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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal Year Ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
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COMMISSION FILE NUMBER: 333-38623
MAXXIS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-22-78241
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of the Common Stock held by affiliates of the
Registrant as of October 6, 2000 was $5,217,487. This calculation is based upon
a price of $ 5.50 per share, or the price per share of Common Stock sold during
our recent public offering. There is no active trading market for the Common
Stock, and the $ 5.50 per share price is not necessarily indicative of market
value. There were 1,546,919 shares of Common Stock issued and outstanding as of
October 6, 2000.
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INDEX TO FORM 10-K
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PART I
Item 1. Business............................................................................................1
Item 2. Properties.........................................................................................10
Item 3. Legal Proceedings..................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders................................................10
PART II
Item 5. Market for Common Equity and Related Shareholder Matters...........................................10
Item 6. Selected Consolidated Financial Data...............................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............12
Item 7A. Quantitative and Qualitative Disclosures About Market Risks........................................19
Item 8. Financial Statements and Supplementary Data........................................................19
Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure...............19
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................20
Item 11. Executive Compensation.............................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................24
Item 13. Certain Relationships and Related Transactions.....................................................25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................26
SIGNATURES.......................................................................................................29
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PART I
ITEM 1. BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Report and include all statements that are
not historical statements of fact regarding the intent, belief or current
expectations of Maxxis or its directors or officers with respect to, among
other things: (i) our financing plans; (ii) trends affecting our financial
condition or results of operations; (iii) our growth strategy and operating
strategy; and (iv) our anticipated capital needs. 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, many of
which are beyond our ability to control, and that actual results may differ
materially from those projected in the forward-looking statements as a result
of various factors discussed herein and those factors discussed in detail in
our filing with the Securities and Exchange Commission, including the "Risk
Factors" section of our Registration Statement on Form S-1 (Registration Number
333-38623).
Our independent associates market communications and Internet services
and nutritional and health enhancement products through our multi-level network
marketing system. We operate through our subsidiaries: Maxxis 2000, Inc.
("Maxxis 2000"); Maxxis Communications, Inc. ("Maxxis Communications"); and
Maxxis Nutritionals, Inc. ("Maxxis Nutritionals").
We believe that our marketing system allows us to obtain customers for
our products and services in a cost effective manner. We believe that our
marketing system also enhances customer retention because of the personal
relationships between our independent associates, or IAs, and their customers.
Maxxis was incorporated in January 1997 and began sponsoring independent
associates and marketing telecommunications services in March 1997. We
generated aggregate net revenues of $12,344,000 for our fiscal year ended June
30, 1999 and $29,133,000 for the fiscal year ended June 30, 2000.
We initially built a customer base without committing capital or
management resources to construct our own communications network. In February
1997, we contracted with Colorado River Communications Corp. to allow our
independent associates to market long distance services provided by Colorado
River Communications. In September 1998, we leased telecommunications switching
equipment and ancillary hardware and software in order to create our own
communications network. As of September 30, 2000, we have obtained regulatory
approval in 49 states and the District of Columbia. As we obtained approvals in
each state, we began to directly service our long distance subscriber base that
was developed under our agreement with Colorado River Communications. We are
continuing to expand our communications customer base through our multi-level
network marketing system. To the extent available, we also intend to lease or
sell excess switch capacity to third parties.
We began marketing private label dietary supplements to our customers
and independent associates in November 1997. During 1998, we began marketing
additional nutritional and health enhancement products. In September 1998, we
began providing Internet access and Web-page development and hosting services.
We believe that the persons who purchase telecommunications services through
our independent associates are also potential customers for our nutritional and
health enhancement products and Internet-related services.
Our products and services are marketed exclusively by our network of
independent associates. Our multi-level network marketing system and our
reliance upon independent associates 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 believe that independent
associates are generally attracted to our multi-level network marketing system
because of the potential for supplemental income and because they are not
required to purchase inventory, have no monthly
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sales quotas or account collection issues, have minimal required paperwork, and
have a flexible work schedule. We encourage independent associates to market
services and products to persons with whom the independent associates have an
ongoing relationship, such as family members, friends, business associates and
neighbors. We also sponsor meetings at which current independent associates are
encouraged to bring in others for an introduction to our marketing system.
STRATEGY
Our goal is to develop a national distribution system through which
large volumes of communications and Internet services, nutritional and health
enhancement products and other products and services may be sold. We intend to
increase our revenues by expanding our marketing network, increasing the number
of customers who purchase our products and services, and providing additional
products and services for sale through our independent associates. We intend to
achieve our goals by:
- Growing and Developing our Network of Independent Associates by
enhancing our sponsoring and training services, continuing to
support the marketing efforts of independent associates and
introducing new income opportunities for independent associates.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services through
a highly motivated network of independent associates.
- Offering Additional Communications Services that meet the needs
of subscribers, which may include, among other services, paging,
conference calling, wireless, cable, cellular and local phone
service.
- Improving and Expanding Our Product Lines by continuing to
evaluate and offer products that are attractive to our
independent associates and customers.
- Obtaining Competitive Prices on products and services through
the purchasing power of our nationwide network.
MAXXIS SWITCH
In September 1998, we entered into an agreement to lease a
telecommunications switch (the "Maxxis Switch") formerly owned by Cherry
Communications, Inc. Beginning in February 1999, our lease required us to make
payments of approximately $118,000 per month. As we obtained the required
regulatory approvals throughout 1999, we began to market services provided
through the Maxxis Switch to the subscriber base that was developed under our
agreement with Colorado River Communications Corp., or CRC, as well customers
that we have obtained more recently.
We are required to obtain the consent of customers before changing
their long distance service. This process can be difficult, time consuming and
expensive. Additionally, the FCC has recently enacted new, more stringent
legislation that governs the procedure by which we must obtain the consent of
customers before changing their long distance service. Problems associated with
the transition of these customers from their existing providers to our network
could have a material adverse effect on our business, financial condition and
operating results.
MARKETING
We market products and services exclusively through our network of
independent associates. Currently, we have six independent associate positions
in our marketing system: associate; senior associate; director; regional
director; executive director; and presidential director. Independent associates
are paid only by commissions, and we do not pay them any salary. Independent
associate commissions are a specified percentage or a designated amount of the
gross proceeds received by us from the sale of our services and products. We
designate a portion of our gross sales as "commission value," or "CV," and
allocate the CV among eligible participants in our marketing system. Currently,
10% of the CV earned with respect to a long distance subscriber is paid monthly
to the independent
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associate who sponsored such subscriber, 57% of the CV is paid monthly to
eligible directors who have the independent associate who sponsored the
subscriber in their downline and an additional 28% is retained by us to be paid
out to regional directors, executive directors and presidential directors in our
performance bonus programs. All directors, executive directors, regional
directors and presidential directors who meet certain performance criteria are
eligible to receive additional performance bonuses.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit.
Independent associates also pay an annual fee in order to maintain their status
as independent associates. The distributor kit is a package of basic materials
which assists an associate in beginning his or her business. Associates are
also entitled to purchase products from us at discounted prices for retail
sales. An associate becomes a senior associate when the associate sells $100 of
bonus-eligible products. Senior associates continue to receive a percentage of
CV with regard to all subscribers personally gathered by them and are also
entitled to purchase products from us at discounted prices for retail sales.
To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the director's
sales organization by sponsoring additional persons to become senior
associates. These senior associates, and all senior associates that they, in
turn, sponsor, become part of the sales organization of the director who
sponsored them. Senior associates, through the growth of their sales
organizations, may become directors, regional directors, executive directors or
presidential directors and thereby increase the size of the sales organization
of the person who was their original sponsor. The organization that grows below
each director through this process is called a "downline." Directors are
eligible to receive the same commissions as senior associates and, if they
directly gather and maintain a minimum commission volume of eight dollars
monthly, are eligible to receive a percentage of the CV produced by each
independent associate that is within 15 levels below them in their downline. In
order to encourage the growth of our marketing system, we also pay eligible
directors a bonus amount, which is designated as "bonus value," or "BV," for
each sale of bonus-eligible products. We primarily designate retail priced
phone cards, nutritional products and Web-page development and hosting services
as bonus-eligible products. Directors become regional directors, executive
directors and presidential directors upon the achievement of certain
independent associate sales goals. Regional directors, executive directors and
presidential directors are eligible to receive the same commissions as
directors and, if they qualify, share in performance bonuses.
RELATIONSHIP WITH INDEPENDENT ASSOCIATES
We seek to contractually limit the statements that independent
associates make about our business. Each independent associate must also agree
to policies and procedures to be followed in order to maintain the independent
associate's status in our organization. We expressly forbid independent
associates from making any representation as to the possible earnings of any
independent associate or from making any representation with regard to our
Common Stock. We also prohibit independent associates from creating any
marketing literature that we have not pre-approved. While we have these
policies and procedures in place governing the conduct of the independent
associates, it is difficult to enforce such policies and procedures. Because
the independent associates are classified as independent contractors, we are
unable to provide them the same level of direction and oversight as our
employees. Violations of our policies and procedures may reflect negatively on
us and could have a material adverse effect on our business, financial
condition and operating results.
TRAINING AND MARKETING SUPPORT
We offer our independent associates a number of support services. We
offer training, information and motivational support to the independent
associate network through our training program, regional meetings and
distributors websites.
Our fourth annual convention was held in September 2000 and we intend
to continue to hold additional annual conventions for independent associates.
This event provides recognition to the top performers, direct access to senior
management and a chance for independent associates to share experiences and
develop support systems. We intend to organize additional conventions
throughout the country that current independent associates and potential
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independent associates can attend to learn more about us. We also publish a
newsletter for the independent associates containing informative and
motivational articles and recognizing independent associate achievements.
PRODUCTS AND SERVICES
Following is a summary of the various services and products we
currently provide to independent associates and customers. We may add and
remove services and products from our services and product lines from time to
time.
Communications Services and Products. Our independent associates
market a variety of long distance and other communications services and
products, which currently include 1-Plus long distance service, prepaid phone
cards and Internet-related services.
- 1-Plus Long Distance. Our 1-Plus long distance service serves
as a replacement for a customer's former long distance
service (such as the long distance services provided by AT&T
Corporation ("AT&T"), MCI WorldCom, Inc. ("MCI WorldCom") and
Sprint Corporation ("Sprint")). Our 1-Plus services are
billed on a flat rate basis, where the cost of a call does
not vary depending upon the distance of a call or the time of
day or day of week when the call is originated or terminated.
Our residential 1-Plus services are billed based on one
minute increments, and business 1-Plus service is billed
based on 6-second increments with a 30-second minimum.
- Prepaid Phone Cards. We offer prepaid phone cards in domestic
time increments of 1 hour and 30 minutes. These cards may be
used for domestic and international calls. We also offer
international prepaid phone cards that are denominated in
dollar amounts. Charges are deducted from these cards based
upon the rates applicable to the calls placed by cardholders.
- MAXXCONNECT. In September 1998, we began providing Internet
access through InteReach Internet Services, L.L.C. and also
began providing Web-page development and hosting services for
independent associates.
Nutritional and Health Enhancement Products. We market a line of
private label nutritional and health enhancement products to our independent
associates and customers. Representative products include:
- Maxx-A-Chol is a dietary supplement which is a specialized
combination of six herbs.
- MAXXIS MSM is a dietary supplement consisting of
methylsulfonylmethane, vitamin C, citrus bioflavonoid complex
and ginseng.
- MAXXIS Multivitamin is a multivitamin nutritional supplement
which is delivered by means of a spray.
- MAXXIS 02 is a nutritional supplement that contains
electrolytes, oxygen, trace elements, enzymes and amino acids.
- BetaShield is a nutritional product containing an extract from
the cell walls of baker's yeast.
- Maxx-Life is a dietary supplement containing amino acids and
other ingredients, including lysine, arginine, GABA,
glutamine and ornithine.
- Weight-Ideal is a dietary supplement in capsule and spray
forms which contains a blend of nutrients, including chromium
picolinate, magnesium acetate and niacin.
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- Maxxis Skin Care System consists of the following health and
beauty products: shampoo; conditioner; body wash; hand and
body conditioner; face wash; skin toner; and moisturizer.
Certain nutritional products are sold as a nutritional pack, and the skin care
products are sold as a complete system or individually.
Promotional Materials. We also derive revenues from the sale of
various educational and promotional materials designed to aid our independent
associates in maintaining and building their businesses. Such materials include
various sales aids, informational videotapes and cassette recordings, and
product and marketing brochures.
INDEPENDENT ASSOCIATE SUPPORT AND INFORMATION SYSTEMS
We operate a call center where advisors answer independent associate questions
and provide information to independent associates. The call center maintains a
system that includes a current database of all independent associates, their
downlines, and their long distance customers. We believe that maintaining
sophisticated and reliable transaction processing systems is essential for
multi-level network marketing companies. We use a commission processing
software system that incorporates the provisions of our marketing program for
purposes of processing detailed and customized independent associate commission
payments, monitoring and analyzing financial and operating trends and tracking
each independent associate's downline. We also maintain transaction processing
systems that facilitate the shipment of independent associate training and
marketing materials. In addition, our order processing system tracks the
receipt, storage, shipment and sale of our sales aid products.
SUPPLIERS
Prior to 1999, we did not own a long distance network. As a result,
Maxxis Communications entered into the 1-Plus Agreement with CRC to allow our
independent associates to market CRC's telecommunications services. Subscribers
gathered by our independent associates were long distance customers on CRC's
network, and CRC provided subscriber support. Subscribers had the right to
change their service at any time. In January of 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 required a minimum monthly
commitment, which provision expired in September 2000. We would be required to
contract with other carriers if either the IXC or MCI WorldCom agreements were
terminated, the usage or number of subscribers originated by our independent
associates exceeded the capacity that these suppliers could provide or if IXC
or MCI WorldCom failed to provide quality services. In such event, or in the
event we otherwise elected to use other carriers, the cost paid by us for long
distance services might exceed that paid under these agreements. If our
agreements with IXC or MCI WorldCom are terminated, there can be no assurance
that we could enter into new contracts with other suppliers.
In November 1997, we began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed
by us are developed and manufactured by third-party suppliers. Certain of the
nutritional products offered by us are proprietary to these suppliers. We do
not have any commitment that these suppliers and manufacturers will continue to
sell us nutritional products. We believe that our relationships with our
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to us. Accordingly,
there is a risk that any or all of our suppliers or manufacturers, including
suppliers which provide proprietary products to us, could discontinue selling
their nutritional products to us. In the event any of the third-party
manufacturers become unable or unwilling to continue to provide the nutritional
products in required volumes, we would be required to identify and obtain
acceptable replacement sources, and we cannot guarantee that any alternative
replacement sources would become available to us on a timely basis.
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CUSTOMER SUPPORT
During fiscal 2000, Maxxis Communications was primarily responsible
for the billing of long distance customers and for providing customer service.
Certain of our communications services, including 1-Plus long distance and
prepaid phone cards, are provided under IXC's or MCI WorldCom's state, national
and international tariffs. We have been informed that IXC and MCI WorldCom
possess all tariffs necessary to offer such services. After we received tariffs
from certain state authorities in April 1999, we assumed the responsibility for
billing long distance and customer service as we migrated customers from those
states onto the Maxxis communications network. We provide our Internet access
services through InteReach, which is responsible for billing certain Internet
access customers and for providing customer support.
COMPETITION
We face competition for our products and services and for independent
associates.
Communications Services. The United States long distance
communications industry is intensely competitive, rapidly evolving and subject
to rapid technological change. In addition, the industry is significantly
influenced by the marketing and pricing practices of the major industry
participants. AT&T, MCI WorldCom and Sprint are the dominant competitors in the
domestic long distance communications industry. All of these companies are
significantly larger than we are and have substantially greater resources. Many
of our current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and substantially greater
financial, personnel, marketing, technical and other resources than us. These
competitors employ various means to attract new customers, including television
and other advertising campaigns, telemarketing programs, network marketing and
cash payments and other incentives to new customers. Our ability to compete
effectively depends upon, among other factors, our ability to offer high
quality products and services at competitive prices. There can be no assurance
that we will be able to compete successfully.
Nutritional and Health Enhancement Products. We also compete in the
highly competitive market of dietary supplements and health enhancement
products. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. We compete with
other providers of such nutritional and health enhancement products, especially
retail outlets, based upon convenience of purchase, price and immediate
availability of the purchased product. For the most part, our competitors
offering comparable products are substantially larger and have available
considerably greater financial resources. The market is highly sensitive to the
introduction of new products (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, our ability to
remain competitive depends in part upon the successful introduction of new
products at competitive prices.
Internet Access and Internet-Related Services. The market for the
provision of Internet access and Internet-related services is extremely
competitive. There are no substantial barriers to entry, and we expect that
competition will continue to intensify. We cannot guarantee that we will be
able to compete successfully against current or future competitors or that
competitive pressures faced by us will not materially adversely affect our
business, financial condition and operating results. Our current and future
competitors include, without limitation, the following types of Internet access
providers: (i) national commercial Internet service providers ("ISPs"); (ii)
numerous regional and local commercial ISPs; (iii) established on-line
commercial information service providers; (iv) national long distance carriers;
(v) regional telephone companies; and (vi) cable operators.
Independent Associates. We compete for independent associates with
other direct selling organizations, some of which have longer operating
histories and greater visibility, name recognition and financial resources. The
largest network marketing companies in our markets are: EXCEL Communications,
Inc.; American Communications Network; BeautiControl Cosmetics, Inc.;
HerbalLife International, Inc.; and Mary Kay, Inc. We compete for new
independent associates on the basis of our reputation, perceived opportunity
for financial success and quality and range of products offered for sale. We
envision the entry of many more direct selling organizations
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into the marketplace. We cannot guarantee that we will be able to successfully
meet the challenges posed by this increased competition. We also compete for
the time, attention and commitment of our independent associates. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of independent
associates for our products and services is reduced to the extent other network
marketing companies successfully attract these individuals. There can be no
assurance that other network marketing companies will not convince our existing
independent associates to join their organizations. In such event, our
business, financial condition and operating results could be materially
adversely affected.
PROPRIETARY RIGHTS
We have applied for a federal registration for the mark "MAXXIS." In
addition, we rely upon common law rights to protect other marks used by us and
other rights that we consider to be our intellectual property. We cannot
guarantee that our measures to protect our intellectual property will prevent
or deter the use or misappropriation of our intellectual property by other
parties. Our inability to protect our intellectual property from use or
misappropriation from others could have a material adverse effect upon our
business, financial condition and operating results. From time to time,
companies may assert other trademark, service mark or intellectual property
rights in marks (including the mark "MAXXIS") or other intellectual property
used by us. We could incur substantial costs to defend any legal action taken
against us. Our use of our trademarks, service marks or other rights could be
found to infringe upon intellectual property rights of other parties. We could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against us, and in the event any
required license were not available on commercially reasonable terms, our
business, financial condition and operating results could be materially
adversely affected. Litigation, which could result in substantial cost to and
diversion of our resources, may also be necessary to enforce our intellectual
property rights or to defend us against claimed infringement of the rights of
others.
REGULATION
Regulation of Long Distance Telephone Services. Various regulatory
factors affect our financial performance and our ability to compete. IXC and
Maxxis are telecommunications carriers, and both of our services are currently
subject to federal, state and local regulation. Pursuant to the Communications
Act, the FCC generally exercises jurisdiction over the facilities of, and
services offered by, telecommunications common carriers that provide interstate
or international communications services. State regulatory authorities retain
jurisdiction over the same facilities and services to the extent that they are
used to provide intrastate communications services. Various international
authorities may also seek to regulate the provision of certain services.
Federal Regulation. The FCC does not require long distance
telecommunications carriers to obtain prior authorization to provide domestic
interstate services, including operator services, although such carriers
currently must file tariffs at the FCC setting forth the rates, terms and
conditions for such services. FCC regulations require telecommunications
carriers to apply for and to obtain certification from the FCC prior to
offering international services, and to file international tariffs with the
FCC.
IXC and Maxxis must comply with the requirements applicable to common
carriers under the Communications Act, which include a duty to offer services
upon request at reasonable rates and on nondiscriminatory terms and conditions.
Long distance telecommunications carriers also are subject to a variety of
miscellaneous regulations that, for example, govern the documentation and
verifications necessary to change a consumer's long distance carrier, require
the filing of periodic reports and the payment of regulatory fees. Currently,
FCC regulations also require long distance telecommunications carriers to
permit resale of their transmission services, and local exchange carriers to
provide all long distance carriers with equal access to local exchange
facilities for purposes of origination and termination of long distance calls.
If either or both of these requirements were eliminated, our business could be
adversely affected.
The FCC generally has the authority to condition, modify, cancel,
terminate or revoke a carrier's authority to operate for failure to comply with
federal laws or FCC orders, rules, regulations or policies. Fines or other
penalties
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also may be imposed by such violations. The FCC has jurisdiction to
act upon complaints against any telecommunications carrier for failure to
comply with its statutory obligations. We cannot guarantee that the FCC or
third parties will not raise issues regarding our compliance with applicable
laws and regulations, which could have a material adverse effect on our
business, financial condition and operating results.
The enactment of the Telecommunications Act served to increase
competition in the long distance market. The Telecommunications Act, among
other things, allowed the Bell operating companies to provide long distance
service outside of their local service territories, but barred them from
immediately offering in-region, interLATA long distance services until they had
satisfied certain conditions. A Bell operating company must apply to the FCC to
provide in-region, interLATA long distance services and must satisfy a set of
pro-competitive criteria intended to ensure that Bell operating companies open
their own local markets to competition before the FCC will approve such
application. We are unable to determine how the FCC will rule on any such
applications. As a result of the Telecommunications Act, IXC and Maxxis may
experience increased competition from others, including the Bell operating
companies. In addition, both IXC and Maxxis may be subject to additional
regulatory requirements and fees, including, without limitation, universal
service assessments, additional access charge assessments, and payphone
compensation surcharges resulting from the implementation of the
Telecommunications Act.
State Regulation. IXC and Maxxis are subject to varying levels of
regulation in states in which each company provides long distance services. The
vast majority of states require long distance carriers to apply for
certificates to provide telecommunications services, or at least to register or
to be found exempt from regulation, before they may commence providing
intrastate long distance services. This authorization process generally
requires the carrier to demonstrate that it has sufficient financial, technical
and managerial capabilities and that granting the authorization will serve the
public interest. Also, a majority of states require long distance carriers to
file and to maintain detailed tariffs listing rates for intrastate services.
Many states also impose various reporting and fee requirements, including,
without limitation, state universal service requirements. State regulatory
agencies also generally require prior notice or approval for (i) transfers of
control of certificated carriers, (ii) sales or transfers of carrier assets,
including customer bases, (iii) carrier stock offerings and (iv) a carrier's
incurrence of significant debt obligations. Certificates of authority can
generally be conditioned, modified, canceled, terminated or revoked by state
telecommunications regulatory agencies for failure to comply with state laws
and rules, regulations and regulatory policies. Fines and other penalties may
be imposed for such violations.
We believe that IXC has made the necessary filings with the various
state telecommunications regulatory agencies to provide intrastate long
distance services in the states where IXC currently conducts its operations. We
believe we have filed the necessary applications and tariffs with the states in
order to provide intrastate long distance services prior to offering such
services to its customers. We cannot guarantee that we will maintain all
necessary authorizations, that IXC will maintain its necessary authorizations
or that IXC will not provide services in a state where it is not properly
certificate or terrified. The occurrence of any or all of the foregoing could
have a material adverse effect on our business, financial condition or
operating results.
Regulation Affecting Nutritional and Health Enhancement Products. The
formulation, manufacturing, packaging, labeling, advertising, distribution and
sale of our nutritional products are subject to regulation by a number of
governmental agencies, the most active of which is the FDA, which regulates our
products under the FDCA and regulations promulgated thereunder. Our products
are also subject to regulation by the FTC, the CPSC, the USDA and the EPA. The
FDCA has been amended several times with respect to dietary supplements, most
recently by the NLEA and the DSHEA. Our nutritional products are generally
classified and regulated as dietary supplements under the FDCA, as amended, and
therefore are not subject to pre-market approval by the FDA. However, these
products are subject to extensive labeling regulation by the FDA and can be
removed from the market if shown to be unsafe. Moreover, if the FDA determines
on the basis of our labeling or advertising claims, that the "intended use" of
any of our nutritional products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the FDA can regulate those products as
drugs and require pre-market clearance for safety and effectiveness. In
addition, if the FDA determines that we have made claims regarding the effect
of dietary supplements on the "structure or function" of the body, such claims
could result in the regulation of such products as drugs.
8
<PAGE> 11
The FTC and certain states regulate advertising, product claims and
other consumer matters, including advertising of our products. In the past
several years, the FTC has instituted enforcement actions against several
dietary supplement companies for false and misleading advertising of certain
products. In addition, the FTC has increased its scrutiny of the use of
testimonials. We cannot guarantee that the FTC will not question our
advertising or other operations. Moreover, we cannot guarantee that a state
will not interpret product claims presumptively valid under federal law as
illegal under that state's regulations. Furthermore, our independent associates
and customers may file actions on their own behalf, as a class or otherwise,
and may file complaints with the FTC or state or local consumer affairs
offices. These agencies may take action on their own initiative or on a
referral from independent associates, customers or others, including actions
resulting in entries of consent decrees and the refund of amounts paid by the
complaining independent associate or customer, refunds to an entire class of
independent associates or customers, or other damages, as well as changes in
our method of doing business. A complaint because of a practice of one
independent associate, whether or not that practice was authorized by us, could
result in an order affecting some or all independent associates in a particular
state. In addition, an order in one state could influence courts or government
agencies in other states. Proceedings resulting from these complaints may
result in significant defense costs, settlement payments or judgments and could
have a material adverse effect on our business, financial condition or
operating results.
Although many of the ingredients in our nutritional products are
vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of our nutritional products contain
ingredients as to which there is little history of human consumption. We have
not tested, and have not engaged any independent third party to test, any of
our nutritional products. Accordingly, we cannot guarantee that our nutritional
products, even when used as directed, will have the effects intended. Although
we believe that our nutritional products are safe when consumed as directed, we
have not sponsored clinical studies on the long-term effect of human
consumption.
Regulation of Network Marketing. Our multi-level network marketing
system is subject to extensive government regulation, including, without
limitation, federal and state regulations governing the offer and sale of
business franchises, business opportunities and securities. Various
governmental agencies monitor direct selling activities, and they could require
us to supply information regarding our marketing plan at any time. Although we
believe that our multi-level network marketing system is in material compliance
with the laws and regulations relating to direct selling activities, we cannot
guarantee that future legislation and regulations adopted in particular
jurisdictions will not adversely affect our business, financial condition and
operating results. We have not obtained no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of our operations. Federal and state regulators may
find our multi-level network marketing system to be in noncompliance with
existing statutes or regulations as a result of, among other things, misconduct
by our independent associates, over whom we have limited control, the ambiguous
nature of certain of the regulations and the considerable interpretive and
enforcement discretion given to regulators. Any assertion or determination that
we or our independent associates are not in compliance with existing statutes
or regulations could require us to modify our multi-level network marketing
system, create negative publicity, affect distributor morale and loyalty and
have a material adverse effect on our business, financial condition and
operating results. An adverse determination by any one state regulator on a
regulatory matter could influence the decisions of regulatory authorities in
other jurisdictions.
FACILITIES
We operate out of offices in Atlanta, Georgia consisting of
approximately 26,000 square feet of leased space for general and administrative
office space, warehouse space and training space. We may be required to lease
or build additional facilities, including at least one additional call center
and new corporate headquarters, in order to adequately meet our future needs.
We believe that suitable additional or alternative space will be available in
the future on commercially reasonable terms as needed.
9
<PAGE> 12
EMPLOYEES
As of June 30, 2000, we employed approximately 61 people on a
full-time basis. Our IAs are classified as independent contractors. Our
employees are not unionized, and we believe our relationship with our employees
is good.
ITEM 2. PROPERTIES
See the information provided in Item 1 above entitled "Business --
Facilities" for information with respect to our properties.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to, nor is any of our property subject to, any
material legal proceedings, other than routine litigation incidental to our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the
fourth quarter of the year ended June 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of October 6, 2000, there were approximately 843 holders of our
Common Stock of record. There is no established trading market for the Common
Stock, and although we intend to register our Common Stock with the SEC, offer
our Common Stock to certain of our IAs, and become listed on an exchange, we
can give no assurance that our registration will be allowed to become
effective, that our offering will be successful, or that we will become listed
on an exchange.
From January to February of 1999, we conducted our public offering of
common stock. Pursuant to this offering, we sold 46,450 shares of Common Stock
at an offering price of $5.50 per share pursuant to a registration statement on
Form S-1 (Commission File No. 333-38623). Our gross proceeds from the offering
were approximately $255,475; our proceeds, net of offering expenses were
approximately $1,000.
All outstanding shares of our Common Stock are entitled to share
equally in dividends from funds legally available therefor, when, as and if
declared by the Board of Directors. We do not plan to declare any dividends in
the immediate future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
10
<PAGE> 13
The following table sets forth selected consolidated financial data
for the periods presented. The statement of operations data for the fiscal
years ended June 30, 1998, 1999 and 2000 and the balance sheet data as of June
30, 1998, 1999 and 2000 are derived from our audited Consolidated Financial
Statements. The Consolidated Financial Statements for the years ended June 30,
1998, 1999 and 2000 were audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Communications services ...................... $ 5,293,000 $ 8,416,000 $ 9,646,000
Nutritional products ......................... 526,000 1,371,000 17,003,000
Marketing services ........................... 1,172,000 2,557,000 2,484,000
----------- ------------ -----------
Total net revenues ....................... 6,991,000 12,344,000 29,133,000
----------- ------------ -----------
Cost of services:
Communications services ...................... 1,351,000 2,166,000 5,292,000
Nutritional products ......................... 294,000 662,000 3,403,000
Marketing services ........................... 431,000 947,000 519,000
----------- ------------ -----------
Total cost of services ................... 2,076,000 3,775,000 9,214,000
----------- ------------ -----------
Gross margin .................................... 4,915,000 8,569,000 19,919,000
----------- ------------ -----------
Operating expenses:
Selling and marketing ........................ 2,665,000 5,373,000 11,827,000
General and administrative ................... 2,344,000 4,376,000 6,411,000
----------- ------------ -----------
Total operating expenses ................. 5,009,000 9,749,000 18,238,000
----------- ------------ -----------
Interest expense ................................ 2,000 356,000 648,000
----------- ------------ -----------
Loss before income tax benefit .................. (96,000) (1,536,000) 1,033,000
Income tax benefit .............................. -- -- --
----------- ------------ -----------
Net (loss) income ............................... $ (96,000) $ (1,536,000) $ 1,033,000
=========== ============ ===========
PER SHARE DATA:
Net (loss) income per share
Basic ........................................ $ (0.06) $ (0.96) $ 0.66
=========== ============ ===========
Diluted ...................................... $ (0.06) $ (0.96) $ 0.56
=========== ============ ===========
Weighted average number of shares outstanding
Basic ........................................ 1,571,187 1,594,387 1,563,092
=========== ============ ===========
Diluted ...................................... 1,571,187 1,594,387 1,844,346
=========== ============ ===========
AS OF JUNE 30,
1998 1999 2000
----------- ------------ -----------
BALANCE SHEET DATA:
Working capital ................................. $ 180,000 $ (1,942,000) $ 2,641,000
Property and equipment, net ..................... 169,000 5,842,000 5,000,000
Total assets .................................... 1,263,000 8,286,000 12,667,000
Long-term obligations ........................... -- 5,395,000 3,107,000
Shareholders'(deficit) equity ................... 484,000 (1,044,000) 4,923,000
</TABLE>
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Report. This Report
contains certain forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future
operations and projections of revenues and other financial items that are based
on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. When used in this Report,
the words "intends," "believes," "anticipates," "estimates," "may," "could,"
"should," "would," "will," "plans" and similar expressions and variations
thereof are intended to identify forward-looking statements. The cautionary
statements set forth elsewhere in this Report identify important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
We market communications and Internet services and nutritional and
health enhancement products through our multi-level network marketing system of
independent associates. We operate through our subsidiaries: Maxxis 2000;
Maxxis Communications; and Maxxis Nutritionals.
We are a network marketing company that currently markets 1-Plus long
distance service, 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 our marketing system allows us to obtain customers for our products and
services in a cost effective manner. We believe that our marketing system also
enhances customer retention because of the personal relationships between our
independent associates and their customers. We believe that the
telecommunications customers obtained by our independent associates are also
potential customers for our nutritional and health enhancement products and
Internet-related services.
We derive revenues from communications services, nutritional products
and marketing services. Communications services revenues are comprised of: (i)
sales of prepaid phone cards to our independent associates; (ii) usage and fees
from long distance services provided by the Maxxis network, net of allowances
for bad debt and billing adjustments; and (iii) 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, 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 revenues 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 to our nutrition customers. Marketing services revenues
include application fees from independent associates and purchases of sales
aids by independent associates, including distributor kits which consist of
forms, promotional brochures, audio and video tapes, marketing materials and
presentation materials. 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.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost
consists of the cost of providing service for prepaid phone cards and the
network services cost to provide or purchase 1-Plus long distance services.
Nutritional products cost consists of the cost of purchasing private label
nutritional products. Marketing services cost includes the costs of purchasing
independent associate 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 independent associates based on: (i) sales
of products to new independent associates sponsored into Maxxis; (ii) usage of
long distance services by customers; and (iii) sales of additional products and
services to customers. General and administrative expenses include costs for
independent
12
<PAGE> 15
associate support services, information systems services and administrative
personnel to support our operations and growth.
Maxxis has 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 maintain profitability. If we continue to grow rapidly, we will be
required to continually expand and modify our operational and financial
systems, add additional independent associates and new customers, and train and
manage both current and new employees and independent associates. 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 operating
results.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues
attributable to each category for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Communications services ...................... 76% 68% 33%
Nutritional products ......................... 7 11 58
Marketing services ........................... 17 21 9
----- ----- -----
Total net revenues ......................... 100% 100% 100%
===== ===== =====
Cost of services:
Communications services ...................... 19% 18% 18%
Nutritional products ......................... 4 5 12
Marketing services ........................... 6 8 2
----- ----- -----
Total cost of services ..................... 29% 31% 32%
Operating expenses:
Selling and marketing ........................ 38 44 41%
General and administrative ................... 34 35 22
----- ----- -----
Total operating expenses ................... 72% 79% 63%
===== ===== =====
</TABLE>
13
<PAGE> 16
YEAR ENDED JUNE 30, 2000 COMPARED WITH JUNE 30, 1999
Net Revenues. Total net revenues are derived from sales of
communications services, nutritional products and marketing services. Total net
revenues increased $16.8 million, or 136%, to $29.1 million for fiscal year
ended June 30, 2000 from $12.3 million for the same period in 1999. The
increase in total net revenues was primarily due to the increase in nutritional
sales for the current year.
Communications services revenues consist of sales of prepaid phone
cards to IAs and commissions, fees and revenues generated from long distance
customers and fees generated from Internet services and web hosting activities.
Communications services revenues increased $1.2 million, or 14.6%, to $9.6
million for fiscal 2000 from $8.4 million for the same period in 1999. This
increase was primarily due to increased phone card sales to our IAs and
increased long distance telephone commissions resulting from our larger
communications customer base and the increase in usage offset by a decrease
caused by lower revenues per minute.
Nutritional products revenues consist of sales of private label
nutritional products. Nutritional products revenues increased $15.6 million, or
1140%, to $17.0 million for fiscal 2000 from $1.4 million for fiscal 1999. This
increase was primarily due to the more expansive product line we offered during
fiscal 2000 and the promotional contests associated with our product line.
Marketing services revenues consist of application fees paid by
independent associates, purchases of sales aids by independent associates,
registration fees for the annual Summit marketing. Marketing services revenues
decreased $73,000, or 3%, to $2.5 million for fiscal 2000 from $2.6 million for
the same period in 1999. This decrease was due to the decrease in the number of
new IAs.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for fiscal 2000 was $9.2 million, or 32% of total net revenues, as
compared to $3.8 million, or 31% of total net revenues, for the same period in
1999 as the result of flat communications services margins which was partially
mitigated by an improvement in nutritional product and marketing services
margins.
Communications services cost consisted primarily of the cost of
purchasing activated prepaid phone cards from MCI WorldCom and other outside
vendors as well as the costs of operating the Maxxis Switch. Communications
services cost was $5.3 million, or 18% of total net revenues, for fiscal 2000,
as compared to $2.2 million, or 18% of total net revenues, for the same period
in 1999. Nutritional products cost was $3.4 million or 12% of total net
revenues for fiscal 2000 as compared to $662,000, or 5% of total revenues for
the comparable 1999 period. This increase in the cost of nutritional products
was due primarily to increased sales volume. Marketing services cost was
$519,000, or 2% of total net revenues, for fiscal 2000, as compared to
$947,000, or 8% of total net revenues, for the same period in 1999. The
decrease in marketing services cost as a percentage of total net revenues was
due primarily to an increase in overall sales and better control of expenses.
Gross Margin. Gross margin increased to $19.9 million for fiscal 2000
from $8.6 million for the same period in 1999. As a percentage of total net
revenues, gross margin was 68% for fiscal 2000 as compared to 69% for fiscal
1999.
Operating Expenses. Selling and marketing expenses consist of
commissions paid to independent associates based on (i) sales of products to
new independent associates sponsored into Maxxis, (ii) usage of long distance
services by customers, and (iii) sales of additional products and services to
customers. For fiscal 2000, selling and marketing expenses were $11.8 million,
or 41% of total net revenues, as compared with $5.4 million, or 44% of total
net revenues, for the same period in 1999. This decrease was due to the
decrease in the number of IAs. General and administrative expenses were $6.4
million, or 22% of total net revenues for 2000, as compared to $4.4 million, or
35% of total net revenues, for the same period in 1999. General and
administrative expenses increased as a percentage of total revenues in fiscal
2000 due to higher legal and other expenses incurred in connection with the
14
<PAGE> 17
filing of tariffs in various states to offer long distance service. Total
operating expenses as a percentage of net revenue decreased to 63% of net
revenues for fiscal 2000 from 79% of net revenues for fiscal 1999.
Interest Expense. For the year ended June 30, 2000, interest expense
was $616,000. The expense was largely comprised of interest costs related to
the lease of the Maxxis Switch. Interest expense of $338,000 in fiscal 1999 was
largely comprised of interest cost related to the lease of the Maxxis Switch
and interest on the line of credit facility, partially offset by interest
earned on overnight cash balances.
Net Income. Net Income for fiscal 2000 was $1.0 million as compared to
a net loss of $1.6 million for the same period in 1999.
YEAR ENDED JUNE 30, 1999 COMPARED WITH JUNE 30, 1998
Net Revenues. Total net revenues are derived from sales of
communications services, nutritional products and marketing services. Total net
revenues increased $5.4 million, or 77%, to $12.3 million for fiscal year ended
June 30, 1999 from $7.0 million for the same period in 1998. The increase in
total net revenues was primarily due to the growth in the number of IAs
enrolled in the Maxxis marketing network.
Communications services revenues consist of sales of prepaid phone
cards to IAs and commissions, fees and revenues generated from long distance
customers and fees generated from Internet services and web hosting activities.
Communications services revenues increased $3.1 million, or 59%, to $8.4
million for fiscal 1999 from $5.3 million for the same period in 1998. This
increase was primarily due to increased phone card sales to our IAs and
increased long distance telephone commissions resulting from our larger
communications customer base.
Nutritional products revenues consist of sales of private label
nutritional products. Nutritional products revenues increased $844,000, or
160%, to $1.4 million for fiscal 1999 from $526,000 for fiscal 1998. This
increase was primarily due to the fact that we did not begin selling
nutritional products until November 1997 combined with the more expansive
product line we offered during fiscal 1999.
Marketing services revenues consist of application fees paid by
independent associates, purchases of sales aids by independent associates,
registration fees for the annual Summit marketing meeting. Marketing services
revenues increased $1.4 million, or 118%, to $2.6 million for fiscal 1999 from
$1.2 million for the same period in 1998. This increase was due to the growth
in the numbers of IAs and the increased attendance of the IAs at our Summit
meeting and our training schools along with an increase in the price of our
distribution kits.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for fiscal 1999 was $3.8 million, or 31% of total net revenues, as
compared to $2.1 million, or 30% of total net revenues, for the same period in
1998. The increase in total cost of services as a percentage of total net
revenues was primarily the result of flat communications services margins which
was mitigated by an improvement in nutritional product and marketing services
margins.
Communications services cost consists primarily of the cost of
purchasing activated prepaid phone cards from CRC and other outside vendors as
well as the costs we incur in the operation of the Maxxis Switch.
Communications services cost was $2.2 million, or 18% of total net revenues,
for fiscal 1999, as compared to $1.4 million, or 19% of total net revenues, for
the same period in 1998. Nutritional products cost was $705,000 or 6% of total
net revenues for fiscal 1999 as compared to $294,000, or 4% of total revenues
for the comparable 1998 period. Marketing services cost was $931,000, or 8% of
total net revenues, for fiscal 1999 as compared to $339,000, or 7% of total net
revenues, for the same period in 1998. The increase in marketing services cost
as a percentage of total net revenues was primarily due to higher costs
associated with our 1999 annual Summit meeting for our IAs.
Gross Margin. Gross margin increased to $8.6 million for fiscal 1999
from $4.9 million for the same period in 1998. As a percentage of total net
revenues, gross margin declined to 69% for fiscal 1999 from 71% for fiscal
1998.
15
<PAGE> 18
Operating Expenses. Selling and marketing expenses consist of
commissions paid to independent associates based on (i) sales of products to
new independent associates sponsored into Maxxis, (ii) usage of long distance
services by customers, and (iii) sales of additional products and services to
customers. For fiscal 1999, selling and marketing expenses were $5.4 million,
or 44% of total net revenues, as compared with $2.7 million, or 38% of total
net revenues, for the same period in 1998. Selling and marketing expenses
increased as a percentage of net revenues primarily for fiscal 1999 primarily
because of an incentive trip and other awards which were provided to our best
performing independent associates. General and administrative expenses were
$4.4 million, or 35% of total net revenues for 1999, as compared to $2.3
million, or 34% of total net revenues, for the same period in 1998. General and
administrative expenses increased as a percentage of total revenues in fiscal
1999 due to higher legal and other expenses in connection with our public stock
offering and the filing of tariffs in various states to offer long distance
service. Total operating expenses increased to 79% of net revenues for fiscal
1999 from 72% of net revenues for fiscal 1998.
Interest Expense. For the year ended June 30, 1999, interest expense
was $356,000. The expense was largely comprised of interest cost related to the
Maxxis Switch and also included interest on the line of credit facility,
partially offset by interest earned on overnight cash balances. Interest
expense of $2,000 in fiscal 1998 was largely related to a loan from a Company
officer.
Net Loss. Net loss for fiscal 1999 was $1.6 million as compared to a
net loss of $96,000 for the same period in 1998.
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<PAGE> 19
SEASONALITY AND UNAUDITED QUARTERLY FINANCIAL INFORMATION
We have historically experienced, and expect to continue to
experience, significant seasonal fluctuations in the recruitment of its IAs and
the sale of its products and services. Our annual summit occurs in the first
quarter of our fiscal year, which has historically caused an increase in the
number of our IAs and sales of our products and services. Historically,
revenues have been lower in the second quarter than in other quarters of a
given year because of the number of new IAs added and product and service sales
have historically declined during the holiday season. Our operating results may
vary significantly in the future, partly due to such seasonal fluctuations. We
believe that recruitment of IAs and sales of our products and services will
continue to follow this seasonal cycle. Our quarterly results may fluctuate
significantly as a result of such seasonality. Because of the potential
quarterly fluctuations in our revenue and operating results, results for any
particular quarter may not be indicative of future quarterly or annual results.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
SEPT. 30, 1999 DEC. 31, 1999 MAR. 31, 2000 JUNE 30, 2000
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Communications services .................. $ 3,034,000 $ 2,189,000 $ 2,407,000 $ 2,016,000
Nutritional products ..................... 423,000 692,000 8,249,000 7,639,000
Marketing services ....................... 863,000 412,000 667,000 542,000
----------- ----------- ----------- ------------
Total net revenues ................. 4,320,000 3,293,000 11,323,000 10,197,000
----------- ----------- ----------- ------------
Cost of services:
Communications services .................. 1,470,000 1,256,000 1,273,000 1,293,000
Nutritional products ..................... 167,000 162,000 1,399,000 1,675,000
Marketing services ....................... 253,000 141,000 161,000 (36,000)
----------- ----------- ----------- ------------
Total cost of services ............. 1,890,000 1,559,000 2,833,000 2,932,000
----------- ----------- ----------- ------------
Gross margin ............................... 2,430,000 1,734,000 8,490,000 7,265,000
----------- ----------- ----------- ------------
Operating Expenses:
Selling and marketing .................... 1,768,000 796,000 5,583,000 3,680,000
General and administrative ............... 1,354,000 1,427,000 1,763,000 1,867,000
----------- ----------- ----------- ------------
Total operating expenses ........... 3,122,000 2,223,000 7,346,000 5,547,000
----------- ----------- ----------- ------------
Operating Income ........................... (692,000) (489,000) 1,144,000 1,718,000
----------- ----------- ----------- ------------
Interest and other (income) expense ........ 188,000 143,000 436,000 (119,000)
----------- ----------- ----------- ------------
Income (loss) before income tax benefit .... (880,000) (632,000) 708,000 1,837,000
Income tax provision (benefit) ............. -- -- -- --
----------- ----------- ----------- ------------
Net (loss) income .......................... $ (880,000) $ (632,000) $ 708,000 $ 1,837,000
=========== =========== =========== ============
Net(loss) income per share:
Basic .................................... $ (0.54) $ (0.41) $ 0.44 $ 1.18
=========== =========== =========== ============
Diluted .................................. $ (0.54) $ (0.41) $ 0.43 $ 0.72
=========== =========== =========== ============
Weighted average number of shares
outstanding
Basic .................................... 1,617,637 1,541,500 1,617,697 1,563,092
=========== =========== =========== ============
Diluted .................................. 1,617,637 1,541,500 1,654,056 2,547,592
=========== =========== =========== ============
</TABLE>
17
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
From January to February of 1999, we conducted a public offering of
our common stock. Pursuant to this offering, we sold 46,450 shares of Common
Stock at an offering price of $5.50 per share pursuant to a registration
statement on Form S-1 (Commission File No. 333-38623). Our proceeds from the
offering were approximately $255,475; our proceeds, net of offering expenses
were approximately $1,000.
On November 22, 1998, we entered into a line of credit with the Maxxis
Millionaire Society, a Georgia partnership in which Ivey Stokes, our Chairman,
Chief Executive Officer and President, and Alvin Curry, our Chief Operating
Officer, are partners. The line of credit was amended on May 1, 1999. Pursuant
to the line of credit, Maxxis may borrow up to $2,000,000 at 10% annual
interest. Advances or interest thereon pursuant to the line of credit are
payable on demand. As of June 30, 2000, $65,000 principal amount was
outstanding pursuant to the line of credit.
In November 1997, we entered into a demand promissory note to fund
expenses incurred in connection with the launch of our nutritional product line.
As of March 23, 1998, we had borrowed $200,000 under such promissory note. On
March 23, 1998, we converted the outstanding principal amount under the
promissory note into units ("Units") at a price of $5.50 per Unit with each Unit
consisting of one share of Series A Convertible Preferred Stock (the "Preferred
Stock") and a warrant (a "Warrant") to purchase one share of Common Stock at a
price of $5.50 per share. The Preferred Stock is: (i) non-voting; (ii) entitled
to an antidilution adjustment only upon a stock split, recapitalization or
similar event; (iii) entitled to a liquidation preference over the Common Stock;
and (iv) convertible into Common Stock at the option of the holder at any time
commencing 14 months following the date of the issuance of the Preferred Stock
and automatically upon the closing of a public offering that occurs at least 14
months following the issuance of the Preferred Stock and that provides us with
gross proceeds of at least $7,500,000. The Warrants are entitled to an
antidilution adjustment only upon a stock split, recapitalization or similar
event, are not exercisable until 14 months following their date of issuance and
remain exercisable at the option of the holder until the seventh anniversary of
their issuance. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of the Preferred
Stock and any additional preferred stock that may be issued in the future.
On March 31, 2000, we sold 967,000 shares of Preferred Stock and on May
15, 2000, we sold 25,000 shares of Preferred Stock, all at a purchase price of
$5.50 per share. These sales were completed in a private placement solely to
accredited investors.
We anticipate that cash generated from operations, together with
additional borrowings or equity financings, will be sufficient to meet our
capital requirements for the next 12 months. However, if we do not receive
sufficient funds from its operations and borrowings and equity financings to
fund its 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, additional lines of
credit and private equity and debt financings. Our cash and financing needs for
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.
For 2000, cash flows provided from operating activities were $2.7
million, compared to net cash used in operating activities of $177,000 for
1999. Operating activities for 2000 consisted primarily of $1.0 million of net
income and $1.7 million in adjustments to reconcile net income to operating
cash flows, which consisted primarily of $1.5 million of non-cash depreciation
and amortization and $427,000 in non-cash provisions for doubtful
communications receivables offset by an increase in inventories of $739,000.
18
<PAGE> 21
Cash used in investing activities was $627,000 for 2000, as compared
to $741,000 for 1999. Investing activities for 2000 consisted primarily of
software development and organizational costs of $0.1 million, and capital
expenditures totaling $434,000.
Cash provided from financing activities was $2.7 million for 2000, as
compared to $600,000 for 1999. Financing activities for 2000 consisted
primarily of $5.1 million of proceeds from sale of preferred stock offset by
repurchase of the preferred stock of $223,000 and payments totaling $853,000 on
the lease obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, including our consolidated
balance sheets as of June 30, 1998, 1999 and 2000 and consolidated statements
of operations, shareholders' equity (deficit) and cash flows for each of these
years, together with the report thereof of Arthur Andersen LLP, dated September
22, 2000 are included on pages F-1 through F-18 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
We had no disagreements on accounting or financial disclosure matters
with our accountants nor did we change accountants during the year ended June
30, 2000.
19
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers are set forth below. Our Board of
Directors consists of nine directors divided into three classes of directors,
serving staggered three-year terms. Our directors and executive officers are
elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified. Our
directors are elected at the annual meeting of shareholders. Our officers are
appointed at the Board's first meeting after each annual meeting of
shareholders. The ages of the persons set forth below are as of September 30,
1999.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
---- --- -------- --------
<S> <C> <C> <C>
Ivey J. Stokes........................ 41 Chairman of the Board of Directors, Chief Executive 2001
Officer, and President
Alvin Curry........................... 43 Chief Operating Officer and Director 2001
DeChane Cameron....................... 31 Chief Financial Officer --
Larry W. Gates, II.................... 37 Vice President, Secretary, and Director 2002
Charles P. Bernstein.................. 49 Director 2000
Thomas O. Cordy....................... 59 Director 2001
Robert James Glover, Jr............... 39 Director 2002
Terry Harris.......................... 45 Director 2000
</TABLE>
IVEY J. STOKES has served as our Chairman of the Board of Directors
since our inception and as our Chief Executive Officer and President since
September 1999. Mr. Stokes began his marketing career in 1982 at A.L. Williams
Corporation ("A.L. Williams") where he became one of less than 400 National
Sales Directors out of 1.3 million insurance agents. In March 1991, Mr. Stokes
left the financial services industry to launch his own independent marketing
firm, Global Marketing Alliance ("Global Alliance"). Over the next five years,
Mr. Stokes became one of the leading money earners in several national network
marketing firms. Mr. Stokes' marketing firm, Global Alliance, has sponsored and
trained over 150,000 distributors since 1991. Mr. Stokes has a bachelors degree
in industrial management from the Georgia Institute of Technology.
ALVIN CURRY has served as a director since our inception. He also
serves as our Executive Vice President and Chief Operating Officer. Mr. Curry
started his marketing career in 1986 with A.L. Williams, where he attained the
position of Senior Vice President in less than three years. In March 1991, Mr.
Curry left the financial services industry to join Mr. Stokes in Global
Alliance. Mr. Curry attended Northwest Mississippi Junior College and Tacoma
Community College, and he received a degree from the Knapp College of Business.
DECHANE CAMERON has served as Chief Financial Officer for the Maxxis
Group since February 2000 after serving as Controller for Maxxis Communications
since he joined us 1999. Before joining us, Mr. Cameron served as Controller
with Meyer Laminates from 1997 to 1999. Prior to that, Mr. Cameron served as
Accounting Manager with Premier Medical Network from 1994 to 1997. Other
positions held by Mr. Cameron include Senior Accountant with Eastern Foods,
Inc. and Matson, Driscoll & Damico. Mr. Cameron is a member of the National
Association of Management Accountants, the National Association of Black
Accountants, and holds a Bachelors of Science in Accounting from Clemson
University.
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<PAGE> 23
LARRY W. GATES, II has served as Vice President since our inception
and as a director since May 1997. Mr. Gates became a part-time independent
insurance agent for A.L. Williams in 1989 while serving in the U.S. Army. In
1993, he left the financial services industry and became a full-time
independent marketer of telecommunications services through his own independent
marketing firm, Classic Enterprises. Mr. Gates built a downline of over 10,000
distributors between 1993 and 1996. Mr. Gates has an associates degree from
Pierre College.
CHARLES P. BERNSTEIN has served as a director since May 1997. Since
1992, Mr. Bernstein has also served as President of Harvest Mortgage Co. From
1989 to 1992, Mr. Bernstein was the Vice President of Nationwide Mortgage
Resources, an underwriter and servicer of loans on residential and commercial
real estate. Mr. Bernstein holds an associates degree from the University of
South Carolina.
THOMAS O. CORDY has served as a director since May 1997. Mr. Cordy
served as our Chief Executive Officer and President from May 1997 to September
1999. Prior to joining us, he served as President and Chief Executive Officer
of CI Cascade Corp. Mr. Cordy currently serves as Vice Chairman of the Board of
Trustees of Clark Atlanta University, Chairman of the Board of Renaissance
Capital Corporation and as a Director of Cox Enterprises. Mr. Cordy has a
bachelors degree from Morehouse College and a masters degree from Atlanta
University. Mr. Cordy has attended the Stanford Executive Program at the
Stanford School of Business and the University of Oklahoma National Lending
School.
ROBERT JAMES GLOVER, JR. has served as a director since our inception.
Mr. Glover started his marketing career as an independent insurance agent with
A.L. Williams in 1985, where he attained the sales position of Senior Vice
President. In December 1993, Mr. Glover left the financial services industry
and became an independent marketer of telecommunications services through his
own independent marketing firm, Glover Enterprises. Mr. Glover's network
marketing firm has sponsored and trained over 10,000 distributors. Mr. Glover
attended Maryland University.
TERRY HARRIS has served as a director since May 1997. Since 1982, Mr.
Harris has served as Pastor and President of Tacoma Christian Center Inc. Mr.
Harris has a bachelors degree from the University of Puget Sound and attended
Rhema Bible School.
COMMITTEES OF THE BOARD
The Executive Committee of our Board of Directors exercises, during
the interval between Board meetings, all of the powers of our Board of
Directors with certain limitations. During the year ended June 30, 2000, the
Executive Committee was composed of Thomas O. Cordy, Alvin Curry and Ivey J.
Stokes and held three meetings.
The Audit Committee of the Board of Directors reviews, with our
independent public accountants, our annual financial statements, reviews the
work of such independent public accountants and makes annual recommendations to
the Board of Directors for the appointment of independent public accountants
for the ensuing year. The Audit Committee also reviews the effectiveness of our
financial and accounting functions, organization, operations and management.
During the year ended June 30, 2000, the Audit Committee was composed of
Charles P. Bernstein, Terry Harris and Larry Gates and held one meeting.
The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of our officers and administers the
issuance of stock options to our officers, employees, consultants and advisors.
The Compensation Committee also reviews general policy matters relating to the
compensation and benefits of our employees. During the year ended June 30,
2000, the Compensation Committee was composed of Charles P. Bernstein, Terry
Harris and Larry Gates and held one meeting.
We do not have a standing nominating committee. The Board of Directors
or the Executive Committee nominates candidates to stand for election as
directors. Our Amended and Restated Bylaws permit shareholders to
21
<PAGE> 24
make nominations for directors but only if such nominations are made pursuant
to timely notice in writing to the Secretary of Maxxis. To be timely, notice of
shareholder nominations for directors must be delivered in writing to the
Secretary of Maxxis no later than 90 days prior to the anniversary of the
previous year's annual meeting, together with the identity of the nominator and
the number of shares of Common Stock owned, directly or indirectly, by the
nominator.
During the year ended June 30, 2000, our Board of Directors held four
meetings. All of our directors have attended 75% or more of the aggregate of
all Board meetings and all meetings of committees of which they were members.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their
out-of-pocket expenses for each meeting attended, but otherwise serve without
compensation.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by our Chief Executive Officer during the years ended June 30, 2000,
1999 and 1998 . No other executive officers received a combined salary and
bonus in excess of $100,000 during the years ended June 30, 1999 and 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS(1)
--------------------------- ----------- -------- ----------
<S> <C> <C> <C>
Ivey J. Stokes ............................. Fiscal 2000 $104,000 $ 0
Chief Executive Officer and President(2) ... Fiscal 1999 $104,000 $ 0
Thomas O. Cordy ............................ Fiscal 1998 $ 41,600 $83,400
</TABLE>
---------------
(1) Represents amounts accrued as bonus compensation for the periods presented.
(2) Mr. Stokes became our Chief Executive Officer and President in September
1999, when Mr. Cordy resigned those positions.
OPTION GRANTS DURING 2000
As of June 30, 2000, no options had been granted to our Chief
Executive Officer during the year ended June 30, 2000.
EMPLOYMENT AGREEMENT
We entered into an employment agreement (the "Cordy Agreement") with
Mr. Cordy on May 1, 1997. In September 1999, Mr. Cordy resigned as our Chief
Executive Officer and President. At the time of Mr. Cordy's resignation, our
Executive Committee appointed our Chairman of the Board, Ivey J. Stokes, to
serve as our Chief Executive Officer and President. Mr. Stokes is not presently
a party to an employment agreement with us.
SALES REPRESENTATIVE AGREEMENTS
We entered into independent sales representative agreements
(collectively, the "Sales Representative Agreements") with ten independent
sales representatives, including Messrs. Stokes, Gates and Glover. The Sales
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<PAGE> 25
Representative Agreements provide for a minimum fee of $800.00 per week. Each
sales representative is also eligible to receive quarterly payments of a
performance bonus which is a percentage of total revenue from Maxxis 2000. To
be paid a bonus, a sales representative must have 180 new activations in a
quarter. The bonus amount is then determined by the number of open centers in
that quarter. The bonus ranges from 1% to 5% based on Production. Each sales
representative is an independent contractor, and we do not exercise control
over the activities of the sales representatives other than as set forth in the
Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year,
and the term renews daily for an additional year until either party fixes the
remaining term at one year by giving written notice. We can terminate each
sales representative upon death or disability (as defined in the Sales
Representative Agreements) or with or without cause upon delivery to the sales
representative of a notice of termination. If a sales representative is
terminated, the sales representative will receive any accrued fees through the
termination date and any accrued performance bonus, unless the sales
representative is terminated for cause. If the sales representative is our
director or officer, the sales representative shall tender his resignation to
such positions effective as of the termination date. Under the Sales
Representative Agreements, each sales representative agrees to maintain the
confidentiality of our trade secrets and confidential business information.
CONSULTING AGREEMENT
In September 1997, we entered into a consulting agreement with Mr.
Robert P. Kelly. The consulting agreement provides for a minimum weekly salary,
and the consultant may participate in a bonus program and is eligible to
receive quarterly or annual payments of a performance bonus based upon the
achievement of targeted levels of performance and such other criteria as the
Board of Directors shall establish from time to time. The consultant is an
independent contractor, and we do not exercise control over the activities of
the consultant other than as set forth in the consulting agreement.
The consulting agreement has a term of one year, and the term renews
daily for an additional year until either party fixes the remaining term at one
year by giving written notice. We can terminate the consultant upon death or
disability (as defined in the consulting agreement) or with or without cause
upon delivery to the consultant of a notice of termination. If the consultant
is terminated because of death, disability or cause, the consultant will
receive any accrued fees through the termination date and any accrued
performance bonus, unless the consultant is terminated for cause. If the
consultant is terminated without cause, we shall pay the consultant severance
payments equal to his minimum base salary for each week during the six-month
period following the termination date.
Under the consulting agreement, the consultant agrees to maintain the
confidentiality of our trade secrets and confidential business information. The
consultant also agrees for a period of one year following the termination date,
if he is terminated or resigns for any reason, not to compete with or solicit
our employees or customers within a 30-mile radius of our corporate offices;
provided, that if the consultant is terminated without cause, the non-compete
period shall be six months.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to its Amended and Restated Articles of Incorporation, we are
obligated to indemnify each of our directors and officers to the fullest extent
permitted by the Georgia Business Corporation Code with respect to all
liability and loss suffered and reasonable expenses incurred by such person in
any action, suit or proceeding in which such person was or is made or
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was our director or officer. We are obligated to pay the
reasonable expenses of our directors and officers incurred in defending such
proceedings if the indemnified party agrees to repay all amounts advanced by us
if it is ultimately determined that such indemnified party is not entitled to
indemnification.
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<PAGE> 26
STOCK OPTION PLAN
On September 16, 1998, the Board of Directors adopted the Maxxis
Group, Inc. 1998 Stock Option Plan (the "Option Plan"), which permits us to
grant options to purchase shares of Common Stock to our officers, directors,
key employees, advisors and consultants. The purpose of the Option Plan is to
advance the interests of Maxxis, its subsidiaries and its shareholders by
affording certain employees and directors of Maxxis and its subsidiaries, as
well as key consultants and advisors to Maxxis or any subsidiary, an
opportunity to acquire or increase their proprietary interests in Maxxis.
Options granted under the Option Plan are intended to promote our growth and
profitability by providing the optionees with an additional incentive to
achieve our objectives through participation in our success and growth and by
encouraging optionees to continue their association with or service to us.
Generally, options granted under the Option Plan may be Incentive
Stock Options ("ISOs"), which are intended to meet the requirements of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified options, which are not intended to meet such requirements
("Non-Qualified Options"). ISOs must have terms of ten years or less from the
date of grant and the fair market value of grants of ISOs during any year on
the date of grant may not exceed $100,000. The Option Plan will be administered
by a committee (the "Committee"), having the duties and authorities set forth
in such Option Plan in addition to any other authority granted by the Board.
The Committee will have the full power and authority, in its discretion,
subject to the provisions of the Option Plan, to interpret the Option Plan, to
prescribe, amend, and rescind rules and regulations relating to them, to
determine the details and provisions of each stock option agreement and
restriction agreement, and to make all other determinations necessary or
advisable for the administration of the Option Plan, including, without
limitation, the amending or altering of such Plan and any options or restricted
stock awards granted thereunder, as may be required to comply with or to
conform to any federal, state, or local laws or regulations. The Committee, in
its discretion, will select the recipients of awards and the number of options
granted thereunder and determine other matters such as (i) vesting schedules,
(ii) the exercise price of options (which cannot be less than 100% of the fair
market value of the Common Stock on the date of grant for ISOs) and (iii) the
duration of awards (which cannot exceed ten years from the date of grant or
modification of the option).
Subject to shareholder approval, the aggregate number of shares of
Common Stock reserved for the issuance of options under the Option Plan will be
300,000 shares, subject to adjustment in accordance with the Option Plan. Any
or all shares of Common Stock subject to the Option Plan may be issued in any
combination of ISOs or Non-Qualified Options, and the amount of Common Stock
subject to the Option Plan may be increased from time to time, subject to
shareholder approval. Shares subject to an option may be either authorized and
unissued shares or shares issued and later reacquired by us. The shares covered
by any unexercised portion of an option that has terminated for any reason may
again be optioned or awarded under the Option Plan, and such shares shall not
be considered as having been optioned in computing the number of shares of
Common Stock remaining available for options under the Option Plan.
The class of persons eligible to participate in the Option Plan shall
consist of all persons whose participation in the Option Plan the Committee
determines to be in our best interests which shall include, but not be limited
to, all employees and directors of Maxxis, as well as key consultants and
advisors to Maxxis. The Committee will have the power to specify, with respect
to the Options granted to a particular Optionee, the effect of the termination
of such Optionee's employment or service under various circumstances on such
Optionee's right to exercise an Option, which effect may include immediate or
deferred termination of such Optionee's rights under an Option, or acceleration
of the date at which an Option may be exercised in full. As of June 30, 2000,
options to purchase 59,133 shares of Common Stock were outstanding.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of September 23, 2000 by: (i) each
person known by us beneficially to own more than 5% of the
24
<PAGE> 27
outstanding shares of the Common Stock; (ii) each of our directors; and (iii)
all of our directors and executive officers as a group. Except as otherwise
indicated, all persons listed have sole voting and investment power with
respect to their shares.
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
BENEFICIAL COMMON STOCK
NAME AND ADDRESS(a) OF BENEFICIAL OWNER OWNERSHIP(b) OUTSTANDING
--------------------------------------- ------------ -------------
<S> <C> <C>
Alvin Curry(c)........................................................... 636,363 40.5%
King David Trust(d)...................................................... 454,545 28.9
Cynthia Glover, trustee(e)............................................... 181,818 11.6
Charles P. Bernstein..................................................... --
Larry W. Gates........................................................... 47,272 3.0
Thomas O. Cordy.......................................................... -- --
Larry W. Gates, II....................................................... 45,454 2.9
Robert J. Glover(f)...................................................... -- --
Terry Harris............................................................. 3,636 *
Ivey J. Stokes(g)........................................................ -- --
All directors and executive officers as a group
(10 persons) (c) - (g)................................................ 948,634 63.0
</TABLE>
---------------------
* Less than one percent
(a) The address of the King David Trust and Alvin Curry is c/o Maxxis
Group, Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084.
The address of Cynthia Glover, trustee, U/A Louise Glover dated
January 10, 1997 is 7839 Taylor Circle, Riverdale, Georgia 30274. The
address of The Anchora Company is c/o Salem Management Company, Ltd.,
Design House, Leeward Highway, P.O. Box 150, Providenciales Turks &
Caicos Island, B.W.I.
(b) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended, a person is deemed to be the beneficial owner, for
purposes of this table, of any shares of Common Stock if such person
has or shares voting power or investment power with respect to such
security, or has the right to acquire beneficial ownership at any time
within 60 days from September 30, 2000. As used herein, "voting power"
is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
(c) Includes 454,545 shares owned by the King David Trust of which Mr.
Curry, a director of, is the trustee. Mr. Curry disclaims beneficial
ownership of such shares.
(d) All such shares are owned by the King David Trust of which Mr. Curry
is the trustee and Mr. Stokes' minor children are the beneficiaries.
Mr. Stokes, the Chairman of the Board, disclaims beneficial ownership
of such shares.
(e) All such shares are owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997. Ms. Glover is the wife of Robert J.
Glover, a director. Mr. Glover is the sole beneficiary and disclaims
beneficial ownership of such shares. In addition, Ms. Glover disclaims
beneficial ownership of such shares.
(f) Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997 of which Mr. Glover is the sole
beneficiary. Mr. Glover disclaims beneficial ownership of such shares.
(g) Excludes 454,545 shares owned by the King David Trust of which Mr.
Stokes' minor children are the beneficiaries. Mr. Stokes disclaims
beneficial ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 22, 1998, Maxxis entered into a line of credit with the
Maxxis Millionaire Society, a Georgia partnership. The line of credit was
amended on May 1, 1999. Ivey Stokes and Alvin Curry, Maxxis' Chairman of the
Board and Chief Operating Officer are partners in the Maxxis Millionaire
Society. Pursuant to the line of credit, Maxxis may borrow up to $2,000,000 at
10% annual interest. No advances or interest thereon pursuant to the line of
credit are payable until November 22, 2000. As of June 30, 2000, $65,000
principal amount was outstanding pursuant to the line of credit.
On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert
J. Glover, a director, loaned us $50,000 to fund our initial start-up costs. We
have repaid this loan.
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<PAGE> 28
During the Inception Period, we paid a fee of $184,000 to IS 14, Inc.
("IS 14"), a former Delaware corporation which was controlled by certain of our
directors and officers. The IS 14 fee was comprised of compensation for
managerial, marketing and administrative services performed by certain of our
officers and sales representatives prior to the establishment of our payroll.
IS 14 has been dissolved, and we will not make any additional payments to IS
14.
Pursuant to Mr. Cordy's employment agreement, The Anchora Company, an
affiliate of Mr. Cordy, purchased 72,727 shares of Common Stock, at a price of
$1.65 per share. In exchange, The Anchora Company gave us a $120,000 full
recourse promissory note which bears interest at an annual rate of 8.75%.
Subsequent to Mr. Cordy's recent resignation, we reached an oral agreement with
Mr. Cordy to cancel the $120,000 full recourse promissory note in exchange for
Mr. Cordy's agreement to require The Anchora Company to return the 72,727
shares of Common Stock to us. As of June 30, 2000, we had received the 72,727
shares and $120,000 full recourse promissory note had been cancelled.
Therefore, we cancelled the 72,727 shares formerly owned by The Anchora
Company.
Certain of the transactions described above may be on terms more
favorable to officers, directors and principal shareholders than they could
obtain in a transaction with an unaffiliated third party. We have adopted a
policy requiring that all material transactions between Maxxis and its
officers, directors or other affiliates must: (i) be approved by a majority of
the disinterested members of our Board of Directors; and (ii) be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company
are filed as a part of this Report and are attached hereto as
pages F-1 through F-18:
Consolidated Balance Sheets as of June 30, 1999 and 2000
Consolidated Statements of Operations for the Years Ended
June 30, 1998, 1999 and 2000
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended June 30, 1998, 1999 and 2000 Consolidated
Statements of Cash Flows for the Years Ended June 30, 1998,
1999 and 2000 Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
26
<PAGE> 29
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
2.1* Plan of Reorganization of the Company effective as of February
17, 1998.
3.1* Amended and Restated Articles of Incorporation of the Company, as
amended to date.
3.2* Amended and Restated Bylaws of the Company, as amended to date.
4.1* See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws defining the rights of holders of Common Stock of the
Company.
4.2* Specimen Common Stock certificate.
4.3* Shareholders Agreement, dated as of September 1, 1997 among the
Company and the holders of Class A Common Stock.
4.4* Amended and Restated Shareholders Agreement, dated as of February
18, 1998 among the Company and certain holders of its Common
Stock.
10.1* Form of Employment Agreement by and between the Company and
certain of its officers.
10.2* Guarantee by Thomas O. Cordy in favor of the Company dated May 1,
1997.
10.3* Form of Independent Sales Representative Agreement by and between
the Company and certain of its sales representatives.
10.4* Consulting Agreement by and between the Company and Robert P.
Kelly dated as of September 1, 1997.
10.5* Software License Agreement between Summit V. Inc., a subsidiary
of Jenkon International, Inc. and the Company dated February 2,
1997.
10.6* Software Service Agreement between Summit V. Inc., a subsidiary
of Jenkon International, Inc. and the Company dated February 2,
1997.
10.7* Equipment Purchase Agreement between Summit V. Inc., a subsidiary
of Jenkon International, Inc. and the Company dated February 2,
1997.
10.8* Agreement for 1-Plus Services between Colorado River
Communications Corporation and the Company dated February 20,
1997.+
10.9* Sublease Agreement between DowElanco and the Company dated
February 14, 1997.
10.10* Warehouse lease between Malon D. Mimms and the Company dated
March 17, 1997.
10.11* Warehouse lease between Malon D. Mimms and the Company dated June
23, 1997.
10.12* Demand Secured Promissory Note dated November 26, 1997 by the
Company in favor of the lenders named on Schedule I thereto.
10.13* Sub-Sublease Agreement between the Company and Simons
Engineering, Inc. dated September 1, 1997.
10.14* Demand Promissory Note dated February 28, 1998 by the Company in
favor of Thomas O. Cordy.
10.15* Form of Stock Purchase Warrant.
10.16** Maxxis Group, Inc. 1998 Stock Option Plan.
10.17** Lease Amendment Agreement dated June 5, 1998 among Malon D.
Mimms, the Company and Richard Bowers & Co.
10.18** Lease Amendment Agreement dated August 14, 1998 among Malon D.
Mimms, the Company and Richard Bowers & Co.
10.19# Software Purchase Agreement between UsefulWare Incorporated and
the Company dated as of August 13, 1998.+
10.20# Asset Purchase Agreement by and among Cherry Communications
Incorporated ("Cherry"), World Access, Inc. ("World Access") and
the Company dated as of September 29, 1998.
10.21# Promissory Note by the Company in favor of Cherry dated September
29, 1998.
10.22# Security Agreement between the Company and World Access dated as
of September 29, 1998.
10.23# Software License Agreement between Alcatel USA Marketing, Inc.
and the Company dated as of September 29, 1998.
</TABLE>
27
<PAGE> 30
<TABLE>
<S> <C>
10.24# Sublease between Cherry and the Company dated as of September 30,
1998.
10.25# Master Lease Agreement between Rockford Industries, Inc. and the
Company dated as of September 29, 1998 (World Access).
10.26# Master Lease Agreement between Rockford Industries, Inc. and the
Company dated as of September 29, 1998 (NACT Telecommunications,
Inc.).
10.27## Line of Credit between the Company and the Maxxis Millionaire
Society dated as of November 22, 1998.
10.28## Investment Agreement between InteReach Internet Services, LLC and
the Company dated as of December 8, 1998.
10.29## Virtual ISP Agreement between InteReach Internet Services, Inc.
and the Company dated as of December 8, 1998.
10.30### Digital Services Agreement between Worldcom Network Services,
Inc. and the Company dated as of January 21, 1999
10.31+### Telecommunications Services Agreement between Worldcom Network
Services, Inc. and the Maxxis Communications dated as of January
21, 1999.
10.32### Program Enrollment Terms to the Telecommunications Services
Agreement dated as of January 21, 1999 between Worldcom Network
Services, Inc. and the Maxxis Communications.
10.33+### Master Service Agreement between IXC Communications Services,
Inc. and the Company dated as of March 25, 1999.
10.34### Amendment to the Line of Credit between the Company and the
Maxxis Millionaire Society dated as of May 1, 1999.
21.1### Subsidiaries of the Company.
24.1 Power of Attorney (contained on the signature page hereof).
27.1 Financial Data Schedule for period ended June 30, 2000 (for SEC
use only).
</TABLE>
-------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-38623).
** Incorporated by reference to the Company's Form 10-K for the year ended
June 30, 1998 as filed with the Commission on September 25, 1998.
# Incorporated by reference to the Company's Form 109-Q for the quarter ended
September 30, 1998 as filed with the Commission on November 12, 1998.
## Incorporated by reference to the Company's Form 10-Q for the quarter ended
December 31, 1998 as filed with the Commission on February 16, 1999.
### Incorporated by reference to the Company's Form 10-K for the year ended
June 30, 1999 as filed with the Commission on October 13, 2000.
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In
accordance with Rule 406, these confidential portions have been omitted
from this exhibit and filed separately with the Commission.
(b) REPORTS ON FORM 8-K
None.
28
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
MAXXIS GROUP, INC.
<TABLE>
<S> <C>
October 23, 2000 By: /s/ Ivey J. Stokes
------------------------------------
Ivey J. Stokes
Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, IVEY J. STOKES and
DECHANE CAMERON, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
October 23, 2000 /s/ Ivey J. Stokes
-----------------------------------------------
Ivey J. Stokes
Chairman of the Board, Chief Executive Officer
and President
(Principal executive officer)
October 23, 2000 /s/ DeChane Cameron
-----------------------------------------------
DeChane Cameron
Chief Financial Officer
(Principal financial and accounting officer)
-----------------------------------------------
Thomas O. Cordy
Director
October 23, 2000 /s/ Larry W. Gates, II
-----------------------------------------------
Larry W. Gates, II
Vice President, Secretary, and Director
</TABLE>
29
<PAGE> 32
<TABLE>
<S> <C>
-----------------------------------------------
Charles P. Bernstein
Director
October 23, 2000 /s/ ALVIN CURRY
-----------------------------------------------
Alvin Curry
Chief Operating Officer and Director
October 23, 2000 /s/ ROBERT J. GLOVER, JR.
-----------------------------------------------
Robert J. Glover, Jr.
Director
-----------------------------------------------
Terry Harris
Director
</TABLE>
30
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ....................................................... F-2
Consolidated Balance Sheets as of June 30, 1998, 1999 and 2000 ................................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1998, 1999 and 2000 ......... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 30, 1998,
1999 and 2000 ............................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1999 and 2000 ......... F-6
Notes to Consolidated Financial Statements ..................................................... F-7
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxxis Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1999 and 2000 and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years ended June 30, 1998, 1999, and 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1999 and 2000 and the results of their operations
and their cash flows for the years ended June 30, 1998, 1999, and 2000 in
conformity with accounting principles generally accepted in the United States.
Atlanta, Georgia
/s/ Arthur Andersen LLP
-----------------------
September 22, 2000
F-2
<PAGE> 35
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,000 $4,867,000
Short-term investment 10,000 0
Communications receivable, net of allowance for doubtful accounts of $113,000
in 1999 652,000 0
Accounts receivable, net of allowance for doubtful accounts of $189,000 and
$931,000 in 1999 and 2000, respectively 817,000 1,081,000
Inventories, net 354,000 1,093,000
Prepaid expenses and other current assets 110,000 237,000
----------- -----------
1,963,000 7,278,000
PROPERTY AND EQUIPMENT, NET (NOTE 3) 5,842,000 5,000,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 352,000 358,000
OTHER ASSETS 129,000 31,000
----------- -----------
$ 8,286,000 $12,667,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit (Note 6) [CHECK DUE DATE] $ 0 $ 65,000
Accounts payable 1,218,000 814,000
Commissions payable 463,000 160,000
Accrued compensation 220,000 756,000
Sales taxes payable 317,000 177,000
Accrued expenses 428,000 813,000
Current maturities of capital lease obligations 929,000 974,000
Deferred revenue 330,000 878,000
----------- -----------
3,905,000 4,637,000
----------- -----------
LINE OF CREDIT (NOTE 6) 1,390,000 0
----------- -----------
LONG-TERM CAPITAL LEASE OBLIGATIONS (NOTE 4) 4,005,000 3,107,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value; 10,000,000 shares authorized, 100,000 and
1,000,000 shares designated as Series A Convertible Preferred Stock, 36,359
and 992,814 Series A Convertible Preferred Stock shares issued and
outstanding in 1999 and 2000, respectively 200,000 5,141,000
Common stock, no par value; 20,000,000 shares authorized, 1,619,646 and
1,546,919 shares issued and outstanding in 1999 and 2000, respectively 612,000 455,000
Shareholder note receivable (120,000) 0
Accumulated deficit (1,706,000) (673,000)
----------- -----------
Total shareholders' equity (deficit) (1,014,000) 4,923,000
----------- -----------
$ 8,286,000 $12,667,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE> 36
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1999, AND 2000
<TABLE>
<CAPTION>
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
NET REVENUES:
Communications services $ 5,293,000 $ 8,416,000 $ 9,646,000
Nutritional products 526,000 1,371,000 17,003,000
Marketing services 1,172,000 2,557,000 2,484,000
----------- ------------ -----------
Total net revenues 6,991,000 12,344,000 29,133,000
----------- ------------ -----------
COST OF GOODS AND SERVICES SOLD:
Communications services 1,351,000 2,166,000 5,292,000
Nutritional products 294,000 662,000 3,403,000
Marketing services 431,000 947,000 519,000
----------- ------------ -----------
Total cost of services 2,076,000 3,775,000 9,214,000
----------- ------------ -----------
GROSS MARGIN 4,915,000 8,569,000 19,919,000
OPERATING EXPENSES:
Selling and marketing 2,665,000 5,373,000 11,827,000
General and administrative 2,344,000 4,376,000 6,411,000
----------- ------------ -----------
Total operating expenses 5,009,000 9,749,000 18,238,000
----------- ------------ -----------
INTEREST AND OTHER EXPENSES:
Interest expense 2,000 338,000 616,000
Other expenses 0 18,000 32,000
----------- ------------ -----------
Total interest and other expenses 2,000 356,000 648,000
----------- ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES (96,000) (1,536,000) 1,033,000
INCOME TAXES 0 0 0
----------- ------------ -----------
(LOSS) INCOME $ (96,000) $ (1,536,000) $ 1,033,000
=========== ============ ===========
LOSS INCOME PER SHARE
BASIC $ (0.06) $ (0.96) $ 0.66
=========== ============ ===========
DILUTED $ (0.06) $ (0.96) $ 0.56
=========== ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 1,571,187 1,594,387 1,563,092
========= ========= =========
DILUTED 1,571,187 1,594,387 1,844,346
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 37
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1999, AND 2000
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK STOCK SHAREHOLDER
------------------------ ------------------------ SUBSCRIPTION NOTE
SHARES AMOUNT SHARES AMOUNT DEPOSITS RECEIVABLE
---------- --------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 0 $ 0 1,302,001 $ 127,000 $ 360,000 $(120,000)
Issuance of preferred stock 36,359 200,000 0 0 0 0
Issuance of common stock 0 0 271,195 447,000 0 0
Stock subscription deposits 0 0 0 0 (360,000) 0
Net loss 0 0 0 0 0 0
--------- ---------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1998 36,359 200,000 1,573,196 574,000 0 (120,000)
Issuance of common stock, net of
issuance expenses 0 0 46,450 1,000 0 0
Compensation expense for stock
option issuance 0 0 0 37,000 0 0
Net loss 0 0 0 0 0 0
--------- ---------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1999 36,359 200,000 1,619,646 612,000 0 (120,000)
Issuance of preferred stock, net of
issuance expenses 997,000 5,164,000 0 0 0 0
Reacquisition of note receivable
with common stock 0 0 (72,727) (120,000) 0 120,000
Acquisition of preferred stock (40,545) (223,000) 0 0 0 0
Forfeited stock options 0 0 0 (37,000) 0 0
Net income 0 0 0 0 0 0
--------- ---------- --------- --------- --------- ---------
BALANCE, JUNE 30, 2000 992,814 $5,141,000 1,546,919 $ 455,000 $ 0 $ 0
========= ========== ========= ========= ========= =========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
BALANCE, JUNE 30, 1997 $ (74,000) $ 293,000
Issuance of preferred stock 0 200,000
Issuance of common stock 0 447,000
Stock subscription deposits 0 (360,000)
Net loss (96,000) (96,000)
----------- -----------
BALANCE, JUNE 30, 1998 (170,000) 484,000
----------- -----------
Issuance of common stock, net of
issuance expenses 0 1,000
Compensation expense for stock
option issuance 0 37,000
Net loss (1,536,000) (1,536,000)
----------- -----------
BALANCE, JUNE 30, 1999 (1,706,000) (1,014,000)
Issuance of preferred stock, net of
issuance expenses 0 5,164,000
Reacquisition of note receivable
with common stock 0 0
Acquisition of preferred stock 0 (223,000)
Forfeited stock options 0 (37,000)
Net income 1,033,000 1,033,000
----------- -----------
BALANCE, JUNE 30, 2000 $ (673,000) $ 4,923,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 38
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1999, AND 2000
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (96,000) $(1,536,000) $ 1,033,000
----------- ----------- -----------
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 176,000 501,000 1,461,000
Write-off of investment in internet service provider 0 0 100,000
Stock compensation expense 0 37,000 (37,000)
Provision for doubtful communications receivables 40,000 73,000 427,000
Changes in operating assets and liabilities:
Accounts receivable 0 (817,000) (264,000)
Communications receivable (331,000) (409,000) 225,000
Inventories (33,000) (136,000) (739,000)
Prepaid expenses and other assets 3,000 (87,000) (127,000)
Commissions payable 59,000 362,000 (303,000)
Accounts payable 53,000 1,007,000 (404,000)
Accrued compensation 154,000 66,000 536,000
Sales taxes payable 130,000 187,000 (140,000)
Accrued expenses 25,000 300,000 385,000
Deferred revenue 55,000 275,000 548,000
----------- ----------- -----------
Total adjustments 331,000 1,359,000 1,668,000
----------- ----------- -----------
Net cash provided by (used in) operating activities 235,000 (177,000) 2,701,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (115,000) (279,000) (434,000)
Investment in Internet service provider 0 (100,000) 0
Software development and other assets (70,000) (362,000) (193,000)
Liquidation of short term investments 0 0 10,000
----------- ----------- -----------
Net cash used in investing activities (185,000) (741,000) (617,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 200,000 0 5,164,000
Net borrowings (payments) on line of credit 0 1,390,000 (1,325,000)
Payments on lease obligations 0 (825,000) (853,000)
Repurchase of preferred stock 0 0 (223,000)
Proceeds from issuance of common stock 87,000 1,000 0
----------- ----------- -----------
Net cash provided by financing activities 287,000 566,000 2,763,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 337,000 (352,000) 4,847,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35,000 372,000 20,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 372,000 $ 20,000 $ 4,867,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 2,000 $ 0 $ 578,000
=========== =========== ===========
Cash paid for income taxes $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE> 39
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1999, AND 2000
1. ORGANIZATION AND PRESENTATION
DESCRIPTION OF BUSINESS AND OPERATIONS
Maxxis Group, Inc., a Georgia corporation, was incorporated on January 24,
1997 ("Inception") and is headquartered in Tucker, Georgia. Maxxis Group,
Inc.'s principal business operations are carried out through its wholly
owned subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc., which began
operations in March 1997, and Maxxis Nutritionals, Inc., which began
operations in December 1997. Maxxis Group, Inc., together with its wholly
owned subsidiaries (collectively referred to as the "Company"), was founded
for the purpose of selling communications services, private label
nutritional products, and other consumable products and services through a
multilevel marketing system of independent associates ("IAs") to
subscribers throughout the United States. The Company currently markets
long-distance services and value-added communications services, such as
travel cards, prepaid phone cards, 800 service, Internet access, Web page
development and hosting services, and international telecommunications
service, as well as private label nutritional products.
The Company has a limited operating history, and its operations are subject
to the risks inherent in the establishment of any new business. Since the
Company has only recently become an operating company, the Company's
ability to manage its growth and expansion will require it to implement and
continually expand its operational and financial systems, recruit
additional employees, and train and manage both current and new employees.
Growth may place a significant strain on the Company's operational
resources and systems, and failure to effectively manage this projected
growth would have a material adverse effect on the Company's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Maxxis Group, Inc and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Communications services revenues consist of sales of prepaid phone cards to
IAs, commissions generated from an agreement to resell long-distance
services, long-distance services directly provided by the Company and from
Internet related services. From inception through March 1999, the Company
purchased prepaid phone cards from an independent tariffed long-distance
reseller (the "Reseller"), and IAs, in turn, purchased these prepaid phone
cards from the Company. Revenues from prepaid phone cards were recognized
when the cards were sold to IAs, net of an estimate of sales returns for
defective or unused cards. Active IAs have the right to return defective or
unused cards for up to 30 days after the date of purchase. IAs that
terminate their relationship with the Company also have up to one year from
the date of purchase to return cards that are unused and sealed in the
original packaging, for a partial refund.
F-7
<PAGE> 40
Communications services in fiscal years 1998 and 1999 also included
long-distance revenues generated by the Company's agreement with the
Reseller under which the Company received a percentage of the gross
long-distance revenues generated by the Company's customers, less billing
adjustments. The Company recognized long-distance revenues when services
were provided by the Reseller, net of an estimate for billing adjustments.
The Reseller assumed the risk of all bad debts. Amounts due to the Company
from the Reseller are included in communications receivable in the
accompanying balance sheets.
In February 1999, the Company entered into an agreement to lease telephone
switching equipment (the "Maxxis Switch"). The Maxxis Switch provides the
Company with the ability to directly provide long-distance services. In
March 1999 ("March Agreement") the Company entered into an agreement with
two independent tariffed long-distance suppliers to provide for additional
capacity for telecommunication traffic that is not routed through the
Maxxis switch. In April 1999, the Company began transferring its existing
long-distance customers from the Reseller's network to the Maxxis Switch
and began routing traffic through the long-distance suppliers under the
March Agreement. In addition, the Maxxis Switch began carrying traffic
related to the Company's prepaid phone cards (the "Switch Phone Cards").
The Company recognizes long-distance revenues as services are provided, net
of an estimate for billing adjustments. The Company assumes the risk of all
bad debts. Amounts due to the Company related to direct long-distance
services are included in accounts receivable in the accompanying balance
sheets.
Revenue from Web Hosting services are recognized as services are provided
to the IAs.
Nutritional services revenues consist of sales of private label nutritional
products manufactured by various suppliers and are recorded as products are
shipped to IAs, net of an allowance for an estimate of returned products.
Marketing services revenues primarily consist of revenue from IAs for the
sale of distributor kits and sales aids, which include forms, promotional
brochures, marketing materials, and presentation materials designed to
assist IAs in the conduct of their business.
DEFERRED REVENUE
Deferred revenue consists of the annual nonrefundable renewal fee assessed
to IAs, unused time related to Switch Phone Cards, unearned web site
hosting revenues and cash received for unshipped nutritional products. The
annual nonrefundable renewal fee provides IAs with the right to sell the
Company's products and services. This fee is assessed to IAs after their
first year with the Company. The Company recognizes this revenue on a
straight-line basis over the IAs' renewal period. Revenues generated from
unused time on the Switch Phone Cards is recognized as the time is used.
COSTS OF GOODS AND SERVICES SOLD
Communications services costs primarily include the costs of purchasing
prepaid phone cards from the Reseller in fiscal years 1998 and 1999, the
cost of long-distance network services purchased from the long-distance
suppliers, and depreciation expense related to the Maxxis Switch.
Nutritional services costs include the costs of purchasing nutritional
products from third-party suppliers.
Marketing services costs include the costs of printing and designing
associate applications, starter kits, associate meetings, and other sales
aids.
F-8
<PAGE> 41
SELLING AND MARKETING EXPENSES
Selling and marketing expenses primarily consist of commissions paid to IAs
based on their sponsorship of new IAs and the sale of communications
services and nutritional products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of salary expense for the
Company's customer service personnel, office staff, and executive personnel
in addition to the cost of IAs' support services.
CONCENTRATIONS OF RISKS
The Company's customers are primarily residential and are not concentrated
in any specific geographic region of the United States. The Company has
agreements with two long-distance providers to provide the network services
required to originate and terminate calls through the Maxxis Switch and to
provide switched services for the telephone traffic that does not go
through the Maxxis Switch. There can be no assurance that the Company could
enter into new contracts with other suppliers if these agreements were
terminated.
The Company markets a line of private label nutritional products. All of
the nutritional products offered and distributed by the Company are
developed and manufactured by third-party suppliers. Certain nutritional
products the Company offers are proprietary to such suppliers. The Company
does not have any written contracts or commitments from any of these
suppliers or manufacturers. There can be no assurance that these suppliers
will continue to be reliable suppliers to the Company.
The Company's success will depend heavily upon its ability to attract,
maintain, and motivate a large base of IAs who, in turn, sponsor other IAs
and sell the Company's products. The Company anticipates significant
turnover among IAs, which the Company believes is typical of direct
selling.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities in the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three
months or less to be cash equivalents.
COMMUNICATIONS RECEIVABLE
A summary of changes in the allowance for doubtful accounts for the years
ended June 30, 1998, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 0 $ 40,000 $ 113,000
Provisions 40,000 73,000 427,000
Recoveries 0 0 0
Write-offs 0 0 (540,000)
--------- --------- ---------
Balance, end of year $ 40,000 $ 113,000 $ 0
========= ========= =========
</TABLE>
F-9
<PAGE> 42
All communication receivables were written off during the year ended June
30, 2000.
ACCOUNTS RECEIVABLE
A summary of changes in the allowance for doubtful accounts for the years
ended June 30, 1998, 1999, and 2000 is as follows. There was no such
allowance or related provision for the year ended June 30, 1998:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Balance, beginning of year $ 0 $ 189,000
Provisions 189,000 927,000
Recoveries 0 0
Write-offs 0 (185,000)
---------- ----------
Balance, end of year $ 189,000 $ 931,000
========== ==========
</TABLE>
INVENTORIES
Inventories consist of the following as of June 30, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Prepaid phone cards $ 25,000 $ 133,000
Sales aids 160,000 310,000
Nutritional products 169,000 650,000
---------- ----------
$ 354,000 $1,093,000
========== ==========
</TABLE>
Inventories are valued at the lower of purchased cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of furniture and fixtures, office
equipment, computer equipment, and leasehold improvements, which are stated
at cost and are depreciated using the straight-line method over the
estimated useful lives of three to five years.
The Company continually evaluates the propriety of the carrying amounts of
long-lived assets as well as the depreciation periods to determine whether
current events and circumstances warrant adjustments to the carrying values
and/or revised estimates of useful lives (Note 3).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires that deferred income taxes be provided based on the
estimated future tax effects of differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes calculated based on provisions of enacted tax
laws (Note 5).
F-10
<PAGE> 43
(LOSS)/INCOME PER SHARE
The Company determines its Earning per Share in accordance with Statement
of Financial Accounting Standards 128, "Earnings Per Share", which requires
the computation of (loss)/income per share on both a basic and diluted
basis. Basic (loss)/income per share is determined using the weighted
average number of shares of outstanding common stock over the course of the
fiscal year. Diluted (loss)/income per share is computed using the
weighted average number of shares of common stock and share equivalents
outstanding considering the dilutive effects of outstanding stock options
and warrants as determined using the treasury stock method and convertible
equity securities using the "if converted" method. All outstanding options
and warrants issued by the company carry exercise prices which are equal to
the current market value of the Company's common stock; therefore, they
have no dilutive effect to (loss)/earnings per share for the years ended
June 30 1998, 1999, and 2000. The Series A Convertible Preferred Stock is
assumed converted at the later of the date the shares were issued or the
beginning of the period in the determination of diluted weighted average
shares.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Certain software development costs pertaining to a software application
which is used internally for processing applications and customer service
have been capitalized as incurred. Capitalization of software development
costs begins upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future revenues,
estimated economic life, and changes in software and hardware technologies.
Software development costs are amortized over an estimated useful life of
three years, and amortization expenses were $62,000, $136,000, and $185,000
for the years ended June 30, 1998, 1999, and 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, and debt. The carrying amounts of cash,
accounts receivable, and accounts payable approximate their fair values
because of the short-term maturity of such instruments. The carrying value
of the Company's debt approximates fair value because the interest rates
approximate current market rates.
F-11
<PAGE> 44
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1999 and
2000:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Computer equipment $ 301,000 $ 586,000
Capital leases 5,759,000 5,759,000
Furniture and fixtures 117,000 177,000
Leasehold improvements 59,000 98,000
Office equipment and other 16,000 58,000
Construction in progress 0 6,000
----------- -----------
6,252,000 6,684,000
Less accumulated depreciation (410,000) (1,684,000)
----------- -----------
Property and equipment, net $ 5,842,000 $ 5,000,000
=========== ===========
</TABLE>
Depreciation expense was $38,000, $365,000, and $1,276,000 for the years
ended June 30, 1998, 1999, and 2000.
4. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. Payments on the lease are due in monthly installments of
$118,000 and carry an imputed rate of interest of approximately 12%. These
leases expire within five years and contain purchase options which are
exercisable at the end of the original lease terms. The capital lease
obligation is secured by the intangible and tangible assets of the Company.
Assets financed under capital leases are included in property and
equipment.
Maturities of capital lease obligations for the years subsequent to June
30, 2000 are as follows:
<TABLE>
<S> <C>
2001 $ 1,416,000
2002 1,416,000
2003 1,416,000
2004 706,000
-----------
4,954,000
Less amounts representing interest (873,000)
-----------
4,081,000
Less current maturities (974,000)
-----------
Long-term capital lease obligations $ 3,107,000
===========
</TABLE>
5. INCOME TAXES
The Company's deferred tax assets and liabilities are as follows as of June
30, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Property and equipment $ (28,000) $ (146,000)
Organizational costs 15,000 7,000
Net operating losses 653,000 397,000
Valuation allowance (640,000) (258,000)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
</TABLE>
F-12
<PAGE> 45
Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance against the net
deferred tax assets of the Company. At June 30, 1999, the Company had net
operating loss carryforwards of approximately $1,719,000, of which $674,000
were utilized in 2000. The remaining $1,045,000 will begin expiring in the
year 2012 unless previously utilized.
A reconciliation of the benefit for income taxes at the statutory federal
income tax rate to the Company's tax benefit as reported in the
accompanying statements of operations is stated below:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Tax benefit computed at statutory rate $ (33,000) $ (522,000) $ 339,000
State income taxes (4,000) (61,000) 39,000
Nondeductible expenses 4,000 3,000 4,000
Change in valuation allowance 33,000 580,000 (382,000)
----------- ----------- -----------
Income tax benefit $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
6. LINE OF CREDIT
On November 22, 1998, the Company entered into a line of credit (the "Line
of Credit") with the Maxxis Millionaire Society, a Georgia partnership in
which certain members of the Company's management are partners. The Line of
Credit was amended on May 1, 1999. Pursuant to the Line of Credit, the
Company may borrow up to $2,000,000 at 10% annual interest. Advances or
interest thereon pursuant to the Line of Credit are payable on demand.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and office space under
operating leases. At June 30, 1998, 1999, and 2000, the Company's total
rental expenses were approximately $84,000, $168,000, and $210,000,
respectively.
Minimum lease payments under noncancelable leases for the years subsequent
to June 30, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 $202,000
2002 216,000
2003 185,000
--------
$603,000
========
</TABLE>
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
TELECOM SERVICE AGREEMENTS
The Company entered into agreements for telecommunications services with
two independent tariffed long-distance providers (collectively, the
"Suppliers" or individually, the "Supplier") in January 1999 (the "January
Agreement") and March 1999 (the "March Agreement"). Under the March
Agreement, the Company is obligated to purchase approximately $250,000 a
month in telecommunications services. This agreement expires in September
2000. The Company intends to extend the agreement upon expiration.
F-13
<PAGE> 46
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers (the "Employment Agreements"). Generally, the Employment
Agreements provide for a minimum weekly salary. In addition, the employee
may participate in a bonus program and shall be eligible to receive
quarterly or annual payments of a performance bonus based on the
achievement of targeted levels of performance and such other criteria as
the board of directors shall establish from time to time. The chief
executive officer's Employment Agreement provided for an additional bonus
payment on July 1, 1999 and 2000. All unpaid bonuses are included in
accrued compensation in the accompanying balance sheets.
Each of the Employment Agreements has a one year term, and renews daily
until either party fixes the remaining term at one year by giving written
notice. The Company can terminate each employee upon death or disability
(as defined in the Employee Agreements) or with or without cause upon
delivery of a notice of termination. If the employee is terminated because
of death or disability, the employee or his/her beneficiary is entitled to
receive any accrued compensation through the termination date along with
any accrued performance bonus. If the employee is terminated without cause,
the Company is required to pay the employee severance payments equal to
his/her minimum base salary for each week during the six-month period
following the termination date. If the employee is a director or officer of
the Company or any of its affiliates, the employee must tender his/her
resignation to such position effective as of the termination date.
Pursuant to the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following
termination or resignation for any reason, not to compete with or solicit
employees or customers of the Company or any of its affiliates within a
30-mile radius of the Company's corporate offices. The noncompete period is
reduced to six months if the employee is terminated without cause.
RELATIONSHIP WITH IAS
Because IAs are classified as independent contractors and not as employees
of the Company, the Company is unable to provide them with the same level
of direction and oversight as company employees. While the Company has
policies and rules in place governing the business conduct of IAs and
intends to review periodically the sales practices of its IAs, it may be
difficult to enforce such policies and rules. Violation of these policies
and rules might reflect negatively on the Company and may lead to
complaints to or by various federal and state regulatory authorities.
Violation of the Company's policies and rules could subject the Company and
its long-distance suppliers to complaints regarding the unauthorized
switching of subscribers' long-distance carriers (also known in the
industry as "slamming"). Such complaints could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
REGULATION OF NETWORK MARKETING AND EFFECT OF STATE LAWS
The Company's network marketing system is subject to or affected by
extensive government regulation, including, without limitation, federal and
state regulations governing the offer and sale of business franchises,
business opportunities, and securities. Various governmental agencies
monitor direct selling activities, and the Company could be required to
supply information regarding its marketing plan to such agencies. Although
the Company believes that its network marketing system is in material
compliance with the laws and regulations relating to direct selling
activities, there can be no assurance that legislation and regulations
adopted in particular jurisdictions in the future will not adversely affect
the Company's business, financial condition, and results of operations. The
Company could also be found to be in noncompliance with existing statutes
or regulations as a result of, among other things, misconduct by IAs, over
whom the Company has limited control; the ambiguous nature of certain of
the regulations; and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the
Company or the IAs are not in compliance with existing statutes or
regulations could have a material adverse effect on the Company's business,
financial condition, and results of operations. An adverse determination by
any one state on any regulatory matter could influence the decisions of
regulatory authorities in other jurisdictions.
F-14
<PAGE> 47
8. SHAREHOLDERS' EQUITY
The Company and certain of its shareholders have entered into a
shareholders' agreement whereby the shareholders agreed to certain
restrictions on the transfer or other disposition of the shares of common
stock held by each holder. In the event a shareholder intends to transfer
his/her common stock to a nonpermitted transferee, the Company and the
remaining shareholders have a right of first refusal to purchase the
transferring shareholder's common stock at fair market value. In addition,
if the Company terminates a shareholder's employment or engagement as a
sales representative or consultant for cause, the Company has the right to
repurchase, at fair market value, an amount of the shareholder's common
stock which starts at 100% and declines 20% per year for each completed
year of service with the Company. If the right of first refusal or the
Company's right to purchase is exercised, these provisions could have the
effect of further concentrating the stock ownership and voting power of the
Company.
In May 1997, the Company sold 72,727 shares of common stock to an executive
officer for $1.65 per share and accepted as payment a $120,000 note
receivable from an affiliate of that individual due on the earlier of (i)
May 1, 2002 or (ii) the closing of an underwritten initial public offering
with aggregate net proceeds of at least $5,000,000. The note is guaranteed
by the executive officer, bears interest at 8.75% per year, is compounded
annually, and is classified as a shareholder note receivable in the
shareholders' equity section of the balance sheets. During 2000, the shares
were returned to the Company and the related receivable was forgiven.
In August 1997, the Company completed a private placement of shares of
common stock at a price of $1.65 per share. Potential investors were
required to complete subscription agreements for the common stock and to
submit cash at the date of subscription. The Company reserved the right to
reject a subscription and to refund amounts to a subscriber at any time
prior to the acceptance of the subscription. At June 30, 1997, the Company
had received paid subscriptions for 218,181 shares of common stock.
However, since these subscriptions had not yet been accepted by the Company
and no shares had been issued as of June 30, 1997, amounts received from
subscribers are included in stock subscription deposits in the accompanying
balance sheet at June 30, 1997. Subsequent to June 30, 1997, the Company
accepted these subscriptions and additional subscriptions for 53,014 shares
of the common stock.
Effective February 17, 1998, the Company declared a 1-for-11 reverse stock
split for all classes of common stock. The Company also effected a plan of
reorganization pursuant to which each outstanding share of Class A common
stock and Class B common stock was converted into one share of common stock
("Common Stock"). All share, per share, and weighted average share
information in the financial statements has been restated for this stock
split and reorganization.
On November 26, 1997, the Company entered into a promissory note (the
"Note") agreement with various lenders for an aggregate principal amount up
to $200,000, which was secured primarily by the assets of the Company. The
Note accrued interest at 10%, payable monthly beginning on January 1, 1998,
and the principal was due on demand. On March 23, 1998, the Note was
exchanged for 36,359 shares of the Company's Series A nonvoting Convertible
Preferred Stock ("Series A Preferred Stock" or "Series A") and warrants
(the "Warrants") to purchase 36,359 shares of the Company's Common Stock.
The Warrants are exercisable 14 months after the issuance date and provide
the right to purchase Common Stock at $5.50 per share. The Warrants expire
seven years after the date of issuance.
Additionally, in February 1998, the Company amended and restated its
articles of incorporation such that the Company is authorized to issue
20,000,000 and 10,000,000 shares of no par value Common Stock and nonvoting
preferred stock (the "Preferred Stock"), respectively. One million shares
of the Company's Preferred Stock have been designated as Series A
Convertible Preferred Stock. The Series A Convertible Preferred Stock has a
liquidation preference of $5.50 per share (as adjusted for any
combinations, consolidations, stock distributions, or stock dividends with
respect to such shares) plus all declared or accumulated but unpaid
dividends. The Series A shareholders have the right to convert each share
into a share of Common Stock, pursuant to the articles of incorporation, at
any time beginning 14 months after the date of issuance. As of June 30,
2000, there were 992,814 shares of Series A Convertible Preferred Stock
outstanding.
F-15
<PAGE> 48
On September 16, 1998, the board of directors adopted the Maxxis Group,
Inc. 1998 Stock Option Plan which permits the Company to grant options to
purchase shares of Common Stock to company officers, directors, key
employees, advisors, and consultants. In December 1998, the board of
directors granted options to purchase 59,133 shares of Common Stock at an
exercise price of $5.50 per share, the estimated fair value at the date of
grant. The options vest based on time as defined in the option agreement.
As of June 30, 1999, 20,105 options were vested and exercisable.
In addition, in December 1998, the board of directors granted options to
purchase 6,819 shares of Common Stock at an exercise price of $0 per share.
The options vest based on time as defined in the option agreement. As of
June 30, 1999, 3,410 options were vested and exercisable. The Company
recorded $37,000 of compensation expense for these options for the year
ended June 30, 1999. During fiscal 2000, the options were cancelled upon
termination of the employee to whom the options were granted, resulting in
the reversal of previously recorded compensation expense.
In 1999, the Company adopted the disclosure provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with these
provisions of 123, the Company is required to calculate pro forma
compensation cost of all stock options granted using an option pricing
model. Accordingly, the fair value of the stock option grants the
Black-Scholes method using the following assumptions for 1999 and 2000,
respectively: a risk-free interest rate of approximately 4.65% and 6.43%,
dividend yield of 0%, volatility of 0% and 50%, and an expected life of
five years. Using these assumptions, the fair value of the stock options
issued at the dates of grant was $70,273 and $55,387 for 1999 and 2000,
respectively. Pro forma compensation expense for the years ended June 30,
1999 and 2000 would have been $24,000 and $71,926, respectively.
9. SALES REPRESENTATIVE AGREEMENTS
The Company has entered into sales representative agreements (collectively,
the "Sales Representative Agreements") with ten independent sales
representatives. The Sales Representative Agreements provide for a minimum
weekly salary, and quarterly payments of a bonus based on the achievement
of targeted levels of performance. Unpaid bonuses are included in accrued
compensation in the accompanying balance sheets. Each sales representative
is an independent contractor, and the Company does not exercise control
over the activities of the sales representatives other than as set forth in
the Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and the
term renews daily until either party fixes the remaining term at one year
by giving written notice. The Company can terminate each sales
representative upon death or disability (as defined in the Sales
Representative Agreements) or with or without cause upon delivery to the
sales representative of a notice of termination. If a sales representative
is terminated, the sales representative will receive any accrued fees
through the termination date and any accrued performance bonus, unless the
sales representative is terminated for cause. If the sales representative
is a director or officer of the Company or any of its affiliates, the sales
representative shall tender his resignation to such position effective as
of the termination date. Under the Sales Representative Agreements, each
sales representative agrees to maintain the confidentiality of the
Company's trade secrets and confidential business information.
10. SEGMENT REPORTING
The Company is a multilevel network marketing company with continuing
operations in three reportable segments: communications, nutritional
products, and marketing services.
The Company's communications services segment markets long-distance
services and value-added services, such as travel cards, prepaid phone
cards, 800 service, Internet access, Web-page development and hosting
services, and international telecommunications service.
F-16
<PAGE> 49
The Company's nutritional products segment distributes a line of private
label nutritional and health enhancement products.
The Company's marketing services segment markets sales aids, distributor
kits, marketing materials, and support and training services.
Included in corporate activities are general and administrative expenses
and certain long-term assets related to the corporate group:
<TABLE>
<CAPTION>
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Revenues $ 5,293,000 $ 526,000 $ 1,172,000 $ 0 $ 6,991,000
Gross profit 3,942,000 232,000 741,000 0 4,915,000
Depreciation and amortization 83,000 0 0 93,000 176,000
Operating income (loss) 7,000 22,000 484,000 (607,000) (94,000)
Segment assets 875,000 135,000 142,000 111,000 1,263,000
Capital expenditures 185,000 0 0 0 185,000
Year ended June 30, 1999:
Revenues 8,416,000 1,371,000 2,557,000 0 12,344,000
Gross profit 6,250,000 709,000 1,610,000 0 8,569,000
Depreciation and amortization 388,000 1,000 2,000 110,000 501,000
Operating income (loss) (328,000) 129,000 (344,000) (637,000) (1,180,00)
Segment assets 7,450,000 458,000 298,000 80,000 8,286,000
Capital expenditures 598,000 5,000 13,000 25,000 641,000
Year ended June 30, 2000:
Revenues 9,646,000 17,003,000 2,484,000 0 29,133,000
Gross profit 4,354,000 13,600,000 1,965,000 0 19,919,000
Depreciation and amortization 1,215,000 4,000 27,000 215,000 1,461,000
Operating income (loss) 532,000 12,591,000 (9,499,000) (1,980,000) 1,644,000
Segment assets 3,151,000 7,358,000 766,000 1,392,000 12,667,000
Capital expenditures 273,000 24,000 62,000 75,000 434,000
</TABLE>
F-17
