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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of to
Commission File No. 000-24637
CAMBIO, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3022377
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6006 North Mesa Street, El Paso, Texas 79912
(Address of Principal Executive Offices) (Zip Code)
915-581-5828
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period of 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The aggregate market value of the voting stock (Class A Common Stock, $.01
par value) held by non-affiliates of the registrant on September 29, 2000 was
$9,884,000 based on the closing sales price of the Class A Common Stock on such
date.
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The number of shares of Class A Common Stock outstanding on September 29,
2000 was 50,032,245. There were no shares of Class B Common Stock outstanding
and 500 shares of Series B Convertible Preferred Stock were outstanding. The
Series B Convertible Stock is convertible into 250,000 shares of Class A Common
Stock.
Cambio, Inc. revenue for the twelve months ending June 30, 2000 was
$983,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAMBIO, INC.
2000 Form 10-KSB
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. ....................................................................................... 4
ITEM 1. DESCRIPTION OF BUSINESS........................................................ 4
ITEM 2. DESCRIPTION OF PROPERTY........................................................ 8
ITEM 3. LEGAL PROCEEDINGS.............................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................................ 9
PART II. ....................................................................................... 10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................................ 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.............................................................. 11
ITEM 7. FINANCIAL STATEMENTS........................................................... 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................ 19
PART III. ....................................................................................... 20
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................................................ 20
ITEM 10. EXECUTIVE COMPENSATION......................................................... 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................................. 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................................... 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................................... 26
</TABLE>
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PART I
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks
and uncertainties that could cause the results of Cambio to differ materially
from those expressed or implied by such forward-looking statements. These risks
include the timely development, production and acceptance of new products and
services and their feature sets; the challenge of managing asset levels; the
flow of products into third-party distribution channels; the difficulty of
keeping expense growth at modest levels while increasing revenues; risks
associated with the settlement of accounts payable claims; and other risks
detailed from time to time in Cambio's Securities and Exchange Commission
filings.
The words "anticipate," "believe," "estimate," "expect," "intend,"
"will," and similar expressions, as they relate to Cambio or our management team
may identify forward-looking statements. Such statements reflect the current
views of Cambio with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. Cambio does not intend to update these
forward-looking statements.
ITEM 1. BUSINESS.
We deliver significant value to our customers by designing and
maintaining accurate models by visual tracking of each customer's unique
network, resources and bandwidth capacity. This added value addresses the
mission-critical needs of telecommunication and wireless communication networks
by reducing our customer's time to service and cost of operation, while in the
process improving quality of service. Our products and services are custom
designed to enhance network operating support by reducing network related costs
associated with a variety of business needs including network changes,
relocations, mergers, acquisitions and network outsourcing including backup and
disaster recovery planning. Network documentation is an essential business
information system allowing network support professionals the ability to create,
maintain and access a centralized graphic blueprint of the entire network
operation including all technical components and their relationships. We also
provide our customers a broad range of network integration, consulting, training
and implementation services.
On September 14, 1998, we 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. Under the terms of the
Agreement, Networks' shareholders received an aggregate of 1,238,842 shares of
our Class A Common Stock representing approximately 32.3% of the outstanding
Class A and Class B Common Stock. Cambio is a global provider of highly
specialized software technology to the telecommunications industry.
On October 20, 1998, Cambio, Inc. changed its name from Meadowbrook
Rehabilitation Group, Inc. to Cambio, Inc. Prior to June 30, 1998, we provided
outpatient, home health, and traditional acute, sub-acute and post-acute
comprehensive rehabilitation services. Since the beginning of the fiscal year
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ended June 30, 1997, and as a result of poor operating results and poor
prospects for growth in their respective markets, our Board of Directors began
to sell our healthcare operating assets. As of June 30, 1998, our assets
consisted mainly of cash and accounts receivable.
Our goal is to become the premier provider of mission-critical software
solutions providing the telecommunications and wireless communication industries
with the highest utilization of their capital, giving our customers competitive
advantage in providing new and enhanced services within their markets. We
continually strive to broaden our solution offerings to increase market share
for our customers by delivering end-to-end turnkey solutions amplifying
usability and simplicity designed for end user.
PRODUCTS AND SERVICES
Cambio's product offerings are based on the netRunner.com family of
products. The current flagship product, netRunner CMP, has now been on the
market for two years and has received wide acceptance from the market, partners,
and customers. netRunner CMP offers an inventory provisioning solution geared at
streamlining and reducing provisioning intervals for telecommunications
carriers.
Product Improvements:
In September 1999, netRunner version 3.3 was released. This marked the
final release done primarily by Phifer Consulting. Refer to the Proprietary
Rights section of this document for discussion on Phifer Consulting
relationship. All subsequent releases have been developed and delivered entirely
by the Cambio development team. In December 1999, Cambio released version 4.02
of netRunner. Version 4.02 was a complete revamping of the user interface in an
attempt to add critical functionality and usability. Currently Cambio has issued
netRunner version 5.0, which is a total rewrite of the entire source code. This
release is totally owned by Cambio and there are no longer any source code
co-ownership issues.
In addition to a new interface, significant effort was taken to move
the product into an N-Tier environment. This is distributed client-server
architecture, which was seen as critical for addressing scalability and
performance in large carrier environments. Version 4.5, released in March 2000,
added additional functionality at the user level and separated the client
interface code from the database code. This was a significant step in creating a
client-server model. In September 2000, Cambio released version 5 of netRunner
CMP. Version 5 was an entirely CORBA compliant architecture.
Professional Services:
Cambio was engaged in three major projects during the course of fiscal
year ended June 30, 2000. The first and largest project was Telecom Egypt. This
USAID project has many facets including product deliverables and data gathering.
The professional services team met all milestones on schedule throughout the
year. The second project, TM Touch (Telecom Malaysia Wireless), began in
February 2000 and received customer signoff in September 2000. The project
provides a complete wireless inventory system and was delivered on schedule. The
third project, Texas BroadBandNOW, began in May 2000 and is scheduled for
completion in November 2000.
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In March 2000, Cambio made a strategic decision to provide services as
an extension to our product. As a result, the Professional Services organization
was moved under product and technology. The Professional Services organization
is no longer treated as a profit center but as a delivery mechanism for Cambio
products. The decision not to be a service company is significant. It does not
mean that Cambio will not provide services and support for its products, but
means that services are viewed as a key component of product deliverables.
De-emphasizing services as a profit center allows Cambio to focus these
resources on successful product implementations and product delivery. It also
avoids the inevitable conflict created between a product and service team since
their charters are otherwise completely different.
MARKETING AND SALES
Cambio is targeting the telecommunications market with its suite of
products and solutions. The telecommunication industry is primarily focused in
the area of providing convergent services to the public and private sector.
These services include voice, data and multi-media. Cambio's solution offering
is positioned to cover the asset management platform that is considered a
crucial part of the Operations Support Systems (OSS) area of the
telecommunication industry. Providing a system that assists in the areas of
network inventory, circuit allocation and assignment, as well as bandwidth
utilization helps the service providers with faster time to market activity and
more reliable service maintenance.
Our marketing activity is focused on the service providers. This market
includes the Regional Bell Operating Company (RBOCs), Competitive Local Exchange
Carrier (CLECs), Incumbent Local Exchange Carrier (ILECs), Broadband providers,
cellular, Public Telephone and Telegraph (PTTs) and Internet providers. We
concentrate our attention on joining the forums in which new strategies are
molded and service providers look for guidance. Our involvement in the TMF
(Telemanagement Forum) is such an example. Other marketing activities include
the joint representation between Cambio and our partners in trade shows and
specialized exhibitions.
The market potential on a global basis for Cambio is significant. There
are several factors this growth potential can be attributed to. First,
De-regulation of telecommunications is occurring on a global scale. This causes
significant expansion in the market where previously it was fixed. In addition,
the worldwide demand for bandwidth has caused an explosion in infrastructure
building. This infrastructure is both wireline based and wireless based.
Cambio's sales strategy is both direct and indirect. We will leverage our
partner relationship to penetrate markets we currently do not have resources to
focus on directly and we are directly targeting the North American, European,
Middle Eastern, and Asian markets.
As these markets develop, Cambio will start maintaining a full presence
in these regions. As soon as a need for Cambio's technology is identified, and
enough interest is generated, Cambio's plan is to open regional offices.
In 2000, the Company had sales in excess of 10% to 2 customers
amounting to $813,000. The 2 customers accounted for 83% of net revenues. In
1999, the Company had sales in excess of 10% to three customers amounting to
$429,000, $117,000 and $96,000. The customers accounted for 52%, 14% and 12%,
respectively, of net revenues.
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PARTNERSHIP AND ALLIANCE
The market requires that we have both a competitive and a collaborative
strategy. The industry is driving the OSS market away from point solutions and
towards a single solution offering. Our partnership and alliance strategy is
designed with this in mind. We leverage the market presence of our large
partners while embedding our technology into their overall solution. Our
partners are Hewlett Packard, Oracle, Sirti, Logica, Alcatel, Information +
Graphic Systems, Inc., Solutions Plus, Sapura System Malaysia (SSM), Step 9 and
Active Software.
SOFTWARE DEVELOPMENT
During fiscal year ended June 30, 2000, we completely restructured the
netRunner product. The development team, formed in June 1999, began first with
reconstructing the user interface and adding key functionality to the original
Phifer Systems code set (see Proprietary Rights section for discussion on Phifer
Consulting relationship). During the last two quarters of the fiscal year, the
development team released the first restructured interface version, and
completely separated the interface code from the database wedge. This enabled
the next step, which was a move to an N-Tier environment. Version 5 is CORBA
based and N-Tier in nature.
Having laid the foundation for a much more scalable and open product,
the team will focus its efforts throughout the year on expanding server
technology to support the OEM product, and adding key functionality for
integration into the OSS environment.
The team will focus heavily this year on development of next generation
technology for all Cambio products and services. The foundation for an R&D
infrastructure that builds core technology and application suites will be
completed. This includes the support, documentation, and service infrastructure.
COMPETITION
Competition in the telecommunications markets is intense. However, we
believe that the segment of the market within which Cambio competes is currently
under-served. While competition in this segment is not intense, the rapid
changes within the industry as a whole could change this. Our continued
development of enhanced network management and operational support systems
should broaden its range of available competing products. Competitors include
hardware manufacturers that have developed software (or obtained software from
third parties) to operate on their hardware. We also encounter competition from
a large number of small software developers, which sell software or integrated
systems either for specific industries or applications within those industries.
We believe that in order to maintain and improve our competitive
position, we must continue to offer comprehensive services that help customers
effectively implement a complete, integrated software solution by providing a
full range of industry-leading consulting, integration, training and customer
support services. The timely delivery of flexible, cost-effective solutions for
the growing dynamic marketplace will continue to be our competitive initiative.
We believe Cambio's international focus
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clearly provides a competitive advantage moving forward. Some of our competitors
have little or no international presence.
PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
own proprietary rights. Presently, we have no patents, no patent applications on
file, and no intent to file patent applications in the near future. As part of
our confidentiality procedures, we enter into non-disclosure agreements with our
employees, distributors and corporate partners, and license agreements with
respect to our software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization, or to
develop similar technology independently. In selling our products, we rely on
both signed license agreements and "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, effective protection of intellectual property rights
is unavailable or limited in certain foreign countries. Currently, Cambio has
issued netRunner version 5.0, which is a total rewrite of the entire source
code. This release is totally owned by Cambio and there are no longer any source
code co-ownership issues. Cambio originally acquired the source code for
netRunner from Phifer Consulting Systems in 1998. The source code was co-owned
by both companies, but Cambio had exclusive marketing and distribution rights.
The contract provided for a graduated royalty schedule to be paid to Phifer for
sales of netRunner and all upgrade development was contracted through Phifer.
This arrangement was terminated in fiscal year 2000 primarily because the
product had been re-written by Cambio and Phifer required no further effort. The
contract was closed and settled through a stock exchange. There are no further
outstanding issues with Phifer consulting and the two companies remain on good
terms.
EMPLOYEES
As of September 29, 2000, we had approximately 33 full time employees,
consisting of 13 in customer service and engineering, 11 in sales and marketing,
and 9 in general and administrative functions. Our future performance depends
upon the continued service of our key members of management, as well as
marketing, sales, consulting and product development personnel, none of whom are
bound by an employment contract, and upon our ability to attract and retain
highly skilled personnel in these areas. Competition for such personnel is
intense, and there can be no assurance that we can retain our key employees or
that we will be successful in attracting, assimilating and retaining such
personnel in the future. None of our employees are represented by a labor union.
We have not experienced any work stoppages and consider our relations with our
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The corporate office is located at 13760 Noel Road, Suite 1023, Dallas,
Texas, 75240. Additional principal administrative, engineering, development and
support offices are located at 6006 Mesa, Suite 600, El Paso, Texas, 79912. The
Dallas office is approximately 3,500 square feet ($6,770 monthly) and the El
Paso office is approximately 7800 square feet ($8,100 monthly). We also have
sales executives
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located outside of the United States in locations of London, England and Cairo,
Egypt. Our offices are equipped sufficiently with leased up-to-date technology
equipment.
ITEM 3. LEGAL PROCEEDINGS.
Cambio is a party to various claims and routine litigation arising in
the ordinary course of business. We do not believe that the results of any such
claim litigation, individually or in the aggregate, will have a material adverse
effect on our business, financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded in the Nasdaq Over the Counter (OTC) Market.
On September 29, 2000, the closing sales price of the common stock was $0.20 per
share.
Prices below may not be actual representations of daily trading ranges.
The table below sets forth the quarterly high and low closing sales prices for
the common stock in the period from July 1, 1998 through September 29, 2000:
<TABLE>
<CAPTION>
PRICE PER SHARE
-------------------
High LOW
------- -------
<S> <C> <C>
FISCAL 2001
First quarter (through September 29, 2000) ............. $ 0.40 $ 0.21
FISCAL 2000
First quarter .......................................... $1.4375 $ 0.625
Second quarter ......................................... 0.875 0.1875
Third quarter .......................................... 3.25 0.1875
Fourth quarter ......................................... 1.1562 0.2812
FISCAL 1999
First quarter .......................................... $ 1.06 $ 0.50
Second quarter ......................................... 0.63 0.25
Third quarter .......................................... 0.50 0.13
Fourth quarter ......................................... 2.44 0.19
</TABLE>
As of June 30, 2000, there were approximately 210 holders of record of
our common stock.
We do not anticipate paying any other cash dividends in the foreseeable
future and intend to retain any earnings to fund future growth and the operation
of our business.
In April 2000, we consummated a private placement of common stock
pursuant to which we issued 800,000 shares of common stock at $0.25 a share for
an aggregate consideration of $200,000. In May 2000, we consummated a private
placement of common stock pursuant to which we issued 2,780,000 shares of common
stock at $.25 a share for an aggregate consideration of $695,000. We believe
that each such issuance or sale was exempt from registration pursuant to Section
4(2) of the Securities Act 1933, as amended.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with our consolidated financial statements, including the notes thereto,
appearing elsewhere in this report.
ACQUISITION OF CAMBIO NETWORKS, INC.
On September 14, 1998, we acquired Cambio Networks, Inc. Under the
terms of the Agreement, Networks' shareholders received an aggregate of
1,238,842 shares of our Class A Common Stock representing approximately 32.3% of
the outstanding Class A and Class B Common Stock.
Immediately following the acquisition of Cambio Networks in September
1998, the company implemented a restructuring plan involving the closing and
relocating of headquarters from Bellevue, Washington to an existing office in
Dallas, Texas. In addition, the company moved its research and development
offices to El Paso, Texas; and is assimilated finance and accounting functions
into existing capabilities in Emeryville, California and subsequently to El
Paso, Texas. We maintained our sales and service offices domestically in
Parsippany, New Jersey until their closure in December 1998.
Our sales and services offices are currently in Dallas, Texas and El
Paso, Texas in the US. Internationally we have sales executives in London,
England and Cairo, Egypt. In an effort to further consolidate its operations, in
February 1999 we decided to close our Emeryville, California office and move all
finance and administrative functions to El Paso, Texas. No material costs were
incurred in connection with these relocations.
DISPOSITION OF HEALTHCARE OPERATIONS
On February 2, 1999, we entered into an agreement with Imperial Loan
Management Corporation whereby we transferred all of the issued and outstanding
stock of its discontinued healthcare subsidiaries to Imperial. As part of the
agreement, Imperial will use its best efforts to liquidate each of the
Subsidiaries, settling outstanding obligations and collecting all amounts due.
We remain a guarantor of the Subsidiaries' outstanding indebtedness consisting
of amounts loaned to Cambio and the Subsidiaries by Imperial, which approximates
$678,000 as of June 30, 2000. We are entitled to receive one-half of any amounts
remaining after payment of the Imperial loans and expenses. We consider the
realization of the remaining assets to be unlikely and the assets have been
fully provided for. All other material obligations of the Subsidiaries have been
settled except for the Imperial loans.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2000 AS COMPARED TO YEAR ENDED JUNE 30, 1999:
Revenues increased $160,000, or 19%, from $823,000 for the twelve
months ended June 30, 1999 compared to $983,000 for the twelve months ended June
30, 2000. Increases in sales have mainly been reflected by product shipments of
netRunner to Hewlett Packard clients in Middle East and Southeast Asia of
approximately $800,000. Revenues for the twelve months ended June 30, 2000 were
split between sales, services and maintenance, primarily of the netRunner
product, compared to revenues for the twelve months ended June 30, 1999 which
were split between sales, services and maintenance split between the netRunner
and Command products.
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Net loss from continuing operations decreased $3,617,000, or 40%, from
$9,002,000 for the twelve months ended June 30, 1999 compared to $5,385,000 for
the twelve months ended June 30, 2000. The decrease was primarily the result of
fiscal year 1999 write-off of goodwill for $4,850,000. Also included in the
twelve months ended June 30, 2000 is approximately $1,000,000 compensation
expenses associated with issuance of stocks, options and warrants at reduced
offering prices compared to current market price.
Because netRunner is a new product, and because of liquidity
difficulties, the launch and marketing activities of the netRunner product were
severely constrained which resulted in poor sales and market penetration for the
twelve months ended June 30, 2000 consistent with the twelve months ended June
30, 1999.
General and administration costs remained consistent, from fiscal year
2000 to 1999. Sales and marketing increased $876,000 in fiscal year 2000 as a
direct result of activities geared at increasing market exposure and generating
revenue. These included partner participation activity and sales staffing
activity. Services increased $207,000 in fiscal year 2000 as a direct result of
staffing increased to accommodate deliver of customer project. Research and
development costs increased approximately $314,000 from $280,000 for the twelve
months ended June 30, 1999 to $594,000 for the twelve months ended June 30, 2000
as a direct result of modification to the netRunner product.
Interest income increased approximately $11,000 from $13,000 for the
twelve months ended June 30, 1999 to $24,000 for the twelve months ended June
30, 2000. Interest expense increased approximately $32,000 from $66,000 for the
twelve months ended June 30, 1999 to $98,000 for the twelve months June 30,
20000.The increase is representative of the company's increase in overnight
investments of excess funds compared to prior fiscal year.
YEAR ENDED JUNE 30, 1999 AS COMPARED TO YEAR ENDED JUNE 30, 1998:
Revenues for the twelve months ended June 30, 1999 of $823,000 were
split between sales, services and maintenance of the Command product and its
newly introduced netRunner product. The Command revenues consisted primarily of
services and maintenance revenues with a negligible amount of new sales. The
netRunner revenues were all new sales of software and attendant implementation
services.
Net loss from continuing operations of $9,002,000 for the twelve months
ended June 30, 1999 was considerably greater than to the comparable loss of
$1,067,000 for the twelve months ended June 30, 1998. The loss from continuing
operations in 1998 was almost entirely made up of administrative and general
expenses due to the fact we had no revenues associated with continuing
operations. In fiscal year 1999, we had approximately $823,000 in revenues with
administrative and general expenses of approximately $4,400,000 and goodwill
write-off of approximately $4,850,000.
Goodwill of approximately $4,850,000 was originally recorded as part of
the acquisition of Cambio Networks, Inc. The subsequent write-off of this
goodwill was taken in response to the inability of the primary product of Cambio
Networks, Inc., Command, to maintain its place in the market without a
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major upgrade including the prohibitive cost to the Company of such an upgrade.
We withdrew the Command product from the market place in the fourth quarter of
fiscal year 1999; and consequently, the decision was made to write off the
goodwill associated with the Command product.
Because netRunner is a new product, and because of our liquidity
difficulties, the launch and marketing activities of the netRunner product were
severely constrained which resulted in poor sales and market penetration during
the twelve months ended June 30, 1999. An additional effect on fiscal year 1999
sales revenue was our change in market focus in conjunction with the
introduction of the netRunner product and the subsequent phase out of the
Command product. The Command product was designed for, and primarily aimed at,
IT Center applications. The netRunner product was designed for, and is primarily
marketed to the telecommunications industry. This change in market focus
contributed to the slow sale start for the netRunner product.
General and administrative expense increased approximately $3,164,000
from $1,207,000 for the twelve months ended June 30, 1998 to approximately
$4,371,000 for the twelve months ended June 30, 1999. The increase in general
and administrative expenses reflects the increased expenses associated with
entering a new line of business and the launch of a new product. We had research
and development costs of approximately $300,000 for the twelve months ended June
30, 1999 compared with none for the twelve months ended June 30, 1998.
Interest income decreased $127,000 from $140,000 for the twelve months
ended June 30, 1998 to $13,000 for the twelve months ended June 30, 1999. The
decrease is the result of our reduced cash balances in fiscal year 1999 as
compared to fiscal year 1998. Interest expense increased from none for the
twelve months ended June 30, 1998 to $66,000 for the twelve months ended June
30, 1999. This expense was associated with the debt acquired in the acquisition
of Cambio Networks, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The use of cash of $3,493,000 for the twelve months ended June 30,
2000, was composed of a net loss of $5,385,000 primarily offset by expenses
settled by payments in common stock of $1,594,000 increasing accounts payable
and accrued liabilities by $214,000 and decreasing other assets by $64,000. This
use of cash in operating activities of $3,493,000 for the twelve month ended,
June 30, 2000 is comparable to $3,289,000 for the twelve month ended, June 30,
1999, which is composed of net losses of continuing operations of $9,002,00 for
the twelve month ended, June 30, 1999 offset by the write-off of goodwill of
$4,850,000 and increases in net operating liabilities over assets of $670,000
for the twelve month ended June 30, 1999. In the fiscal year ended June 30,
1999, we had virtually no operating activities associated with our medical
business other than the continuing wind down of our medical business through the
liquidation of assets in payments of liabilities and seven months operating
activities associated with our new software and services related business after
the acquisition of Cambio Networks Inc..
For the twelve months ended June 30, 2000, our investing activities
consisted of $18,000 of software and computer/network equipment purchases to
support the operations. For the twelve months ended June 30, 1999, our investing
activities consisted mostly of $143,000 in additions to equipment,
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$638,000 as the loan to Cambio Networks Inc., prior to acquisition and the
legal, accounting, and other costs incurred in acquiring Cambio Networks Inc. of
approximately $100,000.
Proceeds from financing activities for the twelve months ended June 30,
2000 consisted of $1,483,000 from common stock issuance, down significantly
compared to $3,700,000 for the twelve months ended June 30, 1999. Also,
borrowings on debt are up $343,000 to $407,000 for the twelve months ended June
30, 2000 from $64,000 for the twelve months ended June 30, 1999.
Our current operations are cash flow negative and as of June 30, 2000,
we had negative working capital of $3,179,000. With our reorganization and the
introduction of netRunner in the prior fiscal year, we believe that we are
poised to take advantage of the market opportunities existing in the
telecommunications and wireless telecommunication industry. With the advanced
programming that netRunner represents and our continued development of this
product, we believe that our current negative operational cash flow is temporal
and will be alleviated by increased sales in the coming year.
On February 1, 2000, we consummated a private placement of common stock
pursuant to which we issued 666,666 shares of common stock at $0.15 a share for
an aggregate consideration of $100,000. Since February 2000, warrant holders
have exercised all of their warrants pursuant to which we issued 1,999,998
shares of common stock at $0.15 a share for an aggregate consideration of
$300,000. In April 2000, we consummated a private placement of common stock
pursuant to which we issued 800,000 shares of common stock at $0.25 a share for
an aggregate consideration of $200,000. In May 2000, we consummated a private
placement of common stock pursuant to which we issued 2,780,000 shares of common
stock at $.25 a share for an aggregate consideration of $695,000. Additionally,
in August and September 2000, we consummated private placements of common stock
pursuant to which we issued 5,674,000 shares of common stock at $.125 a share
for an aggregate consideration of $709,250.
Finally, in July 2000, we issued $1 million in principal amount of
convertible notes. In connection with this financing, we issued warrants to
purchase 1,250,000 shares of common stock. The subscribers in this financing
have agreed to purchase from us convertible notes up to the principal amount of
$17 million. This right is exercisable at our option. In connection with this
right, we are obligated to issue additional warrants to the subscribers
Subsequent to year-end June 30, 2000, Cambio entered into a $17,000,000
financing supported with convertible notes for the next three years as discussed
in footnote to the financial statements. The subscribers have agreed to purchase
from Cambio these convertible notes exercisable at our option. The holders are
bound to honor the loans in the subscription agreement and cannot withhold
monies from draw down by Cambio except for reason of default. Notes bear
interest at 6% and are convertible to common stock at the option of the note
holder.
Cambio's sales activities have grown as the pipeline of active accounts
has grown from 14 customers last year to 107 active customers as of September
29, 2000. In fiscal year ended June 30, 1999, we had no US customers and
currently we have two US customers, Broadband Now and Avista (symbol AVA), one
of which we delivered product for in fiscal year ending June 30, 2000 and the
other will
14
<PAGE> 15
deliver product in the quarter ending December 31, 2000. We anticipated further
orders from the same two customers.
Additionally, Cambio has committed resources to localize the product to
the Japanese and Chinese languages after negotiations with its strategic
partners and potential clients. The localized product assures that Cambio is in
a unique position among all its competitors to address the lucrative Japan,
Korean and Mainland China market. The product should be ready by mid 2001 with
anticipated sales soon after that.
As discussed above, Cambio is a party to an agreement dated February 2,
1999 with Imperial. The primary subject matter of the agreement concerns the
liquidation of assets transferred from Cambio to Imperial and the use of those
liquidation proceeds as payment of two outstanding loans between Imperial and
Cambio and Cambio's wholly owned subsidiary.
The Agreement required Cambio, among other things, to pay fees to
Imperial for the liquidation of assets transferred to Imperial, pay interest to
Imperial on the outstanding principal balance of the loans, and to pay the
remaining outstanding principal balance on the loans on February 1, 2000, if
liquidation proceeds had not already satisfied the loans. Imperial's obligation
under the Agreement, among other things, was to liquidate the assets transferred
to Imperial (consisting primarily of Medicare related receivables of the
company's former medical business), apply the proceeds of said liquidation to
pay down the outstanding loan balances, and to provide quarterly reports to
Cambio with respect to Imperial's progress in liquidating the assets transferred
from Cambio to Imperial.
By letter dated August 16, 1999, Cambio notified Imperial that Imperial
was in breach of the Agreement by virtue of the fact that Imperial had not
provided quarterly reports for the quarters ended March 31 and June 30, 1999.
Cambio further advised Imperial that Cambio would discontinue paying any
additional funds to Imperial until this breach was cured. In late September
1999, Imperial subsequently provided reports for the quarters ended March 31 and
June 30, 1999. Since then, no additional quarterly reports have been provided by
Imperial as required by the Agreement. Additionally, through discussions with
Imperial and the reports provided, it appears that Imperial has liquidated only
$80,000 of the $1,300,000 in assets transferred to it. Cambio's requests for
information documenting why the liquidation process has not gone any further
have been ignored.
Imperial is required under the agreement to use its "best efforts" to
liquidate the assets transferred to Imperial. To date, Imperial has provided no
documentation that would explain why the assets transferred to Imperial have not
been liquidated. Cambio believes that Imperial is in breach of the agreement due
to the failure of Imperial to provide the required quarterly reports and
Imperial's apparent failure to use its best efforts to collect on the accounts
receivable transferred from Cambio to Imperial. Therefore, Cambio believes that
it is not in default of its obligations under the agreement by not paying the
otherwise required payment of the outstanding principal balance of the loans.
The Company has no commitments for capital expenditures currently
outstanding.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company's operating results could vary significantly from period to
period, as a result of a variety of factors including the requisition cycles of
our customers, the financial position of our customers and competitive factors.
The Company is not subject to any seasonality factors.
15
<PAGE> 16
New Accounting Pronouncements - See discussion of new accounting
pronouncements appearing in Note 1 to the consolidated financial statements. See
index to Financial Statements on page F-1 of this report
FACTORS THAT COULD AFFECT FUTURE RESULTS
PRIVATE PLACEMENTS:
In 2000, we completed various financings pursuant to which we issued
shares of common stock at significantly below the market value of our common
stock. We cannot assure you that we will not issue shares in the future at a
price per share, which is less than the then current market price.
HISTORICAL OPERATING LOSSES:
We do not know when our business will be profitable. We have generated
revenue to date, but we have experienced operating losses since our inception.
Our total operating losses since our inception through June 30, 2000 is
approximately $29,957,000.
COMPETITION:
The markets in which we operate are competitive, highly fragmented and
rapidly changing. In order to compete effectively, our strategy is to enhance
our current products, enhance the operability of our products with one another,
develop new products and have them introduce them in the market in a timely
fashion for customer response. We anticipate continued growth of competition in
the telecommunications industry and consequently, the entrance of new
competitors into the software systems market in the future.
The principal competitive factors in our market are quality,
performance, price, customer support and training, business reputation and
product attributes such as scalability, compatibility, functionality and
acceptance. In addition, we compete with a number of companies that have
substantially greater financial, technical, sales, marketing and other resources
as well as greater name recognition. As a result, our competitors may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements, or be able to devote greater resources to the promotion and sale
of their products and services.
TECHNOLOGICAL CHANGE AND INNOVATION:
Our success depends on our 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.
During fiscal year 2000, we enhanced netRunner in a very aggressive manner and
delivered timely. Development included major rewrites of the product as well as
adding capabilities that the customers and potential customers were asking us to
provide. We can not be sure that we will meet all our customer expectations and
that we will be successful in our efforts.
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<PAGE> 17
CUSTOMER BASE:
Our market segment consists mainly of telecommunication service
providers. While this segment is dynamic and growing in a rapid way, it does
represent a limited number of installed customer bases. This concentration of
customers can cause our revenues and earnings to fluctuate from quarter to
quarter based on these customers' requirements and the timing of their orders.
None of our 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 our
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 our major customers would lower our revenues.
In addition, the acquisition by a third party of one of our major customers
could result in the loss of that customer and could disrupt a significant source
of revenue.
INTERNATIONAL:
Our customer base consists of telecommunications service providers
around the world. Telecommunications and the requirement for services are ever
increasing around the world especially due to the increased demand on wireless
and internet services. International sales, however also involve possible longer
account receivable payment cycles and unexpected changes in regulatory
requirements, including royalty and withholding taxes. Also due to any possible
world event, cancellation of orders, delay of orders or possible restriction of
import/export by government may impact us which may lead to loss of revenue.
PRODUCT INTRODUCTIONS:
We can not guarantee the success of any newly introduced product.
Therefore, we may be forced to absorb the cost of developing that product
without a return. Though we have limited resources our strategy is to achieve
market acceptance on our current products, and diversify into other
complementary products which will meet customer expectations and enhance return
for our current shareholders.
INTELLECTUAL PROPERTY:
We rely on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights consistent with other makers of high technology products.
We may be forced to fight these instances. This will add legal cost to our
operation and the cost may outweigh the benefit. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products or technology without authorization, or to develop similar technology
independently.
We are not aware that any of our products infringe upon the proprietary
rights of third parties. However, third parties may claim such infringement by
us with respect to current or future products. We expect that software product
developers will increasingly be subject to such claims as the number of products
and competitors in our industry segment grows and the functionality of products
in the industry segment overlaps.
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<PAGE> 18
DELISTING OF CLASS A COMMON STOCK FROM NASDAQ:
On October 20, 1998, we received notice of a decision by the Nasdaq
Stock Market to delist our Class A Common Stock from the Nasdaq National Market
effective with the close of business on October 20, 1998. Additionally, at that
time, we did not meet the requirements to transfer its listing to the Nasdaq
SmallCap Market. Accordingly, trading in our Class A Common Stock is being
conducted on the OTC Bulletin Board.
PREFERRED STOCK:
As of September 29, 2000, there were outstanding a total of 500 shares
of our Series B convertible preferred stock. These shares presently are
convertible, at any time at the option of their holders, into an aggregate of
250,000 shares of our common stock. These shares of preferred stock also have
anti-dilution protections, which could make them convertible into additional
shares of common stock.
Our board of directors has the authority to issue up to 1,000,000
shares of our preferred stock and to determine the price, rights, preferences
and privileges of those shares without any further vote or action by the
stockholders. As mentioned above, we presently have outstanding 500 shares of
Series B convertible preferred stock. Preferred stockholders could adversely
affect the rights of holders of common stock by:
o exercising voting, redemption and conversion rights to the
detriment of the holders of common stock;
o receiving preferences over the holders of common stock
regarding or surplus funds in the event of our dissolution or
liquidation;
o delaying, deferring or preventing a change in control of our
company; and
o discouraging bids for our common stock at a premium over the
market price of the common stock
KEY PERSONNEL:
We are dependent on the principal member of our management staff who is
Ali Al-Dahwi, our President and Chief Executive Officer. He played a key role in
the strategic partner relationships as well as in funding. The loss of any of
his services could impair our ability to increase operating revenues and could
materially adversely affect our results of operations. We have entered into an
employment agreement with Mr. Al-Dahwi. We currently have no key personnel life
insurance.
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<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are filed as part of
this Form 10-KSB. See Index to Consolidated Financial Statements on page F-1 of
this Form 10-KSB. The report contains an explanatory paragraph regarding the
company's ability to continue as a going concern.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On September 6, 2000, Grant Thornton LLP resigned as the independent
accountants of Cambio, Inc.
In connection with the audits of our financial statements for each of
the two fiscal years ended June 30, 1999 and June 30, 1998, and during the most
recent interim period preceding Grant Thornton LLP's resignation, there were no
disagreements between Grant Thornton LLP and us on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with the change in accountants.
BDO Seidman, LLP has been retained as our new independent accountants
and the decision to engage BDO Seidman, LLP as our accountants was approved by
our Board of Directors.
During the last two fiscal years and the subsequent interim period to
the date hereof, we did not consult BDO Seidman, LLP regarding any of the
matters or events set forth in Item 304(a)(2) of Regulation SB-2.
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<PAGE> 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth information regarding our executive
officers and directors
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Philip R. Chapman 39 Chairman of the Board
Ali Al-Dahwi 45 President, Chief Executive Officer and
Director
Anas El-Mahdi 33 Executive Vice President of Business
Development and Sales
Scott Munden 36 Executive Vice President of Product and
Technology
Kent J. Van Houten 46 Executive Vice President of Finance,
Chief Financial Officer and Secretary
Lin Meyer 53 Executive Vice President of Strategic
Partners and Alliances
</TABLE>
Philip R. Chapman has served as Chairman of the Board since September
1998. From April 1997 to September 1998, Mr. Chapman was a director of Cambio
Networks, Inc. Mr. Chapman is currently and has been for the past five years, a
General Partner of Adler & Company, which is a member of Euro-America Venture
Partners LLC, which is the general partner of Euro-America-II. Mr. Chapman is
presently a director of Shells Seafood Restaurants as well as several privately
held companies. Mr. Chapman holds a BS in Psychology and an MBA in Finance and
Marketing from Columbia University.
Ali Al-Dahwi has served as a Director since September 1998 and has
served as President and Chief Executive Officer since January 1999. From
September 1998 to January 1999, Mr. Al-Dahwi was President and Chief Operating
Officer. From July 1998 to September 1998, Mr. Al-Dahwi served as Vice President
of Marketing of Cambio Networks, Inc. From 1982 to 1998, Mr. Al-Dahwi held
various positions at Accugraph Corporation including Vice President and General
Manager - Global Complex Enterprise Network Business Unit from 1996 to 1998 and
Manager of International Operations from 1992 to 1996. Mr. Al-Dahwi holds a BS
in Civil Engineering from the University of Texas El Paso.
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<PAGE> 21
Anas El-Mahdi has served as Executive Vice President of Business
Development and Sales since January 2000. From June 1999 to December 1999 Mr.
El-Mahdi was Vice President of Business Development. Mr. El-Mahdi joined Cambio
in October of 1998. From April 1998 to October 1998, he was a consultant for
British Telecom in the United Kingdom. From September 1994 to March 1998, he was
a Telecommunications and Networking Consultant for Accugraph Corporation. From
September 1992 to August 1994, he was an Application Engineer for Opensoft. From
October 1990 to September 1992, he was a Development Engineer for AAW Consulting
Engineers. Mr. El-Mahdi holds a BSc. degree in Engineering from the Faculty of
Engineering, Cairo University, Egypt.
Scott Munden has served as Executive Vice President of Research and
Development since January 2000. Mr. Munden was hired October 1998 as Director of
Product Marketing and Development, and was subsequently promoted in January 1999
to Vice President Operations before his recent promotion to Executive Vice
President of Research and Development. From 1996 to 1998 Mr. Munden was General
Manager IBIS Corporation. From 1987 to 1996, Mr. Munden held various positions
at Accugraph Corporation including Solutions Architect, Product Manager,
Regional Sales Manager and Technical Coordinator. From 1984 to 1987, Mr. Munden
held various positions at Wang Labs, Inc. including Technical Support Analyst
and Quality Control Auditor. Mr. Munden holds a BS in Economics from the
University of Texas El Paso.
Kent J. Van Houten has served as Executive Vice President of Finance,
Chief Financial Officer since June 2000. From January 2000 to April 2000, Mr.
Van Houten was a consultant with RF Monolithics, Inc. From May 1995 to October
1999, Mr. Van Houten was Chief Financial Officer, Secretary and Treasurer with
Peerless Mfg. Co. From 1975 to 1994, Mr. Van Houten held various positions with
National Gypsum Company, and its wholly owned Subsidiary, The Austin Company.
Mr. Van Houten holds a BBA in Accounting from Howard Payne University.
Lin Meyer has served as Executive Vice President of Strategic Partners
and Alliances since July 2000. Ms. Meyer was hired in April 1999 as Director
Telecom Sales and Channel Programs and was subsequently promoted on June 1999 to
Vice President Strategic Partners and Alliances before her recent promotion to
Executive Vice President of Strategic Partners and Alliances in July 2000.
Before her employment with Cambio, Ms. Meyer served as Regional Manager for
Beechwood Consulting from 1998 to April 1999. From 1989 to 1998 Ms. Meyer held
various positions with American Telephone &Telegraph. Ms. Meyer holds a BS
degree from Coe College.
BOARD OF DIRECTORS
We currently have authorized two directors. The current directors are
Philip Chapman and Ali Al-Dahwi. These directors hold office until each annual
meeting of stockholders or until their successors are elected or appointed.
Thereafter, at each annual meeting of stockholders the successors to the
directors will be elected to serve from the time of election and qualification
until the next annual meeting following election.
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<PAGE> 22
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and persons who beneficially own
more than ten percent of our common stock, to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission.
Executive officers, directors and greater than ten percent beneficial owners are
required by the SEC to furnish us with copies of all Section 16(a) forms they
file.
Based upon a review of the copies of such forms furnished to us and
written representations from our executive officers and directors, we believe
that during fiscal 2000 all Section 16(a) filing requirements applicable to our
executive officers, directors and greater than ten percent beneficial owners
were complied with.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to compensation
as of June 30, 2000 during the last three fiscal years paid by us for services
by our Chief Executive Officer and our four other highest-paid executive
officers whose total salary and bonus for such fiscal year exceeded $100,000,
collectively referred to below as the Named Executive Officers:
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- NUMBER OF SECURITIES OF OTHER
FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
----------- --------- ------- ----------------------- ------------
<S> <C> <C> <C> <C> <C>
Ali Al-Dahwi(1) 2000 $ 150,015 $19,370 555,000 0
1999 $ 112,512 $ 8,895 250,000 0
1998 0 0 0 0
Steve 2000 $ 135,000 $ 9,448 287,500 0
Dong 1999 $ 43,015 0 333,000 0
1998 0 0 0 0
Anas 2000 $ 124,167 $12,354 500,500 0
El-Mahdi 1999 $ 78,750 0 120,000 0
1998 0 0 0 0
Scott 2000 $ 105,000 $13,964 544,500 0
Munden 1999 $ 48,399 0 76,000 0
1998 0 0 0 0
Lin 2000 $ 100,000 0 150,000 0
Meyer 1999 $ 18,799 0 0 0
1998 0 0 0 0
</TABLE>
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<PAGE> 23
----------
(1) Mr. Al-Dahwi became President and Chief Operating Officer in September 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended June 30, 2000 to each of the Named Executive Officers. No
stock appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
GRANTED FISCAL 2000 ($/SHARE) DATE
----------------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Ali Al-Dahwi 621,771 12.0% $0.20 09/14/04
Steve Dong 336,373 6.0% $0.20 03/05/05
Anas El-Mahdi 514,584 10.0% $0.20 10/01/04
Scott Munden 544,500 10.0% $0.20 10/26/04
Lin Meyer 150,000 2.0% $0.20 04/19/05
</TABLE>
OPTION VALUES
The following table sets forth for each of the Named Executive Officers
options exercised and the number and value of securities underlying unexercised
options that are held by the Named Executive Officers as of June 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT YEAR
ACQUIRED ON VALUE OPTIONS AT YEAR END END ($)
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Ali Al-Dahwi 1,216,771 $243,354 405,000/0 $45,562/$0
Steve Dong 333,000 $66,000 0/336,373 $0/$37,842
Anas El-Mahdi 14,584 $2,917 206,833/413,667 $23,269/$46,537
Scott Munden 0 0 206,833/413,667 $23,269/$46,537
Lin Meyer 0 0 50,000/100,000 $5,625/$11,250
</TABLE>
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<PAGE> 24
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation from Cambio
for their services as members of the Board of Directors, although members are
reimbursed for actual and reasonable out of pocket expenses in connection with
attendance at Board of Directors and Committee meetings.
At this time the Company does not have a long-term incentive plan. The
Company does have an employment agreement with Mr. Al-Dahwi. The terms of the
contract generally provide for the following:
i. Salary of $150,000, with a bonus of 1.5% of sales.
ii. 1,000,000 options with each option being exercisable for 1
share of the Company's Class A Common Shares at $0.20 a share.
750,000 of the options vest over a three-year period and the
remaining 250,000 vested at issuance.
iii. The agreement has a one-year renewable term, which renews on
February 4, 2001.
iv. In the event of termination of the agreement, Mr. Al-Dahwi is
entitled to a severance payment of 6 months base salary
payable semi-monthly over 6 months, and all options
outstanding will vest.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as relating to the
beneficial ownership of our common stock as of September 29, 2000, and as
adjusted to reflect the sale of shares of our common stock by the selling
stockholders, by:
o each beneficial owner of more than 5% of our common stock;
o each director of Cambio;
o each of our named executive officers; and
o all executive officers and directors as a group.
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<PAGE> 25
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A PERCENT OF SHARES OF CLASS A
NAME COMMON STOCK BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY OWNED
---- ------------------------------- -------------------------------
<S> <C> <C>
Ibrahim El-Ibrahim 4,000,000 8.0%
Ali Al-Dahwi(1) 853,894 1.7%
Scott Munden(2) 512,545 1.0%
Anas El-Mahdi(3) 472,792 *
Philip Chapman(4) 268,141 *
Steve Dong 215,373 *
Lin Meyer(5) 50,000 *
All directors and executive
officers as a group (6 persons) 2,422,745 4.8%
</TABLE>
----------
*LESS THAN 1%
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Percentage of beneficial ownership is
based on shares of our common stock outstanding as of September 29, 2000. Shares
of common stock subject to options or warrants currently exercisable, or
exercisable within 60 days after September 29, 2000, are deemed outstanding for
the purpose of computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage
ownership of any other person. The address of the individuals listed above is
c/o Cambio.
(1) Includes 405,000 options.
(2) Includes 413,666 options.
(3) Includes 413,666 options.
(4) Includes 9,000 warrants held by Mr. Chapman and 6,000 warrants held by
his wife, Susan Chapman, for the purchase of Class A Common Stock. Mr.
Chapman disclaims beneficial ownership of these warrants.
(5) Represents 50,000 options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no material interests, direct or indirect, of directors,
executive officers or senior officers or any known associate or affiliate of any
of the foregoing in any transaction during the last two years, or in any
proposed transaction which has materially affected or would materially affect us
or any of our subsidiaries and which is not otherwise disclosed herein except
for the following:
On February 2, 1999, we entered into an agreement with Imperial Loan
Management Corporation whereby we transferred all of the issued and outstanding
stock of our discontinued healthcare subsidiaries to Imperial, an affiliate of
our former Chairman and CEO, Harvey Wm. Glasser, M.D., who is overseeing the
liquidation of the Subsidiaries on behalf of Imperial. As part of the agreement,
Imperial will use its best efforts to liquidate each of the Subsidiaries,
settling outstanding obligations and collecting all amounts due. We remain a
guarantor of the Subsidiaries' outstanding indebtedness, which approximates
$677,808 as of June 30, 1999, and are entitled to receive one-half of proceeds
received after payment of
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<PAGE> 26
all expenses. In connection with this transaction, we recorded a charge to
write-off the remaining net assets from discontinued operations.
Frederick Adler, who purchased a significant portion of the Preferred
Stock offered in fiscal year 1999, is the father-in-law of the Chairman of the
Board, Philip Chapman.
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated April 3, 1998, between
Meadowbrook Rehabilitation Group, Inc., Interset, Inc., Cambio
Networks, Inc., and the securityholders named therein, filed as
Exhibit 2.1 to the Company's current report on Form 8-K dated
April 22, 1998.
2.2 Agreement of Amendment, dated July 27, 1998, between Meadowbrook
Rehabilitation Group, Inc., Interset, Inc., Cambio Networks,
Inc., and the securityholders named therein, filed as Annex A to
the Company's Joint Information/Consent Solicitation Statement on
Schedule 14C dated August 14, 1998.
2.3 Secured Bridge Financial Note dated April 3, 1998, between
Meadowbrook Rehabilitation Group, Inc., and Cambio Networks,
Inc., filed as Exhibit 2.2 to the Company's current report on
Form 8-K dated April 22, 1998.
3.1 Amended and Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Commission File No. 33-44197).
3.2 Amended and Restated By-Laws of the Company, filed as Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Commission
File No. 33-44197).
3.3 Certificate of the Designations, Powers, Preferences, and Rights
of the Series B Convertible Preferred Stock, filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.
4.1 Form of Convertible Note, dated as of July 27, 2000, filed as
Exhibit 4.1 to the Company's current report on Form 8-K dated
July 27, 2000.
4.2 Form of Warrant, dated as of July 27, 2000, filed as Exhibit 4.2
to the Company's current report on Form 8-K dated July 27, 2000.
10.1 1994 Stock Incentive Plan of the Company filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
10.2 Agreement dated February 2, 1999 by and between Harvey Glasser,
the Company and certain security holders, filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998.
10.3 Agreement dated February 2, 1999 by and between Imperial Loan
Management Corporation, Cambio, Inc. and Medbrook Home Health,
Inc., filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1998.
10.4 Form of Subscription Agreement, dated as of July 27, 2000,
between the Company and the subscribers named therein, filed as
Exhibit 10.1 to the Company's current report on Form 8-K dated
July 27, 2000.
21.1 Subsidiaries of the Company, filed as Exhibit 21.1 to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 1999.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
Current Report on Form 8-K, Item 7 dated June 7, 2000.
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAMBIO, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants - BDO Seidman, LLP...................................F-2
Report of Independent Certified Public Accountants - Grant Thornton LLP.................................F-3
Consolidated Financial Statements:
Balance Sheet..................................................................................F-4
Statements of Operations.......................................................................F-5
Statements of Stockholders' Deficit ...........................................................F-6
Statements of Cash Flows.......................................................................F-7
Notes to Financial Statements..................................................................F-8 - F-16
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
Cambio, Inc.
We have audited the accompanying consolidated balance sheet of Cambio, Inc. (a
Delaware corporation) and subsidiaries as of June 30, 2000, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cambio,
Inc. and subsidiaries as of June 30, 2000, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of $5,385,000 during the
year ended June 30, 2000, and, as of that date, the Company's liabilities
exceeded its current assets and total assets by $3,179,000 and $3,117,000,
respectively. These factors, among others, as discussed in Note 2 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Dallas, Texas
September 22, 2000
F-2
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Cambio, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Cambio, Inc. (a Delaware corporation)
and subsidiaries for the year ended June 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Cambio, Inc. and subsidiaries for the year ended June 30, 1999, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of $10,015,000 during the
year ended June 30, 1999, and, as of that date, the Company's current
liabilities exceeded its current assets by $1,381,000 and its total liabilities
exceeded its total assets by $1,215,000. These factors, among others, as
discussed in Note 2 to the consolidated financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ GRANT THORNTON LLP
San Jose, California
September 1, 1999
F-3
<PAGE> 31
CAMBIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................................ $ 302,000
Accounts receivable .............................................. 161,000
Deposits and prepaid expenses .................................... 25,000
------------
Total Current Assets .......................................... 488,000
Property and equipment, net .......................................... 62,000
------------
$ 550,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued liabilities ......................... $ 2,496,000
Liabilities of discontinued operations ........................... 678,000
Notes payable to stockholders .................................... 478,000
Deferred revenue ................................................. 15,000
------------
Total current liabilities ..................................... 3,667,000
------------
Commitments and contingencies
Stockholders' deficit
Common stock, $.01 par value - 55,000,000 shares authorized;
39,359,350 shares issued and outstanding ...................... 393,000
Preferred stock, $.01 par value - 1,000,000 shares authorized;
4,567 shares issued and outstanding ........................... --
Paid-in capital .................................................. 26,447,000
Accumulated deficit .............................................. (29,957,000)
------------
Total Stockholders' Deficit ................................... (3,117,000)
------------
Total liabilities and stockholders' deficit ................... $ 550,000
============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 32
CAMBIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net revenues .............................................................. $ 983,000 $ 823,000
Cost of revenue ........................................................... 264,000 286,000
------------ ------------
Gross profit ....................................................... 719,000 537,000
------------ ------------
Operating expenses
Sales and marketing ................................................... 1,121,000 245,000
Services .............................................................. 421,000 214,000
Research and development .............................................. 594,000 280,000
Administrative and general expenses ................................... 3,894,000 3,912,000
------------ ------------
Total operating expenses ........................................... 6,030,000 4,651,000
------------ ------------
Loss from operations ............................................... (5,311,000) (4,114,000)
Other income (expense)
Interest income ....................................................... 24,000 13,000
Interest expense ...................................................... (98,000) (66,000)
Write-off of goodwill ................................................. -- (4,850,000)
Other, net ............................................................ -- 15,000
------------ ------------
Total other expense ................................................ (74,000) (4,888,000)
------------ ------------
Loss from continuing operations ....................................... (5,385,000) (9,002,000)
Discontinued operations
Loss from disposal of discontinued operations ......................... -- (1,013,000)
------------ ------------
Loss from discontinued operations ..................................... -- (1,013,000)
------------ ------------
Net loss .................................................................. $ (5,385,000) $(10,015,000)
============ ============
Basic and diluted net loss per common share - continued operations ........ $ (0.38) $ (2.52)
Basic and diluted net loss per common share - discontinued operations ..... -- (0.28)
------------ ------------
Basic and diluted net loss per common share ............................... $ (0.38) $ (2.80)
============ ============
Weighted average shares outstanding ....................................... 14,190,965 3,574,460
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 33
CAMBIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
Preferred Stock Class A Class B
------------------------------ ----------------------------- ------------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1998 -- $ -- 1,434,069 $ 14,000 1,159,500 $ 12,000
Net Loss -- -- -- -- -- --
Issuance of Common Stock
in connection with Cambio
Networks, Inc. -- -- 1,238,842 12,000 -- --
Conversion of debt into
preferred stock 14,073 -- -- -- -- --
Issuance of Preferred Stock 37,000 1,000 -- -- -- --
Conversion of Class B
to Class A stock -- -- 1,159,500 12,000 (1,159,500) (12,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 51,073 1,000 3,832,411 38,000 -- --
Net Loss -- -- -- -- -- --
Issuance of Common
Stock including
7,186,000 shares issued
for proceeds of $1,483,000 -- -- 12,273,939 123,000 -- --
Conversion of Preferred
Stock into Class A (46,506) (1,000) 23,253,000 232,000 -- --
Options Granted and
Warrants Issued -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 4,567 $ -- 39,359,350 $ 393,000 -- $ --
<CAPTION>
Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
------------ ------------ -------------
<S> <C> <C> <C>
Balance June 30, 1998 $ 17,605,000 $(14,557,000) $ 3,074,000
Net Loss -- (10,015,000) (10,015,000)
Issuance of Common Stock
in connection with Cambio
Networks, Inc. 607,000 -- 619,000
Conversion of debt into
preferred stock 1,407,000 -- 1,407,000
Issuance of Preferred Stock 3,699,000 -- 3,700,000
Conversion of Class B
to Class A stock -- -- --
------------ ------------ ------------
Balance, June 30, 1999 23,318,000 (24,572,000) (1,215,000)
Net Loss -- (5,385,000) (5,385,000)
Issuance of Common
Stock including
7,186,000 shares issued
for proceeds of $1,483,000 3,127,000 -- 3,250,000
Conversion of Preferred
Stock into Class A (231,000) -- --
Options Granted and
Warrants Issued 233,000 -- 233,000
------------ ------------ ------------
Balance, June 30, 2000 $ 26,447,000 $(29,957,000) $ (3,117,000)
</TABLE>
F-6
<PAGE> 34
CAMBIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................................... $ (5,385,000) $(10,015,000)
Adjustments to reconcile net loss to
cash used in operations:
Depreciation ..................................................................... 97,000 195,000
Write-off of goodwill ............................................................ -- 4,850,000
Expenses and settlements paid with equity ........................................ 1,594,000 --
Gain on sale of equipment ........................................................ -- (2,000)
Loss from discontinued operations ................................................ -- 1,013,000
Changes in assets and liabilities:
Receivables ................................................................. 42,000 (5,000)
Prepaid expenses ............................................................ 10,000 60,000
Other assets ................................................................ 12,000 (25,000)
Net assets of discontinued operations ....................................... -- (211,000)
Accounts payable and accrued liabilities .................................... 214,000 974,000
Deferred revenue ............................................................ (77,000) (123,000)
------------ ------------
Net cash used in operating activities .................................... (3,493,000) (3,289,000)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of equipment ........................................................ -- 25,000
Additions to property and equipment .................................................... (18,000) (143,000)
Cash advanced to acquired company ...................................................... -- (638,000)
Costs related to acquisition ........................................................... -- (100,000)
------------ ------------
Net cash used in investing activities .................................... (18,000) (856,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................................. 1,483,000 3,700,000
Borrowings on debt ..................................................................... 407,000 64,000
Net proceeds of loans collateralized by assets of discontinued operations .............. -- 678,000
Decrease in restricted cash ............................................................ -- 302,000
------------ ------------
Net cash provided by financing activities ................................ 1,890,000 4,744,000
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................................... (1,621,000) 599,000
Cash and cash equivalents, beginning of period ........................................... 1,923,000 1,324,000
------------ ------------
Cash and cash equivalents, end of period ................................................. $ 302,000 $ 1,923,000
============ ============
Supplemental disclosure of cash flow information:
Interest paid .......................................................................... $ 17,000 $ 21,000
Income taxes paid ...................................................................... $ -- $ --
Supplemental disclosure of non-cash investing and financing activities:
Purchase of Cambio Networks, Inc. ......................................................
Common stock issued to seller .......................................................... -- 619,000
Liabilities assumed (including cash advanced prior to acquisition of $1,513,000) ....... -- 4,658,000
Acquisition costs ...................................................................... -- 100,000
------------ ------------
Assets acquired (including goodwill of $4,875,000) .................................. $ -- $ 5,377,000
============ ============
Conversion of debt into preferred stock ................................................ $ -- $ 1,207,000
============ ============
Conversion of debt into common stock ................................................... $ 406,000 $ --
============ ============
Conversion of preferred stock into common stock ........................................ $ 232,000 $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 35
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND OPERATIONS
Cambio, Inc. ("Cambio" or the "Company"), formerly Meadowbrook
Rehabilitation Group, Inc., acquired Cambio Networks, Inc. ("Networks") on
September 14, 1998. The Company currently provides professional services and
supplies software products for operations support systems of telecommunications
networks. The Company's primary product is netRunner(TM). The Company's
corporate headquarters is in Dallas, Texas. The Company's accounting, finance,
and research and development functions are located in El Paso, Texas. The
Company also has sales executives located in the United Kingdom and Egypt.
Prior to the acquisition of Networks, the Company provided outpatient,
home health, and traditional acute, sub-acute and post-acute comprehensive
rehabilitation services through several subsidiaries. In the fourth quarter of
fiscal 1998, the Company's Board of Directors decided to discontinue the
Company's remaining rehabilitation operations due to continued losses and a
diminishing market for the Company's services. Previously, several of the
Company's service locations and units had been sold or otherwise disposed. In
connection with the decision to discontinue the remaining operations, the
Company recorded a charge of $1,563,000 for the write down of tangible and
intangible assets, termination and severance costs and other costs of disposal.
As of June 30, 1998, all health care operations had substantially ceased and the
Company's assets consisted almost exclusively of cash and accounts receivable.
On February 2, 1999, Cambio transferred all of the issued and
outstanding stock of the discontinued healthcare subsidiaries (the
"Subsidiaries") to Imperial Loan Management Corporation ("Imperial"), an
affiliate of the Company's former Chairman and CEO, Harvey Wm. Glasser M.D. Dr.
Glasser, who in February 1999 resigned his position as CEO and in March 1999
resigned from the Board of Directors, is overseeing the liquidation of the
Subsidiaries on behalf of Imperial. The Company received no proceeds from the
transfer. Prior to the transfer, Imperial loaned $900,000 to the Subsidiaries
and Cambio, represented by 10% notes payable. Imperial will use its best efforts
to liquidate each of the Subsidiaries, settle outstanding obligations and
collect all amounts receivable. Cambio remains a guarantor of the Imperial
loans, amounting to $678,000 as of June 30, 2000. Upon liquidation of the
Subsidiaries and settlement of the outstanding indebtedness, Cambio is entitled
to receive one-half of the proceeds remaining after payment of Imperial's
expenses. At June 30, 2000, the assets and liabilities of the discontinued
businesses consist primarily of the accounts receivable and the Imperial loans.
The Company considers the realization of the remaining assets to be unlikely and
the assets have been fully provided for. All other material obligations of the
Subsidiaries have been settled except for the Imperial loans.
Results of discontinued operations are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------- -----------
<S> <C> <C>
Net revenues ............................................... $ -- $ --
Net expenses ............................................... -- --
--------------- -----------
Net loss from operations of discontinued businesses ........ $ -- $ --
=============== ===========
Net loss on disposal of discontinued businesses ............ $ -- $(1,013,000)
=============== ===========
</TABLE>
The operations of Networks are reflected in the Company's fiscal year
1999 results from the date that Networks was acquired by the Company. Pro forma
results for 1999 are not presented, as the results would not be materially
different than the results reported.
F-8
<PAGE> 36
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company incurred net losses of $5,385,000
and $10,015,000 during the years ended June 30, 2000 and 1999, and, as of June
30, 2000, the Company's liabilities exceeded its current assets and total assets
by $3,179,000 and $3,117,000, respectively. These conditions give rise to
substantial doubt about the Company's ability to continue as a going concern.
In addition to the subscription agreement mention below, the Company
continues to seek additional funding through various financing arrangements. The
Company plans to fund its operations for the next twelve months from additional
proceeds, as discussed in Note 11, and ongoing operations. If the investors in
the subscription agreement default, the Company's liquidity will be impaired,
which could have a material adverse effect on its business.
As discussed in Note 11, subsequent to year-end the Company entered
into a Subscription Agreement (the "Subscription Agreement") whereby the Company
offered for sale up to $17,000,000 principal amount of 6% convertible notes (the
"Notes") and issuance of common stock purchase warrants, as defined in the
Subscription Agreement. Through September 22, 2000, the Company sold $1,000,000
in Notes with proceeds, net of fees, of $880,000.
NOTE 3 - SUMMARY OF ACCOUNTING POLICIES
A summary of the Company's significant accounting policies applied in
the preparation of the accompanying financial statements follows.
REVENUE RECOGNITION
Revenue is recognized when earned in accordance with American Institute
of Certified Public Accountants Statements of Position ("SOP") 97-2, "Software
Revenue Recognition" as amended by SOP 98-9. Revenue from products licensed to
customers directly is recorded when the software has been delivered. Maintenance
revenue is recognized ratably over the contract period. Revenue from
professional services are recorded monthly when the services are performed and
invoiced. Provisions are recorded for returns and bad debts.
CONSOLIDATION
The consolidated financial statements include the accounts of Cambio
and Networks. All significant intercompany accounts and transactions have been
eliminated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided for under the
straight-line method in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives, which range from one to
five years. Leasehold improvements are amortized over the lesser of the lease
term or the estimated useful life of the assets.
F-9
<PAGE> 37
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS
All expenditures for research and development are expensed when
incurred. Software development costs are charged to expense until technological
feasibility of the computer software product has been established. No software
development costs have been capitalized to date, as costs incurred after
establishing technological feasibility have been immaterial.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When management determines that it is more likely than not that a
deferred tax asset will not be realized, a valuation allowance is established.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivables and
accounts payables approximates carrying value due to the short maturity of such
instruments. The fair value of debt with related parties is not readily
determinable due to the terms of the debt and no comparable market for such
debt.
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.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive potential
common shares outstanding during the period. Potential common shares, consist of
options and warrants, have not been included in computing diluted EPS for 2000
and 1999 as their effects are antidilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and trade
accounts receivable. Cash equivalents are maintained with high quality
institutions and are regularly monitored by management. The Company extends
credit to its customers, most of whom are large, established companies. Credit
risk is mitigated by performing ongoing credit evaluations of its customers'
financial condition. The Company generally does not require collateral. The
Company provides an allowance for expected uncollectible amounts and actual
amounts not collected have been within management's expectations.
F-10
<PAGE> 38
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting For Stock Issued To Employees." The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based
Compensation."
SEGMENT REPORTING
The Company currently has one operating segment based on the markets in
which the Company operates and the information used to manage the business.
Identifiable assets held outside the United States are not material. Revenues
attributable to customers outside the United States, amounted to $665,000 and
$147,000, primarily in Egypt and Malaysia, respectively, in 2000 and $479,000,
primarily in Egypt, in 1999.
GOODWILL
In 1999, the Company recorded an impairment loss on the goodwill
associated with the Networks acquisition, as the products obtained in the
acquisition were no longer being sold by the Company.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Board has issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, which
is effective for financial statements issued for periods beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption is
not expected to materially impact the results of operations, financial position
and financial statement disclosures in the period in which it is adopted, and is
not expected to have a significant impact on future financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SFAS 101"), "Revenue Recognition in
Financial Statements." SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B that delayed the
implementation date of SAB 101 until the quarter ended December 31, 2000 with
retroactive application to the beginning of our fiscal year. The Company does
not expect the adoption of SAB 101 to have a material impact on its financial
position of results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB No.
25" ("FIN 44"). FIN 44 clarified the application of Opinion No. 25 for certain
issues including: (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or various modifications to the
terms of a previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. In general, FIN
44 is effective July 1, 2000. The Company does not expect the adoption of FIN 44
to have a material impact on its financial position or results of operations.
RECLASSIFICATIONS
Certain items in 1999 have been reclassified to conform to the 2000
presentation. These reclassifications have no effect on the Company's financial
position or results of operations.
F-11
<PAGE> 39
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Office and computer equipment ......................... $289,000
Leasehold improvements ................................ 27,000
--------
316,000
Less accumulated depreciation and amortization ........ 254,000
--------
$ 62,000
========
</TABLE>
NOTE 5 - NOTES PAYABLE TO STOCKHOLDERS
The Company has promissory notes payable to common stockholders of
$250,000, bearing interest at 7% per annum, due on demand, collateralized by
first position on all assets of the Company.
In addition, during fiscal 2000 the Company entered into an unsecured
promissory note agreement with an executive officer of the Company in the amount
of $245,000. This note, bearing interest at 8% per annum, is due on demand. At
June 30, 2000 the balance due under this note was $228,000.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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 2005. Future minimum lease payments under
these agreements for the fiscal years ending June 30, are as follows:
<TABLE>
<S> <C>
2001 .......................................... $ 241,000
2002 .......................................... 126,000
2003 .......................................... 111,000
2004 .......................................... 104,000
2005 .......................................... 104,000
-----------
$ 686,000
===========
</TABLE>
Rent expense for the years ended June 30, 2000 and 1999 was $309,000
and $419,000, respectively.
CONTINGENCIES
The Company is subject to Value Added Tax in the United Kingdom
resulting from the acquisition of Networks and is currently in the process of
finalizing the tax liability for all years since 1995. Management believes any
liability the Company may owe will not be material to the financial statements.
The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with outside legal
counsel, does not believe that the outcome of these actions would have a
material impact on the financial statements of the Company.
F-12
<PAGE> 40
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 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
discretion of the Board of Directors, the Company can match 50% of employee
contributions up to a total contribution of 3% of each employee's annual salary.
There were no employer contributions in 2000 and 1999.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 50,000,000 shares of Class A and 5,000,000
shares of Class B Common Stock. During 1999, all shares of Class B Common Stock
were converted into Class A Common Stock.
During 2000, the Company exchanged 2,348,000 shares of Class A Common
Stock as compensation for services. Expenses of $1,271,000 have been recognized
in connection with these issuances.
SALE OF PREFERRED STOCK
During 1999, the Company's Board of Directors approved the issuance of
up to 62,500 shares of a newly created Convertible Preferred Stock designated as
Series B (the "Preferred Stock") for $100 per share. Each share of Preferred
Stock is convertible into 500 shares of the Company's Class A Common Stock 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. During 2000, certain preferred shareholders elected to convert
46,506 shares of Preferred Stock into 23,253,000 shares of Class A Common Stock.
CONVERSION OF DEBT TO EQUITY
During 2000, the Company converted notes payable of $178,000 into
790,000 shares of the Company's Class A Common Stock. Also during 2000, the
Company converted trade payables and other liabilities of $228,000 into 608,000
shares of the Company's Class A Common Stock.
In February 1999 and May 1999, the Company converted debt and accrued
interest of $1,057,000 and $350,000 into 10,573 and 3,500 shares of the
Company's Preferred Stock.
STOCK PLAN
The Company has in place the 1994 Stock Incentive Plan which has
1,022,500 shares available for grant. No options are outstanding from this plan.
Nonqualified stock options granted to employees in 1999 outside the 1994 plan
generally vest within three years and terminate ten years from the date of
grant.
F-13
<PAGE> 41
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price
Shares Per Share
---------- ----------
<S> <C> <C>
Balance at June 30, 1998 .......... 30,000 $ 2.73
Granted ...................... 2,567,000 .20
Exercised .................... -- --
Cancelled .................... (30,000) 2.73
---------- ----------
Balance at June 30, 1999 .......... 2,567,000 $ .20
Granted ...................... 3,684,000 .20
Exercised .................... (1,728,000) .20
Cancelled .................... (1,288,000) .20
---------- ----------
Balanced at June 30, 2000 ......... 3,235,000 $ .20
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding as of June 30, 2000:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Number Exercise Remaining Number
Price Outstanding Price Life (Years) Exercisable
-------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
$ .20 3,235,000 $ .20 5 1,325,000
</TABLE>
The following table depicts the Company's pro forma results had
compensation expense for employee stock options been determined based on the
fair value at the grant dates as prescribed in SFAS No. 123:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net loss applicable to common shareholders
As reported ................................. $ (5,385,000) $(10,015,000)
Pro forma ................................... (5,594,000) (10,329,000)
Basic and diluted net loss per share
As reported ................................. $ (.38) $ (2.80)
Pro forma ................................... (.39) (2.89)
</TABLE>
The fair value of each option grant was determined using the
Black-Scholes model. The weighted average fair value of options granted to
employees was $.24 and $.20 in 2000 and 1999, respectively. The following
weighted average assumptions were used to perform the calculations: expected
life of 5 years; interest rate of 6%; volatility of 205% in 2000 and 390% in
1999; and no dividend yield. The pro forma disclosures above may not be
representative of pro forma effects on reported financial results for future
years.
During 2000, the Company issued 250,000 shares of Class A Common Stock
to an employee of the Company. Compensation expense of $90,000 has been
recognized in connection with this issuance.
F-14
<PAGE> 42
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS/OPTIONS
On May 3, 1999, the Company sold 39,000 shares of preferred stock and
issued 1,256,000 warrants to purchase 1,256,000 shares of class A common stock
of the Company at $0.20 per share. The warrants were issued as a fee for the
sale of the preferred stock. The warrants expire May 6, 2004. During 2000, the
holders of these warrants exercised 1,085,000 warrants under a cashless exercise
feature of the grant.
During February 2000, the Company issued 2,000,000 warrants to purchase
Class A Common Stock in connection with the sale of 667,000 shares of Class A
Common Stock. These warrants are exercisable into 2,000,000 shares of the Class
A Common Stock at $0.15 per share. Of these warrants 500,000 were issued as a
fee for the sale of the common stock. The warrants were exercised during 2000.
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, and currently does 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.
NOTE 9 - INCOME TAXES
No provision for taxes was made in 2000 or 1999 due to the losses in
each year. The Company increased the valuation allowance on net deferred tax
assets by $1,073,000 and $3,085,000 in 2000 and 1999.
The primary differences between the statutory federal tax rate and the
effective rate are the change in the valuation allowance provided against
deferred tax assets and a change in the effective tax rate of the Company as a
result of the discontinuation of rehabilitation operations and the acquisition
of Networks. The Company has $23,396,000 of net operating loss carryforwards for
federal purposes and associated state net operating loss carryforwards, which
expire at various dates through 2020. Current federal and state tax law includes
certain provisions limiting the annual use of net operating loss carryforwards
in the event of certain defined changes in stock ownership. The annual use of
the Company's net operating loss carryforwards are limited according to these
provisions.
Deferred income taxes are comprised of the following at June 30, 2000:
<TABLE>
<S> <C>
Accruals not currently deductible ................ $ 201,000
Tax loss carry forwards .......................... 7,955,000
-----------
Total deferred income tax assets ................. 8,156,000
Less valuation allowance ......................... (8,156,000)
-----------
Net deferred income tax assets ................... $ --
===========
</TABLE>
NOTE 10 - MAJOR CUSTOMERS
In 2000 the Company had sales in excess of 10% to two customers
amounting to $665,000 and $147,000. The customers accounted for 68% and 15% of
net revenues, respectively.
F-15
<PAGE> 43
CAMBIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1999, the Company had sales in excess of 10% to three customers
amounting to $429,000, $117,000 and $96,000. The customers accounted for 52%,
14% and 12%, respectively, of net revenues.
NOTE 11 - SUBSEQUENT EVENTS
In July 2000, the Company increased its authorized Class A common
shares from 50,000,000 shares to 200,000,000 shares.
The Company settled certain litigation with a vendor for 74,293 Class A
common shares in July 2000.
In July 2000, the Company entered into a Subscription Agreement,
whereby up to $17,000,000 principal amount of 6% convertible notes were offered
for sale, as well as associated stock purchase warrants (the "Warrants"). The
maturity date of the Notes is July 1, 2003. The Notes are subject to certain
performance covenants and registration rights, as defined in the Subscription
Agreement. The Notes convert at the option of the holder and subject to certain
mandatory and optional redemption, as defined. The Warrants grant certain put
provisions to the holder, as defined in the Subscription Agreement.
F-16
<PAGE> 44
SIGNATURES
Pursuant to the requirements of section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of El
Paso, on October 12, 2000.
CAMBIO, INC.
By: /s/ Ali Al-Dahwi
-------------------------------------
Ali Al-Dahwi
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ali Al-Dahwi President, Chief Executive October 12, 2000
-------------------------- Officer and Director (principal
Ali Al-Dahwi executive officer)
/s/ Kent Van Houten Chief Financial Officer (principal October 12, 2000
--------------------------- financial and accounting officer)
Kent Van Houten
/s/ Philip Chapman Director October 12, 2000
---------------------------
Philip Chapman
</TABLE>
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated April 3, 1998, between
Meadowbrook Rehabilitation Group, Inc., Interset, Inc., Cambio
Networks, Inc., and the securityholders named therein, filed as
Exhibit 2.1 to the Company's current report on Form 8-K dated
April 22, 1998.
2.2 Agreement of Amendment, dated July 27, 1998, between Meadowbrook
Rehabilitation Group, Inc., Interset, Inc., Cambio Networks,
Inc., and the securityholders named therein, filed as Annex A to
the Company's Joint Information/Consent Solicitation Statement on
Schedule 14C dated August 14, 1998.
2.3 Secured Bridge Financial Note dated April 3, 1998, between
Meadowbrook Rehabilitation Group, Inc., and Cambio Networks,
Inc., filed as Exhibit 2.2 to the Company's current report on
Form 8-K dated April 22, 1998.
3.1 Amended and Restated Certificate of Incorporation of the Company,
filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Commission File No. 33-44197).
3.2 Amended and Restated By-Laws of the Company, filed as Exhibit 3.2
to the Company's Registration Statement on Form S-1 (Commission
File No. 33-44197).
3.3 Certificate of the Designations, Powers, Preferences, and Rights
of the Series B Convertible Preferred Stock, filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.
4.1 Form of Convertible Note, dated as of July 27, 2000, filed as
Exhibit 4.1 to the Company's current report on Form 8-K dated
July 27, 2000.
4.2 Form of Warrant, dated as of July 27, 2000, filed as Exhibit 4.2
to the Company's current report on Form 8-K dated July 27, 2000.
10.1 1994 Stock Incentive Plan of the Company filed as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
10.2 Agreement dated February 2, 1999 by and between Harvey Glasser,
the Company and certain security holders, filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998.
10.3 Agreement dated February 2, 1999 by and between Imperial Loan
Management Corporation, Cambio, Inc. and Medbrook Home Health,
Inc., filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1998.
10.4 Form of Subscription Agreement, dated as of July 27, 2000,
between the Company and the subscribers named therein, filed as
Exhibit 10.1 to the Company's current report on Form 8-K dated
July 27, 2000.
21.1 Subsidiaries of the Company, filed as Exhibit 21.1 to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 1999.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Grant Thornton LLP.
27.1 Financial Data Schedule.
</TABLE>
