<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1998
Registration No. 333-38623
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
Post-Effective Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
MAXXIS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Georgia 4813 58-2278241
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
----------------------------
</TABLE>
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 696-6343
(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) 696-6343
(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)
----------------------------
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.
===============================================================================
<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission or any state securities commission is
effective. This prospectus is not an offer to sell securities, and we are not
soliciting offers to buy securities, in any state where the offer or sale is
not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1998
PROSPECTUS
450,000 SHARES
[MAXXIS LOGO]
COMMON STOCK
Maxxis Group, Inc. is offering 450,000 shares of Common Stock at a
price of $5.50 per share. There is currently no public market for the Common
Stock, and it is unlikely that any trading market will develop in the future.
Maxxis has arbitrarily established the offering price of the Common Stock. The
offering price does not necessarily bear any relationship to our asset value,
net worth or any other established criteria of value.
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
We will offer the shares primarily to persons who are regional and
executive directors in our marketing system. For persons who are regional or
executive directors, the minimum purchase amount is 20 shares, and the maximum
is 200 shares. We reserve the right not to sell shares to any particular
regional or executive director, to waive the maximum subscription amount or to
allocate additional shares to regional or executive directors. We may also
offer shares to our strategic partners. There are no minimum or maximum
subscription amounts for strategic partners.
We expect to begin selling the Common Stock on or after January 25,
1999. The offering is scheduled to end on June 30, 1999, but we may extend the
offering until December 31, 2000. We reserve the right to terminate the
offering at any time. We have not established an escrow account. Purchasers
will pay all subscription funds to us directly. Upon acceptance of a
subscription, we will be able to use the proceeds immediately.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price.............................................. $ 5.50 $ 2,475,000
Sales Agency Commissions........................................... $ -- --
Proceeds to Maxxis................................................. $ 5.50 $ 2,475,000
</TABLE>
Maxxis will use its best efforts to sell the Common Stock. In
Maryland, Virginia and other states where our directors and executive officers
are not permitted to make offers and sales, we intend to engage broker/dealers
who will use their best efforts to sell the Common Stock.
, 1999
<PAGE> 3
In this prospectus, the "Company," "Maxxis," "we," "us" and "our"
refer to Maxxis Group, Inc. and its subsidiaries (unless the context otherwise
requires). We have applied for federal registration of the "MAXXIS" mark. This
prospectus includes other trademarks, trade names and service marks of Maxxis
and of other companies.
----------------------------
We have adjusted the Common Stock share numbers presented in the
prospectus to reflect: (a) a 1-for-5 reverse split of the Common Stock on
October 8, 1997; (b) a 1-for-11 reverse split of the Common Stock on February
17, 1998; and (c) the conversion of each share of Class A Common Stock and
Class B Common Stock into one share of Common Stock on February 17, 1998. Our
fiscal year ends on June 30 of each year.
----------------------------
This prospectus contains certain "forward-looking statements"
concerning Maxxis' operations, performance and financial condition, including
our future economic performance, plans and objectives and the likelihood of
success in developing and expanding our business. We have based these
statements upon a number of assumptions and estimates which are subject to
significant uncertainties, many of which are beyond our control. The words
"may," "would," "could," "should," "will," "expect," "anticipate," "believe,"
"intend," "plan," "estimate" and similar expressions are meant to identify
forward-looking statements. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to,
those set forth in the "Risk Factors" section of this prospectus.
----------------------------
Our principal executive offices are located at 1901 Montreal Road,
Suite 108, Tucker, Georgia 30084, and our telephone number is (770) 696-6343.
2
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SUMMARY
This summary highlights information contained elsewhere in this
prospectus. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus
carefully, and you should consider the information set forth in "Risk Factors"
and our Consolidated Financial Statements and Notes, before deciding to invest
in our Common Stock.
MAXXIS
Our independent associates market communications and Internet services
and nutritional and health enhancement products through our multi-level network
marketing system. We believe that our marketing system allows us to obtain
customers for our products and services in a cost effective manner. We believe
that our marketing system also enhances customer retention because of the
personal relationships between our independent associates and their customers.
Maxxis was incorporated in January 1997 and began sponsoring independent
associates and marketing telecommunications services in March 1997. We
generated aggregate net revenues of $6,991,000 for our fiscal year ended June
30, 1998 and $5,103,000 for the three months ended September 30, 1998.
OUR PRODUCTS AND SERVICES
We have built a customer base without committing capital or management
resources to construct our own communications network. In February 1997, we
contracted with Colorado River Communications Corp. to allow our independent
associates to market long distance services provided by Colorado River
Communications. In September 1998, we leased telecommunications switching
equipment and ancillary hardware and software in order to create our own
communications network. We will not be able to provide long distance services
using this equipment until we have complied with various regulatory
requirements. We are currently in the process of filing applications and tariffs
to obtain the required regulatory approvals to offer long distance service
throughout the United States. In 1999 we expect to receive regulatory approvals,
and then we plan to market our long distance services to the subscriber base
that is being developed under our agreement with Colorado River Communications
and to other customers. To the extent available, we also intend to lease or sell
excess switch capacity to third parties.
We began marketing private label dietary supplements to our customers
and independent associates in November 1997. Recently, we began marketing
additional nutritional and health enhancement products. In September 1998, we
began providing Internet access and Web-page development and hosting services.
We believe that persons who purchase telecommunications services through our
independent associates are also potential customers for our nutritional and
health enhancement products and Internet-related services.
OUR MARKETING SYSTEM
Our products and services are marketed exclusively by our network of
independent associates. Our multi-level network marketing system and our
reliance upon independent associates are intended to reduce marketing costs,
customer acquisition costs and customer attrition. We believe that our
multi-level network marketing system will continue to build a base of potential
customers for additional services and products. We believe that independent
associates are generally attracted to our multi-level network marketing system
because of the potential for supplemental income and because they are not
required to purchase inventory, have no monthly sales quotas or account
collection issues, have minimal required paperwork and have a flexible work
schedule. We encourage independent associates to market services and products
to persons with whom the independent associates have an ongoing relationship,
such as family members, friends, business associates and neighbors. We also
sponsor meetings at which current independent associates are encouraged to
bring in others for an introduction to our marketing system.
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OUR STRATEGY
Our goal is to develop a national distribution system through which
large volumes of communications and Internet services, nutritional and health
enhancement products and other products and services may be sold. We intend to
increase our revenues by expanding our marketing network, increasing the number
of customers who purchase our products and services and providing additional
products and services for sale through our independent associates. We intend to
achieve our goals by:
- Growing and Developing our Network of Independent Associates
by enhancing our sponsoring and training services, continuing
to support the marketing efforts of independent associates
and introducing new income opportunities for independent
associates.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of independent associates.
- Offering Additional Communications Services that meet the
needs of subscribers, which may include, among other
services, paging, conference calling, wireless cable,
cellular and local phone service.
- Improving and Expanding Our Product Lines by continuing to
evaluate and offer products that are attractive to our
independent associates and customers.
- Obtaining Competitive Prices on products and services through
the purchasing power of our nationwide network.
THE OFFERING
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<S> <C>
Common Stock offered by Maxxis..................... 450,000 shares
Common Stock to be outstanding 2,021,187 shares
after this offering.............................
Offering price per share........................... $5.50
Use of proceeds.................................... Expand our communications business, develop additional product
lines, develop and/or acquire internal systems and for working
capital and general corporate purposes.
Terms of the offering.............................. The offering is scheduled to end on June 30, 1999, but we reserve
the right to extend the offering until December 31, 2000.
Irrevocability of subscriptions.................... You must deliver to us or a broker/dealer, as the case may be, a
completed and executed subscription agreement. A blank
subscription agreement is located at the end of this prospectus.
The executed subscription agreement will be your offer to
purchase shares of Common Stock on the terms contained in this
prospectus. Once you have submitted a subscription agreement,
you will not have the right to revoke or withdraw it without our
prior written consent.
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
No minimum offering amount;
no escrow....................................... We do not have to sell a minimum number of shares, and we cannot
guarantee that any or all of the shares we are offering will be
sold. We have not established an escrow account, and you will
pay your subscription funds to us directly. Upon acceptance of a
subscription, we will be able to use the proceeds immediately.
Once we accept a subscription, we will not refund the
subscription funds under any circumstance, including in the event
that we do not sell all 450,000 shares prior to the termination
of the offering.
Transfer restrictions.............................. Each share certificate will have legends restricting the transfer
of the shares. One legend will restrict the transfer to any
person in any jurisdiction where the offer or sale is not
permitted. In addition, in the subscription agreement, each
purchaser will agree not to sell or otherwise transfer the
shares, or any securities issued on account of the shares, during
the lock-up period that may be required by the underwriters in an
underwritten public offering. We may impose these transfer
restrictions during a lock-up period by giving notice to the
holders of record of the shares.
Plan of distribution............................... In certain states, some of our officers and directors will use
their best efforts to make offers and sales of the Common Stock.
In Maryland, Virginia and other states where our directors and
executive officers are not permitted to make offers and sales, we
intend to engage broker/dealers who will use their best efforts
to sell the Common Stock.
</TABLE>
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
INCEPTION PERIOD YEAR ENDED SEPTEMBER 30,
ENDED ------------------------------
JUNE 30, 1997(1) JUNE 30, 1998 1997 1998
---------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Communications services....................$ 2,322,000 $ 5,293,000 $ 1,465,000 $ 3,686,000
Nutritional products....................... -- 526,000 -- 375,000
Marketing services......................... 369,000 1,172,000 353,000 1,042,000
---------------- ------------- ------------- -------------
Total net revenues....................... 2,691,000 6,991,000 1,818,000 5,103,000
---------------- ------------- ------------- -------------
Cost of services:
Communications services.................... 761,000 1,351,000 438,000 706,000
Nutritional products....................... -- 294,000 -- 202,000
Marketing services......................... 255,000 431,000 101,000 552,000
---------------- ------------- ------------- -------------
Total cost of services................... 1,016,000 2,076,000 539,000 1,460,000
---------------- ------------- ------------- -------------
Gross margin.................................. 1,675,000 4,915,000 1,279,000 3,643,000
---------------- ------------- ------------- -------------
Operating expenses:
Selling and marketing...................... 1,089,000 2,665,000 716,000 2,005,000
General and administrative................. 660,000 2,344,000 597,000 778,000
---------------- ------------- ------------- -------------
Total operating expenses................. 1,749,000 5,009,000 1,313,000 2,783,000
---------------- ------------- ------------- -------------
Interest expense.............................. -- 2,000 -- --
---------------- ------------- ------------- -------------
Income (loss) before income taxes............. (74,000) (96,000) (34,000) 860,000
Provision for income taxes.................... -- -- -- 280,000
---------------- ------------- ------------- -------------
Net (loss) income.............................$ (74,000) $ (96,000) $ (34,000) $ 580,000
================ ============= ============= =============
Net (loss) income per share:
Basic......................................$ (.05) $ (.06) $ (0.02) $ 0.37
================ ============= ============= =============
Diluted....................................$ (.05) $ (.06) $ (0.02) $ 0.36
================ ============= ============= =============
Weighted average number of shares outstanding:
Basic...................................... 1,571,187 1,571,187 1,571,187 1,571,187
================ ============= ============= =============
Diluted.................................... 1,571,187 1,571,187 1,571,187 1,607,546
================ ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash.................................................................................... $ 803,000
Working capital(2)...................................................................... (448,000)
Property and equipment, net............................................................. 5,950,000
Total assets............................................................................ 8,631,000
Long-term capital lease obligations..................................................... 4,866,000
Total shareholders' equity.............................................................. 1,064,000
</TABLE>
- --------------------
(1) Maxxis was incorporated on January 24, 1997 and began operations in
March 1997. The inception period is from January 24, 1997 to June 30,
1997.
(2) Negative working capital is due primarily to a cash payment of
$501,000 for the leased telephone switch equipment and $392,000 of
current maturities associated with this lease obligation.
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<PAGE> 8
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. Our business, financial condition and operating results
could be adversely affected by any of the following risks, and you could lose
all or part of your investment. The risks described below are not the only ones
that we face. Additional risks and uncertainties not presently known to us or
that we currently think are immaterial may also impair our business operations.
This prospectus contains "forward-looking statements" which involve
risks and uncertainties. The forward-looking statements are identified by words
such as "expects," "intends," "estimates," "anticipates," "may," "could,"
"should," "would," "will," "plans," "believes" and similar expressions. Our
actual results may differ materially from those discussed in the
forward-looking statements because of factors such as the Risk Factors
discussed below.
LIMITED OPERATING HISTORY
Maxxis was incorporated on January 24, 1997 and has a limited
operating history. We are subject to the risks and difficulties frequently
encountered by early stage companies in rapidly evolving markets. These risks
and difficulties include, among others, our:
- need to manage our changing operations;
- need to expand our operations, including our independent
associates network;
- dependence upon suppliers of services and products;
- exposure to competition; and
- dependence upon key personnel.
We cannot guarantee that we will successfully address these risks or that our
business strategy will be successful.
NO MINIMUM OFFERING AMOUNT; NO ESCROW
We do not have to sell a minimum number of shares, and we cannot
guarantee that any or all of the shares we are offering will be sold. Once
Maxxis or a broker/dealer, as the case may be, receives a subscription
agreement, the subscriber cannot revoke or withdraw the subscription agreement
without our consent. We also reserve the right to reject, in whole or in part
and in our sole discretion, any subscription.
We have not established an escrow account, and you will pay your
subscription funds to us directly. Our receipt and/or deposit of any
subscription funds shall not constitute acceptance of a subscription. We will
only accept a subscription by countersigning the subscription agreement and
issuing a share certificate to you. Upon acceptance of a subscription, we will
be able to use the proceeds immediately. Once we accept a subscription, we will
not refund the subscription funds under any circumstance, including in the
event that we do not sell all 450,000 shares prior to the termination of the
offering. If we reject all, or accept less than all, of a subscription, we will
refund promptly an amount equal to $5.50 multiplied by the number of shares as
to which the subscription is not accepted.
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BROAD DISCRETION IN USE OF PROCEEDS; UNSPECIFIED ACQUISITIONS
We intend to use the net proceeds of this offering (after deducting
estimated offering expenses of $481,000, but not including any broker/dealer
fees and expenses) in the following manner:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
------------- -------------
<S> <C> <C>
Expansion of communications business......................... $ 720,000 36%
Development of additional product lines...................... 590,000 30
Development and/or acquisition of internal systems........... 384,000 19
Working capital and general corporate purposes............... 300,000 15
------------- -------------
Total net proceeds.................................... $ 1,994,000 100%
============= =============
</TABLE>
Our Board of Directors and management will have significant
flexibility in applying the net proceeds from this offering. The failure of our
management to apply the proceeds effectively could have a material adverse
effect on our business, financial condition and operating results.
Although we currently have no agreements or understandings to engage
in any acquisitions, we may also use a portion of the net proceeds to acquire
complementary services or businesses. In addition to using the net proceeds
from the offering, future acquisitions might involve additional issuances of
our equity securities, which could be dilutive to our shareholders, the
incurrence of additional debt and the write-off of costs and the amortization
of expenses related to intangible assets. Future acquisitions may have a
material adverse effect on our business, financial condition or operating
results, and shareholders may not have the opportunity to review or vote on any
potential acquisition. See "Use of Proceeds."
POTENTIAL NEED FOR ADDITIONAL CAPITAL
We anticipate that we will require approximately $2.0 million in
capital to fund our ongoing operations through June 30, 1999. We anticipate that
the proceeds of this offering, together with cash generated from operations,
will be sufficient to meet our capital requirements through June 30, 1999.
However, we cannot guarantee that we will receive enough proceeds from the
offering to fund any of the proposed uses of proceeds, including raising enough
proceeds to fund our operations or to cover the estimated offering expenses. If
we do not receive sufficient funds from these sources to fund our operations, we
may need to raise additional capital. Sources of additional capital may include
venture capital financing, lines of credit and private equity and debt
financings. We may also require additional financing in the event we decide to
develop additional product lines or to engage in acquisitions. The extent of
additional financing required will depend partially on the success of our
business. We cannot guarantee that additional financing will be available to us
or, if available, that it can be obtained on terms acceptable to us. Our
inability to obtain additional capital on favorable terms could have a material
adverse effect on our business, financial condition and operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
We expect our quarterly operating results to fluctuate significantly
in the future as a result of a variety of factors, many of which are outside
our control. These factors include:
- the extent to which new independent associates are being
sponsored and recruited;
- the timing and market acceptance of new products and
services;
- the loss of key employees and independent sales
representatives and the time required to train replacements;
- delivery interruptions relating to products and services
purchased from third-party suppliers; and
- technical difficulties or telecommunications regulatory
issues in transferring long distance customers to our
telecommunications network (the "Maxxis Switch").
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We have historically experienced, and expect to continue to
experience, significant seasonal fluctuations in the recruitment of our
independent associates and the sale of our products and services. Our annual
summit occurs in the first quarter of our fiscal year, which has historically
caused an increase in the number of independent associates and sales of our
products and services. We expect revenues to be lower in the second quarter
than in other quarters of a given year because, in the direct selling business,
the number of new independent associates added and product and service sales
generally decline during the holiday season. Our operating results may vary
significantly in the future, partly due to such seasonal fluctuations. We
believe that recruitment of our independent associates and sales of our
products and services will continue to follow this seasonal cycle. Because of
the potential quarterly fluctuations in our revenue and operating results,
results for any particular quarter may not be indicative of future quarterly or
annual results.
NEGATIVE WORKING CAPITAL
As of September 30, 1998, we had negative working capital of $448,000
due primarily to a cash payment of $501,000 for the leased telephone switch
equipment and $392,000 of current maturities associated with this lease
obligation. Our operating expenses have increased as our business has grown, and
they will continue to increase significantly if we continue to grow. Although we
generated net income of $580,000 for the three months ended September 30, 1998,
we cannot guarantee that future operating results will generate positive working
capital or will be profitable.
DEPENDENCE ON INDEPENDENT ASSOCIATES
Our success depends heavily upon our ability to attract, maintain and
motivate a large base of independent associates who, in turn, sponsor
subscribers, customers and other independent associates. We anticipate a
significant turnover among independent associates, which we believe is typical
of businesses involved in direct selling. We encourage existing independent
associates to sponsor new independent associates and procure new customers for
our products and services. Independent associate motivation is influenced by
general economic conditions, modifications in commission and training fees,
modifications in our marketing plan, the prices and competitive positions of
our products and services and a number of other intangible factors. Our ability
to attract and retain independent associates could be negatively affected by
adverse publicity relating to us, our products and services or our operations,
including our multi-level network marketing system or by administrative or
technological problems, such as malfunctions in accounting systems or computer
information systems. The number of independent associates 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. Because of the number of factors that affect our ability
to attract and retain independent associates, we cannot predict changes in the
level of independent associate retention or attrition. We cannot guarantee that
the number, or productivity of, independent associates will be sufficient to
allow us to achieve our objectives.
RELATIONSHIP WITH INDEPENDENT ASSOCIATES
Our independent associates are independent contractors. We are unable
to provide them the same level of direction and oversight as our employees.
While we have policies and rules in place governing the conduct of the
independent associates and we review periodically the sales practices of the
independent associates, it is difficult to enforce such policies and rules. If
our independent associates violate our policies and rules, we could be the
subject of complaints to or by various federal and state regulatory
authorities, including regulators of network marketing, securities or
telecommunications. Such complaints could have a material adverse effect on our
business, financial condition and operating results.
REGULATION OF NETWORK MARKETING; EFFECT OF STATE SECURITIES LAWS
Our multi-level network marketing system is subject to extensive
government regulation, including, without limitation, federal and state
regulations governing the offer and sale of business franchises, business
opportunities and
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<PAGE> 11
securities. Various governmental agencies monitor direct selling activities,
and they could require us to supply information regarding our marketing plan at
any time. Although we believe that our multi-level network marketing system is
in material compliance with the laws and regulations relating to direct selling
activities, we cannot guarantee that future legislation and regulations adopted
in particular jurisdictions will not adversely affect our business, financial
condition and operating results. We have not obtained no-action letters or
advance rulings from any federal or state securities regulator or other
governmental agency concerning the legality of our operations. Federal and
state regulators may find our multi-level network marketing system to be in
noncompliance with existing statutes or regulations as a result of, among other
things, misconduct by our independent associates, over whom we have 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 we or our independent associates are not in
compliance with existing statutes or regulations could require us to modify our
multi-level network marketing system, create negative publicity, affect
distributor moral and loyalty and have a material adverse effect on our
business, financial condition and operating results.
The primary goal of the offering is to increase the motivation of
regional and executive directors by allowing them to purchase an equity
interest in Maxxis. Accordingly, because we want the ability to offer our
Common Stock to regional and executive directors in Alabama, California,
Colorado, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland, New York,
North Carolina, South Carolina, Texas, Virginia, Washington and Wyoming, we
have 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, we anticipate that we will be unable to
register or qualify the offering in certain of these states, and we cannot
guarantee that we will be able to register or qualify the offering in any of
these states. Certain of these states require us to sell our securities
exclusively through broker-dealers that are registered in such states. We
cannot guarantee that we will be successful in engaging registered
broker-dealers to sell our Common Stock in such states upon terms acceptable to
us or at all. Our inability to offer and sell the shares to residents of
certain states may limit our ability to attract independent associates in such
states and may have a material adverse effect on our business, prospects,
financial condition and operating results.
An adverse determination by any one state regulator on a regulatory
matter could influence the decisions of regulatory authorities in other
jurisdictions.
INTENSE COMPETITION
We face competition for our products and services and for independent
associates. Currently, we compete with:
- long distance providers, such as AT&T Corp., MCI/WorldCom,
Inc., Sprint Corporation, Bell operating companies, local
exchange carriers and other telecommunications service
providers;
- Internet access and service providers;
- catalog companies, retailers and distributors of dietary
supplements and health enhancement products; and
- other network marketing companies.
Each of the communications services, Internet services and dietary
supplements markets is extremely competitive and highly fragmented. We expect
competition in each of these markets to increase as new companies enter the
markets and current competitors expand their product lines and services. Many
of these competitors are likely to enjoy substantial competitive advantages,
including:
- longer operating histories, greater name recognition and
larger customer bases; and
- greater financial, personnel, marketing and technical
resources.
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<PAGE> 12
We may not be able to effectively compete with current and future competitors
for our products and services. Increased competition may result in price
reductions of our products and services and reduced revenues and gross margins,
any one of which could have a material adverse effect on our business,
financial condition and operating results.
We also compete for independent associates with other direct selling
organizations, some of which have longer operating histories and greater name
recognition and financial resources. The largest network marketing companies in
our markets are EXCEL Communications, Inc., American Communications Network and
Amway Corporation. We compete for independent associates on the basis of our
reputation, perceived opportunity for financial success and quality and range
of products and services. We also compete for the time, attention and
commitment of our independent associates. Given that the number of individuals
interested in the business opportunities presented by direct selling is limited
in each market, the potential pool of independent associates for our products
and services is reduced to the extent other network marketing companies
successfully attract these individuals. We cannot guarantee that other network
marketing companies will not convince our existing independent associates to
join their organizations.
UNCERTAINTY OF SWITCH IMPLEMENTATION
We recently entered into an agreement to lease a telecommunications
switch formerly owned by Cherry Communications, Inc. Our lease requires us to
make payments of approximately $118,000 per month. However, we will not be able
to use or otherwise derive any revenue from the operation of the Maxxis Switch
until we have obtained required regulatory approvals necessary for such
operation. Currently, we are in the process of seeking the required regulatory
approvals in approximately 38 states. However, we cannot guarantee that we will
obtain the necessary regulatory approvals in a timely manner or at all. Until
we receive all necessary regulatory approvals, we must bear the expenses
associated with the Maxxis Switch without any offsetting revenues, which could
have a material adverse effect on our business, financial condition and
operating results.
If we receive the required regulatory approvals, we intend to market
services provided through the Maxxis Switch to the subscriber base that is being
developed under our agreement with Colorado River Communications Corp. ("CRC").
We will be required to obtain the consent of customers before changing their
long distance service. This process could be difficult, time consuming and
expensive, and customers may choose not to subscribe to our services. Because we
derive a significant portion of our revenues from these customers, problems
associated with the transition of these customers from CRC's network to our
network could have a material adverse effect on our business, financial
condition and operating results.
DEPENDENCE UPON CRC
We historically have not owned a long distance network. As a result,
Maxxis Communications entered into an agreement (the "1-Plus Agreement") with
CRC to allow our independent associates to market CRC's telecommunications
services. Subscribers that are gathered by our independent associates are long
distance customers on CRC's network, and CRC provides subscriber support.
Subscribers have the right to change their service at any time. The 1-Plus
Agreement, which expires on February 20, 2000, provides that we will have
certain rights to the subscriber base developed under the agreement only upon
generating certain minimum levels of monthly revenues for CRC. We have reached
these minimum levels, and we have the right to market other carriers to the
subscriber base in the event we contract with such carriers.
CRC is responsible for the accurate and prompt billing of these
subscribers. 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
our business, financial condition and operating results. CRC is currently the
only provider of long distance services marketed through our independent
associates. We would be required to contract with other carriers if the 1-Plus
Agreement were terminated, the usage or number of subscribers originated by our
independent associates exceeded the capacity of CRC or CRC failed to provide
quality services. In such event, or in the event we otherwise elected to use
other carriers, the cost paid by us for such long distance services might
exceed that paid under the 1-Plus Agreement. If the 1-Plus Agreement is
terminated, there can be no assurance that we could enter into new contracts
with other
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providers on terms favorable to us or at all. Further, 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 our business, financial condition and operating results.
DEPENDENCE UPON OTHER SUPPLIERS
In November 1997, we began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed
by us are developed and manufactured by third-party suppliers. Certain of the
nutritional products offered by us are proprietary to such suppliers. We do not
have any written contracts with or commitments from any of our suppliers or
manufacturers to continue to sell nutritional products to us. We believe that
our relationships with our suppliers are satisfactory; however, there can be no
assurance that any or all of these suppliers will continue to be reliable
suppliers to us. Accordingly, there is a risk that any or all of our suppliers
or manufacturers, including suppliers which provide proprietary products to us,
could discontinue selling their nutritional products to us. In the event any
third-party manufacturer becomes unable or unwilling to continue to provide the
nutritional products in required volumes, we would be required to identify and
obtain acceptable replacement sources, which may not be available to us on a
timely basis or at all.
MANAGEMENT WILL MAINTAIN CONTROL
Following the offering, assuming the sale of the maximum of 450,000
shares, the directors and executive officers and relatives and affiliates of
directors and executive officers will beneficially own, in the aggregate,
994,088 shares of Common Stock which collectively represents approximately
49.0% 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, our directors and executive officers and relatives and
affiliates of directors and executive officers, acting as a group, will have
the ability to elect all of our directors and control our management,
operations and affairs for the foreseeable future.
ABILITY TO MANAGE GROWTH
Our goal is to develop a nationwide network of independent associates
to offer communications and Internet services, nutritional products and other
products and services throughout the United States. Our strategy of growth and
expansion will place substantial demands upon current management and may
require additional management, operational and financial resources. Our success
will depend on various factors, including, among others, federal and state
regulation of the telecommunications industry and dietary supplement industry,
competition and the deployment of the Maxxis Switch and communications network
and the ability to sell our long distance services to the subscriber base that
our independent associates developed for CRC. Not all of these factors are
within our control. Our ability to manage growth successfully will require us
to develop strong operational, management, financial and information systems
and controls. We cannot guarantee that we will experience growth or that, if we
do, that management will be able to manage growth effectively.
DEPENDENCE ON KEY PERSONNEL
We believe that our success depends to a significant extent upon the
abilities and efforts of our senior management, particularly Ivey J. Stokes,
our Chairman of the Board, and Thomas O. Cordy, our Chief Executive Officer and
President. We do not maintain key man life insurance on Mr. Stokes, Mr. Cordy
or any other person. Many of our executive officers and other key employees
have only recently joined us. The loss of the services of any of such
individuals could have a material adverse effect on our business, financial
condition and operating results. Our success also depends, in part, upon our
ability to find, hire and retain additional key management personnel. Our
inability to find, hire and retain such personnel could have a material adverse
effect upon our business, financial condition and operating results.
SUBSCRIBER ATTRITION
We believe 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
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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 our business, financial condition and
operating results.
REGULATION OF LONG DISTANCE TELEPHONE SERVICES
Various regulatory factors affect our financial performance and our
ability to compete. We are not a telecommunications carrier and, therefore, are
not directly regulated by federal or state telecommunications authorities.
However, through our wholly owned subsidiary, we are currently in the process
of filing the applications and tariffs to obtain the necessary regulatory
approvals to become a telecommunications carrier. If we are granted such
regulatory approvals, our services will be subject to varying degrees of
federal, state and local regulation.
CRC is a telecommunications carrier, and its services are currently
subject to federal, state and local regulation. Pursuant to the Communications
Act of 1934, as amended (the "Communications Act"), the Federal Communications
Commission (the "FCC") generally exercises jurisdiction over the facilities of,
and services offered by, telecommunications common carriers that provide
interstate or international communications services. State regulatory
authorities retain jurisdiction over the same facilities and services to the
extent that they are used to provide intrastate communications services.
Various international authorities may also seek to regulate the provision of
certain services.
Federal Regulation. The FCC does not require long distance
telecommunications carriers to obtain prior authorization to provide domestic
interstate services, including operator services, although such carriers
currently must file tariffs at the FCC setting forth the rates, terms and
conditions for such services. FCC regulations require telecommunications
carriers to apply for and to obtain certification from the FCC prior to
offering international services, and to file international tariffs with the
FCC. We believe that CRC has made all filings with the FCC that are necessary
for CRC to provide domestic interstate and international long distance
services. Our subsidiary intends to file the necessary applications and tariffs
with the FCC in order to provide domestic interstate, operator and
international services prior to offering such services to customers.
CRC and our subsidiary, once our subsidiary is authorized by the FCC,
must comply with the requirements applicable to common carriers under the
Communications Act, which include a duty to offer services upon request at
reasonable rates and on nondiscriminatory terms and conditions. Long distance
telecommunications carriers also are subject to a variety of miscellaneous
regulations that, for example, govern the documentation and verifications
necessary to change a consumer's long distance carrier, require the filing of
periodic reports and the payment of regulatory fees. Currently, FCC regulations
also require long distance telecommunications carriers to permit resale of
their transmission services, and local exchange carriers to provide all long
distance carriers with equal access to local exchange facilities for purposes
of origination and termination of long distance calls. If either or both of
these requirements were eliminated, CRC and, therefore, us could be adversely
affected.
The FCC generally has the authority to condition, modify, cancel,
terminate or revoke a carrier's authority to operate for failure to comply with
federal laws or FCC orders, rules, regulations or policies. Fines or other
penalties also may be imposed by such violations. The FCC has jurisdiction to
act upon complaints against any telecommunications carrier for failure to
comply with its statutory obligations. We cannot guarantee that the FCC or
third parties will not raise issues with regarding CRC's or our compliance with
applicable laws and regulations, which could have a material adverse effect on
our business, financial condition and operating results.
The enactment of the Telecommunications Act of 1996 (the
"Telecommunications Act") served to increase competition in the long distance
market. The Telecommunications Act, among other things, allowed the Bell
operating companies to provide long distance service outside of their local
service territories, but barred them from immediately offering in-region,
interLATA long distance services until they had satisfied certain conditions. A
Bell operating company must apply to the FCC to provide in-region, interLATA
long distance services and must satisfy a set of pro-competitive criteria
intended to ensure that Bell operating companies open their own local markets
to competition before the FCC will approve such application. We are unable to
determine how the FCC will rule on any such applications. As a result of the
Telecommunications Act, CRC and our subsidiary, once our subsidiary is
authorized to provide long distance services, may experience increased
competition from others, including the Bell
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operating companies. In addition, both CRC and our subsidiary may be subject to
additional regulatory requirements and fees, including, without limitation,
universal service assessments, additional access charge assessments, and
payphone compensation surcharges resulting from the implementation of the
Telecommunications Act.
State Regulation. CRC is, and if it is authorized to provide
intrastate long distance services, our subsidiary would be, subject to varying
levels of regulation in states in which each company provides long distance
services. The vast majority of states require long distance carriers to apply
for certificates to provide telecommunications services, or at least to
register or to be found exempt from regulation, before they may commence
providing intrastate long distance services. This authorization process
generally requires the carrier to demonstrate that it has sufficient financial,
technical and managerial capabilities and that granting the authorization will
serve the public interest. Also, a majority of states require long distance
carriers to file and to maintain detailed tariffs listing rates for intrastate
services. Many states also impose various reporting and fee requirements,
including, without limitation, state universal service requirements. State
regulatory agencies also generally require prior notice or approval for (i)
transfers of control of certificated carriers, (ii) sales or transfers of
carrier assets, including customer bases, (iii) carrier stock offerings and
(iv) a carrier's incurrence of significant debt obligations. Certificates of
authority can generally be conditioned, modified, canceled, terminated or
revoked by state telecommunications regulatory agencies for failure to comply
with state laws and rules, regulations and regulatory policies. Fines and other
penalties may be imposed for such violations.
We believe that CRC has made the necessary filings with the various
state telecommunications regulatory agencies to provide intrastate long
distance services in the states where CRC currently conducts its operations.
Our subsidiary intends to file the necessary applications and tariffs with the
states in order to provide intrastate long distance services prior to offering
such services to its customers. We cannot guarantee that our subsidiary will
obtain all necessary authorizations, that CRC will maintain its necessary
authorizations or that CRC will not provide services in a state where it is not
properly certificate or terrified. The occurrence of any or all of the
foregoing could have a material adverse effect on our business, financial
condition or operating results.
REGULATION AFFECTING NUTRITIONAL PRODUCTS
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of our 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 our products under the Federal
Food, Drug, and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. Our 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"). Our 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 our labeling or advertising claims, that the "intended use" of
any of our 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 we have made claims 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 our 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. We cannot guarantee that the FTC will not question our
advertising or other operations. Moreover, we cannot guarantee that a state
will not interpret product claims presumptively valid under federal law as
illegal under that state's regulations. Furthermore, our independent associates
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 independent associates, customers or others, including actions
resulting in entries of consent decrees and the refund of amounts
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paid by the complaining independent associate or customer, refunds to an entire
class of independent associates or customers, or other damages, as well as
changes in our method of doing business. A complaint because of a practice of
one independent associate, whether or not that practice was authorized by us,
could result in an order affecting some or all independent associates in a
particular state. In addition, 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 our business, financial
condition and operating results.
OFFERING ADDITIONAL PRODUCTS AND SERVICES
Our 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 consumer products. When we enter new markets, we face risks
associated with intense competition from companies already operating in those
markets, including ones with greater financial resources and experience,
increased selling and marketing expenses and regulatory issues. We may not be
successful in developing and marketing new products and services that respond
to the needs of a particular market. We may experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products or services. Also, new products and services may not meet the
requirements of the marketplace and may never achieve market acceptance. Any of
these failures could have a material adverse effect on our business, financial
condition or operating results.
EFFECT OF UNFAVORABLE PUBLICITY
Reports by national media affect the consumption of dietary supplement
products. Future scientific research or publicity may be unfavorable to the
dietary supplement market or a particular product, or be inconsistent with
earlier favorable research or publicity. Because of our dependence upon
consumer perceptions, adverse publicity associated with illness or other
adverse effects resulting from the consumption of our nutritional products, or
any similar products distributed by other companies, could have a material
adverse effect on our business, financial condition or operating results. The
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, we may not be able to counter the effects of negative publicity
concerning the efficacy of our nutritional products.
ABSENCE OF CLINICAL STUDIES
Although many of the ingredients in our nutritional products are
vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of our nutritional products contain
ingredients as to which there is little history of human consumption. We have
not tested, and have not engaged any independent third party to test, any of
our nutritional products. Accordingly, we cannot guarantee that our nutritional
products, even when used as directed, will have the effects intended. Although
we believe that our nutritional products are safe when consumed as directed, we
have not sponsored clinical studies on the long-term effect of human
consumption.
YEAR 2000 COMPLIANCE
Our business and customer relationships rely on computer software
programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), we could experience significant
system failures or errors, which could have a material adverse effect on our
business, financial condition or operating results.
We have begun to review our computerized information and
non-information systems to identify internal accounting programs and operating
systems (collectively, "Systems") that might malfunction due to a
misidentification of the Year 2000. Although we are only in the early stages of
our review, we believe that our Systems are adequately programmed to address
the Year 2000 issue or can be modified or replaced to address the Year 2000
issue without material costs or delays. However, we cannot guarantee that our
Systems are Year 2000
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compliant. In addition, we cannot predict whether we will identify significant
problems with our Systems. Therefore, we have not yet determined the extent of
contingency planning that may be required. We may not be able to develop,
implement or test remediation or contingency plans for such Year 2000 problems
or may find that the costs of these plans exceed current expectations. If we
fail to satisfactorily resolve Year 2000 issues related to our services in a
timely manner, we could be exposed to liability from third parties.
Furthermore, we have only made limited inquiries of third party
providers of products and systems used in our business and at our offices or on
the systems used by our independent associates or other third parties. We have
contacted the provider of our commissions accounting software and have received
written assurances that the provider's software is capable of addressing the
Year 2000 issue. There can be no assurance, however, that any or all of the
products and services that we rely on are Year 2000 compliant. We believe that
if our providers, independent associates or other third parties do not
successfully address Year 2000 issues in their operations, our operations may
be interrupted, hindered or delayed which could cause a material adverse effect
on our business, financial condition and operating results. We further believe
that our independent associates and other third parties may be in the
preliminary stages of analyzing their software and systems to address the Year
2000 issue. Therefore, we do not believe it is possible to accurately analyze
or predict possible "worst-case" scenarios related to the Year 2000 issue and
the potential impact on our business if any of these parties fail to adequately
address the Year 2000 issue. We have not developed a contingency plan for Year
2000 problems experienced by our independent associates or other third parties.
Thus, we believe it is impossible to estimate the potential expenses involved
with a large scale failure of our independent associates or other third parties
to resolve their Year 2000 issues. We may suffer business interruptions, either
because of our own Year 2000 problems or those of our independent associates
and other third parties whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to us.
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
We have applied for a federal registration for the mark "MAXXIS." In
addition, we rely upon common law rights to protect other marks used by us and
other rights that we consider to be our intellectual property. We cannot
guarantee that our measures to protect our intellectual property will prevent
or deter the use or misappropriation of our intellectual property by other
parties. Our inability to protect our intellectual property from use or
misappropriation from others could have a material adverse effect upon our
business, financial condition and operating results. 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 us. We could incur substantial costs to defend any legal action taken
against us. Our use of our trademarks, service marks or other rights could be
found to infringe upon intellectual property rights of other parties. We could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against us, and in the event any
required license were not available on commercially reasonable terms, our
business, financial condition and operating results could be materially
adversely affected. Litigation, which could result in substantial cost to and
diversion of our resources, may also be necessary to enforce our intellectual
property rights or to defend us against claimed infringement of the rights of
others.
TRANSACTIONS WITH RELATED PARTIES
We have entered into agreements and arrangements with certain of our
officers, directors and principal shareholders. 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. We have adopted a policy requiring that all material transactions
between Maxxis and our officers, directors or other affiliates must be approved
by a majority of the disinterested members of the Board of Directors and be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
ARBITRARY DETERMINATION OF OFFERING PRICE
We arbitrarily determined the offering price of the Common Stock, and
the offering price does not necessarily bear any relationship to our asset
value, net worth or other established criteria of value. Each prospective
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investor should make an independent evaluation of the fairness of such price.
We cannot guarantee that any of the shares will be able to be resold for the
offering price or for any other amount.
ABSENCE OF TRADING MARKET
There is currently no market for the shares, and it is unlikely that
any trading market will develop for the shares in the future. We have 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. These restrictions will 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.
ANTI-TAKEOVER PROVISIONS
Incumbent management and our Board of Directors could use certain
provisions of our Articles of Incorporation and Bylaws and Georgia law to make
it more difficult for a third party to acquire control of us, even if the
change in control might be beneficial to our shareholders. This could
discourage potential takeover attempts and could adversely affect the market
value of our Common Stock.
DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in the offering will
experience immediate and substantial dilution of $3.99 per share in net
tangible book value, or 73% of the initial public offering price of $5.50 per
share. In addition, assuming the sale of 450,000 shares, the Board of Directors
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.
The Board of Directors has adopted a stock option plan which permits
Maxxis to grant options to purchase up to 300,000 shares of Common Stock to our
officers, directors, key employees, advisors and consultants. Exercise of these
options could have a dilutive effect on the shareholders' interest in our
earnings and on net tangible book value per share.
APPLICATION OF THE PENNY STOCK RULES
Our Common Stock may be considered "penny stock." The Securities and
Exchange Commission (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 our Common Stock is
considered penny stock, these disclosure requirements imposed on broker-dealers
may discourage them from effecting transactions in our Common Stock, thereby
severely limiting the market
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liquidity of our Common Stock and the ability of purchasers in the offering to
sell our Common Stock in the secondary market.
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THE OFFERING
GENERAL
Maxxis is offering for sale 450,000 shares of our Common Stock at a
price of $5.50 per share. We will offer the shares primarily to persons who are
regional and executive directors in our marketing system. For persons who are
regional or executive directors, the minimum purchase amount is 20 shares, and
the maximum is 200 shares. However, the aggregate number of shares sold in this
offering shall not exceed 450,000. We reserve the right not to sell shares to
any particular regional or executive director, to waive the maximum
subscription amount or to allocate additional shares to regional or executive
directors without notifying any purchaser or prospective purchaser. We may also
offer shares to our strategic partners. There are no minimum or maximum
subscription amounts for strategic partners.
Subscriptions to purchase shares may be delivered to Maxxis or a
broker/dealer, as the case may be, until 12:00 p.m., E.S.T., on June 30, 1999,
unless we earlier terminate or extend the offering. Maxxis reserves the right
to terminate the offering at any time or to extend the expiration date for
additional periods not to extend beyond December 31, 2000. The date the
offering terminates is referred to as the "Expiration Date." We do not have to
give any notice of an extension of the offering period prior to the extension.
An extension will not alter the binding nature of subscriptions we have already
received. Maxxis 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 our organizational
and pre-opening expenses and in the expenses incurred in connection with the
offering.
You must deliver to Maxxis or a broker/dealer, as the case may be, a
completed and executed subscription agreement. A blank subscription agreement
is located at the end of this prospectus. The executed subscription agreement
will be your offer to purchase shares of Common Stock on the terms in this
prospectus. You must warrant in the subscription agreement that you have
received a copy of this prospectus, as amended or supplemented. Once Maxxis or
a broker/dealer, as the case may be, receives your subscription agreement, you
may not revoke or withdraw your subscription agreement except with our consent.
We reserve the right to reject, in whole or in part and in our sole discretion,
any subscription for any reason or no reason whatsoever. Our acceptance of any
particular subscription agreement shall in no case require us to accept any
other subscription agreement. We may, in our 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, we
may take into account any factors we consider 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
independent associates to us. We will issue certificates representing shares
duly subscribed and paid for promptly after we accept a subscription.
NO ESCROW
We do not have to sell a minimum number of shares, and we cannot
guarantee that any or all of the shares we are offering will be sold. We have
not established an escrow account, and you will pay your subscription funds to
us directly. Our receipt and/or deposit of any subscription funds shall not
constitute acceptance of a subscription. We will only accept a subscription by
countersigning the subscription agreement and issuing a share certificate to
you. Upon acceptance of a subscription, we will be able to use the proceeds
immediately. Once we accept a subscription, we will not refund the subscription
funds under any circumstance, including in the event that we do not sell all
450,000 shares prior to the termination of the offering. If we reject all, or
accept less than all, of a subscription, we will refund promptly an amount
equal to $5.50 multiplied by the number of shares as to which the subscription
is not accepted.
TRANSFER RESTRICTIONS
Maxxis has filed or intends to file this Registration Statement of
which this prospectus forms a part with the state securities commissions of 16
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, we anticipate
that we will be unable to register or qualify the offering in some of these
states. See "Risk
19
<PAGE> 21
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: (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 Maxxis 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 Maxxis with respect to any
shares; (iii) agrees that any attempted or purported transfer not made in
accordance with the terms of the subscription agreement shall be void and of no
force and effect, and Maxxis shall have no obligation whatsoever to recognize
any such attempted or purported transfer; 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. ANY ATTEMPTED OR PURPORTED
TRANSFER OF THESE SHARES THAT IS NOT MADE IN ACCORDANCE WITH THE TERMS
OF THE SUBSCRIPTION AGREEMENT SHALL BE VOID AND OF NO FORCE OR EFFECT,
AND THE ISSUER SHALL HAVE NO OBLIGATION WHATSOEVER TO RECOGNIZE ANY SUCH
ATTEMPTED OR PURPORTED TRANSFER.
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."
The transfer restrictions may be imposed and terminated by Maxxis 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
20
<PAGE> 22
prepaid (or, at Maxxis' option, certified mail, return receipt requested), at
the address of the holders of record of the shares on a date chosen by Maxxis
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 Maxxis such that it
is received during the period beginning 15 days prior to the filing by Maxxis
of a registration statement with the Commission whereby Maxxis first seeks to
register our 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 Commission (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 Maxxis, 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 Maxxis files an IPO Registration Statement but such registration
statement is subsequently withdrawn or is not declared effective within 120
days of filing with the Commission, or if Maxxis 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 the subscription
agreement shall survive and shall be applicable to each subsequent filing of an
IPO Registration Statement by Maxxis until an IPO Registration Statement is
first declared effective by the Commission.
PLAN OF DISTRIBUTION
In certain states, offers and sales of the Common Stock will be made
on behalf of Maxxis by certain of our executive officers and directors. These
executive 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 and Virginia and other states where our
directors and executive officers are not permitted to effect offers and sales,
we intend to offer shares of Common Stock through broker/dealers who are
licensed to effect sales. We do not currently have an agreement with a
registered broker-dealer in any state, and we cannot guarantee that we will be
able to engage a broker-dealer in any such state on terms acceptable to us or
at all. We will amend the registration statement to set forth the terms of any
agreement with any broker-dealer.
HOW TO SUBSCRIBE
If you want to purchase shares of Common Stock, you should:
1. Complete, date and execute the subscription agreement which
is located at the end of this prospectus;
2. Make a check, bank draft or money order payable to Maxxis
Group, Inc., in the amount of $5.50 multiplied by the number
of shares subscribed for; and
3. Deliver the completed subscription agreement and check to
Maxxis at the following address:
Mr. Thomas O. Cordy
Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
If you have any questions about the offering or how to subscribe,
please call Mr. Cordy at (770) 696-6343. Subscribers 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.
21
<PAGE> 23
USE OF PROCEEDS
The following table sets forth our anticipated uses of proceeds and
the estimated net proceeds (after deducting estimated offering expenses, but
not including any broker/dealer fees and expenses) based on the sale of 450,000
shares in this offering:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
----------- -------------
<S> <C> <C>
Expansion of communications business(1)......................... $ 720,000 36%
Development of additional product lines(2)...................... 590,000 30
Development and/or acquisition of internal systems.............. 384,000 19
Working capital and general corporate purposes(3)............... 300,000 15
----------- -------------
Total net proceeds(4).................................... $ 1,994,000 100%
=========== =============
</TABLE>
- --------------------
(1) Maxxis is currently in the process of filing tariffs and applying for
the required regulatory approvals to offer long distance service
throughout the United States on the Maxxis Switch. Following our
anticipated receipt of regulatory approvals, we intend to migrate our
long distance customers from CRC's network to our own. In connection
with this migration, we will have to incur significant expenditures
for office equipment, recruiting and training qualified technical and
customer service personnel and regulatory compliance matters.
(2) Maxxis intends to develop additional product and services to be
marketed through our independent associates.
(3) Such purposes may include general and administrative expenses, capital
expenditures, payment of accounts payable and accrued expenses,
marketing expenses, payment of organizational expenses and
satisfaction of certain corporate obligations.
(4) Proceeds are net of an estimated $481,000 in offering expenses.
Our Board of Directors and management will have significant
flexibility in applying the net proceeds from this offering. The failure of our
management to apply the proceeds effectively could have a material adverse
effect on our business, financial condition and operating results.
Although we currently have no agreements or understandings to engage
in any acquisitions, we may also use a portion of the net proceeds to acquire
complementary services or businesses. In addition to using the net proceeds
from the offering, future acquisitions might involve additional issuances of
our equity securities, which could be dilutive to our shareholders, the
incurrence of additional debt and the write-off of costs and the amortization
of expenses related to intangible assets. Future acquisitions may have a
material adverse effect on our business, financial condition or operating
results, and shareholders may not have the opportunity to review or vote on any
potential acquisition.
We anticipate that we will require approximately $2.0 million in
capital to fund our ongoing operations through June 30, 1999. We anticipate
that the proceeds of this offering, together with borrowings and cash generated
from operations, will be sufficient to meet our capital requirements through
June 30, 1999. The foregoing allocation of proceeds is based upon the current
status of our business operations, our current plans and current economic and
industry conditions. Future events, as well as changes in the economic or
competitive conditions of our business, may make different uses of funds
necessary or desirable. In addition, we cannot guarantee that we will receive
enough proceeds from the offering to fund any of the uses of proceeds,
including raising enough proceeds to fund our operations or to cover the
estimated offering expenses. If we do not receive sufficient funds from our
operations, our borrowings and the offering to fund our operations, we may need
to raise additional capital. See "Risk Factors -- Broad Discretion in
Application of Proceeds; Unspecified Acquisitions" and "-- Potential Need for
Additional Capital." Pending application of the net proceeds as described
above, we will invest the proceeds in short-term, interest-bearing instruments
and investment grade securities.
DIVIDEND POLICY
We currently intend to use retained earnings, if any, to fund the
operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future. Our Board of Directors will determine our
dividend policy in the future based upon, among other things, our operating
results, financial condition, business opportunities, capital requirements and
contractual restrictions.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of Maxxis as of
September 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Long-term capital lease obligations.......................................... $ 4,866,000
-------------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; 100,000 shares $ 200,000
designated as Series A Convertible Preferred Stock of which 36,359 shares
are issued and outstanding...............................................
Common Stock, no par value; 20,000,000 shares authorized; 574,000
1,571,187 shares issued and outstanding..................................
Shareholder notes receivable............................................... (120,000)
Accumulated earnings....................................................... 410,000
-------------
Total shareholders' equity............................................ 1,064,000
-------------
Total capitalization............................................. $ 5,930,000
=============
</TABLE>
DILUTION
The net tangible book value of Maxxis as of September 30, 1998 was
$1,064,000, or $0.68 per share of Common Stock outstanding. Net tangible book
value per share represents the amount of Maxxis' total assets less total
liabilities, divided by the total number of outstanding shares of Common Stock.
After giving effect to the sale of 450,000 shares 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
following table sets forth the pro forma net tangible book value of Maxxis at
September 30, 1998:
<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...........................
Common Stock before the offering........................... 0.68
Increase per share attributable to new investors ............ 0.83
------
Pro forma net tangible book value per share of Common
Stock after the offering.....................................
Stock after the offering................................... 1.51
--------
Dilution per share to new investors............................... $ 3.99
========
</TABLE>
The following table sets forth as of September 30, 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 Maxxis, the total
consideration paid therefor and the average price per share paid to Maxxis on
an as adjusted basis:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE
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, on September 16, 1998, the Board of Directors adopted a
stock option plan which permits Maxxis to grant options to purchase up to
300,000 shares of Common Stock to our officers, directors, key employees,
advisors and consultants. On October 13, 1998, Maxxis granted an option to
purchase 6,818 shares of Common Stock to Daniel McDonough, the Chief Financial
Officer of the Company, with an exercise price of $0 per share. Exercise of
these options or any additional options could have a dilutive effect on the
shareholders' and the new investors' interest in the Company's earnings and on
net tangible book value per share. See "Risk Factors -- Dilution to New
Investors."
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
for the periods presented. Maxxis was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the period
from January 24, 1997 to June 30, 1997 (the "Inception Period") and the year
ended June 30, 1998 and the balance sheet data as of June 30, 1997 and 1998 are
derived from the audited consolidated financial statements of Maxxis. The
consolidated financial statements for the Inception Period and the year ended
June 30, 1998 were audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the three months ended
September 30, 1998 and the balance sheet data as of September 30, 1998 are
derived from the unaudited condensed consolidated financial statements of
Maxxis which include all adjustments, consisting of only normal recurring
adjustments, which Maxxis considers necessary for a fair presentation of the
operating results 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 Notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
INCEPTION PERIOD SEPTEMBER 30,
ENDED YEAR ENDED -------------------------
JUNE 30, 1997(1) JUNE 30, 1998 1997 1998
---------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Communications services................... $ 2,322,000 $ 5,293,000 $ 1,465,000 $ 3,686,000
Nutritional products...................... -- 526,000 -- 375,000
Marketing services........................ 369,000 1,172,000 353,000 1,042,000
---------------- ------------- ----------- -----------
Total net revenues...................... 2,691,000 6,991,000 1,818,000 5,103,000
---------------- ------------- ----------- -----------
Cost of services:
Communications services................... 761,000 1,351,000 438,000 706,000
Nutritional products...................... -- 294,000 -- 202,000
Marketing services........................ 255,000 431,000 101,000 552,000
---------------- ------------- ----------- -----------
Total cost of services.................. 1,016,000 2,076,000 539,000 1,460,000
---------------- ------------- ----------- -----------
Gross margin................................. 1,675,000 4,915,000 1,279,000 3,643,000
---------------- ------------- ----------- -----------
Operating expenses:
Selling and marketing..................... 1,089,000 2,665,000 716,000 2,005,000
General and administrative................ 660,000 2,344,000 597,000 778,000
---------------- ------------- ----------- -----------
Total operating expenses................ 1,749,000 5,009,000 1,313,000 2,783,000
---------------- ------------- ----------- -----------
Interest expense............................. -- 2,000 -- --
---------------- ------------- ----------- -----------
Income (loss) before income taxes............ (74,000) (96,000) (34,000) 860,000
Provision for income taxes................... -- -- -- 280,000
---------------- ------------- ----------- -----------
Net (loss) income............................ $ (74,000) $ (96,000) $ (34,000) $ 580,000
================ ============= =========== ===========
Net (loss) income per share:
Basic..................................... $ (.05) $ (.06) $ (0.02) $ 0.37
================ ============= =========== ===========
Diluted................................... $ (.05) $ (.06) $ (0.02) $ 0.36
================ ============= =========== ===========
Weighted average number of shares outstanding:
Basic..................................... 1,571,187 1,571,187 1,571,187 1,571,187
================ ============= =========== ===========
Diluted................................... 1,571,187 1,571,187 1,571,187 1,607,546
================ ============= =========== ===========
<CAPTION>
AS OF JUNE 30,
------------------------ AS OF
1997 1998 SEPTEMBER 30, 1998
--------- ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 35,000 $ 372,000 $ 803,000
Working capital(1)................................... (13,000) 180,000 (448,000)
Property and equipment, net.......................... 92,000 169,000 5,950,000
Total assets......................................... 596,000 1,263,000 8,631,000
Long-term capital lease obligations.................. -- -- 4,866,000
Total shareholders' equity........................... 293,000 484,000 1,064,000
</TABLE>
- -------------------
(1) Negative working capital as of September 30, 1998 is due
primarily to a cash payment of $501,000 for the leased telephone switch
equipment and $392,000 of current maturities associated with this lease
obligation.
24
<PAGE> 26
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. The
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those in
such forward-looking statements as a result of certain factors, including, but
not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
We market communications and Internet services and nutritional and
health enhancement products through our multi-level network marketing system of
independent associates. We operate through our subsidiaries: Maxxis 2000, Inc.
("Maxxis 2000"); Maxxis Communications, Inc. ("Maxxis Communications"); and
Maxxis Nutritionals, Inc. ("Maxxis Nutritionals").
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance service, prepaid phone cards, 800 service and
international telecommunications services, Internet access and Web-page
development and hosting services, and nutritional and health enhancement
products. We believe that our marketing system allows us to obtain customers
for our products and services in a cost effective manner. We believe that our
marketing system also enhances customer retention because of the personal
relationships between our independent associates and their customers. We
believe that the telecommunications customers obtained by our independent
associates are also potential customers for our nutritional and health
enhancement products and Internet-related services.
We have built a customer base without committing capital or management
resources to construct our own communications network. In February 1997, Maxxis
Communications contracted with CRC to allow our independent associates to market
long distance services provided by CRC. Maxxis Communications also obtains
telecommunications services and purchases time for its prepaid 1 hour and 30
minute phone cards from other providers. In September 1998, we leased the Maxxis
Switch and ancillary hardware and software in order to create our own
communications network. We will not be able to provide long distance services
using this equipment until we have complied with various regulatory
requirements. We are currently in the process of filing applications and tariffs
to obtain the required regulatory approvals to offer long distance service
throughout the United States. In 1999 we expect to receive regulatory approvals,
and then we plan to market our long distance services to the subscriber base
that is being developed under our agreement with Colorado River Communications
and to other customers. To the extent available, we also intend to lease or sell
excess switch capacity to third parties.
In November 1997, we began marketing private label dietary supplements
to our customers and independent associates. Recently, we began marketing
additional nutritional and health enhancement products that are manufactured by
various suppliers. In September 1998, we began providing Internet access and
Web-page development and hosting services. Internet access is provided by
Maxxis Communications through its agreement with InteReach Internet Services,
LLC. Maxxis Communications provides Web-page development and hosting services
directly.
Our products and services are marketed exclusively by our network of
independent associates. Our multi-level network marketing system and our
reliance upon independent associates are intended to reduce marketing costs,
customer acquisition costs and customer attrition. We believe that our
multi-level network marketing system will continue to build a base of potential
customers for additional services and products. We believe that independent
associates are generally attracted to our multi-level network marketing system
because of the potential for supplemental income and because they 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. We encourage independent associates to market services and products
to persons with whom the independent associates have an ongoing relationship,
such as family members, friends, business associates and neighbors. We also
sponsor meetings at which current independent associates are encouraged to
bring in others for an introduction to our marketing system.
25
<PAGE> 27
Maxxis derives revenues from communications services, nutritional
products and marketing services. Communications services revenues are comprised
of: (i) sales of prepaid phone cards to our independent associates; (ii)
commissions from our agreement with CRC whereby we receive a percentage of the
long distance billings received by CRC from the customers originated by our
independent associates, net of allowances for bad debts and billing
adjustments; and (iii) subscription fees from our Internet subscribers. Because
of the administrative procedures that must be complied with in order to
establish 1-Plus customers and to collect the usage and access fees from the
local exchange carriers, there is generally a delay of up to three to four
months from the time a prospective customer indicates a desire to become a
1-Plus customer and the time that we begin to receive commissions from such
customer's usage. In the future, we believe that commissions generated on the
sales of 1-Plus long distance services will constitute an increasing percentage
of our total revenues.
Nutritional products revenues include sales of private-label
nutritional products to our independent associates. Recently, we began
marketing new health enhancement products and additional nutritional products,
including a weight management program and skin care system. Marketing services
revenues include application fees from independent associates and purchases of
sales aids by independent associates, including distributor kits which consist
of forms, promotional brochures, audio and video tapes, marketing materials and
presentation materials. Marketing services revenues also include training fees
paid by senior associates and "managing directors" or "MDs." To become an
independent associate, individuals (other than individuals in North Dakota)
must complete an application and purchase a distributor kit. Independent
associates also pay an annual non-refundable fee, which we amortize over the
renewal period, in order to maintain their status as an independent associate.
To become an MD, a senior associate, director or regional director must also
attend a Maxxis approved training school for a fee. 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. We do not
receive any fees from independent associates for the training provided by MDs
or national training directors.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost
consists primarily of 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
independent associate distributor kits, sales aids and promotional materials
and training costs. Operating expenses consist of selling and marketing
expenses and general and administrative expenses. Selling and marketing
expenses include commissions paid to independent associates based on: (i) sales
of products to new independent associates sponsored into Maxxis; (ii) usage of
long distance services by customers; and (iii) sales of additional products and
services to customers. General and administrative expenses include costs for
independent associate support services, information systems services and
administrative personnel to support our operations and growth.
Maxxis has a limited operating history, and our operations are subject
to the risks inherent in the establishment of any new business. We expect that
we will incur substantial initial expenses, and there can be no assurance that
we will maintain profitability. If we continue to grow rapidly, we will be
required to continually expand and modify our operational and financial
systems, add additional independent associates and new customers, and train and
manage both current and new employees and independent associates. Such rapid
growth would place a significant strain on our operational resources and
systems, and the failure to effectively manage any such growth could have a
material adverse effect on our business, financial condition and operating
results.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth the percentage of total net revenues
attributable to each category for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 24, 1997 SEPTEMBER 30,
(INCEPTION) YEAR ENDED -----------------
TO JUNE 30, 1997 JUNE 30, 1998 1997 1998
---------------- ------------- ------ ------
<S> <C> <C> <C> <C>
Net revenues:
Communications services............ 86% 76% 81% 72%
Nutritional products............... -- 7 -- 7
--
Marketing services................. 14 17 19 21
---------------- -------------- ------ ------
Total net revenues............... 100% 100% 100% 100%
================ ============== ====== ======
Cost of services:
Communications services............ 28% 20% 24% 14%
Nutritional products............... -- 4 -- 4
Marketing services................. 10 6 6 11
---------------- ------------- ------ ------
Total cost of services........... 38 30 30 29
Operating expenses:
Selling and marketing.............. 41 38 39 39
General and administrative......... 24 34 33 15
------------------ ------------- ------
------
Total operating expenses......... 65% 72% 72% 54%
================== ============= ====== ======
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Net Revenues. Total net revenues are derived from sales of
communications services, nutritional products and marketing services net of any
returns of prepaid phone cards, distributor kits or other products. Total net
revenues increased $3.3 million, or 181%, to $5.1 million for the three months
ended September 30, 1998 from $1.8 million for the same period in 1997. The
increase in total net revenues was primarily due to the growth in the number of
independent associates enrolled in the Maxxis marketing network.
Communications services revenues consist of sales of prepaid phone
cards by and to independent associates and commissions and fees generated from
long distance customers. Communications services revenues increased $2.2
million, or 152%, to $3.7 million for the three months ended September 30, 1998
from $1.5 million for the same period in 1997. This increase was primarily due
to increased phone card sales to our independent associates and increased long
distance telephone commissions resulting from our larger communications
customer base.
Nutritional products revenues consist of sales of private label
nutritional products. Nutritional products revenues were $375,000 for the three
months ended September 30, 1998. Because we did not begin selling nutritional
products until November 1997, we did not generate any nutritional products
revenues for the three months ended September 30, 1997.
Marketing services revenues consist of application fees paid by
independent associates, purchases of sales aids by independent associates and
training fees paid to become a MD. Marketing services revenues increased
$689,000, or 195%, to $1.0 million for the three months ended September 30,
1998 from $353,000 for the same period in 1997. This increase was due to the
growth in the numbers of independent associates, the increased attendance of
the independent associates at our training schools and the increased sales of
promotional items and sales aids.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for the three months ended September 30, 1998 was $1.5 million, or 29%
of total net revenues, as compared to $539,000, or 30% of total net revenues,
for the same period in 1997. The decline in total cost of services as a
percentage of total net revenues resulted from the improvement in
communications services margins which was partially offset by declines in
marketing services margins.
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Communications services cost consists primarily of the cost of
purchasing activated prepaid phone cards from CRC. Communications services cost
also includes, as a minor component, the costs of materials that are used to
package the phone cards. Communications services cost was $706,000, or 14% of
total net revenues, for the three months ended September 30, 1998, as compared
to $438,000, or 24% of total net revenues, for the same period in 1997. This
decrease as a percentage of total net revenues was due mainly to the increase
in long distance usage commissions and access fees. Nutritional products cost
consists of the cost of purchasing private label nutritional products.
Nutritional products cost was $202,000, or 4% of total net revenues, for the
three months ended September 30, 1998. Marketing services cost primarily
consists of the costs of purchasing application kits, sales aids and
promotional materials and training costs. Marketing services cost was $552,000,
or 11% of total net revenues, for the three months ended September 30, 1998 as
compared to $101,000, or 6% of total net revenues, for the same period in 1997.
The increase as a percentage of total net revenues was primarily due to higher
costs associated with our 1998 annual summit meeting.
Gross Margin. Gross margin increased to $3.6 million for the three
months ended September 30, 1998 from $1.3 million for the same period in 1997.
As a percentage of total net revenues, gross margin improved to 71% from 70%
over those respective periods.
Operating Expenses. Selling and marketing expenses consist of
commissions paid to independent associates based on (i) sales of products to
new independent associates sponsored into Maxxis, (ii) usage of long distance
services by customers, and (iii) sales of additional products and services to
customers. For the three months ended September 30, 1998, selling and marketing
expenses were $2.0 million, or 39% of total net revenues, as compared with
$716,000, or 39% of total net revenues, for the same period in 1997. General
and administrative expenses consist of salary expense for our customer service
personnel, office staff and executive personnel and the cost of independent
associate support services and information systems services. General and
administrative expenses were $778,000, or 15% of total net revenues, for the
three months ended September 30, 1998, as compared to $597,000, or 33% of total
net revenues, for the same period in 1997. The decrease in general and
administrative expenses as a percentage of total net revenues reflects
economies of scale in connection with our growth. Primarily as a result of our
lower general and administrative expenses as a percentage of net revenues,
total operating expenses declined to 54% of net revenues for the three months
ended September 30, 1998 from 72% for the same period in 1997.
Net Income. Net income for the three months ended September 30, 1998
was $582,000 for the three months ended September 30, 1998 as compared to a net
loss of $34,000 for the same period in 1997. The increase in net income
reflects an increase in total net revenues, improved margins on communications
services and a decline in general and administrative expenses relative to total
net revenues.
Income Taxes. As a result of our recent profitability, provision for
income taxes was $280,000 for the three months ended September 30, 1998.
Year Ended June 30, 1998
Maxxis was incorporated in January 1997 and commenced operations in
March 1997. No comparisons are presented for the year ended June 30, 1998
compared to the Inception Period because Maxxis commenced operations in March
1997, and we believe the comparisons would not be meaningful. Similarly, no
comparisons are presented for the Inception Period because Maxxis was not in
existence for the corresponding period in 1996.
Net Revenues. Total net revenues were $6,991,000 for the year ended
June 30, 1998. For the year ended June 30, 1998, communications services
revenues were $5,293,000, or 76% of total revenues. For the year ended June 30,
1998, nutritional products revenues were $526,000, or 7% of total net revenues.
For the year ended June 30, 1998, marketing services revenues were $1,172,000,
or 17% of total revenues.
Cost of Services. Total cost of services for the year ended June 30,
1998 was $2,076,000, or 30% of total revenues. For the year ended June 30,
1998, communications services cost was $1,351,000, or 20% of total revenues.
For the year ended June 30, 1998, nutritional products cost was $294,000, or 4%
of total revenues. Marketing services cost was $431,000, or 6% of total
revenues, for the year ended June 30, 1998.
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Gross Margin. Gross margin was $4,915,000 for the year ended June 30,
1998.
Operating Expenses. For the year ended June 30, 1998, selling and
marketing expenses were $2,665,000, or 38% of total revenues. General and
administrative expenses were $2,344,000, or 34% of total revenues, for the year
ended June 30, 1998.
Inception Period (January 24, 1997 to June 30, 1997)
Net Revenues. For the Inception Period, communications services
revenues were $2,322,000, or 86% of total revenues, and marketing services
revenues were $369,000, or 14% of total revenues. The amount of revenue
generated from long distance usage was minimal for the Inception Period because
no customers were utilizing long distance services until May 1997.
Cost of Services. Communications services cost was $761,000, or 28% of
total revenues, for the Inception Period. Marketing services cost was $255,000,
or 10% of total revenues, for the Inception Period.
Gross Margin. Gross margin was $1,675,000 for the Inception Period.
Operating Expenses. Selling and marketing expenses were $1,089,000, or
41% of total revenues, for the Inception Period. General and administrative
expenses were $660,000, or 24% of total revenues, for the Inception Period.
SEASONALITY AND UNAUDITED QUARTERLY FINANCIAL INFORMATION
Maxxis has historically experienced, and expects to continue to
experience, significant seasonal fluctuations in the recruitment of our
independent associates and the sale of our products and services. Our annual
summit occurs in the first quarter of our fiscal year, which has historically
caused an increase in the number of our independent associates and sales of our
products and services. We expect revenues will be lower in the second quarter
than in other quarters of a given year because, in the direct selling business,
the number of new independent associates added and product and service sales
generally decline during the holiday season. We believe that recruitment of our
independent associates and sales of our products and services will continue to
follow this seasonal cycle. Our quarterly results may fluctuate significantly
as a result of such seasonality. Because of the potential quarterly
fluctuations in our revenue and operating results, results for any particular
quarter may not be indicative of future quarterly or annual results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
INCEPTION -------------------------------------------------------------------------------
PERIOD SEPT. 30, 1997 DEC. 31, 1997 MAR. 31, 1998 JUNE 30, 1998 SEPT. 30, 1998
---------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Communications services.......... $2,322,000 $ 1,465,000 $ 1,122,000 $ 1,352,000 $ 1,354,000 $ 3,686,000
Nutritional products............. -- -- 186,000 155,000 185,000 375,000
Marketing services............... 369,000 353,000 318,000 224,000 277,000 1,042,000
---------- ------------- ------------ ------------- ------------- -------------
Total net revenues........... 2,691,000 1,818,000 1,626,000 1,731,000 1,816,000 5,103,000
---------- ------------- ------------ ------------- ------------- -------------
Cost of services:
Communications services............ 761,000 438,000 430,000 213,000 270,000 706,000
Nutritional products............... -- -- 77,000 146,000 71,000 202,000
Marketing services................. 255,000 101,000 127,000 111,000 92,000 552,000
---------- ------------- ------------ ------------- ------------- -------------
Total cost of services....... 1,016,000 539,000 634,000 470,000 433,000 1,460,000
---------- ------------- ------------ ------------- ------------- -------------
Gross margin......................... 1,675,000 1,279,000 992,000 1,261,000 1,383,000 3,643,000
---------- ------------- ------------ ------------- ------------- -------------
Operating Expenses:
Selling and marketing.............. 1,089,000 716,000 610,000 668,000 671,000 2,005,000
General and administrative......... 660,000 597,000 514,000 542,000 691,000 778,000
---------- ------------- ------------ ------------- ------------- -------------
Total operating expenses..... 1,749,000 1,313,000 1,124,000 1,210,000 1,362,000 2,783,000
---------- ------------- ------------ ------------- ------------- -------------
Interest (income) expense............ -- -- 2,000 (2,000) 2,000 --
---------- ------------- ------------ ------------- ------------- -------------
Income (loss) before income
tax benefit........................ (74,000) (34,000) (134,000) 53,000 19,000 860,000
Income tax benefit................... -- -- -- -- -- 280,000
---------- ------------- ------------ ------------- ------------- -------------
Net (loss) income.................... $ (74,000) $ (34,000) $ (134,000) $ 53,000 $ 19,000 $ 580,000
========== ============= ============ ============= ============= =============
Net (loss) income per share:
Basic.............................. $ (0.05) $ (0.02) $ (0.08) $ 0.03 $ 0.01 $ 0.37
========== ============= ============= ========== ============= =============
Diluted............................ $ (0.05) $ (0.02) $ (0.08) $ 0.03 $ 0.01 $ 0.36
========== ============= ============= ========== ============= =============
</TABLE>
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LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1998, Maxxis entered into a long-term lease commitment
for the exclusive use of the Maxxis Switch and certain ancillary computer
hardware and software required to operate the Maxxis Switch. In connection with
the lease of the Maxxis Switch, Maxxis made an initial payment of $501,000.
Monthly payments of $118,000 begin in January 1999 and will continue for a
period of five years.
During the three months ended September 30, 1998, cash provided by
operating activities was $1.4 million, as compared to $70,000 for the same
period in 1997. Operating activities for the three months ended September 30,
1998 included $580,000 of net income, $107,000 of depreciation and amortization
and $774,000 related to changes in assets and liabilities.
Cash used in investing activities was $194,000 for the three months
ended September 30, 1998, as compared to $123,000 for the same period in 1997.
Investing activities for the three months ended September 30, 1998 consisted
primarily of capital expenditures totaling $41,000 and software development
costs of $153,000.
Cash used by financing activities was $729,000 for the three months
ended September 30, 1998, as compared to cash provided by financing activities
of $87,000 for the same period in 1997. Financing activities for the three
months ended September 30, 1998 consisted of $228,000 paid by Maxxis to third
parties in connection with the preparation of Maxxis' registration statement on
Form S-1 and payments on capital lease obligations of $501,000.
As of September 30, 1998, the Company had cash of $803,000 and a
working capital deficit of $448,000 as compared to cash of $372,000 and working
capital of $180,000 as of June 30, 1998. Negative working capital as of
September 30, 1998 is due primarily to a cash payment of $501,000 for the Maxxis
Switch and $392,000 of current maturities associated with our lease obligation.
We anticipate that cash generated from operations, together with
proceeds from our ongoing equity offering, will be sufficient to meet our
capital requirements until June 30, 1999. However, if we do not receive
sufficient funds from our operations and equity offering to fund our
operations, we may need to raise additional capital. In addition, any increases
in our growth rate, shortfalls in anticipated revenues, increases in expenses
or significant acquisitions could have a material adverse effect on our
liquidity and capital resources and could require us to raise additional
capital. We 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, lines of credit and private equity and debt
financings. Our cash and financing needs for fiscal 1999 and beyond will depend
on our level of independent associate and customer growth and the related
capital expenditures, advertising costs and working capital needs necessary to
support such growth. We believe that major capital expenditures may be
necessary over the next few years to develop additional product lines to sell
through our independent associates and to develop and/or acquire information,
accounting and/or inventory control systems to monitor and analyze our growing
multi-level network marketing system. We have not identified financing sources
to fund such cash needs in fiscal 1999 and beyond. We cannot guarantee that we
will be able to raise any such capital on terms acceptable to us, or at all.
YEAR 2000 COMPLIANCE
Our business and customer relationships rely on computer software
programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999, we could experience significant system failures or errors,
which could have a material adverse effect on our business, financial condition
or operating results.
We have begun to review our computerized information and
non-information systems to identify Systems that might malfunction due to a
misidentification of the Year 2000. Although we are only in the early stages of
our review, we believe that our Systems are adequately programmed to address
the Year 2000 issue or can be
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modified or replaced to address the Year 2000 issue without material costs or
delays. However, we cannot guarantee that our Systems are Year 2000 compliant.
In addition, we cannot predict whether we will identify significant problems
with our Systems. Therefore, we have not yet determined the extent of
contingency planning that may be required. We may not be able to develop,
implement or test remediation or contingency plans for such Year 2000 problems
or may find that the costs of these plans exceed current expectations. If we
fail to satisfactorily resolve Year 2000 issues related to our services in a
timely manner, we could be exposed to liability from third parties.
Furthermore, we have only made limited inquiries of third party
providers of products and systems used in our business and at our offices or on
the systems used by our independent associates or other third parties. We have
contacted the provider of our commissions accounting software and have received
written assurances that the provider's software is capable of addressing the
Year 2000 issue. There can be no assurance, however, that any or all of the
products and services that we rely on are Year 2000 compliant. We believe that
if our providers, independent associates or other third parties do not
successfully address Year 2000 issues in their operations, our operations may
be interrupted, hindered or delayed which could cause a material adverse effect
on our business, financial condition and operating results. We further believe
that our independent associates and other third parties may be in the
preliminary stages of analyzing their software and systems to address the Year
2000 issue. Therefore, we do not believe it is possible to accurately analyze
or predict possible "worst-case" scenarios related to the Year 2000 issue and
the potential impact on our business if any of these parties fail to adequately
address the Year 2000 issue. We have not developed a contingency plan for Year
2000 problems experienced by our independent associates or other third parties.
Thus, we believe it is impossible to estimate the potential expenses involved
with a large scale failure of our independent associates or other third parties
to resolve their Year 2000 issues. We may suffer business interruptions, either
because of our own Year 2000 problems or those of our independent associates
and other third parties whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to us.
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BUSINESS
Our independent associates market communications and Internet services
and nutritional and health enhancement products through our multi-level network
marketing system. We believe that our marketing system allows us to obtain
customers for our products and services in a cost effective manner. We believe
that our marketing system also enhances customer retention because of the
personal relationships between our independent associates and their customers.
Maxxis was incorporated in January 1997 and began sponsoring independent
associates and marketing telecommunications services in March 1997. We
generated aggregate net revenues of $6,991,000 for our fiscal year ended June
30, 1998 and $5,103,000 for the three months ended September 30, 1998.
We have built a customer base without committing capital or management
resources to construct our own communications network. In February 1997, we
contracted with CRC to allow our independent associates to market long distance
services provided by CRC. In September 1998, we leased the Maxxis Switch and
ancillary hardware and software in order to create our own communications
network. We will not be able to provide long distance services using this
equipment until we have complied with various regulatory requirements. We are
currently in the process of filing applications and tariffs to obtain the
required regulatory approvals to offer long distance service throughout the
United States. In 1999 we expect to receive regulatory approvals, and then we
plan to market our long distance services to the subscriber base that is being
developed under our agreement with CRC and to other customers. To the extent
available, we also intend to lease or sell excess switch capacity to third
parties.
We began marketing private label dietary supplements to our customers
and independent associates in November 1997. Recently, we began marketing
additional nutritional and health enhancement products. In September 1998, we
began providing Internet access and Web-page development and hosting services.
We believe that the persons who purchase telecommunications services through
our independent associates are also potential customers for our nutritional and
health enhancement products and Internet-related services.
Our products and services are marketed exclusively by our network of
independent associates. Our multi-level network marketing system and our
reliance upon independent associates are intended to reduce marketing costs,
customer acquisition costs and customer attrition. We believe that our
multi-level network marketing system will continue to build a base of potential
customers for additional services and products. We believe that independent
associates are generally attracted to our multi-level network marketing system
because of the potential for supplemental income and because they are not
required to purchase inventory, have no monthly sales quotas or account
collection issues, have minimal required paperwork and have a flexible work
schedule. We encourage independent associates to market services and products
to persons with whom the independent associates have an ongoing relationship,
such as family members, friends, business associates and neighbors. We also
sponsor meetings at which current independent associates are encouraged to
bring in others for an introduction to our marketing system.
STRATEGY
Our goal is to develop a national distribution system through which
large volumes of communications and Internet services, nutritional and health
enhancement products and other products and services may be sold. We intend to
increase our revenues by expanding our marketing network, increasing the number
of customers who purchase our products and services and providing additional
products and services for sale through our independent associates. We intend to
achieve our goals by:
- Growing and Developing our Network of Independent Associates
by enhancing our sponsoring and training services, continuing
to support the marketing efforts of independent associates
and introducing new income opportunities for independent
associates.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of independent associates.
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- Offering Additional Communications Services that meet the
needs of subscribers, which may include, among other
services, paging, conference calling, wireless cable,
cellular and local phone service.
- Improving and Expanding Our Product Lines by continuing to
evaluate and offer products that are attractive to our
independent associates and customers.
- Obtaining Competitive Prices on products and services through
the purchasing power of our nationwide network.
MAXXIS SWITCH
We recently entered into an agreement to lease a telecommunications
switch formerly owned by Cherry Communications, Inc. Our lease requires us to
make payments of approximately $118,000 per month. However, we will not be able
to use or otherwise derive any revenue from the operation of the Maxxis Switch
until we have obtained required regulatory approvals necessary for such
operation. Currently, we are in the process of seeking the required regulatory
approvals in approximately 38 states. However, we cannot guarantee that we will
obtain the necessary regulatory approvals in a timely manner or at all. Until
we receive all necessary regulatory approvals, we must bear the expenses
associated with the Maxxis Switch without any offsetting revenues, which could
have a material adverse effect on our business, financial condition and
operating results.
If we receive the required regulatory approvals, we intend to market
services provided through the Maxxis Switch to the subscriber base that is being
developed under our agreement with CRC. We will be required to obtain the
consent of customers before changing their long distance service. This process
could be difficult, time consuming and expensive, and customers may choose not
to subscribe to our services. Because we derive a significant portion of our
revenues from these customers, problems associated with the transition of these
customers from CRC's network to our network could have a material adverse effect
on our business, financial condition and operating results.
MARKETING
We market products and services exclusively through our network of
independent associates. Currently, we have five independent associate positions
in our marketing system: associate; senior associate; director; regional
director; and executive director. Independent associates are paid only by
commissions, and we do not pay them any salary. Independent associate
commissions are a specified percentage or a designated amount of the gross
proceeds received by us on the sale of our services and products. We designate
a portion of our gross commissions as "commission value," or "CV," and allocate
the CV among eligible participants in our marketing system. Currently, 20% of
the CV earned with respect to a long distance subscriber is paid monthly to the
independent associate who sponsored such subscriber, 75% of the CV is paid
monthly to eligible directors who have the independent associate who sponsored
the subscriber in their downline and the remaining 5% is retained by us to be
paid out to directors, regional directors and executive directors in our
performance bonus programs. All directors, executive directors and regional
directors who meet certain performance criteria are eligible to receive
additional performance bonuses.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit.
Independent associates also pay an annual fee in order to maintain their status
as independent associates. 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 us 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 us
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
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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 customers, are eligible to receive a percentage of
the CV produced by each independent associate that is within 15 levels below
them in their downline. In order to encourage the growth of our marketing
system, we also pay eligible directors a bonus amount, which is designated as
"bonus value," or "BV," for each sale of bonus-eligible products. We primarily
designate retail priced phone cards, nutritional paks and Web-page development
and hosting services as bonus-eligible products. Directors become regional
directors and executive directors upon the achievement of certain independent
associate sales goals. Regional directors and executive directors are eligible
to receive the same commissions as directors and, if they qualify, share in
performance bonuses. 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 we may be
required to pay with respect to a single subscriber's long distance usage are
approximately 40% of the gross commissions payable to us with respect to such
usage, but we anticipate that the actual amounts paid will be less than 40% as
the usage increases. We expect the difference between actual commission
payments and the maximum payment to occur because certain independent
associates fail to maintain active status necessary to receive commissions from
sales made by persons in their downline.
RELATIONSHIP WITH INDEPENDENT ASSOCIATES
We seek to contractually limit the statements that independent
associates make about our business. Each independent associate must also agree
to policies and procedures to be followed in order to maintain the independent
associate's status in our organization. We expressly forbid independent
associates from making any representation as to the possible earnings of any
independent associate or from making any representation with regard to this
offering of our Common Stock. We also prohibit independent associates from
creating any marketing literature that we have not pre-approved. While we have
these policies and procedures in place governing the conduct of the independent
associates, it is difficult to enforce such policies and procedures. Because
the independent associates are classified as independent contractors, we are
unable to provide them the same level of direction and oversight as our
employees. Violations of our policies and procedures may reflect negatively on
us and could have a material adverse effect on our business, financial
condition and operating results. See "Risk Factors -- Dependence on Independent
Associates" and "-- Relationship with Independent Associates."
TRAINING AND MARKETING SUPPORT
We offer our independent associates a number of support services. We
currently provide to each independent associate without charge one printed
report describing such independent associate's downline and provide additional
reports for a fee. In addition, we offer training, information and motivational
support to the independent associate network through our training program and
regional meetings.
We provide all independent associates with the opportunity to receive
training through our training program. National training directors conduct the
training program, and the training program includes a detailed explanation of
our products, the independent associate compensation plan and the use of the
various marketing tools available to independent associates. In addition, we
encourage senior associates, directors and regional directors to become MDs.
MDs provide personal training to independent associates. To become a MD, a
senior associate, director or regional director must attend a Maxxis-approved
training school for a fee. MDs must also attend continuing education training
schools each year which also are subject to a fee. National training directors
that are selected by us are paid a fee by us for training MDs. We do not
receive any fees from independent associates for the training provided by MDs.
Our second annual convention was held in September 1998, and we intend
to continue to hold additional annual conventions for independent associates.
This event provides recognition to the top performers, direct access to senior
management and a chance for independent associates to share experiences and
develop support systems.
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We intend to organize additional conventions throughout the country that
current independent associates and potential independent associates can attend
to learn more about us. We also intend to publish a newsletter for the
independent associates containing informative and motivational articles and
recognizing independent associate achievements.
PRODUCTS AND SERVICES
Following is a summary of the various services and products we
currently provide to independent associates and customers.
Communications Services and Products. Our independent associates
market a variety of long distance and other communications services and
products, which currently include 1-Plus long distance service, prepaid phone
cards and Internet-related services.
- 1-Plus Long Distance. Our 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
Corporation ("AT&T"), MCI WorldCom, Inc. ("MCI WorldCom") and
Sprint Corporation ("Sprint")). Our 1-Plus services 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.
Our residential 1-Plus services 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. We offer prepaid phone cards in domestic
time increments of 1 hour and 30 minutes. These cards may be
used for domestic and international calls. We also offer
international prepaid phone cards that are denominated in
dollar amounts. Charges are deducted from these cards based
upon the rates applicable to the calls placed by cardholders.
- MAXXCONNECT. In September 1998, we began providing Internet
access through InteReach and also began providing Web-page
development and hosting services for independent associates.
We may add and remove services and products from our communications services
and product lines from time to time.
Nutritional and Health Enhancement Products. We market a line of
private label nutritional and health enhancement products to our independent
associates and customers. Representative products include:
- 40/30/30 Maxxis Bar is 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 is a dietary supplement which is a specialized
combination of six herbs.
- MAXXIS MSM is a dietary supplement consisting of
methylsulfonylmethane, vitamin C, citrus bioflavonoid complex
and ginseng.
- MAXXIS Multivitamin is a multivitamin nutritional supplement
which is delivered by means of a spray.
- MAXXIS 02 is a nutritional supplement that contains
electrolytes, oxygen, trace elements, enzymes and amino
acids.
- BetaShield is a nutritional product containing an extract
from the cell walls of baker's yeast.
- Maxx-Life is a dietary supplement containing amino acids and
other ingredients, including lysine, arginine, GABA,
glutamine and ornithine.
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- Weight-Ideal is a dietary supplement in capsule and spray
forms which contains a blend of nutrients, including chromium
picolinate, magnesium acetate and niacin.
- Maxxis Skin Care System consists of the following health and
beauty products: shampoo; conditioner; body wash; hand and
body conditioner; face wash; skin toner; and moisturizer.
Certain nutritional products are sold as a nutritional pak, and the skin care
products are sold as a complete system or individually. We anticipate adding
products to and may remove products from our nutritional and health enhancement
product lines from time to time.
Promotional Materials. We also derive revenues from the sale of
various educational and promotional materials designed to aid our independent
associates in maintaining and building their businesses. Such materials include
various sales aids, informational videotapes and cassette recordings and
product and marketing brochures.
INDEPENDENT ASSOCIATE SUPPORT AND INFORMATION SYSTEMS
We operate a call center where advisors answer independent associate
questions and provide information to independent associates. The call center
maintains a system that includes a current database of all independent
associates, their downlines and their long distance customers. We believe that
maintaining sophisticated and reliable transaction processing systems is
essential for multi-level network marketing companies. We use a commission
processing software system that incorporates the provisions of our marketing
program for purposes of processing detailed and customized independent
associate commission payments, monitoring and analyzing financial and operating
trends and tracking each independent associate's downline. We also maintain
transaction processing systems that facilitate the shipment of independent
associate training and marketing materials. In addition, our order processing
system tracks the receipt, storage, shipment and sale of our sales aid
products.
SUPPLIERS
We historically have not owned a long distance network. As a result,
Maxxis Communications entered into the 1-Plus Agreement with CRC to allow our
independent associates to market CRC's telecommunications services. Subscribers
that are gathered by our independent associates are long distance customers on
CRC's network, and CRC provides subscriber support. Subscribers have the right
to change their service at any time. The 1-Plus Agreement, which expires on
February 20, 2000, provides that we will have certain rights to the subscriber
base developed under the agreement only upon generating certain minimum levels
of monthly revenues for CRC. We have reached these minimum levels, and we have
the right to market other carriers to the subscriber base in the event we
contract with such carriers.
CRC is responsible for the accurate and prompt billing of these
subscribers. 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
our business, financial condition and operating results. CRC is currently the
only provider of long distance services marketed through our independent
associates. We would be required to contract with other carriers if the 1-Plus
Agreement were terminated, the usage or number of subscribers originated by our
independent associates exceeded the capacity of CRC or CRC failed to provide
quality services. In such event, or in the event we otherwise elected to use
other carriers, the cost paid by us for such long distance services might
exceed that paid under the 1-Plus Agreement. If the 1-Plus Agreement is
terminated, there can be no assurance that we could enter into new contracts
with other
In November 1997, we began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed
by us are developed and manufactured by third-party suppliers. Certain of the
nutritional products offered by us are proprietary to such suppliers. We do not
have any written contracts with or commitments from any of our suppliers or
manufacturers to continue to sell nutritional products to us. We believe that
our relationships with our suppliers are satisfactory; however, there can be no
assurance that any or all of these suppliers will continue to be reliable
suppliers to us. Accordingly, there is a risk that any or all of our suppliers
or manufacturers, including suppliers which provide proprietary products to us,
could discontinue selling their nutritional products to us. In the event any of
the third-party manufacturers become unable or unwilling to continue to provide
the nutritional products in required volumes, we would be required to identify
and obtain acceptable replacement sources,
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and we cannot guarantee that any alternative replacement sources would become
available to us on a timely basis. See "Risk Factors -- Dependence Upon CRC"
and "-- Dependence Upon Suppliers."
CUSTOMER SUPPORT
CRC is responsible for the billing of long distance customers and for
providing customer service. Certain of our communications services, including
1-Plus long distance and prepaid phone cards, are provided under CRC's state,
national and international tariffs. We have been informed that CRC possesses
all tariffs necessary to offer such services. We provide our Internet access
services through InteReach, which is responsible for billing certain Internet
access customers and for providing customer support. We provide all of the
software necessary to automatically sign up for our Internet access services
through UsefulWare Incorporated.
COMPETITION
We face competition for our products and services and for independent
associates.
Communications Services. The United States long distance
communications 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 WorldCom and Sprint are the dominant competitors in the
domestic long distance communications industry. All of these companies are
significantly larger than we are and have substantially greater resources. Many
of our 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 us. These
competitors employ various means to attract new customers, including television
and other advertising campaigns, telemarketing programs, network marketing and
cash payments and other incentives to new customers. Our ability to compete
effectively depends upon, among other factors, our ability to offer high
quality products and services at competitive prices. There can be no assurance
that we will be able to compete successfully.
Nutritional and Health Enhancement Products. We also compete in the
highly competitive market of dietary supplements and health enhancement
products. 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. We compete with
other providers of such nutritional and health enhancement products, especially
retail outlets, based upon convenience of purchase, price and immediate
availability of the purchased product. For the most part, our competitors
offering comparable products are substantially larger and have available
considerably greater financial resources. 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, our ability to
remain competitive depends in part upon the successful introduction of new
products at competitive prices.
Internet Access and Internet-Related Services. The market for the
provision of Internet access and Internet-related services is extremely
competitive and highly fragmented. There are no substantial barriers to entry,
and we expect that competition will continue to intensify. We cannot guarantee
that we will be able to compete successfully against current or future
competitors or that competitive pressures faced by us will not materially
adversely affect our business, financial condition and operating results. Our
current and future competitors include, without limitation, the following types
of Internet access providers: (i) national commercial Internet service
providers ("ISPs"); (ii) numerous regional and local commercial ISPs; (iii)
established on-line commercial information service providers; (iv) national
long distance carriers; (v) regional telephone companies; and (vi) cable
operators.
Independent Associates. We compete for independent associates 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 our markets are: EXCEL Communications,
Inc.; American Communications Network; BeautiControl Cosmetics, Inc.;
HerbalLife International, Inc.; and Mary Kay, Inc. We compete for new
independent associates on the basis of our 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. We cannot guarantee that we will be able to successfully meet
the challenges
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posed by this increased competition. We also compete for the time, attention
and commitment of our independent associates. Given that the pool of
individuals interested in the business opportunities presented by direct
selling is limited in each market, the potential pool of independent associates
for our products and services is reduced to the extent other network marketing
companies successfully attract these individuals. There can be no assurance
that other network marketing companies will not convince our existing
independent associates to join their organizations. In such event, our
business, financial condition and operating results could be materially
adversely affected.
PROPRIETARY RIGHTS
We have applied for a federal registration for the mark "MAXXIS." In
addition, we rely upon common law rights to protect other marks used by us and
other rights that we consider to be our intellectual property. We cannot
guarantee that our measures to protect our intellectual property will prevent
or deter the use or misappropriation of our intellectual property by other
parties. Our inability to protect our intellectual property from use or
misappropriation from others could have a material adverse effect upon our
business, financial condition and operating results. 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 us. We could incur substantial costs to defend any legal action taken
against us. Our use of our trademarks, service marks or other rights could be
found to infringe upon intellectual property rights of other parties. We could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against us, and in the event any
required license were not available on commercially reasonable terms, our
business, financial condition and operating results could be materially
adversely affected. Litigation, which could result in substantial cost to and
diversion of our resources, may also be necessary to enforce our intellectual
property rights or to defend us against claimed infringement of the rights of
others.
REGULATION
Regulation of Long Distance Telephone Services. Various regulatory
factors affect our financial performance and our ability to compete. We are not
a telecommunications carrier and, therefore, are not directly regulated by
federal or state telecommunications authorities. However, through our wholly
owned subsidiary, we are currently in the process of filing the applications
and tariffs to obtain the necessary regulatory approvals to become a
telecommunications carrier. If we are granted such regulatory approvals, our
services will be subject to varying degrees of federal, state and local
regulation.
CRC is a telecommunications carrier, and its services are currently
subject to federal, state and local regulation. Pursuant to the Communications
Act , the FCC generally exercises jurisdiction over the facilities of, and
services offered by, telecommunications common carriers that provide interstate
or international communications services. State regulatory authorities retain
jurisdiction over the same facilities and services to the extent that they are
used to provide intrastate communications services. Various international
authorities may also seek to regulate the provision of certain services.
Federal Regulation. The FCC does not require long distance
telecommunications carriers to obtain prior authorization to provide domestic
interstate services, including operator services, although such carriers
currently must file tariffs at the FCC setting forth the rates, terms and
conditions for such services. FCC regulations require telecommunications
carriers to apply for and to obtain certification from the FCC prior to
offering international services, and to file international tariffs with the
FCC. We believe that CRC has made all filings with the FCC that are necessary
for CRC to provide domestic interstate and international long distance
services. Our subsidiary intends to file the necessary applications and tariffs
with the FCC in order to provide domestic interstate, operator and
international services prior to offering such services to customers.
CRC and our subsidiary, once our subsidiary is authorized by the FCC,
must comply with the requirements applicable to common carriers under the
Communications Act, which include a duty to offer services upon request at
reasonable rates and on nondiscriminatory terms and conditions. Long distance
telecommunications carriers also are subject to a variety of miscellaneous
regulations that, for example, govern the documentation and verifications
necessary to change a consumer's long distance carrier, require the filing of
periodic reports and the payment of regulatory fees. Currently, FCC regulations
also require long distance telecommunications carriers to permit resale of
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their transmission services, and local exchange carriers to provide all long
distance carriers with equal access to local exchange facilities for purposes
of origination and termination of long distance calls. If either or both of
these requirements were eliminated, CRC and, therefore, us could be adversely
affected.
The FCC generally has the authority to condition, modify, cancel,
terminate or revoke a carrier's authority to operate for failure to comply with
federal laws or FCC orders, rules, regulations or policies. Fines or other
penalties also may be imposed by such violations. The FCC has jurisdiction to
act upon complaints against any telecommunications carrier for failure to
comply with its statutory obligations. We cannot guarantee that the FCC or
third parties will not raise issues with regarding CRC's or our compliance with
applicable laws and regulations, which could have a material adverse effect on
our business, financial condition and operating results.
The enactment of the Telecommunications Act served to increase
competition in the long distance market. The Telecommunications Act, among
other things, allowed the Bell operating companies to provide long distance
service outside of their local service territories, but barred them from
immediately offering in-region, interLATA long distance services until they had
satisfied certain conditions. A Bell operating company must apply to the FCC to
provide in-region, interLATA long distance services and must satisfy a set of
pro-competitive criteria intended to ensure that Bell operating companies open
their own local markets to competition before the FCC will approve such
application. We are unable to determine how the FCC will rule on any such
applications. As a result of the Telecommunications Act, CRC and our
subsidiary, once our subsidiary is authorized to provide long distance
services, may experience increased competition from others, including the Bell
operating companies. In addition, both CRC and our subsidiary may be subject to
additional regulatory requirements and fees, including, without limitation,
universal service assessments, additional access charge assessments, and
payphone compensation surcharges resulting from the implementation of the
Telecommunications Act.
State Regulation. CRC is, and if it is authorized to provide
intrastate long distance services, our subsidiary would be, subject to varying
levels of regulation in states in which each company provides long distance
services. The vast majority of states require long distance carriers to apply
for certificates to provide telecommunications services, or at least to
register or to be found exempt from regulation, before they may commence
providing intrastate long distance services. This authorization process
generally requires the carrier to demonstrate that it has sufficient financial,
technical and managerial capabilities and that granting the authorization will
serve the public interest. Also, a majority of states require long distance
carriers to file and to maintain detailed tariffs listing rates for intrastate
services. Many states also impose various reporting and fee requirements,
including, without limitation, state universal service requirements. State
regulatory agencies also generally require prior notice or approval for (i)
transfers of control of certificated carriers, (ii) sales or transfers of
carrier assets, including customer bases, (iii) carrier stock offerings and
(iv) a carrier's incurrence of significant debt obligations. Certificates of
authority can generally be conditioned, modified, canceled, terminated or
revoked by state telecommunications regulatory agencies for failure to comply
with state laws and rules, regulations and regulatory policies. Fines and other
penalties may be imposed for such violations.
We believe that CRC has made the necessary filings with the various
state telecommunications regulatory agencies to provide intrastate long
distance services in the states where CRC currently conducts its operations.
Our subsidiary intends to file the necessary applications and tariffs with the
states in order to provide intrastate long distance services prior to offering
such services to its customers. We cannot guarantee that our subsidiary will
obtain all necessary authorizations, that CRC will maintain its necessary
authorizations or that CRC will not provide services in a state where it is not
properly certificate or terrified. The occurrence of any or all of the
foregoing could have a material adverse effect on our business, financial
condition or operating results.
Regulation Affecting Nutritional and Health Enhancement Products. The
formulation, manufacturing, packaging, labeling, advertising, distribution and
sale of our nutritional products are subject to regulation by a number of
governmental agencies, the most active of which is the FDA, which regulates our
products under the FDCA and regulations promulgated thereunder. Our 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. Our 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.
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Moreover, if the FDA determines on the basis of our labeling or advertising
claims, that the "intended use" of any of our 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 we have made claims
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 our 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. We cannot guarantee that the FTC will not question our advertising
or other operations. Moreover, we cannot guarantee that a state will not
interpret product claims presumptively valid under federal law as illegal under
that state's regulations. Furthermore, our independent associates 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
independent associates, customers or others, including actions resulting in
entries of consent decrees and the refund of amounts paid by the complaining
independent associate or customer, refunds to an entire class of independent
associates or customers, or other damages, as well as changes in our method of
doing business. A complaint because of a practice of one independent associate,
whether or not that practice was authorized by us, could result in an order
affecting some or all independent associates in a particular state. In addition,
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 our business, financial condition or operating results.
Although many of the ingredients in our nutritional products are
vitamins, minerals, herbs and other substances for which there is a long history
of human consumption, some of our nutritional products contain ingredients as to
which there is little history of human consumption. We have not tested, and have
not engaged any independent third party to test, any of our nutritional
products. Accordingly, we cannot guarantee that our nutritional products, even
when used as directed, will have the effects intended. Although we believe that
our nutritional products are safe when consumed as directed, we have not
sponsored clinical studies on the long-term effect of human consumption.
Regulation of Network Marketing. Our multi-level network marketing
system is subject to 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 they could require us to supply
information regarding our marketing plan at any time. Although we believe that
our multi-level network marketing system is in material compliance with the laws
and regulations relating to direct selling activities, we cannot guarantee that
future legislation and regulations adopted in particular jurisdictions will not
adversely affect our business, financial condition and operating results. We
have not obtained no-action letters or advance rulings from any federal or state
securities regulator or other governmental agency concerning the legality of our
operations. Federal and state regulators may find our multi-level network
marketing system to be in noncompliance with existing statutes or regulations as
a result of, among other things, misconduct by our independent associates, over
whom we have 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 we or our independent associates
are not in compliance with existing statutes or regulations could require us to
modify our multi-level network marketing system, create negative publicity,
affect distributor moral and loyalty and have a material adverse effect on our
business, financial condition and operating results. An adverse determination by
any one state regulator on a regulatory matter could influence the decisions of
regulatory authorities in other jurisdictions.
Effect of State Securities Laws. The primary goal of the offering is to
increase the motivation of regional and executive directors by allowing them to
purchase an equity interest in Maxxis. Accordingly, because we want the ability
to offer our Common Stock to regional and executive directors in Alabama,
California, Colorado, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland,
New York, North Carolina, South Carolina, Texas, Virginia, Washington and
Wyoming, we have 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
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regulators, we anticipate that we will be unable to register or qualify the
offering in certain of these states, and we cannot guarantee that we will be
able to register or qualify the offering in any of these states. Certain of
these states require us to sell our securities exclusively through
broker-dealers that are registered in such states. We cannot guarantee that we
will be successful in engaging registered broker-dealers to sell our Common
Stock in such states upon terms acceptable to us or at all. Our inability to
offer and sell the shares to residents of certain states may limit our ability
to attract independent associates in such states and may have a material adverse
effect on our business, prospects, financial condition and operating results. An
adverse determination by any one state regulator on a regulatory matter could
influence the decisions of regulatory authorities in other jurisdictions.
FACILITIES
We operate out of offices in Tucker, Georgia, which is in
metro-Atlanta. Our offices consist of approximately 24,600 square feet for
general and administrative office space, warehouse space and training space. We
may be required to lease or build additional facilities, including at least one
additional call center and new corporate headquarters, in order to meet our
needs in the future. We believe that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
EMPLOYEES
As of September 30, 1998, the Company employed approximately 37 people.
Our independent associates are classified by us as independent contractors. Our
employees are not unionized, and we believe our relationship with our 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 eight 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 September 30, 1998.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- -------
<S> <C> <C> <C>
Ivey J. Stokes........................ 39 Chairman of the Board of Directors 2001
Thomas O. Cordy....................... 57 Chief Executive Officer, President and Director 2001
Alvin Curry........................... 41 Chief Operating Officer and Director 2001
Daniel McDonough...................... 51 Chief Financial Officer and Secretary --
Larry W. Gates, II.................... 35 Vice President and Director 1999
Charles P. Bernstein.................. 47 Director 2000
Robert James 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."
IVERY 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 Stanford
Executive Program at the Stanford School of Business and the University of
Oklahoma National Lending School.
ALVIN CURRY has served as the Chief Operating Officer of the Company
since October 1998 and 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.
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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.
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 Pierce College.
CHARLES P. BERSTEIN 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.
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 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 reviews, with
the Company's independent public accountants, the annual financial statements of
the Company, reviews the work of such independent public accountants and makes
annual recommendations to the Board of Directors for the appointment of
independent public accountants for the ensuing year. The Audit Committee also
reviews the effectiveness of the financial and accounting functions,
organization, operations and management of the Company. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all officers of the Company and administers the issuance of stock
options to the Company's officers, employees, consultants and advisors. The
Compensation Committee also reviews general policy matters relating to
compensation and benefits of employees of the Company.
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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 Chief Executive Officer for the year ended June 30, 1998
and the Inception Period. No other executive officers of the Company received a
combined salary and bonus in excess of $100,000 for the year ended June 30,
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------
NAME AND PRINCIPAL POSITION PERIOD SALARY OTHER(1)
- --------------------------- -------------- --------- ----------
<S> <C> <C> <C>
Thomas O. Cordy............................... Fiscal 1998 $ 41,600 $ 83,400
Chief Executive Officer and President Inception Period 5,250 --
</TABLE>
- ---------------
(1) Represents amounts accrued as deferred compensation for the periods
presented.
OPTION GRANTS DURING 1998
As of June 30, 1998, no options had been granted to the Chief Executive
Officer of the Company.
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 Mr. Alvin Curry and Mr. Shawn Dinwiddie, and in October 1998, the Company
memorialized an employment agreement with Mr. Daniel McDonough (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 is 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. 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 must 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 must 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 will be six
months.
44
<PAGE> 46
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 minimum weekly payments,
which the Executive Committee establishes from time to time. 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.
The Board of Directors determines the amount of the bonus from time to time.
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 will 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.
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 must 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 will be six
months.
INDEMNIFICATION OF DIRECTOR 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."
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<PAGE> 47
STOCK OPTION PLAN
The Board of Directors adopted on September 16, 1998, and the
shareholders approved on October 1, 1998, the Maxxis Group, Inc. 1998 Stock
Option Plan (the "Option Plan"), which permits the Company to grant options to
purchase shares of Common Stock to officers, directors, key employees, advisors
and consultants of the Company. The purpose of the Option Plan is to advance the
interests of the Company, its subsidiaries and its shareholders by affording
certain employees and Directors of the Company and its subsidiaries, as well as
key consultants and advisors to the Company or any subsidiary, an opportunity to
acquire or increase an interest in the Company. Options granted under the Option
Plan are intended to promote the growth and profitability of the Company and its
subsidiaries by providing the optionees with an additional incentive to achieve
the Company's objectives through participation in its success and growth and by
encouraging optionees to continue their association with or service to the
Company.
Generally, options granted under the Option Plan may be Incentive Stock
Options ("ISOs"), which are intended to meet the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options, which are not intended to meet such requirements ("Non-Qualified
Options"). ISOs must have terms of ten years or less from the date of grant and
the fair market value of grants of ISOs during any year on the date of grant may
not exceed $100,000. The Option Plan will be administered by a committee (the
"Committee"), having the duties and authorities set forth in such Option Plan in
addition to any other authority granted by the Board. The Committee will have
the full power and authority, in its discretion, subject to the provisions of
the Option Plan, to interpret the Option Plan, to prescribe, amend, and rescind
rules and regulations relating to them, to determine the details and provisions
of each stock option agreement and restriction agreement, and to make all other
determinations necessary or advisable for the administration of the Option Plan,
including, without limitation, the amending or altering of such Plan and any
options or restricted stock awards granted thereunder, as may be required to
comply with or to conform to any federal, state, or local laws or regulations.
The Committee, in its discretion, will select the recipients of awards and the
number of options granted thereunder and determine other matters such as (i)
vesting schedules, (ii) the exercise price of options (which cannot be less than
100% of the fair market value of the Common Stock on the date of grant for ISOs)
and (iii) the duration of awards (which cannot exceed ten years from the date of
grant or modification of the option).
Subject to shareholder approval, the aggregate number of shares of
Common Stock reserved for the issuance of options under the Option Plan will be
300,000 shares, subject to adjustment in accordance with the Option Plan. Any or
all shares of Common Stock subject to the Option Plan may be issued in any
combination of ISOs or Non-Qualified Options, and the amount of Common Stock
subject to the Option Plan may be increased from time to time, subject to
shareholder approval. Shares subject to an option may be either authorized and
unissued shares or shares issued and later reacquired by the Company. The shares
covered by any unexercised portion of an option that has terminated for any
reason may again be optioned or awarded under the Option Plan, and such shares
shall not be considered as having been optioned in computing the number of
shares of Common Stock remaining available for options under the Option Plan.
The class of persons eligible to participate in the Option Plan
consists of all persons whose participation in the Option Plan the Committee
determines to be in the best interests of the Company which includes, but is not
limited to, all employees and directors of the Company or any subsidiary, as
well as key consultants and advisors to the Company or any subsidiary. The
Committee will have the power to specify, with respect to the Options granted to
a particular Optionee, the effect of the termination of such Optionee's
employment or service under various circumstances on such Optionee's right to
exercise an Option, which effect may include immediate or deferred termination
of such Optionee's rights under an Option, or acceleration of the date at which
an Option may be exercised in full. As of December 1, 1998, options to purchase
6,818 shares of Common Stock were outstanding.
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<PAGE> 48
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 bore
interest at a fixed rate of 6% per year. The Company repaid the Cordy Note in
full with aggregate payments of approximately $54,700 in principal and interest
on or before June 30, 1998.
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> 49
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of December 8, 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 OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(B) AFTER THE OFFERING
------------------------- -------------------------
NAME AND ADDRESS(A) OF A BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------------------- ---------- ------------ ---------- ------------
<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...................................... -- -- -- --
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
(9 persons) (c) - (j).................................. 994,088 63.0 994,088 49.0
</TABLE>
- ------------------
* Less than one percent
(a) The address of the King David Trust and Alvin Curry is c/o Maxxis
Group, Inc., 1901 Montreal Road, 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 Securities Exchange Act of
1934, as amended (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 June 10, 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.
(j) Includes options to acquire 6,818 shares of Common Stock held by Daniel
McDonough.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock is only a summary and is
subject to the provisions of the Amended and Restated Articles of Incorporation
(the "Articles") and the Amended and Restated Bylaws (the "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. 100,000 shares of the preferred stock has been
designated as Series A Convertible Preferred Stock (the "Series A Preferred").
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, if any, 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 (the "Units") at a
price of $5.50 per Unit with each Unit consisting of one share of Series A
Preferred and one warrant (a "Warrant") to purchase one share of Common Stock at
a price of $5.50 per share. The Series A Preferred 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 Series A
Preferred and automatically upon the closing of a public offering that occurs at
least 14 months following the issuance of the Series A Preferred 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> 51
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 anti-takeover 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 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 2001, 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, pledge, tax credit or other financial benefit from the Company,
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<PAGE> 52
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.
SHAREHOLDER'S 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
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<PAGE> 53
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, Maxxis will have a minimum of
1,863,687 shares and a maximum of 2,021,187 shares of Common Stock outstanding,
and 36,359 shares of Preferred Stock outstanding. Maxxis will also have Warrants
to purchase 36,359 shares of Common Stock and options to purchase 6,818 shares
of Common Stock outstanding. Of these shares, the 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 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 and options 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 if the maximum number of shares are
sold) 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.
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. ("Nelson Mullins"),
Atlanta, Georgia. Attorneys at Nelson Mullins beneficially own in the aggregate
28,633 Units, consisting of 28,633 shares of the Company's Series A Preferred
Stock and Warrants to purchase 28,633 shares of the Company's Common Stock.
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EXPERTS
The audited consolidated financial statements of Maxxis Group, Inc. as
of June 30, 1997 and 1998 and for the period from inception (January 24, 1997)
to June 30, 1997 and the year ended June 30, 1998, 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.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Exchange Act. The Company has filed with 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
statement 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.
53
<PAGE> 55
MAXXIS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants................................................................ F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997................................................ F-3
Consolidated Statements of Operations for the Year Ended June 30, 1998 and
for the Period from Inception (January 24, 1997) to June 30, 1997.................................. F-4
Consolidated Statements of Changes in Shareholders' Equity for the Year Ended
June 30, 1998 and for the Period from Inception (January 24, 1997) to June 30, 1997................ F-5
Consolidated Statements of Cash Flows for the Year Ended June 30, 1998 and
for the Period from Inception (January 24, 1997) to June 30, 1997.................................. F-6
Notes to Consolidated Financial Statements.............................................................. F-7
Condensed Consolidated Balance Sheets as of September 30, 1998 (Unaudited)
and June 30, 1998.................................................................................. F-15
Condensed Consolidated Statements of Operations for the Three Months ended
September 30, 1998 and 1997 (Unaudited)............................................................ F-16
Condensed Consolidated Statements of Cash Flows for the Three Months ended
September 30, 1998 and 1997 (Unaudited)............................................................ F-17
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................ F-18
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxxis Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1998 and 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended June 30, 1998 and for the period from inception
(January 24, 1997) 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 audits.
We conducted our audits 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 audits provide 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, 1998 and 1997 and the results of their operations
and their cash flows for the year ended June 30, 1998 and for the period from
inception (January 24, 1997) to June 30, 1997 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 4, 1998
F-2
<PAGE> 57
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 372,000 $ 35,000
Short-term investment 10,000 10,000
Communications receivables, net of allowance for doubtful accounts of $40,000 and
$0, respectively 316,000 25,000
Inventories, net 218,000 185,000
Prepaid expenses 43,000 12,000
Other current assets 0 23,000
---------- --------
959,000 290,000
PROPERTY AND EQUIPMENT, NET 169,000 92,000
ORGANIZATIONAL COSTS, NET 0 76,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 126,000 118,000
OTHER ASSETS 9,000 20,000
---------- --------
$1,263,000 $596,000
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 211,000 $ 158,000
Commissions payable 101,000 42,000
Accrued compensation 154,000 0
Provision for sales returns 45,000 0
Sales taxes payable 130,000 0
Accrued expenses 83,000 103,000
Deferred revenue 55,000 0
----------- ---------
779,000 303,000
----------- ---------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Stock subscription deposits 0 360,000
Preferred stock, no par value; 10,000,000 shares authorized; 100,000 shares
designated as Series A; 36,359 and 0 Series A shares issued and outstanding,
respectively 200,000 0
Common stock, no par value; 20,000,000 shares authorized, 1,571,187 and 1,299,992
shares issued and outstanding, respectively 574,000 127,000
Shareholder note receivable (120,000) (120,000)
Accumulated deficit (170,000) (74,000)
----------- ---------
Total shareholders' equity 484,000 293,000
----------- ---------
$ 1,263,000 $ 596,000
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE> 58
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998 AND
FOR THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES:
Communications services $ 5,293,000 $ 2,322,000
Nutritional products 526,000 0
Marketing services 1,172,000 369,000
----------- -----------
Total net revenues 6,991,000 2,691,000
----------- -----------
COST OF SERVICES:
Communications services 1,351,000 761,000
Nutritional products 294,000 0
Marketing services 431,000 255,000
Total cost of services 2,076,000 1,016,000
----------- -----------
GROSS MARGIN 4,915,000 1,675,000
----------- -----------
OPERATING EXPENSES:
Selling and marketing 2,665,000 1,089,000
General and administrative 2,344,000 660,000
----------- -----------
Total operating expenses 5,009,000 1,749,000
----------- -----------
INTEREST EXPENSE 2,000 0
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (96,000) (74,000)
----------- -----------
INCOME TAX BENEFIT 0 0
----------- -----------
NET LOSS $ (96,000) $ (74,000)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.06) $ (0.05)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES AND SHARE EQUIVALENTS OUTSTANDING 1,571,187 1,571,187
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 59
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998 AND FOR
THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCK SHAREHOLDER
-------------------- ---------------------- SUBSCRIPTION NOTE
SHARES AMOUNT SHARES AMOUNT DEPOSITS RECEIVABLE
------- -------- -------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 24, 1997 (INCEPTION) 0 $ 0 0 $ 0 $ 0 $ 0
Issuance of common stock 0 0 1,299,992 127,000 0 (120,000)
Stock subscription deposits 0 0 0 0 360,000 0
Net loss 0 0 0 0 0 0
------- -------- ---------- -------- --------- ---------
BALANCE, JUNE 30, 1997 0 0 1,299,992 127,000 360,000 (120,000)
Issuance of preferred stock 36,359 200,000 0 0 0 0
Issuance of common stock 0 0 271,195 447,000 0 0
Stock subscription deposits 0 0 0 0 (360,000) 0
Net loss 0 0 0 0 0 0
------- -------- ---------- -------- --------- ---------
BALANCE, JUNE 30, 1998 36,359 $200,000 1,571,187 $574,000 $ 0 $(120,000)
======= ======== ========== ======== ========= =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- ---------
<S> <C> <C>
BALANCE, JANUARY 24, 1997 (INCEPTION) $ 0 $ 0
Issuance of common stock 0 7,000
Stock subscription deposits 0 360,000
Net loss (74,000) (74,000)
--------- ---------
BALANCE, JUNE 30, 1997 (74,000) 293,000
Issuance of preferred stock 0 200,000
Issuance of common stock 0 447,000
Stock subscription deposits 0 (360,000)
Net loss (96,000) (96,000)
--------- ---------
BALANCE, JUNE 30, 1998 $(170,000) $ 484,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 60
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998 AND FOR
THE PERIOD FROM INCEPTION (JANUARY 24, 1997) TO JUNE 30, 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (96,000) $ (74,000)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 176,000 54,000
Changes in assets and liabilities:
Communications receivables (291,000) (25,000)
Inventories (33,000) (185,000)
Prepaid expenses (31,000) (12,000)
Other assets 34,000 (43,000)
Commissions payable 59,000 42,000
Accounts payable 53,000 158,000
Accrued compensation 154,000 0
Provision for sales returns 45,000 0
Sales taxes payable 130,000 0
Accrued expenses (20,000) 103,000
Deferred revenue 55,000 0
--------- ---------
Total adjustments 331,000 92,000
--------- ---------
Net cash provided by operating activities 235,000 18,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (115,000) (99,000)
Purchase of short-term investment 0 (10,000)
Software development and organizational costs (70,000) (241,000)
--------- ---------
Net cash used in investing activities (185,000) (350,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock subscriptions 0 360,000
Proceeds from issuance of common stock 87,000 7,000
Proceeds from issuance of preferred stock 200,000 0
--------- ---------
Net cash provided by financing activities 287,000 367,000
--------- ---------
NET INCREASE IN CASH 337,000 35,000
CASH, BEGINNING OF YEAR 35,000 0
--------- ---------
CASH, END OF YEAR $ 372,000 $ 35,000
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
cash paid for interest $ 2,000 $ 0
========= =========
Cash paid for income taxes $ 0 $ 0
========= =========
Stock issued for note receivable $ 0 $ 120,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE> 61
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 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. Maxxis Group,
Inc.'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, and Maxxis Nutritional, Inc., which began
operations in December 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, private label
nutritional products, and other consumable products and services through a
multilevel marketing system of independent associates ("IAs") to
subscribers throughout the United States. The Company currently markets
both long-distance services and value-added communications services, such
as travel cards, prepaid phone cards, 800 service, and international
telecommunications service, as well as private label nutritional products.
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.
REVENUE RECOGNITION
Communications services revenues consist of prepaid phone card sales to
IAs. The Company purchases prepaid phone cards from an independent
tariffed long-distance reseller (the "Reseller"). IAs purchase these
prepaid phone cards from the Company. Revenues from the sale of these
prepaid phone cards are recognized when the cards are sold to IAs, net of
an estimate of sales returns for defective or unused cards. Active IAs
have the right of return for defective or unused cards for up to 30 days
after the date of purchase. IAs that terminate their relationship with the
Company also have up to one year from the date of purchase to return cards
that are unused and sealed in the original packaging, net of a restocking
fee, for a refund.
Communications 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 customers, 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 communications receivables in the accompanying consolidated
balance sheets.
F-7
<PAGE> 62
Nutritional services revenues consist of sales of private label
nutritional products manufactured by various suppliers and are recorded as
products are shipped.
Marketing services revenues primarily consist of receipts from IAs for
application fees and purchases of distributor kits and sales aids, which
include starter kits of forms, promotional brochures, marketing materials,
and presentation materials.
DEFERRED REVENUE
Deferred revenue relates to an annual nonrefundable renewal fee assessed
to IAs after their first year with the Company that provides IAs with the
right to sell the Company's products and services. The Company recognizes
this revenue on a straight-line basis over the IAs' renewal period.
COST OF SERVICES
Communications services costs primarily include the costs of purchasing
prepaid phone cards from the Reseller.
Nutritional services costs include the costs of purchasing nutritional
products from third-party suppliers.
Marketing services costs include the costs for printing and designing of
associate applications, starter kits, and other sales aids.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses primarily consist of commissions paid to
IAs based on the sponsoring of new IAs and the sale of communication
services and nutritional products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses primarily consist of salary expense
for the Company's customer service personnel, office staff, and executive
personnel in addition to the cost of IAs support services and information
systems services.
CONCENTRATIONS OF CREDIT RISK
The Company's customers 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 the Reseller. Failure of
the 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 Reseller to provide
long-distance services, which if terminated or canceled may significantly
impact the results of operations of the Company. While the Company
believes it could contract with another long-distance reseller, the loss
of revenues or potential disruption of services to customers 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 IAs who, in turn, sponsor customers
and other IAs. The Company anticipates a significant turnover among IAs,
which the Company believes is typical of direct selling. 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.
F-8
<PAGE> 63
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 and liabilities and
disclosure of contingent assets and liabilities in the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMMUNICATIONS RECEIVABLES
A summary of changes in the allowance for doubtful accounts for the year
ended June 30, 1998 and the period from Inception to June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance, beginning of period $ 0 $ 0
Provisions 40,000 0
Recoveries 0 0
Write-offs 0 0
----------- ---------
Balance, end of period $ $0,000 $ 0
=========== =========
</TABLE>
INVENTORIES
Inventories consist of the following as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Prepaid phone cards $ 10,000 $ 25,000
Sales aids 158,000 160,000
Nutritional products 76,000 0
---------- ---------
244,000 185,000
Less reserve (26,000) 0
---------- ---------
Inventory, net $ 218,000 $ 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 consist primarily of furniture and fixtures, office
equipment, computer equipment, and leasehold improvements which are stated
at cost and are depreciated using the straight-line method over the
estimated useful lives of three to 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 taxes 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).
F-9
<PAGE> 64
ORGANIZATIONAL COSTS
The Company capitalized certain organizational costs related to start-up
activities and the legal formation of the Company. These costs were
amortized over one year, and amortization expenses were $76,000 and
$25,000 for the year ended June 30, 1998 and the period from Inception to
June 30, 1997, respectively.
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 an
estimated useful life of three years, and amortization expenses were
$62,000 and $21,000 for the year ended June 30, 1998 and the period from
Inception to June 30, 1997, respectively.
OTHER ASSETS
Other assets include security deposits for lease obligations.
SHORT-TERM INVESTMENT
The short-term investment is a certificate of deposit recorded at cost,
which approximates the estimated fair value and matures in May 1999.
LOSS PER SHARE
In March 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 ("EPS")
which the Company adopted for the year ended June 30, 1998. Basic net EPS
is computed by dividing reported earnings available to common shareholders
by weighted average shares outstanding as computed under the requirements
of Staff Accounting Bulletin 83. As a result, all shares issued prior to
the Company's completion of its registration statement have been included
as outstanding since Inception (Note 6). No dilution for any potentially
dilutive securities is included in basic EPS. Diluted EPS is computed by
dividing reported earnings available to common shareholders by weighted
average shares and common equivalent shares outstanding.
All prior period EPS amounts have been restated to conform to the
provisions of SFAS No. 128.
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.
F-10
<PAGE> 65
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Computer equipment $ 154,000 $ 67,000
Furniture and fixtures 42,000 28,000
Leasehold improvements 13,000 0
Office equipment 5,000 4,000
----------- --------
214,000 99,000
Less accumulated depreciation (45,000) (7,000)
----------- --------
Property and equipment, net $ 169,000 $ 92,000
=========== ========
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 2,000 $ 0
Organizational costs 23,000 0
Net operating losses 35,000 27,000
Valuation allowance (60,000) (27,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance of $60,000 and
$27,000 at June 30, 1998 and 1997, respectively. At June 30, 1998 and
1997, the Company had net operating loss carryforwards of approximately
$90,000 and $70,000, respectively, which will begin expiring in the year
2012 unless previously utilized.
A reconciliation of the benefit for income taxes at the statutory federal
income tax rate to the Company's tax benefit as reported in the
accompanying statements of operations is stated below:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Tax benefit computed at statutory rate $ 33,000) $ (25,000)
State income taxes (4,000) (3,000)
Nondeductible expenses 4,000 1,000
Change in valuation allowance 33,000 27,000
----------- ----------
Income tax benefit $ 0 $ 0
=========== ==========
</TABLE>
5. TRANSACTIONS WITH AFFILIATES
The Company had significant transactions with IS 14, Inc. ("IS 14"), which
was affiliated through common ownership during 1997. IS 14 provided
funding for certain expenses incurred by the Company, and all amounts have
been repaid as of June 30, 1997. In addition, the Company paid to IS 14,
in consideration for marketing support, a fee equivalent to a percentage
of revenues totaling $184,000 for the period from Inception to June 30,
1997 which is included in selling and marketing expense in the
accompanying
F-11
<PAGE> 66
consolidated statements of operations. Amounts due to IS 14 related to this
fee and included in commissions payable in the accompanying consolidated
balance sheets totaled $9,000 at June 30, 1997.
6. SHAREHOLDERS' EQUITY
Effective February 17, 1998, the Company declared a 1 for 11 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 ("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 February 1997, the Company sold 1,227,265 shares of Common Stock to the
founders of the Company at $.006 per share. In May 1997, the Company sold
72,727 shares of Common Stock to an executive officer for $1.65 per share
and accepted as payment a $120,000 note receivable from 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 shareholder note receivable in the shareholders' equity section of
the consolidated balance sheets.
The Company and certain of its 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 nonpermitted 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, the Company shall have the
right to repurchase, at fair market value, an amount of the shareholder's
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 August 1997, the Company completed a private placement
offering for shares of Common Stock at a price of $1.65 per share.
Potential investors were required to complete subscription agreements for
the Common Stock and submit cash at the date of subscription. The Company
reserved the right to reject a subscription and refund amounts to a
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 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 at June 30, 1997. Subsequent to
June 30, 1997, the Company accepted these subscriptions and additional
subscriptions for 53,014 shares of the Common Stock.
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 the assets of the Company.
The Note accrued interest at 10%, payable monthly beginning on January 1,
1998, and the principal was due on demand. On March 23, 1998, the Note was
exchanged for 36,359 shares of the Company's Series A nonvoting
convertible preferred stock ("Series A Preferred Stock" or "Series A") and
warrants (the "Warrants") to purchase 36,359 shares of 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.
In February 1998, the Company amended and restated its 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. 100,000 shares of the
Company's Preferred Stock have been designated as Series A. The Series A
Preferred Stock has a liquidation preference of $5.50 per
F-12
<PAGE> 67
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. The Series A shareholders
have the right to convert each share into shares of Common Stock, pursuant
to the articles of incorporation, at any time beginning 14 months after the
date of issuance. As of June 30, 1998, all outstanding shares of the
Preferred Stock were Series A.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and office space under
operating leases. Total rental expenses for the year ended June 30, 1998
and the period from Inception to June 30, 1997 were approximately $84,000
and $45,000, respectively.
Minimum lease payments under noncancelable leases for the years subsequent
to June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $123,000
2000 101,000
2001 111,000
2002 0
2003 and thereafter 0
--------
$335,000
========
</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
The Company has entered into employment agreements with certain executive
officers (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 provided for an additional bonus
payment on July 1, 1998. All unpaid bonuses are included in accrued
compensation in the accompanying consolidated balance sheets.
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/her 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/her 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/she 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
F-13
<PAGE> 68
corporate offices, provided that if the employee is terminated without
cause, the noncompete period shall be six months.
RELATIONSHIP WITH IAS
Because IAs 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 business conduct of IAs and
intends to review periodically the sales tactics of the IAs, 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 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.
8. SALES REPRESENTATIVE AGREEMENTS
The Company has entered into 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. Unpaid bonuses are included in accrued
compensation in the accompanying consolidated balance sheets. 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.
F-14
<PAGE> 69
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND JUNE 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash............................................................ $ 803,000 $ 372,000
Short-term investments.......................................... 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $40,000.................................. 475,000 316,000
Inventories, net................................................ 725,000 218,000
Prepaid expenses................................................ 214,000 43,000
Other current assets............................................ 26,000 --
------------- ------------
Total current assets.......................................... 2,253,000 959,000
Property and equipment, net........................................ 5,950,000 169,000
Capitalized software development costs, net........................ 191,000 126,000
Other assets....................................................... 237,000 9,000
------------- ------------
Total assets.............................................. $ 8,631,000 $ 1,263,000
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 691,000 $ 211,000
Commissions payable............................................. 154,000 101,000
Taxes payable................................................... 572,000 130,000
Current maturities of long-term capital lease obligations....... 392,000 --
Accrued liabilities............................................. 403,000 282,000
Deferred revenue................................................ 489,000 55,000
------------- ------------
Total current liabilities..................................... 2,701,000 779,000
Long-term capital lease obligations................................ 4,866,000 --
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
100,000 shares designated as Series A Convertible Preferred
Stock of which 36,359 shares are issued and outstanding....... 200,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,571,187 shares issued and outstanding....................... 574,000 574,000
Shareholder note receivable..................................... (120,000) (120,000)
Accumulated earnings (deficit).................................. 410,000 (170,000)
------------- ------------
Total shareholders' equity.................................... 1,064,000 484,000
------------- ------------
Total liabilities and shareholders' equity................ $ 8,631,000 $ 1,263,000
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-15
<PAGE> 70
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
---------- ------------
<S> <C> <C>
Net revenues:
Communications services ............................ $3,686,000 $ 1,465,000
Nutritional products ............................... 375,000 --
Marketing services ................................. 1,042,000 353,000
---------- -----------
Total net revenues ............................... 5,103,000 1,818,000
---------- -----------
Cost of services:
Communications services ............................ 706,000 438,000
Nutritional products ............................... 202,000 --
Marketing services ................................. 552,000 101,000
---------- -----------
Total cost of services ........................... 1,460,000 539,000
---------- -----------
Gross margin .......................................... 3,643,000 1,279,000
---------- -----------
Operating expenses:
Selling and marketing .............................. 2,005,000 716,000
General and administrative ......................... 778,000 597,000
---------- -----------
Total operating expenses ......................... 2,783,000 1,313,000
---------- -----------
Income (loss) before income taxes ..................... 860,000 (34,000)
Provision for income taxes ............................ 280,000 --
---------- -----------
Net income (loss) ..................................... $ 580,000 $ (34,000)
========== ===========
Income (loss) per share:
Basic .............................................. $ 0.37 $ (0.02)
========== ===========
Diluted ............................................ $ 0.36 $ (0.02)
========== ===========
Weighted average number of shares outstanding:
Basic .............................................. 1,571,187 1,571,187
========== ===========
Diluted ............................................ 1,607,546 1,571,187
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-16
<PAGE> 71
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 580,000 $ (34,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ........................................ 107,000 50,000
Changes in assets and liabilities:
Communications receivables ......................................... (159,000) (100,000)
Inventories ........................................................ (507,000) (49,000)
Prepaid expenses ................................................... (171,000) (10,000)
Other assets ....................................................... (26,000) 23,000
Accounts payable ................................................... 480,000 133,000
Commissions payable ................................................ 53,000 15,000
Taxes payable ...................................................... 442,000 --
Accrued liabilities ................................................ 121,000 42,000
Deferred revenue ................................................... 434,000 --
---------- -----------
Total adjustments ................................................ 774,000 104,000
---------- -----------
Net cash provided by operating activities ................... 1,354,000 70,000
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... (41,000) (75,000)
Software development costs ............................................. (153,000) (48,000)
---------- -----------
Net cash used by investing activities ....................... (194,000) (123,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from (for) issuance of common stock ................ (228,000) 87,000
Payments on capital lease obligations .................................. (501,000) --
---------- -----------
Net cash provided (used) by financing activities ............ (729,000) 87,000
---------- -----------
NET INCREASE IN CASH EQUIVALENTS .......................................... 431,000 34,000
CASH AND CASH EQUIVALENTS, beginning of the period ........................ 372,000 35,000
---------- -----------
CASH AND CASH EQUIVALENTS, end of the period .............................. $ 803,000 $ 69,000
========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Capital lease obligations incurred ..................................... $5,759,000 $ --
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-17
<PAGE> 72
MAXXIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Maxxis Group, Inc., a Georgia corporation (the "Company"), was
incorporated on January 24, 1997 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
Communications, Inc., each of which began operations in March 1997, and
Maxxis Nutritionals, Inc., which began operations in November 1997. The
Company was founded for the purpose of providing long-distance
services, private label nutritional products, and other services and
consumable products through a multilevel marketing system of
independent associates ("IAs"). The Company's IAs currently market
communications and Internet services and nutritional and health
enhancement products.
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 IAs, and train and manage both
current and new IAs. Continued growth would place a significant strain
on the Company's operational resources and systems, and failure to
effectively manage any such growth would have a material adverse effect
on the Company's business, financial condition and results of
operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly the financial position of the Company as of September 30, 1998
and the results of the Company's operations and its cash flows for the
three-month periods ended September 30, 1998 and 1997 in conformity
with generally accepted accounting principles. The results of
operations are not necessarily indicative of the results to be expected
for the full fiscal year.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- -------------
<S> <C> <C>
Prepaid phone cards $ 74,000 $ 10,000
Sales aids 263,000 158,000
Nutritional products 388,000 76,000
------------ -------------
$ 725,000 $ 218,000
============ =============
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. These leases expire within five years and have purchase
options at the end of the original lease term. Assets under capital
leases are included in property and equipment in the September 30, 1998
consolidated balance sheet at a fair market value of approximately
$5,759,000.
F-18
<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 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);
A-1
<PAGE> 74
(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;
(iv) agrees that any attempted or purported transfer not made in
accordance with the terms of this Subscription Agreement shall be void and of no
force or effect, and the Company shall have no obligation whatsoever to
recognize any such attempted or purported transfer; and
(v) 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. ANY ATTEMPTED OR PURPORTED
TRANSFER OF THESE SHARES THAT IS NOT MADE IN ACCORDANCE WITH THE TERMS
OF THE SUBSCRIPTION AGREEMENT SHALL BE VOID AND OF NO FORCE OR EFFECT,
AND THE ISSUER SHALL HAVE NO OBLIGATION WHATSOEVER TO RECOGNIZE ANY
SUCH ATTEMPTED OR PURPORTED TRANSFER.
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
A-2
<PAGE> 75
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 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. As a condition to allowing
any transfer of Shares, the Company may require the proposed transferee to agree
in writing to the restrictions set forth in this Subscription Agreement.
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. The undersigned subscriber and the Company hereby
consent to the jurisdiction of the state and federal courts sitting in the State
of Georgia.
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:
----------------------------------- -------------------------------------------------------------
Signature of Subscriber(s)* (L.S.)
- ----------------------------------------- -------------------------------------------------------------
Social Security Number or Federal Signature of Subscriber(s)* (L.S.)
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 the 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
<TABLE>
<S> <C>
=========================================================== ==========================================================
YOU SHOULD RELY ONLY ON THE INFORMATION 450,000 SHARES
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO
SELL, OR SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK
ONLY IN JURISDICTIONS WHERE OFFERS OR SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR
ANY SALE OF OUR COMMON STOCK.
[LOGO]
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR
TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
COMMON STOCK
------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................ 3
Risk Factors...................................... 7
The Offering...................................... 19
Use of Proceeds................................... 22
Dividend Policy................................... 22
Capitalization.................................... 23
Dilution.......................................... 23 P R O S P E C T U S
Selected Consolidated Financial Data.............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................. 25
Business.......................................... 32
Management........................................ 42
Certain Transactions.............................. 47
Principal Shareholders............................ 48
Description of Capital Stock...................... 49
Shares Eligible for Future Sale................... 52
Legal Matters..................................... 52
Experts........................................... 53
Additional Information............................ 53
Index to Financial Statements..................... F-1 , 1999
Subscription Agreement............................ A-1
=========================================================== ==========================================================
</TABLE>
<PAGE> 79
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table 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>
SEC Registration Fee.......................................... $ 758
Blue Sky Fees and Expenses.................................... 50,000*
Printing and Engraving........................................ 80,000*
Legal Fees and Expenses....................................... 200,000*
Accounting Fees and Expenses.................................. 150,000*
Miscellaneous................................................. 242*
-------------
Total................................................... $ 481,000*
=============
</TABLE>
- --------------------
* Estimated for filing purposes.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code, as amended, (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 Amended and Restated Articles of Incorporation
(the "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 Amended and Restated Bylaws (the "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. 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.
II-1
<PAGE> 80
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 AND FINANCIAL STATEMENT SCHEDULES
(a) 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.
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.
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
<S> <C>
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.+
10.11R* 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.
10.15R* 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.
10.18** Maxxis Group, Inc. 1998 Stock Option Plan.
10.19** Lease Amendment Agreement dated June 5, 1998 among Malon D. Mimms, the Company and Richard
Bowers & Co.
10.20** Lease Amendment Agreement dated August 14, 1998 among Malon D. Mimms, the Company and
Richard Bowers & Co.
10.21# Software Purchase Agreement between UsefulWare Incorporated and the Company dated as of
August 13, 1998.+
10.22# Asset Purchase Agreement by and among Cherry Communications Incorporated ("Cherry"), World
Access, Inc. ("World Access") and the Company dated as of September 29, 1998.
10.23# Promissory Note by the Company in favor of Cherry dated September 29, 1998.
10.24# Security Agreement between the Company and World Access dated as of September 29, 1998.
10.25# Software License Agreement between Alcatel USA Marketing, Inc. and the Company dated as of
September 29, 1998.
10.26# Sublease between Cherry and the Company dated as of September 30, 1998.
10.27# Master Lease Agreement between Rockford Industries, Inc. and the Company dated as of
September 29, 1998 (World Access).
10.28# Master Lease Agreement between Rockford Industries, Inc. and the Company dated as of
September 29, 1998 (NACT Telecommunications, Inc.).
10.29# Employment Agreement between Daniel McDonough and the Company dated as of October 13, 1998.
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).
</TABLE>
II-3
<PAGE> 82
<TABLE>
<S> <C>
24.1* Power of Attorney.
27.1** Financial Data Schedule for period ended June 30, 1998.
27.2# Financial Data Schedule for period ended September 30, 1998.
</TABLE>
- -------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-38623).
** Incorporated by reference to the Company's Form 10-K for the year ended
June 30, 1998 as filed with the Commission on September 25, 1998.
# Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1998 as filed with the Commission on November 11, 1998.
+ 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.
(b) Financial Statement Schedules.
All schedules have been omitted as they were not required or not
applicable or because the information required to be presented is
included in the Consolidated Financial Statements and the related
Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) 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
Securities 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.
II-4
<PAGE> 83
(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 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-5
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Atlanta, State of Georgia, on the 8th day of
December, 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
Post-Effective Amendment No. 1 to the 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 December 8, 1998
- --------------------------------------------------
Ivey J. Stokes
/s/ Thomas O. Cordy Chief Executive Officer, President December 8, 1998
- -------------------------------------------------- and Director (Principal executive
Thomas O. Cordy officer)
* Chief Operating Officer and Director December 8, 1998
- --------------------------------------------------
Alvin Curry
/s/ Daniel McDonough Chief Financial Officer and December 8, 1998
- -------------------------------------------------- Secretary (Principal financial and
Daniel McDonough accounting officer)
* Director December 8, 1998
- --------------------------------------------------
Charles P. Bernstein
* Director December 8, 1998
- --------------------------------------------------
Larry W. Gates, II
* Director December 8, 1998
- --------------------------------------------------
Robert J. Glover, Jr.
* Director December 8, 1998
- --------------------------------------------------
Terry Harris
</TABLE>
II-6
<PAGE> 85
<TABLE>
<S> <C> <C>
* Director December 8, 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 on
October 24, 1997)
</TABLE>
II-7
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF MAXXIS GROUP, INC.
Maxxis 2000, Inc., a Georgia corporation and wholly owned subsidiary of
Maxxis Group, Inc. ("Maxxis").
Maxxis Communications, Inc., a Georgia corporation and wholly owned
subsidiary of Maxxis.
Maxxis Nutritionals, Inc., a Georgia corporation and wholly owned
subsidiary of Maxxis.
<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 a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 8, 1998
