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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] 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.
(Name of Small Business Issuer in its Charter)
Delaware 91-1890338
- ------------------------------ ------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
7600 N.E. 41st Street, Suite 350, Vancouver, Washington 98662
- ------------------------------------------------------- --------
Address of principal executive office Zip Code
Issuer's telephone number: (360) 256-4400
--------------
Check whether the issuer has (1) filed all reports required by Section 13 or
15(d) of the Exchange Act during the past 12 months, and (2) been subject to
such filing requirements for the past ninety (90) days. Yes X No
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As of September 30, 1998, 4,253,515 shares of Common Stock were outstanding.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL STATEMENTS
Page
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND
JUNE 30, 1998 1-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15-16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBIT
EXHIBIT 27
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JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
- ------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,796,679 $ 200,557
Restricted cash 150,000 200,000
Trade receivables, net of allowance
for doubtful accounts of $146,500
and $146,500 1,114,295 1,078,268
Prepaid and other assets 283,186 88,998
Refundable income taxes 24,308 24,308
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Total current assets 4,368,468 1,592,131
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $544,500 and $474,100 1,080,970 1,088,926
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $470,589 and $442,278 208,396 226,486
PREPAID FUNDING AND OFFERING COSTS - 374,364
OTHER ASSETS 314,788 160,537
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Total assets $5,972,622 $3,442,444
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- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
1
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JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
- ---------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 414,203 $ 563,924
Accrued vacation 153,439 152,077
Customer deposits 265,584 425,684
Other accrued liabilities 691,443 543,016
Bridge loans - 591,964
Notes payable - current portion 216,046 410,213
- ---------------------------------------------------------------------------------------
Total current liabilities 1,740,715 2,686,878
NOTES PAYABLE, net of current portion 50,876 106,529
- ---------------------------------------------------------------------------------------
Total liabilities 1,791,591 2,793,407
COMMITMENTS AND CONTINGENCIES
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
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.001; 20,000,000
shares authorized; 4,409,970 and
1,955,674 shares issued, 4,253,516 and
1,799,220 shares outstanding 4,410 1,956
Additional paid-in capital 7,389,263 601,483
Stock subscriptions receivable (8,500) (8,500)
Foreign currency translation adjustment (20,231) (28,190)
Accumulated deficit (2,843,911) (1,887,886)
Treasury stock, at cost, 156,454 shares (340,000) (340,000)
- ---------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 4,181,031 (1,661,137)
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity (deficit) $ 5,972,622 $ 3,442,444
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
2
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JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES
Software license fees $ 609,383 $ 688,450
Equipment, software and supplies sales 193,122 113,181
Support and operations revenue 809,478 1,053,979
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Total net sales 1,611,983 1,855,610
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COST OF GOODS SOLD
Cost of software license fees 61,858 69,402
Cost of equipment, software and supplies sold 63,387 82,304
Cost of support and operations 641,327 611,240
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Total cost of goods sold 766,572 762,946
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GROSS PROFIT 845,411 1,092,664
OPERATING EXPENSES
Selling and marketing 226,227 262,352
Product research, development and enhancements 168,658 232,115
General and administration 843,518 899,321
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Total operating expenses 1,238,403 1,393,788
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LOSS FROM OPERATIONS (392,992) (301,124)
OTHER INCOME (EXPENSE)
Interest, net (534,051) (41,240)
Other income (expense) (28,982) (27,284)
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LOSS BEFORE INCOME TAX (956,025) (369,648)
PROVISION FOR INCOME TAX (BENEFIT) - (33,290)
- --------------------------------------------------------------------------------------------
NET LOSS $ (956,025) $ (336,358)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET LOSS PER SHARE
Basic $ (0.30) $ (0.19)
Diluted $ (0.30) $ (0.19)
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- --------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 3,159,754 1,799,220
Diluted 3,159,754 1,799,220
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- --------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
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JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (956,025) $ (336,358)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 104,017 92,144
Amortization of original issue discount 408,037 -
Provision for doubtful accounts - 67
Foreign currency translation adjustment 7,960 10,850
Increase (decrease) from changes in operating
assets and liabilities:
Trade receivables (36,027) 140,986
Prepaid and other assets (194,188) (34,129)
Refundable income taxes - 131,345
Other assets (154,251) (10)
Accounts payable (149,722) (243,085)
Accrued vacation 1,362 (244)
Customer deposits (160,100) 434,864
Other accrued liabilities 148,427 (6,559)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (980,510) 189,871
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (67,761) (9,960)
Additions to software rights (10,211) -
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (77,972) (9,960)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash 50,000 100,000
Additions to prepaid funding and offering costs (459,076) -
Repayment of Bridge Loans (1,000,000) -
Payments on notes payable (249,820) (22,667)
Net proceeds from initial public offering 5,313,500 -
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,654,604 77,333
- -----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,596,122 257,244
CASH AND CASH EQUIVALENTS, beginning of period 200,557 132,736
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 2,796,679 $ 389,980
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
4
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. STATEMENT OF In the opinion of management the accompanying unaudited
INFORMATION financial statements contain all adjustments (consisting
FURNISHED only of normal and recurring accruals) necessary to
present fairly the financial position as of September 30,
1998, and the results of operations and cash flows for the
three month period ended September 30, 1998 and 1997.
These results have been determined on the basis of
generally accepted accounting principles and practices
applied consistently with those used in the preparation of
the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1998.
The results of operations for the three month period ended
September 30, 1998, are not necessarily indicative of the
results to be expected for any other period or for the
entire year.
Certain information and footnote disclosures normally
included in financial statements presented in accordance
with generally accepted accounting principles have been
condensed or omitted. The accompanying financial
statements should be read in conjunction with the
Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1998.
2. REVENUE The Company adopted Statement of Position 97-2, "Software
RECOGNITION Revenue Recognition", ("SOP 97-2") effective July 1, 1998.
In accordance with SOP 97-2, the Company recognizes
revenue on sales of internally-developed software and
turnkey systems when the following criteria are met; (i)
persuasive evidence of an arrangement exists, (ii)
delivery has occurred and the system is functionable,
(iii) the vendor's fee is fixed or determinable and (iv)
collectibility is probable. Also in accordance with SOP
97-2, the Company also allocates the fee of a multiple
element contract to the various elements based on
vendor-specific objective evidence of fair value. Revenue
allocated to a specific element is recognized when the
basic revenue recognition criteria above is met for that
element. If sufficient vendor-specific objective evidence
for all elements does not exist to allocate revenue to the
elements, all revenue from the arrangement is deferred
until such evidence exists or until all elements have been
delivered. Revenues related to installation of systems
requiring substantial future performance by the Company
are recognized using the percentage-of-completion method
based on meeting key milestone events over the terms of
the contract. Customization and training revenue is
recognized as the services are performed. This standard
had no effect on the Company's financial position or
Statement of Operations at September 30, 1998.
5
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3. EARNINGS The Company computes loss per common share under SFAS No.
(LOSS) PER 128, "Earnings Per Share," which requires presentation of
COMMON SHARE basic and diluted earnings (loss) per share. Basic
earnings (loss) per common share is computed by dividing
income or loss available to common shareholders by the
weighted average number of common shares outstanding for
the reporting period. Diluted earnings (loss) per common
share reflects the potential dilution that could occur if
securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common
stock. Common stock options and convertible preferred
stock were not included in the computation of diluted loss
per common share because the effect would be antidilutive.
Weighted average and per share information for the three
month ended September 30, 1997 were restated in accordance
with SFAS 128 which has no effect on the amounts
previously presented.
4. INITIAL In August 1998, the Company completed an initial public
PUBLIC offering of 1,500,000 shares, of which 1,210,000 shares
OFFERING were offered by the Company and 290,000 shares by selling
(IPO) shareholders. Net proceeds to the Company was
approximately $4,480,000 after deducting all
offering-related expenses of $1,570,000. 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 $272,000 related
to other indebtedness. The remaining proceeds are being
used in the development of new products and upgrades,
expansion of the Company's sales and marketing efforts and
general working capital.
5. UNITED Subsequent to September 30, 1998, the Company decided to
KINGDOM eliminate the redundant infrastructure in its United
OPERATIONS Kingdom office and began winding up its international
affairs.
6. COMPREHENSIVE Comprehensive income at September 30, 1998 and 1997 is
INCOME comprised of net loss of $956,025 and $336,358 and foreign
currency translation adjustment of $20,231 and $28,190,
respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information
contained herein, the discussion in this Form 10-QSB contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Form 10-QSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-QSB. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, without limitation, those factors discussed below under
"Additional Considerations and Risk Factors" herein and in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1998.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997
REVENUES. Total revenues decreased 13.1% to $1,612,000 for the three
months ended September 30, 1998 from $1,856,000 for the same period in 1997.
The decrease was primarily attributable to decreased operations revenue.
During the quarter ended September 30, 1998 one client accounted for 12.4% of
total revenue.
SOFTWARE LICENSE REVENUES. Software license revenues decreased 11.5% to
$609,000 for the three months ended September 30, 1998 from $688,000 for the
same period in 1997. The decrease in software license revenue was due to a
decrease in system sales and additional modules sold to new and existing
clients.
EQUIPMENT, SOFTWARE, AND SUPPLIES REVENUES. Equipment, software and
supplies revenues increased 70.8% to $193,000 for the three months ended
September 30, 1998 from $113,000 for the same period in 1997. The increase
was primarily attributable to the sale of additional third-party licenses
which are required in connection with customer implementation of the NOW!
product.
SUPPORT AND OPERATIONS REVENUE. Support and operations revenue
decreased 23.3% to $809,000 for the three months ended September 30, 1998
from $1,054,000 for the same period in 1997. The decrease is primarily
attributable to the lack of custom programming jobs during the recent quarter
compared to the same period last year which included two substantial custom
programming jobs. The decrease is partially offset by increased maintenance
contract revenues resulting primarily from an increase in the number of
customers paying maintenance for new and upgraded systems.
COST OF REVENUES. Total cost of revenues were consistent between the
periods totaling $767,000 for the three months ended September 30, 1998 and
$763,000 for the same period in 1997.
COST OF SOFTWARE LICENSES. The cost of software licenses consists
primarily of the cost of the supplies that are included with the Company's
systems that are provided by third party
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supplier. The cost of software licenses decreased 10.1% to $62,000 for the
three months ended September 30, 1998 from $69,000 for the same period in
1997.
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 23.2% to $63,000 for the three months
ended September 30, 1998 from $82,000 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 increased 4.9% to $641,000 for the three months ended
September 30, 1998 from $611,000 for the same period in 1997. The increase
related primarily to the reclassification of NOW! programmers from research
and development to operations as this product is fully functional.
GROSS PROFIT. Gross profit decreased by 22.7% to $845,000 for the three
months ended September 30, 1998 from $1,093,000 for the same period in 1997.
Overall gross profit as a percentage of total revenues decreased to 52.4% for
the three months ended September 30, 1998 from 58.9% for the same period in
1997, mainly as a result of a decrease in operations revenue coupled with a
fixed labor cost. Gross profit on the Company's software license fees is
significantly higher than on equipment, services and maintenance. Gross
profit on software licenses remained relatively constant for the three months
ended September 30, 1998 and 1997 at 89.8% and 90.0%, respectively. Gross
profit on software support services and maintenance decreased to 20.8% for
the three months ended September 30, 1998 from 42.0% for the same period in
1997 mainly due to reduced support and operations revenue coupled with a fixed
labor cost. The increase in third party software and equipment gross profit
to 67.2% for the three months ended September 30, 1998 from 27.3% for the
same period in 1997 was primarily due to more sales of third party software
and less sales of low margin hardware.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased 13.8% to $226,000 for the three months ended September 30, 1998
from $262,000 for the same period in 1997. The decrease primarily relates to
the retirement of Dan Jensen in June 1998 and lower commissions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 27.2% to $169,000 from $232,000 for the same period in 1997. The
decrease is primarily related to the completion of the NOW! suite of products
in the previous fiscal year. As a result, the expenses are lower in the
current period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 6.1% to $844,000 for the three months ended September 30,
1998 from $899,000 for the same period in 1997. The expenses are fairly
consistent between the periods with the greatest reductions relating to lower
overhead in the Company's United Kingdom office.
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INTEREST EXPENSE. Interest expense increased 1,202.4% to $534,000 for
the three months ended September 30, 1998 from $41,000 for the same period in
1997 and relates primarily to the original issue discount on the June 1997
bridge loan. The loan was paid in full on August 14, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In August 1998, the Company completed an initial public offering of
1,500,000 shares of common stock, of which 1,210,000 shares were sold by the
Company and 290,000 shares were sold by selling shareholders. Net proceeds
to the Company were approximately $4,480,000 after deducting all
offering-related expenses of $1,570,000. 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 $272,000 related
to note payable to a stockholder. The remaining proceeds are being used in
the development of new products and upgrades, expansion of the Company's
sales and marketing efforts and general working capital.
Prior to the initial public offering of common stock the Company
financed its operations primarily through cash flow from operations, private
sales of its equity, private debt placements and long-term equipment
financing. The Company does not have access to a line of credit. The
Company's $600,000 equipment lease requires the Company to maintain cash on
deposit with a bank affiliated with the lessor. The required cash balance
was initially $300,000 and reduces incrementally in proportion to the
reduction in the lease balance. At September 30, 1998 the principal balance
of the lease was $300,000 and the required cash balance was $150,000.
The Company has entered into an 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. 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.
For the three months ended September 30, 1997, operating activities
provided net cash of approximately $190,000 primarily from a combined
decrease in trade receivables and income tax receivables of $272,000 and an
increase in customer deposits of approximately $435,000 which were offset by
a loss from operations of approximately $244,000, net of depreciation and
amortization, and a decrease in accounts payable of approximately $243,000.
For the three months ended September 30, 1997, financing activities provided
net cash of approximately $77,000 primarily from a reduction in the
compensating cash balance requirement associated with the Company's equipment
lease. For the three months ended September 30, 1997 the Company's investing
activities used net cash of approximately $10,000 primarily to purchase
equipment.
For the three months ended September 30, 1998, operating activities used
net cash of approximately $981,000 primarily from a net loss from operations,
net of depreciation and
9
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amortization, of approximately $512,000, a combined increase in prepaid and
other assets of approximately $348,000 and a combined decrease in accounts
payable and customer deposits of approximately $310,000 which were offset by
an increase in other accrued liabilities of approximately $148,000. For the
three months ended September 30, 1998, financing activities provided net cash
of approximately $3,655,000 primarily from net proceeds from the sale of the
Company's common stock (approximately $4,480,000) which were offset by
repayments of note payable (approximately $1,272,000). For the three months
ended September 30, 1998 the company's investing activities used net cash of
approximately $78,000 primarily to purchase equipment.
The Company's accounts receivable balance at June 30, 1998 and September
30, 1998 was $1,224,768 and $1,260,795, respectively. Accounts receivable in
the over 90-day category at June 30, 1998 was $308,292 or 25.2% of accounts
receivable compared to $438,753, or 34.8% of accounts receivable at September
30, 1998. The number of days sales in accounts receivable was 43 days and 71
days, respectively, for the year ended June 30, 1998 and three months ended
September 30, 1998. The increase in accounts receivable and days sales in
accounts receivable 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 year ended June 30, 1998 and the three months
ended September 30, 1998 was 2% and 0%, respectively. At September 30, 1998,
the Company had three customers which accounted for approximately 25.0% of
the accounts receivable balance.
At September 30, 1998 the Company had approximately $3,000,000 in cash,
including restricted cash. The Company believes that its current cash
balance and anticipated cash flow from operations will provide sufficient
cash resources to finance its operations and associated marketing and
customer support activities for at least 12 months.
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
and a loss of $956,000 for the quarter ended September 30, 1998. 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
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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 $150,000. 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.
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
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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 or
12
<PAGE>
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
13
<PAGE>
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 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
14
<PAGE>
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.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal proceedings, see Part I, Item 3 of
the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
15
<PAGE>
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."
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.
The initial public offering resulted in gross proceeds to the Company of
$6,050,000. After deducting total offering costs (including underwriter
discounts and commission) of $1,570,000, the net proceeds to the Company from
the offering were $4,480,000. The total offering costs consist of (i)
$605,000 in underwriter discounts and commissions, (ii) $181,500 in expenses
paid to or for the underwriters, (iii) a $100,000 fee payable to Anthony
Soich for advisory and consulting services, and (iv) $683,500 in other
offering expenses (including filing fees, printing and distribution costs,
and legal and accounting fees), none of which were direct or indirect
payments to directors, officers or 10% stockholders of the Company.
Of the $4,480,000 in net offering proceeds to the Company, approximately
$1,297,000 was used for the repayment of indebtedness, approximately $585,000
was used for general working capital (including $55,000 for payments under a
Non-Compete/Consulting Agreement with Dan Jensen, a director and stockholder
of the Company, and $50,000 for the purchase of certain software products from
an affiliate of Dan Jensen). The remaining $2,598,000 of the offering
proceeds has not yet been applied and is being held in a short-term interest
bearing account of the Company.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
16
<PAGE>
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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*
27 Financial Data Schedule
___________________
* 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.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
JENKON INTERNATIONAL, INC.
Date: November 13, 1998 /s/ STEVE MCKEAG
----------------------------
Steve McKeag
Chief Financial Officer and
Principal Accounting Officer
18
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 0
<RECEIVABLES> 1,260,795
<ALLOWANCES> (146,500)
<INVENTORY> 0
<CURRENT-ASSETS> 4,368,468
<PP&E> 1,625,470
<DEPRECIATION> (544,500)
<TOTAL-ASSETS> 5,972,622
<CURRENT-LIABILITIES> 1,740,715
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<COMMON> 4,410
<OTHER-SE> 4,176,621
<TOTAL-LIABILITY-AND-EQUITY> 5,972,622
<SALES> 1,611,983
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<CGS> 766,572
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