<PAGE> 1
================================================================================
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 DECEMBER 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 ______.
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 February 14, 2000
Common Stock, no par value 1,541,274
================================================================================
<PAGE> 2
MAXXIS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 1999 (Unaudited) and June 30, 1999.................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months ended December 31, 1998 and 1999
(Unaudited)........................................................ 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended December 31, 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................................ 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risks...................................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 14
Item 5. Other Information.................................................. 14
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>
DECEMBER 31, JUNE 30,
1999 1999
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash .......................................................... $ 241,000 $ 20,000
Short-term investments ........................................ 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $313,000 and $113,000 .................. 169,000 652,000
Accounts receivable, net of allowance for
doubtful accounts of $490,000 and $189,000 .................. 1,499,000 817,000
Inventory ..................................................... 499,000 354,000
Prepaid expenses .............................................. 25,000 98,000
Other current assets .......................................... 126,000 12,000
----------- -----------
Total current assets ........................................ 2,569,000 1,963,000
Property and equipment, net ...................................... 5,299,000 5,842,000
Capitalized software development costs, net ...................... 448,000 352,000
Investments ...................................................... 100,000 100,000
Other assets ..................................................... 48,000 29,000
----------- -----------
Total assets ............................................ $ 8,464,000 $ 8,286,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Preferred stock subscriptions ................................. $ 1,987,000 $ --
Accounts payable .............................................. 1,091,000 1,218,000
Commissions payable ........................................... 230,000 463,000
Accrued compensation .......................................... 212,000 220,000
Taxes payable ................................................. 503,000 317,000
Current maturities of long-term capital lease obligations ..... 535,000 929,000
Accrued liabilities ........................................... 516,000 428,000
Deferred revenue .............................................. 428,000 330,000
----------- -----------
Total current liabilities ................................... 5,502,000 3,905,000
Long-term liabilities:
Line of credit ................................................ 65,000 1,390,000
Long-term lease obligations ................................... 4,005,000 4,005,000
----------- -----------
Total long-term liabilities ................................. 4,070,000 5,395,000
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
1,000,000 shares designated as Series A Convertible Preferred
Stock of which 295,450 shares are issued and outstanding .... 1,625,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,541,274 and 1,617,637 shares issued and outstanding ....... 612,000 612,000
Shareholder note receivable ................................... -- (120,000)
Treasury stock, at cost ....................................... (128,000) --
Accumulated earnings (deficit) ................................ (3,217,000) (1,706,000)
----------- -----------
Total shareholders' equity (deficit) ........................ (1,108,000) (1,014,000)
----------- -----------
Total liabilities and shareholders' equity .............. $ 8,464,000 $ 8,286,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------
1998 1999 1998 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Communications services ................... $ 1,435,000 $ 2,189,000 $5,121,000 $ 5,223,000
Nutritional products ...................... 255,000 692,000 630,000 1,115,000
Marketing services ........................ 398,000 412,000 1,440,000 1,275,000
----------- ----------- ---------- -----------
Total net revenues ...................... 2,088,000 3,293,000 7,191,000 7,613,000
----------- ----------- ---------- -----------
Cost of services:
Communications services ................... 202,000 1,256,000 908,000 2,726,000
Nutritional products ...................... 158,000 162,000 360,000 329,000
Marketing services ........................ 85,000 141,000 637,000 394,000
----------- ----------- ---------- -----------
Total cost of services .................. 445,000 1,559,000 1,905,000 3,449,000
----------- ----------- ---------- -----------
Gross margin ................................. 1,643,000 1,734,000 5,286,000 4,164,000
----------- ----------- ---------- -----------
Operating expenses:
Selling and marketing ..................... 1,054,000 796,000 3,059,000 2,564,000
General and administrative ................ 1,072,000 1,427,000 1,850,000 2,781,000
----------- ----------- ---------- -----------
Total operating expenses ................ 2,126,000 2,223,000 4,909,000 5,345,000
----------- ----------- ---------- -----------
Operating income (loss) ...................... (483,000) (489,000) 377,000 (1,181,000)
----------- ----------- ---------- -----------
Interest income (expense) .................... 5,000 (143,000) 5,000 (331,000)
Income (loss) before income taxes ............ (478,000) (632,000) 382,000 (1,512,000)
Provision (benefit) for income taxes ......... (130,000) -- 150,000 --
----------- ----------- ---------- -----------
Net income (loss) ............................ $ (348,000) $ (632,000) $ 232,000 $(1,512,000)
=========== =========== ========== ===========
Income (loss) per share:
Basic ..................................... $ (0.22) $ (0.41) $ 0.15 $ (0.96)
=========== =========== ========== ===========
Diluted ................................... $ (0.22) $ (0.41) $ 0.15 $ (0.96)
=========== =========== ========== ===========
Weighted average number of shares outstanding:
Basic ..................................... 1,571,187 1,541,500 1,571,187 1,581,274
=========== =========== ========== ===========
Diluted ................................... 1,571,187 1,541,500 1,571,187 1,581,274
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ 232,000 $(1,512,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ............................... 252,000 699,000
Compensation expense related to stock options ............... 38,000 --
Changes in assets and liabilities:
Communications receivables ................................ (380,000) 483,000
Accounts receivables ...................................... -- (681,000)
Inventories ............................................... (335,000) (145,000)
Prepaid expenses .......................................... 19,000 73,000)
Other assets .............................................. (28,000) (133,000)
Accounts payable .......................................... 173,000 (128,000)
Commissions payable ....................................... 99,000 (233,000)
Taxes payable ............................................. 333,000 186,000
Accrued liabilities ....................................... 156,000 99,000
Deferred revenue .......................................... 2,000 98,000
----------- -----------
Total adjustments ....................................... 329,000 318,000
----------- -----------
Net cash provided (used) by operating activities ... 561,000 (1,194,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................... (188,000) (84,000)
Software development costs .................................... (281,000) (168,000)
Purchase of equity investment ................................. (100,000) --
----------- -----------
Net cash used by investing activities .............. (569,000) (252,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from (for) issuance of common stock ....... (244,000) --
Proceeds from the sale of preferred stock ..................... -- 1,425,000
Proceeds from preferred stock subscriptions ................... -- 1,987,000
Payments for treasury stock ................................... -- (7,000)
Net proceeds (payments) on line of credit ..................... 800,000 (1,325,000)
Payments on capital lease obligations ......................... (501,000) (413,000)
----------- -----------
Net cash provided by financing activities .......... 55,000 1,667,000
----------- -----------
NET INCREASE IN CASH EQUIVALENTS ................................. 47,000 221,000
CASH AND CASH EQUIVALENTS, beginning of the period ............... 372,000 20,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period ..................... $ 419,000 $ 241,000
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Capital lease obligations incurred ............................ $ 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
<PAGE> 6
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. We are a multi-level network marketing company that
currently sells communications and nutrition products through our
network of IAs. 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. 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 December 31, 1999 and the results
of our operations and our cash flows for the three and six month
periods ended December 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>
DECEMBER 31, JUNE 30,
1999 1999
---------- ---------
<S> <C> <C>
Prepaid phone cards......................... $ 113,000 $ 25,000
Sales aids.................................. 137,000 160,000
Nutritional products........................ 249,000 169,000
--------- ---------
$ 499,000 $ 354,000
========= =========
</TABLE>
4. SEGMENT REPORTING
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.
6
<PAGE> 7
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 December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Net revenues .......... $ 1,435,000 $ 255,000 $ 398,000 $ -- $ 2,088,000
Operating income (loss) (166,000) (263,000) 161,000 (215,000) (483,000)
December 31, 1999
Net revenues .......... $ 2,189,000 $ 692,000 $ 412,000 $ -- $ 3,293,000
Operating income (loss) (525,000) 179,000 192,000 (335,000) (489,000)
</TABLE>
Segment information for the six month periods ended December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Net revenues .......... $ 5,121,000 $ 630,000 $1,440,000 $ -- $ 7,191,000
Operating income (loss) 617,000 (370,000) 520,000 (390,000) 377,000
December 31, 1999
Net revenues .......... $ 5,223,000 $ 1,115,000 $1,275,000 $ -- $ 7,613,000
Operating income (loss) (1,365,000) 157,000 693,000 (666,000) (1,181,000)
</TABLE>
5. 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 forgiveness of a shareholder note
receivable for $120,000, which was guaranteed by the executive. The
returned shares are classified as treasury stock.
During the three month period ended December 31, 1999, we received an
aggregate of $2.0 million in cash for preferred stock subscriptions.
This item is classified as a current liability until such time that we
complete certain regulatory requirements, which is anticipated to be
completed by the end of the third fiscal quarter reporting period.
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 our 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 our 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. 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 all of our long
distance customers and domestic prepaid phone cards from CRC's network to the
Maxxis network.
In November 1997, we began marketing several private label dietary
supplements to our customers and IAs. We also market 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; usage revenue and fees 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, there is generally
8
<PAGE> 9
a delay of up to two to three months from the time a prospective customer
indicates a desire to become a 1-Plus customer and the time that we begin to
receive cash 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 usage from third party carriers and the cost of the
Maxxis Switch. 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
<PAGE> 10
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 SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31,
----------------- -----------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Communications services .. 69% 66% 71% 68%
Nutritional products ..... 12 21 9 15
Marketing services ....... 19 13 20 17
--- --- --- ---
Total net revenues ..... 100% 100% 100% 100%
=== === === ===
Cost of services:
Communications services .. 10% 38% 13% 36
Nutritional products ..... 8 5 5 4
Marketing services ....... 4 4 9 5
--- --- --- ---
Total cost of services . 22% 47% 27% 45%
Operating expenses:
Selling and marketing .... 50% 24% 43% 34%
General and administrative 51 43 26 36
--- --- --- ---
Total operating expenses 101% 67% 69% 70%
=== === === ===
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 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 $1.2 million, or 58%, to $3.3 million for the three months ended
December 31, 1999 from $2.1 million for the same period in 1998. The increase in
total net revenues was primarily due to higher communications services revenue.
Communications services revenues increased $754,000, or 52%, to $2.2
million for the three months ended December 31, 1999 from $1.4 million for the
same period in 1998. This increase was primarily due to the fact that in the
1999 period we recorded all long distance telephone revenues, while in the 1998
period only the commission amount from CRC was recorded as revenue.
Nutritional products revenues increased $437,000, or 171% to $692,000
for the three months ended December 31, 1999 compared with the same period in
1998. The increase is mainly due to an expansion of the product line, an
increase in the number of nutrition product activations and more repeat
consumers of these nutrition and health enhancement products.
Marketing services revenues increased $14,000, or 3%, to $412,000 for
the three months ended December 31, 1999 from $398,000 for the same period in
1998. The increase is the result of a slightly higher average price on
distributor kits.
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 December 31, 1999 was $1.6 million, or 47%
of total net revenues, as compared to $445,000, or 22% of total net revenues,
for the same period in 1998. The increase in total cost of services as a
percentage of total net revenues resulted from higher communications services
costs.
10
<PAGE> 11
Communications services cost was $1.3 million, or 38% of total net
revenues, for the three months ended December 31, 1999, as compared to $202,000,
or 10% of total net revenues, for the same period in 1998. This large increase
in the percentage of total net revenues was due mainly to the fact that in the
latest period we recognized the cost of operation of the Maxxis network,
whereas, in the 1998 period under the reseller agreement with CRC no such cost
was recognized.
Nutritional products cost was $162,000, or 5% of total net revenues,
for the three months ended December 31, 1999 as compared to $158,000 of
nutrition products cost for the same period in 1998. The improved nutrition
products margins were mainly due to cost reductions and improved inventory
control procedures.
Marketing services cost was $141,000, or 4% of total net revenues, for
the three months ended December 31, 1999 as compared to $85,000, or 4% of total
net revenues, for the same period in 1998.
Gross Margin. Gross margin increased to $1.7 million for the three
months ended December 31, 1999 from $1.6 million for the same period in 1998. As
a percentage of total net revenues, gross margin declined to 53% for the three
months ended December 31, 1999 from 79% for the three months ended December 31,
1998. The lower gross margins are mainly attributable to the recognition of
costs associated with the Maxxis network, which are partly offset by higher
nutrition products margins.
Operating Expenses. For the three months ended December 31, 1999,
selling and marketing expenses were $796,000, or 24% of total net revenues, as
compared with $1.1 million, or 50% of total net revenues, for the same period in
1998. The decrease in selling and marketing expenses as a percentage of total
net revenues is primarily due to lower commissions paid on communications
services. General and administrative expenses were $1.4 million, or 43% of total
net revenues, for the three months ended December 31, 1999, as compared to $1.1
million, or 51% of total net revenues, for the same period in 1998. The increase
in general and administrative expenses is largely due to higher bad debt and
depreciation expense. Total operating expenses decreased to 67% of total net
revenues for the three months ended December 31, 1999 from 101% for the same
period in 1998.
Net Loss. The net loss before income taxes for the three months ended
December 31, 1999 was $632,000 as compared to a net loss of $478,000 before
income taxes for the same period in 1998. The higher net loss is largely due to
higher costs for communications services.
Income Taxes. Because we had a net loss for the three months ended
December 31, 1999, no income tax provision was recorded. A tax benefit of
$130,000 was recorded for the three months ended December 31, 1998 to partly
offset the tax provision recorded in the profitable first quarter period ended
September 30, 1998.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998
Revenues. Total net revenues increased $422,000, or 6%, to $7.6 million
for the six months ended December 31, 1999 from $7.2 million for the same period
in 1998. The increase in total net revenues was primarily due to higher
nutrition product sales which was partly offset by a reduction in the number of
IAs enrolled in the Maxxis marketing network for the six months ended December
31, 1999.
Communications services revenues increased $102,000, or 2%, to $5.2
million for the six months ended December 31, 1999 from $5.1 million for the
same period in 1998. This increase was primarily due to higher long distance
services revenue which was offset by fewer prepaid phone card sales to our IAs.
Nutritional products revenues were $1.1 million for the six months
ended December 31, 1999 as compared to $630,000 for the six months ended
December 31, 1998. This 77% increase was largely due to an expanded product line
and an increased number of repeat users of our nutrition and health enhancement
products.
11
<PAGE> 12
Marketing services revenues declined $165,000, or 11%, to $1.3 million
for the six months ended December 31, 1999 from $1.4 million for the same period
in 1998. The decline in revenue network for the six months ended December 31,
1999 was mainly due to a reduction in the number of IAs enrolled in the Maxxis
marketing combined with lower revenues of sales aids and promotional products as
compared to the same period in 1998.
Cost of Services. Total cost of services for the six months ended
December 31, 1999 was $3.5 million, or 45% of total net revenues, as compared to
$1.9 million, or 27% 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.
Communications services cost was $2.7 million, or 36% of total net
revenues, for the six months ended December 31, 1999, as compared to $908,000,
or 13% 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 six months ended December 31, 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 six months ended December 31, 1999, costs
associated with operating the Maxxis Switch and network services are included in
cost of services whereas these costs were not included in the comparable 1998
period.
Nutritional products cost was $329,000, or 4% of total net revenues,
for the six months ended December 31, 1999, as compared to $360,000, or 5% of
total net revenues, for the six months ended December 31, 1998. The improved
margins are the result of lower material costs and improved inventory control
procedures.
Marketing services cost was $394,000, or 5% of total net revenues, for
the six months ended December 31, 1999 as compared to $637,000, or 9% 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 and the higher cost of components included in distributor kits.
Gross Margin. Gross margin declined to $4.2 million for the six months
ended December 31, 1999 from $5.3 million for the same period in 1998. Due to
higher total cost of services, gross margin as a percentage of total net
revenues declined to 55% for the six months ended December 31, 1999 from 74% for
the six months ended December 31, 1998.
Operating Expenses. For the six months ended December 31, 1999, selling
and marketing expenses were $2.6 million, or 34% of total net revenues, as
compared with $3.1 million, or 43% of total net revenues, for the same period in
1998. General and administrative expenses were $2.8 million, or 37% of total net
revenues, for the six months ended December 31, 1999, as compared to $1.8
million, or 26% 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 long
distance telephone customers.
Income Taxes. Due to our net loss for the six months ended December 31,
1999, no provision for income taxes was required while a provision for income
taxes of $150,000 was recorded due to our net income for the six months ended
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended December 31, 1999, the cash used by
operating activities was $1.2 million as compared to cash provided from
operating activities of $561,000 million for the same period in 1998. Operating
activities for the six months ended December 31, 1999 included $1.5 million net
loss, partly offset by $699,000 of depreciation and amortization and $381,000
related to changes in assets and liabilities.
12
<PAGE> 13
Cash used in investing activities was $252,000 for the six months ended
December 31, 1999, as compared to $569,000 for the same period in 1998.
Investing activities for the six months ended December 31, 1999 consisted
primarily of purchases of computer software and hardware.
Cash provided by financing activities was $1.7 million for the six
months ended December 31, 1999, as compared to cash provided by financing
activities of $55,000 for the same period in 1998. Financing activities for the
six months ended December 31, 1999 consisted of $3.4 million of subscriptions
and proceeds from our private preferred stock offering, net payments of $1.3
million on our Line of Credit with the Maxxis Millionaire Society (of which
indebtedness was subsequently converted to our preferred stock) and $413,000 of
lease payments on the Maxxis Switch.
As of December 31, 1999, we had cash of $241,000 and a working capital
deficit of $2.9 million as compared to cash of $20,000 and a working capital
deficit of $1.9 million as of June 30, 1999. Included in the cash deficit for
the three months ended December 31, 1999 are the $2.0 million of preferred stock
subscriptions.
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.
We anticipate that cash generated from operations, together with
proceeds from our private preferred stock 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
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remedied all significant year 2000
problems.
Further remedial efforts may involve significant time and expense, and
uncured problems may have a material adverse effect on our business. Also, we
sell telecommunications products to companies in a variety of industries, each
of which is experiencing different year 2000 issues. Customer difficulties with
year 2000 issues might require us to devote additional resources to resolve
underlying problems. Finally, although we have not been made a party to any
litigation or arbitration proceeding to date involving our products or services
and related to year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000 related damages, including consequential damages, would
negatively affect our business, results of operations, financial condition and
liquidity, perhaps materially.
13
<PAGE> 14
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, our directors and
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 our 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 5. OTHER INFORMATION
On December 31, 1999, our Chief Financial Officer, Daniel McDonough,
resigned.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Exhibit Description
27 Financial Data Schedule (for SEC use only).
(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.
February 18, 2000 /s/ Ivey J. Stokes
-----------------------------------------
Ivey J. Stokes
Chairman, President and Chief Executive
Officer (Principal executive officer)
February 18, 2000 /s/ DeChane Cameron
-----------------------------------------
DeChane Cameron
(Principal accounting officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MAXXIS GROUP INC. FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 241,000
<SECURITIES> 10,000
<RECEIVABLES> 2,471,000
<ALLOWANCES> 803,000
<INVENTORY> 499,000
<CURRENT-ASSETS> 2,569,000
<PP&E> 5,299,000
<DEPRECIATION> 699,000
<TOTAL-ASSETS> 8,464,000
<CURRENT-LIABILITIES> 5,502,000
<BONDS> 0
0
1,625,000
<COMMON> 612,000
<OTHER-SE> (3,345,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,664,000
<SALES> 7,613,000
<TOTAL-REVENUES> 7,613,000
<CGS> 3,449,000
<TOTAL-COSTS> 8,794,000
<OTHER-EXPENSES> 5,345,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,000
<INCOME-PRETAX> (1,512,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,512,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,512,000)
<EPS-BASIC> (.96)
<EPS-DILUTED> (.96)
</TABLE>
