, 1999, the Company entered into an agreement with Imperial,
whereby Imperial assumed control over certain subsidiaries related to the
discontinued operations of the Company and agreed to use its best efforts to
collect their assets (principally accounts receivable due from Medicare).
Proceeds of such collections will be used to pay the obligations owing from the
Company to Imperial and other obligations including accounts payable, property
and equipment leases and Medicare obligations. After the repayment of the Note
and all reasonable collection expenses and legal and accounting fees, the
remaining proceeds of the liquidation shall be split equally between Imperial
and the Company. As of February 16, 1999, $680,000 was due to Imperial under the
Note.
The Company has no current material commitments for capital expenditures.
The Company also expects to make routine capital improvements to its facilities
in the normal course of business.
The Company's current operations are cash flow negative and as of December
31, 1998, the Company had negative working capital of $2,412,000. The Company
has only a limited amount of working capital. The Company will need additional
capital to fund its new operations resulting from the Cambio Networks
acquisition. There can be no assurance that capital will be available, or that,
if available, it can be obtained on terms favorable to the Company. If adequate
funds are not available, the Company's liquidity could be impaired, which would
have a material adverse effect on its business.
Inflation in recent years has not had a significant effect on the Company's
business and is not expected to adversely effect the Company in the future
unless the current rate of inflation increases significantly.
Other Factors That May Affect Future Operating Results
Accumulated Deficits; Uncertain Profitability. On September 14, 1998, the
Company acquired Cambio Networks. Subsequent to that date, the Company's
operations will consist solely of the operations of Cambio Networks. Cambio
Networks has incurred significant net losses since its inception, and had an
accumulated deficit of approximately $26,998,000 at June 30, 1998. Cambio
Networks incurred net losses of $7,466,000 and $3,175,000 on net revenues of
$7,232,000 and $5,515,000 for the years ended December 31, 1996 and 1997,
respectively. There can be no assurance that the Company will be profitable in
any future period. The Company's business will also subject to the risks
inherent in the operation of a new business enterprise, and there can be no
assurance it will be able to successfully address such risks.
Fluctuating Operating Results. Factors that may contribute to future
fluctuations in the Company's quarterly and annual operating results include,
but are not limited to: (i) development and introduction of new operating
systems and new product development expenses; (ii) introduction or enhancement
of products by the Company; (iii) changes in pricing policies of the Company or
its competitors; (iv) increased competition; (v) technological changes in
computer systems and environments; (vi) the ability of the Company to timely
develop, introduce and market new products; (vii) quality control of products
sold; (viii) market readiness to deploy systems management products for
distributed computing environments; (ix) market acceptance of new products and
product enhancements; (x) customer order deferrals in anticipation of new
products and product enhancements; (xi) the Company's success in expanding its
sales and marketing programs; (xii) personnel changes; (xiii) foreign currency
exchange rates; (xiv) mix of products sold; (xv) acquisition costs; and (xvi)
general economic conditions.
Intense Competition. The markets in which the Company competes are
intensely competitive, highly fragmented and rapidly changing. In order to
compete effectively, the Company will have to enhance current products, enhance
the operability of its products with one another and develop new products in a
timely fashion.
The Company anticipates continued growth in competition in the
telecommunications industry and consequently, the entrance of new competitors
into the software systems market in the future. To maintain and improve its
competitive position, the Company must continue to develop and introduce, in a
timely and cost-effective manner, new product sets, new product features and
services and support that keep the Company competitive with its competitors. The
principal competitive factors in the Company's market are quality, performance,
price, customer support and training, business reputation, and product
attributes such as scalability, compatibility, functionality and acceptance. In
addition, the Company competes with a number of companies that have
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substantially greater financial, technical, sales, marketing and other resources
as well as greater name recognition than the Company. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products and services than can the Company. There
can be no assurance that the Company will be able to compete successfully with
its existing competitors or with new competitors.
Risks Associated With International Operations. Historically, revenues from
sales outside the United States have accounted for a significant amount of
Cambio Networks' total revenues. The Company believes that its success depends
upon continued expansion of its international operations. The Company currently
has sales and service offices in the United Kingdom and Egypt. International
expansion may require the Company to establish additional foreign offices, hire
additional personnel and recruit additional international resellers. This may
require significant management attention and financial resources and could
adversely affect the Company's operating margins. To the extent the Company is
unable to effect these additions efficiently and in a timely manner, its growth,
if any, in international sales will be limited, and its business, operating
results and financial condition could be materially adversely affected. There
can be no assurance that the Company will be able to maintain or increase
international market demand for its products.
International operations subject the Company to a number of risks inherent
in developing products for sale outside of the United States, including the
potential loss of developed technology, imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability, trade restrictions, difficulties in managing
international operations, cultural differences in the conduct of business,
extended accounts receivable collection cycles, greater difficulty in accounts
receivable collection, unexpected changes in regulatory requirements and royalty
and withholding taxes that restrict the repatriation of earnings, tariffs and
other trade barriers, the burden of complying with a wide variety of foreign
laws, and the risk of foreign currency gains and losses. There can be no
assurance that any of the factors described herein will not have a material
adverse effect on the Company's future international sales and operations and,
consequently, its business, operating results and financial condition.
Reliance on Significant Customers. Historically, Cambio Networks has
generated a significant portion of its total revenues from a limited number of
customers, some of which have exceeded 10% of revenues. This concentration of
customers can cause the Company's revenues and earnings to fluctuate from
quarter to quarter based on these customers' requirements and the timing of
their orders. Although the Company believes it has good relationships with its
largest customers and has in the past received a substantial portion of its
revenues from repeat business with established customers, none of the Company's
major customers has any obligation to purchase additional products or services,
and these customers generally have acquired fully-paid licenses to their
installed systems. Therefore, there can be no assurance that any of the
Company's major customers will continue to purchase new systems, systems
enhancements and services in amounts similar to previous years. A reduction,
delay or cancellation in orders from any of its major customers would have a
material adverse effect on the Company's results of operations and financial
condition. In addition, the acquisition by a third party of one of the Company's
major customers could result in the loss of that customer and have a material
adverse effect on the Company's results of operations and financial condition.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for the Company's products is intensely competitive,
highly fragmented and characterized by rapid technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies, the emergence of new
industry standards or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner, new products that keep pace with technological developments and
emerging industry standards. Customer requirements include, but are not limited
to, product operability and support across distributed and changing
heterogeneous hardware platforms, operating systems, relational databases and
networks. There can be no assurance that the Company's products will achieve
market acceptance or will adequately address the changing needs of the
marketplace or that the Company will be successful in developing and marketing
enhancements to its existing products or new products incorporating new
technology on a timely basis. The Company has in the past experienced delays in
product development, and there can be no assurance that the Company will not
experience further delays in connection with its current product development or
future development activities. If the Company is unable to develop and introduce
new products, or enhancements to existing products, in a timely manner in
response to changing market conditions or customer requirements, the Company's
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business, operating results and financial condition will be materially adversely
affected. Because the Company has limited resources, the Company must restrict
its product development efforts and its porting efforts to a relatively small
number of products and operating systems. There can be no assurance that these
efforts will be successful or, even if successful, that any resulting products
or operating systems will achieve market acceptance.
Dependence on Key Employees. The Company is highly dependent on the
principal members of its management staff, including Mr. Ali Al-Dahwi, its
President and Chief Executive Officer, the loss of whose services would have a
material adverse effect on the Company's business. The Company has not entered
into any employment agreements with Mr. Al-Dahwi and does not maintain any key
person life insurance policy on the life of any employee. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
Year 2000 Compliance. The Company is currently evaluating the potential
impact of the Year 2000 difficulties on the processing of date-sensitive
information by the Company's computerized information system. The Year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures. Based on preliminary information, the costs of addressing
the potential problems are not currently expected to have a material adverse
effect on the Company's financial position, liquidity or results of operations
in future periods. The software currently offered by the Company is either
designed to be Year 2000 compliant or has been upgraded to be Year 2000
compliant. However, if the Company, or its customers or vendors, are unable to
resolve such processing issues in a timely manner, it could pose a material
financial risk. Accordingly, the Company plans to devote the necessary resources
to resolve all significant Year 2000 issues in a timely manner.
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Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On January 31, 1999, the Company's Board of Directors (the
"Board") approved the issuance of up to 37,500 shares of a newly
created Series A Convertible Preferred Stock (the "Preferred
Stock") for $100.00 per share, an aggregate consideration of up
to $3,750,000. Each share of Preferred Stock is convertible into
500 shares of the Company's Class A Common Stock or $0.20 per
share and is entitled to receive dividends in an amount equal to
the equivalent per share dividend declared on the Class A Common
Stock when and as declared by the Board of Directors.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit No.
10.1 Series A Convertible Preferred Stock summary of principal
terms.
10.2 Agreement dated February 2, 1999 by and between Harvey Wm.
Glasser, Cambio, Inc. and certain security holders.
10.3 Agreement dated February 2, 1999 by and between Imperial
Loan Management Corporation, Cambio, Inc. and Medbrook Home
Health, Inc.
27 Financial Data Schedule.
B. Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cambio, Inc.
/s/ Ali Al-Dahwi
- --------------------------------
Ali Al-Dahwi
President and Chief Executive
Officer
/s/ Wm. Samuel Veazey
- --------------------------------
Wm. Samuel Veazey
Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary (Principal Accounting
and Financial Officer)
February 19, 1999