<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------
JENKON INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
7600 N.E. 41ST STREET, SUITE 350
VANCOUVER, WASHINGTON 98662
(360) 256-4400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
<TABLE>
<S> <C> <C>
DELAWARE 7371 91-1890338
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
DAVID EDWARDS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JENKON INTERNATIONAL, INC.
7600 N.E. 41ST STREET, SUITE 350
VANCOUVER, WASHINGTON 98662
(360) 256-4400
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------
COPIES TO:
Robert M. Steinberg, Esq. Yvonne Chester, Esq.
Jeffer, Mangels, Butler & Marmaro LLP Troy & Gould Professional Corporation
2121 Avenue of the Stars, 10th Floor 1801 Century Park East, 16th Floor
Los Angeles, California 90067 Los Angeles, California 90067
(310) 203-8080 (310) 553-4441
Fax: (310) 203-0567 Fax: (310) 201-4746
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value ("Common
Stock")(2)................................ 3,014,296 shs. $6.00 $18,085,776
Representatives' Warrants(3)................ 180,000 wts. $50.00 $50.00
Common Stock issuable upon exercise of
Representatives' Warrants................. 180,000 shs. $7.20 $1,296,000
TOTAL REGISTRATION FEE...................... $19,381,826 $5,717.64
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes: (i) 1,500,000 shares of Common Stock registered for the account of
the Registrant, (ii) 1,244,296 shares of Common Stock registered for the
account of certain stockholders upon conversion of shares of Series A
Preferred Stock, and (iii) 270,000 shares of Common Stock which the
Underwriters have the option to purchase from the Registrant and certain
stockholders of the Registrant to cover over-allotments, if any.
(3) To be issued to the Representatives of the Underwriters.
Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered hereby such additional indeterminate number of shares of Common Stock
as may become issuable by reason of stock splits, stock dividends and similar
anti-dilutive adjustments as set forth in the Representative's Warrants.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
1,800,000 SHARES
[LOGO]
COMMON STOCK
--------------------------
Of the 1,800,000 shares of common stock, par value $0.001 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,500,000 shares are being
offered by Jenkon International, Inc. ("Jenkon" or the "Company") and 300,000
shares are being offered by certain unaffiliated stockholders of the Company
(the "Selling Stockholders"). See "Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
Prior to this Offering, there has been no public market for the Common Stock
and there can be no assurance that such a market will develop or, if a market
develops, that it will be sustained. It is currently estimated that the initial
public offering price of the Common Stock will be between $5.00 and $6.00 per
share. See "Underwriting" for information relating to the factors considered in
determining the initial offering price to the public. Application has been made
for quotation of the Common Stock on the Nasdaq Small Cap Market under the
proposed symbol "JNKN."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 6
AND 13, RESPECTIVELY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
<CAPTION>
PROCEEDS TO
SELLING STOCKHOLDERS
<S> <C>
Per Share................................. $
Total(3).................................. $
</TABLE>
(1) Excludes a non-accountable expense allowance payable to The Seidler
Companies Incorporated, Meridian Capital Group, Inc. and Trautman, Kramer &
Company, Incorporated (collectively, the "Representatives") and the value of
warrants to be issued to the Representatives or their designees to purchase
up to 180,000 shares of Common Stock at 120% of the initial public offering
price per share of Common Stock (the "Representatives' Warrants"). The
Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, other than underwriting discounts and
commissions, payable by the Company, estimated at approximately $
including the Representatives' non-accountable expense allowance.
(3) The Company and two stockholders of the Company have granted to the
Underwriters a 45-day option to purchase up to 170,000 additional shares
from such Selling Stockholders and 100,000 additional shares from the
Company, solely to cover over-allotments, if any. See "Underwriting." If
such option is exercised in full, the total Price to Public will be
$ , Underwriting Discounts and Commissions will be $ , Proceeds
to the Company will be $ , and Proceeds to the Selling Stockholders
will be $ .
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to reject any order in whole or in part and to withdraw, cancel or
modify the Offering without notice. It is expected that delivery of the shares
will be made on or about , 1998.
--------------------------
[LOGO]
Meridian Capital Group, Inc.
Trautman, Kramer & Company
Incorporated
The date of this Prospectus is , 1998
<PAGE>
[Insert Pictures]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Upon consummation of the
Offering, the Company will become subject to the information requirements of the
Exchange Act. The Company intends to furnish its security holders annual reports
containing audited consolidated financial statements with a report thereon by
independent certified public accountants, and such other periodic reports as the
Company may determine to be appropriate or as required by law.
All of the Company's product names referred to herein are trademarks owned
or licensed by the Company, some of which are the subject of pending trademark
registration applications by the Company.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE
COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE
DESCRIBED UNDER "RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, THE INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION OR THE REPRESENTATIVES' WARRANTS, (II) NO EXERCISE OF
OUTSTANDING WARRANTS AND OPTIONS TO PURCHASE AN AGGREGATE OF 876,315 SHARES OF
COMMON STOCK, AND (III) THE CONVERSION OF THE SERIES A PREFERRED STOCK INTO
1,244,296 SHARES OF COMMON STOCK ON OR PRIOR TO THE CONSUMMATION OF THIS
OFFERING. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL SHARE AND PER-SHARE
INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO A .782271-FOR-ONE REVERSE STOCK
SPLIT EFFECTED IN JUNE 1998. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS
"JENKON" OR THE "COMPANY" REFER TO JENKON INTERNATIONAL, INC., A DELAWARE
CORPORATION ("JENKON DELAWARE"), AND EACH OF ITS SUBSIDIARIES INCLUDING JENKON
INTERNATIONAL LTD., A UNITED KINGDOM CORPORATION, AND SUMMIT V, INC., A
WASHINGTON CORPORATION.
THE COMPANY
Jenkon International, Inc. ("Jenkon" or the "Company") is a leading
developer of specialized software solutions for network marketing and other
companies involved in the direct sales industry. The Company's products are
designed to provide direct sales organizations, which are characterized by a
large number of small transactions, intricate compensation programs, and complex
distributor genealogy trails, with a rapid, accurate and efficient means to
collect, process, transmit and record sales, commissions and other data. The
Company was the recipient of the 1997 DSA Partnership Award, granted by Direct
Selling Association ("DSA"), the direct sales industry's largest trade group, in
recognition of the Company's leadership position as a supplier to the industry.
To date, the Company has focused its development and marketing efforts on
its proprietary management information system software package known as SUMMIT
V. The Company's management information systems, including its SUMMIT V
software, have been installed with over 150 direct sales companies in over 25
countries throughout the world. The Company's clients include many of the direct
sales industry's leading companies such as Shaklee, Avon Products (China and
India), USANA, Nature's Sunshine and Watkins. In addition to SUMMIT V, the
Company has developed and markets a compatible software-based voice response
system known as TOUCHTALK that offers individual home-based direct sales
personnel the ability to access a wide variety of product, sales, commission and
other information regarding the company they represent.
In recognition of the increasing importance of Internet commerce in the
direct sales industry and throughout the economy, the Company has developed and
has recently begun the initial marketing of a scalable Internet-based product,
known as NOW!. NOW! is designed for use by home-based direct sales personnel and
allows such personnel direct access to and communication with the companies that
they represent through the use of personal computers, Web TV and other
Internet-based platforms. NOW! enables home-based direct sales personnel to
quickly obtain current inventory information, directly place orders online,
obtain order status information and view and analyze personal and group sales,
commissions and other information. In addition to the benefits afforded to the
home-based direct sales personnel, the Company believes that the NOW! product
will enable its direct sales company clients to reduce the costs associated with
processing telephonic or fax orders and the labor-intensive paperwork associated
with such processing. The Company believes that NOW! enhances the attractiveness
of SUMMIT V to its direct sales company clients while expanding Jenkon's
potential client base to include the large number of home-based direct sales
personnel affiliated with such companies.
The direct sales industry consists of companies who market their products
through networks of home-based direct sales personnel whose selling activity
most commonly takes place in home offices or in the homes of customers rather
than traditional retail stores or outlets. The network marketing portion of the
3
<PAGE>
industry utilizes a team building approach pursuant to which home-based direct
sales personnel can build a sales group and derive income from the cumulative
sales of the group in addition to commission earned by sales to their own
customers. The Direct Selling Association estimates that since 1991, total
worldwide sales by direct sales companies have grown from approximately $48
billion to approximately $78 billion in 1996 while the worldwide sales force
increased from approximately 11 million people in 1991 to over 22 million people
in 1996. According to an industry analysis compiled by J.P. Morgan Securities
Inc., the worldwide direct sales market is expected to grow at an annual rate of
10% through the year 2000 while the number of worldwide direct sales
representatives is expected to grow at an annual rate of 13% during the same
period.
The Company's business objective is to expand its position as a leading
provider of specialized software to the rapidly growing direct sales industry.
In order to achieve this goal, the Company's growth strategy includes the
following elements:
- DIRECTLY ACCESS HOME-BASED DIRECT SALES PERSONNEL THROUGH THE INTRODUCTION
OF INTERNET-BASED PRODUCTS. While direct sales companies will remain the
Company's core customer base, the Company believes that the large number
of home-based direct sales personnel of these direct sales companies
present a large and growing potential market for direct sales software
products such as the Company's NOW! product.
- INCREASE MARKET PENETRATION OF CORE PRODUCTS. The Company believes that
its current base of direct sales company clients represents only a small
portion of the total number of direct sales companies that are potential
users of SUMMIT V and the Company's other core products. Upon completion
of this Offering, the Company will attempt to increase the market
penetration of SUMMIT V through more aggressive marketing and promotional
efforts and by continuing to modify and improve SUMMIT V and other
products to meet the changing needs of direct sales company clients. The
Company expects that future generations of SUMMIT V will include
multi-platform database support, an e-commerce enabled server, support for
existing communications standards, and other advanced features. In
addition, the Company intends to create an application program interface
that would enable the NOW! product to be used by direct sales companies
and their home-based personnel regardless of whether the company in
question utilizes the SUMMIT V system or any other software products of
the Company.
- LEVERAGE EXISTING CUSTOMER BASE TO INCREASE REVENUES. The Company believes
that its relationships with its corporate direct sales clients provides a
unique opportunity for the Company to generate revenues from the
cross-selling and marketing of additional products and services by the
Company and others to the home-based personnel of its direct sales
clients. For example, the Company has recently entered into contracts with
MCI and Earthlink pursuant to which the Company will receive a referral
fee for NOW! users that subscribe for Internet access with such providers
through the NOW! product. In addition, given the large number of credit
card transactions handled by the Company's direct sales clients, an
opportunity may exist for the Company to offer credit card processing
services for which the Company would receive processing fees.
- EXPAND GEOGRAPHIC MARKET PENETRATION. To date, most of the Company's
software installations have been for the U.S. operations of its direct
sales company clients. Given the rapid growth of the direct sales industry
throughout the world, and especially in the countries of Latin America,
the Pacific Rim and Southeast Asia, the Company intends to expand its
geographic presence by expanding the focus of its sales efforts to these
rapidly-growing international markets as well as the U.S. market.
Jenkon International, Inc. is a Delaware corporation that is a holding
company for the business of the Company. The founders of the Company began
operations in 1982 and incorporated Jenkon International, Inc., a Washington
corporation ("Jenkon Washington") on December 23, 1988. The Company subsequently
reincorporated in the State of Delaware effective July 1, 1996 and Jenkon
Washington became a wholly-owned subsidiary of Jenkon Delaware. Jenkon
Washington was merged into Jenkon
4
<PAGE>
Delaware in June 1998. The Company's executive offices are located at 7600 NE
41st St., Suite 350, Vancouver, Washington, 98662 and its telephone number is
(360) 256-4400.
THE OFFERING
<TABLE>
<S> <C>
Common Stock outstanding prior to 3,043,515 shares(1)
the Offering....................
Common Stock Offered.............. 1,800,000 shares(1)
Common Stock offered by the 1,500,000 shares
Company.........................
Common Stock offered by the 300,000 shares
Selling Stockholders............
Common Stock outstanding after the 4,543,515 shares(1)
Offering........................
Use of Proceeds................... For repayment of indebtedness, product development,
expansion of sales and marketing and working capital.
See "Use of Proceeds."
Risk Factors...................... An investment in the Common Stock involves a high degree
of risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Proposed Nasdaq SmallCap Market JNKN
Symbol (2):
</TABLE>
- ------------------------
(1) Includes 1,244,296 shares of Common Stock issuable upon conversion of all
outstanding Series A Preferred Stock simultaneously with the consummation of
the Offering. Excludes (i) 180,000 shares of Common Stock which may be
issued and sold by the Company upon the exercise in full of the
Representatives' Warrants, (ii) 1,000,000 shares of Common Stock reserved
for issuance pursuant to the Company's stock option plan under which options
to purchase 597,234 shares have been granted, and (iii) 279,081 shares of
Common Stock issuable upon exercise of outstanding warrants See
"Management--Stock Option Plan" and "Certain Transactions."
(2) There is no assurance that the Common Stock will be approved for listing in
the Nasdaq SmallCap Market or that a trading public market will develop, or,
if developed, will be sustained. See "Risk Factors--Absence of Public
Market."
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data in the table are derived from the consolidated
financial statements and related notes thereto of the Company. The data should
be read in conjunction with the consolidated financial statements and the
related notes contained elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
YEARS ENDED JUNE 30, 30,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................................................. $ 6,899,233 $ 8,480,072 $ 6,244,697 $ 7,047,634
Cost of goods sold............................................ 3,337,298 4,230,705 3,404,729 2,384,718
----------- ----------- ----------- -----------
Gross profit.................................................. 3,561,935 4,249,367 2,839,968 4,662,916
Operating expenses............................................ 3,640,963 5,723,142 4,268,394 4,120,627
----------- ----------- ----------- -----------
Income (loss) from operations................................. (79,028) (1,473,775) (1,428,426) 542,289
Other expense................................................. (97,897) (160,521) (155,633) (115,162)
----------- ----------- ----------- -----------
Income (loss) before income taxes............................. (176,925) (1,634,296) (1,584,059) 427,127
Provision (benefit) for income taxes.......................... 88,000 (88,000) -- 15,577
Net income (loss)............................................. (264,925) (1,546,296) (1,584,059) 411,550
Net income (loss) per common share............................
Basic..................................................... $ (.14) $ (.84) $ (.86) $ .23
Diluted................................................... $ (.14) $ (.84) $ (.86) $ .12
Weighted average common shares outstanding....................
Basic..................................................... 1,938,915 1,838,338 1,851,376 1,799,224
Diluted................................................... 1,938,915 1,838,338 1,851,376 3,358,221
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................................................................... $ 83,486 $ 663,486 $6,140,684
Working capital (deficit)................................................. (892,752) 32,248 5,589,446
Total assets.............................................................. 2,849,199 3,624,198 8,981,396
Long-term debt (including current portions)............................... 596,626 955,070 394,870
Total liabilities......................................................... 2,707,233 3,042,452 2,282,232
Redeemable convertible preferred stock.................................... 2,310,174 -- --
Stockholders' equity...................................................... (2,168,208) 581,766 6,699,164
</TABLE>
- ------------------------------
(1) Pro forma balance sheet data gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing, and
the conversion of Series A Preferred Stock into Common Stock upon closing of
the Offering. The warrants were valued, which resulted in original issue
discount of $439,800 and was included in the pro forma balance sheet data.
(2) As adjusted also gives effect to the sale of 1,500,000 shares of Common
Stock by the Company at an assumed initial public offering price of $5.50
per share in the Offering.
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS WHEN EVALUATING AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
HISTORY OF LOSSES. The Company and its predecessors Summit V, Inc., a
Washington corporation and wholly-owned subsidiary of the Company, as well as
Redwood Technology, Inc., a Washington corporation formerly known as Jenkon Data
Systems, Inc. ( "Redwood Technology" ), which operated certain assets of the
Company prior to selling them to Summit V, Inc. in 1995, have a history of
losses. The Company sustained net losses of approximately $265,000 and
$1,546,000 for the fiscal years ended June 30, 1996 and 1997, respectively.
Although the Company operated profitably in the first nine months of fiscal
1998, there can be no assurance that the Company will be able to operate
profitably in the future. See generally "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF ACCEPTANCE OF NEW PRODUCT. The future success and growth of the
Company, if any, will depend in large part upon the success and acceptance of
the Company's Internet-based product, NOW!. Although the Company has completed
initial testing of the product, there can be no assurance that the NOW! product
will be without defects. In addition, the Company has generated only limited
sales from NOW! and there can be no assurance that the Company will be able to
successfully market such product to its existing client base or to new
customers. The failure of the Company to generate significant sales of the NOW!
product would have a material adverse effect on the Company's prospects for
future growth.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The markets for the Company's
products are characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's future success will depend upon its ability to
enhance its current products and develop and successfully introduce and sell new
products that keep pace with technological developments and respond to evolving
end-user requirements. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could damage the
Company's competitive position in the marketplace and reduce revenues. The
Company may need to increase the size of its product development staff in the
near term to meet these challenges. There can be no assurance that the Company
will be successful in hiring and training adequate product development personnel
to meet its needs. In the past, the Company has occasionally experienced delays
in the introduction of new products and product enhancements. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements on a timely basis or that the Company will not
experience significant delays in the future. Any failure to successfully develop
and market new products and product enhancements would have a material adverse
effect on the Company's results of operations.
NEED FOR ADDITIONAL WORKING CAPITAL. The Company's business involves the
continued investment of funds towards the development of new products and
modifications of existing products. To the extent that the Company is not
successful in generating significant cash flow from operations in order to fund
such development expenses and other operating costs, the Company will need to
rely on outside financing sources for working capital. The Company currently has
negative working capital of $892,752 and no bank line of credit and there can be
no assurance that the Company will be able to obtain sources of outside
financing in the event that such financing is required in the future. To the
extent that the Company's
7
<PAGE>
operations do not generate positive working capital or enable it to secure
adequate outside financing, the Company's business could be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK OF CREDITORS CLAIMS AND SUCCESSOR LIABILITY. In July 1995, Summit V,
Inc. purchased and/or licensed substantially all of the assets, and Summit V,
Inc. assumed certain contractual obligations and indebtedness from Redwood
Technology, the developer of a substantial portion of the Company's SUMMIT V
software technology. See "Certain Transactions." Because Redwood Technology may
be deemed to have been rendered insolvent by the sale and license of certain of
its assets to Summit V, Inc. and because of the commonality of ownership and
management of Redwood Technology and Summit V, Inc. and/or because Summit V
continued operating the business of Redwood Technology, the Company is or may be
subject to claims by unsatisfied creditors of Redwood Technology challenging the
rights of the Company to the SUMMIT V software technology or other assets
acquired from Redwood Technology or alleging successor liability or other
similar bases for liability. The Company believes that such claims could total
as much as $350,000 including claims with respect to the unpaid employer portion
of payroll taxes in the amount, including interest and penalties, of
approximately $250,000 and which is secured by a federal tax lien recorded
against the assets of Redwood Technology. There can be no assurance that claims
for successor liability will not be made or that the Company's rights to the
assets acquired from Redwood Technology, including the SUMMIT V software
technology, will not be challenged. If any such claims or challenges are made
and are successful, the Company's business and results of operations would be
materially and adversely affected.
COMPETITION. The software industry is highly competitive and is
characterized by rapid technological change, rapidly changing customer
preferences and little or no barriers to entry. There are several businesses,
some of which may be better capitalized than the Company, currently offering
software similar in type or scope to the Company's. The Company believes that
the primary competitive factors for the provision of its software are price,
technical expertise and quality, ease of use, variety of value-added services,
reliability and security, customer support and geographic coverage. The
Company's success will depend heavily upon its ability to provide high quality
software and value-added services. Other factors that will affect the Company's
success in this market include the Company's continued ability to attract
additional experienced marketing, sales, and management talent, and the
expansion of worldwide support, training and service capabilities. The Company's
current and prospective competitors generally consist of other independent
software providers such as Globenet and 20/21 Interactive. The Company believes
that additional competitors, which may include consumer software or other
companies, may potentially enter the direct sales market. In addition, the
Company may face potential competition from some of the larger direct sales
companies that have developed their own in-house systems that could be adapted
for sale to other direct sales companies. Some or all of the Company's actual
and potential competitors may have greater market presence, engineering,
customer support and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products than can the Company.
Because price is a major competitive factor in the market for the Company's
products, if any of the Company's present or future competitors elect to
initiate and support prolonged price competition to gain market share, the
Company likely would be forced to lower its prices, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability.
RISKS OF SOFTWARE DEVELOPMENT IN GENERAL. The success of the Company is
dependent upon its ability to deliver reliable, easy-to-use and technologically
up-to-date software products. Any failure of the Company's existing or new
products to meet client specifications or expectations will have a material
adverse
8
<PAGE>
effect on the Company's reputation and the demand for the Company's products.
There can be no assurance that the software will consistently meet such
specifications or expectations. In addition, continued demand for the Company's
products and services will depend on its ability to successfully anticipate
customer demand and to integrate new and emerging technologies, features and
standards into its software on a timely basis. Any failure by the Company to
anticipate customer demand and to successfully integrate new features and
standards into its software on a timely basis could adversely affect the
Company's reputation, demand for its products and, as a result, its financial
condition and results of operations.
DEPENDENCE ON SALES OF EXISTING SOFTWARE PRODUCTS. Substantially all of the
Company's revenues have been derived from sales of its SUMMIT V and TOUCHTALK
information systems and software and related support services. In addition, the
initial demand for the Company's NOW! product will be highly dependent on
customers and companies who utilize such information systems and software.
Accordingly, any event that adversely affects fees derived from the sale of such
systems, such as competition from other products, significant flaws in the
Company's software products or incompatibility with third party hardware or
software products, negative publicity or evaluation, or obsolescence of the
hardware platforms or software environments in which the systems run, would have
a material adverse effect on the Company's results of operations. The Company's
future financial performance will depend, in substantial part, on the continued
development and introduction of new and enhanced versions of it's management
information systems and customer acceptance of such new and enhanced products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products and Services."
CONCENTRATION OF CUSTOMERS; LIMITED CUSTOMER BASE. Although no customer
accounted for more than 10% of the Company's net sales during the nine months
ended March 31, 1998, for the fiscal year ended June 30, 1997, Shaklee and
Morinda accounted for approximately 23% and 11%, respectively, of the Company's
net sales. Similar or greater concentration of its net sales among a limited
number of customers may occur in the future. In such event, any material
decrease in net sales to any one of the Company's largest customers that is not
matched by corresponding increases in net sales to new or existing customers
could have a material adverse effect on the Company's financial condition and
results of operations and could affect its economic viability. There can be no
assurance that the Company will receive orders from any existing customers or
from new customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK OF EXPANSION INTO NEW BUSINESSES. Part of the Company's business plan
involves the possible acquisition or development of complementary but
alternative sources of revenues such as credit card processing. There can be no
assurance that the Company will be successful in identifying and acquiring or
developing any alternate sources of revenues. Moreover, to the extent that the
Company acquires or begins operations of a business other than the development
of software products, the Company's lack of experience and track record in such
business may result in an inability of the Company to effectively compete,
potential operating losses and loss of standing in the direct sales industry,
any of which would have a material adverse effect on the Company, its operations
and financial condition.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced
and expects to continue to experience significant fluctuations in its quarterly
results. Such fluctuations may be caused by many factors, including, but not
limited to: the size and timing of individual orders; seasonality of revenues;
lengthy sales cycle; delays in introduction of products or product enhancements
by the Company or other providers of hardware, software and components for the
Company's systems; competition and pricing in the software industry; market
acceptance of new products; reduction in demand for existing products and
shortening of product life cycles as a result of new product introductions by
competitors; foreign currency exchange rates; mix of products sold; conditions
or events in the direct sales industry; and general economic conditions. The
Company does not typically maintain a significant backlog and therefore the
revenue results for each quarter depend substantially on orders received and
delivered in that quarter. The average price of the Company's information
systems sold in fiscal 1997 to new customers was approximately
9
<PAGE>
$100,000. As a result of the relatively high revenue amount per order and
relatively low unit volume, any lost or delayed sales will have a
disproportionately greater effect on the Company's revenues and quarterly
results relative to companies that have higher unit sales volumes and less
revenue associated with each sale. The Company's sales cycle is typically three
to six months from the time initial sales contact is made with a qualified
prospect, making the timing of the Company's license fees difficult to predict
and the Company's quarterly results difficult to forecast. The Company's expense
levels are based in part on its forecasts of future revenues. Accordingly, since
the majority of the Company's expenses are fixed in nature, the Company would
not be able to quickly curtail expenses in response to a decline in revenues,
and operating results for a given quarter would be adversely affected. As a
result, revenues for any quarter are subject to significant variation and the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. To the extent that the Company's Common Stock is publicly
traded, fluctuations in operating results may also result in volatility in the
market price of the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON DIRECT SALES INDUSTRY; LEGISLATIVE RISKS. The Company's
business depends substantially upon the capital expenditures of direct sales
companies, which in part depends upon the demand for such companies products. A
recession, new laws or regulations of the activities of direct sales companies,
or other adverse event affecting the direct sales industry in the United States,
the United Kingdom, Asia or other markets served by the Company could affect
such demand, forcing companies in the Company's targeted markets to curtail or
postpone capital expenditures on business information systems. Any such change
in the amount or timing of capital expenditures in its targeted markets would
have a material adverse effect on the Company's financial condition and results
of operations. The Peoples Republic of China recently announced laws restricting
the ability of multi-level marketing companies to operate in China. To date, the
Company has not derived significant revenues from The Peoples Republic of China.
Accordingly, the Company does not believe that such laws will adversely affect
the Company's current operations or financial condition. However, similar
restrictions, if adopted by other countries, could have a materially adverse
effect on the Company's business, results of operations and prospects.
KEY EMPLOYEES. The Company believes that its future success will depend in
large part on its ability to attract and retain highly skilled technical,
managerial, and marketing personnel who are familiar with and experienced in the
direct sales industry. The Company does not maintain key man life insurance
policies with respect to any of its employees. Competition for such personnel,
in particular for product development and product implementation personnel, is
intense, and the Company competes in the market for such personnel against
numerous companies, including larger, more established companies with
significantly greater financial resources than the Company. The Company has at
times experienced difficulty in recruiting qualified personnel, and there can be
no assurance that the Company will be successful in attracting and retaining
skilled personnel. The inability of the Company to attract and retain other
qualified employees could have a material adverse effect on the Company's
business.
MANAGEMENT OF GROWTH. Management believes that the Company's existing
internal controls are sufficient for the current size and level of operations;
however, to manage its growth effectively, the Company will be required to
continue to implement and improve its operating and financial systems and to
expand, train and manage its employee base. There can be no assurance that the
management skills and systems currently in place will be adequate if the Company
continues to grow. In addition, although no acquisitions of companies or
products are currently being negotiated, the Company may make acquisitions in
the future. The Company's management has only limited experience with
acquisitions, which involve numerous risks, including difficulties in the
assimilation of acquired operations and products, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired companies.
10
<PAGE>
INTERNATIONAL OPERATIONS AND RISK OF INTERNATIONAL SALES. The Company
derived approximately 3.8% and 6.8% of its total revenues from its United
Kingdom operations in fiscal 1996 and 1997, respectively and 6.5% and 7.3% in
the nine month periods ended March 31, 1997 and 1998. International business is
subject to various risks common to international activities, including exposure
to currency fluctuations, political and economic instability, the greater
difficulty of administering business abroad, and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements. The Company does not currently engage in foreign currency hedging
transactions. Any significant adverse change in the international business
climate could have a material adverse effect on the Company, its financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON THIRD PARTY SOFTWARE AND HARDWARE. The Company's products
incorporate and use software products and computer hardware and equipment
developed by other entities. The fourth generation language ("4GL") set of
development tools used by the Company as well as the relational database
management system used in the Company's products are provided by Ardent
Software, Inc. (a successor to Unidata, Inc.) or its affiliates. The operating
systems on which the Company's products can function (UNIX, NT) have been
developed or are owned by Novell Corporation and Microsoft Corporation. The
computer hardware and equipment sold as part of the Company's turnkey system are
manufactured by Hewlett-Packard Company, International Business Machines
Corporation, and others. There can be no assurance that all of these entities
will remain in business, that their product lines will remain viable or that
these products will otherwise continue to be available to the Company. If any of
these entities ceases to do business, or abandons or fails to enhance a
particular product line, the Company may need to seek other suppliers. This
could have a material adverse effect on the Company's results of operations. In
addition, there also can be no assurance that the Company's current suppliers
will not significantly alter their pricing in a manner adverse to the Company.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company attempts to
protect ownership of its software with a combination of copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements, and other
methods of protection common in the industry. The Company has not historically
required trade secrecy and confidentiality agreements to be executed by its
employees or, in some instances, independent software developers, in order to
protect its rights in its proprietary technology. Despite any precautions that
may be taken by the Company, it may be possible for an unauthorized third party
to copy or reverse-engineer certain portions of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
does not currently have any registered patents, trademarks or copyrights, but is
in the process of registering certain trademarks. The Company licenses the
source code for its software to some customers to enable them to customize the
software to meet particular requirements. Although the Company's source code
license contains confidentiality and nondisclosure provisions, there can be no
assurance that such customers will take adequate precautions to protect the
source code. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competition will not
independently develop software products that are substantially equivalent or
superior to the Company's software products. As the number of software products
in the industry increases and the functionality of these products further
overlaps, the Company believes that software programs could become increasingly
the subject of infringement claims. See "Business--Intellectual Property."
Although the Company's products have never been the subject of infringement
claims, there can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such assertion
will not require the Company to enter into royalty arrangements or result in
costly litigation and liability.
11
<PAGE>
RISK OF FIXED PRICE CONTRACTS. The Company has and expects to derive
significant revenues pursuant to software maintenance contracts that provide for
fixed annual fees in exchange for the Company's commitment to provide technical
assistance and customer support. Because the total compensation payable to the
Company pursuant to such contracts is fixed in the event of cost over-runs,
price increases, unanticipated problems, inefficient management, inaccurate
estimates of customer needs or disputes over the terms and specifications of
contracted performance, the Company's business and financial condition could be
materially adversely affected.
LIMITED CONTROL AND INFLUENCE ON THE COMPANY BY NEW INVESTORS. Upon the
consummation of this Offering , the officers and directors of the Company will,
in the aggregate, beneficially own approximately 43% of the Common Stock
assuming exercise of all outstanding options and warrants currently owned by
such persons. As a result, it is anticipated that these individuals will be in a
position to materially influence, if not control, the outcome of all matters
requiring stockholder or board approval, including the election of directors.
See "Management," "Principal Stockholders" and "Description of Securities." Such
influence and control is likely to continue for the foreseeable future and
significantly diminishes control and influence which future stockholders may
have on the Company.
YEAR 2000 COMPLIANCE RISK. The Company believes that its principal software
products (SUMMIT V and NOW!) are Year 2000 compliant. However, because the
Company's products are designed to work with relational database and other
software products developed and sold by third parties, any failure of these
third party software products to be Year 2000 compliant could result in the
failure of the Company's software products to effectively operate. Any such
failure could harm the Company's reputation in the market and could have an
adverse effect on sales of the Company's products and its financial performance.
ABSENCE OF PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Common Stock. While the Company has applied for approval for
listing the Common Stock on the Nasdaq SmallCap Market, there is no assurance
that a regular public market for the Common Stock will develop as a result of
this Offering or, if a regular public market does develop, that it will
continue. In the absence of such a market, investors may be unable to readily
liquidate their investment in the Common Stock.
DETERMINATION OF OFFERING PRICE. The initial public offering price of the
shares of Common Stock will be determined by negotiation between the Company and
the Representatives, as representatives of the Underwriters, and does not
necessarily bear any relationship to the Company's book value, assets, past
operating results, financial condition or any other established criteria of
value. There is no assurance that the Common Stock will trade at market prices
in excess of the initial public offering price as prices for the Common Stock in
any public market which may develop will be determined in the marketplace and
may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company and general
economic and market conditions. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that
a significant portion of the Common Stock being offered hereby will be sold to
clients of the Representatives. Although the Representatives have advised the
Company that they currently intend to make a market in the Common Stock
following this Offering, they have no legal obligation, contractual or
otherwise, to do so. The Representatives, if they become market makers, could be
dominating influences in the market for the Common Stock, if one develops. The
prices and the liquidity of the Common Stock may be significantly affected by
the degree, if any, of the Representatives' participation in such market. There
is no assurance that any market activities of the Representatives, if commenced,
will be continued.
POSSIBLE ADVERSE IMPACT ON MARKET PRICE OF FUTURE SALES OF RESTRICTED
SHARES. Sales of a substantial number of shares of Common Stock into the public
market following the Offering could materially adversely affect the prevailing
market price for the Common Stock. After the completion of this Offering, the
Company will have outstanding an aggregate of 4,543,515 shares of Common Stock.
The 1,800,000 shares of Common Stock offered hereby will be freely tradeable
without restriction or further registration
12
<PAGE>
under the Securities Act of 1933, as amended (the "Securities Act") by persons
other than "affiliates." The remaining 2,743,515 outstanding shares of Common
Stock will be "restricted securities" (the "Restricted Shares") pursuant to Rule
144 promulgated under the Securities Act. All but [167,627] of the Restricted
Shares are subject to lock-up agreements which prohibit the transfer or
assignment of such shares for a period of 12 months following the effective date
of the registration statement of which this Prospectus is a part. Beginning 12
months after such effective date, all of the Restricted Shares subject to
lock-up agreements will become eligible for sale in the public market pursuant
to Rule 144, some of which will be not be subject to the volume limitations and
other restrictions under Rule 144. The Representatives may, in their sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. See "Shares Eligible for Future Sale."
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE
LAW. The Board of Directors of the Company has authority to issue up to
5,000,000 shares of preferred stock of the Company (the "Preferred Stock") and
to fix the rights, preferences, privileges and restrictions of such shares
without any further vote or action by the shareholders. The Preferred Stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue any shares of Preferred Stock following consummation of
this Offering, the issuance of any additional shares of Preferred Stock in the
future could affect the rights of the holders of Common Stock and thereby reduce
the value of the Common Stock. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by its present owners. These provisions, together with certain
provisions of Delaware law, may also have the effect of delaying or preventing
changes in control or management of the Company which could adversely affect the
market price of the Company's Common Stock. See "Description of
Securities--Common Stock."
IMMEDIATE SUBSTANTIAL DILUTION. The initial public offering price per share
will exceed the net tangible book value per share of the Common Stock.
Accordingly, the purchasers of the Shares will experience immediate substantial
dilution of $4.01 per share or 72.9% of their investment based upon the net
tangible book value of the Company at March 31, 1998. In addition, the
purchasers of the Common Stock offered hereby will bear a disproportionate part
of the financial risk associated with the Company's business while effective
control will remain with the existing shareholders and Management. See
"Dilution."
NO DIVIDENDS. The Company has never declared or paid any cash dividends on
its capital stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. No cash
dividends may be paid on Common Stock until all shares of Series A Preferred
Stock have been either redeemed or converted into Common Stock.
NET OPERATING LOSS LIMITATIONS. The Company has net operating losses which
have been utilized to reduce taxable income in fiscal 1998. However, the
Internal Revenue Code of 1986, as amended, (IRC), reduces the extent to which
net operation loss carryforwards may be utilized in the event there has been an
"ownership change" of a company as defined by applicable IRC provisions. The
Company will be subject to net operating loss carryforward limitations as a
result of the ownership change resulting from the Offering. Limitations on the
use of net operating loss carryforward may adversely affect the Company's net
income as compared to prior periods.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, at an assumed initial
public offering price of $5.50 per share, after deducting underwriting discounts
and commissions and estimated offering expenses, are estimated to be
approximately $6,677,198. The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
The Company expects to use approximately $500,000 of the net proceeds for
expansion of the Company's sales and marketing efforts, including an increase in
sales personnel and marketing budgets for the Company's products. The Company
also expects to use approximately $2,000,000 for development of new products and
upgrades of existing products. Approximately $1,200,000 of the net proceeds will
be used to repay outstanding indebtedness of the Company, including
approximately (i) $1,000,000 for repayment of loans incurred in connection with
a 1998 private placement of debt and warrants, and (ii) $200,000 to repay
certain obligations of the Company. See "Certain Transactions."
The remainder of the net proceeds (approximately $2,977,198, or $3,455,698
if the over-allotment option is exercised) will be used to fund the Company's
general working capital requirements, including customer support, corporate
overhead, payroll and other such expenses of the Company.
The foregoing represents the Company's best estimates of its application of
the net proceeds of this Offering based upon present plans and current business
conditions. The net proceeds from the exercise of the Representatives' Warrants,
if any, will be added to the general funds of the Company and used for working
capital and other general corporate purposes. Unforseen events, changed business
conditions and a number of other factors that are beyond the control of the
Company, could necessitate changes in the application of net proceeds. The
Company reserves the right to reallocate the net proceeds of this Offering among
the various uses described above or for such other purposes as it, in its sole
discretion, deems necessary or desirable. In the event that the Company changes
the use of proceeds of this Offering, the Company may require immediate
additional debt or equity financing to meet its business plan. If the need
should arise, there can be no assurance that any such financing would be
available on terms that are favorable to the Company, if at all.
The Company may use a portion of the net proceeds to acquire businesses,
products or technologies complementary to the Company's current business. The
Company has no present commitments or agreements and is not currently involved
in any negotiations with respect to any such acquisitions. The Company has not
determined the amounts it plans to expend on each of such uses or the timing of
such expenditures. The amounts actually expended for each such use, if any, are
at the discretion of the Company and may vary significantly depending upon a
number of factors, including future revenue growth and the amount of cash
generated by the Company's operations.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and has no
current plans to pay dividends on the Common Stock in the foreseeable future.
The Company intends to reinvest future earnings, if any, in the development and
expansion of its business. Any future determination to pay dividends will depend
upon the Company's results of operations, financial condition and capital
requirements and such other factors deemed relevant by the Company's Board of
Directors.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was $59,249, or $.02 per share of Common Stock, based upon 3,043,515 shares of
Common Stock outstanding. Pro forma net tangible book value per share represents
the amount of total tangible assets of the Company less total liabilities,
divided by the number of shares of Common Stock outstanding, after giving effect
to the conversion of all outstanding shares of Series A Preferred Stock into
Common Stock upon the consummation of the Offering. The outstanding shares
excludes (i) 180,000 shares of Common Stock which may be issued by the Company
upon exercise in full of the Representatives' Warrants, (ii) 597,234 shares of
Common Stock which may be issued by the Company under options currently
outstanding under the Company's Stock Option Plan, and (iii) 279,081 shares of
Common Stock which may be issued by the Company upon exercise of outstanding
warrants. After giving effect to the sale of the 1,500,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $5.50 per share (after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company), the pro forma net tangible
book value of the Company as of March 31, 1998 would have been $6,369,367 or
$1.40 per share. This represents an immediate increase in pro forma net tangible
book value of $1.38 per share to existing stockholders and an immediate dilution
of $4.10 per share, or 74.5%, to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common Stock...... $ 5.50
Pro forma net tangible book value per share before the Offering.... $ .02
Increase attributable to new investors............................. 1.38
---------
Pro forma net tangible book value per share after the Offering....... 1.40
---------
Dilution per share to new investors (74.5%).......................... $ 4.10
---------
---------
</TABLE>
The following table summarizes, at March 31, 1998, the number of shares of
Common Stock purchased from the Company, percentage ownership of such shares,
the total consideration paid, the percentage of total consideration paid, and
the average price per share paid by existing stockholders and to be paid by
purchasers of shares offered hereby at an assumed initial public offering price
of $5.50 per share (before deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).............. 3,043,515 67% $ 3,008,750 27% $ .99
New Investors....................... 1,500,000 33% $ 8,250,000 73% $ 5.50
---------- --------- ------------- ---------- -----
Total(1).............................. 4,543,515 100.0% $ 11,258,750 $ 100.0% 2.48
---------- --------- ------------- ---------- -----
---------- --------- ------------- ---------- -----
</TABLE>
- ------------------------
(1) Does not include outstanding options or warrants issued by the Company for
the purchase of up to 876,315 shares of Common Stock. Includes 1,244,296
shares of Common Stock issuable upon conversion of all outstanding Series A
Preferred Stock and the .782271-to-one reverse stock split effected in June
1998.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis including the effect of the .782271-for-one
reverse stock split effected in June 1998, (ii) on a pro forma basis giving
effect to the conversion of Series A Preferred Stock into Common Stock upon
closing of the Offering and completion of a $1,000,000 bridge loan financing
transaction in June 1998, and (iii) on a pro forma as adjusted basis giving
effect to the sale of the 1,500,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $5.50 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by the Company, and the application of the net
proceeds thereof as set forth in "Use of Proceeds." The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
------------- -------------- -------------
<S> <C> <C> <C>
Long Term Debt (including current portion)......................... $ 596,626 $ 955,070 $ 394,870
------------- -------------- -------------
Series A Preferred Stock, $.001 par value:
1,725,000 shares authorized; 1,500,000 issued and
outstanding; none issued and outstanding, pro forma and
as adjusted...................................................... 2,310,174 -- --
Stockholders' Equity (Deficit)
Common Stock, $.001 par value; 20,000,000 shares authorized;
1,955,673 shares issued, 1,799,219 shares outstanding;
3,199,969 shares issued, 3,043,515 shares outstanding, pro
forma; 4,699,969 shares issued, 4,543,515 shares outstanding,
as adjusted.................................................... 1,956 3,200 4,700
Additional paid-in capital....................................... 6,794 2,755,524 9,431,222
Stock subscriptions receivable................................... (8,500) (8,500) (8,500)
Foreign currency translation adjustment.......................... (28,537) (28,537) (28,537)
Accumulated deficit.............................................. (1,799,921) (1,799,921) (2,359,721)
Treasury stock, at cost: 156,454 shares actual................... (340,000) (340,000) (340,000)
------------- -------------- -------------
Total Stockholders' equity (deficit)(2)............................ (2,168,208) 581,766 6,699,164
------------- -------------- -------------
Total Capitalization............................................... $ 738,592 $ 1,536,836 $ 7,094,034
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
- ------------------------
(1) Pro forma capitalization gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing, and
conversion of Series A Preferred Stock into Common Stock upon closing of the
Offering. The warrants were valued, which resulted in original issue
discount of $439,800 and was included in the pro forma capitalization. As
adjusted also gives effect to the sale of 1,500,000 shares of Common Stock
by the Company at an assumed initial public offering price of $5.50 per
share in the Offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth on the following page for each of the
fiscal years in the two-year period ended June 30, 1997, have been derived from
the Company's consolidated financial statements and the related notes thereto
that have been audited by BDO Seidman LLP, independent certified public
accountants. The selected financial data for the nine month periods ended March
31, 1997 and 1998 are derived from unaudited financial statements of the Company
and in the opinion of management include all necessary adjustments to present
fairly the results of operations and financial position for those periods. The
consolidated financial statements for each of the fiscal years in the two-year
period ended June 30, 1997, and the report thereon are included elsewhere in
this Prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Software license fees................................................... $ 1,685,208 $ 2,761,995 $ 2,016,493 $ 3,090,640
Equipment, software and supplies sales.................................. 1,571,516 1,029,314 814,525 638,783
Support and operations revenue.......................................... 3,642,509 4,688,763 3,413,679 3,318,211
----------- ------------ ------------ -----------
Net revenues.............................................................. 6,899,233 8,480,072 6,244,697 7,047,634
----------- ------------ ------------ -----------
Cost of goods sold
Cost of software license fees........................................... 163,233 292,831 192,754 195,720
Cost of equipment, software and supplies sold........................... 1,025,934 781,562 682,934 372,830
Cost of support and operations.......................................... 2,148,131 3,156,312 2,529,041 1,816,168
----------- ------------ ------------ -----------
Total cost of goods sold................................................ 3,337,298 4,230,705 3,404,729 2,384,718
Gross profit.............................................................. 3,561,935 4,249,367 2,839,968 4,662,916
Selling and marketing................................................... 764,711 1,024,716 726,380 673,711
Product research, development and enhancements.......................... 433,061 1,375,452 921,302 1,175,088
General and administrative.............................................. 2,443,191 3,322,974 2,620,712 2,271,828
----------- ------------ ------------ -----------
Total operating expenses.................................................. 3,640,963 5,723,142 4,268,394 4,120,627
----------- ------------ ------------ -----------
Income (loss) from operations............................................. (79,028) (1,473,775) (1,428,427) 542,289
Other income (expense)
Interest, net........................................................... (23,645) (97,433) (35,715) (87,044)
Other................................................................... (74,252) (63,088) (119,917) (28,118)
----------- ------------ ------------ -----------
Income (loss) before provision for income tax............................. (176,925) (1,634,296) (1,584,059) 427,127
Provision (benefit) for income tax........................................ 88,000 (88,000) -- 15,577
----------- ------------ ------------ -----------
Net income (loss)......................................................... $ (264,925) $ (1,546,296) $ (1,584,059) $ 411,550
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Net income (loss) per common share
Basic................................................................. 1,938,915 1,838,338 1,851,376 1,799,224
Diluted............................................................... 1,938,915 1,838,338 1,851,376 3,358,221
Weighted average common shares outstanding
Basic................................................................. $ (.14) $ (.84) $ (.86) $ .23
Diluted............................................................... $ (.14) $ (.84) $ (.86) $ .12
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------ ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash.............................................................................. $ 83,486 $ 663,486 $ 6,140,684
Working capital (deficit)......................................................... (892,752) 32,248 5,589,446
Total assets...................................................................... 2,849,199 3,624,198 8,981,396
Total long-term debt (including current portion).................................. 596,626 955,070 394,870
Total liabilities................................................................. 2,707,233 3,042,432 2,282,232
Redeemable convertible preferred stock............................................ 2,310,174 -- --
Stockholders' equity.............................................................. (2,168,208) 581,766 6,699,164
</TABLE>
- ------------------------------
(1) Pro forma balance sheet data gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing, and
conversion of Series A Preferred Stock into Common Stock upon closing of the
Offering. The warrants were valued, which resulted in original issue
discount of $439,800 and was included in the pro forma balance sheet data.
(2) As adjusted also gives effect to the sale of 1,500,000 shares of Common
Stock by the Company at an assumed initial public offering price of $5.50
per share in the Offering.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. WHEN USED IN THE
FOLLOWING DISCUSSIONS, THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS", "EXPECTS"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS." READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF.
GENERAL
The Company develops, markets, implements and supports specialized software
solutions for network marketing and other companies involved in the direct sales
industry. The Company primarily sells and implements its business information
systems directly. The Company services its clients from offices in both the
United States and United Kingdom. Substantially all of the Company's revenues
are generated from the sale of its systems, which usually consist of proprietary
and third-party software licenses, implementation and software support services,
third-party hardware and maintenance contracts. The Company's proprietary
software licenses are sold on a packaged or individual module basis, and the
license fee is determined in part by the number of modules and concurrent system
users. Maintenance fees are based on a percentage of software license fees and
are billed on a monthly basis.
Revenues from software licenses are recognized upon delivery, provided that
no significant obligations of the Company remain and collection of the related
receivable is deemed probable. Revenues from hardware sales are recognized upon
shipment of the product. Software support service revenues are recognized in the
period in which the services are performed. Revenues from maintenance contracts
are recognized ratably over the period of the contract.
Research and development expenses consist primarily of compensation and
consulting expenses and related equipment and licenses. To date, the Company has
not capitalized any such development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86. All research and development expenses have
been expensed as incurred.
The Company believes future growth is largely dependent on the ability to
increase sales of its core management information system product (SUMMIT V and
related modules) and to develop a market for the NOW! product.
The Company and its predecessors, Summit V, Inc., a Washington corporation
and wholly-owned subsidiary of the Company, as well as Redwood Technology, which
operated certain assets of the Company prior to selling them to Summit V, Inc.
in 1995, have a history of losses. The Company sustained net losses of $265,000
and $1,546,000 for the fiscal years ended June 30, 1996 and 1997, respectively.
Although the Company operated profitably in the first nine months of fiscal
1998, there can be no assurance that the Company will be able to operate
profitably in the future.
The Company's results of operations during fiscal 1997 were greatly affected
by a significant increase in personnel and related personnel costs during the
first half of fiscal 1997. Many of the new personnel were hired in anticipation
of a large increase in sales and related support services which did not
materialize during fiscal 1997. In November 1996, management hired a new Chief
Financial Officer and implemented a significant restructuring of the Company,
including a consolidation of the Company's workforce. As a result of this
restructuring, the Company incurred substantial losses during the first half of
fiscal 1997 and terminated approximately 30 employees in December 1996.
Although no customer accounted for more than 10% of the Company's net sales
during the nine months ended March 31, 1998, for the fiscal year ended June 30,
1997, Shaklee and Morinda accounted for
18
<PAGE>
approximately 23% and 11%, respectively, of the Company's net sales. Similar or
greater concentration of its net sales among a limited number of customers may
continue in the future. Any material decrease in net sales to any one of the
Company's largest customers that is not matched by corresponding increases in
net sales to new or existing customers could have a material adverse effect on
the Company's financial condition and results of operations and could threaten
its economic viability. There can be no assurance that the Company will receive
orders from any existing customers or from new customers.
The Company derived approximately 3.8% and 6.8% of its total revenue from
its United Kingdom operations in 1996 and 1997, respectively. For the nine month
periods ended March 31, 1997 and 1998, the Company derived approximately 6.5%
and 7.3% of its total revenue from its United Kingdom operations. The Company's
international business is subject to various risks common to international
activities, including currency fluctuations. Revenues and expenses of the
Company's United Kingdom operations are translated at the average exchange rate
in effect during the period. Translation adjustments are reported as a separate
component of stockholders' equity. The Company does not currently engage in
currency hedging transactions.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. Such fluctuations may be
caused by many factors, including, but not limited to the size and timing of
individual orders; seasonality of revenues; lengthy sales cycle; delays in
introduction of products or product enhancements by the Company or other
providers of hardware, software and components for the Company's systems;
competition and pricing in the software industry; market acceptance of new
products; foreign currency exchange rates; mix of products sold; and general
economic conditions. See "Risk Factors--Significant Fluctuations in Quarterly
Results."
The Company is or may be subject to claims of unsatisfied creditors of
Redwood Technologies, Inc. alleging successor liability or other similar basis
for liability. The Company believes that such claims could total $350,000 of
which the Company has recorded a liability of approximately $350,000 at March
31, 1998. See "Risk Factors--Risk of Creditors Claims and Successor Liability."
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data shown as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1997
--------- ---------- NINE MONTHS ENDED
------------------------
MARCH 31,
------------------------
1998
1997 -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software license fees.......................................... 24.4% 32.6% 32.3% 43.9 %
Equipment, software and supplies sales......................... 22.8% 12.1% 13.0% 9.1 %
Support and operations revenue................................. 52.8% 55.3% 54.7% 47.0 %
Net revenues..................................................... 100.0% 100.0% 100.0% 100.0 %
Cost of revenues
Cost of software license fees.................................. 2.4% 3.5% 3.1% 2.8 %
Cost of equipment, software and supplies sold.................. 14.9% 9.2% 10.9% 5.3 %
Cost of support and operations................................. 31.1% 37.2% 40.5% 25.8 %
Total cost of revenues........................................... 48.4% 49.9% 54.5% 33.8 %
Gross profit..................................................... 51.6% 50.1% 45.5% 66.2 %
Operating expenses
Selling and marketing.......................................... 11.1% 12.1% 11.6% 9.6 %
Product research, development and enhancements................. 6.3% 16.2% 14.8% 16.7 %
General and administrative..................................... 35.4% 39.2% 42.0% 32.2 %
Total operating expenses......................................... 101.1% 117.4% 68.4% 58.5 %
Operating income (loss).......................................... -1.1% -17.4% -22.9% 7.7 %
Other income (expense)
Interest, net.................................................. -0.3% -1.1% 0.6% (1.2)%
Other.......................................................... -1.1% -0.7% 1.9% -(0.0)%
Income (loss) before provision for income tax.................... -2.6% -19.3% -25.4% 6.1%
Provision (benefit) for income tax............................... 1.3% -1.0% 0.0% (0.0)%
Net income (loss)................................................ -3.8% -18.2% -25.4% 5.8%
</TABLE>
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO AND MARCH 31, 1997
REVENUES. Total revenues increased 12.9% to $7,048,000 for the nine months
ended March 31, 1998 from $6,245,000 million for the same period in 1997. The
increase was primarily attributable to increases in revenues from software
licenses. Simultaneously with this increase in total revenues, the Company
experienced a significant decrease in customer concentration as sales to Shaklee
Products decreased from approximately 23% for all of fiscal 1997 to less than
10% in the nine months ended March 31, 1998.
SOFTWARE LICENSE REVENUES. Software license revenues increased 53.3% to
$3,091,000 for the nine months ended March 31, 1998 from $2,016,000 for the same
period in 1997. The increase in software license revenues was due to an increase
in system sales and additional modules sold to new and existing clients.
EQUIPMENT, SOFTWARE AND SUPPLIES REVENUES. Equipment, software and supplies
revenues decreased 21.6% to $639,000 for the nine months ended March 31, 1998
from $815,000 for the same period in 1997. The Company has reduced its emphasis
on selling turnkey systems which typically had included low margin computer
hardware equipment. As a result, equipment purchases have decreased.
SUPPORT AND OPERATIONS REVENUE . Support and operations revenue decreased
2.8% to $3,318,000 for the nine months ended March 31, 1998 from $3,414,000 for
the same period in 1997. The decrease relates to reduced services required for
the Company's largest customer, Shaklee Products. In the prior year Shaklee
Products was converting to a version of the Company's software and significant
services were
20
<PAGE>
required. The conversion was completed in February 1997. This decrease is
partially offset by increased maintenance contract revenues resulting primarily
from an increase in the number of customers paying maintenance for new and
upgraded systems and enhanced administration of existing contracts. In the
previous period, many customers were not charged additional maintenance fees
when additional user licenses or modules were purchased as outlined in the
original purchase contract. As a result, the Company was able to increase its
maintenance contract revenues.
COST OF REVENUES. Total cost of revenues decreased 30.0% to $2,385,000 for
the nine months ended March 31, 1998 from $3,405,000 for the same period in
1997. Such decrease was primarily due to an increase in higher margin software
sales and a decrease in lower margin service revenues and equipment sales. Total
cost of revenues as a percentage of net revenues decreased from 54.5% in the
nine months ended March 31, 1997 to 33.8% for the period ended March 31, 1998
primarily as a result of the decreased size of support staff in the later period
along with a change in product mix away from sales of turnkey systems which
typically had included low-margin computer equipment.
COST OF SOFTWARE LICENSES. The cost of software licenses consists primarily
of the cost of supplies that are included with the Company's systems that are
provided by third-party suppliers. The cost of software licenses increased 1.6%
to $196,000 for the nine months ended March 31, 1998 from $193,000 for the same
period in 1997 as a result of the increase in software license revenues.
COST OF EQUIPMENT, SOFTWARE AND SUPPLIES. The cost of equipment, software
and supplies consists primarily of the cost of computer hardware and third-party
software and related peripheral equipment purchased by the Company from various
suppliers for resale as part of the Company's turnkey systems. These costs
decreased by 45.4% to $373,000 for the nine months ended March 31, 1998 from
$683,000 for the same period in 1997.
COST OF SUPPORT AND OPERATIONS. The cost of support and operations consists
primarily of personnel costs, travel and materials associated with providing
implementation, education and training, consulting and technical services. These
costs decreased 28.2% to $1,816,000 for the nine months ended March 31, 1998
from $2,529,000 for the same period in 1997. During the first five months of
fiscal 1997 the Company hired numerous support personnel which proved to be
unproductive and the positions were ultimately eliminated in December 1996. As a
result the cost of support and operations were lower for the nine months ended
March 31, 1998.
GROSS PROFIT. Gross profit increased by 64.2% to $4,663,000 for the nine
months ended March 31, 1998 from $2,840,000 for the same period in 1997. Overall
gross profit as a percentage of total revenues increased to 66.2% for the nine
months ended March 31, 1998 from 45.5% for the same period in 1997, mainly as a
result of the increase in higher-margin software license revenues as a
percentage of total sales. Gross profit on the Company's software license
revenues is significantly higher than on revenues from equipment, services and
maintenance. Gross profit on software licenses remained relatively constant from
March 31, 1998 to March 31, 1997 at 93.7% and 90.4%, respectively. Gross profit
on software support services and maintenance increased to 45.3% for the nine
months ended March 31, 1998 from 25.9% for the same period in 1997 due mainly to
the elimination of many support personnel. The increase in equipment gross
profit to 41.6% for the nine months ended March 31, 1998 from 16.2% for the same
period in 1997 was primarily due to sales of more third party software and less
hardware.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
7.2% to $674,000 for the nine months ended March 31, 1998 from $726,000 for the
same period in 1997. The decrease primarily relates to the elimination of a
highly compensated sales professional in March 1997 and more efficient
management of marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 27.6% to $1,175,000 for the nine months ended March 31, 1998 from
$921,000 for the same period in 1997. The
21
<PAGE>
increase in research and development expenses relates primarily to the continued
development of the NOW! suite of products which began in December 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 13.3% to $2,272,000 for the nine months ended March 31, 1998 from
$2,621,000 for the same period in 1997. Such decrease was due primarily to a
significant decrease in personnel resulting from a restructuring of the Company
that began in December 1996.
INTEREST EXPENSE. Interest expense increased 141.7% to $87,000 for the nine
months ended March 31, 1998 from $36,000 for the same period in 1997. The
increase relates primarily to the equipment lease entered into in December 1996
and the interest due on a note payable to a stockholder which accrues interest
at 18% annually and provides for monthly payments equal to 1% of the Company's
gross margin until fully paid.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES. Total revenues increased 22.9% to $8,480,000 for fiscal 1997 from
$6,899,000 for fiscal 1996. The increase was primarily attributable to increases
in revenues from software licenses, software services and maintenance contracts.
SOFTWARE LICENSE REVENUES. Software license revenues increased 63.9% to
$2,762,000 for fiscal 1997 from $1,685,000 for fiscal 1996. The increase in
software license revenues was due to an increase in system sales and additional
software modules sold to new and existing clients. This increase was the direct
result of an increased sales effort to sell high margin products particularly
during the last six months of fiscal 1997.
EQUIPMENT, SOFTWARE AND SUPPLIES REVENUES. Equipment, software and supplies
revenues decreased 34.5% to $1,029,000 for fiscal 1997 from $1,572,000 for
fiscal 1996. During the last half of fiscal 1997, the Company decreased its
emphasis on selling turnkey systems which typically had included low margin
equipment. As a result, equipment purchases have decreased.
SUPPORT AND OPERATIONS REVENUE. Support and operations revenue increased
28.7% to $4,689,000 for fiscal 1997 from $3,643,000 for fiscal 1996. The
increase in service revenues was principally due to additional purchases of the
Company's systems and system upgrades by existing customers which required
implementation assistance and the increase in maintenance contract revenues,
primarily due to an increase in the number of customers paying maintenance fees
for new and upgraded systems and enhanced administration of existing contracts.
In previous years, many customers were not charged additional maintenance fees
as additional user licenses or modules were purchased as outlined in the
original purchase contract. As a result, the Company was able to increase its
maintenance contract revenues.
COST OF REVENUES. Total cost of revenues increased 26.8% to $4,231,000 for
fiscal 1997 from $3,337,000 for fiscal 1996. Total cost of revenues as a
percentage of net revenues increased from 48.4% in fiscal 1996 to 49.9% in
fiscal 1997.
COST OF SOFTWARE LICENSES. The cost of software licenses consists primarily
of the cost of supplies that are included with the Company's systems that are
provided by third-party suppliers. The cost of software licenses increased 79.8%
to $293,000 for fiscal 1997 from $163,000 for fiscal 1996. The increase is a
direct result of the increase in software sales.
COST OF EQUIPMENT, SOFTWARE AND SUPPLIES. The cost of equipment, software
and supplies consists primarily of the cost of computer hardware and third-party
software and related peripheral equipment purchased by the Company from various
suppliers for resale as part of the Company's turnkey systems. These costs
decreased by 23.8% to $782,000 for fiscal 1997 from $1,026,000 for fiscal 1996
primarily as a result of the Company's decision to decrease its emphasis on
sales of turnkey systems which typically had included low margin computer
equipment.
22
<PAGE>
COST OF SUPPORT AND OPERATIONS. The cost of support and operations consists
primarily of personnel costs, travel and materials associated with providing
implementation, education and training, consulting and technical services. These
costs increased 46.9% to $3,156,000 for fiscal 1997 from $2,148,000 for fiscal
1996. The increased support and operations expense relates primarily to a 43%
increase in personnel during the first half of fiscal 1997. Many of the new
hires were unnecessary and therefore unproductive. As a result, the Company
terminated approximately 30 employees in December 1996.
GROSS PROFIT. Gross profit increased by 19.3% to $4,249,000 for fiscal 1997
from $3,562,000 for fiscal 1996 primarily due to the increase in total revenues
from fiscal 1996 to fiscal 1997. Overall gross profit as a percentage of total
revenues decreased slightly to 50.1% for fiscal 1997 from 51.6% in fiscal 1996,
mainly as a result of the decrease in margin on equipment sales which was offset
somewhat by the increase in higher-margin software license revenue as a
percentage of total revenues. Gross margin on the Company's software license
revenues is significantly higher than on revenues from equipment, services and
maintenance. Gross margins on software licenses remained relatively constant
from fiscal 1996 to fiscal 1997 at 90.3% and 89.4%, respectively. Gross margins
on software support services and maintenance decreased to 32.7% in fiscal 1997
from 41.0% in fiscal 1996 due mainly to the addition of new support personnel
described above. The decrease in equipment gross margins to 24.1% in fiscal 1997
from 34.7% in fiscal 1996 was due to price competition in the computer hardware
industry and discounting required in response to volume purchase agreements
being offered by the computer manufacturers and computer resellers.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
34.0% to $1,025,000 for fiscal 1997 from $765,000 for fiscal 1996. The increase
in sales and marketing expenses relate primarily to higher sales commission
associated with increased revenue and higher travel costs to support increased
sales activity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 217.6% to $1,375,000 for fiscal 1997 from $433,000 for fiscal 1996.
The increase in research and development expenses relates primarily to the
development during the last half of fiscal 1997 of the NOW! suite of products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 36.0% to $3,323,000 for fiscal 1997 from $2,443,000 for fiscal 1996.
The general and administrative expenses as a percentage of revenue increased to
39.2% in fiscal 1997 compared to 35.4% in fiscal 1996. The increase in general
and administrative expense relates primarily to the addition of new office space
and additional personnel.
INTEREST EXPENSE, NET. Interest expense increased 304.2% to $97,000 for
fiscal 1997 from $24,000 for fiscal 1996. The increase related primarily to a
$600,000 equipment lease the Company entered into in December 1996 which bears
interest at approximately 9.0% per year.
BACKLOG
The Company does not typically maintain a significant backlog and therefore
revenues for each quarter depend substantially on orders received and delivered
in that quarter. The average price of the Company's systems sold during the
fiscal year ended June 30, 1997 was approximately $100,000. As a result of the
relatively high revenue amount per order and relatively low unit volume, any
lost or delayed sales will have a disproportionately greater effect on the
Company's revenues and quarterly results relative to companies that have higher
unit sales volumes and less revenue associated with each sale. The Company's
sales cycle is typically three to six months from the time initial sales contact
is made with a qualified prospect, making the timing of the Company's license
fees difficult to predict and the Company's quarterly results difficult to
forecast. The Company's expense levels are based in part on its forecast of
future revenues. Accordingly, since the majority of the Company's expenses are
fixed in nature, the Company would not be able to quickly curtail expenses in
response to a decline in revenues, and operating results for
23
<PAGE>
a given quarter would be adversely affected. As a result, revenues for any
quarter are subject to significant variation and the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company will be profitable on a
quarter-to-quarter basis.
LIQUIDITY AND CAPITAL RESOURCES
Prior to this Offering the Company has financed its operations primarily
through cash flow from operations, private sales of the Company's equity and
long-term equipment financing. The Company does not have access to a line of
credit. The Company's $600,000 equipment lease requires the Company to maintain
cash on deposit with a bank affiliated with the lessor. The required cash
balance was initially $300,000 and reduces incrementally in proportion to the
reduction in the lease balance. At September 30, 1997 the principal balance of
the lease was $448,000 and the required cash balance was $250,000.
The Company has a note payable to a stockholder with interest payable at 18%
per annum. The note is payable in monthly installments of the greater of $10,000
or the individual monthly compensation of the two major stockholders ($14,000
per month at March 31, 1998), and is secured by their shares in the Company. The
Company has established an agreement with the note-holder allowing for a
variance from regularly scheduled payments. At March 31, 1998 the outstanding
principal balance was $202,000.
In fiscal 1996, operating activities provided net cash of approximately
$317,000 primarily from an increase in accounts payable and accrued expenses of
approximately $730,000 which were offset by an increase in accounts receivable
of approximately $423,000. In fiscal year 1996 the Company used net cash of
approximately $335,000 in financing activities to repay notes payable, and net
cash of approximately $145,000 in investing activities primarily to purchase
property and equipment.
In fiscal 1997, operating activities used net cash of approximately
$1,192,000 primarily from a net loss from operations of approximately $1,546,000
and a decrease in accounts payable of approximately $500,000 which were offset
by a combined increase in customer deposits and accrued liabilities of
approximately $914,000. In fiscal 1997 financing activities provided net cash of
approximately $2,500,000 primarily from net proceeds from the sale of the
Company's preferred stock (approximately $2,300,000) and proceeds from equipment
notes payable (approximately $660,000) which were offset by a redemption of a
portion of the Company's common stock ($340,000) and repayment of notes payable
(approximately $134,000). In fiscal 1997 the Company's investing activities used
net cash of approximately $1,000,000 primarily to purchase property and
equipment.
At March 31, 1998, the Company had approximately $283,000 in cash. The
Company believes that the net proceeds from the sale of the Common Stock offered
hereby, together with its current cash balance and cash flow from operations,
will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. The Company believes that its
anticipated cash flow from operations, current cash and cash equivalent balances
and the net proceeds of the sale of Common Stock in this Offering will provide
sufficient cash resources to finance its operations and associated marketing and
customer support activities for at least 12 months. Thereafter, the Company's
continued operations will depend upon cash flow from operations and the
availability of further financing.
YEAR 2000
The Company believes that its principal software products (SUMMIT V and
NOW!) are Year 2000 compliant. However, because the Company's products are
designed to work with relational database and other software products developed
and sold by third parties, any failure of these third party software products to
be Year 2000 compliant could result in the failure of the Company's software
products to effectively operate. Although the Company does not expect any
significant disruption in operations or any significant expenditures as a result
of computer software issues related to the Year 2000, any failure of third party
software used by the Company could have the effect of harming the Company's
reputation in
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the market and could have an adverse effect on sales of the Company's products
and its financial performance.
NEW ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 129. the Company does not expect adoption of SFAS No. 129
to have a material effect, if any, on its financial position or results of
operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its results of
operations.
Statement Position 97-2, "Software Revenue Recognition", ("SOP 97-2") issued
by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (1) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. SOP 97-2 also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company does not expect adoption of SOP 97-2 to have a material
effect on the financial statements.
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BUSINESS
Jenkon International, Inc. ("Jenkon" or the "Company") is a leading
developer of specialized software solutions for network marketing and other
companies involved in the direct sales industry. The Company's products are
designed to provide direct sales organizations, which are characterized by a
large number of small transactions, intricate compensation programs, and complex
distributor genealogy trails, with a rapid, accurate and efficient means to
collect, process, transmit and record sales, commissions and other data. The
Company was the recipient of the 1997 DSA Partnership Award granted by the
Direct Selling Association ("DSA"), the direct sales industry's largest trade
group. The award was in recognition of the Company's leadership position as a
supplier to the industry.
To date, the Company has focused its development and marketing efforts on
its proprietary management information system software package known as SUMMIT
V. The Company's management information systems, including its SUMMIT V
software, have been installed with over 150 direct sales companies in over 25
countries throughout the world. The Company's clients include many of the direct
sales industry's leading companies such as Shaklee, Avon Products (China and
India), USANA, Nature's Sunshine and Watkins. In addition to SUMMIT V, the
Company has developed and markets a compatible software-based voice response
system known as TOUCHTALK that offers individual home-based direct sales
personnel the ability to access a wide variety of product, sales, commission and
other information regarding the company they represent.
In recognition of the increasing importance of Internet commerce in the
direct sales industry and throughout the economy, the Company has developed and
has recently begun the initial marketing of a scalable Internet-based product,
known as NOW!. NOW! is designed for use by home-based direct sales personnel and
allows such personnel direct access to and communication with the companies that
they represent through the use of personal computers, Web TV and other
Internet-based platforms. NOW! enables home-based direct sales personnel to
quickly obtain current inventory information, directly place orders online,
obtain order status information and view and analyze personal and group sales,
commissions and other information. In addition to the benefits afforded to the
home-based direct sales personnel, the Company believes that the NOW! product
will enable its direct sales company clients to significantly reduce order
processing and other labor-intensive operating costs which the Company believes
account for a substantial portion of the total operating costs of a typical
direct sales company client. The Company believes that NOW! enhances the
attractiveness of SUMMIT V to its direct sales company clients while expanding
the Company's potential client base to include the large number of home-based
direct sales personnel affiliated with such companies.
DIRECT SALES INDUSTRY BACKGROUND
The direct sales industry markets its products through networks of
home-based direct sales personnel whose selling activities most commonly take
place in customers' homes. This industry thrives on a team building approach
whereby home-based direct sales personnel can build a sales group and derive
income from the cumulative sales of the group in addition to their individual
earnings from retail sales. In 1996, total world wide sales in the industry were
estimated to be in excess of approximately $78 billion and were generated by a
sales force of approximately 22 million distributors.
The industry is built on a "direct to the customer" approach to the
marketing of consumer-oriented products. Eliminating national wholesalers,
regional distribution centers, retail stores and other middlemen, direct sales
companies instead utilize the entrepreneurial spirit of independent home-based
distributors to reach customers. Home-based direct sales personnel buy direct
from the direct sales company or other direct sales personnel at wholesale, sell
at retail and keep the profit for their efforts. Further earnings are available
through team-building activities whereby home-based direct sales personnel can
gain a percentage on all the sales made by team members under a pre-defined
compensation program.
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Direct sales companies benefit by being able to operate a low overhead, high
sales volume business with less staff, premises and marketing costs. Home-based
direct sales personnel benefit by being able to build an ongoing business with
little or no inventory, minimal start-up costs and expanded income through team
building. Although many home-based direct sales personnel are able to generate a
full-time income from their marketing activities, the vast majority are
part-time marketers who use their energy and contacts to build a second income
to supplement their primary source of income.
The Company markets its products to three broad categories of companies in
the direct sales industry:
TRADITIONAL DIRECT SALES COMPANIES. Their prime focus is to make retail
sales on a one-to-one basis. Avon Products is an example of a traditional direct
sales company.
PARTY PLAN COMPANIES. These companies depend on sales "parties" where
guests are invited to a home setting by a "host" or "hostess." The "host" or
"hostess" is then given an opportunity to demonstrate the Company's products and
take orders from customers. Companies in this group, such as Tupperware,
accounted for over 26% of direct sales industry sales in the U.S. in 1994.
NETWORK MARKETING COMPANIES. This industry sector thrives on the
team-building element of sales whereby each home-based direct sales person can
build his/her own sales group and derive income from the cumulative sales of the
group in addition to their individual earnings from retail sales. Herbalife and
Amway are examples of network marketing companies.
The Company believes that there is a large potential for future growth in
the direct sales industry in continental Europe, Latin America, and Pacific Rim
and that due to the dramatic growth, many companies are experiencing dramatic
growth overseas. The Direct Selling Association estimates that since 1991, total
worldwide sales by direct sales companies have grown from approximately $48
billion to approximately $78 billion in 1996 while the worldwide sales force
increased from approximately 11 million people in 1991 to over 22 million people
in 1996. According to an industry analysis compiled by J.P. Morgan Securities
Inc., the worldwide direct sales market is expected to grow at an annual rate of
10% through the year 2000 while the number of worldwide direct sales
representatives is expected to grow at an annual rate of 13% during the same
period.
BUSINESS STRATEGY
The Company's business objective is to take advantage of the rapid growth in
the direct sales industry and expand its position as a leading provider of
specialized software to such industry. In order to achieve this goal, the
Company's growth strategy includes the following elements:
- DIRECTLY ACCESS HOME-BASED DIRECT SALES PERSONNEL THROUGH THE INTRODUCTION
OF INTERNET-BASED PRODUCTS. While direct sales companies will remain the
Company's core customer base, the Company believes that the large number
of individual home-based direct sales personnel of these direct sales
companies present a large and growing potential market for direct sales
software products such as the Company's NOW! product.
- INCREASE MARKET PENETRATION OF CORE PRODUCTS. The Company believes that
its current base of direct sales company clients represents only a small
portion of the total number of direct sales companies that are potential
users of SUMMIT V and the Company's other core products. Upon completion
of this Offering, the Company will attempt to increase the market
penetration of SUMMIT V through more aggressive marketing and promotional
efforts and by continuing to modify and improve SUMMIT V and other
products to meet the changing needs of direct sales company clients. The
Company expects that future generations of SUMMIT V will include
multi-platform database support, an e-commerce enabled server, support for
existing communications standards, and other advanced features. In
addition, the Company is in the process of creating an application program
interface that would enable the NOW! product to be used by direct sales
companies and their home-based
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personnel regardless of whether the company in question utilizes the
SUMMIT V system or any other software products of the Company.
- LEVERAGE EXISTING CUSTOMER BASE TO INCREASE REVENUES. The Company
believes that its relationships with its corporate direct sales clients
provides a unique opportunity for the Company to generate revenues from
the cross-selling and marketing of additional products and services by the
Company and others to the home-based personnel of its direct sales
clients. For example, the Company has entered into contracts with both MCI
and Earthlink pursuant to which the Company will receive a referral fee
for NOW! users that subscribe for Internet access with such providers
through the NOW! product. In addition, given the large number of credit
card transactions handled by the Company's direct sales clients, an
opportunity may exist for the Company to offer credit card processing
services for which the Company would receive processing fees.
- EXPAND GEOGRAPHIC MARKET PENETRATION. The Company believes that
international markets provide significant opportunity for the Company to
increase sales of its products and the Company is making a concerted
effort to expand its international operations. Given the rapid growth of
the direct sales industry throughout the world, and especially in the
countries of the Pacific Rim, Southeast Asia and Latin America, the
Company intends to expand its geographic presence by expanding the focus
of its sales efforts to these expanding international markets as well as
the U.S. market. The Company currently operates a European office in the
United Kingdom and intends to open an office in the Far East to serve the
Pacific Rim market. The Company expects to be able to meet much of its
staffing needs for these branch offices through a combination of existing
personnel and locally hired professionals.
PRODUCTS AND SERVICES
NOW! The Company has recently completed the development and testing and has
begun the marketing of NOW!, a Windows-based software program that together with
Jenkon's SUMMIT V management information system provides home-based direct sales
personnel with immediate access to the real-time sales information they need to
manage their business over the Internet.
Utilizing the power of the Internet NOW! provides home-based direct sales
personnel with the ability to:
- View their entire downline organizations and analyze critical downline
performance information such as personal sales volumes, group sales
volumes, and new recruits
- Place orders online without assistance from corporate personnel
- Obtain the status of various orders
- View current inventory information
- View or listen to corporate announcements and training video/audio
broadcasts from the home office
- View a detailed explanation of their commissions earned to date
In addition to the benefits afforded to home-based direct sales personnel,
the Company believes that NOW! can serve to increase the efficiency of its
corporate customers' order processing while reducing transaction costs by
reducing the volume of labor-intensive paperwork and related costs associated
with distributor inquiries and processing of fax and telephonic orders.
Moreover, the NOW! product is scalable and can be added to a client's system on
a modular basis so that the software system can grow as the needs and size of
the client's business expand.
NOW! has been developed to address the varying information needs and levels
of sophistication among computer users. For novice computer users NOW! Online is
simply an interactive Internet WEB
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system that allows access to all necessary sales information online using
standard WEB browser software. NOW! Online is also compatible with Microsoft's
WEB TV to provide easy Internet access to valuable sales information using the
home television. For the more technically proficient home-based direct sales
personnel the NOW! CD-ROM is available which includes a Personal Information
Manger (PIM) and the ability to download information from the Internet onto a
personal computer to assist in the creation of a personalized management
reports.
SUMMIT V. SUMMIT V is a management information system for direct sales
companies that is designed to provide such companies easy access to the
information necessary for the successful operation and management of their
business.
The range of information SUMMIT V can generate for clients includes:
- Operational information such as sales order processing, sales organization
tracking and maintenance, commission processing, credit card checking,
inventory control
- Management information such as activity analysis and growth analysis
- Financial information such as daily statistics, event analysis and sales
volume
To maximize client loyalty and retention, and to establish and maintain a
reputation that will attract new clients, Jenkon offers annual support and
maintenance contracts whereby purchasers of the service can obtain technical
customer support service. Jenkon technical personnel are available 24 hours a
day, 7 days a week, to assist clients in solving problems with the system at any
time (which in the vast majority of cases can be provided on the spot by voice
or, if necessary, via a telephone modem). In addition, the Company offers
training on an ongoing basis to maintain quality control with respect to the
operation of the system, particularly in the case of customized systems.
TOUCHTALK. TOUCHTALK is a stand-alone software product that operates with
SUMMIT V. Once connected to both a phone system (or lines) and a computer,
TOUCHTALK works 24 hours each day to handle phone calls by home-based direct
sales personnel. By selecting a menu option with a touch tone key, each
home-based sales person can place orders, make inquiries, hear training
messages, or leave messages for their downline direct sales personnel.
The Company believes that the key attractions of the TOUCHTALK software are
that it facilitates around-the-clock operation and helps reduce operating
overhead for direct sales companies.
OTHER SERVICES
CUSTOM PROGRAMMING. The unique compensation programs of direct sales
companies of various kinds have established the need for the Company to
customize SUMMIT V for its customers, which provides an additional source of
potential revenue for the Company. In addition, due to the changing nature of
compensation plans, the international and organization-by-organization
differences between direct sales companies are expected to increase the need for
customization. Moreover, because it is customary in the direct sales industry
for clients to regularly revise their compensation plans and structures in order
to provide incentives to sale personnel, the Company generates additional
revenue for customizations and modifications even after the initial installation
of the product has been completed.
ANNUAL SUPPORT AGREEMENTS. In order for clients to have access to Jenkon's
support services, it is necessary for the client to purchase an Annual Support
Agreement. Such support agreements typically provide for annual fees equal to
15% of the cost of the system. There are many benefits for the customer to do
this, including 24 hour-7 days a week support, and reduced rate for services.
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TECHNOLOGY
Similar to many other business packages, SUMMIT V utilizes various
technologies provided by other suppliers. These include operating systems,
relational database software, and PC/Client software. In addition, SUMMIT V was
built using advanced engineering tools, some of which are required to be
installed on each client computer for SUMMIT V to operate.
OPERATING SYSTEMS. SUMMIT V currently operates within the UNIX and
Microsoft Windows/NT operating systems. UNIX is the current platform of choice
due to its ability to support large companies and the massive volumes of data
they must process. Jenkon installs all small systems (under 20 workstations)
using Windows NT. SUMMIT V is currently compatible with Windows NT running the
Ardent Software, Inc. (formerly Unidata) relational database software.
RELATIONAL DATABASE SOFTWARE. Like other software, relational database
technology has also evolved considerably in recent years and now imposes
"standards" which, if followed, allow business software programs to exchange
data and even "talk" to each other. SUMMIT V utilizes relational database
software products of Ardent Software, Inc. Ardent products comply with industry
standards (ANSI) and are capable of seamlessly communicating with many other
commonly used database systems such as Oracle, Informix, Sybase, and Microsoft
Access. This provides Jenkon with the ability to interface products written in
these other environments into SUMMIT V, if desired. It also allows customers to
use SUMMIT V in similar fashion to other database software they are accustomed
to using for reports and inquiries.
The Company has entered into a reseller agreement with a predecessor to
Ardent Software, Inc. granting the Company the right to utilize Ardent software
in its SUMMIT V software. The Company is in the process of negotiating a renewal
of the reseller agreement. To the extent that Ardent elects to terminate or not
renew the Company's license or change its pricing structures in a manner that is
unfavorable to the Company, the Company may be materially adversely affected.
FOURTH GENERATION LANGUAGE. Today, software engineers often use computers
to design and build programs much like a word processor creates a publication
quality document. Programmers now show the computer what they want by "painting"
input screens and reports on their workstations, then ask the computer to create
the actual programs. This method of software development creates a much more
reliable and consistently coded package which is later easier and less expensive
to support. The Fourth Generation Language which does this is called System
Builder Plus ( "SB+"). SUMMIT V was created with SB+, which is owned by Ardent
Software, Inc.
SB+ has recently provided the capabilities to provide graphically designed
screens to better comply with Windows standards. Jenkon has developed a version
of SUMMIT V which takes advantage of this new capability. The Company believes
this newer look and feel could result in relatively greater market demand for
SUMMIT V.
PC/CLIENT SOFTWARE. Connecting a PC computer to a UNIX server requires a
software program which runs on the PC to manage the connection, the data, and
the software interface. SUMMIT V utilizes a PC software package called SBClient
which is designed to work in harmony with SB+ based applications. SBClient
allows PC networks to access SUMMIT V at high speed. It also provides the GUI
(graphical user interface) capabilities.
SUMMIT V can also be accessed by Macintosh computer workstations using one
of several terminal emulation programs available. In addition, for computer
users who would prefer to avoid the expense of PC workstations, SUMMIT V can
also be accessed by "dumb" workstations costing as little as $300 each.
INTERNET TECHNOLOGY. The NOW! technology provides for multiple
heterogeneous devices to connect simultaneously and in parallel via the
Internet. Utilizing the industry standard Internet TCP/IP (Transmission Control
Protocol/Internet Protocol) through an extended HTML (HyperText Markup
Language), a connection by browsers, web pages, CD-ROMS, or any other 'Internet
aware' device can be achieved.
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The NOW! system is completely proprietary as it requires an interface with
SUMMIT V to be fully functional with real-time information. This interface is an
Application Programming Interface (API) which provides significant time and cost
savings by enabling the reuse of a reliable software interface each time a new
customer or product is connected to SUMMIT V. The API technology is used both
internally, to interface new features developed by Jenkon, as well as being
positioned as a development kit which may be purchased by customers for their
own integration into the otherwise proprietary environment.
CUSTOMERS
Jenkon currently has software systems installed in over 25 countries
including the United States and Canada. The smallest of these are "3-User"
systems, mainly for the new start up customer with a limited budget. Other than
size constraints imposed by the client's hardware systems, the Company does not
believe there is an upper limit to the number of users on a Jenkon software
system, with large companies like Shaklee having a large number of ports on
their mainframe.
The profile of a Jenkon customer ranges from the household names like Avon
Products or Shaklee to the individual starting his or her own direct sales
company.
Although no customer accounted for more than 10% of the Company's net sales
during the nine months exceed March 31, 1998, for the fiscal year ended June 30,
1997, Shaklee and Morinda accounted for approximately 23% and 11%, respectively,
of the Company's net sales. Similar or greater concentration of its net sales
among a limited number of customers may occur in the future. In such event, any
material decrease in net sales to any one of the Company's largest customers
that is not matched by corresponding increases in net sales to new or existing
customers could have a material adverse effect on the Company's financial
condition and results of operations and could affect its economic viability.
There can be no assurance that the Company will receive orders from any existing
customers or from new customers.
SALES AND MARKETING
SALES. Industry sources estimate that there are in excess of 5,000 direct
sales companies globally. Moreover, there is a constant turnover of such
companies as existing companies leave the market and new direct sales companies
are formed. The profiles of these companies range between well known names, such
as Amway and Avon Products to new start-up operations. In most cases, a
prospective client will be "qualified" prior to any selling activity to ensure
that the correct range of products and services are offered to meet the clients
requirements, both in terms of functionality and budget. This process will
typically be carried out on the telephone by a salesperson, with the assistance
of a technician, if necessary, to advise on operational issues and marketing
plan requirements.
The Company sells its products and services to the customer by its direct
sales force based in the United States and Europe. Due to the global nature of
the Company's clients, extensive travel is often necessary in order to negotiate
and conclude sales. On-site visits will often entail a preliminary "site-study"
to clearly identify the type of system needed for the prospect, and a technician
will accompany the salesperson if required.
It is expected that Jenkon will supply NOW! software to the home-based
direct sales personnel of the Company's corporate customers. Such sales are
expected to be made to home-based direct sales personnel in cooperation with
corporate customers. Pricing of the NOW! product will vary depending on whether
corporate customers elect to receive a percentage of the sales price as a fee.
The Company will attempt to contract with its corporate customers to include a
copy of NOW! in each kit provided to home-based direct sales personnel and
promote the package to their downline organization. The Company expects each
NOW! product package will be private labeled with the customer's logo and name.
The software will be personalized to each customer with a corporate "splash"
screen (welcome).
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MARKETING. While traditionally pricing its products so as to target larger
companies, the Company has recently begun to target a broader spectrum of
smaller companies in the belief that, given the rate of industry growth, this
strategy may help the Company retain its position as an industry leader and to
develop profitable long-term relationships with these companies.
The Company's marketing operations include production of DIRECT SELLING
TODAY, a quarterly
Newsletter distributed to over 1,000 industry leaders and contacts; organizing
trade shows; working with consulting companies and individual consultants to
consolidate working relationships and pave the way for the sales process to
begin; and advertisements in trade publications together with other public
relations activity.
Market research is also carried out to assess the relative strengths and
weaknesses of Jenkon's products and services compared to its competition. The
Company's marketing group is responsible for identifying new opportunities
within Jenkon's existing target market and works closely with the Company's
research and development group.
COMPETITION
The software industry is highly competitive and is characterized by rapid
technological change, rapidly changing customer preferences and little or no
barriers to entry. There are several businesses, some of which may be better
capitalized than the Company, currently offering software similar in type or
scope to the Company's. The Company believes that the primary competitive
factors for the provision of its software are price, technical expertise and
quality, ease of use, variety of value-added services, reliability and security,
customer support and geographic coverage. The Company's success will depend
heavily upon its ability to provide high quality software and value-added
services. Other factors that will affect the Company's success in this market
include the Company's continued ability to attract additional experienced
marketing, sales, and management talent, and the expansion of worldwide support,
training and service capabilities.
The Company's current and prospective competitors generally consist of other
independent software providers such as Globenet and 20/21 Interactive. The
Company believes that additional competitors, which may include consumer
software or other companies, may potentially enter the direct sales market. In
addition, the Company may face potential competition from some of the larger
direct sales companies that have developed their own in-house systems that could
be adapted for sale to other direct sales companies. Some or all of the
Company's actual and potential competitors may have greater market presence,
engineering, customer support and marketing capabilities, and financial,
technological and personnel resources than those available to the Company. As a
result, they may be able to adapt more swiftly to new or emerging technologies
and changes in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their products than can the Company.
Because price is a major competitive factor in the market for the Company's
products, if any of the Company's present or future competitors elect to
initiate and support prolonged price competition to gain market share, the
Company likely would be forced to lower its prices, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability.
PROPERTIES
The Company leases approximately 17,000 square feet of space in the
Vancouver, Washington area and approximately 800 square feet of office space in
Redditch, England.
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EMPLOYEES
As of May 31, 1998, the Company has approximately 77 employees in Vancouver,
Washington, and four in Redditch, England. None of the employees are represented
by a labor union, and the Company considers its relations with employees to be
good.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets laws and contractual
restrictions to establish and protect its technology. Although the Company is in
the processing of registering certain trademarks, the Company does not currently
have any registered patents, copyrights or trademarks. There can be no assurance
that the steps taken by the Company will be adequate to prevent misappropriation
of its technology that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, there can be no assurance that licenses for any
intellectual property that may be required for the Company to provide services
or develop products would be available on reasonable terms, if at all.
The Company has not historically required trade secrecy and confidentiality
agreements to be executed by its employees or, in some instances, independent
software developers in order to protect its rights in its proprietary
technology. The Company is in the process of requiring employees and contractors
to execute such agreements. No assurance can be given that such measures will be
effective in protecting the Company's rights in its present or future
technology.
The Company has filed federal trademark registrations for the product names
"Summit V," "TouchTalk" and NOW! as well as for "Jenkon." There can be no
assurance that tradename protection can be obtained for such names. Although the
Company does not believe that its products or tradenames infringe upon the
proprietary rights of any third parties and no third parties have asserted
trademark, patent, or copyright infringement or other similar claims against the
Company, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, parties
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief which could effectively block the
Company's ability to sell product in the United States or abroad. Such a
judgment could have a material adverse effect on the Company's business,
financial condition or results of operations.
The laws of certain foreign countries where the Company distributes or
intends to distribute its products do not effectively protect technology,
trademarks or tradenames that the Company uses in its business and considers
proprietary. The Company has not undertaken to investigate such laws or to
assure that available protection is obtained.
LEGAL PROCEEDINGS
The Company has acquired from Redwood Technology a license to utilize
certain Ardent Software, Inc. products incorporated into the SUMMIT V software
in connection with sales in certain portions of Asia, including China. The grant
of the license by Unidata, Inc., a predecessor of Ardent Software, Inc., to
Redwood Technology and the sublicense by Redwood Technology to Avon Products, a
New York corporation, have been challenged in a lawsuit by the Asia licensee of
Unidata, Inc. as violating the terms of such licensee's agreement with Unidata.
Although Unidata, Inc. and Redwood Technology are the primary defendants in the
litigation, if the Company is required to devote significant resources to
protect its interests and the interests of its sublicensees in Asia, the
Company's financial condition and results of operations could be materially
adversely affected. Moreover, in the event that a court rules that
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the Company's license of the Unidata, Inc. software is invalid, the Company's
ability to expand its sales into China will be materially adversely affected.
In July 1995, Summit V, Inc. purchased and/or licensed substantially all of
the assets and assumed certain liabilities of Redwood Technology, the developer
of certain of the Company's software technology. See "Certain Transactions."
Because Redwood Technology may be deemed to have been rendered insolvent by the
sale and license of certain of its assets to Summit V, Inc. and because of the
commonality of ownership and management of Redwood Technology and Summit V,
Inc., the Company is or may be subject to claims by unsatisfied creditors of
Redwood Technology challenging the Company's rights to the acquired assets
(including the SUMMIT V software technology) or alleging successor liability or
other similar claims. Whether or not litigation ensues, such claims could result
in a disruption of the Company's business which would have material adverse
effect on the Company and its financial performance. In addition, the Company
will likely be subject to claims arising from tax liens in the amount of
approximately $250,000 recorded against the assets of Redwood Technology with
respect to the unpaid employer portion of payroll taxes. The Company intends to
use a portion of the proceeds of this Offering to settle certain obligations of
Redwood Technology. In the event that the Company were required to pay all or a
significant portion of the claims of creditors or tax liens of Redwood
Technology, the Company's business and financial conditions and its ability to
achieve its business plan would be materially and adversely affected. See
"Certain Transactions" and "Risk Factors."
On April 24, 1998, Jenkon was notified of the initiation of an avoidance
action in a Chapter 7 bankruptcy proceeding in the U.S. Bankruptcy Court for the
District of Utah (Central Division). The action was brought by the bankruptcy
trustee of a former customer to recover an alleged preferential transfer of
$25,384.70 made to Jenkon within 90 days prior to the commencement of the
Chapter 7 bankruptcy proceedings. The bankruptcy trustee is seeking recovery of
the complete amount of the alleged preferential transfer plus interest and costs
of the proceeding. The Company does not believe that this action will have a
material adverse effect on the Company, its business or financial condition,
results of operations or cash flow.
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, the amount of ultimate
liability with respect to these proceedings will not materially affect the
financial position, results of operations or cash flow of the Company.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ------------------------------------------------
<S> <C> <C>
David Edwards......................... 46 President, Chief Executive Officer and Chairman
of the Board
Jim Thompson.......................... 35 Technology Officer
Steve McKeag.......................... 34 Chief Financial Officer
Robert Cavitt(1)...................... 35 Executive Vice President of Sales and Marketing
and Director
Greg Fink............................. 35 Senior Vice President of Sales
Dan Jensen............................ 45 Director
</TABLE>
- ------------------------
(1) Not currently a director of the Company but is expected to be appointed as a
director of the Company upon completion of the Offering.
Within 90 days of the completion of the Offering, the Company intends to
identify and elect two independent directors.
DAVID EDWARDS is a founder of the Company and has served as the President,
Chief Executive Officer and a director of the Company since its inception and as
Chairman of the Board of Directors since November 1997. Prior to founding the
Company, Mr. Edwards served as the Chief Executive Officer of Redwood
Technology, the previous owner of certain of the Company's current assets, from
1991 through 1995.
JIM THOMPSON joined the Company in November 1996 as the director of product
development and has served as the Chief Technology Officer since April 1997.
From April 1995 to November 1996, Mr. Thompson served as Manager of Data and
Messaging Services Business Development for TMI Communications, a leader in
geostationary satellite and terrestrially integrated telephony services. From
August 1992 to April 1995, Mr. Thompson served as a senior software manager for
Orbital Sciences Corporation. Mr. Thompson received a B.S. in Computer Sciences
from the University of Ottawa.
STEVE MCKEAG joined the Company in November 1996 as Chief Financial Officer.
From September 1995 until November 1996, he worked as an investment banker for
The Boston Group, L.P. and from January 1993 to September 1995 Mr. McKeag worked
as an investment banker for Cruttenden Roth, Inc. From January 1987 to January
1993 Mr. McKeag worked as a licensed certified public accountant in California.
Mr. McKeag received a B.A. in business administration from California State
University at Fullerton and a J.D. from Loyola Law School.
ROBERT CAVITT has worked for the Company since it commenced operations in
July 1995 and has served as Executive Vice President of Sales since September
1997. From 1988 to 1995, Mr. Cavitt worked for Redwood Technology in sales and
operations. Mr. Cavitt has over 11 years of industry experience in sales and
implementation of corporate operating and information systems.
GREG FINK has worked for the Company since it commenced operations in July
1995 and has served as Senior Vice President of Sales since September 1997.
Previously, Mr. Fink worked for Redwood Technology in sales and operations for
13 years.
DAN JENSEN is a founder of the Company, has served as a director of the
Company since its inception and served as the Company's Chairman of the Board
until November 1997. Prior to founding the Company, Mr. Jensen was one of the
founders of Redwood Technology where he served as Chairman of the Board from
inception through June 1995 and as its President and Chief Executive Officer
from inception to November 1991.
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<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
Members of the Company's Board of Directors serve until the next annual
meeting of stockholders and the election and qualification of their successors.
The business of the Company's Board of Directors is conducted through full
meetings of the Board, as well as through meetings of its committees. Within 90
days of completion of the Offering, the Company will establish an audit
committee, a majority of the members of which shall be independent directors.
The Audit Committee will make recommendations to the Board of Directors
regarding the selection of the Company's independent auditors, review the
results and scope of the audit and other services provided by the Company's
independent auditors, and reviews and evaluates the Company's audit and control
functions.
COMPENSATION OF BOARD OF DIRECTORS
Directors previously have received no cash compensation for serving on the
Board of Directors. Beginning upon completion of this Offering, the Company will
began paying fees to its non-employee directors for serving on the Board of
Directors and for their attendance at Board and committee meetings. The Company
will pay each non-employee director a fee of $1,000, per board meeting attended
plus expenses of attending such meetings.
In addition, the Company intends to grant each independent non-employee
director an option to purchase an aggregate of 15,000 shares of Common Stock
upon appointment of such director. The exercise price of such options shall be
the fair market value of a share of Common Stock on the date of grant. Each such
option shall become exercisable as to one-third of the shares on the third
monthly anniversary of the grant date, one-third on the first yearly anniversary
of the grant date, and the remaining one-third on the second yearly anniversary
of the grant date. The options will expire on the earlier of ten (10) years from
the date of grant or three months after the optionee ceases to be a director of
the Company.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
Chief Executive Officer and each other executive officer who received annual
compensation in excess of $100,000 for the fiscal year ended June 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
COMPENSATION
----------------------- -------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS
- ------------------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
David Edwards ................................... 1997 $ 165,000(1) -0- -0-
President, Chief Executive Officer, and
Chairman
Dan Jensen ...................................... 1997 $ 165,000(1) -0- $ 2,138(3)
Director(2)
</TABLE>
- ------------------------
(1) Perquisites and other personal benefits did not in the aggregate reach the
lesser of $50,000 or 10% of the total annual salary and bonus reported in
this table for any named executive officer.
(2) Mr. Jensen served as the Company's Chairman of the Board during the fiscal
year ended June 30, 1997 and served as an officer of the Company in such
capacity. As described in "Management--Employment and Consulting Agreements"
below, Mr. Jensen resigned as the Company's Chairman of the Board in
November 1997.
(3) Consists of premiums on a term life insurance policy paid for by the Company
of which Mr. Jensen or his designees are beneficiaries.
36
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective on the date of this Prospectus, the Company entered into four-year
employment agreements with each of Messrs. Edwards and Cavitt and one-year
renewable employment agreements with Messrs. McKeag and Thompson, which provide
for annual base salaries of $200,000, $90,000, $150,000 and $150,000,
respectively, subject to a 5% cost of living increases. Mr. Cavitt's employment
agreement provides for a performance bonus based on the volume of sales
generated by Mr. Cavitt. In addition, each of Messrs. Edwards, McKeag, Thompson
and Cavitt will be entitled to discretionary bonuses at the election of the
Board of Directors as well as other benefits and perquisites, including a
minimum of four weeks annual vacation, health insurance, an automobile allowance
and the payment of premiums on term life insurance policies. In the event the
Company terminates the employment of any of these executive officers without
"cause" as defined in their respective employment agreements, the Company will
be required to make a severance payment equal to one year's base salary with
respect to Messrs. Edwards, McKeag and Thompson, and $200,000 with respect to
Mr. Cavitt.
In November 1997, Dan Jensen resigned as Chairman of the Board of the
Company but agreed to remain as a director of the Company. In June 1998 Mr.
Jensen and the Company entered into a Consulting/Non-Compete Agreement pursuant
to which Mr. Jensen agreed to provide certain consulting and software
development services to the Company in exchange for the following payments and
benefits: (i) $75,000 on signing, and (ii) $75,000 at the end of the three year
term, (iii) $12,000 per month from the effective date of the agreement through
December 31, 1998, (iv) $8,000 per month from January 1, 1999 through December
31, 1999, (v) $4,000 per month from January 1, 2000 through November 30, 2000,
(vi) reimbursement and payment of certain automobile, insurance, phone, computer
and other expenses as well as an agreement by Jenkon to assume certain personal
guarantees of Mr. Jensen.
STOCK OPTION PLAN
In October 1996 the Company adopted the Jenkon International, Inc. Stock
Option Plan (the "Plan"). The following summary of the Plan is qualified in its
entirety by the actual Plan filed, a copy of which can be obtained from the
Company upon request. See "Additional Information."
The Plan empowers the Company to award or grant to officers, directors,
outside consultants and employees of the Company and its subsidiaries, Incentive
and Non-Qualified Stock Options ("Options") authorized by the Board of Directors
or a committee of the Board of Directors (the "Committee") formed for purposes
of administering the Plan.
ADMINISTRATION. The Plan will be administered by the Board of Directors or,
in the discretion of the Board of Directors, the Committee (either one being
referred to herein as the "Administrator"). The Plan provides that any Committee
must consist of at least two directors of the Company who are "outside
directors" as defined in Treasury Regs. Section 1.162-27(e)(3) and "non-employee
directors" as defined in Rule 16b-3(b)(3)(i) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee has the
sole authority to construe and interpret the Plan, to make rules and procedures
relating to the implementation of the Plan, to select participants, to establish
the terms and conditions of Options and to grant Options, with broad authority
to delegate its responsibilities to others, except with respect to the selection
for participation of, and the granting of Options to, persons subject to
Sections 16(a) and 16(b) of the Exchange Act.
ELIGIBILITY CONDITIONS. All employees (including officers) and directors of
the Company and its subsidiaries and outside consultants selected by the
Administrator will be eligible to receive Options under the Plan. Outside
consultants and non-employee directors are only eligible to receive
Non-Qualified Stock Options under the Plan. The selection of recipients of, and
the nature and size of, Options granted under the Plan will be solely within the
discretion of the Administrator. Except with respect to the exercisability of
Incentive Stock Options and as provided in the following paragraph, there is no
limit on the number of shares of Common Stock or type of option in respect of
which Options may be granted to or exercised by any person.
37
<PAGE>
SHARES SUBJECT TO PLAN. The maximum number of shares of Common Stock in
respect of which Options may be granted under the Plan (the "Plan Maximum") is
1,000,000. However, options for no more than 250,000 shares may be issued to any
optionee in any calendar year. For the purpose of computing the total number of
shares of Common Stock available for Options under the Plan, the above
limitations shall be reduced by the number of shares of Common Stock subject to
issuance upon exercise or settlement of Options previously granted, determined
at the date of grant of such Options. However, if any Options previously granted
are forfeited, terminated, settled in cash or exchanged for other Options or
expire unexercised, the shares of Common Stock previously subject to such
Options shall again be available for further grants under the Plan. The shares
of Common Stock which may be issued to participants in the Plan upon exercise of
an Option may be either authorized and unissued Common Stock or issued Common
Stock reacquired by the Company. No fractional shares may be issued under the
Plan.
The maximum number of shares of Common Stock issuable upon the exercise of
Options granted under the Plan is subject to appropriate equitable adjustment in
the event of reorganization, stock split, stock dividend, combination of shares,
merger, consolidation or other recapitalization of the Company.
TRANSFERABILITY. No Option granted under the Plan, and no right or interest
therein shall be assignable or transferable by a participant except by will or
the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION. The Plan will terminate on October 31,
2006, except with respect to Options then outstanding. The Board of Directors of
the Company may amend or terminate the Plan at any time, except that the Board
of Directors may not, without approval of the stockholders of the Company, make
any amendments that would (1) increase the total number of shares available for
issuance (except as permitted by the Plan to reflect changes in capital
structure), (2) materially change the eligibility requirements, or (3)
materially increase the benefits accruing to participants under the Plan
INCENTIVE STOCK OPTIONS. Options designated as Incentive Stock Options,
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), in an amount up to the Plan Maximum may be granted under
the Plan. The number of shares of Common Stock in respect of which Incentive
Stock Options are first exercisable by any participant in the Plan during any
calendar year shall not have a fair market value (determined at the date of
grant) in excess of $100,000 (or such other limit as may be imposed by the
Code). To the extent the fair market value of the shares for which options are
designated as Incentive Stock Options that are first exercisable by any optionee
during any calendar year exceed $100,000, the excess amount shall be treated as
Non-Qualified Stock Options. Incentive Stock Options shall be exercisable for
such period or periods, not in excess of ten years after the date of grant, as
shall be determined by the Administrator.
NON-QUALIFIED STOCK OPTIONS. Non-Qualified Stock Options may be granted for
such number of shares of Common Stock and will be exercisable for such period or
periods as the Administrator shall determine.
OPTIONS EXERCISE PRICES. The exercise price of any Option granted under the
Plan shall be at least 85% of the fair market value of the Common Stock on the
date of grant. The exercise price of any Incentive Stock Options shall be at
least 100% of the fair market value on the date of grant, except that the
exercise price of any Incentive Stock Option granted to any participant in the
Plan who owns in excess of 10% of the outstanding voting stock of the Company
shall be 110% of the fair market value of the Common Stock on the date of grant.
Fair market value per share of Common Stock shall be determined as the closing
price per share on the last trading day if the Common Stock is listed on an
established stock exchange or the Nasdaq National market, or as the average of
the closing bid and asked prices per share if the Common Stock is quoted by the
Nasdaq SmallCap Market, the Nasdaq Electronic Bulletin Board or the National
Quotation Bureau pink sheets, or as the amount determined in good faith by the
Administrator if the Common Stock is neither listed for trading on an exchange
or quoted by the Nasdaq National Market, Nasdaq Small Cap Market, Nasdaq
Electronic Bulletin Board or National Quotation Bureau pink sheets.
38
<PAGE>
EXERCISE OF OPTIONS. Each Option shall become exercisable according to the
terms specified in the option agreement governing such Option. Except as
provided below, no Option may be exercised unless the holder thereof remains in
the continuous employ or service of the Company. No Option shall be exercisable
after the earlier of ten years from the date of grant or three months after
employment or service as a director or consultant of the Company or its
subsidiary terminates (one year if such termination is due to the participant's
death or disability). Options shall be exercisable upon the payment in full of
the applicable option exercise price in cash or, if approved by the
Administrator, by instruction to a broker directing the broker to sell the
Common stock for which such Option is exercised and remit to the Company the
aggregate exercise price of the Option or, in the discretion of the
Administrator, upon such terms as the Administrator shall approve, in shares of
the Common Stock then owned or purchasable by the optionee (at the fair market
value thereof at exercise date). The Administrator also has discretion to extend
or arrange for the extension of credit to the optionee to finance the purchase
of shares on exercise.
GRANT OF OPTION. The Company has granted Options to acquire a total of
597,234 shares of Common Stock to certain employees of the Company, including
executive officers of the Company, at an exercise price equal to the fair market
value per share of the Company's Common Stock at the time of grant.
The following executive officers of the Company have received Incentive
Stock Options for the number of shares of Common Stock and exercise prices per
share set forth below: Jim Thompson--97,783 shares at $2.1732 per share; Steve
McKeag--156,454 shares at $0.0128 per share; Robert Cavitt--156,454 shares at
$2.1732 per share and 39,113 shares at $2.5567 per share; Greg Fink--78,227
shares at $2.1732 per share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions that eliminate the directors' personal liability for monetary
damages to the fullest extent possible under Delaware Law or other applicable
law (the "Director Liability Provision"). The Director Liability Provision
eliminates the liability of directors to the Company and its stockholders for
monetary damages arising out of any violation by a director of his fiduciary
duty of due care. Under Delaware Law, however, the Director Liability Provision
does not eliminate the personal liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or any transaction from which the director derived an improper
benefit. Furthermore, pursuant to Delaware Law, the limitation on liability
afforded by the Director Liability Provision does not eliminate a director's
personal liability for breach of the director's duty of due care. Although the
directors would not be liable for monetary damages to the corporation or its
stockholders for negligent acts or omissions in exercising their duty of due
care, the directors remain subject to equitable remedies, such as actions for
injunction or rescission, although these remedies, whether as a result of
timeliness or otherwise, may not be effective in all situations. With regard to
directors who also are officers of the Company, these persons would be insulated
from liability only with respect to their conduct as directors and would not be
insulated from liability for acts or omissions in their capacity as officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Company
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the corporation, to the extent that such person
has been successful in defense of such action or proceeding, or in defense of
any claim, issue or matter raised in such litigation, (ii) may, in actions other
than actions by or in the right of the corporation (such as derivative actions),
be indemnified for expenses actually and reasonably incurred, judgments, fines
and amounts paid in settlement of such litigation, even if he is not successful
on the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not
39
<PAGE>
opposed to the best interests of the corporation (and in a criminal proceeding,
if he did not have reasonable cause to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses actually and reasonably
incurred (but not judgments or settlements) of any action by the corporation or
of a derivative action (such as a suit by a stockholder alleging a breach by the
director or officer of a duty owed to the corporation), even if he is not
successful, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no indemnification is permitted without court approval if the
director has been adjudged liable to the corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Company is required to indemnify its officers,
directors, employees and agents to the fullest extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that the person acted in good faith
and in a manner he or she believed to be in the best interests of the Company
and, in the case of any criminal action or proceeding, the person had no reason
to believe his or her conduct was unlawful.
In furtherance of the objectives of the Indemnification Provision, the
Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Certificate and Bylaws (the "Indemnification Agreements"). The Company
believes that the Indemnification Agreements are necessary to attract and retain
qualified directors and executive officers. Pursuant to the Indemnification
Agreements, an indemnitee will be entitled to indemnification to the extent
permitted by Section 145 or other applicable law. In addition, to the maximum
extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Company, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company and had no reasonable cause to
believe his or her conduct was unlawful. If the Proceeding is brought by or in
the right of the Company and applicable law so provides, the Indemnification
Agreements provide that no indemnification against expenses shall be made in
respect of any claim, issue or matter in the Proceeding as to which the
indemnitee shall have been adjudged liable to the Company.
The inclusion of provisions limiting liability of the Company's officers and
directors may have the effect of reducing the likelihood of derivative
litigation against the officers and directors and may discourage or deter
stockholders or management from bringing a lawsuit against the officers and
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this Offering.
40
<PAGE>
CERTAIN TRANSACTIONS
1998 PRIVATE PLACEMENT
In June 1998, the Company completed a private placement (the "1998 Private
Placement") of $1,000,000 of unsecured promissory notes (the "1998 Notes") and
warrants (the "1998 Warrants") to purchase an aggregate of 117,321 shares at an
exercise price of $.6392 per share. Meridian Capital Group, Inc. and Trautman
Kramer & Company, Incorporated acted as placement agents with respect to the
1998 Private Placement and, as a result, received (i) commissions equal to 10%
of the gross proceeds sold by them, plus (ii) a non-accountable expense
allowance equal to 2% of the gross proceeds sold by them.
The 1998 Notes bear interest at an annual rate of 7% and are due and payable
in full on the earlier to occur of (i) three business days following the funding
date of an initial public offering by the Company, or (ii) May 31, 1999. Accrued
interest is payable in arrears on the last day of each calendar quarter.
The 1998 Warrants are not exercisable until one year from the date of grant
and have a term of five years from the date of grant. Such warrants have a
provision for cashless exercise pursuant to which the holder will receive upon
exercise the number of shares of Common Stock otherwise issuable upon such
exercise, less the number of shares of Common Stock having an aggregate current
market price on the date of exercise equal to the exercise price per share
multiplied by the number of shares of Common Stock for which such warrants are
being exercised.
1996 PRIVATE PLACEMENT
In September 1996, the Company completed a private placement of 1,500,000
shares of its Series A Preferred Stock which resulted in gross proceeds to the
Company of $3 million and net proceeds of approximately $2.3 million (the "1996
Private Placement"). Approximately $400,000 of the proceeds of the 1996 Private
Placement were used to redeem a total of 156,454 shares of Common Stock held by
David Edwards and Dan Jensen at a price of $2.17 per share.
In connection with the 1996 Private Placement, The Boston Group, L.P.
("TBG") received warrants to purchase shares of Series A Preferred Stock (the
"1996 Warrants") which, upon consummation of this Offering, will convert into
warrants to purchase an aggregate of 161,760 shares of Common Stock at an
exercise price of $2.6845 per share. The 1996 Warrants have a provision for
cashless exercise pursuant to which the holder will receive upon exercise the
number of shares of Common Stock otherwise issuable upon such exercise, less the
number of shares of Common Stock having an aggregate current market price on the
date of exercise equal to the exercise price per share multiplied by the number
of shares of Common Stock for which the 1996 Warrants are being exercised.
Subsequent to the issuance of the 1996 Warrants, TBG transferred 1996
Warrants to purchase an aggregate of 40,439 shares of Common Stock to Anthony
Soich and Steve McKeag, each of whom were employed by TBG at the time of the
1996 Private Placement. As a result of such transfers, Mr Soich currently holds
1996 Warrants to purchase 23,849 shares of Common Stock, Mr. McKeag, the
Company's Chief Financial Officer, currently holds 1996 Warrants to purchase
16,590 shares of Common Stock, and TBG holds 1996 Warrants to purchase 121,321
shares of Common Stock.
TRANSACTION WITH REDWOOD TECHNOLOGIES
Konson Gee, one of the founding stockholders of Redwood Technology, left
Redwood Technology in 1994. At such time Mr. Gee held promissory notes
evidencing outstanding loans to Redwood Technology that aggregated approximately
$47,000 and held a note of the Company in the original principal amount of
$362,914 incurred in connection with the repurchase of Mr. Gee's shares in
Redwood Technology. Mr. Gee demanded payment in full of amounts due and payable
under one of these notes representing loans to Redwood Technology. In January
1995, Mr. Gee notified Redwood Technology of his foreclosure. The collateral
that had been granted to Mr. Gee as security for such loans included
substantially all of the Company assets. Although Mr. Gee had rights to
foreclose against substantially all of the assets of Redwood Technology,
including software programs, Mr. Gee only foreclosed on the fixed assets and
41
<PAGE>
permitted Redwood Technology to retain all other assets, and to continue to
supply product to new and existing customers, generally operate, and produce
revenue (which was applied by Redwood Technology to outstanding debts and
operating expenses) through June 30, 1995. Mr. Gee acquired the fixed assets
from Redwood Technology by means of Redwood Technology voluntarily assembling
and surrendering collateral to Mr. Gee in satisfaction of the $47,000 note.
Following Mr. Gee's departure, Dan Jensen and David Edwards formed Jenkon
International, Inc., a Washington corporation, whose wholly-owned subsidiary,
Summit V, Inc. purchased from Mr. Gee all of the fixed assets that had belonged
to Redwood Technology for approximately $47,000. The Company (through Summit V,
Inc.) licensed from Redwood Technology, on a perpetual basis, including an
exclusive seven-year period, all of its software programs and rights therein,
including the SUMMIT V software, and granted the Company the right to purchase
such software. The Company intends to exercise its purchase rights upon
completion of this Offering.
Mr. Gee had personally guaranteed $320,000 of Redwood Technology's debts and
was individually liable as an officer for $280,000 of withholdings from payroll
that were required to be placed in Redwood Technology's payroll tax trust
account. Pursuant to the terms of the license of the SUMMIT V software, the
Company agreed to assume approximately $1.4 million of liabilities of Redwood
Technology as payment of the royalties due under such license. Such liabilities
included loan obligations to Daniel Jensen in the amount of $18,800, and
obligations to Konson Gee in the amount of $362,914 which were incurred in
connection with the redemption by Redwood Technology of Mr. Gee's shares in
Redwood Technology. In addition, a significant portion of the obligations
assumed by the Company were personally guaranteed by Daniel Jensen and/or Mr.
Gee.
In addition, Mr. Gee was granted an option by Jenkon International, Inc., a
Washington corporation, to acquire 22,351 shares of Common Stock of the Company
for an aggregate price of $1,278, and exercised such option in early 1996.
Redwood Technology's former assets comprised substantially all of the
initial operating assets of the Company. Many or all of the initial management
personnel of the Company had been the management personnel of Redwood
Technology. Because Redwood Technology may be deemed to have been rendered
insolvent by the sale and license of certain assets to Summit V, Inc., the
Company is or may be subject to claims by unsatisfied creditors of Redwood
Technology alleging successor liability or other similar claims. The Company
believes that such claims could total as much as $350,000 plus interest and
charges thereon which continue to accrue, including claims arising from tax
liens in the amount of approximately $250,000 recorded against the assets of
Redwood Technology with respect to the unpaid employer portion of payroll taxes.
The Company intends to use a portion of the proceeds of this Offering to settle
the obligations of Redwood Technology. However, there can be no assurance
against claims being made that might result in the Company's rights to such
assets being challenged.
Daniel O. Jensen was a major stockholder, director and executive officer of
Redwood Technology. David A. Edwards was an executive officer of Redwood
Technology. Payment to or for the benefit of Redwood Technology may also further
the individual interests of certain members of the Company's present management
by helping such persons by limiting or eliminating their liability, or claims
asserting their liability, arising from their having served Redwood Technology,
in such capacities or otherwise.
42
<PAGE>
OTHER TRANSACTIONS
In the ordinary course of the Company's business, the Company has had
purchase arrangements with Jentronix, an entity wholly-owned by a brother of Dan
Jensen, a principal stockholder, director and former officer of the Company.
Purchases from Jentronix amounted to $7,322 and $46,799 for the fiscal years
ended June 30, 1997 and 1996, respectively. Purchases from Jentronix amounted to
$8,138 and zero for the nine month periods ended March 31, 1997 and 1998,
respectively.
See "Management--Employment and Consulting Agreements" for a discussion of
the terms of a Consulting/Non-Compete Agreement between the Company and Dan
Jensen, a director and former officer of the Company.
The Company has entered into an agreement with Anthony Soich pursuant to
which the Company will pay Mr. Soich a fee of $100,000 for services rendered to
the Company in connection with the Offering and an additional $25,000 in the
event the Underwriters' over-allotment option is exercised.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998, and as adjusted to
reflect the sale of 1,500,000 shares of Common Stock offered by the Company and
the sale of 300,000 shares of Common Stock by the Selling Stockholders offered
by this Prospectus, for (i) each of the Company's directors (and director
nominees), (ii) by each of the executive officers identified in the Summary
Compensation Table or who have granted the Underwriters an option to acquire
shares of Common Stock in order to cover over-allotments, if any, (iii) all
executive officers and directors of the Company as a group and (iv) each person
who beneficially owns 5% or more of the outstanding shares of Common Stock. The
Company believes that the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------------------------------------
NUMBER OF
SHARES OWNED PERCENT OWNED SHARES TO BE PERCENT OWNED
PRIOR TO PRIOR TO SOLD IN AFTER THE
NAME AND ADDRESS(2) OFFERING(1) OFFERING(3) OFFERING(4) OFFERING(3)
- ----------------------------------------------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
David Edwards........................................ 815,796 26.80 -- (1) 17.96(1)
Dan Jensen........................................... 815,796 26.80 -- 17.96
Robert Cavitt........................................ 195,567(4) 6.04 -- 4.13
Steve McKeag......................................... 173,044(5) 5.38 -- (1) 3.67(1)
All directors and executive officers as a group
(6 persons)........................................ 2,176,213(6) 60.65 -- (1) 42.77(1)
</TABLE>
- --------------------------
(1) Number of shares is exclusive of Common Stock issuable upon exercise of the
Representatives' Warrants to be issued in connection with this Offering.
Assumes no exercise of the Underwriters' over-allotment option. If such
option is exercised in full, the Company will sell an additional 100,000
shares of Common Stock and certain officers of the Company will sell an
additional 170,000 shares of Common Stock. In such event, upon the closing
of the Offering (i) David Edwards will sell an aggregate of 150,000 shares
and beneficially own 665,796 shares, or 14.65% of the Company's outstanding
Common Stock, (ii) Steve McKeag will sell 20,000 shares and beneficially own
153,044 shares, or 3.24% of the Company's outstanding Common Stock, and
(iii) all directors and executive officers as a group will beneficially own
2,006,213 shares, or 39.43% of the Company's outstanding Common Stock.
(2) Unless otherwise indicated, the business address of each of the stockholders
named in this table is c/o the Company at 7600 N.E. 41st Street, Suite 350,
Vancouver, Washington 98662.
43
<PAGE>
(3) Percentages based on (i) 3,043,515 shares of Common Stock outstanding prior
to the Offering (which total includes shares of Common Stock issuable upon
conversion of the Series A Preferred Stock into Common Stock) and (ii)
4,543,515 shares of Common Stock outstanding upon completion of the
Offering. Shares of Common Stock which the person has the right to acquire
within 60 days of the date of this Prospectus are deemed outstanding in
calculating the percentage of ownership of the persons, but not deemed
outstanding as to any other person. Ownership of less than 1% of the
outstanding shares of Common Stock is indicated by an asterisk.
(4) Consists of shares issuable upon currently exercisable options to purchase
an aggregate of 195,567 shares of Common Stock.
(5) Consists of (i) shares issuable upon exercise of an option to purchase up to
156,454 shares of Common Stock which option may be exercised in full prior
to or simultaneously with the completion of the Offering, and (ii) 16,590
shares of Common Stock that are issuable upon exercise of an outstanding
warrant.
(6) Includes currently exercisable options and warrants to acquire an aggregate
of 544,621 shares of Common Stock.
SELLING STOCKHOLDERS
Of the shares of Common Stock offered hereby, 1,500,000 shares are being
sold by the Company and 300,000 shares are being sold by the Selling
Stockholders, all of which are being underwritten by the Underwriters. The
Company will not receive any of the proceeds from the sale of the Selling
Stockholder shares. In addition, David Edwards, an executive officer, director
and principal stockholder of the Company, and Steve McKeag, an executive officer
of the Company (collectively, the "Over-Allotment Stockholders"), have granted
to the Underwriters a 45-day option to purchase an aggregate of 170,000
additional shares of Common Stock on the same terms as the shares sold by the
Company in this Offering, solely to cover over-allotments, if any. The Company
has granted to the Underwriters a 45-day option to purchase up to an aggregate
of 100,000 additional shares of Common Stock on the same terms described above,
solely to cover over-allotments, if any. The over-allotment option granted by
the Over-Allotment Stockholders will be exercised on a pro rata basis and must
be exercised in full before the over-allotment option granted by the Company may
be exercised. See "Underwriting."
In addition to the foregoing, an aggregate of 944,296 shares of Common Stock
are being registered in this offering for the account of Selling Stockholders
which are not being underwritten by the Underwriters. These Selling Stockholder
shares may be sold by the Selling Stockholders or their respective transferees
commencing on the date of this Prospectus. However, all of such shares are
subject to a lock-up agreement under which the shares may not be sold or
transferred without the prior written consent of the Representatives. See
"Shares Eligible for Future Sale" and "Underwriting." Any sale of such shares by
the Selling Stockholders or their respective transferees may depress the price
of the Common Stock in any market that may develop.
The following table sets forth certain information with respect to the
Selling Stockholders for whom the Company is registering shares of Common Stock
for resale to the public. The Company will not receive any of the proceeds from
the sales of such shares of Common Stock. Each of the Selling Stockholders was a
purchaser of Series A Preferred Stock in connection with the 1996 Private
Placement and none of the Selling Stockholders listed below has had a material
relationship with the Company or its predecessors or affiliates in the last
three fiscal years. Other than the 300,000 Selling Stockholder shares described
above, none of the Selling Stockholder shares are being underwritten by the
Underwriters in connection with this Offering.
Each of the Selling Stockholders has agreed not to sell, transfer, assign or
otherwise hypothecate any of the shares of Common Stock owned by them, other
than the 300,000 Selling Stockholder shares being underwritten in this Offering,
for a period of 12 months following the effective date of the registration
44
<PAGE>
statement of which this Prospectus is a part unless such sale has been consented
to in writing by the Representatives.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES TO BE SHARES OWNED
PRIOR TO SHARES SOLD IN AFTER THE
NAME OF SELLING STOCKHOLDER OFFERING(1) REGISTERED(2) OFFERING(3) OFFERING(4)
- ------------------------------------------------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Robert and Antoinette Ahr, JTWROS..................... 20,738 20,738 5,000 15,738
Stanley S. Arkin...................................... 20,738 20,738 5,000 15,738
The Jonathan Stanton Co., Inc......................... 82,954 82,954 20,000 62,954
Charles R. Buckridge, Trustee of the
Charles R. Buckridge Revocable Trust................ 41,477 41,477 10,000 31,477
Mulkey Limited Partnership............................ 20,738 20,738 5,000 15,738
Robert and Thelma Gault, JTWROS....................... 41,477 41,477 10,000 31,477
Larry R. Gordon....................................... 82,954 82,954 20,000 62,954
Edward W. Jones....................................... 20,738 20,738 5,000 15,738
Gabriel Kaplan........................................ 82,954 82,954 20,000 62,954
Joseph Esformes....................................... 20,738 20,738 5,000 15,738
Hazen Peter Kelley and Valerie Kelley as JTWROS....... 20,738 20,738 5,000 15,738
David B. Coward and Linda J. Coward, Trustees of the
Coward Family Trust................................. 20,738 20,738 5,000 15,738
Dr. Leonard Makowka................................... 41,477 41,477 10,000 31,477
Steve Natale.......................................... 41,477 41,477 10,000 31,477
Isaac Starkman........................................ 20,738 20,738 5,000 15,738
Harvey Bibicoff....................................... 41,477 41,477 10,000 31,477
Lester C. Aroh........................................ 41,477 41,477 10,000 31,477
Laura M. Durso........................................ 20,738 20,738 5,000 15,738
Rudiger Dahle......................................... 41,477 41,477 10,000 31,477
Scott Barsotti, Trustee of the Scott Barsotti Family
Trust U/A dated December 1, 1995.................... 20,738 20,738 5,000 15,738
Triventures........................................... 20,738 20,738 5,000 15,738
City National Bank C/F Rotunda Productions, Inc.
MPPP................................................ 41,477 41,477 10,000 31,477
Fred Martell and Barbara Martell JTWROS............... 20,738 20,738 5,000 15,738
Robert L. La Clair.................................... 20,738 20,738 5,000 15,738
Marvin H. Bluman...................................... 20,738 20,738 5,000 15,738
Richard E. Eichhorn................................... 20,738 20,738 5,000 15,738
Ranjan V. Dhaduk...................................... 20,738 20,738 5,000 15,738
Robert Burkhardt...................................... 10,369 10,369 2,500 7,869
Peter Jessel Levay Lawrence........................... 51,846 51,846 12,500 39,346
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES TO BE SHARES OWNED
PRIOR TO SHARES SOLD IN AFTER THE
NAME OF SELLING STOCKHOLDER OFFERING(1) REGISTERED(2) OFFERING(3) OFFERING(4)
- ------------------------------------------------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Linda Wallace Pate.................................... 20,738 20,738 5,000 15,738
Patrick J. Riley...................................... 20,738 20,738 5,000 15,738
Vidal and Rhonda Sassoon, as Community Property....... 41,477 41,477 10,000 31,477
Leslie D. Jones....................................... 20,738 20,738 5,000 15,738
Michael Kesselbrenner................................. 10,369 10,369 2,500 7,869
Jason E. Starkman..................................... 20,738 20,738 5,000 15,738
Richard Houlihan...................................... 20,738 20,738 5,000 15,738
Jeffrey C. Brenner.................................... 20,738 20,738 5,000 15,738
Ronald A. Litz........................................ 20,738 20,738 5,000 15,738
Chelsea Associates.................................... 10,369 10,369 2,500 7,869
Robert P. Bain........................................ 20,738 20,738 5,000 15,738
Vitaloon, Inc......................................... 20,738 20,738 5,000 15,738
Barbara Goldstein..................................... 20,738 20,738 5,000 15,738
</TABLE>
- ------------------------
(1) The listed shares of Common Stock were issued upon the automatic conversion
of 1,500,000 shares of Series A Preferred Stock into an aggregate of
1,244,296 shares of Common Stock simultaneously with the completion of the
Offering.
(2) Investors in the Company's 1996 Private Placement of Series A Preferred
Stock were granted piggy-back registration rights in connection with an
initial public offering by the Company. However, other than the 300,000
Selling Stockholder shares being sold in the Offering, none of the listed
shares may be sold, transferred or assigned during the 12 month period
following the effective date of the registration statement of which this
Prospectus is a part without the prior written consent of the
Representatives.
(3) The Underwriters have agreed to underwrite and sell an aggregate of 300,000
of the Selling Stockholder shares in connection with the Offering.
(4) Shares may be resold by the Selling Stockholders upon expiration of 12
months from the effective date of the registration statement of which this
Prospectus is a part. The Representatives may, in their discretion, release
some or all of the shares from this 12 month lock-up period.
46
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value, 1,725,000 of which have been designated Series A Preferred Stock.
As of May 28, 1998, there were 1,799,219 shares of Common Stock outstanding
held of record by eight stockholders and 1,500,000 shares of Series A Preferred
Stock outstanding and held of record by 42 stockholders. Such shares of Series A
Preferred Stock were originally convertible into an aggregate of 1,500,000
shares of Common Stock. However, due to the application of the anti-dilution and
other adjustment provisions of the Series A Preferred Stock, the number of
shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock has been decreased from 1,500,000 shares to 1,244,296
shares of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be applicable
to the holders of outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, and subject to the prior distribution
rights of the holders of outstanding shares of Preferred Stock, if any, the
holders of shares of Common Stock shall be entitled to receive pro rata all of
the remaining assets of the Company available for distribution to its
stockholders. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and shares of Common Stock to be issued pursuant to this
Offering shall be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the State of Delaware, but without further action by the
Company's stockholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the stockholders. The
Board of Directors may authorize and issue Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Shares.
Simultaneously with the consummation of this Offering, all 1,500,000 shares
of the Company's outstanding Series A Preferred Stock will be converted into
1,244,296 shares of Common Stock and no shares of Preferred Stock of the Company
remain outstanding.
WARRANTS
See "Certain Transactions--1998 Private Placement" for a description of the
1998 Warrants.
See "Certain Transactions--1996 Private Placement" for a description of the
1996 Warrants.
ANTI-TAKEOVER PROVISIONS
The Company may become subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the
47
<PAGE>
date of the transaction in which the person became an interested stockholder,
unless either (i) prior to the date at which the person becomes an interested
stockholder, the Board of Directors approves such transaction or business
combination, (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of such
transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to such
interested stockholder. For purposes of Section 203, "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT
U.S. Stock Transfer & Trust is the transfer agent and registrar for the
shares of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 4,543,515 shares of Common Stock. The 1,800,000 shares of Common
Stock offered hereby will be freely tradeable without restriction or further
registration under the Securities Act by persons other than "affiliates." The
remaining 2,743,515 outstanding shares of Common Stock will be "restricted
securities" (the "Restricted Shares") pursuant to Rule 144 promulgated under the
Securities Act. Of these Restricted Shares, 944,296 shares have been registered
on the account of Selling Stockholders and may be sold upon termination of any
applicable lock-up arrangements described below. Upon termination of such
lock-up agreements, all of the Restricted Shares subject to lock-up agreements
will become eligible for sale in the public market pursuant to Rule 144. In
general, under Rule 144, a person (or persons whose shares are aggregated)
holding restricted securities who has satisfied a one-year holding period may,
commencing 90 days after the date hereof under certain circumstances, sell
within any three-month period that number of shares which does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly reported trading volume during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of shares
without any quantity limitation by a person who has satisfied a two-year holding
period and who is not, and has not been for the preceding three months, an
affiliate of the Company. Future sales under Rule 144 or by the holders of
shares registered on the account of the Selling Stockholders may have an adverse
effect on the market price of the shares of Common Stock should a public market
develop for such shares.
With the exception of the 300,000 shares of Common Stock of the Selling
Stockholders underwritten in this Offering, and [167,627] shares owned by
non-affiliated stockholders of the Company, each officer, director and
stockholder of the Company has agreed not to directly or indirectly offer, offer
to sell, sell, grant an option to purchase or sell, transfer, assign, pledge,
hypothecate or otherwise encumber any shares of Common Stock owned by them for a
period of 12 months from the effective date of the registration statement of
which this Prospectus is a part without the prior written consent of the
Representatives. The Representatives may, in their sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
48
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by The
Seidler Companies Incorporated, Meridian Capital Group, Inc. and Trautman,
Kramer & Company, Incorporated (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the respective number of shares of
Common Stock indicated below opposite their respective name at he public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus. The Underwriting Agreement provides that the
obligations of the several Underwriters thereunder are subject to certain
conditions and that the Underwriters are committed to purchase all of such
shares (other than the common stock covered by the over-allotment option as
described below) of Common Stock if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
The Seidler Companies Incorporated.........................................
Meridian Capital Group, Inc................................................
Trautman, Kramer & Company, Incorporated...................................
Total.............................................................. 1,800,000
-----------------
-----------------
</TABLE>
The Company has been advised by Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus and to certain securities dealers at such
price less a concession of not more than $ per share and that the Underwriters
and such dealers may reallow to other dealers, including the Underwriters, a
discount not in excess of $ per share. After this Offering, the public offering
price and concessions may be changed by the representatives. No change in such
terms shall change the amount of proceeds to be received by the Company as set
forth on the cover page of this Prospectus.
David Edwards and Steve McKeag (collectively, the "Over-Allotment
Stockholders") and the Company have granted the Underwriters an option,
exercisable in the discretion of the Representatives for a period of 45-days
after the date of this Prospectus, to purchase up to an additional 170,000
shares and 100,000 shares, respectively, at the public offering price set forth
on the cover page of this Prospectus. Of the over-allotment shares owned by the
Over-Allotment Stockholders, Mr. Edwards owns 150,000 shares and Mr. McKeag owns
the remaining 20,000 shares. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
first pro rata from the Over-Allotment Stockholders and then from the Company,
an aggregate percentage of such additional shares approximately equal to the
percentage of shares it was obligated to purchase from the Company pursuant to
the Underwriting Agreement.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of three percent of the offering proceeds, including any proceeds from
the sale of shares subject to the Underwriters' over-allotment option if
exercised. The Company has paid $15,000 to be applied to the non-accountable
expense allowance. The Representatives' expenses in excess of the
non-accountable expense allowance, including its legal expenses, will be borne
by the Representatives. To the extent that no expenses of the Representative are
less than the un-accountable expense allowance, the excess may be deemed to be
compensation to the Representatives.
The Company has agreed to issue to the Representatives warrants (the
"Representatives' Warrants") to purchase up to 180,000 shares of Common Stock,
at an exercise price per share equal to 120% of the initial public offering
price per share. The Representatives' Warrants are exercisable for a period of
four
49
<PAGE>
years, beginning one year from the date of the Registration Statement of which
this Prospectus is a part and are not transferrable for a period of one year
except to certain officers of the Representatives and members of the selling
group and their officers and partners. In addition, the Company has granted
certain rights to the holders of the Representatives warrants to register the
Common Stock underlying the Representatives' Warrants, under the Securities Act.
See "Certain Transactions" for a description of the 1998 Private Placement
in which Trautman Kramer & Company, Incorporated and Meridian Capital Group,
Inc. acted as placement agents. See also "Certain Transactions" for a
description of certain compensation payable to Anthony Soich for services
rendered in connection with this Offering.
All the Company's officers and directors and substantially all of the other
stockholders, who in the aggregate hold % of the shares of the Common Stock
of the Company outstanding immediately prior to the completion of this Offering,
have agreed not to sell any shares of Common Stock [or other equity securities
of the Company] for days after the date of this Prospectus (other than shares
sold acquired in the public market) without the prior written consent of the
Representatives.
The Underwriting Agreement provides that the Company and the Selling
Stockholders (and the Over-Allotment Stockholders, with respect to the
over-allotment option) will indemnify the Underwriters and their controlling
persons against certain liabilities under the Securities Act or will contribute
to payments the Underwriters and their controlling persons may be required to
make in respect thereof. The Company, the Selling Stockholders and the
Over-Allotment Stockholders have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Prior to this Offering, there has been no trading market for the Common
Stock. Accordingly, the initial public offering price has been determined among
the Company and the Representatives. Among the factors considered in determining
the initial public offering price were the Company's results of operations,
current financial condition and products, the markets addressed by the Company's
products, the Company's future prospects, the experience of its management, the
general condition of the equity securities market and the demand for similar
securities of companies considered comparable to the Company.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Company and the Securities and Exchange Commission, Washington, D.C. See
"Additional Information."
50
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Jeffer, Mangels, Butler & Marmaro LLP, Los
Angeles, California. Certain legal matters will be passed upon for the
Underwriters by Troy & Gould Professional Corporation, Los Angeles, California.
EXPERTS
The consolidated balance sheets of the Company as of June 30, 1996 and June
30, 1997, and the statements of operations, stockholders' equity (deficit) and
cash flows for each of the two years in the period ended June 30, 1997, included
in this Prospectus and Registration Statement have been audited by BDO Seidman,
LLP, independent certified public accountants, as set forth on their report
thereon given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a registration statement under the Securities
Act with respect to the Common Stock being offered hereby and the shares
registered on behalf of the holders of Converted Shares and certain other
investors in the Company. This Prospectus omits certain information contained in
said registration statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to such registration statement, including the exhibits
and schedules thereto. Statements contained herein concerning the contents of
any contract or any other document are not necessarily complete, and in each
instance, reference is made to such contract or other document filed with the
Commission as an exhibit to the registration statement, or otherwise, each such
statement being qualified in all respects by such reference. The registration
statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and at the New York Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
registration statement may be accessed at the Commission's site on the World
Wide Web located at http://www.sec.gov.
51
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and as of March 31, 1998
(Unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1996 and 1997 and
for the nine month periods ended March 31, 1997 and 1998 (Unaudited)................ F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30,
1996 and 1997 and for the nine month period ended March 31, 1998 (Unaudited)........ F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1996 and 1997 and
for the Nine Month Periods ended March 31, 1997 and 1998 (Unaudited)................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
The following is the form of the opinion that BDO Seidman, LLP will be in a
position to issue upon completion of the reverse stock split described in Note
13(a).
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Jenkon International Inc. and Subsidiaries
Vancouver, Washington
We have audited the accompanying consolidated balance sheets of Jenkon
International, Inc. and Subsidiaries as of June 30, 1996 and 1997, and the
related consolidated statements of operations, statements of stockholders'
deficit and cash flows for the years ended June 30, 1996 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Jenkon International, Inc. and Subsidiaries as of June 30, 1996 and 1997, and
the results of its consolidated operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Los Angeles, CA
October 22, 1997, except for the reverse
stock split described in Note 13 and the
bridge loan as described in Note 14 as to
which the dates are June , 1998
and June , 1998.
F-2
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3)..................... $ 124,504 $ 132,736 $ 83,486
Restricted cash (Note 1)............................... -- 300,000 200,000
Trade receivables, net of allowance for doubtful
accounts of $176,500, $200,000 and $97,600........... 724,259 747,509 1,180,753
Prepaid and other assets............................... 132,153 83,521 145,673
Refundable income taxes................................ -- 155,653 24,308
--------- --------- ---------
Total current assets..................................... 980,916 1,419,419 1,634,220
PROPERTY AND EQUIPMENT, net (Notes 2 and 3).............. 222,963 1,017,056 897,016
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $215,777, $329,024 and $413,967........ 452,987 339,740 254,797
OTHER ASSETS............................................. 57,355 63,156 63,166
--------- --------- ---------
Total assets............................................. $1,714,221 $2,839,371 $2,849,199
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-3
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable....................................... $1,190,953 $ 692,299 $ 466,460
Accrued wages and related taxes........................ 208,450 -- --
Accrued vacation....................................... 83,683 116,172 116,172
Customer deposits...................................... 412,954 920,925 789,075
Other accrued liabilities.............................. 224,678 598,018 738,900
Note payable--current portion (Note 3)................. 77,220 338,512 416,365
--------- --------- ---------
Total current liabilities................................ 2,197,938 2,665,926 2,526,972
Note payable, net of current portion (Note 3)............ 177,920 442,584 180,261
--------- --------- ---------
Total liabilities........................................ 2,375,858 3,108,510 2,707,233
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8, 11 and 14)
SERIES A, REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.001
par value; 1,725,000 shares authorized; 1,500,000
shares issued and outstanding.......................... -- 2,310,174 2,310,174
STOCKHOLDERS' DEFICIT (Note 5)
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,955,673 shares issued 1,799,219
outstanding.......................................... 1,956 1,956 1,956
Additional paid-in capital............................. 6,794 6,794 6,794
Stock subscriptions receivable (Note 6)................ (8,500) (8,500) (8,500)
Foreign currency translation adjustment................ 3,288 (28,092) (28,537)
Accumulated deficit.................................... (665,175) (2,211,471) (1,799,921)
Treasury stock, at cost, 156,454 shares................ -- (340,000) (340,000)
--------- --------- ---------
Total stockholders' deficit.............................. (661,637) (2,579,313) (2,168,208)
--------- --------- ---------
Total liabilities and stockholders' deficit.............. $1,714,221 $2,839,371 $2,849,199
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES (Note 9)
Software license fees.............................. $1,685,208 $2,761,995 $2,016,493 $3,090,640
Equipment, software and supplies sales............. 1,571,516 1,029,314 814,525 638,783
Support and operations revenue..................... 3,642,509 4,688,763 3,413,679 3,318,211
---------- ---------- ---------- -----------
Total net sales...................................... 6,899,233 8,480,072 6,244,697 7,047,634
---------- ---------- ---------- -----------
COST OF GOODS SOLD
Cost of software license fees...................... 163,233 292,831 192,754 195,720
Cost of equipment, software and supplies sold (Note
10).............................................. 1,025,934 781,562 682,934 372,830
Cost of support and operations..................... 2,148,131 3,156,312 2,529,041 1,816,168
---------- ---------- ---------- -----------
Total cost of goods sold............................. 3,337,298 4,230,705 3,404,729 2,384,718
---------- ---------- ---------- -----------
GROSS PROFIT......................................... 3,561,935 4,249,367 2,839,968 4,662,916
OPERATING EXPENSES
Selling and marketing.............................. 764,711 1,024,716 726,380 673,711
Product research, development and enhancements..... 433,061 1,375,452 921,302 1,175,088
General and administration......................... 2,443,191 3,322,974 2,620,712 2,271,828
---------- ---------- ---------- -----------
Total operating expenses............................. 3,640,963 5,723,142 4,268,394 4,120,627
---------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS........................ (79,028) (1,473,775) (1,428,426) 542,289
OTHER EXPENSE
Interest, net...................................... (23,645) (97,433) (35,715) (87,044)
Other expense...................................... (74,252) (63,088) (119,918) (28,118)
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAX...................... (176,925) (1,634,296) (1,584,059) 427,127
PROVISION (BENEFIT) FOR INCOME TAX (Note 4).......... 88,000 (88,000) -- 15,577
---------- ---------- ---------- -----------
NET INCOME (LOSS).................................... $ (264,925) $(1,546,296) $(1,584,059) $ 411,550
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
NET INCOME (LOSS) PER SHARE (Note 12)
Basic.............................................. $ (.14) $ (.84) $ (.86) $ 0.23
Diluted............................................ $ (.14) $ (.84) $ (.86) $ 0.12
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note
12)
Basic.............................................. 1,938,915 1,838,338 1,851,376 1,799,220
Diluted............................................ 1,938,915 1,838,338 1,851,376 3,358,221
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1996 AND 1997, AND FOR THE NINE MONTH PERIOD ENDED MARCH
31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL STOCK CURRENCY TREASURY STOCK
---------------------- PAID-IN SUBSCRIPTIONS TRANSLATION ACCUMULATED --------------------
SHARES AMOUNT CAPITAL RECEIVABLE ADJUSTMENT DEFICIT SHARES AMOUNT
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1995.... 6,845 $ 6,845 $ 1,905 $ (8,500) $ -- $ (400,250) -- $ --
Stock for stock
reorganization (Note
5)..................... (6,845) (6,845) (1,905) -- -- -- -- --
1,955,674 1,956 6,794 -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- 3,288 -- -- --
Net loss................. -- -- -- -- -- (264,925) -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, June 30, 1996... 1,955,674 1,956 6,794 (8,500) 3,288 (665,175) -- --
Stock redemption......... -- -- -- -- -- -- 156,454 (340,000)
Increase in foreign
currency translation
adjustment............. -- -- -- -- (31,380) -- -- --
Net loss................. -- -- -- -- -- (1,546,296) -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, June 30, 1997... 1,955,674 1,956 6,794 (8,500) (28,092) (2,211,471) 156,454 (340,000)
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- (445) -- -- --
Net income (unaudited)... -- -- -- -- -- 411,550 -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, March 31, 1998
(unaudited)............ 1,955,674 $ 1,956 $ 6,794 $ (8,500) $ (28,537) $(1,799,921) 156,454 $(340,000)
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
<CAPTION>
TOTAL
----------
<S> <C>
BALANCE, July 1, 1995.... $ (400,000)
Stock for stock
reorganization (Note
5)..................... (8,750)
(8,750)
Foreign currency
translation
adjustment............. 3,288
Net loss................. (264,925)
----------
BALANCE, June 30, 1996... (661,637)
Stock redemption......... (340,000)
Increase in foreign
currency translation
adjustment............. (31,380)
Net loss................. (1,546,296)
----------
BALANCE, June 30, 1997... (2,579,313)
Foreign currency
translation adjustment
(unaudited)............ (445)
Net income (unaudited)... 411,550
----------
BALANCE, March 31, 1998
(unaudited)............ $(2,168,208)
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
INCREASE (DECREASE) IN CASH AND CASH --------------------- ------------------------
EQUIVALENTS 1996 1997 1997 1998
- ------------------------------------------- --------- ---------- ---------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................ $(264,925) $(1,546,296) $(1,584,059) $ 411,550
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 166,989 314,890 244,934 288,494
Provision for doubtful accounts...... 240,908 102,142 103,081 81,328
Foreign currency translation
adjustment......................... 3,288 (31,380) (7,756) (444)
Increase (decrease) from changes in
operating assets and liabilities:
Trade receivables.................. (422,227) (125,392) (427,215) (514,573)
Prepaid and other assets........... (78,546) 48,632 47,523 (62,152)
Refundable income taxes............ -- (155,653) (67,653) 131,345
Other assets....................... (57,355) (5,801) (2,082) --
Accounts payable................... 202,522 (498,654) (354,191) (225,839)
Accrued wages and related taxes.... 105,558 (208,450) (208,450) --
Accrued vacation................... 66,361 32,489 32,489 --
Customer deposits.................. 130,236 507,971 602,289 (131,850)
Other accrued liabilities.......... 224,678 373,339 338,417 140,882
--------- ---------- ---------- ------------
Net cash provided by (used in) operating
activities............................... 317,487 (1,192,163) (1,282,673) 118,741
--------- ---------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment....... (144,561) (995,736) (1,009,732) (83,521)
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash.......................... -- (300,000) -- 100,000
Borrowings on notes payable.............. -- 659,996 588,922 --
Payments on notes payable................ (334,978) (134,039) -- (184,470)
Net proceeds from private placement...... -- 2,310,174 2,310,174 --
Redemption of common stock............... -- (340,000) (340,000) --
--------- ---------- ---------- ------------
Net cash provided by (used in) financing
activities............................... (334,978) 2,196,131 2,559,096 (84,470)
--------- ---------- ---------- ------------
Net increase (decrease) in cash and cash
equivalents.............................. (162,052) 8,232 266,691 (49,250)
--------- ---------- ---------- ------------
Cash and cash equivalents, beginning of
year..................................... 286,556 124,504 124,504 132,736
--------- ---------- ---------- ------------
Cash and cash equivalents, end of year..... $ 124,504 $ 132,736 $ 391,195 $ 83,486
--------- ---------- ---------- ------------
--------- ---------- ---------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
(a) Cash paid during the year for:
Interest........................... $ 64,372 $ 70,526 $ 52,895 $ 82,573
Income taxes....................... $ -- $ 155,653 $ 155,653 $ --
(b) Other (See Note 5).
--------- ---------- ---------- ------------
--------- ---------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Jenkon International, Inc. (a Delaware corporation) (Parent), through its
wholly-owned subsidiaries, Jenkon International, Inc. (a Washington
Corporation), Summit V, Inc. (the United States operating entity) and Jenkon
Europe Limited (the United Kingdom operating entity), supplies software
solutions to the Direct/Network Marketing industry. Jenkon International, Inc.
and Subsidiaries (the "Company") has developed and markets a management
information system software package called Summit V, as well as a compatible
fully integrated software based voice response system called Touchtalk, that
offers independent direct sales personnel the ability to access an information
base of the company they represent via touch-tone telephone. In addition, the
Company has developed a PC-based software package called NOW! which allows
direct two-way communication between Distributors and the companies that they
represent via the Internet.
In July 1995, the Company through Summit V, Inc. purchased and/or licensed
substantially all of the assets and assumed certain contractual obligations and
indebtedness from Redwood Technology, Inc. (formerly known as Jenkon Data
Systems, Inc.), the developer of a substantial portion of the Company's Summit V
software technology. This transaction was accounted for under the concept of
"entities under common control" and accordingly the historical basis of the
assets acquired and liabilities assumed were recorded.
On January 27, 1997 Jenkon Europe Limited changed its name to Jenkon
International Limited.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
All liquid assets with an initial maturity of three months or less are
considered to be cash equivalents for purposes of the statements of cash flows.
At June 30, 1997 and March 31, 1998, the Company had restricted cash held as
collateral for certain capital leases of $300,000 and $200,000, respectively.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with high credit
worthy institutions. At June 30, 1997, the Company had a $300,000 certificate of
deposit at a bank, which served as collateral for certain capital leases. At
March 31, 1998, the Company had a $200,000 certificate of deposit at the same
bank which served as collateral for the same capital leases.
The Company sells its products and services primarily to customers in the
Direct/Network Marketing Industry throughout the world. Credit is extended based
on an evaluation of the customer's financial condition and collateral is
generally not required. The allowance for doubtful accounts receivable is based
upon the expected collectibility of all accounts receivable.
F-8
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the related asset, which range from 3-7 years.
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the estimated life of the asset or the remaining term
of the lease.
CAPITALIZED SOFTWARE COSTS
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred (and
recorded as "Product research, development and enhancements expense" in the
consolidated statements of operations) until technological feasibility has been
established. Technological feasibility is established upon completion of a
detail program design or working model. Thereafter, all software production
costs are capitalized and reported at the lower of unamortized cost or net
realizable value until the product is available for general release to
customers. Capitalized software costs are amortized based on current and future
expected revenue for each product subject to an annual minimum based on
straight-line amortization over the remaining estimated life of the product, not
to exceed 5 years.
For the years ended June 30, 1997 and 1996, amortization of capitalized
software development costs amounted to $113,247 for both periods and are
included in "Cost of software license fees" in the consolidated statements of
operations. For the nine months ended March 31, 1998 and 1997, amortization of
capitalized software development costs amounted to $84,935 for both periods.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Jenkon Europe Limited, where the functional
currency is the British pound, are translated at the current exchange rate at
the balance sheet date. Income and expenses are translated at the average
exchange rate in effect during the year or period. Resulting translation
adjustments are accumulated as a separate component of stockholders' equity
(deficit).
Realized gains and losses related to other foreign currency transactions are
reported as income or expense in the current year. Such gains or losses were not
material for the years ended June 30, 1997 and 1996, and for the nine months
ended March 31, 1998 and 1997.
REVENUE RECOGNITION
SOFTWARE LICENSE FEES
The Company has established its revenue recognition policy in accordance
with the provisions of the American Institute of Certified Public Accountants'
Statement of Position 91-1 "Software Revenue Recognition." Revenue from the sale
of internally-developed software and turnkey systems are recognized upon
delivery, provided that no significant obligations remain and collection of the
related receivable is deemed probable.
F-9
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT, SOFTWARE AND SUPPLIES SALES
Revenues from third-party hardware, software and supplies are separately
stated in contracts for the license of the Company's software products, and are
recognized when the related hardware, software and supplies are delivered to the
customer.
SUPPORT AND OPERATIONS REVENUE
Support and operations revenue includes software and hardware maintenance
contracts and service revenues.
Maintenance contracts for hardware outside of the original manufacturer's
warranty are written between the customer and the Company and are priced at
market rates. The Company then sub-contracts with a third-party vendor
specializing in on-site hardware maintenance for the same coverage as the
Company has contracted with its customers. Revenues and the corresponding
third-party contract expenses are recognized ratably over the contractual period
(usually one year). Revenues resulting from Company personnel providing
installation, training, custom modification programming, and network consulting
services are recorded as "Service revenue" and are recognized as the services
are provided. These services are not essential to the functionality of any other
element of the transaction.
DISCOUNTS, RETURNS AND EXCHANGES
Discounts are determined at the time the contract is signed. Any cost
associated with returns and exchanges are insignificant and are recorded as
incurred. The Company provides no warranties which are not supported by
third-party contracts or software support contracts. Discounts are applied
against the appropriate revenue account.
DEFERRED REVENUE
Customer deposits received for software license fees, equipment or services
in advance are considered deferred revenue and are included in the consolidated
balance sheets under the caption "Customer deposits." The deferred revenue is
recognized as revenue upon delivery or as services are provided.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the temporary differences are expected to reverse.
State income taxes are not significant as the Company operates primarily in
the State of Washington, where corporate income tax is not assessed.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-10
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended March 31, 1997
and 1998 are unaudited. In the opinion of management, such statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the results of the interim period. The results of
operations for the nine months ended March 31, 1998 are not necessarily
indicative of the results for the entire year.
EMPLOYEE STOCK COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), as of January 1, 1996,
which establishes a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS No. 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date on the value of
the award and is recognized over the service period. The value of the stock-
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128) during 1998. SFAS No. 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, such as stock options,
warrants or convertible debentures. All prior period weighted average and per
share information had no effect on the amounts presented in accordance with SFAS
No. 128.
NEW ACCOUNTING PRONOUNCEMENTS
DISCLOSURE ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 129. The Company adopted SFAS No. 129 on December 15,
1997 and it had no effect on its financial position or results of operations.
F-11
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its results of
operations.
SOFTWARE REVENUE RECOGNITION
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exits, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company does not expect adoption of this SOP to have a material
effect on its financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures.................... $ 8,943 $ 100,904 $ 100,890
Computer systems and related equipment.... 269,988 1,059,522 1,143,176
Vehicles.................................. 48,809 127,900 127,781
Leasehold improvements.................... 31,574 92,317 92,317
--------- --------- ---------
359,314 1,380,643 1,464,164
Accumulated depreciation.................. (136,351) (363,587) (567,148)
--------- --------- ---------
Property and equipment, net............... $ 222,963 $1,017,056 $ 897,016
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended June 30, 1996 and 1997, and for the
nine month periods ended March 31, 1997 and 1998 were $53,742, $201,643,
$159,999 and $203,561.
3. NOTE PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to an individual with interest
payable at 18% per year, in monthly
installments of the greater of $10,000 or
the individual monthly compensation of the
two major shareholders and secured by their
shares in the Company. The noteholder also
receives monthly payments equal to 1% of
the Company's gross margin until fully
paid....................................... $ 255,140 $ 235,494 $ 201,756
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $768, including interest at
8.9%, collateralized by the related
asset...................................... -- 31,950 26,268
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $491, including interest at
11.3%, collateralized by the related
asset...................................... -- 19,538 16,660
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $16,747, including interest
at 7.98%, collateralized by the fixed
assets and a Certificate of Deposit in the
amount of $300,000 at June 30, 1997 and
$200,000 at March 31, 1998................. -- 440,361 312,644
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $1,930, including interest
at 8.20%, collateralized by the fixed
assets and the same Certificate of Deposit
in the amount of $300,000 at June 30, 1997
and $200,000 at March 31, 1998............. -- 53,753 39,298
--------- --------- -----------
255,140 781,096 596,626
Less current portion......................... 77,220 338,512 416,365
--------- --------- -----------
$ 177,920 $ 442,584 $ 180,261
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-13
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. NOTE PAYABLE (CONTINUED)
Aggregate maturities of long-term debt in the next five years at June 30,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 319,994
2000.............................................................................. 106,063
2001.............................................................................. 14,054
2002.............................................................................. 2,473
----------
$ 442,584
----------
----------
</TABLE>
4. INCOME TAXES
The provision for income taxes in the consolidated statement of operations
represents current U.S. federal income tax. State income taxes are not included
as the Company operates primarily in the State of Washington, where corporate
income tax is not assessed.
The provision for income taxes differs from the expected statutory federal
income taxes as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
-------------------- ------------------------
1996 1997 1997 1998
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Provision (benefit) at the
federal statutory rate......... $ (51,000) $(508,000) $(520,000) $ 180,000
Permanent differences............ 26,000 25,000 19,000 1,577
Valuation allowance on net
deferred tax assets............ 113,000 395,000 501,000 (166,000)
--------- --------- ----------- -----------
Provision (benefit) for income
tax............................ $ 88,000 $ (88,000) $ -- $ 15,577
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
F-14
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. INCOME TAXES (CONTINUED)
Temporary differences which give rise to deferred tax assets and
(liabilities) were as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Allowance for doubtful accounts......... $ 60,000 $ 8,000 $ 35,000
Accrued vacation........................ 28,000 11,000 --
Valuation allowance..................... (88,000) (19,000) (35,000)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
Non-current:
Property, and equipment................. $ (1,000) $ (16,000) $ 18,000
Amortization of intangibles............. 26,000 26,000 26,000
Net operating loss...................... -- 366,000 200,000
Valuation allowance..................... (25,000) (376,000) (244,000)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has recorded a 100% valuation allowance on the net deferred tax
asset since management can not determine if it is more likely than not that the
deferred tax assets will be realized.
The Company's ability to utilize the net operating loss carryforwards is
dependent upon its ability to generate taxable income in future periods which
may be limited due to ownership changes as defined under Section 382 of the
Internal Revenue Code of 1986. Any unused annual limitation may be carried over
to future years until the net operating losses expire. Utilization of net
operating losses may also be limited in any one year by alternative minimum tax
rules.
During the year ended June 30, 1997 the Company utilized its net operating
loss carryback, which resulted in an income tax benefit of $88,000.
At June 30, 1997, the Company has net loss operating carryforwards of
approximately $1,077,000 which will expire in 2017.
F-15
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY
On June 27, 1996, Jenkon International, Inc. (a Delaware corporation)
acquired by way of a stock-for-stock reorganization, the 8,750 issued and
outstanding common stock shares of Jenkon International, Inc. (a Washington
corporation) and in exchange issued 1,955,678 shares of common stock to the
shareholders of Jenkon International, Inc. (a Delaware corporation) in
proportion to their shareholdings.
PRIVATE PLACEMENT
In September 1996, the Company completed a private placement of 1,500,000
shares of Series A Preferred Stock and simultaneously purchased 78,227 shares of
common stock from each Dan Jensen, the Company's Chairman of the Board of
Directors and David Edwards, the Company's President and Chief Executive
Officer.
The sale of Series A Preferred Stock and the purchase of common stock were
executed at $2.56 per share. The net proceeds to the Company from these
transactions was approximately $2,310,000 (net of offering costs) and was
utilized as working capital.
In the event that the Company fails to complete an initial public offering
of its Common Stock which results in (1) gross proceeds to the Company of at
least $5,000,000, and (2) the Common Stock being listed or quoted on a
recognized national securities exchange such as the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX), or the National Association of
Securities Dealers Automated Quotation system (NASDAQ), within 30 months from
the date of the initial closing of the private placement offering, the Series A
Preferred Stock shall be redeemable at the election of holders of the majority
of the outstanding preferred shares. In such circumstances, the redemption is at
the election of holders of the majority of these outstanding preferred shares
and the redemption price shall equal either the greater of (1) $2.00 per
preferred share plus an annual return of 10% compounded interest from the date
of issuance, or (2) the value of the Common Stock into which the preferred
shares are convertible as established by a nationally recognized valuation firm
selected by the Company.
STOCK OPTION PLANS
The Company has a stock option plan for the granting of options to purchase
common shares to certain executives and key employees. In each case, the
option's maximum term is five years. Options granted vest immediately upon the
first anniversary of such grant.
WARRANTS
In connection with the Company's private placement, the Company issued
152,542 warrants to purchase Series A Preferred Stock to the Dealer Manager. The
exercise price of these warrants is $2.10 per share, which is subject to
adjustment in certain circumstances.
F-16
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following summarizes stock option and warrant activity during the years
ended June 30, 1996 and 1997 and the nine months ended March 31, 1998 as
follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AND EXERCISE
WARRANTS PRICE
--------- -----------
<S> <C> <C>
Outstanding at July 1, 1996............................................. -- $ --
Granted................................................................. 650,678 1.78
--------- -----
Outstanding at June 30, 1997............................................ 650,678 $ 1.78
Granted (unaudited)..................................................... 225,656 $ 1.95
--------- -----
Outstanding at March 31, 1998 (unaudited)............................... 876,334 $ 1.82
--------- -----
--------- -----
</TABLE>
Information relating to options and warrants at June 30, 1997 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED-AVERAGE WEIGHTED
---------------------- AVERAGE
LIFE EXERCISE EXERCISE
EXERCISE PRICE PER SHARE SHARES (MONTH) PRICE SHARES PRICE
- ---------------------------------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.0128................................. 156,454 53 $ 0.0128 156,454 $ 0.0128
$2.1732................................. 332,464 34.5 $ 2.1732 332,465 $ 2.1732
$2.6845................................. 161,760 18 $ 2.6845 161,760 $ 2.6845
--------- --- --------- --------- ---------
$0.0128-$2.6845......................... 650,678 35 $ 1.78 650,678 $ 1.78
--------- --- --------- --------- ---------
--------- --- --------- --------- ---------
</TABLE>
Information relating to stock options and warrants at March 31, 1998
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------- --------------------
WEIGHTED-AVERAGE WEIGHTED
---------------------- AVERAGE
LIFE EXERCISE EXERCISE
EXERCISE PRICE PER SHARE SHARES (MONTH) PRICE SHARES PRICE
- ---------------------------------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.0128................................. 156,454 44 $ 0.0128 156,454 $ 0.0128
$2.1732................................. 332,464 25.5 $ 2.1732 332,465 $ 2.1732
$2.5567................................. 39,113 $ 2.5567 39,113 $ 2.5567
$2.6845................................. 161,760 9 $ 2.6845 161,760 $ 2.6845
$3.8350................................. 69,203 58 $ 3.8350 69,203 $ 3.8350
--------- --- --------- --------- ---------
$0.0128-$3.8350......................... 758,994 $ 2.01 758,994 $ 2.01
--------- --- --------- --------- ---------
--------- --- --------- --------- ---------
</TABLE>
In accordance with the provisions of SFAS No. 123, the Company applied APB
Opinion 25 and related interpretations in accounting for its stock option plans
and, accordingly, does not recognize
F-17
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income would have been reduced to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
--------------------- -----------------------
1996 1997 1997 1998
--------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss
As reported................. $(264,925) $(1,546,296) $(1,584,059) $ 411,550
Pro forma................... (264,925) (1,593,046) (1,584,059) 374,636
Earnings (loss) per share
Basic:
As reported................. $ (0.14) $ (0.84) $ (0.86) $ 0.23
Pro forma................... (0.14) (0.87) (0.86) 0.21
Diluted:
As reported................. $ (0.14) $ (0.84) $ (0.86) $ 0.12
Pro forma................... (0.14) (0.87) (0.86) 0.12
</TABLE>
The fair value of the option and warrant grants is estimated on the date of
grant using the minimum value method in accordance with SFAS 123, with the
following weighted average assumptions for grants in 1997 and 1998; expected
life of options and warrants of 3-5 years and 5 years, respectively, expected
volatility of 0%, risk free interest rate of 6.4% and 6.0%, respectively, and 0%
dividend yield.
The weighted average fair value at date of grants for options granted during
fiscal 1997 and the nine months ended March 31, 1998 approximated $1.04 and .68.
The effect of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
6. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has purchase arrangements
with Jentronix, an entity wholly-owned by a relative of a major stockholder.
Purchases from Jentronix amounted to $46,799 and $7,322 for the years ended June
30, 1996 and 1997 and $8,138 and $0 for the nine months ended March 31, 1997 and
1998.
Stock subscription receivable represents amounts due from officers of the
Company.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancellable operating leases
which expire at various dates through September 2001.
The Company leases certain equipment under agreements which are classified
as capital leases. Equipment leases have purchase options at the end of the
original lease term.
F-18
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancellable
capital and operating leases with initial or remaining terms of one year or more
consist of the following at June 30, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ------------
<S> <C> <C>
1998............................................................... $ 239,239 $ 395,857
1999............................................................... 239,239 389,048
2000............................................................... 112,259 124,344
2001............................................................... 15,114 109,740
2002............................................................... 2,519 23,694
----------- ------------
Total minimum lease payments....................................... 608,370 $ 1,042,683
------------
------------
Less amount representing interest.................................. (62,768)
-----------
Present value of net minimum lease payments........................ 545,602
Less current portion............................................... (202,002)
-----------
$ 343,600
-----------
-----------
</TABLE>
The Company's rental expense for operating leases aggregated $279,077 and
$308,209 for the years ended June 30, 1996 and 1997, and $275,943 and $230,967
for the nine months ended March 31, 1997 and 1998.
The Company may be required to devote significant resources to protect its
interests and the interests of its sublicensees in Asia. This could materially
adversely affect the Company's financial condition and results of operations.
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, the amount of ultimate
liability with respect to these proceedings will not materially affect the
financial position, results of operations or cash flows of the Company.
The Company is obligated to make monthly payments to a note-holder equal to
1% of the Company's gross margin until the note is fully repaid (Note 3).
POTENTIAL LIABILITY
In July 1995, the Company through Summit V, Inc. purchased and/or licensed
substantially all of the assets and assumed certain contractual obligations and
indebtedness from Redwood Technology, Inc. the developer of a substantial
portion of the Company's Summit V software technology.
As Redwood Technology may be deemed to have been rendered insolvent by the
sale and license of certain of its assets to the Company, and because of the
commonality of ownership and management of Redwood Technology and the Company,
the Company may be subject to claims by unsatisfied creditors of Redwood
Technology.
At June 30, 1996, the Company recorded $400,000 as a liability based on
management's estimate. At June 30, 1997 and March 31, 1998 the amount was
reduced to approximately $375,000 and $350,000, respectively due to settlements
with some unsatisfied creditors.
F-19
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
See Note 5.
8. EMPLOYEE BENEFIT PLAN
The Company's employees are covered by a 401(k) defined contribution benefit
plan. The plan provides for employee tax-deferred contributions up to the
maximum percentage of eligible compensation allowable not to exceed the limit of
code section 401(k). The Company may make matching contributions equal to a
discretionary percentage. For the years ended June 30, 1996 and 1997 and the
nine months ended March 31, 1998, the Company did not elect to make matching
contributions to the plan.
9. MAJOR CUSTOMERS
The Company had two customers which accounted for 23% and 11% of the
Company's sales during the year ended June 30, 1997, and three customers which
accounted for 25%, 12% and 11% of the Company's sales for the year ended June
30, 1996. The Company also had two customers which accounted for 22%, 11% and
10% of the Company's sales during the nine months ended March 31, 1997 and no
customers during the nine months ended March 31, 1998 represented more than 10%
of the Company's sales.
10. CONCENTRATION OF SUPPLIERS
The Company is dependent on third-party equipment manufacturers and
distributors for all its supply of computer equipment and some of its software
accessories. Purchases from individual suppliers that exceed 10% of total
purchases in each period were as follows: three suppliers at 37%, 31% and 12% of
total purchases, for the year ended June 30, 1996; two suppliers at 13% and 10%
of total purchases for the nine months ended March 31, 1997; and one supplier at
10% of total purchases, and for the nine months ended March 31, 1998.
11. LIQUIDITY
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At June 30, 1997 the Company has
negative working capital of approximately $1,348,000, and a stockholders'
deficit of approximately $269,000. At March 31, 1998, the Company has a negative
working capital of approximately $893,000 and stockholders' deficit of
approximately $2,168,000.
The funding of the Company's operations and servicing of existing debt is
dependent upon continued sales of its core products, and extending payment terms
on various current liabilities. During December 1996, the Company implemented
changes to reduce its fixed costs which included eliminating approximately 25
nonproductive positions and terminating a month-to-month office lease. In
addition, the Company has established an agreement with its noteholder to vary
from regularly scheduled payments when necessary. Based on the continuing sales
activity and the above actions, the Company has returned to profitable
operations during the nine months ended March 31, 1998 and met its obligations
on a timely basis. See Note 14.
F-20
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
12. EARNINGS PER SHARE
The following is a reconciliation of the weighted average number of shares
used to compute basic and diluted earnings per share:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Basic weighted average shares
outstanding................. 1,938,915 1,838,338 1,851,376 1,799,224
Diluted effect of stock
options..................... -- -- -- --
--------- --------- --------- ---------
Diluted weighted average
shares outstanding.......... 1,938,915 1,838,338 1,851,376 1,799,224
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Options to purchase 936,378 shares were outstanding during the years ended
June 30, 1996 and 1997 but were not included in the computation of diluted loss
per common share because the effect would be antidilutive.
13. STOCK SPLIT
In June 1998, the Board of Directors declared a .782271-to-one reverse stock
split. All stock related data in the consolidated financial statements reflect
the stock split for all periods presented.
14. SUBSEQUENT EVENTS (UNAUDITED)
BRIDGE LOANS
In June 1998, the Company completed a bridge loan for $1,000,000, of which
net proceeds were $1,000,000 less placement fees of $120,000, or $880,000. In
connection with the bridge loans, the Company issued 11,732 warrants per each
$100,000 of bridge loans, for a total of 117,321 warrants, at an exercise price
of $.6392. The bridge loan is due the earlier of twelve months or at completion
of the initial public offering. The Company valued the warrants at fair value of
$3.91 per warrant. The original issue discount was determined based on the fair
value of the warrants to total fair value of warrants and debt. The original
issue discount is being amortized over the twelve month term of the bridge loans
as interest expense.
EMPLOYMENT AGREEMENTS
Effective with the completion of the initial public offering, the Company
will enter into two four-year employment agreements and two one-year renewable
employment agreements with employees of the Company. The annual base salaries
for the four-year and one-year renewable employment agreements will be $200,000,
$150,000, $150,000 and $90,000. These agreements will be subject to a 5% cost of
living increase and other benefits. In the event the Company terminates any of
the employment agreements without cause, the Company will be required to make a
severance payment equal to one year's base salary. One of the employment
agreements with an annual base salary of $90,000 has a severance payment of
$200,000 instead of $90,000.
F-21
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
CONSULTING/NON-COMPETE AGREEMENT
In June 1998, Mr. Jensen and the Company will enter into a
Consulting/Non-Compete Agreement pursuant to which Mr. Jensen agreed to provide
certain consulting and software development services to the Company in exchange
for the following payments and benefits: (i) $75,000 upon signing, (ii) $75,000
at the end of the three year term, (iii) $12,000 per month from the effective
date of the agreement through December 31, 1998, (iv) $8,000 per month from
January 1, 1999 through December 31, 1999, (v) $4,000 per month from January 1,
2000 through November 30, 2000, (vi) reimbursement and payment of certain
automobile, insurance, phone, computer and other expenses, as well as an
agreement by Jenkon to assume certain personal guarantees of Mr. Jensen.
F-22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Offering.............................................................. 5
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 26
Management................................................................ 35
Certain Transactions...................................................... 41
Principal Stockholders.................................................... 43
Selling Stockholders...................................................... 44
Description of Securities................................................. 47
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 49
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,800,000 SHARES
JENKON
INTERNATIONAL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[LOGO]
Meridian Capital
Group, Inc.
Trautman, Kramer
& Company
Incorporated
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions that eliminate the directors' personal liability for monetary
damages to the fullest extent possible under Delaware Law or other applicable
law (the "Director Liability Provision"). The Director Liability Provision
eliminates the liability of directors to the Company and its stockholders for
monetary damages arising out of any violation by a director of his fiduciary
duty of due care. Under Delaware Law, however, the Director Liability Provision
does not eliminate the personal liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or any transaction from which the director derived an improper
benefit. Furthermore, pursuant to Delaware Law, the limitation on liability
afforded by the Director Liability Provision does not eliminate a director's
personal liability for breach of the director's duty of due care. Although the
directors would not be liable for monetary damages to the corporation or its
stockholders for negligent acts or omissions in exercising their duty of due
care, the directors remain subject to equitable remedies, such as actions for
injunction or rescission, although these remedies, whether as a result of
timeliness or otherwise, may not be effective in all situations. With regard to
directors who also are officers of the Company, these persons would be insulated
from liability only with respect to their conduct as directors and would not be
insulated from liability for acts or omissions in their capacity as officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Company
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the corporation, to the extent that such person
has been successful in defense of such action or proceeding, or in defense of
any claim, issue or matter raised in such litigation, (ii) may, in actions other
than actions by or in the right of the corporation (such as derivative actions),
be indemnified for expenses actually and reasonably incurred, judgments, fines
and amounts paid in settlement of such litigation, even if he is not successful
on the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation (and in a
criminal proceeding, if he did not have reasonable cause to believe his conduct
was unlawful), and (iii) may be indemnified by the corporation for expenses
actually and reasonably incurred (but not judgments or settlements) of any
action by the corporation or of a derivative action (such as a suit by a
stockholder alleging a breach by the director or officer of a duty owed to the
corporation), even if he is not successful, provided that he acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, provided that no indemnification is permitted
without court approval if the director has been adjudged liable to the
corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Company is required to indemnify its officers,
directors, employees and agents to the fullest extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that the person acted in good faith
and in a manner he or she believed to be in the best interests of the Company
and, in the case of any criminal action or proceeding, the person had no reason
to believe his or her conduct was unlawful.
II-1
<PAGE>
In furtherance of the objectives of the Indemnification Provision, the
Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Certificate and Bylaws (the "Indemnification Agreements"). The Company
believes that the Indemnification Agreements are necessary to attract and retain
qualified directors and executive officers. Pursuant to the Indemnification
Agreements, an indemnitee will be entitled to indemnification to the extent
permitted by Section 145 or other applicable law. In addition, to the maximum
extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Company, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company and had no reasonable cause to
believe his or her conduct was unlawful. If the Proceeding is brought by or in
the right of the Company and applicable law so provides, the Indemnification
Agreements provide that no indemnification against expenses shall be made in
respect of any claim, issue or matter in the Proceeding as to which the
indemnitee shall have been adjudged liable to the Company.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this Offering.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates, except the Securities and Exchange
Commission registration and NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 5,718
NASD fees......................................................... $ 1,872
---------
Nasdaq listing fee................................................ $ 9,544
---------
Accounting fees and expenses...................................... $ 100,000
---------
Printing and engraving expenses................................... $ 75,000
---------
Transfer agent and registrar (fees and expenses).................. $ 10,000
---------
Blue sky fees and expenses (including counsel fees)............... $ 25,000
---------
Other legal fees and legal expenses............................... $ 125,000
---------
Miscellaneous expenses............................................ $ 148,168
---------
---------
Total............................................................. $ 500,302
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1995 the Company issued 111,752 shares of Common Stock to a
former officer of the Company for nominal consideration. The issuance of such
shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
In December 1995, A.M. Razo Securities Corp. received 33,524 shares of
Common Stock in exchange for consulting services rendered to the Company. The
issuance of such shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
In early 1996, 22,351 shares of Common Stock were issued as a result of the
exercise of an option to acquire shares of Common Stock of the Company for an
exercise price of $1.278 per share. The issuance of such shares was exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof. See "Certain Transactions."
In September 1996, the Company completed a private placement of 1,500,000
shares of its Series A Preferred Stock to 42 accredited investors which resulted
in gross proceeds to the Company of $3 million and net proceeds of approximately
$2.3 million (the "1996 Private Placement"). Approximately $400,000 of the
proceeds of the 1996 Private Placement were used to redeem a total of 156,454
shares of Common Stock held by David Edwards and Dan Jensen at a price of $2.17
per share. In connection with the 1996 Private Placement, The Boston Group, L.P.
("TBG") received warrants to purchase shares of Series A Preferred Stock (the
"1996 Warrants") which, upon consummation of this Offering, will convert into
warrants to purchase an aggregate of 161,760 shares of Common Stock at an
exercise price of $2.6845 per share. The issuance of the shares of Series A
Preferred Stock and the 1996 Warrants in connection with the 1996 Private
Placement was exempt from the registration requirements of the Securities Act
pursuant to Rule 506 of Regulation D promulgated thereunder. See "Certain
Transactions."
In November 1996 the Company issued an option to purchase 156,454 shares of
Common Stock at an exercise price of $0.0128 per share. Such option was issued
under the Company's Stock Option Plan and in reliance on the exemption afforded
by Section 4(2) of the Securities Act.
In April 1997, the Company issued options to purchase an aggregate of
332,464 shares of Common Stock at an exercise price of $2.1732 per share to
three executive officers of the Company in accordance with the Company's Stock
Option Plan. Such options were issued in reliance on the exemption afforded by
Section 4(2) under the Securities Act.
In late 1997, the Company issued to one executive officer an option to
purchase 39,113 shares of Common Stock at an exercise price of $2.1732 per
share. Such option was issued under the Company's Stock Option Plan and in
reliance on the exemption afforded by Section 4(2) of the Securities Act.
In January 1998, the Company issued options to purchase an aggregate of
69,203 shares of Common Stock at an exercise price of $3.835 per share to a
total of 77 employees in accordance with the Company's Stock Option Plan. Such
options were issued in reliance on the exemption afforded by Rule 701 of the
Securities Act.
On June 3, 1998, the Company completed a private placement of $1,000,000 of
unsecured promissory notes (the "1998 Notes") and warrants (the "1998 Warrants")
to purchase an aggregate of 117,321 shares (the "1998 Private Placement") at an
exercise price of $.6392 per share to 40 accredited investors. Meridian Capital
Group, Inc. and Trautman Kramer & Company, Incorporated acted as placement
agents with respect to the 1998 Private Placement and, as a result, received (i)
commissions equal to 10% of the gross proceeds sold by them, plus (ii) a
non-accountable expense allowance equal to 2% of the gross proceeds sold by
them. The issuance of the 1998 Notes and 1998 Warrants was exempt from the
registration requirements of the Securities Act pursuant to Rule 506 of
Regulation D promulgated thereunder. See "Certain Transactions."
II-3
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of the Company, as amended*
3.2 Bylaws of the Company*
3.3 Certificate of Designation, Preferences and Rights of Series A Preferred
Stock
4.1 Specimen Stock Certificate of the Company*
4.2 Form of Representatives' Warrant*
4.3 Dealer Manager's Warrant Agreement, dated as of July 1, 1996 between the
Company and The Boston Group, L.P.
4.4 Form of unsecured Promissory Note of the Company issued in connection with
the 1998 Private Placement
4.5 Form of Warrant to purchase Common Stock issued in connection with the
1998 Private Placement
4.6 Subscription Supplement and Registration Rights Agreement with respect to
1996 private placement
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro LLP*
10.1 Form of Employment Agreement of David Edwards*
10.2 Form of Employment Agreement of Steve McKeag*
10.3 Form of Employment Agreement of Jim Thompson*
10.3 Form of Employment Agreement of Robert Cavitt*
10.4 Consulting and Non-Competition Agreement of Dan Jensen*
10.5 Form of Indemnification Agreement with Officers and Directors*
10.6 Jenkon International, Inc. Stock Option Plan*
10.7 Lease Agreement--Corporate Headquarters, Vancouver, Washington*
11.1 Statement re: Computation of Per Share Earnings*
21.1 List of Subsidiaries*
23.1 Consent of BDO Seidman L.L.P.
23.2 Consent of Jeffer, Mangels, Butler & Marmaro LLP* (included in Exhibit
5.1)*
24 Power of Attorney (incorporated by reference to page II-4 of the
Registration Statement on Form SB-2)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment.
(B) FINANCIAL STATEMENT SCHEDULES
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (Section
230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein,
and the Offering of such securities at that time shall be deemed to be
the initial bona fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the Offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Act shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
II-5
<PAGE>
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to be
the initial bona fide Offering thereof.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California on the 4th day of
June, 1998.
JENKON INTERNATIONAL, INC.
By: /s/ DAVID EDWARDS
-----------------------------------------
David Edwards,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David
Edwards and Steve McKeag, or either of them, his true and lawful
attorney-in-fact and agent, acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, any Amendments thereto and any Registration
Statement for the same Offering which is effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, each acting
alone, full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Company in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Director, President and
/s/ DAVID EDWARDS Chief Executive Officer
- ------------------------------ (principal executive June 4, 1998
David Edwards officer)
/s/ DAN JENSEN
- ------------------------------ Director June 4, 1998
Dan Jensen
Chief Financial Officer,
/s/ STEVE MCKEAG Treasurer (principal
- ------------------------------ financial and accounting June 4, 1998
Steve McKeag officer)
II-7
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF
SERIES A PREFERRED STOCK
OF
JENKON INTERNATIONAL, INC.,
A DELAWARE CORPORATION
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Jenkon International, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that, pursuant to the authority contained in Article 4, Section 2 of
its Certificate of Incorporation, and in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware, its Board
of Directors has adopted the following resolution creating a series of its
Preferred Stock designated as Series A Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred Stock of the
Corporation be, and hereby is, created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof, are as follows:
BE IT RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board
of Directors does hereby provide for the issue of a series of Preferred
Stock, $.001 par value per share, of the Corporation, to be designated
"Series A Preferred Stock" (hereinafter referred to as the "Series A
Preferred Stock"), consisting of 1,150,000 shares, and to the extent that
the voting powers, designations, preferences, limitations, restrictions and
relative rights of the Series A Preferred Stock are not stated and
expressed in the Certificate of Incorporation, does hereby fix and herein
state and express such voting powers, designations, preferences,
limitations, restrictions and relative rights as follows (all terms used
herein which are defined in the Certificate of Incorporation shall be
deemed to have the meanings provided therein):
1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Preferred Stock" and the number of shares
constituting such series shall he 1,150,000. Such number of shares may be
decreased by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series A
<PAGE>
Preferred Stock to a number less than the number of shares of Series A
Preferred Stock then outstanding or reserved for issuance.
2. DIVIDENDS. The holders of Series A Preferred Stock shall be
entitled to receive, out of the assets of the Corporation legally available
for distribution to holders of the Corporation's Series A Preferred Stock,
whether such assets are capital, surplus, or earnings (hereinafter called
the "Available Funds"), as and when received by holders of the Common Stock
of the Corporation or any other class of stock of the Corporation ranking
the same or junior to the Series A Preferred Stock, dividends in an amount
equal to the amount of any dividends payable to holders of the Common Stock
of the Corporation or any other class of the Corporation ranking junior to
Series A Preferred Stock, based on the largest number of full shares of
Common Stock into which a holder's shares of Series A Preferred Stock could
be converted immediately prior to the record date for the payment of such
dividend. No dividend may be declared and paid upon shares of Common Stock
or any other class of stock of the Corporation ranking junior to the Series
A Preferred Stock unless the Series A Preferred Stock was converted into
Common Stock before the record date of such dividend or the Series A
Redemption Price (as defined below) is simultaneously paid Or deposited
into trust for the benefit of all then outstanding shares of Series A
Preferred Stock for the redemption and retirement thereof as described ia
Section 7, below. Dividends on Series A Preferred Stock shall not be
cumulative, and no declared and unpaid dividend on Series A Preferred Stock
shall bear interest.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary ("Liquidation"), the holders of each share of Series A
Preferred Stock shall be entitled to receive out of the Available Funds,
before any sums shall be paid or any assets distributed among the holders
of shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Series A Preferred Stock, an amount or value (such
amount or value as described immediately below is hereinafter called the
"Series A Preference Price") equal to the Series A Redemption Price, as
defined in Section 7(a), below, per share of Series A Preferred Stock
(subject to adjustment if the Series A Preferred Stock of the Corporation
shall be changed into a different number of shares, whether by
recapitalization, reclassification or otherwise, and then and in each such
event the holder of shares of Series A Preferred Stock shall have the right
thereafter to receive upon redemption such same amount aggregately
receivable immediately prior to reorganization, reclassification or other
change of the number of shares of Series A Preferred Stock apportioned
among the number of shares into which such shares of Series A Preferred
Stock are changed) plus in each case, any and all declared but unpaid
dividends on such shares. If the Available Funds shall be insufficient to
permit the payment in full to all holders of the Series A Preferred Stock
the full amounts (including all dividends accrued and unpaid) to which they
shall be entitled by reason of such Liquidation of the Corporation, then
there shall be paid to
-2-
<PAGE>
the holders of the Series A Preferred Stock in connection with such
Liquidation of the Corporation, an amount equal to product derived by
multiplying the amount of Available Funds times a fraction, the numerator
of which shall be the full amount to which the holders of the Series A
Preferred Stock shall be entitled by reason of such Liquidation of the
Corporation and the denominator of which shall be the total amount which
would have been distributed by reason of such Liquidation of the
Corporation with respect to the Series A Preferred Stock then outstanding
had the Corporation possessed sufficient assets to pay the maximum amount
which the holders of all such stock would be entitled to receive in
connection with such Liquidation of the Corporation.
The voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all the property or assets of the Corporation, or the merger
or consolidation of the Corporation into or with any other corporation, or
the merger of any other corporation into the Corporation, or any purchase
of all or substantially all of the shares of any class or series of stock
of the Corporation, shall not be deemed to be a Liquidation of the
Corporation for the purposes of this Section 3, so long as such transaction
does not result in the issuance or creation of any shares of Preferred
Stock of the Corporation, or of any successor, except any shares of
Preferred Stock that rank junior (as defined elsewhere in these
resolutions) to the shares of Series A Preferred Stock as to dividends and
as to the distribution of assets upon dissolution, liquidation or winding
up; provided, however, if more than 50% (by value as determined in good
faith by the Board of Directors) of the consideration received in a
transaction by holders of the Corporation's Common Stock in such
transaction consists of cash, notes payable in cash or Marketable Stock (as
defined below), the transaction will be deemed to be a Liquidation for
purposes of this Section. The phrase "all or substantially all" as used in
this definition in reference to a class of the Corporation's capital stock
means 66% or more of the aggregate outstanding amount. The phrase "all or
substantially all" as used in this definition in reference to the property,
business or assets of the Corporation shall mean assets of a corporation as
are quantitatively vital to the operations of the Corporation and
substantially affects the existence and purpose of the Corporation. As
used herein, the term "Marketable Stock" means the Corporation's Common
Stock or common stock of any corporation that is the successor to all or
substantially all of the business or assets of the Corporation or of the
ultimate parent of such successor, which is (or will, upon distribution
thereof, be) listed or quoted on the New York Stock Exchange, the American
Stock Exchange, or the Nasdaq National Market or the Nasdaq Small Cap
Market.
The holder of any shares of Series A Preferred Stock shall not be
entitled to receive any payment of the full balance owed for such shares
under this Section 3 until such holder shall cause to be delivered to the
Corporation (i) the certificate(s) representing such shares of Series A
Preferred Stock (or an affidavit of lost certificate and such other
documentation or assurances as are required by applicable law, in a form
reasonably acceptable to the Corporation) and (ii) transfer instrument(s)
satisfactory to the Corporation and sufficient to transfer such shares of
Series A
-3-
<PAGE>
Preferred Stock to the Corporation free of any adverse interest. No
interest shall accrue on any payment upon Liquidation after the due date
thereof.
After the Series A Preference Price shall have been paid in full to
the holders of the Series A Preferred Stock, or funds necessary for such
payment shall have been set aside by the Corporation in trust for the
account of holders of the Series A Preferred Stock and available for such
payment, the remaining assets of the Corporation available for distribution
to stockholders shall be distributed among the holders of Common Stock and
any other class of stock of the Corporation ranking junior to the Series A
Preferred Stock, and the holders of shares of the Series A Preferred Stock
will not be entitled to any further participation in any distribution of
assets by the Corporation.
(b) PROPERTY. Whenever the distribution provided for herein
shall be paid in property other than cash, the value of such distribution
shall be the fair market value of such property as determined in good faith
by the Board of Directors of the Corporation.
4. SERIES A PREFERRED STOCK VOTING RIGHTS. The holders of Series A
Preferred Stock shall not have any voting rights if, whether at or prior to
the effective time of the act with respect to which such vote would
otherwise be required, all outstanding shares of Series A Preferred Stock
shall have either been redeemed or, if then redeemable, sufficient funds
shall have been deposited irrevocably in trust to effect such redemption.
Subject to the foregoing sentence, the Series A Preferred Stock shall have
the following voting rights:
(a) VOTING RIGHTS IN GENERAL. Except to the extent that
requirements of law supersede the limitations on voting rights in the
Certificate of Incorporation or these resolutions and as otherwise set
forth herein, the shares of Series A Preferred Stock shall be entitled to
voted equally with the shares of Common Stock. Each holder of Series A
Preferred Stock shall be entitled, notwithstanding any provision hereof, to
notice of any stockholders' meeting in accordance with the bylaws of this
Corporation, and shall be entitled to vote, together with holders of Common
Stock as a single class, with respect to any questions upon which holders
of Common Stock have the right to vote. Each holder of Series A Preferred
Stock shall be entitled to that number of votes equal to the largest number
of whole shares of Common Stock into which such holder's shares of Series A
Preferred Stock could be converted pursuant to the provisions of Section 5
hereof, at the record date for the determination of stockholders entitled
to vote on such matter or, if no such record date is established, at the
date such vote is taken or any written consent of stockholders is
solicited.
(b) OTHER SERIES A PREFERRED STOCK VOTING RIGHTS. So long as
any shares of Series A Preferred Stock remain outstanding, the vote or
consent of the holders of at least a majority of the shares of Series A
Preferred Stock outstanding at the time (voting separately as a class)
given in person or by proxy, either in writing or
-4-
<PAGE>
at any special or annual meeting called for the purpose, shall be necessary
to permit, effect or validate any one or more of the following:
(i) The authorization, creation or issuance (whether
by creation or amendment of an existing class or series of Preferred
Stock), or any increase in the authorized or issued amount, of any class or
series of stock (including any class or series of Preferred Stock) ranking
prior (as that term is hereinafter defined) to or on a parity (as that term
is hereinafter defined) with the Series A Preferred Stock; or
(ii) The Amendment, alteration or repeal, whether by
merger, consolidation or otherwise, of any of the provisions of the
Certificate of Incorporation or of these resolutions which would alter or
change the powers, preferences, or special rights of the shares of the
Series A Preferred Stock in any material respect; provided, however, that
the creation and issuance of other series of Preferred Stock ranking junior
to the Series A Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to adversely affect such powers, preferences, or
special rights, and provided, further, that the unanimous vote or consent
of the shares of the Series A Preferred Stock outstanding shall be
necessary to effect any amendment to these resolutions that would (A)
except as otherwise permitted by Section 5, increase the Conversion Price;
(B) reduce the Series A Preference Price; (C) reduce or eliminate the
entitlement to cash dividends, if any, payable on the shares of the Series
A Preferred Stock; or (D) reduce the Series A Redemption Price.
For purposes of these resolutions, any class or classes of stock of
the Corporation shall be deemed to rank:
(A) prior to the Series A Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class shall be entitled to the receipt
of dividends or amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to the holders of
Series A Preferred Stock;
(B) on a parity with the Series A Preferred
Stock as to dividends or as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates, or redemption or liquidation prices per shares thereof be
different from those of the Series A Preferred Stock, if such stock or
series shall be the Series A Preferred Stock or if the holders of such
class of stock and the Series A Preferred Stock shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their
respective dividend rates or liquidation prices, without preference or
priority one over the other: and
-5-
<PAGE>
(C) junior to the Series A Preferred Stock as
to dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if such class shall be Common Stock or if
holders of the Series A Preferred Stock shall be entitled to receipt of
dividends or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to holders of
stock of such class.
(c) RIGHT TO ELECT A MAJORITY OF DIRECTORS IN CERTAIN
CIRCUMSTANCES. In the event that the Corporation fails to redeem (or set
aside funds required to redeem) all of the outstanding shares of Series A
Preferred Stock in a timely manner in accordance with the provisions of
Section 7 hereof (regardless of the reasons for such failure to redeem),
the holders of Series A Preferred Stock, as a class, shall be entitled to
elect a majority of the members of the Corporation's Board of Directors.
The remaining members of the Board of Directors shall be elected by the
holders of the Common Stock, voting as a separate class.
(i) REMOVAL. Removal of any director or directors
whom the holders of the Series A Preferred Stock are entitled to elect
shall require only a majority of the votes of holders of the then
outstanding shares of Series A Preferred Stock. Removal of any director or
directors whom the holders of the Common Stock are entitled to elect shall
require only a majority of the votes of holders of the then outstanding
shares of Common Stock.
(ii) VACANCIES. All vacancies of directors whom the
holders of Series A Preferred Stock or Common Stock are entitled to elect,
whether caused by removal, resignation, an increase in the authorized
number of directors, or otherwise, may be filled by a majority of votes of
holders of the then outstanding shares of Series A Preferred Stock or
Common Stock, as the case may be, or by a majority of the remaining
directors whom the Series A Preferred Stock or Common Stock, as the case
may be, are entitled to elect, though less than a quorum, and shall not be
filled by a majority of all of the remaining directors as a whole.
(iii) TERMINATION OF RIGHT TO ELECT MAJORITY OF BOARD.
The right of the holders of the Series A Preferred Stock to elect a
majority of the members of the Corporation's Board of Directors (and the
related rights to remove directors and fill vacancies) shall terminate at
such time as (i) the Corporation has completed the redemption of the shares
of Series A Preferred Stock in accordance with the provisions of Section 7
hereof, or (ii) no shares of Series A Preferred Stock remain outstanding.
5. CONVERSION RIGHTS. The holders of the Series A Preferred Stock
shall have the following conversion rights:
(a) GENERAL. Subject to and in compliance with the
provisions of this Section 5, any shares of the Series A Preferred Stock
may, at the option of the holder, be converted at any time or from time to
time into fully-paid and nonassessable shares
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(calculated as to each conversion to the largest whole share) of Common
Stock. The number of shares of Common Stock to which a holder of Series A
Preferred Stock shall be entitled upon conversion, subject to the payment
of cash in lieu of fractional shares as provided in Section 5(e), shall be
the product obtained by multiplying the applicable Conversion Rate
(determined as provided in Section 5(b)) by the number of shares of Series
A Preferred Stock being converted.
(b) CONVERSION RATE. The conversion rate per share of Series
A Preferred Stock in effect at any time (the "Conversion Rate") shall be
the quotient obtained by dividing Two Dollars and 00 Cents ($2.00) by the
conversion price, calculated as provided in Section 5.(c) (the "Conversion
Price").
(c) CONVERSION PRICE. The Conversion Price shall be
initially Two Dollars and 00 Cents ($2.00), subject to adjustment as
provided in this Section 5(c) and customary adjustment from time to time as
provided in Section 5(f). In addition to any adjustment to the Conversion
Price pursuant to Section 5(f) hereof, the Conversion Price shall
immediately be adjusted as described below upon the Corporation's receipt
of audited financial statements of the Corporation for the fiscal year
ended June 30, 1996. In the event that the Corporation's audited financial
statements for the fiscal year ended June 30, 1996 report net sales of less
than $6,800,000, the Conversion Price shall be adjusted to equal (i)
.7352941 multiplied by (ii) the audited net sales per share of the
Corporation for fiscal year 1996 calculated based on 2,500,000 shares of
Common Stock outstanding on a fully-diluted basis. In the event that the
Corporation's audited financial statements for the fiscal year ended June
30, 1996 report net sales of at least $6,800,000, there shall be no
adjustment to the Conversion Price pursuant to this Section 5(c).
(d) MECHANICS OF CONVERSION. Each holder of Series A
Preferred Stock, who desires to convert the same into shares of Common
Stock, subject to the provisions of this Section 5(d), shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Common Stock, and shall give
written notice to the Corporation at its principal office that such holder
elects to convert the same and shall state therein the number of shares of
Series A Preferred Stock being converted. Thereupon the Corporation shall
promptly issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder
is entitled and shall promptly pay in cash all declared but unpaid
dividends on the shares of Series A Preferred Stock being converted or, if
the Corporation is legally or financially unable to pay such dividends in
cash, pay in Common Stock (valued at the Common Stock's fair market value
at the time of surrender as determined in good faith by the Board) all
declared but unpaid dividends on the shares being converted. Such
conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the certificate representing
the shares to be converted, and the person entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such shares of Common Stock on such
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date (the "Conversion Date"). The Series A Preferred Stock may be
converted in any whole number multiple of one (1) share.
(e) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares
of Common Stock or scrip representing fractional shares shall be issued
upon the conversion of shares of Series A Preferred Stock. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of the Series A Preferred Stock, the Corporation shall pay to
the holder of the shares of Series A Preferred Stock which were converted a
cash adjustment in respect and in lieu of such fractional shares in an
amount equal to the same fraction of the fair market value per share of the
Common Stock (as determined in good faith by the Board of Directors) at the
close of business on the Conversion Date. The determination as to whether
or not any fractional shares are issuable shall be based upon the total
number of shares of Series A Preferred Stock being converted at any one
time by any holder thereof, not upon each share of Series A Preferred Stock
being converted.
(f) ADJUSTMENTS IN CERTAIN CUSTOMARY EVENTS.
(i) DIVIDENDS. In the event the Corporation shall
make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable
in securities of the Corporation other than shares of Common Stock or in
assets (excluding cash dividends or distributions), then and in each such
event provision shall be made so that the holders of the Series A Preferred
Stock shall receive upon conversion thereof in addition to the number of
shares of Common Stock receivable thereupon, the number of securities or
such other assets of the Corporation which they would have received had
their Series A Preferred Stock been converted into Common Stock on the date
of such event and had they thereafter, during the period from the date of
such event to and including the Conversion Date (as that term is defined in
Section 5(d)), retained such securities or such other assets receivable by
them as aforesaid during such period, giving application to all adjustments
called for during such period under this Section 5 with respect to the
rights of the holders of the Series A Preferred Stock.
(ii) RECAPITALIZATION OR RECLASSIFICATION. If the
Common Stock of the Corporation shall be changed into the same or different
number of shares of any class or classes of stock of the Corporation,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for
elsewhere in the Certificate of Incorporation or these resolutions, or a
reorganization, merger, consolidation or sale of assets provided for
elsewhere in the Certificate of Incorporation or these resolutions), then
and in each such event the holder of shares of Series A Preferred Stock
shall have the right thereafter to convert such shares into the kind and
amount of shares of stock and other securities and property receivable upon
such reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such shares of Series A
Preferred Stock would have been converted (taking into account all accrued
and unpaid
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dividends and interest with respect to such Series A Preferred Stock)
immediately prior to such reorganization, reclassification or change, all
subject to further adjustment as provided herein.
(iii) MERGER OR SALE OF ASSETS. If at any time or from
time to time there shall be a merger or consolidation of the Corporation
with or into another corporation (other than a merger which does not result
in any reclassification, conversion, exchange or cancellation of
outstanding shares or Common Stock of the Corporation), or the sale of all
or substantially all of the Corporation's properties and assets to any
other person followed by a liquidation of the Corporation, then, as a part
of such transaction, provision shall be made so that each holder of a share
of Series A Preferred Stock then outstanding shall have the right
thereafter to convert such share only into the kind and amount of
securities, cash and other property of the Corporation, or of the successor
corporation resulting from such merger or consolidation, receivable upon
such consolidation, merger, sale or transfer by a holder of the number of
shares of Common Stock of the Corporation into which such share of Series A
Preferred Stock might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common
Stock of the Corporation is not an entity with which the Corporation
consolidated or into which the Corporation merged or which merged into the
Corporation or to which such sale or transfer was made, as the case may be
(a "constituent entity"), or an affiliate of a constituent entity. If
necessary in any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5 with respect to the rights
of the holders of the Series A Preferred Stock after such transaction to
the end that the provisions of this Section 5 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that
event in a manner corresponding as nearly as may be practicable in relation
to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares. The above provisions shall
similarly apply to successive consolidations, mergers, sales or transfers.
(iv) SALE OF SHARES BELOW CONVERSION PRICE.
(A) GENERAL. If the Corporation issues or
sells, or is deemed by the express provisions of Section 5(d) to have
issued or sold, Additional Shares of Common Stock (as hereinafter defined),
other than as provided elsewhere in Section 5(f) or upon a subdivision or
combination of shares of Common Stock as provided in Section 5(f)(ii), for
an Effective Price (as hereinafter defined) less than the greater of the
then existing Conversion Price for the Series A Preferred Stock or the
Market Price, if any, as defined in Section 5(f)(iv)(E) below, then and in
each such case the then existing Conversion Price for the Series A
Preferred Stock shall be reduced, as of the opening of business on the date
of such issue or sale by the Corporation, to the Effective Price for each
such Additional Share of Common Stock so issued.
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(B) AMOUNT AND KIND OF CONSIDERATION. For the
purpose of making any adjustment required under this Section 5(f)(iv), the
consideration received by the Corporation for any issue or sale of
securities shall (A) to the extent it consists of cash be computed at the
net amount of cash received by the Corporation after the deduction of any
expenses payable by the Corporation and any underwriting or similar
commissions, compensation, or concessions paid or allowed by the
Corporation in connection with such issue or sale, (B) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board, and (C) if Additional
Shares of Common Stock, Convertible Securities (as hereinafter defined) or
rights or options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Corporation for a consideration which
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board to be
allocable to such Additional Shares of Common Stock, Convertible Securities
or rights or options.
(C) CONVERTIBLE SECURITIES. For the purpose of
the adjustment required under this Section 5(f)(iv), if the Corporation
issues or sells any rights or options for the purchase of, or stock or
other securities convertible into, Additional Shares of Common Stock (such
convertible stock or securities being hereinafter referred to as
"Convertible Securities") and if the Effective Price of such Additional
Shares of Common Stock is less than the Conversion Price then in effect for
the Series A Preferred Stock, then in each case the Corporation shall be
deemed to have issued at the time of the issuance of such rights or options
or Convertible Securities the maximum number of Additional Shares of Common
Stock issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, received by the Corporation for the
issuance of such rights or options or Convertible Securities, plus, in the
case of such rights or options, the minimum amounts of consideration, if
any, payable to the Corporation upon the exercise of such rights or
options, plus, in the case of Convertible Securities, the minimum amounts
of consideration, if any, payable to the Corporation (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof. No further adjustment of the
Conversion Price for the Series A Preferred Stock shall be made as a result
of the actual issuance of Additional Shares of Common Stock on the exercise
of any such rights or options or the conversion of any such Convertible
Securities. If any such rights or options or the conversion privilege
represented by any such Convertible Securities shall expire or otherwise
terminate without having been exercised, the Conversion Price for the
Series A Preferred Stock adjusted upon the issuance of such rights, options
or Convertible Securities shall be readjusted to the Conversion Price for
the Series A Preferred Stock which would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or rights
of conversion of such Convertible Securities, and such
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Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Corporation upon such exercise, plus
the consideration, if any, actually received by the Corporation for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities
actually converted, plus the consideration if any, actually received by the
Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion of such
Convertible Securities.
(D) [Intentionally omitted]
(E) CERTAIN DEFINITIONS. "Additional Shares of
Common Stock" shall mean all shares of Common Stock issued by the
Corporation after the initial issuance date of the Series A Preferred
Stock, whether or not subsequently reacquired or retired by the
Corporation, other than (A) shares of Common Stock issued to employees or
directors of or consultants and advisers to the Corporation or any
Subsidiary pursuant to any stock purchase or stock option plans or other
arrangements approved by the Board so long as the aggregate number of
shares issued after the issuance date of the Series A Preferred Stock does
not exceed two hundred fifty thousand (250,000) shares (which amount may be
increased annually, commencing July 1, 1997, by an amount equal to one
percent (1%) of the number of outstanding shares of Common Stock (but in no
event shall the total number of shares subject to such plan exceed 15% of
the outstanding shares of Common Stock); provided, however, if at any time
or from time to time after the issuance date of the Series A Preferred
Stock the Corporation effects a subdivision or combination of the
outstanding Common Stock or makes a dividend or other distribution payable
in additional shares of Common Stock, then the aggregate number of shares
specifically excluded from the definition of Additional Shares of Common
Stock shall be increased or decreased appropriately to reflect such
subdivision, combination, dividend, or other distribution. "The "Effective
Price" of Additional Shares of Common Stock issued at any time after the
initial issue date of the Series A Preferred Stock shall mean the quotient
determined by dividing the total of (a) the number of shares of Common
Stock outstanding prior to the issuance or deemed issuance or sale, plus
the number of Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold, by the Corporation under Section 5(f)(iv),
into (b) the aggregate of Five Million Dollars ($5,000,000) plus the
consideration received, or deemed to have been received by the Corporation
for such issue and all previous issues under Section 5(f)(iv)(B), for such
and all previous Additional Shares of Common Stock following the original
issue date of the Series A Preferred Stock. The "Market Price" of the
Common Stock shall mean either the reported bid price or closing sale price
on a principal trading market of the Common Stock (less 15% for issuances
of Common Stock with restrictions on free transferability) or, if there is
no such market, the fair market value of the Common Stock as determined by
the Board of Directors in their good faith judgment as of a particular
date.
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(v) CERTIFICATE AS TO ADJUSTMENTS. In each case of an
adjustment or readjustment of the Conversion Price or Conversion Rate, the
Corporation will furnish each holder of Series A Preferred Stock with a
certificate, executed by the President and chief financial officer of the
Corporation showing such adjustment or readjustment, and stating in detail
the facts upon which such adjustment or readjustment is based. The
Corporation in any such instance may, and in every instance upon the
request of the holders of a majority of the Series A Preferred Stock the
Corporation will, cause its independent public accountants to confirm the
accuracy of such adjustment or readjustment. Any adjustment so confirmed
shall be for all purposes hereof conclusively be deemed to be an
appropriate adjustment.
(g) TRANSFER TAXES. The Corporation will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock on conversions of shares of
Series A Preferred Stock pursuant hereto; provided, however, that the
Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issue or delivery of shares of
Common Stock in a name other than that of the holder of the shares of
Series A Preferred Stock to be converted and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery
has paid to the Corporation the amount of any such tax or has established,
to the satisfaction of the Corporation, that such tax has been paid.
(h) SHARES TO BE VALIDLY ISSUED, ETC.. The Corporation
covenants that all shares of Common Stock which may be issued upon
conversions of shares of Series A Preferred Stock will upon issue be duly
and validly issued, fully paid and non-assessable, free of all liens and
charges and not subject to any preemptive rights.
(i) PARTIAL CONVERSION. In the event some but not all of the
shares of Series A Preferred Stock represented by a certificate or
certificates surrendered by a holder are converted, the Corporation shall
execute and deliver to or on the order of the holder, at the expense of the
Corporation, a new certificate representing the number of shares of Series
A Preferred Stock which were not converted.
(j) RESERVATION OF COMMON STOCK. The Corporation shall at
all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
of the shares of the Series A Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock, and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding
shares of the Series A Preferred Stock, the Corporation shall take such
corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
6. AUTOMATIC CONVERSION.
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(a) PUBLIC OFFERING. Each share of Series A Preferred Stock
shall automatically be converted into shares of Common Stock based on the
then effective Conversion Rate for the Series A Preferred Stock immediately
upon the closing of a public offering of the Corporation's Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended, which results in (i) gross proceeds to the Corporation of
at least $5,000,000 and (ii) the Common Stock being listed or quoted on the
New York Stock Exchange, the American Stock Exchange, the Nasdaq National
Market or the Nasdaq Small Cap Market (a "Public Offering"); provided,
however, that such conversion shall be conditioned upon payment, or
declaration and setting aside of a sum sufficient for payment, by the
Corporation of all declared but unpaid dividends, if any, on the
outstanding Series A Preferred Stock payable in cash or Common Stock
(valued at the Common Stock's fair market value), or both.
(b) MECHANICS OF CONVERSION. Upon the completion of an
Public Offering, the outstanding shares of Series A Preferred Stock shall
be converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares
are surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
the certificates evidencing such shares of Series A Preferred Stock are
either delivered to the Corporation or its transfer agent as provided
below, or the holder notifies the Corporation or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection with the certificates. Upon the
occurrence of such automatic conversion of Series A Preferred Stock, the
holders of Series A Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or any transfer
agent for the Common Stock. Thereupon, there shall be issued and delivered
to such holder promptly at such office and in its name as shown on such
surrendered certificate or certificates, a certificate or certificates for
the number of whole shares of Common Stock into which the shares
surrendered were convertible on the date on which such automatic conversion
occurred, and the Corporation shall promptly pay the holder in cash for any
fractional shares (calculated at the Common Stock's Market Price, as
defined in Section 5(f)(iv)(E) above, as of the date of such conversion).
Upon conversion of any holder after the record date but before the payment
date for any dividend, the Corporation shall pay the holder on account of
such dividend payment on the payment date notwithstanding prior conversion.
7. REDEMPTION.
(a) STOCKHOLDER RIGHT OF REDEMPTION. In the event that the
Corporation has not completed a Public Offering (as defined in Section 6(a)
hereof) prior to thirty (30) months following the date of the first
issuance of shares of Series A Preferred Stock (the "Series A Issue Date"),
holders of a majority of the then
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outstanding shares of Series A Preferred Stock, voting separately as a
single class, shall have the right to cause the Corporation to redeem all
of the then outstanding shares of Series A Preferred Stock. The redemption
price per share (the "Series A Redemption Price") shall equal the product
of Two Dollars and 00 Cents ($2.00) (subject to adjustment if the Series A
Preferred Stock of the Corporation shall be changed into a different number
of shares, whether by recapitalization, reclassification or otherwise, and
then and in each such event the holder of shares of Series A Preferred
Stock shall have the right thereafter to receive upon redemption such same
amount aggregately receivable immediately prior to reorganization,
reclassification or other change of the number of shares of Series A
Preferred Stock apportioned among the number of shares into which such
shares of Series A Preferred Stock are changed) multiplied by the following
percentage if redeemed during the respective calendar year indicated below:
1998 . . 121.0% 2003 . . 194.9%
1999 . . 133.1% 2004 . . 214.4%
2000 . . 146.4% 2005 . . 235.8%
2001 . . 161.1% 2006 . . 259.4%
2002 . . 177.2% 2007 . . 285.3%
and thereafter the applicable percentage shall increase in the same manner
by multiplying the prior percentage by one hundred ten percent (110%) for
each additional year, plus, in each case, an amount equal to all dividends
declared, due and payable prior to the date fixed for such redemption
(herein referred to as the "Redemption Date").
(b) PROCEDURES APPLICABLE TO REDEMPTIONS AT OPTION OF ANY
HOLDERS. If holders of a majority of the Series A Preferred Stock intend
to exercise their right to cause the Corporation to redeem the shares of
Series A Preferred Stock, in whole but not in part, such holders shall
provide at least thirty (30) and not more than sixty (60) days prior
written notice (a "Mandatory Redemption Notice") to the Corporation, which
notice shall be signed by the holders of at least a majority of the
outstanding Series A Preferred Stock and shall state such holders'
intention to exercise the redemption right set forth herein. Any Mandatory
Redemption Notice of holders of a majority of the outstanding shares of
Series A Preferred Stock shall be sent by Federal Express (or similar
overnight delivery service), or first-class certified mail, return-receipt
requested, postage prepaid, to the Corporation addressed to its president
at its principal executive office as of such time.
(c) NOTICE OF REDEMPTION. Within fifteen (15) days of the
Corporation's receipt of the Mandatory Redemption Notice, the Corporation
shall mail each record holder of outstanding shares of Series A Preferred
Stock (regardless of whether such holder executed the Mandatory Redemption
Notice) a notice (the "Redemption Notice") which shall specify (i) the
Redemption Date, (ii) the Series A Redemption Price, (iii) the place for
payment and for delivering the stock certificates) and transfer
instrument(s) in order to receive the Series A Redemption Price, and (iv)
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the then effective Conversion Price and that the right of holders of shares
of Series A Preferred Stock being redeemed to exercise their conversion
right shall terminate as to such shares at the close of business on the
fifth business day preceding the Redemption Date (provided that no default
by the Corporation in the payment of the applicable Series A Redemption
Price (including any accrued and unpaid dividends) shall have occurred and
be continuing). Any notice mailed by certified mail, postage pre-paid,
return receipt requested shall be conclusively deemed to have been duly
given regardless of whether such notice is in fact received.
(d) PAYMENT OF REDEMPTION PRICE.
(i) METHODS OF PAYMENT. The Redemption Price for the
shares being redeemed may be payable by the Corporation's check payable to
the order of the person whose name appears on the certificate or
certificates therefor as the owner thereof, or to such payee as such owner
may designate in writing to the Corporation not later than the fifth
business day prior to the Redemption Date. Payment by check shall be sent
on the Redemption Date by first class, certified mail, postage prepaid by
the Corporation to such owner or payee, as the case may be. The
Corporation also may deposit the amount of the Redemption Price with a bank
or trust company designated in the Corporation's notice of redemption,
irrevocably in trust for the benefit of the holders.
(ii) CONDITION TO PAYMENT. The holders of any shares
of Series A Preferred Stock redeemed upon any exercise of the holders'
redemption right shall not be entitled to receive payment of the Series A
Redemption Price for such shares until such holder shall cause to be
delivered to the Corporation at its then principal executive office or any
other place specified in a Redemption Notice given by the Corporation (i)
the certificate(s) representing such shares of Series A Preferred Stock (or
an affidavit of lost certificate and such other documentation or assurances
as are required by applicable law, in a form and substance reasonably
acceptable to the Corporation) and (ii) transfer instrument(s) satisfactory
to the Corporation and sufficient to transfer such shares of Series A
Preferred Stock to the Corporation, in the manner and at the place
designated by the Corporation, by no later than the fifth (5th) business
day preceding the Redemption Date. In the event fewer than all of the
shares represented by such certificate are redeemed, a new certificate
representing the unredeemed shares shall be issued to the holder of such
shares.
(iii) REDEMPTION FROM CERTAIN FUNDS. Notwithstanding
any provisions herein to the contrary, the Corporation shall not pay or set
apart any amount for the redemption of any Series A Preferred Stock, or pay
any amount for the repurchase of any Series A Preferred Stock, in excess of
Available Funds. If the Available Funds shall be insufficient to permit
the redemption of all of the shares of Series A Preferred Stock in the full
amounts (including all dividends accrued and unpaid to the Redemption Date)
to which they shall be entitled by reason of redemption on the Redemption
Date, then the Corporation shall effect a partial redemption (pro
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rata among the holders of outstanding Series A Preferred Stock in
proportion to each such holder's number of shares).
(e) EFFECT OF REDEMPTION NOTICE. At the close of business on
the Redemption Date for any share of Series A Preferred Stock, such share
shall (provided that the Series A Redemption Price (including any accrued
and unpaid dividends to the Redemption Date) of such shares has been paid
or properly provided for) be deemed to cease to be outstanding and all
rights of any person other than the Corporation in such share shall be
extinguished on the Redemption Date for such share (including all rights to
receive future dividends with respect to such share) except for the right
to receive the Series A Redemption Price (including any accrued and unpaid
dividends to the Redemption Date), without interest, for such share in
accordance with the provisions of this Section 7, subject to applicable
escheat laws. In the event of a default by the Corporation in payment of
the Series A Redemption Price, or the Corporation's failure to give a
required Redemption Notice, interest shall accrue at the rate of ten
percent (10%) per annum, compounded annually from the Redemption Date on
the Series A Redemption Price for any shares of Series A Preferred Stock
outstanding after the Redemption Date.
(f) EFFECT OF PRIOR CONVERSION. In the event that any shares
of Series A Preferred Stock shall be converted into Common Stock prior to
the Redemption Date pursuant to Section 5, then (i) the Corporation shall
not have the right to redeem such shares and (ii) any funds which shall
have been deposited for the payment of the Series A Redemption Price for
such shares shall be returned to the Corporation immediately after such
conversion (subject to declared dividends payable to holders of shares of
Series A Preferred Stock on the record date for such dividends being so
payable, to the extent set forth in Section 5 hereof, if such shares are
converted subsequent to such dividend record date and prior to the
Redemption Date).
8. NO REISSUANCE OF THE SERIES A PREFERRED STOCK. No share or
shares of the Series A Preferred Stock acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be reissued.
The Corporation may from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of the
Series A Preferred Stock accordingly.
9. NOTICES OF RECORD DATES. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or to receive any other right, or any
capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, or any transfer of all or substantially
all of the assets of the Corporation to any other corporation, or any other
entity or person, or any voluntary or involuntary dissolution, liquidation
or winding up of the Corporation, then and in each such event the
Corporation shall mail or cause to be mailed to each holder of Series A
Preferred Stock a notice specifying (i) the date on
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which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or
right, (ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up is expected to become effective, (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up. Such notice
shall be mailed at least 30 days prior to the date specified in such notice
on which such action is to be taken.
10. COMMON STOCK. All rights accruing to the outstanding shares of
the Corporation not expressly provided for to the contrary herein shalt be
vested in the Common Stock.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Designation, Preferences and Rights of Series A Preferred Stock to be duly
executed by its President and Chief Executive Officer and attested to by its
Secretary on this 16th day of July, 1996.
JENKON INTERNATIONAL, INC.
By: /s/ David A. Edwards
-------------------------------
David A. Edwards, President and
Chief Executive Officer
ATTEST:
/s/ Lowell T. Holden, Treasurer
- -------------------------------
Lowell T. Holden, Treasurer
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JENKON INTERNATIONAL, INC.
and
THE BOSTON GROUP, L.P.
--------------------
DEALER MANAGER'S WARRANT AGREEMENT
Dated as of July 1, 1996
--------------------
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<PAGE>
DEALER MANAGER'S WARRANT AGREEMENT
THIS DEALER MANAGER'S WARRANT AGREEMENT (the "Agreement"), dated as of July
25, 1996, is made and entered into by and between JENKON INTERNATIONAL, INC., a
Delaware corporation (the "Company"), and THE BOSTON GROUP, L.P. ("the Dealer
Manager").
Pursuant to the terms of that certain Amended and Restated Dealer Manager
Agreement, dated as of July 25, 1996, by and among the Company, the Dealer
Manager, Dan Jensen and David Edwards (the "Dealer Manager Agreement"), the
Company hereby agrees to issue and sell to the Dealer Manager, for $50 and other
good and valuable consideration, the receipt of which is hereby acknowledged, a
warrant, as hereinafter described (the "Warrant" and together with any warrants
subsequently issued hereunder, the "Warrants"), to purchase up to ten percent of
the total number of shares of Series A Preferred Stock, $.001 par value
("Preferred Stock"), sold by the Company in connection with the offering (the
"Offering") contemplated by the Dealer Manager Agreement and that certain
Confidential Offering Memorandum, dated July 1, 1996 (together with any and all
supplements and/or amendments thereto, the "Memorandum"), as may be adjusted
from time to time as set forth herein. The shares of Preferred Stock
purchasable upon exercise of the Warrants, as may be adjusted from time to time
as set forth herein, are hereinafter referred to as the "Warrant Stock." The
Warrant shall be issued pursuant to this Agreement on the final closing date of
the Offering (the "Closing Date").
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants, the Warrant Stock and the respective rights and
obligations thereunder, the Company and the Dealer Manager, for value received,
hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 REGISTRATION. All Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 TRANSFER. The Warrants shall be transferable only on the
books of the Company maintained at its principal office, wherever its principal
office may then be located, upon delivery thereof duly endorsed by the
registered holder of a Warrant (a "Warrantholder") or by its duly authorized
attorney or representative and with the signatures properly guaranteed,
accompanied by proper evidence of succession, assignment or authority to
transfer. Upon any registration of transfer, the Company shall execute and
deliver a new certificate evidencing each such Warrant to each person entitled
thereto.
1.3 LIMITATIONS ON TRANSFER OF THE WARRANTS. Warrants shall not
be sold, transferred, assigned or hypothecated by the Dealer Manager for a
period of one year following the date of issuance other than (i) to one or more
officers or partners of any Warrantholder, and the officers or partners of any
such partner; (ii) to any other member of
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the National Association of Securities Dealers, Inc. which participated in the
Offering and the officers or partners of any such member; (iii) to successors to
a Warrantholder or the officers or partners of any such successor; (iv) to a
purchaser of all or substantially all of the assets of a Warrantholder; or
(v) by will, pursuant to the laws of descent or distribution or by operation of
law. The Warrants may be divided or combined, upon request to the Company by a
Warrantholder, into a certificate or certificates representing the right to
purchase the same aggregate number of shares of Warrant Stock. Unless the
context indicates otherwise, the term "Warrantholder" shall include the Dealer
Manager and any transferee or transferees of the Warrants pursuant to this
subsection 1.3 and as otherwise permitted by this Agreement, and the term
"Warrants" shall include any and all Warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.4 FORM OF WARRANTS. The text of the Warrants and of the form
of election to purchase Warrant Stock shall be substantially as set forth in
Exhibit A attached hereto. The aggregate number of shares of Preferred Stock
issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall
be executed on behalf of the Company by its Chief Executive Officer or its
President and attested to by its Treasurer, Chief Financial Officer or its
Secretary. A Warrant bearing the signature of an individual who was at any time
the proper officer of the Company shall bind the Company, notwithstanding that
such individual shall have ceased to hold such office prior to the delivery of
such Warrant or did not hold such office on the date of this Agreement or at any
time thereafter.
The Warrants shall be dated as of the date of signature
thereof by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
1.5 LEGEND ON WARRANTS AND WARRANT STOCK. Each certificate
evidencing a Warrant (or Warrant Stock issued upon exercise of a Warrant)
initially issued upon exercise of a Warrant shall bear the following legend,
unless, at the time of exercise, such Warrant Stock is subject to a currently
effective Registration Statement under the Securities Act of 1933, as amended
(the "Act"):
"THIS WARRANT AND THE SECURITIES PURCHASABLE HEREUNDER
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. SUCH WARRANTS AND SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, TRANSFERRED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO SUCH SECURITIES UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED."
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Any certificate issued at any time in exchange or substitution
for any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to an effective registration
statement under the Act, of the securities represented thereby) shall also bear
the above legend unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions.
SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of shares of Warrant Stock as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in writing delivered to the Company, and shall surrender,
properly endorsed, the certificate evidencing the Warrant to be so exchanged.
Thereupon, the Company shall execute and deliver to the person entitled thereto
a new Warrant certificate or certificates as so requested.
SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
6:30 a.m., Pacific Time, on July 1, 1997 and ending at 5:00 p.m., Pacific Time,
on June 30, 2001 (the "Termination Date"), to purchase from the Company up to
the number of fully paid and nonassessable shares of Warrant Stock to which the
Warrantholder may at the time be entitled to purchase pursuant to this
Agreement, upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrants to be exercised, together with the purchase
form on the reverse thereof duly completed and executed, and upon payment to the
Company of the Warrant Price (as defined in and determined in accordance with
the provisions of this Section 3 and Sections 7 and 8 hereof) for the number of
shares of Warrant Stock in respect of which such Warrants are then exercised,
but in no event for less than 100 shares of Warrant Stock (unless less than an
aggregate of 100 shares of Warrant Stock are then purchasable under all
outstanding Warrants held by such Warrantholder). This Warrant, when
exercisable, may be exercised from time to time in whole or in part.
(b) Payment of the Warrant Price shall be made in cash,
by certified or official bank check in Los Angeles Clearing House funds (next
day funds), or any combination thereof.
(c) In addition to the method of payment set forth in
Section 3(b) above and in lieu of any cash payment required thereunder, unless
otherwise prohibited by law, the Warrantholders shall have the right at any
time, when exercisable, and from time to time to exercise the Warrants in full
or in part (i) by receiving from the Company the number of shares of Warrant
Stock equal to the number of shares of Warrant Stock otherwise issuable upon
such exercise less the number of shares of Warrant Stock having an aggregate
value on the date of exercise equal to the Warrant Price multiplied by the
number of shares of Warrant Stock for which this Warrant is being exercised
and/or (ii) by delivering to the Company the
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number of shares of Preferred Stock having an aggregate value on the date of
exercise equal to the Warrant Price multiplied by the number of shares of
Warrant Stock for which this Warrant is being exercised. For purposes hereof,
the "value" of a share of Preferred Stock on a given date shall equal to the
Current Market Price on such date as defined in Section 9 of this Agreement.
(d) Upon surrender of the Warrants and payment of the
Warrant Price as aforesaid, the Company shall issue and cause to be delivered
with all reasonable dispatch to or upon the written order of the Warrantholder,
and (subject to any applicable restrictions on transfer) in such name or names
as the Warrantholder may designate, a certificate or certificates for the number
of full shares of Warrant Stock so purchased upon such exercise of the Warrant,
together with cash, as provided in Section 9 hereof, in respect of any
fractional shares otherwise issuable upon such surrender. Such certificate or
certificates, to the extent permitted by law, shall be deemed to have been
issued and any person so designated to be named therein shall be defined to have
become a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time in part and, in the event
that a Warrant is exercised in respect of less than all of the shares of Warrant
Stock specified therein at any time prior to the Termination Date, a new Warrant
evidencing the remaining shares of the Warrant Stock purchasable by such
Warrantholders hereunder shall be issued by the Company to such Warrantholders.
(e) In the event that the outstanding shares of Preferred
Stock are automatically converted into Common Stock pursuant to the terms of the
Certificate of Designation, Preferences and Rights of Series A Preferred Stock
then in effect, the Warrants shall automatically convert into Warrants to
purchase the number of shares of Common Stock that would have been issuable to
Warrantholder had the Warrants been exercised in full immediately prior to the
date of conversion of the Preferred Stock into Common Stock.
SECTION 4. VALIDITY; PAYMENT OF TAXES. All securities delivered upon
exercise of a Warrant shall be duly and validly issued and non-assessable. The
Company shall pay all documentary stamp taxes, if any, attributable to the
initial issuance of the Warrants and the shares of Warrant Stock issuable upon
the exercise of the Warrants; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the Warrant Stock.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence
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<PAGE>
reasonably satisfactory to the Company of such loss, theft or destruction of
such Warrant which may include an indemnity of lost certificate or such other
documentation as is required by applicable law.
SECTION 6. RESERVATION OF SHARES. The Company represents and warrants to
the Warrantholder that there has been reserved, and the Company shall at all
times keep reserved so long as the Warrants remain outstanding, out of its
authorized Preferred Stock, such number of shares of Preferred Stock as shall be
subject to purchase under the Warrants. Every transfer agent for the Preferred
Stock and other securities of the Company issuable upon the exercise of the
Warrants shall be irrevocably authorized and directed at all times to reserve
such number of authorized shares and other securities as shall be requisite for
such purpose. The Company shall keep a copy of this Agreement on file with
every transfer agent for the Preferred Stock and other securities of the Company
issuable upon the exercise of the Warrants. The Company shall supply every such
transfer agent with duly executed stock and other certificates, as appropriate,
for such purpose and shall provide or otherwise make available any cash which
may be payable in lieu of the issuance of fractional shares, as provided in
Section 9 hereof.
SECTION 7. WARRANT PRICE. The price per share at which shares of Warrant
Stock shall be purchasable upon the exercise of the Warrants shall be $2.10,
subject to adjustment pursuant to Section 8 hereof (as so adjusted from time to
time, the "Warrant Price").
SECTION 8. ADJUSTMENTS OF NUMBER OF SHARES OF WARRANT STOCK AND WARRANT
PRICE. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 ADJUSTMENTS. The number of shares of Warrant Stock
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend or make
a distribution on its Preferred Stock in shares of its capital stock or other
securities, (ii) subdivide its outstanding shares of Preferred Stock into a
greater number of shares, (iii) combine its outstanding Preferred Stock into a
smaller number of shares or (iv) issue, by reclassification of its Preferred
Stock, shares of its capital stock or other securities of the Company (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), the number of shares of Warrant
Stock purchasable upon exercise of a Warrant immediately prior thereto shall be
adjusted so that the Warrantholder shall be entitled to receive the kind and
number of shares of Warrant Stock, shares of its capital stock and other
securities of the Company which such holder would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 8.1(a) shall become effective immediately after
the effective date of such event.
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<PAGE>
(b) In case the Company shall issue rights, options,
warrants or convertible securities to holders of its Preferred Stock, without
any charge to such holders, containing the right to subscribe for or purchase
Preferred Stock, the number of shares of Warrant Stock thereafter purchasable
upon the exercise of each Warrant shall be determined by multiplying the number
of shares of Warrant Stock theretofore purchasable upon exercise of a Warrant by
a fraction, of which the numerator shall be the number of shares of Preferred
Stock outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of additional shares of
Preferred Stock offered for subscription or purchase, and of which the
denominator shall be the number of shares of Preferred Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities. Such adjustment shall be made whenever such rights,
options, warrants or convertible securities are issued, and shall become
effective immediately upon issuance of such rights, options, warrants or
convertible securities. In the event of such adjustment, corresponding
adjustments shall be made to the Warrant Price.
(c) In case the Company shall distribute to holders of
its Preferred Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions out of current earnings made in the ordinary course
of business consistent with past practices), then in each case the number of
shares of Warrant Stock thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of shares of Warrant Stock
theretofore purchasable upon exercise of such Warrant by a fraction, of which
the numerator shall be the then Current Market Price (as defined below) on the
date of such distribution, and of which the denominator shall be such Current
Market Price on such date minus the then fair value (determined as provided in
subsection 8(f) below) of the portion of the assets or evidences of indebtedness
so distributed applicable to one share of Preferred Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
on the date of distribution.
(d) No adjustment in the number of shares of Warrant
Stock purchasable pursuant to subsections 8.1(b) or (c) hereof shall be required
unless such adjustment would require an increase or decrease of at least one
percent in the number of shares of Warrant Stock then purchasable upon the
exercise of the Warrants or, if the Warrants are not then exercisable, the
number of shares of Warrant Stock purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants would become exercisable;
provided, however, that any adjustments which by reason of this subsection
8.1(d) are not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(e) Whenever the number of shares of Warrant Stock
purchasable upon the exercise of a Warrant is adjusted as herein provided, the
Warrant Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of shares of Warrant Stock
purchasable upon the exercise of such Warrant immediately prior to such
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adjustment, and of which the denominator shall be the number of shares of
Warrant Stock purchasable immediately thereafter.
(f) To the extent not covered by subsections 8.1(b) or
(c) hereof, in case the Company shall sell or issue Preferred Stock or rights,
options, warrants or convertible securities containing the right to subscribe
for, purchase or exchange into shares of Preferred Stock at a price per share
(determined, in the case of such rights, options, warrants or convertible
securities, by dividing (i) the total amount received or receivable by the
Company in consideration of the sale or issuance of such rights, options,
warrants or convertible securities, plus the total consideration payable to the
Company upon exercise, conversion or exchange thereof, by (ii) the total number
of shares covered by such rights, options, warrants or convertible securities)
lower than the then Current Market Price or the Warrant Price in effect
immediately prior to such sale or issuance, then the Warrant Price shall be
reduced to a price (calculated to the nearest cent) determined by dividing (I)
an amount equal to the sum of (A) the number of shares of Preferred Stock
outstanding immediately prior to such sale or issuance multiplied by the then
existing Warrant Price, plus (B) the consideration received or receivable by the
Company upon such sale or issuance, by (II) the total number of shares of
Preferred Stock outstanding immediately after such sale or issuance. The number
of shares of Warrant Stock purchasable upon the exercise of a Warrant shall
thereafter be that number determined by multiplying the number of shares of
Warrant Stock purchasable upon exercise immediately prior to such adjustment by
a fraction, of which the numerator shall be the Warrant Price in effect
immediately prior to such adjustment and the denominator shall be the Warrant
Price as so adjusted. For the purposes of such adjustments, the Preferred Stock
which the holders of any such rights, options, warrants or convertible
securities shall be entitled to subscribe for, purchase or exchange into shall
be deemed issued and outstanding as of the date of such sale or issuance and the
consideration received by the Company therefor shall be deemed to be the
consideration received by the Company for such rights, options, warrants or
convertible securities, plus the consideration or premiums stated in such
rights, options, warrants or convertible securities to be payable for the
Preferred Stock covered thereby. In case the Company shall sell or issue
Preferred Stock or rights, options, warrants or convertible securities
containing the right to subscribe for, purchase or exchange into Preferred Stock
for a consideration consisting, in whole or in part, of property other than cash
or its equivalent, then, in determining the "price per share" of Preferred Stock
and the "consideration received by the Company" for purposes of the first
sentence of this subsection 8.1(f), the Board of Directors shall determine the
fair value of said property, and such determination, if based upon the Board of
Directors, good faith business judgment, shall be binding upon the
Warrantholders. In determining the "price per share" of Preferred Stock, any
underwriting discounts or commissions paid to brokers, dealers or other selling
agents shall not be deducted from the price received by the Company for sales of
securities registered under the Act or issued in a private placement. There
shall be no adjustment of the Warrant Price pursuant to this subsection 8.1(f)
if the amount of such adjustment would be less than $.01 per share of Preferred
Stock; provided, however, that any adjustment which by reason of this provision
is not required to be made immediately shall be carried forward and taken into
account in any subsequent adjustment.
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(g) For the purpose of this Section 8, the term
"Preferred Stock" shall mean (i) the class of stock designated as the Preferred
Stock of the Company at the date of this Agreement or (ii) any other class of
stock (other than Common Stock) resulting from successive changes or
reclassifications of such Preferred Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made pursuant to this
Section 8, a Warrantholder shall become entitled to purchase any securities of
the Company other than Preferred Stock, (i) if the Warrantholder's right to
purchase is on any other basis than that available to all holders of the
Company's Preferred Stock, the Company shall obtain an opinion of a reputable
investment banking firm valuing such other securities and (ii) thereafter the
number of such other securities so purchasable upon exercise of a Warrant and
the Warrant Price of such securities shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in this Section 8.
(h) Upon the expiration of any rights, options, warrants
or conversion privileges, if such shall not have been exercised, the number of
shares of Warrant Stock purchasable upon exercise of a Warrant and the Warrant
Price, to the extent a Warrant has not then been exercised, shall, upon such
expiration, be readjusted and shall thereafter be such number and such price as
they would have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) on the basis of (A) the fact
that the only shares of Preferred Stock issued in respect of such rights,
options, warrants or conversion privileges were the shares of Preferred Stock,
if any, actually issued or sold upon the exercise of such rights, options,
warrants or conversion privileges, and (B) the fact that such shares of
Preferred Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the consideration, if any,
actually received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion privileges whether or not exercised;
provided, however, that no such readjustment shall have the effect of decreasing
the numbers of shares of Warrant Stock purchasable upon exercise of a Warrant or
increasing the Warrant Price by an amount in excess of the amount of the
adjustment made in respect of the issuance, sale or grant of such rights,
options, warrants or conversion privileges.
(i) Whenever the number of shares of Warrant Stock
purchasable upon the exercise of a Warrant or the Warrant Price is adjusted
pursuant to this Section 8, the Company shall cause to be promptly mailed to
each Warrantholder by first class mail, postage prepaid, notice of such
adjustment or adjustments and a certificate of the chief financial officer of
the Company setting forth the number of shares of Preferred Stock, capital stock
and other securities purchasable upon the exercise of such Warrantholder's
Warrant and the applicable Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as specifically
provided in subsection 8.1, no adjustment in respect of any cash dividends or
distributions on the
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Company's Preferred Stock out of current earnings made in the ordinary course of
business consistent with past practices shall be made during the term of the
Warrants or upon the exercise of the Warrants.
8.3 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or other entity or in case of any sale,
lease, conveyance or other transfer to another corporation, person or other
entity of the property, assets or business of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, person or other entity, as the case may be, shall execute with the
Warrantholder, and the agreements governing such consolidation, merger, sale,
lease, conveyance or other transfer shall require such execution of, an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Warrant Price in effect immediately prior to such event, upon exercise of
the Warrants, to receive the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, lease, conveyance or other
transfer had the Warrants (and each underlying security) been exercised
immediately prior to such action. The Company shall promptly mail to each
Warrantholder by first class mail, postage prepaid, notice of the execution of
any such agreement. In the event of a merger described in Section 368(a)(2)(E)
of the Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase shares of Warrant Stock under the Warrants
shall terminate on the date of such merger and thereupon the Warrants shall
become null and void, but only if the controlling corporation shall agree to
substitute for the Warrants its warrant which entitles the holder thereof to
purchase upon its exercise the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this subsection 8.3 shall provide for adjustments, which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
Section 8 hereof, and shall provide for terms and provisions at least as
favorable to the Warrantholder as those contained in this Agreement. The
provisions of this subsection 8.3 shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances or other transfers.
8.4 PAR VALUE OF SHARES OF PREFERRED STOCK. Before taking any
action which would cause an adjustment effectively reducing the portion of the
Warrant Price allocable to each share of Warrant Stock below the then par value
per share, if any, of the Warrant Stock issuable upon exercise of the Warrants,
the Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Stock upon exercise of the Warrants.
8.5 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement, provided that such
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expression shall in no way affect the number of shares of Warrant Stock actually
purchasable upon the exercise of such Warrants.
SECTION 9. FRACTIONAL SHARES; CURRENT MARKET PRICE. The Company shall not
be required to issue fractional shares of Preferred Stock on the exercise of a
Warrant. If any fraction of a share of Preferred Stock would, except for the
provisions of this Section 9, be issuable upon the exercise of a Warrant (or
specified portion thereof), the Company shall in lieu thereof pay an amount in
cash equal to the then Current Market Price multiplied by such fraction. For
purposes of this Agreement, the term "Current Market Price" shall mean (i) if
the Preferred Stock is traded on the Nasdaq National Market ("NNM") or on a
national securities exchange, the average per share closing price of the
Preferred Stock for the five (5) consecutive trading days preceding the date of
exercise, as reported by the NNM or on the principal stock exchange on which it
is listed, as the case may be, on the date of exercise of the Warrant or, with
respect to any adjustment pursuant to Section 8.1 hereof, on the date
immediately preceding the announcement of the event causing such adjustment or
(ii) if the Preferred Stock is traded in the over-the-counter market and not in
the NNM or on any national securities exchange, the average of the per share
closing bid prices of the Preferred Stock on the thirty (30) consecutive trading
days immediately preceding the date in question, as reported by The Nasdaq Small
Cap Market (or an equivalent generally accepted reporting service if quotations
are not reported on The Nasdaq Small Cap Market). The closing price referred to
in clause (i) above shall be the last reported sale price or, in the case no
such reported sale takes place on such day, the average of the reported closing
bid and asked prices, in either case in the NNM or on the principal stock
exchange on which the Preferred Stock is then listed. For purposes of clause
(ii) above, if trading in the Preferred Stock is not reported by The Nasdaq
Small Cap Market, the bid price referred to in said clause shall be the lowest
bid price as reported in the Nasdaq Electronic Bulletin Board or, if not
reported thereon, as reported in the "pink sheets" published by National
Quotation Bureau, Incorporated, and, if such Preferred Stock is not so reported,
shall be the price of a share of Preferred Stock determined by the Company's
Board of Directors in good faith (which shall, in no event, be less than the
"Current Market Price" (calculated as set forth above) of the securities into
which the shares of Preferred Stock could be converted). In the event that the
Preferred Stock is automatically converted into Common Stock, the Current Market
Price of the Common Stock shall be calculated in the same manner as described
above.
SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER. Except as
expressly provided herein, nothing contained in this Agreement or in the
Warrants shall be construed as conferring upon the Warrantholder or its
transferees any rights as a stockholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter. If, however, at any time prior to the expiration of the
Warrants and prior to their exercise, any one or more of the following events
shall occur:
(a) any action which would require an adjustment pursuant
to Section 8 hereof;
-10-
<PAGE>
(b) an issuance by the Company of rights, options,
warrants or convertible securities to all or substantially all holders of its
Preferred Stock, without any charge to such holders, containing the right to
subscribe for or purchase Preferred Stock; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger or sale of its
property, assets and business as an entirety or substantially as an entirety)
shall be proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 12 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution or other rights or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation or winding up; provided that
the failure to give such notice shall not affect the validity of such action.
Such notice shall specify such record date or the date of closing the transfer
books, as the case may be.
SECTION 11. REGISTRATION RIGHTS; INDEMNIFICATION. The Warrantholders
shall have (i) piggy back registration rights identical to those granted to the
purchasers of Preferred Stock in the Offering, and (ii) one demand registration
right exercisable by holders of a majority of the shares of Preferred Stock
issued or issuable upon exercise of the Warrants which are identical to the
demand registration rights granted to purchasers of shares of Preferred Stock in
the Offering, except that the demand registration rights of the holders of the
Warrants (or underlying shares of Preferred Stock) shall be exercisable
separately from the demand registration rights of purchasers of shares in the
Offering.
SECTION 12. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed, delivered by hand or transmitted by any
standard form of telecommunication. Notices to the Warrantholders or a holder
of Warrant Stock shall be directed to the record address of such Warrantholder
with a copy to The Boston Group, L.P. at 2049 Century Park East, 30th Floor, Los
Angeles, California 90067, Attention: Mr. Robert A. DiMinico. Notices to the
Company shall be directed to the Company, attention President, at its principal
executive offices as set forth in the Memorandum. Any address for purposes of
notice may be changed by giving notice of such change to the other parties
hereto in the same manner as provided herein.
SECTION 13. PARTIES. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Dealer Manager, the Company and the
Warrantholders and the holders of Warrant Stock, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
SECTION 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Dealer Manager Agreement, any schedule, exhibit, certificate or
other instrument
-11-
<PAGE>
delivered by or on behalf of the parties hereto, or in connection with the
transactions contemplated by this Agreement, shall be deemed to be
representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties and agreements made by the parties to this Agreement or pursuant
hereto shall survive the termination of this Agreement and the issuance, sale
and delivery of the Warrant and the Warrant Stock.
SECTION 15. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
SECTION 16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
SECTION 17. ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the Dealer
Manager Agreement constitute the entire agreement of the parties hereto
concerning the subject matter hereof and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. To the extent that the terms or provisions of this Agreement are
inconsistent with the terms or provisions of the Dealer Manager Agreement, the
terms of this Agreement shall govern. This Agreement may not be amended,
modified or altered except in a writing signed by the Dealer Manager and the
Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
JENKON INTERNATIONAL, INC.
By: /s/ David Edwards
----------------------
David Edwards
President and CEO
THE BOSTON GROUP, L.P.
By: /s/ Anthony Soich
--------------------------------
Anthony Soich
Director of Corporate Finance
-12-
<PAGE>
THIS WARRANT AND THE SECURITIES PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH WARRANTS
AND SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO SUCH SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
WARRANT CERTIFICATE NO. ___
WARRANT TO PURCHASE
_____ SHARES OF SERIES A PREFERRED STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON JUNE 30, 2001
JENKON INTERNATIONAL, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, ___________________________, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from JENKON INTERNATIONAL, INC. (the "Company"), at any time during the
period commencing at 6:30 am., Pacific time, on July 1, 1997, and before 5:00
p.m., Pacific time, on June 30, 2001, at the purchase price per share of Series
A Preferred Stock, $0.001 par value (the "Preferred Stock") of $2.10 (the
"Warrant Price"), __________ shares of Preferred Stock of the Company (the
"Warrant Stock "). The number of shares of Preferred Stock of the Company
purchasable upon exercise of each Warrant evidenced hereby shall be subject to
adjustment from time to time as set forth in the Dealer Manager's Warrant
Agreement, dated as of July 1, 1996, by and between the Company and The Boston
Group, L.P. (the "Dealer Manager's Warrant Agreement").
The Warrants evidenced hereby represent the right to purchase an aggregate
of up to ___________ shares of Warrant Stock (subject to adjustment as provided
in the Dealer Manager's Warrant Agreement) and are issued under and in
accordance with the Dealer Manager's Warrant Agreement, and are subject to the
terms and provisions contained in the Dealer Manager's Warrant Agreement, to all
of which the Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Warrant Price at the
<PAGE>
principal office of the Company. Payment of such price shall be made at the
option of the Warrantholder in any manner allowed in the Dealer Manager's
Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
signed and issued to the Warrantholder a new Warrant Certificate in respect of
the shares of Warrant Stock as to which the Warrants evidenced hereby shall not
have been exercised. These Warrants may be exchanged at the office of the
Company by surrender of this Warrant Certificate properly endorsed for one or
more new Warrants of the same aggregate number of shares of Warrant Stock as
evidenced by the Warrant or Warrants exchanged. No fractional securities shall
be issued upon the exercise of rights to purchase hereunder, but the Company
shall pay the cash value of any fraction upon the exercise of one or more
Warrants. These Warrants are transferable at the office of the Company in the
manner and subject to the limitations set forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of the
rights of a stockholder of the Company.
JENKON INTERNATIONAL, INC.
By:
--------------------------------
David Edwards
President and CEO
Dated , 1996
------------ --
ATTEST:
- --------------------------------------
Lowell T. Holden
Treasurer
<PAGE>
JENKON INTERNATIONAL, INC.
PURCHASE FORM
JENKON INTERNATIONAL, INC (the "Company")
- -----------------------------------
- -----------------------------------
Attention: President
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
_____ shares of Series A Preferred Stock of the Company (the "Warrant Stock")
provided for therein, and requests that certificates for the Warrant Stock be
issued in the name of:
--------------------------------------------------------------
(Please print or Type Name, Address and Social Security Number)
--------------------------------------------------------------
--------------------------------------------------------------
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Stock purchasable under the within Warrant Certificate be registered
in the name of the undersigned Warrantholder or his Assignee as below indicated
and delivered to the address stated below.
Dated:
-----------------
Name of Warrantholder
or Assignee:
-------------------------
(Please Print)
Address:
-------------------------
-------------------------
Signature:
-------------------------
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
-----------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase _____ shares of Warrant Stock represented by the within
Warrant Certificate unto, and requests that a certificate for such Warrant be
issued in the name of:
------------------------------------------------------------
(Name and Address of Assignee Must be Printed or Typewritten)
------------------------------------------------------------
------------------------------------------------------------
hereby irrevocably constituting and appointing _______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of shares of Warrant Stock
shall not be all of the Warrant Stock purchasable under the within Warrant
Certificate, that a new Warrant Certificate for the balance of the Warrant Stock
purchasable under the within Warrant Certificate be registered in the name of
the undersigned Warrantholder and delivered to such Warrantholder's address as
then set forth on the Company's books.
Dated:
--------------- ------------------------------------
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
-----------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES ARE
RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED OR TRANSFERRED
EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR
EXEMPTION OR SAFE HARBOR THEREFROM.
No. US $
------- ------------
JENKON INTERNATIONAL, INC.
PROMISSORY NOTE
THIS PROMISSORY NOTE is one of a duly authorized issue of up to $1,000,000
in Notes of JENKON INTERNATIONAL, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Company").
FOR VALUE RECEIVED, the Company promises to pay to ___________________, the
registered holder hereof (the "Holder"), the principal sum set forth above on or
prior to the Maturity Date (as defined below) and to pay interest on the
principal sum outstanding from time to time in arrears (i) quarterly, on or
before the last day of March, June, September and December of each year prior to
the Maturity Date, and (ii) on the Maturity Date, at the rate of 7% per annum
accruing from the date of initial issuance of this Note (the "Issue Date").
Accrual of interest shall commence on the first business day to occur after the
date hereof and shall continue until payment in full of the principal sum has
been made. All payments hereunder shall be made at the address last appearing
on the Note Register of the Company as designated in writing by the Holder from
time to time. The Company will pay the principal of accrued but unpaid
interest upon this Note on the Maturity Date, less any amounts required by law
to be deducted, to the registered holder of this Note as of the tenth day prior
to the Maturity Date and addressed to such holder at the last address appearing
on the Note Register. Payment shall be made by check and the forwarding of such
check shall constitute a payment of principal and interest hereunder and shall
satisfy and discharge the liability for principal and interest on this Note to
the extent of the sum represented by such check plus any amounts so deducted.
The "Maturity Date" referred to in this Note shall be the earlier of (i)
three business days after the funding date of an initial public offering of
shares of Common Stock of the Company or (ii) May 31, 1999.
1
<PAGE>
This Note is subject to the following additional provisions:
1. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Note any amounts required to be withheld
under the applicable provisions of the United States income tax laws or other
applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
2. This Note has been issued subject to investment representations of the
original purchaser hereof and may be transferred or exchanged only in compliance
with the Securities Act of 1933, as amended (the "Act"), and other applicable
state and foreign securities laws. In the event of any proposed transfer of
this Note, the Company may require, prior to issuance of a new Note in the name
of such other person, that it receive reasonable transfer documentation
including legal opinions that the issuance of the Note in such other name does
not and will not cause a violation of the Act or any applicable state or foreign
securities laws. Prior to due presentment for transfer of this Note, the Company
and any agent of the Company may treat the person in whose name this Note is
duly registered on the Company's Note Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other purposes,
whether or not this Note be overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
3. Subject to the terms of the Bridge Loan Agreement (the "Agreement"),
between the Company and the Holders no provision of this Note shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and interest on, this Note at the time, place, and rate,
and in the manner herein prescribed. This Note is a direct obligation of the
Company.
4. No recourse shall be had for the payment of the principal of, or the
interest on, this Note, or for any claim based hereon, or otherwise in respect
hereof, against any incorporator, shareholder, officer or director, as such,
past, present or future, of the Company or any successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
5. The Holder of the Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Note except under circumstances which will not result
in a violation of the Act or any applicable state Blue Sky or foreign laws or
similar laws relating to the sale of securities.
6. This Note shall be governed by and construed in accordance with the
laws of the State of Delaware and shall be subject to the arbitration and forum
provisions of the Agreement.
7. The following shall constitute an "Event of Default":
2
<PAGE>
a. The Company shall default in the payment of principal or interest
on this Note and same shall continue for a period of five (5)
business days; or
b. Any of the representations or warranties made by the Company in
the Agreement, or in any certificate or financial or other
written statements heretofore or hereafter furnished by the
Company in connection with the execution and delivery of this
Note or the Agreement shall be false or misleading in any
material respect at the time made; or
c. The Company shall fail to perform or observe, in any material
respect, any material covenant, term, provision, condition,
agreement or obligation of the Company under the Agreement or
this Note (other than the provision regarding payment of
principal and interest), and such failure shall continue uncured
for a period of thirty (30) days after written notice from the
Holder of such failure; or
d. The Company shall (1) admit in writing its inability to pay its
debts generally as they mature; (2) make an assignment for the
benefit of creditors or commence proceedings for its dissolution;
or (3) apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial part of its
property or business; or
e. A trustee, liquidator or receiver shall be appointed for the
Company or for a substantial part of its property or business
without its consent and shall not be discharged within sixty (60)
days after such appointment; or
f. Any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency shall assume custody or
control of the whole or any substantial portion of the properties
or assets of the Company and shall not be dismissed within sixty
(60) days thereafter; or
g. Bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against
the Company and, if instituted against the Company, shall not be
dismissed within sixty (60) days after such institution or the
Company shall by any action or answer approve of, consent to, or
acquiesce in any such proceedings or admit the material
allegations of, or default in answering a petition filed in any
such proceeding.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Note immediately due and payable on the fifth business day following delivery of
3
<PAGE>
written notice of default to the Company, notice, without presentment, demand,
protest or notice of any kinds, all of which are hereby expressly waived,
anything herein or in any note or other instruments contained to the contrary
notwithstanding, and the Holder may immediately enforce any and all of the
Holder's rights and remedies provided herein or any other rights or remedies
afforded by law.
8. Nothing contained in this Note shall be construed as conferring upon
the Holder the right to vote or to receive dividends or to consent or receive
notice as a shareholder in respect of any meeting of shareholders or any rights
whatsoever as a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: June 2, 1998
JENKON INTERNATIONAL, INC.
By:_______________________________________
Steve McKeag, Chief Financial Officer
4
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH WARRANTS AND SHARES
MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED.
WARRANT
TO PURCHASE SHARES OF
COMMON STOCK OF
JENKON INTERNATIONAL, INC.
No. of Shares:_____________ Holder:__________________________________________
THIS CERTIFIES THAT, for good and valuable consideration, the above
referenced holder ("Holder"), or its registered assigns, is entitled to
subscribe for and purchase from JENKON INTERNATIONAL, INC., a Delaware
corporation (the "Company"), at any time commencing one (1) year from the date
hereof and ending at the close of business five (5) years from the date hereof,
the number of fully paid and nonassessable shares of the Common Stock of the
Company set forth above at an exercise price of Fifty Cents ($.50) per share
(the "Warrant Exercise Price"), subject to the adjustment provisions of Sections
5 and 6 of this Warrant. Reference is made to this Warrant in the Bridge Loan
Agreement (the "Loan Agreement"), by and between the Company and Holder. The
shares which maybe acquired upon exercise of this Warrant are referred to herein
as the "Warrant Shares." As used herein, the term "Holder" includes any party
who acquires all or a part of this Warrant as a registered transferee of Holder,
or any record holder or holders of the Warrant Shares issued upon exercise,
whether in whole or in part, of the Warrant; the term "Common Stock" means and
includes the Company's presently authorized Common Stock, $0.001 par value.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to any fractional shares of
Common Stock), by written notice of exercise (in the form attached hereto)
delivered to the Company at the principal office
<PAGE>
of the Company prior to the expiration of this Warrant and accompanied or
preceded by the surrender of this Warrant along with payment of the Warrant
Exercise Price for such shares (a) in cash, by check or by wire transfer of
federal funds, (b) to the extent permitted by law, by offset of principal or
interest owed under the Note (as defined in the Loan Agreement), (c) on a
cashless basis in accordance with the provisions of Section 10 of this Warrant,
or (d) by a combination of the methods specified in clauses (a), (b) and (c).
(b) This Warrant may not be sold, transferred, assigned, hypothecated
or divided except as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 8 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if Holder shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the Warrant Shares shall be and will be
deemed to be issued to the Holder as of the close of business on the date on
which this Warrant shall have been surrendered and the payment made for such
Warrant Shares as provided herein. Subject to the provisions of the next
section, certificates for the Warrant Shares so purchased shall be delivered to
the Holder within a reasonable time, not exceeding fifteen (15) days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the right to purchase the
number of Warrant Shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws. If registrations are not in effect and
if
<PAGE>
exemptions are not available when the Holder seeks to exercise the Warrant, the
Warrant exercise period will be extended, if need be, to prevent the Warrant
from expiring, until such time as either registrations become effective or
exemptions are available, and the Warrant shall then remain exercisable for a
period of at least 45 calendar days from the date the Company delivers to the
Holder written notice of the availability of any registrations or exemptions.
The Holder agrees to execute such documents and make such representations,
warranties, and agreements as maybe required solely to comply with the
exemptions relied upon by the Company, or any registrations made, for the
issuance of the Warrant Shares.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the purchase rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. ADJUSTMENT IN EXERCISE PRICE. In the event that the National
Association of Securities Dealers, Inc. (the "NASD") determines that the Warrant
constitutes underwriting compensation in connection with any initial public
offering by the Company, the Holder agrees that the Warrant Exercise Price may
be increased without prior notice to the Holder to an exercise price equal to no
more than the initial public offering price for the Company's Common Stock.
6. ANTI-DILUTION ADJUSTMENTS. The number of shares of Warrant Shares
purchasable upon the exercise of this Warrant and the Warrant Exercise Price
shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its capital stock or other
securities, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares, (iii) combine its outstanding Common Stock into a
smaller number of shares or (iv) issue, by reclassification of its Common
Stock, shares of its capital stock or other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), the number of
Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive
the kind and number of Warrant Shares, shares of its capital stock and
other securities of the Company which such holder would have owned or would
have been entitled to receive immediately after the happening of any of the
events described above, had the Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 6(a) shall become effective
immediately after the effective date of such event.
<PAGE>
(b) In case the Company shall issue rights, options, warrants or
convertible securities to holders of its Common Stock, without any charge
to such holders, containing the right to subscribe for or purchase Common
Stock, the number of Warrant Shares thereafter purchasable upon the
exercise of this Warrant shall be determined by multiplying the number of
Warrant shares theretofore purchasable upon exercise of this Warrant by a
fraction, of which the numerator shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such rights,
options, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which
the denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities. Such adjustment shall be made whenever such
rights, options, warrants or convertible securities are issued, and shall
become effective immediately upon issuance of such rights, options,
warrants or convertible securities. In the event of such adjustment,
corresponding adjustments shall be made to the Warrant Exercise Price.
(c) In case the Company shall distribute to holders of its Common
Stock evidences of its indebtedness or assets (excluding cash dividends or
distributions out of current earnings made in the ordinary course of
business consistent with past practices), then in each case the number of
Warrant shares thereafter purchasable upon the exercise of this Warrant
shall be determined by multiplying the number of Warrant Shares theretofore
purchasable upon exercise of this Warrant by a fraction, of which the
numerator shall be the then Market Price (as defined below) on the date of
such distribution, and of which the denominator shall be such Market Price
on such date minus the then fair value (determined as provided in
subsection 6(e) below) of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution.
(d) Whenever the number of Warrant Shares purchasable upon the
exercise of this Warrant is adjusted as herein provided, the Warrant
Exercise Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Warrant Exercise Price immediately prior to such
adjustment by a fraction, the numerator of which shall be the number of
Warrant Shares purchasable upon the exercise of this Warrant immediately
prior to such adjustment, and the denominator of which shall be the number
of Warrant Shares purchasable immediately thereafter.
(e) To the extent not covered by subsections 6(a), (b) or (c) hereof,
in case the Company shall, subsequent to the date of issuance of this
Warrant, issue shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe
for or purchase shares of Common Stock (excluding Warrants issued to
investors in connection with the Loan Agreement), at a price per share of
Common Stock (determined in the case of such rights, options, warrants, or
convertible
<PAGE>
or exchangeable securities by dividing (x) the total amount receivable by
the Company in consideration of the sale and issuance of such rights,
options, warrants, or convertible or exchangeable securities, plus the
total minimum consideration payable to the Company upon exercise,
conversion, or exchange thereof by (y) the total maximum number of shares
of Common Stock covered by such rights, options, warrants, or convertible
or exchangeable securities) lower than the Market Price (as such term is
defined in Section 9 hereof) per share of Common Stock on the date the
Company fixes the offering price of such shares, rights, options, warrants,
or convertible or exchangeable securities, then the Warrant Exercise Price
shall be adjusted so that it shall equal the price determined by
multiplying the Warrant Exercise Price in effect immediately prior thereto
by a fraction (i) the numerator of which shall be the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such sale and
issuance plus (B) the number of shares of Common Stock which the aggregate
consideration received (determined as provided below) for such sale or
issuance would purchase at such Market Price per share, and (ii) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale and issuance. Such adjustment shall
be made successively whenever such an issuance is made. For the purposes of
such adjustment, the maximum number of shares of Common Stock which the
holder of any such rights, options, warrants or convertible or exchangeable
securities shall be entitled to subscribe for or purchase shall be deemed
to be issued and outstanding as of the date of such sale and issuance and
the consideration received by the Company therefor shall be deemed to be
the consideration received by the Company for such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum
consideration or premium stated in such rights, options, warrants, or
convertible or exchangeable securities to be paid for the shares of Common
Stock covered thereby. In case the Company shall sell and issue shares of
Common Stock, or rights, options, warrants, or convertible or exchangeable
securities containing the right to subscribe for or purchase shares of
Common Stock for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then in determining the price
per share of Common Stock and the consideration received by the Company for
purposes of the first sentence of this subparagraph (b), the Board of
Directors of the Company shall determine, in good faith, the fair value of
said property, and such determination shall be described in a duly adopted
board resolution certified by the Company's Secretary. In case the Company
shall sell and issue rights, options, warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock together with one or more other securities as a part
of a unit at a price per unit, then in determining the price per share of
Common Stock and the consideration received by the Company for purposes of
the first sentence of this subparagraph (b), the Board of Directors of the
Company shall determine, in good faith, which determination shall be
described in a duly adopted board resolution certified by the Company's
Secretary, the fair value of the rights, options, warrants, or convertible
or exchangeable securities then being sold as part of such unit. Such
adjustment shall be made successively whenever such an issuance occurs, and
in the event that such rights, options, warrants, or convertible or
exchangeable securities expire or cease to be convertible or
<PAGE>
exchangeable before they are exercised, converted, or exchanged (as the
case may be), then the Warrant Exercise Price shall again be adjusted to
the Warrant Exercise Price that would then be in effect if such sale and
issuance had not occurred, but such subsequent adjustment shall not affect
the number of Warrant Shares issued upon any exercise of Warrants prior to
the date such subsequent adjustment is made.
(f) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 6(e) above, the Holder of each Warrant shall thereafter (until
another such adjustment) be entitled to purchase at the adjusted Warrant
Exercise Price the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares specified in such Warrant (as
adjusted as a result of all adjustments in the Warrant Exercise Price in
effect prior to such adjustment) by the Warrant Exercise Price in effect
prior to such adjustment and dividing the product so obtained by the
adjusted Warrant Exercise Price.
(g) Upon any adjustment of the Warrant Exercise Price and the number
of Warrant Shares subject to this Warrant, then and in each such case, the
Company shall give written notice thereof, by first-class mail, postage
prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based.
7. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a stockholder of the Company.
8. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on the Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws; and provided further that the
<PAGE>
prospective transferee or purchaser shall execute such documents and make such
representations, warranties, and agreements as may be reasonably required solely
to comply with the exemptions relied upon by the Company or the Holder for the
transfer or disposition of the Warrant or Warrant Shares.
(b) If in the opinion of counsel referred to in this Section 8, the
proposed transfer or disposition of this Warrant or such Warrant Shares
described in the written notice given pursuant to this Section 7 may not be
effected without registration or qualification of this Warrant or such Warrant
Shares, the Company shall promptly give written notice thereof to the Holder.
9. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the
term "Market Price" with respect to shares of Common Stock of any class or
series means the average of the last reported sale prices or, if none, the
average of the last reported closing bid and asked prices on any national
securities exchange, the Nasdaq National Market, Nasdaq SmallCap Market, or
NASD OTC Bulletin Board over the five trading days immediately preceding the
determination date. If the Company's Common Stock is not listed on a national
securities exchange or quoted on Nasdaq or the OTC Bulletin Board, the Market
Price shall be average of the last reported closing bid and asked prices as
reported in the "pink sheets" or other standard compilation of quotations by
market makers in the over-the-counter market. In the event that no quotations
are available, the "Market Price" shall be the fair market value of a share of
Common Stock as determined in good faith by the Board of Directors of the
Company.
10. RIGHT TO CONVERT WARRANT INTO COMMON STOCK; NET ISSUANCE. In addition
to any other methods of payment set forth in Section 1(a) above and in lieu of
any cash payment required thereunder, unless otherwise prohibited by law, the
Holder shall have the right at any time, when exercisable, and from time to time
to exercise this Warrant in full or in part (i) by receiving from the Company
the number of Warrant Shares equal to the number of Warrant shares otherwise
issuable upon such exercise less the number of Warrant Shares having an
aggregate value on the date of exercise equal to the Warrant Exercise Price
multiplied by the number of Warrant Shares for which this Warrant is being
exercised. For purposes hereof, the "value" of a share of Common Stock on a
given date shall equal to the Market Price on such date as defined in Section 9
of this Agreement.
11. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by the Company
and is a valid and binding obligation of the Company enforceable in accordance
with its terms, subject
<PAGE>
to laws of general application relating to bankruptcy, insolvency and the relief
of debtors and the rules of law or principles at equity governing specific
performance, injunctive relief and other equitable remedies;
(b) The Warrant Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable; and
(c) The execution and delivery of this Warrant are not, and the
issuance of the Warrant Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Certificate of Incorporation
or by-laws of the Company, do not and will not contravene, in any material
respect, any governmental rule or regulation, judgment or order applicable to
the Company, and do not and will not conflict with or contravene any provision
of, or constitute a default under, any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or require
the consent or approval of, the giving of notice to, the registration or filing
with or the taking of any action in respect of or by, any Federal, state or
local government authority or agency or other person, except for the filing of
notices pursuant to federal and state securities laws, which filings will be
effected by the time required thereby.
12. NOTICES. Notices and other communications provided for herein shall
be in writing and may be given by mail, courier, confirmed telex or facsimile
transmission and shall, unless otherwise expressly required, be deemed given
when received or when delivery thereof is refused. In the case of Holder, such
notices and communications shall be addressed to its address as shown on the
books maintained by the Company unless Holder shall notify the Company that
notices and communications should be sent to a different address (or telex or
facsimile number) in which case such notices and communications shall be sent to
the address (or telex or facsimile number) specified by Holder.
13. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the internal laws of Delaware.
IN WITNESS WHEREOF, Jenkon International, Inc. has caused this Warrant to
be signed by its duly authorized officer this 2nd day of June, 1998.
JENKON INTERNATIONAL, INC.
By _____________________________________________
Steve McKeag, Chief Financial Officer
<PAGE>
JENKON INTERNATIONAL, INC.
WARRANT EXERCISE NOTICE
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned Holder of the foregoing Warrant hereby irrevocably elects
to exercise the right, represented by such Warrant, to purchase _____________
shares of the Common Stock, $0.001 par value, of JENKON INTERNATIONAL, INC. and
tenders herewith payment in accordance with Section 1 of said Warrant as
follows:
/ / _____ shares for CASH: $ _______________________
/ / _____ shares for CASHLESS EXERCISE
Please deliver the stock certificate to the address set forth below. In
addition, if the number of shares being purchased pursuant to this exercise is
less than the all of the shares purchasable under this Warrant, please return to
such address either (1) the Warrant marked to reflect the remaining balance of
shares purchasable thereunder or (2) a newly issued Warrant in the name of the
undersigned for such remaining balance of shares purchasable thereunder.
Dated: _____________________________ Name of Warrant Holder:
Tax Identification No. or _____________________________________
Social Security No. of Warrant Holder (Please Print)
____________________________________
_____________________________________
(Signature)
Title:
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT
HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED
WARRANT ASSIGNMENT.
<PAGE>
JENKON INTERNATIONAL, INC.
WARRANT ASSIGNMENT
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ___________________________________________________________, the assignee,
whose address is __________________________________________________________, and
whose tax identification or social security number is _____________________,the
right represented by the foregoing Warrant to purchase ___________________shares
of the Common Stock of JENKON INTERNATIONAL, INC., to which the foregoing
Warrant relates and appoints ___________________ attorney to transfer said right
on the books of Jenkon International, Inc., with full power of substitution in
the premises. If the number of shares assigned is less than all of the shares
purchasable under the Warrant, a new Warrant will be issued in the name of the
undersigned for the remaining balance of the shares purchasable thereunder.
Dated: ___________________________ Name of Warrant Holder/Assignor:
_______________________________________
(Please print)
_______________________________________
(Signature)
Title:
Address of Warrant Holder/Assignor
_______________________________________
_______________________________________
Tax Identification No. or Social
Security No. of Warrant Holder/Assignor:
_______________________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT
HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED
ASSIGNMENT FORM.
<PAGE>
SUBSCRIPTION SUPPLEMENT AND REGISTRATION RIGHTS AGREEMENT
This Subscription Supplement and Registration Rights Agreement (the
"Subscription Supplement"), containing terms applicable to the Subscription
Document, has been incorporated by reference into the Subscription Document
accompanying the Confidential Offering Memorandum of Jenkon International, Inc.
Each investor should therefore carefully review this Subscription Supplement
before signing the Subscription Document. Terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Memorandum (as defined
below).
1. SUBSCRIPTION FOR SHARES. I subscribe for the number of Shares of
Series A Preferred Stock (the "Shares") of Jenkon International, Inc., a
Delaware corporation (the "Company"), set forth in the Subscription Document,
priced at $2.00 per Share.
2. REVIEW OF MEMORANDUM. I HAVE CAREFULLY REVIEWED THE CONFIDENTIAL
OFFERING MEMORANDUM IN CONNECTION WITH THE OFFERING OF SHARES AND ANY
SUPPLEMENT(S) THERETO PROVIDED BY THE COMPANY (COLLECTIVELY THE "MEMORANDUM").
I HAVE BEEN FURNISHED WITH AND HAVE CAREFULLY READ THE DOCUMENTS REFERENCED IN
THIS MEMORANDUM AND I AM A SUITABLE INVESTOR AS DESCRIBED IN THE MEMORANDUM.
3. IRREVOCABILITY OF SUBSCRIPTION. I agree to pay for the Shares in the
manner set forth in the Subscription Document. I agree that his subscription is
and shall be irrevocable, but my obligations hereunder will terminate if this
subscription is not accepted by the Company.
4. ILLIQUID INVESTMENT. I understand that investment in the Shares is an
ILLIQUID INVESTMENT. In particular, I recognize that:
(a) I must bear the economic risk of investment in the Shares for an
indefinite period of time, since neither the Shares nor the Common Stock into
which the Shares may be converted have been registered under the Securities Act
of 1933 (the "Securities Act") and therefore cannot be sold unless either they
are subsequently registered under the Securities Act or an exemption from such
registration is available and a favorable opinion of counsel for the Company to
that effect is obtained (if requested by the Company);
(b) No established market will exist and it is possible that no
public market for the Series A Preferred Stock and Common Stock will develop as
a result of the offering contemplated by this Memorandum.
5. CONSENT TO LEGENDS. I consent to the affixing by the Company of such
legends on certificates representing the Shares and Common Stock as any
applicable federal or state securities law may require from time to time.
6. SUBSCRIBER'S REPRESENTATIONS AND WARRANTIES. I represent and warrant
to the Company that:
(a) The financial information provided in the Subscription Document
is complete, true and correct;
(b) I and my investment advisors, if any, have CAREFULLY REVIEWED AND
UNDERSTAND the risks of, and other considerations relating to, a purchase of
Shares, including, but not limited to, the risks set forth under "RISK FACTORS"
in the Memorandum;
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<PAGE>
(c) I and my investment advisors, if any, have been afforded the
opportunity to obtain any information necessary to verify the accuracy of any
representations or information set forth in the Memorandum and have had all
inquiries to the Company answered, and have been furnished all requested
materials, relating to the Company and the offering and sale of the Shares and
anything else set forth in the Memorandum;
(d) Neither I nor my investment advisors, if any, have been furnished
any offering literature by the Company or any of its affiliates, associates or
agents other than the Memorandum, and the documents referenced therein;
(e) I am acquiring the Shares for which I am subscribing for my own
account, as principal, for investment and not with a view to the resale or
distribution of all or any part of the Shares or the Common Stock underlying the
Shares;
(f) The undersigned, if a corporation, partnership, trust or other
form of business entity, (i) is authorized and otherwise duly qualified to
purchase and hold the Shares, (ii) has obtained such additional tax and other
advice that it has deemed necessary, (iii) has its principal place of business
at its address set forth in this Subscription Document, and (iv) has not been
formed for the specific purpose of acquiring the Shares (although this may not
necessarily disqualify the subscriber as a purchaser). The persons executing
the Subscription Document, as well as all other documents related to the
Offering of Shares contemplated by the Memorandum (the "Offering"), represent
that they are duly authorized to execute all such documents on behalf of the
entity. (If the undersigned is one of the aforementioned entities, it agrees to
supply any additional written information that may be required.);
(g) All of the information which I have furnished to the Company or
which is set forth in the Subscription Document (including this Subscription
Supplement) is correct and complete as of the date of the Subscription Document.
If any material change in this information should occur prior to my subscription
being accepted, I will immediately furnish the revised or corrected information;
(h) I further agree to be bound by all of the terms and conditions of
the Offering described in the Memorandum; and
(i) I am the only person with a direct or indirect interest in the
Shares subscribed for by the Subscription Document.
7. CERTIFICATION OF INFORMATION. I certify, to the best of my
information and belief, that the above information that I have supplied is true
and correct in all material respects.
8. INDEMNIFICATION OF COMPANY. I agree to indemnify and hold harmless
the Company, The Boston Group, L.P. and their respective officers, directors,
agents, attorneys, accountants and affiliates from and against all damages,
losses, costs and expenses (including reasonable attorneys' fees) that they may
incur by reason of the failure of the undersigned to fulfill any of the terms or
conditions of this Subscription Supplement or the Subscription Document, or by
reason of any breach of the representations and warranties made by the
undersigned herein or in the undersigned's related Subscription Document, or in
any document provided by the undersigned to the Company.
9. NONTRANSFERABILITY OF SUBSCRIPTION. This subscription is not
transferable or assignable by me without the written consent of the Company.
2
<PAGE>
10. SUBSCRIBERS' JOINT AND SEVERAL LIABILITY. If more than one person is
executing the Subscription Document, the obligations of each shall be joint and
several and the representations and warranties contained in this Subscription
Supplement and related Subscription Document shall be deemed to be made by, and
be binding upon, each of these persons and his or her heirs, executors,
administrators, successors and assigns.
11. SUCCESSORS AND ASSIGNS. This subscription, upon acceptance by the
Company, shall be binding upon my heirs, executors, administrators, successors
and assigns.
12. GOVERNING LAW. This Subscription Supplement and related Subscription
Document shall be construed in accordance with and governed in all respects by
the laws of the State of California.
13. REGISTRATION RIGHTS. I acknowledge and agree that I will have the
following registration rights with respect to the Common Stock underlying the
Shares purchased by me in the Offering:
(a) At any time commencing on the earlier of (i) eighteen (18) months
from the date of the final closing of the Offering, or (ii) the day following
the date on which the Company completes a Public Offering, and expiring three
(3) years thereafter, holders ("Holders") representing a "Majority of the
Registerable Securities" (as defined in subparagraph (f) below) shall have the
right (which right is in addition to the registration rights under Paragraph
13(b) hereof), exercisable by written notice to the Company, to have the Company
prepare, file and use its best efforts to have declared effective by the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Holders, if any, in order to comply with the provisions of the Securities Act,
so as to permit a public offering and sale of their respective shares of
Registerable Securities (as defined in subparagraph (e) below) for twelve (12)
consecutive months thereafter by such Holders and any other Holders who notify
the Company within ten (10) days after receiving notice from the Company of such
registration request of their desire to include their Registerable Securities in
such registration.
The Company covenants and agrees to give written notice of any
registration request under this Paragraph 13(a) by any Holder or Holders to all
other registered Holders of Registerable Securities within ten (10) days from
the date of the receipt of any such registration request at the address of such
Holders reflected in the Company's stock records.
(b) If at any time the Company proposes to register any of its
securities under the Securities Act (other than in connection with a merger,
acquisition or exchange offer or pursuant to Form S-8 or successor form) it will
give written notice by registered mail, at least thirty (30) days prior to the
filing of each such registration statement to the Holder(s) of the Registerable
Securities of its intention to do so. Upon the written request of any Holder of
Registerable Securities given within fifteen (15) days after receipt of any such
notice of his, her, its or their desire to include any Registerable Securities
in such proposed registration statement, the Company shall afford such Holder(s)
of the Registerable Securities the opportunity to have such Holder's
Registerable Securities registered under such registration. The "piggyback"
registration rights described in this Paragraph 13(b) shall terminate at such
time as the Registerable Securities are saleable in one or more transactions
pursuant to Rule 144 of the Securities Act. Any sales of Registerable
Securities pursuant to such registration statement shall be effected through the
underwriter of such registered offering, if any, and the Holders thereof shall
compensate the underwriter in accordance with its customary compensation
practices.
Notwithstanding anything to the contrary contained in the provisions
of this Paragraph 13(b), the Company shall have the right at any time after it
shall have given written notice pursuant to this Paragraph 13(b)(irrespective of
whether a written request for inclusion of any such Registerable Securities
shall have
3
<PAGE>
been made) to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof.
(c) The Company shall indemnify and hold harmless the Holders of
Registerable Securities from and against any and all losses, claims, damages and
liabilities caused by any untrue statement of a material fact contained in any
registration statement filed by the Company under the Securities Act by reason
of this Paragraph 13, any post-effective amendment to such registration
statement, or any prospectus included therein, or caused by any omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission based
upon information furnished or required to be furnished in writing to the Company
by a Holder (or the authorized representatives or agents of the Holder)
expressly for use therein, which indemnification shall include each person, if
any, who controls the Holder within the meaning of the Securities Act and each
officer, director, employee and agent of the Holder; provided, however, that the
indemnification in this Paragraph 13(c) with respect to any prospectus shall
not inure to the benefit of the Holder (or to the benefit of any person
controlling the Holder) on account of any such loss, claim, damage or liability
arising from the sale of Registerable Securities by such Holder, if a copy of a
subsequent prospectus correcting the untrue statement or omission in such
earlier prospectus was provided to such Holder by the Company prior to the
subject sale and the subsequent prospectus was not delivered or sent by the
Holder to the purchaser of such securities prior to such sale; and provided
further, that the Company shall not be obligated to so indemnify the Holder or
any other person referred to above unless the Holder or other person, as the
case may be, shall at the same time indemnify the Company, its directors, each
officer signing the registration statement and each person, if any, who controls
the Company within the meaning of the Securities Act, from and against any and
all losses, claims, damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement or any prospectus required
to be filed or furnished in connection with such public offering or caused any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, insofar as such losses,
claims, damages or liabilities are caused by any untrue statement or omission
based upon information furnished in writing to the Company by the Holder
expressly for use therein.
If for any reason the indemnification provided for in the preceding
subparagraph is held by a court of competent jurisdiction to be unavailable to
an indemnified party with respect to any loss, claim, damage, liability or
expense referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim, damage
or liability in such proportion as is appropriate to reflect not only the
relative benefits received by the indemnified party and the indemnifying party,
but also the relative fault of the indemnified party and the indemnifying party,
as well as any other relevant equitable considerations.
(d) All expenses, filing fees and other costs incurred by the Company
in connection with any registration of securities pursuant to this Paragraph 13
(exclusive of underwriting discounts and selling commissions applicable to any
sale of registered securities and any fees and costs of legal counsel engaged by
the Holders) shall be borne by the Company.
In the case of each registration effected by the Company pursuant to
the provisions of this Paragraph 13, the Company will (i) furnish to the Holders
of the Registerable Securities such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such Holders may reasonably request in order to
facilitate the disposition of the Registerable Securities owned by them, and
(ii) notify each Holder of Registerable Securities covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included
4
<PAGE>
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
(e) For purposes hereof, the term "Registerable Securities"
means the shares of Common Stock into which the Shares sold in the Offering are
convertible.
(f) For purposes hereof, the term "Majority of Registerable
Securities" means Holders in excess of fifty percent (50%) of the then
outstanding or Registerable Securities that (i) are not held by the Company, an
affiliate, officer, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith or (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Securities Act.
14. LOCK-UP BY UNDERWRITER. Notwithstanding anything to the contrary
contained in the Memorandum or in Paragraph 13 hereof, I acknowledge and agree
that, in the event of an initial public offering by the Company, I will not
sell, pledge, assign or otherwise transfer or hypothecate any Shares, shares of
Common Stock or other equity securities of the Company (other than those
acquired in the public market in the Company's initial public offering or
thereafter) during the twelve (12) month period following the effective date of
such initial public offering without the prior written consent of the
underwriter of such initial public offering. Any sales of Common Stock
permitted by the underwriter during such period shall be made through such
underwriter who shall be paid its customary commissions and/or discounts.
15. REDEMPTION RIGHTS. I acknowledge and agree that I have such rights,
if any, to have the Company redeem the Shares purchased by me pursuant to the
Offering as are set forth in the Company's Certificate of Incorporation or
Certificate of Designation, Preferences and Rights of Series A Preferred Stock,
which shall be in lieu of any demand registration rights described in Section 13
above.
5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jenkon International, Inc.
Vancouver, Washington
We hereby consent to the use in the Company's Registration Statements on Form
SB-2 of our report dated October 22, 1997, relating to the audit of the
consolidated financial statements of Jenkon International, Inc. as of June 30,
1996 and 1997 and the years then ended, which are contained in and incorporated
by reference to the Prospectus dated June 4, 1998 filed with the Securities and
Exchange Commission on June 4, 1998.
Los Angeles, California
June 4, 1998
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