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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 SEPTEMBER 30, 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 .
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Commission File Number: 333-38623
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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 November 15, 1999
Common Stock, no par value 1,544,910
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MAXXIS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements....................................................... 3
Condensed Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and June 30, 1999........................... 3
Condensed Consolidated Statements of Operations
for the Three Months ended September 30, 1998
and 1999 (Unaudited)....................................................... 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended September 30, 1998
and 1999 (Unaudited)....................................................... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)..................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 13
Item 3. Quantitative and Qualitative Disclosure About
Market Risks............................................................... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................ 13
Item 5. Other Information.......................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................... 14
SIGNATURES
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash ............................................................... $ 1,000 $ 20,000
Short-term investments ............................................. 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $113,000 .................................... 459,000 652,000
Accounts receivable, net of allowance for doubtful
accounts of $363,000 and $189,000, respectively .................. 1,388,000 817,000
Inventories, net ................................................... 327,000 354,000
Prepaid expenses and other current assets .......................... 144,000 110,000
------------------ -------------
Total current assets ............................................. 2,329,000 1,963,000
Property and equipment, net ........................................... 5,583,000 5,842,000
Capitalized software development costs, net ........................... 405,000 352,000
Investments ........................................................... 100,000 100,000
Other assets .......................................................... 37,000 29,000
------------------ -------------
Total assets ................................................. $ 8,454,000 $ 8,286,000
================== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................... $ 1,866,000 $ 1,218,000
Commissions payable ................................................ 506,000 463,000
Accrued compensation ............................................... 224,000 220,000
Taxes payable ...................................................... 497,000 317,000
Current maturities of long-term capital lease obligations .......... 877,000 929,000
Accrued liabilities ................................................ 559,000 428,000
Deferred revenue ................................................... 389,000 330,000
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Total current liabilities ........................................ 4,918,000 3,905,000
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Long-term liabilities
Line of credit ..................................................... -- 1,390,000
Long-term lease obligations ........................................ 4,005,000 4,005,000
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Total long-term liabilities ...................................... 4,005,000 5,395,000
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Shareholders' deficit:
Preferred Stock, no par value; 10,000,000 shares authorized;
100,000 shares designated as Series A Convertible Preferred
Stock of which 295,450 and 36,359 shares are issued and
outstanding, respectively ........................................ 1,625,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,544,910 and 1,617,637 shares issued and outstanding,
respectively ..................................................... 612,000 612,000
Shareholder note receivable ........................................ -- (120,000)
Treasury stock, at cost ............................................ (120,000) --
Accumulated deficit ................................................ (2,586,000) (1,706,000)
------------------ -------------
Total shareholders' deficit ...................................... (469,000) (1,014,000)
------------------ -------------
Total liabilities and shareholders' deficit .................. $ 8,454,000 $ 8,286,000
================== =============
</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
SEPTEMBER 30,
-----------------------------
1998 1999
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<S> <C> <C>
Net revenues:
Communications services ............................................ $ 3,686,000 $ 3,034,000
Nutritional products ............................................... 375,000 423,000
Marketing services ................................................. 1,042,000 863,000
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Total net revenues ............................................... 5,103,000 4,320,000
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Cost of services:
Communications services ............................................ 706,000 1,470,000
Nutritional products ............................................... 202,000 167,000
Marketing services ................................................. 552,000 253,000
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Total cost of services ........................................... 1,460,000 1,890,000
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Gross margin .......................................................... 3,643,000 2,430,000
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Operating expenses:
Selling and marketing .............................................. 2,005,000 1,768,000
General and administrative ......................................... 778,000 1,354,000
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Total operating expenses ......................................... 2,783,000 3,122,000
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Operating income (loss) ............................................... 860,000 (692,000)
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Interest expense ...................................................... 188,000
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Income (loss) before income taxes ..................................... 860,000 (880,000)
Provision for income taxes ............................................ 280,000 --
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Net income (loss) ..................................................... $ 580,000 $ (880,000)
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Income (loss) per share:
Basic .............................................................. $ 0.37 $ (0.54)
=========== ===========
Diluted ............................................................ $ 0.36 $ (0.54)
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Weighted average number of shares outstanding:
Basic .............................................................. 1,571,187 1,617,637
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Diluted ............................................................ 1,607,546 1,617,637
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</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>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 580,000 $ (880,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization .................................... 107,000 348,000
Changes in assets and liabilities:
Communications receivables ..................................... (159,000) 193,000
Accounts receivables ........................................... -- (571,000)
Inventories .................................................... (507,000) 27,000
Prepaid expenses and other assets .............................. (197,000) 142,000
Accounts payable ............................................... 480,000 648,000
Commissions payable ............................................ 53,000 43,000
Taxes payable .................................................. 442,000 180,000
Accrued compensation and accrued liabilities ................... 121,000 135,000
Deferred revenue ............................................... 434,000 59,000
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Total adjustments ............................................ 774,000 1,020,000
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Net cash provided in operating activities ............... 1,354,000 147,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (41,000) (52,000)
Software development costs ......................................... (153,000) (90,000)
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Net cash used in investing activities ................... (194,000) (142,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for issuance of common stock .............................. (228,000) --
Proceeds from line of credit ....................................... (1,390,000) 35,000
Payments on capital lease obligations .............................. (501,000) (52,000)
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Net cash used in financing activities ................... (729,000) (24,000)
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NET INCREASE IN CASH EQUIVALENTS ...................................... 431,000 (19,000)
CASH AND CASH EQUIVALENTS, beginning of the period .................... 372,000 20,000
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CASH AND CASH EQUIVALENTS, end of the period .......................... $ 803,000 $ 1,000
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SUPPLEMENTAL CASH FLOW DISCLOSURES OF
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred ................................. $ 5,759,000 $ 5,759,000
=========== ===========
Conversion of amounts owed under line of credit to preferred
stock ............................................................ $ -- $ 1,425,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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MAXXIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
We were incorporated on January 24, 1997 and are headquartered in
Tucker, Georgia. Our principal business operations are carried out
through our 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. We
were 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, or "IAs". Our IAs market communications and Internet
services and nutritional and health enhancement products.
We have a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. Since we
only recently made the transition to an operating company, our ability
to manage our growth and expansion will require us to implement and
continually expand our operational and financial systems, recruit
additional IAs, and train and manage both current and new IAs. Growth
may place a significant strain on our operational resources and
systems, and failure to effectively manage any such growth might have a
material adverse effect on our business, financial condition and
results of operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of our management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly our financial position as of September 30, 1999 and the results
of our operations and our cash flows for the three-month periods ended
September 30, 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>
SEPTEMBER 30, JUNE 30,
1999 1999
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<S> <C> <C>
Prepaid phone cards...................... $ 14,000 $ 25,000
Sales aids............................... 129,000 160,000
Nutritional products..................... 184,000 169,000
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$ 327,000 $ 354,000
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</TABLE>
4. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, we entered into certain leases for telephone
switching equipment, which are classified as capital lease obligations.
These leases expire within five years and have purchase options at the
end of the original lease term. Assets under capital leases are
included in property and equipment in the September 30, 1999
consolidated balance sheet at a fair gross market value of
approximately $5,759,000.
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5. SEGMENT REPORTING
We are a multi-level network marketing company that currently sells
communications and nutrition products through our network of IAs.
The Communications segment of our business provides and distributes
1-Plus long distance services, prepaid phone cards, internet service
and provides the hosting of web pages for Maxxis 2000 distributors. Our
Nutrition division distributes private label nutritional and health
enhancement products to our IAs. Our Marketing Services segment
provides sales aids, product fulfillment, promotional materials and
provides other support services such as conducting our annual marketing
summit meeting and other training meetings.
The Corporate Group segment of our business is largely an overhead
function that provides our administrative, financial and legal support
services.
Segment information for the three month periods ended September 30,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
September 30, 1998
Net revenues ............ $ 3,686,000 $ 375,000 $1,042,000 $ -- $ 5,103,000
Operating income (loss).. 783,000 (107,000) 359,000 (175,000) 860,000
September 30, 1999
Net revenues ............ $ 3,034,000 $ 423,000 $ 863,000 $ -- $ 4,320,000
Operating income (loss).. (840,000) (22,000) 501,000 (331,000) (692,000)
</TABLE>
6. SHAREHOLDERS' DEFICIT
On September 30, 1999 we converted the outstanding Line of Credit
balance of $1.4 million into 259,091 shares of Series A Convertible
Preferred Stock. The Line of Credit is with the Maxxis Millionaire
Society, whose partners are certain members of senior management and
significant shareholders of the common stock. Under the Line of Credit,
Maxxis may borrow up to $2 million at 10% annual interest. Advances and
interest are not payable until November 22, 2000. Also on September 30,
1999, we agreed to accept the return of common stock issued to a former
executive in exchange for the foregiveness of a shareholder note
receivable for $120,000, which was guaranteed by the executive. The
returned shares are classified as Treasury Stock.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We market 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." We operate through our
subsidiaries: Maxxis 2000; Maxxis Communications; and 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. We believe that a multi-level network marketing system allows us to
obtain customers for our products in a cost effective manner and enhances
customer retention because of the relationships between our IAs and their
customers. The telecommunications customer base developed by our IAs provides a
potential customer base for our nutritional and health enhancement products,
Internet-related services and for future products.
We have 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 our IAs. Maxxis
Communications obtains telecommunications services and purchases time for its
prepaid 1 hour, 30 minute and 10 minute phone cards from CRC. In September 1998,
we 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.
In January 1999, we notified CRC of our intent to terminate our 1-Plus agreement
and begin a process of migrating our customers to the Maxxis communications
network. At that time, we entered into an agreement with MCI WorldCom to provide
us with the necessary private lines, circuits and other network services to be
able to originate and terminate telephone calls through the Maxxis Switch. In
March 1999, we entered an agreement with IXC Communications Services, Inc. to
provide switched services for carrying the portion of the Maxxis traffic that
does not go through the Maxxis Switch. A provision of our contract with IXC
requires a minimum monthly commitment expiring in September 2000. We have
obtained tariffs and the required regulatory approvals necessary to offer
interstate and intrastate long distance service throughout the United States.
During the period of April through July 1999, we migrated our long distance
customers from CRC's network to the Maxxis Network.
In November 1997, we began marketing several private label dietary
supplements to our customers and IAs. Recently, we began marketing additional
nutritional and health enhancement products that are manufactured by various
suppliers. In September 1998, we began providing Internet access and Web-page
development and hosting services. Internet access is provided by Maxxis
Communications through its agreement with InteReach Internet Services, LLC, and
Web-page development and hosting services are provided by Maxxis Communications.
We conduct marketing activities exclusively through our network of IAs.
We believes that IAs are generally attracted to our multi-level network
marketing system because of the potential for supplemental income and because
our 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. We encourage 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. We also sponsors meetings at which
current IAs are encouraged to bring in others for an introduction to our
marketing system. Our multi-level network marketing system and our reliance upon
IAs are intended to reduce marketing costs, customer acquisition costs and
customer attrition. We believe that our multi-level network marketing system
will continue to build a base of potential customers for additional services and
products.
We derive revenues from communications services, nutritional products
and marketing services. Communications services revenues are comprised of: sales
of prepaid phone cards to our IAs; commissions, fees
8
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and revenues generated from our long distance customers; and subscription fees
from our Internet subscribers. Because of the administrative procedures that
must be complied with in order to establish 1-Plus customers and to collect the
usage and access fees from the local exchange carriers, there is generally a
delay of up to three to four months from the time a prospective customer
indicates a desire to become a 1-Plus customer and the time that we begin to
receive commissions from such customer's usage. In the future, we believe that
revenues generated on the sales of 1-Plus long distance services will constitute
an increasing percentage of our total revenues.
Nutritional products revenues include sales of private-label
nutritional products, health enhancement products, a weight management program
and a 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 independent associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit. Independent
associates also pay an annual non-refundable fee, which we amortize into
revenues over the renewal period, in order to maintain their status as an
independent associate. MDs must attend continuing education training schools
each year which also are subject to a fee. The training fees are recognized at
the time the training is received. We do not receive any fees from independent
associates for the training provided by MDs or national training directors.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost consists
primarily of the cost of purchasing activated prepaid phone cards, the Maxxis
Switch and network services. Nutritional products cost consists of the cost of
purchasing private label nutritional products. Marketing services cost includes
the costs of purchasing IA distributor kits, sales aids and promotional
materials and training costs. Operating expenses consist of selling and
marketing expenses and general and administrative expenses. Selling and
marketing expenses include commissions paid to IAs based on: (i) usage of long
distance services by customers; (ii) sales of products to new IAs sponsored into
Maxxis; 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 our
operations and growth.
We have a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. We expect that we
will incur substantial initial expenses, and there can be no assurance that we
will achieve profitability. If we grow rapidly, we will be required to
continually expand and modify our 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 our
operational resources and systems, and the failure to effectively manage any
such growth could have a material adverse effect on our business, financial
condition and 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
SEPTEMBER 30,
--------------------
1998 1999
------- -------
<S> <C> <C>
Net revenues:
Communications services .... 72% 70%
Nutritional products ....... 7 10
Marketing services ......... 21 20
------- -------
Total net revenues ....... 100% 100%
======= =======
Cost of services:
Communications services .... 14% 34%
Nutritional products ....... 4 4
Marketing services ......... 11 6
------- -------
Total cost of services ... 29 44
Operating expenses:
Selling and marketing ...... 39 41
General and administrative.. 15 31
------- -------
Total operating expenses.. 54% 72%
======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 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
declined $783,000, or 15%, to $4.3 million for the three months ended September
30, 1999 from $5.1 million for the same period in 1998. The decline in total net
revenues was primarily due to a reduction in the number of IAs enrolled in the
Maxxis marketing network for the three months ended September 30, 1999.
Communications services revenues declined $652,000, or 18%, to $3.0
million for the three months ended September 30, 1999 from $3.7 million for the
same period in 1998. This decrease was primarily due to fewer prepaid phone card
sales to the our IAs.
Nutritional products revenues were $423,000 for the three months ended
September 30, 1999 as compared to $375,000 for the three months ended
September 30, 1998. This 13% increase was largely due to an increased number of
repeat users of our nutrition products.
Marketing services revenues declined $179,000, or 17%, to $863,000
million for the three months ended September 30, 1999 from $1.0 million for the
same period in 1998. The decline in revenue was mainly due to a reduction in the
number of IAs enrolled in the Maxxis marketing network for the three months
ended September 30, 1999 combined with lower revenues of sales aids and
promotional products.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for the three months ended September 30, 1999 was $1.9 million, or 44%
of total net revenues, as compared to $1.5 million, or 29% of total net
revenues, for the same period in 1998. The higher cost of services as a
percentage of net revenues is primarily the result of establishing Maxxis
Communications as a facilities based carrier of long distance telephone services
including the costs of operating the Maxxis Switch.
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<PAGE> 11
Communications services cost was $1.5 million, or 34% of total net
revenues, for the three months ended September 30, 1999, as compared to
$706,000, or 14% of total net revenues, for the same period in 1998. This
increase as a percentage of total net revenues was due mainly to the expenses
associated with the Maxxis Switch and our operation as a tariffed facilities
based provider of telecommunications services for the three months ended
September 30, 1999. During the same period in 1998, we earned commissions for
enrolling customers in 1-Plus long distance service provided by CRC and incurred
a negligible amount of cost of services. Consequently, for the three months
ended September 30, 1999, costs associated with operating the Maxxis Switch and
network services are included in cost of services whereas there were none of
these costs in the 1998 period. Nutritional products cost was $167,000, or 4% of
total net revenues, for the three months ended September 30, 1999, as compared
to $202,000, or 4% of total net revenues, for the three months ended September
30, 1998. Marketing services cost was $253,000, or 6% of total net revenues,
for the three months ended September 30, 1999 as compared to $552,000, or 11% of
total net revenues, for the same period in 1998. The decline as a percentage of
total net revenues was primarily due to higher costs associated with our 1998
annual summit meeting.
Gross Margin. Gross margin decline to $2.4 million for the three months
ended September 30, 1999 from $3.6 million for the same period in 1998. As a
percentage of total net revenues, gross margin declined to 56% from 71% over
those respective periods.
Operating Expenses. For the three months ended September 30, 1999,
selling and marketing expenses were $1.8 million, or 41% of total net revenues,
as compared with $2.0 million, or 39% of total net revenues, for the same period
in 1998. General and administrative expenses were $1.3, or 31% of total net
revenues, for the three months ended September 30, 1999, as compared to
$778,000, or 15% of total net revenues, for the same period in 1998. The
increase in general and administrative cost largely relate to the higher costs
of operating the Maxxis network and directly servicing and billing our
customers.
Income Taxes. No provision for income taxes was required in the 1999
period as compared with a provision for income taxes of $280,000 recorded for
the three months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 1999, cash provided by
operating activities was $147,000 as compared to $1.4 million for the same
period in 1998. Operating activities for the three months ended September 30,
1999 included $873,000 of net loss, $348,000 of depreciation and amortization
and $1.0 million related to changes in assets and liabilities.
Cash used in investing activities was $142,000 for the three months
ended September 30, 1999, as compared to $194,000 for the same period in 1998.
Investing activities for the three months ended September 30, 1999 consisted
primarily of purchases of computer software and hardware.
Cash used by financing activities was $24,000 for the three months
ended September 30, 1999, as compared to cash provided by financing activities
of $729,000 for the same period in 1998. Financing activities for the three
months ended September 30, 1999 consisted of $35,000 of proceeds from our Line
of Credit with the Maxxis Millionaire Society, which indebtedness was
subsequently converted to our preferred stock and $59,000 of lease payments on
the Maxxis Switch.
As of September 30, 1999, we had cash of $1,000 and a working capital
deficit of $2.6 million as compared to cash of $803,000 and a working capital
deficit of $1.0 million as of June 30, 1999.
On September 29, 1998, we 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 Network. In connection with
the lease of the Maxxis Switch, Maxxis made an initial payment of $501,000.
Monthly payments of $118,000 began in January 1999 and will continue for a
period of five years.
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<PAGE> 12
We anticipate that cash generated from operations, together with
proceeds from our ongoing equity offering, will be sufficient to meet our
capital requirements for the next 12 months. However, if we do not receive
sufficient funds from our operations and equity offering to fund our operations,
we may need to raise additional capital. In addition, any increases in our
growth rate, shortfalls in anticipated revenues, increases in expenses or
significant acquisitions could have a material adverse effect on our liquidity
and capital resources and could require us to raise additional capital. We may
also need to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, lines of credit and private equity and debt
financings. Our cash and financing needs for fiscal 2000 and beyond will be
dependent on our level of IA and customer growth and the related capital
expenditures, advertising costs and working capital needs necessary to support
such growth. We believe that major capital expenditures may be necessary over
the next few years to develop additional product lines to sell through our IAs
and to develop and/or acquire information, accounting and/or inventory control
systems to monitor and analyze our growing multi level network marketing system.
We have not identified financing sources to fund such cash needs in fiscal 2000
and beyond. There can be no assurance that we will be able to raise any such
capital on terms acceptable to us or at all.
YEAR 2000 COMPLIANCE
Many installed computer software and network processing systems
currently accept only two-digit entries in the date code field and may need to
be upgraded or replaced in order to accurately record and process information
and transactions on and after January 1, 2000. Our business and relationships
with our customers and IAs depends significantly on a number of computer
software programs, internal operating systems and connections to other networks,
and the failure of these programs, systems or networks to successfully address
the Year 2000 problem could have a material adverse effect on our business,
financial condition and results of operations. The Maxxis Switch is not Year
2000 compliant. Although we expect that the transactions processed through the
Maxxis Switch will be Year 2000 compliant by mid-December 1999, there is no
assurance that we will be able to successfully address the Year 2000 problem
with respect to the Maxxis Switch by mid-December 1999 or at all. Our failure to
solve this issue could result in serious financial harm due to the fact that we
could lose a portion of or all of the revenues that would otherwise be obtained
from traffic routed over the Maxxis Switch.
We have conducted reviews to assess the extent to which our internal
systems and software and the network connections it maintains are adequately
programmed to address the Year 2000 issue. In addition, our ability to provide
services and support to our customers and IAs depends upon the continued
functioning of the software programs, operating systems and networking used by
its vendors and suppliers. We are also assessing the extent to which our vendors
and suppliers have successfully addressed the Year 2000 problem. It currently is
impossible for us to predict the potential expenditures that may be required or
the delay or interruption in service that may result due to the Year 2000
problem. Based on these reviews, we expect to complete the necessary steps to
address potential operating issues in connection with the Year 2000 problem. Any
failure by us or our vendors or suppliers to successfully address the Year 2000
problem could significantly interrupt our business operations and have a
material adverse effect on our business, financial condition and results of
operations. We have established certain contingency plans relative to our most
critical operating procedures.
Our business and customer relationships rely on computer software
programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), we could experience significant
system failures or errors, which could have a material adverse effect on our
business, financial condition or results of operations.
12
<PAGE> 13
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 the current expectations of Maxxis, its directors or its
officers with respect to, among other things: (i) Maxxis' financing plans,
including our ability to obtain financing in the future; (ii) trends affecting
our financial condition or results of operations, including those related to
Year 2000 issues; (iii) our growth and operating strategy; (iv) our anticipated
capital needs and anticipated capital expenditures; and (v) projected outcomes
and effects on us of potential litigation and investigations concerning us. 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 our products and services to be
commensurate with management's expectations or past experience; the impact of
present or future laws and regulations on the our 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 our filings with Securities and Exchange Commission
(the "Commission"), including the "Risk Factors" section of the Post-Effective
Amendment No. 1 to our Registration Statement on Form S-1 (Registration number
(333-38623), as declared effective by the Commission on January 5, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to, nor is any of its property subject to, any
material legal proceedings. We may be subject from time to time to legal
proceedings that arise out of our business operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 1999 Annual Meeting of shareholders was held on October 21, 1999
to: (i) elect three directors to serve on our Board of Directors, each for a
three-year term; and (ii) ratify the appointment of Arthur Andersen LLP as our
independent public accountants for the fiscal year ending June 30, 2000.
Election of Directors. The shareholders were asked to elect Robert J.
Glover, Larry W. Gates II and John Phillips to our Board of Directors, each for
a three-year term. A total of 1,041,530 (or 64% of the eligible votes) shares
were cast for the election of Mr. Glover, 923 votes were cast against and there
were 450 abstentions. A total of 1,041,646 shares were cast for the election of
Mr. Gates, no votes were cast against and there were 1,259 abstentions. A total
of 118,122 shares were cast for the election of Mr. Phillips, 867,446 votes were
cast against and there were 57,337 abstentions. Consequently, Messrs. Gates,
Glover and Phillips were
13
<PAGE> 14
re-elected to the Board. In addition to the foregoing, the following persons
continue to serve as directors: Thomas O. Cordy; Charles P. Bernstein; Alvin
Curry, Jr.; Terry Harris; Philip E. Lundquist and Ivey J. Stokes.
Accountants. The shareholders were asked to ratify the appointment by
the Board of Directors of the firm of Arthur Andersen LLP as our independent
public accountants for the fiscal year ending June 30, 2000. A total of 64%, or
1,033,365 votes were cast for the ratification of Arthur Andersen LLP.
ITEM 5. OTHER INFORMATION
On September 30, 19998, Thomas O. Cordy resigned as our Chief Executive
Officer. Mr. Cordy continues to serve as a director.
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 Maxxis, as amended to date.*
3.2 Amended and Restated Bylaws of Maxxis., 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 our Common Stock.*
27 Financial Data Schedule (for SEC use only).
</TABLE>
- --------------------------
* Incorporated by reference to the exhibits to our 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.
14
<PAGE> 15
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.
November 15, 1999 /s/ Ivey J. Stokes
-----------------------------------------------
Ivey J. Stokes
Chairman, President and Chief Executive Officer
(Principal executive officer)
November 15, 1999 /s/ Daniel McDonough
-----------------------------------------------
Daniel McDonough
Chief Financial Officer
(Principal financial and accounting officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MAXXIS GROUP INC. FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,000
<SECURITIES> 10,000
<RECEIVABLES> 2,323,000
<ALLOWANCES> 476,000
<INVENTORY> 327,000
<CURRENT-ASSETS> 2,329,000
<PP&E> 5,583,000
<DEPRECIATION> 107,000
<TOTAL-ASSETS> 8,454,000
<CURRENT-LIABILITIES> 4,918,000
<BONDS> 0
0
1,625,000
<COMMON> 612,000
<OTHER-SE> (2,706,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,454,000
<SALES> 4,320,000
<TOTAL-REVENUES> 4,320,000
<CGS> 1,890,000
<TOTAL-COSTS> 5,012,000
<OTHER-EXPENSES> 3,122,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188,000
<INCOME-PRETAX> (880,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (880,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (880,000)
<EPS-BASIC> (.54)
<EPS-DILUTED> (.54)
</TABLE>
