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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1998
or
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
Commission File No. 000-24637
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JENKON INTERNATIONAL, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 91-1890338
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State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization
7600 N.E. 41st Street, Suite 350, Vancouver, Washington 98662
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Address of principal executive office Zip Code
Issuer's telephone number: (360) 256-4400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $0.001 Par Value
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(Title of Class)
Check whether the issuer has (i) filed all reports required by Section 13 or
15(d) of the Exchange ACT during the past 12 months, and (ii) been subject to
such filing requirements for the past ninety (90) days. Yes No X
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. X
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The Company's revenues for Fiscal Year ended June 30, 1998 were $9,437,417.
As of September 24, 1998, 4,253,515 shares of Common Stock were outstanding and
the aggregate market value of the Common Stock (based on the latest sale price
on the Nasdaq Small Cap Market on September 24, 1998) held by non-affiliates
(2,621,923 shares) was $12,126,393.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF 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.
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. The Company's primary focus over the past three years has been in
the development and sale of its SUMMIT V management information system
software package, sales of which have been the primary source of the
Company's business during such period. However, the Company has recently
completed the development of NOW! and has begun initial marketing of such
product.
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.
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
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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.
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. This group includes companies such as Tupperware.
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.
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. 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
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of creating 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 entered into a contract with EarthLink Network,
Inc. 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 system that allows access to all
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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 Manager (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 customization 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
18% 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.
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.
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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.
The NOW! system is 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
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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 fiscal 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).
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.
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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.
EMPLOYEES
As of June 30, 1998, the Company has approximately 77 employees in
Vancouver, Washington, all of which were full-time employees, and four in
Redditch, England, all of which were full-time employees. None of the employees
are represented by a labor union, and the Company considers its relations with
employees to be good.
RESEARCH AND DEVELOPMENT
Since the beginning of the fiscal year ended June 30, 1996, the
Company's research and development activities have primarily focused on the
development of its SUMMIT V, TOUCHTALK, and NOW! products. The Company's
research and development expenses for particular periods consist of all costs
incurred on projects for which technological feasibility has not yet been
attained. In accordance with Statement of Financial Accounting Standards No. 86,
the Company determines technological feasibility based upon the completion of a
detailed program design or working model, after which time all software
production expenses for a particular project are capitalized. For the years
ended June 30, 1997 and 1998 the product research, development and enhancement
expenses were $737,056, and $772,962, respectively.
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.
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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.
ADDITIONAL CONSIDERATIONS AND RISK FACTORS
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
$1,701,000 for the fiscal years ended June 30, 1996 and 1997, respectively.
Although the Company operated profitably in fiscal 1998, there can be no
assurance that the Company will be able to operate profitably in the future.
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. 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 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.
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. 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
$175,000. 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.
Any payments made by the Company with respect to claims against Redwood
Technology may benefit certain officers and directors of the Company who may be
secondarily liable for such claims.
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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.
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 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.
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
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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 1998 to new customers was
approximately $100,000 to $150,000. 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.
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.
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.
INTERNATIONAL OPERATIONS AND RISK OF INTERNATIONAL SALES. The Company
derived approximately 6.8% and 7.4% of its total revenues from its United
Kingdom operations in fiscal 1997 and 1998, respectively. 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.
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
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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.
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.
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.
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 in the future could materially adversely affect the prevailing market
price for the Common Stock. The Company has outstanding an aggregate of
4,253,515 shares of Common Stock of which approximately 2,750,000 are
"restricted securities" (the "Restricted Shares") pursuant to Rule 144
promulgated under the Securities Act. Beginning on the expiration of applicable
lock-up agreements (a substantial majority of which expire in August 1999), the
Restricted Shares subject to such 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.
MAINTENANCE CRITERIA FOR NASDAQ; RISK OF LOW-PRICED SECURITIES. The
Company's Common Stock is currently listed for trading on the Nasdaq SmallCap
Market. To maintain inclusion on the Nasdaq SmallCap Market, the Company's
Common Stock must continue to be registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company must continue to have net tangible assets of at least $2,000,000, a
public float of at least 500,000 shares with a market value of at least
$1,000,000, at least 300 stockholders, a minimum bid price of $1.00 per share
and at least two market makers. While the Company has initially satisfied these
maintenance standards, there is no assurance that the Company will be able to
maintain the standards for Nasdaq SmallCap Market inclusion with respect to its
Common Stock. If the Company fails to maintain Nasdaq SmallCap Market listing,
the market value of the Common Stock likely would decline and stockholders
likely would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock.
If the Common Stock ceases to be included on the Nasdaq SmallCap
Market, the Common Stock could become subject to Rule 15a-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities. If the Common Stock becomes subject to the penny
stock rules, the ability of broker-dealers to make a market in or sell the
Company's securities may be adversely affected and the market liquidity for the
Company's securities could be severely adversely affected.
ITEM 2. DESCRIPTION OF PROPERTY
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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ITEM 3. 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 (the "U.S. Claim") filed
in the United States District Court for the Western District of Washington at
Tacoma (Case No. C96-5459FDB) by Pacific Unidata, Ltd., the Asia licensee of
Unidata, Inc., as violating the terms of such licensee's agreement with Unidata.
In addition, Pacific Unidata, Ltd. brought an action (the "China Claim") against
Guangzhou Avon Co., Ltd., a Chinese subsidiary of Avon Products ("Avon China"),
in the Guangdong Province Supreme People's Court (the "Chinese Court") seeking
damages against Avon China for infringement of Pacific Unidata, Ltd.'s copyright
and exclusive rights to certain Unidata software in China. In June 1998, the
Chinese Court awarded damages in favor of Pacific Unidata, Ltd. in an amount of
approximately US$12 million plus costs. Avon China has informed the Company that
it intends to appeal the ruling. Although the Company is not a party to the
China Claim or the U.S. Claim, if Unidata, Inc. does not indemnify Redwood
Technology from damages resulting from the China Claim and the U.S. Claim and
the Company is required to (i) devote significant resources to protect its
interests and the interests of its sublicensees in Asia or (ii) if any
sublicensee successfully seeks indemnification against Redwood Technology for
damages suffered as a result of claims made by Pacific Unidata, Ltd. and the
Company is required to pay such indemnification as a successor to Redwood
Technology, the Company's financial condition and results of operations could be
materially adversely affected. Moreover, in the event that a court rules that
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. 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. The Company recently settled a claim for the
unpaid portion of payroll taxes of Redwood Technology in exchange for a payment
by the Company of $135,000. The Company may elect or be required to settle
other obligations of Redwood Technology. In the event that the Company were
required to pay all or a significant portion of the claims of creditors of
Redwood Technology, the Company's business and financial conditions and its
ability to achieve its business plan could be materially and adversely affected.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Quotation of the Company's Common Stock, $0.001 par value, commenced
on The Nasdaq Small Cap Market on August 11, 1998 under the symbol "JNKN."
As trading in the Company's Common Stock did not commence until after
completion of fiscal 1998, no information regarding the trading price of the
Company's Common Stock has been provided. The last reported sale price per
share of the Common Stock of the Company as reported on the Nasdaq Small Cap
Market on September 24, 1998 was $4.625. As of September 24, 1998, there
were approximately 54 record holders of the Company's Common Stock. The
number of beneficial owners of the Company's Common Stock was not readily
available at the time of filing of this Annual Report on Form 10-KSB but is
estimated to be in excess of 300 stockholders.
On August 14, 1998 the Company and certain selling stockholders of the
Company completed an underwritten public offering of an aggregate of 1,500,000
shares of Common Stock, $0.001 par value, 1,210,000 of which were sold by the
Company and 290,000 shares of which were sold by selling stockholders. The
managing underwriters of the initial public offering were Meridian Capital
Group, Inc., Trautman Kramer & Company Incorporated, and W.J. Nolan & Company
Inc.
The shares of Common Stock sold in the offering were registered
pursuant to a Registration Statement on Form SB-2 (Commission File No.
333-56023) which was declared effective at 5:30 p.m. E.D.T. on August 10, 1998.
The offering price to the public was $5.00 per share. The registration statement
covered (i) 1,210,000 shares sold by the Company in the offering (aggregate
offering price registered and sold of $6,050,000), (ii) 290,000 shares sold by
certain selling stockholders in the offering (aggregate offering price
registered and sold of $1,450,000), (iii) 225,000 additional shares of Common
Stock for the sole purpose of covering an over-allotment option granted to the
underwriters by the Company and two executive officers of the Company (aggregate
offering price registered of $850,000 for the executive officers and $275,000
for the Company; none of which were sold), (iv) 1,034,296 additional shares of
Common Stock registered on the account of certain stockholders of the Company
but which were not underwritten or sold in the offering (aggregate offering
price registered of $5,171,480; none of which were sold), (v) warrants to
purchase up to 150,000 shares of Common Stock granted to the managing
underwriters at $8.25 per share (aggregate offering price registered and sold of
$150), and (vi) the 150,000 shares of Common Stock underlying the underwriters'
warrants (aggregate offering price registered of $1,237,500; none of which have
been sold). The underwriters' over-allotment option expired without being
exercised in September 1998.
As the offering was not completed until the first quarter of fiscal
1999, no expenses were applied against the proceeds during fiscal year 1998.
Information regarding expenses of the offering and application of net proceeds
will be included in the Company's Periodic Report on Form 10-QSB for the quarter
ending September 30, 1998.
See Item 12 of this Annual Report on Form 10-KSB for a description of
certain private placement transactions by the Company. In addition, the
discussion of certain sales of securities by the Company is incorporated by
reference to Part III, Item 26 of the Company's Registration Statement on Form
SB-2, Commission File No. 333-56023, filed on June 4, 1998, and amended on July
15, 1998 and August 3, 1998.
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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ITEM 6. 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 HEREIN. 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" BELOW. 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 $1,701,000 for the fiscal years ended June 30, 1996 and
1997, respectively. Although the Company operated profitably in 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 fiscal 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 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 6.8% and 7.4% of its total revenue
from its United Kingdom operations
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in 1997 and 1998, respectively. 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.
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. As of June 30, 1998 the Company had estimated and
recorded a liability for such claims of approximately $175,000. In June 1998,
the Company settled certain claims by the Internal Revenue Service against
Redwood Technology for $135,000.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES. Total revenues increased 11.3% to $9,437,000 for 1998 from
$8,480,000 for 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 fiscal 1998.
SOFTWARE LICENSE REVENUES. Software license revenues increased 32.1% to
$3,649,000 for fiscal 1998 from $2,762,000 for 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 18.8% to $836,000 for fiscal 1998 from $1,029,000 for 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 increased
5.6% to $4,952,000 for fiscal 1998 from $4,689,000 for 1997. The increase is
attributable to significant customization revenue recognized during the last
quarter of 1998 related to a major customer. The increase was also a result
of 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 23.9% to $3,219,000 for
fiscal 1998 from $4,231,000 for 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 49.9% in fiscal 1997 to 34.1% for fiscal 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 75.1% to $513,000 for fiscal 1998 from $293,000 for fiscal
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
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suppliers for resale as part of the Company's turnkey systems. These costs
decreased by 78.5% to $168,000 for fiscal 1998 from $782,000 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 19.6% to $2,538,000 for fiscal 1998 from $3,156,000 for 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 1998 fiscal year.
GROSS PROFIT. Gross profit increased by 46.4% to $6,219,000 for fiscal
1998 from $4,249,000 for 1997. Overall gross profit as a percentage of total
revenues increased to 65.9% for fiscal 1998 from 50.1% for 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
fiscal 1997 to 1998 at 89.4% and 86.0%, respectively. Gross profit on software
support services and maintenance increased to 48.7% for fiscal 1998 from 32.7%
for 1997 due mainly to the elimination of many support personnel. The increase
in equipment gross profit to 79.9% for fiscal 1998 from 24.1% for 1997 was
primarily due to sales of more third party software and less hardware.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
9.8% to $925,000 for fiscal 1998 from $1,025,000 for 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 4.9% to $773,000 for the year ended June 30, 1998 from $737,000
for 1997. The 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 6.1% to $3,864,000 for 1998 from $4,116,000 for 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 83.5% to $178,000 for
fiscal 1998 from $97,000 for 1997. The increase relates 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.
The increase is also attributable to the amortization of the original issue
discount and deferred loan costs of $40,000 related to the 1998 Private
Placement.
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
-17-
<PAGE>
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.
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 70.2% to $737,000 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 68.5% to $4,116,000 for fiscal 1997 from $2,443,000 for fiscal 1996.
The general and administrative expenses as a percentage of revenue increased to
41.0% 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 8.0% per year.
-18-
<PAGE>
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, 1998 was approximately $100,000 to
$150,000. 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 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
The Company 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 June 30, 1998 the principal balance of the lease was $303,000 and
the required cash balance was $200,000.
As of June 30, 1998, 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 and was 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 June 30, 1998 the outstanding
principal balance was $173,000. The note was repaid in full in August 1998.
The Company has entered into employment agreements with four of its
executive officers as well as a Consulting and Non-Competition Agreement with a
director and former officer of the Company, the terms of which are described
elsewhere in this Annual Report on Form 10-KSB. In general, assuming none of the
agreements are terminated and that each one year contract is renewed annually,
such agreements provide for total payments of not less than $2.9 million through
the end of the fiscal year ending June 30, 2002, including approximately $86,000
per month during the fiscal year ending June 30, 1999.
In fiscal 1997, operating activities used net cash of approximately
$1,192,000 primarily from a net loss of approximately $1,701,000 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 $705,000. In fiscal 1997 financing activities provided net cash of
approximately $2,200,000 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), repayment of notes payable
(approximately $134,000), and increase in restricted cash ($300,000). In fiscal
1997 the Company's investing activities used net cash of approximately
$1,000,000 primarily to purchase property and equipment.
In fiscal 1998, operating activities used net cash of approximately
$62,000 attributable to the increase in trade receivables of approximately
$496,000, an increase in other assets of $97,000, a decrease in accounts
payable of approximately $128,000 and a combined decrease in customer
deposits and other accrued liabilities of approximately $514,000. This was
partially offset by net income of approximately $478,000, and an increase in
refundable income taxes of $131,000. In fiscal 1998 financing activities
provided net cash of approximately $461,000 primarily from the net proceeds
through the sale of the promissory notes and warrants of (approximately
$1,000,000) and a decrease in restricted cash (approximately $100,000) which
were offset by repayment of notes payable (approximately $265,000) and
prepaid offerings costs (approximately $374,000). In fiscal 1998 the
Company's investing activities used net cash of approximately $331,000
primarily to purchase property and equipment.
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<PAGE>
At June 30, 1998, the Company had approximately $401,000 in cash,
including restricted cash. As of August 31, 1998, the Company believes that 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 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/or the availability of
further financing.
In June 1998, the Company completed a $1,000,000 private placement
of bridge loans. Net proceeds were $880,000 after a placement fee of
$120,000. The bridge loans accrue interest at an annual rate of 7%. The
proceeds were used to pay off some existing debt and for general working
capital. The bridge loans are due the earlier of twelve months or at
completion of the initial public offering.
In August 1998, the Company completed an initial public offering of
1,500,000 shares, of which 1,210,000 shares were offered by the Company and
290,000 shares by selling shareholders. Net proceeds to the Company was
approximately $4,514,000 after deducting all offering-related expenses of
$1,536,000. The Company used a portion of the proceeds to repay the
outstanding indebtedness of $1,000,000 which was incurred with 1998 private
placement and approximately $258,000 related to other indebtedness. The
remaining proceeds will be used in the development of new products and
upgrades, expansion of the Company's sales and marketing efforts and general
working capital.
The Company's accounts receivable balances at June 30, 1997, and
1998 were $948,000 and $1,225,000, respectively. Accounts receivable in the
over 90-day category at June 30, 1997 was $485,000, or 51.16% of accounts
receivable, compared to $308,000, or 25.0% of accounts receivable, at June
30, 1998. The number of days sales in accounts receivable was 40 days for the
years ended June 30, 1997 and 1998. The increase in accounts receivable from
June 30, 1997 to June 30, 1998 was due to granting additional credit terms to
larger customers that have a strong payment history. Bad debt expense as a
percentage of sales for the period ended June 30, 1997 and 1998 was 1.2% and
1.8%, respectively. The allowance for doubtful accounts decreased from
$200,000 at June 30, 1997 to $146,000 at June 30, 1998, a decrease of
$54,000, which is attributable to more specific write-offs in 1998 and
therefore a lower general reserve.
At June 30, 1998, the Company had three customers which accounted for
approximately 40.4% of the accounts receivable at June 30, 1998.
See Note 4 in the Consolidated Financial Statements, regarding the
Company's income tax provision and deferred taxes.
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 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 adopted SFAS No. 129 on December 15,
1997 and it had no effect 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. This standard deals with financial
statement disclosure and will not affect the results of operations.
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. This standard deals with financial statement disclosure and will
not affect the results of operations.
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<PAGE>
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 (1) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the vendor's fee is
fixed or determinable, and (iv) collectibility 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 has not determined the effect on its
results of operations, however, it does not expect adoption of SOP 97-2 to
have a material effect on the financial statements.
FORWARD-LOOKING STATEMENTS
When included in this Annual Report on Form 10-KSB, 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 Item 6 and
Item 1 hereof, 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
the subsection of Item 1 entitled "Risk Factors." These forward-looking
statements speak only as of the date of this Annual Report on Form 10-KSB. 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.
ITEM 7. FINANCIAL STATEMENTS
See the Consolidated Financial Statements and related Report of
Independent Certified Public Accountants included herewith as pages F-1
through F-28
ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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 Chief Technology Officer
Steve McKeag . . . . . . 34 Chief Financial Officer
Robert Cavitt. . . . . . 35 Executive Vice President of Sales and
Marketing and Director
Greg Fink. . . . . . . . 35 Senior Vice President of Sales
Dan Jensen . . . . . . . 45 Director
John L. Tefft(1) . . . . 57 Director
</TABLE>
- -----------
(1) Appointed as a director in September 1998.
In addition to John Tefft, the Company intends to identify and elect one
additional independent director.
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, has served as Executive Vice President of Sales since September 1997,
and was appointed as a director of the Company upon completion of the Company's
initial public offering in August 1998. 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>
JOHN L. TEFFT was appointed as a director in September 1998. From 1993 until
recently, Mr. Tefft was an executive of Shaklee Corporation, a leading direct
sales company, where he served as an Executive Vice President from 1995 until
his recent retirement from that company. Mr. Tefft's responsibilities at
Shaklee Corporation included marketing and operations of all Network Marketing
business units with worldwide sales in excess of $300M annually. Mr. Tefft's
previous experience also includes 18 years at Avon Products Inc. where he was
involved in the development of both domestic and international markets
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. The
Company intends to 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.
ITEM 10. 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, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
SHARES
FISCAL ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2) OPTIONS
--------------------------- ------- ------ ----- --------------- -------
<S> <C> <C> <C> <C> <C>
David Edwards 1998 $165,000 $ -0- $ -- (2) -0-
President, Chief Executive 1997 165,000 -0- -- (2) -0-
Officer, and Chairman
Steve McKeag 1998 135,000 100,000 -- (2) -0-
Chief Financial Officer
Dan Jensen 1998 165,000 -0- -- (2) -0-
Director(3) 1997 165,000 -0- -- (2) -0-
Robert Cavitt
Executive Vice President of 1998 153,620(4) -0- -- (2) 39,113
Sales and Marketing
Greg Fink 1998 142,453(4) -0- -- (2) -0-
Senior Vice President of Sales
Jim Thompson 1998 125,000 10,000 -- (2) -0-
Chief Technical Officer
</TABLE>
- -----------
(1) Pursuant to applicable rules of the Securities and Exchange
Commission, information with respect to compensation paid in fiscal
1997 is only provided for those executive officers with respect to
which such compensation information was required to be provided in
previous Company filings. However, except as disclosed in the Summary
Compensation Table, no executive officer of the Company was paid more
than $100,000 in salary and bonus in fiscal 1997.
(2) 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.
(3) Mr. Jensen served as the Company's Chairman of the Board during the
fiscal year ended June 30, 1998 and served as an officer of the
Company in such capacity. As described in "Management--Employment and
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<PAGE>
Consulting Agreements" below, Mr. Jensen resigned as the Company's
Chairman of the Board in November 1997.
(4) Includes base salary and commission earned during the fiscal year in
question.
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information on grants of stock options
pursuant to Jenkon International, Inc. Stock Option Plan during the fiscal year
ended June 30, 1998, to the officers identified in the Summary Compensation
Table who were granted options in fiscal 1998:
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
% of Total
Options
Granted to
Options Employees Exercise
Name Granted(1) in 1998(2) Price Expiration Date
---- ---------- ---------- ----- ---------------
<S> <C> <C> <C> <C>
Robert Cavitt 39,113 36.1% $2.5567 October 1, 2007
</TABLE>
- ---------------------------
(1) The amounts in the table represent shares of the Company's Common
Stock covered by stock options granted to the named individual under
the Jenkon International, Inc. Stock Option Plan. The listed options
are fully vested.
(2) The number of shares of Company Common Stock covered by the options
granted to the named individual during the last completed fiscal year
of the Company equals the percentage set forth below of the total
number of shares of the Company common stock covered by all options
granted by the Company to employees of the Company during such year.
OPTION EXERCISES IN FISCAL 1998 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1998 by the officers
named in the Summary Compensation Table:
OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired at Fiscal Year End at Fiscal Year End(1)
on Value -------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David Edwards -0- $ -0- -0- -0- $ -0- $ -0-
Dan Jensen -0- -0- -0- -0- -0- -0-
Robert Cavitt -0- -0- 195,567 -0- 464,491 -0-
Greg Fink -0- -0- 78,227 -0- 191,797 -0-
Jim Thompson -0- -0- 97,783 -0- 239,744 -0-
Steve McKeag -0- -0- 156,454(2) -0- 721,597 -0-
</TABLE>
- --------------------------
(1) Common Stock valued at $4.625 per share.
(2) Excludes warrants to purchase up to 16,590 shares of Common Stock at a
price of $2.6845 granted to Mr. McKeag in connection with services
rendered to The Boston Group, L.P. prior to his employment by the
Company.
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<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective August 11, 1998, 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, and health, group life and disability
insurance. 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. Each of these employment agreements
contains non-competition covenants.
In November 1997, Dan Jensen resigned as Chairman of the Board of the
Company but agreed to remain as a director of the Company. Effective July 1,
1998 Mr. Jensen and the Company entered into a Consulting and Non-Competition
Agreement pursuant to which Mr. Jensen agreed to provide certain consulting
services to the Company and agreed to certain three year covenants regarding
future competition with the Company in exchange for the following payments and
benefits: (i) $30,000 on signing, (ii) $50,000 within three business days
following completion of the Company's initial public offering, (iii) $75,000 at
the end of the three year term, (iv) $12,000 per month from August 1, 1998
through January 31, 1999, (v) $8,000 per month from February 1, 1999 through
January 31, 2000, (vi) $4,000 per month from February 1, 2000 through July 31,
2001, and (vii) reimbursement and payment of certain automobile, insurance,
phone, and other expenses as well as an agreement by Jenkon to assume certain
personal guarantees of Mr. Jensen.
With respect to any covenants not to compete contained in the
agreements described above, there can be no assurance that, if challenged, a
state court would elect to enforce such provisions in full, if at all.
COMPENSATION OF BOARD OF DIRECTORS
Directors previously have received no cash compensation for serving on
the Board of Directors. Beginning in September 1998, the Company will pay 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 has granted John L. Tefft and intends to
grant each additional 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 Mr. Tefft's option is $5.32 per share and the exercise
price of any additional options granted to independent non-employee directors
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
years from the date of grant or three months after the optionee ceases to be a
director of the Company.
See "Employment and Consulting Agreement" above for a description of
the terms of the Consulting and Non-Competition Agreement between the Company
and Dan Jensen, a director and former officer of the Company.
STOCK OPTION PLAN
In October 1996 the Company adopted the Jenkon International, Inc.
Stock Option Plan (the "Plan"). 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.
-25-
<PAGE>
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.
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 6, 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.
-26-
<PAGE>
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.
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. As of June 30, 1998, the Company had 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of September 24, 1998, for
(i) each of the Company's directors, (ii) by each of the executive officers
identified in the Summary Compensation Table, (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 PERCENT
NAME SHARES (1) OWNED(3)
---- ---------- --------
<S> <C> <C>
David Edwards(2) 815,796 19.18
Dan Jensen(2) 815,796 19.18
Robert Cavitt 195,567 (4) 4.40
Greg Fink 78,227 (5) 1.81
Jim Thompson 97,783 (6) 2.25
Steve McKeag 173,044 (7) 3.91
John Tefft -0- (8) 0.00
All directors and executive
officers as a group (7 persons) 2,176,213 (8)(9) 45.35
</TABLE>
- --------------------
-27-
<PAGE>
(1) Shares of Common Stock which the person has the right to acquire
within 60 days of September 24, 1998 are deemed outstanding in
calculating the percentage of ownership of the persons, but not deemed
outstanding as to any other person.
(2) The business address of each of Mr. Edwards and Mr. Jensen is c/o the
Company at 7600 N.E. 41st Street, Suite 350, Vancouver, Washington
98662.
(3) Percentages based on 4,253,515 shares of Common Stock outstanding as
of September 24, 1998.
(4) Consists of shares issuable upon currently exercisable options to
purchase an aggregate of 195,567 shares of Common Stock.
(5) Consists of shares issuable upon currently exercisable options to
purchase an aggregate of 78,227 shares of Common Stock.
(6) Consists of shares issuable upon currently exercisable options to
purchase an aggregate of 97,783 shares of Common Stock.
(7) Consists of (i) shares issuable upon exercise of an option to purchase
up to 156,454 shares of Common Stock, and (ii) 16,590 shares of Common
Stock that are issuable upon exercise of an outstanding warrant.
(8) Excludes 15,000 shares issuable upon exercise of an option to purchase
Common Stock granted to Mr. Tefft and which becomes exercisable as to
5,000 shares on each of December 17, 1998, September 17, 1999, and
September 17, 2000.
(9) Includes currently exercisable options and warrants to acquire an
aggregate of 544,621 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRIVATE PLACEMENTS
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
had an interest rate of 7% per annum and were repaid in full upon completion of
the Company's initial public offering in August 1998.
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.
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, converted into warrants to purchase an aggregate of
161,760 shares of Common Stock at an exercise price of $2.6845 per share upon
completion of the Company's initial public offering in August 1998. 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 certain of its current and former affiliates, including transfers of
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
-28-
<PAGE>
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 TECHNOLOGY
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 redemption 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 assets of Redwood Technology. 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 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 Redwood Technology granted
the Company the right to purchase such software. The Company exercised its
purchase rights in July 1998.
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 $100, 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 $200,000 plus interest and
charges thereon which continue to accrue. In exchange for payment of $135,000,
the Company recently settled certain claims arising from tax liens recorded
against the assets of Redwood Technology with respect to the unpaid employer
portion of payroll taxes. The Company intends to settle certain other
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 significant 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 limiting or eliminating their liability, or claims asserting their
liability, arising from their having served Redwood Technology, in such
capacities or otherwise.
-29-
<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 zero, $7,322 and $46,799 for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively. In addition, in July
1998, the Company agreed to acquire two software products developed by Jenetec
LLC, an affiliate of Dan Jensen, for an aggregate purchase price of $50,000.
See "Management--Employment and Consulting Agreements" for a
discussion of the terms of a Consulting and Non-Competition Agreement between
the Company and Dan Jensen, a director and former officer of the Company.
The Company intends that future transactions between the Company and
its officers, directors and 5% (or greater) stockholders will be on terms no
less favorable than could be obtained from unaffiliated third parties and will
be approved by a majority of the disinterested directors or by the Company's
stockholders in accordance with Delaware law.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended*
3.2 Bylaws of the Company, as amended*
4.1 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant.*
4.2 Dealer Manager's Warrant Agreement, dated as of July 1, 1996
between the Company and The Boston Group, L.P.*
4.3 Form of Warrant to purchase Common Stock issued in connection
with the 1998 Private Placement*
4.4 Subscription Supplement and Registration Rights Agreement with
respect to 1996 private placement*
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*
10.4 Form of Employment Agreement of Robert Cavitt*
10.5 Consulting and Non-Competition Agreement of Dan Jensen*
10.6 Form of Indemnification Agreement with Officers and Directors*
10.7 Jenkon International, Inc. Stock Option Plan*
10.8 Lease Agreement--Corporate Headquarters, Vancouver, Washington*
10.9 Form of Software Service Agreement*
10.10 Value Added Reseller Agreement, dated January 17, 1997, between
the Company and Unidata, Inc.*
10.11 Earthlink Network TotalAccess Distribution Agreement, dated
November 27, 1997, between the Company and EarthLink Network,
Inc.*
10.12 Sublease Agreement, dated April 1, 1998, between the Company and
S&P Company*
11 Statement re: Computation of Per Share Earnings
22 List of Subsidiaries*
27 Financial Data Schedule
</TABLE>
- -------------------
* Incorporated by reference to the referenced document filed as an
exhibit to the Company's Registration Statement on Form SB-2,
Commission File No. 333-56023, filed on June 4, 1998, and amended on
July 15, 1998 and August 3, 1998).
b. Reports on Form 8-K.
No reports on Form 8-K were filed in the last quarter of the
period covered by this Report.
-30-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 25, 1998
Jenkon International, Inc.
By: /s/ David Edwards
----------------------------------
David Edwards, President and CEO
Pursuant to the requirements of the Securities Exchange Act, of 1934
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signatures Capacity Date
- ---------- -------- -----
/s/ David Edwards Chairman, President, September 25, 1998
- ---------------------- Chief Executive Officer and
David Edwards Director
/s/ Dan Jensen Director September 25, 1998
- ----------------------
Dan Jensen
/s/ Robert Cavitt Executive Vice-President of Sales September 25, 1998
- ---------------------- and Marketing, and Director
Robert Cavitt
/s/ Steve McKeag Chief Financial Officer September 25, 1998
- ---------------------- (Principal Accounting Officer)
Steve McKeag
-31-
<PAGE>
JENKON INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1998
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND 1998 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30,
1997 AND 1998 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED
JUNE 30, 1997 AND 1998 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30,
1997 AND 1998 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
F-2
<PAGE>
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, 1997 and 1998, and the
related consolidated statements of operations, statements of stockholders'
deficit and cash flows for the years ended June 30, 1997 and 1998. 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, 1997 and 1998, and the
results of its consolidated operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Los Angeles, CA
September 18, 1998
F-3
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3) $ 132,736 $ 200,557
Restricted cash (Notes 1 and 3) 300,000 200,000
Trade receivables, net of allowance for doubtful
accounts of $200,000 and $146,500 (Note 1) 747,509 1,078,268
Prepaid and other assets 83,521 88,998
Refundable income taxes 155,653 24,308
- -------------------------------------------------------------------------------------------------
Total current assets 1,419,419 1,592,131
PROPERTY AND EQUIPMENT, net (Notes 2 and 3) 1,017,056 1,088,926
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $329,024 and $442,278 339,740 226,486
PREPAID FUNDING AND OFFERING COSTS (Notes 13 and 14) - 374,364
OTHER ASSETS 63,156 160,537
- -------------------------------------------------------------------------------------------------
Total assets $ 2,839,371 $ 3,442,444
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 692,299 $ 563,924
Accrued vacation 116,172 152,077
Customer deposits 920,925 425,684
Other accrued liabilities 598,018 543,016
Bridge loans (Note 13) - 591,964
Notes payable - current portion (Note 3) 338,512 410,213
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 2,665,926 2,686,878
NOTES PAYABLE, net of current portion (Note 3) 442,584 106,529
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 3,108,510 2,793,407
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8, and 14)
SERIES A, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
(Notes 5 and 14) $0.001 par value;
5,000,000 shares authorized; Series A,
1,500,000 shares issued and outstanding 2,310,174 2,310,174
STOCKHOLDERS' DEFICIT (Note 5)
Common stock, par value $.001; 20,000,000 shares
authorized; 1,955,674 shares issued, 1,799,220
shares outstanding 1,956 1,956
Additional paid-in capital 161,683 601,483
Stock subscriptions receivable (Note 6) (8,500) (8,500)
Foreign currency translation adjustment (28,092) (28,190)
Accumulated deficit (2,366,360) (1,887,886)
Treasury stock, at cost, 156,454 shares (340,000) (340,000)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (2,579,313) (1,661,137)
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 2,839,371 $ 3,442,444
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES (Notes 1 and 9)
Software license fees $ 2,761,995 $3,649,060
Equipment, software and supplies sales 1,029,314 836,156
Support and operations revenue 4,688,763 4,952,201
- ---------------------------------------------------------------------------------------------------------------
Total net sales 8,480,072 9,437,417
- ---------------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Cost of software license fees 292,831 512,612
Cost of equipment, software and supplies sold (Note 10) 781,562 167,892
Cost of support and operations 3,156,312 2,538,076
- ---------------------------------------------------------------------------------------------------------------
Total cost of goods sold 4,230,705 3,218,580
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT (Note 7) 4,249,367 6,218,837
OPERATING EXPENSES
Selling and marketing 1,024,716 924,654
Product research, development and enhancements 737,056 772,962
General and administration 4,116,259 3,863,974
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 5,878,031 5,561,590
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (1,628,664) 657,247
OTHER INCOME (EXPENSE)
Interest, net (97,433) (177,823)
Other income (expense) (63,088) 3,950
- ---------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX (1,789,185) 483,374
PROVISION (BENEFIT) FOR INCOME TAX (Note 4) (88,000) 4,900
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,701,185) $ 478,474
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE (Note 11)
Basic $ (.85 ) $ 0.27
Diluted $ (.85 ) $ 0.14
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 11)
Basic 1,994,792 1,799,220
Diluted 1,994,792 3,392,549
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Stock Currency
------------------------ Paid-In Subscriptions Translation Accumulated
Shares Amount Capital Receivable Adjustment Deficit
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1996 1,955,674 $ 1,956 $ 6,794 $ (8,500) $ 3,288 $ (665,175)
Stock redemption - - - - - -
Compensation expense related to
employee stock options
(Note 5) - - 154,889 - - -
Foreign currency translation
adjustment - - - - (31,380) -
Net loss - - - - - (1,701,185)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 1,955,674 1,956 161,683 (8,500) (28,092) (2,366,360)
Issuance of warrants (Note 13)
and original issue discount
associated with the private
placement - - 439,800 - - -
Increase in foreign currency
translation adjustment - - - - (98) -
Net income - - - - - 478,474
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 1,955,674 $ 1,956 $ 601,483 $ (8,500) $ (28,190) $ (1,887,886)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Treasury Stock
-----------------------
Shares Amount Total
-----------------------------------------
<S> <C> <C> <C>
BALANCE, July 1, 1996 - $ - $ (661,637)
Stock redemption 156,454 (340,000) (340,000)
Compensation expense related to
employee stock options
(Note 5) - - 154,889
Foreign currency translation
adjustment - - (31,380)
Net loss - - (1,701,185)
- -----------------------------------------------------------------------
BALANCE, June 30, 1997 156,454 (340,000) (2,579,313)
Issuance of warrants associated
with the private placement
(Note 13) - - 439,800
Increase in Foreign currency
translation adjustment - - (98)
Net income - - 478,474
- -----------------------------------------------------------------------
BALANCE, June 30, 1998 156,454 $ (340,000) (1,661,137)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (NOTE 1)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,701,185) $ 478,474
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 314,890 368,509
Amortization of original issue discount - 31,763
Provision for doubtful accounts 102,142 165,473
Non-cash compensation expense 154,889 -
Foreign currency translation adjustment (31,380) 4,216
Increase (decrease) from changes in operating
assets and liabilities:
Trade receivables (125,392) (496,232)
Prepaid and other assets 48,632 (5,477)
Refundable income taxes (155,653) 131,345
Other assets (5,801) (97,381)
Accounts payable (498,654) (128,375)
Accrued wages and related taxes (208,450) -
Accrued vacation 32,489 35,905
Customer deposits 507,971 (495,241)
Other accrued liabilities 373,339 (55,002)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,192,163) (62,023)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (995,736) (331,438)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash (300,000) 100,000
Additions to prepaid funding and offering costs - (374,364)
Borrowings on notes payable 659,996 -
Payments on notes payable (134,039) (264,354)
Borrowings from private placement 2,310,174 1,000,000
Redemption of common stock (340,000) -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,196,131 461,282
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,232 67,821
CASH AND CASH EQUIVALENTS, beginning of year 124,504 132,736
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 132,736 $ 200,557
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(a) Cash paid during the year
for:
Interest $ 70,526 $ 159,495
Income taxes $ 155,653 $ 4,859
(b) Other (See Notes 5 and 13).
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY NATURE OF BUSINESS
ORGANIZATION
AND SIGNIFICANT Jenkon International, Inc. (a Delaware
ACCOUNTING corporation) (Parent), through its wholly-owned
POLICIES subsidiaries, Jenkon International, Inc. (a
Washington Corporation), Summit V, Inc. (the
United States operating entity) and Jenkon
International 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.
F-9
<PAGE>
1. COMPANY ORGANIZATION CASH AND CASH EQUIVALENTS
AND SIGNIFICANT
ACCOUNTING All liquid assets with an initial maturity of
POLICIES three months or less are considered to be cash
(CONTINUED) equivalents for purposes of the statements of
cash flows.
At June 30, 1997 and 1998, the Company had
restricted cash held as collateral for certain
capital leases of $300,000 and $200,000.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash
investments with high credit worthy
institutions. At June 30, 1997 and 1998, the
Company had a $300,000 and $200,000
certificate of deposit at a bank, which served
as collateral for certain capital leases. At
June 30, 1997 and 1998, the Company had
$200,838 and $415,315 at the same bank. These
balances are insured by the FDIC up to
$100,000.
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 collection of all
accounts receivable.
At June 30, 1998, the Company had three
customers which represented approximately
40.4% of accounts receivable. At June 30,
1997, the Company had two customers which
represented approximately 34% of accounts
receivable.
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 ranges from 3 to 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.
F-10
<PAGE>
1. COMPANY ORGANIZATION AND CAPITALIZED SOFTWARE COSTS
SIGNIFICANT
ACCOUNTING Costs incurred in the research and development
POLICIES of new software products and enhancements to
(CONTINUED) 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 detailed
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. The Company evaluates
the recoverability of all capitalized
software costs on a quarterly basis by
comparing the net realizable value,
determined pursuant to management's
estimates of future product cash flows,
with the unamortized capitalized software
costs balance.
For the years ended June 30, 1997 and 1998,
amortization of capitalized software
development costs amounted to approximately
$113,000 for each period and is included in
"Cost of software license fees" in the
consolidated statements of operations.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Jenkon International
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' 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 1998.
F-11
<PAGE>
1. COMPANY ORGANIZATION AND REVENUE RECOGNITION
SIGNIFICANT
ACCOUNTING SOFTWARE LICENSE FEES
POLICIES
(CONTINUED) 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.
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.
F-12
<PAGE>
1. COMPANY REVENUE RECOGNITION (Continued)
ORGANIZATION
AND SIGNIFICANT DISCOUNTS, RETURNS AND EXCHANGES
ACCOUNTING
POLICIES Discounts are determined at the time the
(CONTINUED) 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. A
valuation allowance is recognized when it
is more likely than not that some portion
or all of the deferred tax asset will not
be realized.
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 reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
F-13
<PAGE>
1. COMPANY EMPLOYEE STOCK COMPENSATION
ORGANIZATION
AND SIGNIFICANT The Company adopted Statement of Financial
ACCOUNTING Accounting Standards No. 123, "Accounting for
POLICIES Stock-Based Compensation" (SFAS No. 123), as
(CONTINUED) 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 where
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.
F-14
<PAGE>
1. COMPANY NEW ACCOUNTING PRONOUNCEMENTS
ORGANIZATION
AND SIGNIFICANT DISCLOSURE ABOUT CAPITAL STRUCTURE
ACCOUNTING
POLICIES Statement of Financial Accounting Standards
(CONTINUED) 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.
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. This
standard deals with financial statement
disclosure and will not effect the results
of operations.
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. This standard deals
with financial statement disclosure and will
not effect the results of operations.
F-15
<PAGE>
1. COMPANY SOFTWARE REVENUE RECOGNITION
ORGANIZATION
AND SIGNIFICANT Statement of Position 97-2, "Software Revenue
ACCOUNTING Recognition", ("SOP 97-2") issued by the AICPA
POLICIES is effective for transactions entered into in
(CONTINUED) 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)
collectibility 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 has not determined the
effect on its results of operations, however
it 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, 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 100,904 $ 133,046
Computer systems and related equipment 1,059,522 1,174,843
Vehicles 127,900 127,781
Leasehold improvements 92,317 271,808
-------------------------------------------------------------------------------
1,380,643 1,707,478
Accumulated depreciation (363,587) (618,552)
-------------------------------------------------------------------------------
Property and equipment, net $ 1,017,056 $ 1,088,926
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended
June 30, 1997 and 1998 were $201,643 and
$255,255.
F-16
<PAGE>
3. NOTES PAYABLE A summary of notes payable is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Note payable to an individual, who is a
related party, 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 note-holder also
receives monthly payments equal to 1% of
the Company's gross margin until fully paid $ 235,494 $ 173,142
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 31,950 25,327
asset
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 19,538 15,645
asset
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 June 30, 1998 440,361 268,350
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 above mentioned
Certificate of Deposit in the amount of
$300,000 at June 30, 1997 and $200,000 at 53,753 34,278
June 30, 1998
-------------------------------------------------------------------------------
781,096 516,742
Less current portion 338,512 410,213
-------------------------------------------------------------------------------
$ 442,584 $ 106,529
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
3. NOTES PAYABLE Aggregate maturities of long-term debt in
(CONTINUED) the next five years ending June 30, 1998 are
as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
-------------------------------------------------------------------------------
<C> <C>
1999 $ 410,213
2000 100,110
2001 5,450
2002 969
-------------------------------------------------------------------------------
$ 516,742
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
4. INCOME TAXES The provision (benefit) 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>
JUNE 30, 1997 1998
---------------- -----------------
Amount % Amount %
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision (benefit) at the
federal statutory rate $ (561,000) (34)% 164,000 34%
Permanent differences 25,000 2 (111,200) (23)
Valuation allowance on net
deferred tax assets 448,000 29 (47,900) (10)
--------------------------------------------------------------------------------
Provision (benefit) for
income tax $ (88,000) (6)% 4,900 1%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
4. INCOME TAXES Temporary differences which give rise to
(CONTINUED) deferred tax assets and (liabilities) were as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Current:
Allowance for doubtful accounts $ 8,000 $ 49,800
Accrued vacation 11,000 51,700
-------------------------------------------------------------------------------
19,000 101,500
-------------------------------------------------------------------------------
Non-current:
Property and equipment $ (16,000) $ (65,400)
Amortization of intangibles 26,000 77,000
Net operating loss 366,000 234,000
-------------------------------------------------------------------------------
Gross deferred tax asset 395,000 347,100
Less: valuation allowance (395,000) (347,100)
-------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</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, 1998, the Company has net loss
operating carryforwards of approximately
$688,000 which will expire in 2018.
F-19
<PAGE>
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 1,955,674 common stock shares 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
Preferred Series A 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 Preferred Series A stock and the
purchase of common stock were executed at
$2.56 per share. The net proceeds to the
Company from the sale of preferred stock 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.
(See Note 14)
In the original Certificate of Designation,
Preferences and Rights of Series A Preferred
Stock, there is a criterion which states that
if the Company issues or sells additional
shares of Common Stock for less than the
greater of the then existing conversion price
for the Series A Preferred Stock or the market
price, then in each such case the then
existing conversion price for the Series A
Preferred Stock is reduced.
STOCK OPTION PLANS
The Company has a common stock option plan for
certain executives and key employees. The
option's maximum term is ten years. Options
granted vest immediately at the first
anniversary of the grant.
In November 1996, the Company issued 156,454
options to an employee at a nominal value
($0.01) and recorded compensation expense of
$154,889, which represented the difference
between the exercise price and fair value of
the stock on the grant date.
F-20
<PAGE>
5. SHAREHOLDERS' EQUITY WARRANTS
(CONTINUED)
In connection with the Company's private
placement, the Company issued 161,760 warrants
to purchase Series A preferred stock to the
Dealer Manager. The exercise price of these
warrants is $2.6845 per share, which is
subject to adjustment in certain
circumstances.
In connection with the Company's 1998
private placement of debt, the Company issued
warrants to purchase 117,340 common stock
at an exercise price of $.6392. (See Note 13).
The following summarizes stock option and
warrant activity during the years ended June
30, 1997 and 1998:
<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 214,341 1.95
--------------------------------------------------------------------------------
Outstanding at June 30, 1998 865,019 $ 1.82
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
5. SHAREHOLDERS' EQUITY WARRANTS (CONTINUED)
(CONTINUED)
Information relating to stock options and
warrants at June 30, 1998 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------- ------------------------
Weighted
Exercise Weighted-Average Average
----------------------- -------------
Price Per Life Exercise Exercise
Share Shares (Month) Price Shares Price
---------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$0.0128 156,454 101.0 $0.0128 156,454 $0.0128
$0.6392 117,340 18.0 $0.6392 117,340 $0.6392
$2.1732 332,464 105.3 $2.1732 332,464 $2.1732
$2.5567 39,113 108.5 $2.5567 39,113 $2.5567
$2.6845 161,760 45.5 $2.6845 161,760 $2.6845
$3.8350 57,888 115.0 $3,8350 - $3.8350
---------------------------------------------------------------------------------
$0.0128-
$3.8350 865,019 82.7 $1.8200 807,131 $1.6500
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</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 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 (loss) would have been the pro
forma amounts indicated in the table below:
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)
As reported $ (1,701,185) $ 478,474
Pro forma (1,747,935) 423,934
Earnings (loss) per share
As reported $ (0.85) $ .27
Pro forma (0.88) .24
Diluted:
As reported $ (0.85) $ .14
Pro forma (0.88) .13
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
5. SHAREHOLDERS' EQUITY WARRANTS (CONTINUED)
(CONTINUED)
The fair value of the option and warrant
grants are 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
grant for options granted during fiscal 1997
and 1998 approximated $1.04 and $0.68.
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 The Company has purchase arrangements with
TRANSACTIONS Jentronix, an entity wholly-owned by a
relative of a major stockholder. Purchases
from Jentronix amounted to $7,322 for the
year ended June 30, 1997.
Stock subscription receivable represents
amounts due from officers of the Company.
At June 30, 1997 and 1998, the Company had a
receivable due from an officer of $10,000 and
$37,000. (See Notes 3 and 14.)
CONSULTING/NON-COMPETE AGREEMENT
In June 1998, Mr. Jensen and the Company
entered into a Consulting/Non-Compete
Agreement which is effective July 1, 1998,
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-23
<PAGE>
7. COMMITMENTS The Company leases its facilities under
AND noncancellable operating leases which
CONTINGENCIES 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.
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, 1998:
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
-------------------------------------------------------------------------------
<C> <C> <C>
1999 $ 255,350 $ 370,100
2000 103,143 175,275
2001 5,898 109,740
2002 983 23,694
-------------------------------------------------------------------------------
Total minimum lease payments 365,374 $ 678,809
------------
------------
Less amount representing interest 22,406
-------------------------------------------------------------
Present value of net minimum lease payments
342,968
Less current portion 237,072
-------------------------------------------------------------
$ 105,896
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
The Company's rental expense for operating
leases was $308,209 and $391,171 for the years
ended June 30, 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.
F-24
<PAGE>
7. COMMITMENTS In the ordinary course of business, the
AND Company is subject to various legal
CONTINGENCIES proceedings and claims. In the opinion of
(CONTINUED) 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 (See 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 common ownership and
management of Redwood Technology and the
Company, the Company may be subject to claims
by unsatisfied creditors of Redwood
Technology.
During 1996 the Company established a
predecessor liability of $400,000. During the
year ended June 30, 1997 and 1998 the amount
was reduced to approximately $375,000 and
$175,000, respectively due to settlements with
some unsatisfied creditors, including a
settlement with the IRS for $135,000.
8. EMPLOYEE BENEFIT The Company's employees are covered by a
PLAN 401(k) defined contribution benefit plan. The
plan provides for employee tax-deferred
contributions up to the maximum percentage of
eligible compensation allowed by tax code
section 401(k). The Company may make matching
contributions equal to a discretionary
percentage. For the years ended June 30, 1997
and 1998, the Company did not make matching
contributions to the plan.
F-25
<PAGE>
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. The Company had
no customers that accounted for more than 10%
of the Company's sales for the year ended
June 30,1998.
10. CONCENTRATION OF The Company is dependent on third-party
SUPPLIERS 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: for
the year ended June 30, 1998: one supplier at
12% of total purchases, and for the year ended
June 30, 1997: three suppliers at 37%, 31% and
12% of total purchases.
11. 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, 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Basic weighted average shares outstanding 1,994,792 1,799,220
Diluted effect of stock options and
warrants - 390,377
Conversion of preferred stock - 1,202,952
-------------------------------------------------------------------------------
Diluted weighted average shares outstanding 1,994,792 3,392,549
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
Options to purchase 494,224 shares were
outstanding during the year ended June 30,
1997 but were not included in the computation
of diluted loss per common share because the
effect would be antidilutive.
12. 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.
F-26
<PAGE>
13. BRIDGE LOANS In June 1998, the Company completed a
$1,000,000 private placement of bridge
loans. Net proceeds were $880,000
after a placement fee of $120,000. The
bridge loan accrues interest at an annual
rate of 7%. The Company issued 11,732
warrants for each $100,000 of bridge
loans, for a total of 117,321 warrants, at a
per share exercise price of $.6392. The bridge
loans are due the earlier of twelve months
or at completion of the initial public
offering. The Company valued the warrants
at fair value. The original issue discount of
$439,800 was determined based on the fair
value of the warrants to total fair value
of warrants and debt. The original issue
discount and placement fees are being
amortized over the twelve month term of
the bridge loans as interest expense. At
June 30, 1998, amortization of the
original issue discount and placement fees
were $31,763 and $8,667.
14. SUBSEQUENT EVENTS INITIAL PUBLIC OFFERING (IPO)
In August 1998, the Company completed an
initial public offering of 1,500,000
shares, of which 1,210,000 shares were
offered by the Company and 290,000 shares
by selling shareholders. Net proceeds to
the Company were approximately $4,514,000
after deducting all offering-related
expenses of $1,536,000. The Company used a
portion of the proceeds to repay the
outstanding indebtedness of $1,000,000
which was incurred with the 1998 private
placement and approximately $258,000
related to other indebtedness (see Note 3).
The remaining proceeds will be used in the
development of new products and upgrades,
expansion of the Company's sales and
marketing efforts and general working
capital. In connection with the initial
public offering, the Company issued
warrants to purchase 150,000 shares of
common stock at an exercise price of $8.25
(165% of the initial public offering price)
to underwriters. At June 30, 1998, the
Company had prepaid funding costs of
$374,364, which was offset against the
gross proceeds from the IPO.
Subsequent to June 30, 1998, the Company
awarded a $120,000 bonus to the Chief
Financial Officer. The bonus is payable
after the completion of the IPO in equal
installments of $10,000 per month.
In connection with the IPO, the Company
committed 39,113 options to the Vice-President
of Marketing and Sales. As of September 11,
1998, the Company has not granted these
options.
F-27
<PAGE>
14. SUBSEQUENT EVENTS EMPLOYMENT AGREEMENTS
(CONTINUED)
In August 1998, the Company entered 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 are $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, it will
be required to make a severance payment equal
to one year's base salary. However, one of the
employment agreements with an annual base
salary of $150,000 has a severance payment of
$200,000 instead of $150,000.
SOFTWARE PURCHASE AGREEMENT
In August 1998, the Company purchased
software products for $50,000 from a related
party.
PREFERRED STOCK
In August 1998, all 1,500,000 outstanding
shares of the Company's outstanding Series A
preferred stock were converted into 1,244,296
shares of common stock.
F-28
<PAGE>
JENKON INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1997 1998
------------ ----------
<S> <C> <C>
EARNINGS (LOSS) PER SHARE:
- --------------------------
Net income (loss) .................................. $ (1,701,185) $ 478,474
------------ ----------
------------ ----------
Basic weighted average share outstanding ........... 1,994,792 1,799,220
Diluted effect of stock options and warrants ....... - 390,377
Conversion of preferred stock ...................... - 1,202,952
------------ ----------
Diluted weighted average shares outstanding ........ 1,994,792 3,392,549
------------ ----------
------------ ----------
Basic earnings (loss) per share .................... $ (0.85) $ 0.27
------------ ----------
------------ ----------
Diluted earnings (loss) per share .................. $ (0.85) $ 0.14
------------ ----------
------------ ----------
</TABLE>
Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 200,557
<SECURITIES> 0
<RECEIVABLES> 1,224,768
<ALLOWANCES> 146,500
<INVENTORY> 0
<CURRENT-ASSETS> 1,592,131
<PP&E> 1,707,478
<DEPRECIATION> 618,552
<TOTAL-ASSETS> 3,442,444
<CURRENT-LIABILITIES> 2,686,878
<BONDS> 0
0
2,310,174
<COMMON> 1,956
<OTHER-SE> 1,663,093
<TOTAL-LIABILITY-AND-EQUITY> 3,442,444
<SALES> 9,437,417
<TOTAL-REVENUES> 9,437,417
<CGS> 3,218,580
<TOTAL-COSTS> 8,780,170
<OTHER-EXPENSES> (3,950)
<LOSS-PROVISION> 165,473
<INTEREST-EXPENSE> 177,823
<INCOME-PRETAX> 483,374
<INCOME-TAX> 4,900
<INCOME-CONTINUING> 478,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 478,474
<EPS-PRIMARY> .27
<EPS-DILUTED> .14
</TABLE>
