AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1998
REGISTRATION NO. 333-56023
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------
JENKON INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
7600 N.E. 41ST STREET, SUITE 350
VANCOUVER, WASHINGTON 98662
(360) 256-4400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DELAWARE 7371 91-1890338
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
DAVID EDWARDS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JENKON INTERNATIONAL, INC.
7600 N.E. 41ST STREET, SUITE 350
VANCOUVER, WASHINGTON 98662
(360) 256-4400
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------
COPIES TO:
Robert M. Steinberg, Esq. Yvonne Chester, Esq.
Jeffer, Mangels, Butler & Marmaro LLP Troy & Gould Professional Corporation
2121 Avenue of the Stars, 10th Floor 1801 Century Park East, 16th Floor
Los Angeles, California 90067 Los Angeles, California 90067
(310) 203-8080 (310) 553-4441
Fax: (310) 203-0567 Fax: (310) 201-4746
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE
Common Stock, $0.001 par value ("Common
Stock")(2)................................ 2,654,296 shs. $5.00 $13,271,480
Representatives' Warrants(3)................ 150,000 wts. $150.00 $150.00
Common Stock issuable upon exercise of
Representatives' Warrants................. 150,000 shs. $8.25 $1,237,500
TOTAL REGISTRATION FEE...................... $14,509,130 $4,280.19(4)
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes: (i) 1,210,000 shares of Common Stock registered for the account of
the Registrant, (ii) 1,244,296 shares of Common Stock registered for the
account of certain stockholders issuable upon conversion of shares of Series
A Preferred Stock, and (iii) 225,000 shares of Common Stock which the
Underwriters have the option to purchase from the Registrant and certain
stockholders of the Registrant to cover over-allotments, if any.
(3) To be issued to the Representatives of the Underwriters.
(4) A filing fee of $5,717.64 was paid simultaneously with the original filing
of the registration statement. No fee is currently due.
Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered hereby such additional indeterminate number of shares of Common Stock
as may become issuable by reason of stock splits, stock dividends and similar
anti-dilutive adjustments as set forth in the Representatives' Warrants.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED AUGUST 3, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
1,500,000 SHARES
[LOGO]
JENKON
INTERNATIONAL, INC.
COMMON STOCK
---------------------
Of the 1,500,000 shares of common stock, par value $0.001 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,210,000 shares are being
offered by Jenkon International, Inc. ("Jenkon" or the "Company") and 290,000
shares are being offered by certain unaffiliated stockholders of the Company
(the "Selling
Stockholders"). See "Selling Stockholders." The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that such a market will develop or, if a market
develops, that it will be sustained. It is expected that the initial public
offering price of the Common Stock will be $5.00 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
offering price to the public. The Common Stock has been approved for quotation
on the Nasdaq SmallCap Market under the symbol "JNKN."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" COMMENCING ON PAGES 7
AND 16, RESPECTIVELY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share................................. $ $ $
Total(3).................................. $ $ $
PROCEEDS TO
SELLING STOCKHOLDERS
Per Share................................. $
Total(3).................................. $
(1) Excludes a non-accountable expense allowance payable to Meridian Capital
Group, Inc., Trautman, Kramer & Company Incorporated, and W.J. Nolan &
Company Inc. (collectively, the "Representatives") and the value of warrants
to be issued to the Representatives or their designees to purchase up to
150,000 shares of Common Stock at 165% of the initial public offering price
per share of Common Stock (the "Representatives' Warrants"). The Company and
the Selling Stockholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses, other than underwriting discounts and
commissions, payable by the Company, estimated at approximately $
including the Representatives' non-accountable expense allowance.
(3) The Company and two stockholders of the Company have granted to the
Underwriters a 45-day option to purchase up to 170,000 additional shares
from such stockholders and 55,000 additional shares from the Company, solely
to cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public will be $ , Underwriting
Discounts and Commissions will be $ , Proceeds to the Company will be
$ , and Proceeds to the Selling Stockholders will be $ .
------------------------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to reject any order in whole or in part and to withdraw, cancel or
modify the Offering without notice. It is expected that delivery of the shares
will be made on or about August , 1998.
---------------------
MERIDIAN CAPITAL GROUP, INC.
TRAUTMAN, KRAMER & COMPANY
INCORPORATED
W.J. NOLAN & COMPANY INC.
The date of this Prospectus is August , 1998
[ARTWORK -- INSIDE FRONT COVER]
LOGO Jenkon International...Leading developer of software
solutions for the direct sales industry.
SAMPLE COMPUTER SCREEN DISPLAYS:
SAMPLE MAIN PAGE FROM "NOW!" PROGRAM
SAMPLE PERSONAL SALES CHART FROM "NOW!" PROGRAM
SAMPLE PRODUCT ORDER PAGE FROM "NOW!" PROGRAM
SAMPLE ORDER TRACKING PAGE FROM "NOW!" PROGRAM
Utilizing the power of the Internet, "NOW!"
enables home-based entrepeneurs to:
PICTURE OF FAMILY VIEWING COMPUTER
View the monthly activity of their entire downline organizations.
Place orders online without assistance from corporate personnel.
Review status of various orders.
View inventory information.
View or listen to corporate announcements and training.
View commissions earned to date.
[FOLDED INSERT TO INSIDE FRONT COVER]
http://www.Jenkon.com
PICTURE OF CONFERENCE ROOM MEETING
BACKGROUND REPRESENTATION OF GLOBE
Internet
PICTURE OF COMPUTER PROCESSOR AT COMPUTER
Summit V Technology
Back Office Corporate Software
Standard Modules: Add-on Modules:
Accounts Receivable Module AutoFax System
Commission and Bonus Module Autoship Order System
Customer Service System Credit Card Automation
Executive Information System (EIS) Electronic Funds Transfer (EFI)
Financial Reporting System Incentives and Promotions
Inventory and Warehousing Control Order International Business
Fulfillment System Laser Checks
Regional Information System (RIS) Party Plan
Representative Tracking System Product Returns
Sales Tax Management Sales Tax Database Interface
Security Management TouchTalk
Warehouse Shipping
[FOLDED INSERT TO INSIDE FRONT COVER -- CONTINUED]
GRAPHICAL SYMBOL "@" Now! Online
Real time online interactive web site for your
sales organization.
GRAPHICAL SYMBOL OF CD Now! CD
The ultimate software package specifically
tailored for the independent direct seller.
GRAPHICAL SYMBOL OF PHONE Now! Communications
Delivers the latest in telecommunication
technologies to your sales organization via
touch talk, long distance usage and Internet
access programs.
GRAPHICAL SYMBOL OF LIGHTBULB Now! Vision
We are committed to finding exciting ways to
make your sales force more dynamic and
successful.
GRAPHICAL SYMBOL OF "e" Now! E-commerce
Taking advantage of the Internet to provide
real-time secured credit card processing 24
hours a day!
Now! Technology
Home Sales Force Automation
SAMPLE COMPUTER SCREEN DISPLAYS:
SAMPLE MAIN PAGE FROM PICTURES OF FAMILY USING COMPUTER
"NOW!" PROGRAM
SAMPLE PERSONAL SALES CHART FROM "NOW!" PROGRAM
SAMPLE PRODUCT ORDER PAGE FROM "NOW!" PROGRAM
SAMPLE ORDER TRACKING PAGE FROM "NOW!" PROGRAM
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Upon consummation of the
Offering, the Company will become subject to the information requirements of the
Exchange Act. The Company intends to furnish its security holders annual reports
containing audited consolidated financial statements with a report thereon by
independent certified public accountants, and such other periodic reports as the
Company may determine to be appropriate or as required by law.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE
COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE
DESCRIBED UNDER "RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, THE INFORMATION
PRESENTED IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION OR THE REPRESENTATIVES' WARRANTS, (II) NO EXERCISE OF
OUTSTANDING WARRANTS AND OPTIONS TO PURCHASE AN AGGREGATE OF 876,315 SHARES OF
COMMON STOCK, AND (III) THE CONVERSION OF THE SERIES A PREFERRED STOCK INTO
1,244,296 SHARES OF COMMON STOCK UPON THE CONSUMMATION OF THE OFFERING. UNLESS
THE CONTEXT OTHERWISE REQUIRES, ALL SHARE AND PER-SHARE INFORMATION IN THIS
PROSPECTUS GIVES EFFECT TO A .782271-FOR-ONE REVERSE STOCK SPLIT EFFECTED IN
JUNE 1998. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "JENKON" OR THE
"COMPANY" REFER TO JENKON INTERNATIONAL, INC., A DELAWARE CORPORATION ("JENKON
DELAWARE"), AND EACH OF ITS SUBSIDIARIES, INCLUDING JENKON INTERNATIONAL LTD., A
UNITED KINGDOM CORPORATION, SUMMIT V, INC., A WASHINGTON CORPORATION, AND JENKON
INTERNATIONAL, INC., A WASHINGTON CORPORATION.
THE COMPANY
Jenkon International, Inc. ("Jenkon" or the "Company") is a leading
developer of specialized software solutions for network marketing and other
companies involved in the direct sales industry. The Company's products are
designed to provide direct sales organizations, which are characterized by a
large number of small transactions, intricate compensation programs, and complex
distributor genealogy trails, with a rapid, accurate and efficient means to
collect, process, transmit and record sales, commissions and other data. The
Company was the recipient of the 1997 DSA Partnership Award, granted by Direct
Selling Association ("DSA"), the direct sales industry's largest trade group, in
recognition of the Company's leadership position as a supplier to the industry.
To date, the Company has focused its development and marketing efforts on
its proprietary management information system software package known as SUMMIT
V. The Company's management information systems, including its SUMMIT V
software, have been installed with over 150 direct sales companies in over 25
countries throughout the world. The Company's clients include many of the direct
sales industry's leading companies such as Shaklee, Avon Products (China and
India), USANA, Nature's Sunshine and Watkins. In addition to SUMMIT V, the
Company has developed and markets a compatible software-based voice response
system known as TOUCHTALK that offers individual home-based direct sales
personnel the ability to access a wide variety of product, sales, commission and
other information regarding the company they represent.
In recognition of the increasing importance of Internet commerce in the
direct sales industry and throughout the economy, the Company has developed and
has recently begun the initial marketing of a scalable Internet-based product,
known as NOW!. NOW! is designed for use by home-based direct sales personnel and
allows such personnel direct access to and communication with the companies that
they represent through the use of personal computers, Web TV and other
Internet-based platforms. NOW! enables home-based direct sales personnel to
quickly obtain current inventory information, directly place orders online,
obtain order status information and view and analyze personal and group sales,
commissions and other information. In addition to the benefits afforded to the
home-based direct sales personnel, the Company believes that the NOW! product
will enable its direct sales company clients to reduce the costs associated with
processing telephonic or fax orders and the labor-intensive paperwork associated
with such processing. The Company believes that NOW! enhances the attractiveness
of SUMMIT V to its direct sales company clients while expanding Jenkon's
potential client base to include the large number of home-based direct sales
personnel affiliated with such companies.
The direct sales industry consists of companies who market their products
through networks of home-based direct sales personnel whose selling activity
most commonly takes place in home offices or in the homes of customers rather
than traditional retail stores or outlets. The network marketing portion of the
3
industry utilizes a team building approach pursuant to which home-based direct
sales personnel can build a sales group and derive income from the cumulative
sales of the group in addition to commission earned by sales to their own
customers. The Direct Selling Association estimates that since 1991, total
worldwide sales by direct sales companies have grown from approximately $48
billion to approximately $78 billion in 1996 while the worldwide sales force
increased from approximately 11 million people in 1991 to over 22 million people
in 1996. According to an industry analysis compiled by J.P. Morgan Securities
Inc., the worldwide direct sales market is expected to grow at an annual rate of
10% through the year 2000 while the number of worldwide direct sales
representatives is expected to grow at an annual rate of 13% during the same
period.
The Company's business objective is to expand its position as a leading
provider of specialized software to the rapidly growing direct sales industry.
In order to achieve this goal, the Company's growth strategy includes the
following elements:
- DIRECTLY ACCESS HOME-BASED DIRECT SALES PERSONNEL THROUGH THE INTRODUCTION
OF INTERNET-BASED PRODUCTS. While direct sales companies will remain the
Company's core customer base, the Company believes that the large number
of home-based direct sales personnel of these direct sales companies
present a large and growing potential market for direct sales software
products such as the Company's NOW! product.
- INCREASE MARKET PENETRATION OF CORE PRODUCTS. The Company believes that
its current base of direct sales company clients represents only a small
portion of the total number of direct sales companies that are potential
users of SUMMIT V and the Company's other core products. Upon completion
of this Offering, the Company will attempt to increase the market
penetration of SUMMIT V through more aggressive marketing and promotional
efforts and by continuing to modify and improve SUMMIT V and other
products to meet the changing needs of direct sales company clients. The
Company expects that future generations of SUMMIT V will include
multi-platform database support, an e-commerce enabled server, support for
existing communications standards, and other advanced features. In
addition, the Company intends to create an application program interface
that would enable the NOW! product to be used by direct sales companies
and their home-based personnel regardless of whether the company in
question utilizes the SUMMIT V system or any other software products of
the Company.
- LEVERAGE EXISTING CUSTOMER BASE TO INCREASE REVENUES. The Company believes
that its relationships with its corporate direct sales clients provides a
unique opportunity for the Company to generate revenues from the
cross-selling and marketing of additional products and services by the
Company and others to the home-based personnel of its direct sales
clients. For example, the Company has recently entered into a contract
with EarthLink Network, Inc. pursuant to which the Company will receive a
referral fee for NOW! users that subscribe for Internet access with such
providers through the NOW! product. In addition, given the large number of
credit card transactions handled by the Company's direct sales clients, an
opportunity may exist for the Company to offer credit card processing
services for which the Company would receive processing fees.
- EXPAND GEOGRAPHIC MARKET PENETRATION. To date, most of the Company's
software installations have been for the U.S. operations of its direct
sales company clients. Given the rapid growth of the direct sales industry
throughout the world, and especially in the countries of Latin America,
the Pacific Rim and Southeast Asia, the Company intends to expand its
geographic presence by expanding the focus of its sales efforts to these
rapidly-growing international markets as well as the U.S. market.
Jenkon International, Inc. is a Delaware corporation that is a holding
company for the business of the Company. The founders of the Company began
operations in 1982 as Jenkon Data Systems, Inc. (now Redwood Technology, Inc.)
and incorporated Jenkon International, Inc., a Washington corporation ("Jenkon
Washington"), on December 23, 1988. The Company subsequently reincorporated in
the State of Delaware effective July 1, 1996 and Jenkon Washington became a
wholly-owned subsidiary of Jenkon
4
Delaware. The Company intends to merge Jenkon Washington into Jenkon Delaware
following completion of the Offering. The Company's executive offices are
located at 7600 NE 41st St., Suite 350, Vancouver, Washington, 98662 and its
telephone number is (360) 256-4400.
All of the Company's product names referred to herein are trademarks owned
or licensed by the Company, some of which are the subject of pending trademark
registration applications by the Company.
THE OFFERING
Common Stock outstanding prior to
the Offering..................... 3,043,515 shares(1)
Common Stock Offered.............. 1,500,000 shares
Common Stock offered by the
Company.......................... 1,210,000 shares
Common Stock offered by the
Selling Stockholders............. 290,000 shares
Common Stock outstanding after the
Offering......................... 4,253,515 shares(1)
Use of Proceeds................... For product development, repayment of indebtedness,
expansion of sales and marketing and working capital.
See "Use of Proceeds."
Risk Factors...................... An investment in the Common Stock involves a high degree
of risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Nasdaq SmallCap Market Symbol
(2):............................. JNKN
- ------------------------------
(1) Includes 1,244,296 shares of Common Stock issuable upon conversion of all
outstanding Series A Preferred Stock simultaneously with the consummation of
the Offering. Excludes (i) 150,000 shares of Common Stock which may be
issued and sold by the Company upon the exercise in full of the
Representatives' Warrants, (ii) 1,000,000 shares of Common Stock reserved
for issuance pursuant to the Company's stock option plan under which options
to purchase 597,234 shares have been granted, and (iii) 279,081 shares of
Common Stock issuable upon exercise of outstanding warrants See
"Management--Stock Option Plan" and "Certain Transactions."
(2) There is no assurance that a trading public market for the Common Stock will
develop, or, if developed, will be sustained. See "Risk Factors--Absence of
Public Market."
5
SUMMARY FINANCIAL DATA
The summary financial data in the table are derived from the consolidated
financial statements and related notes thereto of the Company. The data should
be read in conjunction with the consolidated financial statements and the
related notes contained elsewhere herein.
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net revenues.................................................... $6,899,233 $8,480,072 $6,244,697 $7,047,634
Cost of goods sold.............................................. 3,337,298 4,230,705 3,404,729 2,384,718
---------- ---------- ---------- ----------
Gross profit.................................................... 3,561,935 4,249,367 2,839,968 4,662,916
Operating expenses.............................................. 3,640,963 5,878,031 4,423,283 4,120,627
---------- ---------- ---------- ----------
Income (loss) from operations................................... (79,028) (1,628,664) (1,583,315) 542,289
Other expense................................................... (97,897) (160,521) (155,633) (115,162)
---------- ---------- ---------- ----------
Income (loss) before income taxes............................... (176,925) (1,789,185) (1,738,948) 427,127
Provision (benefit) for income taxes............................ 88,000 (88,000) -- 15,577
---------- ---------- ---------- ----------
Net income (loss)............................................... (264,925) (1,701,185) (1,738,948) 411,550
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per common share..............................
Basic....................................................... $ (.13) $ (.85) $ (.87) $ .21
Diluted..................................................... $ (.13) $ (.85) $ (.87) $ .12
Weighted average common shares outstanding......................
Basic....................................................... 2,095,369 1,994,792 2,007,830 1,955,678
Diluted..................................................... 2,095,369 1,994,792 2,007,830 3,358,744
MARCH 31, 1998
--------------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ------------ -----------
BALANCE SHEET DATA:
Cash...................................................................... $ 83,486 $ 663,486 $4,226,986
Working capital (deficit)................................................. (892,752) (87,752) 3,675,748
Total assets.............................................................. 2,849,199 3,624,198 7,067,698
Long-term debt (including current portions)............................... 596,626 955,070 394,870
Total liabilities......................................................... 2,707,233 3,042,432 2,282,232
Redeemable convertible preferred stock.................................... 2,310,174 -- --
Stockholders' equity...................................................... (2,168,208) 581,766 4,785,466
- ------------------------------
(1) Pro forma balance sheet data gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing,
related deferred loan costs of $120,000, and the conversion of Series A
Preferred Stock into Common Stock upon closing of the Offering. Valuation of
the warrants resulted in original issue discount of $439,800 and was
included in the pro forma balance sheet data.
(2) As adjusted also gives effect to the sale of 1,210,000 shares of Common
Stock by the Company at an assumed initial public offering price of $5.00
per share in the Offering.
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS WHEN EVALUATING AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS 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 PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
HISTORY OF LOSSES; ACCUMULATED DEFICIT. The Company and its predecessors
Summit V, Inc., a Washington corporation and wholly-owned subsidiary of the
Company, as well as Redwood Technology, Inc., a Washington corporation formerly
known as Jenkon Data Systems, Inc. ( "Redwood Technology" ), which operated
certain assets of the Company prior to selling them to Summit V, Inc. in 1995,
have a history of losses. The Company sustained net losses of approximately
$265,000 and $1,701,000 for the fiscal years ended June 30, 1996 and 1997,
respectively, and had an accumulated deficit as of March 31, 1998 of $2,168,208.
Although the Company operated profitably in the first nine months of fiscal
1998, there can be no assurance that the Company will be able to operate
profitably in the future. See generally "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ADDITIONAL WORKING CAPITAL. The Company's business involves the
continued investment of funds towards the development of new products and
modifications of existing products. To the extent that the Company is not
successful in generating significant cash flow from operations in order to fund
such development expenses and other operating costs, the Company will need to
rely on outside financing sources for working capital. At March 31, 1998, the
Company currently has negative working capital of $892,752 and no bank line of
credit and there can be no assurance that the Company will be able to obtain
sources of outside financing in the event that such financing is required in the
future. To the extent that the Company's operations do not generate positive
working capital or enable it to secure adequate outside financing, the Company's
business could be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISK OF CREDITORS CLAIMS AND SUCCESSOR LIABILITY. In July 1995, Summit V,
Inc. purchased and/or licensed substantially all of the assets, and Summit V,
Inc. assumed certain contractual obligations and indebtedness from Redwood
Technology, the developer of a substantial portion of the Company's SUMMIT V
software technology. See "Certain Transactions." Because Redwood Technology may
be deemed to have been rendered insolvent by the sale and license of certain of
its assets to Summit V, Inc. and because of the commonality of ownership and
management of Redwood Technology and Summit V, Inc. and/or because Summit V
continued operating the business of Redwood Technology, the Company is or may be
subject to claims by unsatisfied creditors of Redwood Technology challenging the
rights of the Company to the SUMMIT V software technology or other assets
acquired from Redwood Technology or alleging successor liability or other
similar bases for liability. The Company believes that such claims could total
as much as $200,000. There can be no assurance that claims for successor
liability will not be made or that the Company's rights to the assets acquired
from Redwood Technology, including the SUMMIT V software technology, will not be
challenged. If any such claims or challenges are made and are successful, the
Company's business and results of operations would be materially and adversely
affected. Any payments 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. See "Certain Transactions" and
"Business--Legal Proceedings."
RISK OF ACCEPTANCE OF NEW PRODUCT. The future success and growth of the
Company, if any, will depend in large part upon the success and acceptance of
the Company's Internet-based product, NOW!. Although the Company has completed
initial testing of the product, there can be no assurance that the NOW! product
will be without defects. In addition, the Company has generated only limited
sales from NOW! and there can be no assurance that the Company will be able to
successfully market such product to its existing client base or to new
customers. The failure of the Company to generate significant sales of the NOW!
product would have a material adverse effect on the Company's prospects for
future growth.
7
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE. The markets for the Company's
products are characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements and frequent new product
introductions and enhancements. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products and products currently under development obsolete
and unmarketable. The Company's future success will depend upon its ability to
enhance its current products and develop and successfully introduce and sell new
products that keep pace with technological developments and respond to evolving
end-user requirements. Any failure by the Company to anticipate or respond
adequately to technological developments or end-user requirements, or any
significant delays in product development or introduction, could damage the
Company's competitive position in the marketplace and reduce revenues. The
Company may need to increase the size of its product development staff in the
near term to meet these challenges. There can be no assurance that the Company
will be successful in hiring and training adequate product development personnel
to meet its needs. In the past, the Company has occasionally experienced delays
in the introduction of new products and product enhancements. There can be no
assurance that the Company will be successful in developing and marketing new
products or product enhancements on a timely basis or that the Company will not
experience significant delays in the future. Any failure to successfully develop
and market new products and product enhancements would have a material adverse
effect on the Company's results of operations.
COMPETITION. The software industry is highly competitive and is
characterized by rapid technological change, rapidly changing customer
preferences and little or no barriers to entry. There are several businesses,
some of which may be better capitalized than the Company, currently offering
software similar in type or scope to the Company's. The Company believes that
the primary competitive factors for the provision of its software are price,
technical expertise and quality, ease of use, variety of value-added services,
reliability and security, customer support and geographic coverage. The
Company's success will depend heavily upon its ability to provide high quality
software and value-added services. Other factors that will affect the Company's
success in this market include the Company's continued ability to attract
additional experienced marketing, sales, and management talent, and the
expansion of worldwide support, training and service capabilities. The Company's
current and prospective competitors generally consist of other independent
software providers such as Globenet and 20/21 Interactive. The Company believes
that additional competitors, which may include consumer software or other
companies, may potentially enter the direct sales market. In addition, the
Company may face potential competition from some of the larger direct sales
companies that have developed their own in-house systems that could be adapted
for sale to other direct sales companies. 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.
RISKS OF SOFTWARE DEVELOPMENT IN GENERAL. The success of the Company is
dependent upon its ability to deliver reliable, easy-to-use and technologically
up-to-date software products. Any failure of the Company's existing or new
products to meet client specifications or expectations will have a material
adverse effect on the Company's reputation and the demand for the Company's
products. There can be no assurance that the software will consistently meet
such specifications or expectations. In addition, continued demand for the
Company's products and services will depend on its ability to successfully
anticipate customer demand and to integrate new and emerging technologies,
features and standards into its software on a timely basis. Any failure by the
Company to anticipate customer demand and to successfully integrate
8
new features and standards into its software on a timely basis could adversely
affect the Company's reputation, demand for its products and, as a result, its
financial condition and results of operations.
DEPENDENCE ON SALES OF EXISTING SOFTWARE PRODUCTS. Substantially all of the
Company's revenues have been derived from sales of its SUMMIT V and TOUCHTALK
information systems and software and related support services. In addition, the
initial demand for the Company's NOW! product will be highly dependent on
customers and companies who utilize such information systems and software.
Accordingly, any event that adversely affects fees derived from the sale of such
systems, such as competition from other products, significant flaws in the
Company's software products or incompatibility with third party hardware or
software products, negative publicity or evaluation, or obsolescence of the
hardware platforms or software environments in which the systems run, would have
a material adverse effect on the Company's results of operations. The Company's
future financial performance will depend, in substantial part, on the continued
development and introduction of new and enhanced versions of it's management
information systems and customer acceptance of such new and enhanced products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products and Services."
CONCENTRATION OF CUSTOMERS; LIMITED CUSTOMER BASE. Although no customer
accounted for more than 10% of the Company's net sales during the nine months
ended March 31, 1998, for the fiscal year ended June 30, 1997, Shaklee and
Morinda accounted for approximately 23% and 11%, respectively, of the Company's
net sales. Similar or greater concentration of its net sales among a limited
number of customers may occur in the future. In such event, any material
decrease in net sales to any one of the Company's largest customers that is not
matched by corresponding increases in net sales to new or existing customers
could have a material adverse effect on the Company's financial condition and
results of operations and could affect its economic viability. There can be no
assurance that the Company will receive orders from any existing customers or
from new customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISK OF EXPANSION INTO NEW BUSINESSES. Part of the Company's business plan
involves the possible acquisition or development of complementary but
alternative sources of revenues such as credit card processing. There can be no
assurance that the Company will be successful in identifying and acquiring or
developing any alternate sources of revenues. Moreover, to the extent that the
Company acquires or begins operations of a business other than the development
of software products, the Company's lack of experience and track record in such
business may result in an inability of the Company to effectively compete,
potential operating losses and loss of standing in the direct sales industry,
any of which would have a material adverse effect on the Company, its operations
and financial condition.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS. The Company has experienced
and expects to continue to experience significant fluctuations in its quarterly
results. Such fluctuations may be caused by many factors, including, but not
limited to: the size and timing of individual orders; seasonality of revenues;
lengthy sales cycle; delays in introduction of products or product enhancements
by the Company or other providers of hardware, software and components for the
Company's systems; competition and pricing in the software industry; market
acceptance of new products; reduction in demand for existing products and
shortening of product life cycles as a result of new product introductions by
competitors; foreign currency exchange rates; mix of products sold; conditions
or events in the direct sales industry; and general economic conditions. The
Company does not typically maintain a significant backlog and therefore the
revenue results for each quarter depend substantially on orders received and
delivered in that quarter. The average price of the Company's information
systems sold in fiscal 1997 to new customers was approximately $100,000 to
$150,000. As a result of the relatively high revenue amount per order and
relatively low unit volume, any lost or delayed sales will have a
disproportionately greater effect on the Company's revenues and quarterly
results relative to companies that have higher unit sales volumes and less
revenue associated with each sale. The Company's sales cycle is typically three
to six months from the time initial sales contact is made with a qualified
prospect, making the timing of the Company's license fees difficult to predict
and the Company's quarterly results difficult to forecast. The Company's expense
levels are based in part on its forecasts of future revenues. Accordingly, since
the majority of the Company's expenses are fixed in nature, the Company would
not be able to quickly curtail expenses in response to a decline in revenues,
and
9
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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds to the Company from
the sale of the Common Stock offered hereby, at an assumed initial public
offering price of $5.00 per share, after deducting underwriting discounts and
commissions, the Representatives' non-accountable expense allowance and the
estimated other expenses of the Offering of $500,000, are estimated to be
approximately $4,763,500. The Company estimates that $1,063,500 of such net
proceeds will be allocated to working capital. The Company will have broad
discretion to reallocate the net proceeds of the Offering among the various uses
described in "Use of Proceeds" or for such other purposes as it, in its sole
discretion, deems necessary or appropriate. In addition, approximately
$1,200,000 of the net proceeds of the Offering will be used to repay
approximately $1,000,000 of loans incurred in connection with a 1998 private
placement of debt and warrants and approximately $200,000 of Company
indebtedness to various parties. As result, only approximately $3,563,500 of the
net proceeds of the Offering will be available for the Company to meet its
ongoing needs for capital. See "Use of Proceeds."
DEPENDENCE ON DIRECT SALES INDUSTRY; LEGISLATIVE RISKS. The Company's
business depends substantially upon the capital expenditures of direct sales
companies, which in part depends upon the demand for such companies products. A
recession, new laws or regulations of the activities of direct sales companies,
or other adverse event affecting the direct sales industry in the United States,
the United Kingdom, Asia or other markets served by the Company could affect
such demand, forcing companies in the Company's targeted markets to curtail or
postpone capital expenditures on business information systems. Any such change
in the amount or timing of capital expenditures in its targeted markets would
have a material adverse effect on the Company's financial condition and results
of operations. The Peoples Republic of China recently announced laws restricting
the ability of multi-level marketing companies to operate in China. To date, the
Company has not derived significant revenues from The Peoples Republic of China.
Accordingly, the Company does not believe that such laws will adversely affect
the Company's current operations or financial condition. However, similar
restrictions, if adopted by other countries, could have a materially adverse
effect on the Company's business, results of operations and prospects.
KEY EMPLOYEES. The Company believes that its future success will depend in
large part on its ability to attract and retain highly skilled technical,
managerial, and marketing personnel who are familiar with and experienced in the
direct sales industry. The Company does not maintain key man life insurance
policies with respect to any of its employees. The Company has entered into
employment agreements with each of its key executives having terms ranging from
one to four years. See "Management--Employment and Consulting Agreements."
Competition for such personnel, in particular for product development and
product implementation personnel, is intense, and the Company competes in the
market for such personnel against numerous companies, including larger, more
established companies with significantly greater financial resources than the
Company. The Company has at times experienced difficulty in recruiting qualified
personnel, and there can be no assurance that the Company will be successful in
attracting and retaining skilled personnel. The inability of the Company to
attract and retain other qualified employees could have a material adverse
effect on the Company's business.
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
10
management's attention from other business concerns and the potential loss of
key employees of the acquired companies.
INTERNATIONAL OPERATIONS AND RISK OF INTERNATIONAL SALES. The Company
derived approximately 3.8% and 6.8% of its total revenues from its United
Kingdom operations in fiscal 1996 and 1997, respectively and 6.5% and 7.3% in
the nine month periods ended March 31, 1997 and 1998. International business is
subject to various risks common to international activities, including exposure
to currency fluctuations, political and economic instability, the greater
difficulty of administering business abroad, and the need to comply with a wide
variety of foreign import and United States export laws and regulatory
requirements. The Company does not currently engage in foreign currency hedging
transactions. Any significant adverse change in the international business
climate could have a material adverse effect on the Company, its financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON THIRD PARTY SOFTWARE AND HARDWARE. The Company's products
incorporate and use software products and computer hardware and equipment
developed by other entities. The fourth generation language ("4GL") set of
development tools used by the Company as well as the relational database
management system used in the Company's products are provided by Ardent
Software, Inc. (a successor to Unidata, Inc.) or its affiliates. The operating
systems on which the Company's products can function (UNIX, NT) have been
developed or are owned by Novell Corporation and Microsoft Corporation. The
computer hardware and equipment sold as part of the Company's turnkey system are
manufactured by Hewlett-Packard Company, International Business Machines
Corporation, and others. There can be no assurance that all of these entities
will remain in business, that their product lines will remain viable or that
these products will otherwise continue to be available to the Company. If any of
these entities ceases to do business, or abandons or fails to enhance a
particular product line, the Company may need to seek other suppliers. This
could have a material adverse effect on the Company's results of operations. In
addition, there also can be no assurance that the Company's current suppliers
will not significantly alter their pricing in a manner adverse to the Company.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company attempts to
protect ownership of its software with a combination of copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements, and other
methods of protection common in the industry. The Company has not historically
required trade secrecy and confidentiality agreements to be executed by its
employees or, in some instances, independent software developers, in order to
protect its rights in its proprietary technology. Despite any precautions that
may be taken by the Company, it may be possible for an unauthorized third party
to copy or reverse-engineer certain portions of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
does not currently have any registered patents, trademarks or copyrights, but is
in the process of registering certain trademarks. The Company licenses the
source code for its software to some customers to enable them to customize the
software to meet particular requirements. Although the Company's source code
license contains confidentiality and nondisclosure provisions, there can be no
assurance that such customers will take adequate precautions to protect the
source code. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competition will not
independently develop software products that are substantially equivalent or
superior to the Company's software products. As the number of software products
in the industry increases and the functionality of these products further
overlaps, the Company believes that software programs could become increasingly
the subject of infringement claims. See "Business--Intellectual Property."
Although the Company's products have never been the subject of infringement
claims, there can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such assertion
will not require the Company to enter into royalty arrangements or result in
costly litigation and liability.
11
RISK OF FIXED PRICE CONTRACTS. The Company has and expects to derive
significant revenues pursuant to software maintenance contracts that provide for
fixed annual fees in exchange for the Company's commitment to provide technical
assistance and customer support. Because the total compensation payable to the
Company pursuant to such contracts is fixed in the event of cost over-runs,
price increases, unanticipated problems, inefficient management, inaccurate
estimates of customer needs or disputes over the terms and specifications of
contracted performance, the Company's business and financial condition could be
materially adversely affected.
LIMITED CONTROL AND INFLUENCE ON THE COMPANY BY INVESTORS IN THE
OFFERING. Upon the consummation of the Offering, the officers and directors of
the Company will, in the aggregate, beneficially own approximately 45% of the
Common Stock assuming exercise of all outstanding options and warrants currently
owned by such persons. As a result, it is anticipated that these individuals
will be in a position to materially influence, if not control, the outcome of
all matters requiring stockholder or board approval, including the election of
directors. See "Management," "Principal Stockholders" and "Description of
Securities." Such influence and control is likely to continue for the
foreseeable future and significantly diminishes control and influence which
future stockholders may have on the Company.
YEAR 2000 COMPLIANCE RISK. The Company believes that its principal software
products (SUMMIT V and NOW!) are Year 2000 compliant. However, because the
Company's products are designed to work with relational database and other
software products developed and sold by third parties, any failure of these
third party software products to be Year 2000 compliant could result in the
failure of the Company's software products to effectively operate. Any such
failure could harm the Company's reputation in the market and could have an
adverse effect on sales of the Company's products and its financial performance.
ABSENCE OF PUBLIC MARKET. Prior to the Offering, there has been no public
market for the Common Stock. While the Common Stock has been approved for
quotation on the Nasdaq SmallCap Market, there is no assurance that a regular
public market for the Common Stock will develop as a result of the Offering or,
if a regular public market does develop, that it will continue. In the absence
of such a market, investors may be unable to readily liquidate their investment
in the Common Stock.
DETERMINATION OF OFFERING PRICE. The initial public offering price of the
shares of Common Stock will be determined by negotiation between the Company and
the Representatives, as representatives of the Underwriters, and does not
necessarily bear any relationship to the Company's book value, assets, past
operating results, financial condition or any other established criteria of
value. There is no assurance that the Common Stock will trade at market prices
in excess of the initial public offering price as prices for the Common Stock in
any public market which may develop will be determined in the marketplace and
may be influenced by many factors, including the depth and liquidity of the
market for the Common Stock, investor perception of the Company and general
economic and market conditions. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET. It is anticipated that
a significant portion of the Common Stock being offered hereby will be sold to
clients of the Representatives. Although the Representatives have advised the
Company that they currently intend to make a market in the Common Stock
following the Offering, they have no legal obligation, contractual or otherwise,
to do so. The Representatives, if they become market makers, could be dominating
influences in the market for the Common Stock, if one develops. The prices and
the liquidity of the Common Stock may be significantly affected by the degree,
if any, of the Representatives' participation in such market. There is no
assurance that any market activities of the Representatives, if commenced, will
be continued.
POSSIBLE ADVERSE IMPACT ON MARKET PRICE OF FUTURE SALES OF RESTRICTED
SHARES. Sales of a substantial number of shares of Common Stock into the public
market following the Offering could materially adversely affect the prevailing
market price for the Common Stock. After the completion of the Offering, the
Company will have outstanding an aggregate of 4,253,515 shares of Common Stock.
The 1,500,000 shares of Common Stock offered hereby will be freely tradeable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), by persons other than "affiliates." The
remaining 2,753,515 outstanding shares of Common Stock will be "restricted
securities" (the
12
"Restricted Shares") pursuant to Rule 144 promulgated under the Securities Act.
All but 65,875 of the Restricted Shares are subject to lock-up agreements which
prohibit the transfer or assignment of such shares for a period of 12 months
following the effective date of the registration statement of which this
Prospectus is a part. Beginning 12 months after such effective date, all of the
Restricted Shares subject to lock-up agreements will become eligible for sale in
the public market pursuant to Rule 144, some of which will be not be subject to
the volume limitations and other restrictions under Rule 144. The
Representatives may, in their sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. See
"Shares Eligible for Future Sale."
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE
LAW. The Board of Directors of the Company has authority to issue up to
5,000,000 shares of preferred stock of the Company (the "Preferred Stock") and
to fix the rights, preferences, privileges and restrictions of such shares
without any further vote or action by the shareholders. The Preferred Stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by the
Company's stockholders, and may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions as determined by the Board of Directors. Although the Company has no
present plans to issue any shares of Preferred Stock following consummation of
the Offering, the issuance of any additional shares of Preferred Stock in the
future could affect the rights of the holders of Common Stock and thereby reduce
the value of the Common Stock. In particular, specific rights granted to future
holders of Preferred Stock could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by its present owners. These provisions, together with certain
provisions of Delaware law, may also have the effect of delaying or preventing
changes in control or management of the Company which could adversely affect the
market price of the Company's Common Stock. See "Description of
Securities--Common Stock."
IMMEDIATE SUBSTANTIAL DILUTION. The initial public offering price per share
will exceed the net tangible book value per share of the Common Stock.
Accordingly, the purchasers of the Shares will experience immediate substantial
dilution of $3.95 per share or 79.0% of their investment based upon the net
tangible book value of the Company at March 31, 1998. In addition, the
purchasers of the Common Stock offered hereby will bear a disproportionate part
of the financial risk associated with the Company's business while effective
control will remain with the existing shareholders and Management. See
"Dilution."
NO DIVIDENDS. The Company has never declared or paid any cash dividends on
its capital stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. No cash
dividends may be paid on Common Stock until all shares of Series A Preferred
Stock have been either redeemed or converted into Common Stock.
NET OPERATING LOSS LIMITATIONS. The Company has net operating losses which
have been utilized to reduce taxable income in fiscal 1998. However, the
Internal Revenue Code of 1986, as amended, (IRC), reduces the extent to which
net operation loss carryforwards may be utilized in the event there has been an
"ownership change" of a company as defined by applicable IRC provisions. The
Company will be subject to net operating loss carryforward limitations as a
result of the ownership change resulting from the Offering. Limitations on the
use of net operating loss carryforward may adversely affect the Company's net
income as compared to prior periods.
LIMITED EXPERIENCE OF REPRESENTATIVES. The Representatives do not have
substantial experience in acting as managing underwriters in public offerings.
Since it became a member of the National Association of Securities Dealers, Inc.
("NASD") in 1994, Meridian Capital Group, Inc. has participated in three public
offerings as lead manager each of which was completed between September 1995 and
November 1996; since it became an NASD member in 1993, Trautman, Kramer &
Company Incorporated has participated as a co-manager in one public offering
which was completed in 1997; and since it became an NASD member in 1985, W.J.
Nolan & Company Inc. has not participated as a co-manager in any public
offering. There can be no assurance that the Representatives' lack of experience
will not adversely affect the
13
Offering or the market for the Company's Common Stock upon completion of the
Offering. See "Underwriting."
MAINTENANCE CRITERIA FOR NASDAQ; RISK OF LOW-PRICED SECURITIES. The
Company's Common Stock has been approved for quotation on the Nasdaq SmallCap
Market, commencing upon the effective date of the Offering. To maintain
inclusion on the Nasdaq SmallCap Market, the Company's Common Stock must
continue to be registered under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the Company must continue to have net
tangible assets of at least $2,000,000, a public float of at least 500,000
shares with a market value of at least $1,000,000, at least 300 stockholders, a
minimum bid price of $1.00 per share and at least two market makers. While the
Company has initially satisfied these maintenance standards, there is no
assurance that the Company will be able to maintain the standards for Nasdaq
SmallCap Market inclusion with respect to its Common Stock. If the Company fails
to maintain Nasdaq SmallCap Market listing, the market value of the Common Stock
likely would decline and purchasers in the Offering 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 to persons other than established customers and "accredited
investors" (primarily individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses).
Commission regulations define penny stocks generally as equity securities with a
price of less than $5.00 or with an exercise price of less than $5.00 per share,
subject to certain exceptions. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure in a form prepared by the Commission
which provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to these penny stock rules. 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 investors in the Offering may be unable to readily sell
their Common Stock.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of a
penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a restriction
would be in the public interest. If the Company's securities were subject to the
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
14
USE OF PROCEEDS
The net proceeds to the Company from the Offering, at an assumed initial
public offering price of $5.00 per share, after deducting underwriting discounts
and commissions, the representatives' non-accountable expense allowance, and the
other estimated expenses of the Offering of $500,000, are estimated to be
approximately $4,763,500. The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders. The Company
anticipates that the estimated net proceeds of the Offering will be allocated
substantially as follows:
APPROXIMATE
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- ------------------------------------------------------------------------------------ -------------- ---------------
Product development (1)............................................................. $ 2,000,000 42%
Repayment of indebtedness (2)....................................................... $ 1,200,000 25%
Sales and marketing expenses (3).................................................... $ 500,000 11%
Working capital (4)................................................................. $ 1,063,500 22%
- ------------------------------
(1) Represents amounts expected to be expended for the development of new
products and upgrades of existing products.
(2) Represents repayment of outstanding indebtedness consisting of (i) $200,000
of Company indebtedness to various parties, including creditors of a
predecessor of the Company (See "Certain Transactions--Transactions With
Redwood Technology"), and (ii) approximately $1,000,000 of loans incurred in
connection with a 1998 private placement of debt and warrants, which loans
bear interest, payable quarterly in arrears, at an annual rate of seven
percent and are due and payable in full on the earlier to occur of three
business days following the completion of the Offering or May 31, 1999. The
proceeds of the 1998 private placement were used primarily to repay
indebtedness of the Company and its predecessor, to fund increased sales and
marketing efforts, including attendance at direct sales industry trade
shows, and for general working capital.
(3) Represents amounts expected to be expended in connection with the expansion
of the Company's sales and marketing efforts, including an increase in sales
personnel and marketing budgets for the Company's products.
(4) The remainder of the net proceeds (approximately $1,302,750 if the
over-allotment option is exercised in full) will be used to fund the
Company's general working capital requirements, including customer support,
corporate overhead, payroll and other such expenses of the Company.
The foregoing represents the Company's best estimates of its application of
the net proceeds of the Offering based upon present plans and current business
conditions. The net proceeds from the exercise of the Representatives' Warrants,
if any, will be added to the general funds of the Company and used for working
capital and other general corporate purposes. Unforseen events, changed business
conditions and a number of other factors that are beyond the control of the
Company, could necessitate changes in the application of net proceeds. The
Company reserves the right to reallocate the net proceeds of the Offering among
the various uses described above or for such other purposes as it, in its sole
discretion, deems necessary or desirable. In the event that the Company changes
the use of proceeds of the Offering, the Company may require immediate
additional debt or equity financing to meet its business plan. If the need
should arise, there can be no assurance that any such financing would be
available on terms that are favorable to the Company, if at all.
The Company may use a portion of the net proceeds to acquire businesses,
products or technologies complementary to the Company's current business. The
Company has no present commitments or agreements and is not currently involved
in any negotiations with respect to any such acquisitions. The Company has not
determined the amounts it plans to expend on each of such uses or the timing of
such expenditures. The amounts actually expended for each such use, if any, are
at the discretion of the Company and may vary significantly depending upon a
number of factors, including future revenue growth and the amount of cash
generated by the Company's operations.
Pending their application, the net proceeds of the Offering will be invested
principally in U.S. government securities, short-term certificates of deposit,
money market funds or other similar short-term interest bearing investments.
15
DIVIDEND POLICY
The Company has not paid any dividends since its inception and has no
current plans to pay dividends on the Common Stock in the foreseeable future.
The Company intends to reinvest future earnings, if any, in the development and
expansion of its business. Any future determination to pay dividends will depend
upon the Company's results of operations, financial condition and capital
requirements and such other factors deemed relevant by the Company's Board of
Directors.
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was $59,249, or $.02 per share of Common Stock, based upon 3,043,515 shares of
Common Stock outstanding. Pro forma net tangible book value per share represents
the amount of total tangible assets of the Company less total liabilities,
divided by the number of shares of Common Stock outstanding, after giving effect
to the conversion of all outstanding shares of Series A Preferred Stock into
Common Stock upon the consummation of the Offering. The outstanding shares
excludes (i) 150,000 shares of Common Stock which may be issued by the Company
upon exercise in full of the Representatives' Warrants, (ii) 597,234 shares of
Common Stock which may be issued by the Company under options currently
outstanding under the Company's Stock Option Plan, and (iii) 279,081 shares of
Common Stock which may be issued by the Company upon exercise of outstanding
warrants. After giving effect to the sale of the 1,210,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $5.00 per share (after deducting underwriting discounts and commissions, the
Representatives' non-accountable expense allowance, and the other estimated
expenses of the Offering of $500,000 payable by the Company), the pro forma net
tangible book value of the Company as of March 31, 1998 would have been
$4,455,669, or $1.05 per share. This represents an immediate increase in pro
forma net tangible book value of $1.03 per share to existing stockholders and an
immediate dilution of $3.95 per share, or 79.0%, to new investors.
The following table illustrates this per share dilution:
Assumed initial public offering price per share of Common Stock......................... $ 5.00
Pro forma net tangible book value per share before the Offering....................... $ .02
Increase attributable to new investors................................................ 1.03
---------
Pro forma net tangible book value per share after the Offering.......................... 1.05
---------
Dilution per share to new investors (79.0%)............................................. $ 3.95
---------
---------
The following table summarizes, at March 31, 1998, the number of shares of
Common Stock purchased from the Company, percentage ownership of such shares,
the total consideration paid, the percentage of total consideration paid, and
the average price per share paid by existing stockholders and to be paid by
purchasers of shares offered hereby at an assumed initial public offering price
of $5.00 per share (before deducting underwriting discounts and commissions, the
Representatives' non-accountable expense allowance, and the other estimated
expenses of the Offering of $500,000 payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- ---------- ---------------
Existing stockholders(1)............... 3,043,515 72% $ 3,008,750 33% $ .99
New investors.......................... 1,210,000 28% $ 6,050,000 67% $ 5.00
---------- --------- ------------- ---------- ------
Total(1)............................... 4,253,515 100.0% $ 9,058,750 100.0% 2.13
---------- --------- ------------- ---------- ------
---------- --------- ------------- ---------- ------
- ------------------------------
(1) Does not include outstanding options or warrants issued by the Company for
the purchase of up to 876,315 shares of Common Stock. Includes 1,244,296
shares of Common Stock issuable upon conversion of all outstanding Series A
Preferred Stock and gives effect to the .782271-to-one reverse stock split
effected in June 1998.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis including the effect of the .782271-for-one
reverse stock split effected in June 1998, (ii) on a pro forma basis giving
effect to the conversion of Series A Preferred Stock into Common Stock upon
closing of the Offering and completion of a $1,000,000 bridge loan financing
transaction in June 1998, and (iii) on a pro forma as adjusted basis giving
effect to the sale of the 1,210,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $5.00 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by the Company, and the application of the net
proceeds thereof as set forth in "Use of Proceeds." The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
MARCH 31, 1998
--------------------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
------------- -------------- -------------
Long-term debt (including current portion)......................... $ 596,626 $ 955,070 $ 394,870
------------- -------------- -------------
Preferred Stock, $.001 par value:
5,000,000 shares authorized; Series A, 1,500,000 issued and
outstanding; none issued and outstanding, pro forma and as
adjusted......................................................... 2,310,174 -- --
Stockholders' equity (deficit)
Common Stock, $.001 par value; 20,000,000 shares authorized;
1,955,673 shares issued, 1,799,219 shares outstanding;
3,199,969 shares issued, 3,043,515 shares outstanding, pro
forma; 4,299,969 shares issued, 4,253,515 shares outstanding,
as adjusted.................................................... 1,956 3,200 4,410
Additional paid-in capital....................................... 161,683 2,910,413 7,672,703
Stock subscriptions receivable................................... (8,500) (8,500) (8,500)
Foreign currency translation adjustment.......................... (28,537) (28,537) (28,537)
Accumulated deficit.............................................. (1,954,810) (1,954,810) (2,514,610)
Treasury stock, at cost: 156,454 shares actual................... (340,000) (340,000) (340,000)
------------- -------------- -------------
Total stockholders' equity (deficit)............................... (2,168,208) 581,766 4,785,466
------------- -------------- -------------
Total capitalization............................................... $ 738,592 $ 1,536,836 $ 5,180,336
------------- -------------- -------------
------------- -------------- -------------
- ------------------------------
(1) Pro forma capitalization gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing,
related deferred loan costs of $120,000, and conversion of Series A
Preferred Stock into Common Stock upon closing of the Offering. Valuation of
the warrants resulted in original issue discount of $439,800 and was
included in the pro forma capitalization. As adjusted also gives effect to
the sale of 1,210,000 shares of Common Stock by the Company at an assumed
initial public offering price of $5.00 per share in the Offering.
17
SELECTED FINANCIAL DATA
The selected financial data set forth on the following page for each of the
fiscal years in the two-year period ended June 30, 1997, have been derived from
the Company's consolidated financial statements and the related notes thereto
that have been audited by BDO Seidman LLP, independent certified public
accountants. The selected financial data for the nine month periods ended March
31, 1997 and 1998 are derived from unaudited financial statements of the Company
and in the opinion of management include all necessary adjustments to present
fairly the results of operations and financial position for those periods. The
consolidated financial statements for each of the fiscal years in the two-year
period ended June 30, 1997, and the report thereon are included elsewhere in
this Prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto appearing elsewhere herein.
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ------------ ------------ -----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Software license fees................................................... $ 1,685,208 $ 2,761,995 $ 2,016,493 $ 3,090,640
Equipment, software and supplies sales.................................. 1,571,516 1,029,314 814,525 638,783
Support and operations revenue.......................................... 3,642,509 4,688,763 3,413,679 3,318,211
----------- ------------ ------------ -----------
Net revenues.............................................................. 6,899,233 8,480,072 6,244,697 7,047,634
----------- ------------ ------------ -----------
Cost of goods sold
Cost of software license fees........................................... 163,233 292,831 192,754 195,720
Cost of equipment, software and supplies sold........................... 1,025,934 781,562 682,934 372,830
Cost of support and operations.......................................... 2,148,131 3,156,312 2,529,041 1,816,168
----------- ------------ ------------ -----------
Total cost of goods sold................................................ 3,337,298 4,230,705 3,404,729 2,384,718
Gross profit.............................................................. 3,561,935 4,249,367 2,839,968 4,662,916
Selling and marketing................................................... 764,711 1,024,716 726,380 673,711
Product research, development and enhancements.......................... 433,061 1,375,452 921,302 1,175,088
General and administrative.............................................. 2,443,191 3,477,863 2,775,601 2,271,828
----------- ------------ ------------ -----------
Total operating expenses.................................................. 3,640,963 5,878,031 4,423,283 4,120,627
----------- ------------ ------------ -----------
Income (loss) from operations............................................. (79,028) (1,628,664) (1,583,315) 542,289
Other income (expense)
Interest, net........................................................... (23,645) (97,433) (35,715) (87,044)
Other................................................................... (74,252) (63,088) (119,918) (28,118)
----------- ------------ ------------ -----------
Income (loss) before provision for income tax............................. (176,925) (1,789,185) (1,738,948) 427,127
Provision (benefit) for income tax........................................ 88,000 (88,000) -- 15,577
----------- ------------ ------------ -----------
Net income (loss)......................................................... $ (264,925) $ (1,701,185) $ (1,738,948) $ 411,550
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Net income (loss) per common share
Basic................................................................. 2,095,369 1,994,792 2,007,830 1,955,678
Diluted............................................................... 2,095,369 1,994,792 2,007,830 3,358,744
Weighted average common shares outstanding
Basic................................................................. $ (.13) $ (.85) $ (.87) $ .21
Diluted............................................................... $ (.13) $ (.85) $ (.87) $ .12
MARCH 31, 1998
-------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------ ------------- --------------
BALANCE SHEET DATA:
Cash.............................................................................. $ 83,486 $ 663,486 $ 4,226,986
Working capital (deficit)......................................................... (892,752) (87,752) 3,675,748
Total assets...................................................................... 2,849,199 3,624,198 7,067,698
Total long-term debt (including current portion).................................. 596,626 955,070 394,870
Total liabilities................................................................. 2,707,233 3,042,432 2,282,232
Redeemable convertible preferred stock............................................ 2,310,174 -- --
Stockholders' equity.............................................................. (2,168,208) 581,766 4,785,466
- ------------------------------
(1) Pro forma balance sheet data gives effect to the $1,000,000 bridge financing
transaction completed in June 1998, warrants to purchase up to 117,321
shares of Common Stock issued in connection with such bridge financing,
related deferred loan costs of $120,000 and conversion of Series A Preferred
Stock into Common Stock upon closing of the Offering. Valuation of the
warrants resulted in original issue discount of $439,800 and was included in
the pro forma balance sheet data.
(2) As adjusted also gives effect to the sale of 1,210,000 shares of Common
Stock by the Company at an assumed initial public offering price of $5.00
per share in the Offering.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. WHEN USED IN THE
FOLLOWING DISCUSSIONS, THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS", "EXPECTS"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS." READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF.
GENERAL
The Company develops, markets, implements and supports specialized software
solutions for network marketing and other companies involved in the direct sales
industry. The Company primarily sells and implements its business information
systems directly. The Company services its clients from offices in both the
United States and United Kingdom. Substantially all of the Company's revenues
are generated from the sale of its systems, which usually consist of proprietary
and third-party software licenses, implementation and software support services,
third-party hardware and maintenance contracts. The Company's proprietary
software licenses are sold on a packaged or individual module basis, and the
license fee is determined in part by the number of modules and concurrent system
users. Maintenance fees are based on a percentage of software license fees and
are billed on a monthly basis.
Revenues from software licenses are recognized upon delivery, provided that
no significant obligations of the Company remain and collection of the related
receivable is deemed probable. Revenues from hardware sales are recognized upon
shipment of the product. Software support service revenues are recognized in the
period in which the services are performed. Revenues from maintenance contracts
are recognized ratably over the period of the contract.
Research and development expenses consist primarily of compensation and
consulting expenses and related equipment and licenses. To date, the Company has
not capitalized any such development costs under Statement of Financial
Accounting Standards ("SFAS") No. 86. All research and development expenses have
been expensed as incurred.
The Company believes future growth is largely dependent on the ability to
increase sales of its core management information system product (SUMMIT V and
related modules) and to develop a market for the NOW! product.
The Company and its predecessors, Summit V, Inc., a Washington corporation
and wholly-owned subsidiary of the Company, as well as Redwood Technology, which
operated certain assets of the Company prior to selling them to Summit V, Inc.
in 1995, have a history of losses. The Company sustained net losses of $265,000
and $1,701,000 for the fiscal years ended June 30, 1996 and 1997, respectively.
Although the Company operated profitably in the first nine months of fiscal
1998, there can be no assurance that the Company will be able to operate
profitably in the future.
The Company's results of operations during fiscal 1997 were greatly affected
by a significant increase in personnel and related personnel costs during the
first half of fiscal 1997. Many of the new personnel were hired in anticipation
of a large increase in sales and related support services which did not
materialize during fiscal 1997. In November 1996, management hired a new Chief
Financial Officer and implemented a significant restructuring of the Company,
including a consolidation of the Company's workforce. As a result of this
restructuring, the Company incurred substantial losses during the first half of
fiscal 1997 and terminated approximately 30 employees in December 1996.
Although no customer accounted for more than 10% of the Company's net sales
during the nine months ended March 31, 1998, for the fiscal year ended June 30,
1997, Shaklee and Morinda accounted for approximately 23% and 11%, respectively,
of the Company's net sales. Similar or greater concentration of
19
its net sales among a limited number of customers may continue in the future.
Any material decrease in net sales to any one of the Company's largest customers
that is not matched by corresponding increases in net sales to new or existing
customers could have a material adverse effect on the Company's financial
condition and results of operations and could threaten its economic viability.
There can be no assurance that the Company will receive orders from any existing
customers or from new customers.
The Company derived approximately 3.8% and 6.8% of its total revenue from
its United Kingdom operations in 1996 and 1997, respectively. For the nine month
periods ended March 31, 1997 and 1998, the Company derived approximately 6.5%
and 7.3% of its total revenue from its United Kingdom operations. The Company's
international business is subject to various risks common to international
activities, including currency fluctuations. Revenues and expenses of the
Company's United Kingdom operations are translated at the average exchange rate
in effect during the period. Translation adjustments are reported as a separate
component of stockholders' equity. The Company does not currently engage in
currency hedging transactions.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly results. Such fluctuations may be
caused by many factors, including, but not limited to the size and timing of
individual orders; seasonality of revenues; lengthy sales cycle; delays in
introduction of products or product enhancements by the Company or other
providers of hardware, software and components for the Company's systems;
competition and pricing in the software industry; market acceptance of new
products; foreign currency exchange rates; mix of products sold; and general
economic conditions. See "Risk Factors--Significant Fluctuations in Quarterly
Results."
The Company is or may be subject to claims of unsatisfied creditors of
Redwood Technologies, Inc. alleging successor liability or other similar basis
for liability. As of March 31, 1998 the Company estimated that such claims could
total $350,000 of which the Company had recorded a liability of approximately
$350,000 at March 31, 1998. In July 1998, the Company settled certain claims by
the Internal Revenue Service against Redwood Technology for $135,000. See "Risk
Factors--Risk of Creditors Claims and Successor Liability."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data shown as a percentage of net sales.
YEARS ENDED JUNE 30,
--------------------
1996 1997
--------- --------- NINE MONTHS ENDED
------------------------
MARCH 31,
------------------------
1998
1997 -----------
----------- (UNAUDITED)
(UNAUDITED)
Revenues:
Software license fees............................................. 24.4% 32.6% 32.3% 43.9 %
Equipment, software and supplies sales............................ 22.8% 12.1% 13.0% 9.1 %
Support and operations revenue.................................... 52.8% 55.3% 54.7% 47.0 %
Net revenues........................................................ 100.0% 100.0% 100.0% 100.0 %
Cost of revenues
Cost of software license fees..................................... 2.4% 3.5% 3.1% 2.8 %
Cost of equipment, software and supplies sold..................... 14.9% 9.2% 10.9% 5.3 %
Cost of support and operations.................................... 31.1% 37.2% 40.5% 25.8 %
Total cost of revenues.............................................. 48.4% 49.9% 54.5% 33.8 %
Gross profit........................................................ 51.6% 50.1% 45.5% 66.2 %
Operating expenses
Selling and marketing............................................. 11.1% 12.1% 11.6% 9.6 %
Product research, development and enhancements.................... 6.3% 16.2% 14.8% 16.7 %
General and administrative........................................ 35.4% 41.0% 44.4% 32.2 %
Total operating expenses............................................ 52.8% 69.3% 70.8% 58.5 %
Operating income (loss)............................................. -1.1% -19.2% -25.3% 7.7 %
Other income (expense)
Interest, net..................................................... -0.3% -1.1% 0.6% -1.2%
Other............................................................. -1.1% -0.8% 1.9% -0.4%
Income (loss) before provision for income tax....................... -2.6% -21.1% -27.8% 6.1%
Provision (benefit) for income tax.................................. 1.2% -1.0% 0.0% 0.3%
Net income (loss)................................................... -3.8% -20.1% -27.8% 5.8%
20
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 TO AND MARCH 31, 1997
REVENUES. Total revenues increased 12.9% to $7,048,000 for the nine months
ended March 31, 1998 from $6,245,000 million for the same period in 1997. The
increase was primarily attributable to increases in revenues from software
licenses. Simultaneously with this increase in total revenues, the Company
experienced a significant decrease in customer concentration as sales to Shaklee
Products decreased from approximately 23% for all of fiscal 1997 to less than
10% in the nine months ended March 31, 1998.
SOFTWARE LICENSE REVENUES. Software license revenues increased 53.3% to
$3,091,000 for the nine months ended March 31, 1998 from $2,016,000 for the same
period in 1997. The increase in software license revenues was due to an increase
in system sales and additional modules sold to new and existing clients.
EQUIPMENT, SOFTWARE AND SUPPLIES REVENUES. Equipment, software and supplies
revenues decreased 21.6% to $639,000 for the nine months ended March 31, 1998
from $815,000 for the same period in 1997. The Company has reduced its emphasis
on selling turnkey systems which typically had included low margin computer
hardware equipment. As a result, equipment purchases have decreased.
SUPPORT AND OPERATIONS REVENUE . Support and operations revenue decreased
2.8% to $3,318,000 for the nine months ended March 31, 1998 from $3,414,000 for
the same period in 1997. The decrease relates to reduced services required for
the Company's largest customer, Shaklee Products. In the prior year Shaklee
Products was converting to a version of the Company's software and significant
services were required. The conversion was completed in February 1997. This
decrease is partially offset by increased maintenance contract revenues
resulting primarily from an increase in the number of customers paying
maintenance for new and upgraded systems and enhanced administration of existing
contracts. In the previous period, many customers were not charged additional
maintenance fees when additional user licenses or modules were purchased as
outlined in the original purchase contract. As a result, the Company was able to
increase its maintenance contract revenues.
COST OF REVENUES. Total cost of revenues decreased 30.0% to $2,385,000 for
the nine months ended March 31, 1998 from $3,405,000 for the same period in
1997. Such decrease was primarily due to an increase in higher margin software
sales and a decrease in lower margin service revenues and equipment sales. Total
cost of revenues as a percentage of net revenues decreased from 54.5% in the
nine months ended March 31, 1997 to 33.8% for the period ended March 31, 1998
primarily as a result of the decreased size of support staff in the later period
along with a change in product mix away from sales of turnkey systems which
typically had included low-margin computer equipment.
COST OF SOFTWARE LICENSES. The cost of software licenses consists primarily
of the cost of supplies that are included with the Company's systems that are
provided by third-party suppliers. The cost of software licenses increased 1.6%
to $196,000 for the nine months ended March 31, 1998 from $193,000 for the same
period in 1997 as a result of the increase in software license revenues.
COST OF EQUIPMENT, SOFTWARE AND SUPPLIES. The cost of equipment, software
and supplies consists primarily of the cost of computer hardware and third-party
software and related peripheral equipment purchased by the Company from various
suppliers for resale as part of the Company's turnkey systems. These costs
decreased by 45.4% to $373,000 for the nine months ended March 31, 1998 from
$683,000 for the same period in 1997.
COST OF SUPPORT AND OPERATIONS. The cost of support and operations consists
primarily of personnel costs, travel and materials associated with providing
implementation, education and training, consulting and technical services. These
costs decreased 28.2% to $1,816,000 for the nine months ended March 31, 1998
from $2,529,000 for the same period in 1997. During the first five months of
fiscal 1997 the Company hired numerous support personnel which proved to be
unproductive and the positions were ultimately
21
eliminated in December 1996. As a result the cost of support and operations were
lower for the nine months ended March 31, 1998.
GROSS PROFIT. Gross profit increased by 64.2% to $4,663,000 for the nine
months ended March 31, 1998 from $2,840,000 for the same period in 1997. Overall
gross profit as a percentage of total revenues increased to 66.2% for the nine
months ended March 31, 1998 from 45.5% for the same period in 1997, mainly as a
result of the increase in higher-margin software license revenues as a
percentage of total sales. Gross profit on the Company's software license
revenues is significantly higher than on revenues from equipment, services and
maintenance. Gross profit on software licenses remained relatively constant from
March 31, 1998 to March 31, 1997 at 93.7% and 90.4%, respectively. Gross profit
on software support services and maintenance increased to 45.3% for the nine
months ended March 31, 1998 from 25.9% for the same period in 1997 due mainly to
the elimination of many support personnel. The increase in equipment gross
profit to 41.6% for the nine months ended March 31, 1998 from 16.2% for the same
period in 1997 was primarily due to sales of more third party software and less
hardware.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
7.2% to $674,000 for the nine months ended March 31, 1998 from $726,000 for the
same period in 1997. The decrease primarily relates to the elimination of a
highly compensated sales professional in March 1997 and more efficient
management of marketing expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 27.6% to $1,175,000 for the nine months ended March 31, 1998 from
$921,000 for the same period in 1997. The increase in research and development
expenses relates primarily to the continued development of the NOW! suite of
products which began in December 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 18.2% to $2,272,000 for the nine months ended March 31, 1998 from
$2,776,000 for the same period in 1997. Such decrease was due primarily to a
significant decrease in personnel resulting from a restructuring of the Company
that began in December 1996.
INTEREST EXPENSE. Interest expense increased 141.7% to $87,000 for the nine
months ended March 31, 1998 from $36,000 for the same period in 1997. The
increase relates primarily to the equipment lease entered into in December 1996
and the interest due on a note payable to a stockholder which accrues interest
at 18% annually and provides for monthly payments equal to 1% of the Company's
gross margin until fully paid.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES. Total revenues increased 22.9% to $8,480,000 for fiscal 1997 from
$6,899,000 for fiscal 1996. The increase was primarily attributable to increases
in revenues from software licenses, software services and maintenance contracts.
SOFTWARE LICENSE REVENUES. Software license revenues increased 63.9% to
$2,762,000 for fiscal 1997 from $1,685,000 for fiscal 1996. The increase in
software license revenues was due to an increase in system sales and additional
software modules sold to new and existing clients. This increase was the direct
result of an increased sales effort to sell high margin products particularly
during the last six months of fiscal 1997.
EQUIPMENT, SOFTWARE AND SUPPLIES REVENUES. Equipment, software and supplies
revenues decreased 34.5% to $1,029,000 for fiscal 1997 from $1,572,000 for
fiscal 1996. During the last half of fiscal 1997, the Company decreased its
emphasis on selling turnkey systems which typically had included low margin
equipment. As a result, equipment purchases have decreased.
SUPPORT AND OPERATIONS REVENUE. Support and operations revenue increased
28.7% to $4,689,000 for fiscal 1997 from $3,643,000 for fiscal 1996. The
increase in service revenues was principally due to
22
additional purchases of the Company's systems and system upgrades by existing
customers which required implementation assistance and the increase in
maintenance contract revenues, primarily due to an increase in the number of
customers paying maintenance fees for new and upgraded systems and enhanced
administration of existing contracts. In previous years, many customers were not
charged additional maintenance fees as additional user licenses or modules were
purchased as outlined in the original purchase contract. As a result, the
Company was able to increase its maintenance contract revenues.
COST OF REVENUES. Total cost of revenues increased 26.8% to $4,231,000 for
fiscal 1997 from $3,337,000 for fiscal 1996. Total cost of revenues as a
percentage of net revenues increased from 48.4% in fiscal 1996 to 49.9% in
fiscal 1997.
COST OF SOFTWARE LICENSES. The cost of software licenses consists primarily
of the cost of supplies that are included with the Company's systems that are
provided by third-party suppliers. The cost of software licenses increased 79.8%
to $293,000 for fiscal 1997 from $163,000 for fiscal 1996. The increase is a
direct result of the increase in software sales.
COST OF EQUIPMENT, SOFTWARE AND SUPPLIES. The cost of equipment, software
and supplies consists primarily of the cost of computer hardware and third-party
software and related peripheral equipment purchased by the Company from various
suppliers for resale as part of the Company's turnkey systems. These costs
decreased by 23.8% to $782,000 for fiscal 1997 from $1,026,000 for fiscal 1996
primarily as a result of the Company's decision to decrease its emphasis on
sales of turnkey systems which typically had included low margin computer
equipment.
COST OF SUPPORT AND OPERATIONS. The cost of support and operations consists
primarily of personnel costs, travel and materials associated with providing
implementation, education and training, consulting and technical services. These
costs increased 46.9% to $3,156,000 for fiscal 1997 from $2,148,000 for fiscal
1996. The increased support and operations expense relates primarily to a 43%
increase in personnel during the first half of fiscal 1997. Many of the new
hires were unnecessary and therefore unproductive. As a result, the Company
terminated approximately 30 employees in December 1996.
GROSS PROFIT. Gross profit increased by 19.3% to $4,249,000 for fiscal 1997
from $3,562,000 for fiscal 1996 primarily due to the increase in total revenues
from fiscal 1996 to fiscal 1997. Overall gross profit as a percentage of total
revenues decreased slightly to 50.1% for fiscal 1997 from 51.6% in fiscal 1996,
mainly as a result of the decrease in margin on equipment sales which was offset
somewhat by the increase in higher-margin software license revenue as a
percentage of total revenues. Gross margin on the Company's software license
revenues is significantly higher than on revenues from equipment, services and
maintenance. Gross margins on software licenses remained relatively constant
from fiscal 1996 to fiscal 1997 at 90.3% and 89.4%, respectively. Gross margins
on software support services and maintenance decreased to 32.7% in fiscal 1997
from 41.0% in fiscal 1996 due mainly to the addition of new support personnel
described above. The decrease in equipment gross margins to 24.1% in fiscal 1997
from 34.7% in fiscal 1996 was due to price competition in the computer hardware
industry and discounting required in response to volume purchase agreements
being offered by the computer manufacturers and computer resellers.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
34.0% to $1,025,000 for fiscal 1997 from $765,000 for fiscal 1996. The increase
in sales and marketing expenses relate primarily to higher sales commission
associated with increased revenue and higher travel costs to support increased
sales activity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 217.6% to $1,375,000 for fiscal 1997 from $433,000 for fiscal 1996.
The increase in research and development expenses relates primarily to the
development during the last half of fiscal 1997 of the NOW! suite of products.
23
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 42.4% to $3,478,000 for fiscal 1997 from $2,443,000 for fiscal 1996.
The general and administrative expenses as a percentage of revenue increased to
41.0% in fiscal 1997 compared to 35.4% in fiscal 1996. The increase in general
and administrative expense relates primarily to the addition of new office space
and additional personnel.
INTEREST EXPENSE, NET. Interest expense increased 304.2% to $97,000 for
fiscal 1997 from $24,000 for fiscal 1996. The increase related primarily to a
$600,000 equipment lease the Company entered into in December 1996 which bears
interest at approximately 8.0% per year.
BACKLOG
The Company does not typically maintain a significant backlog and therefore
revenues for each quarter depend substantially on orders received and delivered
in that quarter. The average price of the Company's systems sold during the
fiscal year ended June 30, 1997 was approximately $100,000 to $150,000. As a
result of the relatively high revenue amount per order and relatively low unit
volume, any lost or delayed sales will have a disproportionately greater effect
on the Company's revenues and quarterly results relative to companies that have
higher unit sales volumes and less revenue associated with each sale. The
Company's sales cycle is typically three to six months from the time initial
sales contact is made with a qualified prospect, making the timing of the
Company's license fees difficult to predict and the Company's quarterly results
difficult to forecast. The Company's expense levels are based in part on its
forecast 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. There can be no
assurance that the Company will be profitable on a quarter-to-quarter basis.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Offering the Company has financed its operations primarily
through cash flow from operations, private sales of the Company's equity and
long-term equipment financing. The Company does not have access to a line of
credit. The Company's $600,000 equipment lease requires the Company to maintain
cash on deposit with a bank affiliated with the lessor. The required cash
balance was initially $300,000 and reduces incrementally in proportion to the
reduction in the lease balance. At March 31, 1998 the principal balance of the
lease was $352,000 and the required cash balance was $200,000.
The Company has a note payable to a stockholder with interest payable at 18%
per annum. The note is payable in monthly installments of the greater of $10,000
or the individual monthly compensation of the two major stockholders ($14,000
per month at March 31, 1998), and is secured by their shares in the Company. The
Company has established an agreement with the note-holder allowing for a
variance from regularly scheduled payments. At March 31, 1998 the outstanding
principal balance was $202,000.
The Company has entered into employment agreements with four of its
executive officers as well as a Consulting and Non-Competition Agreement with a
director and former officer of the Company, the terms of which are described in
"Management--Employment and Consulting Agreements" below. In general, assuming
none of the agreements are terminated and that each one year contract is renewed
annually, such agreements provide for total payments of not less than $2.9
million through the end of the fiscal year ending June 30, 2002, including
approximately $86,000 per month during the fiscal year ending June 30, 1999. See
"Management--Employment and Consulting Agreements" for details regarding the
terms of such agreements.
In fiscal 1996, operating activities provided net cash of approximately
$317,000 primarily from an increase in accounts payable and accrued expenses of
approximately $730,000 which were offset by an
24
increase in accounts receivable of approximately $423,000. In fiscal year 1996
the Company used net cash of approximately $335,000 in financing activities to
repay notes payable, and net cash of approximately $145,000 in investing
activities primarily to purchase property and equipment.
In fiscal 1997, operating activities used net cash of approximately
$1,192,000 primarily from a net loss from operations of approximately $1,701,000
and a decrease in accounts payable of approximately $500,000 which were offset
by a combined increase in customer deposits and accrued liabilities of
approximately $705,000. In fiscal 1997 financing activities provided net cash of
approximately $2,200,000 primarily from net proceeds from the sale of the
Company's preferred stock (approximately $2,300,000) and proceeds from equipment
notes payable (approximately $660,000) which were offset by a redemption of a
portion of the Company's common stock ($340,000), repayment of notes payable
(approximately $134,000), and increase in restricted cash ($300,000). In fiscal
1997 the Company's investing activities used net cash of approximately
$1,000,000 primarily to purchase property and equipment.
At March 31, 1998, the Company had approximately $283,000 in cash, including
restricted cash. The Company believes that the net proceeds from the sale of the
Common Stock offered hereby, together with its current cash balance and cash
flow from operations, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. The Company believes
that its anticipated cash flow from operations, current cash and cash equivalent
balances and the net proceeds of the sale of Common Stock in this Offering will
provide sufficient cash resources to finance its operations and associated
marketing and customer support activities for at least 12 months. Thereafter,
the Company's continued operations will depend upon cash flow from operations
and the availability of further financing.
The Company's accounts receivable balances at June 30, 1996, and 1997 and
March 31, 1998 were $900,759, $947,509 and $1,278,353, respectively. Accounts
receivable in the over 90-day category at June 30, 1997 was $485,233, or 52.86%
of accounts receivable, compared to $140,956, or 11.62% of accounts receivable,
at March 31, 1998. The number of days sales in accounts receivable was 48 days,
40 days and 55 days, respectively, for the years ended June 30, 1996 and 1997
and for the nine month period ended March 31, 1998. The increase in accounts
receivable and days sales in accounts receivable from June 30, 1997 to March 31,
1998 was due to granting additional credit terms to larger customers that have a
strong payment history. Bad debt expense as a percentage of sales for the period
ended June 30, 1996, and 1997 and the nine months ended March 31, 1998 was 3.5%,
1.2% and 1.2%, respectively. As a result, the allowance for doubtful accounts
decreased from $200,000 at June 30, 1997 to $97,600 at March 31, 1998, a
decrease of $102,400.
At March 31, 1998, the Company had four customers which accounted for
approximately 60% of the accounts receivable at March 31, 1998.
YEAR 2000
The Company believes that its principal software products (SUMMIT V and
NOW!) are Year 2000 compliant. However, because the Company's products are
designed to work with relational database and other software products developed
and sold by third parties, any failure of these third party software products to
be Year 2000 compliant could result in the failure of the Company's software
products to effectively operate. Although the Company does not expect any
significant disruption in operations or any significant expenditures as a result
of computer software issues related to the Year 2000, any failure of third party
software used by the Company could have the effect of harming the Company's
reputation in the market and could have an adverse effect on sales of the
Company's products and its financial performance.
25
NEW ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 129. The Company does not expect adoption of SFAS No. 129
to have a material effect, if any, on its financial position or results of
operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its results of
operations.
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (1) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. SOP 97-2 also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company does not expect adoption of SOP 97-2 to have a material
effect on the financial statements.
26
BUSINESS
Jenkon International, Inc. ("Jenkon" or the "Company") is a leading
developer of specialized software solutions for network marketing and other
companies involved in the direct sales industry. The Company's products are
designed to provide direct sales organizations, which are characterized by a
large number of small transactions, intricate compensation programs, and complex
distributor genealogy trails, with a rapid, accurate and efficient means to
collect, process, transmit and record sales, commissions and other data. The
Company was the recipient of the 1997 DSA Partnership Award granted by the
Direct Selling Association ("DSA"), the direct sales industry's largest trade
group. The award was in recognition of the Company's leadership position as a
supplier to the industry.
To date, the Company has focused its development and marketing efforts on
its proprietary management information system software package known as SUMMIT
V. The Company's management information systems, including its SUMMIT V
software, have been installed with over 150 direct sales companies in over 25
countries throughout the world. The Company's clients include many of the direct
sales industry's leading companies such as Shaklee, Avon Products (China and
India), USANA, Nature's Sunshine and Watkins. In addition to SUMMIT V, the
Company has developed and markets a compatible software-based voice response
system known as TOUCHTALK that offers individual home-based direct sales
personnel the ability to access a wide variety of product, sales, commission and
other information regarding the company they represent.
In recognition of the increasing importance of Internet commerce in the
direct sales industry and throughout the economy, the Company has developed and
has recently begun the initial marketing of a scalable Internet-based product,
known as NOW!. NOW! is designed for use by home-based direct sales personnel and
allows such personnel direct access to and communication with the companies that
they represent through the use of personal computers, Web TV and other
Internet-based platforms. NOW! enables home-based direct sales personnel to
quickly obtain current inventory information, directly place orders online,
obtain order status information and view and analyze personal and group sales,
commissions and other information. In addition to the benefits afforded to the
home-based direct sales personnel, the Company believes that the NOW! product
will enable its direct sales company clients to significantly reduce order
processing and other labor-intensive operating costs which the Company believes
account for a substantial portion of the total operating costs of a typical
direct sales company client. The Company believes that NOW! enhances the
attractiveness of SUMMIT V to its direct sales company clients while expanding
the Company's potential client base to include the large number of home-based
direct sales personnel affiliated with such companies.
Jenkon International, Inc., is a Delaware corporation that is a holding
company for the business of the Company. The founders of the Company began
operations in 1982 and incorporated Jenkon International, Inc., a Washington
corporation ("Jenkon Washington"), on December 23, 1988. The Company
subsequently reincorporated in the State of Delaware effective July 1, 1996 and
Jenkon Washington became a wholly-owned subsdiary of Jenkon Delaware. The
Company's primary focus over the past three years has been in the development
and sale of its SUMMIT V management information system software package, sales
of which have been the primary source of the Company's business over the past
three years. However, the Company has recently completed the development of NOW!
and has begun initial marketing of such product. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DIRECT SALES INDUSTRY BACKGROUND
The direct sales industry markets its products through networks of
home-based direct sales personnel whose selling activities most commonly take
place in customers' homes. This industry thrives on a team building approach
whereby home-based direct sales personnel can build a sales group and derive
income from the cumulative sales of the group in addition to their individual
earnings from retail sales. In 1996,
27
total world wide sales in the industry were estimated to be in excess of
approximately $78 billion and were generated by a sales force of approximately
22 million distributors.
The industry is built on a "direct to the customer" approach to the
marketing of consumer-oriented products. Eliminating national wholesalers,
regional distribution centers, retail stores and other middlemen, direct sales
companies instead utilize the entrepreneurial spirit of independent home-based
distributors to reach customers. Home-based direct sales personnel buy direct
from the direct sales company or other direct sales personnel at wholesale, sell
at retail and keep the profit for their efforts. Further earnings are available
through team-building activities whereby home-based direct sales personnel can
gain a percentage on all the sales made by team members under a pre-defined
compensation program.
Direct sales companies benefit by being able to operate a low overhead, high
sales volume business with less staff, premises and marketing costs. Home-based
direct sales personnel benefit by being able to build an ongoing business with
little or no inventory, minimal start-up costs and expanded income through team
building. Although many home-based direct sales personnel are able to generate a
full-time income from their marketing activities, the vast majority are
part-time marketers who use their energy and contacts to build a second income
to supplement their primary source of income.
The Company markets its products to three broad categories of companies in
the direct sales industry:
TRADITIONAL DIRECT SALES COMPANIES. Their prime focus is to make retail
sales on a one-to-one basis. Avon Products is an example of a traditional direct
sales company.
PARTY PLAN COMPANIES. These companies depend on sales "parties" where
guests are invited to a home setting by a "host" or "hostess." The "host" or
"hostess" is then given an opportunity to demonstrate the Company's products and
take orders from customers. Companies in this group, such as Tupperware,
accounted for over 26% of direct sales industry sales in the U.S. in 1994.
NETWORK MARKETING COMPANIES. This industry sector thrives on the
team-building element of sales whereby each home-based direct sales person can
build his/her own sales group and derive income from the cumulative sales of the
group in addition to their individual earnings from retail sales. Herbalife and
Amway are examples of network marketing companies.
The Company believes that there is a large potential for future growth in
the direct sales industry in continental Europe, Latin America, and Pacific Rim
and that due to the dramatic growth, many companies are experiencing dramatic
growth overseas. The Direct Selling Association estimates that since 1991, total
worldwide sales by direct sales companies have grown from approximately $48
billion to approximately $78 billion in 1996 while the worldwide sales force
increased from approximately 11 million people in 1991 to over 22 million people
in 1996. According to an industry analysis compiled by J.P. Morgan Securities
Inc., the worldwide direct sales market is expected to grow at an annual rate of
10% through the year 2000 while the number of worldwide direct sales
representatives is expected to grow at an annual rate of 13% during the same
period.
BUSINESS STRATEGY
The Company's business objective is to take advantage of the rapid growth in
the direct sales industry and expand its position as a leading provider of
specialized software to such industry. In order to achieve this goal, the
Company's growth strategy includes the following elements:
- DIRECTLY ACCESS HOME-BASED DIRECT SALES PERSONNEL THROUGH THE INTRODUCTION
OF INTERNET-BASED PRODUCTS. While direct sales companies will remain the
Company's core customer base, the Company believes that the large number
of individual home-based direct sales personnel of these direct sales
companies present a large and growing potential market for direct sales
software products such as the Company's NOW! product.
- INCREASE MARKET PENETRATION OF CORE PRODUCTS. The Company believes that
its current base of direct sales company clients represents only a small
portion of the total number of direct sales companies
28
that are potential users of SUMMIT V and the Company's other core
products. Upon completion of this Offering, the Company will attempt to
increase the market penetration of SUMMIT V through more aggressive
marketing and promotional efforts and by continuing to modify and improve
SUMMIT V and other products to meet the changing needs of direct sales
company clients. The Company expects that future generations of SUMMIT V
will include multi-platform database support, an e-commerce enabled
server, support for existing communications standards, and other advanced
features. In addition, the Company is in the process of creating an
application program interface that would enable the NOW! product to be
used by direct sales companies and their home-based personnel regardless
of whether the company in question utilizes the SUMMIT V system or any
other software products of the Company.
- LEVERAGE EXISTING CUSTOMER BASE TO INCREASE REVENUES. The Company
believes that its relationships with its corporate direct sales clients
provides a unique opportunity for the Company to generate revenues from
the cross-selling and marketing of additional products and services by the
Company and others to the home-based personnel of its direct sales
clients. For example, the Company has entered into a contract with
EarthLink Network, Inc. pursuant to which the Company will receive a
referral fee for NOW! users that subscribe for Internet access with such
providers through the NOW! product. In addition, given the large number of
credit card transactions handled by the Company's direct sales clients, an
opportunity may exist for the Company to offer credit card processing
services for which the Company would receive processing fees.
- EXPAND GEOGRAPHIC MARKET PENETRATION. The Company believes that
international markets provide significant opportunity for the Company to
increase sales of its products and the Company is making a concerted
effort to expand its international operations. Given the rapid growth of
the direct sales industry throughout the world, and especially in the
countries of the Pacific Rim, Southeast Asia and Latin America, the
Company intends to expand its geographic presence by expanding the focus
of its sales efforts to these expanding international markets as well as
the U.S. market. The Company currently operates a European office in the
United Kingdom and intends to open an office in the Far East to serve the
Pacific Rim market. See "Risk Factors--International Operations and Risk
of International Sales." The Company expects to be able to meet much of
its staffing needs for these branch offices through a combination of
existing personnel and locally hired professionals.
PRODUCTS AND SERVICES
NOW! The Company has recently completed the development and testing and has
begun the marketing of NOW!, a Windows-based software program that together with
Jenkon's SUMMIT V management information system provides home-based direct sales
personnel with immediate access to the real-time sales information they need to
manage their business over the Internet.
Utilizing the power of the Internet NOW! provides home-based direct sales
personnel with the ability to:
- View their entire downline organizations and analyze critical downline
performance information such as personal sales volumes, group sales
volumes, and new recruits
- Place orders online without assistance from corporate personnel
- Obtain the status of various orders
- View current inventory information
- View or listen to corporate announcements and training video/audio
broadcasts from the home office
- View a detailed explanation of their commissions earned to date
29
In addition to the benefits afforded to home-based direct sales personnel,
the Company believes that NOW! can serve to increase the efficiency of its
corporate customers' order processing while reducing transaction costs by
reducing the volume of labor-intensive paperwork and related costs associated
with distributor inquiries and processing of fax and telephonic orders.
Moreover, the NOW! product is scalable and can be added to a client's system on
a modular basis so that the software system can grow as the needs and size of
the client's business expand.
NOW! has been developed to address the varying information needs and levels
of sophistication among computer users. For novice computer users NOW! Online is
simply an interactive Internet WEB system that allows access to all necessary
sales information online using standard WEB browser software. NOW! Online is
also compatible with Microsoft's WEB TV to provide easy Internet access to
valuable sales information using the home television. For the more technically
proficient home-based direct sales personnel the NOW! CD-ROM is available which
includes a Personal Information Manger (PIM) and the ability to download
information from the Internet onto a personal computer to assist in the creation
of a personalized management reports.
SUMMIT V. SUMMIT V is a management information system for direct sales
companies that is designed to provide such companies easy access to the
information necessary for the successful operation and management of their
business.
The range of information SUMMIT V can generate for clients includes:
- Operational information such as sales order processing, sales organization
tracking and maintenance, commission processing, credit card checking,
inventory control
- Management information such as activity analysis and growth analysis
- Financial information such as daily statistics, event analysis and sales
volume
To maximize client loyalty and retention, and to establish and maintain a
reputation that will attract new clients, Jenkon offers annual support and
maintenance contracts whereby purchasers of the service can obtain technical
customer support service. Jenkon technical personnel are available 24 hours a
day, 7 days a week, to assist clients in solving problems with the system at any
time (which in the vast majority of cases can be provided on the spot by voice
or, if necessary, via a telephone modem). In addition, the Company offers
training on an ongoing basis to maintain quality control with respect to the
operation of the system, particularly in the case of customized systems.
TOUCHTALK. TOUCHTALK is a stand-alone software product that operates with
SUMMIT V. Once connected to both a phone system (or lines) and a computer,
TOUCHTALK works 24 hours each day to handle phone calls by home-based direct
sales personnel. By selecting a menu option with a touch tone key, each
home-based sales person can place orders, make inquiries, hear training
messages, or leave messages for their downline direct sales personnel.
The Company believes that the key attractions of the TOUCHTALK software are
that it facilitates around-the-clock operation and helps reduce operating
overhead for direct sales companies.
OTHER SERVICES
CUSTOM PROGRAMMING. The unique compensation programs of direct sales
companies of various kinds have established the need for the Company to
customize SUMMIT V for its customers, which provides an additional source of
potential revenue for the Company. In addition, due to the changing nature of
compensation plans, the international and organization-by-organization
differences between direct sales companies are expected to increase the need for
customization. Moreover, because it is customary in the direct sales industry
for clients to regularly revise their compensation plans and structures in order
to provide incentives to sale personnel, the Company generates additional
revenue for customizations and modifications even after the initial installation
of the product has been completed.
30
ANNUAL SUPPORT AGREEMENTS. In order for clients to have access to Jenkon's
support services, it is necessary for the client to purchase an Annual Support
Agreement. Such support agreements typically provide for annual fees equal to
18% of the cost of the system. There are many benefits for the customer to do
this, including 24 hour-7 days a week support, and reduced rate for services.
TECHNOLOGY
Similar to many other business packages, SUMMIT V utilizes various
technologies provided by other suppliers. These include operating systems,
relational database software, and PC/Client software. In addition, SUMMIT V was
built using advanced engineering tools, some of which are required to be
installed on each client computer for SUMMIT V to operate. See "Risk
Factors--Dependence on Third Party Software and Hardware."
OPERATING SYSTEMS. SUMMIT V currently operates within the UNIX and
Microsoft Windows/NT operating systems. UNIX is the current platform of choice
due to its ability to support large companies and the massive volumes of data
they must process. Jenkon installs all small systems (under 20 workstations)
using Windows NT. SUMMIT V is currently compatible with Windows NT running the
Ardent Software, Inc. (formerly Unidata) relational database software.
RELATIONAL DATABASE SOFTWARE. Like other software, relational database
technology has also evolved considerably in recent years and now imposes
"standards" which, if followed, allow business software programs to exchange
data and even "talk" to each other. SUMMIT V utilizes relational database
software products of Ardent Software, Inc. Ardent products comply with industry
standards (ANSI) and are capable of seamlessly communicating with many other
commonly used database systems such as Oracle, Informix, Sybase, and Microsoft
Access. This provides Jenkon with the ability to interface products written in
these other environments into SUMMIT V, if desired. It also allows customers to
use SUMMIT V in similar fashion to other database software they are accustomed
to using for reports and inquiries.
The Company has entered into a reseller agreement with a predecessor to
Ardent Software, Inc. granting the Company the right to utilize Ardent software
in its SUMMIT V software. The Company is in the process of negotiating a renewal
of the reseller agreement. To the extent that Ardent elects to terminate or not
renew the Company's license or change its pricing structures in a manner that is
unfavorable to the Company, the Company may be materially adversely affected.
FOURTH GENERATION LANGUAGE. Today, software engineers often use computers
to design and build programs much like a word processor creates a publication
quality document. Programmers now show the computer what they want by "painting"
input screens and reports on their workstations, then ask the computer to create
the actual programs. This method of software development creates a much more
reliable and consistently coded package which is later easier and less expensive
to support. The Fourth Generation Language which does this is called System
Builder Plus ( "SB+"). SUMMIT V was created with SB+, which is owned by Ardent
Software, Inc.
SB+ has recently provided the capabilities to provide graphically designed
screens to better comply with Windows standards. Jenkon has developed a version
of SUMMIT V which takes advantage of this new capability. The Company believes
this newer look and feel could result in relatively greater market demand for
SUMMIT V.
PC/CLIENT SOFTWARE. Connecting a PC computer to a UNIX server requires a
software program which runs on the PC to manage the connection, the data, and
the software interface. SUMMIT V utilizes a PC software package called SBClient
which is designed to work in harmony with SB+ based applications. SBClient
allows PC networks to access SUMMIT V at high speed. It also provides the GUI
(graphical user interface) capabilities.
SUMMIT V can also be accessed by Macintosh computer workstations using one
of several terminal emulation programs available. In addition, for computer
users who would prefer to avoid the expense of PC workstations, SUMMIT V can
also be accessed by "dumb" workstations costing as little as $300 each.
31
INTERNET TECHNOLOGY. The NOW! technology provides for multiple
heterogeneous devices to connect simultaneously and in parallel via the
Internet. Utilizing the industry standard Internet TCP/IP (Transmission Control
Protocol/Internet Protocol) through an extended HTML (HyperText Markup
Language), a connection by browsers, web pages, CD-ROMS, or any other 'Internet
aware' device can be achieved.
The NOW! system is completely proprietary as it requires an interface with
SUMMIT V to be fully functional with real-time information. This interface is an
Application Programming Interface (API) which provides significant time and cost
savings by enabling the reuse of a reliable software interface each time a new
customer or product is connected to SUMMIT V. The API technology is used both
internally, to interface new features developed by Jenkon, as well as being
positioned as a development kit which may be purchased by customers for their
own integration into the otherwise proprietary environment.
CUSTOMERS
Jenkon currently has software systems installed in over 25 countries
including the United States and Canada. The smallest of these are "3-User"
systems, mainly for the new start up customer with a limited budget. Other than
size constraints imposed by the client's hardware systems, the Company does not
believe there is an upper limit to the number of users on a Jenkon software
system, with large companies like Shaklee having a large number of ports on
their mainframe.
The profile of a Jenkon customer ranges from the household names like Avon
Products or Shaklee to the individual starting his or her own direct sales
company.
Although no customer accounted for more than 10% of the Company's net sales
during the nine months exceed March 31, 1998, for the fiscal year ended June 30,
1997, Shaklee and Morinda accounted for approximately 23% and 11%, respectively,
of the Company's net sales. Similar or greater concentration of its net sales
among a limited number of customers may occur in the future. In such event, any
material decrease in net sales to any one of the Company's largest customers
that is not matched by corresponding increases in net sales to new or existing
customers could have a material adverse effect on the Company's financial
condition and results of operations and could affect its economic viability.
There can be no assurance that the Company will receive orders from any existing
customers or from new customers.
SALES AND MARKETING
SALES. Industry sources estimate that there are in excess of 5,000 direct
sales companies globally. Moreover, there is a constant turnover of such
companies as existing companies leave the market and new direct sales companies
are formed. The profiles of these companies range between well known names, such
as Amway and Avon Products to new start-up operations. In most cases, a
prospective client will be "qualified" prior to any selling activity to ensure
that the correct range of products and services are offered to meet the clients
requirements, both in terms of functionality and budget. This process will
typically be carried out on the telephone by a salesperson, with the assistance
of a technician, if necessary, to advise on operational issues and marketing
plan requirements.
The Company sells its products and services to the customer by its direct
sales force based in the United States and Europe. Due to the global nature of
the Company's clients, extensive travel is often necessary in order to negotiate
and conclude sales. On-site visits will often entail a preliminary "site-study"
to clearly identify the type of system needed for the prospect, and a technician
will accompany the salesperson if required.
It is expected that Jenkon will supply NOW! software to the home-based
direct sales personnel of the Company's corporate customers. Such sales are
expected to be made to home-based direct sales personnel in cooperation with
corporate customers. Pricing of the NOW! product will vary depending on whether
corporate customers elect to receive a percentage of the sales price as a fee.
The Company will attempt to contract with its corporate customers to include a
copy of NOW! in each kit provided to home-based direct sales personnel and
promote the package to their downline organization. The Company expects each
32
NOW! product package will be private labeled with the customer's logo and name.
The software will be personalized to each customer with a corporate "splash"
screen (welcome).
MARKETING. While traditionally pricing its products so as to target larger
companies, the Company has recently begun to target a broader spectrum of
smaller companies in the belief that, given the rate of industry growth, this
strategy may help the Company retain its position as an industry leader and to
develop profitable long-term relationships with these companies.
The Company's marketing operations include production of DIRECT SELLING
TODAY, a quarterly
Newsletter distributed to over 1,000 industry leaders and contacts; organizing
trade shows; working with consulting companies and individual consultants to
consolidate working relationships and pave the way for the sales process to
begin; and advertisements in trade publications together with other public
relations activity.
Market research is also carried out to assess the relative strengths and
weaknesses of Jenkon's products and services compared to its competition. The
Company's marketing group is responsible for identifying new opportunities
within Jenkon's existing target market and works closely with the Company's
research and development group.
COMPETITION
The software industry is highly competitive and is characterized by rapid
technological change, rapidly changing customer preferences and little or no
barriers to entry. There are several businesses, some of which may be better
capitalized than the Company, currently offering software similar in type or
scope to the Company's. The Company believes that the primary competitive
factors for the provision of its software are price, technical expertise and
quality, ease of use, variety of value-added services, reliability and security,
customer support and geographic coverage. The Company's success will depend
heavily upon its ability to provide high quality software and value-added
services. Other factors that will affect the Company's success in this market
include the Company's continued ability to attract additional experienced
marketing, sales, and management talent, and the expansion of worldwide support,
training and service capabilities.
The Company's current and prospective competitors generally consist of other
independent software providers such as Globenet and 20/21 Interactive. The
Company believes that additional competitors, which may include consumer
software or other companies, may potentially enter the direct sales market. In
addition, the Company may face potential competition from some of the larger
direct sales companies that have developed their own in-house systems that could
be adapted for sale to other direct sales companies. 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.
PROPERTIES
The Company leases approximately 17,000 square feet of space in the
Vancouver, Washington area and approximately 800 square feet of office space in
Redditch, England.
33
EMPLOYEES
As of June 30, 1998, the Company has approximately 77 employees in
Vancouver, Washington, all of which were full-time employees, and four in
Redditch, England, all of which were full-time employees. None of the employees
are represented by a labor union, and the Company considers its relations with
employees to be good.
RESEARCH AND DEVELOPMENT
Since the beginning of the fiscal year ended June 30, 1996, the Company's
research and development activities have primarily focused on the development of
its SUMMIT V, TOUCHTALK, and NOW! products. The Company's research and
development expenses for particular periods consist of all costs incurred on
projects for which technological feasibility has not yet been attained. In
accordance with Statement of Financial Accounting Standards No. 86, the Company
determines technological feasibility based upon the completion of a detailed
program design or working model, after which time all software production
expenses for a particular project are capitalized. For the years ended June 30,
1996 and 1997 and the nine month periods ended March 31, 1997 and 1998, the
product research, development and enhancement expenses were $433,061,
$1,375,452, $921,302, and $1,175,088, respectively.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secrets laws and contractual
restrictions to establish and protect its technology. Although the Company is in
the processing of registering certain trademarks, the Company does not currently
have any registered patents, copyrights or trademarks. There can be no assurance
that the steps taken by the Company will be adequate to prevent misappropriation
of its technology that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, there can be no assurance that licenses for any
intellectual property that may be required for the Company to provide services
or develop products would be available on reasonable terms, if at all.
The Company has not historically required trade secrecy and confidentiality
agreements to be executed by its employees or, in some instances, independent
software developers in order to protect its rights in its proprietary
technology. The Company is in the process of requiring employees and contractors
to execute such agreements. No assurance can be given that such measures will be
effective in protecting the Company's rights in its present or future
technology. See "Risk Factors--Intellectual Property and Proprietary Rights."
The Company has filed federal trademark registrations for the product names
"Summit V," "TouchTalk" and NOW! as well as for "Jenkon." There can be no
assurance that tradename protection can be obtained for such names. Although the
Company does not believe that its products or tradenames infringe upon the
proprietary rights of any third parties and no third parties have asserted
trademark, patent, or copyright infringement or other similar claims against the
Company, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights which could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, parties
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief which could effectively block the
Company's ability to sell product in the United States or abroad. Such a
judgment could have a material adverse effect on the Company's business,
financial condition or results of operations.
The laws of certain foreign countries where the Company distributes or
intends to distribute its products do not effectively protect technology,
trademarks or tradenames that the Company uses in its business and considers
proprietary. The Company has not undertaken to investigate such laws or to
assure that available protection is obtained.
34
LEGAL PROCEEDINGS
The Company has 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, a
New York corporation, 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. Although the Company is not a party to the China Claim or the
U.S. Claim, if Unidata, Inc. does not indemnify Redwood Technology 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 for damages suffered as a result of
claims made by Pacific Unidata, Ltd. and the Company is required to pay such
indemnification as a successor to Redwood Technology, the Company's financial
condition and results of operations could be materially adversely affected.
Moreover, in the event that a court rules that the Company's license of the
Unidata, Inc. software is invalid, the Company's ability to expand its sales
into China will 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. See "Certain Transactions."
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 recently
settled a claim for the unpaid portion of payroll taxes of Redwood Technology in
exchange for a payment by the Company of $135,000. See "Risk Factors--Risk of
Creditors Claims and Successor Liability." The Company may use a portion of the
proceeds of this Offering to settle other obligations of Redwood Technology. See
"Use of Proceeds." 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. See "Certain
Transactions" and "Risk Factors."
On April 24, 1998, Jenkon was notified of the initiation of an avoidance
action in a Chapter 7 bankruptcy proceeding in the U.S. Bankruptcy Court for the
District of Utah (Central Division). The action was brought by the bankruptcy
trustee of a former customer to recover an alleged preferential transfer of
$25,384.70 made to Jenkon within 90 days prior to the commencement of the
Chapter 7 bankruptcy proceedings. The bankruptcy trustee is seeking recovery of
the complete amount of the alleged preferential transfer plus interest and costs
of the proceeding. The Company does not believe that this action will have a
material adverse effect on the Company, its business or financial condition,
results of operations or cash flow.
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.
35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
NAME AGE POSITION
- -------------------------------------- --- ------------------------------------------------
David Edwards......................... 46 President, Chief Executive Officer and Chairman
of the Board
Jim Thompson.......................... 35 Chief Technology Officer
Steve McKeag.......................... 34 Chief Financial Officer
Robert Cavitt(1)...................... 35 Executive Vice President of Sales and Marketing
and Director
Greg Fink............................. 35 Senior Vice President of Sales
Dan Jensen............................ 45 Director
- ------------------------
(1) Not currently a director of the Company but is expected to be appointed as a
director of the Company upon completion of the Offering.
Within 90 days of the completion of the Offering, the Company intends to
identify and elect two independent directors. The Company has not yet selected
nominees to serve as independent directors.
DAVID EDWARDS is a founder of the Company and has served as the President,
Chief Executive Officer and a director of the Company since its inception and as
Chairman of the Board of Directors since November 1997. Prior to founding the
Company, Mr. Edwards served as the Chief Executive Officer of Redwood
Technology, the previous owner of certain of the Company's current assets, from
1991 through 1995.
JIM THOMPSON joined the Company in November 1996 as the director of product
development and has served as the Chief Technology Officer since April 1997.
From April 1995 to November 1996, Mr. Thompson served as Manager of Data and
Messaging Services Business Development for TMI Communications, a leader in
geostationary satellite and terrestrially integrated telephony services. From
August 1992 to April 1995, Mr. Thompson served as a senior software manager for
Orbital Sciences Corporation. Mr. Thompson received a B.S. in Computer Sciences
from the University of Ottawa.
STEVE MCKEAG joined the Company in November 1996 as Chief Financial Officer.
From September 1995 until November 1996, he worked as an investment banker for
The Boston Group, L.P. and from January 1993 to September 1995 Mr. McKeag worked
as an investment banker for Cruttenden Roth, Inc. From January 1987 to January
1993 Mr. McKeag worked as a licensed certified public accountant in California.
Mr. McKeag received a B.A. in business administration from California State
University at Fullerton and a J.D. from Loyola Law School.
ROBERT CAVITT has worked for the Company since it commenced operations in
July 1995 and has served as Executive Vice President of Sales since September
1997. From 1988 to 1995, Mr. Cavitt worked for Redwood Technology in sales and
operations. Mr. Cavitt has over 11 years of industry experience in sales and
implementation of corporate operating and information systems.
GREG FINK has worked for the Company since it commenced operations in July
1995 and has served as Senior Vice President of Sales since September 1997.
Previously, Mr. Fink worked for Redwood Technology in sales and operations for
13 years.
DAN JENSEN is a founder of the Company, has served as a director of the
Company since its inception and served as the Company's Chairman of the Board
until November 1997. Prior to founding the Company, Mr. Jensen was one of the
founders of Redwood Technology where he served as Chairman of the Board from
inception through June 1995 and as its President and Chief Executive Officer
from inception to November 1991.
36
BOARD OF DIRECTORS AND COMMITTEES
Members of the Company's Board of Directors serve until the next annual
meeting of stockholders and the election and qualification of their successors.
The business of the Company's Board of Directors is conducted through full
meetings of the Board, as well as through meetings of its committees. Within 90
days of completion of the Offering, the Company will establish an audit
committee, a majority of the members of which shall be independent directors.
The Audit Committee will make recommendations to the Board of Directors
regarding the selection of the Company's independent auditors, review the
results and scope of the audit and other services provided by the Company's
independent auditors, and reviews and evaluates the Company's audit and control
functions.
COMPENSATION OF BOARD OF DIRECTORS
Directors previously have received no cash compensation for serving on the
Board of Directors. Beginning upon completion of the Offering, the Company will
began paying fees to its non-employee directors for serving on the Board of
Directors and for their attendance at Board and committee meetings. The Company
will pay each non-employee director a fee of $1,000 per board meeting attended,
plus expenses of attending such meetings.
In addition, the Company intends to grant each independent non-employee
director an option to purchase an aggregate of 15,000 shares of Common Stock
upon appointment of such director. The exercise price of such options shall be
the fair market value of a share of Common Stock on the date of grant. Each such
option shall become exercisable as to one-third of the shares on the third
monthly anniversary of the grant date, one-third on the first yearly anniversary
of the grant date, and the remaining one-third on the second yearly anniversary
of the grant date. The options will expire on the earlier of ten years from the
date of grant or three months after the optionee ceases to be a director of the
Company.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
Chief Executive Officer and each other executive officer who received annual
compensation in excess of $100,000 for the fiscal year ended June 30, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER
COMPENSATION
----------------------- -------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS
- ------------------------------------------------- ----------- ---------- -----------
David Edwards ................................... 1997 $ 165,000(1) -0- -0-
President, Chief Executive Officer, and
Chairman
Dan Jensen ...................................... 1997 $ 165,000(1) -0- $ 2,138(3)
Director(2)
- ------------------------
(1) Perquisites and other personal benefits did not in the aggregate reach the
lesser of $50,000 or 10% of the total annual salary and bonus reported in
this table for any named executive officer.
(2) Mr. Jensen served as the Company's Chairman of the Board during the fiscal
year ended June 30, 1997 and served as an officer of the Company in such
capacity. As described in "Management--Employment and Consulting Agreements"
below, Mr. Jensen resigned as the Company's Chairman of the Board in
November 1997.
(3) Consists of premiums on a term life insurance policy paid for by the Company
of which Mr. Jensen or his designees are beneficiaries.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective on the date of this Prospectus, the Company entered into four-year
employment agreements with each of Messrs. Edwards and Cavitt and one-year
renewable employment agreements with
37
Messrs. McKeag and Thompson, which provide for annual base salaries of $200,000,
$90,000, $150,000 and $150,000, respectively, subject to a 5% cost of living
increases. Mr. Cavitt's employment agreement provides for a performance bonus
based on the volume of sales generated by Mr. Cavitt. In addition, each of
Messrs. Edwards, McKeag, Thompson and Cavitt will be entitled to discretionary
bonuses at the election of the Board of Directors as well as other benefits and
perquisites, including a minimum of four weeks annual vacation, and health,
group life and disability insurance. In the event the Company terminates the
employment of any of these executive officers without "cause" as defined in
their respective employment agreements, the Company will be required to make a
severance payment equal to one year's base salary with respect to Messrs.
Edwards, McKeag and Thompson, and $200,000 with respect to Mr. Cavitt. Each of
these employment agreements contains non-competition covenants.
In November 1997, Dan Jensen resigned as Chairman of the Board of the
Company but agreed to remain as a director of the Company. Effective July 1,
1998 Mr. Jensen and the Company entered into a Consulting and Non-Competition
Agreement pursuant to which Mr. Jensen agreed to provide certain consulting
services to the Company and agreed to certain three year covenants regarding
future competition with the Company in exchange for the following payments and
benefits: (i) $30,000 on signing, (ii) $50,000 within three business days
following completion of this Offering, (iii) $75,000 at the end of the three
year term, (iv) $12,000 per month from August 1, 1998 through January 31, 1999,
(v) $8,000 per month from February 1, 1999 through January 31, 2000, (vi) $4,000
per month from February 1, 2000 through July 31, 2001, and (vii) reimbursement
and payment of certain automobile, insurance, phone, and other expenses as well
as an agreement by Jenkon to assume certain personal guarantees of Mr. Jensen.
With respect to any covenants not to compete contained in the agreements
described above, there can be no assurance that, if challenged, a state court
would elect to enforce such provisions in full, if at all.
STOCK OPTION PLAN
In October 1996 the Company adopted the Jenkon International, Inc. Stock
Option Plan (the "Plan"). The following summary of the Plan is qualified in its
entirety by the actual Plan filed, a copy of which can be obtained from the
Company upon request. See "Additional Information."
The Plan empowers the Company to award or grant to officers, directors,
outside consultants and employees of the Company and its subsidiaries, Incentive
and Non-Qualified Stock Options ("Options") authorized by the Board of Directors
or a committee of the Board of Directors (the "Committee") formed for purposes
of administering the Plan.
ADMINISTRATION. The Plan will be administered by the Board of Directors or,
in the discretion of the Board of Directors, the Committee (either one being
referred to herein as the "Administrator"). The Plan provides that any Committee
must consist of at least two directors of the Company who are "outside
directors" as defined in Treasury Regs. Section 1.162-27(e)(3) and "non-employee
directors" as defined in Rule 16b-3(b)(3)(i) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee has the
sole authority to construe and interpret the Plan, to make rules and procedures
relating to the implementation of the Plan, to select participants, to establish
the terms and conditions of Options and to grant Options, with broad authority
to delegate its responsibilities to others, except with respect to the selection
for participation of, and the granting of Options to, persons subject to
Sections 16(a) and 16(b) of the Exchange Act.
ELIGIBILITY CONDITIONS. All employees (including officers) and directors of
the Company and its subsidiaries and outside consultants selected by the
Administrator will be eligible to receive Options under the Plan. Outside
consultants and non-employee directors are only eligible to receive
Non-Qualified Stock Options under the Plan. The selection of recipients of, and
the nature and size of, Options granted under the Plan will be solely within the
discretion of the Administrator. Except with respect to the exercisability of
Incentive Stock Options and as provided in the following paragraph, there is no
limit on the number of shares of Common Stock or type of option in respect of
which Options may be granted to or exercised by any person.
38
SHARES SUBJECT TO PLAN. The maximum number of shares of Common Stock in
respect of which Options may be granted under the Plan (the "Plan Maximum") is
1,000,000. However, options for no more than 250,000 shares may be issued to any
optionee in any calendar year. For the purpose of computing the total number of
shares of Common Stock available for Options under the Plan, the above
limitations shall be reduced by the number of shares of Common Stock subject to
issuance upon exercise or settlement of Options previously granted, determined
at the date of grant of such Options. However, if any Options previously granted
are forfeited, terminated, settled in cash or exchanged for other Options or
expire unexercised, the shares of Common Stock previously subject to such
Options shall again be available for further grants under the Plan. The shares
of Common Stock which may be issued to participants in the Plan upon exercise of
an Option may be either authorized and unissued Common Stock or issued Common
Stock reacquired by the Company. No fractional shares may be issued under the
Plan.
The maximum number of shares of Common Stock issuable upon the exercise of
Options granted under the Plan is subject to appropriate equitable adjustment in
the event of reorganization, stock split, stock dividend, combination of shares,
merger, consolidation or other recapitalization of the Company.
TRANSFERABILITY. No Option granted under the Plan, and no right or interest
therein shall be assignable or transferable by a participant except by will or
the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION. The Plan will terminate on October 6,
2006, except with respect to Options then outstanding. The Board of Directors of
the Company may amend or terminate the Plan at any time, except that the Board
of Directors may not, without approval of the stockholders of the Company, make
any amendments that would (1) increase the total number of shares available for
issuance (except as permitted by the Plan to reflect changes in capital
structure), (2) materially change the eligibility requirements, or (3)
materially increase the benefits accruing to participants under the Plan
INCENTIVE STOCK OPTIONS. Options designated as Incentive Stock Options,
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), in an amount up to the Plan Maximum may be granted under
the Plan. The number of shares of Common Stock in respect of which Incentive
Stock Options are first exercisable by any participant in the Plan during any
calendar year shall not have a fair market value (determined at the date of
grant) in excess of $100,000 (or such other limit as may be imposed by the
Code). To the extent the fair market value of the shares for which options are
designated as Incentive Stock Options that are first exercisable by any optionee
during any calendar year exceed $100,000, the excess amount shall be treated as
Non-Qualified Stock Options. Incentive Stock Options shall be exercisable for
such period or periods, not in excess of ten years after the date of grant, as
shall be determined by the Administrator.
NON-QUALIFIED STOCK OPTIONS. Non-Qualified Stock Options may be granted for
such number of shares of Common Stock and will be exercisable for such period or
periods as the Administrator shall determine.
OPTIONS EXERCISE PRICES. The exercise price of any Option granted under the
Plan shall be at least 85% of the fair market value of the Common Stock on the
date of grant. The exercise price of any Incentive Stock Options shall be at
least 100% of the fair market value on the date of grant, except that the
exercise price of any Incentive Stock Option granted to any participant in the
Plan who owns in excess of 10% of the outstanding voting stock of the Company
shall be 110% of the fair market value of the Common Stock on the date of grant.
Fair market value per share of Common Stock shall be determined as the closing
price per share on the last trading day if the Common Stock is listed on an
established stock exchange or the Nasdaq National market, or as the average of
the closing bid and asked prices per share if the Common Stock is quoted by the
Nasdaq SmallCap Market, the Nasdaq Electronic Bulletin Board or the National
Quotation Bureau pink sheets, or as the amount determined in good faith by the
Administrator if the Common Stock is neither listed for trading on an exchange
or quoted by the Nasdaq National Market, Nasdaq Small Cap Market, Nasdaq
Electronic Bulletin Board or National Quotation Bureau pink sheets.
39
EXERCISE OF OPTIONS. Each Option shall become exercisable according to the
terms specified in the option agreement governing such Option. Except as
provided below, no Option may be exercised unless the holder thereof remains in
the continuous employ or service of the Company. No Option shall be exercisable
after the earlier of ten years from the date of grant or three months after
employment or service as a director or consultant of the Company or its
subsidiary terminates (one year if such termination is due to the participant's
death or disability). Options shall be exercisable upon the payment in full of
the applicable option exercise price in cash or, if approved by the
Administrator, by instruction to a broker directing the broker to sell the
Common stock for which such Option is exercised and remit to the Company the
aggregate exercise price of the Option or, in the discretion of the
Administrator, upon such terms as the Administrator shall approve, in shares of
the Common Stock then owned or purchasable by the optionee (at the fair market
value thereof at exercise date). The Administrator also has discretion to extend
or arrange for the extension of credit to the optionee to finance the purchase
of shares on exercise.
GRANT OF OPTION. The Company has granted Options to acquire a total of
597,234 shares of Common Stock to certain employees of the Company, including
executive officers of the Company, at an exercise price equal to the fair market
value per share of the Company's Common Stock at the time of grant.
The following executive officers of the Company have received Incentive
Stock Options for the number of shares of Common Stock and exercise prices per
share set forth below: Jim Thompson--97,783 shares at $2.1732 per share; Steve
McKeag--156,454 shares at $0.0128 per share; Robert Cavitt--156,454 shares at
$2.1732 per share and 39,113 shares at $2.5567 per share; Greg Fink--78,227
shares at $2.1732 per share.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND RELATED MATTERS
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions that eliminate the directors' personal liability for monetary
damages to the fullest extent possible under Delaware Law or other applicable
law (the "Director Liability Provision"). The Director Liability Provision
eliminates the liability of directors to the Company and its stockholders for
monetary damages arising out of any violation by a director of his fiduciary
duty of due care. Under Delaware Law, however, the Director Liability Provision
does not eliminate the personal liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or any transaction from which the director derived an improper
benefit. Furthermore, pursuant to Delaware Law, the limitation on liability
afforded by the Director Liability Provision does not eliminate a director's
personal liability for breach of the director's duty of due care. Although the
directors would not be liable for monetary damages to the corporation or its
stockholders for negligent acts or omissions in exercising their duty of due
care, the directors remain subject to equitable remedies, such as actions for
injunction or rescission, although these remedies, whether as a result of
timeliness or otherwise, may not be effective in all situations. With regard to
directors who also are officers of the Company, these persons would be insulated
from liability only with respect to their conduct as directors and would not be
insulated from liability for acts or omissions in their capacity as officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Company
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the corporation, to the extent that such person
has been successful in defense of such action or proceeding, or in defense of
any claim, issue or matter raised in such litigation, (ii) may, in actions other
than actions by or in the right of the corporation (such as derivative actions),
be indemnified for expenses actually and reasonably incurred, judgments, fines
and amounts paid in settlement of such litigation, even if he is not successful
on the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not
40
opposed to the best interests of the corporation (and in a criminal proceeding,
if he did not have reasonable cause to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses actually and reasonably
incurred (but not judgments or settlements) of any action by the corporation or
of a derivative action (such as a suit by a stockholder alleging a breach by the
director or officer of a duty owed to the corporation), even if he is not
successful, provided that he acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no indemnification is permitted without court approval if the
director has been adjudged liable to the corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Company is required to indemnify its officers,
directors, employees and agents to the fullest extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that the person acted in good faith
and in a manner he or she believed to be in the best interests of the Company
and, in the case of any criminal action or proceeding, the person had no reason
to believe his or her conduct was unlawful.
In furtherance of the objectives of the Indemnification Provision, the
Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Certificate and Bylaws (the "Indemnification Agreements"). The Company
believes that the Indemnification Agreements are necessary to attract and retain
qualified directors and executive officers. Pursuant to the Indemnification
Agreements, an indemnitee will be entitled to indemnification to the extent
permitted by Section 145 or other applicable law. In addition, to the maximum
extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Company, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company and had no reasonable cause to
believe his or her conduct was unlawful. If the Proceeding is brought by or in
the right of the Company and applicable law so provides, the Indemnification
Agreements provide that no indemnification against expenses shall be made in
respect of any claim, issue or matter in the Proceeding as to which the
indemnitee shall have been adjudged liable to the Company.
The inclusion of provisions limiting liability of the Company's officers and
directors may have the effect of reducing the likelihood of derivative
litigation against the officers and directors and may discourage or deter
stockholders or management from bringing a lawsuit against the officers and
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of the
Offering.
41
CERTAIN TRANSACTIONS
1998 PRIVATE PLACEMENT
In June 1998, the Company completed a private placement (the "1998 Private
Placement") of $1,000,000 of unsecured promissory notes (the "1998 Notes") and
warrants (the "1998 Warrants") to purchase an aggregate of 117,321 shares at an
exercise price of $.6392 per share. Meridian Capital Group, Inc. and Trautman
Kramer & Company Incorporated acted as placement agents with respect to the 1998
Private Placement and, as a result, received (i) commissions equal to 10% of the
gross proceeds sold by them, plus (ii) a non-accountable expense allowance equal
to 2% of the gross proceeds sold by them.
The 1998 Notes bear interest at an annual rate of 7% and are due and payable
in full on the earlier to occur of (i) three business days following the funding
date of an initial public offering by the Company, or (ii) May 31, 1999. Accrued
interest is payable in arrears on the last day of each calendar quarter.
The 1998 Warrants are not exercisable until one year from the date of grant
and have a term of five years from the date of grant. Such warrants have a
provision for cashless exercise pursuant to which the holder will receive upon
exercise the number of shares of Common Stock otherwise issuable upon such
exercise, less the number of shares of Common Stock having an aggregate current
market price on the date of exercise equal to the exercise price per share
multiplied by the number of shares of Common Stock for which such warrants are
being exercised.
1996 PRIVATE PLACEMENT
In September 1996, the Company completed a private placement of 1,500,000
shares of its Series A Preferred Stock which resulted in gross proceeds to the
Company of $3 million and net proceeds of approximately $2.3 million (the "1996
Private Placement"). Approximately $400,000 of the proceeds of the 1996 Private
Placement were used to redeem a total of 156,454 shares of Common Stock held by
David Edwards and Dan Jensen at a price of $2.17 per share.
In connection with the 1996 Private Placement, The Boston Group, L.P.
("TBG") received warrants to purchase shares of Series A Preferred Stock (the
"1996 Warrants") which, upon consummation of the Offering, will convert into
warrants to purchase an aggregate of 161,760 shares of Common Stock at an
exercise price of $2.6845 per share. The 1996 Warrants have a provision for
cashless exercise pursuant to which the holder will receive upon exercise the
number of shares of Common Stock otherwise issuable upon such exercise, less the
number of shares of Common Stock having an aggregate current market price on the
date of exercise equal to the exercise price per share multiplied by the number
of shares of Common Stock for which the 1996 Warrants are being exercised.
Subsequent to the issuance of the 1996 Warrants, TBG transferred 1996
Warrants to certain of its current and former affiliates, including transfers of
warrants to purchase an aggregate of 40,439 shares of Common Stock to Anthony
Soich and Steve McKeag, each of whom were employed by TBG at the time of the
1996 Private Placement. As a result of such transfers, Mr Soich currently holds
1996 Warrants to purchase 23,849 shares of Common Stock, Mr. McKeag, the
Company's Chief Financial Officer, currently holds 1996 Warrants to purchase
16,590 shares of Common Stock, and TBG holds 1996 Warrants to purchase 121,321
shares of Common Stock.
TRANSACTION WITH REDWOOD TECHNOLOGY
Konson Gee, one of the founding stockholders of Redwood Technology, left
Redwood Technology in 1994. At such time Mr. Gee held promissory notes
evidencing outstanding loans to Redwood Technology that aggregated approximately
$47,000 and held a note of the Company in the original principal amount of
$362,914 incurred in connection with the redemption of Mr. Gee's shares in
Redwood Technology. Mr. Gee demanded payment in full of amounts due and payable
under one of these notes representing loans to Redwood Technology. In January
1995, Mr. Gee notified Redwood Technology of his foreclosure.
42
The collateral that had been granted to Mr. Gee as security for such loans
included substantially all of the assets of Redwood Technology. Although Mr. Gee
had rights to foreclose against substantially all of the assets of Redwood
Technology, including software programs, Mr. Gee only foreclosed on the fixed
assets and permitted Redwood Technology to retain all other assets, and to
continue to supply product to new and existing customers, generally operate, and
produce revenue (which was applied by Redwood Technology to outstanding debts
and operating expenses) through June 30, 1995. Mr. Gee acquired the fixed assets
from Redwood Technology by means of Redwood Technology voluntarily assembling
and surrendering collateral to Mr. Gee in satisfaction of the $47,000 note.
Following Mr. Gee's departure, Dan Jensen and David Edwards formed Jenkon
International, Inc., a Washington corporation, whose wholly-owned subsidiary,
Summit V, Inc. purchased from Mr. Gee all of the fixed assets that had belonged
to Redwood Technology for approximately $47,000. The Company (through Summit V,
Inc.) licensed from Redwood Technology, on a perpetual basis, including an
exclusive seven-year period, all of its software programs and rights therein,
including the SUMMIT V software, and Redwood Technology granted the Company the
right to purchase such software. The Company exercised its purchase rights in
July 1998.
Mr. Gee had personally guaranteed $320,000 of Redwood Technology's debts and
was individually liable as an officer for $280,000 of withholdings from payroll
that were required to be placed in Redwood Technology's payroll tax trust
account. Pursuant to the terms of the license of the SUMMIT V software, the
Company agreed to assume approximately $1.4 million of liabilities of Redwood
Technology as payment of the royalties due under such license. Such liabilities
included loan obligations to Daniel Jensen in the amount of $18,800, and
obligations to Konson Gee in the amount of $362,914 which were incurred in
connection with the redemption by Redwood Technology of Mr. Gee's shares in
Redwood Technology. In addition, a significant portion of the obligations
assumed by the Company were personally guaranteed by Daniel Jensen and/or Mr.
Gee.
In addition, Mr. Gee was granted an option by Jenkon International, Inc., a
Washington corporation, to acquire 22,351 shares of Common Stock of the Company
for an aggregate price of $1,000, and exercised such option in early 1996.
Redwood Technology's former assets comprised substantially all of the
initial operating assets of the Company. Many or all of the initial management
personnel of the Company had been the management personnel of Redwood
Technology. Because Redwood Technology may be deemed to have been rendered
insolvent by the sale and license of certain assets to Summit V, Inc., the
Company is or may be subject to claims by unsatisfied creditors of Redwood
Technology alleging successor liability or other similar claims. The Company
believes that such claims could total as much as $200,000 plus interest and
charges thereon which continue to accrue. In exchange for payment of $135,000,
the Company recently settled certain claims arising from tax liens recorded
against the assets of Redwood Technology with respect to the unpaid employer
portion of payroll taxes. The Company intends to use a portion of the proceeds
of the Offering to settle certain other obligations of Redwood Technology.
However, there can be no assurance against claims being made that might result
in the Company's rights to such assets being challenged.
Daniel O. Jensen was a significant stockholder, director and executive
officer of Redwood Technology. David A. Edwards was an executive officer of
Redwood Technology. Payment to or for the benefit of Redwood Technology may also
further the individual interests of certain members of the Company's present
management by limiting or eliminating their liability, or claims asserting their
liability, arising from their having served Redwood Technology, in such
capacities or otherwise. See "Risk Factors--Risk of Creditor Claims and
Successor Liabilities."
OTHER TRANSACTIONS
In the ordinary course of the Company's business, the Company has had
purchase arrangements with Jentronix, an entity wholly-owned by a brother of Dan
Jensen, a principal stockholder, director and former
43
officer of the Company. Purchases from Jentronix amounted to $7,322 and $46,799
for the fiscal years ended June 30, 1997 and 1996, respectively. Purchases from
Jentronix amounted to $8,138 and zero for the nine month periods ended March 31,
1997 and 1998, respectively. In addition, in July 1998, the Company agreed to
acquire two software products developed by Jenetec LLC, an affiliate of Dan
Jensen, for an aggregate purchase price of $50,000.
See "Management--Employment and Consulting Agreements" for a discussion of
the terms of a Consulting and Non-Competition Agreement between the Company and
Dan Jensen, a director and former officer of the Company.
The Company has entered into an agreement with Anthony Soich pursuant to
which the Company will pay Mr. Soich a fee of $110,000 upon completion of the
Offering for advisory and consulting services rendered to the Company in
connection with the Offering and advice regarding negotiations with and the
selection of underwriters for the Offering.
The Company intends that future transactions between the Company and its
officers, directors and 5% (or greater) stockholders will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested directors or by the Company's
stockholders in accordance with Delaware law.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998, and as adjusted to
reflect the sale of 1,210,000 shares of Common Stock offered by the Company and
the sale of 290,000 shares of Common Stock by the Selling Stockholders offered
by this Prospectus, for (i) each of the Company's directors (and director
nominees), (ii) by each of the executive officers identified in the Summary
Compensation Table or who have granted the Underwriters an option to acquire
shares of Common Stock in order to cover over-allotments, if any, (iii) all
executive officers and directors of the Company as a group and (iv) each person
who beneficially owns 5% or more of the outstanding shares of Common Stock. The
Company believes that the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
SHARES BENEFICIALLY OWNED(1)
----------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES OWNED PERCENT OWNED SHARES TO BE PERCENT OWNED
PRIOR TO PRIOR TO SOLD IN AFTER THE
NAME AND ADDRESS(2) OFFERING(1) OFFERING(3) OFFERING OFFERING(3)
- ----------------------------------------------------- ------------- --------------- --------------- ---------------
David Edwards........................................ 815,796 26.80 -- (1) 19.18(1)
Dan Jensen........................................... 815,796 26.80 -- 19.18
Robert Cavitt........................................ 195,567(4) 6.04 -- 4.40
Steve McKeag......................................... 173,044(5) 5.38 -- (1) 3.91(1)
All directors and executive officers as a group
(6 persons)........................................ 2,176,213(6) 60.65 -- (1) 45.35(1)
- ------------------------------
(1) Number of shares is exclusive of Common Stock issuable upon exercise of the
Representatives' Warrants to be issued in connection with the Offering.
Assumes no exercise of the Underwriters' over-allotment option. If such
option is exercised in full, the Company will sell an additional 55,000
shares of Common Stock and David Edwards and Steve McKeag will sell 150,000
shares of Common Stock and 20,000 shares of Common Stock, respectively. In
such event, upon the closing of the Offering (i) David Edwards will
beneficially own 665,796 shares, or 15.45% of the Company's outstanding
Common Stock, (ii) Steve McKeag will beneficially own 153,044 shares, or
3.41% of the Company's outstanding Common Stock, and (iii) all directors and
executive officers as a group will beneficially own 2,006,213 shares, or
41.33% of the Company's outstanding Common Stock.
(2) Unless otherwise indicated, the business address of each of the stockholders
named in this table is c/o the Company at 7600 N.E. 41st Street, Suite 350,
Vancouver, Washington 98662.
(3) Percentages based on (i) 3,043,515 shares of Common Stock outstanding prior
to the Offering (which total includes shares of Common Stock issuable upon
conversion of the Series A Preferred Stock into Common Stock) and (ii)
4,253,515 shares of Common Stock outstanding upon completion of the
Offering. Shares of Common Stock which the person has the right to acquire
within 60 days of the date of this Prospectus are deemed outstanding in
calculating the percentage of ownership of the persons, but not deemed
outstanding as to any other person.
(4) Consists of shares issuable upon currently exercisable options to purchase
an aggregate of 195,567 shares of Common Stock.
(5) Consists of (i) shares issuable upon exercise of an option to purchase up to
156,454 shares of Common Stock which option may be exercised in full prior
to or simultaneously with the completion of the Offering, and (ii) 16,590
shares of Common Stock that are issuable upon exercise of an outstanding
warrant.
(6) Includes currently exercisable options and warrants to acquire an aggregate
of 544,621 shares of Common Stock.
SELLING STOCKHOLDERS
Of the shares of Common Stock offered hereby, 1,210,000 shares are being
sold by the Company and 290,000 shares are being sold by the Selling
Stockholders, all of which are being underwritten by the Underwriters. The
Company will not receive any of the proceeds from the sale of the Selling
Stockholders' shares. In addition, David Edwards, an executive officer, director
and principal stockholder of the Company, and Steve McKeag, an executive officer
of the Company (collectively, the "Over-Allotment Stockholders"), have granted
to the Underwriters a 45-day option to purchase an aggregate of 170,000
additional shares of Common Stock on the same terms as the shares sold by the
Company in the Offering,
45
solely to cover over-allotments, if any. The Company has granted to the
Underwriters a 45-day option to purchase up to an aggregate of 55,000 additional
shares of Common Stock on the same terms described above, solely to cover
over-allotments, if any. The over-allotment option granted by the Over-Allotment
Stockholders, if exercised, will be exercised on a pro rata basis and must be
exercised in full before the over-allotment option granted by the Company may be
exercised. See "Underwriting."
In addition to the foregoing, an aggregate of 954,296 shares of Common Stock
are being registered in this offering for the account of Selling Stockholders
which are not being underwritten by the Underwriters (the "Lock-up Shares").
These Lock-up Shares may be sold by the Selling Stockholders or their respective
transferees commencing on the date of this Prospectus. However, all of the
Lock-up Shares are subject to a lock-up agreement under which the shares may not
be sold or transferred without the prior written consent of the Representatives.
See "Shares Eligible for Future Sale" and "Underwriting." Any sale of such Lock-
up Shares by the Selling Stockholders or their respective transferees may
depress the price of the Common Stock in any market that may develop.
Upon expiration or termination of any applicable lock-up periods, the sale
of the Lock-up Shares may be effected by the Selling Stockholders from time to
time in transactions (which may include block transactions by or for the account
of the Selling Stockholders) in the over-the-counter market or in negotiated
transactions, through a combination of such methods of sale, or otherwise. Sales
may be made at fixed prices which may be changed, at market prices prevailing at
the time of sale, or at negotiated prices.
If any Selling Stockholder sells, his, her or its Lock-up Shares pursuant to
this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Stockholder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Lock-up Shares, a post-
effective amendment to the Registration Statement of which this Prospectus is a
part may need to be filed and declared effective before such Selling Stockholder
could make such sale, pay such compensation, or make such a distribution. The
Company is under no obligation to file a post-effective amendment to the
Registration Statement of which this Prospectus is a part under such
circumstances.
The Selling Stockholders may effect transactions in their Lock-up Shares by
selling such securities directly to purchasers, through broker-dealers acting as
agents for the Selling Stockholders, or to broker-dealers who may purchase the
Lock-up Shares as principals and thereafter sell such securities from time to
time in the over-the-counter market, in negotiated transactions, or otherwise.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions, or commissions from the Selling Stockholders and/or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or both.
The Selling Stockholders and broker-dealers, if any, acting in connection
with such sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit on the resale of such securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
The following table sets forth certain information with respect to the
Selling Stockholders for whom the Company is registering shares of Common Stock
for resale to the public. The Company will not receive any of the proceeds from
the sales of such shares of Common Stock. Each of the Selling Stockholders was a
purchaser of Series A Preferred Stock in connection with the 1996 Private
Placement and none of the Selling Stockholders listed below has had a material
relationship with the Company or its predecessors or affiliates in the last
three fiscal years. Other than the 290,000 Selling Stockholder shares described
above,
46
none of the Selling Stockholder shares are being underwritten by the
Underwriters in connection with the Offering.
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES TO BE SHARES OWNED
PRIOR TO SHARES SOLD IN AFTER THE
NAME OF SELLING STOCKHOLDER OFFERING(1) REGISTERED(2) OFFERING OFFERING(3)
- ------------------------------------------------------ ------------- ------------- ------------- ---------------
Robert and Antoinette Ahr, JTWROS..................... 20,738 20,738 5,000 15,738
Stanley S. Arkin...................................... 20,738 20,738 5,000 15,738
The Jonathan Stanton Co., Inc......................... 82,954 82,954 20,000 62,954
Charles R. Buckridge, Trustee of the
Charles R. Buckridge Revocable Trust................ 41,477 41,477 10,000 31,477
Mulkey Limited Partnership............................ 20,738 20,738 5,000 15,738
Robert and Thelma Gault, JTWROS....................... 41,477 41,477 10,000 31,477
Larry R. Gordon....................................... 82,954 82,954 20,000 62,954
Edward W. Jones....................................... 20,738 20,738 5,000 15,738
Gabriel Kaplan........................................ 82,954 82,954 20,000 62,954
Joseph Esformes....................................... 20,738 20,738 5,000 15,738
Hazen Peter Kelley and Valerie Kelley as JTWROS....... 20,738 20,738 5,000 15,738
David B. Coward and Linda J. Coward, Trustees of the
Coward Family Trust................................. 20,738 20,738 5,000 15,738
Leonard Makowka....................................... 41,477 41,477 10,000 31,477
Steve Natale.......................................... 41,477 41,477 10,000 31,477
Isaac Starkman........................................ 20,738 20,738 5,000 15,738
Harvey Bibicoff....................................... 41,477 41,477 10,000 31,477
Lester C. Aroh........................................ 41,477 41,477 10,000 31,477
Laura M. Durso........................................ 20,738 20,738 5,000 15,738
Rudiger Dahle......................................... 41,477 41,477 -0- 41,477
Scott Barsotti, Trustee of the Scott Barsotti Family
Trust U/A dated December 1, 1995.................... 20,738 20,738 5,000 15,738
Triventures........................................... 20,738 20,738 5,000 15,738
Gabriel Kaplan, Plan Administrator,
City National Bank C/F Rotunda Productions, Inc.
MPPP................................................ 41,477 41,477 10,000 31,477
Fred Martell and Barbara Martell JTWROS............... 20,738 20,738 5,000 15,738
Robert L. La Clair.................................... 20,738 20,738 5,000 15,738
Marvin H. Bluman...................................... 20,738 20,738 5,000 15,738
Richard E. Eichhorn................................... 20,738 20,738 5,000 15,738
Ranjan V. Dhaduk...................................... 20,738 20,738 5,000 15,738
Robert Burkhardt...................................... 10,369 10,369 2,500 7,869
47
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OWNED NUMBER OF SHARES TO BE SHARES OWNED
PRIOR TO SHARES SOLD IN AFTER THE
NAME OF SELLING STOCKHOLDER OFFERING(1) REGISTERED(2) OFFERING OFFERING(3)
- ------------------------------------------------------ ------------- ------------- ------------- ---------------
Peter Jessel Levay Lawrence........................... 51,846 51,846 12,500 39,346
Linda Wallace Pate.................................... 20,738 20,738 5,000 15,738
Patrick J. Riley...................................... 20,738 20,738 5,000 15,738
Vidal and Rhonda Sassoon, as Community Property....... 41,477 41,477 10,000 31,477
Leslie D. Jones....................................... 20,738 20,738 5,000 15,738
Michael Kesselbrenner................................. 10,369 10,369 2,500 7,869
Jason E. Starkman..................................... 20,738 20,738 5,000 15,738
Richard Houlihan...................................... 20,738 20,738 5,000 15,738
Jeffrey C. Brenner.................................... 20,738 20,738 5,000 15,738
Ronald A. Litz........................................ 20,738 20,738 5,000 15,738
Chelsea Associates.................................... 10,369 10,369 2,500 7,869
Robert P. Bain........................................ 20,738 20,738 5,000 15,738
Vitaloon, Inc......................................... 20,738 20,738 5,000 15,738
Barbara Goldstein..................................... 20,738 20,738 5,000 15,738
- ------------------------------
(1) The listed shares of Common Stock are issuable upon the automatic conversion
of 1,500,000 shares of Series A Preferred Stock into an aggregate of
1,244,296 shares of Common Stock simultaneously with the closing of the
Offering.
(2) Investors in the Company's 1996 Private Placement of Series A Preferred
Stock were granted piggy-back registration rights in connection with an
initial public offering by the Company. However, other than the 290,000
Selling Stockholder shares being sold in the Offering, none of the listed
shares may be sold, transferred or assigned during the 12-month period
following the effective date of the registration statement of which this
Prospectus is a part without the prior written consent of the
Representatives.
(3) Shares may be resold by the Selling Stockholders upon expiration of 12
months from the effective date of the registration statement of which this
Prospectus is a part. The Representatives may, in their discretion, release
some or all of the shares from this 12-month lock-up period.
Each of the Selling Stockholders has agreed not to sell, transfer, assign or
otherwise hypothecate any of the shares of Common Stock owned by them, other
than the 290,000 Selling Stockholder shares being underwritten in the Offering,
for a period of 12 months following the effective date of the registration
statement of which this Prospectus is a part unless such sale has been consented
to in writing by the Representatives. The Company has been informed by the
Representatives that neither of them has any present intention to waive or
shorten such lock-ups.
48
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value, 1,725,000 of which have been designated Series A Preferred Stock.
As of May 28, 1998, there were 1,799,219 shares of Common Stock outstanding
held of record by eight stockholders and 1,500,000 shares of Series A Preferred
Stock outstanding and held of record by 42 stockholders. Such shares of Series A
Preferred Stock were originally convertible into an aggregate of 1,500,000
shares of Common Stock. However, due to the application of the anti-dilution and
other adjustment provisions of the Series A Preferred Stock, the number of
shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock has been decreased from 1,500,000 shares to 1,244,296
shares of Common Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be applicable
to the holders of outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, and subject to the prior distribution
rights of the holders of outstanding shares of Preferred Stock, if any, the
holders of shares of Common Stock shall be entitled to receive pro rata all of
the remaining assets of the Company available for distribution to its
stockholders. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and shares of Common Stock to be issued pursuant to the
Offering shall be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the State of Delaware, but without further action by the
Company's stockholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the designations, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the stockholders. The
Board of Directors may authorize and issue Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Shares.
Simultaneously with the consummation of the Offering, all 1,500,000 shares
of the Company's outstanding Series A Preferred Stock will be converted into
1,244,296 shares of Common Stock and no shares of Preferred Stock of the Company
remain outstanding.
WARRANTS
See "Certain Transactions--1998 Private Placement" for a description of the
1998 Warrants.
See "Certain Transactions--1996 Private Placement" for a description of the
1996 Warrants.
ANTI-TAKEOVER PROVISIONS
The Company may become subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the
49
date of the transaction in which the person became an interested stockholder,
unless either (i) prior to the date at which the person becomes an interested
stockholder, the Board of Directors approves such transaction or business
combination, (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of such
transaction, or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent). A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to such
interested stockholder. For purposes of Section 203, "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.
TRANSFER AGENT
U.S. Stock Transfer & Trust is the transfer agent and registrar for the
shares of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 4,253,000 shares of Common Stock. The 1,500,000 shares of Common
Stock offered hereby will be freely tradeable without restriction or further
registration under the Securities Act by persons other than "affiliates." The
remaining 2,753,515 outstanding shares of Common Stock will be "restricted
securities" (the "Restricted Shares") pursuant to Rule 144 promulgated under the
Securities Act. Of these Restricted Shares, 944,296 shares have been registered
on the account of Selling Stockholders and may be sold without restriction or
further registration upon termination of any applicable lock-up arrangements
described below. Upon termination of such lock-up agreements, all of the
remaining Restricted Shares subject to lock-up agreements will become eligible
for sale in the public market pursuant to Rule 144. In general, under Rule 144,
a person (or persons whose shares are aggregated) holding restricted securities
who has satisfied a one-year holding period may, commencing 90 days after the
date hereof under certain circumstances, sell within any three-month period that
number of shares which does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly reported trading volume during the
four calendar weeks prior to such sale. Rule 144 also permits, under certain
circumstances, the sale of shares without any quantity limitation by a person
who has satisfied a two-year holding period and who is not, and has not been for
the preceding three months, an affiliate of the Company. Future sales under Rule
144 or by the holders of shares registered on the account of the Selling
Stockholders may have an adverse effect on the market price of the shares of
Common Stock should a public market develop for such shares.
With the exception of the 290,000 shares of Common Stock of the Selling
Stockholders underwritten in the Offering, and 65,875 shares owned by
non-affiliated stockholders of the Company, each officer, director and
stockholder of the Company has agreed not to directly or indirectly offer, offer
to sell, sell, grant an option to purchase or sell, transfer, assign, pledge,
hypothecate or otherwise encumber any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock (other than
shares acquired in the public market) for a period of 12 months from the
effective date of the registration statement of which this Prospectus is a part
without the prior written consent of the Representatives. The Representatives
may, in their sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
50
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Meridian
Capital Group, Inc., Trautman, Kramer & Company Incorporated, and W.J. Nolan &
Company Inc. (collectively, the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the respective number of shares of
Common Stock indicated below opposite their respective names at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the several Underwriters thereunder are subject to certain
conditions and that the Underwriters are committed to purchase all of such
shares (other than the Common Stock covered by the over-allotment option as
described below) of Common Stock if any are purchased.
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
Meridian Capital Group, Inc................................................
Trautman, Kramer & Company Incorporated....................................
W.J. Nolan & Company Inc...................................................
Total.............................................................. 1,500,000
-----------------
-----------------
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus and to certain securities dealers at such
price less a concession of not more than $ per share and that the Underwriters
and such dealers may reallow to other dealers, including the Underwriters, a
discount not in excess of $ per share. After completion of the initial public
offering, the public offering price, concessions and discounts may be changed by
the Representatives. No change in such terms shall change the amount of proceeds
to be received by the Company as set forth on the cover page of this Prospectus.
David Edwards and Steve McKeag (collectively, the "Over-Allotment
Stockholders") and the Company have granted the Underwriters an option (the
"Over-Allotment Option"), exercisable in the discretion of the Representatives
for a period of 45-days after the date of this Prospectus, to purchase an
aggregate of up to an additional 170,000 shares and 55,000 shares, respectively,
at the public offering price set forth on the cover page of this Prospectus. Of
the over-allotment shares owned by the Over-Allotment Stockholders, Mr. Edwards
owns 150,000 shares and Mr. McKeag owns the remaining 20,000 shares. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase first, pro rata from the Over-Allotment
Stockholders, and then from the Company, an aggregate percentage of such
additional shares approximately equal to the percentage of shares it was
obligated to purchase from the Company and the Selling Stockholders pursuant to
the Underwriting Agreement.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, including any proceeds
from the sale of shares subject to the Underwriters' over-allotment option if
exercised. The Company has paid $15,000 to be applied to the non-accountable
expense allowance. The Representatives' expenses in excess of the
non-accountable expense allowance, including their legal expenses, will be borne
by the Representatives. To the extent that the expenses of the Representatives
are less than the non-accountable expense allowance, the excess may be deemed to
be compensation to the Representatives.
The Company has agreed to issue to the Representatives warrants (the
"Representatives' Warrants") to purchase an aggregate of up to 150,000 shares of
Common Stock, at an exercise price per share equal to 165% of the initial public
offering price per share. The Representatives' Warrants are exercisable for a
51
period of four years, beginning one year from the effective date of the
registration statement of which this Prospectus is a part and will not be
transferrable for a period of one year except to certain officers of the
Representatives and members of the selling group and their officers, and
partners. In addition, the Company has granted certain rights to the holders of
the Representatives' Warrants to register under the Securities Act, the Common
Stock underlying the Representatives' Warrants.
The Representatives have informed the Company that the Underwriters
anticipate selling up to 5% of the shares offered hereby to accounts over which
they exercise discretionary authority.
See "Certain Transactions" for a description of the 1998 Private Placement
in which Trautman Kramer & Company Incorporated and Meridian Capital Group, Inc.
acted as placement agents. See also "Certain Transactions" for a description of
certain compensation payable to Anthony Soich for services rendered in
connection with the Offering.
Meridian Capital Group, Inc. was registered as a broker/dealer and became a
member of the National Association of Securities Dealers, Inc. in October 1994.
Meridian Capital Group, Inc. has previously participated in three public
offerings as a managing underwriter each of which was completed between
September 1995 and November 1996. Trautman, Kramer & Company Incorporated was
registered as a broker/dealer and became a member of the National Association of
Securities Dealers, Inc. in 1993. Trautman, Kramer & Company Incorporated has
participated as a co-manager in one public offering which was completed in 1997.
W.J. Nolan & Company Inc. was registered as a broker-dealer and became a member
of the National Association of Securities Dealers, Inc. in 1985. W.J. Nolan &
Company Inc. has not participated as a co-manager in any public offering. See
"Risk Factors--Limited Experience of Representatives."
All the Company's officers and directors and substantially all of the other
stockholders, who in the aggregate hold approximately 97.8% of the shares of the
Common Stock of the Company outstanding immediately prior to the completion of
the Offering, have agreed not to sell any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock (other than
shares underwritten in the Offering or acquired in the public market) for 12
months after the date of this Prospectus (other than shares sold in the public
market) without the prior written consent of the Representatives.
The Underwriting Agreement provides that the Company and the Selling
Stockholders (and the Over-Allotment Stockholders with respect to the
Over-Allotment Option) will indemnify the Underwriters and their controlling
persons against certain liabilities under the Securities Act or will contribute
to payments the Underwriters and their controlling persons may be required to
make in respect thereof. The Company, the Selling Stockholders and the
Over-Allotment Stockholders have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
Prior to the Offering, there has been no trading market for the Common
Stock. Accordingly, the initial public offering price has been determined among
the Company and the Representatives. Among the factors considered in determining
the initial public offering price were the Company's results of operations,
current financial condition and products, the markets addressed by the Company's
products, the Company's future prospects, the experience of its management, the
general condition of the equity securities market and the demand for similar
securities of companies considered comparable to the Company.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Company and the Securities and Exchange Commission, Washington, D.C. See
"Additional Information."
52
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Jeffer, Mangels, Butler & Marmaro LLP, Los
Angeles, California. Certain legal matters will be passed upon for the
Underwriters by Troy & Gould Professional Corporation, Los Angeles, California.
EXPERTS
The consolidated balance sheets of the Company as of June 30, 1996 and June
30, 1997, and the statements of operations, stockholders' equity (deficit) and
cash flows for each of the two years in the period ended June 30, 1997, included
in this Prospectus and Registration Statement have been audited by BDO Seidman,
LLP, independent certified public accountants, as set forth on their report
thereon given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a registration statement under the Securities
Act with respect to the Common Stock being offered hereby and the shares
registered on behalf of the holders of Converted Shares and certain other
investors in the Company. This Prospectus omits certain information contained in
said registration statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to such registration statement, including the exhibits
and schedules thereto. Statements contained herein concerning the contents of
any contract or any other document are not necessarily complete, and in each
instance, reference is made to such contract or other document filed with the
Commission as an exhibit to the registration statement, or otherwise, each such
statement being qualified in all respects by such reference. The registration
statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and at the New York Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
registration statement may be accessed at the Commission's site on the World
Wide Web located at http://www.sec.gov.
53
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and as of March 31, 1998
(Unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1996 and 1997 and
for the nine month periods ended March 31, 1997 and 1998 (Unaudited)................ F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 30,
1996 and 1997 and for the nine month period ended March 31, 1998 (Unaudited)........ F-6
Consolidated Statements of Cash Flows for the years ended June 30, 1996 and 1997 and
for the Nine Month Periods ended March 31, 1997 and 1998 (Unaudited)................ F-7
Notes to Consolidated Financial Statements............................................ F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Jenkon International Inc. and Subsidiaries
Vancouver, Washington
We have audited the accompanying consolidated balance sheets of Jenkon
International, Inc. and Subsidiaries as of June 30, 1996 and 1997, and the
related consolidated statements of operations, statements of stockholders'
deficit and cash flows for the years ended June 30, 1996 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Jenkon International, Inc. and Subsidiaries as of June 30, 1996 and 1997, and
the results of its consolidated operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, CA
October 22, 1997, except for the reverse
stock split described in Note 13 as to
which the date is June 8, 1998.
F-2
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3)..................... $ 124,504 $ 132,736 $ 83,486
Restricted cash (Note 1)............................... -- 300,000 200,000
Trade receivables, net of allowance for doubtful
accounts of $176,500, $200,000 and $97,600........... 724,259 747,509 1,180,753
Prepaid and other assets............................... 132,153 83,521 145,673
Refundable income taxes................................ -- 155,653 24,308
--------- --------- ---------
Total current assets..................................... 980,916 1,419,419 1,634,220
PROPERTY AND EQUIPMENT, net (Notes 2 and 3).............. 222,963 1,017,056 897,016
CAPITALIZED SOFTWARE COSTS, net of accumulated
amortization of $215,777, $329,024 and $413,967........ 452,987 339,740 254,797
OTHER ASSETS............................................. 57,355 63,156 63,166
--------- --------- ---------
Total assets............................................. $1,714,221 $2,839,371 $2,849,199
--------- --------- ---------
--------- --------- ---------
F-3
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable....................................... $1,190,953 $ 692,299 $ 466,460
Accrued wages and related taxes........................ 208,450 -- --
Accrued vacation....................................... 83,683 116,172 116,172
Customer deposits...................................... 412,954 920,925 789,075
Other accrued liabilities.............................. 224,678 598,018 738,900
Note payable--current portion (Note 3)................. 77,220 338,512 416,365
--------- --------- ---------
Total current liabilities................................ 2,197,938 2,665,926 2,526,972
Note payable, net of current portion (Note 3)............ 177,920 442,584 180,261
--------- --------- ---------
Total liabilities........................................ 2,375,858 3,108,510 2,707,233
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8, 11 and 14)
REDEEMABLE CONVERTIBLE PREFERRED STOCK, $0.001 par value;
5,000,000 shares authorized; Series A, 1,500,000 shares
issued and outstanding................................. -- 2,310,174 2,310,174
STOCKHOLDERS' DEFICIT (Note 5)
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,955,673 shares issued 1,799,219
outstanding.......................................... 1,956 1,956 1,956
Additional paid-in capital (Note 5).................... 6,794 161,683 161,683
Stock subscriptions receivable (Note 6)................ (8,500) (8,500) (8,500)
Foreign currency translation adjustment................ 3,288 (28,092) (28,537)
Accumulated deficit.................................... (665,175) (2,366,360) (1,954,810)
Treasury stock, at cost, 156,454 shares................ -- (340,000) (340,000)
--------- --------- ---------
Total stockholders' deficit.............................. (661,637) (2,579,313) (2,168,208)
--------- --------- ---------
Total liabilities and stockholders' deficit.............. $1,714,221 $2,839,371 $2,849,199
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-4
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------- -----------------------
1996 1997 1997 1998
---------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
NET SALES (Note 9)
Software license fees.............................. $1,685,208 $2,761,995 $2,016,493 $3,090,640
Equipment, software and supplies sales............. 1,571,516 1,029,314 814,525 638,783
Support and operations revenue..................... 3,642,509 4,688,763 3,413,679 3,318,211
---------- ---------- ---------- -----------
Total net sales...................................... 6,899,233 8,480,072 6,244,697 7,047,634
---------- ---------- ---------- -----------
COST OF GOODS SOLD
Cost of software license fees...................... 163,233 292,831 192,754 195,720
Cost of equipment, software and supplies sold (Note
10).............................................. 1,025,934 781,562 682,934 372,830
Cost of support and operations..................... 2,148,131 3,156,312 2,529,041 1,816,168
---------- ---------- ---------- -----------
Total cost of goods sold............................. 3,337,298 4,230,705 3,404,729 2,384,718
---------- ---------- ---------- -----------
GROSS PROFIT......................................... 3,561,935 4,249,367 2,839,968 4,662,916
OPERATING EXPENSES
Selling and marketing.............................. 764,711 1,024,716 726,380 673,711
Product research, development and enhancements..... 433,061 1,375,452 921,302 1,175,088
General and administration......................... 2,443,191 3,477,863 2,775,601 2,271,828
---------- ---------- ---------- -----------
Total operating expenses............................. 3,640,963 5,878,031 4,423,283 4,120,627
---------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS........................ (79,028) (1,628,664) (1,583,315) 542,289
OTHER EXPENSE
Interest, net...................................... (23,645) (97,433) (35,715) (87,044)
Other expense...................................... (74,252) (63,088) (119,918) (28,118)
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAX...................... (176,925) (1,789,185) (1,738,948) 427,127
PROVISION (BENEFIT) FOR INCOME TAX (Note 4).......... 88,000 (88,000) -- 15,577
---------- ---------- ---------- -----------
NET INCOME (LOSS).................................... $ (264,925) $(1,701,185) $(1,738,948) $ 411,550
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
NET INCOME (LOSS) PER SHARE (Note 12)
Basic.............................................. $ (.13) $ (.85) $ (.87) $ 0.21
Diluted............................................ $ (.13) $ (.85) $ (.87) $ 0.12
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note
12)
Basic.............................................. 2,095,369 1,994,792 2,007,830 1,955,678
Diluted............................................ 2,095,369 1,994,792 2,007,830 3,358,744
See accompanying notes to consolidated financial statements.
F-5
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1996 AND 1997, AND FOR THE NINE MONTH PERIOD ENDED MARCH
31, 1998 (UNAUDITED)
FOREIGN
COMMON STOCK ADDITIONAL STOCK CURRENCY TREASURY STOCK
---------------------- PAID-IN SUBSCRIPTIONS TRANSLATION ACCUMULATED --------------------
SHARES AMOUNT CAPITAL RECEIVABLE ADJUSTMENT DEFICIT SHARES AMOUNT
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, July 1, 1995.... 6,845 $ 6,845 $ 1,905 $ (8,500) $ -- $ (400,250) -- $ --
Stock for stock
reorganization (Note
5)..................... (6,845) (6,845) (1,905) -- -- -- -- --
1,955,674 1,956 6,794 -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- 3,288 -- -- --
Net loss................. -- -- -- -- -- (264,925) -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, June 30, 1996... 1,955,674 1,956 6,794 (8,500) 3,288 (665,175) -- --
Stock redemption......... -- -- -- -- -- -- 156,454 (340,000)
Increase in foreign
currency translation
adjustment............. -- -- -- -- (31,380) -- -- --
Net loss................. -- -- -- -- -- (1,701,185) -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, June 30, 1997... 1,955,674 1,956 161,683 (8,500) (28,092) (2,366,360) 156,454 (340,000)
Compensation expense
related to employee
stock options (Note
5)..................... -- -- 154,889 -- -- -- -- --
Foreign currency
translation adjustment
(unaudited)............ -- -- -- -- (445) -- -- --
Net income (unaudited)... -- -- -- -- -- 411,550 -- --
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
BALANCE, March 31, 1998
(unaudited)............ 1,955,674 $ 1,956 $ 161,683 $ (8,500) $ (28,537) $(1,954,810) 156,454 $(340,000)
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
--------- ----------- ----------- ------------- ----------- ------------ --------- ---------
TOTAL
----------
BALANCE, July 1, 1995.... $ (400,000)
Stock for stock
reorganization (Note
5)..................... (8,750)
8,750
Foreign currency
translation
adjustment............. 3,288
Net loss................. (264,925)
----------
BALANCE, June 30, 1996... (661,637)
Stock redemption......... (340,000)
Increase in foreign
currency translation
adjustment............. (31,380)
Net loss................. (1,701,185)
----------
BALANCE, June 30, 1997... (2,579,313)
Compensation expense
related to employee
stock options (Note
5)..................... 154,889
Foreign currency
translation adjustment
(unaudited)............ (445)
Net income (unaudited)... 411,550
----------
BALANCE, March 31, 1998
(unaudited)............ $(2,168,208)
----------
----------
See accompanying notes to consolidated financial statements.
F-6
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
INCREASE (DECREASE) IN CASH AND CASH --------------------- -----------------------
EQUIVALENTS 1996 1997 1997 1998
- ---------------------------------------------- --------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................... $(264,925) $(1,701,185) $(1,738,948) $ 411,550
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 166,989 314,890 244,934 288,494
Provision for doubtful accounts......... 240,908 102,142 103,081 81,328
Non-cash compensation expense........... -- 154,889 154,889 --
Foreign currency translation
adjustment............................ 3,288 (31,380) (7,756) (444)
Increase (decrease) from changes in
operating assets and liabilities:
Trade receivables..................... (422,227) (125,392) (427,215) (514,573)
Prepaid and other assets.............. (78,546) 48,632 47,523 (62,152)
Refundable income taxes............... -- (155,653) (67,653) 131,345
Other assets.......................... (57,355) (5,801) (2,082) --
Accounts payable...................... 202,522 (498,654) (354,191) (225,839)
Accrued wages and related taxes....... 105,558 (208,450) (208,450) --
Accrued vacation...................... 66,361 32,489 32,489 --
Customer deposits..................... 130,236 507,971 602,289 (131,850)
Other accrued liabilities............. 224,678 373,339 338,417 140,882
--------- ---------- ---------- -----------
Net cash provided by (used in) operating
activities.................................. 317,487 (1,192,163) (1,282,673) 118,741
--------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......... (144,561) (995,736) (1,009,732) (83,521)
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash............................. -- (300,000) -- 100,000
Borrowings on notes payable................. -- 659,996 588,922 --
Payments on notes payable................... (334,978) (134,039) -- (184,470)
Net proceeds from private placement......... -- 2,310,174 2,310,174 --
Redemption of common stock.................. -- (340,000) (340,000) --
--------- ---------- ---------- -----------
Net cash provided by (used in) financing
activities.................................. (334,978) 2,196,131 2,559,096 (84,470)
--------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents................................. (162,052) 8,232 266,691 (49,250)
--------- ---------- ---------- -----------
Cash and cash equivalents, beginning of
year........................................ 286,556 124,504 124,504 132,736
--------- ---------- ---------- -----------
Cash and cash equivalents, end of year........ $ 124,504 $ 132,736 $ 391,195 $ 83,486
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
(a) Cash paid during the year for:
Interest.............................. $ 64,372 $ 70,526 $ 52,895 $ 82,573
Income taxes.......................... $ -- $ 155,653 $ 155,653 $ --
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
(b) Other (See Note 5).
See accompanying notes to consolidated financial statements.
F-7
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Jenkon International, Inc. (a Delaware corporation) (Parent), through its
wholly-owned subsidiaries, Jenkon International, Inc. (a Washington
Corporation), Summit V, Inc. (the United States operating entity) and Jenkon
Europe Limited (the United Kingdom operating entity), supplies software
solutions to the Direct/Network Marketing industry. Jenkon International, Inc.
and Subsidiaries (the "Company") has developed and markets a management
information system software package called Summit V, as well as a compatible
fully integrated software based voice response system called Touchtalk, that
offers independent direct sales personnel the ability to access an information
base of the company they represent via touch-tone telephone. In addition, the
Company has developed a PC-based software package called NOW! which allows
direct two-way communication between Distributors and the companies that they
represent via the Internet.
In July 1995, the Company through Summit V, Inc. purchased and/or licensed
substantially all of the assets and assumed certain contractual obligations and
indebtedness from Redwood Technology, Inc. (formerly known as Jenkon Data
Systems, Inc.), the developer of a substantial portion of the Company's Summit V
software technology. This transaction was accounted for under the concept of
"entities under common control" and accordingly the historical basis of the
assets acquired and liabilities assumed were recorded.
On January 27, 1997 Jenkon Europe Limited changed its name to Jenkon
International Limited.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
All liquid assets with an initial maturity of three months or less are
considered to be cash equivalents for purposes of the statements of cash flows.
At June 30, 1997 and March 31, 1998, the Company had restricted cash held as
collateral for certain capital leases of $300,000 and $200,000, respectively.
CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary cash investments with high credit
worthy institutions. At June 30, 1997, the Company had a $300,000 certificate of
deposit at a bank, which served as collateral for certain capital leases. At
March 31, 1998, the Company had a $200,000 certificate of deposit at the same
bank which served as collateral for the same capital leases.
The Company sells its products and services primarily to customers in the
Direct/Network Marketing Industry throughout the world. Credit is extended based
on an evaluation of the customer's financial condition and collateral is
generally not required. The allowance for doubtful accounts receivable is based
upon the expected collectibility of all accounts receivable.
At March 31, 1998, the Company had four customers which represented
approximately 60% of accounts receivable.
F-8
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the related asset, which range from 3-7 years.
Amortization of leasehold improvements is computed using the straight-line
method over the lesser of the estimated life of the asset or the remaining term
of the lease.
CAPITALIZED SOFTWARE COSTS
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred (and
recorded as "Product research, development and enhancements expense" in the
consolidated statements of operations) until technological feasibility has been
established. Technological feasibility is established upon completion of a
detail program design or working model. Thereafter, all software production
costs are capitalized and reported at the lower of unamortized cost or net
realizable value until the product is available for general release to
customers. Capitalized software costs are amortized based on current and future
expected revenue for each product subject to an annual minimum based on
straight-line amortization over the remaining estimated life of the product, not
to exceed 5 years.
For the years ended June 30, 1997 and 1996, amortization of capitalized
software development costs amounted to $113,247 for both periods and are
included in "Cost of software license fees" in the consolidated statements of
operations. For the nine months ended March 31, 1998 and 1997, amortization of
capitalized software development costs amounted to $84,935 for both periods.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Jenkon Europe Limited, where the functional
currency is the British pound, are translated at the current exchange rate at
the balance sheet date. Income and expenses are translated at the average
exchange rate in effect during the year or period. Resulting translation
adjustments are accumulated as a separate component of stockholders' equity
(deficit).
Realized gains and losses related to other foreign currency transactions are
reported as income or expense in the current year. Such gains or losses were not
material for the years ended June 30, 1997 and 1996, and for the nine months
ended March 31, 1998 and 1997.
REVENUE RECOGNITION
SOFTWARE LICENSE FEES
The Company has established its revenue recognition policy in accordance
with the provisions of the American Institute of Certified Public Accountants'
Statement of Position 91-1 "Software Revenue Recognition." Revenue from the sale
of internally-developed software and turnkey systems are recognized upon
delivery, provided that no significant obligations remain and collection of the
related receivable is deemed probable.
F-9
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT, SOFTWARE AND SUPPLIES SALES
Revenues from third-party hardware, software and supplies are separately
stated in contracts for the license of the Company's software products, and are
recognized when the related hardware, software and supplies are delivered to the
customer.
SUPPORT AND OPERATIONS REVENUE
Support and operations revenue includes software and hardware maintenance
contracts and service revenues.
Maintenance contracts for hardware outside of the original manufacturer's
warranty are written between the customer and the Company and are priced at
market rates. The Company then sub-contracts with a third-party vendor
specializing in on-site hardware maintenance for the same coverage as the
Company has contracted with its customers. Revenues and the corresponding
third-party contract expenses are recognized ratably over the contractual period
(usually one year). Revenues resulting from Company personnel providing
installation, training, custom modification programming, and network consulting
services are recorded as "Service revenue" and are recognized as the services
are provided. These services are not essential to the functionality of any other
element of the transaction.
DISCOUNTS, RETURNS AND EXCHANGES
Discounts are determined at the time the contract is signed. Any cost
associated with returns and exchanges are insignificant and are recorded as
incurred. The Company provides no warranties which are not supported by
third-party contracts or software support contracts. Discounts are applied
against the appropriate revenue account.
DEFERRED REVENUE
Customer deposits received for software license fees, equipment or services
in advance are considered deferred revenue and are included in the consolidated
balance sheets under the caption "Customer deposits." The deferred revenue is
recognized as revenue upon delivery or as services are provided.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the temporary differences are expected to reverse.
State income taxes are not significant as the Company operates primarily in
the State of Washington, where corporate income tax is not assessed.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-10
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended March 31, 1997
and 1998 are unaudited. In the opinion of management, such statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the results of the interim period. The results of
operations for the nine months ended March 31, 1998 are not necessarily
indicative of the results for the entire year.
EMPLOYEE STOCK COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), as of January 1, 1996,
which establishes a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS No. 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS No. 123, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date on the value of
the award and is recognized over the service period. The value of the stock-
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128) during 1998. SFAS No. 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, such as stock options,
warrants or convertible debentures. All prior period weighted average and per
share information had no effect on the amounts presented in accordance with SFAS
No. 128.
The Company adjusted its basic and diluted earnings (loss) per share because
of Securities and Exchange Commission Staff Accounting Bulletin No. 98 (SAB No.
98). Pursuant to SAB No. 98, common stock or options issued by the Company at
nominal value should be reflected in a manner similar to a stock split or stock
dividend, and are treated as outstanding for all periods presented.
F-11
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
DISCLOSURE ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 129. The Company adopted SFAS No. 129 on December 15,
1997 and it had no effect on its financial position or results of operations.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its results of
operations.
SOFTWARE REVENUE RECOGNITION
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exits, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company does not expect adoption of this SOP to have a material
effect on its financial statements.
F-12
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
Furniture and fixtures.................... $ 8,943 $ 100,904 $ 100,890
Computer systems and related equipment.... 269,988 1,059,522 1,143,176
Vehicles.................................. 48,809 127,900 127,781
Leasehold improvements.................... 31,574 92,317 92,317
--------- --------- ---------
359,314 1,380,643 1,464,164
Accumulated depreciation.................. (136,351) (363,587) (567,148)
--------- --------- ---------
Property and equipment, net............... $ 222,963 $1,017,056 $ 897,016
--------- --------- ---------
--------- --------- ---------
Depreciation expense for the years ended June 30, 1996 and 1997, and for the
nine month periods ended March 31, 1997 and 1998 were $53,742, $201,643,
$159,999 and $203,561.
3. NOTE PAYABLE
A summary of notes payable is as follows:
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
Note payable to an individual with interest
payable at 18% per year, in monthly
installments of the greater of $10,000 or
the individual monthly compensation of the
two major shareholders and secured by their
shares in the Company. The noteholder also
receives monthly payments equal to 1% of
the Company's gross margin until fully
paid....................................... $ 255,140 $ 235,494 $ 201,756
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $768, including interest at
8.9%, collateralized by the related
asset...................................... -- 31,950 26,268
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $491, including interest at
11.3%, collateralized by the related
asset...................................... -- 19,538 16,660
F-13
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. NOTE PAYABLE (CONTINUED)
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $16,747, including interest
at 7.98%, collateralized by the fixed
assets and a Certificate of Deposit in the
amount of $300,000 at June 30, 1997 and
$200,000 at March 31, 1998................. -- 440,361 312,644
Note payable to a company for purchase of
fixed assets, payable in monthly
installments of $1,930, including interest
at 8.20%, collateralized by the fixed
assets and the same Certificate of Deposit
in the amount of $300,000 at June 30, 1997
and $200,000 at March 31, 1998............. -- 53,753 39,298
--------- --------- -----------
255,140 781,096 596,626
Less current portion......................... 77,220 338,512 416,365
--------- --------- -----------
$ 177,920 $ 442,584 $ 180,261
--------- --------- -----------
--------- --------- -----------
Aggregate maturities of long-term debt in the next five years at June 30,
1997 are as follows:
YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
1999.............................................................................. $ 319,994
2000.............................................................................. 106,063
2001.............................................................................. 14,054
2002.............................................................................. 2,473
----------
$ 442,584
----------
----------
4. INCOME TAXES
The provision for income taxes in the consolidated statement of operations
represents current U.S. federal income tax. State income taxes are not included
as the Company operates primarily in the State of Washington, where corporate
income tax is not assessed.
F-14
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the expected statutory federal
income taxes as follows:
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
-------------------- ------------------------
1996 1997 1997 1998
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Provision (benefit) at the
federal statutory rate......... $ (51,000) $(561,000) $(564,000) $ 180,000
Permanent differences............ 26,000 25,000 19,000 1,577
Valuation allowance on net
deferred tax assets............ 113,000 448,000 545,000 (166,000)
--------- --------- ----------- -----------
Provision (benefit) for income
tax............................ $ 88,000 $ (88,000) $ -- $ 15,577
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Temporary differences which give rise to deferred tax assets and
(liabilities) were as follows:
JUNE 30,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(UNAUDITED)
Current:
Allowance for doubtful accounts......... $ 60,000 $ 8,000 $ 35,000
Accrued vacation........................ 28,000 11,000 --
Valuation allowance..................... (88,000) (19,000) (35,000)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
Non-current:
Property, and equipment................. $ (1,000) $ (16,000) $ 18,000
Amortization of intangibles............. 26,000 26,000 26,000
Non-cash stock compensation............. -- 53,000 53,000
Net operating loss...................... -- 366,000 200,000
Valuation allowance..................... (25,000) (429,000) (297,000)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
The Company has recorded a 100% valuation allowance on the net deferred tax
asset since management can not determine if it is more likely than not that the
deferred tax assets will be realized.
The Company's ability to utilize the net operating loss carryforwards is
dependent upon its ability to generate taxable income in future periods which
may be limited due to ownership changes as defined under Section 382 of the
Internal Revenue Code of 1986. Any unused annual limitation may be carried over
to future years until the net operating losses expire. Utilization of net
operating losses may also be limited in any one year by alternative minimum tax
rules.
During the year ended June 30, 1997 the Company utilized its net operating
loss carryback, which resulted in an income tax benefit of $88,000.
At June 30, 1997, the Company has net loss operating carryforwards of
approximately $1,077,000 which will expire in 2017.
F-15
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY
On June 27, 1996, Jenkon International, Inc. (a Delaware corporation)
acquired by way of a stock-for-stock reorganization, the 8,750 issued and
outstanding common stock shares of Jenkon International, Inc. (a Washington
corporation) and in exchange issued 1,955,678 shares of common stock to the
stockholders of Jenkon International, Inc. (a Delaware corporation) in
proportion to their shareholdings.
PRIVATE PLACEMENT
In September 1996, the Company completed a private placement of 1,500,000
shares of Series A Preferred Stock and simultaneously purchased 78,227 shares of
common stock from each of Dan Jensen, the Company's Chairman of the Board of
Directors and David Edwards, the Company's President and Chief Executive
Officer.
The sale of Series A Preferred Stock and the purchase of common stock were
executed at $2.00 and $2.17 per share, respectively. The net proceeds to the
Company from these transactions was approximately $2,310,000 (net of offering
costs) and was utilized as working capital.
In the event that the Company fails to complete an initial public offering
of its Common Stock which results in (1) gross proceeds to the Company of at
least $5,000,000, and (2) the Common Stock being listed or quoted on a
recognized national securities exchange such as the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX), or the National Association of
Securities Dealers Automated Quotation system (NASDAQ), within 30 months from
the date of the initial closing of the private placement offering, the Series A
Preferred Stock shall be redeemable at the election of holders of the majority
of the outstanding preferred shares. In such circumstances, the redemption is at
the election of holders of the majority of these outstanding preferred shares
and the redemption price shall equal either the greater of (1) $2.00 per
preferred share plus an annual return of 10% compounded interest from the date
of issuance, or (2) the value of the Common Stock into which the preferred
shares are convertible as established by a nationally recognized valuation firm
selected by the Company.
In the original Certificate of Designation, Preferences and Rights of Series
A Preferred Stock, there is a criterion which states that if the Company issues
or sells additional shares of Common Stock for less than the greater of the then
existing conversion price for the Series A Preferred Stock or the market price,
then in each such case the then existing conversion price for the Series A
Preferred Stock shall be reduced.
STOCK OPTIONS
The Company has a stock option plan for the granting of options to purchase
common shares to certain executives and key employees. In each case, the
option's maximum term is ten years. Options granted vest immediately upon the
first anniversary of such grant.
In November 1996, the Company issued 156,454 options to an employee at a
nominal value ($0.01) and recorded compensation expense of $154,889, which
represented the difference between the exercise price and fair value of the
stock on the date of grant.
F-16
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In connection with the Company's private placement, the Company issued
161,760 warrants to purchase Series A Preferred Stock to the Dealer Manager. The
exercise price of these warrants is $2.68 per share, which is subject to
adjustment in certain circumstances.
The following summarizes stock option and warrant activity during the years
ended June 30, 1996 and 1997 and the nine months ended March 31, 1998 as
follows:
WEIGHTED
OPTIONS AVERAGE
AND EXERCISE
WARRANTS PRICE
--------- -----------
Outstanding at July 1, 1996............................................. -- $ --
Granted................................................................. 650,678 1.78
--------- -----
Outstanding at June 30, 1997............................................ 650,678 $ 1.78
Granted (unaudited)..................................................... 108,316 $ 3.37
--------- -----
Outstanding at March 31, 1998 (unaudited)............................... 758,994 $ 2.01
--------- -----
--------- -----
Information relating to options and warrants at June 30, 1997 summarized by
exercise price are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED-AVERAGE WEIGHTED
---------------------- AVERAGE
LIFE EXERCISE EXERCISE
EXERCISE PRICE PER SHARE SHARES (MONTH) PRICE SHARES PRICE
- ---------------------------------------- --------- ----------- --------- --------- ---------
$0.0128................................. 156,454 113.0 $ 0.0128 156,454 $ 0.0128
$2.1732................................. 332,464 117.5 $ 2.1732 332,465 $ 2.1732
$2.6845................................. 161,760 57.5 $ 2.6845 161,760 $ 2.6845
--------- ----- --------- --------- ---------
$0.0128-$2.6845......................... 650,678 101.5 $ 1.78 650,678 $ 1.78
--------- ----- --------- --------- ---------
--------- ----- --------- --------- ---------
F-17
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Information relating to stock options and warrants at March 31, 1998
summarized by exercise price are as follows:
OUTSTANDING EXERCISABLE
--------------------------------- --------------------
WEIGHTED-AVERAGE WEIGHTED
---------------------- AVERAGE
LIFE EXERCISE EXERCISE
EXERCISE PRICE PER SHARE SHARES (MONTH) PRICE SHARES PRICE
- ---------------------------------------- --------- ----------- --------- --------- ---------
$0.0128................................. 156,454 104.0 $ 0.0128 156,454 $ 0.0128
$2.1732................................. 332,464 108.5 $ 2.1732 332,465 $ 2.1732
$2.5567................................. 39,113 111.5 $ 2.5567 39,113 $ 2.5567
$2.6845................................. 161,760 48.5 $ 2.6845 161,760 $ 2.6845
$3.8350................................. 69,203 118.0 $ 3.8350 69,203 $ 3.8350
--------- ----------- --------- --------- ---------
$0.0128-$3.8350......................... 758,994 95.8 $ 2.01 758,994 $ 2.01
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
In accordance with the provisions of SFAS No. 123, the Company applied APB
Opinion 25 and related interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net income would have been
reduced to the pro forma amounts indicated in the table below:
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
--------------------- -----------------------
1996 1997 1997 1998
--------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
Net loss
As reported................. $(264,925) $(1,701,185) $(1,738,948) $ 411,550
Pro forma................... (264,925) (1,747,935) (1,738,948) 374,636
Earnings (loss) per share
Basic:
As reported................. $ (0.13) $ (0.85) $ (0.87) $ 0.21
Pro forma................... (0.13) (0.88) (0.87) 0.19
Diluted:
As reported................. $ (0.13) $ (0.85) $ (0.87) $ 0.12
Pro forma................... (0.13) (0.88) (0.87) 0.11
The fair value of the option and warrant grants is estimated on the date of
grant using the minimum value method in accordance with SFAS 123, with the
following weighted average assumptions for grants in 1997 and 1998; expected
life of options and warrants of 3-5 years and 5 years, respectively, expected
volatility of 0%, risk free interest rate of 6.4% and 6.0%, respectively, and 0%
dividend yield.
The weighted average fair value at date of grants for options granted during
fiscal 1997 and the nine months ended March 31, 1998 approximated $1.04 and
$.68.
F-18
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The effect of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
6. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has purchase arrangements
with Jentronix, an entity wholly-owned by a relative of a major stockholder.
Purchases from Jentronix amounted to $46,799 and $7,322 for the years ended June
30, 1996 and 1997 and $8,138 and $0 for the nine months ended March 31, 1997 and
1998.
Stock subscription receivable represents amounts due from officers of the
Company.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancellable operating leases
which expire at various dates through September 2001.
The Company leases certain equipment under agreements which are classified
as capital leases. Equipment leases have purchase options at the end of the
original lease term.
Future minimum payments, by year and in the aggregate, under noncancellable
capital and operating leases with initial or remaining terms of one year or more
consist of the following at June 30, 1997:
CAPITAL OPERATING
LEASES LEASES
----------- ------------
1998............................................................... $ 239,239 $ 395,857
1999............................................................... 239,239 389,048
2000............................................................... 112,259 124,344
2001............................................................... 15,114 109,740
2002............................................................... 2,519 23,694
----------- ------------
Total minimum lease payments....................................... 608,370 $ 1,042,683
------------
------------
Less amount representing interest.................................. (62,768)
-----------
Present value of net minimum lease payments........................ 545,602
Less current portion............................................... (202,002)
-----------
$ 343,600
-----------
-----------
The Company's rental expense for operating leases aggregated $279,077 and
$308,209 for the years ended June 30, 1996 and 1997, and $354,711 and $277,981
for the nine months ended March 31, 1997 and 1998.
The Company may be required to devote significant resources to protect its
interests and the interests of its sublicensees in Asia. This could materially
adversely affect the Company's financial condition and results of operations.
F-19
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 flows of the Company.
The Company is obligated to make monthly payments to a note-holder equal to
1% of the Company's gross margin until the note is fully repaid (Note 3).
POTENTIAL LIABILITY
In July 1995, the Company through Summit V, Inc. purchased and/or licensed
substantially all of the assets and assumed certain contractual obligations and
indebtedness from Redwood Technology, Inc. the developer of a substantial
portion of the Company's Summit V software technology.
As Redwood Technology may be deemed to have been rendered insolvent by the
sale and license of certain of its assets to the Company, and because of the
commonality of ownership and management of Redwood Technology and the Company,
the Company may be subject to claims by unsatisfied creditors of Redwood
Technology.
At June 30, 1996, the Company recorded $400,000 as a liability based on
management's estimate. At June 30, 1997 and March 31, 1998 the amount was
reduced to approximately $375,000 and $350,000, respectively due to settlements
with some unsatisfied creditors.
See Note 5.
8. EMPLOYEE BENEFIT PLAN
The Company's employees are covered by a 401(k) defined contribution benefit
plan. The plan provides for employee tax-deferred contributions up to the
maximum percentage of eligible compensation allowable not to exceed the limit of
code section 401(k). The Company may make matching contributions equal to a
discretionary percentage. For the years ended June 30, 1996 and 1997 and the
nine months ended March 31, 1998, the Company did not elect to make matching
contributions to the plan.
9. MAJOR CUSTOMERS
The Company had two customers which accounted for 23% and 11% of the
Company's sales during the year ended June 30, 1997, and three customers which
accounted for 25%, 12% and 11% of the Company's sales for the year ended June
30, 1996. The Company also had two customers which accounted for 22%, 11% and
10% of the Company's sales during the nine months ended March 31, 1997 and no
customers during the nine months ended March 31, 1998 represented more than 10%
of the Company's sales.
10. CONCENTRATION OF SUPPLIERS
The Company is dependent on third-party equipment manufacturers and
distributors for all its supply of computer equipment and some of its software
accessories. Purchases from individual suppliers that exceed 10% of total
purchases in each period were as follows: three suppliers at 37%, 31% and 12% of
total purchases, for the year ended June 30, 1997; one supplier at 36% of total
purchases, for the year ended June 30, 1996; two suppliers at 13% and 10% of
total purchases for the nine months ended March 31, 1997; and one supplier at
10% of total purchases, for the nine months ended March 31, 1998.
F-20
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
11. LIQUIDITY
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At June 30, 1997 the Company has
negative working capital of approximately $1,247,000, and a stockholders'
deficit of approximately $2,579,000. At March 31, 1998, the Company had a
negative working capital of approximately $893,000 and stockholders' deficit of
approximately $2,168,000.
The funding of the Company's operations and servicing of existing debt is
dependent upon continued sales of its core products, and extending payment terms
on various current liabilities. During December 1996, the Company implemented
changes to reduce its fixed costs which included eliminating approximately 25
nonproductive positions and terminating a month-to-month office lease. In
addition, the Company has established an agreement with its noteholder to vary
from regularly scheduled payments when necessary. Based on the continuing sales
activity and the above actions, the Company has returned to profitable
operations during the nine months ended March 31, 1998 and met its obligations
on a timely basis. See Note 14.
12. EARNINGS PER SHARE
The following is a reconciliation of the weighted average number of shares
used to compute basic and diluted earnings per share:
JUNE 30, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Basic weighted average shares
outstanding................. 2,095,369 1,994,792 2,007,830 1,955,678
Diluted effect of stock
options and warrants........ -- -- -- 203,876
Conversion of preferred
stock....................... -- -- -- 1,199,190
--------- --------- --------- ---------
Diluted weighted average
shares outstanding.......... 2,095,369 1,994,792 2,007,830 3,358,744
--------- --------- --------- ---------
--------- --------- --------- ---------
Options to purchase 494,224 shares were outstanding during the year ended
June 30, 1997 but were not included in the computation of diluted loss per
common share because the effect would be antidilutive.
In November 1996, the Company issued 156,454 stock options at a nominal
value. In accordance with SAB 98, these options are considered outstanding for
all periods presented when computing basic and diluted weighted average shares
outstanding.
13. STOCK SPLIT
In June 1998, the Board of Directors declared a .782271-to-one reverse stock
split. All stock related data in the consolidated financial statements reflect
the stock split for all periods presented.
F-21
JENKON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1997 AND 1998 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED)
BRIDGE LOANS
In June 1998, the Company completed a bridge loan for $1,000,000, of which
net proceeds were $1,000,000 less placement fees of $120,000, or $880,000. In
connection with the bridge loans, the Company issued 11,732 warrants per each
$100,000 of bridge loans, for a total of 117,321 warrants, at an exercise price
of $.6392. The bridge loan is due the earlier of May 31, 1999 or three business
days following the completion of the initial public offering. The Company valued
the warrants at fair value. The original issue discount was determined based on
the fair value of the warrants to total fair value of warrants and debt. The
original issue discount is being amortized over the twelve month term of the
bridge loans as interest expense.
EMPLOYMENT AGREEMENTS
Effective with the completion of the initial public offering, the Company
will enter into two four-year employment agreements and two one-year renewable
employment agreements with employees of the Company. The annual base salaries
for the four-year and one-year renewable employment agreements will be $200,000,
$150,000, $150,000 and $90,000. These agreements will be subject to a 5% cost of
living increase and other benefits. In the event the Company terminates any of
the employment agreements without cause, the Company will be required to make a
severance payment equal to one year's base salary. One of the employment
agreements with an annual base salary of $90,000 has a severance payment of
$200,000 instead of $90,000.
CONSULTING AND NON-COMPETITION AGREEMENT
Effective July 1, 1998, Mr. Jensen and the Company entered into a Consulting
and Non-Competition Agreement pursuant to which Mr. Jensen agreed to provide
certain consulting services to the Company in exchange for the following
payments and benefits: (i) $30,000 on signing, (ii) $50,000 within three
business days following completion of this Offering, (iii) $75,000 at the end of
the three year term, (iv) $12,000 per month from August 1, 1998 through January
31, 1999, (v) $8,000 per month from February 1, 1999 through January 31, 2000,
(vi) $4,000 per month from February 1, 2000 through July 31, 2001, and (vii)
reimbursement and payment of certain automobile, insurance, phone, and other
expenses as well as an agreement by Jenkon to assume certain personal guarantees
of Mr. Jensen.
F-22
[ARTWORK]
LOGO Jenkon's management information systems are installed throughout the world.
UK
Germany
France
Netherlands
Belgium
Spain
Sweden
South Korea
Finland CHART SHOWING ACTUAL AND ESTIMATED INCREASE IN WORLDWIDE HOME-BASED DIRECT
Norway SALES PERSONNEL FROM 11.3 MILLION IN 1991 TO AN ESTIMATED 37 MILLION IN
Portugal 2000
Italy
Columbia
Venezuela
Brazil
Singapore
Malaysia
New Zealand
Phillipines
Argentina
Russia
China
India
Japan
Mexico
Canada
USA CHART SHOWING ACTUAL AND ESTIMATED INCREASE IN WORLDWIDE DIRECT SALES FROM
$48.3 BILLION IN 1991 TO 113.7 BILLION IN 2000
Source: World Federation of Direct Selling Associations and J.P. Morgan
Securities projections
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include provisions that eliminate the directors' personal liability for monetary
damages to the fullest extent possible under Delaware Law or other applicable
law (the "Director Liability Provision"). The Director Liability Provision
eliminates the liability of directors to the Company and its stockholders for
monetary damages arising out of any violation by a director of his fiduciary
duty of due care. Under Delaware Law, however, the Director Liability Provision
does not eliminate the personal liability of a director for (i) breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (iii) payment of
dividends or repurchases or redemptions of stock other than from lawfully
available funds, or any transaction from which the director derived an improper
benefit. Furthermore, pursuant to Delaware Law, the limitation on liability
afforded by the Director Liability Provision does not eliminate a director's
personal liability for breach of the director's duty of due care. Although the
directors would not be liable for monetary damages to the corporation or its
stockholders for negligent acts or omissions in exercising their duty of due
care, the directors remain subject to equitable remedies, such as actions for
injunction or rescission, although these remedies, whether as a result of
timeliness or otherwise, may not be effective in all situations. With regard to
directors who also are officers of the Company, these persons would be insulated
from liability only with respect to their conduct as directors and would not be
insulated from liability for acts or omissions in their capacity as officers.
Delaware Law provides a detailed statutory framework covering
indemnification of directors, officers, employees or agents of the Company
against liabilities and expenses arising out of legal proceedings brought
against them by reason of their status or service as directors, officers,
employees or agents. Section 145 of the Delaware General Corporation Law
("Section 145") provides that a director, officer, employee or agent of a
corporation (i) shall be indemnified by the corporation for expenses actually
and reasonably incurred in defense of any action or proceeding if such person is
sued by reason of his service to the corporation, to the extent that such person
has been successful in defense of such action or proceeding, or in defense of
any claim, issue or matter raised in such litigation, (ii) may, in actions other
than actions by or in the right of the corporation (such as derivative actions),
be indemnified for expenses actually and reasonably incurred, judgments, fines
and amounts paid in settlement of such litigation, even if he is not successful
on the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation (and in a
criminal proceeding, if he did not have reasonable cause to believe his conduct
was unlawful), and (iii) may be indemnified by the corporation for expenses
actually and reasonably incurred (but not judgments or settlements) of any
action by the corporation or of a derivative action (such as a suit by a
stockholder alleging a breach by the director or officer of a duty owed to the
corporation), even if he is not successful, provided that he acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, provided that no indemnification is permitted
without court approval if the director has been adjudged liable to the
corporation.
Delaware Law also permits a corporation to elect to indemnify its officers,
directors, employees and agents under a broader range of circumstances than that
provided under Section 145. The Certificate contains a provision that takes full
advantage of the permissive Delaware indemnification laws (the "Indemnification
Provision") and provides that the Company is required to indemnify its officers,
directors, employees and agents to the fullest extent permitted by law,
including those circumstances in which indemnification would otherwise be
discretionary, provided, however, that prior to making such discretionary
indemnification, the Company must determine that the person acted in good faith
and in a manner he or she believed to be in the best interests of the Company
and, in the case of any criminal action or proceeding, the person had no reason
to believe his or her conduct was unlawful.
II-1
In furtherance of the objectives of the Indemnification Provision, the
Company has also entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Certificate and Bylaws (the "Indemnification Agreements"). The Company
believes that the Indemnification Agreements are necessary to attract and retain
qualified directors and executive officers. Pursuant to the Indemnification
Agreements, an indemnitee will be entitled to indemnification to the extent
permitted by Section 145 or other applicable law. In addition, to the maximum
extent permitted by applicable law, an indemnitee will be entitled to
indemnification for any amount or expense which the indemnitee actually and
reasonably incurs as a result of or in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, preparing to be a witness, or
otherwise participating in any threatened, pending or completed claim, suit,
arbitration, inquiry or other proceeding (a "Proceeding") in which the
indemnitee is threatened to be made or is made a party or participant as a
result of his or her position with the Company, provided that the indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company and had no reasonable cause to
believe his or her conduct was unlawful. If the Proceeding is brought by or in
the right of the Company and applicable law so provides, the Indemnification
Agreements provide that no indemnification against expenses shall be made in
respect of any claim, issue or matter in the Proceeding as to which the
indemnitee shall have been adjudged liable to the Company.
The Company intends to purchase a directors' and officers' liability policy
insuring directors and officers of the Company effective upon the closing of
this Offering.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions and non-accountable expense allowance.
All of the amounts shown are estimates, except the Securities and Exchange
Commission registration and NASD filing fees.
Securities and Exchange Commission registration fee............... $ 5,718
NASD fees......................................................... $ 1,872
---------
Nasdaq listing fee................................................ $ 9,544
---------
Accounting fees and expenses...................................... $ 100,000
---------
Printing and engraving expenses................................... $ 75,000
---------
Transfer agent and registrar (fees and expenses).................. $ 10,000
---------
Blue sky fees and expenses (including counsel fees)............... $ 25,000
---------
Other legal fees and legal expenses............................... $ 125,000
---------
Miscellaneous expenses............................................ $ 147,866
---------
---------
Total............................................................. $ 500,000
---------
---------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1995 the Company issued 111,752 shares of Common Stock to a
former officer of the Company for nominal consideration. The issuance of such
shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
In December 1995, A.M. Razo Securities Corp. received 33,524 shares of
Common Stock in exchange for consulting services rendered to the Company. The
issuance of such shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
II-2
In November 1995, 22,351 shares of Common Stock were issued to Konsen Gee, a
founder and officer of the Company's predecessor corporation, as a result of the
exercise of an option to acquire shares of Common Stock of the Company for an
aggregate exercise price of $1,000. See "Certain Transactions." The issuance of
such shares was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
In September 1996, the Company completed a private placement of 1,500,000
shares of its Series A Preferred Stock to 42 accredited investors which resulted
in gross proceeds to the Company of $3 million and net proceeds of approximately
$2.3 million (the "1996 Private Placement"). Approximately $400,000 of the
proceeds of the 1996 Private Placement were used to redeem a total of 156,454
shares of Common Stock held by David Edwards and Dan Jensen at a price of $2.17
per share. In connection with the 1996 Private Placement, The Boston Group, L.P.
("TBG") received warrants to purchase shares of Series A Preferred Stock (the
"1996 Warrants") which, upon consummation of this Offering, will convert into
warrants to purchase an aggregate of 161,760 shares of Common Stock at an
exercise price of $2.6845 per share. The issuance of the shares of Series A
Preferred Stock and the 1996 Warrants in connection with the 1996 Private
Placement was exempt from the registration requirements of the Securities Act
pursuant to Rule 506 of Regulation D promulgated thereunder. See "Certain
Transactions."
In November 1996 the Company issued to one executive officer an option to
purchase 156,454 shares of Common Stock at an exercise price of $0.0128 per
share. Such option was issued under the Company's Stock Option Plan and in
reliance on the exemption afforded by Section 4(2) of the Securities Act.
In April 1997, the Company issued options to purchase an aggregate of
332,464 shares of Common Stock at an exercise price of $2.1732 per share to
three executive officers of the Company in accordance with the Company's Stock
Option Plan. Such options were issued in reliance on the exemption afforded by
Section 4(2) under the Securities Act.
In late 1997, the Company issued to one executive officer an option to
purchase 39,113 shares of Common Stock at an exercise price of $2.1732 per
share. Such option was issued under the Company's Stock Option Plan and in
reliance on the exemption afforded by Section 4(2) of the Securities Act.
In January 1998, the Company issued options to purchase an aggregate of
69,203 shares of Common Stock at an exercise price of $3.835 per share to a
total of 77 employees in accordance with the Company's Stock Option Plan. Such
options were issued in reliance on the exemption afforded by Rule 701 of the
Securities Act.
On June 3, 1998, the Company completed a private placement of $1,000,000 of
unsecured promissory notes (the "1998 Notes") and warrants (the "1998 Warrants")
to purchase an aggregate of 117,321 shares (the "1998 Private Placement") at an
exercise price of $.6392 per share to 40 accredited investors. Meridian Capital
Group, Inc. and Trautman Kramer & Company Incorporated acted as placement agents
with respect to the 1998 Private Placement and, as a result, received (i)
commissions equal to 10% of the gross proceeds of the 1998 Notes sold by them,
plus (ii) a non-accountable expense allowance equal to 2% of the gross proceeds
of the 1998 Notes sold by them. The issuance of the 1998 Notes and 1998 Warrants
was exempt from the registration requirements of the Securities Act pursuant to
Rule 506 of Regulation D promulgated thereunder. See "Certain Transactions."
II-3
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company, as amended**
3.2 Bylaws of the Company, as amended**
3.3 Certificate of Designation, Preferences and Rights of Series A Preferred
Stock, as amended**
4.1 Specimen Stock Certificate of the Company
4.2 Form of Representatives' Warrant Agreement, including form of
Representatives' Warrant.
4.3 Dealer Manager's Warrant Agreement, dated as of July 1, 1996 between the
Company and The Boston Group, L.P.**
4.4 Form of unsecured Promissory Note of the Company issued in connection with
the 1998 Private Placement**
4.5 Form of Warrant to purchase Common Stock issued in connection with the
1998 Private Placement**
4.6 Subscription Supplement and Registration Rights Agreement with respect to
1996 private placement**
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro LLP
10.1 Form of Employment Agreement of David Edwards**
10.2 Form of Employment Agreement of Steve McKeag**
10.3 Form of Employment Agreement of Jim Thompson**
10.4 Form of Employment Agreement of Robert Cavitt**
10.5 Consulting and Non-Competition Agreement of Dan Jensen**
10.6 Form of Indemnification Agreement with Officers and Directors**
10.7 Jenkon International, Inc. Stock Option Plan**
10.8 Lease Agreement--Corporate Headquarters, Vancouver, Washington**
10.9 Form of Software Service Agreement**
10.10 Value Aded Reseller Agreement, dated January 17, 1997, between the Company
and Unidata, Inc.**
10.11 Earthlink Network TotalAccess Distribution Agreement, dated November 27,
1997, between the Company and EarthLink Network, Inc.**
10.12 Sublease Agreement, dated April 1, 1998, between the Company and S&P
Company**
10.13 Lease Intended as Security No. 960171, dated November 26, 1998, between BA
Leasing & Capital Corporation and Summit V, Inc.**
10.14 Agreement between the Company and Anthony Soich, as amended
11.1 Statement re: Computation of Per Share Earnings
21.1 List of Subsidiaries
23.1 Consent of BDO Seidman, L.L.P.
23.2 Consent of Jeffer, Mangels, Butler & Marmaro LLP* (included in Exhibit
5.1)
23.3 Consent of Robert Cavitt
24 Power of Attorney (incorporated by reference to page II-4 of the
Registration Statement on Form SB-2)**
27 Financial Data Schedule
- --------------------------
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
II-4
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (Section
230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein,
and the Offering of such securities at that time shall be deemed to be
the initial bona fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the Offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Act shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement
II-5
relating to the securities offered therein, and the Offering of such securities
at that time shall be deemed to be the initial bona fide Offering thereof.
The undersigned Registrant hereby undertakes to file a post-effective
amendment to the Registration Statement in the event that the Representatives
waive the 12 month lock-up agreements with respect to 10% or more of the shares
of Common Stock owned by Selling Stockholders who are subject to such lock-up
agreements. In addition, the undersigned Registrant hereby undertakes to provide
a sticker supplement to the Registration Statement in the event that the
Representatives waive the lock-up agreements with respect to between 5% and 10%
of the shares of Common Stock owned by Selling Stockholders who are subject to
such lock-up agreements.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vancouver, State of Washington on the
3rd day of August, 1998.
JENKON INTERNATIONAL, INC.
By: /s/ DAVID EDWARDS
-----------------------------------------
David Edwards,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed below by the following
persons on behalf of the Company in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Director, President and
/s/ DAVID EDWARDS Chief Executive Officer
- ------------------------------ (principal executive August 3, 1998
David Edwards officer)
*
- ------------------------------ Director August 3, 1998
Dan Jensen
Chief Financial Officer,
* Treasurer (principal
- ------------------------------ financial and accounting August 3, 1998
Steve McKeag officer)
*By: /s/ DAVID EDWARDS
-------------------------
David Edwards
HIS ATTORNEY-IN-FACT
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