<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 000-24265
NETWORK HOLDINGS INTERNATIONAL, INC.
(Name of small business issuer specified in its charter)
Delaware 65-0794980
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2701 West Oakland Park Boulevard, Suite 305, Fort Lauderdale, Florida 33311
---------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
954-453-3400
------------------------------------------------
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
--------------------------------------------------
(Title of Class)
1
<PAGE>
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's Common Stock as of October 1,
1998 was 36,601,591 shares.
Transactional Small Business Disclosure Format (Check one): Yes No X
--- ---
THIS QUARTERLY REPORT ON FORM 10-QSB (THE "REPORT") MAY BE DEEMED TO
CONTAIN FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT
OR HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), REPORTS TO THE COMPANY'S
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE
COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH
COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING)
OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES
BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE
RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREIN, EACH OF WHICH
COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
2
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
9 MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
1998
-----------
(unaudited)
<S> <C>
CURRENT ASSETS
Cash $ 127,887
Other Receivables 125,273
Inventory (See attached schedule) 658,517
Prepaid Expenses 10,134
-----------
Total Current Assets 921,811
-----------
Property and Equipment, net of accumulated
depreciation and amortization 1,352,376
-----------
OTHER ASSETS
Restricted cash 70,127
Deposits 4,041
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Total Other Assets 74,168
-----------
TOTAL ASSETS $ 2,348,356
-----------
-----------
</TABLE>
F-1
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
9 MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
March 31,
1998
-----------
(unaudited)
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 1,769,725
Accrued expenses 5,153,499
Line of credit - Related Party 8,551,744
Current portion of note payable 552,500
-----------
Total Current Liabilities 16,027,468
NOTE PAYABLE, net of current portion 35,979
-----------
Total Liabilities 16,063,447
-----------
STOCKHOLDERS' DEFICIT
Common stock, $.001 par value,
70,000,000 Shares authorized,
10,649,127, and 36,562,325 (unaudited)
shares issued and outstanding 36,562
Treasury Stock, 6500 shares at cost (22,500)
Additional paid-in-capital 8,888,861
Accumulated Deficit (22,618,015)
-----------
Total Shareholders' Equity (13,715,092)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 2,348,355
-----------
-----------
</TABLE>
F-2
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) AND
NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
---------------------------------- ----------------------------------
March 31, March 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 414,766 $ 6,808,197 $ 1,280,344 $ 23,341,881
Cost of Sales 52,841 707,939 212,075 1,896,644
----------- ----------- ----------- ------------
Gross Profit 361,924 6,100,258 1,068,269 21,445,237
----------- ----------- ----------- ------------
Operating expenses
Selling expense 525,769 1,452,218 1,571,437 19,749,464
General & administrative expense 616,486 7,710,370 3,102,283 11,789,159
----------- ----------- ----------- ------------
Total operating expenses 1,142,255 9,162,588 4,673,720 31,538,623
----------- ----------- ----------- ------------
Loss from operations (780,330) (3,062,330) (3,605,451) (10,093,386)
----------- ----------- ----------- ------------
Other income (expense)
Interest income 4,109 (1,111) 5,261 3,407
Interest expense (379,240) 13,102 (651,963) 0
----------- ----------- ----------- ------------
Total other income (expense) (375,131) 11,991 (646,702) 3,407
----------- ----------- ----------- ------------
Loss before provision for income
taxes (1,155,461) (3,050,339) (4,252,153) (10,089,979)
----------- ----------- ----------- ------------
Provision for income taxes 0 0
----------- ----------- ----------- ------------
Net Loss $(1,155,461) $(3,050,339) $(4,252,153) $(10,089,979)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Loss per share
Basic $ (0.03) $ (0.29) $ (0.12) $ (0.95)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Diluted $ (0.03) $ (0.29) $ (0.12) $ (0.95)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted-average common shares
outstanding 36,549,587 10,609,875 34,534,860 9,521,394
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
F-3
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
9 Months Ended
-------------------------------------------
March 31,
-------------------------------------------
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Cash used in operating activities (6,225,921) (1,410,471)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (109,997) (1,375,020)
----------- -----------
Net cash used in investing activities (109,997) (1,375,020)
----------- -----------
Cash flows from financing activities
Proceeds from long-term debt and
line of credit 6,398,012
Issuance of common stock 2,030,325
Purchase of Treasury Stock 2,188
----------- -----------
Net cash provided by financing activities 6,400,200 2,030,325
----------- -----------
Net increase (decrease) in cash 64,282 (755,166)
Cash, beginning of period 63,605 783,877
----------- -----------
Cash, end of period $ 127,887 $ 28,711
</TABLE>
F-4
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT MARCH 31, 1998 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Network Holdings International, Inc. (the Company), a Delaware corporation,
(formerly TravelMax International, Inc., a Utah corporation; originally
incorporated in California on July 12, 1995) through its subsidiaries: (i)
develops, markets and distributes travel and leisure related products; (ii)
markets travel related services; and (iii) engages in certain charity oriented
business activities. The Company's products and services are marketed through a
national network marketing system in which Independent Representatives, who are
independent contractors, purchase the products for their own use, sale to other
Independent Representatives or sale to new customers.
Since April 1997, the Company's cash flow requirements have been met by the
line of credit extended by a related party. No assurance can be given that this
source of financing will continue to be available to the Company. The operations
of the Company are absolutely dependent on infusion of this debt capital. If the
Company is unable to generate profits and unable to continue to obtain financing
for its working capital needs, it may have to curtail its business sharply or
cease business altogether.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary after the elimination of intercompany accounts
and transactions.
INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC). Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principals have been omitted
pursuant to such rules and regulations.
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of their operations, and cash flows for the periods
presented. The results of operations for the nine months ended March 31, 1998
are not necessarily indicative of results for the entire year ended June 30,
1998.
F-5
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT MARCH 31, 1998 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
INVENTORIES
Inventories consist of product and merchandise held for resale and is
stated at the lower of cost (on the first-in, first out basis) or market.
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31,
1998
---------
<S> <C>
Products $ 407,520
Merchandise 11,941
Phone Cards 239,056
---------
Total $ 658,517
</TABLE>
LINE OF CREDIT AND NOTE PAYABLE
The Company entered into an agreement on April 21, 1997 with a non-bank
affiliate for an $11,500,000 as amended, revolving line of credit. The line
accrues interest at 10%, and is due April 21, 1999. Principal payments on this
line have been deferred by the affiliated entity. As of March 31, 1998, the
Company had drawn on the line for $8,551,744 (unaudited) with accrued interest
of $85,314 (unaudited).
Subsequent to December 31, 1997, the Company had drawn amounts in excess of
the limits of the line. The line has been amended to reflect the increased
borrowing level. The line is secured by substantially all of the assets of the
Company, and should this financing cease, it may curtail its business sharply or
cease business altogether.
On November 20, 1997, the Company entered into a loan agreement with a bank
in the amount of $765,000. The loan is a variable rate loan with an initial
interest rate of 9.5% and matures on May 1, 1999, requiring payments of
principal in the amount of $42,500, plus accrued interest. The purpose of the
loan is to provide funds to process credit card chargebacks. The first payment
was due on December 31, 1997 and paid in January 1998. The payment was made out
of funds from the related party line of credit which increased the amount owed
to the related party. The note requires principal payments of $297,500 during
fiscal year end June 30, 1998 and $467,500 in the following year. The company is
now current with this obligation.
F-6
<PAGE>
NETWORK HOLDINGS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AT MARCH 31, 1998 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
ACCRUED EXPENSES
As a result of the Company's lack of liquidity in April 1997, the Company became
delinquent in payment for product returned by Independent Representatives for
refund. As of March 31, 1998 (unaudited) and December 31, 1997 (unaudited), the
Company had recorded a reserve in the amount of $1,454,054 and $1,588,872,
respectively.
LITIGATION
The Company and its subsidiary are involved in legal proceedings, claims,
litigation, and governmental investigations arising in the ordinary course of
business and covering a wide range of matters. There exists a reasonable
possibility that the company will not prevail in an unknown number of these
cases and, as a result, the Company's consolidated operating results and cash
flows for the period in which such determination occurs could be materially
affected.
F-7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW OF PRESENTATION.
Network Holdings International, Inc., a Delaware corporation (the
"Company"), formerly known as Travel Max International, Inc. ("TMax Utah"), a
Utah corporation, together with its wholly-owned subsidiary, TravelMax
International, Inc., a California corporation ("TMax California"),
(collectively, the "Company"), is principally a provider of travel agent
services through its network of independent representatives ("IRs"), many of
whom are independent travel agents ("ITAs"). The Company's IRs, who are
independent contractors, earn commissions by selling travel services and travel
and leisure products to retail consumers or to other IRs. IRs may also develop
their own IR organizations (sometimes referred to as "downlines") by sponsoring
other IRs to sell travel services and products in any market where the Company
operates. In addition, the Company markets tutorials and promotional
merchandise designed to enable IRs to build their own referral travel agent
business.
The Company began operations in July, 1995 under its prior management. On
April 14, 1997, the Company ceased operations for 14 days as a result of a lack
of sufficient funds to continue operations at that time.
On April 24, 1997, the Company entered into the Management Agreement
whereby two of the former officers and directors resigned. As a part of this
agreement, Messrs. Douglas R. Baetz and Glenn M. Gallant (the "Principal
Shareholders") agreed to accept election to the Board of Directors and provide a
source of financing in order to mitigate the Company's working capital
deficiencies. In consideration for these acts and the aggregate sum of $10.00,
on July 22, 1997, the Company issued an aggregate of 25,863,354 shares of Common
Stock to the Principal Shareholders, equal to 70.8% of the total issued and
outstanding shares at that date.
Since the assumption of control of the Company by the Principal
Shareholders in April, 1997, the Company has continued to generate regular and
substantial losses, and revenues have substantially contracted. Further, the
Company has reduced its staffing level and, therefore, its payroll expense,
operating costs and overhead since the recommencement of operations in April,
1997. No assurance can be given when, or whether, the Company will begin to be
profitable. Since April, 1997, the Company's cash flow requirements have been
met by loans from affiliates of the Principal Shareholders through two (2)
credit lines (the "Credit Lines") from Century Financial Group, Inc.
("Century"), an affiliate of the Principal Shareholders. No assurance can be
given that this source of financing will continue. Management believes that, as
of March 31, 1998, and for the foreseeable future, the Company will be required
to finance costs of current levels of operations primarily through the Credit
Lines from Century. However, should the Credit Lines not be renewed, the
Company's ability to continue operations would be highly questionable. If the
Company is not able to generate profits and is unable to continue to obtain
financing of its working capital needs, it may have to curtail its operations
sharply or cease business altogether.
As a direct result of the cessation of operations in April, 1997, a
significant number of IRs have either become inactive or have terminated
their relationship with the Company. In 1998, two key IRs that had remained
active were retained by management to regenerate interest in the Company with
the Company's existing IRs and one IR became the Company's national director
of sales. Additionally, various marketing consultants have been retained to
attract new IRs. To date, such efforts have been met with marginal success.
Management continues to re-evaluate the corporate structure, commission
structure and operating expenses in an attempt to make the Company
profitable.
The Company's current business plan involves a strategy to expand its
activities as a provider of network marketing products and travel agent
services through the acquisition of additional operations and the marketing
of additional products related to the Company's business plan and the
attraction of additional IRs to market the Company's products and services.
The market for such acquisition prospects is highly competitive, and
management expects that other potential acquirers will have significantly
greater capital than the Company. The Company has suffered recurring losses
and had a working capital deficit of $15,105,657 at March 31, 1998. There can
be no assurances that the Company will be able to generate revenues
sufficient to develop sufficient positive cash flow or develop additional
sources of financing to continue the Company's business plan of growth and
expansion.
4
<PAGE>
One of the Credit Lines provides for a line of credit of up to $11,500,000
at a fixed interest rate of 10% PER ANNUM, with a maturity date of April 21,
1999. The amount advanced under this Credit Line totaled approximately
$10,470,000 in principal as of August 31, 1998. The other Credit Line provides
for a line of credit of up to $2,000,000 at a fixed interest rate of 10%
PER ANNUM, with a maturity date of December 10, 1998. The amount advanced under
this Credit Line was approximately $942,000 in principal, as of August 31, 1998.
Each of the Credit Lines is secured by substantially all the assets of the
Company.
During late fiscal 1996 and 1997, the Company experienced an
extraordinarily high level of returns of its product for refund. The Company's
lack of liquidity led to a backlog of requests for refunds of approximately
$4.7 million, and, in part, to the cessation of operations described above. As
a part of the refund process, certain individuals that had purchased their
product by credit card contacted the merchant bank processing the credit card
purchases to request credits, known as "charge-backs," to their accounts. The
volume of such charge-backs reached a level that required the merchant bank to
request the Company to reduce the level of the balance of charge backs that had
built up. On November 20, 1997, in order to comply with the merchant bank's
request, the Company arranged for a loan from BestBank in the amount of $765,000
at 1.0% over Wall Street prime rate with an initial base rate of 8.5% and a
maturity date of May 1, 1999, which loan has been guaranteed by the Principal
Shareholders. BestBank is an unaffiliated financial institution which engages
in numerous business activities with affiliates of the Company. On July 23,
1998, the operations of Best Bank were taken over by the Federal Deposit
Insurance Company. As of July 31, 1998, the Company owed approximately $418,000
to Best Bank.
In August, 1997, the Company filed suit alleging breach of fiduciary
duty and fraud against ten of the Company's former stockholders, directors
and officers and certain others in the Superior Court of Orange County,
California. The Company alleges that the defendants knowingly committed
fraud, breached their fiduciary duty, negligently performed their duties,
misappropriated funds and failed to repay obligations owing to the Company.
The Company is seeking actual damages in excess of $13 million, plus special
and punitive damages. One group of defendants has filed a cross-complaint
for express indemnity, comparative indemnity and declaratory relief. Another
group of defendants has filed a cross-complaint for breach of contract,
account stated and common counts for a sum alleged to be in excess of $75,000.
During the period from 1995 to April, 1997, the Company and TMax California
undertook a total of four private offerings of their securities. The Company
believes that, as a result of actions by former directors and officers, some of
the individuals that invested in these private offerings may have the right to
assert claims for rescission. The extent of rescission is unknown at this time.
However, it is estimated that such amount may be as much as $3.8 million.
During 1997, the Company established the TMax International Foundation (the
"TMax Foundation") with the intent of making contributions to the TMax
Foundation from the sale of products and merchandise by the Company. A judgment
by stipulation was entered against the Company on September 8, 1998 in the
amount of approximately $246,000 in connection with the operations of the TMax
Foundation. See "Legal Proceedings."
During the period from inception to December, 1997, the Company may have
been liable for the withholding and payment of state sales tax on sales of its
products. Although there is currently no claim by any state for past due sales
taxes, the Company has set up a reserve as of March 31, 1998, in the amount of
$2,300,000.
During the period from 1995 to April, 1997, the Company sold a total of
5,400 tutorials for the provision of charity consultant services, of which
nearly one quarter have been returned for refunds. The Company is developing a
much more comprehensive tutorial on this subject. The Company could be faced
with claims for refunds from most or all of the remaining 3,600 purchasers of
the old program, for a total potential liability of $1.7 million. During the
nine (9) months ended March 31, 1998, the Company has paid approximately
$180,000 in refunds. The Company has set up a reserve of approximately
$1,450,000 at March 31, 1998, for potential claims for refund with respect to
all Tutorial Products.
5
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND MARCH
31, 1997. Sales for the nine-month period ended March 31, 1998 decreased to
$1,280,344 from $23,341,881 for the nine-month period ended March 31, 1997.
This decrease in sales reflects of the slowdown in sales activity that
occurred as a result of the temporary closure of business in April, 1997 and
the subsequent contraction in the Company's business.
Similarly, travel service commission income generated through air, hotel,
cruise and tour bookings decreased 23% to $532,343 for the nine-month period
ended March 31, 1998 from $690,733 for the nine-month period ended March 31,
1997.
Gross profit as a percent of sales for the nine-month period ended
March 31, 1998 decreased to 83% from 92% for the nine-month period ended
March 31, 1997, due primarily to increased product costs.
Total operating expenses decreased to $4,673,720 for the nine-month
period ended March 31, 1998 from $31,538,623 for the nine-month period ended
March 31, 1997. The primary components of operating expenses are:
(i) commissions to IRs; (ii) salaries, wages and benefits to officers and
employees; (iii) meeting expenses and travel expenses; (iv) office rent and
rental of equipment and furniture; and (v) legal expenses.
Other income and expenses resulted in total other expenses of $646,702 for
the nine-month period ended March 31, 1998, as compared to other income of
$3,407 for the nine-month period ended March 31, 1997. This increase in
expenses was primarily the result of interest payments on the Credit Lines and a
note payable.
As a result of the foregoing, the Company experienced a net loss of
$4,252,153 for the nine-month period ended March 31, 1998, as compared to a net
loss of $10,089,979 for the nine-month period ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1998, the ratio of current
assets to current liabilities was 0.6 to 1 compared to 0.4 to 1 at March 31,
1997.
Prior to its cessation of operations in April, 1997, the Company had
historically financed its operations through the use of working capital. Upon
resumption of operations at the end of April, 1997, the Company has almost
exclusively relied upon the Credit Lines provided by Century to cover the costs
of current operations. At March 31, 1998, the majority of trade payables were
delinquent. Prepaid expenses and inventories were $668,651 and are anticipated
to be expensed as used in the future. Net property and equipment was $1,352,376
at March 31, 1998. Management believes that without the Credit Line, the
Company's ability to continue operations would be highly questionable.
On October 24, 1997, the Company entered into an agreement to purchase
Links Direct, Inc. ("Links Direct"), a company involved in the multilevel
marketing of golf related products and travel packages . The Company has not
closed the acquisition of Links Direct. However, since October, 1997, Century
has advanced loans to finance the current operations of Links Direct. The
principal stockholder of Links Direct has filed an action against the Company
relating to the Links Direct transaction. See "Legal Proceedings."
On January 16, 1998, the Company acquired the exclusive rights to the names
of the IRs of Jetaway Travel Corporation ("Jetaway"), a multilevel marketing
travel business. Consideration for the acquisition of Jetaway's assets
consisted of specified amounts of cash and Common Stock payable over an extended
period of time. Payment of the cash portion of the purchase price was
originally to have been in two installments of $100,000 and $50,000. The first
installment was paid at the closing of the transaction out of the Credit Lines.
On August 12, 1998, the Company issued 74,766 shares of Common Stock to the
former stockholder of Jetaway in place of the second cash installment, and in
fulfillment of an additional obligation to issue shares of Common Stock to the
seller. The Company issued an additional 49,844 shares of Common Stock pursuant
to an employment contract executed in connection with the Jetaway acquisition on
January 23, 1998.
6
<PAGE>
Cash and cash equivalents were $127,887 as of March 31, 1998, as compared
to $63,605 as of June 30, 1997.
As of March 31, 1998, the Company's only long-term borrowing consisted of a
loan from an unrelated financial institution in the amount of $35,979.
As of March 31, 1998, the Company had drawn down on the Credit Lines in the
aggregate amount of $8,551,744 as compared to $2,189,711 at June 30, 1997.
The Company continues to generate losses from operations and does not
anticipate achieving profitable operations in the foreseeable future. The
Company's current levels of IR compensation and expenses far exceeds current
levels of revenues. The Company is dependent on external sources of financing,
particularly loans from affiliates of the Principal Shareholders, to finance
current levels of operations.
As noted in the independent certified public accountant's opinion expressed
on the Company's financial statements and Note 2 to the audited financial
statements, as filed in the Company's Registration Statement on Form 10-SB, the
financial statements have been prepared under the assumption that the Company is
a going concern. This assumption is subject to numerous objectives that must be
achieved, including, but not limited to, the Company's generation of sufficient
cash flow to meet its obligations on a timely basis, retention of its current
financing, securing additional financing and, ultimately, the attainment of
profitability. However, there can be no assurances that the Company will
continue to receive financing from the Principal Shareholders or other sources
to support business operations or that the Company will ever achieve profitable
operations. To the extent that additional capital is raised through the sale of
additional securities of the Company, the issuance of such securities could
result in substantial dilution to the Company's stockholders. Moreover, the
Company's cash requirements may vary materially because of liabilities,
currently known or unknown, including certain liabilities to judgment creditors,
governmental agencies or refund claims arising from operations conducted by
prior management, as well as the level of working capital required to sustain
the Company's planned growth, litigation, operating results and other factors.
In the event that the Company experiences the need for additional capital, and
is not able to generate capital from external financing sources or from future
operations, management may be required to modify, suspend or discontinue the
business plan and operations of the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128 (SFAS NO. 128), "Earnings Per Share,"
which is effective for financial statements issued for periods ending after
December 31, 1997. SFAS No. 128 requires public companies to present specified
disclosure of basic earnings per share and, if applicable, diluted earnings per
share, instead of primary and fully diluted earnings per share based on the
dilutive impacts of outstanding stock options or other convertible securities.
There was no material difference between reported earnings per share and diluted
earnings per share for the periods presented in the Company's financial
statements.
FASB recently issued SFAS No. 130, "Reporting Comprehensive Income," which
is required to be adopted for financial statements issued for periods beginning
after December 15, 1997. This statement establishes standards for the reporting
and display of comprehensive income and its components. Comprehensive income is
defined as revenue, expenses, gains and losses that, under generally accepted
accounting principles, are included in comprehensive income, but excluded from
net income (such as extraordinary and non-recurring gains and losses). SFAS
No. 130 requires that items of comprehensive income be classified separately in
the financial statements. SFAS No. 130 also requires that the accumulated
balance of comprehensive income items be reported separately from retained
earnings and paid-in capital in the equity section of the balance sheet. SFAS
No. 130 is not anticipated to have a material effect on the Company's financial
position or results of operations.
7
<PAGE>
FASB recently issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is required to be adopted for
financial statements issued for periods beginning after December 15, 1997.
SFAS No. 131 is not required to be applied to interim financial statements in
the initial segments being reported. Generally, financial information will be
required to be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
SFAS No. 131 is not anticipated to have any effect on the Company's financial
position or results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
LINKS DIRECT. On August 13, 1998, Links Direct filed a complaint against
the Company in the Circuit Court for the Seventeenth Judicial Circuit in and for
Broward County, Florida (Case No. 98-013075-CA-25). The complaint is premised
upon an alleged breach by the Company of a Share Purchase Agreement entered into
between the Company and Links Direct in October, 1997. Pursuant to the Share
Purchase Agreement, the Company had agreed to purchase all the issued and
outstanding shares of capital stock of Links Direct, contingent upon the
satisfactory completion of a review and examination of the business and affairs
of Links Direct and to assume all liabilities and obligations of Links Direct.
Links Direct specifically warranted that it had auditable books and records.
The agreed upon purchase price was that number of shares of Common Stock, which,
at the time of closing would have a market value equal to the total investment
in Links Direct made by its principal.
Due diligence efforts have been ongoing and, to date, the transaction has
not closed. Links Direct has asserted three claims against the Company:
(1) breach of contract, (2) breach of covenant of good faith and fair dealing,
and (3) action for specific performance. Links Direct contends that, by failing
to close the transaction, the Company has breached the agreement and seeks an
order requiring specific performance of the agreement. The Company has answered
and asserted affirmative defenses and, in addition, has asserted a counterclaim
against Links Direct. The counterclaim includes claims for (1) fraud and
deceit, (2) breach of contract, (3) breach of duty of good faith and fair
dealing, and (4) rescission. The Company has taken the position that Links
Direct did not have auditable books and records, as represented, and that the
extent of Links Direct's liabilities was misrepresented in order to induce the
Company to enter into the agreement. The court has denied Links Direct's motion
to dismiss the counterclaim.
The discovery phase of the litigation has just commenced. The Company
intends to defend the action and to pursue the claims set forth in the
counterclaim vigorously. There can be no assurances as to the resolution of
this matter.
TMax FOUNDATION. On September 8, 1998, the Superior Court of the State
of California for the County of Los Angeles entered a judgment upon stipulation
against the Company, TMax California and the TMax Foundation (the "Foundation").
The judgment provides that the Company and TMax California shall pay to certain
tax-exempt charitable organizations the aggregate sum of $245,695.55, payable in
ten (10) monthly installments of $24,695.55 each, commencing on September 5,
1998, and, thereafter, on the fifth day of each of the succeeding nine (9)
months. The judgment also provides that the Foundation will wind up and
dissolve within 60 days form the date of entry of the judgment. The Company was
also permanently enjoined from offering goods and services for sale to the
public upon the representation that donations will be made from the proceeds of
such a sale to a charitable organization or charitable purpose, or from
acting in any respect as a commercial fund raiser for charitable purposes,
without complying with requirements of applicable law.
IKON OFFICE SOLUTIONS. On June 18, 1998, IKON Office Solutions ("IKON")
filed a verified complaint in the Superior Court of California for the County of
Orange (Case No. 795718) against the Company. The Complaint alleges a cause of
action for breach of contract with respect to a lease agreement for copier and
fax machines. The Complaint seeks damages of approximately $760,000. The
Complaint also alleges a cause of action related to the loss of other equipment
belonging to IKON while in the possession of the Company, and seeks damages of
approximately $4,200. The Company is defending this action and attempting to
negotiate a settlement of this action. There can be no assurances as to the
resolution of this matter.
8
<PAGE>
NOVUS SERVICES. On August 6, 1998, NOVUS Services ("NOVUS") filed a
complaint in the Superior Court of California for the County of Orange (Case
No. 797873) against the Company. The Complaint alleges a cause of action for
breach of contract for failure to reimburse NOVUS for certain goods, services
and merchandise with respect to the Company's account with NOVUS. The Complaint
seeks damages in the amount of approximately $107,000. The Company is defending
this action. There can be no assurances as to the resolution of this matter.
ITEM 2. CHANGES IN SECURITIES.
On January 23, 1998, the Company issued 49,844 shares of Common Stock
pursuant to exemption from registration under Section 4(2) of the Securities Act
in connection with an employment agreement entered into with respect to the
closing of the acquisition of Jetaway.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's stockholders did not adopt any resolutions at a meeting or by
written consent during the quarter ended March 31, 1998.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter ended
March 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The Company is currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York, 10048;
and at its Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of such materials can be obtained from the
Public Reference Section of the Commission at its principal office in
Washington, D.C., at prescribed rates. In addition, such materials may be
accessed electronically at the Commission's site on the World Wide Web, located
at http://www.sec.gov.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NETWORK HOLDINGS INTERNATIONAL, INC.
Dated: October 8, 1998 By: /s/ James C. Healy
-----------------------
James C. Healy
Executive Vice President
10
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