<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
____________, 19__.
Commission File Number: 333-38623
---------------------
MAXXIS GROUP, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 22-78241
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1901 MONTREAL ROAD, SUITE 108, TUCKER, GEORGIA 30084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 696-6343
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 21, 1999
Common Stock, no par value 1,617,522
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MAXXIS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 3
Condensed Consolidated Balance Sheets as of
March 31, 1999 (Unaudited) and June 30, 1998........................ 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months ended March 31, 1999
and 1998 (Unaudited)................................................ 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 1999 and 1998 (Unaudited)............... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited).............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risks........................................................ 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSET
Current assets:
Cash ....................................................................... $ 162,000 $ 372,000
Short-term investments ..................................................... 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $40,000 ............................................. 702,000 316,000
Inventories, net ........................................................... 462,000 218,000
Prepaid expenses ........................................................... 125,000 43,000
Other current assets ....................................................... 20,000 --
----------- -----------
Total current assets ..................................................... 1,481,000 959,000
Property and equipment, net ................................................... 6,120,000 169,000
Capitalized software development costs, net ................................... 277,000 126,000
Investment .................................................................... 100,000 --
Other assets .................................................................. 57,000 9,000
----------- -----------
Total assets ......................................................... $ 8,035,000 $ 1,263,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 698,000 $ 211,000
Commissions payable ........................................................ 220,000 101,000
Taxes payable .............................................................. 347,000 130,000
Current maturities of long-term capital lease obligations .................. 393,000 --
Accrued liabilities ........................................................ 599,000 282,000
Deferred revenue ........................................................... 70,000 55,000
----------- -----------
Total current liabilities ................................................ 2,327,000 779,000
----------- -----------
Long-term liabilities:
Long-term capital lease obligations ........................................ 4,737,000 --
Line of credit ............................................................. 800,000 --
----------- -----------
Total long-term liabilities .............................................. 5,537,000 --
----------- -----------
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
100,000 shares designated as Series A Convertible Preferred
Stock of which 36,359 shares are issued and outstanding .................. 200,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,617,587 and 1,571,187 shares issued and outstanding, respectively ...... 612,000 574,000
Subscription receivable .................................................... (120,000) (120,000)
Accumulated deficit ........................................................ (521,000) (170,000)
----------- -----------
Total shareholders' equity ............................................... 171,000 484,000
----------- -----------
Total liabilities and shareholders' equity ........................... $ 8,035,000 $ 1,263,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Communications services ....................... $ 1,166,000 $ 1,351,000 $ 6,287,000 $ 3,939,000
Nutritional products .......................... 303,000 155,000 934,000 341,000
Marketing services ............................ 427,000 225,000 1,866,000 895,000
----------- ----------- ----------- -----------
Total net revenues .......................... 1,896,000 1,731,000 9,087,000 5,175,000
----------- ----------- ----------- -----------
Cost of services:
Communications services ....................... 120,000 213,000 1,028,000 1,081,000
Nutritional products .......................... 118,000 146,000 478,000 223,000
Marketing services ............................ 183,000 111,000 819,000 339,000
----------- ----------- ----------- -----------
Total cost of services ...................... 421,000 470,000 2,325,000 1,643,000
----------- ----------- ----------- -----------
Gross margin ..................................... 1,475,000 1,261,000 6,762,000 3,532,000
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing ......................... 1,126,000 668,000 4,185,000 1,994,000
General and administrative .................... 903,000 542,000 2,754,000 1,653,000
----------- ----------- ----------- -----------
Total operating expenses .................... 2,029,000 1,210,000 6,939,000 3,647,000
----------- ----------- ----------- -----------
Operating income (loss) .......................... (554,000) 51,000 (177,000) (115,000)
Interest income (expense) ........................ (179,000) 2,000 (174,000) --
----------- ----------- ----------- -----------
Income (loss) before income taxes (benefit) ...... (733,000) 53,000 (351,000) (115,000)
Benefit for income taxes ......................... (150,000) -- -- --
----------- ----------- ----------- -----------
Net income (loss) ................................ $ (583,000) $ 53,000 $ (351,000) $ (115,000)
=========== =========== =========== ===========
Income (loss) per share:
Basic ......................................... $ (0.37) $ 0.03 $ (0.22) $ (0.07)
=========== =========== =========== ===========
Diluted ....................................... $ (0.37) $ 0.03 $ (0.22) $ (0.07)
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic ......................................... 1,594,355 1,571,187 1,578,910 1,571,187
=========== =========== =========== ===========
Diluted ....................................... 1,594,355 1,571,187 1,578,910 1,571,187
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (351,000) $ (115,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................................. 183,000 150,000
Compensation expense related to stock options ............................. 38,000 --
Changes in assets and liabilities:
Communications receivables .............................................. (386,000) (302,000)
Inventories ............................................................. (244,000) 4,000
Prepaid expenses ........................................................ (82,000) (26,000)
Other assets ............................................................ (20,000) 34,000
Accounts payable ........................................................ 487,000 115,000
Commissions payable ..................................................... 119,000 42,000
Taxes payable ........................................................... 217,000 --
Accrued liabilities ..................................................... 317,000 63,000
Deferred revenue ........................................................ 15,000 27,000
----------- -----------
Total adjustments ..................................................... 644,000 107,000
----------- -----------
Net cash provided by (used in) operating activities .............. 293,000 (8,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (243,000) (100,000)
Software development costs .................................................. (284,000) (38,000)
Purchase of equity investment ............................................... (100,000) --
----------- -----------
Net cash used by investing activities ............................ (627,000) (138,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from (for) issuance of common stock ..................... (48,000) 87,000
Proceeds from issuance of preferred stock ................................... -- 200,000
Line of credit borrowings ................................................... 800,000 53,000
Principal payments on capital lease obligations ............................. (629,000) --
----------- -----------
Net cash provided by financing activities ........................ 123,000 340,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................................ (210,000) 194,000
CASH, beginning of the period .................................................. 372,000 35,000
----------- -----------
CASH, end of the period ........................................................ $ 162,000 $ 229,000
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Capital lease obligations incurred .......................................... $ 5,759,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
MAXXIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
Maxxis Group, Inc., a Georgia corporation (the "Company"), was
incorporated on January 24, 1997 and is headquartered in Tucker,
Georgia. The Company's principal business operations are carried out
through its wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis
Communications, Inc., each of which began operations in March 1997,
and Maxxis Nutritionals, Inc., which began operations in November
1997. The Company was founded for the purpose of providing
long-distance services, private label nutritional products, and other
services and consumable products through a multilevel marketing system
of independent associates ("IAs"). The Company's IAs currently market
communications and Internet services and nutritional and health
enhancement products.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new
business. Since the Company has only recently made the transition to
an operating company, the Company's ability to manage its growth and
expansion will require it to implement and continually expand its
operational and financial systems, recruit additional IAs, and train
and manage both current and new IAs. Continued growth would place a
significant strain on the Company's operational resources and systems,
and failure to effectively manage any such growth would have a
material adverse effect on the Company's business, financial condition
and results of operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly the financial position of the Company as of March 31, 1999 and
the results of the Company's operations for the three and nine month
periods ended March 31, 1999 and 1998, and its cash flows for the nine
month periods ended March 31, 1999 and 1998, in conformity with
generally accepted accounting principles. The results of operations
are not necessarily indicative of the results to be expected for the
full fiscal year.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
--------- ---------
<S> <C> <C>
Prepaid phone cards $ 5,000 $ 10,000
Sales aids 194,000 158,000
Nutritional products 263,000 76,000
Less reserve -- (26,000)
--------- ---------
$ 462,000 $ 218,000
========= =========
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. These leases expire within five years and have purchase
options at the end of the original lease term. Assets under capital
leases are included in property and equipment in the March 31, 1999
consolidated balance sheet at a fair market value of approximately
$5,759,000.
6
<PAGE> 7
5. LINE OF CREDIT
On November 22, 1998, the Company entered into a line of credit (the
"Line of Credit") with the Maxxis Millionaire Society, a Georgia
partnership. Ivey Stokes and Alvin Curry, the Company's Chairman of the
Board and Chief Operating Officer, respectively, are partners in the
Maxxis Millionaire Society. Pursuant to the Line of Credit, Maxxis may
borrow up to $1,000,000 at 10% annual interest. No advances or interest
thereon pursuant to the Line of Credit are payable until November 22,
2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Maxxis Group, Inc., a Georgia corporation ("Maxxis" or the "Company"),
markets communications and Internet services and nutritional and health
enhancement products in the United States through its multi-level network
marketing system of "independent associates," or "IAs." The Company operates
through its subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"); Maxxis
Communications, Inc. ("Maxxis Communications"); and Maxxis Nutritionals, Inc.
("Maxxis Nutritionals").
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance service, travel cards, prepaid phone cards, 800 service
and international telecommunications services, Internet access and Web-page
development and hosting services, and nutritional and health enhancement
products. The Company believes that its multi-level network marketing system
allows it to obtain customers for its products in a cost effective manner and
to enhance customer retention because of the relationships between the
Company's IAs and customers. The telecommunications customer base developed by
the Company's IAs provides a potential customer base for the Company's
nutritional and health enhancement products, Internet-related services and for
future products.
The Company has built a customer base without committing capital or
management resources to construct its own communications network and
transmission facilities. In February 1997, Maxxis Communications contracted
with Colorado River Communications, Corp. ("CRC") to obtain switching and
network services and to allow CRC's communications services to be sold by the
Company's IAs. Maxxis Communications obtains telecommunications services and
purchases time for its prepaid one hour and 30 minute phone cards from CRC. In
September 1998, the Company entered into a long-term lease commitment for the
exclusive use of telecommunications switching equipment (the "Maxxis Switch")
along with certain ancillary computer hardware and software required to operate
the Maxxis Switch. The Company is currently in the process of filing tariffs
and applying for the required regulatory approvals necessary to offer
interstate and intrastate long distance service throughout the United States.
Maxxis is currently in the process of migrating its long distance customers
from CRC's network to the Maxxis Switch and intends to sell additional network
capacity, to the extent available, to third parties.
In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. Recently, the Company began
marketing additional nutritional and health enhancement products that are
manufactured by various suppliers. In September 1998, the Company began
providing Internet access and Web-page development and hosting services.
Internet access is provided by Maxxis Communications through its agreement with
InteReach Internet Services, LLC. Web-page development and hosting services are
also provided by Maxxis Communications.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to market services and products to persons with whom the IAs
have an ongoing relationship, such as family members, friends, business
associates and neighbors. The Company also sponsors meetings at which current
IAs are encouraged to bring in others for an introduction to the Company's
marketing system. The Company's multi-level network marketing system and the
Company's reliance upon IAs are intended to reduce marketing costs, customer
acquisition costs and customer attrition. The Company believes that its
multi-level network marketing system will continue to build a base of potential
customers for additional services and products.
The Company derives revenues from communications services, nutritional
products and marketing services. Communications services revenues are comprised
of: sales of prepaid phone cards to the Company's IAs; 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
8
<PAGE> 9
for bad debts and billing adjustments; and subscription fees from the Company's
Internet subscribers. Because of the administrative procedures that must be
complied with in order to establish 1-Plus customers and to collect the usage
and access fees from the local exchange carriers, there is generally a delay of
up to three to four months from the time a prospective customer indicates a
desire to become a 1-Plus customer and the time that the Company begins to
receive commissions from such customer's usage. Once Maxxis migrates customers
onto the Maxxis Switch, it will begin billing customers directly for usage and
fees on a monthly basis. In this regard, Maxxis will recognize the entire
billed amount as revenue as services are provided, less certain allowances and
adjustments, and establish appropriate customer account receivables.
Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Recently, the Company began
marketing new health enhancement products and additional nutritional products,
including a weight management program and skin care system. Marketing services
revenues include application fees from IAs and purchases of sales aids by IAs,
including distributor kits which consist of forms, promotional brochures, audio
and video tapes, marketing materials and presentation materials. Marketing
services revenues also include training fees paid by senior associates and
"managing directors" or "MDs." To become an IA, individuals (other than
individuals in North Dakota) must complete an application and purchase a
distributor kit for $129. IAs also pay an annual non-refundable fee in order to
maintain their status as an IA, which fee the Company amortizes over the
renewal period. To become an 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 or national training
directors.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services costs
consist primarily of the cost of purchasing activated prepaid phone cards.
Nutritional products costs consist of the cost of purchasing private label
nutritional products. Marketing services costs include the costs of purchasing
IA distributor kits, sales aids and promotional materials and training costs.
Operating expenses consist of selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses include commissions
paid to IAs based on: (i) sales of products to new IAs sponsored into the
Company; (ii) usage of long distance services by customers; and (iii) sales of
additional products and services to customers. General and administrative
expenses include costs for 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 become 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 any such growth
could have a material adverse effect on the Company's business, financial
condition and results of operations.
9
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total net revenues
attributable to each category for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net revenues:
Communications services....................... 61% 78% 69% 76%
Nutritional products.......................... 16 9 10 7
Marketing services............................ 23 13 21 17
--- --- --- ---
Total net revenues.......................... 100% 100% 100% 100%
=== === === ===
Cost of services:
Communications services....................... 6% 12% 11% 21%
Nutritional products.......................... 6 8 5 4
Marketing services............................ 10 7 9 7
--- --- --- ---
Total cost of services...................... 22 27 25 32
Operating expenses:
Selling and marketing......................... 59 39 46 39
General and administrative.................... 48 31 30 32
--- --- --- ---
Total operating expenses.................... 107% 70% 76% 71%
=== === === ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
Revenues. Total net revenues are derived from sales of communications
services, nutritional products and marketing services net of any returns of
prepaid phone cards, distributor kits or other products. Total net revenues
increased $165,000, or 10%, to $1.9 million for the three months ended March
31, 1999 from $1.7 million for the same period in 1998. The increase in total
net revenues was primarily due to higher revenues from marketing services and
nutritional products.
Communications services revenues declined $185,000, or 14%, to $1.2
million for the three months ended March 31, 1999 from $1.4 million for the
same period in 1998. This decrease was primarily due to lower long distance
telephone commissions.
Nutritional products revenues increased $148,000, or 95%, to $303,000
for the three months ended March 31, 1999 from $155,000 for the three months
ended March 31, 1998. The increase was primarily due to an increase in the
number of nutritional customers.
Marketing services revenues increased $202,000, or 90%, to $426,000
for the three months ended March 31, 1999 from $225,000 for the same period in
1998. This increase was largely due to an increase in the price of distributor
kits from $99 to $129 and an increase in the number of IAs during the current
quarter.
Cost of Services. Cost of services includes communications services
costs, nutritional products costs and marketing services costs. Total cost of
services for the three months ended March 31, 1999 was $421,000, or 22% of total
net revenues, as compared to $470,000, or 27% of total net revenues, for the
same period in 1998. The decline in total cost of services as a percentage of
total net revenues resulted primarily from the improvement in communications
services margins.
Communications services cost was $120,000, or 6% of total net
revenues, for the three months ended March 31, 1999, as compared to $213,000,
or 12% of total net revenues, for the same period in 1998. This decrease as a
percentage of total net revenues was due mainly to higher margins on prepaid
calling cards.
10
<PAGE> 11
Nutritionals products cost was $118,000, or 6% of total net revenues, for the
three months ended March 31, 1999 as compared to $146,000, or 8% of total net
revenues for the same period in 1998. Marketing services cost was $183,000, or
10% of total net revenues, for the three months ended March 31, 1999 as
compared to $111,000, or 6% of total net revenues, for the same period in 1998.
Gross Margin. Gross margin increased to $1.5 million for the three
months ended March 31, 1999 from $1.3 million for the same period in 1998. As a
percentage of total net revenues, gross margin improved to 78% from 73% over
those respective periods.
Operating Expenses. For the three months ended March 31, 1999, selling
and marketing expenses were $1.1 million, or 59% of total net revenues, as
compared with $668,000, or 39% of total net revenues, for the same period in
1998. The increase in selling and marketing expenses as a percentage of total
net revenues for the three months ended March 31, 1999 was due to sales
incentive awards and higher commission payouts pursuant to a new sales
incentive program. General and administrative expenses were $903,000, or 48% of
total net revenues, for the three months ended March 31, 1999, as compared to
$542,000, or 31% of total net revenues, for the same period in 1998. The
increase in general and administrative expenses is largely due to an increase
in start up expenses relating to the implementation of the Maxxis Switch. Total
operating expenses increased to 107% of net revenues for the three months ended
March 31, 1999 from 70% for the same period in 1998.
Interest Income (Expense). Interest expense of $179,000 for the three
months ended March 31, 1999 compares with interest income of $2,000 for the same
period in 1998. The expense in the most recent period is largely attributable
to the lease of the Maxxis Switch and to a lesser degree interest expense
recognized on the line of credit facility.
Income Taxes. The Company recognized an income tax benefit of $150,000
for the three months ended March 31, 1999 while there was no provision for
income taxes for the comparable 1998 period. This tax benefit offsets the tax
provision recorded for the three months ended September 30, 1998.
Net Loss. Net loss for the three months ended March 31, 1999 was
$583,000 as compared to a net profit of $53,000 for the same period in 1998.
The net loss is largely due to higher total operating costs for the three
months ended March 31, 1999, partly offset by improved margins on nutritional
products and prepaid calling.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Revenues. Total net revenues increased $3.9 million, or 75%, to $9.1
million for the nine months ended March 31, 1999 from $5.2 million for the same
period in 1998. The increase in total net revenues was primarily due to the
growth in the number of IAs enrolled in the Maxxis marketing network.
Communications services revenues increased $2.3 million, or 60%, to
$6.3 million for the nine months ended March 31, 1999 from $3.9 million for the
same period in 1998. This increase was primarily due to increased phone card
sales to the Company's IAs and increased long distance telephone commissions
resulting from the Company's larger communications customer base.
Nutritional products revenues increased $593,000, or 173%, to $934,000
for the nine months ended March 31, 1999 from $341,000 for the nine months
ended March 31, 1998. This increase was primarily due to the fact that the
Company did not begin selling nutritional products until November 1997 combined
with more expansive product offerings sold during fiscal 1999.
Marketing services revenues increased $971,000, or 108%, to $1.9
million for the nine months ended March 31, 1998 from $895,000 for the same
period in 1998. This increase was due to the growth in the numbers of IAs, the
increased attendance of the IAs at the Company's training schools and the
increased sales of promotional items and sales aids.
Cost of Services. Total cost of services for the nine months ended
March 31, 1999 was $2.3 million, or 25% of total net revenues, as compared to
$1.6 million, or 32% of total net revenues, for the same period in 1998. The
decline in total cost of services as a percentage of total net revenues
resulted from the improvement in communications services and nutritional
product margins which was partially offset by declines in marketing services
margins.
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<PAGE> 12
Communications services cost was $1.0 million, or 11% of total net
revenues, for the nine months ended March 31, 1999, as compared to $1.1
million, or 21% of total net revenues, for the same period in 1998. This
decrease as a percentage of total net revenues was due mainly to the higher
margins from long distance usage commissions and access fees. Nutritional
products cost was $478,000, or 5% of total net revenues, for the nine months
ended March 31, 1999 as compared to $223,000, or 4% of total revenues for the
comparable 1998 period. Marketing services cost was $819,000, or 9% of total
net revenues, for the nine months ended March 31, 1999 as compared to $339,000,
or 7% of total net revenues, for the same period in 1998. This increase as a
percentage of total net revenues was primarily due to higher costs associated
with the Company's 1998 annual summit meeting for its IAs, which was partly
offset by higher margins on distributor kits.
Gross Margin. Gross margin increased to $6.8 million for the nine
months ended March 31, 1999 from $3.5 million for the same period in 1997. As a
percentage of total net revenues, gross margin improved to 75% from 68% over
those respective periods.
Operating Expenses. For the nine months ended March 31, 1999, selling
and marketing expenses were $4.2 million, or 46% of total net revenues, as
compared with $2.0 million, or 39% of total net revenues, for the same period
in 1998. The increase in selling and marketing expenses as a percentage of
total net revenues was primarily due to a sales incentive program that began in
1999. General and administrative expenses were $2.8 million, or 30% of total
net revenues, for the nine months ended March 31, 1999, as compared to $1.7
million, or 32% of total net revenues, for the same period in 1998. Total
operating expenses increased to 76% of net revenues for the three months ended
March 31, 1999, from 71% for the three months ended March 31, 1998 largely due
to higher selling costs.
Interest Expense. For the nine months ended March 31, 1999, interest
expense was $174,000. The expense was largely comprised of interest cost related
to the Maxxis Switch and also included interest on the line of credit facility,
partially offset by interest earned on overnight cash balances. No interest was
recorded for the same 1998 period.
Net Income. Net loss for the nine months ended March 31, 1999 was
$351,000 as compared to a net loss of $115,000 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1998, the Company entered into a long-term lease
commitment for the exclusive use of the Maxxis Switch, along with certain
ancillary computer hardware and software required to operate the Maxxis Switch.
In connection with the lease of the Maxxis Switch, Maxxis made an initial
payment of $501,000. Monthly payments of $118,000 began in February 1999 and
will continue for a period of five years.
On November 22, 1998, the Company entered into the Line of Credit with
the Maxxis Millionaire Society, a Georgia partnership. Ivey Stokes and Alvin
Curry, the Company's Chairman of the Board and Chief Operating Officer,
respectively, are partners in the Maxxis Millionaire Society. Pursuant to the
Line of Credit, Maxxis may borrow up to $1,000,000 at 10% annual interest. No
advances or interest thereon pursuant to the Line of Credit are payable until
November 22, 2000.
During the nine months ended March 31, 1999, cash provided by
operating activities was $293,000, as compared to cash used in operating
activities of $8,000 for the same period in 1998. Operating activities for the
nine months ended March 31, 1999 included a $351,000 net loss, $183,000 of
depreciation and amortization and $423,000 related to changes in assets and
liabilities.
Cash used in investing activities was $627,000 for the nine months
ended March 31, 1999, as compared to $138,000 for the same period in 1998.
Investing activities for the nine months ended March 31, 1999 consisted
primarily of software development costs of $284,000 and capital expenditures
totaling $243,000.
Cash provided by financing activities was $123,000 for the nine months
ended March 31, 1999, as compared to $340,000 for the same period in 1998.
Financing activities for the nine months ended March 31, 1999 consisted of
$303,000 paid by the Company to third parties in connection with the
preparation of the Company's registration statement on Form S-1, partly offset
by $255,000 in proceeds from the issuance of stock, payments on capital lease
obligations of $629,000 and borrowings pursuant to the Company's Line of Credit
in the amount of $800,000.
12
<PAGE> 13
As of March 31, 1999, the Company had cash of $162,000 and a working
capital deficit of $846,000 as compared to cash of $372,000 and working capital
surplus of $180,000 as of June 30, 1998.
The Company anticipates that cash generated from operations, together
with proceeds from its equity offering to certain of its regional and executive
directors and its Line of Credit, will be sufficient to meet the Company's
capital requirements for the next 12 months. However, if the Company does not
receive sufficient funds from its operations, equity offering and Line of
Credit to fund its operations, the Company may need to raise additional
capital. In addition, any increases in the Company's growth rate, shortfalls in
anticipated revenues, increases in expenses or significant acquisitions could
have a material adverse effect on the Company's liquidity and capital resources
and could require the Company to raise additional capital. The Company may also
need to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
lines of credit and private equity and debt financings. The Company's cash and
financing needs for fiscal 1999 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 multi-level network
marketing system. The Company has not identified financing sources to fund such
cash needs in fiscal 1999 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.
YEAR 2000 COMPLIANCE
The Company's business and customer relationships rely on computer
software programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), the Company could experience
significant system failures or errors, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has not yet begun to review its computerized information
and non-information systems to identify internal accounting programs and
operating systems (collectively, "Systems") that might malfunction due to a
misidentification of the Year 2000. Although the Company has not yet undertaken
a review of its Systems, it believes that its Systems are adequately programmed
to address the Year 2000 issue or can be modified or replaced to address the
Year 2000 issue without material costs or delays. However, there can be no
assurances that these Systems are Year 2000 compliant. In addition, as its
review is in the early stages of assessment, Maxxis cannot predict whether
significant problems will be identified with its Systems. Therefore, the
Company has not yet determined the extent of contingency planning that may be
required. The Company may not be able to develop, implement or test remediation
or contingency plans with such Year 2000 problems or may find that the costs of
these plans exceed current expectations. If the Company fails to satisfactorily
resolve Year 2000 issues related to its Services in a timely manner, it could
be exposed to liability from third parties.
Furthermore, Maxxis has only made limited inquiries of third party
providers of products and systems used in its business and at its offices or on
the systems used by its IAs or other third parties. The Company has contacted
one provider of software used in Maxxis' operations and has received assurances
from this provider that its software is capable of addressing the Year 2000
issue. There can be no assurance, however, that any or all of the products and
services used and relied upon by the Company are Year 2000 compliant. Maxxis
believes that if its providers, IAs or other third parties do not successfully
address Year 2000 issues in their operations, the Company's operations may be
interrupted, hindered or delayed which could cause a material adverse effect on
the Company's business, financial condition and results of operations. Maxxis
further believes that CRC, its IAs and other third parties may be in the
preliminary stages of analyzing their software and systems to address the Year
2000 issue. Therefore, the Company does not believe it is possible to
accurately analyze or predict possible "worst-case" scenarios related to the
Year 2000 issue and the potential impact on the Company's business if any of
these parties fail to adequately address the Year 2000 issue. The Company has
not developed a contingency
13
<PAGE> 14
plan for Year 2000 problems experienced by CRC, its IAs or other third parties.
Thus, the Company believes it is impossible to estimate the potential expenses
involved with a large scale failure of CRC, the Company's IAs or other third
parties to resolve their Year 2000 issues. The Company can provide no assurance
that it will not suffer business interruptions, either because of its own Year
2000 problems or those of CRC, its IAs and other third parties whose Year 2000
problems may make it difficult or impossible for them to fulfill their
commitments to the Company.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). These statements appear in a number of places in this
Report and include all statements which are not historical facts and which
relate to the intent, belief or current expectations of the Company, its
directors or its officers with respect to, among other things: (i) the
Company's liquidity and financing plans, including the Company's ability to
obtain financing in the future; (ii) trends affecting the Company's financial
condition or results of operations, including those related to Year 2000
issues; (iii) the Company's growth and operating strategy; (iv) the Company's
anticipated capital needs and anticipated capital expenditures; and (v)
projected outcomes and effects on the Company of potential litigation and
investigations concerning the Company. When used in this Report, the words
"expects," "intends," "believes," "anticipates," "estimates," "may," "could,"
"should," "would," "will," "plans" and similar expressions and variations
thereof are intended to identify forward-looking statements. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in forward-looking statements as a
result of: (i) factors affecting the availability, terms and cost of capital;
risks associated with meeting lease obligations and obtaining necessary
regulatory approvals in connection with the Maxxis Switch; competitive factors
and pricing pressures; general economic conditions; the failure of the market
demand for the Company's products and services to be commensurate with
management's expectations or past experience; the impact of present or future
laws and regulations on the Company's business; changes in operating expenses
or the failure of operating expenses to be consistent with management's
expectations; and the difficulty of accurately predicting the outcome and
effect of certain matters, such as matters involving potential litigation and
investigations; (ii) various factors discussed herein; and (iii) those factors
discussed in detail in the Company's filings with Securities and Exchange
Commission (the "Commission"), including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration No. 333-38623), as
amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Maxxis does not use derivative financial instruments in its operations
or investments and does not have significant operations subject to fluctuations
in foreign currency exchange rates. The Line of Credit bears interest at a
fixed rate of 10% annually; therefore, Maxxis does not believe it has a
significant risk due to potential fluctuations in interest rates at this time.
Changes in interest rates which dramatically increase interest rates that we
might obtain from lenders in the future could make it more costly to borrow
proceeds and could impede the Company's growth strategies if management
determines that the costs associated with borrowing funds are too high to
implement these strategies.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any material legal proceedings. The Company may be subject from time to time to
legal proceedings that arise out of the Company's business operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company,
as amended to date.*
3.2 Amended and Restated Bylaws of the Company, as amended to date.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of holders of Common Stock of the
Company.*
27 Financial Data Schedule (for SEC use only).
</TABLE>
- ---------------------------------
* Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (No. 333-38623) as declared effective by the
Securities and Exchange Commission on January 5, 1999.
(B) REPORTS ON FORM 8-K.
None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXXIS GROUP, INC.
May 14, 1999 /s/ Thomas O. Cordy
---------------------------------------------
Thomas O. Cordy
President and Chief Executive Officer
(Principal executive officer)
May 14, 1999 /s/ Daniel McDonough
---------------------------------------------
Daniel McDonough
Chief Financial Officer
(Principal financial and accounting officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 162,000
<SECURITIES> 10,000
<RECEIVABLES> 742,000
<ALLOWANCES> 40,000
<INVENTORY> 462,000
<CURRENT-ASSETS> 1,481,000
<PP&E> 6,120,000
<DEPRECIATION> 183,000
<TOTAL-ASSETS> 8,035,000
<CURRENT-LIABILITIES> 2,327,000
<BONDS> 0
0
200,000
<COMMON> 612,000
<OTHER-SE> (641,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,035,000
<SALES> 9,087,000
<TOTAL-REVENUES> 9,087,000
<CGS> 2,325,000
<TOTAL-COSTS> 9,264,000
<OTHER-EXPENSES> 6,939,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (174,000)
<INCOME-PRETAX> (351,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (351,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (351,000)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
