<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, 1999
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No Fee Required)
Commission File No. 000-24637
JENKON INTERNATIONAL, INC.
----------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 91-1890338
----------------------------------------------------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
7600 N.E. 41st Street, Suite 350, Vancouver, Washington 98662
- -------------------------------------------------------------------------
Address of principal executive office Zip Code
Issuer's telephone number: (360) 256-4400
---------------------
Check whether the issuer has (1) filed all reports required by Section 13 or
15(d) of the Exchange Act during the past 12 months, and (2) been subject to
such filing requirements for the past ninety (90) days. Yes X No
------ -----
As of February 14, 2000, [5,501,617] shares of Common Stock were outstanding.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
PART I - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 (UNAUDITED)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THREE
MONTHS ENDED DECEMBER 31, 1999 AND 1998
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR SIX MONTHS
ENDED DECEMBER 31, 1999 AND 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,122,788
Short-term investments 306,376
Trade receivables 1,769,920
Other receivables 356,143
Inventory 650,000
Net assets of discontinued operations 453,222
- -----------------------------------------------------------------------------------------------------
Total current assets 6,658,449
PROPERTY AND EQUIPMENT 242,849
OTHER ASSETS, net 965,895
- -----------------------------------------------------------------------------------------------------
Total assets $ 7,867,193
=====================================================================================================
</TABLE>
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank credit and current maturities of
long-term liability $ 865,234
Accounts payable 393,596
Other accrued liabilities 109,400
Convertible debt, net of original issue discount of
$3,825,377 674,623
Amount due to a company under common control 677,072
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 2,719,925
Long-term liabilities
Accrued severance payment 145,000
Notes payable, net of current portion 1,120,271
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 3,985,196
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, SERIES B, par value
$.001, 1,208,000 shares issued and outstanding, liquidation
preference of $10 per share 833,809
REDEEMABLE PREFERRED STOCK, SERIES C, par value
$.001, 1,208,000 shares issued and outstanding, liquidation
preference of $10 per share 833,809
STOCKHOLDERS' EQUITY
Common stock, par value $.001; 20,000,000 shares authorized;
5,633,398 shares issued, 5,476,944 shares outstanding 5,633
Additional paid-in-capital 5,888,687
Stock subscriptions receivable (8,500)
Rights in products acquired from a company under
Common control (1,750,000)
Foreign currency translation (13,119)
Accumulated deficit (1,568,322)
Treasury stock, at cost, 156,454 shares (340,000)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,214,379
- ------------------------------------------------------------------------------------------------------------
Total liabilities, preferred stock and stockholders' equity $ 7,867,193
============================================================================================================
</TABLE>
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES FROM PRODUCTS, SERVICES AND MARKETING
RIGHTS $ 878,051 $ 502,627
COST OF REVENUES 377,050 278,328
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 501,001 224,299
OPERATING EXPENSES
Selling and marketing 67,933 103,543
Product research, development and enhancements 223,677 162,816
General and administration 31,370 41,957
Acquisition expense 344,713 -
Goodwill expense 12,460 -
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 680,153 308,316
- ---------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (179,152) (84,017)
OTHER EXPENSE
Interest expenses, net (622,098) (2,799)
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX AND DISCONTINUED OPERATIONS (801,250) (86,816)
PROVISION FOR INCOME TAX - -
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (801,250) (86,816)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax (98,123) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $ (899,373) (86,816)
=====================================================================================================================
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations $ (0.57) $ (0.28)
Discontinued operations (0.07) -
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (0.64) $ (0.28)
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 1,401,349 312,558
=====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES FROM PRODUCTS, SERVICES AND MARKETING
RIGHTS $ 1,266,838 $ 740,743
TOTAL COST OF REVENUES 470,053 388,099
- -----------------------------------------------------------------------------------------------------
GROSS PROFIT 796,785 352,644
OPERATING EXPENSES
Selling and marketing 150,691 166,282
Product research, development and enhancements 262,860 311,196
General and administration 82,389 50,504
Acquisition expense 344,713 -
Goodwill expense 12,460 -
- -----------------------------------------------------------------------------------------------------
Total operating expenses 853,113 527,982
- -----------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (56,328) (175,338)
OTHER EXPENSE
Interest expenses, net (622,098) (9,980)
- -----------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX AND DISCONTINUED OPERATIONS (678,426) (185,318)
PROVISION FOR INCOME TAX - -
- -----------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (678,426) (185,318)
LOSS FROM DISCONTINUED OPERATIONS, net of income taxes (98,123) -
- -----------------------------------------------------------------------------------------------------
NET LOSS $ (776,549) (185,318)
=====================================================================================================
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations $ (0.67) $ (0.59)
Discontinued operations (0.10) -
- -----------------------------------------------------------------------------------------------------
NET LOSS PER SHARE $ (0.77) $ (0.59)
- -----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted 1,013,233 312,558
=====================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (776,549) $ (185,318)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 51,326 24,655
Amortization of original issue discount 623,703 -
Change in net assets of discontinued operation (50,533) -
Loss from discontinued operations 98,123 -
Decrease in other long-term liabilities - (1,536)
Stock compensation and forgiveness of debt 345,023 -
Increase (decrease) from changes in operating
assets and liabilities:
Receivables (847,403) 56,225
Long-term receivables - (231,458)
Prepaid and other assets (325,540) 85,175
Inventories (100,000) (244,939)
Accounts payable 327,627 117,398
Accrued severance (5,000) (7,312)
Deposits (4,763) -
Other accrued liabilities (199,918) (111,955)
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (863,904) (499,065)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (71,969) (90,266)
Cash acquired in purchase 129,154 -
Deposits (101,613) -
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,428) (90,266)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term credits received, net (84,957) 137,965
Loan payments (104,445) (2,867)
Loan proceeds 951,296 19,470
Proceeds from sale of common stock 210,304 645,136
Decrease in amount due to a company under
common control - (205,381)
Proceeds from sale of convertible debt, net of costs 3,038,444
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,010,642 594,323
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,102,310 4,992
CASH AND CASH EQUIVALENTS, beginning of period 20,478 -
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 3,122,788 4,992
=====================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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 December 31, 1999.
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 December 31, 1999,
and the results of operations and cash flows
for the three and six month periods ended
December 31, 1999 and 1998. These results
have been determined on the basis of
generally accepted accounting principles and
practices.
The results of operations for the three and
six month periods ended December 31, 1999 are
not necessarily indicative of the results to
be expected for any other period or for the
entire year.
Certain information and footnote disclosures
normally included in financial statements
presented in accordance with generally
accepted accounting principles have been
condensed or omitted. MMKid's audited
financial statements and notes for the years
ended December 31, 1998 and 1997 are to be
filed in the Form 8-K/A by February 29, 2000.
A transition Form 10-K for MMKid for the six
months ended June 30, 1999 will be filed by
March 15, 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).
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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 29,053,382 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. In the event the annual
revenue target is not reached by December
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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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 March 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.
4. ACQUISITION AND For accounting purposes, the acquisition has
DISCONTINUED been treated as a reverse acquisition
OPERATIONS whereby MMKid acquired Jenkon. The assets
(CONTINUED) 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 December 31, 1999.
At December 16, 1999, the purchase price
exceeded the estimated net assets by
approximately $7,590,600, which has been
recorded as goodwill.
Subsequent to the acquisition, on February
14, 2000, Jenkon's Board of Directors
approved the sale and plan of disposition of
all its operating assets and liabilities
associated with the software solutions for
network marketing companies involved in the
direct sales industry. 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 $6,792,000, which
represents net assets of $600,812, goodwill
of $7,590,600, estimated operating losses
subsequent to the discontinued operation
measurement date of approximately $475,000
and accrued estimated run-off and other
disposal costs of $75,000 less the expected
purchase price of $850,000. In accordance
with EITF 87-11, "Allocation of Purchase
Price to Assets to Be Sold", the loss on
disposal of $6,792,000 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 $798,600, 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 six months ended
December 31, 1999 were $1,999,300 and
$2,181,700, respectively.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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>
<CAPTION>
Three months ended Six months ended
December 31, 1999 December 31, 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 878,000 $ 1,267,000
Net loss (896,000) (773,000)
Net loss per common share (0.64) (0.76)
=================================================================================
</TABLE>
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 April 1,
2000. Accrued interest is payable on
February 1, 2000 and 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.
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. INCOME TAXES Due to the significant operating losses
incurred by the Company for the six month
period ended December 31, 1999 and 1998, the
Company has recorded a 100% valuation
allowance on its net deferred tax assets
since management cannot determine whether it
is more likely than not that the deferred
tax assets may be realized.
7. RELATED PARTY RELATED PARTY TRANSACTIONS At December 31,
TRANSACTIONS 1999, the Company agreed to forgive a
receivable due from an officer of $116,573
and issue 50,000 shares of common stock
valued at $228,450. This aggregate amount is
recorded as acquisition expense on the
consolidated statement of operations.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
During December 1999, 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.
8. 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
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.
9. FUNCTIONAL CURRENCY The currency of the primary economic
environment in which the operations of the
Company are conducted is the U.S. dollar and
Management therefore considers the
functional currency to be the U.S. dollar.
Note 10 Inventory
Inventory is valued at the lower of cost or market on a FIFO (first in, first
out) basis and the balance at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $360,000
Work in process 210,000
Finished goods 80,000
--------
$650,000
========
</TABLE>
Note 11 Short-term investments
Short-term investments are deposits with banks that have an initial maturity of
three months or less.
Note 12 Property and equipment
Property and equipment are stated at cost and are depreciated on a straight-line
basis over their estimated useful lives which range from approximately 3 to 15
years. Leasehold improvements are amortized on a straight line basis over the
shorter of their lease term or estimated useful lives.
The balance at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment $230,775
Furniture and fixtures 69,560
Machinery 16,917
Vehicles 51,340
--------
368,592
Less accumulated depreciation 125,743
--------
$242,849
========
</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 six months ended December 31, 1999 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 quarter ended December
31, 1998 as well as the portion of the quarter ended December 31, 1999 prior to
December 16, 1999 include the operations of MMKid only.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1999 TO DECEMBER 31, 1998
REVENUES. Total revenues increased 74.7% to $878,051 for the three months ended
December 31, 1999 from $502,627 for the same period in 1998. The increase is
primarily attributable to the sale of Action K.I.D. centers. During the three
months ended December 31, 1999, one customer purchased an Action K.I.D. center
that accounted for 57% of total revenue. The sale of two Action K.I.D. centers
to two separate clients accounted for nearly all revenue during the three month
period ended December 31, 1999.
COST OF REVENUES. Total cost of revenues increased by $98,722 or 35.5% to
$377,050 for the three months ended December 31, 1999 as compared to $278,328
for the same period in 1998. This increase was primarily due to the increase in
the number of Action K.I.D centers sold. As a percentage of revenues, cost of
revenues decreased to 42.9% for the three months ended December 31, 1999 from
55.4% for the same period in 1998 due primarily to the economics of scale
associated with increased production.
GROSS PROFIT. Gross profit increased by 123.4% to $501,001 for the three months
ended December 31, 1999 from $224,299 for the same period in 1998. Overall gross
profit as a percentage of total revenues increased to 57.1% for the three months
ended December 31, 1999 from 44.6% for the same period in 1998, mainly as a
result of the economics of scale associated with increased production.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased 34.4%
to $67,933 for the three months ended December 31, 1999 from $103,543 for the
same period in 1998. The decrease is the direct result of a head count reduction
in the marketing department.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
37.4% to $223,677 for the three months ended December 31, 1999 from $162,816 for
the same period in 1998. The increase is primarily related to the acceleration
of the development of a new educational product to be named 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 $3,825,377 will be expensed over the period from the issue
date to the expected conversion date of the debt, which will convert upon
shareholder approval on March 31, 2000.
ACQUISITION EXPENSES. Acquisition expenses for the three months ended December
31, 1999 are comprised of internal costs associated with the acquisition
including the issuance of common stock and forgiveness of debt. Other direct
costs of the acquisition have been capitalized as a component of the purchase
price.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 25.2% to $31,370 for the three months ended December 31, 1999 from
$41,957 for the same period in 1998. The decrease is primarily the result of a
reduction in administrative and support personnel.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations
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.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1999 TO DECEMBER 31, 1998
REVENUES. Total revenues increased 71.0% to $1,266,838 for the six months ended
December 31, 1999 from $740,743 for the same period in 1998. The increase is
primarily due to the sale of two Action K.I.D. centers during the six months
ended December 31, 1999 versus one for the same period in 1998. During the six
month period ended December 31, 1999 two clients accounted for 76.5% of total
revenue. For the six month period ended December 31, 1998 one client accounted
for 38.0% of total revenue.
COST OF REVENUES. Total cost of revenues increased by $81,954 or 21.1% to
$470,053 for the six months ended December 31, 1999 as compared to $388,099 for
the same period in 1998. This increase was primarily due to the increase in the
number of Action K.I.D. centers sold. As a percentage of revenues, cost of
revenues decreased to 37.1% for the six months ended December 31, 1999 from
52.4% for the same period in 1998 due primarily to the increase in revenue and
the fixed cost of certain portions of the production process.
GROSS PROFIT. Gross profit increased by 125.9% to $796,785 for the six months
ended December 31, 1999 from $352,644 for the same period in 1998. Overall gross
profit as a percentage of total revenues increased to 62.9% for the six months
ended December 31, 1999 from 47.6% for the same period in 1998, due primarily to
the high margin associated with the sale of Action K.I.D. centers. The Company
had two major Action K.I.D. center sales for the six months ended December 31,
1999 versus one major sale during the same period in 1998.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
SELLING AND MARKETING EXPENSES. Selling and marketing expenses remained
relatively consistent totaling $150,691 for the six months ended December 31,
1999 compared with $166,282 for the same period in 1998. The slight decrease was
due to a reduction in marketing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
15.5% to $262,860 for the six months ended December 31, 1999 from $311,196 for
the same period in 1998. The decrease resulted from a reduction in research and
development personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 63.1% to $82,389 for the six months ended December 31, 1999 from
$50,504 for the same period in 1998. The increase is primarily the result of
additional general and administrative costs added based on the anticipated
future production and sales of Action K.I.D. centers.
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 $3,825,377 will be expensed over the period from the issue
date to the expected conversion date of the debt, which will convert upon
shareholder approval on March 31, 2000.
ACQUISITION EXPENSES. Acquisition expenses for the six months ended December 31,
1999 are comprised of internal costs associated with the acquisition including
the issuance of common stock and forgiveness of debt. Other direct costs of the
acquisition have been capitalized as a component of the purchase price.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations
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 Company. In general, assuming the remaining agreements are not terminated
such agreements provide for total payments of not less than approximately
$913,000 through the end of the fiscal year ending June 30, 2002, including
payments ranging from approximately $30,000 to $33,000 per month during 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 no longer be honored in exchange for 50,000 shares and the forgiveness
of approximately $117,000 in amounts owed the Company.
For the six months ended December 31, 1999, operating activities used net cash
of $863,904 primarily due to a net loss of $776,549 combined with an increase
in receivables of $847,403, offset by a decrease in payables of $327,627 and
depreciation and amortization in the amount of $675,029. For the six months
ended December 31, 1999, investing activities used net cash of $44,428
resulting primarily from the cash acquired in the purchase of $129,154 offset
by deposits and purchase of property and equipment. Cash flows from financing
activities provided cash of $4,010,642 for the six months ended December 31,
1999 due primarily to the combined proceeds of convertible debt (described
below), issuance of stock and loan proceeds of $4,200,044 offset by loan
payments of $104,445.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
Net cash used in operating activities of $499,065 for the six months ended
December 31, 1998 was primarily attributable to an increase in long-term
receivables of $231,458, an increase in inventories of $244,939 and a net loss
of $185,318. During the same period, net cash used in investing activities of
$90,266 was attributable entirely to the purchase of fixed assets. Financing
activities provided $594,323 primarily due to the proceeds from the sale of
common stock of $645,136 combined with net short-term credits received of
$137,965, which is offset by the decrease in the amount due to a company under
common control of $205,381.
The Company's accounts receivable balance at December 31, 1999 was $1,769,920.
Accounts receivable in the over 90-day category at December 31, 1999 was
$1,653,000 or 93.5% of accounts. The number of day's sales in accounts
receivable was 184 days, for the six months ended December 31, 1999. 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 six months ended December 31, 1999.
During the three months ended December 31, 1999, the Company completed a
$4,500,000 private placement of convertible promissory notes. The notes will
accrue interest at 12% per annum and are due and payable in full on April 1,
2000 unless converted into common stock. Upon shareholder approval of conversion
of the notes to common stock on or before February 28, 2000, the notes will be
convertible into common shares of the Company at a conversion price of $1.00 per
share.
YEAR 2000 ISSUE
Like many companies, Jenkon is subject to risks from the Year 2000 computer and
software issue. The Year 2000 issue exists because many computer programs use
two digit rather than four-digit date fields to define the applicable year. As a
result, computer equipment and software and devices with imbedded technology
that are time-sensitive may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, production
delays, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Incomplete or untimely resolution of the
Year 2000 issue by the Company or critically important suppliers or customers of
the Company could have a materially adverse effect on the Company's business,
financial condition, or results of operations. The Company has undertaken
various initiatives intended to ensure that its computer systems, software and
other operational equipment will function properly with respect to dates in the
Year 2000 and thereafter.
The Year 2000 Problem potentially impacts the Company in the following principal
areas: (i) The Company's software products, including products manufactured by
third parties that are resold by the Company; (ii) the Company's internal
technology systems; and (iii) the Company's major vendors. The Company is in the
process, but has not completed, what it believes is a reasonable and thorough
review of the principal areas identified as well as the effects on its
operations, liquidity and financial condition. The review includes identifying
the related issues and risks to ensure that its computer systems, software and
other operational equipment will function properly with respect to dates in the
Year 2000 and thereafter.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
INTERNAL TECHNOLOGY SYSTEMS
The Company has completed its testing of the internal hardware and software used
by all departments. To date, no significant issues have been identified with
respect to those systems. Non-information technology systems such as
Company-owned office equipment and local office telephone systems have also been
assessed for related Year 2000 risks with fixes being installed as applicable.
These fixes relate primarily to upgrades to voice mail and phone systems.
MAJOR VENDORS
The Company has been surveying its major vendors to assess any potential impact
on its operations caused by key third parties. The process includes obtaining
information as to their efforts associated with Year 2000-compliance. To date,
no significant compliance issues have been identified with these third parties.
The Company currently estimates that the cost of its Year 2000 assessment,
remediation and testing efforts, as well as current anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not exceed $25,000. Any such expenditures will be funded from operating cash
flows. This estimate is subject to change as additional information is obtained
in connection with the Company's assessment of the Year 2000 issue. The Company
has incurred minimal costs to date directly related to its Year 2000 assessment,
remediation, and testing efforts.
The Company presently believes that Year 2000 issues will not pose significant
problems for the Company. However, if all Year 2000 issues are not properly
identified, or assessment, remediation and testing are not effected timely with
respect to Year 2000 problems that are identified, there can be no assurance
that the Year 2000 issue will not have a material adverse impact on the
Company's business, financial condition or results of operations, or adversely
affect the Company's relationships with customers, vendors and others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities, such as one or more of the Company's critical customers or suppliers,
will not have a material adverse impact on the Company's systems or its
business, financial condition or results of operations. Potential infrastructure
failures, such as disruptions in the supply of power, water, transportation,
communications services, or if major institutions, such as the government,
foreign or domestic banking systems, are unable to continue to provide their
services or support resulting in a disruption in services or support to the
Company, the Company may be unable to operate for the duration of the
disruption. The costs of the Company's Year 2000 assessment, remediation and
testing efforts and the dates on which the Company believes it will complete
such efforts are forward-looking statements that are based upon management's
best estimates.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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 March 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 March 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.
CURRENT 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, 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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
JENKON HAS A HISTORY OF SIGNIFICANT LOSSES. Jenkon, as well as Redwood
Technology, Inc., a Washington corporation formerly known as Jenkon Data
Systems, Inc. ("Redwood Technology"), which operated certain assets of Jenkon
prior to selling them to the Company in 1995, have a history of losses. Jenkon
sustained net losses of approximately $265,000 and $1,546,000 for the fiscal
years ended June 30, 1996 and 1997, respectively. Although the Company operated
profitably in fiscal 1998, the Company incurred significant losses of $3,307,000
and $1,182,000 in the fiscal 1999 and the first quarter of fiscal 2000,
respectively Such losses have and will continue to have a material adverse
effect on the Company's business and financial condition.
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 of
$801,250 in the quarter ended December 31, 1999 Moreover, MMKid has generated
only limited revenues from the sale of products, services and marketing rights.
There can be no assurance that MMKid will ever be able to generate significant
revenues or profits from operations.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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
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
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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, 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 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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
THE COMPANY MAY NOT BE ABLE TO MAINTAIN ITS NASDAQ LISTING; RISK OF LOW-PRICED
SECURITIES. The Company's Common Stock is currently listed for trading on the
Nasdaq SmallCap Market. To maintain inclusion on the Nasdaq SmallCap Market, the
Company's Common Stock must continue to be registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company must continue to have net tangible assets of at least $2,000,000, a
public float of at least 500,000 shares with a market value of at least
$1,000,000, at least 300 stockholders, a minimum bid price of $1.00 per share
and at least two market makers. As previously reported, the Company has received
a letter from the Nasdaq Listing Qualifications Division stating that the
Company's net tangible assets as of June 30, 1999 did not meet the minimum
amount of $2,000,000 and the Company's eligibility for continued listing on The
Nasdaq Stock Market is under review. The Company believes that, upon stockholder
approval of the conversion of preferred stock and convertible promissory notes
into common stock, the Company's net tangible assets in excess of the minimum
requirement. However, there can be 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.
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
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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 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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
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.
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.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, the amount of ultimate
liability with respect to these proceedings will not materially affect the
financial position, results of operations or cash flow of the Company.
See also "Additional Considerations and Risk Factors -- Risk of Creditors Claims
and Successor Liability; Risks of Pending Litigation" in Part I, Item 2 of this
Form 10-QSB.
ITEM 5. OTHER INFORMATION.
On November 9, 1999, the Company received a letter from the Nasdaq Listing
Qualifications Division stating that the Company's net tangible assets as of
June 30, 1999 did not meet the minimum amount of $2,000,000 and the Company's
eligibility for continued listing on The Nasdaq Stock Market is under review.
The Company believes that the conversion of Series B and Series C Preferred
Shares and the conversion of convertible promissory notes into Common Stock
(upon stockholder approval of such conversions) will result in an increase
the Company's net tangible assets in excess of the minimum requirement.
However, there can be no assurance that future operating losses or other
events will not result in the Company's ineligibility for listing on the
Nasdaq Stock Market.
As a result of Jenkon's continuing losses and the Company's lack of financial
resources to continue to fund anticipated future losses for a significant
period, 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, or, if the operating assets and
liabilities of Jenkon cannot be sold on favorable terms and within the
desired timeframe. There can be no assurance that the Company will be able to
successfully divest itself of Jenkon's operations on favorable terms. If a
sale of Jenkon's operations does not occur, it may be forced to discontinue
Jenkon's operations which could materially and adversely affect the Company's
financial condition and expose it to potential claims by Jenkon customers or
other creditors of Jenkon.
<PAGE>
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
- -------------------
(b) Reports on Form 8-K.
On December 30, 1999, the Company filed a Form 8-K relating
to the closing of the private placement of $4,500,000 of
$4,500,000 of convertible promissory notes and the
completion of the acquisition of MMKid.
<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.
February 22, 2000 /s/ DAVID A. EDWARDS
- --------------------- ---------------------------------------
Date Chief Executive Officer, Interim Chief
Financial Officer, Chairman and Director
February 22, 2000 /s/ J. ROBERT CAVITT
- --------------------- ---------------------------------------
Date President
February 22, 2000 /s/ CLIFFORD DEGROOT
- --------------------- ---------------------------------------
Date Controller and Principal Accounting
Officer
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