<PAGE> 1
As filed with the Securities and Exchange Commission on January 8, 1998
Registration No. 333-38623
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
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)
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<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) 552-4766
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 552-4766
(770) 552-8471 (Fax)
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------------
Copies of all correspondence to:
Glenn W. Sturm, Esq.
James Walker IV, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 817-6000
(404) 817-6050 (Fax)
------------------------------------
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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 8, 1998
PROSPECTUS
5,000,000 SHARES
[MAXXIS LOGO]
CLASS B COMMON STOCK
This Prospectus relates to the offering (the "Offering") of 5,000,000 shares
of Class B Common Stock, no par value per share (the "Class B Common Stock" or
the "Shares"), of MAXXIS GROUP, INC., a Georgia corporation (the "Company"). All
of the Shares offered hereby are being sold by the Company. The Class B Common
Stock entitles holders to one vote per share, whereas the Class A Common Stock,
no par value per share (the "Class A Common Stock"), entitles holders to ten
votes per share. The Class A Common Stock and Class B Common Stock vote as a
single class with respect to substantially all matters submitted to a vote of
the shareholders. Following the Offering, assuming the sale of 5,000,000 Shares
offered hereby, the directors and executive officers and relatives and
affiliates of directors and executive officers of the Company and its
subsidiaries, acting as a group and by reason of their ownership of Class A
Common Stock, will hold approximately 71.6% of the combined voting power (on a
fully diluted basis) of the
(cover continued on next page)
SEE"RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS, INCLUDING THE RISK OF SUBSTANTIAL DILUTION, THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....... $0.50 $ - $0.50
- -------------------------------------------------------------------------------
Total........... $2,500,000 $ - $2,500,000
===============================================================================
</TABLE>
(1) The offering price has been arbitrarily established by the Company. See
"Risk Factors - Arbitrary Determination of Offering Price."
(2) This Offering is expected to be made on behalf of the Company solely by
certain of its directors and executive officers, to whom no commission or
other compensation will be paid on account of such activity, although
they will be reimbursed for reasonable expenses incurred in connection
with such activity. The Company believes such participating officers and
directors shall not be deemed brokers under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), based on reliance on Rule 3a4-1
of the Exchange Act.
(3) Before deducting estimated expenses of $400,000 related to the Offering.
See "Use of Proceeds."
PROSPECTIVE PURCHASERS MUST EXECUTE A SUBSCRIPTION AGREEMENT (A "SUBSCRIPTION
AGREEMENT") IN ORDER TO OFFER TO PURCHASE SHARES. ONCE A SUBSCRIPTION AGREEMENT
IS RECEIVED BY THE COMPANY, A PROSPECTIVE PURCHASER WILL NOT HAVE THE RIGHT TO
REVOKE OR WITHDRAW SUCH SUBSCRIPTION AGREEMENT. ANY SUBSCRIPTION AGREEMENT MAY
BE REJECTED BY THE COMPANY FOR ANY REASON OR NO REASON WHATSOEVER. ACCEPTANCE OF
ANY PARTICULAR SUBSCRIPTION AGREEMENT BY THE COMPANY SHALL IN NO CASE REQUIRE
THE COMPANY TO ACCEPT ANY OTHER SUBSCRIPTION AGREEMENT. PROSPECTIVE PURCHASERS
MUST WARRANT IN THE SUBSCRIPTION AGREEMENT THAT THEY HAVE RECEIVED A COPY OF
THIS PROSPECTUS, AS AMENDED OR SUPPLEMENTED. SEE "THE OFFERING - HOW TO
SUBSCRIBE."
No escrow account has been established, and all subscription funds will be
paid directly to the Company. Upon acceptance of a subscription by the Company,
subscription proceeds will be available for immediate use by the Company. There
can be no assurance that the Company will receive sufficient proceeds from the
Offering to fund any of the stated purposes of the Offering. See "Use of
Proceeds." In addition, there is no minimum number of Shares which must be sold
in this Offering, and there can be no assurance that any or all of the Shares
offered hereby will be sold. Once the Company accepts a subscription, the
Company will not refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares offered hereby are sold
prior to the termination of the Offering. See "The Offering - No Escrow" and
"Risk Factors - No Minimum Offering Amount; Irrevocability of Subscriptions; No
Escrow."
The date of this Prospectus is , 1998
<PAGE> 3
(cover continued from previous page)
Company with respect to substantially all matters submitted to a vote of the
shareholders. See "Risk Factors - Management will Maintain Control of the
Company; Voting Rights of Class A and Class B Common Stock" and "Description of
Capital Stock."
Prior to this Offering, there has been no public market for the Shares,
and it is currently anticipated that there will be no active trading market for
the Shares. The price of the Shares has been arbitrarily established by the
Company and does not necessarily bear any relationship to the Company's asset
value, net worth or other established criteria of value. See "Risk Factors -
Arbitrary Determination of Offering Price."
Sales of the Shares are expected to commence on or about January 31,
1998. This is a "best efforts" offering by the Company, and it will expire on
December 31, 1998, unless terminated earlier or extended by the Company for
additional 90-day periods ending no later than December 31, 2000. The Company
reserves the right to terminate the Offering at any time.
The Company intends to offer the Shares primarily to individuals who
are regional and executive directors of the Company. The Company has established
a minimum subscription of 200 Shares and maximum subscriptions of 200 Shares and
2,000 Shares, respectively, for each person who qualifies as a regional or
executive director in the Company's marketing system; provided, that the
aggregate number of Shares sold in this Offering shall not exceed 5,000,000.
However, the Company reserves the right to not sell to any particular regional
or executive director, to waive the maximum subscription amount or to allocate
additional Shares to regional and executive directors without notifying any
purchaser or prospective purchaser. See "The Offering."
------------------------------------
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Exchange Act. The Company has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (which term
shall include any amendments thereto) on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Shares to be
offered pursuant hereto. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Shares, reference is made to the Registration
Statement, including the exhibits and schedules thereto, copies of which may be
examined without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http:\\www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is not a reporting company as defined by the Commission.
The Company intends to furnish holders of the Shares with annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
The Company has applied for federal registration for the mark "MAXXIS."
This Prospectus includes product names and other trade names and trademarks of
the Company and of other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including "Risk Factors" and the
consolidated financial statements and related notes thereto, appearing elsewhere
in this Prospectus. Currently, Maxxis Group, Inc. conducts all of its business
and operations through its wholly owned subsidiaries: Maxxis 2000, Inc. ("Maxxis
2000"); Maxxis Telecom, Inc. ("Maxxis Telecom"); and Maxxis Nutritional, Inc.
("Maxxis Nutritional"). Unless the context indicates otherwise, all references
to the "Company" or "Maxxis" refer to Maxxis Group, Inc. and its subsidiaries.
The Class A Common Stock and Class B Common Stock are sometimes collectively
referred to herein as the "Common Stock." On October 8, 1997, the Company
effected a five-for-one reverse stock split for all outstanding shares of Common
Stock. All share and per share data have been adjusted to reflect this
five-for-one reverse stock split.
THE COMPANY
Maxxis markets telecommunications services and nutritional products in
the United States through its multi-level network marketing system of
"independent associates," or "IAs." The Company currently operates through its
subsidiaries: Maxxis 2000, which conducts network marketing operations; Maxxis
Telecom, which provides long distance services; and Maxxis Nutritional, which
provides private label nutritional products. The Company currently markets
1-Plus long distance service, value-added telecommunications services, such as
prepaid phone cards, and nutritional products. The Company was incorporated in
January 1997 and began sponsoring IAs and marketing telecommunications services
in March 1997. For the period of January 24, 1997 to June 30, 1997 (the
"Inception Period") and the quarter ended September 30, 1997, the Company had
generated aggregate gross revenues of approximately $2,691,000 and $1,818,000,
respectively.
The Company initially intends to build a customer base without having to
commit capital or management resources to construct its own telecommunications
network and transmission facilities. In February 1997, Maxxis Telecom contracted
with Colorado River Communications, Corp. ("CRC") to obtain switching and
network services and to allow CRC's telecommunications services to be sold by
the Company's IAs. In the future, the Company may contract with other providers
of long distance services and intends to analyze the feasibility of developing
its own long distance network. In November 1997, the Company began marketing
several private label dietary supplements to its customers and IAs. The
Company's nutritional products are manufactured by various suppliers. Also, in
December 1997, the Company started marketing certain internet related services
to its IAs.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's network marketing system because of the potential for supplemental
income and because the IAs are not required to purchase any inventory, have no
monthly sales quotas or account collection issues, have minimal required
paperwork and have a flexible work schedule. The Company encourages IAs to
enroll subscribers with whom the IAs have an ongoing relationship, such as
family members, friends, business associates and neighbors. The Company also
sponsors opportunity meetings at which current IAs are encouraged to bring in
potential candidates for an introduction to the Company's marketing system. The
Company's network marketing system and the Company's reliance upon IAs are
intended to reduce net marketing costs, subscriber acquisition costs and
subscriber attrition. The Company believes that its network marketing system
will build a base of potential customers for additional services and products.
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing to
support the marketing efforts of IAs and introducing new
income opportunities for IAs.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of IAs.
3
<PAGE> 5
- Offering Additional Telecommunications Products by entering into
agreements for the marketing of additional products that meet the
needs of subscribers, which may include, among others, paging,
conference calling, wireless cable, cellular and local phone
service.
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the Company
recently began marketing a line of private label nutritional
products to its customers and IAs and certain internet related
services to its IAs.
- Obtaining Competitive Prices on products and services through the
purchasing power of the Company's nationwide network.
Currently, the Company has five IA positions in its marketing system:
associate; senior associate; director; regional director; and executive
director. A director increases the size of the director's sales organization by
sponsoring additional persons to become senior associates. These senior
associates, and all senior associates that they, in turn, sponsor, become part
of the sales organization of the director who sponsored them. Senior associates,
through the growth of their sales organizations, may become directors, regional
directors or executive directors and thereby increase the size of the sales
organization of the person who was their original sponsor. The organization that
grows below each director through this process is called a "downline."
IAs are paid only by commissions and do not receive any salary from the
Company. All IA commissions are paid directly by the Company and are a specified
percentage or a designated amount of the gross proceeds received by the Company
on the sale of services and products. The Company designates a portion of its
gross commissions as "commission value," or "CV," and allocates the CV among
eligible participants in its marketing system. Currently, 20% of the CV earned
with respect to a long distance subscriber is paid weekly to the IA who
sponsored such subscriber, 75% of the CV is paid monthly to eligible directors
who have the IA who sponsored the subscriber in their downline and the remaining
5% is retained by the Company to be paid out to directors, regional directors
and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as marketing directors ("MDs") are eligible to receive an
additional "Leadership Bonus." The Leadership Bonus is payable quarterly and
equals, in the aggregate, 1% of the total revenues of Maxxis 2000 during the
quarter. The Leadership Bonus is divided equally among all directors, regional
directors and executive directors who qualify for a Leadership Bonus. In order
to encourage the growth of the Company's marketing system, the Company also pays
eligible directors a weekly bonus amount, which is designated as "bonus value,"
or "BV," for each sale of bonus-eligible products. The Company currently
designates retail priced phone cards, nutritional paks and certain internet
related services as bonus-eligible products.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The Company
provides training to all IAs which includes a detailed explanation of the
Company's products, the IA compensation plan and the use of the various
marketing tools available to the IA. The Company encourages senior associates,
directors and regional directors to become MDs. MDs provide personal training to
IAs. To become a MD, a senior associate, director or regional director must
attend a Company approved training school. The fee to attend the training school
is currently $99, and MDs must attend continuing education training schools each
year which also are subject to a fee. National training directors that are
selected by the Company are paid a fee by the Company for training MDs. The
Company does not receive any fees from IAs for the training provided by MDs.
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
As of December 31, 1997, the Company employed approximately 26 people,
not including IAs who are classified by the Company as independent contractors.
The Company's employees are not unionized, and the Company believes its
relationship with its employees is good.
The Company's principal executive office is located at 1901 Montreal
Road, Suite 108, Tucker, Georgia 30084, and its telephone number is (770)
552-4766.
4
<PAGE> 6
THE OFFERING
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Class A Common Stock outstanding.................. 14,300,000 shares
Class B Common Stock outstanding.................. 2,983,333 shares
Class B Common Stock to be
offered hereby.................................. 5,000,000 shares
Common Stock to be Outstanding after
the Offering.................................... 22,283,333 shares
Use of Proceeds................................... Development of
additional product
lines, including an
internet access product;
development and/or
acquisition of
information, accounting
and/or inventory control
systems; and for working
capital and general
corporate purposes.
There can be no
assurance that the
Company will receive
sufficient proceeds from
the Offering to fund any
of the proposed uses of
proceeds. See "Use of
Proceeds."
Terms of the Offering; Irrevocability
of Subscriptions................................. Prospective purchasers
must deliver to the
Company a completed and
executed Subscription
Agreement, the form of
which is attached hereto
as Appendix A. An
executed Subscription
Agreement will
constitute a prospective
purchaser's offer to
purchase shares of Class
B Common Stock as set
forth in this
Prospectus. Prospective
purchasers submitting
completed and executed
Subscription Agreements
will not have the right
to revoke or withdraw
such Subscription
Agreements. See "The
Offering - General."
No Minimum Offering Amount;
No Escrow........................................ There is no minimum
number of Shares which
must be sold in this
Offering, and there can
be no assurance that any
or all of the Shares
offered hereby will be
sold. No escrow account
has been established,
and all subscription
funds will be paid
directly to the Company.
Upon acceptance of a
subscription by the
Company, subscription
proceeds will be
available for immediate
use by the Company. Once
the Company accepts a
subscription, the
Company will not refund
the funds received in
payment for such
subscription in the
event that less than the
maximum number of Shares
offered hereby are sold
prior to the termination
of the Offering. See
"The Offering - No
Escrow" and "Risk
Factors - No Minimum
Offering Amount;
Irrevocability of
Subscriptions; No
Escrow."
</TABLE>
5
<PAGE> 7
<TABLE>
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Transfer Restrictions............................. Each certificate
evidencing the Shares
will bear a legend
restricting the transfer
of the Shares to
individuals in any
jurisdiction where the
offer or sale of the
Shares would be unlawful
prior to registration or
qualification of such
offer or sale under the
laws of any such
jurisdiction. In
addition, pursuant to
the Subscription
Agreement, each
purchaser of the Shares
offered hereby agrees
not to sell or otherwise
transfer the Shares or
any securities issued on
account of such Shares
during the Lock-up
Period (as defined
herein). The Company may
impose transfer
restrictions during the
Lock-up Period by giving
notice to the holders of
record of the Shares.
The certificates
evidencing the Shares
will bear a legend
referencing these
potential restrictions
on transfer. See "Risk
Factors - Absence of
Trading Market; Transfer
Restrictions" and "The
Offering - Transfer
Restrictions."
Plan of Distribution.............................. Offers and sales of the
Class B Common Stock
will be made on behalf
of the Company by
certain of its officers
and directors. The
officers and directors
will receive no
commissions or other
remuneration in
connection with such
activities, but they
will be reimbursed for
reasonable expenses
incurred in connection
with the Offering. See
"The Offering - Plan of
Distribution."
Voting Rights of Class A Common
and Class B Common Stock........................ On all matters with
respect to which the
Company's shareholders
have a right to vote,
including the election
of directors, each share
of Class A Common Stock
is entitled to ten
votes, while each share
of Class B Common Stock
is entitled to one vote.
Except as otherwise
required by law or
expressly provided in
the Amended and Restated
Articles of
Incorporation of the
Company, as amended (the
"Articles"), the Class A
Common Stock and Class B
Common Stock vote
together as a single
class with respect to
substantially all
matters submitted to a
vote of the
shareholders. See "Risk
Factors - Management
will Maintain Control of
the Company; Voting
Rights of Class A and
Class B Common Stock"
and "Description of
Capital Stock."
</TABLE>
RISK FACTORS
Prospective purchasers of the Class B Common Stock should carefully
consider the matters set forth herein under "Risk Factors," as well as the other
information set forth in this Prospectus.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period is derived from the audited consolidated financial statements
and other data of the Company. The consolidated financial statements for the
Inception Period were audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the quarter ended September
30, 1997 and the balance sheet data as of September 30, 1997 have been derived
from the unaudited condensed consolidated financial statements of the Company
which include all adjustments, consisting of only normal recurring adjustments,
which the Company considers necessary for a fair presentation of the results of
operations for the period. Results for interim periods are not necessarily
indicative of the results to be expected for a full fiscal year. The following
summary consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto appearing elsewhere in this Prospectus.
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<CAPTION>
JANUARY 24, 1997 QUARTER
(INCEPTION) ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunication services .............. $ 2,322,000 $ 1,465,000
Marketing services ...................... 369,000 353,000
------------ ------------
Total revenues ....................... 2,691,000 1,818,000
------------ ------------
Cost of services:
Telecommunication services .............. 761,000 438,000
Marketing services ...................... 255,000 100,000
------------ ------------
Gross margin .............................. 1,675,000 1,280,000
------------ ------------
Operating expenses:
Selling and marketing ................... 1,089,000 716,000
General and administrative .............. 660,000 598,000
------------ ------------
Total operating expenses ............. 1,749,000 1,314,000
------------ ------------
Loss before income tax benefit ............ (74,000) (34,000)
Income tax benefit ........................ -- --
------------ ------------
Net loss .................................. $ (74,000) $ (34,000)
============ ============
PER SHARE DATA:
Net loss per share ........................ $ 0.00 $ 0.00
============ ============
Weighted average number of
shares outstanding ...................... 17,283,333 17,283,333
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital............................... $ (33,000)
Property and equipment, net................... 164,000
Total assets.................................. 839,000
Long-term obligations......................... -
Shareholders' equity.......................... 346,000
</TABLE>
7
<PAGE> 9
RISK FACTORS
Before purchasing any Shares offered by this Prospectus, prospective
purchasers should carefully consider the following factors relating to the
Company and the Offering, together with the other information and financial data
appearing elsewhere in this Prospectus.
NEW ENTERPRISE
The Company currently is in the organizational stage and has a limited
operating history. As a consequence, prospective purchasers of the Shares have
limited information upon which to base an investment decision. The Company's
operations are subject to the risks inherent in the establishment of any new
business. The Company expects that it will incur substantial initial expenses,
and there can be no assurance that the Company will achieve or maintain
profitability. There can be no assurance that the products or services offered
by the Company will receive market acceptance or that the Company's prices and
demand for products and services offered by the Company will be at a level
sufficient to provide profitable operations. The Company has entered into an
agreement with CRC, a provider of switching and network transmission services,
and the Company purchases its private label nutritional products from several
manufacturers. However, there can be no assurance that the Company will be able
to maintain these relationships or enter into new contracts with other suppliers
on terms acceptable to the Company or at all. See "- Dependence upon Suppliers,"
"Business Competition," "- Strategy" and "- Products and Services."
The Company will use the proceeds of the Offering, in part, to pay
organizational and offering expenses in connection with the start-up of the
Company's business and, in particular, the establishment of the Company's
network marketing system. The Company believes that the proceeds of the
Offering, together with cash generated through operations, will be sufficient to
enable the Company to pay organizational and offering expenses and to fund
continued operations, including the development of additional product lines.
However, there can be no assurance that the Company will generate sufficient
proceeds from this Offering and its ongoing operations to establish its network
marketing system or to maintain its operations, or that the Company's business
will be successful. See "- Broad Discretion in Application of Proceeds; Possible
Need for Additional Capital" and "Use of Proceeds."
NO MINIMUM OFFERING AMOUNT; IRREVOCABILITY OF SUBSCRIPTIONS; NO ESCROW
There is no minimum number of Shares which must be sold in this Offering,
and there can be no assurance that any or all of the Shares offered hereby will
be sold. Once a Subscription Agreement is received by the Company, a prospective
purchaser will not have the right to revoke or withdraw such Subscription
Agreement. In addition, the Company reserves the right to reject, in whole or in
part and in its sole discretion, any subscription. No escrow account has been
established, and all subscription funds will be paid directly to the Company.
Upon acceptance of a subscription by the Company, subscription proceeds will be
available for immediate use by the Company. Once the Company accepts a
subscription, the Company will not refund the funds received in payment for such
subscription in the event that less than the maximum number of Shares offered
hereby are sold prior to the termination of the Offering. See "The Offering - No
Escrow."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; POSSIBLE NEED FOR ADDITIONAL
CAPITAL
The Company intends to use: (i) approximately $900,000, or 42.9%, of the
net proceeds for the development of additional product lines, including an
internet access product; (ii) approximately $500,000, or 23.8%, of the net
proceeds for the development and/or acquisition of information, accounting
and/or inventory control systems; and (iv) approximately $700,000, or 33.3%, of
the net proceeds for working capital and general corporate purposes. However,
the specific uses for much of the net proceeds will be at the complete
discretion of the Board of Directors of the Company and may be allocated based
upon circumstances arising from time to time in the future. The Company may in
the future utilize a portion of the net proceeds of the Offering to pursue
acquisitions or complementary services or businesses. Future acquisitions may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt, the write-off of costs and the amortization of expenses related
to goodwill and other intangible assets, all of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company currently
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has no agreements or understandings with regard to any acquisitions.
Shareholders may not be able to vote on any potential acquisitions (unless
required by applicable law) nor have the opportunity to review any potential
acquisition candidate. See "Use of Proceeds."
In addition, there can be no assurance that the Company will receive
enough proceeds from the Offering to fund any of the proposed uses of proceeds,
including raising enough proceeds to cover the estimated offering expenses. If
the Company is not able to raise enough proceeds from the Offering to fund its
operations, the Company may need to raise additional capital. Sources of
additional capital may include venture capital financing, cash flow from
operations, lines of credit and private equity and debt financings. The Company
may also require additional financing in the event it decides to develop
additional product lines. The extent of additional financing required will
depend partially on the success of the Company's business. There can be no
assurance that additional financing will be available to the Company or, if
available, that it can be obtained on terms acceptable to the Company. The
Company's ability to obtain additional capital on terms favorable to the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
NET LOSS; ACCUMULATED DEFICIT; NEGATIVE WORKING CAPITAL
At September 30, 1997, the Company had a net loss of $34,000, an
accumulated deficit of $108,000 representing accumulated losses from operations
during the Inception Period and the quarter ended September 30, 1997, and
negative working capital of $33,000. See "Selected Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company's operating expenses have increased as
its business has grown and can be expected to increase significantly if the
Company continues to grow. There is no assurance that future operating results
will result in a profit, will eliminate the accumulated deficit or will generate
positive working capital or that additional losses from operations will not be
sustained by the Company, each of which would result in further increases of
such accumulated deficit and negative working capital.
DEPENDENCE ON IAS
The Company's success depends heavily upon its ability to attract,
maintain and motivate a large base of IAs who, in turn, sponsor subscribers,
customers and other IAs. The Company anticipates a significant turnover among
IAs, which the Company believes is typical of businesses involved in direct
selling. The Company encourages existing IAs to sponsor new IAs in order to
maintain or increase the overall IA force. Activities of the IAs in obtaining
new subscribers will particularly be influenced by changes in the level of IA
motivation, which in turn can be positively or negatively affected by general
economic conditions, modifications in commission and training fees and in the
Company's marketing plan, the prices and competitive positions of the products
and services offered by the Company and a number of other intangible factors.
The Company's ability to attract IAs could be negatively affected by adverse
publicity relating to the Company or its services or its operations, including
its network marketing system. Administrative or technological problems of the
type that may be encountered by both early stage and mature companies, such as
malfunctions in accounting systems or computer information systems, may lead to
the immediate and dramatic attrition of IAs and subscribers. The Company has
begun establishing its network of IAs. However, there can be no assurance that
the Company will be successful in establishing a viable network of IAs. Because
of the number of factors that affect the Company's ability to attract and retain
IAs, the Company cannot predict when or to what extent increases or decreases in
the level of IA retention or attrition will occur. In addition, the number of
IAs as a percentage of the population could reach levels that become difficult
to exceed due to the finite number of persons inclined to pursue an independent
direct selling business opportunity. There can be no assurance that the number
or productivity of IAs will be sufficient to support the Company's proposed
products and services in the future or to allow the Company to achieve its
objectives.
The Company is subject to competition for IAs from other network
marketing organizations, including those that market long distance services,
health products, cosmetics and dietary supplements, such as EXCEL
Communications, Inc. ("EXCEL"), American Communications Network ("ACN"), Amway
Corporation ("Amway"), TDG Communications ("TDG"), BeautiControl Cosmetics,
Inc., Herbalife International, Inc.
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("Herbalife") and Mary Kay, Inc. EXCEL representatives sell a variety of long
distance telecommunications services, ACN representatives sell long distance
services for LCI International, Inc. ("LCI") and other long-distance carriers,
Amway distributors sell 1-Plus long distance service for MCI Communications
Corporation ("MCI"), TDG sells MCI Paging Services and the MCI VNet Calling
Cards and Herbalife markets food and dietary supplements. See "Business -
Strategy," "- Marketing" and "- Regulation."
RELATIONSHIP WITH IAS
Because IAs are classified as independent contractors, the Company is
unable to provide them the same level of direction and oversight as Company
employees. While the Company has policies and rules in place governing the
conduct of the IAs and intends to review periodically the sales tactics of the
IAs, it may be difficult to enforce such policies and rules. Violations of these
policies and rules might reflect negatively on the Company and may lead to
complaints to or by various federal and state regulatory authorities. Violation
of the Company's policies and rules could subject the Company and its long
distance provider to complaints regarding the unauthorized switching of
subscribers' long distance carriers (also known in the industry as "slamming").
Such complaints could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Relationship with
IAs."
REGULATION OF NETWORK MARKETING; EFFECT OF STATE SECURITIES LAWS
The Company's 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 also could be found not to be in compliance
with existing statutes or regulations as a result of, among other things,
misconduct by IAs, who are considered independent contractors over whom the
Company has limited control, the ambiguous nature of certain of the regulations
and the considerable interpretive and enforcement discretion given to
regulators. Any assertion or determination that the Company or the IAs are not
in compliance with existing statutes or regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations. An adverse determination by any one state on any regulatory matter
could influence the decisions of regulatory authorities in other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its network marketing system could be found to be in
noncompliance with applicable laws and regulations, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such a decision could require the Company to modify its network
marketing system, result in negative publicity, or have a negative effect on
distributor morale and loyalty. In addition, the Company's network marketing
system will be subject to regulations in foreign markets administered by foreign
agencies should the Company expand its network marketing organization into such
markets. See "Business - Marketing" and "- Regulation - Regulation of Network
Marketing."
The primary goal of the Offering is to increase the motivation of
regional and executive directors by allowing them to purchase an interest in the
Company. Accordingly, because the Company desires the ability to offer its Class
B Common Stock to regional and executive directors in Alabama, California,
Florida, Georgia, Maryland, Michigan, New York, North Carolina, South Carolina,
Texas, Virginia and Washington, the Company has filed the Registration Statement
of which this Prospectus forms a part with the state securities regulators for
such states in order to apply for registration or qualification of the Offering
in such states. Due to the varying nature of state securities regulations and
the considerable discretion given to state securities regulators, the Company
anticipates that it will be unable to register or qualify the Offering in
certain of these states, and there can be no assurance that the Company will be
able to register or qualify the Offering in any of these
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states. The inability of the Company to offer and sell the Shares to residents
of certain states may limit the ability of the Company to attract IAs in such
states, or lead to increased attrition of IAs in such states, and may have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. An adverse determination by any one state
regulator on a securities regulatory matter could influence the decisions of
state regulatory authorities in other jurisdictions. See "Business - Regulation
Effect of State Securities Laws."
REGULATION AFFECTING NUTRITIONAL PRODUCTS
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's products are subject to regulation by a
number of governmental agencies, the most active of which is the Food and Drug
Administration (the "FDA"), which regulates the Company's products under the
Federal Food, Drug, and Cosmetic Act (the "FDCA") and regulations promulgated
thereunder. The Company's products are also subject to regulation by the Federal
Trade Commission (the "FTC"), the Consumer Product Safety Commission (the
"CPSC"), the United States Department of Agriculture (the "USDA"), and the
Environmental Protection Agency (the "EPA"). The FDCA has been amended several
times with respect to dietary supplements, most recently by the Nutrition
Labeling and Education Act of 1990 (the "NLEA") and the Dietary Supplement
Health and Education Act of 1994 (the "DSHEA"). The Company's products are
generally classified and regulated as dietary supplements under the FDCA, as
amended, and therefore are not subject to pre-market approval by the FDA.
However, these products are subject to extensive labeling regulation by the FDA
and can be removed from the market if shown to be unsafe. Moreover, if the FDA
determines on the basis of labeling or advertising claims by the Company, that
the "intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the FDA can regulate those
products as drugs and require pre-market clearance for safety and effectiveness.
In addition, if the FDA determines that claims have been made regarding the
effect of dietary supplements on the "structure or function" of the body, such
claims could result in the regulation of such products as drugs.
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's products. In the
past several years, the FTC has instituted enforcement actions against several
dietary supplement companies for false and misleading advertising of certain
products. In addition, the FTC has increased its scrutiny of the use of
testimonials. There can be no assurance that the FTC will not question the
Company's advertising or other operations. Moreover, there can be no assurance
that a state will not interpret product claims presumptively valid under federal
law as illegal under that state's regulations. Furthermore, the Company's
distributors and customers of distributors 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 distributors, consumers or others, including actions
resulting in entries of consent decrees and the refund of amounts paid by the
complaining distributor or consumer, refunds to an entire class of distributors
or customers, or other damages, as well as changes in the Company's method of
doing business. A complaint because of a practice of one distributor, whether or
not that practice was authorized by the Company, could result in an order
affecting some or all distributors in a particular state, and an order in one
state could influence courts or government agencies in other states. Proceedings
resulting from these complaints may result in significant defense costs,
settlement payments or judgments and could have a material adverse effect on the
Company's business, financial condition or results of operations. See "Business
- - Regulation - Regulation Affecting Nutritional Products."
INTENSE COMPETITION
The Company faces competition in the United States for both the products
and services it sells and for the sponsoring and retaining of independent
salespeople. The United States long distance telecommunications industry is
intensely competitive, rapidly evolving and subject to rapid technological
change. In addition, the industry is significantly influenced by the marketing
and pricing practices of the major industry participants. AT&T Corp. ("AT&T"),
MCI, Sprint Corporation ("Sprint") and WorldCom, Inc. ("WorldCom") are the
dominant competitors in the domestic long distance telecommunications industry.
All of these companies are significantly larger than the Company and have
substantially greater resources. According to a 1995 report by the Federal
Communications Commission (the "FCC"), AT&T, MCI, Sprint and WorldCom accounted
for
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approximately 56%, 17%, 10% and 5%, respectively, of total domestic long
distance revenue for calendar year 1994. Many of the Company's current and
potential competitors have longer operating histories, greater name recognition,
larger customer bases and substantially greater financial, personnel, marketing,
technical and other resources than the Company. These competitors employ various
means to attract new subscribers, including television and other advertising
campaigns, telemarketing programs, network marketing and cash payments and other
incentives. The Company's ability to compete effectively depends upon, among
other factors, its ability to offer high quality products and services at
competitive prices. There can be no assurance that the Company will be able to
compete successfully. See "Business - Competition."
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Telecommunications Act"),
that will allow local exchange carriers ("LECs"), including the Bell Operating
Companies ("BOCs"), to provide long distance telephone service inter-LATA (a
"LATA" is a Local Access and Transport Area), which will likely significantly
increase competition for long distance services. The new legislation also grants
the FCC the authority to deregulate other aspects of the telecommunications
industry. Such increased competition could have a material adverse effect on the
Company's business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs into the long distance market,
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such products, especially retail outlets, based
upon convenience of purchase, price and immediate availability of the purchased
product. For the most part, the Company's competitors offering comparable
products are substantially larger and have available considerably greater
financial resources than the Company. The market is highly sensitive to the
introduction of new products (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, the Company's
ability to remain competitive depends in part upon the successful introduction
of new products at competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. Although management believes
that the Company offers an attractive business opportunity, there can be no
assurance that other network marketing companies will not be able to convince
the Company's existing IAs to joint their organization or to deplete the pool of
potential IAs in a given market, and in such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business - Competition."
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DEPENDENCE UPON SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has entered into an agreement (the "1-Plus Agreement") with CRC to
obtain switching and network services. The Company now depends exclusively on
CRC for the transmission of subscriber phone calls and the activation of prepaid
phone cards. Subscribers are long distance customers on CRC's network, and CRC
provides subscriber support for the Company's subscribers. Subscribers have the
right to change their service at any time. The 1-Plus Agreement, which expires
on February 20, 2000, provides that the Company will have such rights to the
subscriber base developed under the agreement only upon achieving certain
minimum levels of monthly revenues on CRC's network. Once the Company reaches
these minimum levels, the Company will have the right to market other carriers
to the subscriber base in the event the Company contracts with such carriers.
There can be no assurance that the Company will achieve the minimum level of
monthly revenues on CRC's network necessary to obtain rights to the subscriber
base. Although the Company does not currently intend to use a different carrier,
minimum monthly revenues may be more difficult to maintain if the Company
utilizes additional carriers, and the Company could be subject to additional
minimum commitments including, but not limited to, minimum monthly revenues or
minimum monthly minutes of usage, with such new carriers. The accurate and
prompt billing of the subscribers originated by the IAs is also dependent upon
CRC. The failure of CRC to accurately and promptly bill subscribers could lead
to a loss of subscribers and could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
would be required to use another carrier if the 1-Plus Agreement is terminated,
the usage or number of subscribers originated by the Company's IAs exceeds the
capacity of CRC or CRC fails to provide quality services. In such event, or in
the event the Company otherwise elects to use other carriers, the cost paid by
the Company for such long distance services may exceed that paid under the
1-Plus Agreement. If the 1-Plus Agreement is terminated, there can be no
assurance that the Company could enter into new contracts with other providers
on terms favorable to the Company or at all, and the termination of the 1-Plus
Agreement or the failure of CRC to provide quality services, quality customer
support or accurate and timely billing could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business - Suppliers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are manufactured by third-party manufacturers pursuant to product
formulations developed for the Company. The Company does not have any written
contracts with any of its suppliers or manufacturers or commitments from any of
its suppliers or manufacturers to continue to sell products to the Company. The
Company believes that its relationships with its suppliers are satisfactory;
however, there can be no assurance that any or all of these suppliers will
continue to be reliable suppliers to the Company. Accordingly, there is a risk
that any or all of the Company's suppliers or manufacturers could discontinue
selling their products to the Company for any reason. In the event any of the
third-party manufacturers were to become unable or unwilling to continue to
provide the products in required volumes, the Company would be required to
identify and obtain acceptable replacement manufacturing sources, and no
assurance can be given that any alternative manufacturing sources would become
available to the Company on a timely basis. See "Business - Suppliers."
MANAGEMENT WILL MAINTAIN CONTROL OF THE COMPANY; VOTING RIGHTS OF CLASS A AND
CLASS B COMMON STOCK
Following the Offering, assuming the sale of 5,000,000 Shares offered
hereby, the directors and executive officers and relatives and affiliates of
directors and executive officers of the Company and its subsidiaries will own,
in the aggregate, 10,800,000 shares of Class A Common Stock and 60,000 shares of
Class B Common Stock which collectively represents approximately 48.7% of the
total outstanding shares of Common Stock, and investors purchasing in this
Offering would own 22.4% of the total outstanding shares of Common Stock. The
Class A Common Stock and Class B Common Stock vote as a single class with
respect to substantially all matters, including the election of directors,
submitted to a vote of the shareholders, with each share of Class A Common Stock
entitled to ten votes and each share of Class B Common Stock entitled to one
vote. Accordingly, assuming the sale of 5,000,000 Shares offered hereby, the
directors and executive officers and relatives and affiliates of directors and
executive officers of the Company and its subsidiaries, acting as a group, will
hold approximately 71.6% of the combined voting power (on a fully diluted basis)
of the Company
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and will have the ability to elect all of the directors of the Company and
control the Company's management, operations and affairs for the foreseeable
future. See "Principal Shareholders" and "Description of Capital Stock."
EFFECT OF UNFAVORABLE PUBLICITY
The Company believes the dietary supplement products market is affected
by national media attention regarding the consumption of such products. There
can be no assurance that future scientific research or publicity will not be
unfavorable to the dietary supplement market or any particular product, or be
inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable or that question earlier research
could have a material adverse effect on the Company's business, financial
condition or results of operations. Because of the Company's dependence upon
consumer perceptions, adverse publicity associated with illness or other adverse
effects resulting from the consumption of the Company's products, or any similar
products distributed by other companies, could have a material adverse effect on
the Company's business, financial condition or results of operations. Such
adverse publicity could arise even if the adverse effects associated with such
products result from failure to consume such products as directed. In addition,
the Company may not be able to counter the effects of negative publicity
concerning the efficacy of its products.
ABSENCE OF CLINICAL STUDIES
Although many of the ingredients in the Company's products are vitamins,
minerals, herbs and other substances for which there is a long history of human
consumption, some of the Company's products contain ingredients as to which
there is little history of human consumption. Accordingly, no assurance can be
given that the Company's products, even when used as directed, will have the
effects intended. Although the Company takes steps to ensure that the
formulation and production of its products are safe when consumed as directed,
generally the Company has not sponsored clinical studies on the long-term effect
of human consumption. See "- Effect of Unfavorable Publicity," and "- Product
Liability," and "Business Regulation."
ABILITY TO MANAGE GROWTH
The Company's goal is to develop a nationwide network of IAs and to offer
long distance telecommunications products, nutritional products and other
products and services throughout the United States. The Company's strategy of
growth and expansion will place substantial demands upon the Company's current
management and other resources and may require a substantial amount of working
capital, as well as management, operational and other financial resources. The
success of the Company will depend on various factors, including, among others,
federal and state regulation of the telecommunications industry, competition and
the capability and capacity of the Company's long distance carriers. Not all of
the foregoing factors are within the control of the Company. The Company's
ability to manage growth successfully will require the Company to develop strong
operational, management, financial and information systems and controls. No
assurance can be given that the Company will experience growth or that, if it
does, that management will be able to manage growth effectively. In such event,
the Company's business, financial condition and results of operations could be
materially adversely affected. See "Business - Strategy," "- Marketing," "-
Information Systems," "- Suppliers," "- Employees" and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the abilities and efforts of its senior management, particularly Ivey J.
Stokes, its Chairman of the Board, and Thomas O. Cordy, its Chief Executive
Officer and President. The Company does not maintain key man life insurance on
Mr. Stokes, Mr. Cordy or any other person. Many of the Company's executive
officers and other key employees, including the Company's Chief Financial
Officer, Daniel McDonough, have only recently joined the Company. The loss of
the services of any of such individuals could have a material adverse effect on
the Company's business, financial condition and results of operations. The
success of the Company will also depend, in part, upon the Company's ability to
find, hire and retain additional key management personnel. The inability to
find, hire and
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retain such personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management --
Executive Officers and Directors."
SUBSCRIBER ATTRITION
The Company believes that a high level of subscriber attrition is a
characteristic of the domestic residential long distance industry. Attrition is
attributable to a variety of factors, including the termination of subscribers
for non-payment and the initiatives of existing and new competitors as they
engage in, among other things, national advertising campaigns, telemarketing
programs and the issuance of cash or other forms of incentives. Such attrition
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
REGULATION OF LONG DISTANCE TELEPHONE SERVICES
Various regulatory factors may have an impact on the Company's ability to
compete and on its financial performance. CRC is subject to regulation by the
FCC and by various state public service and public utility commissions. Federal
and state regulations and regulatory trends have had, and may have in the
future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register or be found exempt from registration
by such commissions. While the Company believes that CRC is in compliance with
the applicable state and federal regulations governing telecommunications
service, and the Company believes that it is not required to obtain
certification or to be registered with public utility commissions, there can be
no assurance that the FCC or any state regulatory authority in one or more
states will not raise material issues with regard to CRC's or the Company's
compliance with applicable regulations, or that regulatory activities with
respect to CRC or the Company, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
In February 1996, the enactment of the 1996 Telecommunications Act served
to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended to
ensure that BOCs open their own local markets to competition before the FCC will
approve such application. The Company is unable to determine how the FCC will
rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "- Intense Competition." If the federal
and state regulations requiring the LECs to provide equal access for the
origination and termination of calls by long distance subscribers change or if
the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "Business - Competition" and "- Regulation - Regulation of Long
Distance Telephone Services."
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OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional products and services
in the future, which may include, among others, paging, wireless cable,
conference calling, cellular phone service, local phone service and other
non-communications related consumer products. In November 1997, the Company
began marketing a line of private label nutritional products to its customers
and its IAs. Also in December 1997, the Company started marketing certain
internet related services to its IAs. Entry into new markets entails risks
associated with the state of development of the market, intense competition from
companies already operating in those markets, potential competition from
companies that may have greater financial resources and experience than the
Company, increased selling and marketing expenses and regulatory issues. There
can be no assurance that: (i) the Company will be successful in developing and
marketing new products and services that respond to the needs of a particular
market; (ii) the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products
or services; or (iii) its new products and services will adequately meet the
requirements of the marketplace and achieve market acceptance. Delays in the
introduction of new products and services, the inability of the Company to
develop and market such new products or services and the failure of such
products or services to achieve market acceptance could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business - Competition," "- Strategy" and "- Products and Services."
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark "MAXXIS."
In addition, the Company relies upon common law rights to protect other marks
used by the Company and other rights that the Company considers to be its
intellectual property. There can be no assurance that the Company's measures to
protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. See "Business -
Proprietary Rights."
TRANSACTIONS WITH RELATED PARTIES
The Company has in the past entered into agreements and arrangements with
certain officers, directors and principal shareholders of the Company. Certain
of these transactions may have been made on terms more favorable to such
officers, directors and principal shareholders than could have been obtained
from an unaffiliated third party. The Company intends to adopt a policy
requiring that all material transactions between the Company and its officers,
directors or other affiliates must: (i) be approved by a majority of the
disinterested members of the Board of Directors of the Company; and (ii) be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. See "Certain Transactions."
ARBITRARY DETERMINATION OF OFFERING PRICE
The purchase price of the Class B Common Stock was arbitrarily determined
by the Company and does not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value. Each prospective
investor should make an independent evaluation of the fairness of such price. No
16
<PAGE> 18
assurance is or can be given that any of the shares will be able to be resold
for the offering price or for any other amount. See "Capitalization" and
"Dilution."
ABSENCE OF TRADING MARKET; TRANSFER RESTRICTIONS
There is currently no market for the Shares. Although the Company has
filed a Registration Statement with the Commission to register the issuance of
the Shares in the Offering under the Securities Act, it is unlikely that any
trading market will develop for the shares in the future. There are no present
plans for the Shares to be traded on any stock exchange or in the
over-the-counter market. As a result, investors who may need or wish to dispose
of all or part of their Shares may be unable to do so. In addition, sales of
substantial amounts of the Shares after the Offering could adversely affect
prevailing market prices, if any. See "Application of the Penny Stock Rules" and
"Shares Eligible for Future Sale."
Each certificate evidencing the Shares will bear a legend restricting the
transfer of the Shares to individuals in any jurisdiction where the offer or
sale of the Shares would be unlawful prior to registration or qualification of
such offer or sale under the laws of any such jurisdiction. In addition,
pursuant to the Subscription Agreement, each purchaser of the Shares offered
hereby agrees not to sell or otherwise transfer the Shares or any securities
issued on account of such Shares during the Lock-up Period (as defined herein).
The Company may impose transfer restrictions during the Lock-up Period by giving
notice to the holders of record of the Shares. A purchaser of the Shares offered
hereby will not be able to transfer such Shares during the Lock-up Period and
may have substantial difficulty transferring such Shares after the expiration of
the Lockup Period. The certificates evidencing the Shares will bear a legend
referencing these potential restrictions on transfer. See "The Offering -
Transfer Restrictions."
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors has authority to issue up to 10,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by the Company's shareholders. The rights of the holders of Class B Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. An issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company. See
"Description of Capital Stock Preferred Stock."
The Company's Amended and Restated Bylaws (the "Bylaws") provide for the
Company's Board of Directors to be divided into three classes, as nearly equal
in size as possible, with staggered three-year terms, and with one class being
elected each year. This classification of the Board of Directors could make it
more difficult for a third party to acquire control of the Company. The
Articles, Bylaws and the Georgia Business Corporation Code, as amended (the
"Georgia Law"), contain certain additional provisions that could have the effect
of making it more difficult for a party to acquire, or of discouraging a party
from attempting to acquire, control of the Company without approval of the
Company's Board of Directors. See "Description of Capital Stock - Certain
Provisions of the Articles, Bylaws and Georgia Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Class B Common Stock following the Offering could
adversely affect the price of the Company's Class B Common Stock. Upon
completion of the Offering, assuming 5,000,000 Shares offered hereby are sold,
the Company will have outstanding 7,983,333 shares of Class B Common Stock. Of
these shares, the 5,000,000 Shares offered hereby will be freely tradeable
without restriction or further registration under the Securities Act, unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
("Rule 144") under the Securities Act. The remaining 2,983,333 shares of Class B
Common Stock and all shares of Class A Common Stock outstanding upon completion
of the Offering are "restricted securities," as that term is defined in Rule
144. All of such restricted securities will be eligible for sale in the open
market under, and subject to the restrictions contained in, Rule 144.
17
<PAGE> 19
The Company and all of the holders of the Class A Common Stock have
entered into a shareholders agreement (the "Shareholders' Agreement") whereby
the shareholders agreed to certain restrictions on the transfer or other
disposition of the shares of Class A Common Stock held by each holder. In the
event a shareholder intends to transfer his or her Class A Common Stock to a
non-permitted transferee, the Company and the remaining shareholders have a
right of first refusal to purchase the transferring shareholder's Class A Common
Stock at fair market value. In addition, if the Company terminates a
shareholder's employment or engagement as a sales representative or consultant
for cause (or the employment or engagement of certain persons associated with a
shareholder), the Company shall have the right to repurchase, at fair market
value, a percentage of the shareholder's Class A Common Stock which begins at
100% and declines 20% per year for each completed year of service with the
Company. If either the right of first refusal or the Company's right to purchase
is exercised, either provision could have the effect of further concentrating
the stock ownership and voting power of the Company. See "Description of Capital
Stock - Shareholders' Agreement" and "Shares Eligible for Future Sale."
DILUTION TO NEW INVESTORS
Investors purchasing shares of Class B Common Stock in the Offering will
experience immediate and substantial dilution of $0.39 per share in net tangible
book value, or 78% of the initial public offering price of $0.50 per share. In
addition, the Board of Directors of the Company has the authority to issue up to
700,000 additional shares of Class A Common Stock and up to 177,056,667
additional shares of Class B Common Stock, and such amounts may be increased and
new securities may be authorized in the future upon the determination of the
Board of Directors with the consent of the shareholders. See "- Management will
Maintain Control of the Company; Voting Rights of the Class A and Class B Common
Stock."
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of its Class B Common Stock to officers,
directors, key employees, advisors and consultants of the Company. Exercise of
these options could have a dilutive effect on the shareholders' interest in the
Company's earnings and on net tangible book value per share. See "Dilution."
LACK OF DIVIDENDS
The Company does not intend to pay any cash dividends with respect to its
Class B Common Stock in the foreseeable future. See "Dividend Policy."
APPLICATION OF THE PENNY STOCK RULES
The Class B Common Stock offered hereby will be considered "penny stock."
The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." The Commission defines a
"broker" as any person engaged in the business of effecting transactions in
securities for the account of others, but does not include a bank, and a
"dealer" as any person engaged in the business of buying and selling securities
for his own account, through a broker or otherwise, but does not include a bank,
or any person insofar as he buys or sells securities for his own account, either
individually or in some fiduciary capacity, but not as part of a regular
business. Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ Stock Market's National Market, provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from such rules the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements imposed on broker-dealers may
discourage them from effecting transactions in the Class B Common
18
<PAGE> 20
Stock, thereby severely limiting the market liquidity of the Class B Common
Stock and the ability of purchasers in the Offering to sell the Class B Common
Stock in the secondary market. See "- Absence of Trading Marketing; Transfer
Restrictions.".
19
<PAGE> 21
THE OFFERING
GENERAL
The Company intends to offer for sale pursuant to this Prospectus up to
5,000,000 shares of its Class B Common Stock. The Company intends to offer the
Shares to individuals who are regional and executive directors of the Company.
The Company has established a minimum subscription of 200 Shares and maximum
subscriptions of 200 Shares and 2,000 Shares, respectively, for each person who
qualifies as a regional or executive director in the Company's marketing system;
provided, that the aggregate number of Shares sold in this Offering shall not
exceed 5,000,000. However, the Company reserves the right to not sell shares to
any particular regional or executive director, to waive the maximum subscription
amount or to allocate additional Shares to regional and executive directors
without notifying any purchaser or prospective purchaser.
Subscriptions to purchase Shares may be delivered to the Company until
12:00 p.m., E.S.T., on December 31, 1998, unless all of the Shares are earlier
sold or the Offering is earlier terminated or extended by the Company. The
Company reserves the right to terminate the Offering at any time or to extend
the expiration date for additional 90-day periods not to extend beyond December
31, 2000. The date the Offering terminates is referred to herein as the
"Expiration Date." No notice of an extension of the offering period need be
given prior to any extension, and any such extension will not alter the binding
nature of subscriptions already received by the Company. The Company intends to
provide quarterly communications to all purchasers which will include
information concerning any extensions of the Offering. Extension of the
Expiration Date might cause an increase in the Company's organizational and
pre-opening expenses and in the expenses incurred in connection with this
Offering. The Company may find it necessary to utilize the services of brokers
or dealers in order to effect sales of these securities in certain
jurisdictions. The Company will supplement this Prospectus or, if appropriate,
will file a post-effective amendment to the Registration Statement setting forth
the terms of any agreement with brokers or dealers.
Prospective purchasers must deliver to the Company a completed and
executed Subscription Agreement, the form of which is attached hereto as
Appendix A. An executed Subscription Agreement will constitute a prospective
purchaser's offer to purchase shares of Class B Common Stock as set forth in
this Prospectus. Prospective purchasers must warrant in the Subscription
Agreement that they have received a copy of this Prospectus, as amended or
supplemented. Once a Subscription Agreement is received by the Company, a
prospective purchaser may not revoke or withdraw such Subscription Agreement
except with the consent of the Company. In addition, the Company reserves the
right to reject, in whole or in part and in its sole discretion, any
subscription for any reason or no reason whatsoever. Acceptance of any
particular Subscription Agreement by the Company shall in no case require the
Company to accept any other Subscription Agreement. The Company may, in its sole
discretion, allocate Shares among prospective purchasers in the event of an
oversubscription for the Shares. In determining which subscriptions to accept,
in whole or in part, the Company may take into account any factors it considers
relevant, including the order in which subscriptions are received, and a
prospective purchaser's perceived potential to do business with, or to direct
customers or IAs to, the Company.
Certificates representing Shares duly subscribed and paid for will be
issued by the Company promptly after the Company accepts a subscription.
NO ESCROW
There is no minimum number of Shares which must be sold in this
Offering, and no escrow account has been established. All subscription funds
will be paid directly to the Company. Upon acceptance of a subscription by the
Company, subscription proceeds will be available for immediate use by the
Company. Once a subscription is accepted by the Company, the Company will not
refund the funds for any subscription in the event that less than the maximum
number of Shares offered hereby are sold prior to the termination of the
Offering. In the event the Company rejects all, or accepts less than all, of any
subscription, the Company will refund promptly an amount remitted equal to the
purchase price for such Shares multiplied by the number of Shares as to which
the subscription is not accepted. See "Risk Factors - No Minimum Offering
Amount; Irrevocability of Subscriptions; No Escrow."
20
<PAGE> 22
TRANSFER RESTRICTIONS
The Company has filed this registration statement of which this
Prospectus forms a part with the state securities commissions of 12 states in
order to apply for registration or qualification of the Offering in such states.
Due to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company anticipates that it
will be unable to register or qualify the Offering in certain of these states,
and there can be no assurance that the Company will be able to register or
qualify the Offering in any of these states. See "Risk Factors - Regulation of
Network Marketing; Effect of State Securities Laws." Each certificate evidencing
the Shares will bear a legend restricting the transfer of the Shares to
individuals in any jurisdiction where the offer or sale of the Shares would be
unlawful prior to registration or qualification of such offer or sale under the
laws of any such jurisdiction.
Pursuant to the Subscription Agreement, each purchaser of the Shares
offered hereby: (i) agrees during the Lock-up Period (as defined below) not to
(x) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the Shares or any securities issued on account of such Shares
(whether by stock split, stock dividend or otherwise) or (y) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Shares (regardless of whether
any of the transactions described in clause (x) or (y) is to be settled by the
delivery of Shares, or such other securities, in cash or otherwise); (ii)
authorizes the Company to cause the transfer agent during the Lock-up Period to
decline to transfer any Shares and/or to note stop transfer restrictions on the
transfer books and records of the Company with respect to any Shares; and (iii)
agrees that a legend in substantially the following form will be placed on
certificates representing the Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT
TO CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS
ARE SET FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION
AGREEMENT") BY AND BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES. ANY TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO
THE CONDITIONS SET FORTH IN THE SUBSCRIPTION AGREEMENT.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD
OR TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH
SHARES WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF
SUCH OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I)
SUCH REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH
JURISDICTION AND SET FORTH SUCH INFORMATION AS IS 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
21
<PAGE> 23
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 by the Company by giving notice
of the imposition of such restriction (the "Lock-up Notice") to holders of
record of the Shares by first class mail, postage prepaid (or, at the Company's
option, certified mail, return receipt requested), at the address of the holders
of record of the Shares on a date chosen by the Company that is at least one but
no more than fifteen days prior to such mailing. The restrictions shall be
effective upon receipt of such notice, which date of receipt shall be deemed to
be three days following such mailing. Such notice may be given by the Company
such that it is received on any date beginning fifteen days prior to the filing
by the Company of a registration statement with the Commission 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 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"). The Lock-up Period shall terminate if the
Company files an IPO Registration Statement but such registration statement is
subsequently withdrawn or is not declared effective within 120 days of filing
with the SEC, or if the Company transmits a Lock-up Notice prior to the filing
of an IPO Registration Statement but the IPO Registration Statement is not filed
within 15 days of receipt of such notice; provided, however, that in any such
event the restrictions shall survive and shall be applicable to each subsequent
filing of an IPO Registration Statement by the Company until an IPO Registration
Statement is first declared effective by the SEC. See "Risk Factors - Absence of
Trading Market; Transfer Restrictions."
PLAN OF DISTRIBUTION
Offers and sales of the Class B Common Stock will be made on behalf of
the Company by certain of its officers and directors. The officers and directors
will receive no commissions or other remuneration in connection with such
activities, but they will be reimbursed for reasonable expenses incurred in
connection with the Offering. The Company reserves the right to use brokers or
dealers to effect sales of the Shares in the Offering.
HOW TO SUBSCRIBE
A Subscription Agreement, a form of which is attached hereto as Appendix
A, must be completed, executed and delivered to the Company on or prior to the
Expiration Date. Prospective purchasers should retain a copy of the completed
Subscription Agreement for their records. The subscription price is due and
payable when the Subscription Agreement is delivered. Payment must be made in
United States dollars by cash or by check, bank draft or money order drawn to
the order of Maxxis Group, Inc., in the amount of $0.50 multiplied by the number
of Shares subscribed for.
22
<PAGE> 24
USE OF PROCEEDS
The net proceeds to the Company from the sale of 5,000,000 Shares offered
hereby (after deducting estimated offering expenses) are estimated to be
approximately $2,100,000 if all the Shares offered hereby are sold. Assuming the
sale of all 5,000,000 Shares offered hereby, the following table sets forth the
intended uses of proceeds from the Offering:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
----------------------- ------------- ---------------
<S> <C> <C>
Development of additional product lines(1)........................ $ 900,000 42.9%
Development and/or acquisition of information,
accounting and/or inventory control systems.................... 500,000 23.8
Working capital and general corporate purposes(2)................. 700,000 33.3
-------- -----
Total....................................................... $2,100,000 100.0%
========== =====
</TABLE>
- ------------------
(1) The Company intends to develop additional product lines to be marketed
through the Company's IAs, including an internet access product.
(2) Such purposes may include general and administrative expenses, capital
expenditures, payment of accounts payable and accrued expenses,
marketing expenses, payment of organizational and offering expenses and
satisfaction of certain corporate obligations.
A portion of the net proceeds may be used for acquisitions of
complementary services or businesses. The Company currently has no agreements or
understandings with regard to any acquisitions. Shareholders may not be able to
vote on any potential acquisitions (unless required by applicable law) nor have
the opportunity to review any potential acquisition candidate. The foregoing
represents the Company's current estimate of its allocation of the net proceeds
of the Offering based upon the current status of its business operations, its
current plans, and current economic and industry conditions. Future events, as
well as changes in economic or competitive conditions of the Company's business
and the results of the Company's marketing activities, may make different uses
of funds necessary or desirable. In addition, there can be no assurance that the
Company will receive enough proceeds from the Offering to fund any of the uses
of proceeds. If the Company is not able to raise enough capital from the
Offering to fund its operations, the Company may need to raise additional
capital. See "Risk Factors - Broad Discretion in Application of Proceeds;
Possible Need for Additional Capital." Pending application of the net proceeds
as described above, the Company will invest such proceeds in short-term,
interest-bearing instruments and investment grade securities.
DIVIDEND POLICY
The Company anticipates that for the foreseeable future its earnings, if
any, will be retained for the operation and expansion of its business and that
it will not pay cash dividends. The Company's Board of Directors will determine
the Company's dividend policy in the future based upon, among other things, the
Company's results of operations, financial condition, business opportunities,
capital requirements, contractual restrictions and other factors deemed relevant
at the time.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Stock subscription deposits.............................................................. $ -
Class A Common Stock, no par value; 15,000,000 shares authorized;
14,300,000 shares issued and outstanding............................................... -
Class B Common Stock, no par value; 185,000,000 shares authorized;
2,983,333 shares issued and outstanding................................................ -
Subscription receivable.................................................................. (120,000)
Additional paid-in capital............................................................... 574,000
Accumulated deficit...................................................................... (108,000)
---------
Total shareholders' equity.......................................................... $ 346,000
=========
</TABLE>
24
<PAGE> 26
DILUTION
The net tangible book value of the Company as of September 30, 1997, was
$296,000, or $0.02 per share of Common Stock outstanding. Net tangible book
value per share represents the amount of the Company's total assets (excluding
organizational costs) less total liabilities, divided by the total number of
outstanding shares of Common Stock. After giving effect to the sale of 5,000,000
Shares offered hereby and the receipt and application of the estimated proceeds
therefrom (at a public offering price of $0.50 per share and after deducting
estimated expenses of the Offering), the pro forma net tangible book value of
the Company at September 30, 1997 would have been $2,396,000, or $0.11 per share
of Common Stock. This represents an immediate increase in the net tangible book
value of $0.09 per share to existing shareholders and an immediate dilution to
new investors purchasing shares of Class B Common Stock in the Offering of $0.39
per share. The following table illustrates the per share dilution to new
investors at September 30, 1997, assuming the Offering was made at that time:
<TABLE>
<S> <C> <C>
Initial offering price per share of Class B Common Stock.............. $ 0.50
Net tangible book value per share of
Common Stock before the Offering.................................. 0.02
Increase per share attributable to new investors.................... 0.09
----
Pro forma net tangible book value per share of Common
Stock after the Offering............................................ 0.11
----------
Dilution per share to new investors................................... $ 0.39
==========
</TABLE>
The following table sets forth as of September 30, 1997, after giving
effect to the Offering, the difference between existing shareholders and the new
investors purchasing shares of Class B Common Stock in the Offering with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid to the Company
on an as adjusted basis:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------------ ------------------------ Price
Number Percent Amount Percent Per Share
------------ ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................. 17,283,333 77.6% $ 574,000 18.7% $ 0.03
New investors.......................... 5,000,000 22.4 2,500,000 81.3 0.50
------------ ----- ------------ -----
Total............................... 22,283,333 100.0% $ 3,074,000 100.0%
============ ===== ============ =====
</TABLE>
In addition, the Board of Directors intends (subject to shareholder
approval or ratification) to adopt a stock option plan which will permit the
Company to grant options to purchase shares of Class B Common Stock to officers,
directors, key employees, advisors and consultants of the Company. Exercise of
these options could have a dilutive effect on the shareholders' interest in the
Company's earnings and on net tangible book value per share. See "Risk Factors -
Dilution to New Investors."
25
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period and the balance sheet data as of June 30, 1997 are derived from
the audited consolidated financial statements of the Company. The consolidated
financial statements for the Inception Period were audited by Arthur Andersen
LLP, independent public accountants. The statement of operations data for the
quarter ended September 30, 1997 and the balance sheet data as of September 30,
1997 have been derived from the unaudited condensed consolidated financial
statements of the Company which include all adjustments, consisting of only
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the results of operations for the period. Results for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1997 QUARTER
(INCEPTION) ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
(UNAUDITED) ---------------- ------------------
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C>
Telecommunication services................................... $ 2,322,000 $ 1,465,000
Marketing services........................................... 369,000 353,000
--------------------- --------------------
Total revenues............................................ 2,691,000 1,818,000
--------------------- --------------------
Cost of services:
Telecommunication services................................... 761,000 438,000
Marketing services........................................... 255,000 100,000
--------------------- --------------------
Gross margin................................................... 1,675,000 1,280,000
--------------------- --------------------
Operating expenses:
Selling and marketing........................................ 1,089,000 716,000
General and administrative................................... 660,000 598,000
--------------------- --------------------
Total operating expenses.................................. 1,749,000 1,314,000
--------------------- --------------------
Loss before income tax benefit................................. (74,000) (34,000)
Income tax benefit............................................. - -
--------------------- --------------------
Net loss....................................................... $ (74,000) $ (34,000)
===================== ====================
PER SHARE DATA:
Net loss per share............................................. $ 0.00 $ 0.00
===================== ====================
Weighted average number of shares outstanding.................. 17,283,333 17,283,333
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 SEPTEMBER 30, 1997
------------- ------------------
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
<S> <C> <C>
Working capital......................... $ (13,000) $ (33,000)
Property and equipment, net............. 92,000 164,000
Total assets............................ 596,000 839,000
Long-term obligations................... - -
Shareholders' equity.................... 293,000 346,000
</TABLE>
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<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Consolidated Financial Data" and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, among other things, those discussed in "Risk
Factors."
GENERAL
Maxxis was incorporated on January 24, 1997 and began accepting IAs and
marketing telecommunications services in March 1997. Currently, the Company
conducts all of its business and operations through its wholly-owned
subsidiaries Maxxis 2000, Maxxis Telecom and Maxxis Nutritional.
Maxxis 2000 is a network marketing company that currently markets 1-Plus
long distance services, travel cards, prepaid phone cards, 800 service and
international telecommunications services. The Company believes that its network
marketing system allows it to obtain customers for its products in a cost
effective manner and to enhance customer retention because of the relationships
between the Company's IAs and customers. The Company also believes the
telecommunications customer base developed by its IAs will provide a potential
customer base for future products. Maxxis Telecom obtains telecommunications
services through its contract with CRC. Maxxis Telecom also purchases
telecommunications time for its prepaid 5 hour, 1 hour, 30 minute and 10 minute
phone cards from CRC. Maxxis Nutritional purchases private label nutritional
products which the Company distributes through its network of IAs.
The Company derives revenues from telecommunication services and
marketing services. Telecommunication services revenues are comprised of sales
of prepaid phone cards to the Company's IAs and commissions from the Company's
agreement with CRC whereby the Company receives a percentage of the long
distance billings received by CRC from the customers originated by the Company's
IAs, net of allowances for bad debts and billing adjustments. The Company's
aggregate revenues from 1-Plus services were $25,000, or only 0.93% of the
Company's total revenues, for the Inception Period, and $105,000, or 5.8% of the
Company's total revenues, for the quarter ended September 30, 1997. Because of
the administrative procedures that must be complied with in order to establish
1-Plus customers, there is generally a delay of between three to four months
from the time a prospective customer indicates a desire to become a 1-Plus
customer and the time that the Company begins to receive commissions from such
customer's usage. In the future, the Company believes that commissions generated
on the sales of 1-Plus long distance services will constitute a significant
percentage of its total revenues.
Marketing services revenues include application fees from IAs and
purchases of sales aids by IAs, including distributor kits which consist of
forms, promotional brochures, marketing materials and presentation materials.
Marketing services revenues also include training fees paid by MDs. To become an
associate, individuals (other than individuals in North Dakota) must complete an
application and purchase a distributor kit for $30. IAs also pay an annual fee
in order to maintain their status as an IA, which fee the Company intends to
amortize over the renewal period. To become a MD, a senior associate, director
or regional director must attend a Company approved training school. The fee to
attend the training school is currently $99, and MDs must attend continuing
education training schools each year which also are subject to a fee. The
training fees are recognized at the time the training is received. The Company
does not receive any fees from IAs for the training provided by MDs.
Cost of services consists of telecommunication services costs and
marketing services costs. Telecommunication services costs are the costs of
purchasing prepaid phone cards and long distance services for those cards.
Marketing services costs are the costs of purchasing IA distributor kits, sales
aids and promotional materials and training costs. Operating expenses consist of
selling and marketing expenses, which include commissions paid to IAs based on
sales of prepaid phone cards and other products and usage of long distance
services by subscribers and the sponsoring of new IAs and customers, and general
and administrative
27
<PAGE> 29
expenses, which include costs for IA support services, information systems
services and administrative personnel to support the Company's operations and
growth.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will achieve or maintain profitability. If the
Company continues to grow rapidly, the Company will be required to continually
expand and modify its operational and financial systems, add additional IAs and
new customers, and train and manage both current and new employees and IAs. Such
rapid growth would place a significant strain on the Company's operational
resources and systems, and the failure to effectively manage this projected
growth could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - New Enterprise" and "-
Ability to Manage Growth."
RESULTS OF OPERATIONS
The following table sets forth historical revenues and cost of revenues
by category and the percentage of total revenues attributable to each category
for the periods shown.
<TABLE>
<CAPTION>
JANUARY 24, 1997 QUARTER
(INCEPTION) ENDED
TO JUNE 30, 1997 SEPTEMBER 30, 1997
<S> <C> <C>
Revenues:
Telecommunication services.............. 86.3% 80.6%
Marketing services...................... 13.7 19.4
----- -----
Total revenues....................... 100.0% 100.0%
===== =====
Cost of services:
Telecommunication services costs........ 28.3% 24.1%
Marketing services costs................ 9.5 5.5
----- -----
Total cost of services............... 37.8 29.6
Operating expenses:
Selling and marketing................... 40.5 39.4
General and administrative.............. 24.5 32.9
----- -----
Total operating expenses............. 65.0% 72.3%
===== =====
</TABLE>
The Company was incorporated in January 1997 and commenced operations in
March 1997. No comparisons are presented for the quarter ended September 30,
1997 and the Inception Period because the Company was not in existence for the
corresponding prior periods in 1996. Results of operations for the quarter ended
September 30, 1997 and the Inception Period are not necessarily indicative of
the results to be expected for a full fiscal year.
QUARTER ENDED SEPTEMBER 30, 1997
Revenues
Total revenues consist of telecommunication services and marketing
services revenues. Total revenues were $1,818,000 for the quarter ended
September 30, 1997. For the quarter ended September 30, 1997, telecommunication
services revenues were $1,465,000, or 80.6% of total revenues. Telecommunication
services revenues consist of sales of prepaid phone cards by IAs and commissions
generated from long distance usage of customers originated by IAs. For the
quarter ended September 30, 1997, marketing services revenues were $353,000, or
19.4% of total revenues. Marketing services revenues consist of application fees
paid by IAs, purchases of sales aids by IAs and training fees paid to become a
MD.
28
<PAGE> 30
Cost of Services
Cost of services include telecommunication services costs and marketing
services costs. Total cost of services for the quarter ended September 30, 1997
was $538,000, or 29.6% of total revenues. For the quarter ended September 30,
1997, telecommunication services costs were $438,000, or 24.1% of total
revenues. Telecommunication services cost include the costs of purchasing
prepaid phone cards and long distance services. The Company purchases
non-activated phone cards from a third party and purchases telecommunication
time for such phone cards from CRC. The Company then sells activated phone cards
to its IAs. Marketing services costs were $100,000, or 5.5% of total revenues,
for the quarter ended September 30, 1997. Marketing services costs primarily
consists of the costs of purchasing IA distributor kits, sales aids and
promotional materials and training costs.
Operating Expenses
For the quarter ended September 30, 1997, selling and marketing
expenses were $716,000, or 39.4% of total revenues. Selling and marketing
expenses consist of commissions paid to IAs based on (i) usage of long distance
services, (ii) sales of IA distributor kits, (iii) sponsoring of additional IAs
and (iv) addition of new customers.
General and administrative expenses were $598,000, or 32.9% of total
revenues, for the quarter ended September 30, 1997. General and administrative
expenses consist of salary expense for the Company's customer service personnel,
office staff and executive personnel and the cost of IA support services and
information systems services.
INCEPTION PERIOD (JANUARY 24, 1997 TO JUNE 30, 1997)
Revenues
For the Inception Period, telecommunication services revenues were
$2,322,000, or 86.3% of total revenues, and marketing services revenues were
$369,000, or 13.7% of total revenues. Telecommunication services revenues
consist of sales of prepaid phone cards to the Company's IAs and commissions
generated from 1-Plus services commissions generated from long distance usage of
customers generated by the Company's IAs. This amount was minimal for the
Inception Period because no customers were utilizing long distance services
until May 1997. In the future, the Company believes that commissions generated
on sales of 1-Plus long distance services will constitute a more significant
percentage of telecommunication services revenues. Marketing services revenues
include application fees from IAs, purchases of sales aids by IAs and training
fees paid to become a MD.
Cost of Services
Telecommunication services costs were $761,000, or 28.3% of total
revenues, for the Inception Period. Telecommunication services costs include the
costs of purchasing prepaid phone cards and long distance services for these
cards. Marketing services costs, which includes the cost of the IA distributor
kits and promotional materials, were $255,000, or 9.5% of total revenues, for
the Inception Period.
Operating Expenses
Selling and marketing expenses principally consist of commissions paid to
IAs based on (i) usage of long distance services, (ii) sales of IA distributor
kits, (iii) sponsoring of additional IAs and (iv) addition of new customers.
Selling and marketing expenses were $1,089,000, or 40.5% of total revenues, for
the Inception Period.
General and administrative expenses were $660,000, or 24.5% of total
revenues, for the Inception Period. General and administrative expenses consist
primarily of salary expense for the Company's customer service personnel, office
staff and executive personnel. Such expenses also include costs for IA support
services and information systems services.
29
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily financed all of its operations
through the sale of its securities in private placements. During the quarter
ended September 30, 1997, cash flows from financing activities totaled
approximately $87,500 related to the sales of equity securities. In November
1997, the Company entered into a demand promissory note. As of December 31,
1997, the Company had borrowed $177,500 under the promissory note.
As of September 30, 1997, the Company had cash and cash equivalents of
$69,000 and working capital of $(33,000). Cash provided by operating activities
for the quarter ended September 30, 1997 was $70,000.
The Company's investing activities principally consisted of the
purchase of office and computer equipment for $75,000 and software development
costs of $48,000 for the quarter ended September 30, 1997.
The Company believes that the current operations, as well as the proceeds
to be received from the sale of Class B Common Stock offered hereby, will be
sufficient to fund the Company's anticipated operations through the next 12
months. However, if the Company is not able to raise enough proceeds from the
Offering to fund its operations, the Company may need to raise additional
capital. In addition, any increases in the Company's growth rate, shortfalls in
anticipated revenues, increases in expenses or significant acquisition
opportunities could have a material adverse effect on the Company's liquidity
and capital resources and could require the Company to raise additional capital.
The Company may also need to raise additional funds in order to take advantage
of unanticipated opportunities, such as acquisitions of complementary businesses
or the development of new products, or otherwise respond to unanticipated
competitive pressures. Sources of additional capital may include venture capital
financing, cash flow from operations, additional lines of credit and private
equity and debt financings. The Company's cash and financing needs for 1998 and
beyond will be dependent on the Company's level of IA and customer growth and
the related capital expenditures, advertising costs and working capital needs
necessary to support such growth. The Company believes that major capital
expenditures may be necessary over the next few years to develop additional
product lines to sell through its IAs and to develop and/or acquire information,
accounting and/or inventory control systems to monitor and analyze the Company's
growing network marketing system. The Company has not identified financing
sources to fund such cash needs in 1998 and beyond. There can be no assurance
that the Company will be able to raise any such capital on terms acceptable to
the Company or at all. See "Risk Factors - Broad Discretion in Application of
Proceeds; Possible Need for Additional Capital," "- New Enterprise" and "-
Ability to Manage Growth."
30
<PAGE> 32
BUSINESS
Maxxis markets telecommunications services in the United States through
its multi-level network marketing system of "independent associates," or "IAs."
The Company operates through its subsidiaries: Maxxis 2000, which conducts
network marketing operations; Maxxis Telecom, which provides long distance
services; and Maxxis Nutritional, which provides private label nutritional
products. The Company currently markets both 1-Plus long distance service,
value-added telecommunications services, such as prepaid phone cards, and
nutritional products. The Company was incorporated in January 1997 and began
accepting IAs and marketing telecommunications services in March 1997. For the
Inception Period and the quarter ended September 30, 1997, the Company had
generated aggregate gross revenues of approximately $2,691,000 and $1,818,000,
respectively.
The Company initially intends to build a customer base without having to
commit capital or management resources to construct its own telecommunications
network and transmission facilities. In February 1997, Maxxis Telecom contracted
with CRC to obtain switching and network services and to allow CRC's
telecommunications services to be sold by the Company's IAs. In the future, the
Company may contract with other providers of long distance services and intends
to analyze the feasibility of developing its own long distance network. In
November 1997, the Company began marketing several private label dietary
supplements to its customers and IAs. The Company's nutritional products are
manufactured by various suppliers. Also, in December 1997, the Company started
marketing certain internet related services to its IAs.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's network marketing system because of the potential for supplemental
income and because the IAs are not required to purchase any inventory, have no
monthly sales quotas or account collection issues, have minimal required
paperwork and have a flexible work schedule. The Company encourages IAs to
enroll subscribers with whom the IAs have an ongoing relationship, such as
family members, friends, business associates and neighbors. The Company also
sponsors opportunity meetings at which current IAs are encouraged to bring in
potential candidates for an introduction to the Company's marketing system. The
Company's network marketing system and the Company's reliance upon IAs are
intended to reduce net marketing costs, subscriber acquisition costs and
subscriber attrition. The Company believes that its network marketing system
will continue to build a base of potential customers for additional services and
products.
The Company offers its IAs a number of support services. The Company
currently provides to each IA without charge one printed report describing such
IA's organization and provides additional reports for a fee. In addition, the
Company offers training, information and motivational support to the IA network
through: (i) its training organization; (ii) monthly newsletters; and (iii)
regional rallies.
STRATEGY
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing
to support the marketing efforts of IAs and introducing new
income opportunities for IAs.
- Maintaining and Expanding the Number of Customers by
offering high quality, competitively-priced products and
services through a highly motivated network of IAs.
- Offering Additional Telecommunications Products by entering
into agreements for the marketing of additional products
that meet the needs of subscribers, which may include, among
others, paging, conference calling, wireless cable, cellular
and local phone service.
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<PAGE> 33
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the Company
recently began marketing a line of private label nutritional
products to its customers and IAs and certain internet related
services to its IAs.
- Obtaining Competitive Prices on products and services through the
purchasing power of the Company's nationwide network.
MARKETING
The Company markets products and services exclusively through its network
of IAs. Currently, the Company has five IA positions in its marketing system:
associate; senior associate; director; regional director; and executive
director. IAs are paid only by commissions and do not receive any salary from
the Company. All IA commissions are paid directly by the Company and are a
specified percentage or a designated amount of the gross proceeds received by
the Company on the sale of services and products. The Company designates a
portion of its gross commissions as "commission value," or "CV," and allocates
the CV among eligible participants in its marketing system. Currently, 20% of
the CV earned with respect to a long distance subscriber is paid weekly to the
IA who sponsored such subscriber, 75% of the CV is paid monthly to eligible
directors who have the IA who sponsored the subscriber in their downline and the
remaining 5% is retained by the Company to be paid out to directors, regional
directors and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as MDs are eligible to receive an additional Leadership
Bonus. The Leadership Bonus is payable quarterly and equals, in the aggregate,
1% of the total sales of Maxxis 2000 during the quarter. The Leadership Bonus is
divided equally among all directors, regional directors and executive directors
who qualify for a Leadership Bonus.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The distributor
kit is a package of basic materials which assists an associate in beginning his
or her business. Associates may gather long distance customers and receive 20%
of the CV generated by such customers. Associates are also entitled to purchase
products from the Company at discounted prices for retail sales. An associate
becomes a senior associate when the associate sells $100 of bonus-eligible
products. Senior associates continue to receive a percentage of CV with regard
to all subscribers personally gathered by them and are also entitled to purchase
products from the Company at discounted prices for retail sales.
To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the director's
sales organization by sponsoring additional persons to become senior associates.
These senior associates, and all senior associates that they, in turn, sponsor,
become part of the sales organization of the director who sponsored them. Senior
associates, through the growth of their sales organizations, may become
directors, regional directors or executive directors and thereby increase the
size of the sales organization of the person who was their original sponsor. The
organization that grows below each director through this process is called a
"downline." Directors are eligible to receive the same commissions as senior
associates and, if they directly gather and maintain a minimum of four active
1-Plus long distance customers, are eligible to receive a percentage of the CV
produced by each IA that is within 15 levels below them in their downline. In
order to encourage the growth of the Company's marketing system, the Company
also pays eligible directors a bonus amount, which is designated as "bonus
value," or "BV," for each sale of bonus-eligible products. Currently, the
Company designates retail priced phone cards, nutritional paks and certain
internet related services as bonus-eligible products. Directors become regional
directors and executive directors upon the achievement of certain IA sales
goals. Regional directors and executive directors are eligible to receive the
same commissions as directors and, if they qualify, share in the Leadership
Bonus. Regional directors and executive directors are eligible to serve on the
Maxxis 2000 Advisory Board, which advises management on issues regarding field
leadership.
The maximum aggregate long distance usage commissions the Company may be
required to pay with respect to a single subscriber's long distance usage are
approximately 40% of the gross commissions payable
32
<PAGE> 34
to the Company with respect to such usage, but the Company anticipates that the
actual amounts paid will be less than 40% as the usage increases. The difference
between actual commission payments and the maximum payment is expected to occur
because certain IAs fail to maintain active status necessary to receive
commissions from sales made by persons in their downline.
RELATIONSHIP WITH IAS
The Company seeks to contractually limit the statements that IAs make
about the Company's business. Each IA also must agree to policies and procedures
to be followed in order to maintain the IA's status in the organization. IAs are
expressly forbidden from making any representation as to the possible earnings
of any IA from the Company. IAs are also prohibited from creating any marketing
literature that has not been pre-approved by the Company. While the Company has
these policies and procedures in place governing the conduct of the IAs, it is
difficult to enforce such policies and procedures. Because the IAs are
classified as independent contractors, the Company is unable to provide them the
same level of direction and oversight as Company employees. Violations of the
Company's policies and procedures may reflect negatively on the Company and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - Dependence on IAs" and
"- Relationship with IAs."
TRAINING AND MARKETING SUPPORT
The Company provides all IAs with the opportunity to receive training
through the Company's training program. The training is conducted by the
Company's MDs and includes a detailed explanation of the Company's products, the
IA compensation plan and the use of the various marketing tools available to the
IA. The Company intends to publish a newsletter for the IAs containing
informative and motivational articles and recognizing IA achievements. The
Company's first annual convention was held in August 1997, and the Company
intends to continue to hold annual conventions for IAs. This event provides
recognition to the top performers, direct access to senior management and a
chance for IAs to share experiences and develop support systems. The Company
intends to organize additional conventions throughout the country that current
IAs and potential new IAs can attend to learn more about the Company.
The Company encourages senior associates, directors and regional
directors to become MDs. MDs provide personal training to IAs. To become a MD, a
senior associate, director or regional director must attend a Company approved
training school. The fee to attend the training school is currently $99, and MDs
must attend continuing education training schools each year which also are
subject to a fee. National training directors that are selected by the Company
are paid a fee by the Company for training MDs. The Company does not receive any
fees from IAs for the training provided by MDs.
The Company operates a call center to answer IA questions and provide IA
support. This system includes a current database of all IAs, their personal
organizations and their subscribers. In addition, the Company has licensed a
commission processing software system to process the high volume of data
necessary to calculate commissions. This system prepares weekly commission
payments.
PRODUCTS AND SERVICES
The Company markets a variety of long distance and value-added
telecommunications services and products to customers in equal access areas,
which currently include 1-Plus long distance service and prepaid phone cards,
and the Company recently began marketing several nutritional products.
Following is a summary of the various services and products the Company
currently provides to IAs and customers.
1-Plus Long Distance. The Company's 1-Plus long distance service serves
as a replacement for a customer's former long distance service (such as the long
distance services provided by AT&T, MCI and Sprint). The 1-Plus services
marketed by the Company are billed on a flat rate basis, where the cost of a
call does not vary depending upon the distance of a call or the time of day or
day of week when the call is originated or terminated. Residential 1-Plus
services marketed by the Company are billed based on one minute increments, and
business 1-Plus service is billed based on 6-second increments with a 30-second
minimum.
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<PAGE> 35
Prepaid Phone Cards. The Company offers prepaid phone cards in domestic
time increments of 5 hours, 1 hour, 30 minutes and 10 minutes. These cards may
be used for domestic and international calls. If used for international calls, a
greater number of minutes will be deducted from the call in proportion to the
differential between the domestic and applicable international rate.
Nutritional Products. The Company recently began marketing a line of
private label nutritional products to its IAs and customers. The Company offers
several private label dietary supplements that contain herbs, vitamins, minerals
and other natural ingredients.
Promotional Materials. The Company also derives revenues from the sale of
various educational and promotional materials designed to aid its IAs in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings and product and marketing
brochures.
INFORMATION SYSTEMS
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
IA SUPPORT
The Company operates a call center where advisors answer IA questions and
provide information to IAs. This system includes a current database of all IAs,
their personal organizations and their subscribers. The Company has licensed a
commission processing software system that incorporates the provisions of the
Company's marketing program for purposes of calculating commissions. The Company
also maintains transaction processing systems that facilitate the shipment of IA
training and marketing materials. In addition,
the Company's order processing system tracks the receiving, storage, shipment
and purchasing of sales aid products.
SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has contracted with CRC to obtain switching and network services. The
Company now depends exclusively on CRC for the transmission of subscriber phone
calls and the activation of prepaid phone cards. Subscribers are long distance
customers on CRC's network, and CRC provides subscriber support for the
Company's subscribers. Subscribers have the right to change their service at any
time. CRC provides subscriber support for the Company. The Company's 1-Plus
Agreement with CRC, which expires on February 20, 2000, provides that the
Company will have such rights to the subscriber base developed under the
agreement upon achieving certain minimum levels of monthly revenues on CRC's
network. Once the Company reaches these minimum levels, the Company will have
the right to market other carriers to the subscriber base in the event the
Company contracts with such carriers. There can be no assurance that the Company
will achieve the minimum level of monthly revenues on CRC's network necessary to
have rights to the subscriber base. Although the Company does not currently
intend to use a different carrier, minimum monthly revenues may be more
difficult to maintain if the Company utilizes additional carriers, and the
Company could be subject to additional minimum commitments including, but not
limited to, minimum monthly revenues or minimum monthly minutes of usage, with
such new carriers. The accurate and prompt billing of subscribers originated by
the IAs is also dependent upon CRC. The failure of CRC to accurately and
promptly bill subscribers could lead to a loss of subscribers and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company would be required to use another carrier if
the 1-Plus Agreement is terminated, the usage or number of subscribers
originated by the Company's IAs exceeds the capacity of CRC or CRC fails to
provide quality services. In such event, or in the event the Company otherwise
elects to use other carriers, the cost paid by the Company for such long
distance services may exceed that paid under the 1-Plus Agreement. If the 1-Plus
Agreement is terminated, there can be no assurance that the Company could enter
into new contracts with other providers on
34
<PAGE> 36
terms favorable to the Company or at all. The termination of the 1-Plus
Agreement could have a material adverse effect on the Company's business,
financial condition and results of operations.
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are manufactured by third-party manufacturers pursuant to product
formulations developed for the Company. The Company does not have any written
contracts with any of its suppliers or manufacturers or commitments from any of
its suppliers or manufacturers to continue to sell products to the Company. The
Company believes that its relationships with its suppliers are satisfactory;
however, there can be no assurance that any or all of these suppliers will
continue to be reliable suppliers to the Company. Accordingly, there is a risk
that any or all of the Company's suppliers or manufacturers could discontinue
selling their products to the Company for any reason. In the event any of the
third-party manufacturers were to become unable or unwilling to continue to
provide the products in required volumes, the Company would be required to
identify and obtain acceptable replacement manufacturing sources, and no
assurance can be given that any alternative manufacturing sources would become
available to the Company on a timely basis. See "Risk Factors - Dependence Upon
Suppliers."
SUBSCRIBER SUPPORT
CRC's is responsible for the billing of long distance customers and for
providing customer service. Services are provided under CRC's state, national
and international tariffs. The Company has been informed that CRC possesses all
tariffs necessary to offer such services.
COMPETITION
The Company faces competition in the United States for both the products
and services it sells and for the sponsoring and retaining of independent
salespeople. The United States long distance telecommunications industry is
intensely competitive, rapidly evolving and subject to rapid technological
change. In addition, the industry is significantly influenced by the marketing
and pricing practices of the major industry participants. AT&T, MCI, Sprint and
WorldCom are the dominant competitors in the domestic long distance
telecommunications industry. All of these companies are significantly larger
than the Company and have substantially greater resources. According to a 1995
FCC report, AT&T, MCI, Sprint and WorldCom accounted for approximately 56%, 17%,
10% and 5%, respectively, of total domestic long distance revenue for calendar
year 1994. Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger customer bases and
substantially greater financial, personnel, marketing, technical and other
resources than the Company. These competitors employ various means to attract
new subscribers, including television and other advertising campaigns,
telemarketing programs, network marketing and cash payments and other incentives
to new subscribers. The Company's ability to compete effectively depends upon,
among other factors, its ability to offer high quality products and services at
competitive prices. There can be no assurance that the Company will be able to
compete successfully. See "Risk Factors - Intense Competition."
The evolving regulatory environment of the United States
telecommunications industry significantly influences the Company's ability to
compete. On February 8, 1996, President Clinton signed into law the 1996
Telecommunications Act that will allow LECs, including the BOCs, to provide long
distance telephone service inter-LATA, which will likely significantly increase
competition for long distance services. The new legislation also grants the FCC
the authority to deregulate other aspects of the telecommunications industry.
Such increased competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs into the long distance market,
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
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<PAGE> 37
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such products, especially retail outlets, based
upon convenience of purchase, price and immediate availability of the purchased
product. For the most part, the Company's competitors offering comparable
products are substantially larger and have available considerably greater
financial resources than the Company. The market is highly sensitive to the
introduction of new products (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, the Company's
ability to remain competitive depends in part upon the successful introduction
of new products at competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for new IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. Although management believes
that the Company offers an attractive business opportunity, there can be no
assurance that other network marketing companies will not be able to convince
the Company's existing IAs to join their organization or to deplete the pool of
potential IAs in a given market and, in such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Risk Factors - Intense Competition."
PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark "MAXXIS."
In addition, the Company relies upon common law rights to protect other marks
used by the Company and other rights that the Company considers to be its
intellectual property. There can be no assurance that the Company's measures to
protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. See "Risk Factors -
Possible Claims Relating to Ownership of Proprietary Rights."
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<PAGE> 38
REGULATION
Regulation of Long Distance Telephone Services. Various regulatory
factors may have an impact on the Company's ability to compete and on its
financial performance. The Company's carrier, CRC, is subject to regulation by
the FCC and by various state public service and public utility commissions.
Federal and state regulations and regulatory trends have had, and may have in
the future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register or be found exempt from registration
by such commissions. While the Company believes that CRC is in compliance with
the applicable state and federal regulations governing telecommunications
service, there can be no assurance that the FCC or any state regulatory
authority in one or more states will not raise material issues with regard to
CRC's compliance with applicable regulations, or that regulatory activities with
respect to CRC will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Regulation of Long Distance Telephone Services."
In February 1996, the enactment of the 1996 Telecommunications Act served
to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended to
ensure that BOCs open their own local markets to competition before the FCC will
approve such application. The Company is unable to determine how the FCC will
rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "Risk Factors - Intense Competition." If
the federal and state regulations requiring the LECs to provide equal access for
the origination and termination of calls by long distance subscribers change or
if the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "- Competition" and "Risk Factors - Regulation of Long Distance
Telephone Services."
Regulation Affecting Nutritional Products. The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of the
Company's products are subject to regulation by a number of governmental
agencies, the most active of which is the FDA, which regulates the Company's
products under the FDCA and regulations promulgated thereunder. The Company's
products are also subject to regulation by the FTC, the CPSC, the USDA, and the
EPA. The FDCA has been amended several times with respect to dietary
supplements, most recently by the NLEA and the DSHEA. The Company's products are
generally classified and regulated as dietary supplements under the FDCA, as
amended, and therefore are not subject to pre-market approval by the FDA.
However, these products are subject to extensive labeling regulation by the FDA
and can be removed from the market if shown to be unsafe. Moreover, if the FDA
determines on the basis of labeling or advertising claims by the Company, that
the "intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the FDA can regulate those
products as drugs and require pre-market clearance for safety and effectiveness.
In addition, if the FDA determines that claims have been made regarding the
effect of dietary supplements on the "structure or function" of the body, such
claims could result in the regulation of such products as drugs.
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<PAGE> 39
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's products. In the
past several years the FTC has instituted enforcement actions against several
dietary supplement companies for false and misleading advertising of certain
products. In addition, the FTC has increased its scrutiny of the use of
testimonials, such as those utilized by the Company. There can be no assurance
that the FTC will not question the Company's past or future advertising or other
operations. Moreover, there can be no assurance that a state will not interpret
product claims presumptively valid under federal law as illegal under that
state's regulations. Furthermore, the Company's distributors and customers of
distributors 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
distributors, consumers or others, including actions resulting in entries of
consent decrees and the refund of amounts paid by the complaining distributor or
consumer, refunds to an entire class of distributors or customers, or other
damages, as well as changes in the Company's method of doing business. A
complaint because of a practice of one distributor, whether or not that practice
was authorized by the Company, could result in an order affecting some or all
distributors in a particular state, and an order in one state could influence
courts or government agencies in other states. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Risk Factors - Regulation
Affecting Nutritional Products."
Regulation of Network Marketing. 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 also could be found
not to be in compliance with existing statutes or regulations as a result of,
among other things, misconduct by IAs, who are considered independent
contractors over whom the Company has limited control, the ambiguous nature of
certain of the regulations and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the Company
or the IAs are not in compliance with existing statutes or regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations. An adverse determination by any one state on any
regulatory matter could influence the decisions of regulatory authorities in
other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its network marketing system could be found to be in
noncompliance with applicable laws and regulations, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such a decision could require the Company to modify its network
marketing system, result in negative publicity, or have a negative effect on
distributor morale and loyalty. In addition, the Company's network marketing
system will be subject to regulations in foreign markets administered by foreign
agencies should the Company expand its network marketing organization into such
markets. See "Risk Factors Regulation of Network Marketing; Effect of State
Securities Laws."
Effect of State Securities Laws. Furthermore, the primary goal of the
Offering is to increase the motivation of regional directors by allowing them to
purchase an interest in the Company. Accordingly, because the Company desires
the ability to offer its Class B Common Stock to regional directors in certain
states, the Company will attempt to register or qualify the Offering in such
states. Due to the varying nature of state securities regulations and the
considerable discretion given to state securities regulators, the Company may be
unable to register or qualify the Offering in certain states. The inability of
the Company to offer the Shares to residents of certain states may limit the
ability of the Company to attract IAs in such states, or lead to increased
attrition of IAs in such states, and may have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. An
adverse determination by any one state regulator
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on a securities regulatory matter could influence the decisions of securities
regulatory authorities in other jurisdictions. See "Risk Factors - Regulation of
Network Marketing; Effect of State Securities Laws."
FACILITIES
The Company operates out of offices in Atlanta, Georgia consisting of
approximately 7,200 square feet of general and administrative office space and
approximately 5,500 square feet of training space. The Company believes that it
will be required to lease or build additional facilities, including at least one
additional call center and new corporate headquarters, in order to meet
adequately its needs in the future. The Company believes that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 26 people.
The Company's IAs are classified by the Company as independent contractors;
however, two of the Company's employees are also IAs. The Company's employees
are not unionized, and the Company believes its relationship with its employees
is good.
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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are set forth below.
The Company's Board of Directors consists of nine directors divided into three
classes of directors, serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of shareholders. Officers of the Company are appointed at the Board's
first meeting after each annual meeting of shareholders. The ages of the persons
set forth below are as of October 1, 1997.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY EXPIRES
- ---- --- -------------------------- -------
<S> <C> <C> <C>
Ivey J. Stokes............... 38 Chairman of the Board of Directors 1998
Thomas O. Cordy.............. 56 Chief Executive Officer, President and
Director 1998
Daniel McDonough............. 50 Chief Financial Officer -
James W. Brown............... 62 Executive Vice President, Secretary and
Director 1999
Larry W. Gates, II........... 34 Vice President - Human Resources and
Director 1999
Charles P. Bernstein......... 47 Director 2000
Alvin Curry.................. 40 Director 1998
Robert J. Glover, Jr......... 36 Director 1999
Terry Harris................. 43 Director 2000
Philip E. Lundquist.......... 61 Director 2000
</TABLE>
The Company intends to adopt a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal shareholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's
length transactions with independent third parties. Any other matters involving
potential conflicts of interests are to be resolved on a case-by-case basis. See
"Certain Transactions."
IVEY J. STOKES has served as Chairman of the Board of Directors of the
Company since its inception. Mr. Stokes started his marketing career in 1982 at
A.L. Williams Corporation ("A.L. Williams") where he became one of less than 400
National Sales Directors out of 1.3 million insurance agents. In March 1991, Mr.
Stokes left the financial services industry to launch his own independent
marketing firm, Global Marketing Alliance ("Global Alliance"). In the next five
years, Mr. Stokes became one of the leading money earners in several top rated
network marketing firms, with the most prominent being Excel. 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 Georgia Tech University.
THOMAS O. CORDY has served as Chief Executive Officer, President and a
Director of the Company since May 1997. Prior to that time, he served as
President and Chief Executive Officer of CI Cascade Corp. Mr. Cordy currently
serves as Vice Chairman of the Board of Trustees for Clark Atlanta University,
Chairman of the Board of Renaissance Capital Corporation and a Director of Cox
Enterprises. Mr. Cordy has a bachelors degree from Morehouse College and a
masters degree from Atlanta University. Mr. Cordy has attended the
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<PAGE> 42
Stanford Executive Program at the Stanford School of Business and the University
of Oklahoma National Lending School.
DANIEL MCDONOUGH has served as Chief Financial Officer of the Company
since October 1997. Prior to his employment with the Company, Mr. McDonough
provided financial consulting services to a number of start up companies at
Creative Benefits, Inc. In addition, from 1992 to 1994, Mr. McDonough was the
controller of Jostens Learning Corporation, a $75 million technology company
specializing in educational software. Prior to his employment with Jostens, Mr.
McDonough served as assistant controller to Alumax, Inc., a $2.5 billion
integrated aluminum company with over 100 manufacturing operations throughout
the United States. From 1973 to 1980, Mr. McDonough was employed by Price
Waterhouse & Co. Mr. McDonough is a licensed CPA and also holds a masters of
business administration from the University of Buffalo.
JAMES W. BROWN currently serves as Executive Vice President and Secretary
of the Company and has been a Director of the Company since May 1997. He served
as President and Chief Executive Officer of the Company from inception to April
1997. He has also served as Chief Executive Officer, President and a Director of
Maxxis 2000 since its inception. From 1995 to 1997, Mr. Brown has served as a
manager of NetWorld Communications, L.L.C. Since 1979, Mr. Brown has also served
as President and Chief Executive Officer of Marketing Ideas, Ltd. Mr. Brown has
a bachelors degree from the University of Georgia. He also attended the John
Marshall School of Law and the American Mutual Institute of Management.
LARRY W. GATES, II has served as Vice President of Human Resources since
the Company's inception and a Director of the Company since May 1997. Mr. Gates
became a part-time independent insurance agent for A.L. Williams in 1989 while
serving in the U.S. Army. In 1993, he left the financial services industry and
became a full-time independent marketer for Excel. Mr. Gates built a downline of
over 10,000 distributors between 1993 and 1996. He also attained the position of
Executive Director in Excel, one of less than 600 out of over 1.5 million
independent distributors. Mr. Gates has an associates degree from Pierre
College.
CHARLES P. BERNSTEIN has served as a Director of the Company since May
1997. Since 1992, Mr. Bernstein has also served as President of Harvest Mortgage
Co.
ALVIN CURRY has served as a Director of the Company since its inception.
He also serves as Executive Vice President and Chief Operating Officer of Maxxis
2000. Mr. Curry started his marketing career in 1986 with A.L. Williams, where
he attained the position of Senior Vice President in less than three years with
A.L. Williams. In March 1991, Mr. Curry left the financial services industry to
join Mr. Stokes in Global Alliance. Mr. Curry attended Northwest Mississippi
Junior College and Tacoma Community College, and he received a degree from the
Knapp College of Business.
ROBERT JAMES GLOVER, JR. has served as a Director of the Company since
its inception. Mr. Glover started his marketing career as an independent
insurance agent with A.L. Williams in 1985, where he attained the sales position
of Senior Vice President. In December 1993, Mr. Glover left the financial
services industry and became an independent distributor for Excel. Mr. Glover
was one of the first 100 Executive Directors of Excel, and he built a downline
of 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.
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<PAGE> 43
COMMITTEES OF THE BOARD
Subsequent to the Offering, the Board of Directors will establish an
audit committee (the "Audit Committee"). The Audit Committee will be comprised
solely of independent directors and will be charged with reviewing the Company's
annual audit and meeting with the Company's independent accountants to review
the Company's internal controls and financial management practices.
Also, subsequent to the Offering, the Board of Directors will establish a
compensation committee (the "Compensation Committee"). The Compensation
Committee will be comprised solely of "disinterested persons" within the meaning
of Rule 16b-3(c)(2)(i) promulgated under the Exchange Act and "outside
directors" as contemplated by Section 162(m)(4)(C)(i) of the Internal Revenue
Code of 1986, as amended. The Compensation Committee will be responsible for
establishing salaries, bonuses and other compensation for the Company's
executive officers.
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their out-of-pocket
expenses for each meeting attended, but otherwise serve without compensation.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by the Company's current Chief Executive Officer and its former chief
executive officer for the Inception Period. No executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the Inception
Period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
INCEPTION PERIOD
COMPENSATION
Salary Bonus
Name and Principal Position ($) ($)
- --------------------------- ------------- --------
<S> <C> <C>
Thomas O. Cordy(1)....................................... $5,250 $ -
Chief Executive Officer and President
James W. Brown(1)........................................ 7,950 -
Executive Vice President
</TABLE>
- ----------------
(1) Mr. Brown served as the Chief Executive Officer and President of the
Company from inception to April 30, 1997, and Mr. Cordy has served as
Chief Executive Officer of the Company since May 1, 1997.
OPTION GRANTS DURING 1997
As of June 30, 1997, no options had been granted to the Chief Executive
Officer of the Company, and no executive officer of the Company received a
combined salary and bonus in excess of $100,000 during the Inception Period.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with Mr.
Cordy, and in September 1997, the Company entered into employment agreements
with each of Messrs. Brown, Curry and Dinwiddie (collectively, the "Employment
Agreements"). The Company intends to enter into an employment agreement with Mr.
McDonough. Generally, the Employment Agreements provide for a minimum weekly
salary. In
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<PAGE> 44
addition, the employee may participate in a bonus program and shall
be eligible to receive quarterly or annual payments of a performance bonus based
upon the achievement of targeted levels of performance and such other criteria
as the Board of Directors shall establish from time to time. Mr. Cordy's
employment agreement provides for an additional bonus payment on July 1, 1998
and the purchase of Class A Common Stock. Each employee may participate in
insurance and other benefit plans of similarly situated employees, including any
stock option plans of the Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by giving
written notice. The Company can terminate each employee upon death or disability
(as defined in the Employment Agreements) or with or without cause upon delivery
to the employee of a notice of termination. If the employee is terminated
because of death, disability or cause, the employee will receive any accrued
compensation through the termination date and any accrued performance bonus,
unless the employee is terminated for cause. If the employee is terminated
without cause, the Company shall pay the employee severance payments equal to
his minimum base salary for each week during the six-month period following the
termination date. If the employee is a director or officer of the Company or any
of its affiliates, the employee shall tender his resignation to such positions
effective as of the termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the employee is terminated without cause, the non-compete period shall be six
months.
SALES REPRESENTATIVE AGREEMENTS
In September 1997, the Company entered into independent sales
representative agreements (collectively, the "Sales Representative Agreements")
with ten independent sales representatives, including Messrs. Stokes, Gates and
Glover. The Sales Representative Agreements provide for a minimum fee of $800.00
per week. Each sales representative shall also be eligible to receive quarterly
payments of a performance bonus which shall be a percentage of total revenue
from Maxxis 2000. To be paid a bonus, a sales representative must have 180 new
activations in a quarter. The bonus amount is then determined by the number of
open centers in that quarter. The bonus ranges from 0.5% of total revenue from
Maxxis 2000 if six centers are opened to 3.0% of the revenue if 27 centers are
opened. Each sales representative is an independent contractor, and the Company
does not exercise control over the activities of the sales representatives other
than as set forth in the Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and
the term renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each sales representative upon
death or disability (as defined in the Sales Representative Agreements) or with
or without cause upon delivery to the sales representative of a notice of
termination. If a sales representative is terminated, the sales representative
will receive any accrued fees through the termination date and any accrued
performance bonus, unless the sales representative is terminated for cause. If
the sales representative is a director or officer of the Company or any of its
affiliates, the sales representative shall tender his resignation to such
positions effective as of the termination date. Under the Sales Representative
Agreements, each sales representative agrees to maintain the confidentiality of
the Company's trade secrets and confidential business information.
CONSULTING AGREEMENT
In September 1997, the Company entered into a consulting agreement with
Mr. Robert P. Kelly. The consulting agreement provides for a minimum weekly
salary, and the consultant may participate in a bonus program and shall be
eligible to receive quarterly or annual payments of a performance bonus based
upon the achievement of targeted levels of performance and such other criteria
as the Board of Directors shall establish
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<PAGE> 45
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 shall pay the consultant severance payments equal to his
minimum base salary for each week during the six-month period following the
termination date.
Under the consulting agreement, the consultant agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The consultant also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the consultant is terminated without cause, the non-compete period shall be six
months.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Articles, the Company is obligated to indemnify each of
its directors and officers to the fullest extent permitted by Georgia Law with
respect to all liability and loss suffered and reasonable expenses incurred by
such person in any action, suit or proceeding in which such person was or is
made or threatened to be made a party or is otherwise involved by reason of the
fact that such person is or was a director or officer of the Company. The
Company is obligated to pay the reasonable expenses of the directors or officers
incurred in defending such proceedings if the indemnified party agrees to repay
all amounts advanced by the Company if it is ultimately determined that such
indemnified party is not entitled to indemnification. See "Description of
Capital Stock - Limitations on Liability of Officers and Directors."
STOCK OPTION PLAN
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of Class B Common Stock to officers, directors,
key employees, advisors and consultants of the Company.
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.
44
<PAGE> 46
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 intends to
adopt 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."
45
<PAGE> 47
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of December 31, 1997, and as
adjusted to reflect the sale of 5,000,000 Shares of Class B 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. Shares of both Class A Common Stock and Class B Common Stock are
currently outstanding. The Shares to be issued in the Offering are Class B
Common Stock. See "Description of Capital Stock." Except as otherwise indicated,
all persons listed have sole voting and investment power with respect to their
shares.
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL AFTER THE OFFERING
COMMON STOCK COMMON STOCK ------------------------
--------------------- -------------------- PERCENT OF PERCENT OF
PERCENT OF PERCENT OF VOTING SHARES
NAME AND ADDRESS(A) OF BENEFICIAL OWNER SHARES CLASS(B) SHARES CLASS(B) POWER OUTSTANDING
- --------------------------------------- ------ -------- ------ -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Alvin Curry(c).......................... 7,000,000 49.0% - -% 46.4% 31.4%
King David Trust(d)..................... 5,000,000 35.0 - - 33.1 22.4
Cynthia Glover, trustee(e).............. 2,000,000 14.0 - - 13.2 9.0
The Anchora Company(f).................. 800,000 5.6 - - 5.3 3.6
Charles P. Bernstein.................... - - - - - -
James W. Brown.......................... 500,000 3.5 20,000 * 3.3 2.3
Thomas O. Cordy(g)...................... - - - - - -
Larry W. Gates, II...................... 500,000 3.5 - - 3.3 2.2
Robert J. Glover(h)..................... - - - - - -
Terry Harris............................ - - 40,000 1.3 * *
Philip E. Lundquist..................... - - - - - -
Ivey J. Stokes(i)....................... - - - - - -
All directors and executive
officers as a group
(9 persons) (c) - (i)................. 10,800,000 75.5 60,000 2.0 71.6 48.7
</TABLE>
- -------------------
* Less than one percent
(a) The address of the King David Trust and Alvin Curry is c/o Maxxis Group,
Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The address
of Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997 is
7839 Taylor Circle, Riverdale, Georgia 30274. The address of the Anchora
Company is c/o Salem Management Company, Ltd., Design House, Leeward
Highway, P.O. Box 150, Providenciales Turks & Caicos Island, B.W.I.
(b) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if such person has or shares voting power or investment
power with respect to such security, or has the right to acquire
beneficial ownership at any time within 60 days from December 31, 1997.
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 5,000,000 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 800,000 shares owned by The Anchora Company, of which Mr. Cordy
is the protector. Mr. Cordy disclaims beneficial ownership of such
shares.
(h) Excludes 2,000,000 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 5,000,000 shares owned by the King David Trust of which Mr.
Stokes' minor children are the beneficiaries. Mr. Stokes disclaims
beneficial ownership of such shares.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock is only a summary and is
subject to the provisions of the Articles and Bylaws, which are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of Georgia Law.
GENERAL
The Articles authorize the Company to issue up to 15,000,000 shares of
Class A Common Stock and 185,000,000 shares of Class B Common Stock. As of the
date hereof, 14,300,000 shares of Class A Common Stock are issued and
outstanding and are held of record by 15 shareholders, and 2,983,333 shares of
Class B Common Stock are issued and outstanding and are held of record by 42
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; however, no preferred
stock has been issued.
COMMON STOCK
The rights of the holders of the Class A Common Stock and the Class B
Common Stock are identical in all respects except for voting rights and
conversion rights.
Voting Rights. Except as otherwise provided by Georgia Law or the
Articles, holders of Class A Common Stock and Class B Common Stock vote as a
single class on all matters submitted to a vote of the shareholders, with each
share of Class A Common Stock entitled to ten votes and each share of Class B
Common Stock entitled to one vote. See "Risk Factors - Management will Maintain
Control of the Company; Voting Rights of Class A and Class B Common Stock."
Under Georgia Law, the affirmative vote of the holders of a majority of the
outstanding shares of any class of stock, voting as a single class, is required
to approve, among other things, a change in the designations, rights,
preferences or limitations of all or part of the shares of such class of stock.
Conversion Rights. Upon the closing of an Initial Public Offering, each
share of Class A Common Stock then outstanding shall automatically be converted
into one fully paid and nonassessable share of Class B Common Stock. An "Initial
Public Offering" means a public offering of the Company's capital stock for cash
which is offered and sold in a transaction that is registered under the
Securities Act through one or more underwriters, pursuant to an underwriting
agreement between the Company and such underwriters, resulting in aggregate net
proceeds of $5,000,000 to the Company.
Other Provisions. Subject to the rights of the holders of any class of
preferred stock, holders of record of shares of Common Stock on the record date
fixed by the Board of Directors are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available for such
purpose. No dividends may be declared or paid in cash or property on any share
of any class of Common Stock unless simultaneously the same dividend is declared
or paid on each share of the other class of Common Stock. In the case of any
stock dividend, holders of Class A Common Stock are entitled to receive the same
percentage dividend (payable in shares of Class A Common Stock) as the holders
of Class B Common Stock receive (payable in shares of Class B Common Stock).
Upon liquidation, dissolution or winding-up of the Company, the holders of the
Common Stock are entitled to share ratably in all assets available for
distribution after payment in full of creditors and payment in full to any
holders of preferred stock then outstanding on any amount required to be paid
under the terms of such preferred stock.
PREFERRED STOCK
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,
47
<PAGE> 49
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. Upon
completion of the Offering, the Company will not have any shares of preferred
stock outstanding. 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 a majority of the outstanding voting stock of the Company
or the effect of decreasing the market price of the Common Stock.
CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW
Certain provisions of the Articles and Bylaws and the Georgia Law,
summarized in the following paragraphs, may be considered to have antitakeover
effects and may hinder, delay, deter or prevent a tender offer, proxy contest or
other attempted takeover that a shareholder may deem to be in such shareholder's
best interest, including such an attempted transaction as might result in
payment of a premium over the market price for shares held by such shareholder.
Classified Board of Directors. The Articles of Incorporation divide the
Board of Directors into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of the Board of Directors are
elected at each annual meeting of shareholders. The classification of directors,
together with other provisions in the Articles of Incorporation and Bylaws that
limit the ability of shareholders to remove directors and that permit the
remaining directors to fill any vacancies on the Board of Directors, have the
effect of making it more difficult for shareholders to change the composition of
the Board of Directors. As a result, at least two annual meetings of
shareholders may be required for the shareholders to change a majority of the
directors, whether or not such a change in the Board of Directors would be
beneficial to the Company and its shareholders and whether or not a majority of
the Company's shareholders believes that such a change would be desirable.
Currently, the terms of Class I directors expire in 1998, the terms of Class II
directors expire in 1999 and the terms of Class III directors expire in 2000.
Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals; Actions by Written Consent of Shareholders. The Bylaws establish an
advance notice procedure for shareholders to make nominations of candidates for
election as directors or to bring other business before any meeting of
shareholders of the Company. Any shareholder nomination or proposal for action
at an upcoming shareholder meeting must be delivered to the Company no later
than the deadline for submitting shareholder proposals pursuant to Rule 14a-8
under the Exchange Act. The presiding officer at any shareholder meeting is not
required to recognize any proposal or nomination which did not comply with such
deadline.
The purpose of requiring shareholders to give the Company advance notice
of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of shareholders.
Although the Bylaws do not give the Board of Directors any power to disapprove
timely shareholder nominations for the election of directors or proposals for
action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal.
Actions required to be taken at a shareholder meeting may be taken
without a meeting only if the unanimous written consent of the shareholders
entitled to vote at such meeting is obtained and delivered to the Company for
inclusion in its minute book or other corporate records.
Georgia Business Combination Statute. Pursuant to its Bylaws, the Company
is subject to the provisions of the Georgia Law, including provisions
prohibiting various "business combinations" involving "interested
48
<PAGE> 50
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, 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
49
<PAGE> 51
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.
SHAREHOLDERS' AGREEMENT
The Company and all of the holders of the Class A Common Stock have
entered into a Shareholders' Agreement whereby the shareholders agreed to
certain restrictions on the transfer or other disposition of the shares of Class
A Common Stock held by each holder. In the event a shareholder intends to
transfer his or her Class A Common Stock to a non-permitted transferee, the
Company and the remaining shareholders have a right of first refusal to purchase
the transferring shareholder's Class A Common Stock at fair market value. In
addition, if the Company terminates a shareholder's employment or engagement (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 Class
A Common Stock which begins at 100% and declines 20% per year for each completed
year of service with the Company. If either the right of first refusal or the
Company's right to purchase is exercised, either provision could have the effect
of further concentrating the stock ownership and voting power of the Company.
See "Risk Factors - Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming the sale of 5,000,000 Shares
offered hereby, the Company will have outstanding 7,983,333 shares of Class B
Common Stock. Of these shares, the 5,000,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act described below, but will be
subject to certain possible restrictions pursuant to the Subscription Agreement.
See "The Offering Transfer Restrictions." The remaining 2,983,333 shares of
Class B Common Stock outstanding upon completion of the Offering 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 addition,
the Company will have outstanding 14,300,000 shares of Class A Common Stock, and
all such shares are Restricted Securities.
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 222,000 shares based on the number of
shares to be outstanding after this Offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the filing
of the Seller's Form 144. Sales under Rule 144 are also subject to certain
notice requirements and the availability of current public information
concerning the Company. After two years have elapsed from the issuance of
Restricted Securities by the Company, such shares generally may be sold without
limitation by persons who have not been affiliates of the Company for at least
quarter. Rule 144 also provides that affiliates who are selling shares which
are not Restricted Securities must nonetheless comply with the same restrictions
applicable to Restricted Securities with the exception of the holding period
requirements.
50
<PAGE> 52
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 Class B Common Stock
offered hereby. See "Risk Factors - Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The audited consolidated financial statements of the Company as of June
30, 1997 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving said report.
51
<PAGE> 53
MAXXIS GROUP, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AS OF JUNE 30, 1997
TOGETHER WITH
AUDITORS' REPORT
F-1
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxxis Group, Inc.:
We have audited the accompanying consolidated balance sheet of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the period from January 24, 1997 (inception) to June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1997 and the results of their operations and their
cash flows for the period from January 24, 1997 (inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
Atlanta, Georgia
September 22, 1997
(except with respect to the matter
discussed in the second paragraph
of Note 8, as to which the date is
October 8, 1997)
F-2
<PAGE> 55
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000
Short-term investments 10,000
Telecommunications receivables 25,000
Inventories 185,000
Prepaid expenses 12,000
Other current assets 23,000
---------
290,000
PROPERTY AND EQUIPMENT, NET 92,000
ORGANIZATIONAL COSTS, NET 76,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000
OTHER ASSETS 20,000
---------
$596,000
=========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Accounts payable $158,000
Commissions payable 42,000
Accrued liabilities 103,000
--------
303,000
--------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000
Class A common stock, no par value; 15,000,000 shares authorized, 14,300,000 shares issued
and outstanding 0
Class B common stock, no par value; 185,000,000 shares authorized, 0 shares issued and
outstanding 0
Subscription receivable (120,000)
Additional paid-in capital 127,000
Accumulated deficit (74,000)
--------
Total shareholders' equity 293,000
--------
$596,000
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 56
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<S> <C>
REVENUES:
Telecommunication services $2,322,000
Marketing services 369,000
----------
Total revenues 2,691,000
----------
COST OF SERVICES:
Telecommunication services 761,000
Marketing services 255,000
----------
Total cost of services 1,016,000
----------
GROSS MARGIN 1,675,000
----------
OPERATING EXPENSES:
Selling and marketing 1,089,000
General and administrative 660,000
----------
Total operating expenses 1,749,000
----------
LOSS BEFORE INCOME TAX BENEFIT (74,000)
INCOME TAX BENEFIT 0
----------
NET LOSS $ (74,000)
==========
NET LOSS PER SHARE $ .00
==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 17,283,333
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 57
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK STOCK ADDITIONAL
--------------------- SUBSCRIPTION SUBSCRIPTION PAID-IN ACCUMULATED
SHARES AMOUNT DEPOSITS RECEIVABLE CAPITAL DEFICIT TOTAL
---------- -------- ------------ ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 24, 1997 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock 14,300,000 0 0 (120,000) 127,000 0 7,000
Stock subscription deposits 0 0 360,000 0 0 0 360,000
Net loss 0 0 0 0 0 (74,000) (74,000)
------------ ------- --------- --------- --------- -------- ---------
BALANCE, JUNE 30, 1997 14,300,000 $ 0 $ 360,000 $(120,000) $ 127,000 $(74,000) $ 293,000
============ ======= ========= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE> 58
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,000)
---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 54,000
Changes in assets and liabilities:
Subscriber receivables (25,000)
Inventories (185,000)
Prepaid expenses (12,000)
Deposits and other (43,000)
Commissions payable 42,000
Accounts payable 158,000
Accrued liabilities 103,000
---------
Total adjustments 92,000
---------
Net cash provided by operating activities 18,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (99,000)
Purchase of short-term investment (10,000)
Software development and organizational costs (241,000)
---------
Net cash used in investing activities (350,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock subscriptions 360,000
Proceeds from issuance of common stock 7,000
---------
Net cash provided by financing activities 367,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 35,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,000
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
=========
Cash paid for income taxes $ 0
=========
Stock issued for note receivable $ 120,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE> 59
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND PRESENTATION
DESCRIPTION OF BUSINESS AND OPERATIONS
Maxxis Group, Inc., a Georgia corporation, was incorporated on
January 24, 1997 (inception) and is headquartered in Tucker, Georgia. The
Company's principal business operations are carried out through its
wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc.,
which began operations in March 1997. Maxxis Group, Inc., together with
its wholly owned subsidiaries (collectively referred to as the
"Company"), was founded for the purpose of providing long-distance
services and other consumable products through a multilevel marketing
system of independent associates ("Associates") to subscribers throughout
the United States. The Company currently markets both long-distance
services and value-added telecommunications services, such as travel
cards, prepaid phone cards, 800 service, and international
telecommunications service.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business.
Since the Company has only recently made the transition to an operating
company, the Company's ability to manage its growth and expansion will
require it to implement and continually expand its operational and
financial systems, recruit additional employees, and train and manage
both current and new employees. Growth may place a significant strain on
the Company's operational resources and systems, and failure to
effectively manage this projected growth would have a material adverse
effect on the Company's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
REVENUE RECOGNITION
Telecommunications services revenues are primarily comprised of prepaid
phone card sales to Associates. The Company purchases prepaid phone cards
from an independent tariffed long-distance reseller (the "Reseller").
Associates purchase these prepaid phone cards from the Company. Revenues
from the sale of these prepaid phone cards are recognized when the cards
are
F-7
<PAGE> 60
sold to the Associates, net of an estimate of sales returns for defective
or unused cards. Associates have the right of return for defective or
unused cards for up to 30 days after the date of purchase.
Telecommunications services also consist of revenues generated from the
Company's agreement with the Reseller that provides for the Company to
receive a percentage of the gross long-distance revenues generated by the
Company's subscribers, less billing adjustments. The Company recognizes
long-distance revenues when services are provided by the Reseller, net of
an estimate for billing adjustments. The Reseller assumes the risk of all
bad debts. Amounts due to the Company related to this agreement are
included in telecommunication receivables in the accompanying balance
sheet.
Marketing services revenues primarily consist of receipts from Associates
for application fees and purchases of distributor kits and sales aids,
which include starter kits of forms, promotional brochures, marketing
materials, and presentation materials.
COST OF SERVICES
Telecommunication services costs include the costs of purchasing the
prepaid phone cards from the Reseller.
Marketing services costs include the costs for printing and designing of
applications, starter kits, and sales aids.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses primarily consist of commissions paid to
Associates based on long-distance usage and the cost of sponsoring new
associates.
CONCENTRATIONS OF CREDIT RISK
The Company's subscribers are primarily residential and are not
concentrated in any specific geographic region of the United States. The
Company purchases its prepaid phone card services from a long-distance
reseller. Failure of this reseller to provide quality services and
customer support could have a material adverse effect on the Company's
results of operations. The Company has an additional agreement with the
long-distance reseller to provide subscriber services, which if
terminated or canceled may significantly impact results of operations of
the Company. While the Company believes it could contract with another
long-distance reseller, the potential disruption of services may have a
material effect on the Company's results of operations.
The Company's success will depend heavily on its ability to attract,
maintain, and motivate a large base of Associates who, in turn, sponsor
subscribers, customers, and other Associates. The Company anticipates a
significant turnover among Associates, which the Company believes is
typical of direct selling. The Company has begun establishing its network
of Associates; however, there can be no assurance that the Company will
be successful in establishing a viable network of Associates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
F-8
<PAGE> 61
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
INVENTORIES
Inventories consist of the following:
Prepaid phone cards $ 25,000
Sales aids 160,000
---------
$ 185,000
=========
Inventories are valued at the lower of purchased cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires that deferred income tax expenses be provided
based on estimated future tax effects of differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes calculated based on provisions
of enacted tax laws (Note 4).
ORGANIZATIONAL COSTS
The Company has capitalized certain organizational costs related to
start-up activities and the legal formation of the Company. These costs
are amortized over one year, and amortization expense was $25,000 for the
period from inception to June 30, 1997.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Certain software development costs pertaining to a software application
which is used internally for processing applications and customer service
have been capitalized as incurred. Capitalization of software development
costs begins upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgement by management with respect to certain external
factors, including but not limited to anticipated future revenues,
estimated economic life, and changes in software and hardware
technologies. These software development costs are amortized over the
estimated useful life of three years, and amortization expense was
$21,000 for the period from inception to June 30, 1997.
OTHER ASSETS
Other assets include security deposits for lease obligations totaling
$20,000.
F-9
<PAGE> 62
SHORT-TERM INVESTMENTS
Included in short-term investments is a certificate of deposit recorded
at cost, which approximates the estimated fair value and matures in May
1998. This investment has been pledged as collateral for one of the
Company's cash accounts.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding under the requirements of Staff Accounting
Bulletin 83. As a result, all shares issued prior to the issuance in
connection with the Registration Statement have been included as
outstanding since inception.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, and accounts payable. The carrying amounts of cash, accounts
receivable, and accounts payable approximate their fair values because of
the short-term maturity of such instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share," which specifies the
computation, presentation, and disclosure requirements for earnings per
share. The Company will be required to adopt this new standard in the
quarter ending December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company will be required to adopt the new
standard in 1998, and all prior period information will be restated.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement
requires companies to determine segments based on how management makes
decisions about allocating resources to segments and measuring their
performance. Disclosures for each segment are similar to those required
under current standards, with the addition of certain quarterly
disclosure requirements. SFAS No. 131 also requires entitywide disclosure
about the products and services an entity provides, the countries in
which it holds material assets and reports material revenues, and its
significant customers. The Company will be required to adopt the new
standard in 1998, and all prior period information presented will be
restated.
The effect of adopting the above statements is not expected to be
material to the consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997:
F-10
<PAGE> 63
Furniture and fixtures $ 99,000
Less accumulated depreciation (7,000)
--------
Property and equipment, net $ 92,000
========
4. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows at June 30, 1997:
Net operating losses $ 18,000
Valuation allowance (18,000)
--------
Net deferred tax assets $ 0
========
Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance of $18,000 at
June 30, 1997. At June 30, 1997, the Company had net operating loss
carryforwards of approximately $50,000, which will expire in the year
2012 unless previously utilized.
The benefit for income taxes at June 30, 1997 was different than the
amount computed using the statutory income tax rate as follows:
Taxes computed at statutory rate $ (17,000)
State income taxes, net of federal benefit (2,000)
Nondeductible expenses 1,000
Change in valuation allowance 18,000
---------
$ 0
=========
5. TRANSACTIONS WITH AFFILIATES
The Company has significant transactions with IS 14, Inc. ("IS 14"),
which is affiliated through common ownership. IS 14 has provided funding
for certain expenses incurred by the Company, and all amounts have been
repaid as of June 30, 1997. The Company paid to IS 14 in consideration
for marketing support a fee equivalent to a percentage of revenues
totaling $184,000 from inception to June 30, 1997, which is included in
selling and marketing operating expense in the accompanying consolidated
statement of operations. Amounts due to IS 14 related to this fee and
included in commissions payable in the accompanying consolidated balance
sheet totaled $9,000 at June 30, 1997.
6. SHAREHOLDERS' EQUITY
The articles of incorporation (the "Articles") authorize the Company to
issue up to 15,000,000 shares of Class A common stock and 185,000,000
shares of Class B common stock. As of June 30, 1997, 14,300,000 shares of
Class A common stock are issued and outstanding and are held of record by
15 shareholders and the Company had received paid subscriptions for
2,400,000 shares of Class B common stock. In addition, the Articles
authorize the Company to issue up to 10,000,000 shares of preferred
stock, no par value per share, with such rights and preferences as the
board of directors shall determine; however, no preferred stock has been
issued as of June 30, 1997.
F-11
<PAGE> 64
In February 1997, the Company sold 13,500,000 shares of the Company's
Class A common stock to the founders of the Company at $.0005 per share.
In May 1997, the Company sold 800,000 shares of Class A common stock to
an executive officer for $0.15 per share in exchange for a $120,000 note
receivable to an affiliate of that individual due on the earlier of
(i) May 1, 2002 or (ii) the closing of an underwritten initial public
offering with aggregate net proceeds of at least $5 million. The note is
guaranteed by the executive officer, bears interest at 8.75% per year,
compounded annually, and is classified as a subscription receivable in
the balance sheet. Each holder of the Class A common stock is entitled to
ten votes per share with respect to each company matter voted on.
The Company and all of the holders of Class A common stock have entered
into a shareholders' agreement whereby the shareholders agreed to certain
restrictions on the transfer or other disposition of the shares of
Class A common stock held by each holder. In the event a shareholder
intends to transfer his or her Class A common stock to a non-permitted
transferee, the Company and the remaining shareholders have a right of
first refusal to purchase the transferring shareholder's Class A common
stock at fair market value. In addition, if the Company terminates a
shareholder's employment or engagement as a sales representative or
consultant for cause, the Company shall have the right to repurchase, at
fair market value, an amount of the shareholder's Class A common stock
which starts at 100% and declines 20% per year for each completed year of
service with the Company. If the right of first refusal or the Company's
right to purchase is exercised, these provisions could have the effect of
further concentrating the stock ownership and voting power of the
Company.
Additionally, in February 1997, the Company completed a private placement
offering for 3,000,000 shares of Class B common stock at a price of $.15
per share. The Class B common stock entitles each holder to one vote per
share with respect to each company matter voted on. Potential investors
were required to complete subscription agreements for the Class B common
stock and submit cash at the date of subscription. The Company reserved
the right to reject a subscription and refund amounts to a Class B
subscriber at any time prior to the acceptance of the subscription. At
June 30, 1997, the Company had received paid subscriptions for 2,400,000
shares of Class B common stock. However, since these subscriptions had
not yet been accepted by the Company and no shares had been issued as of
June 30, 1997, amounts received from subscribers are included in stock
subscription deposits in the accompanying balance sheet. Subsequent to
June 30, 1997, the Company has accepted these subscriptions and
additional subscriptions for 583,333 shares of the Class B common stock.
Upon the closing of an initial public offering, each share of Class A
common stock then outstanding shall automatically be converted into one
fully paid and nonassessable share of Class B common stock. An "initial
public offering" means a public offering of the Company's capital stock
for cash which is offered and sold in a transaction that is registered
under the Securities Act through one or more underwriters, pursuant to an
underwriting agreement between the Company and such underwriters,
resulting in aggregate net proceeds of $5 million to the Company.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and office space under
operating leases. Total rental expense for the period ended June 30,
1997 was approximately $45,000.
F-12
<PAGE> 65
Minimum lease payments under noncancelable leases for the years
subsequent to June 30, 1997 are as follows:
1998 $124,000
1999 72,000
2000 39,000
2001 34,000
2002 and thereafter 0
--------
$269,000
========
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the
ultimate resolution of such matters will not have a material adverse
effect on the Company's financial position, liquidity, or results of
operations.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with the
chief executive officer, and in September 1997, the Company entered into
employment agreements with the executive vice president, the chief
financial officer, and a director (collectively, the "Employment
Agreements"). Generally the Employment Agreements provide for a minimum
weekly salary. In addition, the employee may participate in a bonus
program and shall be eligible to receive quarterly or annual payments of
a performance bonus based on the achievement of targeted levels of
performance and such other criteria as the board of directors shall
establish from time to time. The chief executive officer's Employment
Agreement provides for an additional bonus payment on July 1, 1998. Each
employee may participate in insurance and other benefit plans of
similarly situated employees, including any stock option plans of the
Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each employee upon death
or disability (as defined in the Employee Agreements) or with or without
cause upon delivery of a notice of termination. If the employee is
terminated because of death, disability, or cause, the employee will
receive any accrued compensation through the termination date and any
accrued performance bonus, unless the employee is terminated for cause.
If the employee is terminated without cause, the Company shall pay the
employee severance payments equal to his minimum base salary for each
week during the six-month period following the termination date. If the
employee is a director or officer of the Company or any of its
affiliates, the employee shall tender his resignation to such positions
effective as of the termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following
the termination date if he is terminated or resigns for any reason not to
compete with or solicit employees or customers of the Company or any of
its affiliates within a 30-mile radius of the Company's corporate
offices, provided that if the employee is terminated without cause, the
noncompete period shall be six months.
F-13
<PAGE> 66
RELATIONSHIP WITH ASSOCIATES
Because Associates are classified as independent contractors and not as
employees of the Company, the Company is unable to provide them with the
same level of direction and oversight as company employees. While the
Company has policies and rules in place governing the conduct of the
Associates and intends to review periodically the sales tactics of the
Associates, it may be difficult to enforce such policies and rules.
Violation of these policies and rules might reflect negatively on the
Company and may lead to complaints to or by various federal and state
regulatory authorities. Violation of the Company's policies and rules
could subject the Company and its long-distance provider to complaints
regarding the unauthorized switching of subscribers' long-distance
carriers (also known in the industry as "slamming"). Such complaints
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
REGULATION OF NETWORK MARKETING; EFFECT OF STATE LAWS
The Company's network marketing system is subject to or affected by
extensive government regulation, including, without limitation, federal
and state regulations governing the offer and sale of business
franchises, business opportunities, and securities. Various governmental
agencies monitor direct selling activities, and the Company could be
required to supply information regarding its marketing plan to such
agencies. Although the Company believes that its network marketing system
is in material compliance with the laws and regulations relating to
direct selling activities, there can be no assurance that legislation and
regulations adopted in particular jurisdictions in the future will not
adversely affect the Company's business, financial condition, and results
of operations. The Company could also be found to be in noncompliance
with existing statutes or regulations as a result of, among other things,
misconduct by Associates, who are considered independent contractors over
whom the Company has limited control; the ambiguous nature of certain of
the regulations; and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the
Company or the Associates are not in compliance with existing statutes or
regulations could have a material adverse effect on the Company's
business, financial condition, and results of operations. An adverse
determination by any one state on any regulatory matter could influence
the decisions of regulatory authorities in other jurisdictions.
8. SUBSEQUENT EVENTS
In October 1997, the Company filed a registration statement on Form S-1
for the sale of 5,000,000 shares of Class B common stock primarily to
individuals who are regional and executive directors of the Company.
Effective October 8, 1997, the Company declared a five-for-one reverse
stock split for all classes of common stock. All share, per share, and
weighted average share information in the financial statements and notes
thereto has been restated for this stock split.
In September 1997, the Company entered into independent sales
representative agreements (collectively, the "Sales Representative
Agreements") with ten independent sales representatives. The Sales
Representative Agreements provide for a minimum weekly salary, and each
sales representative shall be eligible to receive quarterly payments of a
performance bonus based on the achievement of targeted levels of
performance. Each sales representative is an independent
F-14
<PAGE> 67
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-15
<PAGE> 68
MAXXIS GROUP, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997
F-16
<PAGE> 69
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, SEPTEMBER 30,
ASSETS 1997 1997
- ---------------------------------------------------------------------------------- ---------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000 $ 69,000
Short-term investments 10,000 10,000
Telecommunication receivables 25,000 125,000
Inventories 185,000 234,000
Prepaid expenses 12,000 22,000
Other current assets 23,000 0
--------- ---------
290,000 460,000
PROPERTY AND EQUIPMENT, NET 92,000 164,000
ORGANIZATIONAL COSTS, NET 76,000 50,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000 145,000
OTHER ASSETS 20,000 20,000
--------- ---------
$ 596,000 $ 839,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, SEPTEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1997
- ---------------------------------------------------------------------------------- --------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 158,000 $ 291,000
Commissions payable 42,000 57,000
Accrued liabilities 103,000 145,000
--------- ---------
303,000 493,000
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000 0
Class A common stock, no par value; 15,000,000 shares authorized,
14,300,000 shares issued and outstanding 0 0
Class B common stock, no par value; 185,000,000 shares authorized, 0 and
2,983,333 shares issued and outstanding at June 30, 1997 and
September 30, 1997, respectively 0 0
Subscription receivable (120,000) (120,000)
Additional paid-in capital 127,000 574,000
Accumulated deficit (74,000) (108,000)
--------- ---------
Total shareholders' equity 293,000 346,000
--------- ---------
$ 596,000 $ 839,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheet.
F-17
<PAGE> 70
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
REVENUES:
Telecommunication services $ 1,465,000
Marketing services 353,000
------------
Total revenues 1,818,000
------------
COST OF SERVICES:
Telecommunication services 438,000
Marketing services 100,000
------------
Total cost of services 538,000
------------
GROSS MARGIN 1,280,000
------------
OPERATING EXPENSES:
Selling and marketing 716,000
General and administrative 598,000
------------
Total operating expenses 1,314,000
------------
LOSS BEFORE INCOME TAX BENEFIT (34,000)
------------
INCOME TAX BENEFIT 0
NET LOSS $ (34,000)
============
NET LOSS PER SHARE $ 0
------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 17,283,333
============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-18
<PAGE> 71
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (34,000)
---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 50,000
Changes in assets and liabilities:
Subscriber receivables (100,000)
Inventories (49,000)
Prepaid expenses (10,000)
Deposits and other 23,000
Commissions payable 15,000
Accounts payable 133,000
Accrued liabilities 42,000
---------
Total adjustments 104,000
---------
Net cash provided by operating activities 70,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (75,000)
Software development costs (48,000)
--------
Net cash used in investing activities (123,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 87,000
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,000
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 69,000
========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
========
Cash paid for income taxes $ 0
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-19
<PAGE> 72
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities and Exchange Commission.
The accompanying unaudited consolidated financial statements reflect, in
the opinion of management, all adjustments necessary to achieve a fair
statement of financial position and results for the interim periods
presented. All such adjustments are of a normal and recurring nature. It
is suggested that these consolidated financial statements be read in
conjunction with the annual financial statements of Maxxis Group, Inc.
and Subsidiaries (the "Company") and the notes thereto.
2. SUBSEQUENT EVENT
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 is secured primarily by all of the assets of the
Company. The Note accrues interest at 10%, payable monthly beginning on
January 1, 1998, and principal is due on demand.
F-20
<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 5,000,000 shares of its Class B Common Stock, no
par value per share (the "Class B Common Stock"), at a price of $0.50 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 $0.50 per share for the number of shares of Class B 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 Class B 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 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 Class B Common Stock to
the undersigned subscriber, the undersigned subscriber:
(i) agrees not to sale or transfer 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 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 of Class B Common Stock purchased pursuant to this
Subscription Agreement or any securities issued on account of such Class B
Common Stock (whether by stock split, stock dividend or otherwise)
(collectively, 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);
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; and
(iv) agrees that a legend in substantially the following form will be
placed on certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT TO
CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS ARE SET
FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") BY AND
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. ANY
TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO THE CONDITIONS
SET FORTH IN THE SUBSCRIPTION AGREEMENT.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH SHARES
WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF SUCH
OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I) SUCH
REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH JURISDICTION AND
SET FORTH SUCH INFORMATION AS IS 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 by
the Company by giving notice of the imposition of such restriction (the "Lock-up
Notice") to holders of record of the Shares by first class mail, postage prepaid
(or, at the Company's option, certified mail, return receipt requested), at the
address of the holders of record of the Shares on a date chosen by the Company
that is at least one but no more than fifteen days prior to such mailing. The
restrictions set forth herein shall be effective upon receipt of such notice,
which date of receipt shall be deemed to be three days following such mailing.
Such notice may be given by the Company such that it is received on any date
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").
A-2
<PAGE> 75
(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"). The Lock-up Period shall terminate if the
Company files an IPO Registration Statement but such registration statement is
subsequently withdrawn or is not declared effective within 120 days of filing
with the SEC, or if the Company transmits a Lock-up Notice prior to the filing
of an IPO Registration Statement but the IPO Registration Statement is not filed
within 15 days of receipt of such notice; provided, however, that in any such
event the restrictions set forth in Section 3(a)(ii) shall survive and shall be
applicable to each subsequent filing of an IPO Registration Statement by the
Company until an IPO Registration Statement is first declared effective by the
SEC.
(d) All obligations of the undersigned subscriber set forth herein
shall be binding upon the undersigned subscriber's heirs, personal
representatives, successors, transferees and assigns.
4. ACKNOWLEDGMENTS. The undersigned subscriber hereby acknowledges
that he or she has received and reviewed a copy of the Prospectus and all
amendments thereto. This Subscription Agreement creates a legally binding
obligation, and the undersigned subscriber agrees to be bound by the terms of
this Agreement.
5. REVOCATION. The undersigned subscriber agrees that once this
Subscription Agreement is tendered to the Company, it may not be withdrawn and
that this Agreement shall survive the death or disability of the undersigned
subscriber.
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 200 shares)
- ------------------------------------- ------------------------------------------
$
Total Subscription Price at Please indicate form of ownership desired
$0.50 per share (individual, joint tenants with right of survivorship,
(funds must be enclosed) tenants in common, trust, corporation,
partnership, custodian, etc.)
Date: (L.S.)
-------------------------------- ------------------------------------------
Signature of Subscriber(s)*
(L.S.)
- ------------------------------------- ------------------------------------------
Social Security Number or Federal Signature of Subscriber(s)*
Taxpayer Identification Number
STREET (RESIDENCE) ADDRESS:
------------------------------------------
------------------------------------------
------------------------------------------
City, State and Zip Code
</TABLE>
* When signed as attorney, trustee, administrator or guardian, please
give your full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. In the case of
joint tenants or tenants in common, each owner must sign.
FEDERAL INCOME TAX BACKUP WITHHOLDING
In order to prevent the application of federal income tax backup
withholding, each subscriber must provide the Escrow Agent with a correct
Taxpayer Identification Number ("TIN"). An individual's social security number
is his or her TIN. The TIN should be provided in the space provided in the
Substitute Form W-9, which is set forth below.
Under federal income tax law, any person who is required to furnish his
or her correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the IRS.
Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of taxes, a refund may
be obtained from the IRS. Certain taxpayers, including all corporations, are not
subject to these backup withholding and reporting requirements.
If the shareholder has not been issued a TIN and has applied for a TIN
or intends to apply for a TIN in thee near future, "Applied For" should be
written in the space provided for the TIN on the Substitute Form W-9.
A-4
<PAGE> 77
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify that: (i) the number shown on
this form is my correct Taxpayer Identification Number (or I am waiting for a
Taxpayer Identification Number to be issued to me), and (ii) I am not subject to
backup withholding because: (a) I am exempt from backup withholding; or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends; or (c) the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (ii) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out
item (ii).
Each subscriber should complete this section.
- -------------------------------------------- ---------------------------
Signature of Subscriber Signature of Subscriber
- -------------------------------------------- ---------------------------
Printed Name Printed Name
- -------------------------------------------- ---------------------------
Social Security or Employer Identification No. Social Security or Employer
Identification No.
TO BE COMPLETED BY THE COMPANY:
Accepted as of ____________________, 199___, as to ______________
shares.
MAXXIS GROUP, INC.
By:
------------------------------------
Name:
Title:
A-5
<PAGE> 78
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information............................................. 2
Prospectus Summary................................................. 3
Risk Factors....................................................... 8
The Offering....................................................... 20
Use of Proceeds.................................................... 23
Dividend Policy.................................................... 23
Capitalization..................................................... 24
Dilution........................................................... 25
Selected Consolidated Financial Data............................... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........................................ 27
Business........................................................... 31
Management......................................................... 40
Certain Transactions............................................... 44
Principal Shareholders............................................. 46
Description of Capital Stock....................................... 47
Shares Eligible for Future Sale.................................... 50
Legal Matters...................................................... 51
Experts............................................................ 51
Index to Consolidated Financial Statements......................... F-1
Subscription Agreement............................................. A-1
</TABLE>
================================================================================
================================================================================
5,000,000 SHARES
[LOGO]
MAXXIS GROUP, INC.
CLASS B
COMMON STOCK
-------------------------------------
P R O S P E C T U S
-------------------------------------
, 1998
================================================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Registration Fee........................................... $ 758
Blue Sky Fees and Expenses................................. 50,000*
Printing and Engraving..................................... 100,000*
Legal Fees and Expenses.................................... 100,000*
Accounting Fees and Expenses............................... 100,000*
Miscellaneous.............................................. 49,242*
------------
Total.................................................. $ 400,000*
============
</TABLE>
- --------------
* Estimated for filing purposes.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code (the "Georgia Law") permits a
corporation to eliminate or limit the personal liability of a director to the
corporation or its shareholders for monetary damages for a breach of duty,
provided that no provision shall eliminate or limit the liability of a director
for: an appropriation of any business opportunity of the corporation; any act or
omission which involves an intentional misconduct or a knowing violation of law;
any transaction from which the director derives an improper personal benefit; or
any distribution that is illegal under Section 14-2-832 of the Georgia Law. The
Company's Articles contain a provision which limits the liability of a director
to the Company or its shareholders for any breach of duty as a director except
for a breach of duty for which the Georgia Law prohibits such limitation of
liability. This provision does not limit the right of the Company or its
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
The Company's Articles and Bylaws contain certain provisions which
provide indemnification to directors of the Company that is broader than the
protection expressly mandated in Sections 14-2-852 and 14-2- 857 of the Georgia
Law. If a director or officer of the Company has been wholly successful, on the
merits or otherwise, in the defense of any action or proceeding brought by
reason of the fact that such person was a director or officer of the Company,
Sections 14-2-852 and 14-2-857 of the Georgia Law would require the Company to
indemnify such person against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith. The Georgia Law expressly allows
the Company to provide for greater indemnification rights to its officers and
directors, subject to shareholder approval.
The indemnification provisions in the Company's Articles and Bylaws
require the Company to indemnify and hold harmless each of its directors,
officers, employees and agents to the extent that he or she is or was a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including, but not
limited to, attorneys' fees and disbursements, court costs and expert witness
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by
II-1
<PAGE> 80
action of the board of directors, the shareholders or otherwise, including any
liability of a director for: (i) any appropriation, in violation of his duties,
of any business opportunity of the Company; (ii) any acts or omissions involving
intentional misconduct or a knowing violation of the law; (iii) any unlawful
distribution as set forth in Section 14-2-832 of the Georgia Law; or (iv) any
transaction from which the director received an improper personal benefit.
Indemnified persons would also be entitled to have the Company advance expenses
prior to the final disposition of the proceeding. If it is ultimately determined
that they are not entitled to indemnification, however, such amounts must be
repaid.
The Company has the power, under its Bylaws, to obtain insurance on
behalf of any director, officer, employee or agent of the Company against any
liability asserted against or incurred by such person in any such capacity,
whether or not the Company has the power to indemnify such person against such
liability at that time under the Articles, Bylaws or the Georgia Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued or
sold since the inception of the Company which were not registered under the
Securities Act:
(i) in February 1997, the Company sold 13,500,000 shares of Class A
Common Stock to the founders of the Company for $0.0005 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 800,000 shares of Class A Common Stock to The Anchora
Company, an entity of which Mr. Cordy serves as protector, for
$0.15 per share; and
(iii) in August 1997, the Company sold 2,983,333 shares of Class B
Common Stock to 42 purchasers in a private placement for $0.15 per
share.
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 five-for-one
reverse stock split effective October 8, 1997.
ITEM 16. EXHIBITS
The exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
3.1R 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 Class B Common Stock certificate.
4.3** Shareholders Agreement, dated as of September 1, 1997 among
the Company and the holders of Class A 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.+
10.11 Sublease Agreement between DowElanco and the Company dated
February 14, 1997.++
10.12** Warehouse lease between Malon D. Mimms and the Company dated
March 17, 1997.
10.13** Warehouse lease between Malon D. Mimms and the Company dated
June 23, 1997.
10.14 Demand Secured Promissory Note dated November 26, 1997 by
the Company in favor of the lenders named on Schedule I
thereto.
10.15 Sub-Sublease Agreement between the Company and Simons
Engineering, Inc. dated September 1, 1997.++
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in Exhibit 5.1).
24.1** Power of Attorney (contained on the signature page hereto
with respect to Mr. McDonough and previously filed with
respect to all other signatories).
27.1** Financial Data Schedule.
</TABLE>
- ---------------------------
** Previously filed.
* To be filed by Amendment.
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities Act.
In accordance with Rule 406, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
++ The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request, as provided in Item 601(b)(2) of Regulation S-K.
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes as follows:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement. Notwithstanding the
foregoing, any increase or
II-3
<PAGE> 82
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high and of the
estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than
20 percent change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective
Registration Statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability
under the Act, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under
the Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 7th day of January, 1998.
MAXXIS GROUP, INC.
By: /s/ Thomas O. Cordy
--------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ivey J. Stokes and Thomas O. Cordy, and
each of them, as his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any related Registration
Statement pursuant to Rule 462 under the Securities Act of 1933, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully and
to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all which said attorney-in-fact and agent or his substitute or
substitutes may lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
* Chairman of the Board January 7, 1998
- ------------------------------------------------
Ivey J. Stokes
/s/ Thomas O. Cordy Chief Executive Officer, President January 7, 1998
- ------------------------------------------------ and Director (Principal executive
Thomas O. Cordy officer)
/s/ Daniel McDonough Chief Financial Officer January 7, 1998
- ------------------------------------------------ (Principal financial
Daniel McDonough and accounting officer)
* Director and Secretary January 7, 1998
- ---------------------------------------------
James W. Brown
* Director January 7, 1998
- ---------------------------------------------
Charles P. Bernstein
* Director January 7, 1998
- -----------------------------------------------
Alvin Curry
* Director January 7, 1998
- -----------------------------------------------
Larry W. Gates, II
</TABLE>
II-5
<PAGE> 84
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
* Director January 7, 1998
- ------------------------------------------------
Robert J. Glover, Jr.
* Director January 7, 1998
- ------------------------------------------------
Terry Harris
* Director January 7, 1998
- ------------------------------------------------
Phil Lundquist
*By: /s/ Thomas O. Cordy
Thomas O. Cordy
Attorney-in-Fact pursuant to the power of
attorney granted in Registration
Statement (No. 333-38623) as filed
October 24, 1997.
</TABLE>
II-6
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
3.1R 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 Class B Common Stock certificate.
4.3 ** Shareholders Agreement, dated as of September 1, 1997
among the Company and the holders of Class A Common Stock.
5.1 * Opinion of Nelson Mullins Riley & Scarborough, L.L.P.,
counsel to the Company, as to the legality of the shares
being registered.
10.1 ** Form of Employment Agreement by and between the Company
and certain of its officers.
10.2 ** Employment Agreement by and between the Company and
Thomas O. Cordy dated as of May 1, 1997.
10.3 ** Promissory Note by The Anchora Company in favor of the
Company dated as of May 1, 1997 in the original principal
amount of $120,000.
10.4 ** Guarantee by Thomas O. Cordy in favor of the Company
dated May 1, 1997.
10.5 ** Form of Independent Sales Representative Agreement by and
between the Company and
certain of its sales representatives.
10.6 ** Consulting Agreement by and between the Company and Robert
P. Kelly dated as of
September 1, 1997.
10.7 ** Software License Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company
dated February 2, 1997.
10.8 ** Software Service Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company
dated February 2, 1997.
10.9R Equipment Purchase Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company
dated February 2, 1997.
10.10 ** Agreement for 1-Plus Services between Colorado River
Communications Corporation and the Company dated February
20, 1997.+
10.11 Sublease Agreement between DowElanco and the Company dated
February 14, 1997.++
10.12 ** Warehouse lease between Malon D. Mimms and the Company
dated March 17, 1997.
10.13 ** Warehouse lease between Malon D. Mimms and the Company
dated June 23, 1997.
10.14 Demand Secured Promissory Note dated November 26, 1997 by
the Company in favor of the lenders named on Schedule I
thereto.
10.15 Sub-Sublease Agreement between the Company and Simons
Engineering, Inc. dated September 1, 1997.++
21.1 ** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 * Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in Exhibit 5.1).
24.1 ** Power of Attorney (contained on the signature page hereto
with respect to Mr. McDonough and previously filed with
respect to all other signatories).
27.1 ** Financial Data Schedule.
</TABLE>
- --------------------
** Previously filed.
* To be filed by Amendment.
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities Act.
In accordance with Rule 406, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
++ The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request, as provided in Item 601(b)(2) of Regulation S-K.
<PAGE> 1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MAXXIS GROUP, INC.
ARTICLE I
The name of the corporation is "Maxxis Group, Inc." The principal
executive office of the corporation is 1901 Montreal Road, Suite 108, Tucker,
Georgia 30084.
ARTICLE II
The corporation shall have authority to issue not more than
210,000,000 shares of capital stock which shall consist of:
(i) 15,000,000 shares of Class A Common Stock, no par value
per share (the "Class A Common Stock"); and
(ii) 185,000,000 shares of Class B Common Stock, no par value
per share (the "Class B Common Stock," and together with the Class A
Common Stock, the "Common Stock"); and
(iii) 10,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock").
A. Common Stock.
The holders of Class A Common Stock and Class B Common Stock shall
have the following specific powers, designations, preferences and relative
participating rights and privileges:
(a) Voting. Each holder of Class A Common Stock shall be entitled
to ten votes per share, whether in person or by proxy, for each share of Class
A Common Stock outstanding in his name on the transfer books of the
corporation. Each holder of Class B Common Stock shall be entitled to one vote
per share, whether in person or by proxy, for each share of Class B Common
Stock outstanding in his name on the transfer books of the corporation. Except
as otherwise provided by the Georgia Business Corporation Code, as amended (the
"Act"), or these Amended and Restated Articles of Incorporation, (i) the
holders of Class A Common Stock and Class B Common Stock shall vote together as
a combined class on all matters to be voted on by the shareholders of the
corporation, and (ii) a majority of the votes entitled to be cast on a matter
as determined for the combined class shall constitute a quorum of the single
class for action on that matter.
<PAGE> 2
(b) Conversion. On the closing date of an Initial Public
Offering, each share of Class A Common Stock then outstanding shall
automatically be converted into one fully paid and nonassessable share of Class
B Common Stock. Upon such conversion, the certificates which theretofore
evidenced the shares of Class A Common Stock shall be deemed to evidence shares
of Class B Common Stock until such time, if any, as new certificates for the
shares of Class B Common Stock are issued pursuant to procedures established by
the corporation for such purpose. For purposes hereof, "Initial Public
Offering" shall mean a public offering of the corporation's capital stock for
cash which is offered and sold in a transaction that is registered under the
Securities Act of 1933, as amended, and through one or more underwriters,
pursuant to an underwriting agreement between the corporation and such
underwriters, resulting in aggregate net proceeds of at least $5,000,000 to the
corporation.
(c) Dividends. Holders of the Common Stock shall be entitled to
receive such dividends and other distributions in cash, stock or property of
the corporation as may be declared thereon by the Board of Directors from time
to time out of assets or funds of the corporation legally available therefor.
(d) Ranking. In the event of any dissolution, liquidation or
winding up of the corporation, whether voluntary or involuntary, after there
shall have been paid, or set aside for payment, to the holders of shares of any
class having preference over the Common Stock in the event of dissolution,
liquidation or winding up, the full preferential amounts to which they are
respectively entitled, then the holders of shares of Common Stock shall
participate equally with the holders of shares of any other class or series of
stock entitled to participate with the Common Stock in the event of
dissolution, liquidation or winding up, in the distribution of any remaining
assets of the corporation.
B. Preferred Stock.
In addition to the Common Stock, the corporation shall have the
authority, exercisable by its Board of Directors, to issue up to 10,000,000
shares of Preferred Stock, any part or all of which shares of Preferred Stock
may be established and designated from time to time by the Board of Directors
by filing an amendment to these Amended and Restated Articles of Incorporation,
which shall be effective without shareholder action, in accordance with the
appropriate provisions of the Act, and any amendment or supplement thereto (a
"Preferred Stock Designation"), in such series and with such preferences,
limitations and relative rights as may be determined by the Board of Directors.
The number of authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of a majority of the votes of the Common Stock, without a vote
of the holders of the shares of Preferred Stock, or of any series thereof,
unless a vote of any such holders is required by law or pursuant to the
Preferred Stock Designation or Preferred Stock Designations establishing the
series of Preferred Stock.
ARTICLE III
The corporation shall have not more than fifteen directors, and the
number of directors shall be set by the Board of Directors as set forth in the
corporation's Amended and Restated Bylaws. The Board of Directors shall be
divided into three classes to be known as Class I, Class
<PAGE> 3
II, and Class III, which shall be as nearly equal in number as possible.
Except in case of death, resignation, disqualification or removal for cause,
each director shall serve for a term ending on the date of the third annual
meeting of shareholders following the annual meeting at which the director was
elected; provided, however, that each initial director in Class I shall hold
office until the first annual meeting of shareholders after his election; each
initial director in Class II shall hold office until the second annual meeting
of shareholders after his election; and each initial director in Class III
shall hold office until the third annual meeting of shareholders after his
election. Despite the expiration of a director's term, he shall continue to
serve until his successor, if there is to be any, has been elected and
qualified. In the event of any increase or decrease in the authorized number
of directors, the newly created or eliminated directorships resulting from such
an increase or decrease shall be apportioned among the three classes of
directors so that the three classes remain as nearly equal in size as possible;
provided, however, that there shall be no classification of additional
directors elected by the Board of Directors until the next meeting of
shareholders called for the purposes of electing directors, at which meeting
the terms of all such additional directors shall expire, and such additional
directors positions, if they are to be continued, shall be apportioned among
the classes of directors and nominees therefor shall be submitted to the
shareholders for their vote. Any vacancy occurring on the Board of Directors,
including a vacancy resulting from an increase in the number of directors, may
only be filled by the affirmative vote of the remaining directors even if the
remaining directors constitute less than a quorum of the Board of Directors.
ARTICLE IV
No director of the corporation shall be personally liable for monetary
damages to the corporation or its shareholders for breach of the duty of care
or any other duty as a director, except that such liability shall not be
eliminated for:
(i) any appropriation, in violation of the director's
duties, of any business opportunity of the corporation;
(ii) acts or omissions which involve intentional
misconduct or a knowing violation of law;
(iii) liability under Section 14-2-832 (or any successor
provision or redesignation thereof) of the Act; and
(iv) any transaction from which the director received an
improper personal benefit.
If at any time the Act shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Act, as so amended, without further action
by the shareholders, unless the provisions of the Act, as amended, require
further action by the shareholders. Any repeal or modification of the
foregoing provisions of this Article IV shall not adversely affect the
elimination or limitation of liability or alleged liability pursuant hereto of
any director of the corporation for or with respect to any alleged act or
omission of the director occurring prior to such repeal or modification.
<PAGE> 4
ARTICLE V
All actions by the shareholders shall be taken at a meeting, with
prior notice which complies with the notice provisions of the corporation's
Amended and Restated Bylaws, and with a vote of the holders of the outstanding
stock of each voting group entitled to vote thereon.
ARTICLE VI
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the corporation,
the Board of Directors, committees of the Board of Directors and individual
directors, in addition to considering the effects of any action on the
corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the corporation and its subsidiaries, the
communities in which offices or other establishments of the corporation and its
subsidiaries are located and all other factors such directors consider
pertinent; provided, however, that any such provision shall be deemed solely to
grant discretionary authority to directors and shall not be deemed to provide
to any constituency any right to be considered.
The amendments contained herein were duly approved by the written
consents of holders of a majority of the shares of the Class A and Class B
Common Stock of the corporation, voting as a single group, in accordance with
Section 14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the undersigned has executed these Amended and
Restated Articles of Incorporation as of the 9th day of October, 1997.
/s/ Thomas O. Cordy
-------------------------------------
Thomas O. Cordy
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.9R
===============================================================================
EQUIPMENT PURCHASE AGREEMENT
===============================================================================
The following document constitutes a Purchase Agreement between:
SUMMIT V, INC., a subsidiary of Jenkon International, Inc., a corporation
organized and existing under the laws of the State of Washington, United States
of America, located at 4601 NE 77TH AVENUE, SUITE 300, VANCOUVER, WA 98662,
hereinafter referred to as Seller, and
IS 14, Inc. (Maxxis Group, Inc.), a corporation organized and existing under the
State of GEORGIA, United States of America, located at 11205 ALPHARETTA HWY,
SUITE G-3, ROSWELL, GA 30076 hereinafter referred to as BUYER.
1. BASIS OF AGREEMENT
===============================================================================
Buyer agrees to purchase the equipment identified herein, and Seller
agrees to sell the respective specified products listed at the
Agreement price in Paragraph 3.1 as agreed upon in the Terms and
Conditions of this Equipment Purchase Agreement.
2. HARDWARE EQUIPMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
LIST OF EQUIPMENT PRICE
- -------------------------------------------------------------------------------
<S> <C>
MONOLITH MARQUIS POWER SERVER $14,750.00
1 Intel 586/200mhz Pentium Pro Processor
1 SVGA 14' Color System Monitor and 101 -Key Keyboard
1 2.0 GB Hard Disk
1 1.44 MB Diskette Drive
1 32MB RAM
1 2 Serial Ports
1 Parallel Printer Port
1 SmartSource UPS 650
1 2.5 Gb 1/4 Tape Back-Up System
1 16 - Port Mux
1 1 year On-Site Maintenance
1 Support Modem with Cable
1 On-Site Installation
- -------------------------------------------------------------------------------
</TABLE>
3. PRICE AND PAYMENT SCHEDULE
===============================================================================
3.1 The stated price that Buyer agrees to pay Seller for the full
performance of this Agreement is the sum of: $14,750.00
3.2 PAYMENT SCHEDULE
<TABLE>
<S> <C> <C>
Deposit of $7,375.00 due upon execution of this Agreement.
Payment of $3,688.00 due February 22, 1997.
Balance of $3,688.00 due upon installation of base hardware package at Licensee site.
</TABLE>
Any late payment according to the terms set forth in the payment
schedule above shall be subject to
<PAGE> 2
a late payment charge of one and one half percent (I 1/2%) per month,
or the maximum allowed by law, whichever is less, on the past due
balance, commencing with the payment's due date.
4. EFFECTIVE DATE
================================================================================
Date 2/2/97. This is the effective date of this Agreement.
5. HARDWARE PURCHASE
================================================================================
5.1 DELIVERY/DELAYS
The Seller shall deliver the equipment in conjunction with the
Manufacturer's production schedule; and in any case, no later that
sixty days. Delivery shall be the date on which:
- The Equipment arrives at the Buyer's installation address, or
- The Manufacturer delivers the product to the Buyer's freight
carrier, or
- The Buyer takes possession from the Seller's freight carrier.
5.2 WARRANTIES
The equipment purchased pursuant to this Agreement is manufactured by a
vendor other than Seller, and any warranties for the equipment
specified herein shall be only as may be provided by the
vendor/manufacturer, SELLER MAKES NO WARRANTIES, EITHER EXPRESSED OR
IMPLIED, WITH RESPECT TO SUCH EQUIPMENT, INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
Seller shall assign to Buyer the benefits of the vendor/manufacturer's
warranty which Seller may receive from vendor/manufacturer with respect
to such equipment. Seller will furnish Buyer with a copy of the
standard warranty which may be applicable to the machine from the
vendor/manufacturer. Seller agrees to test such equipment and process
all returns or warranty.
Seller agrees to take no action nor fail to take any action which would
make vendors/manufacturers warranty inapplicable to the Buyer unless
requested to do so by the Buyer.
5.3 EQUIPMENT ACCEPTANCE
Acceptance takes place when the Hardware has been installed and the
Operating System software has been loaded either by Buyer, or by
Seller, or by Manufacturer's Service Technician. Acceptance for
peripheral equipment, not a part of the system equipment, such as video
terminals, printers, modems, occurs when said peripheral equipment is
received by Buyer. Title to the equipment will be delivered to Buyer
upon receipt of payment in full.
5.4 DEPOSIT AND RESTOCKING FEES
Buyer recognizes that any deposit paid under this Agreement will be
withheld as down payment for equipment ordered by Seller for Buyer.
Should Buyer cancel this Agreement, any deposit refunded under this
Agreement will be subject to a deduction of a minimum of $1,500, actual
costs incurred by Seller, or 10% of the value of the equipment as per
this Agreement, whichever is the greater.
The equipment price stated herein is exclusive of all taxes, duties and
other governmental charges. The Buyer agrees to pay any and all taxes,
and other governmental charges on the equipment however designated or
levied whether or not specifically included in this Agreement.
<PAGE> 3
5.6 LIMITATION OF REMEDIES
The entire liability of Seller to Buyer, or to any third party, and the
Buyer's exclusive remedy, shall be as follows:
Seller's liability for damages to the Buyer or any third party for any
cause whatsoever, and regardless of the form of action, whether in
contract or in tort, including negligence, shall be limited to direct
and actual damages directly and solely caused by Seller's performance
or nonperformance hereunder and will not exceed the purchase price paid
by Buyer for the specific equipment that is the subject matter of, or
is directly related to, the cause of action. The measure of damages
shall not include any amounts for indirect, consequential, or punitive
damages of any party, including third parties, or for damages which
could have been avoided, and the data furnished by the equipment has
been verified before utilization thereof. In no event will Seller be
liable for any damages caused by the Buyer's failure to perform the
Buyer's responsibilities, or for any lost profits or savings or other
consequential damages, regardless of the form of action, whether in
contract or in tort, including negligence, even if Seller has been
advised of the possibility of such damages, or for any claim against
the Buyer by another party, or for any damages caused by performance or
nonperformance of the equipment.
5.7 MANUALS
Seller will provide one full set of the required primary System Manuals
as provided by manufacturer.
5.8 COMMUNICATION AND POWER WIRING
The actual installation of wiring and the associated costs are the
responsibility of the Buyer. The proper electrical service must be
available prior to the installation of the Computer. To make it
possible to do remote system maintenance, and acceptable modem must be
connected to the computer, and a voice-grade phone live for this must
be installed prior to the equipment installation. The operator must
also have access to another voice communication phone adjacent to the
System console terminal. Seller shall provide functional and technical
specifications to allow Buyer to comply with the requirements of this
section.
6. GENERAL:
================================================================================
6.1 DEFAULT
It is a default under this Agreement if any one or more of the
following events occur and Seller is adversely affected:
6.1.1 Buyer breaches any one or more of the covenants, terms or
conditions of this Agreement to be paid, performed, or
complied with by Buyer; or
6.1.2 Buyer becomes bankrupt or insolvent
In the event that a default on the payment terms
occur on this agreement, Seller may exercise his
rights of enforcement under the Uniform Commercial
Code in force in the State of STATE at the date of
this Security Agreement and, in conjunction with,
addition to,, or substitution for those rights, at
Seller's discretion, may
6.1.3 Section Removed
6.1.4 Enter upon Licensee's premises to take possession of,
assemble, and collect the Collateral or render it unusable.
<PAGE> 4
6.2 SECURITY INTEREST GRANTED
Licensee hereby grants a money purchase security interest in and
assigns to the Licensor the collateral described in Section 6.1.4 above
to secure payment and performance of this Agreement.
Licensee will sign and execute any financing statement or other
document or procure any document and pay all connected costs necessary
to protect the security interest of Licensee against the rights and
interests of a third party.
This security interest will be removed after has been paid in full, the
amount of which is stipulated in Section 6.1.3 above.
6.3 NOTICES
All other notices required hereunder shall be given in writing and
shall be personally delivered or sent by postage prepaid mail addressed
to the parties at their addresses first mentioned, or at such other
addresses as either party may designate to the other by notice as
provided in this Section. Notices shall be deemed effective upon their
deposit into the U.S. Mail, properly addressed and postage prepaid.
6.4 INVALID PROVISIONS
If any provision of this Agreement be invalid or unenforceable, then
the remainder of this Agreement shall not be affected thereby.
6.5 ENTIRE AGREEMENT
This Agreement supersedes all prior agreements, letters of intent,
negotiations, representations and proposals, written or oral, requests
for proposals, or previous discussions of the parties. There have been
no other promises or inducements, oral or written, given by any party
to the other to enter into this Agreement. The parties agree that this
Agreement or any term or provision thereof shall not be modified in any
manner whatsoever without the written authorization of both parties
hereto and signed by both an authorized representative of Buyer and by
an authorized representative of Seller.
6.6 ARBITRATION
If any controversy or dispute arises out of this Agreement, or the
breach thereof, the parties will endeavor to settle such dispute
amicably. If the parties shall fail to settle any dispute, such dispute
shall be finally settled by blinding arbitration conducted in Clark
County, Washington. All arbitration shall be in accordance with the
then existing Commercial Arbitration rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction thereof-, provided that
nothing in this Section shall prevent a party from applying to a court
of competent jurisdiction to obtain temporary relief pending resolution
of the dispute through arbitration. The parties hereby agree that
service of any notices in the course of such arbitration at their
respective addresses as provided for in this Agreement shall be valid
and sufficient. If either party seeks to enforce its rights under this
Agreement, the non-prevailing party shall pay all costs and expenses
incurred by the prevailing party.
6.7 ATTORNEY FEES
The Prevailing party in any arbitration or lawsuit concerning this
Agreement or any matter related thereto shall be entitled to any award
of reasonable attorney fees and costs from the other, including fees
incurred through trial, appeal or in bankrupt proceedings. Seller shall
be entitled to recover reasonable attorney's fees incurred with regard
to collection of payments due to repossession or disposal of
collateral, without regard to the institution of legal proceedings.
<PAGE> 5
================================================================================
7. AUTHORIZED SIGNATURE
================================================================================
This Agreement shall be binding upon Buyer and Seller only at such time
as it has been signed by an Authorized Officer of the Buyer and by an
Officer, identified below, of Seller.
================================================================================
ACCEPTED BY: Summit V, Inc. IS 14, Inc.
================================================================================
NAME (PLEASE PRINT) Brian W. Maggs James W. Brown
(Maxxis Group, Inc.)
================================================================================
NAME (SIGNATURE) /S/ Brian W. Maggs /s/ James W. Brown
================================================================================
TITLE: Executive Vice President President
================================================================================
DATE: 2/10/97 2/2/97
================================================================================
<PAGE> 1
EXHIBIT 10.11
SUBLEASE
1. PARTIES.
This Sublease, dated ___________________, 1997 is made between
DowElanco ("Sublessor"), and IS 14 Inc. ("Sublessee").
2. MASTER LEASE
Sublessor is the lessee under a written lease dated November 23, 1993,
wherein ORE Holding, a California Corporation ("Lessor") leased to
Sublessor the real property located in the City of Roswell, County of
Fulton, State of Georgia, described as 1080 Holcomb Bridge Road -
Roswell Summit, Building 100, Suite 135 ("Master Premises"). Said
lease is herein referred to as the "Master lease" and is attached
hereto as Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions
set forth in this Sublease the following portion of the Master
Premises ("Premises"): Approximately 3,938 square feet, Building 100,
Suite 135. The Sublessee agrees to take the premises "As Is"; and that
no tenant improvement work is to be performed by ORE Holding Company
as the landlord relative to the Sublease.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease
has not been amended or modified except as expressly set forth herein,
that Sublessor is not now, and as of the commencement of the Term
hereof will not be, in default or breach of any of the provisions of
the Master Lease, and that Sublessor has no knowledge of any claim by
Lessor that Sublessor is in default or breach of any of the provisions
of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on February 15, 1997,
("Commencement Date"), or when Lessor consents to this Sublease (if
such consent is required under the Master Lease), whichever shall last
occur, and end on November 30, 1998, ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this
Sublease. In the event the Term commences on a date other than the
Commencement Date, Sublessor and Sublessee shall execute a memorandum
setting forth the actual date of commencement of the Term. Possession
of the Premises ("Possession") shall be delivered to Sublessee on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor
shall not be subject to any liability for such failure, the
Termination Date shall not be extended by the delay, and the validity
of this Sublease shall not be impaired, but rent shall abate until
delivery of Possession. Notwithstanding the foregoing, if Sublessor
has not delivered Possession to Sublessee within ten (10) days after
the Commencement Date, then at any time thereafter and before delivery
of Possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set
forth an effective date for such cancellation which shall be at least
three (3) days after delivery of said notice to Sublessor. If
Sublessor delivers Possession to Sublessee on or before such effective
date, this Sublease shall remain in full force and effect. If
Sublessor fails to deliver Possession to Sublessee on or before such
effective date, this Sublease shall be canceled, in which case all
consideration previously paid by Sublessee to Sublessor on account of
this Sublease shall be returned to Sublessee, this Sublease shall
thereafter be of no further force or effect, and Sublessor shall have
no further liability to Sublessee on account of such delay or
cancellation. If Sublessor permits Sublessee to take Possession prior
to the commencement of the Term, such early Possession
1
<PAGE> 2
shall not advance the Termination Date and shall be subject to the
provisions of this Sublease, including without limitation the payment
of rent. In addition the Subtenant has no right to extend the lease
term.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum
rent, without deduction, setoff, notice, or demand, at
Director - Site Operations - DowElanco - 9330 Zionsville Road
- Indianapolis, IN 46268 or at such other place as Sublessor
shall designate from time to time by notice to Sublessee, the
sum of Five Thousand Three Hundred Thirty Two and 71/100
Dollars ($5,332.71) per month, in advance on the first day of
each month of the Term. Sublessee shall pay to Sublessor upon
execution of this Sublease Five Thousand Three Hundred Thirty
Two and 71/100 Dollars ($5,332,71) as rent for March 1997. If
the Term begins or ends on a day other than the first or last
day of a month, the rent for the partial months shall be
prorated on a per diem basis. Additional provisions: Rent
commencement shall begin March 1, 1997.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease
the sum of Fifteen Thousand Nine Ninety Eight Hundred and 12/100
Dollars ($15,998.12) as security for Sublessee's faithful performance
of Sublessee's obligations hereunder ("Security Deposit"). If
Sublessor fails to pay rent or other charges when due under this
Sublease, or fails to perform any of its other obligations hereunder,
Sublessor may use or apply all or any portion of the Security Deposit
for the payment of any rent or other amount then due hereunder and
unpaid, for the payment of any other sum for which Sublessor may
become obligated by reason of Sublessee's default or breach, or for
any loss or damage sustained by Sublessor as a result of Sublessee's
default or breach. If Sublessor so uses any portion of the Security
Deposit, Sublessee shall, within ten (10) days after written demand by
Sublessor, restore the Security Deposit to the full amount originally
deposited, and Sublessee's failure to do so shall constitute a default
under this Sublease. Sublessor shall not be required to keep the
Security Deposit separate from its general accounts, and shall have no
obligation or liability for payment of interest on the Security
Deposit. In the event Sublessor assigns its interest in this Sublease,
Sublessor shall deliver to its assignee so much of the Security
Deposit as is then held by Sublessor within (10) days after the Term
has expired, or Sublessee has vacated the Premises, or any final
adjustment pursuant to Subsection 6.2 hereof has been made, whichever
shall last occur, and provided Sublessee is not then in default of any
of its obligations hereunder, the Security Deposit or so much thereof
as had not theretofore been applied by Sublessor, shall be applied to
the last two months of the term, if any, of Sublessee's interest
hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office
purpose, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any
part of the Premises without the prior written consent of Sublessor
which consent shall not be unreasonably withheld (and the consent of
Lessor, if such is required under the term of the Master Lease).
2
<PAGE> 3
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sublease as if Sublessor
were the lessor thereunder, Sublessee the lessee thereunder, and the
Premises the Master Premises, except for the following: None*.
Sublessee assumes and agrees to perform the lessee's obligations under
the Master Lease during the Term to the extent that such obligations
are applicable to the Premises, except that the obligation to pay rent
to Lessor under the Master Lease shall be considered performed by
Sublessee to the extent and in the amount rent is paid to Sublessor in
accordance with Section 6 of this Sublease. Sublessee shall not commit
or suffer any act or omission that will violate any of the provisions
of the Master Lease. Sublessor shall exercise due diligence in
attempting to cause Lessor to perform its obligations under the Master
Lease for the benefit of Sublessee. If the Master Lease terminates,
this Sublease shall terminate and the parties shall be relieved of any
further liability or obligation under this Sublease, provided however,
that if the Master Lease terminates as a result of a default or breach
by Sublessor or Sublessee under this Sublease and/or the Master Lease,
then the defaulting party shall be liable to the nondefaulting party
for the damage suffered as a result of such termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor shall not constitute a default or
breach hereunder.
*Except as specifically set forth within this sublease, this sublease is not to
be construed as an amendment to the Lease Agreement in any report.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against
the other arising out of or in connection with this Sublease, the
prevailing party shall be entitled to recover its costs of suit and
reasonable attorney's fees.
12. AGENCY DISCLOSURE:
Sublessor and Sublessee each warrant that they have dealt with no
other real estate broker in connection with this transaction except:
CB COMMERCIAL REAL ESTATE GROUP, INC., who represents the Sublessor
and Richard Bowers & Co. who represents Sublessee. In the event that
CB COMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and
Sublessee, Sublessor and Sublessee hereby confirm that they were
timely advised of the dual representation and that they consent to the
same, and that they do not expect said broker to disclose to either of
them the confidential information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if
such is under the terms of the Master Lease), Sublessor shall pay
Broker a real estate brokerage commission in accordance with
Sublessor's contract with Broker for the subleasing of the Premises,
if any, and otherwise in the amount of Nine Thousand Eight Hundred
Twenty Nine and 96/100 Dollars ($9,829.96), for services rendered in
effecting this Sublease. Broker is hereby made a third party
beneficiary of this Sublease for the purpose of enforcing its right to
said commission.
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<PAGE> 4
14. NOTICES.
All notices and demands which may or are to be required or permitted
to be given by either party on the other hereunder shall be in
writing. All notices and demands by the Sublessor to Sublessee shall
be sent by United States Mail, postage prepaid, addressed to the
Sublessee at the Premises, and to the address hereinbelow, or to such
other place as Sublessee may from time to time designate in a notice
to the Sublessor. All notices and demands by the Sublessee to
Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessor at the address set forth herein, and to
such other person or place as the Sublessor may from time to time
designate in a notice to the Sublessee. Copies of any notices that are
sent between the Sublessor and Sublessee should be sent to ORE Holding
Company as the Landlord.
To Sublessor: Director-Site Operations-DowElanco-9330-Zionsville
Road-Indianapolis, IN 46268
To Sublessee: 1700 Westlake Avenue North, Suite 400, Seattle,
Washington 98109
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY
VIA A LETTER BY THE LESSOR. (DATED ________________________ ).
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative
orders having jurisdiction over the parties, property or the subject
matter of this Agreement, including, but not limited to, the 1964
Civil Rights Act and all amendments thereto, the Foreign Investment In
Real Property Tax Act, the Comprehensive Environmental Response
Compensation and Liability Act and The Americans With Disabilities
Act.
Sublessor: DOWELANCO Sublessee: IS 14, INC.
------------------------ -------------------
By: /s/ Douglas C. Vawter By: /s/ James W. Brown
------------------------------ ----------------------------
Title: Director Site Operations Title: President
--------------------------- ------------------------
Date: 2/14/97 Date: 2/14/97
---------------------------- -------------------------
4
<PAGE> 5
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning assignment or subletting. Lessor certifies that, as of the date of a
execution hereof, Sublessor is not in default or breach of any of the
provisions of the Master Lease, and that the Master Lease has not been amended
or modified except as expressly set forth in the foregoing Sublease.
Lessor: ORE HOLDING COMPANY, A CALIFORNIA CORPORATION
--------------------------------------------------------
By:
------------------------------------------------------------
Title:
---------------------------------------------------------
By:
------------------------------------------------------------
Title:
---------------------------------------------------------
Date:
----------------------------------------------------------
- -------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
- -------------------------------------------------------------------------------
SPECIAL STIPULATIONS
Sublessor agrees to sell Sublessee the three (3) existing work stations for
$550.00 each. These work stations will become the property of the Sublessee at
the end of the lease term.
5
<PAGE> 1
EXHIBIT 10.14
Tucker, Georgia Up to $200,000 Principal Amount
November 26, 1997
DEMAND SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the
order of the persons (individually, a "Lender," and collectively, the "Lenders")
named on Schedule I, as such Schedule may be amended from time to time pursuant
hereto ("Schedule I"), at their respective addresses set forth on Schedule I or
at such other place or places as the respective Lenders may from time to time
designate with respect to themselves, the aggregate principal sum of TWO HUNDRED
THOUSAND and NO/100 Dollars ($200,000.00), or such lesser principal amount as
may be advanced from time to time to Borrower by the Lenders and set forth on
Schedule I, together with interest thereon at the rate or rates hereafter
specified and any and all other sums which may be owing to the Lenders by
Borrower pursuant to this Promissory Note. The Borrower shall pay to each Lender
the principal amounts set forth by such Lender's name on Schedule I, plus
interest, under the terms and conditions of this Promissory Note.
1. INTEREST. From the date hereof until all sums due hereunder, including
principal, interest, charges, fees and expenses are paid in full, the
principal amount outstanding from time to time pursuant to this
Promissory Note shall bear interest at the fixed per annum rate of 10%.
2. CALCULATION OF INTEREST. Interest shall be calculated on the basis of
a 360 day year applied to the actual days on which there exists an
unpaid balance hereunder.
3. REPAYMENT. BORROWER SHALL MAKE PAYMENTS OF PRINCIPAL AND ALL UNPAID
INTEREST, EXPENSES, CHARGES AND OTHER FEES IN FULL TO A LENDER ON DEMAND
BY SUCH LENDER, WHICH MAY BE MADE AT ANY TIME, WITHOUT NOTICE, AND
WITHOUT REGARD TO WHETHER A DEFAULT HAS OCCURRED. No Lender shall have
the right to demand or require that payment be made to any other Lender.
All accrued and unpaid interest shall be paid by Borrower on the first
day of each successive month, beginning on January 1, 1998, and
continuing until the maturity of this Promissory Note (whether upon
demand, stated maturity, acceleration or otherwise) at which time all
sums due hereunder, including principal, interest, charges, fees and
expenses, shall be paid in full.
4. LATE PAYMENT CHARGE. If any payment due hereunder (including any
payment in whole or in part of principal) is not received by a Lender
within 15 calendar days after its due date, Borrower shall pay a late
payment charge equal to 5% of the amount then due.
5. APPLICATION OF PAYMENTS. All payments made pursuant to this Promissory
Note shall be applied first to accrued and unpaid interest, then to
unpaid expenses and charges payable hereunder, and then to principal, or
in such other order or proportion as any Lender, in such Lender's sole
discretion, may elect from time to time with respect to such amounts
owed to such Lender.
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<PAGE> 2
6. USE OF PROCEEDS. Borrower represents and agrees that the proceeds of the
loan evidenced by this Promissory Note shall be used solely for working
capital business purposes (namely, to purchase inventory necessary to
launch Borrower's nutritional product line) and shall not be used for
any personal, family, household, consumer or other purpose, including
but not limited to the purchase or carrying of margin stock or other
securities.
7. SECURITY. Sums due under this Promissory Note are secured by, and
Borrower hereby assigns, conveys and grants a security interest to each
Lender named on Schedule I, jointly and severally, in and to, all
tangible and intangible property, property rights and assets of Borrower
now owned or hereafter acquired, including but not limited to all
accounts, receivables, money, securities, equipment, furniture,
fixtures, inventory, goods, software, patents, trademarks, service
marks, tradenames, copyrights, works, works in progress, programs,
program documentation, intellectual property and rights, contracts,
contract rights, instruments, documents, general intangibles, chattel
paper, notes, and other choses in action, all deposits and property of
Borrower now or at any time hereafter in the possession of the Lenders,
and all proceeds and products of the foregoing and all rights related
thereto. In addition, this Promissory Note is secured by all property
described as collateral in any security agreement, financing statement,
mortgage, deed of trust, pledge agreement or other document previously,
simultaneously, or hereafter entered into by Borrower in connection with
any obligation or liability of Borrower to the Lenders, such other
security document(s) including but not limited to the UCC-1 financing
statement of even date herewith. This Promissory Note specifically
incorporates by reference, as if fully set forth herein, all of the
language and provisions of the security documents described generally or
specifically above. The lien created by the security interest granted
herein shall not expire until each Lender named on Schedule I has been
paid all amounts due under this Promissory Note.
8. DEFAULT. Any of the following will be a default under this Promissory
Note: (a) failure to pay any principal, expense, fee, charge or interest
when due, or failure to perform any other obligations hereunder; (b) a
default by any Borrower upon any of the existing or future obligations
of any Borrower to the Lenders; (c) a default in any other agreement,
instrument or document between Borrower and any Lender, including,
without limitation, any security document referred to above, whether
previously, simultaneously, or hereafter entered into; (d) a material
adverse change in the financial condition of Borrower from that
expressed in the financial statement most recently submitted to the
Lenders prior to the date of this Promissory Note, as determined in good
faith by the Lenders in their sole discretion; (e) institution of
bankruptcy, insolvency, reorganization or receivership proceedings by or
against Borrower in any state or federal court; (f) the appointment of a
receiver, assignee, custodian, trustee or similar official under any
federal or state insolvency or creditors' rights law for any property of
Borrower; (g) failure of Borrower to furnish to the Lenders such
collateral or additional collateral as the Lenders may in good faith
request; (h) any warranty, representation, or statement to the Lenders
by or on behalf of Borrower proving to have been incorrect in any
material respect when made or furnished; (i) the occurrence of any event
which is, or would be with the passage of time or the giving of notice
or both, a default under any indebtedness of Borrower to any person
other than the Lenders; (j) any material loss, theft or substantial
damage,
2
<PAGE> 3
not fully insured for the benefit of the Lenders, to any of the assets
of Borrower, or the sale, transfer, lease, encumbrance or other
disposition of all or any material part of the assets of Borrower other
than in the ordinary course of business of Borrower; (k) the entry of
any final judgment against Borrower for the payment of money in excess
of $5,000; (l) the levy upon or attachment of any assets of Borrower;
(m) the recordation of any federal, state or local tax lien against
Borrower; (n) a change of ownership or dissolution, merger,
consolidation, liquidation or reorganization of Borrower; (o) the
failure of Borrower to furnish to the Lenders such financial information
as the Lenders may require from time to time; or (p) the determination
in good faith by Lenders who hold, in the aggregate, a majority of the
outstanding principal amount of this Promissory Note (a "Majority in
Interest of the Lenders"), in their sole discretion, that the ability of
Borrower to pay or perform any of its obligations to the Lenders is
impaired for any reason.
9. REMEDIES. Upon a default, in addition to all other rights and
remedies available to the Lenders under any other document or agreement
between Borrower and the Lenders or under applicable law (including
the Uniform Commercial Code), a Majority in Interest of the Lenders,
in their sole discretion and without notice or demand, may: (a) raise
the rate of interest accruing on the unpaid balance due under this
Promissory Note by two percentage points above the rate of interest
otherwise applicable, independent of whether the Lenders elect to
accelerate the unpaid principal balance as a result of such default;
(b) declare the entire unpaid principal balance plus accrued interest
and all other sums due hereunder immediately due and payable; and (c)
exercise any rights of a secured creditor under the Uniform Commercial
Code and other law, including the right to take possession of the
collateral without the use of judicial process or hearing of any kind
and the right to require the debtor to assemble the collateral at such
place(s) as the Lenders may specify. Borrower agrees that a default
under this Promissory Note is a default by Borrower under all other
liabilities and obligations of Borrower to the Lenders, and that the
Lenders shall have the right to declare immediately due and payable all
of such other liabilities and obligations. Borrower agrees that any
notice required to be given under applicable law or otherwise in
connection with the Lenders' exercise of their remedies hereunder shall
be deemed to be reasonable if given at least five business days in
advance at the address set forth below by Borrower's signature.
Borrower waives the benefit of any and every statute, ordinance, or
rule of court which may be lawfully waived conferring upon Borrower any
right or privilege of exemption, homestead rights, stay of execution,
or supplementary proceedings, or other relief from the enforcement or
immediate enforcement of a judgment or related proceedings on a
judgment.
10. INTEREST RATE AFTER JUDGMENT. If judgment is entered against Borrower on
this Promissory Note, the amount of the judgment entered (which may
include principal, interest, charges, fees, and expenses) shall bear
interest at the higher of the above described default interest rate as
determined on the date of the entry of the judgment, or the legal rate
of interest then applicable to judgments in the jurisdiction in which
judgment was entered.
11. EXPENSES OF COLLECTION. Borrower shall pay all costs and expenses
incurred by the Lenders in collecting sums due under this Promissory
Note, including without limitation the
3
<PAGE> 4
costs of any lien, judgment or other record searches, appraisals, travel
expenses and the like. In addition, if this Promissory Note is referred
to an attorney for collection, whether or not suit has been filed,
Borrower shall pay all of the Lenders' costs, fees (including, but not
limited to, the Lenders' attorneys' fees, charges and expenses) and all
other expenses resulting from such referral.
12. NEGOTIABLE INSTRUMENT. Borrower agrees that this Promissory Note
shall be deemed to be a negotiable instrument, even though this
Promissory Note may not qualify under applicable law, absent this
paragraph, as a negotiable instrument.
13. WAIVERS. Borrower, and all parties to this Promissory Note, whether
maker, endorser or guarantor, waive presentment, demand, notice of
dishonor and protest.
14. EXTENSIONS OF MATURITY. All parties to this Promissory Note, whether
maker, endorser or guarantor, agree that the maturity of this Promissory
Note, or any payment due hereunder, may be extended at any time or from
time to time without releasing, discharging or affecting the liability
of such party.
15. NOTICES. Any notice or demand required or permitted by or in connection
with this Promissory Note, without implying the obligation to provide
any notice or demand, shall be in writing at the addresses set forth
below or to such other address as may be hereafter specified by written
notice to the Lenders by Borrower or by a Lender to the Borrower, as the
case may be. Any such notice or demand shall be deemed to be effective
as of the date of hand delivery or facsimile transmission, one day after
dispatch if sent by telegram, mailgram, overnight delivery, express mail
or Federal Express, or three days after mailing if sent by first class
mail with postage prepaid.
16. ASSIGNABILITY. This Promissory Note may be assigned by the Lenders or
any holder at any time.
17. ADDITION OF LENDERS. Schedule I may be amended from time to time in
accordance with this Section 17 in order to add parties as Lenders
("Additional Lenders") under this Promissory Note and to set forth any
increases in amounts advanced by a Lender; provided, however, that in no
event may the aggregate principal amount advanced by the Lenders under
this Promissory Note exceed $200,000. Subject to such $200,000
limitation, (i) parties may be added to this Promissory Note as
Additional Lenders and their names, addresses and the principal amounts
advanced by them may be added to Schedule I upon the written consent of
the Borrower and such Additional Lenders and without the consent of any
other Lender, and (ii) Schedule I may be amended to reflect any increase
in the amount advanced by a Lender upon the written consent of the
Borrower and such Lender and without the consent of any other Lender.
18. JOINT AND SEVERAL LIABILITY. If more than one person or entity is
executing this Promissory Note as Borrower, all liabilities under this
Promissory Note shall be joint and several with respect to each of such
persons or entities.
4
<PAGE> 5
19. BINDING NATURE. This Promissory Note shall inure to the benefit of and
be enforceable by each Lender and its successors and assigns and any
other person to whom such Lender may grant an interest in Borrower's
obligations to the Lender, and shall be binding and enforceable against
Borrower and Borrower's personal representatives, successors and
assigns.
20. INVALIDITY OF ANY PART. If any provision or part of any provision of
this Promissory Note shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this
Promissory Note, and this Promissory Note shall be construed as if such
invalid, illegal or unenforceable provision or part thereof had never
been contained herein, but only to the extent of its invalidity,
illegality or unenforceability.
21. MAXIMUM RATE OF INTEREST; COMMERCIAL LOAN. Notwithstanding any provision
of this Promissory Note to the contrary, Borrower shall not be obligated
to pay interest hereunder in excess of the maximum rate of interest
permitted by the laws of any state determined to govern this Promissory
Note or the laws of the United States applicable to loans in such state.
If any provision of this Promissory Note shall ever be construed to
require the payment of any amount of interest in excess of that
permitted by applicable law, then the interest to be paid hereunder
shall be held subject to reduction to the amount allowed under
applicable law, and any sums paid in excess of the interest rate allowed
by law shall be applied in reduction of the principal balance
outstanding under this Promissory Note. Borrower acknowledges that it
has been contemplated at all times by Borrower that the laws of the
State of Georgia will govern the maximum rate of interest that it is
permissible for the Lenders to charge Borrower under this Promissory
Note. Borrower warrants that this Promissory Note evidences a loan made
solely to acquire or carry on a business or commercial purpose.
22. CHOICE OF LAW; CONSENT TO VENUE AND JURISDICTION. THIS PROMISSORY NOTE
SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF GEORGIA, EVEN IF THE GEORGIA RULES GOVERNING CONFLICTS
OF LAWS WOULD OTHERWISE REQUIRE THAT THE LAWS OF ANOTHER JURISDICTION
GOVERN THIS PROMISSORY NOTE. BORROWER CONSENTS TO THE JURISDICTION AND
VENUE OF THE COURTS OF ANY COUNTY IN THE STATE OF GEORGIA OR TO THE
JURISDICTION AND VENUE OF THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF GEORGIA IN ANY ACTION OR JUDICIAL PROCEEDING BROUGHT TO
ENFORCE, CONSTRUE OR INTERPRET THIS PROMISSORY NOTE.
23. UNCONDITIONAL OBLIGATIONS. Borrower's obligations under this Promissory
Note shall be the absolute and unconditional duties and obligations of
Borrower and shall be independent of any rights of set-off, recoupment
or counterclaim which Borrower might otherwise have against the Lenders,
and Borrower shall pay absolutely the payments of principal, interest,
fees, charges and expenses hereunder, free of any deductions and without
abatement, diminution or set-off.
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<PAGE> 6
24. ACTIONS AGAINST LENDERS. Any action brought by Borrower against any
Lender which is based, directly or indirectly, or in whole or in part,
upon this Promissory Note or any matter related to this Promissory Note
shall be brought only in the courts of the State of Georgia.
25. TIME IS OF THE ESSENCE. Time is of the essence in the payment and
performance of this Promissory Note.
26. WAIVER OF JURY TRIAL. BORROWER (BY EXECUTION OF THIS PROMISSORY NOTE)
AND EACH LENDER (BY ACCEPTANCE OF THIS PROMISSORY NOTE) AGREE THAT ANY
SUIT, ACTION, OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR
INSTITUTED BY BORROWER OR THE LENDERS ON OR WITH RESPECT TO THIS
PROMISSORY NOTE OR WHICH IN ANY WAY RELATES, DIRECTLY OR INDIRECTLY, TO
THE OBLIGATIONS OF BORROWER TO THE LENDERS UNDER THIS PROMISSORY NOTE,
OR THE DEALINGS OF THE PARTIES WITH RESPECT THERETO, SHALL BE TRIED ONLY
BY A COURT AND NOT BY A JURY. BORROWER (BY EXECUTION OF THIS PROMISSORY
NOTE) AND EACH LENDER (BY ACCEPTANCE OF THIS PROMISSORY NOTE) HEREBY
EACH EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT,
ACTION, OR PROCEEDING. BORROWER (BY EXECUTION OF THIS PROMISSORY NOTE)
AND EACH LENDER (BY ACCEPTANCE OF THIS PROMISSORY NOTE) ACKNOWLEDGE AND
AGREE THAT THIS PROVISION IS A SPECIFIC AND MATERIAL ASPECT OF THE
AGREEMENT BETWEEN THE PARTIES AND THAT THE LENDERS WOULD NOT ENTER INTO
THE TRANSACTION WITH BORROWER IF THIS PROVISION WERE NOT A PART OF THEIR
AGREEMENT.
6
<PAGE> 7
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
undersigned hereby executes this Promissory Note under seal, as Borrower, as of
the date first written above.
Maxxis Group, Inc.
--------------------------------------
1901 Montreal Road, Suite 108
--------------------------------------
(Street Address)
Tucker, Georgia 30084
--------------------------------------
(City-State-Zip)
(770) 552-4766 (770) 552-8471
--------------------------------------
(Telephone) (Facsimile)
WITNESS/ATTEST:
/s/ Kelly Wilder By: /s/ Thomas O. Cordy (SEAL)
- ------------------------------------ ----------------------------
(Authorized Signature)
Kelly Wilder Thomas O. Cordy, President/CEO
- ------------------------------------ --------------------------------
(Print Name) (Print Name and Title)
7
<PAGE> 8
<TABLE>
<CAPTION>
SCHEDULE I
NAME AND ADDRESS OF LENDERS PRINCIPAL AMOUNT
- --------------------------- ----------------
<S> <C>
Glenn W. Sturm $50,000
Nelson Mullins Riley & Scarborough, L.L.P
First Union Plaza
999 Peachtree Street, N.E., Suite 1400
Atlanta, Georgia 30309
Peter C. Quittmeyer 35,000
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
James Walker IV 30,000
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
James Walker III 20,000
2780 Habersham Road
Atlanta, Georgia 30305
TAF, L.P. 20,000
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
William J. Ching 10,000
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
Andrew L. Howell 7,500
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
Terresa R. Tarpley 5,000
Nelson Mullins Riley & Scarborough, L.L.P
(see address above)
</TABLE>
<PAGE> 1
EXHIBIT 10.15
SUB-SUBLEASE
1. PARTIES.
This Sub-Sublease, dated September 1, 1997, is made between Maxxis
2000, Inc. (IS14, Inc.) ("Subtenant #1"), and Simons Engineering, Inc.
("Subtenant #2").
2. MASTER LEASE.
DowElanco (Sublessor) is the lessee under a written lease dated
November 23, 1993, wherein The Mutual Life Insurance Company of New
York ("Lessor") leased to Sublessor the real property located in the
City of Roswell, County of Fulton, State of Georgia, described as 1080
Holcomb Bridge Road - Roswell Summit, Building 100, Suite 135 ("Master
Premises"). Said lease is herein referred to as the "Master Lease" and
is attached hereto as Exhibit "A". The Mutual Life Insurance Company of
New York transferred, sold, assigned and conveyed all of their interest
to QRE Holding Company. QRE Holding Company transferred, sold, assigned
and conveyed all of their interest to Realty Associates Fund IV, L.P.
(New Owner). DowElanco is the Sublessor under a written sublease dated
February 14, 1997, wherein Maxxis 2000, Inc., also known as IS14, Inc.,
(Subtenant #1) is the Sublessee of said premises. Said sublease is
attached hereto as Exhibit "B".
3. PREMISES.
Sublessor and Subtenant #1 hereby sub-subleases to Subtenant #2 on the
terms and conditions set forth in this Sub-sublease the following
portion of the Master Premises ("Premises"): Approximately 3,938 square
feet, Building 100, Suite 135. Subtenant #2 agrees to take the premises
"As Is"; and that no tenant improvement work is to be performed by
Realty Associates Fund IV, L.P. as the landlord relative to the
Sub-Sublease.
4. WARRANTY BY SUBLESSOR AND SUBTENANT #1.
Sublessor and Subtenant #1 warrant and represent to Subtenant #2 that
the Master Lease has not been amended or modified except as expressly
set forth herein, that Sublessor and Subtenant #1 are not now, and as
of the commencement of the Term hereof will not be, in default or
breach of any of the provisions of the Master Lease, and that Sublessor
and Subtenant #1 have no knowledge of any claim by Lessor the Sublessor
or Subtenant #1 are in default or breach of any of the provisions of
the Master Lease or Sublease.
5. TERM.
The Term of this Sub-Sublease shall commence on September 8, 1997
("Commencement Date"), or when Lessor consents to this Sub-Sublease (if
such consent is required under the Master Lease), whichever shall last
occur, and end on November 30, 1998 ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this
Sub-Sublease. In the event the Term commences on a date other than the
Commencement Date, Sublessor, Subtenant #1 and Subtenant #2 shall
execute a memorandum setting forth the actual date of commencement of
the Term. Possession of the Premises ("Possession") shall be delivered
to Subtenant #2 on the commencement of the Term. If for any reason
Subtenant #1 does not deliver Possession to Subtenant #2 on the
commencement of the Term, Subtenant #1 shall not be subject to any
liability for such failure, the Termination Date shall not be extended
by the delay, and the validity of this Sub-Sublease shall not be
impaired, but rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Subtenant #1 has not delivered
Possession to Subtenant #2 within ten (10) days after the Commencement
Date, then at any time
<PAGE> 2
thereafter and before delivery of Possession, Subtenant #2 may give
written notice to Subtenant #1 of Subtenant #2's intention to cancel
this Sub-Sublease. Said notice shall set forth an effective date for
such cancellation which shall be at least three (3) days after delivery
of said notice to Subtenant #1. If Subtenant #1 delivers Possession to
Subtenant #2 on or before such effective date, this Sub-Sublease shall
remain in full force and effect. If Subtenant #1 fails to deliver
Possession to Subtenant #2 on or before such effective date, this
Sub-Sublease shall be canceled, in which case all consideration
previously paid by Subtenant #2 to Subtenant #1 on account of this
Sub-Sublease shall be returned to Subtenant #2, this Sub-Sublease shall
thereafter be of no further force or effect, and Subtenant #1 shall
have no further liability to Subtenant #2 on account of such delay or
cancellation. If Subtenant #1 permits Subtenant #2 to take Possession
prior to the commencement of the Term, such early Possession shall not
advance the Termination Date and shall be subject to the provisions of
this Sub-Sublease, including without limitation the payment of rent.
6. RENT.
6.1 Minimum Rent. Subtenant #2 shall pay to Subtenant #1 as minimum
rent, without deduction, setoff, notice, or demand, at 1901 Montreal
Rd., Suite 108, Tucker, Georgia 30084 or at such other place as
Subtenant #1 shall designate from time to time by notice to Subtenant
#2, the sum of Five Thousand Three Hundred Thirty-Two and 71/100
Dollars ($5,332.71) per month, in advance on the first day of each
month of the Term. Subtenant #2 shall pay to Subtenant #1 upon
execution of this Sub-Sublease Five Thousand Three Hundred Thirty-Two
and 71/100 Dollars ($5,332.71) as rent for September 1997. If the Term
begins or ends on a day other than the first or last day of the month,
the rent for the partial month shall be prorated on a per diem basis.
Additional provisions: Rent commencement will begin September 8, 1997.
7. SECURITY DEPOSIT.
On the date of execution of this Sub-sublease by Subtenant #2,
Subtenant #2 will pay to Subtenant #1 a security deposit in the amount
of $5,332.71 for Subtenant #2's faithful performance of Subtenant #2's
obligation hereunder (hereinafter "Security Deposit"). If Subtenant #2
fails to pay rent or other charges when due under this Sub-sublease, or
fails to perform any of its other obligations hereunder, Subtenant #1
may use or apply all or any portion of the Security Deposit for the
payment of any rent or other amounts then due hereunder and unpaid, for
the payment of any other sum for which Subtenant #1 may become
obligated by reason of Subtenant #2's default or breach, or for any
loss or damage sustained by Subtenant #1 as a result of Subtenant #2's
default or breach. If Subtenant #1 so uses any portion of the Security
Deposit, Subtenant #2 shall, within (10) days after written demand by
Subtenant #1, restore the Security Deposit to the full amount
originally deposited, and Subtenant #2's failure to do so shall
constitute a default under this Sub-sublease. Subtenant #1 shall not be
required to keep the Security Deposit separate from its general
accounts, and shall have no obligation or liability for payment of
interest on the Security Deposit. In the event Subtenant #1 assigns its
interest in this Sub-sublease, Subtenant #1 shall deliver to its
assignee so much of the Security Deposit as is then held by Subtenant
#1. Within ten (10) days after the Term has expired, or Subtenant #2
has vacated the Premises, or any final adjustment pursuant to Paragraph
5(b) hereof has been made, whichever shall last occur, and provided
Subtenant #2 is not then in default of any of its obligations
hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Subtenant #1, shall be returned to
Subtenant #2 or to the last assignee, if any, of Subtenant #2's
interest hereunder.
<PAGE> 3
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office
purposes, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Subtenant #2 shall not assign this Sub-Sublease or further sublet all
or any part of the Premises without the prior written consent of
Sublessor and Subtenant #1 which consent shall not be unreasonably
withheld (and the consent of Lessor, if such is required under the term
of the Master Lease).
10. OTHER PROVISIONS OF SUB-SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sub-Sublease as if Sublessor
were the lessor thereunder, Subtenant #1 the lessee thereunder,
Subtenant #2 the sublessee thereunder, and the Premises the Master
Premises. Subtenant #2 assumes and agrees to perform the lessee's
obligations under the Master Lease during the Term to the extent that
such obligations are applicable to the Premises, except that the
obligation to pay rent to Lessor under the Master Lease shall be
considered performed by Subtenant #2 to the extent and in the amount
rent is paid to Subtenant #1 in accordance with Section 6 of this
Sub-Sublease. Subtenant #2 shall not commit or suffer any act or
omission that will violate any of the provisions of the Master Lease.
Sublessor and Subtenant #1 shall exercise due diligence in attempting
to cause Lessor to perform its obligations under the Master Lease for
the benefit of Subtenant #2. If the Master Lease terminates, this
Sub-Sublease shall terminate and the parties shall be relieved of any
further liability or obligation under this Sub-Sublease, provided
however, that if the Master Lease terminates as a result of a default
or breach by Sublessor, Subtenant #1 or Subtenant #2 under this
Sublease, Sub-Sublease and/or the Master Lease, then the defaulting
party shall be liable to the nondefaulting party for the damage
suffered as a result of such termination. Notwithstanding the
foregoing, if the Master Lease gives Sublessor, or Subtenant #1 any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor or Subtenant #1 shall not
constitute a default or breach hereunder.
* Except as specifically set forth within this Sub-Sublease. This
Sub-Sublease is not to be construed as an amendment to the Lease
Agreement in any report.
11. ATTORNEY'S FEES.
If Sublessor, Subtenant #1, Subtenant #2, or Broker shall commence an
action against the other arising out of or in connection with this
Sub-Sublease, the prevailing party shall be entitled to recover its
costs of suit and reasonable attorney's fees.
12. AGENCY DISCLOSURE.
Subtenant #1 and Subtenant #2 each warrant that they have dealt with no
other real estate broker in connection with this transaction except:
Richard Bowers & Co., who represents Subtenant #1 and Cushman &
Wakefield who represents Subtenant #2.
13. COMMISSION.
Upon execution of this Sub-Sublease, and consent thereto by Lessor (if
such consent is required under the terms of the Master Lease),
Subtenant #1 shall pay Broker a real estate brokerage commission in
accordance with Subtenant #1's contract with Broker for the
sub-subleasing of
<PAGE> 4
the Premises, if any, and otherwise in the amount of Seven Thousand One
Hundred Forty-Five and 83/100 Dollars ($7,145.83) to be divided
$4,763.89 to Cushman & Wakefield of Georgia, Inc. and $2,381.94 to
Richard Bowers for services rendered in effecting this Sub-Sublease.
Broker is hereby made a third party beneficiary of this Sub-Sublease
for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to
be given by either party on the other hereunder shall be in writing.
All notices and demands by Subtenant #1 to Subtenant #2 shall be sent
by United States Mail, postage prepaid, addressed to the Subtenant #2
at the Premises, and to the address hereinbelow, or to such other place
as Subtenant #2 may from time to time designate in a notice to
Subtenant #1. All notices and demands by Subtenant #2 to Subtenant #1
shall be sent by United States Mail, postage prepaid, addressed to
Subtenant #1 at the address set forth herein, and to such other person
or place as Subtenant #1 from time to time designate in a notice to
Subtenant #2. Copies of any notices that are sent between the
Sublessor, Subtenant #1 and Subtenant #2 should be sent to Realty
Associates Fund IV, L.P.
To: Subtenant #1: 1700 Westlake Avenue North, Suite 400, Seattle,
Washington 98109
To: Subtenant #2: One West Court Square, P.O. Box 1286, Decatur,
Georgia 30301-1286
15. CONSENT BY LESSOR.
THIS SUB-SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO
VIA A CONSENT TO SUB-SUBLEASE FORM BY THE LESSOR. (DATED
____________________).
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative
orders having jurisdiction over the parties, property or the subject
matter of this Agreement, including, but not limited to, the 1964 Civil
Rights Act and all amendments thereto, the Foreign Investment In Real
Property Tax Act, the Comprehensive Environmental Response Compensation
and Liability Act, and The Americans With Disabilities Act.
Subtenant #1: Maxxis 2000, Inc. Subtenant #2: Simons Engineering, Inc.
By: /s/ Thomas O. Cordy By: /s/ George T. Ragsdale
---------------------- -------------------------
Title: President Title: Vice President
-------------------- ------------------------
Date: 9/2/97 Date: 9/2/97
-------------------- ------------------------
<PAGE> 5
SUBLESSOR'S CONSENT TO SUB-SUBLEASE
The undersigned ("Sublessor"), Lessee under the Master Lease, hereby consents to
the foregoing Sub-sublease without waiver of any restriction in Master Lease
concerning further assignment or subletting. Sublessor certifies that, as of the
date of Sublessor's execution hereof, Sublessor or Subtenant #1 are not in
default or breach of any of the provisions of the Master Lease or Sublease, and
that the Master Lease or Sublease has not been amended or modified except as
expressly set forth in the foregoing Sub-Sublease.
Sublessor: DowElanco
By: /s/ T. E. Lingafelter
-------------------------------
Title: Manager, Site Operations
------------------------------
Date: Sept. 3, 1997
------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
SPECIAL STIPULATIONS
Subtenant #1 agrees to steam clean the carpet.
<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
Atlanta, Georgia
January 6, 1998
