<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 March 31, 2000
[ ] 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 May 12, 2000, 5,513,732 shares of Common Stock were outstanding.
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PAGE 1
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 (UNAUDITED)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE
MONTHS ENDED MARCH 31, 2000 AND 1999
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR NINE MONTHS
ENDED MARCH 31, 2000 AND 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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PAGE 2
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
2000
- -----------------------------------------------------------------------------------------------------
<S> <C>
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 599,068
Short-term investments 600,000
Trade receivables 1,463,074
Other receivables 328,338
Inventory 725,000
Other assets 62,482
Net assets of discontinued operations 192,842
- -----------------------------------------------------------------------------------------------------
Total current assets 3,970,804
LONG TERM INVESTMENTS 308,279
PROPERTY AND EQUIPMENT 228,262
LONG TERM RECEIVABLES, net 680,000
OTHER ASSETS, net 1,152,163
- -----------------------------------------------------------------------------------------------------
Total assets $ 6,339,508
=====================================================================================================
</TABLE>
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PAGE 3
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
2000
- ------------------------------------------------------------------------------------------------------------
<S> <C>
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Short-term bank credit and current maturities of
long-term liability $ 879,906
Accounts payable 274,539
Other accrued liabilities 278,388
Convertible debt, net of original issue discount of
$1,008,480 3,491,520
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 4,924,353
Long-term liabilities
Accrued severance payment 161,000
Notes payable, net of current portion 1,043,082
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 6,128,435
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, SERIES B, par value
$.001, 1,208,000 shares issued and outstanding, liquidation
preference of $10 per share 3,421,966
REDEEMABLE PREFERRED STOCK, SERIES C, par value
$.001, 1,208,000 shares issued and outstanding, liquidation
preference of $10 per share 3,421,967
STOCKHOLDERS' DEFICIT
Common stock, par value $.001; 20,000,000 shares authorized;
5,661,570 shares issued, 5,505,116 shares outstanding 5,662
Additional paid-in-capital 2,757,128
Stock subscriptions receivable (8,500)
Rights in products acquired from a company under
Common control (1,750,000)
Foreign currency translation (6,444)
Accumulated deficit (7,290,706)
Treasury stock, at cost, 156,454 shares (340,000)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (6,632,860)
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Total liabilities, preferred stock and stockholders' deficit $ 6,339,508
============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PAGE 4
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited) (Unaudited)
NET SALES FROM PRODUCTS, SERVICES AND MARKETING
RIGHTS $ 426,849 $ 456,307
COST OF REVENUES 194,207 220,340
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 232,642 235,967
OPERATING EXPENSES
Product research, development and enhancements 187,147 97,922
Selling, general and administration 503,071 137,511
Goodwill amortization 61,175 -
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 751,393 235,433
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INCOME (LOSS) FROM CONTINUING OPERATIONS (518,751) 534
OTHER EXPENSE
Interest expenses, net (2,929,271) (5,366)
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX AND DISCONTINUED OPERATIONS (3,448,022) (4,832)
PROVISION FOR INCOME TAX - -
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (3,448,022) (4,832)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax (654,478) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $(4,102,500) (4,832)
=====================================================================================================================
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations $ (0.63) $ (0.01)
Discontinued operations (0.12) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (0.75) $ (0.01)
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 5,495,762 479,256
=====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PAGE 5
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited) (Unaudited)
NET SALES FROM PRODUCTS, SERVICES AND MARKETING
RIGHTS $ 1,693,687 $ 1,197,050
TOTAL COST OF REVENUES 839,110 608,439
- -----------------------------------------------------------------------------------------------------
GROSS PROFIT 854,577 588,611
OPERATING EXPENSES
Product research, development and enhancements 1,621,507 409,118
Selling, general and administration 1,138,309 354,297
Acquisition expense 116,563 -
Goodwill amortization 71,371 -
- -----------------------------------------------------------------------------------------------------
Total operating expenses 2,947,750 763,415
- -----------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (2,093,173) (174,804)
OTHER EXPENSE
Interest expenses, net (3,063,159) (15,346)
- -----------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX AND DISCONTINUED OPERATIONS (5,746,332) (190,150)
PROVISION FOR INCOME TAX - -
- -----------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (5,746,332) (190,150)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax (752,601) -
- -----------------------------------------------------------------------------------------------------
NET LOSS $ (6,498,933) (190,150)
=====================================================================================================
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations $ (2.30) $ (0.52)
Discontinued operations (0.30) -
- -----------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (2.60) $ (0.52)
- -----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 2,496,542 367,513
=====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PAGE 6
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE IN CASH AND CASH EQUIVALENTS
NINE MONTHS ENDED MARCH 31, 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,498,933) $ (190,150)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 132,801 40,232
Amortization of original issue discount 3,440,600 -
Change in net assets of discontinued operation (444,631) -
Loss from discontinued operations 752,601 -
Decrease in other long-term liabilities - (1,536)
Stock compensation 1,748,508 -
Foreign currency translation adjustment 6,675 -
Increase (decrease) from changes in operating
assets and liabilities:
Receivables (544,261) (515,477)
Long-term receivables (496,562) (264,600)
Prepaid and other assets (243,644) 53,593
Inventories (175,000) (110,000)
Accounts payable 208,570 (39,503)
Accrued severance 84,108 (34,422)
Other accrued liabilities (30,930) 819,770
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,060,098) (242,093)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (79,946) (110,701)
Cash acquired in purchase 129,154 -
Deposits (708,279) -
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (659,071) (110,701)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term credits received (paid), net 81,211 337,233
Loan payments (406,238) (56,455)
Loan proceeds 951,296 19,470
Proceeds from sale of common stock 208,028 1,495,136
Decrease in amount due to a company under
common control (677,072) (1,442,590)
Proceeds from sale of convertible debt, net of costs 3,140,534 -
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,297,759 352,794
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 578,590 -
CASH AND CASH EQUIVALENTS, beginning of period 20,478 -
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 599,068 -
=====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PAGE 7
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
1. STATEMENT OF On December 16, 1999, Jenkon International,
INFORMATION Inc. ("Jenkon") acquired all the outstanding
FURNISHED common stock of Multimedia Kid -
Intelligence in Education Ltd. (an
Israeli corporation) ("MMKid"). The
acquisition has been accounted for as a
reverse acquisition. Accordingly the
historical financial statements prior to
December 16, 1999 are those of MMKid and
Jenkon's operations are included from
December 16, 1999 through March 31, 2000.
In the opinion of management the accompanying
unaudited financial statements contain all
adjustments (including normal and recurring
accruals) necessary to present fairly the
financial position as of March 31, 2000,
and the results of operations and cash flows
for the three and nine month periods ended
March 31, 2000 and 1999. These results
have been determined on the basis of
generally accepted accounting principles and
practices.
The results of operations for the three and
nine month periods ended March 31, 2000 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. MMKid's audited
financial statements and notes for the years
ended December 31, 1998 and 1997 were
filed in the Form 8-K/A on February 28, 2000.
A transition Form 10-K for MMKid for the six
months ended June 30, 1999 was filed on
March 30, 2000.
2. BUSINESS AND REVENUE MMKid develops educational systems for
RECOGNITION kindergartens, schools, special education,
management training and enrichment centers.
MMKid's computer-based systems combine
interactive software, playful didactic aides
and unique electronic interfaces. MMKid's
products are used to create educational,
three dimensional computerized environments
that combine physical components such as
wooden blocks, task cards, worksheets and
books with computer-based technologies.
MMKid derives revenue primarily from the sale
of Multimedia K.I.D. interactive learning
systems and Action K.I.D. systems (an
interactive learning center for children
which is comprised of a physical wooden
playground-like structure with activity
points that provide electronic feedback to
children).
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PAGE 8
<PAGE>
Revenue from the sale of Multimedia K.I.D.
systems is recognized at shipment. Revenue
from the sale of Action K.I.D. systems are
recognized when accepted by the customer.
3. EARNINGS (LOSS) PER The Company computes loss per common share
COMMON SHARE under 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
equivalents from options, convertible debt,
and preferred stock of 28,989,951 have not
been included in the computation of diluted
loss per common share as the effect would be
antidilutive.
As a result of the December 16, 1999 reverse
acquisition, Jenkon issued 840,000 shares of
Common Stock in exchange for 5,375 shares of
MMKid Common Stock. This has been treated as
a stock split of 156.28 for 1 and is
retroactively reflected for all periods
presented.
4. ACQUISITION AND On December 16, 1999, Jenkon entered into a
DISCONTINUED Stock Exchange Agreement and Plan of
OPERATIONS Reorganization (the "Agreement") with MMKid
and the holders of all MMKid's capital stock,
to purchase all the outstanding capital stock
of MMKid in exchange for 840,000 shares of
Common Stock, 1,208,000 shares of Series B
Preferred Stock, and 1,208,000 shares of
Series C Preferred Stock. The acquisition has
been accounted for as a reverse acquisition
and accordingly the outstanding stock of
Jenkon at December 16, 1999 was valued at
approximately $7,806,000. The Series B and
Series C Preferred Stock will be convertible
into an aggregate of 24,160,000 shares of
Jenkon Common Stock and will have no voting or
conversion rights unless and until the
stockholders of Jenkon have approved the
conversion rights of Series B and Series C
Preferred Stock. Upon stockholder approval,
(i) the Series B Preferred Stock will
automatically convert into 12,080,000 shares
of Common Stock, and (ii) the Series C
Preferred Stock will have voting rights on an
as-converted basis and will be convertible
into an aggregate of 12,080,000 shares of
Common Stock at such time as the revenues of
MMKid exceed $1,700,000 for any 12 month
period. This revenue amount had been reached
by December 16, 1999. In the event the annual
revenue target is not reached by December
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PAGE 9
<PAGE>
31, 2001, all of the Series C Preferred
Stock will be cancelled. Assuming all
shares of Series B and Series C Preferred
Stock are converted into Common Stock, the
former stockholders of MMKid would hold
approximately 73% of Jenkon's fully-diluted
Common Stock after taking into account the
Convertible promissory notes described in
Note 5.
In the event that Jenkon does not obtain
stockholder approval of the grant of
conversion rights to the Series B and Series
C Preferred Stock prior to May 31, 2000 (or
such later date as the holders the Series B
and C Preferred Stock may agree), the shares
of Series B and Series C Preferred Stock will
be redeemable at the option of the holders
thereof at a price of $10 per share for a
total redemption price of $24,160,000.
For accounting purposes, the acquisition has
been treated as a reverse acquisition
whereby MMKid acquired Jenkon. The assets
and liabilities of Jenkon have been recorded
at estimated fair market value on the date
of acquisition using the purchase method of
accounting. The combined consolidated
financial statements represent MMKid on a
historical basis with the results of
operations of Jenkon for the period from
December 16, 1999 through March 31, 2000.
At December 16, 1999, the purchase price
exceeded the estimated net assets by
approximately $13,725,300, which has been
recorded as goodwill.
Subsequent to the acquisition, on April 6,
2000, Jenkon's Board of Directors entered into
a Stock Purchase Agreement for the sale of all
its operating assets and liabilities
associated with the software solutions for
network marketing companies involved in the
direct sales industry. In February 2000
Jenkon's Board of Directors had a formal plan
to dispose of these operations. In accordance
with EITF 95-18, "Accounting and Reporting for
a Discontinued Business Segment When the
Measurement Date occurs after the Balance
Sheet Date but before the Issuance of
Financial Statements", the discontinued
operations have been reflected in the
financial statements assuming the discontinued
operations were recorded at the beginning of
the period presented. The combined entity did
not recognize a deferred tax benefit on the
loss from discontinued operations due to a
100% valuation allowance provided on the
deferred tax assets. The combined entity
anticipates disposing of these operating
assets and liabilities within one year of the
measurement date. The loss on disposal is
estimated to be $12,501,000, which represents
net assets of $500,812, goodwill of
$13,725,300, reduced by estimated operating
losses subsequent to the discontinued
operation measurement date of approximately
$475,000
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PAGE 10
<PAGE>
and accrued estimated run-off and other
disposal costs of $75,000 less the expected
purchase price of $1,175,000. In accordance
with EITF 87-11, "Allocation of Purchase
Price to Assets to Be Sold", the loss on
disposal of $11,907,000 has been accounted
for as an adjustment to the purchase price
of MMKid and reduced goodwill recorded as a
result of the reverse merger. The remaining
goodwill of $1,123,500, after the purchase
price adjustment, is being amortized over
five years on a straight-line basis.
Gross revenues for the discontinued
operations for the three and nine months ended
March 31, 2000 were $1,067,400 and
$2,800,900, respectively.
The following table reflects unaudited pro
forma combined results of operations of the
combined entity on the basis that the
acquisition had taken place at the beginning
of each period presented:
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, 2000 March 31, 2000
---------------------------------------------------------------------------------
<S> <S> <C>
Revenues $ 427,000 $ 1,694,000
Net loss (4,103,000) (6,499,000)
Net loss per common share (0.75) (2.60)
=================================================================================
</TABLE>
<TABLE>
<S> <C>
In management's opinion, the unaudited pro
forma combined results of operations are not
indicative of the actual results that would
have occurred had the acquisition been
consummated at the beginning of the period.
5. PRIVATE PLACEMENT On December 16, 1999, Jenkon completed a
private placement of an aggregate of
$4,500,000 of Convertible Promissory Notes,
of which $3,735,000 was collected on
December 16, 1999. Such Notes are unsecured
and bear interest at an annual rate of 12%
from and after January 1, 2000 and are due
and payable in full on or before June 1,
2000. Accrued interest was paid on
February 1, 2000 and March 1, 2000. Accrued
Interest from March 1, 2000 through conversion
will be payable in stock at maturity.
The principal balance of the Notes are
automatically converted into Common Stock of
the Company at a conversion rate of $1.00 per
share at such time as the Jenkon's
stockholders have approved the issuance of
such conversion shares.
Original issue discount of $4,500,000 has
been recorded for the difference between the
reported market price of Jenkon's Common
Stock when the Convertible Promissory Notes
were issued and the Convertible Promissory
Notes conversion price of $1.00 per share.
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PAGE 11
<PAGE>
The original issue discount will be amortized
on a straight-line basis from the issue date
to the expected date the Notes are to be
converted and reported as interest expense in
the statement of operations.
6. RELATED PARTY RELATED PARTY TRANSACTIONS At December 31,
TRANSACTIONS 1999, the Company agreed to forgive a
receivable due from an officer of $116,563. This
aggregate amount is recorded as acquisition
expense on the consolidated statement of
operations.
During December 1999, MMKid issued 300 shares
of its stock to an officer of the Company. The
shares converted into Jenkon Common and
Preferred Stock upon the date of acquisition
as further described in Note 1 and 4. As a
result, MMKid recorded a non-cash expense of
$1,748,508 as compensation expense. This
compensation expense was allocated in
accordance with the general allocation of the
officer's salary. The allocation resulted in
an increase in cost of revenues of
approximately $175,000, research and
development expenses of approximately
$1,172,000 and selling, general and
administrative expenses of approximately
$402,000.
Also prior to the MMKid issued 1,175
shares of its stock to an outside advisor.
These shares converted into 500,000 shares
of Jenkon Preferred Series B and C Stock
and resulted in an acquisition cost of
approximately $5,539,900. This amount was
capitalized as part of the overall
purchase price and resulted in additional
goodwill (Note 4).
From December 1999 through March 2000, the
company paid to Jenetek, LLC, a Company owned
and operated by a Board Member of the
Company, consulting fees above and beyond the
monthly amount set forth in the consulting
agreement.
7. FINANCIAL VIABILITY 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 needs. Although the Company
raised capital through the private placement
described above, it has and continues to
experience negative cash flow. The Company's
ability to continue as a going concern may
be dependent on its ability to raise future
capital and generate positive cash flow from
operations. The consolidated financial
statements do not include any adjustments
relating to the Company's ability to
continue as a going concern.
In the event the shareholders approve the
conversion of the Series B and C preferred
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PAGE 12
<PAGE>
stock and the convertible promissory notes,
the Company believes it will have sufficient
capital to meet its cash flow requirements
for at least the next twelve months.
</TABLE>
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.
The unaudited financial statements and the Management's Discussion and Analysis
or Plan of Operations contained in this Form 10-QSB reflect the operations of
MMKid for the nine months ended March 31, 2000 and the operations of Jenkon
International, Inc. since December 16, 1999, the date of the acquisition of
MMKid by Jenkon. Because of the change in control, the acquisition of MMKid by
Jenkon was accounted for as a reverse acquisition. Based on such accounting
treatment, MMKid is reported as the surviving entity. The nine months and three
months ended March 31, 1999 includes the operations of MMKid only.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO MARCH 31, 1999
REVENUES. Total revenues decreased 6.5% to $426,849 for the three months
ended March 31, 2000 from $456,307 for the same period in 1999. The slight
decrease is primarily attributable to the decrease in the sale of Action
K.I.D. centers. Two customers accounted for approximately 95.1% and 98.9% of
total revenues for the three months ended March 31, 2000 and March 31, 1999,
respectively.
COST OF REVENUES. Total cost of revenues decreased by $26,133 or 11.9% to
$194,207 for the three months ended March 31, 2000 as compared to $220,340 for
the same period in 1999. This decrease is consistent with the decrease in
associated revenues coupled with a higher margin sales mix. As a percentage of
revenues, cost of revenues decreased to 45.5% for the three months ended March
31, 2000 from 48.3% for the same period in 1999 due primarily to the
implementation of cost controls.
GROSS PROFIT. Gross profit was consistent between the two periods having
decreased by 1.4% to $232,642 for the three months ended March 31, 2000 from
$235,967 for the same period in 1999. Overall gross profit as a percentage of
total revenues increased to 54.5% for the three months ended March 31, 2000
from 51.7% for the same period in 1999, mainly as a result of the
implementation of cost controls.
PRODUCT RESEARCH AND DEVELOPMENT EXPENSES. Product research and development
expenses increased 91.1% to $187,147 for the three months ended March 31, 2000
from $97,922 for the same period in 1999. The increase is primarily related to
the acceleration of the development of new educational products including My
K.I.D. and My Home (the home version of My K.I.D.).
INTEREST EXPENSES. Interest expense is comprised primarily of the
amortization of the original issue discount on the convertible debt. The
remaining original issue discount of $1,008,480 will be expensed over the
period from the issue date to the expected conversion date of the debt, which
management expects will occur upon shareholder approval on May 31, 2000.
However, there can be no assurances that shareholder approval of conversion
will be obtained on a timely basis.
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PAGE 13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 265.8% to $503,071 for the three months
ended March 31, 2000 from $137,511 for the same period in 1999. The increase
is primarily the combined result of an increase in sales travel and
professional fees associated with the acquisition of MMKid and the
disposition of the Company's direct sales software operations.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was
$654,478 in the three months ended March 31, 2000 as compared to $0 in the
same period in 1999. Such loss represents the loss disposition of all the
operating assets and liabilities associated with the software solutions for
the direct sales industry.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 2000 TO MARCH 31, 1999
REVENUES. Total revenues increased 41.5% to $1,693,687 for the nine months
ended March 31, 2000 from $1,197,050 for the same period ended March 31,
1999. The increase is primarily due to more sales of Action K.I.D. centers
during the nine months ended March 31, 2000 compared to the same period in
1999. Action K.I.D. centers are the highest cost item sold by the Company.
During the nine month period ended March 31, 2000 three clients accounted for
98.0% of total revenue. For the nine month period ended March 31, 1999 four
clients accounted for approximately 94.6% of total revenue.
COST OF REVENUES. Total cost of revenues increased by $230,671 or 37.9% to
$839,110 for the nine months ended March 31, 2000 as compared to $608,439 for
the same period ended March 31, 1999. This increase was primarily due to the
compensation expense related to MMKid shares issued to an officer as well as
an increase in the number of Action K.I.D. centers sold. As a percentage of
revenues, cost of revenues decreased slightly to 49.5% for the nine months
ended March 31, 2000 as compared to 50.8% for the same period ended March 31,
1999. This slight decrease is the result of higher revenues and cost controls
implemented by the Company.
GROSS PROFIT. Gross profit increased by 45.2% to $854,577 for the nine months
ended March 31, 2000 from $588,611 for the same period ended March 31, 1999.
Overall gross profit as a percentage of total revenues increased slightly to
50.5% for the nine months ended March 31, 2000 as compared to 49.2% for the
same period ended March 31, 1999, due primarily to the high margin associated
with the sale of Action K.I.D. centers offset, in part, by higher
compensation expense.
PRODUCT RESEARCH AND DEVELOPMENT EXPENSES. Product research and development
expenses increased 296.3% to $1,621,507 for the nine months ended March 31, 2000
from $409,118 for the same period ended March 31, 1999. The increase is
primarily attributable to the compensation expense associated with the MMKid
shares issued to an officer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 221.3% to $1,138,309 for the nine months ended
March 31, 2000 from $354,297 for the same period ended March 31, 1999. The
increase is primarily the result of the compensation expense related to MMKid
shares issued to an officer as well as professional fees associated with the
acquisition of MMKid and disposition of the Company's direct sales software
operations.
INTEREST EXPENSES. Interest expense is comprised primarily of the amortization
of the original issue discount on the convertible debt. The remaining original
issue discount of $1,008,480 will be expensed over the period from the issue
date to the expected conversion date of the debt.
ACQUISITION EXPENSES. Acquisition expenses for the nine months ended March
31, 2000 were $116,563 as compared to $0 for the same period in fiscal 1999.
Such expenses are comprised of internal costs associated with the acquisition
of MMKid including the forgiveness of debt.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was
$752,601 for the nine months ended March 31, 2000 as compared to $0 in the
same period in fiscal 1999. Such loss represents the disposition of all the
operating assets and liabilities associated with the software solutions for
network marketing companies involved in the direct sales industry.
LIQUIDITY AND CAPITAL RESOURCES
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
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Company. In general, assuming the remaining agreements are not terminated
such agreements provide for total payments of not less than approximately
$821,000 through the end of the fiscal year ending June 30, 2002, including
payments of approximately $30,000 per month for the remainder of the fiscal year
ending June 30, 2000. With the pending sale of the discontinued operations, one
employment agreement as well as the consulting and Non-Competition Agreement
will be assumed by the purchaser. An agreement pertaining to the remaining
employment has been executed whereby the agreement will be terminated in
exchange for the forgiveness of approximately $117,000 in amounts owed the
Company.
For the nine months ended March 31, 2000, operating activities used net cash of
$2,060,098 primarily due to a net loss of $6,498,933 combined with an increase
in current and long term receivables of $1,040,823 and a change in net assets of
discontinued operations of $444,631, offset by depreciation and amortization in
the amount of $3,573,401 and stock compensation of $1,748,508. For the nine
months ended March 31, 2000, investing activities used net cash of $659,071
resulting primarily from the cash acquired in the purchase of $129,154 offset by
deposits and purchase of property and equipment of $788,225. Cash flows from
financing activities provided cash of $3,297,759 for the nine months ended March
31, 2000 due primarily to the combined proceeds of convertible debt (described
below), issuance of stock and loan proceeds of $4,299,858 offset by a decrease
in the amount due to a company under common control of $677,072 and loan
payments of $406,238.
Net cash used in operating activities of $242,093 for the nine months ended
March 31, 1999 was primarily attributable to an increase in current and
long-term receivables of $780,077, an increase in inventories of $110,000 and a
net loss of $190,150. During the same period, net cash used in investing
activities of $110,701 was attributable entirely to the purchase of fixed
assets. Financing activities provided $352,794 primarily due to the proceeds
from the sale of common stock of $1,495,136 combined with net short-term credits
received of $337,233, which is offset by the decrease in the amount due to a
company under common control of $1,442,590.
The Company's accounts receivable balance at March 31, 2000 was $1,463,074.
Accounts receivable in the over 90-day category at March 31, 2000 was
$1,243,000 or 85.0% of accounts. The number of day's sales in accounts
receivable was 251 days, for the nine months ended March 31, 2000. The
increase in accounts receivable is directly related to the sale of long-term
projects. The company provides extended payment terms on these larger sales.
there were no bad debts during the nine months ended March 31, 2000.
During the nine months ended March 31, 2000, the Company completed a
$4,500,000 private placement of convertible promissory notes. The notes
accrue interest at 12% per annum and by agreement of substantially all of the
holders thereof, are due and payable in full on June 1, 2000 unless converted
into common stock. Upon shareholder approval of conversion of the notes to
common stock on or before May 31, 2000, the notes will be convertible into
common shares of the Company at a conversion price of $1.00 per share. In
addition, substantially all of the noteholders have agreed to convert all
accrued but unpaid interest on the notes into common stock at a conversion
rate equal to the closing price of the Company's common stock on May 30, 2000.
YEAR 2000 ISSUE
Like many companies, Jenkon is subject to risks from the Year 2000 computer and
software issue. 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 Company has completed what it believes is a reasonable and thorough review
of Year 2000 issues as it relates to the Company's operations, liquidity and
financial condition. The review included identifying the related issues and
risks that could have a material effect on the Company. To date, no significant
issues have been identified with respect to the Company's systems or any
significant third parties dealing with the Company. Identified issues or
reasonably foreseeable circumstances are not expected to have a material affect
on the Company's systems or operations.
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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
FOR PURPOSES OF THIS SUBSECTION, REFERENCES TO THE "COMPANY" SHALL REFER TO
JENKON INTERNATIONAL, INC., A DELAWARE CORPORATION AND ITS SUBSIDIARIES TAKEN AS
A WHOLE; REFERENCES TO "JENKON" SHALL REFER TO THE DIRECT SALES SOFTWARE
BUSINESS CONDUCTED BY JENKON INTERNATIONAL, INC. THROUGH ITS SUMMIT V, INC.
SUBSIDIARY; AND REFERENCES TO "MMKID" SHALL REFER TO THE EDUCATIONAL SYSTEMS
BUSINESS CONDUCTED BY MULTIMEDIA K.I.D. INTELLIGENCE IN EDUCATION, LTD., AN
ISRAELI CORPORATION.
IF STOCKHOLDER APPROVAL OF CONVERSION OF PREFERRED STOCK AND CONVERTIBLE
PROMISSORY NOTES CANNOT BE OBTAINED ON A TIMELY BASIS, THE COMPANY MAY LACK THE
CAPITAL RESOURCES TO REPAY CONVERTIBLE PROMISSORY NOTES OR REDEEM ITS PREFERRED
SHARES. Pursuant to the terms of the Series B and Series C Preferred Stock, in
the event that stockholder approval of the conversion of the Series B and Series
C Preferred Stock is not approved by May 31, 2000 (or any later date as the
majority of such preferred stockholders may approve), the Company may be
required to redeem the preferred shares for an aggregate redemption price of
approximately $24 million. In addition, in the event the Company's stockholders
do not approve the conversion of the Convertible Promissory Notes into Common
Stock prior to May 31, 2000 (or such later date as the holders of such notes may
agree), the notes will be payable in full. The Company lacks the capital
resources to redeem the preferred stock and to repay the Notes. Accordingly, in
the event that stockholder approval of conversion of the preferred stock and
convertible notes are not approved in a timely manner, the Company's financial
position would be severely adversely affected.
WITHOUT SHAREHOLDER APPROVAL OF CONVERSION OF PREFERRED STOCK AND CONVERTIBLE
NOTES, LIQUIDITY CONSTRAINTS RAISE DOUBTS REGARDING COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN. As a result of the Company's near and long term
liquidity needs,
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the Company's ability to continue as a going concern may be dependent on its
ability to raise future capital and generate positive cash flow from
operations. The Company believes that, upon any conversion of the Series B
and Series C Preferred Stock and Convertible Promissory Notes into Common
Stock, it will have sufficient capital resources to continue its operations
for at least the next twelve months. However, if the Company's stockholders
do not elect to approve such conversions or if the Company is required to
fund the operations of Jenkon for longer than is currently expected, the
Company's may not have sufficient capital resources to continue as a going
concern.
THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS NASDAQ SMALLCAP LISTING. The Nasdaq
Stock Market, Inc. has indicated that the change of control of the Company that
will result from the approval of the Conversion Proposal will cause Nasdaq to
review the Company's listing on the Nasdaq SmallCap Market as if it were a new
applicant. The standards for new listing include requirements that (i) the
Company have net tangible assets of at least $4 million or a market
capitalization of at least $50 million, and (ii) the minimum bid price of the
Company's Common Stock be at least $4. The Company must also meet other,
quantitative and non-quantitative listing requirements in order to meet the
Nasdaq listing standards. There can be no assurances that the Company will have
sufficient net tangible assets or market capitalization, that its stock price
will be high enough on date of the Meeting, or that it will be able to otherwise
satisfy the requirements for listing on the Nasdaq SmallCap Market. If the
Company fails to maintain its Nasdaq SmallCap Market listing or is deemed not to
qualify for continued listing upon Nasdaq review, the market value of the
Company's 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.
IF THE COMPANY CANNOT SUCCESSFULLY SELL OR DISPOSE OF THE OPERATIONS OF JENKON,
ITS FINANCIAL CONDITION WILL BE MATERIALLY AND ADVERSELY EFFECTED. As a result
of Jenkon's continuing losses and the Company's lack of financial resources to
continue to fund such losses, the Board of Directors of the Company has formal
plans relating to the sale of the Jenkon business, including an offer and board
approval (subject to closing conditions) for the sale to a group of directors,
officers and employees of the Company. There can be no assurance that the
Company will be able to successfully divest itself of Jenkon's operations on
favorable terms. If the operating assets and liabilities of Jenkon cannot be
sold on favorable terms and within the desired timeframe, the Company may be
forced to discontinue Jenkon's operations which could materially and adversely
affect the Company's financial condition and expose it to potential liabilities
from Jenkon customers or other creditors of Jenkon.
MMKID HAS A LIMITED HISTORY OF OPERATIONS, A HISTORY OF LOSSES AND LIMITED
REVENUES. MMKid has a limited history of operations, has not operated
profitably andhas and continues to experience significant losses, including a
loss before discontinued operations of $5,746,332 for the nine months ended
March 31, 2000. Moreover, MMKid has generated only limited revenues from the
sale of products, services and marketing rights. There can be no assurance
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that MMKid will ever be able to generate significant revenues or profits from
operations.
THE COMPANY MAY NEED ADDITIONAL CAPITAL. The Company's business involves the
continued investment of funds towards the development of new products and
modifications of existing products. To the extent that the Company 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 financial sources for working capital. Moreover, because
MMKid is in the early stages of its development and will require significant
capital to implement its business planthe Company may require additional capital
in order to operate its business. The Company currently has no significant 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.
NEW BUSINESS; ABILITY TO INTEGRATE AND MANAGE. The acquisition of MMKid has
resulted in the Company operating a new business with respect to which it has
little or no experience in a country (Israel) in which the Company's current
Board of Directors has little experience. The business of MMKid, although
software-related, is separate, distinct and not complimentary to Jenkon's
historical business. Because of the differences between the Company's existing
business and the business of MMKid, there will be little or no efficiencies or
economies of scale that will result from the acquisition of MMKid. The Company's
lack of experience and track record in the educational software and systems
business, and the Company's inexperience with Israeli laws and business
practices may result in the inability of the Company to effectively compete
which may lead to operating losses and loss of standing in the industries in
which the Company operates, any of which would have an adverse effect on the
Company, its operations and financial condition.
OPERATIONS IN ISRAEL. MMKid's operations are based in Israel and, as a result,
the Company's financial results and prospects are directly affected by economic,
political and military conditions in Israel. Moreover, some of the Company's
employees may be obligated to perform annual reserve duty in the Israeli Defense
Forces and are subject to being called for active duty at any time upon the
outbreak of hostilities. Any adverse economic, political or military
developments in Israel could have a material adverse effect on the Company and
its ability to operate.
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 product in general and software products in particular. 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
Company's products 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 PRODUCTS. Substantially all of MMKid's revenues
have been derived from sales of its Action K.I.D. systems and substantially all
of Jenkon's historical revenues have been derived from sales and related fees
from its Summit V 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 products or incompatibility of software
products 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 its ability to expand sales of its existing products
while developing and successfully marketing new and enhanced products
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COMPETITION. The educational products and software industries are 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 products and services. Other factors that will affect the Company's
success in this market include the overall demand for educational products, the
Company's 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 Broderbund, Davidson &
Associates, The Learning Company CVC Software and Others. 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.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The markets for both MMKid's and
Jenkon's products are characterized by rapid technological advances, evolving
industry standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's future success will depend upon its ability to
enhance its current products and develop and successfully introduce and sell new
products that keep pace with technological developments and respond to evolving
end-user requirements and customer preferences. Any failure by the Company to
anticipate or respond adequately to technological developments, customer demands
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. 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 and financial position.
RISK OF CREDITORS CLAIMS AND SUCCESSOR LIABILITY; RISKS OF PENDING
LITIGATION. In July 1995, Summit V, Inc., a subsidiary of the Company,
purchased and/or licensed substantially all of the assets, and Summit V, Inc.
assumed certain contractual obligations and indebtedness from Redwood
Technology, Inc. ("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 $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
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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.
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 educational products and
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.
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
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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.
FUTURE SALES OF RESTRICTED SHARES COULD ADVERSELY AFFECT PRICE OF COMMON STOCK
AND LIMIT THE COMPANY'S ABILITY TO COMPLETE ADDITIONAL FINANCING. 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
Company's Common. Upon any conversion of preferred shares and convertible notes
issued in connection with the acquisition of MMKid and concurrent private
placement, the Company will issue approximately 29,000,000 shares of Common
Stock, a portion of which will be registered for resale and a portion of which
will become eligible for resale pursuant to Rule 144 one year following the date
of issuance. Such a large "over-hang" of stock eligible for sale in the public
market may have the effect of (i) depressing the price of the Company's Common
Stock, and (ii) making it difficult or impossible for the Company to obtain
additional debt or equity financing.
STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION UPON CONVERSION OF PREFERRED
STOCK AND CONVERTIBLE PROMISSORY NOTES. IN THE EVENT STOCKHOLDERS OF THE COMPANY
ELECT TO APPROVE THE CONVERSION OF SERIES B AND SERIES C PREFERRED STOCK AND
CONVERTIBLE PROMISSORY NOTES INTO COMMON STOCK, the Company will issue
approximately 29,000,000 additional shares of its Common Stock. Because MMKid
has limited net tangible assets and no historical earnings and because of the
large number of shares being issued to MMKid stockholders and holders of
convertible notes, the holders of Common Stock will experience significant
dilution both in terms of ownership percentage and in terms of net tangible book
value per share.
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 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.
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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 November 1999, AmeriPlan Corporation ("AmeriPlan"), a Texas corporation,
filed a demand for arbitration seeking a refund of approximately $100,000 in
payments owing for software and services provided by Jenkon. AmeriPlan also is
seeking an undetermined amount of consequential damages. Jenkon has denied that
it owes AmeriPlan any of these amounts and has also filed a counterclaim for
approximately $250,000 that is still owing under the parties' agreements. The
arbitration hearing is scheduled for July 2000. Jenkon intends to vigorously
pursue this litigation.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
- ------------------------------------------------------------------------------
PAGE 22
<PAGE>
27 Financial Data Schedule
</TABLE>
- -------------------
(b) Reports on Form 8-K.
None
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.
May 15, 2000 /s/ DAVID A. EDWARDS
- --------------------- ---------------------------------------
Date Chief Executive Officer, Interim Chief
Financial Officer, Chairman and Director
May 15, 2000 /s/ PESSIE GOLDENBERG
- --------------------- ---------------------------------------
Date President
May 15, 2000 /s/ CLIFFORD DEGROOT
- --------------------- ---------------------------------------
Date Controller and Principal Accounting
Officer
- ------------------------------------------------------------------------------
PAGE 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 599,068 0
<SECURITIES> 600,000 0
<RECEIVABLES> 1,463,074 0
<ALLOWANCES> 0 0
<INVENTORY> 725,000 0
<CURRENT-ASSETS> 3,970,804 0
<PP&E> 376,569 0
<DEPRECIATION> (148,307) 0
<TOTAL-ASSETS> 6,339,508 0
<CURRENT-LIABILITIES> 4,924,353 0
<BONDS> 0 0
0 0
6,843,933 0
<COMMON> 5,662 0
<OTHER-SE> (510,087) 0
<TOTAL-LIABILITY-AND-EQUITY> 6,339,508 0
<SALES> 1,693,687 1,197,050
<TOTAL-REVENUES> 1,693,687 1,197,050
<CGS> 839,110 608,439
<TOTAL-COSTS> 839,110 608,439
<OTHER-EXPENSES> 2,947,750 763,415
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,653,159 15,346
<INCOME-PRETAX> 5,746,332 (190,150)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 5,746,332 (190,150)
<DISCONTINUED> (752,601) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,498,933) (190,150)
<EPS-BASIC> (2.60) (0.52)
<EPS-DILUTED> (2.60) (0.52)
</TABLE>
