JENKON INTERNATIONAL INC
10QSB, 1999-11-15
COMPUTER PROGRAMMING SERVICES
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<PAGE>
                        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, 1999

[ ]  TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (No Fee Required)

Commission File No. 000-24637

                           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
                                                            -----     -----

As of September 30, 1999, [4,459,970] shares of Common Stock were outstanding.



<PAGE>

                         PART I -- FINANCIAL INFORMATION

                   JENKON INTERNATIONAL, INC. AND SUBSIDIARIES

ITEM 1.  FINANCIAL STATEMENTS:

   CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND JUNE 30,
    1999 (AUDITED)

   UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE MONTHS ENDED
    SEPTEMBER 30, 1999 AND 1998

   UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THREE MONTHS ENDED
    SEPTEMBER 30, 1999 AND 1998

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


                        PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

ITEM 5.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


                                       2
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS

                  JENKON INTERNATIONAL, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                        September 30,     June 30,
                                                           1999            1999
- -----------------------------------------------------------------------------------
                                                        (Unaudited)
<S>                                                     <C>              <C>
ASSETS

CURRENT ASSETS
      Cash and cash equivalents                         $  174,067       $  703,043
      Trade receivables, net of allowance for
       doubtful accounts of $222,700 and $355,800          513,753        1,042,333
      Prepaid and other assets                             167,468          176,276
      Refundable income taxes                                6,010            6,010
- -----------------------------------------------------------------------------------
Total current assets                                       861,298        1,927,662

PROPERTY AND EQUIPMENT, net of accumulated
 depreciation of $977,877 and $885,667                   1,022,152        1,106,731

CAPITALIZED SOFTWARE COSTS, net of
 accumulated amortization of $585,415
 and $555,523                                              102,323          132,215

PREPAID FUNDING AND OFFERING COSTS                         136,567                -

OTHER ASSETS                                               221,378          241,980
- -----------------------------------------------------------------------------------
Total assets                                            $2,343,718       $3,408,588
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------

</TABLE>


                                       3
<PAGE>

                  JENKON INTERNATIONAL, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                September 30,        June 30,
                                                                    1999               1999
- ----------------------------------------------------------------------------------------------
                                                                (Unaudited)
<S>                                                             <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable                                          $   415,993        $   424,288
      Accrued vacation                                              161,656            166,935
      Deferred revenue                                              850,510            708,485
      Other accrued liabilities                                     124,260            152,125
      Notes payable - current portion                                45,763            100,110
- ----------------------------------------------------------------------------------------------
Total current liabilities                                         1,598,182          1,551,943

NOTES PAYABLE, net of current portion                                 5,114              6,419
- ----------------------------------------------------------------------------------------------
Total liabilities                                                 1,603,296          1,558,362

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock, par value $.001; 20,000,000 shares
   authorized; 4,616,424 and 4,409,970 shares issued,
   4,459,970 and 4,253,516 shares outstanding                         4,616              4,410
  Additional paid-in capital                                      7,483,350          7,389,263
  Stock subscriptions receivable                                     (8,500)            (8,500)
  Foreign currency translation adjustment                           (22,362)              (254)
  Accumulated deficit                                            (6,376,682)        (5,194,693)
  Treasury stock, at cost, 156,454 shares                          (340,000)          (340,000)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity                                          740,422          1,850,226
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                      $ 2,343,718        $ 3,408,588
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------

</TABLE>

                   SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       4
<PAGE>

                  JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

THREE MONTHS ENDED SEPTEMBER 30,                           1999               1998
- -------------------------------------------------------------------------------------
                                                       (Unaudited)        (Unaudited)
<S>                                                    <C>                <C>
NET SALES
  Software license fees                                $    93,431        $   609,383
  Software and supplies sales                               35,314            193,122
  Support and operations revenue                           676,345            809,478
- -------------------------------------------------------------------------------------
Total net sales                                            805,090          1,611,983
- -------------------------------------------------------------------------------------
COST OF REVENUES
  Cost of software license fees                             30,145             28,310
  Cost of software and supplies sold                        28,645             96,935
  Cost of support and operations                           574,767            641,327
- -------------------------------------------------------------------------------------
Total cost of revenues                                     633,557            766,572
- -------------------------------------------------------------------------------------
GROSS PROFIT                                               171,533            845,411

OPERATING EXPENSES
  Selling and marketing                                    223,676            226,227
  Product research, development and enhancements           348,419            168,658
  General and administration                               802,559            843,518
- -------------------------------------------------------------------------------------
Total operating expenses                                 1,374,654          1,238,403
- -------------------------------------------------------------------------------------
LOSS FROM OPERATIONS                                    (1,203,121)          (392,992)

OTHER INCOME (EXPENSE)
  Interest, net                                                372           (534,051)
  Other income (expense)                                    20,760            (28,982)
- -------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX                                  (1,181,989)          (956,025)

PROVISION FOR INCOME TAX                                         -                  -
- -------------------------------------------------------------------------------------
NET LOSS                                               $(1,181,989)       $  (956,025)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
NET LOSS PER SHARE
  Basic and diluted                                    $     (0.27)       $     (0.30)
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
  Basic and diluted                                      4,427,712          3,159,754
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------

</TABLE>

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       5
<PAGE>

                   JENKON INTERNATIONAL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

THREE MONTHS ENDED SEPTEMBER 30,                              1999               1998
- -----------------------------------------------------------------------------------------
                                                           (Unaudited)        (Unaudited)
<S>                                                        <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss                                                  $(1,181,989)       $  (956,025)
 Adjustments to reconcile net loss to net
  used in operating activities:
  Depreciation and amortization                                122,102            104,018
  Amortization of original issue discount                            -            408,036
  Provision for doubtful accounts                              122,080                  -
  Foreign currency translation adjustment                      (22,108)             7,960
  Increase (decrease) from changes in operating
   assets and liabilities:
    Trade receivables                                          406,500            (36,027)
    Prepaid and other assets                                     8,808           (194,188)
    Other assets                                                20,602           (154,251)
    Accounts payable                                            (8,295)          (149,722)
    Accrued vacation                                            (5,279)             1,362
    Deferred revenue                                           142,025           (160,100)
    Other accrued liabilities                                  (27,865)           148,427
- -----------------------------------------------------------------------------------------
Net cash used in operating activities                         (423,419)          (980,510)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of property and equipment                            (13,583)           (67,761)
 Proceeds from sale of fixed assets                              5,952                  -
 Additions to capitalized software costs                             -            (10,311)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities                           (7,631)           (77,972)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
 Restricted cash                                                     -             50,000
 Additions to prepaid funding and offering costs               (44,777)          (459,076)
 Repayment of Bridge Loans                                           -         (1,000,000)
 Payments on notes payable                                     (55,652)          (249,820)
 Net proceeds from initial public offering                           -          5,313,500
 Issuance of common stock                                        2,503                  -
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities            (97,926)         3,654,604
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          (528,976)         2,596,122

CASH AND CASH EQUIVALENTS, beginning of period                 703,043            200,557
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period                   $   174,067        $ 2,796,679
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLSOURE OF CASH FLOWS
 Cash paid for interest                                    $     1,886        $     9,795
 Issuance of 50,000 common stock options ($.01 strike
  price) issued to non-employee resulting in non-cash
  transaction included in prepaid funding and offering
  costs. Value determined using the Black-Scholes model.        91,790                  -

</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                       6
<PAGE>

                   JENKON INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  STATEMENT OF              In the opinion of management the accompanying
    INFORMATION               unaudited financial statements contain all
    FURNISHED                 adjustments (consisting only of normal and
                              recurring accruals) necessary to present fairly
                              the financial position as of September 30, 1999,
                              and the results of operations and cash flows for
                              the three month period ended September 30, 1999
                              and 1998. 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, 1999.

                              The results of operations for the three-month
                              period ended September 30, 1999 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, 1999.

2.  REVENUE RECOGNITION       The Company adopted Statement of Position 97-2,
                              "Software 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
                              functional, (iii) the vendor's fee is fixed or
                              determinable and (iv) collectibility is probable.
                              Also in accordance with SOP 97-2, the Company
                              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 are
                              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
                              generally would be deferred until such evidence
                              does exist 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 revenue as the services are
                              performed. Future sales of the Company's existing
                              products may be contingent upon delivery of the
                              future software products. In such a case, the
                              Company would defer a portion or all of the
                              revenue, until all elements of the sales contract
                              have been delivered.

                              During the three months ended September 30, 1999
                              two


                                       7
<PAGE>

                              customers accounted for 30.3% of total revenue.
                              The Company had one customer that accounted for
                              12.4% of total revenue for the three months ended
                              September 30, 1998.

3.  EARNINGS (LOSS) PER       The Company computes loss per common share under
    COMMON SHARE              SFAS No. 128, "Earnings Per Share," which requires
                              presentation of 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 were not included in the computation
                              of diluted loss per common share for the three
                              months ended September 30, 1999 and 1998, because
                              the effect would be antidilutive.

4.  INITIAL PUBLIC            In August 1998, the Company completed an initial
    OFFERING (IPO)            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
                              $4,480,000 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
                              $272,500 related to other indebtedness. The
                              remaining proceeds were used in the development of
                              new products and upgrades, and general working
                              capital.

5.  COMPREHENSIVE             Comprehensive income for the three months ended
    INCOME                    September 30, 1999 and 1998 is comprised of a net
                              loss of $(1,181,989) and $(956,025) and foreign
                              currency translation adjustment of $(22,108) and
                              $7,960, respectively.

6.  INCOME TAXES              Due to the significant operating losses incurred
                              by the Company for the three month period ended
                              September 30, 1999 and 1998, the Company has
                              recorded a 100% valuation allowance on its net
                              deferred tax assets since management cannot
                              determine whether it is more likely than not that
                              the deferred tax assets may be realized.

7.  RELATED PARTY             At September 30, 1999, the Company had a
    TRANSACTIONS              receivable due from an officer amounting to
                              $116,573.

8.  SUBSEQUENT EVENT          In August 1999, the Company signed a non-binding
                              letter of intent to acquire MMKid, an
                              Isreali-based interactive educational company that
                              designs, manufactures and sells innovative
                              software and activity systems for children and
                              adults. The terms of the proposed transaction
                              include the issuance of 840,000 common shares of
                              Jenkon and 2,416,000 shares of redeemable
                              preferred stock which will be convertible into an
                              aggregate of 24,160,000 common shares of Jenkon,
                              in exchange for 100% of the outstanding securities
                              of MMKid. The acquisition is contingent upon
                              signing of a definitive acquisition agreement, the
                              completion of a $4,000,000 private


                                       8
<PAGE>

                              placement of convertible notes and other customary
                              terms and conditions.

                              In connection with the proposed acquisition, the
                              Company has incurred various legal and
                              professional fees that have been capitalized as
                              prepaid funding and offering costs. Capitalized
                              costs will be expensed upon completion of the
                              acquisition or upon determination that the
                              acquisition will not be consummated.

9.  GOING CONCERN             The Company's consolidated financial statements
                              have been prepared on a going concern basis, which
                              contemplates continuity of operations, realization
                              of assets and the liquidation of liabilities in
                              the normal course of business. The appropriateness
                              of using the going concern basis is dependent
                              upon, among other things, the adequate resolution
                              of the Company's near and long term liquidity
                              shortfall, as well as the successful consummation
                              of the acquisition described above. Although the
                              Company is in the process of raising capital
                              through the private placement described above, it
                              has and continues to suffer substantial losses and
                              negative cash flow. Accordingly, the Company's
                              auditors have included an explanatory paragraph in
                              their report for the year ended June 30, 1999
                              indicating there is substantial doubt regarding
                              the Company's ability to continue as a going
                              concern. The consolidated financial statements do
                              not include any adjustments relating to the
                              Company's ability to continue as a going concern.


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, 1999.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO SEPTEMBER 30, 1998

      REVENUES. Total revenues decreased 50.1% to $805,000 for the three months
ended September 30, 1999 from $1,612,000 for the same period in 1998. The
decrease was primarily attributable to a significant reduction in software
license revenue and third party software and supplies revenue as described
below. During the three month period ended September 30, 1999 two clients
accounted for 30.3% of total revenue. For the three month period ended September
30, 1998 one client accounted for 12.4% of total revenue.

      As a result of increased competitive pressures, the Company has
accelerated the development of its next generation management information
system. The Company has incurred and expects to continue to incur significant
losses for at least the next six to nine months due primarily to decreased
demand for its existing products, as well as the costs associated with the
development of this new product.


                                       9
<PAGE>

Additionally, the Company has experienced and expects to continue
experiencing delays in revenue recognition for sales of existing products
that are linked to or contingent upon delivery of the new management
information system. Such revenues would be recognized at such time as the
Company has completed its obligations under any such sales contracts.

      SOFTWARE LICENSE REVENUES. Software license revenues decreased 84.7% to
$93,000 for the three months ended September 30, 1999 from $609,000 for the same
period in 1998. The decrease in software license revenue was due to a continued
reduction in system sales and additional modules sold to new and existing
clients, as a result of increased competition in the marketplace and decreased
demand for older generation products.

      EQUIPMENT, SOFTWARE, AND SUPPLIES REVENUES. Equipment, software and
supplies revenues decreased 81.7% to $35,000 for the three months ended
September 30, 1999 from $193,000 for the same period in 1998. The decrease was
primarily attributable to the decrease in resale of third party software
required to run the Company's software products. This decrease is directly
related to the decrease in software license revenues.

      SUPPORT AND OPERATIONS REVENUE. Support and operations revenue decreased
16.4% to $676,000 for the three months ended September 30, 1999 from $809,000
for the same period in 1998. The decrease is primarily attributable to a
decrease in consulting and custom programming orders resulting from the
reduction in system sales. The decrease is partially offset by increased NOW!
subscription fees.

      COST OF REVENUES. Total cost of revenues decreased by $133,000 or 17.4% to
$634,000 for the three months ended September 30, 1999 as compared to $767,000
for the same period in 1998. This decrease was primarily due to a decrease in
the cost of equipment, software and supplies and support and operations as
described below. As a percentage of revenues, cost of revenues increased to
78.7% for the three months ended September 30, 1999 from 47.6% for the same
period in 1998 due primarily to a significant decrease in revenues and
particularly higher margin software license fees.

      COST OF SOFTWARE LICENSES. The cost of software licenses consists
primarily of amortization of capitalized software costs. The cost of software
licenses remained relatively constant between the periods totaling $30,000 for
the three months ended September 30, 1999 compared with $28,000 for the same
period in 1998.

      COST OF EQUIPMENT, SOFTWARE AND SUPPLIES SOLD. The cost of equipment,
software and supplies sold 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 70.4% to $29,000 for the three months ended
September 30, 1999 from $97,000 for the same period in 1998, primarily resulting
from the reduction in system sales.

      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 by 10.4% to $575,000 for the three months ended
September 30, 1999 from $641,000 for the same period in 1998. The decrease in
costs is related primarily to a reduction in production personnel.

      GROSS PROFIT. Gross profit decreased by 79.7% to $172,000 for the three
months ended September 30, 1999 from $845,000 for the same period in 1998.
Overall gross profit as a percentage of total revenues decreased to 21.3% for
the three months ended September 30, 1999 from 52.4% for the same period in
1998, mainly as a result of the substantial decrease in software license revenue
and the relatively fixed cost of support and operations during the quarter.
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 decreased for the three months ended September 30, 1999 to
67.7% from 95.4% in 1998 primarily due to competitive pressures and a relatively
fixed amortization expense. The significant decrease in third party software and
equipment gross profit to 18.9% for the three months ended September 30, 1999
from 49.8% for the same period in 1998 was


                                       10
<PAGE>

due to a change in composition of third party software sales with a greater
portion of higher margin sales occurring during the three months ended September
30, 1998 and a reduction in margins with certain third party suppliers due to
lower sale levels. Gross profit on support and operations revenue decreased to
15.0% for the three months ended September 30, 1999 from 20.8% for the same
period in 1998 mainly due to the decrease in support and operations revenue
coupled with relatively fixed labor costs.

      SELLING AND MARKETING EXPENSES. Selling and marketing expenses remained
relatively consistent totaling $224,000 for the three months ended September 30,
1999 compared with $226,000 for the same period in 1998.

      RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 106.6% to $348,000 for the three months ended September 30, 1999 from
$169,000 for the same period in 1998. The increase is primarily related to the
acceleration of the development of the next generation management information
system. The Company expects that research and development expenses will continue
to increase in future periods as the Company increases its efforts to develop
new products.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 4.9% to $803,000 for the three months ended September 30, 1999 from
$844,000 for the same period in 1998. The decrease is primarily related to the
closure of the Company's UK office and a reduction in support personnel offset
by an increase in the provision for bad debts totaling $122,000.

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 a note payable to a stockholder.
The remaining proceeds were used in the development of new products and upgrades
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 has employment agreements with two 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 the remaining agreements are not
terminated such agreements provide for total payments of not less than
$1,013,000 through the end of the fiscal year ending June 30, 2002, including
payments ranging from $30,000 to $33,000 per month during the fiscal year ending
June 30, 1999.

      For the three months ended September 30, 1999, operating activities
used net cash of $423,000 primarily due to a net loss, net of depreciation
and amortization in the amount of $122,000, of $1,060,000, an increase in
trade receivables of $407,000, an increase in deferred revenue of $142,000
and the provision for doubtful accounts of $122,000, which were offset by a
combined decrease in accounts payable, accrued vacation and other accrued
liabilities of $41,000. For the three months ended September 30, 1999,
investing activities used net cash of $8,000 primarily to purchase equipment.
For the three months ended September 30, 1999 the Company's financing
activities used net cash of $98,000 primarily due to additions to prepaid
funding and operating costs and principal payments on notes payable.

      For the three months ended September 30, 1998, operating activities
used net cash of approximately $981,000 primarily from a loss from
operations, net of depreciation and amortization, of $512,000, and a combined
decrease in accounts payable and deferred revenue of approximately $310,000,
which were offset by an increase in other accrued liabilities of $148,000.
For the three months ended

                                       11
<PAGE>

September 30, 1998 the Company's investing activities used net cash of
approximately $78,000 primarily to purchase equipment. 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 of $4,480,000 which were offset by repayments of notes
and loans payable of $1,250,000.

      The Company's accounts receivable balance at June 30, 1999 and September
30, 1999 was $1,398,000 and $736,000, respectively. Accounts receivable in the
over 90-day category at June 30, 1999 was $628,000 or 44.9% of accounts
receivable compared to $405,000, or 55.0% of accounts receivable at September
30, 1999. The number of day's sales in accounts receivable was 74 days and 31
days, respectively, for the year ended June 30, 1999 and three months ended
September 30, 1999. The decrease in accounts receivable is directly related to
the decrease in sales. The decrease in day's sales in accounts receivable was
due to the write-off of certain large receivables against the allowance as well
as stronger collection and credit granting practices. Bad debt expense as a
percentage of sales for the year ended June 30, 1999 and the three months ended
September 30, 1999 was 6.1% and 15.2%, respectively. At September 30, 1999, the
Company did not have any customers which accounted for 10% or more of the
accounts receivable balance.

      The Company has experienced a significant decrease in operating funds as a
result of increased competitive pressure and the accelerated development of the
next generation management information system. In August 1999, the Company
signed a letter of intent to acquire Multimedia K.I.D. LTD. ("MMKid"), an
Israeli-based interactive educational software company. The terms of the
proposed transaction include the issuance of 840,000 common shares of Jenkon and
2,416,000 shares of redeemable preferred stock which will be convertible into an
aggregate of 24,160,000 common shares of Jenkon, in exchange for 100% of the
outstanding securities of MMKid. The acquisition is contingent upon, among other
things, the completion of a $4,000,000 private placement of convertible
promissory notes, the signing of a definitive acquisition agreement and other
customary terms and conditions. The notes will accrue interest at 12% per annum
and are due and payable in full on April 1, 2000 unless converted into common
stock. Upon shareholder approval of conversion of the notes to common stock on
or before February 28, 2000, the notes will be convertible into common shares of
the Company at a conversion price of not less then $1.00 per share.

      On October 7, 1999, the Company received $500,000 in an initial closing of
the private placement of convertible promissory notes to cover operating and
development expenses.

      Although the Company is in the process of raising capital through the
private placement described above, it has and continues to suffer substantial
losses and negative cash flow. Accordingly, the Company's auditors have included
an explanatory paragraph in their report for the year ended June 30, 1999
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern.

      Based on the Company's current and expected financial position and
operating results, management believes that the funds provided from the private
placement in addition to operating cash flows will be sufficient to meet its
financial needs through the end of fiscal year 2000. Any failure of the Company
to complete the acquisition and financing would have a material adverse affect
on the Company and its ability to successfully operate.

YEAR 2000 ISSUE

      Like many companies, Jenkon is subject to risks from the Year 2000
computer and software issue. The Year 2000 issue exists because many computer
programs use two digit rather than four-digit date fields to define the
applicable year. As a result, computer equipment and software and devices with
imbedded technology that are time-sensitive may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, production delays, a


                                       12
<PAGE>

temporary inability to process transactions, send invoices, or engage in similar
normal business activities. Incomplete or untimely resolution of the Year 2000
issue by the Company or critically important suppliers or customers of the
Company could have a materially adverse effect on the Company's business,
financial condition, or results of operations. The Company has undertaken
various initiatives intended to ensure that its computer systems, software and
other operational equipment will function properly with respect to dates in the
Year 2000 and thereafter.

      The Year 2000 Problem potentially impacts the Company in the following
principal areas: (i) The Company's software products, including products
manufactured by third parties that are resold by the Company; (ii) the Company's
internal technology systems; and (iii) the Company's major vendors. The Company
is in the process, but has not completed, what it believes is a reasonable and
thorough review of the principal areas identified as well as the effects on its
operations, liquidity and financial condition. The review includes identifying
the related issues and risks to ensure that its computer systems, software and
other operational equipment will function properly with respect to dates in the
Year 2000 and thereafter.

      Company's Software Products. The Company presently believes that the
current releases of its Summit V-Registered Trademark-, NOW!-Registered
Trademark-, and JOL software products are Year 2000 compliant. The company is
currently working on a new release of the TouchTalk software product that is
being developed to be Year 2000 compliant. The Company's Discos software
product is not considered Year 2000 compliant. The Company has notified all
known customers currently on the Discos product. There are currently no plans
to support the Discos product after December 31, 1999. Although all products
are subject to constant testing as well as continued review of the source
code, there can be no assurance that these products do not contain undetected
errors associated with the year 2000-date functions that may result adversely
affect operations.

      As part of its Summit V product line, the Company resells certain software
and hardware products that are manufactured by third parties. The Company has
received assurances from such third parties regarding the Year 2000 compliance
of the most recent releases of third party products. Despite these assurances,
there can be no guarantee that the third party products are Year 2000 compliant
or that customers will obtain and install the most releases of third party
products.

      Due to the nature of the direct selling industry, each client requires
customized compensation plans which become embedded in the Summit V and JOL
systems. Such customizations are programmed by the Company, outside consultants,
and the clients themselves. Due to the number of factors beyond the control of
the Company, all customizations are considered the responsibility of the
customer. As such, the Company does not warrant that customizations are Year
2000 compliant.

      INTERNAL TECHNOLOGY SYSTEMS. The Company has completed its testing of the
internal hardware and software used by all departments. To date, no significant
issues have been identified with respect to those systems. Non-information
technology systems such as Company-owned office equipment and local office
telephone systems have also been assessed for related Year 2000 risks with fixes
being installed as applicable. These fixes relate primarily to upgrades to voice
mail and phone systems.

      MAJOR VENDORS. The Company has been surveying its major vendors to assess
any potential impact on its operations caused by key third parties. The process
includes obtaining information as to their efforts associated with Year
2000-compliance. To date, no significant compliance issues have been identified
with these third parties. The Company plans to continue to update and evaluate
compliance issues with key third parties through 1999.

      The Company currently estimates that the cost of its Year 2000 assessment,
remediation and testing efforts, as well as current anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not exceed


                                       13
<PAGE>

$25,000. Any such expenditures will be funded from operating cash flows. This
estimate is subject to change as additional information is obtained in
connection with the Company's assessment of the Year 2000 issue. The Company has
incurred minimal costs to date directly related to its Year 2000 assessment,
remediation, and testing efforts.

      The Company presently believes that Year 2000 issues will not pose
significant problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not effected
timely with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not have a material adverse impact on
the Company's business, financial condition or results of operations, or
adversely affect the Company's relationships with customers, vendors and others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities, such as one or more of the Company's critical customers or suppliers,
will not have a material adverse impact on the Company's systems or its
business, financial condition or results of operations. Potential infrastructure
failures, such as disruptions in the supply of power, water, transportation,
communications services, or if major institutions, such as the government,
foreign or domestic banking systems, are unable to continue to provide their
services or support resulting in a disruption in services or support to the
Company, the Company may be unable to operate for the duration of the
disruption. A contingency plan has not been developed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999. The costs of the Company's Year 2000
assessment, remediation and testing efforts and the dates on which the Company
believes it will complete such efforts are forward-looking statements that are
based upon management's best estimates.

EURO CURRENCY CONVERSION

      The introduction of the Euro is a significant event with potential
implications for the Company as well as the Company's existing customers within
countries participating in the European Monetary Union. As such, the Company has
committed resources to conduct risk assessments and to take corrective actions,
where required, to ensure that it, and its products are prepared for the
introduction of the Euro. The Summit V system currently supports multiple
currencies and the Company continues development of Euro specific requirements.
Development updates are communicated to upper management on a regular basis.

      The Company has not experienced any significant operational disruptions to
date and does not currently expect the continued implementation of the Euro to
cause any significant operational disruptions. Additionally, the Company has not
incurred and does not expect to incur any significant costs from the continued
implementation of the Euro, including any currency risk, which could materially
affect the Company's liquidity or capital resources.

ADDITIONAL CONSIDERATIONS AND RISK FACTORS

      SUBSTANTIAL DOUBTS REGARDING COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN. As a result of increased competitive pressures, the Company has
experienced deterioration in sales of the current generation of Summit V
software and has accelerated the development of its next generation management
information system. Such decrease in sales and increased development costs have
resulted in negative cash flow and a lack of cash resources. In August 1999, the
Company signed a letter of intent to acquire MMKid, an Israeli-based interactive
educational software company. The terms of the proposed transaction include the
issuance of 840,000 common shares of Jenkon and 2,416,000 shares of redeemable
preferred stock which will be convertible into an aggregate of 24,160,000 common
shares of Jenkon, in exchange for 100% of the outstanding securities of MMKid.
The acquisition is contingent upon the signing of a definitive acquisition
agreement, the completion of a private placement of at least $4,000,000 in
convertible debt, and other customary terms and conditions. Any failure of the
Company to complete the acquisition and


                                       14
<PAGE>

financing would have a material adverse affect on the Company and its ability to
successfully operate.

      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. The Company's current business plan calls
for significant expenditures of cash over the next three to nine months in order
to complete the development of the next generation of its back office management
information system to replace its current SUMMIT V product. To the extent that
the Company continues to be unsuccessful 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. Moreover, because MMKid is in the early stages of its development and
will require significant capital to implement its business plan, even if the
Company completes the $4,000,000 in financing that is a condition to closing the
MMKid Transaction and the notes issued in such financing are converted into
Common Stock, the Company may require additional capital in order to operate its
business. The Company currently has no bank line of credit and there can be no
assurance that the Company will be able to obtain sources of outside financing
on favorable terms, if at all, 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 would be materially and adversely affected.

      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, $1,701,000,
and $3,307,000 for the fiscal years ended June 30, 1996, 1997 and 1999,
respectively. There can be no assurance that the Company will be able to operate
profitably in the future.

      As a result of increased competitive pressures, the Company has
accelerated the development of its next generation management information
system. The Company expects that it will incur significant losses during the
next three to nine months due primarily to the costs associated with the
development of this new product and delays in revenue recognition for sales of
existing products that are linked to or contingent upon delivery of new
products. Such revenues would be recognized at such time as the Company has
completed its obligations under any such sales contracts.

      MMKID HAS A HISTORY OF LOSSES AND HAS LIMITED REVENUES AND CAPITAL
RESOURCES. MMKid has not operated profitable and, based on financial statement
prepared in accordance with generally accepted accounting principles in Israel
that were provided to the Company by MMKid, has experienced losses of
approximately $50,000 and $72,000 for the fiscal years ended December 31, 1997
and 1998, respectively. Moreover, MMKid's revenues from sales of products,
services and marketing rights were only approximately $714,000 and $1,500,000
over the same periods. Additionally, based on unaudited financial statements for
the six month period ended June 30, 1999, which were prepared in accordance with
generally accepted accounting principles in Israel, MMKid has a net loss of
approximately $170,000 and revenues of $748,000 for such six month period. In
the event that the acquisition of MMKid is completed, there can be no assurance
that MMKid will ever be able to generate significant revenues or profits from
operations.

      RISK OF CREDITORS CLAIMS AND SUCCESSOR LIABILITY; RISKS OF PENDING
LITIGATION. 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


                                       15
<PAGE>

believes that such claims could total as much as $120,000. 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.

      The Company acquired from Redwood Technology a license to utilize certain
Ardent Software, Inc. products which were 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 or its affiliates 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, Pacifica 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 has appealed the ruling and has indicated an intention to seek
indemnification against Redwood Technology and the Company in the event it is
unsuccessful in its appeal. Although the Company is not a party to the China
Claim, if Unidata, Inc. does not indemnify Redwood Technology and the Company
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 or the Company for damages
suffered as a result of claims made by Pacific Unidata, Ltd., and the Company is
required to pay such indemnification directly or as a successor to Redwood
Technology, the Company's financial condition and results of operations would be
materially and adversely affected.

      RISK OF ACCEPTANCE OF NEW PRODUCT. The future success and growth of the
Company, if any, will depend in large part upon the ability of the Company to
develop and sell a next generation back office product to replace Summit V. The
Company has experienced a significant deterioration in its revenues as a result
of the obsolescence of the Summit V product. Even if development is completed,
there can be no assurance that the next generation back office product will be
accepted by its existing or new customers. The failure of the Company to
complete the development of its next generation back office 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 has experienced decreased demand for its SUMMIT V
product, as a result of the introduction of competing products which more
effectively embody these new technologies. 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


                                       16
<PAGE>

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 information
system, customizations, and related support services. The demand for the product
has decreased in recent periods due to increased competition through the
introduction of new technology and products by the Company's competitors.
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 its management
information systems and customer acceptance of such new and enhanced products.

      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 products. 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. 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.

      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;


                                       17
<PAGE>

lengthy sales cycle; delays in introduction of products or product enhancements
by the Company or other providers of hardware, software and components for the
Company's systems; competition and pricing in the software industry; market
acceptance of new products; reduction in demand for existing products and
shortening of product life cycles as a result of new product introductions by
competitors; foreign currency exchange rates; mix of products sold; conditions
or events in the direct sales industry; and general economic conditions. The
Company does not typically maintain a significant backlog and therefore the
revenue results for each quarter depend substantially on orders received and
delivered in that quarter. 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 nine 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.

      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


                                       18
<PAGE>

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.

      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.

      THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS NASDAQ LISTING; 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. The Company has recently received a letter
from the Nasdaq Listing Qualifications Division stating that the Company's net
tangible assets as of June 30, 1999 did not meet the minimum amount of
$2,000,000 and the Company's eligibility for continued listing on The Nasdaq
Stock Market is under review. The private placement of convertible promissory
notes and pending acquisition of MMKid are expected to increase the Company's
net tangible assets in excess of the minimum requirement. 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.

      The Company 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 or its
affiliates, 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




                                       19
<PAGE>

Company that it intends to appeal the ruling and has indicated an intention to
seek indemnification against Redwood Technology and the Company in the event it
is unsuccessful in it's appeal. Although the Company is not a party to the China
Claim or the U.S. Claim, if Unidata, Inc. does not indemnify Redwood Technology
and the Company 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 or the
Company for damages suffered as a result of claims made by Pacific Unidata, Ltd.
and the Company is required to pay such indemnification directly or as a
successor to Redwood Technology, the Company's financial condition and results
of operations could 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 may elect or be required to settle
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.

      See also "Additional Considerations and Risk Factors -- Risk of Creditors
Claims and Successor Liability; Risks of Pending Litigation" in Part I, Item 2
of this Form 10-QSB.

ITEM  5. OTHER INFORMATION.

            On November 9, 1999, the Company received a letter from the
            Nasdaq Listing Qualifications Division stating that the Company's
            net tangible assets as of June 30, 1999 did not meet the minimum
            amount of $2,000,000 and the Company's eligibility for continued
            listing on The Nasdaq Stock Market is under review. While there
            can be no assurances that such transactions will be completed in
            a timely basis, the Company believes that completion of the
            private placement of convertible promissory notes and pending
            acquisition of MMKid would result in an increase the
            Company's net tangible assets in excess of the minimum
            requirement. There can be no assurance that future operating
            losses or other events will not result in the Company's
            ineligibility for listing on the Nasdaq Stock Market. See Part I,
            Item 2 -- "Additional Considerations and Risk Factors -- The Company
            May Not be Able to Maintain its Nasdaq Listing; Risk of Low-Priced
            Securities" above.

                                       20
<PAGE>

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*

10.1              Letter of Intent ^

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).

^        Incorporated by reference to the referenced document field as an
         exhibit to the Company's Form 8-K, filed on August 30, 1999.

         (b)      Reports on Form 8-K.

                  On August 30, 1999, the Company filed a Form 8-K relating to
                  the signing of a Letter of Intent to acquire MMKid -
                  Intelligence in Education, Ltd., an Israeli corporation. See
                  Liquidity and Capital Resources in part I, Item 2 of this
                  Form 10-QSB.


                                       21
<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.

November 15, 1999                       /s/ DAVID A. EDWARDS
- ---------------------                   ---------------------------------------
Date                                    Chief Executive Officer, Interim Chief
                                        Financial Officer, Chairman and Director

November 15, 1999                       /s/ CLIFFORD DEGROOT
- ---------------------                   ---------------------------------------
Date                                    Controller and Principal Accounting
                                        Officer

                                       22

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