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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[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
(no fee required)
For the transition period _______to _______
Commission File No. 0-24273
MAX INTERNET COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 75-2715335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8115 PRESTON ROAD, EIGHTH FLOOR EAST, DALLAS, TEXAS 75225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 691-0055
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.0001
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The registrant's revenues for its most recent fiscal year were: $548,033.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of August 31,
2000 was $48,129,000.
At June 30, 2000, the registrant had outstanding 17,734,242 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (except Item 13) will be contained in Registrant's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in November 2000.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business...................................................................3
Item 2. Description of Property...................................................................6
Item 3. Legal Proceeding..........................................................................7
Item 4. Submission of Matters to a Vote of Security Holders.......................................7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..................................8
Item 6. Management's Discussion and Analysis or Plan of Operations................................8
Item 7. Financial Statements.....................................................................13
Item 8. Changes in Disagreements with Accountants on Accounting and Financial Disclosure.........14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act...................................................14
Item 10. Executive Compensation...................................................................14
Item 11. Security Ownership of Certain Beneficial Owners and Management...........................14
Item 12. Certain Relationships and Related Transactions...........................................14
Item 13. Exhibits and Reports on Form 8K..........................................................14
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We were organized under the laws of the State of Nevada in September 1996.
We have engaged in a number of previous businesses, all of which have been sold
or closed in order to concentrate our resources on the development and sales of
our technology and products.
TECHNOLOGY
In April 1998, we acquired all of the common stock of MAXpc Technologies,
Inc., which has the exclusive right to manufacture and market a high
performance, multi-media add-in card providing both hardware and software for
personal computers. (MAXpc Technologies, Inc. was merged into the company in
March 2000). Our card enhances the performance of computers, either as an add-in
at time of manufacture or installed into existing units. The card, with its own
inbuilt processor, has the ability to perform multi-media software functions,
simultaneously if need be, without detracting from the central processor of the
computer. Additional software can be added to the card as developed.
We are marketing the card, as well as other products utilizing the same
technology, under the trade name MAX i.c. Live.
The i.c.Live Technology is a combination of hardware and software
designed to accelerate video & audio processing. At the core of the hardware is
the i.c.Live Internet Media Processor . More than just a DSP or RISC chip, the
Internet Media Processor is a 72-bit parallel processor with multiple execution
units and an internal 792-bit bus. It is able to execute billions of operations
per second to provide the maximum video and audio quality possible.
The software is implemented in layers to allow full utilization of the
i.c.Live processor in standard-hardware systems and existing operating systems.
It consists of i.c.Live's own real-time micro-kernel operating system, resource
manager modules, software mediaware modules (that emulate the functionality
normally provided by separate fixed function chips) and interface layer modules
that conform to traditional device driver models. This approach provides the
performance of silicon implementation with the flexibility of software
updateability. Since functionality is provided by software, systems can be
real-time field upgraded to provide new features and functions, substantially
increasing the lifetime of products built incorporating i.c.Live Technology.
This architecture allows the i.c.Live Technology to: (1) overcome
bottlenecks and limitations normally associated with traditional fixed function
chips and their drivers, (2) offload media processing and real-time-critical
processes from the host processor, allowing utilization of lower cost processors
for highest performance systems and appliances, (3) outperform 32-bit and
yet-to-be released 64-bit processors in existing and new systems, and (4)
deliver the highest quality Internet Video and Audio at a low cost.
INTELLECTUAL PROPERTY
Chromatic Research of Sunnyvale, California developed the original
MPACT technology, which we have acquired and which has evolved into our i.c.Live
technology and products. In April 1998 we purchased the exclusive rights to any
new MPACT 1 MAX board designs, as well as Chromatic's inventory of partially
completed units and components.
In March 1999, we licensed the source code (human readable) and object
code (machine readable) of the MPACT technology and thereby acquired the rights
to use and modify them, with all derivative works becoming our exclusive
property free of any further royalties.
In September 1999, we began production of the MAX3600R card, which is a
new design owned exclusively by us, complete with i.c.Live Mediaware (object
code) drivers.
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In February 2000 we purchased the MPACT hardware technology assets,
including the chip designs and development databases, and all of the product
designs and development databases.
In May 2000, we began production of the i.c.Live video communication
station (VCS), which contains additional exclusive designs and software owned by
us. We will pursue copyright and patent protection for IP assets we currently
possess and develop, and we will continue research and development on new
products.
We rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights in products and services. These
include confidentiality and nondisclosure agreements with our employees,
contractors, suppliers and strategic partners. Despite these precautions, it may
be possible for a third party to copy or otherwise obtain and use our
intellectual property without our authorization. In addition, we pursue the
registration of our trademarks and service marks in the U.S. and
internationally. However, effective intellectual property protection may not be
available in every country in which our products are made available.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable terms
in the future. As a result, we may be required to obtain substitute technology
of lower quality or at greater cost, which could adversely affect our business,
results of operations and financial condition.
We expect that participants in our markets will be increasingly subject
to infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, with or without merit, could be time-consuming,
result in costly litigation, cause service upgrade delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to us or at all. As a result, any such
claim of infringement against us could have an adverse effect upon our business,
results of operations and financial condition.
EXISTING PRODUCTS
Currently, we offer three basic products incorporating the i.c.Live
technology, each intended for a specific target market segment.
The MAX3600R is targeted for personal computer and information
appliance manufacturers, integrators and value added resellers (VAR). The
MAX3600R is a PCI plug-in card that is compatible with a Pentium-class (166mhz
or faster) host system running a Windows(R) operating system. The MAX3600R card
provides the following features: SVGA Graphics Controller; MPEG-1&2 Decoder with
full DVD support; MPEG-1 encoder; Full Motion Video Capture; H.261/263 video
codec and H.711/723 audio codec; AC97 audio Codec (8 simultaneous play and
record channels), hardware wavetable, digital (AC3) audio; MIDI and telephony
codec (full-duplex Speakerphone with Voice Mail, Caller ID and Distinctive
Ring).
The MAX3600R is in production and available for sale.
The MAX i.c.Live VIDEO COMMUNICATION STATION (VCS) is targeted to
resellers, VARs and large end users, and serves as a reference design for
original equipment manufacturer (OEM) relationships. The VCS is an easy-to-use
Internet communications appliance, about the size of a DVD player. The MAX
i.c.Live VCS(TM) allows users to videoconference, send and receive video e-mail,
broadcast live Internet video, surf Internet video and web-sites, and even view
DVD movies. It's on-screen menu and remote control make it easy to use. It's
ability to display output to a television, video projector, or computer monitor
makes it perfect for home or office use.
The first production run of VCS units is in process, and deliveries are
under way.
The MAX i.c. Live CHIPKIT is targeted to major OEMs. The ChipKit is a
minimal set of proprietary components necessary to build an i.c.Live technology
based product. It consists of an i.c.Live Internet Media Processor, proprietary
support chips, and one software set license. These are available only to
customers who license an i.c.Live product reference design and commit to a
minimum purchase quantity.
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RESEARCH AND DEVELOPMENT
We have invested, and intend to continue to invest, significant
resources in product and technology development. We focus and modify our product
development efforts based on the needs of users and changes in the marketplace.
We are currently focusing our development efforts on improving the hardware and
software offered, including the MAX OS kernel, as well as commercializing our
innovations into new products and product enhancements that are easier to use,
easy to upgrade, and provide greater functionality.
Our development engineers perform extensive testing of our hardware and
software to ensure it is properly assembled and works as a coherent whole from
the user's perspective. We use industry standard methods of quality assurance
testing to ensure our products are solidly engineered and ready for use by our
customers when shipped.
We have begun development of a Phase II and Phase III VCS, each of
which should reduce production cost, yet maintain the look, function, and
performance of previous phases. Development includes further hardware and
software integration which could be characterized as 'engineering' as opposed to
'inventing', and could be accelerated by strategic partners. Ultimately, we plan
to develop a Phase IV unit, with the help of a development partner, that will
allow maximum cost reduction. These cost reductions are possible because of the
i.c.Live core technology, which when fully utilized, will need only the most
minimal of support hardware and operating systems.
We spent approximately $666,000 in the year ended June 30, 2000 for
research and development. Projects included hardware designs of MAX3600R card
and the i.c.Live VCS; updated software drivers for the MAX3600R card; adding
Windows NT support; application and driver software for the VCS; additional
hardware peripherals for the MAX3600R (which plug into the MAX3600R's "VersaBus"
connector), including an analog TV tuner module and a six-camera input module
(these features will be a software and/or module upgrade for the existing
MAX3600R card).
Projects for the year ending June 2001 are anticipated to include joint
development of the "NetForAll Plus TV" interactive television set-top device, of
which $2,000,000 will be funded by NetForAll, Inc.; cost reduction and
integration for the VCS; a personal computer (PC) motherboard with integrated
i.c.Live technology; HDTV / DVB tuner module; continued software development for
additional video and audio processing functionalities and support for Windows NT
and Windows 2000; plus support for alternative and embedded operating systems
for PC's and internet appliances.
STRATEGIC ALLIANCES
In August 2000, NetForAll, Inc. signed a three year joint development
with us to create a consumer Interactive Television device which will offer
Video On Demand (VOD), DVD movies, eCommerce, Internet browsing with video
streaming, and advanced features like Video Phone and Video E-mail.
The interactive television set-top device, NetForAll Plus, will employ
the MAX i.c.Live licensed technology on an integrated motherboard along with
additional licensed software. Upon completion of the development, NetForAll,
Inc. irrevocably commits to purchase a minimum of 100,000 units during the first
12 months. Also, NetForAll, Inc. agrees to purchase an additional 400,000 units
during the same 12-month period, and each contract year thereafter, to maintain
exclusivity on the South American Continent, Central America, Mexico, and the
Caribbean. The first $2,000,000 of development costs will be funded by
NetForAll, Inc. in the form of purchases of our common stock. Thereafter, we and
NetForAll, Inc. will devote resources and personnel to further developing the
NetForAll Plus product.
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COMPETITION
Competition in the industry is extremely high, and new developments and
products are offered regularly. Many of our competitors have greater experience
in the industry and more financial resources available to them. Competition in
multi-media products comes from companies such as ATI Technologies, Inc.,
Creative Technology, Ltd. and Sigma Designs, Inc. While these competitors
obviously have more financial strength, we believe we can successfully compete
because our board fulfills functions that no other single board can achieve.
GROWTH STRATEGY
We are a technology company with limited marketing funds, but we
have the most cost effective technology for processing two way full motion video
communications over the Internet. Our immediate focus for growth is on creating
strategic alliances with those companies associated with broadband deployment,
which is expected to be explosive in the short term future. Creating marketing
partnerships with these PC and Internet appliance manufacturers and Telcos will
place us in the middle of large scale broadband deployment. We also focus our
sales and marketing efforts toward direct sales to these groups, plus other
large end users.
ENVIRONMENTAL IMPACT
None of the company's activities utilize any hazardous materials or results
in any discharge of pollutants into the environment. The company believes it
complies fully with all environmental laws and regulations.
EMPLOYEES
We employ a total of 56 full-time persons in our company and its
subsidiaries. None of such persons is represented by a union, and the company
believes its relations with its employees is very good.
REGULATION
There are no regulatory issues affecting the company not common to all
businesses.
ITEM 2. DESCRIPTION OF PROPERTY
OFFICES AND WAREHOUSE FACILITY
Our principal executive offices are located at 8115 Preston Road, Suite
800, Dallas, Texas 75225. The premises, which are leased from an unaffiliated
party, consist of 11,010 square feet. The executive office facility contains
management offices, work stations, computer equipment, and related software.
Monthly rent is $22,020 through the remainder of a sixty-four month Lease Term,
which expires on May 31, 2003. We have a renewal option to extend the Lease Term
for one additional period of five years, at a rental rate equal to the
prevailing market for such premises at that time.
Our warehouse facility is located at 12917 Valley Branch Lane, Farmers
Branch, Texas. The premises, which are leased from an unaffiliated party,
consist of approximately 4,500 square feet. Monthly base rent is $2,625 through
July 2001 and $2,812 through July 2002, the end of the lease term.
We also lease space for sales offices in Frankfurt, Germany and Rio de
Janeiro, Brazil, as well as warehouse space in Rio. Each of these leases is
short-term in nature.
All of our properties are covered by property and casualty insurance
which we believe to be adequate.
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ITEM 3. LEGAL PROCEEDINGS
On various dates between August 1, 2000 and September 14, 2000, the
Company, and certain of its officers and directors, were named as defendants in
the following lawsuits which were filed in the U. S. District Court for the
Northern District of Texas, Dallas Division: Douglas Haack, et al. v. Max
Internet Communications, Inc., Lawrence R. Biggs, Jr., Donald G. McLellan and
Leslie D. Crone; CA# 3-00CV-1662; Leonard J. Bartello, et al. v. Max Internet
Communications, Inc., Harold L. Clark, Lawrence R. Biggs, Jr. and Leslie D.
Crone; CA# 3-00CV-1719-L; Gunter Huls, et al. v. Max Internet Communications,
Inc., Lawrence R. Biggs, Jr., Donald G. McLellan and Leslie D. Crone; CA#
3-00CV-1724-R; Congregation Mitzva Meals, Inc., et al. v. Max Internet
Communications, Inc., Lawrence R. Biggs, Jr., Donald G. McLellan and Leslie D.
Crone; CA# 3-00CV-1741-L; Jay Patel, et al. v. Max Internet Communications,
Inc., Lawrence R. Biggs, Jr., Donald G. McLellan and Leslie D. Crone; CA#
3-00CV1747-H; Carolyn Dennis, et al. v. Max Internet Communications, Inc.,
Harold L. Clark; Lawrence R. Biggs, Jr. and Leslie D. Crone; CA# 3-00CV1785-H;
Robert Van Dyke, et al. v. Max Internet Communications, Inc., Harold L. Clark;
Lawrence R. Biggs, Jr. and Leslie D. Crone; CA# 3-00CV1814-M; Glen Strathearn,
et al. v. Max Internet Communications, Inc., Harold L. Clark; Lawrence R. Biggs,
Jr. and Leslie D. Crone; CA# 3-00CV1853-R; and Marian Dunn, et al. V. Max
Internet Communications, Inc., Harold L. Clark; Lawrence R. Biggs, Jr. and
Leslie D. Crone; CA# 3-00CV2016-D.
In these purported class action lawsuits, plaintiffs allege that they
and other similarly situated investors purchased common stock of the Company at
artificially inflated prices due to false and misleading disclosures by the
Company concerning its sales revenue for the quarterly financial reporting
periods ending September 30, 1999 and December 31, 1999. Plaintiffs allege that
the Company's false and misleading disclosures violated Sections 10(b) of 20(a)
of the Securities Exchange Act of 1934.
The plaintiffs seek to represent persons or entities who purchased the
Company's common stock between November 15, 1999 and May 12, 2000. On the latter
date, the Company announced that it was restating earnings for the two prior
quarters due principally to the booking of sales in reliance upon documentation
that was later found to be falsified. Plaintiffs seek an unspecified amount of
damages, together with prejudgment interest, attorneys fees and other costs of
suit.
These lawsuits are expected to be consolidated, and that after
selection of plaintiff representatives and appointment of counsel to represent
the purported class, a consolidated amended complaint will be filed. The Company
intends to vigorously defend itself against these allegations.
We have been notified by the staff of the Nasdaq Listing Qualifications
Department that our securities have been subject to Nasdaq delisting procedures.
Pursuant to Nasdaq procedure, we will appeal the staff's decision and have
requested a hearing before the Nasdaq Listing Qualifications Panel. A hearing is
scheduled for October 19, 2000 as to the company's appeal.
We are engaged from time to time in routine legal proceedings, none of
which was material to our operations on the date hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The company's common stock is traded on the Nasdaq Small Cap Market under
the symbol MXIP. The following table shows the price range of the company's
common stock from July 1, 1998 through September 30, 2000.
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BID ASK
QUARTER ENDED HIGH LOW HIGH LOW
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9-30-98 2-13/16 7/8 3 1
12-31-98 1-3/4 9/16 1-7/8 19/32
3-31-99 5-19/32 5/8 5-3/4 25/32
6-30-99 6-9/16 2-7/16 6-1/2 2-5/8
9-30-99 5-1/4 3-3/8 5-5/16 3-9/16
12-31-99 8-1/2 3-5/16 9 3-1/2
3-31-00 28 6-9/16 28-1/8 6-11/16
6-30-00 10-5/8 1-7/8 12 2-5/8
9-30-00 5-5/32 5/8 8-1/8 7/8
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HOLDERS
As of June 30, 2000, there were 197 record holders of the
company's common stock and three (3) holders of the company's Series A
Preferred Stock and four (4) holders of the company's Series C Preferred
Stock.
DIVIDENDS
The company does not anticipate any stock or cash dividends on its
common stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
We assemble, through contractors, and market a PC Internet Media
Processor Card, the MAX i.c. Live 3600, an information appliance, the MAX
i.c. Live Video Communication Station and the related ChipKit. The core
technology of both products, the MAX i.c. Live Internet Media Processor,
delivers the power to conduct true-motion, synchronized video and audio
communications and high-quality video and audio streaming and browsing over
a broadband Internet connection. The MAX i.c. Live Internet Media Processor
also integrates full DVD and Dolby AC-3 surround sound for a complete video
communication and entertainment solution.
The MAX i.c. Live card enhances the performance of personal
computers, either as an add-in at time of manufacture or installed into
existing units. The card, with its own inbuilt processor, has the ability
to perform multi-media software functions, simultaneously if need be,
without detracting from the central processor of the computer. Additional
software can be added to the card as developed.
We continue to look for additional software applications which may
be integrated into the card, and believe some of these will give rise to
the availability of patent protection. We will continue research and
development in this regard.
During the year ended June 30, 2000, we formed two new
subsidiaries, both of which are 100% owned. MAX Internet Communications
Deutschland GmbH was incorporated in Frankfurt, Germany on August 4, 1999,
and MAX Internet Communications do Brasil Ltda was formed in Rio de
Janeiro, Brazil on September 14, 1999. Both of these companies sell and
service the MAX i.c. Live products in their respective regions, as well as
other products we may develop.
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We previously operated businesses which sold and distributed
merchant credit card authorization and payment systems; marketed home-based
businesses through seminars; and produced customized printing for
distribution by home-based businesses. Each of these businesses was sold in
the year ended June 30, 1999, to allow us to concentrate our resources on
selling and further developing the MAX i.c. Live line of products.
SELECTED FINANCIAL INFORMATION
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YEAR ENDED JUNE 30,
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2000 1999
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STATEMENT OF OPERATIONS DATA:
Net Sales $ 548,033 $ 397,989
Gross Profit (loss) $ (5,731,400) $ 212,754
Operating Loss $(18,450,546) $(3,865,170)
Loss from continuing operations $(18,346,699) $(3,865,677)
Net loss $(18,346,699) $(5,360,655)
Loss per share from
Continuing operations $ (1.12) $ (.44)
Net loss per share $ (1.12) $ (.60)
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JUNE 30, 2000 JUNE 30, 1999
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BALANCE SHEET DATA:
Total assets $11,121,962 $10,665,647
Working capital $ 5,156,785 $ 8,734,663
Total liabilities $ 4,214,776 $ 902,153
Stockholders' equity $ 4,470,090 $ 9,763,494
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999
Net Sales
Net sales from continuing operations were $548,033 for the year ended
June 30, 2000, an increase of $150,044 over the $397,989 for the year ended
June 30, 1999. During most of the year ended June 30, 2000 our marketing
focus was on selling through the distribution channels to value added
resellers and original equipment manufacturers. It became apparent that the
market for our products was not yet established enough to sell in this way,
as the MAX i.c. Live 3600 and our information appliance, the MAX i.c. Live
Video Communication Station (VCS) are both revolutionary new products. In
addition, they require broadband internet access to achieve the highest
quality video, which often means a third party broadband provider must be
brought into the sale negotiations in order to be successful. Due to the
relative lack of sales, we have adjusted our sales and marketing focus
directly to internet
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appliance manufacturers, telephone companies, broadband providers, original
equipment manufacturers and significant end users, and away from the
distribution channels.
We continue to be optimistic regarding the prospects of future sales.
To date we have negotiated a development and sales contract with a customer
under which they will provide development funds through the purchase of our
common stock. At the end of the development period, they have irrevocably
committed to purchase 100,000 units of the developed product during the
first 12 months, and have agreed to purchase an additional 400,000 units in
order to maintain exclusivity in a defined territory. Other sales
negotiations are in process, and we are optimistic that some of these will
come to fruition and generate net sales in the future.
Cost of Sales
Cost of sales were $438,253 for the year ended June 30, 2000, an
increase of $253,018 over the $185,235 for the year ended June 30, 1999.
Cost of sales consists primarily of the cost of the MAX i.c. Live cards and
cameras, plus the cost of royalties relating to third party software
included in our products, media, manuals, and shipping. Cost of sales as a
percentage of sales increased to 80% for the year ended June 30, 2000 from
47% for the year ended June 30, 1999. This was primarily due to promotional
pricing given to certain customers during the year ended June 30, 2000 in
an effort to increase sales.
Write-Off of Inventory
We have written our inventory down. See "-- Liquidity."
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 176% to
$10,798,896 for the year ended June 30, 2000 from $3,909,174 for the year
ended June 30, 1999. This increase in costs is a result of a number of
factors, including:
- The hiring of a significant number of sales and development personnel
during the year ended June 30, 2000;
- The opening and maintaining of subsidiary offices in Germany and
Brazil during the current year;
- Research and development spending which amounted to approximately
$666,000 in the year ended June 30, 2000, an increase of $662,000 as
compared to the approximately $4,000 incurred in the year ended June
30, 1999.
- Advertising and marketing expenses in the approximate amount of
$2,206,000 in the year ended June 30, 2000, an increase of $1,451,000
as compared to the approximately $755,000 in the year ended June 30,
1999. The increases in these expenses were in the areas of public
relations and advertising company fees, print ads, brochures and trade
shows.
Interest Income and Expense
The interest income of $117,574 and $76,464 for the years ended June
30, 2000 and 1999, respectively, was earned on the available cash balances
we have invested in money market funds.
The interest expense of $76,971 for the year ended June 30, 1999 was
incurred primarily on convertible debentures. This debt has been fully
converted to common stock as of November 1998, and no further interest is
payable. The interest expense for the year ended June 30, 2000 was not
significant.
Income Taxes
No income taxes have been accrued due to operating losses of the
company.
Discontinued Operations
On September 30, 1998, we sold the stock of Home Business Group Inc.
(HBG) to it's management in exchange for the redemption of 200,000 shares
of the company's common stock previously owned by such management.
Effective January 15, 1999, we closed AmeraPress, Inc., as it had been
unable to generate sufficient business activity to justify its ongoing
overhead following the sale of HBG described above. AmeraPress was sold on
June 30, 1999.
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Effective February 19, 1999, we closed Voxcom Systems, Inc., as it had
been unable to generate sufficient business activity to justify its ongoing
overhead following the sale of HBG and the closure of AmeraPress described
above. Voxcom Systems, Inc. was sold on June 30, 1999.
The accompanying financial statements reflect the results of
operations and net liabilities of Systems, AmeraPress and HBG as
discontinued operations.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Net Sales
Net sales increased to $397,989 for the year ended June 30, 1999 from
$7,736 for the year ended June 30, 1998. MAXpc was acquired in April 1998,
and for the period from the date of acquisition to June 30, 1998, MAXpc had
no significant sales as it was in the early stages of designing its sales
and marketing plan. During the year ended June 30, 1999, the company was
still in the early stages of marketing its new product, which included
sending the MAX i.c. Live card to potential customers on an evaluation
basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 190% to
$4,077,924 for the year ended June 30, 1999 from $1,407,654 for the year
ended June 30, 1998. This increase was due to advertising, marketing and
selling expenses related to the MAXpc product, amortization of payments
made for noncompetition agreements, purchased technology and consulting
agreements, and increased overhead expenses which have been incurred.
Interest Expense
Interest expense of $76,971 for the year ended June 30, 1999 was
incurred primarily on the convertible debentures. This debt has been
converted to common stock, and no further interest is payable. The interest
expense of $139,702 for the year ended June 30, 1998 was incurred on debt
to the company's shareholders that sold AmeraPress to the company. This
debt was converted to Series A Preferred Stock, and no further interest is
payable.
Income Taxes
No income taxes have been accrued due to operating losses of the
company.
LIQUIDITY
At June 30, 2000, we had approximately $12,000,000 in inventory,
at cost, consisting primarily of finished goods.
The majority of this inventory was purchased in response to
expected sales in South America in the second and third quarters of the
year. These sales have not been consummated. As a result, we have a large
proportion of our working capital resources invested in inventories,
especially when viewed in relation to the level of sales which have been
realized to date.
We have closely reviewed the valuation of the inventories at June 30,
2000 and have determined that a writedown of the inventory should be taken
at this date. Substantive discussions are currently underway with a variety
of customers, and we are confident that sales will be consummated with one
or more of these customers for cards at sales prices which will be in
excess of our cost. However, while we are confident sales will occur, there
can be no assurance that this will be the case.
Therefore, we have written the inventory down to $6,481,555, which is
an amount we determined based on our current assessment of market
conditions, current sales prospects in negotiation, and contracts we have
in place.
11
<PAGE> 12
Cash and cash equivalents decreased $6,020,553 in the year ended
June 30, 2000. Net cash used in operating activities for the period was
$18,597,822. This cash used in operating activities primarily consisted of
increases in inventories of $11,003,168 and prepaid expenses of $690,840;
offset by an increase in accounts payable and accrued expenses of
$3,162,618. We have increased inventories in part because of the need to
purchase certain components well in advance of the scheduled production
date, due to competition for these parts. In addition, we purchase a
portion of our inventory based on a production schedule in order to
maintain our production capacity with the manufacturer. Most of this
purchasing is done in response to expected sales in South America as
detailed above. Because of these purchases of inventories, without
corresponding increases in sales, we have raised additional equity
financing in the form of sales of common and preferred stock. Cash used in
investing activities consisted of $412,975 in purchases of property and
equipment, $500,000 in purchases of technology and $198,865 in software
development costs incurred. Financing activities generated $13,689,534,
consisting primarily of sales of common and preferred stock.
Working capital at June 30, 2000 decreased by 41% to $5,156,785
from $8,734,663 at June 30, 1999. This was due primarily to the cash
received from the sales of common and preferred stock, offset by the losses
of the company during that period.
Due to net operating losses, the purchase of inventories, the
selling of product on terms to customers, and the lack of significant sales
to date, we may need additional financing in the future. There is no
assurance we will be successful in future fundraising efforts.
Delisting of the Company's common stock could result in the
Series C preferred stock and an adjustable stock warrant becoming due and
payable pursuant to redemption rights and put rights. If the rights were
exercised by the holders, the Company would be required to pay
approximately $6,000,000 for the Series C preferred stock and approximately
$3,400,000 for the adjustable stock warrant.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements and
information relating to the company that are based on the beliefs of the
company's management as well as assumptions made by and information
currently available to the company's management. When used in this report,
words such as "anticipate," "believe," "estimate," "expect," "intend,"
"should," and similar expressions, as they relate to the company or its
management, identify forward-looking statements. Such statements reflect
the current views of the company with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to the
operations, results of operations, liquidity and growth strategy of the
company, including competitive factors and pricing pressures, changes in
legal and regulatory requirements, interest rate fluctuations, and general
economic conditions, as well as other factors described in this report.
Should one or more of the risks materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially
from those described herein as anticipated, believed, estimated, expected
or intended.
12
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of June 30, 1999 and 2000 F-2
Consolidated Statements of Operations for the years ended June 30, 1999 and 2000 F-3
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
June 30, 1999 and 2000 F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1999 and 2000 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Max Internet Communications, Inc.
We have audited the accompanying consolidated balance sheets of Max Internet
Communications, Inc. as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. 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 of America. 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 consolidated financial position of Max Internet
Communications, Inc. as of June 30, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has experienced continuing operating losses
and negative cash flows. Its continued existence is dependent upon the
successful acceptance and sale of its products or obtaining additional capital,
neither of which is assured. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
GRANT THORNTON LLP
Dallas, Texas
August 18, 2000 (except for the first
paragraph of Note L,
as to which the date is
September 25, 2000)
F-1
<PAGE> 15
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,116,032 $ 8,136,585
Accounts receivable - trade, net of allowance for doubtful
accounts of $136,123 and $30,000 at June 30, 2000
and 1999, respectively 48,820 169,217
Inventories 6,481,555 1,286,539
Prepaid expenses 725,154 44,475
------------ ------------
TOTAL CURRENT ASSETS 9,371,561 9,636,816
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 489,808 87,830
Furnishings 76,631 67,634
------------ ------------
566,439 155,464
Less accumulated depreciation (135,960) (27,969)
------------ ------------
430,479 127,495
OTHER ASSETS 1,319,922 901,336
------------ ------------
$ 11,121,962 $ 10,665,647
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 3,506,544 $ 113,356
Accrued expenses 558,232 788,797
Advance from director 150,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 4,214,776 902,153
REDEEMABLE PREFERRED STOCK, NET OF UNAMORTIZED
DISCOUNT OF $2,062,904 2,437,096 --
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; Series A, authorized, 100,000
shares; issued and outstanding, 80,000 shares 8,000,000 8,000,000
Common stock, $.0001 par value; authorized, 50,000,000 shares;
issued, 17,734,242 and 15,772,823 at June 30, 2000 and 1999,
respectively 1,773 1,577
Additional paid-in capital 30,912,603 17,693,743
Accumulated deficit (34,262,393) (15,719,326)
Accumulated other comprehensive income 30,607 --
------------ ------------
4,682,590 9,975,994
Less 200,000 shares of common stock in treasury - at cost (212,500) (212,500)
------------ ------------
4,470,090 9,763,494
------------ ------------
$ 11,121,962 $ 10,665,647
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 16
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 548,033 $ 397,989
Cost of sales (438,253) (185,235)
Write-off of inventory (5,841,180) --
------------ ------------
Gross profit (loss) (5,731,400) 212,754
Selling, general and administrative expenses 10,798,896 3,909,174
Stock-based compensation and other stock-based expenses 1,920,250 168,750
------------ ------------
12,719,146 4,077,924
------------ ------------
Operating loss (18,450,546) (3,865,170)
Interest income (117,574) (76,464)
Interest expense 13,727 76,971
------------ ------------
Loss from continuing operations (18,346,699) (3,865,677)
Discontinued operations
Loss from operations -- (2,475,217)
Gain on disposal -- 980,239
------------ ------------
-- (1,494,978)
------------ ------------
Net loss (18,346,699) (5,360,655)
Dividends on preferred stock (196,368) (133,660)
------------ ------------
Net loss allocable to common stockholders $(18,543,067) $ (5,494,315)
============ ============
Loss per share - basic and diluted
Continuing operations $ (1.12) $ (.44)
Discontinued operations -- (.16)
------------ ------------
Net loss $ (1.12) $ (.60)
============ ============
Weighted average shares outstanding 16,608,496 9,099,295
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 17
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Series A Series B
Common stock Preferred stock Preferred stock Additional
--------------------- --------------------- ------------------------ paid-in
Shares Amount Shares Amount Shares Amount capital
-------- ------ ------ ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1998 6,085,772 $ 609 80,000 $8,000,000 350,000 $ 3,500,000 $ 1,479,691
Net loss for the year -- -- -- -- -- -- --
Sales of common stock 7,644,000 764 -- -- -- -- 12,800,936
Conversion of debentures,
including interest 364,427 37 -- -- -- -- 403,095
Dividends on Series B preferred
stock
Paid in common stock 113,697 11 -- -- -- -- 91,695
Paid in cash -- -- -- -- -- -- --
Conversion of preferred stock 547,201 55 -- -- (34,000) (340,000) 339,945
Redemption of preferred stock -- -- -- -- (316,000) (3,160,000) (632,000)
Acquisition of 200,000 shares
of common stock for the
treasury -- -- -- -- -- -- --
Exercise of Class A Warrants 412,226 41 -- -- -- -- 1,648,863
Redemption of Class B Warrants -- -- -- -- -- -- (1,608)
Exercise of stock options 455,500 45 -- -- -- -- 1,154,391
Shares and stock options issued
in exchange for services 150,000 15 -- -- -- -- 168,735
Stock options issued in
connection with sale
of subsidiary -- -- -- -- -- -- 240,000
---------- ----- ------ --------- --------- ------------ ----------
Balances at June 30, 1999 15,772,823 1,577 80,000 8,000,000 -- -- 17,693,743
<CAPTION>
Accumulated
other
Accumulated comprehensive Treasury
deficit income stock Total
------------ -------------- --------- -----------
<S> <C> <C> <C> <C>
Balances at July 1, 1998 $(10,225,011) $ -- $ -- $ 2,755,289
Net loss for the year (5,360,655) -- -- (5,360,655)
Sales of common stock -- -- -- 12,801,700
Conversion of debentures,
including interest -- -- -- 403,132
Dividends on Series B preferred
stock
Paid in common stock (91,706) -- -- --
Paid in cash (41,954) -- -- (41,954)
Conversion of preferred stock -- -- -- --
Redemption of preferred stock -- -- -- (3,792,000)
Acquisition of 200,000 shares
of common stock for the
treasury -- -- (212,500) (212,500)
Exercise of Class A Warrants -- -- -- 1,648,904
Redemption of Class B Warrants -- -- -- (1,608)
Exercise of stock options -- -- -- 1,154,436
Shares and stock options issued
in exchange for services -- -- -- 168,750
Stock options issued in
connection with sale
of subsidiary -- -- -- 240,000
------------ ---------- --------- ----------
Balances at June 30, 1999 (15,719,326) -- (212,500) 9,763,494
</TABLE>
F-4
<PAGE> 18
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Series A Series B
Common stock Preferred stock Preferred stock Additional
--------------------- --------------------- ---------------- paid-in
Shares Amount Shares Amount Shares Amount capital
---------- ------ ------ ---------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive loss
Net loss for the year -- $ -- -- $ -- -- $ -- $ --
Other comprehensive income
Foreign currency
translation adjustment -- -- -- -- -- -- --
Total
Discount on sale of redeemable
preferred stock -- -- -- -- -- 1,792,410
Beneficial conversion feature on
Series C preferred stock -- -- -- -- -- -- 171,862
Amortization of discount on Series
C Preferred Stock -- -- -- -- -- -- --
Exercise of Class A Warrants 729,146 73 -- -- -- -- 2,916,511
Sales of common stock 1,112,273 111 -- -- -- -- 6,376,589
Exercise of stock options 55,000 5 -- -- -- -- 41,245
Stock-based compensation
and other stock-based
expenses 65,000 7 -- -- -- -- 1,920,243
---------- ------ ------ ---------- ------ ------ -----------
Balances at June 30, 2000 17,734,242 $1,773 80,000 $8,000,000 -- $ -- $30,912,603
========== ====== ====== ========== ====== ====== ===========
<CAPTION>
Accumulated
other
Accumulated comprehensive Treasury
deficit income stock Total
------------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Comprehensive loss
Net loss for the year $(18,346,699) $ -- $ -- $(18,346,699)
Other comprehensive income
Foreign currency
translation adjustment -- 30,607 -- 30,607
------------
Total (18,316,092)
Discount on sale of redeemable
preferred stock -- -- -- 1,792,410
Beneficial conversion feature on
Series C preferred stock (171,862) -- -- --
Amortization of discount on Series
C Preferred Stock (24,506) -- -- (24,506)
Exercise of Class A Warrants -- -- -- 2,916,584
Sales of common stock -- -- -- 6,376,700
Exercise of stock options -- -- -- 41,250
Stock-based compensation
and other stock-based
expenses -- -- -- 1,920,250
------------ ------- --------- ------------
Balances at June 30, 2000 $(34,262,393) $30,607 $(212,500) $ 4,470,090
============ ======= ========= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 19
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(18,346,699) $ (5,360,655)
Loss from discontinued operations -- 1,494,978
Adjustments to reconcile net loss to net cash
used by continuing operations
Depreciation and amortization 396,081 613,156
Stock-based compensation and other stock-based expenses 1,920,250 168,750
Write-off of inventory 5,841,180 --
Change in operating assets and liabilities
Prepaid expenses (690,840) (41,350)
Accounts receivable 120,397 (166,151)
Inventories (11,003,168) (863,289)
Other assets 2,359 (126,000)
Accounts payable and accrued expenses 3,162,618 252,263
------------ ------------
Net cash used in continuing operations (18,597,822) (4,028,298)
Net cash used by discontinued operations -- (1,058,739)
------------ ------------
Net cash used in operating activities (18,597,822) (5,087,037)
Cash flows from investing activities
Purchase of property and equipment (412,975) (119,947)
Purchase of technology (500,000) (200,000)
Software development costs (198,865) --
------------ ------------
Net cash used by investing activities (1,111,840) (319,947)
Cash flows from financing activities
Advance from director 150,000 --
Sales of common stock 9,334,534 15,605,040
Redemption of preferred stock -- (3,792,000)
Sale of preferred stock 4,205,000 --
Redemption of class B warrants -- (1,608)
Dividends paid - preferred stock -- (41,954)
------------ ------------
Net cash provided by financing activities 13,689,534 11,769,478
------------ ------------
Net increase in cash and cash equivalents (6,020,128) 6,362,494
Effect of exchange rate changes on cash (425) --
Cash and cash equivalents at beginning of year 8,136,585 1,774,091
------------ ------------
Cash and cash equivalents at end of year $ 2,116,032 $ 8,136,585
============ ============
</TABLE>
F-6
<PAGE> 20
\
MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Noncash financing and investing activities:
Issuance of common stock for dividends $ -- $ 91,706
Conversion of debentures and accrued interest
into common stock -- 403,132
Conversion of Series B preferred stock into
common stock -- 340,000
Cash payments for:
Interest 13,727 506
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 21
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Max Internet
Communications, Inc. and its subsidiaries, Max Internet Communications do
Brasil Ltda. and Max Internet Communications Deutschland GMBH collectively,
the "Company." Voxcom Systems, Inc., AmeraPress, Inc., and Home Business
Group, Inc., former subsidiaries, were sold during fiscal 1999. See Note D.
NOTE B - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
The Company assembles, through contractors, and markets a PC Internet Media
Processor Card, the MAX i.c. Live 3600, an information appliance, the MAX
i.c. Live Video Communication Station and the related Chip Kit.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Advertising Costs
The Company charges advertising costs to expense when incurred. Advertising
costs for the years ended June 30, 2000 and 1999 were approximately
$2,206,000 and $365,000, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and all highly liquid
investments with maturities of three months or less when purchased.
Inventories
Inventories consist principally of finished goods and are stated at the
lower of cost or market; cost is determined using the first-in, first-out
method. During the year ended June 30, 2000, the Company wrote inventories
down by approximately $5,800,000 due to quantities in excess of current
anticipated demand.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated lives of the individual assets,
ranging from three to five years.
Intangible Assets
Purchased technology and licenses are being amortized over five to seven
years.
F-8
<PAGE> 22
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE B - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Revenue Recognition
Sales are recorded when products are shipped.
Loss Per Share
The Company computes basic earnings or loss per share based on net earnings
or loss, adjusted for preferred stock dividends, divided by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed based on the weighted average number of common shares outstanding
plus the number of additional common shares that would have been
outstanding if dilutive potential common shares, consisting of stock
options, stock purchase warrants, and preferred stock, had been issued or
converted. For all periods presented, there was no dilutive effect from
these securities.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents
for which the fair value approximates the carrying value.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees using the
intrinsic value method. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Software Development Costs
The Company capitalizes software development costs incurred from the time
technological feasibility of the software is established until the software
is ready for use in its products. Research and development costs related to
software development are expensed as incurred. The capitalized costs relate
to software which will become an integral part of the Company's revenue
producing products and are amortized in relation to expected revenues from
the product or a maximum of five years, whichever is greater. The carrying
value of software development costs is regularly reviewed by the Company,
and a loss is recognized when the net realizable value by product falls
below the unamortized cost.
Currency Translation
Translation adjustments to the financial statements of foreign subsidiaries
are reflected in the consolidated financial statements as a component of
other comprehensive loss.
F-9
<PAGE> 23
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE B - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to prior years financial
statements to conform with the 2000 presentation.
NOTE C - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company has sustained significant operating losses and negative cash
flows from operations in 2000 and 1999. Achievement of operating income or
positive cash flow from operations is uncertain. Additionally, the Company
has been notified that NASDAQ has begun delisting procedures of the
Company's common stock. Although the Company is appealing the decision,
delisting of the Company's common stock could result in the Series C
preferred stock and an adjustable stock warrant becoming due and payable
pursuant to redemption rights and put rights (see Notes H and M). If the
rights were exercised by the holders, the Company would be required to pay
approximately $6,000,000 for the Series C preferred stock and approximately
$3,400,000 for the adjustable stock warrant.
Recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent on continued operations. The
Company believes that it has or can obtain the financial resources
sufficient to meet its needs for working capital through at least fiscal
2001 based upon (1) current business prospects, (2) actions to control
spending, (3) the ability to establish license and development agreements,
and (4) raising additional funds through public or private equity
financings.
There can be no assurance, however, that the underlying assumptions and
projections will be realized and that the Company will be successful in its
operations. The financial statements do not include any adjustments that
might result from the unfavorable outcome of this uncertainty.
NOTE D - ACQUISITION, DISPOSITION AND DISCONTINUANCE OF BUSINESSES
Effective October 1, 1997, the Company formed Home Business Group, Inc.
(HBG), to acquire certain assets and assume the liabilities of a company
engaged in the business of home-based business seminars for no
consideration. A major stockholder and officer of the acquired business is
a stockholder and officer of the Company. The acquisition was accounted for
as a purchase. In September 1998, the Company sold the common stock of HBG
to HBG's management in exchange for the redemption of 200,000 shares of the
Company's common stock previously owned by such management.
Effective January 15, 1999, the Company closed AmeraPress, Inc.
(AmeraPress), as it had been unable to generate sufficient business
activity to justify its ongoing overhead following the sale of HBG
described above. AmeraPress was sold on June 30, 1999.
Effective February 19, 1999, the Company closed Voxcom Systems, Inc.
(Systems), as it had been unable to generate sufficient business activity
to justify its ongoing overhead following the sale of HBG and the closure
of AmeraPress described above. Systems was sold on June 30, 1999.
The accompanying financial statements have been reclassified to present the
results of operations of HBG, AmeraPress and Systems as discontinued
operations.
Summary operating data of discontinued operations for the year ended June
30, 1999 is presented below.
<TABLE>
<S> <C>
Revenues $ 4,456,000
Cost and expenses (6,931,217)
-----------
Net loss $(2,475,217)
===========
</TABLE>
F-10
<PAGE> 24
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE E - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Deposits $ 25,494 $ 37,341
Purchased technology, net of accumulated amortization
of $249,260 and $95,759 at June 30, 2000 and 1999,
respectively 1,059,313 695,241
Software development costs 198,865 --
Consulting agreement -- 114,587
Licenses, net of accumulated amortization
of $8,750 and $1,250 at June 30, 2000 and 1999,
respectively 36,250 43,750
Other -- 10,417
---------- ----------
$1,319,922 $ 901,336
========== ==========
</TABLE>
NOTE F - LEASE COMMITMENTS
The Company leases office and warehouse space and equipment under various
noncancellable lease agreements. Total rent expense was approximately
$352,000 and $304,000 for the years ended June 30, 2000 and 1999,
respectively. As of June 30, 2000, the future minimum rental payments are
as follows:
<TABLE>
<CAPTION>
Year ending
June 30,
-----------
<S> <C>
2001 $ 367,285
2002 333,134
2003 272,521
2004 28,845
----------
$1,001,785
==========
</TABLE>
F-11
<PAGE> 25
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE G - INCOME TAXES
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities)
Inventories $ 2,096,856 $ --
Accounts receivable 54,980 --
Accrued expenses 82,861 244,614
Property and equipment (16,845) (17,760)
Net operating loss carryforward 10,447,320 5,613,821
------------ ------------
12,665,172 5,840,675
Valuation allowance (12,665,172) (5,840,675)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
The Company has provided a valuation allowance against deferred tax assets
because their recovery is uncertain. The net operating loss carryforward
and valuation allowance as of June 30, 1999 have been increased by
approximately $3,260,000 from that previously reported, based on a
re-determination of amounts deductible for tax purposes. Following is a
reconciliation of income taxes at the federal statutory rate to income tax
expense:
<TABLE>
<CAPTION>
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate - continuing operations $ 6,237,878 $ 1,314,330
Losses for which a benefit was not recorded (6,237,878) (1,314,330)
----------- -----------
Income tax benefit - continuing operations $ -- $ --
=========== ===========
</TABLE>
At June 30, 2000, the Company had Federal and foreign net operating loss
carryforwards of approximately $25,900,000 and $1,600,000, respectively.
The Federal net operating loss carryforwards expire from 2013 through 2020.
The foreign net operating loss carryforwards do not expire.
F-12
<PAGE> 26
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE H - REDEEMABLE PREFERRED STOCK
In June 2000, the Company issued 45,000 shares of Series C preferred stock
(Series C) and stock purchase warrants for $4.5 million. An additional
15,000 shares of Series C and stock purchase warrants were issued for $1.5
million in July 2000. The Series C has a par value of $.0001 per share, no
voting rights, and a liquidation value of $100 per share. The Series C is
convertible into common stock at the lesser of $3.3171875 per share or 85%
of the ten lowest closing bid prices during the twenty-two trading days
preceding conversion. If certain conditions are met, the Company may redeem
the Series C for 120% of the stated value of $100 per share plus any
amounts of dividends accrued or in arrears. Dividends are 6% cumulative and
are payable quarterly in cash or stock purchase warrants at the option of
the Company. All shares of Series C not previously converted or redeemed
will automatically be converted into common stock, at the fifth anniversary
from date of issue.
The Series C is subject to mandatory redemption based on the occurrence of
certain triggering events, which include, among others, delisting of the
Company's common stock from a national stock market.
In connection with the issuance of the aforementioned Series C, the Company
issued stock purchase warrants, exercisable at date of issue, as follows:
(1) Warrants covering 441,326 shares of common stock, at exercise prices
ranging from $3.68 to $4.29 per share and expiring May 31, 2005 and
June 15, 2005.
(2) An adjustable warrant as to which the number of shares of common stock
obtainable varies with fluctuations in the market price of the
Company's common stock at an exercise price of $.001 per share and
expiring May 31, 2002. This warrant contains a mandatory redemption
feature based on the occurrence of certain triggering events, which
include, among others, delisting of the Company's common stock from a
national stock market. Upon the occurrence of a triggering event, the
Company is required to repurchase the warrant for an amount equal to
the market value of the shares obtainable. At June 30, 2000,
approximately 858,000 shares were obtainable. As of September 25,
2000, approximately 3,800,000 shares were obtainable and their market
value approximated $3,400,000. See Note M.
(3) Warrants issued to the placement agent covering 115,438 shares of
common stock, at an exercise price of $3.77 per share and expiring
June 15, 2005.
The aforementioned stock purchase warrants have been valued at $1,792,000
using the Black-Scholes option pricing model, and reflected as a discount
on the Series C. Additionally, $295,000 of cash financing costs have been
reflected as a discount on the Series C. The discount is being amortized
over five years by the straight-line method and the amortization is treated
as a dividend on preferred stock in the financial statements.
One of the sales of the Series C had an imbedded beneficial conversion
feature valued at approximately $172,000 which has been reflected as a
preferred stock dividend in the financial statements.
F-13
<PAGE> 27
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE H - REDEEMABLE PREFERRED STOCK - CONTINUED
Also in connection with the sale of the Series C, the Company entered into
an agreement with certain Series C stockholders. The agreement contains an
option for the Company to require these certain Series C stockholders to
purchase up to $4 million of a Series D preferred stock and stock purchase
warrants. The agreement is subject to being voided upon the occurrence of
certain events, which include, among others, actual or threatened delisting
from NASDAQ.
See Note M regarding potential NASDAQ delisting.
NOTE I - OTHER PREFERRED STOCK
The Series A preferred stock, which is held by officers of the Company,
does not pay dividends.
On March 31, 1999, the Company acquired for $3,792,000, 3,000,000 shares of
its common stock which had been issued upon conversion of 316,000 shares of
Series B preferred stock. The 3,000,000 shares, along with 4,000,000
newly-issued common shares were sold on March 31, 1999, for $12,660,000
less placement costs of $663,300. At June 30, 1999, all Series B preferred
shares had been converted.
NOTE J - STOCK PURCHASE WARRANTS
Upon formation of the Company in June 1997, all stockholders were given one
Class A warrant for each common share acquired by them. Each warrant
entitles the holder to purchase one share of common stock for $4.00. If not
exercised, warrants expire in June 2001. If exercised, the holder will
receive one Class B warrant for each Class A warrant. Each Class B warrant
entitles the holder to purchase one share of common stock for $20.00.
The class B warrants were redeemed in May 1999 for $1,608. At June 30,
2000, 3,697,441 Class A warrants remained outstanding.
In connection with the sale of common stock in January 2000, the Company
issued 812,728 stock purchase warrants to the investors and the placement
agent at exercise prices ranging from $3.75 to $10.00, which expire five
years from date of issuance.
See Note H regarding stock purchase warrants issued in connection with the
sale of Series C preferred stock.
F-14
<PAGE> 28
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE K - STOCK OPTIONS
The Company's 1999 Stock Option Plan provides for the granting of options to
purchase shares of the Company's common stock to employees, consultants and
directors. The plan includes non-qualified and incentive stock options. The
plan authorizes grants of options for up to 2,600,000 shares. Options that
terminate or expire prior to exercise are available for future rewards under
the Plan.
The Company has issued 2,558,500 stock options to employees and directors,
pursuant to the 1999 Stock Option Plan. At June 30, 2000, 292,500 shares
were available for grant under the plan. Prior to adoption of the Plan,
1,050,000 stock options were issued to employees. Options are granted at no
less than fair value at date of grant. Of the options granted, approximately
1,872,000 vested immediately and approximately 668,000 vest over one to four
years. The options expire from three to ten years. Following is a summary of
employee option transactions for fiscal 1999 and 2000:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
---------- --------------
<S> <C> <C>
Outstanding at July 1, 1998 -- $ --
Granted 2,557,500 4.20
---------- -----
Outstanding at June 30, 1999 2,557,500 4.20
Granted 1,351,000 4.41
Exercised (55,000) 0.75
Expired or cancelled (196,000) 5.33
---------- -----
Outstanding at June 30, 2000 3,657,500 $4.27
========== =====
Exercisable at June 30, 1999 2,557,500 $4.20
========== =====
Exercisable at June 30, 2000 2,967,500 $4.08
========== =====
</TABLE>
Weighted-average fair value of options granted during the year ended June
30, 2000 and 1999 was $4.19 and $2.95 per share, respectively.
F-15
<PAGE> 29
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE K - STOCK OPTIONS - CONTINUED
The following table summarizes information about stock options at June 30,
2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
average
remaining Weighted Weighted
contractual average average
Range of life exercise Number exercise
exercise prices Shares (in years) price exercisable price
---------------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.80 to $1.25 157,500 3.24 $0.94 157,500 $0.94
$3.00 300,000 5.00 3.00 300,000 3.00
$4.00 to $4.44 1,650,000 4.47 4.01 1,510,000 4.00
$5.00 to $5.33 1,550,000 3.86 5.12 1,000,000 5.00
--------- ---- --------- ----
3,657,500 $4.27 2,967,500 $4.08
========= ==== ========= ====
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", (SFAS No. 123) and continues to apply the intrinsic value
for stock options granted to employees. If the Company had recognized
compensation expense based upon the fair value at the grant date for
options granted to employees, pursuant to SFAS No. 123, the effect on net
loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
Net loss
As reported $(18,346,699) $ (5,360,655)
Pro forma (20,312,000) (12,907,000)
Loss per common share
As reported $ (1.12) $ (.60)
Pro forma (1.22) (1.43)
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Weighted average expected life (years) 5.1 5.0
Expected stock price volatility 150% 180%
Risk-free interest rate (percent) 6.30% 6.21%
</TABLE>
F-16
<PAGE> 30
MAX INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000 and 1999
NOTE K - STOCK OPTIONS - CONTINUED
During the years ended June 30, 1999 and 2000, the Company also granted
stock options to nonemployees, principally for fees in connection with the
sale of common and preferred stock. These grants totaled 1,088,461 shares
at prices ranging from $0.10 to $7.50 per share. These options expire in
three to five years and are generally exercisable at date of grant. During
the year ended June 30, 2000, the Company granted options covering 188,461
shares at prices ranging from $4.00 to $5.00 per share as payment for
services. These options vested immediately and expire five years from date
of issue. These grants resulted in a charge to expense of approximately
$1,250,000. At June 30, 2000, options covering 1,088,461 shares remained
outstanding.
NOTE L - CONTINGENCIES
On various dates between August 1, 2000 and September 14, 2000, the
Company, and certain of its officers and directors, were named as
defendants in a number of lawsuits which were filed in the U. S. District
Court for the Northern District of Texas, Dallas Division.
In these purported class action lawsuits, plaintiffs allege that they and
other similarly situated investors purchased common stock of the Company at
artificially inflated prices due to false and misleading disclosures by the
Company concerning its sales revenue for the quarterly financial reporting
periods ending September 30, 1999 and December 31, 1999. Plaintiffs allege
that the Company's false and misleading disclosures violated Sections 10(b)
of 20(a) of the Securities Exchange Act of 1934.
The plaintiffs seek to represent persons or entities who purchased the
Company's common stock between November 15, 1999 and May 12, 2000. On the
latter date, the Company announced that it was restating earnings for the
two prior quarters due principally to the booking of sales in reliance upon
documentation that was later found to be falsified. Plaintiffs seek an
unspecified amount of damages, together with prejudgment interest,
attorneys fees and other costs of suit.
These lawsuits are expected to be consolidated, and that after selection of
plaintiff representatives and appointment of counsel to represent the
purported class, a consolidated amended complaint will be filed. The
Company intends to vigorously defend itself against these allegations.
At June 30, 2000, the Company was involved in other litigation arising in
the normal course of business. Management believes that the ultimate
resolution will not have a material effect on financial position, results
of operations or cash flows.
NOTE M - SUBSEQUENT EVENTS
In September 2000, the Company was notified that the Company's common stock
is subject to NASDAQ delisting procedures. The Company is appealing
NASDAQ's decision.
In August 2000, the Company granted a vendor a security interest in
inventory with a carrying value of approximately $2 million.
F-17
<PAGE> 31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT
The sections entitled "Directors, Director Nominees and Executive
Officers' appearing in the Registrant's Definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on or about November 29,
2000, sets forth certain information with respect to the directors and
executive officers of the company.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the
Registrant's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on or about November 29, 2000, sets forth
certain information with respect to the compensation of management of
the Registrant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Principal Shareholders and Security Ownership of
Management" appearing in the Registrant's Definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on or about November
29, 2000, sets forth certain information with respect to the ownership
of the Registrant's Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the
Registrant's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on or about November 29, 2000, sets forth
certain information with respect to these matters.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated June 9, 1997, among
Newcorp One, Inc. and the shareholders of Voxcom Systems, Inc.
(filed as Exhibit 2.01 to the company's Form 10-SB filed with the
Securities and Exchange Commission on May 15, 1998 (the "Form
10-SB"), and incorporated herein by reference).
2.3.2 Employment Agreement with Gary Raabe (filed as Exhibit 2.03.2 to
the company's Form 10-SB, and incorporated herein by reference).
</TABLE>
14
<PAGE> 32
<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation of Newcorp One, Inc., dated June
12, 1997 (filed as Exhibit 3.01 to the company's Form 10-SB, and
incorporated herein by reference).
3.2 By-laws of Voxcom Holdings, Inc. (filed as Exhibit 3.02 to the
company's Form 10-SB, and incorporated herein by reference).
3.3 Certificate of Decrease in Authorized and Issued Shares (filed as
Exhibit 3.03 to the company's Form 10-SB, and incorporated herein
by reference).
3.4 Certificate of Designation regarding Series A Preferred Stock
(filed as Exhibit 3.04 to the company's Form 10-SB, and
incorporated herein by reference).
3.5 Amended and Restated Certificate of Designations, Preferences and
Rights of Preferred Stock creating the Series B Preferred Stock
(filed as Exhibit 3.05 to the company's Form 10-SB, and
incorporated herein by reference).
*3.6 Certificate of Designation Regarding Series C Preferred Stock.
4.3.3 Stock Purchase Agreement dated March 26, 1999 to purchase of
4,000,000 shares of Common Stock (filed as Exhibit (3) to the
company's Form 8-K dated March 31, 1999 and incorporated herein by
reference).
4.3.4 Distribution Agreement (filed as Exhibit (4) to the company's Form
8-K dated March 31, 1999 and incorporated herein by reference).
4.3.5 Voting Agreement (filed as Exhibit (5) to the company's Form 8-K
dated March 31, 1999 and incorporated herein by reference).
10.2 1997 Stock Bonus Plan (filed as Exhibit 10.02 to the company's Form
10-SB, and incorporated herein by reference).
10.3 1999 Stock Option Plan (filed as Exhibit 10.3 to the company's Form
SB-2, file number 333-83659 and incorporated herein by reference).
10.4 Settlement Agreement with FTC (filed as Exhibit 10.04 to the
company's Form 10-SB, and incorporated herein by reference).
*10.5 Development Agreement with NetForAll Inc. dated August 3, 2000.
*21.1 Subsidiaries.
*23.1 Consent of Grant Thornton.
*27. Financial Data Schedule.
(b) Reports on Form 8-K - None.
</TABLE>
-----------------------
* Filed herewith.
15
<PAGE> 33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MAX INTERNET COMMUNICATIONS, INC.
By: /s/ Donald G. McLellan
----------------------
Donald G. McLellan
President and Director
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the company and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Office Date
---- ------ ----
<S> <C> <C>
/s/ Lawrence R. Biggs, Jr. Chief Executive Officer September 27, 2000
-------------------------- and Director (Principal
Lawrence R. Biggs, Jr. Executive Officer)
/s/ Donald G. McLellan President and Director September 27, 2000
--------------------------
Donald G. McLellan
/s/ Lawrence A. Cahill Director September 27, 2000
--------------------------
Lawrence A. Cahill
/s/ Brahill Santos Director September 27, 2000
--------------------------
Brahill Santos
/s/ Harold L. Clark Director September 27, 2000
--------------------------
Harold L. Clark
/s/ Brian K. Norman Director September 27, 2000
--------------------------
Brian K. Norman
/s/ Leslie D. Crone Principal Financial September 27, 2000
-------------------------- Officer, Controller and
Leslie D. Crone Principal Accounting
Officer
</TABLE>
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
Exhibit
Number Description of Exhibits
-------- -----------------------
<S> <C>
3.6 Certificate of Designation Regarding Series C Preferred Stock.
10.5 Development Agreement with NetForAll Inc. dated August 3, 2000.
21.1 Subsidiaries.
23.1 Consent of Grant Thornton.
27 Financial Data Schedule.
</TABLE>
