<PAGE> 1
As filed with the Securities and Exchange Commission on May 13, 1998
Registration No. 333-38623
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Amendment No. 3 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
MAXXIS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
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Georgia 4813 58-2278241
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 552-4766
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 552-4766
(770) 552-8471 (Fax)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
------------------------------------
Copies of all correspondence to:
Glenn W. Sturm, Esq.
James Walker IV, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 817-6000
(404) 817-6050 (Fax)
------------------------------------
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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, 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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[ ]
------------------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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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.
SUBJECT TO COMPLETION, DATED MAY 13, 1998
PROSPECTUS
450,000 SHARES
[MAXXIS LOGO]
COMMON STOCK
This Prospectus relates to the offering (the "Offering") of 450,000 shares
of Common Stock, no par value per share (the "Common Stock" or the "Shares"), of
MAXXIS GROUP, INC., a Georgia corporation (the "Company"). All of the Shares
offered hereby are being sold by the Company. Following the Offering, assuming
the sale of 450,000 Shares offered hereby, the directors and executive officers
and relatives and affiliates of directors and executive officers of the Company
and its subsidiaries, acting as a group and by reason of their ownership of
Common Stock, will hold approximately 48.8% of the voting power (on a fully
diluted basis) of the Company with respect to substantially all
(cover continued on next page)
SEE"RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS,
INCLUDING THE RISK OF SUBSTANTIAL DILUTION, THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
------------------------------------
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.
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
- --------------------------------------------------------------------------------------------------------------------------
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Per Share.................. $5.50 $ - $5.50
- --------------------------------------------------------------------------------------------------------------------------
Total...................... $2,475,000 $ - $2,475,000
==========================================================================================================================
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(1) The offering price has been arbitrarily established by the Company. See
"Risk Factors - Arbitrary Determination of Offering Price."
(2) In certain states, this Offering is expected to be made on behalf of the
Company solely by certain of its directors and executive officers, to whom
no commission or other compensation will be paid on account of such
activity, although they will be reimbursed for reasonable expenses incurred
in connection with such activity. The Company believes such participating
officers and directors shall not be deemed brokers under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), based on reliance on
Rule 3a4-1 of the Exchange Act. In addition, in the states of Maryland,
North Carolina and Virginia and, in the event this Offering is registered
or qualified in other states where directors and officers are not permitted
to effect offers and sales, in such other states, the Company intends to
offer shares of Common Stock through broker/dealers who will enter into
selling agent agreements with the Company, whereby they will use their best
efforts to sell the Common Stock in those states. The Company will amend
the Registration Statement to set forth the terms of any agreement with any
broker/dealer.
(3) Before deducting estimated expenses of $400,000 related to the Offering.
See "Use of Proceeds."
PROSPECTIVE PURCHASERS MUST EXECUTE A SUBSCRIPTION AGREEMENT (A "SUBSCRIPTION
AGREEMENT") IN ORDER TO OFFER TO PURCHASE SHARES. ONCE A SUBSCRIPTION AGREEMENT
IS RECEIVED BY THE COMPANY OR A BROKER/DEALER, AS THE CASE MAY BE, A PROSPECTIVE
PURCHASER WILL NOT HAVE THE RIGHT TO REVOKE OR WITHDRAW SUCH SUBSCRIPTION
AGREEMENT. ANY SUBSCRIPTION AGREEMENT MAY BE REJECTED BY THE COMPANY FOR ANY
REASON OR NO REASON WHATSOEVER. ACCEPTANCE OF ANY PARTICULAR SUBSCRIPTION
AGREEMENT BY THE COMPANY SHALL IN NO CASE REQUIRE THE COMPANY TO ACCEPT ANY
OTHER SUBSCRIPTION AGREEMENT. PROSPECTIVE PURCHASERS MUST WARRANT IN THE
SUBSCRIPTION AGREEMENT THAT THEY HAVE RECEIVED A COPY OF THIS PROSPECTUS, AS
AMENDED OR SUPPLEMENTED. SEE "THE OFFERING - HOW TO SUBSCRIBE."
No escrow account has been established, and all subscription funds will be
paid directly to the Company. Upon acceptance of a subscription by the Company,
subscription proceeds will be available for immediate use by the Company. There
can be no assurance that the Company will receive sufficient proceeds from the
Offering to fund any of the stated purposes of the Offering. See "Use of
Proceeds." In addition, there is no minimum number of Shares which must be sold
in this Offering, and there can be no assurance that any or all of the Shares
offered hereby will be sold. Once the Company accepts a subscription, the
Company will not refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares offered hereby are sold
prior to the termination of the Offering. See "The Offering - No Escrow" and
"Risk Factors - No Minimum Offering Amount; Irrevocability of Subscriptions; No
Escrow."
------------------------------------
The date of this Prospectus is , 1998
<PAGE> 3
(cover continued from previous page)
matters submitted to a vote of the shareholders. See "Risk Factors - Management
will Maintain Control of the Company."
Prior to this Offering, there has been no public market for the Shares,
and it is currently anticipated that there will be no active trading market for
the Shares. The price of the Shares has been arbitrarily established by the
Company and does not necessarily bear any relationship to the Company's asset
value, net worth or other established criteria of value. See "Risk Factors -
Arbitrary Determination of Offering Price."
Sales of the Shares are expected to commence on or about May 20, 1998.
This is a "best efforts" offering by the Company, and it will expire on May 20,
1999, unless terminated earlier or extended by the Company for additional 90-day
periods ending no later than December 31, 2000. The Company reserves the right
to terminate the Offering at any time.
The Company intends to offer the Shares primarily to regional and
executive directors and strategic partners of the Company. The Company has
established a minimum subscription of 20 Shares and maximum subscriptions of 20
Shares and 200 Shares, respectively, for each person who qualifies as a regional
or executive director in the Company's marketing system; provided, that the
aggregate number of Shares sold in this Offering shall not exceed 450,000.
However, the Company reserves the right to not sell to any particular regional
or executive director, to waive the maximum subscription amount or to allocate
additional Shares to regional and executive directors without notifying any
purchaser or prospective purchaser. The Company has not established minimum or
maximum subscriptions for strategic partners. See "The Offering."
-------------------------
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Exchange Act. The Company has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (which term
shall include any amendments thereto) on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Shares to be
offered pursuant hereto. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Shares, reference is made to the Registration
Statement, including the exhibits and schedules thereto, copies of which may be
examined without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http:\\www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is not a reporting company as defined by the Commission.
The Company intends to furnish holders of the Shares with annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
The Company has applied for federal registration for the mark "MAXXIS."
This Prospectus includes product names and other trade names and trademarks of
the Company and of other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including "Risk Factors" and the
consolidated financial statements and related notes thereto, appearing elsewhere
in this Prospectus. Maxxis Group, Inc. conducts all of its business and
operations through its wholly owned subsidiaries: Maxxis 2000, Inc. ("Maxxis
2000"); Maxxis Telecom, Inc. ("Maxxis Telecom"); and Maxxis Nutritional, Inc.
("Maxxis Nutritional"). Unless the context indicates otherwise, all references
to the "Company" or "Maxxis" refer to Maxxis Group, Inc. and its subsidiaries.
On October 8, 1997, the Company effected a one-for-five reverse stock split of
all outstanding shares of Common Stock. On February 17, 1998, the Company
effected a one-for-11 reverse stock split of all outstanding shares of Common
Stock and effected a plan of reorganization pursuant to which each outstanding
share of Class A Common Stock and Class B Common Stock was converted into one
share of Common Stock. All share and per share data have been adjusted to
reflect the reverse stock splits and the reorganization. The Company's fiscal
year ends on June 30 of each year.
THE COMPANY
Maxxis markets telecommunications services and nutritional products in
the United States through its multi-level network marketing system of
"independent associates," or "IAs." The Company currently operates through its
subsidiaries: Maxxis 2000, which conducts network marketing operations; Maxxis
Telecom, which provides long distance services; and Maxxis Nutritional, which
provides private label nutritional products. The Company currently markets
1-Plus long distance service, value-added telecommunications services such as
prepaid phone cards, and nutritional products. The Company was incorporated in
January 1997 and began sponsoring IAs and marketing telecommunications services
in March 1997. For the period of January 24, 1997 to June 30, 1997 (the
"Inception Period") and the nine months ended March 31, 1998, the Company
generated aggregate gross revenues of approximately $2,691,000 and $5,175,000,
respectively.
The Company initially intends to build a customer base for its
telecommunications services without having to commit capital or management
resources to construct its own telecommunications network and transmission
facilities. In February 1997, Maxxis Telecom contracted with Colorado River
Communications, Corp. ("CRC") to obtain switching and network services and to
allow CRC's telecommunications services to be sold by the Company's IAs. In the
future, the Company may contract with other providers of long distance services
and intends to analyze the feasibility of developing its own long distance
network. In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. The Company's nutritional products
are manufactured by various suppliers.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to enroll subscribers with whom the IAs have an ongoing
relationship, such as family members, friends, business associates and
neighbors. The Company also sponsors opportunity meetings at which current IAs
are encouraged to bring in potential candidates for an introduction to the
Company's marketing system. The Company's multi-level network marketing system
and the Company's reliance upon IAs are intended to reduce net marketing costs,
subscriber acquisition costs and subscriber attrition. The Company believes that
its multi-level network marketing system will build a base of potential
customers for additional services and products.
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing to
support the marketing efforts of IAs and introducing new
income opportunities for IAs.
3
<PAGE> 5
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of IAs.
- Offering Additional Telecommunications Products by entering
into agreements for the marketing of additional products that
meet the needs of subscribers, which may include, among
others, paging, conference calling, wireless cable, cellular
and local phone service.
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the
Company recently began marketing a line of private label
nutritional products to its customers and IAs.
- Obtaining Competitive Prices on products and services through
the purchasing power of the Company's nationwide network.
Currently, the Company has five IA positions in its marketing system:
associate; senior associate; director; regional director; and executive
director. A director increases the size of the director's sales organization by
sponsoring additional persons to become senior associates. These senior
associates, and all senior associates that they, in turn, sponsor, become part
of the sales organization of the director who sponsored them. Senior associates,
through the growth of their sales organizations, may become directors, regional
directors or executive directors and thereby increase the size of the sales
organization of the person who was their original sponsor. The organization that
grows below each director through this process is called a "downline."
IAs are paid only by commissions and do not receive any salary from the
Company. All IA commissions are paid directly by the Company and are a specified
percentage or a designated amount of the gross proceeds received by the Company
on the sale of services and products. The Company designates a portion of its
gross commissions as "commission value," or "CV," and allocates the CV among
eligible participants in its marketing system. Currently, 20% of the CV earned
with respect to a long distance subscriber is paid weekly to the IA who
sponsored such subscriber, 75% of the CV is paid monthly to eligible directors
who have the IA who sponsored the subscriber in their downline and the remaining
5% is retained by the Company to be paid out to directors, regional directors
and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as marketing directors ("MDs") are eligible to receive an
additional "Leadership Bonus." The Leadership Bonus is payable quarterly and
equals, in the aggregate, 1% of the total revenues of Maxxis 2000 during the
quarter. The Leadership Bonus is divided equally among all directors, regional
directors and executive directors who qualify for a Leadership Bonus. In order
to encourage the growth of the Company's marketing system, the Company also pays
eligible directors a weekly bonus amount, which is designated as "bonus value,"
or "BV," for each sale of bonus- eligible products. The Company primarily
designates retail priced phone cards and nutritional paks as bonus-eligible
products.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The Company
provides training to all IAs which includes a detailed explanation of the
Company's products, the IA compensation plan and the use of the various
marketing tools available to the IA. The Company encourages senior associates,
directors and regional directors to become MDs. MDs provide personal training to
IAs. To become a MD, a senior associate, director or regional director must
attend a Company approved training school. The fee to attend the training school
is currently $99, and MDs must attend continuing education training schools each
year which also are subject to a fee. National training directors that are
selected by the Company are paid a fee by the Company for training MDs. The
Company does not receive any fees from IAs for the training provided by MDs.
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
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<PAGE> 6
As of March 31, 1998, the Company employed approximately 30 people, not
including IAs who are classified by the Company as independent contractors. The
Company's employees are not unionized, and the Company believes its relationship
with its employees is good.
The Company's principal executive office is located at 1901 Montreal
Road, Suite 108, Tucker, Georgia 30084, and its telephone number is (770)
552-4766.
THE OFFERING
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Common Stock outstanding.......................... 1,571,187 shares
Common Stock to be offered hereby................. 450,000 shares
Common Stock to be outstanding after
the Offering.................................... 2,021,187 shares
Use of Proceeds................................... Development of additional product lines, including an internet
access product; development and/or acquisition of
information, accounting and/or inventory control systems; and
for working capital and general corporate purposes. There
can be no assurance that the Company will receive sufficient
proceeds from the Offering to fund any of the proposed uses
of proceeds. See "Use of Proceeds."
Terms of the Offering; Irrevocability
of Subscriptions................................. Prospective purchasers must deliver to the Company or a
broker/dealer, as the case may be, a completed and executed
Subscription Agreement, the form of which is attached hereto
as Appendix A. An executed Subscription Agreement will
constitute a prospective purchaser's offer to purchase shares
of Common Stock as set forth in this Prospectus.
Prospective purchasers submitting completed and executed
Subscription Agreements will not have the right to revoke or
withdraw such Subscription Agreements. See "The Offering
- General."
No Minimum Offering Amount;
No Escrow........................................ There is no minimum number of Shares which must be sold in
this Offering, and there can be no assurance that any or all
of the Shares offered hereby will be sold. No escrow
account has been established, and all subscription funds will
be paid directly to the Company. Upon acceptance of a
subscription by the Company, subscription proceeds will be
available for immediate use by the Company. Once the
Company accepts a subscription, the Company will not
refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares
offered hereby are sold prior to the termination of the
Offering. See "The Offering - No Escrow" and "Risk
Factors - No Minimum Offering Amount; Irrevocability of
Subscriptions; No Escrow."
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Transfer Restrictions............................. Each certificate evidencing the Shares will bear a legend
restricting the transfer of the Shares to individuals in any
jurisdiction where the offer or sale of the Shares would be
unlawful prior to registration or qualification of such offer or
sale under the laws of any such jurisdiction. In addition,
pursuant to the Subscription Agreement, each purchaser of
the Shares offered hereby agrees not to sell or otherwise
transfer the Shares or any securities issued on account of
such Shares during the Lock-up Period (as defined herein).
The Company may impose transfer restrictions during the
Lock-up Period by giving notice to the holders of record of
the Shares. The certificates evidencing the Shares will bear
a legend referencing these potential restrictions on transfer.
See "Risk Factors - Absence of Trading Market; Transfer
Restrictions" and "The Offering - Transfer Restrictions."
Plan of Distribution.............................. In certain states, offers and sales of the Common Stock will be
made on behalf of the Company by certain of its officers
and directors. The officers and directors will receive no
commissions or other remuneration in connection with such
activities, but they will be reimbursed for reasonable
expenses incurred in connection with the Offering. In
addition, in the states of Maryland, North Carolina and
Virginia and in any other states where officers and directors
of the Company are not permitted to make offers and sales,
the Company will offer shares of Common Stock through
broker/dealers who will use their best efforts to sell the
Common Stock in those states. See "The Offering - Plan
of Distribution."
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RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider
the matters set forth herein under "Risk Factors," as well as the other
information set forth in this Prospectus.
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period is derived from the audited consolidated financial statements
and other data of the Company. The consolidated financial statements for the
Inception Period were audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the nine months ended March
31, 1998 and the balance sheet data as of March 31, 1998 have been derived from
the unaudited condensed consolidated financial statements of the Company which
include all adjustments, consisting of only normal recurring adjustments, which
the Company considers necessary for a fair presentation of the results of
operations for the period. All numbers have been rounded. Results for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. The following summary consolidated financial data 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 in this Prospectus.
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JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services...................................... $ 2,322,000 $ 3,939,000
Nutritional products............................................. -- 341,000
Marketing services............................................... 369,000 895,000
---------------- --------------
Total revenues................................................ 2,691,000 5,175,000
---------------- --------------
Cost of services:
Telecommunications services...................................... 761,000 1,081,000
Nutritional products............................................. -- 223,000
Marketing services............................................... 255,000 339,000
---------------- --------------
Total cost of services........................................ 1,016,000 1,643,000
---------------- --------------
Gross margin....................................................... 1,675,000 3,532,000
---------------- --------------
Operating expenses:
Selling and marketing............................................ 1,089,000 1,994,000
General and administrative....................................... 660,000 1,653,000
---------------- --------------
Total operating expenses...................................... 1,749,000 3,647,000
---------------- --------------
Loss before income tax benefit..................................... (74,000) (115,000)
Income tax benefit................................................. -- --
---------------- --------------
Net loss........................................................... $ (74,000) $ (115,000)
================ ==============
PER SHARE DATA:
Net loss per share................................................. $ (0.05) (0.07)
================ ==============
Weighted average number of shares outstanding...................... 1,571,187 $ 1,571,187
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AS OF
MARCH 31, 1998
--------------
(UNAUDITED)
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BALANCE SHEET DATA:
Working capital...................................................................... $ 182,000
Property and equipment, net.......................................................... 146,000
Total assets......................................................................... 1,068,000
Long-term obligations................................................................ --
Shareholders' equity................................................................. 465,000
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Before purchasing any Shares offered by this Prospectus,
prospective purchasers should carefully consider the following factors relating
to the Company and the Offering, together with the other information and
financial data appearing elsewhere in this Prospectus. This Prospectus contains
"forward-looking statements" relating to, without limitation, future economic
performance, plans and objectives of management for future operations and
projections of revenues and other financial items that are based on the beliefs
of the Company's management, as well as assumptions made by, and information
currently available to, the Company's management. The words "expect,"
"estimate," "anticipate," "believe" and similar expressions and variations
thereof are intended to identify forward-looking statements. The cautionary
statements set forth in this "Risk Factors" section and elsewhere in this
Prospectus identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
NEW ENTERPRISE
The Company currently is in the organizational stage and has a limited
operating history. As a consequence, prospective purchasers of the Shares have
limited information upon which to base an investment decision. The Company's
operations are subject to the risks inherent in the establishment of any new
business. The Company expects that it will incur substantial initial expenses,
and there can be no assurance that the Company will achieve or maintain
profitability. There can be no assurance that the products or services offered
by the Company will receive market acceptance or that the Company's prices and
demand for products and services offered by the Company will be at a level
sufficient to provide profitable operations. The Company has entered into an
agreement with CRC, a provider of switching and network transmission services,
and the Company purchases its private label nutritional products from several
manufacturers. However, there can be no assurance that the Company will be able
to maintain these relationships or enter into new contracts with other suppliers
on terms acceptable to the Company or at all. See "- Dependence upon Suppliers,"
"Business Competition," "- Strategy" and "- Products and Services."
The Company will use the proceeds of the Offering, in part, to pay
organizational and offering expenses in connection with the start-up of the
Company's business and, in particular, the establishment of the Company's
multi-level network marketing system. The Company believes that the proceeds of
the Offering, together with cash generated through operations, will be
sufficient to enable the Company to pay organizational and offering expenses and
to fund continued operations, including the development of additional product
lines. However, there can be no assurance that the Company will generate
sufficient proceeds from this Offering and its ongoing operations to establish
its multi-level network marketing system or to maintain its operations, or that
the Company's business will be successful. See "- Broad Discretion in
Application of Proceeds; Unspecified Acquisitions; Possible Need for Additional
Capital" and "Use of Proceeds."
NO MINIMUM OFFERING AMOUNT; IRREVOCABILITY OF SUBSCRIPTIONS; NO ESCROW
There is no minimum number of Shares which must be sold in this
Offering, and there can be no assurance that any or all of the Shares offered
hereby will be sold. Once a Subscription Agreement is received by the Company, a
prospective purchaser will not have the right to revoke or withdraw such
Subscription Agreement. In addition, the Company reserves the right to reject,
in whole or in part and in its sole discretion, any subscription. No escrow
account has been established, and all subscription funds will be paid directly
to the Company. Acceptance and/or deposit of any subscription funds by the
Company shall not constitute acceptance of a subscription. Upon acceptance of a
subscription by the Company, subscription proceeds will be available for
immediate use by the Company. Once the Company accepts a subscription, the
Company will not refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares offered hereby are sold
prior to the termination of the Offering. See "The Offering - No Escrow."
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BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS; POSSIBLE
NEED FOR ADDITIONAL CAPITAL
The Company intends to use: (i) approximately $53,000, or 2.6%, of the
net proceeds to repay a note outstanding to the Company's Chief Executive
Officer; (ii) approximately $900,000, or 43.4%, of the net proceeds for the
development of additional product lines, including an internet access product;
(iii) approximately $500,000, or 24.1%, of the net proceeds for the development
and/or acquisition of information, accounting and/or inventory control systems;
and (iv) approximately $622,000, or 29.9%, of the net proceeds for working
capital and general corporate purposes. However, the specific uses for much of
the net proceeds will be at the complete discretion of the Board of Directors of
the Company and may be allocated based upon circumstances arising from time to
time in the future.
The Company may in the future utilize a portion of the net proceeds of
the Offering to pursue acquisitions or complementary services or businesses.
Future acquisitions may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, the write-off of costs and the
amortization of expenses related to goodwill and other intangible assets, all of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. The Company currently has no agreements or
understandings with regard to any acquisitions. Shareholders may not be entitled
to vote on any potential acquisitions nor have the opportunity to review any
potential acquisition candidate. See "Use of Proceeds."
The Company anticipates that it will require approximately $1.9 million
in capital to fund its ongoing operations through December 31, 1998. The Company
anticipates that the proceeds of this Offering, together with borrowings and
cash generated from operations, will be sufficient to meet the Company's capital
requirements through December 31, 1998. However, there can be no assurance that
the Company will receive enough proceeds from the Offering to fund any of the
proposed uses of proceeds, including raising enough proceeds to fund its
operations or to cover the estimated offering expenses. If the Company does not
receive sufficient funds from its operations, its borrowings and from the
Offering to fund its operations, the Company may need to raise additional
capital. Sources of additional capital may include venture capital financing,
cash flow from operations, lines of credit and private equity and debt
financings. The Company may also require additional financing in the event it
decides to develop additional product lines or to engage in acquisitions. The
extent of additional financing required will depend partially on the success of
the Company's business. There can be no assurance that additional financing will
be available to the Company or, if available, that it can be obtained on terms
acceptable to the Company. The Company's inability to obtain additional capital
on terms favorable to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
NET LOSS; ACCUMULATED DEFICIT
For the nine months ended March 31, 1998, the Company had a net loss of
$115,000. As of March 31, 1998, the Company had an accumulated deficit of
$189,000 representing accumulated losses from operations during the Inception
Period and the nine months ended March 31, 1998. See "Selected Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's operating expenses have
increased as its business has grown and can be expected to increase
significantly if the Company continues to grow. There is no assurance that
future operating results will result in a profit, will eliminate the accumulated
deficit or will generate positive working capital or that additional losses from
operations will not be sustained by the Company. Accordingly, the Company may
have negative working capital or further increases of such accumulated deficit
in the future
DEPENDENCE ON IAS
The Company's success depends heavily upon its ability to attract,
maintain and motivate a large base of IAs who, in turn, sponsor subscribers,
customers and other IAs. The Company anticipates a significant turnover among
IAs, which the Company believes is typical of businesses involved in direct
selling. The Company encourages existing IAs to sponsor new IAs in order to
maintain or increase the overall IA force. Activities of the IAs in obtaining
new subscribers will particularly be influenced by changes in the level of IA
motivation, which in turn can be positively or negatively affected by general
economic conditions, modifications in commission and training fees and in the
Company's marketing plan, the prices and competitive positions of
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the products and services offered by the Company and a number of other
intangible factors. The Company's ability to attract IAs could be negatively
affected by adverse publicity relating to the Company or its services or its
operations, including its multi-level network marketing system. Administrative
or technological problems of the type that may be encountered by both early
stage and mature companies, such as malfunctions in accounting systems or
computer information systems, may lead to the immediate and dramatic attrition
of IAs and subscribers. The Company has begun establishing its network of IAs.
However, there can be no assurance that the Company will be successful in
establishing a viable network of IAs. Because of the number of factors that
affect the Company's ability to attract and retain IAs, the Company cannot
predict when or to what extent increases or decreases in the level of IA
retention or attrition will occur. In addition, the number of IAs as a
percentage of the population could reach levels that become difficult to exceed
due to the finite number of persons inclined to pursue an independent direct
selling business opportunity. There can be no assurance that the number or
productivity of IAs will be sufficient to support the Company's proposed
products and services in the future or to allow the Company to achieve its
objectives.
The Company is subject to competition for IAs from other network
marketing organizations, including those that market long distance services,
health products, cosmetics and dietary supplements, such as EXCEL
Communications, Inc. ("EXCEL"), American Communications Network ("ACN"), Amway
Corporation ("Amway"), TDG Communications ("TDG"), BeautiControl Cosmetics,
Inc., Herbalife International, Inc. ("Herbalife") and Mary Kay, Inc. EXCEL
representatives sell a variety of long distance telecommunications services, ACN
representatives sell long distance services for LCI International, Inc. ("LCI")
and other long-distance carriers, Amway distributors sell 1-Plus long distance
service for MCI Communications Corporation ("MCI"), TDG sells MCI Paging
Services and the MCI VNet Calling Cards and Herbalife markets food and dietary
supplements. See "Business - Strategy," "- Marketing" and "- Regulation."
RELATIONSHIP WITH IAS
Because IAs are classified as independent contractors, the Company is
unable to provide them the same level of direction and oversight as Company
employees. While the Company has policies and rules in place governing the
conduct of the IAs and intends to review periodically the sales tactics of the
IAs, it may be difficult to enforce such policies and rules. Violations of these
policies and rules might reflect negatively on the Company and may lead to
complaints to or by various federal and state regulatory authorities. Violation
of the Company's policies and rules could subject the Company and its long
distance provider to complaints regarding the unauthorized switching of
subscribers' long distance carriers (also known in the industry as "slamming").
Such complaints could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Relationship with
IAs."
REGULATION OF NETWORK MARKETING; EFFECT OF STATE SECURITIES LAWS
The Company's multi-level network marketing system is subject to or
affected by extensive government regulation including, without limitation,
federal and state regulations governing the offer and sale of business
franchises, business opportunities and securities. Various governmental agencies
monitor direct selling activities, and the Company could be required to supply
information regarding its marketing plan to such agencies. Although the Company
believes that its multi-level network marketing system is in material compliance
with the laws and regulations relating to direct selling activities, there can
be no assurance that legislation and regulations adopted in particular
jurisdictions in the future will not adversely affect the Company's business,
financial condition and results of operations. The Company also could be found
not to be in compliance with existing statutes or regulations as a result of,
among other things, misconduct by IAs, who are considered independent
contractors over whom the Company has limited control, the ambiguous nature of
certain of the regulations and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the Company
or the IAs are not in compliance with existing statutes or regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations. An adverse determination by any one state on any
regulatory matter could influence the decisions of regulatory authorities in
other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the
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<PAGE> 12
risk that its multi-level network marketing system could be found to be in
noncompliance with applicable laws and regulations, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such a decision could require the Company to modify its multi-level
network marketing system, result in negative publicity, or have a negative
effect on distributor morale and loyalty. In addition, the Company's multi-level
network marketing system will be subject to regulations in foreign markets
administered by foreign agencies should the Company expand its network marketing
organization into such markets. See "Business - Marketing" and "- Regulation -
Regulation of Network Marketing."
The primary goal of the Offering is to increase the motivation of
regional and executive directors by allowing them to purchase an interest in the
Company. Accordingly, because the Company desires the ability to offer its
Common Stock to regional and executive directors in California, Florida,
Georgia, Maryland, New York, North Carolina, South Carolina, Virginia and
Washington, the Company has filed the Registration Statement of which this
Prospectus forms a part with the state securities regulators for such states in
order to apply for registration or qualification of the Offering in such states.
Due to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company anticipates that it
will be unable to register or qualify the Offering in certain of these states,
and there can be no assurance that the Company will be able to register or
qualify the Offering in any of these states. Certain of these states require the
Company to sell its securities exclusively through broker-dealers that are
registered in such states. There can be no assurance that the Company will be
successful in engaging registered broker-dealers to sell its securities in such
states upon terms acceptable to the Company or at all. The inability of the
Company to offer and sell the Shares to residents of certain states may limit
the ability of the Company to attract IAs in such states, or lead to increased
attrition of IAs in such states, and may have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. An
adverse determination by any one state regulator on a securities regulatory
matter could influence the decisions of state regulatory authorities in other
jurisdictions. See "Business - Regulation - Effect of State Securities Laws."
INTENSE COMPETITION
The Company faces competition in the United States for both the
products and services it sells and for the sponsoring and retaining of
independent salespeople. The United States long distance telecommunications
industry is intensely competitive, rapidly evolving and subject to rapid
technological change. In addition, the industry is significantly influenced by
the marketing and pricing practices of the major industry participants. AT&T
Corp. ("AT&T"), MCI, Sprint Corporation ("Sprint") and WorldCom, Inc.
("WorldCom") are the dominant competitors in the domestic long distance
telecommunications industry. All of these companies are significantly larger
than the Company and have substantially greater resources. According to a 1995
report by the Federal Communications Commission (the "FCC"), AT&T, MCI, Sprint
and WorldCom accounted for approximately 56%, 17%, 10% and 5%, respectively, of
total domestic long distance revenue for calendar year 1994. Many of the
Company's current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and substantially greater
financial, personnel, marketing, technical and other resources than the Company.
These competitors employ various means to attract new subscribers, including
television and other advertising campaigns, telemarketing programs, network
marketing and cash payments and other incentives. The Company's ability to
compete effectively depends upon, among other factors, its ability to offer high
quality products and services at competitive prices. There can be no assurance
that the Company will be able to compete successfully. See "Business -
Competition."
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Telecommunications Act"),
that will allow local exchange carriers ("LECs"), including the Bell Operating
Companies ("BOCs"), to provide long distance telephone service inter-LATA (a
"LATA" is a Local Access and Transport Area), which will likely significantly
increase competition for long distance services. The new legislation also grants
the FCC the authority to deregulate other aspects of the telecommunications
industry. Such increased competition could have a material adverse effect on the
Company's business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs
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<PAGE> 13
into the long distance market, would not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such products, especially retail outlets, based
upon convenience of purchase, price and immediate availability of the purchased
product. For the most part, the Company's competitors offering comparable
products are substantially larger and have available considerably greater
financial resources than the Company. The market is highly sensitive to the
introduction of new products (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, the Company's
ability to remain competitive depends in part upon the successful introduction
of new products at competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. Although management believes
that the Company offers an attractive business opportunity, there can be no
assurance that other network marketing companies will not be able to convince
the Company's existing IAs to joint their organization or to deplete the pool of
potential IAs in a given market, and in such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business - Competition."
DEPENDENCE UPON SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has entered into an agreement (the "1-Plus Agreement") with CRC to
obtain switching and network services. The Company now depends exclusively on
CRC for the transmission of subscriber phone calls and the activation of prepaid
phone cards. Subscribers are long distance customers on CRC's network, and CRC
provides subscriber support for the Company's subscribers. Subscribers have the
right to change their service at any time. The 1-Plus Agreement, which expires
on February 20, 2000, provides that the Company will have such rights to the
subscriber base developed under the agreement only upon achieving certain
minimum levels of monthly revenues on CRC's network. Once the Company reaches
these minimum levels, the Company will have the right to market other carriers
to the subscriber base in the event the Company contracts with such carriers.
There can be no assurance that the Company will achieve the minimum level of
monthly revenues on CRC's network necessary to obtain rights to the subscriber
base. Although the Company does not currently intend to use a different carrier,
minimum monthly revenues may be more difficult to maintain if the Company
utilizes additional carriers, and the Company could be subject to additional
minimum commitments including, but not limited to, minimum monthly revenues or
minimum monthly minutes of usage, with such new carriers. The accurate and
prompt billing of the subscribers originated by the IAs is also dependent upon
CRC. The failure of CRC to accurately and promptly bill subscribers could lead
to a loss of subscribers and could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
would be required to use another carrier if the 1-Plus Agreement is terminated,
the usage or number of subscribers originated by the Company's IAs exceeds the
capacity of CRC or CRC fails to provide quality services. In such event, or in
the event the Company otherwise elects to use other carriers, the cost paid by
the Company for such long distance services may exceed that paid under the
1-Plus Agreement. If the 1-Plus Agreement is
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terminated, there can be no assurance that the Company could enter into new
contracts with other providers on terms favorable to the Company or at all, and
the termination of the 1-Plus Agreement or the failure of CRC to provide quality
services, quality customer support or accurate and timely billing could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business - Suppliers" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are developed and manufactured by third-party suppliers. Certain of
the nutritional products offered by the Company are proprietary to such
suppliers. The Company does not have any written contracts with or commitments
from any of its suppliers or manufacturers to continue to sell nutritional
products to the Company. The Company believes that its relationships with its
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to the Company.
Accordingly, there is a risk that any or all of the Company's suppliers or
manufacturers, including suppliers which provide proprietary products to the
Company, could discontinue selling their nutritional products to the Company. In
the event any of the third-party manufacturers become unable or unwilling to
continue to provide the nutritional products in required volumes, the Company
would be required to identify and obtain acceptable replacement sources, and no
assurance can be given that any alternative replacement sources would become
available to the Company on a timely basis. See "Business Suppliers."
MANAGEMENT WILL MAINTAIN CONTROL OF THE COMPANY
Following the Offering, assuming the sale of 450,000 Shares offered
hereby, the directors and executive officers and relatives and affiliates of
directors and executive officers of the Company and its subsidiaries will own,
in the aggregate, 987,270 shares of Common Stock which collectively represents
approximately 48.8% of the total outstanding shares of Common Stock, and
investors purchasing in this Offering would own 22.3% of the total outstanding
shares of Common Stock. Accordingly, the directors and executive officers and
relatives and affiliates of directors and executive officers of the Company and
its subsidiaries, acting as a group, will have the ability to elect all of the
directors of the Company and control the Company's management, operations and
affairs for the foreseeable future. See "Principal Shareholders" and
"Description of Capital Stock."
ABILITY TO MANAGE GROWTH
The Company's goal is to develop a nationwide network of IAs and to
offer long distance telecommunications products, nutritional products and other
products and services throughout the United States. The Company's strategy of
growth and expansion will place substantial demands upon the Company's current
management and other resources and may require a substantial amount of working
capital, as well as management, operational and other financial resources. The
success of the Company will depend on various factors, including, among others,
federal and state regulation of the telecommunications industry and dietary
supplement industry, competition and the capability and capacity of the
Company's long distance carriers. Not all of the foregoing factors are within
the control of the Company. The Company's ability to manage growth successfully
will require the Company to develop strong operational, management, financial
and information systems and controls. No assurance can be given that the Company
will experience growth or that, if it does, that management will be able to
manage growth effectively. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business - Strategy," "- Marketing," "- Information Systems," "- Suppliers," "-
Employees" and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant
extent upon the abilities and efforts of its senior management, particularly
Ivey J. Stokes, its Chairman of the Board, and Thomas O. Cordy, its Chief
Executive Officer and President. The Company does not maintain key man life
insurance on Mr. Stokes, Mr. Cordy or any other person. Many of the Company's
executive officers and other key employees, including the Company's Chief
Financial Officer, Daniel McDonough, have only recently joined the Company. The
loss of the services of any of such individuals could have a material adverse
effect on the Company's business, financial condition and results of operations.
The success of the Company will also depend, in part, upon the Company's ability
to find, hire and retain additional key management personnel. The inability to
find, hire and
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retain such personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management -
Executive Officers and Directors."
SUBSCRIBER ATTRITION
The Company believes that a high level of subscriber attrition is a
characteristic of the domestic residential long distance industry. Attrition is
attributable to a variety of factors, including the termination of subscribers
for non-payment and the initiatives of existing and new competitors as they
engage in, among other things, national advertising campaigns, telemarketing
programs and the issuance of cash or other forms of incentives. Such attrition
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
REGULATION OF LONG DISTANCE TELEPHONE SERVICES
Various regulatory factors may have an impact on the Company's ability
to compete and on its financial performance. CRC is subject to regulation by the
FCC and by various state public service and public utility commissions. Federal
and state regulations and regulatory trends have had, and may have in the
future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register or be found exempt from registration
by such commissions. While the Company believes that CRC is in compliance with
the applicable state and federal regulations governing telecommunications
service, and the Company believes that it is not required to obtain
certification or to be registered with public utility commissions, there can be
no assurance that the FCC or any state regulatory authority in one or more
states will not raise material issues with regard to CRC's or the Company's
compliance with applicable regulations, or that regulatory activities with
respect to CRC or the Company, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
In February 1996, the enactment of the 1996 Telecommunications Act
served to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that BOCs open their own local markets to competition before the FCC
will approve such application. The Company is unable to determine how the FCC
will rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "- Intense Competition." If the federal
and state regulations requiring the LECs to provide equal access for the
origination and termination of calls by long distance subscribers change or if
the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "Business - Competition" and "- Regulation - Regulation of Long
Distance Telephone Services."
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REGULATION AFFECTING NUTRITIONAL PRODUCTS
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's nutritional products are subject to
regulation by a number of governmental agencies, the most active of which is the
Food and Drug Administration (the "FDA"), which regulates the Company's products
under the Federal Food, Drug, and Cosmetic Act (the "FDCA") and regulations
promulgated thereunder. The Company's products are also subject to regulation by
the Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission
(the "CPSC"), the United States Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). The FDCA has been amended several
times with respect to dietary supplements, most recently by the Nutrition
Labeling and Education Act of 1990 (the "NLEA") and the Dietary Supplement
Health and Education Act of 1994 (the "DSHEA"). The Company's nutritional
products are generally classified and regulated as dietary supplements under the
FDCA, as amended, and therefore are not subject to pre-market approval by the
FDA. However, these products are subject to extensive labeling regulation by the
FDA and can be removed from the market if shown to be unsafe. Moreover, if the
FDA determines on the basis of labeling or advertising claims by the Company,
that the "intended use" of any of the Company's nutritional products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can
regulate those products as drugs and require pre-market clearance for safety and
effectiveness. In addition, if the FDA determines that claims have been made
regarding the effect of dietary supplements on the "structure or function" of
the body, such claims could result in the regulation of such products as drugs.
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's products. In the
past several years, the FTC has instituted enforcement actions against several
dietary supplement companies for false and misleading advertising of certain
products. In addition, the FTC has increased its scrutiny of the use of
testimonials. There can be no assurance that the FTC will not question the
Company's advertising or other operations. Moreover, there can be no assurance
that a state will not interpret product claims presumptively valid under federal
law as illegal under that state's regulations. Furthermore, the Company's IAs
and customers may file actions on their own behalf, as a class or otherwise, and
may file complaints with the FTC or state or local consumer affairs offices.
These agencies may take action on their own initiative or on a referral from
IAs, customers or others, including actions resulting in entries of consent
decrees and the refund of amounts paid by the complaining IA or customer,
refunds to an entire class of IAs or customers, or other damages, as well as
changes in the Company's method of doing business. A complaint because of a
practice of one IA, whether or not that practice was authorized by the Company,
could result in an order affecting some or all IAs in a particular state, and an
order in one state could influence courts or government agencies in other
states. Proceedings resulting from these complaints may result in significant
defense costs, settlement payments or judgments and could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business - Regulation Regulation Affecting Nutritional
Products."
OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional products and
services in the future, which may include, among others, paging, wireless cable,
conference calling, cellular phone service and local phone service, additional
nutritional products and other non-communications and non-nutritional related
consumer products. In November 1997, the Company began marketing a line of
private label nutritional products to its customers and its IAs. Entry into new
markets entails risks associated with the state of development of the market,
intense competition from companies already operating in those markets, potential
competition from companies that may have greater financial resources and
experience than the Company, increased selling and marketing expenses and
regulatory issues. There can be no assurance that: (i) the Company will be
successful in developing and marketing new products and services that respond to
the needs of a particular market; (ii) the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products or services; or (iii) its new
products and services will adequately meet the requirements of the marketplace
and achieve market acceptance. Delays in the introduction of new products and
services, the inability of the Company to develop and market such new products
or services and the failure of such products or services to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business - Competition,"
"-Strategy" and "- Products and Services."
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EFFECT OF UNFAVORABLE PUBLICITY
The Company believes the dietary supplement products market is affected
by national media attention regarding the consumption of such products. There
can be no assurance that future scientific research or publicity will not be
unfavorable to the dietary supplement market or any particular product, or be
inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable than or that question earlier
research could have a material adverse effect on the Company's business,
financial condition or results of operations. Because of the Company's
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from the consumption of the Company's
nutritional products, or any similar products distributed by other companies,
could have a material adverse effect on the Company's business, financial
condition or results of operations. Such adverse publicity could arise even if
the adverse effects associated with such products result from failure to consume
such nutritional products as directed. In addition, the Company may not be able
to counter the effects of negative publicity concerning the efficacy of its
nutritional products.
ABSENCE OF CLINICAL STUDIES
Although many of the ingredients in the Company's nutritional products
are vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of the Company's nutritional products contain
ingredients as to which there is little history of human consumption. The
Company has not tested, and has not engaged any independent third party to test,
any of its nutritional products. Accordingly, no assurance can be given that the
Company's nutritional products, even when used as directed, will have the
effects intended. Although the Company believes that its nutritional products
are safe when consumed as directed, the Company has not sponsored clinical
studies on the long-term effect of human consumption. See "- Effect of
Unfavorable Publicity," and "- Product Liability," and "Business - Regulation."
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark
"MAXXIS." In addition, the Company relies upon common law rights to protect
other marks used by the Company and other rights that the Company considers to
be its intellectual property. There can be no assurance that the Company's
measures to protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. See "Business -
Proprietary Rights."
TRANSACTIONS WITH RELATED PARTIES
The Company has in the past entered into agreements and arrangements
with certain officers, directors and principal shareholders of the Company.
Certain of these transactions may have been made on terms more favorable to such
officers, directors and principal shareholders than could have been obtained
from an unaffiliated third party. The Company has adopted a policy requiring
that all material transactions between the Company and its officers, directors
or other affiliates must: (i) be approved by a majority of the disinterested
members of the Board of Directors of the Company; and (ii) be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
See "Certain Transactions."
16
<PAGE> 18
ARBITRARY DETERMINATION OF OFFERING PRICE
The purchase price of the Common Stock was arbitrarily determined by
the Company and does not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value. Each prospective
investor should make an independent evaluation of the fairness of such price. No
assurance is or can be given that any of the shares will be able to be resold
for the offering price or for any other amount. See "Capitalization" and
"Dilution."
ABSENCE OF TRADING MARKET; TRANSFER RESTRICTIONS
There is currently no market for the Shares. Although the Company has
filed a Registration Statement with the Commission to register the issuance of
the Shares in the Offering under the Securities Act, it is unlikely that any
trading market will develop for the shares in the future. There are no present
plans for the Shares to be traded on any stock exchange or in the
over-the-counter market. The Shares will be subject to certain restrictions
which will be referenced on legends set forth on the certificates representing
the Shares and which the Company expects to limit the ability of holders to
dispose of the Shares in the over-the-counter market. As a result, investors who
may need or wish to dispose of all or part of their Shares may be unable to do
so. In addition, sales of substantial amounts of the Shares after the Offering
could adversely affect prevailing market prices, if any. See "- Application of
the Penny Stock Rules" and "Shares Eligible for Future Sale."
Each certificate evidencing the Shares will bear a legend restricting
the transfer of the Shares to individuals in any jurisdiction where the offer or
sale of the Shares would be unlawful prior to registration or qualification of
such offer or sale under the laws of any such jurisdiction. The Company is not
obligated to register or qualify, or to maintain the registration or
qualification of, the Shares for sale or resale in any jurisdiction. In
addition, pursuant to the Subscription Agreement, each purchaser of the Shares
offered hereby agrees not to sell or otherwise transfer the Shares or any
securities issued on account of such Shares during the Lock-up Period (as
defined herein). The Company may impose transfer restrictions during the Lock-up
Period by giving notice to the holders of record of the Shares. A purchaser of
the Shares offered hereby will not be able to transfer such Shares during the
Lock-up Period and may have substantial difficulty transferring such Shares
after the expiration of the Lock-up Period. The certificates evidencing the
Shares will bear a legend referencing these potential restrictions on transfer.
See "The Offering - Transfer Restrictions."
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors has authority to issue up to 10,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by the Company's shareholders. In November 1997, the Company
entered into a demand promissory note to fund expenses incurred in connection
with the launch of the Company's nutritional product line. On March 23, 1998,
the Company converted the $200,000 principal amount of the promissory note into
units (the "Units") at a price of $5.50 per Unit with each Unit consisting of
one share of convertible preferred stock (the "Preferred Stock") and a warrant
(a "Warrant") to purchase one share of Common Stock at a price of $5.50 per
share. The Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution
adjustment only upon a stock split, recapitalization or similar event; (iii)
entitled to a liquidation preference over the Common Stock; and (iv) convertible
into Common Stock at the option of the holder at any time commencing 14 months
following the date of the issuance of the Preferred Stock and automatically upon
the closing of a public offering that occurs at least 14 months following the
issuance of the Preferred Stock and that provides gross proceeds to the Company
of at least $7,500,000. The Warrants are entitled to an antidilution adjustment
only upon a stock split, recapitalization or similar event, are not exercisable
until 14 months following their date of issuance and remain exercisable at the
option of the holder until the seventh anniversary of their issuance. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of the Preferred Stock and any additional
preferred stock that may be issued in the future. In addition, an issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire control of the Company. See "Description of Capital Stock -
Preferred Stock and Warrants."
The Articles, Amended and Restated Bylaws (the "Bylaws") and the
Georgia Business Corporation Code, as amended (the "Georgia Law"), contain
certain additional provisions that could have the effect of making it
17
<PAGE> 19
more difficult for a party to acquire, or of discouraging a party from
attempting to acquire, control of the Company without approval of the Company's
Board of Directors. See "Description of Capital Stock - Certain Provisions of
the Articles, Bylaws and Georgia Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock following the Offering could adversely
affect the price of the Company's Common Stock. Upon completion of the Offering,
assuming 450,000 Shares offered hereby are sold, the Company will have
outstanding 2,021,187 shares of Common Stock, 36,359 shares of Preferred Stock
and Warrants to purchase 36,359 shares of Common Stock. Of these shares, the
450,000 Shares offered hereby will be freely tradeable without restriction or
further registration under the Securities Act, unless purchased by "affiliates"
of the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act. However, such shares will be subject to certain restrictions on
transfer, including the restrictions set forth in the Subscription Agreement.
See "The Offering - Transfer Restrictions." The remaining 1,643,905 shares of
Common Stock outstanding upon completion of the Offering and issuable upon the
conversion of outstanding Preferred Stock and the exercise of outstanding
Warrants are "Restricted Securities," as that term is defined in Rule 144. Upon
compliance by the Company with the current public information requirements of
Rule 144(c), all of such Restricted Securities will be eligible for sale in the
open market under, and subject to the restrictions contained in, Rule 144.
The Company and certain of its directors, officers and major
shareholders have entered into a shareholders agreement (the "Shareholders'
Agreement") whereby such shareholders agreed to certain restrictions on the
transfer or other disposition of the shares of Common Stock held by each holder.
In the event a shareholder intends to transfer his or her Common Stock to a
non-permitted transferee, the Company and the remaining shareholders have a
right of first refusal to purchase the transferring shareholder's Common Stock
at fair market value. In addition, if the Company terminates a shareholder's
employment or engagement as a sales representative or consultant for cause (or
the employment or engagement of certain persons associated with a shareholder),
the Company shall have the right to repurchase, at fair market value, a
percentage of the shareholder's Common Stock which begins at 100% and declines
20% per year for each completed year of service with the Company. If either the
right of first refusal or the Company's right to purchase is exercised, either
provision could have the effect of further concentrating the stock ownership and
voting power of the Company. See "Description of Capital Stock - Shareholders'
Agreement" and "Shares Eligible for Future Sale."
DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in the Offering will
experience immediate and substantial dilution of $4.24 per share in net tangible
book value, or 77.1% of the initial public offering price of $5.50 per share. In
addition, assuming the sale of the 450,000 Shares offered hereby, the Board of
Directors of the Company has the authority to issue up to approximately
17,980,000 additional shares of Common Stock, and such amount may be increased
and new securities may be authorized in the future upon the determination of the
Board of Directors with the consent of the shareholders. See "- Management will
Maintain Control of the Company."
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of its Common Stock to officers, directors, key
employees, advisors and consultants of the Company. Exercise of these options
could have a dilutive effect on the shareholders' interest in the Company's
earnings and on net tangible book value per share.
See "Dilution."
LACK OF DIVIDENDS
The Company does not intend to pay any cash dividends with respect to its Common
Stock in the foreseeable future. See "Dividend Policy."
18
<PAGE> 20
APPLICATION OF THE PENNY STOCK RULES
The Common Stock offered hereby may be considered "penny stock." The
Commission has adopted rules that regulate broker/dealer practices in connection
with transactions in "penny stocks." The Commission defines a "broker" as any
person engaged in the business of effecting transactions in securities for the
account of others, but does not include a bank, and a "dealer" as any person
engaged in the business of buying and selling securities for his own account,
through a broker or otherwise, but does not include a bank, or any person
insofar as he buys or sells securities for his own account, either individually
or in some fiduciary capacity, but not as part of a regular business. Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market's National Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system). 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 document prepared by the Commission that
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 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. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such 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. If
the Common Stock is considered penny stock, these disclosure requirements
imposed on broker-dealers may discourage them from effecting transactions in the
Common Stock, thereby severely limiting the market liquidity of the Common Stock
and the ability of purchasers in the Offering to sell the Common Stock in the
secondary market. See "- Absence of Trading Marketing; Transfer Restrictions."
19
<PAGE> 21
THE OFFERING
GENERAL
The Company intends to offer for sale pursuant to this Prospectus up to
450,000 shares of its Common Stock. The Company intends to offer the Shares to
regional and executive directors and strategic partners of the Company. The
Company has established a minimum subscription of 20 Shares and maximum
subscriptions of 20 Shares and 200 Shares, respectively, for each person who
qualifies as a regional or executive director in the Company's marketing system;
provided, that the aggregate number of Shares sold in this Offering shall not
exceed 450,000. However, the Company reserves the right to not sell shares to
any particular regional or executive director or strategic partner, to waive the
maximum subscription amount or to allocate additional Shares to regional and
executive directors without notifying any purchaser or prospective purchaser.
The Company has not established minimum or maximum subscriptions for strategic
partners.
Subscriptions to purchase Shares may be delivered to the Company until
12:00 p.m., E.S.T., on May 20, 1999, unless all of the Shares are earlier sold
or the Offering is earlier terminated or extended by the Company. The Company
reserves the right to terminate the Offering at any time or to extend the
expiration date for additional 90-day periods not to extend beyond December 31,
2000. The date the Offering terminates is referred to herein as the "Expiration
Date." No notice of an extension of the offering period need be given prior to
any extension, and any such extension will not alter the binding nature of
subscriptions already received by the Company. The Company intends to provide
quarterly communications to all purchasers which will include information
concerning any extensions of the Offering. Extension of the Expiration Date
might cause an increase in the Company's organizational and pre-opening expenses
and in the expenses incurred in connection with this Offering.
Prospective purchasers must deliver to the Company or a broker/dealer,
as the case may be, a completed and executed Subscription Agreement, the form of
which is attached hereto as Appendix A. An executed Subscription Agreement will
constitute a prospective purchaser's offer to purchase shares of Common Stock as
set forth in this Prospectus. Prospective purchasers must warrant in the
Subscription Agreement that they have received a copy of this Prospectus, as
amended or supplemented. Once a Subscription Agreement is received by the
Company or a broker/dealer, as the case may be, a prospective purchaser may not
revoke or withdraw such Subscription Agreement except with the consent of the
Company. In addition, the Company reserves the right to reject, in whole or in
part and in its sole discretion, any subscription for any reason or no reason
whatsoever. Acceptance of any particular Subscription Agreement by the Company
shall in no case require the Company to accept any other Subscription Agreement.
The Company may, in its sole discretion, allocate Shares among prospective
purchasers in the event of an oversubscription for the Shares. In determining
which subscriptions to accept, in whole or in part, the Company may take into
account any factors it considers relevant, including, without limitation, the
order in which subscriptions are received and a prospective purchaser's
perceived potential to do business with, or to direct customers or IAs to, the
Company.
Certificates representing Shares duly subscribed and paid for will be
issued by the Company promptly after the Company accepts a subscription.
NO ESCROW
There is no minimum number of Shares which must be sold in this
Offering, and no escrow account has been established. All subscription funds
will be paid directly to the Company. Acceptance and/or deposit of any
subscription funds by the Company shall not constitute acceptance of a
subscription. Upon acceptance of a subscription by the Company, subscription
proceeds will be available for immediate use by the Company. Once a subscription
is accepted by the Company, the Company will not refund the funds for any
subscription in the event that less than the maximum number of Shares offered
hereby are sold prior to the termination of the Offering. In the event the
Company rejects all, or accepts less than all, of any subscription, the Company
will refund promptly an amount remitted equal to the purchase price for such
Shares multiplied by the number of Shares as to which the subscription is not
accepted. See "Risk Factors - No Minimum Offering Amount; Irrevocability of
Subscriptions; No Escrow."
20
<PAGE> 22
TRANSFER RESTRICTIONS
The Company has filed this Registration Statement of which this
Prospectus forms a part with the state securities commissions of nine states in
order to apply for registration or qualification of the Offering in such states.
Due to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company anticipates that it
will be unable to register or qualify the Offering in certain of these states.
See "Risk Factors - Regulation of Network Marketing; Effect of State Securities
Laws." Each certificate evidencing the Shares will bear a legend restricting the
transfer of the Shares to individuals in any jurisdiction where the offer or
sale of the Shares would be unlawful prior to registration or qualification of
such offer or sale under the laws of any such jurisdiction.
Pursuant to the Subscription Agreement, each purchaser of the Shares
offered hereby: (i) agrees during the Lock-up Period (as defined below) not to
(x) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the Shares or (y) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Shares (regardless of whether any of the transactions described
in clause (x) or (y) is to be settled by the delivery of Shares, or such other
securities, in cash or otherwise); (ii) authorizes the Company to cause the
transfer agent during the Lock-up Period to decline to transfer any Shares
and/or to note stop transfer restrictions on the transfer books and records of
the Company with respect to any Shares; and (iii) agrees that a legend in
substantially the following form will be placed on certificates representing the
Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT
TO CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS ARE
SET FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") BY
AND BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. ANY
TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO THE CONDITIONS
SET FORTH IN THE SUBSCRIPTION AGREEMENT.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD
OR TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH
SHARES WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF
SUCH OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I)
SUCH REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH
JURISDICTION AND SETS FORTH SUCH INFORMATION AS IS IN THE COMPANY'S
SOLE JUDGMENT THEN REQUIRED TO BE DISCLOSED PURSUANT TO THE LAWS AND
REGULATIONS OF SUCH JURISDICTION; OR (II) REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED IN SUCH JURISDICTION AND, IN SUCH CASE,
THE PROSPECTIVE TRANSFEROR, AS A CONDITION TO EFFECTING THE TRANSFER OF
THE SHARES, PROVIDES TO THE COMPANY AT SUCH TRANSFEROR'S EXPENSE A
LEGAL OPINION, WHICH MUST BE SATISFACTORY TO THE COMPANY AND THE
COMPANY'S LEGAL COUNSEL IN THEIR SOLE DISCRETION, STATING THAT THE
OFFER AND SALE OF SUCH SHARES IN SUCH JURISDICTION MAY BE ACCOMPLISHED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH
JURISDICTION.
IN ADDITION, THE ISSUER MAY ELECT TO IMPOSE A PROHIBITION ON THE SALE
OR TRANSFER OF THESE SHARES IN THE EVENT THE ISSUER DETERMINES TO FILE
A REGISTRATION STATEMENT WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION THAT SEEKS TO REGISTER SECURITIES OF THE ISSUER IN AN
INITIAL PUBLIC OFFERING THAT IS FIRMLY UNDERWRITTEN. SUCH RESTRICTION
MAY REMAIN IN EFFECT FOR A PERIOD ENDING 180 DAYS FOLLOWING THE
EFFECTIVENESS OF SUCH REGISTRATION STATEMENT. THE ISSUER MAY IMPOSE
THESE CONDITIONS BY GIVING WRITTEN NOTICE TO THE HOLDER OF RECORD OF
THESE SHARES. THE FOREGOING SUMMARY IS
21
<PAGE> 23
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE SUBSCRIPTION AGREEMENT, A
COPY OF WHICH WILL BE PROVIDED FREE OF CHARGE BY THE ISSUER TO ANY
HOLDER, PROSPECTIVE PURCHASER OR TRANSFEREE OF THESE SHARES UPON THEIR
REQUEST."
The transfer restrictions may be imposed and terminated by the Company
by giving notice of the imposition or termination of such restriction (the
"Lock-up Notice") to holders of record of the Shares by first class mail,
postage prepaid (or, at the Company's option, certified mail, return receipt
requested), at the address of the holders of record of the Shares on a date
chosen by the Company that is at least one but no more than 15 days prior to
such mailing. The restrictions and the termination of such restrictions shall be
effective upon receipt of such notice, which date of receipt shall be deemed to
be three days following such mailing. The Lock-up Notice may be given by the
Company such that it is received during the period beginning 15 days prior to
the filing by the Company of a registration statement with the U.S. Securities
and Exchange Commission (the "SEC") whereby the Company first seeks to register
its securities for sale to the public in a firmly underwritten public offering
(the "IPO Registration Statement"), and ending upon the date that the IPO
Registration Statement is declared effective by the SEC (the "Effective Date").
The transfer restrictions shall be effective on the date of receipt of
the Lock-up Notice and shall remain in force and effect until 180 days following
the Effective Date (such period being referred to as the "Lock-up Period") at
which time such Lock-up Period shall automatically terminate; provided, however,
that the Company in its sole discretion may elect to terminate the Lock-up
Period from time to time prior to the expiration of such 180-day period with
respect to an identical specified percentage of each holder's Shares by giving
notice of such earlier termination. The Lock-up Period shall terminate if the
Company files an IPO Registration Statement but such registration statement is
subsequently withdrawn or is not declared effective within 120 days of filing
with the SEC, or if the Company transmits a Lock-up Notice prior to the filing
of an IPO Registration Statement but the IPO Registration Statement is not filed
within 15 days of receipt of such notice; provided, however, that in any such
event the restrictions set forth in Section 3(a)(ii) shall survive and shall be
applicable to each subsequent filing of an IPO Registration Statement by the
Company until an IPO Registration Statement is first declared effective by the
SEC. See "Risk Factors - Absence of Trading Market; Transfer Restrictions."
PLAN OF DISTRIBUTION
In certain states, offers and sales of the Common Stock will be made on
behalf of the Company by certain of its officers and directors. The officers and
directors will receive no commissions or other remuneration in connection with
such activities, but they will be reimbursed for reasonable expenses incurred in
connection with the Offering.
In the states of Maryland, North Carolina and Virginia and, in the
event this Offering is registered or qualified in other states where the
Company's directors and officers are not permitted to effect offers and sales,
in such other states, the Company intends to offer shares of Common Stock
through broker/dealers who are licensed to effect sales in such states. The
Company currently has no agreement with a registered broker-dealer in any such
state, and no assurance can be given that the Company will be able to engage a
broker-dealer in any such state on terms acceptable to the Company or at all.
The Company will amend the Registration Statement to set forth the terms of any
agreement with any broker-dealer.
HOW TO SUBSCRIBE
A Subscription Agreement, a form of which is attached hereto as
Appendix A, must be completed, executed and delivered to the Company on or prior
to the Expiration Date. Prospective purchasers should retain a copy of the
completed Subscription Agreement for their records. The subscription price is
due and payable when the Subscription Agreement is delivered. Payment must be
made in United States dollars by cash or by check, bank draft or money order
drawn to the order of Maxxis Group, Inc., in the amount of $5.50 multiplied by
the number of Shares subscribed for.
22
<PAGE> 24
USE OF PROCEEDS
The net proceeds to the Company from the sale of 450,000 Shares offered
hereby (after deducting estimated offering expenses not including any
broker/dealer fees and expenses) are estimated to be approximately $2,075,000 if
all the Shares offered hereby are sold. Assuming the sale of all 450,000 Shares
offered hereby, the following table sets forth the intended uses of proceeds
from the Offering:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
----------------------- ------------- ---------------
<S> <C> <C>
Repayment of promissory note(1)........................................ $ 53,000 2.6%
Development of additional product lines(2)............................. 900,000 43.4
Development and/or acquisition of information,
accounting and/or inventory control systems......................... 500,000 24.1
Working capital and general corporate purposes(3)...................... 622,000 29.9
------------- ---------------
Total............................................................ $ 2,075,000 100.0%
============= ===============
</TABLE>
- -------------------------
(1) On February 28, 1998, the Company entered into a demand promissory note
(the "Cordy Note") with Thomas O. Cordy, the Chief Executive Officer of
the Company, to memorialize a loan from Mr. Cordy to the Company to
fund certain operational expenses. The Cordy Note bears interest at 6%
per annum and is payable on demand at any time.
(2) The Company intends to develop additional product lines to be marketed
through the Company's IAs, including an internet access product.
(3) Such purposes may include general and administrative expenses, capital
expenditures, payment of accounts payable and accrued expenses,
marketing expenses, payment of organizational and offering expenses and
satisfaction of certain corporate obligations.
A portion of the net proceeds may be used for acquisitions of
complementary services or businesses. The Company currently has no agreements or
understandings with regard to any acquisitions. Shareholders may not be able to
vote on any potential acquisitions (unless required by applicable law) nor have
the opportunity to review any potential acquisition candidate. The Company
anticipates that it will require approximately $1.9 million in capital to fund
its ongoing operations through December 31, 1998. The Company anticipates that
the proceeds of this Offering, together with borrowings and cash generated from
operations, will be sufficient to meet the Company's capital requirements
through December 31, 1998. The foregoing allocation of proceeds represents the
Company's current estimate of its allocation of the net proceeds of the Offering
based upon the current status of its business operations, its current plans, and
current economic and industry conditions. Future events, as well as changes in
economic or competitive conditions of the Company's business and the results of
the Company's marketing activities, may make different uses of funds necessary
or desirable. In addition, there can be no assurance that the Company will
receive enough proceeds from the Offering to fund any of the uses of proceeds,
including raising enough proceeds to fund its operations or to cover the
estimated offering expenses. If the Company does not receive sufficient funds
from its operations, its borrowings and from the Offering to fund its
operations, the Company may need to raise additional capital. See "Risk Factors
- - Broad Discretion in Application of Proceeds; Unspecified Acquisitions;
Possible Need for Additional Capital." Pending application of the net proceeds
as described above, the Company will invest such proceeds in short-term,
interest-bearing instruments and investment grade securities.
23
<PAGE> 25
DIVIDEND POLICY
The Company anticipates that for the foreseeable future its earnings,
if any, will be retained for the operation and expansion of its business and
that it will not pay cash dividends. The Company's Board of Directors will
determine the Company's dividend policy in the future based upon, among other
things, the Company's results of operations, financial condition, business
opportunities, capital requirements, contractual restrictions and other factors
deemed relevant at the time.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions."
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Preferred Stock, no par value; 10,000,000 shares
authorized; 36,359 shares issued and outstanding................................. $ 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,571,187 shares issued and outstanding.......................................... 574,000
Subscription receivable............................................................ (120,000)
Accumulated deficit................................................................ (189,000)
--------------
Total shareholders' equity.................................................... $ 465,000
==============
</TABLE>
24
<PAGE> 26
DILUTION
The net tangible book value of the Company as of March 31, 1998, was
$465,000, or $0.30 per share of Common Stock outstanding. Net tangible book
value per share represents the amount of the Company's total assets (excluding
organizational costs) less total liabilities, divided by the total number of
outstanding shares of Common Stock. After giving effect to the sale of 450,000
Shares offered hereby and the receipt and application of the estimated proceeds
therefrom (at a public offering price of $5.50 per share and after deducting
estimated expenses of the Offering), the pro forma net tangible book value of
the Company at March 31, 1998 would have been $2,540,000, or $1.26 per share of
Common Stock. This represents an immediate increase in the net tangible book
value of $.96 per share to existing shareholders and an immediate dilution to
new investors purchasing shares of Common Stock in the Offering of $4.24 per
share. The following table illustrates the per share dilution to new investors
at March 31, 1998, assuming the Offering was made at that time:
<TABLE>
<S> <C> <C>
Initial offering price per share of Common Stock...................... $ 5.50
Net tangible book value per share of
Common Stock before the Offering.................................. 0.30
Increase per share attributable to new investors.................... 0.96
----
Pro forma net tangible book value per share of Common
Stock after the Offering............................................ 1.26
--------
Dilution per share to new investors................................... $ 4.24
========
</TABLE>
The following table sets forth as of March 31, 1998, after giving
effect to the Offering, the difference between existing shareholders and the new
investors purchasing shares of Common Stock in the Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid to the Company
on an as adjusted basis:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
-------------------- --------------------- Price
Number Percent Amount Percent Per Share
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 1,571,187 77.7% $ 574,000 18.8% $ 0.37
New investors........................... 450,000 22.3 2,475,000 81.2 5.50
--------- ------- ---------- -------
Total................................ 2,021,187 100.0% $3,049,000 100.0%
========= ======= ========== =======
</TABLE>
In addition, the Board of Directors intends (subject to shareholder
approval or ratification) to adopt a stock option plan which will permit the
Company to grant options to purchase shares of Common Stock to officers,
directors, key employees, advisors and consultants of the Company. Exercise of
these options could have a dilutive effect on the shareholders' interest in the
Company's earnings and on net tangible book value per share. See "Risk Factors -
Dilution to New Investors."
25
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period and the balance sheet data as of June 30, 1997 are derived from
the audited consolidated financial statements of the Company. The consolidated
financial statements for the Inception Period were audited by Arthur Andersen
LLP, independent public accountants. The statement of operations data for the
nine months ended March 31, 1998 and the balance sheet data as of March 31, 1998
have been derived from the unaudited condensed consolidated financial statements
of the Company which include all adjustments, consisting of only normal
recurring adjustments, which the Company considers necessary for a fair
presentation of the results of operations for the period. All numbers have been
rounded. Results for interim periods are not necessarily indicative of the
results to be expected for a full fiscal year. The selected consolidated
financial data 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 in this
Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services................................... $ 2,322,000 $ 3,939,000
Nutritional products.......................................... -- 341,000
Marketing services............................................ 369,000 895,000
---------------- --------------
Total revenues............................................. 2,691,000 5,175,000
---------------- --------------
Cost of services:
Telecommunications services................................... 761,000 1,081,000
Nutritional products.......................................... -- 223,000
Marketing services............................................ 255,000 339,000
---------------- -------------
Total cost of services..................................... 1,016,000 1,643,000
---------------- -------------
Gross margin.................................................... 1,675,000 3,532,000
---------------- -------------
Operating expenses:
Selling and marketing......................................... 1,089,000 1,994,000
General and administrative.................................... 660,000 1,653,000
---------------- -------------
Total operating expenses................................... 1,749,000 3,647,000
---------------- -------------
Loss before income tax benefit.................................. (74,000) (115,000)
Income tax benefit.............................................. - -
---------------- -------------
Net loss........................................................ $ (74,000) $ (115,000)
================ =============
PER SHARE DATA:
Net loss per share.............................................. $ (0.05) $ (0.07)
================ =============
Weighted average number of shares outstanding................... 1,571,187 1,571,187
AS OF
MARCH 31, 1998
--------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital........................................................................ $ 182,000
Property and equipment, net............................................................ 146,000
Total assets........................................................................... 1,068,000
Long-term obligations.................................................................. --
Shareholders' equity................................................................... 465,000
</TABLE>
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Consolidated Financial Data" and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements relating to, without
limitation, future economic performance, plans and objectives of management for
future operations and projections of revenues and other financial items that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
cautionary statements set forth in the "Risk Factors" section and elsewhere in
this Prospectus identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements. See
"Risk Factors" for a discussion of factors that could cause or contribute to
such material differences.
GENERAL
Maxxis was incorporated on January 24, 1997 and began accepting IAs and
marketing telecommunications services in March 1997. The Company conducts all of
its business and operations through its wholly-owned subsidiaries Maxxis 2000,
Maxxis Telecom and Maxxis Nutritional.
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance services, travel cards, prepaid phone cards, 800 service
and international telecommunications services. Maxxis Telecom obtains
telecommunications services through its contract with CRC. Maxxis Telecom also
purchases telecommunications time for its prepaid 5 hour, 1 hour, 30 minute and
10 minute phone cards from CRC. The Company believes that its multi-level
network marketing system allows it to obtain customers for its products in a
cost effective manner and to enhance customer retention because of the
relationships between the Company's IAs and customers. The telecommunications
customer base developed by the Company's IAs provides a potential customer base
for the Company's nutritional products and for future products. Maxxis
Nutritional purchases private label nutritional products which the Company
distributes through its network of IAs.
The Company derives revenues from telecommunications services,
nutritional products and marketing services. Telecommunications services
revenues are comprised of sales of prepaid phone cards to the Company's IAs and
commissions from the Company's agreement with CRC whereby the Company receives a
percentage of the long distance billings received by CRC from the customers
originated by the Company's IAs, net of allowances for bad debts and billing
adjustments. The Company's aggregate revenues from 1-Plus services were $25,000,
or only 0.93% of the Company's total revenues, for the Inception Period, and
$696,000, or 13.4% of the Company's total revenues, for the nine months ended
March 31, 1998. Because of the administrative procedures that must be complied
with in order to establish 1-Plus customers, there is generally a delay of
between three to four months from the time a prospective customer indicates a
desire to become a 1-Plus customer and the time that the Company begins to
receive commissions from such customer's usage. In the future, the Company
believes that commissions generated on the sales of 1-Plus long distance
services will constitute a significant percentage of its total revenues.
Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Marketing services revenues include
application fees from IAs and purchases of sales aids by IAs, including
distributor kits which consist of forms, promotional brochures, marketing
materials and presentation materials. Marketing services revenues also include
training fees paid by MDs. To become an associate, individuals (other than
individuals in North Dakota) must complete an application and purchase a
distributor kit for $30. IAs also pay an annual fee in order to maintain their
status as an IA, which fee the Company intends to amortize over the renewal
period. To become a MD, a senior associate, director or regional director must
attend a Company approved training school. The fee to attend the training school
is currently $99, and MDs must attend continuing education training schools each
year which also are subject to a fee. The training fees are recognized at the
time the training is received. The Company does not receive any fees from IAs
for the training provided by MDs.
27
<PAGE> 29
Cost of services consists of telecommunications services costs,
nutritional products costs and marketing services costs. Telecommunications
services cost includes the cost of purchasing activated prepaid phone cards.
Nutritional products cost consists of the cost of purchasing private label
nutritional products. Marketing services cost includes the costs of purchasing
IA distributor kits, sales aids and promotional materials and training costs.
Operating expenses consist of selling and marketing expenses, which include
commissions paid to IAs based on usage of long distance services by subscribers
and sales of IA distributor kits and products to new IAs sponsored into the
Company and sales of additional products to customers, and general and
administrative expenses, which include costs for IA support services,
information systems services and administrative personnel to support the
Company's operations and growth.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will achieve or maintain profitability. If the
Company continues to grow rapidly, the Company will be required to continually
expand and modify its operational and financial systems, add additional IAs and
new customers, and train and manage both current and new employees and IAs. Such
rapid growth would place a significant strain on the Company's operational
resources and systems, and the failure to effectively manage this projected
growth could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - New Enterprise" and "-
Ability to Manage Growth."
RESULTS OF OPERATIONS
The following table sets forth historical revenues and cost of revenues
by category and the percentage of total revenues attributable to each category
for the periods shown.
<TABLE>
<CAPTION>
JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
<S> <C> <C>
Revenues:
Telecommunications services...................................... 86.3% 76.1%
Nutritional products............................................. - 6.6
Marketing services............................................... 13.7 17.3
----- -----
Total revenues................................................ 100.0% 100.0%
===== =====
Cost of services:
Telecommunications services ..................................... 28.3% 20.9%
Nutritional products............................................. -- 4.3
Marketing services .............................................. 9.5 6.5
----- -----
Total cost of services........................................ 37.8 31.7
Operating expenses:
Selling and marketing............................................ 40.5 38.5
General and administrative....................................... 24.5 32.0
----- -----
Total operating expenses...................................... 65.0% 70.5%
===== =====
</TABLE>
The Company was incorporated in January 1997 and commenced operations
in March 1997. No comparisons are presented for the nine months ended March 31,
1998 because the Company commenced operations in March 1997 and the comparisons
would not be meaningful. Similarly, no comparisons are presented for the
Inception Period because the Company was not in existence for the corresponding
prior period in 1996. Results of operations for the nine months ended March 31,
1998 and the Inception Period are not necessarily indicative of the results to
be expected for a full fiscal year.
28
<PAGE> 30
NINE MONTHS ENDED MARCH 31, 1998
Revenues
Total revenues consist of telecommunications services, nutritional
products and marketing services revenues. Total revenues were $5,175,000 for the
nine months ended March 31, 1998. For the nine months ended March 31, 1998,
telecommunications services revenues were $3,939,000, or 76.1% of total
revenues. Telecommunications services revenues consist of sales of prepaid phone
cards by IAs and commissions generated from long distance usage of customers
originated by IAs. For the nine months ended March 31, 1998, nutritional
products revenues were $341,000, or 6.6% of total revenues. Nutritional products
revenues consist of sales of private label nutritional products. For the nine
months ended March 31, 1998, marketing services revenues were $895,000, or 17.3%
of total revenues. Marketing services revenues consist of application fees paid
by IAs, purchases of sales aids by IAs and training fees paid to become a MD.
Cost of Services
Cost of services includes telecommunications services costs,
nutritional products costs and marketing services costs. Total cost of services
for the nine months ended March 31, 1998 was $1,643,000, or 31.7% of total
revenues. For the nine months ended March 31, 1998, telecommunications services
cost was $1,081,000, or 20.9% of total revenues. Telecommunications services
cost includes the cost of purchasing activated prepaid phone cards from CRC. The
Company then sells activated phone cards to its IAs. Telecommunications services
cost also includes, as a minor component, the costs of materials that are used
to package the phone cards. For the nine months ended March 31, 1998,
nutritional products cost was $223,000, or 4.3% of total revenues. Nutritional
products cost consists of the cost of purchasing private label nutritional
products. Marketing services cost was $339,000, or 6.5% of total revenues, for
the nine months ended March 31, 1998. Marketing services cost primarily consists
of the costs of purchasing IA distributor kits, sales aids and promotional
materials and training costs.
Operating Expenses
For the nine months ended March 31, 1998, selling and marketing
expenses were $1,994,000, or 38.5% of total revenues. Selling and marketing
expenses consist of commissions paid to IAs based on (i) usage of long distance
services, (ii) sales of IA distributor kits and products for any new IAs they
sponsor into the Company and (iii) sales of additional products to customers.
General and administrative expenses were $1,653,000, or 31.9% of total
revenues, for the nine months ended March 31, 1998. General and administrative
expenses consist of salary expense for the Company's customer service personnel,
office staff and executive personnel and the cost of IA support services and
information systems services.
INCEPTION PERIOD (JANUARY 24, 1997 TO JUNE 30, 1997)
Revenues
For the Inception Period, telecommunications services revenues were
$2,322,000, or 86.3% of total revenues, and marketing services revenues were
$369,000, or 13.7% of total revenues. Telecommunications services revenues
consist of sales of prepaid phone cards to the Company's IAs and commissions
generated from 1-Plus services commissions generated from long distance usage of
customers generated by the Company's IAs. This amount was minimal for the
Inception Period because no customers were utilizing long distance services
until May 1997. In the future, the Company believes that commissions generated
on sales of 1-Plus long distance services will constitute a more significant
percentage of telecommunications services revenues. Marketing services revenues
include application fees from IAs, purchases of sales aids by IAs and training
fees paid to become a MD.
29
<PAGE> 31
Cost of Services
Telecommunications services cost was $761,000, or 28.3% of total
revenues, for the Inception Period. Telecommunications services cost includes
the cost of purchasing activated prepaid phone cards. Marketing services cost,
which includes the cost of the IA distributor kits and promotional materials,
was $255,000, or 9.5% of total revenues, for the Inception Period.
Operating Expenses
Selling and marketing expenses principally consist of commissions paid
to IAs based on (i) usage of long distance services, (ii) sales of IA
distributor kits and products for any new IAs they sponsor into the Company and
(iii) sales of additional products to customers. Selling and marketing expenses
were $1,089,000, or 40.5% of total revenues, for the Inception Period.
General and administrative expenses were $660,000, or 24.5% of total
revenues, for the Inception Period. General and administrative expenses consist
primarily of salary expense for the Company's customer service personnel, office
staff and executive personnel. Such expenses also include costs for IA support
services and information systems services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily financed all of its
operations through the sale of its securities in private placements. During the
nine months ended March 31, 1998, cash flows from financing activities totaled
approximately $340,000 related to the sales of equity securities and short-term
borrowings. In November 1997, the Company entered into a demand promissory note
to fund expenses incurred in connection with the launch of the Company's
nutritional product line. As of March 23, 1998, the Company had borrowed
$200,000 under such promissory note. On March 23, 1998, the Company converted
the outstanding principal amount under the promissory note into Units at a price
of $5.50 per Unit with each Unit consisting of one share of Preferred Stock and
one Warrant. In February 1998, the Company entered into the Cordy Note to
memorialize a loan in December 1997 of $53,000 from the Chief Executive Officer
of the Company to fund certain operational expenses. The Cordy Note bears
interest at a fixed rate of 6% per year. The Company intends to repay the Cordy
Note out of the proceeds of the Offering.
As of March 31, 1998, the Company had cash and cash equivalents of
$229,000 and working capital of $182,000. Cash used in operating activities for
the nine months ended March 31, 1998 was $8,000.
The Company's investing activities principally consisted of the
purchase of office and computer equipment for $100,000 and software development
costs of $38,000 for the nine months ended March 31, 1998.
The Company anticipates that it will require approximately $1.9 million
in capital to fund its ongoing operations through December 31, 1998. The Company
anticipates that the proceeds of this Offering, together with borrowings and
cash generated from operations, will be sufficient to meet the Company's capital
requirements through December 31, 1998. However, if the Company does not receive
sufficient funds from its operations, its borrowings and from the Offering to
fund its operations, the Company may need to raise additional capital. In
addition, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in expenses or significant acquisitions could have a
material adverse effect on the Company's liquidity and capital resources and
could require the Company to raise additional capital. The Company may also need
to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, additional lines of credit and private equity and
debt financings. The Company's cash and financing needs for 1998 and beyond will
be dependent on the Company's level of IA and customer growth and the related
capital expenditures, advertising costs and working capital needs necessary to
support such growth. The Company believes that major capital expenditures may be
necessary over the next few years to develop additional product lines to sell
through its IAs and to develop and/or acquire information, accounting and/or
inventory control
30
<PAGE> 32
systems to monitor and analyze the Company's growing multi-level network
marketing system. The Company has not identified financing sources to fund such
cash needs in 1998 and beyond. There can be no assurance that the Company will
be able to raise any such capital on terms acceptable to the Company or at all.
See "Risk Factors - Broad Discretion in Application of Proceeds; Unspecified
Acquisitions; Possible Need for Additional Capital," "- New Enterprise" and "-
Ability to Manage Growth."
31
<PAGE> 33
BUSINESS
Maxxis markets telecommunications services in the United States through
its multi-level network marketing system of "independent associates," or "IAs."
The Company operates through its subsidiaries: Maxxis 2000, which conducts
network marketing operations; Maxxis Telecom, which provides long distance
services; and Maxxis Nutritional, which provides private label nutritional
products. The Company currently markets both 1-Plus long distance service,
value-added telecommunications services, such as prepaid phone cards, and
nutritional products. The Company was incorporated in January 1997 and began
accepting IAs and marketing telecommunications services in March 1997. For the
Inception Period and the nine months ended March 31, 1998, the Company generated
aggregate gross revenues of approximately $2,691,000 and $5,175,000,
respectively.
The Company initially intends to build a customer base without having
to commit capital or management resources to construct its own
telecommunications network and transmission facilities. In February 1997, Maxxis
Telecom contracted with CRC to obtain switching and network services and to
allow CRC's telecommunications services to be sold by the Company's IAs. In the
future, the Company may contract with other providers of long distance services
and intends to analyze the feasibility of developing its own long distance
network. In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. The Company's nutritional products
are manufactured by various suppliers.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to enroll subscribers with whom the IAs have an ongoing
relationship, such as family members, friends, business associates and
neighbors. The Company also sponsors opportunity meetings at which current IAs
are encouraged to bring in potential candidates for an introduction to the
Company's marketing system. The Company's multi-level network marketing system
and the Company's reliance upon IAs are intended to reduce net marketing costs,
subscriber acquisition costs and subscriber attrition. The Company believes that
its multi-level network marketing system will continue to build a base of
potential customers for additional services and products.
The Company offers its IAs a number of support services. The Company
currently provides to each IA without charge one printed report describing such
IA's organization and provides additional reports for a fee. In addition, the
Company offers training, information and motivational support to the IA network
through: (i) its training organization; (ii) monthly newsletters; and (iii)
regional rallies.
STRATEGY
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing to
support the marketing efforts of IAs and introducing new
income opportunities for IAs.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of IAs.
32
<PAGE> 34
- Offering Additional Telecommunications Products by entering
into agreements for the marketing of additional products that
meet the needs of subscribers, which may include, among
others, paging, conference calling, wireless cable, cellular
and local phone service.
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the
Company recently began marketing a line of private label
nutritional products to its customers and IAs.
- Obtaining Competitive Prices on products and services through
the purchasing power of the Company's nationwide network.
MARKETING
The Company markets products and services exclusively through its
network of IAs. Currently, the Company has five IA positions in its marketing
system: associate; senior associate; director; regional director; and executive
director. IAs are paid only by commissions and do not receive any salary from
the Company. All IA commissions are paid directly by the Company and are a
specified percentage or a designated amount of the gross proceeds received by
the Company on the sale of services and products. The Company designates a
portion of its gross commissions as "commission value," or "CV," and allocates
the CV among eligible participants in its marketing system. Currently, 20% of
the CV earned with respect to a long distance subscriber is paid weekly to the
IA who sponsored such subscriber, 75% of the CV is paid monthly to eligible
directors who have the IA who sponsored the subscriber in their downline and the
remaining 5% is retained by the Company to be paid out to directors, regional
directors and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as MDs are eligible to receive an additional Leadership
Bonus. The Leadership Bonus is payable quarterly and equals, in the aggregate,
1% of the total sales of Maxxis 2000 during the quarter. The Leadership Bonus is
divided equally among all directors, regional directors and executive directors
who qualify for a Leadership Bonus.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The distributor
kit is a package of basic materials which assists an associate in beginning his
or her business. Associates may gather long distance customers and receive 20%
of the CV generated by such customers. Associates are also entitled to purchase
products from the Company at discounted prices for retail sales. An associate
becomes a senior associate when the associate sells $100 of bonus-eligible
products. Senior associates continue to receive a percentage of CV with regard
to all subscribers personally gathered by them and are also entitled to purchase
products from the Company at discounted prices for retail sales.
To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the director's
sales organization by sponsoring additional persons to become senior associates.
These senior associates, and all senior associates that they, in turn, sponsor,
become part of the sales organization of the director who sponsored them. Senior
associates, through the growth of their sales organizations, may become
directors, regional directors or executive directors and thereby increase the
size of the sales organization of the person who was their original sponsor. The
organization that grows below each director through this process is called a
"downline." Directors are eligible to receive the same commissions as senior
associates and, if they directly gather and maintain a minimum of four active
1-Plus long distance customers, are eligible to receive a percentage of the CV
produced by each IA that is within 15 levels below them in their downline. In
order to encourage the growth of the Company's marketing system, the Company
also pays eligible directors a bonus amount, which is designated as "bonus
value," or "BV," for each sale of bonus-eligible products. The Company primarily
designates retail priced phone cards and nutritional paks as bonus-eligible
products. Directors become regional directors and executive directors upon the
achievement of certain IA sales goals. Regional directors and executive
directors are eligible to receive the same commissions
33
<PAGE> 35
as directors and, if they qualify, share in the Leadership Bonus. Regional
directors and executive directors are eligible to serve on the Maxxis 2000
Advisory Board, which advises management on issues regarding field leadership.
The maximum aggregate long distance usage commissions the Company may
be required to pay with respect to a single subscriber's long distance usage are
approximately 40% of the gross commissions payable to the Company with respect
to such usage, but the Company anticipates that the actual amounts paid will be
less than 40% as the usage increases. The difference between actual commission
payments and the maximum payment is expected to occur because certain IAs fail
to maintain active status necessary to receive commissions from sales made by
persons in their downline.
RELATIONSHIP WITH IAS
The Company seeks to contractually limit the statements that IAs make
about the Company's business. Each IA also must agree to policies and procedures
to be followed in order to maintain the IA's status in the organization. IAs are
expressly forbidden from making any representation as to the possible earnings
of any IA from the Company. IAs are also prohibited from creating any marketing
literature that has not been pre-approved by the Company. While the Company has
these policies and procedures in place governing the conduct of the IAs, it is
difficult to enforce such policies and procedures. Because the IAs are
classified as independent contractors, the Company is unable to provide them the
same level of direction and oversight as Company employees. Violations of the
Company's policies and procedures may reflect negatively on the Company and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - Dependence on IAs" and
"- Relationship with IAs."
TRAINING AND MARKETING SUPPORT
The Company provides all IAs with the opportunity to receive training
through the Company's training program. The training is conducted by the
Company's MDs and includes a detailed explanation of the Company's products, the
IA compensation plan and the use of the various marketing tools available to the
IA. The Company intends to publish a newsletter for the IAs containing
informative and motivational articles and recognizing IA achievements. The
Company's first annual convention was held in August 1997, and the Company
intends to continue to hold annual conventions for IAs. This event provides
recognition to the top performers, direct access to senior management and a
chance for IAs to share experiences and develop support systems. The Company
intends to organize additional conventions throughout the country that current
IAs and potential new IAs can attend to learn more about the Company.
The Company encourages senior associates, directors and regional
directors to become MDs. MDs provide personal training to IAs. To become a MD, a
senior associate, director or regional director must attend a Company approved
training school. The fee to attend the training school is currently $99, and MDs
must attend continuing education training schools each year which also are
subject to a fee. National training directors that are selected by the Company
are paid a fee by the Company for training MDs. The Company does not receive any
fees from IAs for the training provided by MDs.
The Company operates a call center to answer IA questions and provide
IA support. This system includes a current database of all IAs, their personal
organizations and their subscribers. In addition, the Company has licensed a
commission processing software system to process the high volume of data
necessary to calculate commissions. This system prepares weekly commission
payments.
34
<PAGE> 36
PRODUCTS AND SERVICES
Following is a summary of the various services and products the Company
currently provides to IAs and customers.
Telecommunications Products. The Company markets a variety of long
distance and value-added telecommunications services and products to customers
in equal access areas, which currently include 1-Plus long distance service and
prepaid phone cards.
- 1-Plus Long Distance. The Company's 1-Plus long distance
service serves as a replacement for a customer's former long
distance service (such as the long distance services provided
by AT&T, MCI and Sprint). The 1-Plus services marketed by the
Company are billed on a flat rate basis, where the cost of a
call does not vary depending upon the distance of a call or
the time of day or day of week when the call is originated or
terminated. Residential 1-Plus services marketed by the
Company are billed based on one minute increments, and
business 1-Plus service is billed based on 6-second increments
with a 30-second minimum.
- Prepaid Phone Cards. The Company offers prepaid phone cards in
domestic time increments of 5 hours, 1 hour, 30 minutes and 10
minutes. These cards may be used for domestic and
international calls. If used for international calls, a
greater number of minutes will be deducted from the call in
proportion to the differential between the domestic and
applicable international rate.
The Company may add products to and remove products from its telecommunications
product line from time to time.
Nutritional Products. The Company recently began marketing a line of
private label nutritional products to its IAs and customers. The Company offers
private label dietary supplements that contain herbs, vitamins, minerals and
other natural ingredients. Representative products include:
- 40/30/30 Maxxis Bar - an energy bar intended as a meal
replacement which contains approximately 40% carbohydrates,
30% protein, 30% dietary fat and various vitamins and
minerals.
- Maxx-A-Chol - a dietary supplement which is a specialized
combination of six herbs.
- MAXXIS MSM - a dietary supplement consisting of
methylsulfonylmethane, vitamin C, citrus bioflavonoid complex
and ginseng.
- MAXXIS Multivitamin - a multivitamin nutritional supplement
which is delivered by means of a spray.
- MAXXIS 0(2) - a nutritional supplement that contains
electrolytes, oxygen, trace elements, enzymes and amino acids.
The Company anticipates adding products to and may remove products from its
nutritional product line from time to time.
Promotional Materials. The Company also derives revenues from the sale
of various educational and promotional materials designed to aid its IAs in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings and product and marketing
brochures.
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<PAGE> 37
INFORMATION SYSTEMS
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
IA SUPPORT
The Company operates a call center where advisors answer IA questions
and provide information to IAs. This system includes a current database of all
IAs, their personal organizations and their subscribers. The Company has
licensed a commission processing software system that incorporates the
provisions of the Company's marketing program for purposes of calculating
commissions. The Company also maintains transaction processing systems that
facilitate the shipment of IA training and marketing materials. In addition, the
Company's order processing system tracks the receiving, storage, shipment and
purchasing of sales aid products.
SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has contracted with CRC to obtain switching and network services. The
Company now depends exclusively on CRC for the transmission of subscriber phone
calls and the activation of prepaid phone cards. Subscribers are long distance
customers on CRC's network, and CRC provides subscriber support for the
Company's subscribers. Subscribers have the right to change their service at any
time. CRC provides subscriber support for the Company. The Company's 1-Plus
Agreement with CRC, which expires on February 20, 2000, provides that the
Company will have such rights to the subscriber base developed under the
agreement upon achieving certain minimum levels of monthly revenues on CRC's
network. Once the Company reaches these minimum levels, the Company will have
the right to market other carriers to the subscriber base in the event the
Company contracts with such carriers. There can be no assurance that the Company
will achieve the minimum level of monthly revenues on CRC's network necessary to
have rights to the subscriber base. Although the Company does not currently
intend to use a different carrier, minimum monthly revenues may be more
difficult to maintain if the Company utilizes additional carriers, and the
Company could be subject to additional minimum commitments including, but not
limited to, minimum monthly revenues or minimum monthly minutes of usage, with
such new carriers. The accurate and prompt billing of subscribers originated by
the IAs is also dependent upon CRC. The failure of CRC to accurately and
promptly bill subscribers could lead to a loss of subscribers and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company would be required to use another carrier if
the 1-Plus Agreement is terminated, the usage or number of subscribers
originated by the Company's IAs exceeds the capacity of CRC or CRC fails to
provide quality services. In such event, or in the event the Company otherwise
elects to use other carriers, the cost paid by the Company for such long
distance services may exceed that paid under the 1-Plus Agreement. If the 1-Plus
Agreement is terminated, there can be no assurance that the Company could enter
into new contracts with other providers on terms favorable to the Company or at
all. The termination of the 1-Plus Agreement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are developed and manufactured by third-party suppliers. Certain of
the nutritional products offered by the Company are proprietary to such
suppliers. The Company does not have any written contracts with or commitments
from any of its suppliers or manufacturers to continue to sell nutritional
products to the Company. The Company believes that its relationships with its
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to the Company.
Accordingly, there is a risk that any or all of the Company's suppliers or
manufacturers, including suppliers which provide proprietary products to the
Company, could discontinue selling their nutritional products to the Company. In
the event any of the third-party manufacturers become unable or unwilling to
continue to provide the nutritional products in required volumes, the Company
would be
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<PAGE> 38
required to identify and obtain acceptable replacement sources, and no assurance
can be given that any alternative manufacturing sources would become available
to the Company on a timely basis. See "Risk Factors - Dependence Upon
Suppliers."
SUBSCRIBER SUPPORT
CRC's is responsible for the billing of long distance customers and for
providing customer service. Services are provided under CRC's state, national
and international tariffs. The Company has been informed that CRC possesses all
tariffs necessary to offer such services.
COMPETITION
The Company faces competition in the United States for both the
products and services it sells and for the sponsoring and retaining of
independent salespeople. The United States long distance telecommunications
industry is intensely competitive, rapidly evolving and subject to rapid
technological change. In addition, the industry is significantly influenced by
the marketing and pricing practices of the major industry participants. AT&T,
MCI, Sprint and WorldCom are the dominant competitors in the domestic long
distance telecommunications industry. All of these companies are significantly
larger than the Company and have substantially greater resources. According to a
1995 FCC report, AT&T, MCI, Sprint and WorldCom accounted for approximately 56%,
17%, 10% and 5%, respectively, of total domestic long distance revenue for
calendar year 1994. Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger customer bases and
substantially greater financial, personnel, marketing, technical and other
resources than the Company. These competitors employ various means to attract
new subscribers, including television and other advertising campaigns,
telemarketing programs, network marketing and cash payments and other incentives
to new subscribers. The Company's ability to compete effectively depends upon,
among other factors, its ability to offer high quality products and services at
competitive prices. There can be no assurance that the Company will be able to
compete successfully.
The evolving regulatory environment of the United States
telecommunications industry significantly influences the Company's ability to
compete. On February 8, 1996, President Clinton signed into law the 1996
Telecommunications Act that will allow LECs, including the BOCs, to provide long
distance telephone service inter-LATA, which will likely significantly increase
competition for long distance services. The new legislation also grants the FCC
the authority to deregulate other aspects of the telecommunications industry.
Such increased competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs into the long distance market,
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such nutritional products, especially retail
outlets, based upon convenience of purchase, price and immediate availability of
the purchased product. For the most part, the Company's competitors offering
comparable products are substantially larger and have available considerably
greater financial resources
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<PAGE> 39
than the Company. The market is highly sensitive to the introduction of new
products (including various prescription drugs) that may rapidly capture a
significant share of the market. As a result, the Company's ability to remain
competitive depends in part upon the successful introduction of new products at
competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for new IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. Although management believes
that the Company offers an attractive business opportunity, there can be no
assurance that other network marketing companies will not be able to convince
the Company's existing IAs to join their organization or to deplete the pool of
potential IAs in a given market and, in such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.
PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark
"MAXXIS." In addition, the Company relies upon common law rights to protect
other marks used by the Company and other rights that the Company considers to
be its intellectual property. There can be no assurance that the Company's
measures to protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others.
REGULATION
Regulation of Long Distance Telephone Services. Various regulatory
factors may have an impact on the Company's ability to compete and on its
financial performance. The Company's carrier, CRC, is subject to regulation by
the FCC and by various state public service and public utility commissions.
Federal and state regulations and regulatory trends have had, and may have in
the future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register
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<PAGE> 40
or be found exempt from registration by such commissions. While the Company
believes that CRC is in compliance with the applicable state and federal
regulations governing telecommunications service, there can be no assurance that
the FCC or any state regulatory authority in one or more states will not raise
material issues with regard to CRC's compliance with applicable regulations, or
that regulatory activities with respect to CRC will not have a material adverse
effect on the Company's business, financial condition and results of operations.
In February 1996, the enactment of the 1996 Telecommunications Act
served to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended
to ensure that BOCs open their own local markets to competition before the FCC
will approve such application. The Company is unable to determine how the FCC
will rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "Risk Factors - Intense Competition." If
the federal and state regulations requiring the LECs to provide equal access for
the origination and termination of calls by long distance subscribers change or
if the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "- Competition."
Regulation Affecting Nutritional Products. The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of the
Company's nutritional products are subject to regulation by a number of
governmental agencies, the most active of which is the FDA, which regulates the
Company's nutritional products under the FDCA and regulations promulgated
thereunder. The Company's products are also subject to regulation by the FTC,
the CPSC, the USDA, and the EPA. The FDCA has been amended several times with
respect to dietary supplements, most recently by the NLEA and the DSHEA. The
Company's nutritional products are generally classified and regulated as dietary
supplements under the FDCA, as amended, and therefore are not subject to
pre-market approval by the FDA. However, these products are subject to extensive
labeling regulation by the FDA and can be removed from the market if shown to be
unsafe. Moreover, if the FDA determines on the basis of labeling or advertising
claims by the Company, that the "intended use" of any of the Company's
nutritional products is for the diagnosis, cure, mitigation, treatment or
prevention of disease, the FDA can regulate those products as drugs and require
pre-market clearance for safety and effectiveness. In addition, if the FDA
determines that claims have been made regarding the effect of dietary
supplements on the "structure or function" of the body, such claims could result
in the regulation of such products as drugs.
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's nutritional
products. In the past several years the FTC has instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. In addition, the FTC has increased its scrutiny
of the use of testimonials, such as those utilized by the Company. There can be
no assurance that the FTC will not question the Company's past or future
advertising or other operations. Moreover, there can be no assurance that a
state will not interpret product claims presumptively valid under federal law as
illegal under that state's regulations. Furthermore, the Company's IAs and
customers of IAs may file actions on their own behalf, as a class or otherwise,
and may file complaints with the FTC or state or local consumer affairs offices.
These agencies may take action on their own initiative or on a referral from
IAs, customers or others, including actions resulting in entries of consent
decrees and the refund of amounts paid by the complaining IA or customer,
refunds to an entire class of IAs or customers, or other damages, as well as
changes in the Company's method of doing business. A complaint because of a
practice of one IA, whether or not that practice was authorized by the Company,
could result in an order affecting some or all IAs in a particular state, and an
order in one state could influence courts or government agencies in other
states. Proceedings resulting from these complaints may result in significant
defense costs, settlement payments or judgments and could have a material
adverse effect on the Company's business, financial condition or results of
operations.
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Regulation of Network Marketing. The Company's multi-level network
marketing system is subject to or affected by extensive government regulation
including, without limitation, federal and state regulations governing the offer
and sale of business franchises, business opportunities and securities. Various
governmental agencies monitor direct selling activities, and the Company could
be required to supply information regarding its marketing plan to such agencies.
Although the Company believes that its multi-level network marketing system is
in material compliance with the laws and regulations relating to direct selling
activities, there can be no assurance that legislation and regulations adopted
in particular jurisdictions in the future will not adversely affect the
Company's business, financial condition and results of operations. The Company
also could be found not to be in compliance with existing statutes or
regulations as a result of, among other things, misconduct by IAs, who are
considered independent contractors over whom the Company has limited control,
the ambiguous nature of certain of the regulations and the considerable
interpretive and enforcement discretion given to regulators. Any assertion or
determination that the Company or the IAs are not in compliance with existing
statutes or regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. An adverse
determination by any one state on any regulatory matter could influence the
decisions of regulatory authorities in other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its multi-level network marketing system could be found
to be in noncompliance with applicable laws and regulations, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Such a decision could require the Company to modify its
multi-level network marketing system, result in negative publicity, or have a
negative effect on distributor morale and loyalty. In addition, the Company's
multi-level network marketing system will be subject to regulations in foreign
markets administered by foreign agencies should the Company expand its network
marketing organization into such markets.
Effect of State Securities Laws. Furthermore, the primary goal of the
Offering is to increase the motivation of regional directors by allowing them to
purchase an interest in the Company. Accordingly, because the Company desires
the ability to offer its Common Stock to regional directors in certain states,
the Company will attempt to register or qualify the Offering in such states. Due
to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company may be unable to
register or qualify the Offering in certain states. The inability of the Company
to offer the Shares to residents of certain states may limit the ability of the
Company to attract IAs in such states, or lead to increased attrition of IAs in
such states, and may have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. An adverse
determination by any one state regulator on a securities regulatory matter could
influence the decisions of securities regulatory authorities in other
jurisdictions.
FACILITIES
The Company operates out of offices in Atlanta, Georgia consisting of
approximately 7,200 square feet of general and administrative office space and
approximately 5,500 square feet of training space. The Company believes that it
will be required to lease or build additional facilities, including at least one
additional call center and new corporate headquarters, in order to meet
adequately its needs in the future. The Company believes that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 30 people. The
Company's IAs are classified by the Company as independent contractors; however,
two of the Company's employees are also IAs. The Company's employees are not
unionized, and the Company believes its relationship with its employees is good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are set forth
below. The Company's Board of Directors consists of nine directors divided into
three classes of directors, serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of shareholders. Officers of the Company are appointed at the Board's
first meeting after each annual meeting of shareholders. The ages of the persons
set forth below are as of March 31, 1998.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY EXPIRES
- ---- --- -------------------------- --------
<S> <C> <C> <C>
Ivey J. Stokes.................. 39 Chairman of the Board of Directors 1998
Thomas O. Cordy................. 56 Chief Executive Officer, President and
Director 1998
Daniel McDonough................ 50 Chief Financial Officer --
James W. Brown.................. 62 Executive Vice President, Secretary and
Director 1999
Larry W. Gates, II.............. 35 Vice President - Human Resources and
Director 1999
Charles P. Bernstein............ 47 Director 2000
Alvin Curry..................... 41 Director 1998
Robert J. Glover, Jr............ 37 Director 1999
Terry Harris.................... 43 Director 2000
Philip E. Lundquist............. 62 Director 2000
</TABLE>
The Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal shareholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's
length transactions with independent third parties. Any other matters involving
potential conflicts of interests are to be resolved on a case-by-case basis. See
"Certain Transactions."
IVEY J. STOKES has served as Chairman of the Board of Directors of the
Company since its inception. Mr. Stokes started his marketing career in 1982 at
A.L. Williams Corporation ("A.L. Williams") where he became one of less than 400
National Sales Directors out of 1.3 million insurance agents. In March 1991, Mr.
Stokes left the financial services industry to launch his own independent
marketing firm, Global Marketing Alliance ("Global Alliance"). Over the next
five years, Mr. Stokes became one of the leading money earners in several
national network marketing firms. Mr. Stokes' marketing firm, Global Alliance,
has sponsored and trained over 150,000 distributors since 1991. Mr. Stokes has a
bachelors degree in industrial management from the Georgia Institute of
Technology.
THOMAS O. CORDY has served as Chief Executive Officer, President and a
Director of the Company since May 1997. Prior to that time, he served as
President and Chief Executive Officer of CI Cascade Corp. Mr. Cordy currently
serves as Vice Chairman of the Board of Trustees for Clark Atlanta University,
Chairman of the Board of Renaissance Capital Corporation and a Director of Cox
Enterprises. Mr. Cordy has a bachelors degree from Morehouse College and a
masters degree from Atlanta University. Mr. Cordy has attended the
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Stanford Executive Program at the Stanford School of Business and the University
of Oklahoma National Lending School.
DANIEL MCDONOUGH has served as Chief Financial Officer of the Company
since October 1997. Prior to his employment with the Company, Mr. McDonough
provided financial consulting services to a number of start up companies at
Creative Benefits, Inc. In addition, from 1992 to 1994, Mr. McDonough was the
controller of Jostens Learning Corporation, a $75 million technology company
specializing in educational software. Prior to his employment with Jostens, Mr.
McDonough served as assistant controller to Alumax, Inc., a $2.5 billion
integrated aluminum company with over 100 manufacturing operations throughout
the United States. From 1973 to 1980, Mr. McDonough was employed by Price
Waterhouse & Co. Mr. McDonough is a licensed CPA and also holds a masters of
business administration degree from the University of Buffalo.
JAMES W. BROWN currently serves as Executive Vice President and
Secretary of the Company and has been a Director of the Company since May 1997.
He served as President and Chief Executive Officer of the Company from inception
to April 1997. He has also served as Chief Executive Officer, President and a
Director of Maxxis 2000 since its inception. From 1995 to 1997, Mr. Brown has
served as a manager of NetWorld Communications, L.L.C. Since 1979, Mr. Brown has
also served as President and Chief Executive Officer of Marketing Ideas, Ltd.
Mr. Brown has a bachelors degree from the University of Georgia. He also
attended the John Marshall School of Law and the American Mutual Institute of
Management.
LARRY W. GATES, II has served as Vice President of Human Resources
since the Company's inception and a Director of the Company since May 1997. Mr.
Gates became a part-time independent insurance agent for A.L. Williams in 1989
while serving in the U.S. Army. In 1993, he left the financial services industry
and became a full-time independent marketer of telecommunications services
through his own independent marketing firm, Classic Enterprises. Mr. Gates built
a downline of over 10,000 distributors between 1993 and 1996. Mr. Gates has an
associates degree from Pierre College.
CHARLES P. BERNSTEIN has served as a Director of the Company since May
1997. Since 1992, Mr. Bernstein has also served as President of Harvest Mortgage
Co. From 1989 to 1992, Mr. Bernstein was the Vice President of Nationwide
Mortgage Resources, an underwriter and servicer of loans on residential and
commercial real estate. Mr. Bernstein holds an associates degree from the
University of South Carolina.
ALVIN CURRY has served as a Director of the Company since its
inception. He also serves as Executive Vice President and Chief Operating
Officer of Maxxis 2000. Mr. Curry started his marketing career in 1986 with A.L.
Williams, where he attained the position of Senior Vice President in less than
three years with A.L. Williams. In March 1991, Mr. Curry left the financial
services industry to join Mr. Stokes in Global Alliance. Mr. Curry attended
Northwest Mississippi Junior College and Tacoma Community College, and he
received a degree from the Knapp College of Business.
ROBERT JAMES GLOVER, JR. has served as a Director of the Company since
its inception. Mr. Glover started his marketing career as an independent
insurance agent with A.L. Williams in 1985, where he attained the sales position
of Senior Vice President. In December 1993, Mr. Glover left the financial
services industry and became an independent marketer of telecommunications
services through his own independent marketing firm, Glover Enterprises. Mr.
Glover's network marketing firm has sponsored and trained over 10,000
distributors. Mr. Glover attended Maryland University.
TERRY HARRIS has served as a Director of the Company since May 1997.
Since 1982, Mr. Harris has served as Pastor and President of Tacoma Christian
Center Inc. Mr. Harris has a bachelors degree from the University of Puget Sound
and attended Rhema Bible School.
PHILIP E. LUNDQUIST has served as a Director of the Company since May
1997. He also serves as Chairman of Christopher Partners Inc. Since 1988, Mr.
Lundquist has owned and operated an investment banking consulting company as a
sole proprietorship. From 1985 to 1988, Mr. Lundquist was the Director of
Corporate Finance for Deloitte Haskins & Sells in Atlanta, Georgia. Mr.
Lundquist has a bachelors degree
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<PAGE> 44
from Williams College and attended the Institute of Investment Banking at the
Wharton School, University of Pennsylvania.
COMMITTEES OF THE BOARD
The Company's Board of Directors recently established Executive, Audit
and Compensation Committees. The Executive Committee may, within certain
limitations, during the interval between Board meetings, exercise all of the
powers of the Company's Board of Directors. The Audit Committee is responsible
for reviewing and making recommendations regarding the Company's independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting practices and policies. The Compensation Committee
will review and approve compensation arrangements for key employees, key
independent sales representatives and key consultants of the Company.
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their
out-of-pocket expenses for each meeting attended, but otherwise serve without
compensation.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by the Company's current Chief Executive Officer and its former chief
executive officer for the Inception Period. No executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the Inception
Period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
INCEPTION PERIOD
COMPENSATION
----------------
Salary Bonus
Name and Principal Position ($) ($)
- --------------------------- ------ -----
<S> <C> <C>
Thomas O. Cordy(1)......................................... $5,250 $ -
Chief Executive Officer and President
James W. Brown(1).......................................... 7,950 -
Executive Vice President
</TABLE>
- ----------------
(1) Mr. Brown served as the Chief Executive Officer and President of the
Company from inception to April 30, 1997, and Mr. Cordy has served as
Chief Executive Officer of the Company since May 1, 1997.
OPTION GRANTS DURING 1997
As of June 30, 1997, no options had been granted to the Chief Executive
Officer of the Company, and no executive officer of the Company received a
combined salary and bonus in excess of $100,000 during the Inception Period.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with Mr.
Cordy, and in September 1997, the Company entered into employment agreements
with each of Messrs. Brown and Curry and Mr. Shawn Dinwiddie (collectively, the
"Employment Agreements"). The Company intends to enter into an employment
agreement with Mr. McDonough. Generally, the Employment Agreements provide for a
minimum weekly salary. In addition, the employee may participate in a bonus
program and shall be eligible to receive quarterly
43
<PAGE> 45
or annual payments of a performance bonus based upon the achievement of targeted
levels of performance and such other criteria as the Board of Directors shall
establish from time to time. Mr. Cordy's employment agreement provides for an
additional bonus payment on July 1, 1998 and the purchase of Class A Common
Stock. Each employee may participate in insurance and other benefit plans of
similarly situated employees, including any stock option plans of the Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by giving
written notice. The Company can terminate each employee upon death or disability
(as defined in the Employment Agreements) or with or without cause upon delivery
to the employee of a notice of termination. If the employee is terminated
because of death, disability or cause, the employee will receive any accrued
compensation through the termination date and any accrued performance bonus,
unless the employee is terminated for cause. If the employee is terminated
without cause, the Company shall pay the employee severance payments equal to
his minimum base salary for each week during the six-month period following the
termination date. If the employee is a director or officer of the Company or any
of its affiliates, the employee shall tender his resignation to such positions
effective as of the termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the employee is terminated without cause, the non-compete period shall be six
months.
SALES REPRESENTATIVE AGREEMENTS
In September 1997, the Company entered into independent sales
representative agreements (collectively, the "Sales Representative Agreements")
with ten independent sales representatives, including Messrs. Stokes, Gates and
Glover. The Sales Representative Agreements provide for a minimum fee of $800.00
per week. Each sales representative shall also be eligible to receive quarterly
payments of a performance bonus which shall be a percentage of total revenue
from Maxxis 2000. To be paid a bonus, a sales representative must have 180 new
activations in a quarter. The bonus amount is then determined by the number of
open centers in that quarter. The bonus ranges from 1% of total revenue from
Maxxis 2000 if four centers are opened to 5% of the revenue if 20 centers are
opened. Each sales representative is an independent contractor, and the Company
does not exercise control over the activities of the sales representatives other
than as set forth in the Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and
the term renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each sales representative upon
death or disability (as defined in the Sales Representative Agreements) or with
or without cause upon delivery to the sales representative of a notice of
termination. If a sales representative is terminated, the sales representative
will receive any accrued fees through the termination date and any accrued
performance bonus, unless the sales representative is terminated for cause. If
the sales representative is a director or officer of the Company or any of its
affiliates, the sales representative shall tender his resignation to such
positions effective as of the termination date. Under the Sales Representative
Agreements, each sales representative agrees to maintain the confidentiality of
the Company's trade secrets and confidential business information.
CONSULTING AGREEMENT
In September 1997, the Company entered into a consulting agreement with
Mr. Robert P. Kelly. The consulting agreement provides for a minimum weekly
salary, and the consultant may participate in a bonus program and shall be
eligible to receive quarterly or annual payments of a performance bonus based
upon the achievement of targeted levels of performance and such other criteria
as the Board of Directors shall establish from time to time. The consultant is
an independent contractor, and the Company does not exercise control over the
activities of the consultant other than as set forth in the consulting
agreement.
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<PAGE> 46
The consulting agreement has a term of one year, and the term renews
daily until either party fixes the remaining term at one year by giving written
notice. The Company can terminate the consultant upon death or disability (as
defined in the consulting agreement) or with or without cause upon delivery to
the consultant of a notice of termination. If the consultant is terminated
because of death, disability or cause, the consultant will receive any accrued
fees through the termination date and any accrued performance bonus, unless the
consultant is terminated for cause. If the consultant is terminated without
cause, the Company shall pay the consultant severance payments equal to his
minimum base salary for each week during the six-month period following the
termination date.
Under the consulting agreement, the consultant agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The consultant also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the consultant is terminated without cause, the non-compete period shall be six
months.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Articles, the Company is obligated to indemnify each of
its directors and officers to the fullest extent permitted by Georgia Law with
respect to all liability and loss suffered and reasonable expenses incurred by
such person in any action, suit or proceeding in which such person was or is
made or threatened to be made a party or is otherwise involved by reason of the
fact that such person is or was a director or officer of the Company. The
Company is obligated to pay the reasonable expenses of the directors or officers
incurred in defending such proceedings if the indemnified party agrees to repay
all amounts advanced by the Company if it is ultimately determined that such
indemnified party is not entitled to indemnification. See "Description of
Capital Stock - Limitations on Liability of Officers and Directors."
STOCK OPTION PLAN
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of Common Stock to officers, directors, key
employees, advisors and consultants of the Company.
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<PAGE> 47
CERTAIN TRANSACTIONS
On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert
J. Glover, a director of the Company, loaned the Company $50,000 to fund initial
start-up costs of the Company. The Company has repaid this loan.
During the Inception Period, the Company paid a fee of $184,000 to IS
14, Inc. ("IS 14"), a former Delaware corporation which was controlled by
certain of the directors and officers of the Company. The IS 14 fee was
comprised of compensation for managerial, marketing and administrative services
performed by certain of the Company's officers and sales representatives prior
to the establishment of the Company's payroll. IS 14 has been dissolved, and the
Company will not make any additional payments to IS 14.
Pursuant to Mr. Cordy's employment agreement, The Anchora Company, an
affiliate of Mr. Cordy, purchased 800,000 shares of Class A Common Stock, at a
price of $0.15 per share. In exchange, The Anchora Company gave the Company a
$120,000 full recourse promissory note which bears interest at an annual rate of
8.75%. Mr. Cordy guaranteed the promissory note. The principal and interest on
the promissory note are due and payable on the earlier of May 1, 2002 or the
closing of an underwritten public offering where the Company receives aggregate
net proceeds of at least $5,000,000.
In December 1997, the Company borrowed approximately $53,000 from Mr.
Cordy to fund certain operational expenses. In February 1998, the Company
entered into the Cordy Note to memorialize such borrowing. The Cordy Note bears
interest at a fixed rate of 6% per year and is payable on demand. The Company
intends to repay the Cordy Note out of the proceeds of the Offering.
Certain of the transactions described above may be on terms more
favorable to officers, directors and principal shareholders than they could
obtain in a transaction with an unaffiliated third party. The Company has
adopted a policy requiring that all material transactions between the Company
and its officers, directors or other affiliates must: (i) be approved by a
majority of the disinterested members of the Board of Directors of the Company;
and (ii) be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties. See "Risk Factors - Transactions with Related
Parties."
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<PAGE> 48
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of April 30, 1998, and as adjusted
to reflect the sale of 450,000 Shares of Common Stock offered hereby, by: (i)
each person known by the Company beneficially to own more than 5% of the
outstanding shares of the Common Stock; (ii) each director of the Company; and
(iii) all directors and executive officers of the Company as a group. Except as
otherwise indicated, all persons listed have sole voting and investment power
with respect to their shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(B) THE OFFERING(B)
-------------------- -------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
NAME AND ADDRESS(A) OF BENEFICIAL OWNER
- ---------------------------------------
<S> <C> <C> <C> <C>
Alvin Curry(c)....................................... 636,363 40.5% 636,363 31.5%
King David Trust(d).................................. 454,545 28.9 454,545 22.5
Cynthia Glover, trustee(e)........................... 181,818 11.6 181,818 9.0
The Anchora Company(f)............................... 72,727 4.6 72,727 3.6
Charles P. Bernstein................................. - - - -
James W. Brown....................................... 47,272 3.0 47,272 2.3
Thomas O. Cordy(g)................................... - - - -
Larry W. Gates, II................................... 45,454 2.9 45,454 2.3
Robert J. Glover(h).................................. - - - -
Terry Harris......................................... 3,636 * 3,636 *
Philip E. Lundquist.................................. - - - -
Ivey J. Stokes(i).................................... - - - -
All directors and executive officers as a group
(10 persons) (c) - (i)............................. 987,270 62.8 987,270 48.8
</TABLE>
- ------------------------
* Less than one percent
(a) The address of the King David Trust and Alvin Curry is c/o Maxxis
Group, Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The
address of Cynthia Glover, trustee, U/A Louise Glover dated January 10,
1997 is 7839 Taylor Circle, Riverdale, Georgia 30274. The address of
the Anchora Company is c/o Salem Management Company, Ltd., Design
House, Leeward Highway, P.O. Box 150, Providenciales Turks & Caicos
Island, B.W.I.
(b) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if such person has or shares voting power or
investment power with respect to such security, or has the right to
acquire beneficial ownership at any time within 60 days from March 1,
1998. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares.
(c) Includes 454,545 shares owned by the King David Trust of which Mr.
Curry, a director of the Company, is the trustee. Mr. Curry disclaims
beneficial ownership of such shares.
(d) All such shares are owned by the King David Trust of which Mr. Curry is
the trustee and Mr. Stokes' minor children are the beneficiaries. Mr.
Stokes, the Chairman of the Board, disclaims beneficial ownership of
such shares.
(e) All such shares are owned by Cynthia Glover, trustee, U/A Louise Glover
dated January 10, 1997. Ms. Glover is the wife of Robert J. Glover, a
director of the Company. Mr. Glover is the sole beneficiary and
disclaims beneficial ownership of such shares.
In addition, Ms. Glover disclaims beneficial ownership of such shares.
(f) All such shares are owned by The Anchora Company of which Mr. Cordy,
Chief Executive Officer and President of the Company, is the protector.
Mr. Cordy disclaims beneficial ownership of such shares.
(g) Excludes 72,727 shares owned by The Anchora Company, of which Mr. Cordy
is the protector. Mr. Cordy disclaims beneficial ownership of such
shares.
(h) Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997 of which Mr. Glover is the sole
beneficiary. Mr. Glover disclaims beneficial ownership of such shares.
(i) Excludes 454,545 shares owned by the King David Trust of which Mr.
Stokes' minor children are the beneficiaries. Mr. Stokes disclaims
beneficial ownership of such shares.
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<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock is only a summary and is
subject to the provisions of the Articles and Bylaws, which are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of Georgia Law.
GENERAL
The Articles authorize the Company to issue up to 20,000,000 shares of
Common Stock. As of the date hereof, 1,571,187 shares of Common Stock are issued
and outstanding and are held of record by 56 shareholders. In addition, the
Articles authorize the Company to issue up to 10,000,000 shares of preferred
stock, no par value per share, with such rights and preferences as the Board of
Directors shall determine.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote at
shareholders' meetings for each share held. Subject to the prior rights of any
series of preferred stock that may be issued, holders of shares of Common Stock
are entitled to receive, pro rata, such dividends as may be declared by the
Board of Directors out of funds legally available therefor, and are also
entitled to share, pro rata, in any other distributions to the shareholders. The
Company anticipates that for the foreseeable future its earnings will be
retained for the operation and expansion of its business and that it will not
pay cash dividends. See "Dividend Policy." There are no redemption or sinking
fund provisions applicable to the Common Stock. Holders of shares of Common
Stock do not have any preemptive rights or other rights to subscribe for
additional shares. The outstanding shares of Common Stock are, and the shares
sold by the Company pursuant to this Offering will be, when issued and paid for,
fully paid and non-assessable.
PREFERRED STOCK AND WARRANTS
The Articles provide that the Board of Directors shall be authorized,
without further action by the holders of the Common Stock, to provide for the
issuance of shares of the preferred stock in one or more classes or series and
to fix the designations, powers, preferences and relative, participating,
optional and other rights, qualifications, limitations and restrictions thereof,
including the dividend rate, conversion rights, voting rights, redemption price
and liquidation preference; and to fix the number of shares to be included in
any such classes or series. Any preferred stock so issued may rank senior to the
Common Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding-up, or both. In addition, any such shares of
preferred stock may have class or series voting rights. Issuances of preferred
stock, while providing the Company with flexibility in connection with general
corporate purposes, may, among other things, have an adverse effect on the
rights of holders of Common Stock and, in certain circumstances, could have the
effect of making it more difficult for a third party to acquire control of the
Company or the effect of decreasing the market price of the Common Stock.
In November 1997, the Company entered into a demand promissory note to
fund expenses incurred in connection with the launch of the Company's
nutritional product line. On March 23, 1998, the Company converted the $200,000
principal amount of the promissory note into 36,359 Units at a price of $5.50
per Unit with each Unit consisting of one share of Preferred Stock and one
Warrant to purchase one share of Common Stock at a price of $5.50 per share. The
Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution adjustment
only upon a stock split, recapitalization or similar event; (iii) entitled to a
liquidation preference over the Common Stock; and (iv) convertible into Common
Stock at the option of the holder at any time commencing 14 months following the
date of the issuance of the Preferred Stock and automatically upon the closing
of a public offering that occurs at least 14 months following the issuance of
the Preferred Stock and that provides gross proceeds to the Company of at least
$7,500,000. The Warrants are entitled to an antidilution adjustment only upon a
stock split, recapitalization or similar event and are not exercisable until 14
months following their date of issuance and remain exercisable at the option of
the holder until the seventh anniversary of their issuance.
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<PAGE> 50
CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW
Certain provisions of the Articles and Bylaws and the Georgia Law,
summarized in the following paragraphs, may be considered to have antitakeover
effects and may hinder, delay, deter or prevent a tender offer, proxy contest or
other attempted takeover that a shareholder may deem to be in such shareholder's
best interest, including such an attempted transaction as might result in
payment of a premium over the market price for shares held by such shareholder.
Classified Board of Directors. The Articles of Incorporation divide the
Board of Directors into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of the Board of Directors are
elected at each annual meeting of shareholders. Currently, the terms of Class I
directors expire in 1998, the terms of Class II directors expire in 1999 and the
terms of Class III directors expire in 2000.
Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals; Actions by Written Consent of Shareholders. The Bylaws establish an
advance notice procedure for shareholders to make nominations of candidates for
election as directors or to bring other business before any meeting of
shareholders of the Company. Any shareholder nomination or proposal for action
at an upcoming shareholder meeting must be delivered to the Company no later
than the deadline for submitting shareholder proposals pursuant to Rule 14a-8
under the Exchange Act. The presiding officer at any shareholder meeting is not
required to recognize any proposal or nomination which did not comply with such
deadline.
The purpose of requiring shareholders to give the Company advance
notice of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of shareholders.
Although the Bylaws do not give the Board of Directors any power to disapprove
timely shareholder nominations for the election of directors or proposals for
action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal.
Actions required to be taken at a shareholder meeting may be taken
without a meeting only if the unanimous written consent of the shareholders
entitled to vote at such meeting is obtained and delivered to the Company for
inclusion in its minute book or other corporate records.
Georgia Business Combination Statute. Pursuant to its Bylaws, the
Company is subject to the provisions of the Georgia Law, including provisions
prohibiting various "business combinations" involving "interested shareholders"
for a period of five years after the shareholder becomes an interested
shareholder of the Company. Such provisions prohibit any business combination
with an interested shareholder unless either (i) prior to such time, the Board
of Directors approves either the business combination or the transaction by
which such shareholder became an interested shareholder; (ii) in the transaction
that resulted in the shareholder becoming an interested shareholder, the
interested shareholder became the beneficial owner of at least 90% of the
outstanding voting stock of the Company which was not held by directors,
officers, affiliates thereof, subsidiaries or certain employee option plans of
the Company, or (iii) subsequent to becoming an interested shareholder, such
shareholder acquired additional shares resulting in such shareholder owning at
least 90% of the outstanding voting stock of the Company and the business
combination is approved by a majority of the disinterested shareholders' shares
not held by directors, officers, affiliates thereof, subsidiaries or certain
employee stock option plans of the Company. Under the relevant provisions of the
Georgia Law, a "business combination" is defined to include, among other things,
(i) any merger, consolidation, share exchange or any sale, transfer or other
disposition (or series of related sales or transfers) of assets of the Company
having an aggregate book value of 10% or more of the Company's net assets
(measured as of the end of the most recent fiscal quarter), with an interested
shareholder of the Company or any other corporation which is or, after giving
effect to such business combination, becomes an affiliate of any such interested
shareholder, (ii) the liquidation or dissolution of the Company, (iii) the
receipt by an interested shareholder of any benefit from any loan, advance,
guarantee,
49
<PAGE> 51
pledge, tax credit or other financial benefit from the Company, other than in
the ordinary course of business and (iv) certain other transactions involving
the issuance or reclassification of securities of the Company which produce the
result that 5% or more of the total equity shares of the Company, or of any
class or series thereof, is owned by an interested shareholder. An "interested
shareholder" is defined by the Georgia Law to include any person or entity that,
together with affiliates, beneficially owns or has the right to own 10% or more
of the outstanding voting shares of the Company, or any person that is an
affiliate of the Company and has, at any time within the preceding two-year
period, been the beneficial owner of 10% or more of the outstanding voting
shares of the Company. The restrictions on business combinations shall not apply
to any person who was an interested shareholder before the adoption of the
Bylaws which made the provisions applicable to the Company nor to any persons
who subsequently become interested shareholders inadvertently, subsequently
divest sufficient shares so that the shareholder ceases to be an interested
shareholder and would not, at any time within the five-year period immediately
before a business combination involving the shareholder have been an interested
shareholder but for the inadvertent acquisition.
Constituency Provisions. In addition to considering the effects of any
action on the Company and its shareholders, the Articles permit the Board of
Directors and the committees and individual members thereof to consider the
interests of various constituencies, including employees, customers, suppliers,
and creditors of the Company, communities in which the Company maintains offices
or operations, and other factors which such directors deem pertinent, in
carrying out and discharging the duties and responsibilities of such positions
and in determining what is believed to be in the best interests of the Company.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Articles provide that no director shall be personally liable to the
Company or any of its shareholders for any breach of the duties of such
position, except that such elimination of liability does not apply to: (i)
appropriations of business opportunities from the Company in violation of such
director's duties; (ii) knowing or intentional misconduct or violation of law;
(iii) liability for assent to distributions which are illegal or improper under
the Georgia Law or the Articles; and (iv) liability for any transaction in which
an improper personal benefit is derived. In addition, the Articles state that if
the Georgia Law is ever amended to allow for greater exculpation of directors
than presently permitted, the directors shall be relieved from liabilities to
the fullest extent provided by the Georgia Law, as so amended, without further
action by the Board or the shareholders of the Company, unless the Georgia Law
provides otherwise. No modification or repeal of this provision will adversely
affect the elimination or reduction in liability provided thereby with respect
to any alleged act occurring before the effective date of such modification or
repeal.
The Company intends to enter into agreements with each of its current
directors and executive officers pursuant to which it is obligated to indemnify
those persons to the fullest extent authorized by law and to advance payments to
cover defense costs against an unsecured obligation to repay such advances if it
is ultimately determined that the recipient of the advance is not entitled to
indemnification. The indemnification agreements will provide that no
indemnification or advancement of expenses shall be made (a) if a final
adjudication establishes that his actions or omissions to act were material to
the cause of action so adjudicated and constitute: (i) a violation of criminal
law (unless the indemnitee had reasonable cause to believe that his actions were
lawful); (ii) a transaction from which the indemnitee derived an improper
personal benefit; (iii) an unlawful distribution or dividend under the Georgia
Law; or (iv) willful misconduct or a conscious disregard for the just interests
of the Company in a derivative or shareholder action; (b) for liability under
Section 16(b) of the Exchange Act, or (c) if a final decision by a court having
jurisdiction in the matter determines that indemnification is not lawful.
At present, the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted under the Bylaws
or the Georgia Law.
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<PAGE> 52
SHAREHOLDERS' AGREEMENT
The Company and certain of its officers, directors and major
shareholders have entered into a Shareholders' Agreement whereby the
shareholders agreed to certain restrictions on the transfer or other disposition
of the shares of Common Stock held by each holder. In the event a shareholder
intends to transfer his or her Common Stock to a non-permitted transferee, the
Company and the remaining shareholders have a right of first refusal to purchase
the transferring shareholder's Common Stock at fair market value. In addition,
if the Company terminates a shareholder's employment or engagement (or the
employment or engagement of certain persons associated with a shareholder) as a
sales representative or consultant for cause, the Company shall have the right
to repurchase, at fair market value, an amount of the shareholder's Common Stock
which begins at 100% and declines 20% per year for each completed year of
service with the Company. If either the right of first refusal or the Company's
right to purchase is exercised, either provision could have the effect of
further concentrating the stock ownership and voting power of the Company. See
"Risk Factors - Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming the sale of 450,000 Shares
offered hereby, the Company will have outstanding 2,021,187 shares of Common
Stock, 36,359 shares of Preferred Stock and Warrants to purchase 36,359 shares
of Common Stock. Of these shares, the 450,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. However, such shares will be
subject to certain restrictions on transfer including the restrictions set forth
in the Subscription Agreement. See "The Offering - Transfer Restrictions." The
remaining 1,643,905 shares of Common Stock outstanding upon completion of the
Offering and issuable upon the conversion of outstanding Preferred Stock and the
exercise of outstanding Warrants are "Restricted Securities" under Rule 144 of
the Securities Act in that they were originally issued and sold by the Company
in private transactions in reliance upon exemptions from the registration
provisions of the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
Restricted Securities have been fully paid for and held for at least one year
from the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three-month period does not exceed the greater of 1% of the then outstanding
shares of the Common Stock (approximately 20,000 shares based on the number of
shares to be outstanding after this Offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the filing
of the Seller's Form 144. Sales under Rule 144 are also subject to certain
notice requirements and the availability of current public information
concerning the Company. After two years have elapsed from the issuance of
Restricted Securities by the Company, such shares generally may be sold without
limitation by persons who have not been affiliates of the Company for at least
quarter. Rule 144 also provides that affiliates who are selling shares which are
not Restricted Securities must nonetheless comply with the same restrictions
applicable to Restricted Securities with the exception of the holding period
requirements.
Prior to the Offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby. See "Risk Factors - Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
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<PAGE> 53
EXPERTS
The audited consolidated financial statements of the Company as of June
30, 1997 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving said report.
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<PAGE> 54
MAXXIS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants .................................. F-2
Consolidated Balance Sheet as of June 30, 1997 ............................ F-3
Consolidated Statement of Operations for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-4
Consolidated Statement of Shareholders' Equity for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-5
Consolidated Statement of Cash Flows for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-6
Notes to Consolidated Financial Statements ................ ............... F-7
Consolidated Balance Sheets as of March 31 (Unaudited)
and June 30, 1997 ....................................................... F-16
Consolidated Statement of Operations for the
Nine Months ended March 31, 1998 (Unaudited) ............................ F-17
Consolidated Statement of Cash Flows for the
Nine Months ended March 31, 1998 (Unaudited) ............................ F-18
Notes to Consolidated Financial Statements (Unaudited) .................... F-19
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxxis Group, Inc.:
We have audited the accompanying consolidated balance sheet of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the period from January 24, 1997 (inception) to June 30, 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1997 and the results of their operations and their
cash flows for the period from January 24, 1997 (inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 22, 1997
F-2
<PAGE> 56
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000
Short-term investments 10,000
Telecommunication receivables 25,000
Inventories 185,000
Prepaid expenses 12,000
Other current assets 23,000
---------
290,000
PROPERTY AND EQUIPMENT, NET 92,000
ORGANIZATIONAL COSTS, NET 76,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000
OTHER ASSETS 20,000
---------
$ 596,000
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 158,000
Commissions payable 42,000
Accrued liabilities 103,000
---------
303,000
---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000
Class A common stock, no par value; 1,363,636 shares authorized, 1,299,992 shares issued
and outstanding 127,000
Class B common stock, no par value; 16,818,182 shares authorized, 0 shares issued and
outstanding 0
Subscription receivable (120,000)
Accumulated deficit (74,000)
---------
Total shareholders' equity 293,000
---------
$596,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 57
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Telecommunication services $2,322,000
Marketing services 369,000
----------
Total revenues 2,691,000
----------
COST OF SERVICES:
Telecommunication services 761,000
Marketing services 255,000
----------
Total cost of services 1,016,000
----------
GROSS MARGIN 1,675,000
----------
OPERATING EXPENSES:
Selling and marketing 1,089,000
General and administrative 660,000
----------
Total operating expenses 1,749,000
----------
LOSS BEFORE INCOME TAX BENEFIT (74,000)
INCOME TAX BENEFIT 0
----------
NET LOSS $ (74,000)
==========
NET LOSS PER SHARE $ (0.05)
----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,571,187
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 58
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK STOCK
----------------------- SUBSCRIPTION SUBSCRIPTION ACCUMULATED
SHARES AMOUNT DEPOSITS RECEIVABLE DEFICIT TOTAL
--------- -------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 24, 1997 0 $ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock 1,299,992 127,000 0 (120,000) 0 7,000
Stock subscription deposits 0 0 360,000 0 0 360,000
Net loss 0 0 0 0 (74,000) (74,000)
--------- -------- ------------ ------------ ----------- --------
BALANCE, JUNE 30, 1997 1,299,992 $127,000 $ 360,000 $ (120,000) $ (74,000) $293,000
========= ======== ============ ============ =========== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE> 59
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,000)
---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 54,000
Changes in assets and liabilities:
Telecommunication receivables (25,000)
Inventories (185,000)
Prepaid expenses (12,000)
Other assets (43,000)
Commissions payable 42,000
Accounts payable 158,000
Accrued liabilities 103,000
---------
Total adjustments 92,000
---------
Net cash provided by operating activities 18,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (99,000)
Purchase of short-term investment (10,000)
Software development and organizational costs (241,000)
---------
Net cash used in investing activities (350,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock subscriptions 360,000
Proceeds from issuance of common stock 7,000
---------
Net cash provided by financing activities 367,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 35,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,000
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
=========
Cash paid for income taxes $ 0
=========
Stock issued for note receivable $ 120,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE> 60
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND PRESENTATION
DESCRIPTION OF BUSINESS AND OPERATIONS
Maxxis Group, Inc., a Georgia corporation, was incorporated on January 24,
1997 (inception) and is headquartered in Tucker, Georgia. The Company's
principal business operations are carried out through its wholly owned
subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc., which began
operations in March 1997. Maxxis Group, Inc., together with its wholly owned
subsidiaries (collectively referred to as the "Company"), was founded for
the purpose of providing long-distance services and other consumable
products through a multilevel marketing system of independent associates
("Associates") to subscribers throughout the United States. The Company
currently markets both long-distance services and value-added
telecommunications services, such as travel cards, prepaid phone cards, 800
service, and international telecommunications service.
The Company has a limited operating history, and its operations are subject
to the risks inherent in the establishment of any new business. Since the
Company has only recently made the transition to an operating company, the
Company's ability to manage its growth and expansion will require it to
implement and continually expand its operational and financial systems,
recruit additional employees, and train and manage both current and new
employees. Growth may place a significant strain on the Company's
operational resources and systems, and failure to effectively manage this
projected growth would have a material adverse effect on the Company's
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
REVENUE RECOGNITION
Telecommunications services revenues are primarily comprised of prepaid
phone card sales to Associates. The Company purchases prepaid phone cards
from an independent tariffed long-distance reseller (the "Reseller").
Associates purchase these prepaid phone cards from the Company. Revenues
from the sale of these prepaid phone cards are recognized when the cards are
F-7
<PAGE> 61
sold to the Associates, net of an estimate of sales returns for defective or
unused cards. Associates have the right of return for defective or unused
cards for up to 30 days after the date of purchase.
Telecommunications services also consist of revenues generated from the
Company's agreement with the Reseller that provides for the Company to
receive a percentage of the gross long-distance revenues generated by the
Company's subscribers, less billing adjustments. The Company recognizes
long-distance revenues when services are provided by the Reseller, net of an
estimate for billing adjustments. The Reseller assumes the risk of all bad
debts. Amounts due to the Company related to this agreement are included in
telecommunication receivables in the accompanying balance sheet.
Marketing services revenues primarily consist of receipts from Associates
for application fees and purchases of distributor kits and sales aids, which
include starter kits of forms, promotional brochures, marketing materials,
and presentation materials.
COST OF SERVICES
Telecommunication services costs include the costs of purchasing the prepaid
phone cards from the Reseller.
Marketing services costs include the costs for printing and designing of
applications, starter kits, and sales aids.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses primarily consist of commissions paid to
Associates based on long-distance usage and the cost of sponsoring new
associates.
CONCENTRATIONS OF CREDIT RISK
The Company's subscribers are primarily residential and are not concentrated
in any specific geographic region of the United States. The Company
purchases its prepaid phone card services from a long-distance reseller.
Failure of this reseller to provide quality services and customer support
could have a material adverse effect on the Company's results of operations.
The Company has an additional agreement with the long-distance reseller to
provide subscriber services, which if terminated or canceled may
significantly impact results of operations of the Company. While the Company
believes it could contract with another long-distance reseller, the
potential disruption of services may have a material effect on the Company's
results of operations.
The Company's success will depend heavily on its ability to attract,
maintain, and motivate a large base of Associates who, in turn, sponsor
subscribers, customers, and other Associates. The Company anticipates a
significant turnover among Associates, which the Company believes is typical
of direct selling. The Company has begun establishing its network of
Associates; however, there can be no assurance that the Company will be
successful in establishing a viable network of Associates.
USE OF 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
F-8
<PAGE> 62
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Prepaid phone cards $ 25,000
Sales aids 160,000
---------
$ 185,000
=========
</TABLE>
Inventories are valued at the lower of purchased cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires that deferred income tax expenses be provided based
on estimated future tax effects of differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes calculated based on provisions of enacted tax
laws (Note 4).
ORGANIZATIONAL COSTS
The Company has capitalized certain organizational costs related to start-up
activities and the legal formation of the Company. These costs are amortized
over one year, and amortization expense was $25,000 for the period from
inception to June 30, 1997.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Certain software development costs pertaining to a software application
which is used internally for processing applications and customer service
have been capitalized as incurred. Capitalization of software development
costs begins upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgement by management with respect to certain external
factors, including but not limited to anticipated future revenues, estimated
economic life, and changes in software and hardware technologies. These
software development costs are amortized over the estimated useful life of
three years, and amortization expense was $21,000 for the period from
inception to June 30, 1997.
OTHER ASSETS
Other assets include security deposits for lease obligations totaling
$20,000.
F-9
<PAGE> 63
SHORT-TERM INVESTMENTS
Included in short-term investments is a certificate of deposit recorded at
cost, which approximates the estimated fair value and matures in May 1998.
This investment has been pledged as collateral for one of the Company's cash
accounts.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding under the requirements of Staff Accounting Bulletin
83. As a result, all shares issued prior to the issuance in connection with
the Registration Statement have been included as outstanding since
inception.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, and accounts payable. The carrying amounts of cash, accounts
receivable, and accounts payable approximate their fair values because of
the short-term maturity of such instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which specifies the computation,
presentation, and disclosure requirements for earnings per share. The
Company will be required to adopt this new standard in the quarter ending
December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company will be required to adopt the new standard
in 1998, and all prior period information will be restated.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." This statement requires companies
to determine segments based on how management makes decisions about
allocating resources to segments and measuring their performance.
Disclosures for each segment are similar to those required under current
standards, with the addition of certain quarterly disclosure requirements.
SFAS No. 131 also requires entitywide disclosure about the products and
services an entity provides, the countries in which it holds material assets
and reports material revenues, and its significant customers. The Company
will be required to adopt the new standard in 1998, and all prior period
information presented will be restated.
The effect of adopting the above statements is not expected to be material
to the consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997:
F-10
<PAGE> 64
<TABLE>
<S> <C>
Furniture and fixtures $99,000
Less accumulated depreciation (7,000)
-------
Property and equipment, net $92,000
=======
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows at June 30, 1997:
<TABLE>
<S> <C>
Net operating losses $18,000
Valuation allowance (18,000)
-------
Net deferred tax assets $ 0
=======
</TABLE>
Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance of $18,000 at June
30, 1997. At June 30, 1997, the Company had net operating loss carryforwards
of approximately $50,000, which will expire in the year 2012 unless
previously utilized.
The benefit for income taxes at June 30, 1997 was different than the amount
computed using the statutory income tax rate as follows:
<TABLE>
<S> <C>
Taxes computed at statutory rate $(17,000)
State income taxes, net of federal benefit (2,000)
Nondeductible expenses 1,000
Change in valuation allowance 18,000
--------
$ 0
========
</TABLE>
5. TRANSACTIONS WITH AFFILIATES
The Company has significant transactions with IS 14, Inc. ("IS 14"), which
is affiliated through common ownership. IS 14 has provided funding for
certain expenses incurred by the Company, and all amounts have been repaid
as of June 30, 1997. The Company paid to IS 14 in consideration for
marketing support a fee equivalent to a percentage of revenues totaling
$184,000 from inception to June 30, 1997, which is included in selling and
marketing operating expense in the accompanying consolidated statement of
operations. Amounts due to IS 14 related to this fee and included in
commissions payable in the accompanying consolidated balance sheet totaled
$9,000 at June 30, 1997.
6. SHAREHOLDERS' EQUITY
The articles of incorporation (the "Articles") authorize the Company to
issue up to 1,363,636 shares of Class A common stock and 16,818,182 shares
of Class B common stock. As of June 30, 1997, 1,299,992 shares of Class A
common stock are issued and outstanding and are held of record by 15
shareholders and the Company had received paid subscriptions for 218,181
shares of Class B common stock. In addition, the Articles authorize the
Company to issue up to 10,000,000 shares of preferred stock, no par value
per share, with such rights and preferences as the board of directors shall
determine; however, no preferred stock has been issued as of June 30, 1997.
F-11
<PAGE> 65
In February 1997, the Company sold 1,227,265 shares of the Company's Class A
common stock to the founders of the Company at $.006 per share. In May 1997,
the Company sold 72,727 shares of Class A common stock to an executive
officer for $1.65 per share in exchange for a $120,000 note receivable to an
affiliate of that individual due on the earlier of (i) May 1, 2002 or (ii)
the closing of an underwritten initial public offering with aggregate net
proceeds of at least $5 million. The note is guaranteed by the executive
officer, bears interest at 8.75% per year, compounded annually, and is
classified as a subscription receivable in the balance sheet. Each holder of
the Class A common stock is entitled to ten votes per share with respect to
each company matter voted on.
The Company and all of the holders of Class A common stock have entered into
a shareholders' agreement whereby the shareholders agreed to certain
restrictions on the transfer or other disposition of the shares of Class A
common stock held by each holder. In the event a shareholder intends to
transfer his or her Class A common stock to a nonpermitted transferee, the
Company and the remaining shareholders have a right of first refusal to
purchase the transferring shareholder's Class A common stock at fair market
value. In addition, if the Company terminates a shareholder's employment or
engagement as a sales representative or consultant for cause, the Company
shall have the right to repurchase, at fair market value, an amount of the
shareholder's Class A common stock which starts at 100% and declines 20% per
year for each completed year of service with the Company. If the right of
first refusal or the Company's right to purchase is exercised, these
provisions could have the effect of further concentrating the stock
ownership and voting power of the Company.
Additionally, in February 1997, the Company completed a private placement
offering for 272,727 shares of Class B common stock at a price of $1.65 per
share. The Class B common stock entitles each holder to one vote per share
with respect to each company matter voted on. Potential investors were
required to complete subscription agreements for the Class B common stock
and submit cash at the date of subscription. The Company reserved the right
to reject a subscription and refund amounts to a Class B subscriber at any
time prior to the acceptance of the subscription. At June 30, 1997, the
Company had received paid subscriptions for 218,181 shares of Class B common
stock. However, since these subscriptions had not yet been accepted by the
Company and no shares had been issued as of June 30, 1997, amounts received
from subscribers are included in stock subscription deposits in the
accompanying balance sheet. Subsequent to June 30, 1997, the Company has
accepted these subscriptions and additional subscriptions for 53,014 shares
of the Class B common stock.
Upon the closing of an initial public offering, each share of Class A common
stock then outstanding shall automatically be converted into one fully paid
and nonassessable share of Class B common stock. An "initial public
offering" means a public offering of the Company's capital stock for cash
which is offered and sold in a transaction that is registered under the
Securities Act through one or more underwriters, pursuant to an underwriting
agreement between the Company and such underwriters, resulting in aggregate
net proceeds of $5 million to the Company.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and office space under operating
leases. Total rental expense for the period ended June 30, 1997 was
approximately $45,000.
F-12
<PAGE> 66
Minimum lease payments under noncancelable leases for the years subsequent
to June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998 $124,000
1999 72,000
2000 39,000
2001 34,000
2002 and thereafter 0
--------
$269,000
========
</TABLE>
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with the chief
executive officer, and in September 1997, the Company entered into
employment agreements with the executive vice president, the chief financial
officer, and a director (collectively, the "Employment Agreements").
Generally the Employment Agreements provide for a minimum weekly salary. In
addition, the employee may participate in a bonus program and shall be
eligible to receive quarterly or annual payments of a performance bonus
based on the achievement of targeted levels of performance and such other
criteria as the board of directors shall establish from time to time. The
chief executive officer's Employment Agreement provides for an additional
bonus payment on July 1, 1998. Each employee may participate in insurance
and other benefit plans of similarly situated employees, including any stock
option plans of the Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each employee upon death or
disability (as defined in the Employee Agreements) or with or without cause
upon delivery of a notice of termination. If the employee is terminated
because of death, disability, or cause, the employee will receive any
accrued compensation through the termination date and any accrued
performance bonus, unless the employee is terminated for cause. If the
employee is terminated without cause, the Company shall pay the employee
severance payments equal to his minimum base salary for each week during the
six-month period following the termination date. If the employee is a
director or officer of the Company or any of its affiliates, the employee
shall tender his resignation to such positions effective as of the
termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date if he is terminated or resigns for any reason not to
compete with or solicit employees or customers of the Company or any of its
affiliates within a 30-mile radius of the Company's corporate offices,
provided that if the employee is terminated without cause, the noncompete
period shall be six months.
F-13
<PAGE> 67
RELATIONSHIP WITH ASSOCIATES
Because Associates are classified as independent contractors and not as
employees of the Company, the Company is unable to provide them with the
same level of direction and oversight as company employees. While the
Company has policies and rules in place governing the conduct of the
Associates and intends to review periodically the sales tactics of the
Associates, it may be difficult to enforce such policies and rules.
Violation of these policies and rules might reflect negatively on the
Company and may lead to complaints to or by various federal and state
regulatory authorities. Violation of the Company's policies and rules could
subject the Company and its long-distance provider to complaints regarding
the unauthorized switching of subscribers' long-distance carriers (also
known in the industry as "slamming"). Such complaints could have a material
adverse effect on the Company's business, financial condition, and results
of operations.
REGULATION OF NETWORK MARKETING; EFFECT OF STATE LAWS
The Company's network marketing system is subject to or affected by
extensive government regulation, including, without limitation, federal and
state regulations governing the offer and sale of business franchises,
business opportunities, and securities. Various governmental agencies
monitor direct selling activities, and the Company could be required to
supply information regarding its marketing plan to such agencies. Although
the Company believes that its network marketing system is in material
compliance with the laws and regulations relating to direct selling
activities, there can be no assurance that legislation and regulations
adopted in particular jurisdictions in the future will not adversely affect
the Company's business, financial condition, and results of operations. The
Company could also be found to be in noncompliance with existing statutes or
regulations as a result of, among other things, misconduct by Associates,
who are considered independent contractors over whom the Company has limited
control; the ambiguous nature of certain of the regulations; and the
considerable interpretive and enforcement discretion given to regulators.
Any assertion or determination that the Company or the Associates are not in
compliance with existing statutes or regulations could have a material
adverse effect on the Company's business, financial condition, and results
of operations. An adverse determination by any one state on any regulatory
matter could influence the decisions of regulatory authorities in other
jurisdictions.
8. SUBSEQUENT EVENTS
In September 1997, the Company entered into independent sales representative
agreements (collectively, the "Sales Representative Agreements") with ten
independent sales representatives. The Sales Representative Agreements
provide for a minimum weekly salary, and each sales representative shall be
eligible to receive quarterly payments of a performance bonus based on the
achievement of targeted levels of performance. Each sales representative is
an independent contractor, and the Company does not exercise control over
the activities of the sales representatives other than as set forth in the
Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and the
term renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each sales representative
upon death or disability (as defined in the Sales Representative Agreements)
or with or without cause upon delivery to the sales representative of a
notice of termination. If a sales representative is terminated, the sales
representative will receive any accrued fees through the termination date
and any accrued performance bonus, unless the sales
F-14
<PAGE> 68
representative is terminated for cause. If the sales representative is a
director or officer of the Company or any of its affiliates, the sales
representative shall tender his resignation to such positions effective as
of the termination date. Under the Sales Representative Agreements, each
sales representative agrees to maintain the confidentiality of the Company's
trade secrets and confidential business information.
9. SUBSEQUENT TO DATE OF AUDITORS' REPORT
All share, per share, and weighted average share information in the
financial statements and notes thereto has been restated to reflect a
one-for-five reverse stock split effective October 8, 1997 and a
one-for-eleven reverse stock split effective February 17, 1998 for all
classes of common stock.
In addition, on February 17, 1998, the Company effected a plan of
reorganization pursuant to which each outstanding share of Class A common
stock and Class B common stock was converted into one share of common stock.
F-15
<PAGE> 69
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
MARCH 31, 1998 (UNAUDITED)
AND JUNE 30, 1997
<TABLE>
<CAPTION>
June 30, MARCH 31,
ASSETS 1997 1998
- ------------------------------------------------------------------------------------- -------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000 $ 229,000
Short-term investments 10,000 10,000
Telecommunication receivables 25,000 327,000
Inventories 185,000 181,000
Prepaid expenses 12,000 38,000
Other current assets 23,000 0
-------- -----------
290,000 785,000
PROPERTY AND EQUIPMENT, NET 92,000 146,000
ORGANIZATIONAL COSTS, NET 76,000 0
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000 128,000
OTHER ASSETS 20,000 9,000
-------- -----------
$596,000 $ 1,068,000
======== ===========
<CAPTION>
June 30, MARCH 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
- ------------------------------------------------------------------------------------- --------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 158,000 $ 273,000
Commissions payable 42,000 84,000
Shareholder note payable 0 53,000
Accrued liabilities 103,000 166,000
Deferred revenue 0 27,000
--------- ----------
303,000 603,000
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000 0
Preferred stock, no par value; 10,000,000 shares authorized; 0 and 36,359
shares issued and outstanding at June 30, 1997 and March 31, 1998,
respectively 0 200,000
Common stock, no par value; 20,000,000 shares authorized, 1,299,992 and
1,571,187 shares issued and outstanding at June 30, 1997 and March 31,
1998, respectively 127,000 574,000
Subscription receivable (120,000) (120,000)
Accumulated deficit (74,000) (189,000)
--------- ----------
Total shareholders' equity 293,000 465,000
--------- ----------
$ 596,000 $1,068,000
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-16
<PAGE> 70
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Telecommunication services $3,939,000
Nutritional products 341,000
Marketing services 895,000
----------
Total revenues 5,175,000
----------
COST OF SERVICES:
Telecommunication services 1,081,000
Nutritional products 223,000
Marketing services 339,000
----------
Total cost of services 1,643,000
----------
GROSS MARGIN 3,532,000
----------
OPERATING EXPENSES:
Selling and marketing 1,994,000
General and administrative 1,653,000
----------
Total operating expenses 3,647,000
----------
LOSS BEFORE INCOME TAX BENEFIT (115,000)
INCOME TAX BENEFIT 0
----------
NET LOSS $ (115,000)
==========
NET LOSS PER SHARE $ (0.07)
==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,571,187
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-17
<PAGE> 71
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(115,000)
---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 150,000
Changes in assets and liabilities:
Telecommunication receivables (302,000)
Inventories 4,000
Prepaid expenses (26,000)
Other assets 34,000
Commissions payable 42,000
Accounts payable 115,000
Accrued liabilities 63,000
Deferred revenue 27,000
---------
Total adjustments 107,000
---------
Net cash used in operating activities (8,000)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,000)
Software development costs (38,000)
---------
Net cash used in investing activities (138,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 53,000
Proceeds from issuance of common stock 87,000
Proceeds from sale of preferred stock 200,000
---------
Net cash provided by financing activities 340,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 194,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,000
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 229,000
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
=========
Cash paid for income taxes $ 0
=========
Stock issued for note receivable $ 120,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-18
<PAGE> 72
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of
Regulation S-X of the Securities and Exchange Commission. The accompanying
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of
financial position and results for the interim periods presented. All such
adjustments are of a normal and recurring nature. It is suggested that these
consolidated financial statements be read in conjunction with the annual
financial statements of Maxxis Group, Inc. and Subsidiaries (the "Company")
and the notes thereto.
2. PROMISSORY NOTE
On February 28, 1998, a shareholder loan was converted into a demand
promissory note (the "Shareholder Note"). The Shareholder Note accrues
interest at 6% and is payable monthly beginning on January 1, 1998.
3. SHAREHOLDERS' EQUITY
Effective February 17, 1998, the Company declared a one for eleven reverse
stock split for all classes of common stock. The Company also effected a
plan of reorganization pursuant to which each outstanding share of Class A
common stock and Class B common stock was converted into one share of common
stock. All share, per share, and weighted average share information in the
financial statements has been restated for this stock split and
reorganization.
In addition, in February of 1998, the Company amended and restated their
articles of incorporation such that the Company is authorized to issue
20,000,000 and 10,000,000 shares of no par value common stock and nonvoting
preferred stock (the "Preferred Stock"), respectively. The Preferred Stock
has a liquidation preference of $5.50 per share (as adjusted for any
combinations, consolidations, stock distributions, or stock dividends with
respect to such shares) plus all declared or accumulated but unpaid
dividends. 100,000 shares of the Company's Preferred Stock has been
designated as Series A Non-Voting Convertible Preferred Stock (the "Series
A"). The Series A shareholders have the right to convert each share into
shares of common stock, as defined by a formula in the articles of
incorporation, at any time at least 14 months after the date of issuance. As
of March 31, 1998, each share of Series A is convertible into one share of
common stock pursuant to the aforementioned restriction.
On November 26, 1997, the Company entered into a promissory note (the
"Note") agreement with various lenders for an aggregate principal amount up
to $200,000, which was secured primarily by all of the assets of the
Company. The Note accrued interest at 10%, payable monthly beginning on
January 1, 1998, and principal was due on demand. On March 23, 1998, the
Note was exchanged for 36,359 shares of the Series A and 36,359 warrants
(the "Warrants") to purchase the Company's common stock. The Warrants are
exercisable 14 months after the issuance date and provide the right to
purchase common stock at $5.50 per share. The Warrants expire seven years
after the date of issuance.
F-19
<PAGE> 73
APPENDIX A
MAXXIS GROUP, INC. SUBSCRIPTION AGREEMENT
MAXXIS GROUP, INC.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
Ladies and Gentlemen:
You have informed me that Maxxis Group, Inc., a Georgia corporation
(the "Company"), is offering up to 450,000 shares of its Common Stock, no par
value per share (the "Common Stock"), at a price of $5.50 per share payable as
provided herein and as described in the Prospectus furnished with this
Subscription Agreement to the undersigned (the "Prospectus").
1. SUBSCRIPTION. Subject to the terms and conditions hereof, the
undersigned subscriber hereby tenders this subscription, together with payment
in United States currency by check, bank draft or money order payable to "Maxxis
Group, Inc." in the amount indicted below (the "Funds"), representing the
payment of $5.50 per share for the number of shares of Common Stock indicated
below. The total subscription price must be paid at the time the Subscription
Agreement is executed. Tender of this Subscription Agreement by the undersigned
subscriber constitutes the undersigned subscriber's offer to purchase the number
of shares of Common Stock indicated below.
2. ACCEPTANCE OF SUBSCRIPTION. It is understood and agreed that the
Company shall have the right to accept or reject this subscription in whole or
in part, for any reason whatsoever. The Company may reduce the number of shares
for which the undersigned subscriber has subscribed for any reason whatsoever by
indicating acceptance of less than all of the shares subscribed on its written
form of acceptance. This Subscription Agreement shall not be deemed accepted by
the Company until it is countersigned by a duly authorized officer of the
Company. Acceptance and/or deposit of the Funds by the Company shall not
constitute acceptance of this Subscription Agreement. However, if the Company
determines not to accept this Subscription Agreement, it shall return any Funds
received to the undersigned subscriber promptly following such determination.
3. LIMITATION ON DISPOSITIONS.
(a) To induce the Company to sell shares of Common Stock to the
undersigned subscriber, the undersigned subscriber:
(i) agrees not to sell or transfer the shares of Common Stock purchased
pursuant to this Subscription Agreement or any securities issued in respect or
on account thereof, whether by stock split, stock dividend or otherwise
(collectively, the "Shares") in any jurisdiction where the offer or sale of such
Shares would be unlawful prior to the registration or qualification of such
offer and sale under the laws of such jurisdiction unless: (i) such registration
or qualification is then effective in such jurisdiction and sets forth such
information as is in the Company's sole judgment then required to be disclosed
pursuant to the laws and regulations of such jurisdiction; or (ii) registration
and qualification are not required in such jurisdiction and, in such case, as a
condition to effecting the transfer of the Shares, agrees to provide to the
Company at the subscriber's expense a legal opinion, which must be satisfactory
to the Company and the Company's legal counsel in their sole discretion, stating
that the offer and sale of such Shares in such jurisdiction may be accomplished
without registration or qualification under the laws of such jurisdiction;
(ii) agrees during the Lock-up Period (as defined in Section 3(c)
below) not to (x) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any Shares or (y) enter into any swap or other arrangement that
transfers all or a portion of the economic consequences
A-1
<PAGE> 74
associated with the ownership of any Shares (regardless of whether any of the
transactions described in clause (x) or (y) is to be settled by the delivery of
Shares, or such other securities, in cash or otherwise);
(iii) authorizes the Company to cause the transfer agent during the
Lock-up Period (as defined in Section 3(c) below) to decline to transfer any
Shares and/or to note stop transfer restrictions on the transfer books and
records of the Company with respect to any Shares; and
(iv) agrees that a legend in substantially the following form will be
placed on certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT
TO CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS ARE
SET FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") BY
AND BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. ANY
TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO THE CONDITIONS
SET FORTH IN THE SUBSCRIPTION AGREEMENT.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD
OR TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH
SHARES WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF
SUCH OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I)
SUCH REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH
JURISDICTION AND SETS FORTH SUCH INFORMATION AS IS IN THE COMPANY'S
SOLE JUDGMENT THEN REQUIRED TO BE DISCLOSED PURSUANT TO THE LAWS AND
REGULATIONS OF SUCH JURISDICTION; OR (II) REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED IN SUCH JURISDICTION AND, IN SUCH CASE,
THE PROSPECTIVE TRANSFEROR, AS A CONDITION TO EFFECTING THE TRANSFER OF
THE SHARES, PROVIDES TO THE COMPANY AT SUCH TRANSFEROR'S EXPENSE A
LEGAL OPINION, WHICH MUST BE SATISFACTORY TO THE COMPANY AND THE
COMPANY'S LEGAL COUNSEL IN THEIR SOLE DISCRETION, STATING THAT THE
OFFER AND SALE OF SUCH SHARES IN SUCH JURISDICTION MAY BE ACCOMPLISHED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH
JURISDICTION.
IN ADDITION, THE ISSUER MAY ELECT TO IMPOSE A PROHIBITION ON THE SALE
OR TRANSFER OF THESE SHARES IN THE EVENT THE ISSUER DETERMINES TO FILE
A REGISTRATION STATEMENT WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION THAT SEEKS TO REGISTER SECURITIES OF THE ISSUER IN AN
INITIAL PUBLIC OFFERING THAT IS FIRMLY UNDERWRITTEN. SUCH RESTRICTION
MAY REMAIN IN EFFECT FOR A PERIOD ENDING 180 DAYS FOLLOWING THE
EFFECTIVENESS OF SUCH REGISTRATION STATEMENT. THE ISSUER MAY IMPOSE
THESE CONDITIONS BY GIVING WRITTEN NOTICE TO THE HOLDER OF RECORD OF
THESE SHARES. THE FOREGOING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE SUBSCRIPTION AGREEMENT, A COPY OF WHICH WILL BE
PROVIDED FREE OF CHARGE BY THE ISSUER TO ANY HOLDER, PROSPECTIVE
PURCHASER OR TRANSFEREE OF THESE SHARES UPON THEIR REQUEST.
(b) The restriction set forth in Section 3(a)(ii) may be imposed and
terminated by the Company by giving notice of the imposition or termination of
such restriction (the "Lock-up Notice") to holders of record of the Shares by
first class mail, postage prepaid (or, at the Company's option, certified mail,
return receipt requested), at the address of the holders of record of the Shares
on a date chosen by the Company that is at least one but no more than fifteen
days prior to such mailing. The restrictions set forth herein and the
termination of such restrictions shall be effective upon receipt of such notice,
which date of receipt shall be deemed to be three days following such mailing.
The Lock-up Notice may be given by the Company such that
A-2
<PAGE> 75
it is received during the period beginning fifteen days prior to the filing by
the Company of a registration statement with the U.S. Securities and Exchange
Commission (the "SEC") whereby the Company first seeks to register its
securities for sale to the public in a firmly underwritten public offering (the
"IPO Registration Statement"), and ending upon the date that the IPO
Registration Statement is declared effective by the SEC (the "Effective Date").
(c) The restrictions set forth in Section 3(a)(ii) hereof shall be
effective on the date of receipt of the Lock-up Notice and shall remain in force
and effect until 180 days following the Effective Date (such period being
referred to as the "Lock-up Period") at which time such Lock-up Period shall
automatically terminate; provided, however, that the Company in its sole
discretion may elect to terminate the Lock-up Period from time to time prior to
the expiration of such 180-day period with respect to an identical specified
percentage of the Shares held as of the date of the Lock-up Notice by each
person who holds Shares. The Lock-up Period shall terminate if the Company files
an IPO Registration Statement but such registration statement is subsequently
withdrawn or is not declared effective within 180 days of filing with the SEC,
or if the Company transmits a Lock-up Notice prior to the filing of an IPO
Registration Statement but the IPO Registration Statement is not filed within 15
days of receipt of such notice; provided, however, that in any such event the
restrictions set forth in Section 3(a)(ii) shall survive and shall be applicable
to each subsequent filing of an IPO Registration Statement by the Company until
an IPO Registration Statement is first declared effective by the SEC.
(d) All obligations of the undersigned subscriber set forth herein
shall be binding upon the undersigned subscriber's heirs, personal
representatives, successors, transferees and assigns.
4. ACKNOWLEDGMENTS. The undersigned subscriber hereby acknowledges that
he or she has received and reviewed a copy of the Prospectus and all amendments
thereto. This Subscription Agreement creates a legally binding obligation, and
the undersigned subscriber agrees to be bound by the terms of this Agreement.
5. REVOCATION. The undersigned subscriber agrees that once this
Subscription Agreement is tendered to the Company, it may not be withdrawn and
that this Agreement shall survive the death or disability of the undersigned
subscriber.
6. GOVERNING LAW. This Subscription Agreement shall be governed by the
laws of the State of Georgia without reference to the principles or rules
governing conflicts of laws.
7. ENTIRE AGREEMENT. This Subscription Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior agreements and
undertakings, both written and oral, between the undersigned and the Company
with respect to the subject matter hereof.
8. ASSIGNMENT. This Subscription Agreement may not be assigned by
operation of law or otherwise without the express written consent of the
Company.
9. AMENDMENT. This Subscription Agreement may not be amended or
modified, except by an instrument in writing signed by, or on behalf of, the
undersigned and the Company.
BY EXECUTING THIS AGREEMENT, THE UNDERSIGNED SUBSCRIBER IS NOT WAIVING
ANY RIGHTS HE OR SHE MAY HAVE UNDER FEDERAL SECURITIES LAWS, INCLUDING THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
A-3
<PAGE> 76
Please indicate in the space provided below the exact name or names and
addresses in which the stock certificate representing shares subscribed for
hereunder should be registered.
<TABLE>
<S> <C>
- --------------------------------- -------------------------------------------------------------
Number of Shares Subscribed Name or Names of Subscribers (please print)
for (minimum 20 shares)
$
- --------------------------------- -------------------------------------------------------------
Total Subscription Price at Please indicate form of ownership desired (individual, joint
$5.50 per share tenants with right of survivorship, tenants in common, trust,
(funds must be enclosed) corporation, partnership, custodian, etc.)
Date: (L.S.)
---------------------------- -------------------------------------------------------
Signature of Subscriber(s)*
(L.S.)
- --------------------------------- -------------------------------------------------------
Social Security Number or Signature of Subscriber(s)*
Federal Taxpayer Identification
Number
STATE OF LEGAL RESIDENCE: STREET (RESIDENCE) ADDRESS:
- --------------------------------- -------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
City, State and Zip Code
</TABLE>
* When signed as attorney, trustee, administrator or guardian, please
give your full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. In the case of
joint tenants or tenants in common, each owner must sign.
FEDERAL INCOME TAX BACKUP WITHHOLDING
In order to prevent the application of federal income tax backup
withholding, each subscriber must provide the Escrow Agent with a correct
Taxpayer Identification Number ("TIN"). An individual's social security number
is his or her TIN. The TIN should be provided in the space provided in the
Substitute Form W-9, which is set forth below.
Under federal income tax law, any person who is required to furnish his
or her correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the IRS.
Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of taxes, a refund may
be obtained from the IRS. Certain taxpayers, including all corporations, are not
subject to these backup withholding and reporting requirements.
If the shareholder has not been issued a TIN and has applied for a TIN
or intends to apply for a TIN in thee near future, "Applied For" should be
written in the space provided for the TIN on the Substitute Form W-9.
A-4
<PAGE> 77
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify that: (i) the number shown on
this form is my correct Taxpayer Identification Number (or I am waiting for a
Taxpayer Identification Number to be issued to me), and (ii) I am not subject to
backup withholding because: (a) I am exempt from backup withholding; or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends; or (c) the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (ii) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out
item (ii).
Each subscriber should complete this section.
<TABLE>
<S> <C>
- --------------------------------------------- ----------------------------------------------
Signature of Subscriber Signature of Subscriber
- --------------------------------------------- ----------------------------------------------
Printed Name Printed Name
- --------------------------------------------- ----------------------------------------------
Social Security or Employer Identification No. Social Security or Employer Identification No.
</TABLE>
TO BE COMPLETED BY THE COMPANY:
Accepted as of _________________, 199___, as to ______________ shares.
MAXXIS GROUP, INC.
By:
------------------------------------
Name:
Title:
A-5
<PAGE> 78
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information....................................................................................... 2
Prospectus Summary........................................................................................... 3
Risk Factors................................................................................................. 8
The Offering................................................................................................. 20
Use of Proceeds.............................................................................................. 23
Dividend Policy.............................................................................................. 24
Capitalization............................................................................................... 24
Dilution..................................................................................................... 25
Selected Consolidated Financial Data......................................................................... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.................................................................................. 27
Business..................................................................................................... 32
Management................................................................................................... 41
Certain Transactions......................................................................................... 46
Principal Shareholders....................................................................................... 47
Description of Capital Stock................................................................................. 48
Shares Eligible for Future Sale.............................................................................. 51
Legal Matters................................................................................................ 51
Experts...................................................................................................... 52
Index to Consolidated Financial Statements.................................................................... F-1
Subscription Agreement........................................................................................ A-1
</TABLE>
================================================================================
================================================================================
450,000 SHARES
[LOGO]
MAXXIS GROUP, INC.
COMMON STOCK
-------------------------------------
P R O S P E C T U S
-------------------------------------
, 1998
================================================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Registration Fee................................................................... $ 758
Blue Sky Fees and Expenses......................................................... 50,000*
Printing and Engraving............................................................. 100,000*
Legal Fees and Expenses............................................................ 100,000*
Accounting Fees and Expenses....................................................... 100,000*
Miscellaneous...................................................................... 49,242*
------------
Total.......................................................................... $ 400,000*
============
</TABLE>
- -----------------
* Estimated for filing purposes.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code (the "Georgia Law") permits a
corporation to eliminate or limit the personal liability of a director to the
corporation or its shareholders for monetary damages for a breach of duty,
provided that no provision shall eliminate or limit the liability of a director
for: an appropriation of any business opportunity of the corporation; any act or
omission which involves an intentional misconduct or a knowing violation of law;
any transaction from which the director derives an improper personal benefit; or
any distribution that is illegal under Section 14-2-832 of the Georgia Law. The
Company's Articles contain a provision which limits the liability of a director
to the Company or its shareholders for any breach of duty as a director except
for a breach of duty for which the Georgia Law prohibits such limitation of
liability. This provision does not limit the right of the Company or its
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
The Company's Articles and Bylaws contain certain provisions which
provide indemnification to directors of the Company that is broader than the
protection expressly mandated in Sections 14-2-852 and 14-2-857 of the Georgia
Law. If a director or officer of the Company has been wholly successful, on the
merits or otherwise, in the defense of any action or proceeding brought by
reason of the fact that such person was a director or officer of the Company,
Sections 14-2-852 and 14-2-857 of the Georgia Law would require the Company to
indemnify such person against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith. The Georgia Law expressly allows
the Company to provide for greater indemnification rights to its officers and
directors, subject to shareholder approval.
The indemnification provisions in the Company's Articles and Bylaws
require the Company to indemnify and hold harmless each of its directors,
officers, employees and agents to the extent that he or she is or was a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including, but not
limited to, attorneys' fees and disbursements, court costs and expert witness
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by action of the board of directors, the
shareholders or otherwise, including any liability of a director for: (i) any
II-1
<PAGE> 80
appropriation, in violation of his duties, of any business opportunity of the
Company; (ii) any acts or omissions involving intentional misconduct or a
knowing violation of the law; (iii) any unlawful distribution as set forth in
Section 14-2-832 of the Georgia Law; or (iv) any transaction from which the
director received an improper personal benefit. Indemnified persons would also
be entitled to have the Company advance expenses prior to the final disposition
of the proceeding. If it is ultimately determined that they are not entitled to
indemnification, however, such amounts must be repaid.
The Company has the power, under its Bylaws, to obtain insurance on
behalf of any director, officer, employee or agent of the Company against any
liability asserted against or incurred by such person in any such capacity,
whether or not the Company has the power to indemnify such person against such
liability at that time under the Articles, Bylaws or the Georgia Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued
or sold since the inception of the Company which were not registered under the
Securities Act:
(i) in February 1997, the Company sold 1,227,265 shares of Common
Stock to the founders of the Company for $0.006 per share;
(ii) in May 1997, in connection with Mr. Thomas O. Cordy's
employment as President and Chief Executive Officer of the
Company, the Company sold 72,727 shares of Common Stock to The
Anchora Company, an entity of which Mr. Cordy serves as
protector, for $1.65 per share;
(iii) in August 1997, the Company sold 271,195 shares of Common
Stock to 42 purchasers in a private placement for $1.65 per
share; and
(iv) in March 1998, the Company converted the principal amount of a
demand promissory note, pursuant to which nine persons had
loaned the Company an aggregate amount of $200,000, into Units
at a price of $5.50 per Unit with each Unit consisting of one
share of Preferred Stock and one Warrant.
Each of these transactions was completed without registration of the
respective securities under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transactions did not involve a
public offering. All share data has been adjusted to reflect a one-for-five
reverse stock split effective October 8, 1997, a one-for-11 reverse stock split
effective February 17, 1998 and the conversion of each outstanding share of
Class A Common Stock and Class B Common Stock for one share of Common Stock
effective February 17, 1998.
ITEM 16. EXHIBITS
The exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
2.1** Plan of Reorganization of the Company effective as of February 17, 1998.
3.1 Amended and Restated Articles of Incorporation of the Company, as amended to date.
3.2** Amended and Restated Bylaws of the Company, as amended to date.
4.1** See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws defining the rights of holders of
Common Stock of the Company.
4.2** Specimen Common Stock certificate.
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
4.3** Shareholders Agreement, dated as of September 1, 1997 among the Company and the
holders of Class A Common Stock.
4.4** Amended and Restated Shareholders Agreement, dated as of February 18, 1998 among
the Company and certain holders of its Common Stock.
5.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to the Company, as
to the legality of the shares being registered.
10.1** Form of Employment Agreement by and between the Company and certain of its
officers.
10.2** Employment Agreement by and between the Company and Thomas O. Cordy dated May 1, 1997.
10.3** Promissory Note by The Anchora Company in favor of the Company dated as of May 1,
1997 in the original principal amount of $120,000.
10.4** Guarantee by Thomas O. Cordy in favor of the Company dated May 1, 1997.
10.5** Form of Independent Sales Representative Agreement by and between the Company and
certain of its sales representatives.
10.6** Consulting Agreement by and between the Company and Robert P. Kelly dated as of
September 1, 1997.
10.7** Software License Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.8** Software Service Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.9R** Equipment Purchase Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.10** Agreement for 1-Plus Services between Colorado River Communications Corporation and
the Company dated February 20, 1997.+
10.11** Sublease Agreement between DowElanco and the Company dated February 14, 1997.++
10.12** Warehouse lease between Malon D. Mimms and the Company dated March 17, 1997.
10.13** Warehouse lease between Malon D. Mimms and the Company dated June 23, 1997.
10.14** Demand Secured Promissory Note dated November 26, 1997 by the Company in favor of
the lenders named on Schedule I thereto.
10.15** Sub-Sublease Agreement between the Company and Simons Engineering, Inc. dated
September 1, 1997.++
10.16** Demand Promissory Note dated February 28, 1998 by the Company in favor of
Thomas O. Cordy.
10.17 Form of Stock Purchase Warrant.
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities Act.
In accordance with Rule 406, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
++ The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request, as provided in Item 601(b)(2) of Regulation S-K.
II-3
<PAGE> 82
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes as follows:
(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
Act;
(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 and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
more than 20 percent 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
Act, 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 under the Securities
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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than 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 of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, 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 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
securities Act, each post-effective amendment that contains a form of
prospectus 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.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 12th day of May, 1998.
MAXXIS GROUP, INC.
By:/s/ Thomas O. Cordy
-------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
* Chairman of the Board May 12, 1998
- ----------------------------------------------
Ivey J. Stokes
/s/ Thomas O. Cordy Chief Executive Officer, President May 12, 1998
- ---------------------------------------------- and Director (Principal executive
Thomas O. Cordy officer)
/s/ Daniel McDonough Chief Financial Officer May 12, 1998
- ---------------------------------------------- (Principal financial
Daniel McDonough and accounting officer)
* Director and Secretary May 12, 1998
- ----------------------------------------------
James W. Brown
* Director May 12, 1998
- ----------------------------------------------
Charles P. Bernstein
* Director May 12, 1998
- ----------------------------------------------
Alvin Curry
* Director May 12, 1998
- ----------------------------------------------
Larry W. Gates, II
* Director May 12, 1998
- ----------------------------------------------
Robert J. Glover, Jr.
* Director May 12, 1998
- ----------------------------------------------
Terry Harris
* Director May 12, 1998
- ----------------------------------------------
Phil Lundquist
*By:/s/ Thomas O. Cordy
------------------------------------------
Thomas O. Cordy
Attorney-in-Fact pursuant to the power
of attorney granted in Registration
Statement (No. 333-38623) as filed
October 24, 1997.
</TABLE>
II-5
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
---------- -------------------
<S> <C>
2.1** Plan of Reorganization of the Company effective as of February 17, 1998.
3.1 Amended and Restated Articles of Incorporation of the Company, as amended to
date.
3.2** Amended and Restated Bylaws of the Company, as amended to date.
4.1** See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws defining the rights of holders of
Common Stock of the Company.
4.2** Specimen Common Stock certificate.
4.3** Shareholders Agreement, dated as of September 1, 1997 among the Company and the
holders of Class A Common Stock.
4.4** Amended and Restated Shareholders Agreement, dated as of February 18, 1998 among
the Company and certain holders of its Common Stock.
5.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to the Company, as
to the legality of the shares being registered.
10.1** Form of Employment Agreement by and between the Company and certain of its
officers.
10.2** Employment Agreement by and between the Company and Thomas
O. Cordy dated as of May 1, 1997.
10.3** Promissory Note by The Anchora Company in favor of the
Company dated as of May 1, 1997 in the original principal
amount of $120,000.
10.4** Guarantee by Thomas O. Cordy in favor of the Company dated May 1, 1997.
10.5** Form of Independent Sales Representative Agreement by and between the Company
and certain of its sales representatives.
10.6** Consulting Agreement by and between the Company and Robert P. Kelly dated as
of September 1, 1997.
10.7** Software License Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.8** Software Service Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.9R** Equipment Purchase Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.
10.10** Agreement for 1-Plus Services between Colorado River Communications Corporation
and the Company dated February 20, 1997.+
10.11** Sublease Agreement between DowElanco and the Company dated February 14,
1997.++
10.12** Warehouse lease between Malon D. Mimms and the Company dated March 17, 1997.
10.13** Warehouse lease between Malon D. Mimms and the Company dated June 23, 1997.
10.14** Demand Secured Promissory Note dated November 26, 1997 by the Company in
favor of the lenders named on Schedule I thereto.
10.15** Sub-Sublease Agreement between the Company and Simons Engineering, Inc. dated
September 1, 1997.++
10.16** Demand Promissory Note dated February 28, 1998 by the Company in favor of
Thomas O. Cordy.
10.17 Form of Stock Purchase Warrant.
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities Act.
In accordance with Rule 406, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
++ The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request, as provided in Item 601(b)(2) of Regulation S-K.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MAXXIS GROUP, INC.
ARTICLE I
The name of the corporation is "Maxxis Group, Inc." The principal
executive office of the corporation is 1901 Montreal Road, Suite 108, Tucker,
Georgia 30084.
ARTICLE II
The corporation shall have authority to issue not more than 30,000,000
shares of capital stock which shall consist of:
(i) 20,000,000 shares of Common Stock, no par value per share
(the "Common Stock"); and
(ii) 10,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock").
A. Common Stock.
Subject to all of the rights of the Preferred Stock as expressly
provided herein, by law or by the Board of Directors pursuant to this Article
II, the Common Stock shall possess all such rights and privileges as are
afforded to capital stock by applicable law in the absence of any express grant
of rights or privileges in the Amended and Restated Articles of Incorporation,
including, but not limited to, the following rights and privileges:
(i) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the corporation legally available
for the payment of dividends;
(ii) the holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring shareholder action,
each share being entitled to one vote; and
(iii) upon the voluntary or involuntary liquidation, dissolution or
winding-up of the corporation, the net assets of the corporation available for
distribution shall be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests.
B. Preferred Stock.
In addition to the Common Stock, the corporation shall have the
authority, exercisable by its Board of Directors, to issue up to 10,000,000
shares of Preferred Stock, any part or all
<PAGE> 2
of which shares of Preferred Stock may be established and designated from time
to time by the Board of Directors by filing an amendment to these Amended and
Restated Articles of Incorporation, which shall be effective without shareholder
action, in accordance with the appropriate provisions of the Georgia Business
Corporation Act (the "Act") and any amendment or supplement thereto (a
"Preferred Stock Designation"), in such series and with such preferences,
limitations and relative rights as may be determined by the Board of Directors.
The number of authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative
vote of a majority of the votes of the Common Stock, without a vote of the
holders of the shares of Preferred Stock, or of any series thereof, unless a
vote of any such holders is required by law or pursuant to the Preferred Stock
Designation or Preferred Stock Designations establishing the series of Preferred
Stock.
100,000 shares of the corporation's Preferred Stock shall be designated
"Series A Convertible Preferred Stock." The Series A Preferred Stock shall have
the rights, preferences, privileges, restrictions, and other matters as follows:
1. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, the holders of
the Series A Convertible Preferred Stock (the "Series A Holders") shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the corporation to the holders of the Common Stock by
reason of their ownership thereof, the amount of $5.50 per share (as adjusted
for any combinations, consolidations, stock distributions or stock dividends
with respect to such shares) plus all declared or accumulated but unpaid
dividends on such share for each share of Series A Convertible Preferred Stock
then held by them and no more. If upon the occurrence of such event, the assets
and funds thus distributed among the Series A Holders shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the corporation legally available for
distribution shall be distributed among the Series A Holders in proportion to
the shares of Series A Convertible Preferred Stock then held by them.
(b) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, and subject to
the payment in full of the liquidation preferences with respect to the Series A
Convertible Preferred Stock as provided in subparagraph (a) of this Section 1,
the holders of the Common Stock shall be entitled to receive, prior and in
preference to any further distribution of any of the assets or surplus funds of
the corporation to the Series A Holders by reason of their ownership thereof, an
amount equal to the per share book value for each share of Common Stock then
held by them and no more. Subject to the payment in full of the liquidation
preferences with respect to the Series A Convertible Preferred Stock as provided
in subparagraph (a) of this Section 1, if upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Common Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire remaining assets and funds of the
corporation legally available for distribution shall be distributed among the
holders of the Common Stock in proportion to the shares of Common Stock then
held by them. After payment to the Series A Holders and the holders of Common
Stock of the amounts set forth in subparagraph (a) above and this subparagraph
(b), the entire
2
<PAGE> 3
remaining assets and funds of the corporation legally available for
distribution, if any, shall be distributed among the holders of the Common Stock
and the Series A Convertible Preferred Stock in proportion to the shares of
Common Stock then held by them and the shares of Common Stock which the Series A
Holders have the right to acquire upon conversion of their shares.
(c) A consolidation or merger of the corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the corporation, shall not be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 1, but shall be
subject to the provisions of Section 4 hereof.
2. Voting Rights. Except as otherwise expressly provided
herein or as required by law, the Series A Holders shall have no voting rights
on account of the ownership of Series A Convertible Preferred Stock and shall
not be entitled to notice of any shareholders meeting.
3. Conversion. The Series A Holders shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time at least 14 months after the date of issuance of such share, at the
office of the corporation or any transfer agent for such stock, into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing $5.50 plus all declared or accumulated but unpaid dividends on each
share of Series A Convertible Preferred Stock by the then applicable Conversion
Price, determined as hereinafter provided (the "Conversion Price"), in effect on
the date the certificate is surrendered for conversion. The initial Conversion
Price shall be $5.50. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(b) Automatic Conversion. Each share of Series A Convertible
Preferred Stock that has been outstanding for at least 14 months shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price immediately upon the closing of a public offering that occurs
at least 14 months following the date of issuance and that provides gross
proceeds to the corporation of at least $7,500,000.
(c) Mechanics of Conversion. Before any Series A Holder shall
be entitled to convert his shares of Series A Convertible Preferred Stock into
shares of Common Stock, he shall surrender the certificate or certificates
thereof, duly endorsed, at the office of the corporation or of any transfer
agent for such stock, and shall give written notice to the corporation at such
office that he elects to convert the same and shall state therein the name or
names in which he wishes the certificate or certificates for shares of Common
Stock to be issued. The corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such Series A Holder, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of surrender of the
shares of Series A Convertible Preferred Stock to be converted, and the person
or persons entitled to receive the
3
<PAGE> 4
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
(d) Adjustments to Conversion Price.
(i) Special Definitions. For purposes of this Section 3,
the following definitions apply:
"Original Issue Date" shall mean the date on which a
share of Series A Convertible Preferred Stock was first
issued.
"Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the corporation after the
Original Issue Date, other than shares of Common Stock issued
or issuable:
(A) upon conversion of shares of Series A
Convertible Preferred Stock;
(B) to officers, directors or employees of, or
consultants to, the corporation, on terms approved by
the Board of Directors; or
(C) as a dividend or distribution on Series A
Convertible Preferred Stock.
(ii) Adjustments for Combinations or Subdivisions.
No adjustment in the Conversion Price of a particular share of Series A
Convertible Preferred Stock shall be made unless this corporation at any time
or from time to time after the Original Issue Date shall declare or pay any
dividend on the Common Stock payable in Common Stock or in any right to acquire
Common Stock, or shall effect a subdivision of the outstanding shares of Common
Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Conversion
Price in effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate.
(e) Other Distributions. In the event the corporation
shall at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the corporation or any of its
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the Series A Holders shall receive the
securities of the corporation which they would have received had their stock
been converted into Common Stock on the date of such event.
(f) No Impairment. The corporation will not, by amendment
of its Amended and Restated Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the corporation, but will at all times in good faith assist in the
carrying out of all
4
<PAGE> 5
the provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the Series
A Holders against impairment.
(g) Notices of Record Date. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution of: (i) any security
or right convertible into or entitling the holder thereof to receive Additional
Shares of Common Stock; (ii) any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property; or
(iii) any other similar right, the corporation shall mail to each Series A
Holder at least 20 days prior to the date specified therein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution, security or right, and the amount and character of such
dividend, distribution, security or right.
(h) Issue Taxes. The corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series A Convertible Preferred
Stock.
(i) Reservation of Stock Issuable Upon Conversion. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Convertible Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Convertible
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Convertible Preferred Stock, the corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendment to these Articles.
(j) Fractional Shares. No fractional share shall be issued
upon the conversion of any shares of Series A Convertible Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series A Convertible Preferred Stock by a Series A Holder
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share of Common Stock. In lieu of any
fractional share of Common Stock to which a Series A Holder would otherwise be
entitled, the corporation shall make a cash payment equal to the fair market
value of such fractional share of Common Stock, as determined in good faith by
the Board of Directors.
(k) Adjustments. In case of any reorganization or any
reclassification of the capital stock of the corporation, any consolidation or
merger of the corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Series A Convertible Preferred Stock shall
thereafter be convertible into the number of shares of stock or other securities
or property (including cash) to which a holder of the number of shares of Common
Stock deliverable upon
5
<PAGE> 6
conversion of such share of Series A Convertible Preferred Stock would have been
entitled upon the record date of (or date of, if no record date is fixed) such
reorganization, reclassification, consolidation, merger or conveyance; and, in
any case, appropriate adjustment (as determined by the Board of Directors) shall
be made in the application of the provisions herein set forth with respect to
the rights and interests thereafter of the Series A Holders, to the end that the
provisions set forth herein shall thereafter be applicable, as nearly as
equivalent as is practicable, in relation to any shares of stock or the
securities or property (including cash) thereafter deliverable upon the
conversion of the shares of such Series A Convertible Preferred Stock.
4. Merger, Consolidation.
(a) At any time, in the event of:
(i) a consolidation or merger of the corporation with
or into any other corporation, or any other entity or
person, other than a wholly-owned subsidiary;
(ii) any corporate reorganization in which the
corporation shall not be the continuing or surviving
entity of such reorganization;
(iii) a sale of all or substantially all of the
assets of the corporation; or
(iv) any transaction approved by the corporation in
which more than 50% of the outstanding stock of the
corporation (on an as-converted basis) is exchanged
in any three month period;
the Series A Holders shall be paid (unless such payment is waived by the holders
of a majority of the outstanding shares of Series A Convertible Preferred Stock)
in cash or in securities received from the acquiring corporation or in a
combination thereof, at the closing of any such transaction, an amount equal to
the amount per share which would be payable to such holders pursuant to Section
1 if all consideration received by the corporation and its shareholders in
connection with such event were being distributed in a liquidation of the
corporation.
(b) Any securities to be delivered to the Series A
Holders pursuant to Section 4(a) above shall be valued as follows:
(i) Securities not subject to investment letter
or other similar restrictions on free marketability:
(A) If traded on a securities exchange, the
value shall be deemed to be the average of
the security's closing prices on such
exchange over the 30-day period ending three
(3) days prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of
the closing bid prices over the 30-day
period ending three (3) days prior to the
closing; and
6
<PAGE> 7
(C) If there is no active public market, the
value shall be the fair market value thereof
(as determined in good faith by the Board of
Directors of the corporation).
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free
marketability shall be to make an appropriate
discount from the market value determined as above in
(b)(1)(a), (b)(1)(b) or (b)(1)(c) to reflect the
approximate fair market value thereof (as determined
in good faith by the Board of Directors of the
corporation).
(c) The corporation shall give each Series A Holder written
notice of such impending transaction not later than 30 days prior to the
shareholders' meeting called to approve such transaction or 30 days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction, The first of said
notices shall describe the material terms and conditions of the contemplated
transaction as well as the terms and conditions of this Section 4, and the
corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than 30 days after
the mailing by the corporation of the first notice provided for herein or sooner
than 20 days after the mailing by the corporation of any notice of material
changes provided for herein; provided, however, that such periods may be
shortened upon the written consent of the holders of not less than 50% of the
then outstanding Series A Convertible Preferred Stock.
5. Amendment. Any term relating to the Series A Convertible
Preferred Stock may be amended and the observance of any term relating to the
Series A Convertible Preferred Stock may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
vote or written consent of holders of more than 50% of all Series A Convertible
Preferred Stock then outstanding and the corporation. Any amendment or waiver so
effected shall be binding upon the corporation and any Series A Holder.
6. Restrictions and Limitations. So long as any shares of
Series A Convertible Preferred Stock remain outstanding, the corporation shall
not, without the vote or written consent by the holders of more than 50% of the
then outstanding shares of Series A Convertible Preferred Stock:
(a) Effect any reclassification, recapitalization or other
change with respect to any outstanding shares of stock or create any new class
or series of capital stock which results in the issuance of shares of stock
having any preference or priority as to dividend or redemption rights,
liquidation preferences, conversion rights, or otherwise, superior to (but not
on a parity with) any such preference or priority of the Series A Convertible
Preferred Stock;
(b) Increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Convertible
Preferred Stock; or
(c) Declare or pay any cash dividends on the corporation's
Common Stock unless the Series A Holders receive dividends of like amount on an
as-if-converted to Common Stock basis.
7
<PAGE> 8
7. No Reissuance of Series A Convertible Preferred Stock. No
share or shares of Series A Convertible Preferred Stock acquired by the
corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such shares shall be returned to the status of undesignated
shares of Preferred Stock.
ARTICLE III
The corporation shall have not more than fifteen directors, and the
number of directors shall be set by the Board of Directors as set forth in the
corporation's Amended and Restated Bylaws. The Board of Directors shall be
divided into three classes to be known as Class I, Class II, and Class III,
which shall be as nearly equal in number as possible. Except in case of death,
resignation, disqualification or removal for cause, each director shall serve
for a term ending on the date of the third annual meeting of shareholders
following the annual meeting at which the director was elected; provided,
however, that each initial director in Class I shall hold office until the first
annual meeting of shareholders after his election; each initial director in
Class II shall hold office until the second annual meeting of shareholders after
his election; and each initial director in Class III shall hold office until the
third annual meeting of shareholders after his election. Despite the expiration
of a director's term, he shall continue to serve until his successor, if there
is to be any, has been elected and qualified. In the event of any increase or
decrease in the authorized number of directors, the newly created or eliminated
directorships resulting from such an increase or decrease shall be apportioned
among the three classes of directors so that the three classes remain as nearly
equal in size as possible; provided, however, that there shall be no
classification of additional directors elected by the Board of Directors until
the next meeting of shareholders called for the purpose of electing directors,
at which meeting the terms of all such additional directors shall expire, and
such additional directors positions, if they are to be continued, shall be
apportioned among the classes of directors and nominees therefor shall be
submitted to the shareholders for their vote. Any vacancy occurring on the Board
of Directors, including a vacancy resulting from an increase in the number of
directors, may only be filled by the affirmative vote of the remaining directors
even if the remaining directors constitute less than a quorum of the Board of
Directors. Any director or the entire Board of Directors may be removed with or
without cause by a majority vote of the holders of Common Stock then entitled to
vote thereon.
ARTICLE IV
No director of the corporation shall be personally liable for monetary
damages to the corporation or its shareholders for breach of the duty of care or
any other duty as a director, except that such liability shall not be eliminated
for:
(i) any appropriation, in violation of the director's duties,
of any business opportunity of the corporation;
(ii) acts or omissions which involve intentional misconduct or
a knowing violation of law;
(iii) liability under Section 14-2-832 (or any successor
provision or redesignation thereof) of the Act; and
8
<PAGE> 9
(iv) any transaction from which the director received an
improper personal benefit.
If at any time the Act shall have been amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
each director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Act, as so amended, without further action by the
shareholders, unless the provisions of the Act, as amended, require further
action by the shareholders. Any repeal or modification of the foregoing
provisions of this Article IV shall not adversely affect the elimination or
limitation of liability or alleged liability pursuant hereto of any director of
the corporation for or with respect to any alleged act or omission of the
director occurring prior to such repeal or modification.
ARTICLE V
All actions by the shareholders shall be taken at a meeting, with prior
notice which complies with the notice provisions of the corporation's Amended
and Restated Bylaws, and with a vote of the holders of the outstanding stock of
each voting group entitled to vote thereon.
ARTICLE VI
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the corporation, the
Board of Directors, committees of the Board of Directors and individual
directors, in addition to considering the effects of any action on the
corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the corporation and its subsidiaries, the
communities in which offices or other establishments of the corporation and its
subsidiaries are located and all other factors such directors consider
pertinent; provided, however, that any such provision shall be deemed solely to
grant discretionary authority to directors and shall not be deemed to provide to
any constituency any right to be considered.
These Amended and Restated Articles of Incorporation were duly adopted
by the Board of Directors of Maxxis Group, Inc. pursuant to a written consent
dated March 23, 1998. Shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles of Incorporation as of the 23rd day of March, 1998.
/s/ Thomas O. Cordy
-------------------------------------
Thomas O. Cordy
President and Chief Executive Officer
9
<PAGE> 1
EXHIBIT 5.1
[Nelson Mullins Riley & Scarborough, L.L.P. Letterhead]
May 13, 1998
Maxxis Group, Inc.
1901 Montreal Road
Suite 108
Tucker, GA 30084
Gentlemen:
We have acted as counsel to Maxxis Group, Inc. (the "Company") in
connection with the filing of a Registration Statement on Form S-1 (Reg. No.
333-38623) (the "Registration Statement") under the Securities Act of 1933,
covering the offering of up to 450,000 shares (the "Shares") of the Company's
Common Stock, no par value per share. In connection therewith, we have
examined such corporate records, certificates of public officials and other
documents and records as we have considered necessary or proper for the purpose
of this opinion.
This opinion is limited by and is in accordance with, the January 1,
1992, edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion Committee
of the Corporate and Banking Law Section of the State Bar of Georgia.
Based on the foregoing, and having regard to legal considerations
which we deem relevant, we are of the opinion that the Shares, when purchased,
issued and delivered as described in the Registration Statement, will be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Nelson Mullins Riley & Scarborough, L.L.P.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
<PAGE> 1
EXHIBIT 10.17
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT (the "Warrant") is made and entered into
as of March 23, 1998 (the "Issuance Date"), by and between MAXXIS GROUP, INC.,
a Georgia corporation (the "Corporation"), and ____________________________
(the "Warrantholder").
W I T N E S S E T H:
WHEREAS, the Corporation desires to grant the Warrantholder warrants
to purchase shares of the Corporation's Common Stock, no par value per share
(the "Common Stock"), upon the terms and conditions herein contained;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants hereinafter set forth, and of other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. GRANT OF WARRANT. Subject to the terms and conditions of this
Warrant, the Corporation hereby grants to the Warrantholder the right to
purchase _______ shares of Common Stock (the "Warrant Shares").
2. EXERCISE PRICE. The purchase price (the "Exercise Price") for each
Warrant Share initially shall be $5.50. The Exercise Price shall be subject to
adjustment as provided in Section 6 below.
3. EXERCISE OF WARRANT.
(a) To the extent that the Warrant has become and remains
exercisable it may be exercised by the Warrantholder delivering to the
Corporation a written notice of exercise signed by the Warrantholder, in
substantially the form attached hereto as EXHIBIT A (a "Notice of Exercise"),
together with, at the option of the Warrantholder: (i) a check payable to the
Corporation in the amount of the total purchase price for the Warrant Shares
to be purchased pursuant to the Notice of Exercise; (ii) shares of Common
Stock duly endorsed for transfer to the Corporation and owned by the
Warrantholder; (iii) by authorization to the Corporation to withhold shares of
Common Stock otherwise issuable upon exercise of the Warrant; or (iv) any
combinations of (i), (ii) and (iii) of this Section 3(a). In cases of exercise
whereby the Warrantholder tenders Common Stock to the Corporation or otherwise
withholds Common Stock pursuant to provisions (ii) or (iii) of this Section
3(a), the Fair Market Value (as defined below) on the date of exercise of the
Common Stock tendered to the Corporation or authorized to be withheld upon
exercise of the Warrant shall be credited against the Exercise Price of the
Common Stock for which a Notice of Exercise has been provided (however, the
Company shall not be obligated to issue any fractional shares or to make any
cash payments in consideration of any excess of the aggregate Fair Market
Value of shares transferred or withheld over the aggregate Exercise Price).
(1) "Fair Market Value" on any date shall mean: (i) the
closing sales price of the Common Stock, regular
way, on such date on the national securities
exchange having the greatest volume of trading in
the Common Stock during the thirty-day period
preceding the date the value is to be determined
or, if such exchange was not open for trading on
such date, the next preceding date on which it was
open; (ii) if the Common Stock is
<PAGE> 2
not traded on any national securities exchange, the
average of the closing high bid and low asked
prices of the Stock on the over-the-counter market
on the day such value is to be determined, or in
the absence of closing bids on such day, the
closing bids on the next preceding day on which
there were bids; or (iii) if the Common Stock also
is not traded on the over-the-counter market, the
fair market value as determined in good faith by
the Board of Directors (the "Board") or the
Executive Committee (the "Committee") of the
Corporation based on such relevant facts as may be
available to the Board or Committee, which may
include opinions of independent experts, the price
at which recent sales have been made, the book
value of the Common Stock, and the Company's
current and future earnings.
(b) The Warrant shall not become exercisable with respect to
the Warrant Shares until 14 months following the anniversary of the Issuance
Date. Thereafter, this Warrant shall be exercisable, in whole or in part as
set forth herein, during the term of the Warrant.
(c) Within 30 days after the exercise of the Warrant as
herein provided, the Corporation shall deliver to the Warrantholder a
certificate or certificates for the Warrant Shares being issued in the name of
the Warrantholder and in such denominations as are requested by the
Warrantholder.
(d) The Corporation covenants and agrees that all Warrant
Shares which may be issued upon exercise of the Warrant shall, upon issuance
and payment therefor, be legally and validly issued and outstanding, fully
paid and nonassessable, and free from all liens, claims and encumbrances,
except restrictions imposed by applicable securities laws, the Corporation's
Amended and Restated Articles of Incorporation and this Warrant. The
Corporation shall at all times reserve and keep available for issuance upon
the exercise of the Warrant such number of authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of the
Warrant.
4. TERM OF WARRANT.
(a) The term of the Warrant shall continue in effect until
the earlier of: (i) the date on which the Warrant has been exercised; or (ii)
seven years from the anniversary of the Issuance Date.
(b) In the event of the Warrantholder's death, the Warrant
may be exercised hereunder by the Warrantholder's personal representative,
legatees, or heirs at law, as the case may be, and in the case of the
Warrantholder's mental incompetence, by Warrantholder's legal guardian, or if
none has been appointed, by Warrantholder's duly authorized attorney-in-fact.
5. CONSENT TO TRANSFER. Unless the Corporation consents thereto
in writing, this Warrant and all rights hereunder are nontransferable and
nonassignable by the Warrantholder, other than transfers: (i) pursuant to the
last will and testament of the Warrantholder or the laws of descent and
distribution; (ii) pursuant to a bona fide gift; (iii) to an immediate family
member of the Warrantholder; or (iv) in the case of a Warrantholder that is not
an individual, the partners or shareholders of such Warrantholder. Any transfer
or attempted transfer except pursuant to the preceding sentence shall be null
and void and of no effect whatsoever.
2
<PAGE> 3
6. ADJUSTMENTS.
(a) If, prior to the termination of the Warrant as provided in
Section 4(a) hereof:
(i) The number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, or other similar event,
the Exercise Price shall be proportionately reduced and the number of
Warrant Shares that have not theretofore been purchased by the
Warrantholder shall be proportionately increased.
(ii) The number of outstanding shares of Common Stock is
decreased by a combination or reclassification of shares, or other
similar event, the Exercise Price shall be proportionately increased
and the number of Warrant Shares that have not theretofore been
purchased by the Warrantholder shall be proportionately reduced.
If any adjustment under this Section 6(a) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded. In lieu of any fractional Warrant Share
to which the Warrantholder would otherwise be entitled, the Corporation shall
make a cash payment equal to the fair market value of such fractional Warrant
Share, as determined in good faith by the board of directors of the
Corporation.
(b) If, prior to the termination of the Warrant as provided
in Section 4(a) hereof, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result
of which shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of stock or
securities of the Corporation or another entity, then the Warrantholder shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified in this Warrant and in lieu of the Warrant
Shares immediately theretofore purchasable and receivable upon the exercise of
the Warrant, such shares of stock and securities as may be issued or payable
with respect to or in exchange for the number of Warrant Shares immediately
theretofore purchasable and receivable upon the exercise of the Warrant had
such merger, consolidation, exchange of shares, recapitalization or
reorganization not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of the Warrantholder to
the end that the provisions hereof (including, without limitation, provisions
for adjustment of the Exercise Price and of the number of shares purchasable
upon the exercise of the Warrant) shall thereafter be applicable, as nearly as
may be practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection (b) unless the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligation to deliver to the Warrantholder such shares of stock and securities
as, in accordance with the foregoing provisions, the Warrantholder may be
entitled to purchase. The foregoing notwithstanding, in the event of a merger
or consolidation in which the Corporation is not the surviving entity, if the
Corporation concludes that it will be unable to satisfy the conditions of this
subsection (b) without a material adverse effect on the terms of such proposed
transaction, then the Corporation shall have the option, prior to or
contemporaneously with the closing of such merger or consolidation, to
purchase the Warrant from the Warrantholder at its then fair value, determined
with regard to both the spread between the Exercise Price and the value of the
consideration to be received in the transaction and the remaining term of the
Warrant. The Corporation and the Warrantholder shall agree on such fair value
or, in the event they are unable to agree, shall submit the question of fair
value to an investment banking firm to be selected by the Corporation, with
the cost of such investment banking firm to be paid by the Corporation.
3
<PAGE> 4
7. INVESTMENT REPRESENTATION. As a condition to the issuance of
Warrant Shares hereunder, the Warrantholder represents to the Corporation that
the Warrant Shares Warrantholder will acquire pursuant to such exercise are
being purchased for Warrantholder's own account for investment purposes only
and not with a present view to resale or a distribution thereof, unless the
Warrantholder delivers to the Corporation an opinion of counsel acceptable to
the Corporation stating that such a representation is not required under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws.
The Warrantholder acknowledges that the Warrant Shares may be "restricted
securities" as defined in the Act and that such Warrant Shares may not be able
to be resold unless such resale is registered under the Act and applicable
state securities laws or unless an exemption is available. The Warrantholder
acknowledges that Warrantholder has no rights to cause the registration of the
Warrant Shares.
8. NO RIGHTS AS A SHAREHOLDER. The Warrantholder shall not have any
interest in or shareholder rights with respect to any shares of Common Stock
which are subject to the Warrant until such shares have been issued and
delivered to the Warrantholder in accordance with this Warrant.
9. TAXES. As a condition to the issuance of Warrant Shares hereunder,
the Corporation may withhold, or require the Warrantholder to pay or reimburse
the Corporation for, any taxes which the Corporation determines are required
to be withheld under federal, state or local law in connection with the
exercise of the Warrant.
10. HEIRS AND SUCCESSORS. This Warrant and all terms and conditions
hereof shall be binding upon the Corporation and its successors and assigns,
and upon the Warrantholder and Warrantholder's heirs, legatees and legal
representatives.
11. GOVERNING LAW. This Warrant shall be governed by, and construed
and enforced in accordance with, the laws of the State of Georgia without
regard to the principles of conflicts of laws.
12. NOTICES. All notices, requests and other communications required
or permitted hereunder shall be in writing and shall be deemed to have been
duly given and received when delivered in person, when delivered by overnight
delivery service, or three business days after being mailed by registered or
certified mail, postage prepaid, return receipt requested, to the following
addresses (or to such other address as one party may from time to time
designate in writing to the other party hereto):
If to the Corporation: Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
Attn: President
If to the Warrantholder: ------------------------------
------------------------------
------------------------------
------------------------------
13. ENTIRE AGREEMENT. This Warrant and the related Subscription
Agreement and Amended and Restated Articles of Incorporation of the
Corporation in the form filed with the Secretary of State of the State of
Georgia (collectively, the "Related Documents") constitute the full and entire
agreement and understanding of the parties to this Warrant with respect to the
subjects hereof and thereof, and supersede all previous discussions and
agreements, if any, of the parties hereto. No party
4
<PAGE> 5
shall be liable for or bound in any other manner by any representations,
warranties, covenants or agreements except as specifically set forth in this
Warrant and the Related Documents.
14. SEVERABILITY. The provisions of this Warrant, and of each
separate section and subsection, are severable, and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in
whole or in part, the remaining provisions, and any unenforceable provision to
the extent enforceable, shall nevertheless be binding and enforceable.
5
<PAGE> 6
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
executed by its duly authorized officer, and the Warrantholder has executed
this Warrant, as of the Issuance Date.
MAXXIS GROUP, INC.
By:
-------------------------------------
President
WARRANTHOLDER:
By:
-------------------------------------
Name (Print):
---------------------------
6
<PAGE> 7
EXHIBIT A
NOTICE OF EXERCISE
[DATE]
Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
Attn: President
Re: Exercise of Stock Purchase Warrant
Dear Sir:
The undersigned, _______, pursuant to that certain Stock Purchase
Warrant, dated as of March 23, 1998, by and between Maxxis Group, Inc. (the
"Corporation") and the undersigned (the "Warrant"), hereby exercises the Warrant
for ______________ Warrant Shares, subject to the terms and conditions of the
Warrant. Accompanying this Notice is: (i) a check in the amount of
$________________ payable to the Corporation; (ii) _______________ shares of the
Company's Common Stock presently owned by the undersigned and duly endorsed or
accompanied by stock transfer powers, having an aggregate Fair Market Value (as
defined in the Warrant) as of the date hereof of $________________; (iii)
authorization to withhold ___________________ shares of Common Stock otherwise
issuable upon exercise of the Warrant (which authorization is given pursuant to
my signature below); or (iv) any combinations of (i), (ii) and (iii) of this
Notice of Exercise, such amounts or withholdings being equal, in the aggregate,
to the Exercise Price set forth in Section 2 of the Warrant multiplied by the
number of shares of Common Stock being acquired hereby (in each instance subject
to appropriate adjustment pursuant to Section 6 of the Warrant).
Very truly yours,
-------------------------------------
[Name]
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and all references to our firm) included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
May 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 229,000
<SECURITIES> 10,000
<RECEIVABLES> 327,000
<ALLOWANCES> 0
<INVENTORY> 181,000
<CURRENT-ASSETS> 785,000
<PP&E> 146,000
<DEPRECIATION> 150,000
<TOTAL-ASSETS> 1,068,000
<CURRENT-LIABILITIES> 603,000
<BONDS> 0
0
200,000
<COMMON> 0
<OTHER-SE> 265,000
<TOTAL-LIABILITY-AND-EQUITY> 1,068,000
<SALES> 5,175,000
<TOTAL-REVENUES> 5,175,000
<CGS> 1,643,000
<TOTAL-COSTS> 5,290,000
<OTHER-EXPENSES> 3,647,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (115,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,000)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
