<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 December 31, 1998
/ / 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 December 31, 1998, 4,253,515 shares of Common Stock were outstanding.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 (UNAUDITED)
AND JUNE 30, 1998 (AUDITED)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE MONTHS
ENDED DECEMBER 31, 1998 AND 1997
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR SIX MONTHS
ENDED DECEMBER 31, 1998 AND 1997
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED DECEMBER 31, 1998 AND 1997
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBITS
EXHIBIT 27
2
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,078,757 $ 200,557
Restricted cash 154,874 200,000
Trade receivables, net of allowance for doubtful accounts of
$146,200 and $146,500 1,500,506 1,078,268
Prepaid and other assets 385,311 88,998
Refundable income taxes 24,308 24,308
- --------------------------------------------------------------------------------------------------------------------
Total current assets 4,143,756 1,592,131
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$604,700 and $474,100 1,149,257 1,088,926
CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of
$498,900 and $442,278 188,837 226,486
PREPAID FUNDING AND OFFERING COSTS - 374,364
OTHER ASSETS 288,371 160,537
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 5,770,221 $ 3,442,444
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 595,123 $ 563,924
Accrued vacation 162,717 152,077
Customer deposits 436,201 425,684
Other accrued liabilities 312,561 543,016
Bridge loans - 591,964
Notes payable - current portion 203,690 410,213
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,710,292 2,686,878
NOTES PAYABLE, net of current portion 10,840 106,529
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,721,132 2,793,407
COMMITMENTS AND CONTINGENCIES
SERIES A, REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.001 par value; 5,000,000
shares authorized; Series A, none and 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, 4,253,515 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 (33,881) (28,190)
Accumulated deficit (2,962,203) (1,887,886)
Treasury stock, at cost, 156,454 shares (340,000) (340,000)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 4,049,089 (1,661,137)
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 5,770,221 $ 3,442,444
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES
Software license fees $ 1,217,502 $ 881,297
Equipment, software and supplies sales 390,238 242,117
Support and operations revenue 755,819 1,249,509
- --------------------------------------------------------------------------------------------------------------------
Total net sales 2,363,559 2,372,923
- --------------------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Cost of software license fees 46,846 93,375
Cost of equipment, software and supplies sold 199,639 88,888
Cost of support and operations 667,923 694,816
- --------------------------------------------------------------------------------------------------------------------
Total cost of goods sold 914,408 877,079
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,449,151 1,495,844
OPERATING EXPENSES
Selling and marketing 284,952 220,235
Product research, development and enhancements 172,142 212,126
General and administration 1,117,885 1,032,375
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,574,979 1,464,736
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (125,828) 31,108
OTHER INCOME (EXPENSE)
Interest, net 12,590 (32,003)
Other income (expense) (5,053) 41,489
- --------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX (118,291) 40,594
PROVISION (BENEFIT) FOR INCOME TAX - -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (118,291) $ 40,594
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
Basic $ (.03) $ .03
Diluted (.03) .03
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 4,253,515 1,799,220
Diluted 4,253,515 2,069,425
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES
Software license fees $ 1,826,885 $ 1,569,747
Equipment, software and supplies sales 583,360 355,298
Support and operations revenue 1,565,297 2,303,488
- --------------------------------------------------------------------------------------------------------------------
Total net sales 3,975,542 4,228,533
- --------------------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Cost of software license fees 108,704 162,777
Cost of equipment, software and supplies sold 263,026 171,192
Cost of support and operations 1,309,250 1,306,056
- --------------------------------------------------------------------------------------------------------------------
Total cost of goods sold 1,680,980 1,640,025
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 2,294,562 2,588,508
OPERATING EXPENSES
Selling and marketing 511,179 482,587
Product research, development and enhancements 340,800 444,241
General and administration 1,987,819 1,931,696
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,839,798 2,858,524
- --------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (545,236) (270,016)
OTHER INCOME (EXPENSE)
Interest, net (521,461) (73,243)
Other income (expense) (7,619) 14,205
- --------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX (1,074,316) (329,054)
PROVISION (BENEFIT) FOR INCOME TAX - (33,290)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,074,316) $ (295,764)
- --------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (.29) $ (.17)
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND
DILUTED 3,731,746 1,799,220
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,074,316) $ (295,764)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 275,528 190,660
Amortization of original issue discount 408,037 -
Provision for doubtful accounts 108,703 64,287
Foreign currency translation adjustment (5,692) 2,684
Loss on disposal of fixed assets 11,679 -
Increase (decrease) from changes in operating
assets and liabilities:
Trade receivables (530,941) (189,845)
Prepaid and other assets (296,313) (33,563)
Refundable income taxes - 131,345
Other assets (180,668) -
Accounts payable 31,199 (219,882)
Accrued vacation 10,640 8,270
Customer deposits 10,517 485,245
Other accrued liabilities (230,453) 105,802
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,462,080) 249,239
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (256,046) (66,427)
Proceeds from sale of fixed assets 17,962 -
Additions to software rights (18,973) -
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (257,057) (66,427)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash 45,126 50,000
Additions to prepaid funding and offering costs (459,076) (58,720)
Repayment of Bridge Loans (1,000,000) -
Payments on notes payable (302,213) (109,796)
Net proceeds from initial public offering 5,313,500 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,597,337 (118,516)
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,878,200 64,296
CASH AND CASH EQUIVALENTS, beginning of period 200,557 132,736
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 2,078,757 $ 197,032
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 December 31, 1998,
and the results of operations and cash flows for
the three and six month periods ended December 31,
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 and six-month
periods ended December 31, 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 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
functionable, (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
future software products. This would defer a
portion or all of the revenue, until the Company
has delivered all elements of the sales contract.
8
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REVENUE RECOGNITION During the period ended December 31, 1998 one
(CONTINUED) customer accounted for 16.8% of total revenue. The
Company had no customers that accounted for more
than 10% of total revenue for the six months ended
December 31, 1997.
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 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 six month ended December 31,
1997 were restated in accordance with SFAS 128
which has no effect on the amounts previously
presented.
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 Company's 1998 private placement,
approximately $272,500 related to other
indebtedness, approximately $700,000 was used for
general working capital, $50,000 for the purchase
of certain software, $500,000 for product developing
and $250,000 for sales and marketing. 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 KINGDOM During the third quarter of 1998, the Company
OPERATIONS decided to close its United Kingdom office and
is winding up its international affairs.
6. COMPREHENSIVE INCOME Comprehensive income at December 31, 1998 and 1997
is comprised of net loss of $1,074,316 and
$295,764 and foreign currency translation
adjustment of $33,881 and $25,408, respectively.
7. INCOME TAXES Due to the significant operating losses incurred
by the Company for the three and six month periods
ended December 31, 1998 and 1997, the Company has
recorded a 100% valuation allowance on its net
deferred tax asset since management cannot
determine whether it is more likely than not that
the deferred tax assets may be realized.
</TABLE>
9
<PAGE>
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 DECEMBER 31, 1998 TO DECEMBER 31, 1997
REVENUES. Total revenues were $2,364,000 for the three months ended
December 31, 1998 as compared to $2,373,000 for the same period in 1997.
During the three month period ended December 31, 1998 two clients accounted
for 42.7% of total revenue. For the three month period ended December 31,
1997 two clients accounted for 22.6% 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 expects that it will incur significant losses during the
next six to twelve 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 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 increased 38.1% to
$1,217,000 for the three months ended December 31, 1998 from $881,000 for the
same period in 1997. The increase in software license revenue was due to an
increase in system sales and additional modules sold to new and existing
clients.
EQUIPMENT, SOFTWARE, AND SUPPLIES REVENUES. Equipment, software and
supplies revenues increased 61.2% to $390,000 for the three months ended
December 31, 1998 from $242,000 for the same period in 1997. The increase
was primarily attributable to the sale of third party software required to
run the Company's software products. This increase is directly related to
the increase in software license revenues. The Company has reduced its
emphasis on selling computer hardware and makes exceptions only when the
margins on the overall contract are acceptable.
SUPPORT AND OPERATIONS REVENUE. Support and operations revenue decreased
39.5%
10
<PAGE>
to $756,000 for the three months ended December 31, 1998 from $1,250,000 for
the same period in 1997. The decrease is primarily attributable to the lack
of custom programming jobs during the recent period 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 increased by $37,000 or 4.2%
to $914,000 for the three months ended December 31, 1998 as compared to
$877,000 for the same period in 1997. This increase was primarily due to an
increase in the cost of equipment, software and supplied described below
which was offset, in part by decreases in costs of software licenses and
costs of support and operations.
COST OF SOFTWARE LICENSES. The cost of software licenses consists
primarily of the cost of the third party provided supplies that are included
with the Company's systems and amortization of capitalized software costs.
The cost of software licenses decreased 49.5% to $47,000 for the three months
ended December 31, 1998 from $93,000 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 increased by 124.7% to $200,000 for the three months
ended December 31, 1998 from $89,000 for the same period in 1997, primarily
as a result of an increase in the proportion of revenues derived from resale
of lower-margin third party software products.
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 remained relatively constant totaling $668,000 for the
three months ended December 31, 1998 and $695,000 for the same period in
1997. The decrease in such costs resulting from certain Summit V programmers
moving from operations to research and development to begin the development
next generation of management information software was partially offset by an
increase in costs resulting from moving certain NOW! product programmers from
research and development to operations upon completion of development of such
product.
GROSS PROFIT. Gross profit decreased by 3.1% to $1,449,000 for the
three months ended December 31, 1998 from $1,496,000 for the same period in
1997. Overall gross profit as a percentage of total revenues decreased to
61.3% for the three months ended December 31, 1998 from 63.0% for the same
period in 1997, mainly as a result of a decrease in operations revenue and
fixed labor costs which was offset by an increase in higher margin software
license fees. Gross profit on the Company's software license revenues is
significantly higher
11
<PAGE>
than on revenues from equipment, services and maintenance. Gross profit on
software licenses increased marginally for the three months ended December
31, 1998 to 96.2% from 89.4% in 1997 primarily due to fewer sales in the
current period of the Company's TouchTalk product which has hardware costs
associated with it and therefore a smaller gross profit. Gross profit on
software support services and maintenance decreased to 11.6% for the three
months ended December 31, 1998 from 44.4% for the same period in 1997 due
mainly to reduced operations revenue and relatively fixed labor costs. The
decrease in third party software and equipment gross profit to 48.8% for the
three months ended December 31, 1998 from 63.3% for the same period in 1997
was primarily due to a change in mix of third party software sales with a
greater portion of lower margin sales occurring during the three months ended
December 31, 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased 29.5% to $285,000 for the three months ended December 31, 1998 from
$220,000 for the same period in 1997. The increase was primarily
attributable to NOW! related marketing efforts and increased sales
commissions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 18.9% to $172,000 for the three months ended December 31, 1998 from
$212,000 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. The Company is
accelerating its development of its next generation management information
system and expects that research and development expenses will increase
substantially in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 8.3% to $1,118,000 for the three months ended December 31,
1998 from $1,032,000 for the same period in 1997. The expenses are fairly
consistent between the periods with an increase in professional service
expense offset by lower overhead in the Company's United Kingdom office which
was closed during the period.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1997
REVENUES. Total revenues decreased 6.0% to $3,976,000 for the six
months ended December 31, 1998 from $4,229,000 for the same period in 1997.
The decrease was primarily attributable to decreased operations revenue.
During the six month period ended December 31, 1998 one client accounted for
16.8% of total revenue. The Company had no customers that accounted for more
than 10% of the Company's sales for the six months ended December 31, 1997.
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 six to
twelve months due primarily to the
12
<PAGE>
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 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 increased 16.4% to
$1,827,000 for the six months ended December 31, 1998 from $1,570,000 for the
same period in 1997. The increase in software license revenue was due to an
increase in system sales and additional modules sold to new and existing
clients.
EQUIPMENT, SOFTWARE, AND SUPPLIES REVENUES. Equipment, software and
supplies revenues increased 64.2% to $583,000 for the six months ended
December 31, 1998 from $355,000 for the same period in 1997. The increase
was primarily attributable to the sale of third party software required to
run the Company's software products. This increase is directly related to
the increase in software license revenues. The Company has reduced its
emphasis on selling computer hardware and makes exceptions only when the
margins on the overall contract are acceptable.
SUPPORT AND OPERATIONS REVENUE. Support and operations revenue
decreased 32.0% to $1,565,000 for the six months ended December 31, 1998 from
$2,303,000 for the same period in 1997. The decrease is primarily
attributable to the lack of custom programming jobs during the recent period
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 $1,681,000 for the six months ended December 31, 1998 and
$1,640,000 for the same period in 1997.
COST OF SOFTWARE LICENSES. The cost of software licenses consists
primarily of the cost of the third party provided supplies that are included
with the Company's systems and amortization of capitalized software costs.
The cost of software licenses decreased 33.1% to $109,000 for the six months
ended December 31, 1998 from $163,000 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 increased by 53.8% to $263,000 for the six months ended
December 31, 1998 from $171,000 for the same period in 1997, primarily as a
result of an increase in the proportion of revenues derived from resale of
lower-margin third party software products.
COST OF SUPPORT AND OPERATIONS. The cost of support and operations
consists
13
<PAGE>
primarily of personnel costs, travel and materials associated with providing
implementation, education and training, consulting and technical services.
These costs remained relatively constant totaling $1,309,000 for the six
months ended December 31, 1998 and $1,306,000 for the same period in 1997.
The increase created by the reclassification of NOW! programmers from
research and development to operations upon completion of development of such
product was offset by certain Summit V programmers moving from operations to
research and development to begin the next generation of management
information software.
GROSS PROFIT. Gross profit decreased by 11.4% to $2,295,000 for the six
months ended December 31, 1998 from $2,589,000 for the same period in 1997.
Overall gross profit as a percentage of total revenues decreased to 57.7% for
the six months ended December 31, 1998 from 61.2% for the same period in
1997, mainly as a result of a decrease in operations revenue and relatively
fixed labor costs. 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 increased marginally for the
six months ended December 31, 1998 to 94.1% from 89.6% in 1997 primarily due
to fewer sales in the current period of the Company's TouchTalk product which
has hardware costs associated with it and therefore a smaller gross profit.
Gross profit on software support services and maintenance decreased to 16.4%
for the six months ended December 31, 1998 from 43.3% for the same period in
1997 due mainly to reduce operations revenue and a fixed labor cost. The
increase in third party software and equipment gross profit to 54.9% for the
six months ended December 31, 1998 from 51.8% for the same period in 1997 was
primarily due to a change in mix of third party software sales with a greater
portion of lower margin sales occurring during the six months ended December
31, 1997.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
increased 5.8% to $511,000 for the six months ended December 31, 1998 from
$483,000 for the same period in 1997. The increase was primarily
attributable to NOW! related marketing efforts and increased sales
commissions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 23.2% to $341,000 from $444,000 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. The Company is accelerating its development of its next
generation management information system and expects that research and
development expenses will increase substantially in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 2.9% to $1,988,000 for the six months ended December 31,
1998 from $1,932,000 for the same period in 1997. The expenses are fairly
consistent between the periods with an increase in professional service
expense offset by lower overhead in the Company's United Kingdom office which
was closed during the period.
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<PAGE>
INTEREST EXPENSE. Interest expense increased 613.7% to $521,000 for the
six months ended December 31, 1998 from $73,000 for the same period in 1997.
The interest relates primarily to expense of 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 December 31, 1998 the principal balance
of the lease was $201,000 and the required cash balance was $150,000.
The Company has entered into employment agreements with four of its
executive officers as well as a Consulting and Non-Competition Agreement with
a director and former officer of the Company. The Company does not intend to
renew the one-year contracts upon their termination in August 1999. In
general, assuming the remaining agreements are not terminated such agreements
provide for total payments of not less than $2.0 million through the end of
the fiscal year ending June 30, 2002, including approximately $76,000 per
month during the fiscal year ending June 30, 1999.
For the six months ended December 31, 1997, operating activities
provided net cash of approximately $249,000 primarily from a decrease in
refundable income tax of $131,000 and a combined increase in customer
deposits and other accrued liabilities of approximately $591,000 which were
offset by a loss from operations of approximately $105,000, net of
depreciation and amortization, an increase in trade receivables of
approximately $190,000, and a decrease in accounts payable of approximately
$220,000. For the six months ended December 31, 1997, financing activities
used net cash of approximately $119,000 primarily from principal payments on
notes payable. For the six months ended December 31, 1997 the Company's
investing activities used net cash of approximately $66,000 primarily to
purchase
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<PAGE>
equipment.
For the six months ended December 31, 1998, operating activities used
net cash of approximately $1,462,000 primarily from a loss from operations,
net of depreciation and amortization, of approximately $391,000, a combined
increase in trade receivables, prepaids and other assets of approximately
$899,000 and a decrease in other accrued liabilities of approximately
$230,000. For the six months ended December 31, 1998, financing activities
provided net cash of approximately $3,597,000 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 $1,300,000). For
the six months ended December 31, 1998 the Company's investing activities
used net cash of approximately $257,000 primarily to purchase equipment.
The Company's accounts receivable balance at June 30, 1998 and December
31, 1998 was $1,224,768 and $1,646,706, respectively. Accounts receivable in
the over 90-day category at June 30, 1998 was $308,292 or 25.2% of accounts
receivable compared to $523,235, or 31.8% of accounts receivable at December
31, 1998. The number of days sales in accounts receivable was 43 days and 65
days, respectively, for the year ended June 30, 1998 and six months ended
December 31, 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 six months ended
December 31, 1998 was 2% and 3%, respectively. At December 31, 1998, the
Company had four customers which accounted for approximately 41.0% of the
accounts receivable balance.
At December 31, 1998 the Company had approximately $2,200,000 in cash,
including restricted cash. The Company's current business plan calls for
significant expenditures of cash over the next six to twelve months in order
to complete the development and marketing of certain products. To the extent
the Company is unable to complete the development of these products on a
timely basis or generate significant cash flow from operations, 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 on favorable terms, if at all. Any failure of the Company
to obtain such financing if and when needed would have a material adverse
affect on the Company its fiancial condition, and its ability to successfully
operate.
ADDITIONAL CONSIDERATIONS AND RISK FACTORS
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 six to twelve 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 and to continue the
roll-out of its NOW! product. To the extent that the Company's business plan is
16
<PAGE>
not implemented on a timely basis or at all and the Company is not successful
in generating significant cash flow from operations in order to fund the
expenses associated with the implementation of its business plan, 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 on favorable
terms, if at all, in the event that such financing is required in the future.
Any failure of the Company to obtain such financing if and when needed would
have a material adverse affect on the Company, its financial condition, and its
ability to successfully operate.
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 $1,074,000 for the six months ended December 31, 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.
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 six to twelve 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.
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 believes that such claims could total as much as
$200,000. 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
17
<PAGE>
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 sale 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 the 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 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
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<PAGE>
ability to enhance its current products and develop and successfully
introduce and sell new products that keep pace with technological
developments and respond to evolving end-user requirements. Any failure by
the Company to anticipate or respond adequately to technological developments
or end-user requirements, or any significant delays in product development or
introduction, could damage the Company's competitive position in the
marketplace and reduce revenues. The Company may need to increase the size of
its product development staff in the near term to meet these challenges.
There can be no assurance that the Company will be successful in hiring and
training adequate product development personnel to meet its needs. In the
past, the Company has occasionally experienced delays in the introduction of
new products and product enhancements. There can be no assurance that the
Company will be successful in developing and marketing new products or
product enhancements on a timely basis or that the Company will not
experience significant delays in the future. Any failure to successfully
develop and market new products and product enhancements would have a
material adverse effect on the Company's results of operations.
RISKS OF SOFTWARE DEVELOPMENT IN GENERAL. The success of the Company is
dependent upon its ability to deliver reliable, easy-to-use and
technologically up-to-date software products. Any failure of the Company's
existing or new products to meet client specifications or expectations will
have a material adverse effect on the Company's reputation and the demand for
the Company's products. There can be no assurance that the software will
consistently meet such specifications or expectations. In addition, continued
demand for the Company's products and services will depend on its ability to
successfully anticipate customer demand and to integrate new and emerging
technologies, features and standards into its software on a timely basis. Any
failure by the Company to anticipate customer demand and to successfully
integrate new features and standards into its software on a timely basis
could adversely affect the Company's reputation, demand for its products and,
as a result, its financial condition and results of operations.
DEPENDENCE ON SALES OF EXISTING SOFTWARE PRODUCTS. Substantially all of
the Company's revenues have been derived from sales of its SUMMIT V and
TOUCHTALK information systems and software and related support services. In
addition, the initial demand for the Company's NOW! product will be highly
dependent on customers and companies who utilize such information systems and
software. Accordingly, any event that adversely affects fees derived from the
sale of such systems, such as competition from other products, significant
flaws in the Company's software products or incompatibility with third party
hardware or software products, negative publicity or evaluation, or
obsolescence of the hardware platforms or software environments in which the
systems run, would have a material adverse effect on the Company's results of
operations. The Company's future financial performance will depend, in
substantial part, on the continued development and introduction of new and
enhanced versions of it's management information systems and customer
acceptance of such new and enhanced products.
RISK OF EXPANSION INTO NEW BUSINESSES. Part of the Company's business
plan involves the possible acquisition or development of complementary but
alternative sources of revenues such
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as credit card processing. There can be no assurance that the Company will be
successful in identifying and acquiring or developing any alternate sources
of revenues. Moreover, to the extent that the Company acquires or begins
operations of a business other than the development of software products, the
Company's lack of experience and track record in such business may result in
an inability of the Company to effectively compete, potential operating
losses and loss of standing in the direct sales industry, any of which would
have a material adverse effect on the Company, its operations and financial
condition.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. The Company has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. Such fluctuations may be caused by many factors,
including, but not limited to: the size and timing of individual orders;
seasonality of revenues; lengthy sales cycle; delays in introduction of
products or product enhancements by the Company or other providers of
hardware, software and components for the Company's systems; competition and
pricing in the software industry; market acceptance of new products;
reduction in demand for existing products and shortening of product life
cycles as a result of new product introductions by competitors; foreign
currency exchange rates; mix of products sold; conditions or events in the
direct sales industry; and general economic conditions. The Company does not
typically maintain a significant backlog and therefore the revenue results
for each quarter depend substantially on orders received and delivered in
that quarter. The average price of the Company's information systems sold in
fiscal 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
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postpone capital expenditures on business information systems. Any such
change in the amount or timing of capital expenditures in its targeted
markets would have a material adverse effect on the Company's financial
condition and results of operations. The Peoples Republic of China recently
announced laws restricting the ability of multi-level marketing companies to
operate in China. To date, the Company has not derived significant revenues
from The Peoples Republic of China. Accordingly, the Company does not believe
that such laws will adversely affect the Company's current operations or
financial condition. However, similar restrictions, if adopted by other
countries, could have a materially adverse effect on the Company's business,
results of operations and prospects.
MANAGEMENT OF GROWTH. Management believes that the Company's existing
internal controls are sufficient for the current size and level of
operations; however, to manage its growth effectively, the Company will be
required to continue to implement and improve its operating and financial
systems and to expand, train and manage its employee base. There can be no
assurance that the management skills and systems currently in place will be
adequate if the Company continues to grow. In addition, although no
acquisitions of companies or products are currently being negotiated, the
Company may make acquisitions in the future. The Company's management has
only limited experience with acquisitions, which involve numerous risks,
including difficulties in the assimilation of acquired operations and
products, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired companies.
INTERNATIONAL OPERATIONS AND RISK OF INTERNATIONAL SALES. The Company
derived approximately 8.8% and 2.4% of its total revenues from its United
Kingdom operations for the six months ended December 31, 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
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will remain viable or that these products will otherwise continue to be
available to the Company. If any of these entities ceases to do business, or
abandons or fails to enhance a particular product line, the Company may need
to seek other suppliers. This could have a material adverse effect on the
Company's results of operations. In addition, there also can be no assurance
that the Company's current suppliers will not significantly alter their
pricing in a manner adverse to the Company.
RISK OF FIXED PRICE CONTRACTS. The Company has and expects to derive
significant revenues pursuant to software maintenance contracts that provide
for fixed annual fees in exchange for the Company's commitment to provide
technical assistance and customer support. Because the total compensation
payable to the Company pursuant to such contracts is fixed in the event of
cost over-runs, price increases, unanticipated problems, inefficient
management, inaccurate estimates of customer needs or disputes over the terms
and specifications of contracted performance, the Company's business and
financial condition could be materially adversely affected.
YEAR 2000 COMPLIANCE RISK. The Company believes that its principal
software products (SUMMIT V and NOW!) are Year 2000 compliant. However,
because the Company's products are designed to work with relational database
and other software products developed and sold by third parties, any failure
of these third party software products to be Year 2000 compliant could result
in the failure of the Company's software products to effectively operate. Any
such failure could harm the Company's reputation in the market and could have
an adverse effect on sales of the Company's products and its financial
performance.
POSSIBLE ADVERSE IMPACT ON MARKET PRICE OF FUTURE SALES OF RESTRICTED
SHARES. Sales of a substantial number of shares of Common Stock into the
public market in the future could materially adversely affect the prevailing
market price for the Common Stock. The Company has outstanding an aggregate
of 4,253,515 shares of Common Stock of which approximately 2,750,000 are
"restricted securities" (the "Restricted Shares") pursuant to Rule 144
promulgated under the Securities Act. Beginning on the expiration of
applicable lock-up agreements (a substantial majority of which expire in
August 1999), the Restricted Shares subject to such lock-up agreements will
become eligible for sale in the public market pursuant to Rule 144, some of
which will be not be subject to the volume limitations and other restrictions
under Rule 144.
MAINTENANCE CRITERIA FOR NASDAQ; RISK OF LOW-PRICED SECURITIES. The
Company's Common Stock is currently listed for trading on the Nasdaq SmallCap
Market. To maintain inclusion on the Nasdaq SmallCap Market, the Company's
Common Stock must continue to be registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company must continue to have net tangible assets of at least $2,000,000, a
public float of at least 500,000 shares with a market value of at least
$1,000,000, at least 300 stockholders, a minimum bid price of $1.00 per share
and at least two market makers. While the Company has initially satisfied
these maintenance standards, there
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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.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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
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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 commissions) of $1,570,000, the net proceeds to the Company
from the offering were $4,480,000. The total offering costs consisted 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
$1.3 million was used for the repayment of indebtedness, approximately
$700,000 was used for general working capital (including $91,000 for payments
under a Non-Compete/Consluting 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), $500,000 for product development,
$250,000 for sales and marketing, The remaining approximately $1,730,000 of
the offering proceeds has not yet been applied and is being held in a short
- -term interest bearing account for 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.
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ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of the Company, as amended*
3.2 Bylaws of the Company, as amended*
4.1 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant.*
4.2 Dealer Manager's Warrant Agreement, dated as of July 1, 1996 between
the Company and The Boston Group, L.P.*
4.3 Form of Warrant to purchase Common Stock issued in connection with the
1998 Private Placement*
4.4 Subscription Supplement and Registration Rights Agreement with respect
to 1996 private placement*
27 Financial Data Schedule
</TABLE>
- ------------------
* Incorporated by reference to the referenced document filed as an exhibit
to the Company's Registration Statement on Form SB-2, Commission File
No. 333-56023, filed on June 4, 1998, and amended on July 15, 1998 and
August 3, 1998).
(b.) Reports on Form 8-K.
No reports on Form 8-K were filed in the last quarter of the period
covered by this Report.
25
<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: February 12, 1998 /s/ STEVE MCKEAG
------------------------------------------------
Steve McKeag
Chief Financial Officer and Principal
Accounting Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,078,757
<SECURITIES> 0
<RECEIVABLES> 1,646,706
<ALLOWANCES> (146,200)
<INVENTORY> 0
<CURRENT-ASSETS> 4,143,756
<PP&E> 1,864,991
<DEPRECIATION> (715,734)
<TOTAL-ASSETS> 5,770,221
<CURRENT-LIABILITIES> 1,710,292
<BONDS> 0
0
0
<COMMON> 4,410
<OTHER-SE> 4,044,679
<TOTAL-LIABILITY-AND-EQUITY> 5,770,221
<SALES> 3,975,542
<TOTAL-REVENUES> 3,975,542
<CGS> 1,680,980
<TOTAL-COSTS> 1,680,980
<OTHER-EXPENSES> 2,847,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 521,461
<INCOME-PRETAX> (1,074,316)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,074,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,074,316)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
