<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
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 May 8, 2000
Common Stock, no par value 1,617,637
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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 (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 2000 (Unaudited) and June 30, 1999....................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months ended March 31, 1999
and 2000 (Unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 1999 and 2000 (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, 2000 JUNE 30, 1999
-------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash ................................................................ $ 11,137,000 $ 20,000
Short-term investments .............................................. 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $313,000 and $113,000 ........................ 165,000 652,000
Accounts receivable, net of allowance for
doubtful accounts of $584,000 and $189,000 ........................ 1,375,000 817,000
Inventory ........................................................... 175,000 354,000
Prepaid expenses .................................................... 611,000 98,000
Other current assets ................................................ 103,000 12,000
------------- -------------
Total current assets .............................................. 13,576,000 1,963,000
Property and equipment, net ............................................ 5,263,000 5,842,000
Capitalized software development costs, net ............................ 458,000 352,000
Investments ............................................................ 100,000 100,000
Other assets ........................................................... 67,000 29,000
------------- -------------
Total assets .................................................. $ 19,464,000 $ 8,286,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... 1,386,000 1,218,000
Commissions payable ................................................. 588,000 463,000
Taxes payable ....................................................... 269,000 317,000
Current maturities of long-term capital lease obligations ........... 299,000 929,000
Accrued liabilities ................................................. 2,265,000 648,000
Deferred revenue .................................................... 6,569,000 330,000
------------- -------------
Total current liabilities ......................................... 11,376,000 3,905,000
Long-term liabilities:
Line of credit ...................................................... 65,000 1,390,000
Long-term lease obligations ......................................... 3,593,000 4,005,000
------------- -------------
Total long-term liabilities ....................................... 3,658,000 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 1,204,731 shares are issued and outstanding ........ $ 5,200,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,617,637 shares issued and outstanding ........................... 612,000 612,000
Shareholder note receivable ......................................... -- (120,000)
Treasury stock, at cost ............................................. (127,000) --
Accumulated earnings (deficit) ...................................... (1,255,000) (1,706,000)
------------- -------------
Total shareholders' equity (defict) ............................... 4,430,000 (1,014,000)
------------- -------------
Total liabilities and shareholders' equity .................... $ 19,464,000 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Telecommunications services ....................... $ 2,407,000 $ 1,166,000 $ 7,630,000 $ 6,287,000
Nutritional products .............................. 8,245,000 303,000 9,360,000 934,000
Marketing services ................................ 665,000 427,000 1,940,000 1,866,000
------------ ------------ ------------ ------------
Total net revenues .............................. 11,317,000 1,896,000 18,930,000 9,087,000
------------ ------------ ------------ ------------
Cost of services:
Telecommunications services ....................... 1,275,000 120,000 4,001,000 1,028,000
Nutritional products .............................. 1,401,000 118,000 1,730,000 478,000
Marketing services ................................ 161,000 183,000 555,000 819,000
------------ ------------ ------------ ------------
Total cost of services .......................... 2,837,000 421,000 6,286,000 2,325,000
------------ ------------ ------------ ------------
Gross margin ......................................... 8,480,000 1,475,000 12,644,000 6,762,000
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing ............................. 5,103,000 1,126,000 7,667,000 4,185,000
General and administrative ........................ 1,298,000 903,000 4,079,000 2,754,000
------------ ------------ ------------ ------------
Total operating expenses ........................ 6,401,000 2,029,000 11,746,000 6,939,000
------------ ------------ ------------ ------------
Operating income (loss) .............................. 2,079,000 (554,000) 898,000 (177,000)
Interest income (expense) ............................ (116,000) (179,000) (447,000) (174,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes .................... 1,963,000 (733,000) 451,000 (351,000)
Provision (benefit) for income taxes ................. -- (150,000) -- --
------------ ------------ ------------ ------------
Net income (loss) .................................... $ 1,963,000 $ (583,000) $ 451,000 $ (351,000)
============ ============ ============ ============
Income (loss) per share:
Basic ............................................. $ 1.21 $ (0.37) $ 0.28 $ (0.22)
============ ============ ============ ============
Diluted ........................................... $ 1.21 $ (0.37) $ 0.28 $ (0.22)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic ............................................. 1,617,637 1,594,355 1,617,637 1,578,910
============ ============ ============ ============
Diluted ........................................... 1,617,637 1,594,355 1,617,637 1,578,910
============ ============ ============ ============
</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,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 451,000 $ (351,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ..................................... 725,000 183,000
Compensation expense related to stock options ..................... -- 38,000
Changes in assets and liabilities:
Communications receivables ...................................... 487,000 (386,000)
Accounts receivables ............................................ (558,000) --
Inventories ..................................................... 179,000 (244,000)
Prepaid expenses ................................................ (513,000) (82,000)
Other assets .................................................... (129,000) (20,000)
Accounts payable ................................................ 168,000 487,000
Commissions payable ............................................. 125,000 119,000
Taxes payable ................................................... (48,000) 217,000
Accrued liabilities ............................................. 1,617,000 317,000
Deferred revenue ................................................ 6,239,000 15,000
------------- -------------
Total adjustments ............................................. 8,292,000 644,000
------------- -------------
Net cash provided by operating activities ................ 8,743,000 293,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (84,000) (242,000)
Software development costs .......................................... (168,000) (284,000)
Purchase of equity investment ....................................... -- (100,000)
------------- -------------
Net cash used in investing activities .................... (252,000) (626,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for issuance of common stock ............................... -- (48,000)
Proceeds from the sale of preferred stock ........................... 5,000,000 --
Payments for treasury stock ......................................... (7,000) --
Net (payments) proceeds on line of credit ........................... (1,325,000) 800,000
Payments on capital lease obligations ............................... (1,042,000) (629,000)
------------- -------------
Net cash provided by financing activities ................ 2,626,000 123,000
------------- -------------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS ............................ 11,117,000 (210,000)
CASH AND CASH EQUIVALENTS, beginning of the period ..................... 20,000 372,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of the period ........................... $ 11,137,000 $ 162,000
============= =============
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 $ --
============= =============
Common stock received for shareholder note .......................... $ 120,000 $ --
============= =============
</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. 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 March 31, 2000 and the results of
our operations and our cash flows for the three and nine month periods
ended March 31, 2000 and 1999 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,
2000 1999
------------- -------------
<S> <C> <C>
Prepaid phone cards .......... $ 25,000 $ 25,000
Sales aids ................... 150,000 160,000
Nutritional products ......... -- 169,000
------------- -------------
$ 175,000 $ 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.
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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 March 31, 1999
and 2000 are as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
March 31, 1999
Net revenues .............. $ 1,166,000 $ 303,000 $ 427,000 $ -- $ 1,896,000
Operating income (loss) ... (174,000) (18,000) (105,000) (257,000) (554,000)
March 31, 2000
Net revenues .............. $ 2,407,000 $ 8,245,000 $ 665,000 $ -- $ 11,317,000
Operating income (loss) ... (665,000) 2,915,000 193,000 (364,000) 2,079,000
</TABLE>
Segment information for the nine month periods ended March 31, 1999
and 2000 are as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
March 31, 1999
Net revenues .............. $ 6,287,000 $ 934,000 $ 1,866,000 $ -- $ 9,087,000
Operating income (loss) ... (786,000) 620,000 246,000 (257,000) (177,000)
March 31, 2000
Net revenues .............. $ 7,630,000 $ 9,360,000 $ 1,940,000 $ -- $ 18,930,000
Operating income (loss) ... (1,115,000) 4,491,000 (1,448,000) (1,030,000) 898,000
</TABLE>
5. SHAREHOLDERS' EQUITY
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 March 31, 2000, we received
approximately $5.0 million of subscriptions and proceeds from our
private preferred stock offering.
7
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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. ("IXC") 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 1999 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
8
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the administrative procedures that must be complied with in order to establish
1-Plus customers, there is generally 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 is
amortized 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 NINE MONTHS ENDED
MARCH 31 MARCH 31,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Communications services ............ 21% 61% 40% 69%
Nutritional products ............... 73 16 50 10
Marketing services ................. 6 23 10 21
-------- -------- -------- --------
Total net revenues ............... 100% 100% 100% 100%
======== ======== ======== ========
Cost of services:
Communications services ............ 11% 6% 21% 11%
Nutritional products ............... 12 6 9 5
Marketing services ................. 2 10 3 9
-------- -------- -------- --------
Total cost of services ........... 25% 22% 33% 25%
Operating expenses:
Selling and marketing .............. 45% 59% 41% 46%
General and administrative ......... 11 48 22 30
-------- -------- -------- --------
Total operating expenses ......... 56% 107% 63% 76%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
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 $9.4 million, or 497%, to $11.3 million for the three months ended
March 31, 2000 from $1.9 million for the same period in 1999. The increase in
total net revenues was primarily due to a sharp increase in our nutritional
products sales.
Communications services revenues increased $1.2 million, or 106%, to
$2.4 million for the three months ended March 31, 2000 from $1.2 million for
the same period in 1999. This increase was primarily due to an increase in our
independent associates for the three months ended March 31, 2000.
Nutritional products revenues increased $7.9 million, or 2,621% to
$8.2 million for the three months ended March 31, 2000 from $303,000 for the
same period in 1999. 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 $238,000, or 56%, to $665,000
for the three months ended March 31, 2000 from $427,000 for the same period in
1999. 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 March 31, 2000 was $2.8 million, or 25% of
total net revenues, as compared to $421,000, or 22% of total net revenues, for
the same period in 1999. The increase in total cost of services as a percentage
of total net revenues resulted primarily from higher communications services
costs associated with operating the Maxxis Switch and other network services.
10
<PAGE> 11
Communications services cost was $1.3 million, or 11% of total net
revenues, for the three months ended March 31, 2000, as compared to $120,000,
or 6% of total net revenues, for the same period in 1999. This increase in
communications cost as a percentage of total net revenues was due mainly to the
increase in network operating costs and the installation of new circuits to
provide service to new customers.
Nutritional products cost was $1.4 million, or 12% of total net
revenues, for the three months ended March 31, 2000 as compared to $118,000 or
6% of total net revenues, for the same period in 1999. The increase in
nutritional products cost was due to a sharp increase in our nutritional
products sales.
Marketing services cost was $161,000, or 2% of total net revenues, for
the three months ended March 31, 2000 as compared to $183,000, or 10% of total
net revenues, for the same period in 1999.
Gross Margin. Gross margin increased to $8.5 million for the three
months ended March 31, 2000 from $1.5 million for the same period in 1999. As a
percentage of total net revenues, gross margin decreased to 75% for the three
months ended March 31, 2000 from 78% for the three months ended March 31, 1999.
The lower gross margins are mainly attributable to an increase in our
communication service costs as a percentage of our total costs.
Operating Expenses. For the three months ended March 31, 2000, selling
and marketing expenses were $5.1 million, or 45% of total net revenues, as
compared with $1.1 million, or 59% of total net revenues, for the same period
in 1999. The decrease in selling and marketing expenses as a percentage of
total net revenues is primarily due to an increase in our revenues without a
proportionate increase in our selling and marketing expenses. General and
administrative expenses were $1.3 million, or 11% of total net revenues, for
the three months ended March 31, 2000, as compared to $903,000 or 48% of total
net revenues, for the same period in 1999. The decrease in general and
administrative expenses as a percentage of total net revenues is largely due to
operating leverage associated with increased sales of our products and
services. Total operating expenses decreased to 56% of total net revenues for
the three months ended March 31, 2000 from 107% for the same period in 1999.
Net Income. Our net income for the three months ended March 31, 2000
was $1,963,000 as compared to a net loss including income tax benefit of
$583,000 for the same period in 1999.
Income Taxes. Due to our loss carryforwards for the year ended June
30, 1999 and the six months ended December 31, 1999 no provision for income
taxes was required for the three months ended March 31, 2000. We had an income
tax benefit of $150,000 for the for the three months ended March 31, 1999.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
Revenues. Total net revenues increased $9.8 million, or 108%, to $18.9
million for the nine months ended March 31, 2000 from $9.1 million for the same
period in 1999. The increase in total net revenues was primarily due to higher
nutrition product sales and an increase in the number of IAs enrolled in the
Maxxis marketing network for the nine months ended March 31, 2000.
Communications services revenues increased $1.3 million, or 21%, to
$7.6 million for the nine months ended March 31, 2000 from $6.3 million for the
same period in 1999. This increase was primarily due to higher long distance
services revenue.
Nutritional products revenues were $9.4 million for the nine months
ended March 31, 2000 as compared to $934,000 for the nine months ended March
31, 1999. This 902% increase was largely due to an expanded product line and an
increased number of repeat users of our nutrition and health enhancement
products.
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Marketing services revenues remained relatively constant at $1.9
million for both the nine months ended March 31, 2000 and the same period in
1999.
Cost of Services. Total cost of services for the nine months ended
March 31, 2000 was $6.3 million, or 33% of total net revenues, as compared to
$2.3 million, or 25% of total net revenues, for the same period in 1999. 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 $4.0 million, or 21% of total net
revenues, for the nine months ended March 31, 2000, as compared to $1.0
million, or 11% of total net revenues, for the same period in 1999. 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 nine months ended March
31, 2000. During the same period in 1999, 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 nine months ended
March 31, 2000, costs associated with operating the Maxxis Switch and network
services are included in cost of services whereas these costs were not
completely included in the comparable 1999 period.
Nutritional products cost was $1.7 million, or 9% of total net
revenues, for the nine months ended March 31, 2000, as compared to $478,000, or
5% of total net revenues, for the nine months ended March 31, 1999. Our costs
increased due to a sharp increase in nutritional products sales at a rate
higher than that of our other service and product lines.
Marketing services cost was $555,000, or 3% of total net revenues, for
the nine months ended March 31, 2000 as compared to $819,000, or 9% of total
net revenues, for the same period in 1999. The decline as a percentage of total
net revenues was primarily due to an increase in our total net revenues.
Gross Margin. Gross margin increased to $12.7 million for the nine
months ended March 31, 2000 from $6.8 million for the same period in 1999. Due
to higher total cost of services, gross margin as a percentage of total net
revenues declined to 67% for the nine months ended March 31, 2000 from 75% for
the nine months ended March 31, 1999.
Operating Expenses. For the nine months ended March 31, 2000, selling
and marketing expenses were $7.7 million, or 41% of total net revenues, as
compared with $4.2 million, or 46% of total net revenues, for the same period
in 1999. General and administrative expenses were $4.1 million, or 22% of total
net revenues, for the nine months ended March 31, 2000, as compared to $2.8
million, or 30% of total net revenues, for the same period in 1999. The
decrease in general and administrative as a percentage of total net revenues
relates to the distribution of our general and administrative costs over larger
total net revenues for the nine months ended March 31, 2000.
Income Taxes. No provision for income taxes was required for the nine
months ended March 31, 2000 and March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 2000, the cash provided by
operating activities was $8.7 million as compared to cash provided by operating
activities of $293,000 for the same period in 1999. Operating activities for
the nine months ended March 31, 2000 included $451,000 of net income, partly
offset by $725,000 of depreciation and amortization and $7.6 million related to
changes in assets and liabilities.
Cash used in investing activities was $252,000 for the nine months
ended March 31, 2000, as compared to $627,000 for the same period in 1999.
Cash provided by financing activities was $2.6 million for the nine
months ended March 31, 2000, as compared to cash provided by financing
activities of $123,000 for the same period in 1999. Financing activities
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for the nine months ended March 31, 2000 consisted of $5.0 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 $1.0 million of lease payments on the Maxxis Switch.
As of March 31, 2000, we had cash of $11.1 million and working capital
of $2.2 million as compared to cash of $20,000 and a working capital deficit of
$1.9 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.
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.
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
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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.
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
27 Financial Data Schedule (for SEC use only).
</TABLE>
(B) REPORTS ON FORM 8-K.
None.
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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 31, 2000 /s/ Ivey J. Stokes
------------------------------------------------
Ivey J. Stokes
Chairman, President and Chief Executive Officer
(Principal executive officer)
May 31, 2000 /s/ DeChane Cameron
------------------------------------------------
DeChane Cameron
(Chief Financial Officer)
16
