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 September 30, 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)
2000 Powell Street, Suite 1203
Emeryville, California 94608
(Address of principal executive offices)
(510) 420-0900
(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 November 12, 1998, 2,672,911 shares of Class A Common Stock and 1,159,500
shares of Class B Common Stock were outstanding.
<PAGE>
CAMBIO, INC.
Form 10-QSB
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance
Sheet as of September 30, 1998 1
Consolidated Statements of
Operations for the three months
ended September 30, 1998 and 1997 2
Consolidated Statements of
Cash Flows for the three months
ended September 30, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 6 - 10
Part II. Other Information and Signatures 12 - 13
<PAGE>
CAMBIO, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 289,000
Restricted cash ............................................... 171,000
Accounts receivable - net of allowance
for doubtful accounts of $230,000 ........................... 198,000
Prepaids and deposits ......................................... 83,000
Net assets of discontinued operations (net
receivables and other assets of $1,842,000
less liabilities and estimated accrued
disposal costs of $1,295,000) ................................ 547,000
------------
Total current assets ..................................... 1,288,000
Property and equipment, net ................................... 188,000
Other assets:
Goodwill ..................................................... 4,769,000
------------
Total assets ............................................. $ 6,245,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes payable ...................... $ 521,000
Accounts payable - trade ..................................... 1,350,000
Accrued expenses ............................................. 167,000
Deferred revenue and customer deposits ....................... 216,000
------------
Total current liabilities ................................ 2,254,000
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 .......................................... (15,267,000)
Total stockholders' equity .............................. 2,983,000
------------
Total liabilities and stockholders' equity .............. $ 6,245,000
============
The accompanying notes are an integral part of this statement
-1-
<PAGE>
CAMBIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
1998 1997
---- ----
Net revenue .......................................... $ 120,000 $ --
Cost of sales ........................................ 10,000 --
--------- ---------
Gross profit .................................... 110,000 --
Selling, general and administrative expenses ......... 637,000 152,000
Research and development expense ..................... 75,000 --
Depreciation and amortization ........................ 100,000 12,000
--------- ---------
Loss from operations ............................ (702,000) (164,000)
--------- ---------
Other income (expense):
Interest and other income ........................... -- 40,000
Interest expense .................................... (7,000) (9,000)
--------- ---------
Total other income (expense) .................... (7,000) 31,000
--------- ---------
Loss before discontinued operations ............. (709,000) (133,000)
Income from operations of discontinued businesses -- 802,000
--------- ---------
Net income (loss) ............................... $(709,000) $ 669,000
========= =========
Basic and diluted net (loss) per common share
- continuing operations ............................ $ (0.25) $ (0.05)
Basic and diluted net income per common share
- discontinued operations .......................... $ -- $ 0.28
--------- ---------
Basic and diluted net income (loss) per common
share .............................................. $ (0.25) $ 0.23
========= =========
Weighted average shares outstanding .................. 2,795,554 2,895,366
========= =========
The accompanying notes are an integral part of these statements
-2-
<PAGE>
CAMBIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) .............................. $ (709,000) $ 669,000
Adjustments to reconcile net income (loss) to
cash provided (used) by operations:
Income from discontinued operations .......... -- (802,000)
Depreciation and amortization ................ 100,000 88,000
Changes in operating assets and liabilities:
Net assets of discontinued operations ....... 255,000 593,000
Accounts receivable ......................... 61,000 --
Prepaids and deposits ....................... (6,000) --
Accounts payable and accrued expenses ....... (79,000) (3,000)
Deferred revenue and prepaid deposits ....... (9,000) --
----------- -----------
Net cash provided (used) by operating
activities ................................ (387,000) 545,000
----------- -----------
Cash flows from investing activities:
Capital expenditures ........................... (7,000) --
Cash advance to acquired company ............... (638,000) --
Costs related to acquisition ................... (100,000) --
Discontinued operations, net ................... -- 722,000
----------- -----------
Net cash provided (used) by investing
activities ................................ (745,000) 722,000
----------- -----------
Cash flows from financing activities:
Short-term borrowings ........................... (42,000) 16,000
Long-term borrowings ............................ 8,000 --
Decrease in restricted cash ..................... 131,000 5,000
----------- -----------
Net cash provided by financing activities .. 97,000 21,000
----------- -----------
Net change in cash and cash equivalents .... (1,035,000) 1,288,000
Cash and cash equivalents at beginning of
the period ................................ 1,324,000 2,929,000
----------- -----------
Cash and cash equivalents at end of
the period ................................ $ 289,000 $ 4,217,000
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest ..................................... $ 2,000 $ 45,000
Income taxes ................................. 9,000 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
===========
The accompanying notes are an integral part of these statements
-3-
<PAGE>
CAMBIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated condensed financial statements of the Company
for the three months ended September 30, 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 September 30, 1998, net assets of discontinued operations consist of the
following:
Receivables $1,764,000
Other current assets 78,000
Trade Payables, accrued liabilities
and estimated accrued disposal costs (1,295,000)
-----------
$ 547,000
===========
Results of discontinued operation for the three months ended September 30,
1998 and 1997 are as follows:
Three Months Ended
September 30,
1998 1997
---- ----
Net revenues $ 66,000 $ 3,060,000
Net expenses (299,000) (2,258,000)
Accrued expenses 233,000 --
------------ -----------
Net income from operations of
discontinued businesses $ -- $ 802,000
============ ===========
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
-4-
<PAGE>
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 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.
Three Months Ended
September 30,
-------------------------
1998 1997
---- ----
Net revenues ................. $ 340,000 $ 1,208,000
Net loss ..................... $(1,779,000) $ (259,000)
=========== ===========
Net loss per share:
Basic ....................... $ (0.46) $ (0.06)
=========== ===========
Diluted ..................... $ (0.46) $ (0.06)
=========== ===========
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 three months ended September 30, 1998
and 1997, representing all changes in Stockholders' deficit during the
period other than changes resulting from the Company's stock, was
$(709,000) and $669,000, respectively.
-5-
<PAGE>
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
("HCFA"), 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-
<PAGE>
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 September 30, 1998
as Compared to Three months ended September 30, 1997
Net revenues for the First Quarter Fiscal 1999 were $120,000. Because of
the change in business as a result of the Cambio Networks acquisition and the
discontinuance of the healthcare business, the results of operation for the same
period in the prior year are not comparable. Revenues for the current period
include one month of Cambio Networks operations following its acquisition in
September 1998.
The Company intends to concentrate its efforts on increasing its level of
sales and decreasing its operating expenses in order to achieve profitable
operations. In that regard, following the completion of the acquisition, the
Company appointed Ali Al-Dahwi as President and Chief Operating Officer. In June
1998, immediately after his appointment as President of Cambio Networks, Mr.
Al-Dahwi developed a new business model by which a new product was developed for
the Company by engineers from the Phifer Consulting Group, Inc. in association
with the Company's existing research and development ("R&D") group. The new
application, netRunner, is the Company's new flagship network information
management platform. In October 1998, the Company officially launched netRunner
at the InterOp, Atlanta and InterOp, Paris tradeshows. The new product has an
entirely new architecture and advanced capabilities. The Company is currently
aggressively marketing its new application and expects to generate increased
level of sales.
netRunner is designed to run under Windows 95, 98 or NT operating systems
using current development technologies. Extensions to netRunner are continously
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, 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
and internationally in the United Kingdom and Egypt.
Selling, general and administrative ("SG&A") expenses for the First Quarter
Fiscal 1999 were $637,000, a 319.1% increase from SG&A expenses of $152,000 for
the First Quarter 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 First Quarter Fiscal 1998 include only the
administrative costs not associated with the discontinued operations.
R&D expense for the First Quarter Fiscal 1999 was $75,000. The Company
incurred R&D expenses primarily as a result of its new product development by
the Phifer Group.
Depreciation and amortization ("D&A") expense for the First Quarter Fiscal
1999 was $100,000, a 733.3% increase from D&A expense of $12,000 for the First
Quarter Fiscal 1998. The increase in D&A expense is primarily due to the one
month 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 First Quarter Fiscal 1999 was $7,000 as
compared to a net interest income of $31,000 for the First Quarter Fiscal 1998.
For the First Quarter Fiscal 1999 interest expense includes interest on existing
debt of Cambio Networks.
The costs associated with the discontinued operations for the First Quarter
Fiscal 1999 were accrued at June 30, 1998. Therefore, no income or loss
associated with discontinued operations is reported. For the First Quarter
Fiscal 1998, the Company generated $802,000 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.
-7-
<PAGE>
As a result of the foregoing, net loss for the First Quarter Fiscal 1999
was $709,000, an increase in loss of $1,378,000 from a net income of $669,000
for the First Quarter Fiscal 1998. The decrease in net loss is primarily due to
the one time gain recorded during the First Quarter Fiscal 1998.
Basic and diluted loss per share was $0.25 for the First Quarter Fiscal
1999 as compared to a net income of $0.23 per share for the same period in the
prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had negative working capital of
$966,000, 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 of receivables
due from Cambio Networks. The Company had cash and cash equivalents of $289,000
at September 30, 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
acquisition.
During the First Quarter Fiscal 1999, the Company's operating activities
used cash of $387,000, as compared to cash provided by operating activities of
$545,000 during the same period in the prior fiscal year. The cash used for
operating activities during the First Quarter Fiscal 1999 is primarily the
result of the losses incurred by the continuing operations including one month
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.
The Company's assets of discontinued operations include $1,764,000 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. Such amount also includes amounts the Company
expects to receive upon regulatory approval of the Company's annual application
for an exception from the routine cost limitation under the Medicare program for
fiscal years 1992 through 1996 for its 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.
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 is due after
February 1999. The Loan is guaranteed by Frederick R. Adler and Euro-America II
L.P, two of the Company's majority shareholders. As of September 30, 1998, the
outstanding balance on the Loan was $1,000,000.
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. As of September 30, 1998, the outstanding balance
on the notes was $250,000. The Company agreed to the repayment of these notes in
four quarterly principal and interest payments commencing December 1998.
As of September 30, 1998, the Company had advanced Cambio Networks
$1,810,000 to fund its business activities prior and subsequent to the closing
of the acquisition. Such advances 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 (the "Imperial Loan") evidenced by a promissory note (the
"Note") bearing interest at a per annum rate of prime plus 2.25% with the
principal 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 Imperial Loan is enhanced by a personal guarantee from Harvey Wm.
Glasser, the Company's Chairman and Chief Executive Officer, to Imperial Bank,
the source of funds for the Imperial Loan. The Imperial Loan is being used to
provide working capital for current operations.
-8-
<PAGE>
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 September
30, 1998, the Company had negative working capital of $966,000. The Company has
only a limited amount of working capital. Although the Company's management
believes that its expected funds from discontinued operations and currently
available working capital will be sufficient to meet its forecasted short-term
cash commitments, in the future, 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
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
-9-
<PAGE>
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, andits 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,
longer accounts receivable payment 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 translation 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
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 Dr. Harvey Wm. Glasser, its
Chief Executive Officer, Ali Al-Dahwi, its President and Chief Operating
Officer, and Wm. Samuel Veazey, its Vice President and Chief Financial 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 any of
such persons 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.
-10-
<PAGE>
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. Although most of the software currently offered by the
Company is either designed to be Year 2000 compliant or has been upgraded to be
Year 2000 compliant, the Company still offers some software which is not Year
2000 compliant. The Company anticipates these software products to be Year 2000
compliant by the end of 1998. 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.
-11-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On November 12, 1998, the Company was served with a complaint filed by
Thomas C. Barron ("Barron"), a former employee of Cambio Networks, Inc.
entitled Thomas C. Barron v. Cambio Networks, Inc., and Meadowbrook
Rehabilitation Group, Inc., Docket No. 605493/98, Supreme Court of the
State of New York, County of New York. The complaint alleges damages in the
amount of $224,999.96, plus the value of Mr. Barron's accrued vacation
through the last day of his employment at Cambio Networks, Inc. for breach
of contract and anticipatory breach of contract. The Company regards these
allegations as inaccurate and is vigorously defending Mr. Barron's
complaint.
Item 2. Changes in Securities
None
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.
27 Financial Data Schedule.
B. Reports on Form 8-K
The Registrant filed a Form 8-K dated August 10, 1998 which reported
the change of Artur Andersen LLP as the Registrant's principal
independent accountant engaged to audit the Registrant's financial
statements and the appointment of Grant Thornton LLP as its new
independent accountants.
The Registrant filed a Form 8-K dated September 14, 1998 which
reported that it had acquired Cambio Networks, Inc., 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.
-12-
<PAGE>
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/ Harvey Wm. Glasser
- --------------------------------
Harvey Wm. Glasser
Chairman of the Board and
Chief Executive Officer
/s/ Ali Al-Dahwi
- --------------------------------
Ali Al-Dahwi
President and Chief Operating
Officer
/s/ Wm. Samuel Veazey
- --------------------------------
Wm. Samuel Veazey
Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary (Principal Accounting
and Financial Officer)
November 13, 1998
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10QSB for Cambio, Inc. for the quarter ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000852164
<NAME> Cambio, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1998
<CASH> 289
<SECURITIES> 0
<RECEIVABLES> 428
<ALLOWANCES> 230
<INVENTORY> 0
<CURRENT-ASSETS> 1,288
<PP&E> 188
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,245
<CURRENT-LIABILITIES> 2,254
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 2,945
<TOTAL-LIABILITY-AND-EQUITY> 6,245
<SALES> 120
<TOTAL-REVENUES> 120
<CGS> 10
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7)
<INCOME-PRETAX> (709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (709)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
