SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 14, 1998
CAMBIO, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-19726 94-3022377
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification Number)
incorporation)
2000 Powell Street, Suite 1203, Emeryville, CA 94608
(Address of principal executive offices)
Registrant's telephone number, including area code:
(510) 420-0900
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired.
The Financial Statements required by this item are submitted in a separate
section beginning on page F-1 of this Amendment No. 1 to Current Report on Form
8-K/A and are incoporated by reference herein.
(b) Pro Forma Financial Information
CAMBIO, INC.
Pro Forma Statement of Operations
For the Twelve Months Ended June 30, 1998
(Unaudited)
In thousands
<TABLE>
<CAPTION>
Cambio Pro Forma Pro Forma
Cambio, Inc. Network, Inc. Adjustments Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales ....................................................... $ -- $ 3,355 $ -- $ 3,555
Cost of goods sold .............................................. -- 1,538 -- 1,538
----------- ----------- ----------- -----------
Gross profit ................................................ -- 1,817 -- 1,817
Selling and administrative expenses ............................. 1,207 4,592 514 (a) 6,313
Research and development ........................................ -- 1,313 -- 1,313
Interest and other (income) expense, net ........................ (140) 269 (69)(b) (49)
(11)(c)
----------- ----------- ----------- -----------
Loss before income taxes ........................................ (1,067) (4,357) (434) (5,858)
Income taxes .................................................... -- -- -- --
----------- ----------- ----------- -----------
Net loss ........................................................ $ (1,067) $ (4,357) (434) $ (5,858)
=========== =========== =========== ===========
Basic and diluted loss per common share ......................... $ (0.37) $ (0.35) $ (1.43)
=========== =========== ===========
Weighted Average Common Shares Outstanding ...................... 2,851,893 1,238,842 (d) 4,090,735
=========== =========== ===========
</TABLE>
<PAGE>
Notes Unaudited to Pro Forma Statements of Operations
(unaudited)
Cambio, Inc., formerly known as Meadowbrook Rehabilitation Group, Inc. (the
"Company") acquired all of the outstanding common stock of Cambio Networks Inc.
("Cambio Networks") a network inventory management solutions company in
September 1998 (the "Acquisition"). The purchase price was paid in 1,238,842
shares of the Company's Class A Common Stock and the assumption of certain
liabilities. Goodwill $4,875,000 was recognized upon completion of the
transaction.
PRO FORMA ADJUSTMENTS
Statement of Operations for the Twelve Months Ended June 30, 1998
(a) Records the amortization of the excess of cost over net assets acquired
attributable to the acquisition of Cambio Networks using an estimated life of 5
years.
(b) Eliminates interest expense related to the outstanding indebtedness of
Cambio Networks, which was retired in exchange for Cambio Networks Common Stock.
(c) Eliminates interest expense on intercompany debt.
(d) Increases the number of shares of Common Stock used in the per share
calculation for the Common Stock issued in the Acquisition.
The accompanying pro forma statement of operations is presented in
accordance with Regulation SB Item 310(d). No pro forma balance sheet is
presented as the assets and liabilities of Cambio Networks and the goodwill
recognized in the Acquisition are included in the September 30, 1998 balance
sheet of the Company filed on Form 10-QSB. The Company's historical results of
operations include Cambio Networks from September 1998.
The adjustments do not give effect to any potential benefits that might
have been realized through the combination of operations and are not necessarily
indicative of the consolidated results which would have been reported if the
Acquisition had actually occurred at the beginning of the year ended June 30,
1998.
<PAGE>
(c) Exhibits:
Exhibit 2.1* Agreement and Plan of Merger, dated
April 7, 1998, between the Registrant,
Cambio's majority shareholders and Cambio.
Exhibit 2.2* Secured Bridge Financial Note dated
April 3, 1998 between the Registrant and
Cambio.
Exhibit 99.1* Press release dated April 7, 1998
announcing the execution of the Agreement.
* Previously filed with the Company's Current Report on Form 8-K, dated April
7, 1998 and filed April 22, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CAMBIO, INC.
By: /s/ Harvey Wm. Glasser, M.D.
Harvey Wm. Glasser, M.D.
President and Chief Executive Officer
Dated: November 25, 1998
<PAGE>
Financial Statements and
Report of Independent Certified
Public Accountants
CAMBIO NETWORKS, INC.
December 31, 1997
F-1
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENT OF STOCKHOLDERS' DEFICIT 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Cambio Networks, Inc.
We have audited the accompanying balance sheet of Cambio Networks, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Cambio Networks, Inc., as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Seattle, Washington
July 22, 1998, except for Note B as to
which the date is September 14, 1998.
F-3
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
BALANCE SHEETS
ASSETS
December 31, June 30,
1997 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 13,028 $ 14,927
Accounts receivable, net of allowance for doubtful accounts of
$291,967 and $238,097, respectively 508,983 375,439
Inventory (note A2) 17,316 16,075
----------- -----------
Total current assets 539,327 406,441
PROPERTY AND EQUIPMENT, net (notes A3 and C) 256,364 198,116
OTHER ASSETS 54,818 50,720
----------- -----------
$ 850,509 $ 655,277
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable to stockholders (note D) $ 900,000 $ 1,075,000
Advances from Meadowbrook (note B) - 875,000
Notes payable to bank (note E) - 2,000,000
Line of credit (note E) - 150,000
Cash overdraft 71,658 -
Accounts payable 703,455 1,039,952
Accrued liabilities 365,459 385,394
Deferred revenue (note A1) 228,773 260,939
Other liabilities 40,388 -
----------- ----------
Total current liabilities 2,309,733 5,786,285
NOTES PAYABLE TO BANK (note E) 1,300,000 -
COMMITMENTS AND CONTINGENCIES (notes G and H) - -
STOCKHOLDERS' DEFICIT (notes B, I and J)
Preferred stock-series 1; no par value, 10,000,000 shares authorized;
3,500,000 shares issued and outstanding
1,050,000 1,050,000
Common stock; no par value, 10,000,000 shares authorized; 387,293 and
443,653 shares issued and outstanding, respectively
17,546,332 17,549,150
Additional paid-in capital 3,268,056 3,268,056
Accumulated deficit (24,623,612) (26,998,214)
----------- -----------
Total stockholders' deficit (2,759,224) (5,131,008)
----------- -----------
$ 850,509 $ 655,277
=========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31, Six months ended June 30,
1997 1996 1998 1997
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues (note A1) $ 5,515,177 $ 7,231,794 $ 1,158,993 $ 3,327,877
Cost of revenues 1,368,370 622,307 379,087 209,922
---------- ---------- ---------- ----------
Gross profit 4,146,807 6,609,487 779,906 3,117,955
Operating expenses
Administrative expenses 5,806,567 12,306,672 2,368,959 3,552,164
Research and development
(note A4) 1,339,785 1,721,756 692,779 949,809
---------- ---------- ---------- ----------
Operating loss (2,999,545) (7,418,941) (2,281,832) (1,384,018)
Other income (expense)
Interest income 4,084 66,588 - -
Interest expense (122,675) (19,301) (89,663) -
Other expense, net (56,919) (94,010) (3,107) 3,824
---------- ---------- ---------- ----------
(175,510) (46,723) (92,770) 3,824
---------- ---------- ---------- ----------
NET LOSS (note F) $(3,175,055) $(7,465,664) $(2,374,602) $(1,380,194)
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
F-5
<PAGE>
Cambio Networks, Inc.
STATEMENT OF STOCKHOLDERS' DEFICIT
Total
Additional stockholders'
Common stock Preferred stock paid-in Accumulated equity
Shares Amount Shares Amount capital deficit (deficit)
------- ---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 404 $ 297 27,052.748 $17,500,000 $ 3,000,000 $(13,982,893) $ 6,517,396
Exercise of stock options 4,878 45,910 - - - - 45,910
Net loss for December 31, 1996 - - - - - (7,465,664) (7,465,656)
------- ---------- ---------- ----------- ---------- ----------- ----------
Balance at December 31, 1996 5,282 46,207 27,052.748 17,500,000 3,000,000 (21,448,557) (902,350)
Conversion of preferred series A, B
andC to common shares (note J) 379,511 17,500,000 (27,052.748) (17,500,000) - - -
Sale of preferred shares series 1
(note J) - - 3,500.000 1,050,000 - - 1,050,000
Re-granting of stock options
(notes I and J) - - - - 187,000 - 187,000
Granting of stock options (note I) - - - - 57,250 - 57,250
Issuance of stock warrants - - - - 23,806 - 23,806
Exercise of stock options 2,500 125 - - - - 125
Net loss for the year ended
December 31, 1997 - - - - - (3,175,055) (3,175,055)
------- ---------- ---------- ---------- ---------- ----------- ----------
Balance at December 31, 1997 387,293 17,546,332 3,500.000 1,050,000 3,268,056 (24,623,612) (2,759,224)
Exercise of stock options (unaudited) 56,360 2,818 - - - - 2,818
Net loss for the six months ended
June 30, 1998 (unaudited) - - - - - (2,374,602) (2,374,602)
------- ---------- ---------- ---------- ---------- ----------- ----------
Balance at June 30, 1998 (unaudited) 443,653 $17,549,150 3,500.000 $ 1,050,000 $ 3,268,056 $(26,998,214) $(5,131,008)
======= ========== ========== ========== ========== =========== ==========
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Cambio Networks, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31, Six months ended June 30,
Increase (Decrease) in Cash 1997 1996 1998 1997
---------- ---------- ---------- ----------
Cash flows from operating activities (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $(3,175,055) $(7,465,664) $(2,374,602) $(1,380,194)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 269,141 334,416 72,332 127,618
Noncash stock compensation 268,056 - - 187,000
Loss on disposal of assets 64,336 - - 8,935
Provision for allowance
for doubtful accounts (438,914) 313,667 53,870 (116,363)
Changes in assets and liabilities
Accounts receivables 2,241,677 (140,084) 79,674 1,702,077
Inventory (17,316) 10,834 1,241 -
Prepaid expenses and other assets 106,036 223,571 4,098 (24,865)
Accounts payable (1,025,964) 1,082,497 336,497 (781,746)
Accrued expenses and
other liabilities (39,003) (1,143,020) (20,453) (86,691)
Deferred revenue (810,719) 786,489 32,166 (566,112)
---------- ---------- ---------- ----------
Net cash used in
operating activities (2,557,725) (5,997,294) (1,815,177) (930,341)
Cash flows from investing activities
Capital expenditures (51,814) (479,768) (14,084) (10,140)
----------- ----------- --------- ---------
Net cash used in
investing activities (51,814) (479,768) (14,084) (10,140)
Cash flows from financing activities
Cash overdraft 71,658 - (71,658) -
Net borrowings from line of credit - - 150,000 -
Advances from Meadowbrook - - 875,000 -
Proceeds from issuance of common stock 125 45,910 2,818 -
Proceeds from issuance of preferred stock 1,050,000 - - 1,050,000
Proceeds from bank notes payable 1,300,000 - 700,000 -
Proceeds from issuance of
notes payable to stockholders 950,000 750,000 175,000 -
Payment on notes payable to stockholders (800,000) - - -
---------- ---------- --------- --------
Net cash provided by
financing activities 2,571,783 795,910 1,831,160 1,050,000
---------- ---------- ---------- ----------
Net increase (decrease) in cash (37,756) (5,681,152) 1,899 109,519
Cash at beginning of period 50,784 5,731,936 13,028 50,784
---------- ---------- ---------- ----------
Cash at end of period $ 13,028 $ 50,784 $ 14,927 $ 160,303
========== ========== =========== ==========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 30,679 $ 22,989 $ 36,474 $ 19,459
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
F-7
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cambio Networks, Inc. (the Company), a California corporation, develops and
markets solutions for physical network management applications. Headquartered in
Bellevue, Washington, the Company operates sales offices nationally and in the
U.K.
A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with American Institute of Certified Public Accountants
Statements of Position 97-1, Software Revenue Recognition. Revenue from products
licensed to customers directly is recorded when the software has been delivered.
Revenue from product sales to distributors and resellers is recorded when
related products are shipped. Maintenance revenue is recognized ratably over the
contract period. Provisions are recorded for returns and bad debts.
The Accounting Standards Executive Committee has issued Statement of Position
97-2, "Software Revenue Recognition" (SOP 97-2), which supersedes SOP 91-1, the
former literature on software revenue recognition. This Statement will be
effective beginning in fiscal year 1998. The Company believes it is
substantially in compliance with the provisions of SOP 97-2, and its adoption is
not expected to have a material impact on the financial position or results of
operations of the Company.
2. Inventories
Inventories are stated at the lower of cost or market; cost is determined by the
first-in, first-out method.
3. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lesser of
the period of the lease term or the estimated useful life of the assets.
F-8
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Research and Development Costs
All expenditures for research and development are expensed in the year incurred.
Software development costs are charged to expense until technological
feasibility of the computer software product has been established.
5. Fair Value of Financial Instruments
Statement of Financial Accounting Standards 107, Disclosures About Fair Value of
Financial Instruments, require disclosure of the estimated fair value of the
Company's financial instruments. The carrying amount of the notes payable to
bank approximates fair value, based on the bank's current incremental borrowing
rates for similar types of borrowing arrangements. The carrying amount of the
notes payable to stockholders approximates fair value.
6. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
7. Interim Statements
In the opinion of management, the unaudited interim financial statements as of
June 30, 1998 and for the six months ended June 30, 1998 and 1997 include all
adjustments, consisting only of those of a normal recurring nature, necessary to
present fairly the Company's financial position as of June 30, 1998 and the
results of its operations and cash flows for the six months ended June 30, 1998
and 1997. The results of operations for the six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
F-9
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE B - MANAGEMENT'S PLANS
As shown in the financial statements, the Company incurred net losses of
$3,175,055 and $7,465,664 during the years ended December 31, 1997 and 1996,
respectively. As of December 31, 1997, the Company's current liabilities
exceeded its current assets by $1,770,406 and its total liabilities exceeded its
total assets by $2,759,224. The Company's ability to continue as a going concern
is contingent on the Company's ability to generate additional capital and
operate at a profit.
On September 14, 1998, Meadowbrook Rehabilitation Group, Inc. (Meadowbrook), a
liquidating health care company listed on the NASDAQ, acquired the 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, the Company's shareholders
received an aggregate of 1,238,842 shares of Meadowbrook's Class A Common Stock
representing approximately 32.3% of the outstanding Class A and Class B Common
Stock. Meadowbrook is currently in the process of liquidating its health care
business and plans to use the proceeds of the liquidation for technology
investments. Management believes the expected proceeds from the sale of the
health care business will provide the Company with access to capital required to
launch the next generation product, which the Company plans to launch in October
1998. Through July 15, 1998, the Company has received $1,100,000 in bridge loans
from Meadowbrook.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 1997 June 30, 1998
----------------- -------------
Office and warehouse equipment $2,191,302 $721,573
Leasehold improvements 97,747 22,677
--------- -------
2,289,049 744,250
Less accumulated depreciation
and amortization 2,032,685 546,134
--------- -------
$ 256,364 $198,116
========= =======
F-10
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months ended
June 30, 1998 and 1997 is unaudited)
NOTE D - NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consist of the following:
December 31, June 30,
1997 1998
Promissory notes to common stockholders
bearing interest at 7% per annum,
due on demand, collateralized by
co-second position on all assets
of the Company
$500,000 $ 500,000
Promissory notes to common stockholders
bearing interest at 7% per annum,
due on demand, collateralized by
first position on all assets of the
Company
250,000 250,000
Notes payable to preferred stockholders
bearing interest at prime rate (8.5%
at December 31, 1997) plus 2% per
annum, due on demand, collateralized
by co-second position on all assets
of the Company
150,000 325,000
------- ---------
$900,000 $1,075,000
======= =========
The promissory notes to common stockholders provide for an automatic conversion
into the Company's common stock upon the Company receiving equity financing in
excess of $1,000,000.
The Company issued 295,000 common stock warrants to the preferred stockholders
in connection with issuance of the notes payable, with an exercise price of
$0.30 per warrant. The warrants are immediately exercisable and expire at
various dates through December, 2002. At June 30, 1998, none of the warrants had
been exercised.
F-11
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months ended
June 30, 1998 and 1997 is unaudited)
NOTE E - NOTES PAYABLE TO BANK
At December 31, 1997 and June 30, 1998, the Company had a note payable to a
bank, bearing interest at 7% per annum. No payments on the loan are required
currently. The principal and accrued interest are due on February 1, 1999. The
note payable is guaranteed by the Company's preferred stockholders.
On March 16, 1998, the Company entered into a business loan agreement with a
bank. Under the terms of the loan agreement, the Company can borrow up to
$150,000 at prime plus 1%. The loan agreement expires on March 16, 1999 and is
guaranteed by the Company's President.
NOTE F - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes."
At December 31, 1997, a net operating loss (NOL) carryforward of approximately
$2,700,000 expiring through 2012 is available to offset future taxable income.
On April 17, 1997, an ownership change, as defined under Section 382 of the
Internal Revenue Code, occurred. Consequently, annual utilization of the
pre-change NOL to offset future taxable income will be limited. The acquisition
by Meadowbrook provides for additional limitations on the use of these
carryforwards.
Deferred tax assets consist of the following at December 31, 1997:
Current
Allowance for doubtful accounts $ 99,000
Accrued vacation 41,000
Less valuation allowance (140,000)
----------
$ -
Long-term
NOL carryforwards prior to ownership change in 1997 $ 36,000
NOL carryforwards after ownership change in 1997 1,068,000
Depreciation and amortization 81,000
Less valuation allowance (1,185,000)
----------
$ -
F-12
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months ended
June 30, 1998 and 1997 is unaudited)
NOTE F - INCOME TAXES - Continued
The Company has established a valuation allowance of $1,325,000 as of December
31, 1997, due to the uncertainty of future utilization. The valuation allowance
decreased by $4,475,000 during the year ended December 31, 1997, due to the
Section 382 limitations on the Company's NOL carryforwards.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company leases its office and service facilities and certain equipment under
noncancelable and month-to-month operating lease agreements which expire at
various dates through 2002. Future minimum lease payments under these agreements
follow:
December 31,
1998 $ 464,000
1999 231,000
2000 201,000
2001 88,000
2002 16,000
---------
$1,000,000
Rent expense for the years ended December 31, 1997 and 1996 approximated
$1,015,000 and $1,116,000, respectively. Rent expense for the six months ended
June 30, 1998 and 1997 approximated $438,241 and $552,000, respectively.
2. Contingencies
The Company is subject to Value Added Tax in the United Kingdom and is currently
in the process of finalizing the tax liability since 1995. Management believes
any liability the Company may owe will not be material to the financial
statements.
F-13
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months ended
June 30, 1998 and 1997 is unaudited)
NOTE G - COMMITMENTS AND CONTINGENCIES - Continued
In April 1998, an officer terminated employment with the Company. The officer's
employment contract stated that if the agreement was terminated for a reason
other than with cause, the officer would receive $200,000, equaling one year's
salary. The Company is currently negotiating the employment settlement.
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan (401(k)) covering
substantially all employees who have completed three months of service. At the
Board's discretion, the Company can matched 50% of employee contributions up to
a total contribution of 3% of each employee's annual salary. There were no
employer contributions in 1997 and 1996.
NOTE I - STOCK OPTION PLAN
Under the terms of the Company's 1994 Stock Option Plan (the Plan), employees,
officers, directors and consultants to the Company may be granted incentive
stock options or non-statutory stock options to purchase up to an authorized
1,063,073 shares of common stock. The options are generally granted at exercise
prices equal to the market value of the Company's common stock on the date of
the grant. The options generally vest over five years and expire ten years from
date of grant.
The Company has adopted the disclosure only provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The
Company applies the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and related Interpretations in determining the
amount of any compensation expense to be recognized from the issuance of stock
options to employees. Compensation expense is generally not recognized for the
Company's stock-based compensation plans when options are exercisable at the
exercise price not less than the market value of the Company's stock on the date
of the grant. For options with an exercise price less than fair market value,
compensation expense equal to the difference between the exercise price and the
fair market value is recognized at the date of grant.
F-14
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE I - STOCK OPTION PLAN - Continued
Had compensation cost for options granted under the Plan been determined based
on the fair value method prescribed by SFAS 123, the Company's net loss would
have increased by approximately $20,000 and $0 for the years ended December 31,
1997 and 1996, respectively. The Black-Scholes option pricing model was used to
estimate the fair value of options granted using the following assumptions for
1997: an expected life of 7.8 years; expected volatility of 0%, and risk-free
rate of 6.0%.
A summary of the status of the Company's stock option plan as of December 31,
1997 and 1996 and June 30, 1998, and changes during the periods ending on those
dates is presented below.
Number of Weighted-average
shares exercise price
Balance at January 1, 1996 114,734 $8.80
Granted 46,350 9.48
Exercised (4,878) 9.41
Forfeited (89,123) 8.80
--------
Balance at December 31, 1996 67,083 9.48
Granted 977,000 0.05
Exercised (2,500) 0.05
Forfeited (67,083) 9.48
--------
Balance at December 31, 1997 974,500 0.05
Granted 99,700 0.05
Exercised (56,630) 0.05
Forfeited (132,492) 0.05
--------
Balance at June 30, 1998 885,078 0.05
========
The weighted-average fair value of options granted during the years ended
December 31, 1997 and 1996 was $0.27 and $9.49, respectively.
F-15
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE I - STOCK OPTION PLAN - Continued
The following information applies to options outstanding at:
December 31, 1997 June 30, 1998
----------------- -------------
Options outstanding 974,500 885,078
Weighted average
exercise price $0.05 $0.05
Weighted average
remaining contractual life 7.8 7.8
Options exercisable 289,792 237,229
Weighted average
exercise price $0.05 $0.05
In April 1997, the Company reissued 748,000 stock options with an exercise price
of $0.05 to replace all of the outstanding stock options. The reissuance
provided a benefit to existing stock option holders with additional stock
options and accordingly, compensation cost was recognized. Additionally, the
Company granted 229,000 stock options with an exercise price of $0.05. The
exercise price was less than the market value of the Company's stock on the date
of the grant. Accordingly, compensation cost was recognized consistent with the
method of APB 25.
NOTE J - PREFERRED AND COMMON STOCK
On April 9, 1997, the Company's stockholders approved, among other resolutions,
to provide for the automatic conversion of the Company's outstanding preferred
stock series A, B and C equal to the same number of shares of the Company's
common stock and effect a .01402856-to-1 reverse stock split of the resulting
shares of common stock. Additionally, the Company's stockholders approved to
effect a .0147669-to-1 reverse stock split of the common stock of the Company
(other than the common shares resulting from the conversion) and the shares
subject to the Company's outstanding stock options. All references to common
stock have been retroactively restated to reflect the decreased number of common
shares outstanding.
F-16
<PAGE>
Cambio Networks, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Information as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997 is unaudited)
NOTE J - PREFERRED AND COMMON STOCK - Continued
The Company's stockholders also approved to have the Company enter into a Series
1 Preferred Stock Purchase Agreement with a group of outside investors
(Purchasers). Under the terms of the agreement, the Company issued and sold to
the Purchasers 3,500,000 shares of the Company's Preferred Stock (Series 1) at
$0.30 per share.
Holders of Series 1 are entitled to receive, when and as declared by the Board
of Directors, cash dividends at the rate of 8% of the "Original Issue Price,"
$0.30. Each holder of Series 1 is entitled to an equal number of votes of the
Company's common stock into which the holder's aggregate number of shares of
Series 1 are convertible.
NOTE K - MAJOR CUSTOMERS
In 1997, the Company had sales to one customer totaling approximately $764,000.
The customer accounted for 13.9% of net revenues. There were no major customers
with sales over 10% in 1996. For the six months ended June 30, 1998, the Company
had sales to three customers totaling approximately $489,000, which accounted
for 42.2% of net revenues. There were no major customers with sales over 10% for
the six months ended June 30, 1997.
F-17
