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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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-----------, -----.
Commission File Number: 333-38623
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MAXXIS GROUP, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 22-78241
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1901 MONTREAL ROAD, SUITE 108, TUCKER, GEORGIA 30084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 696-6343
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 1, 2001
Common Stock, no par value 1,814,743
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MAXXIS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
December 31, 2000 (Unaudited) and June 30, 2000........................ 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months ended December 31, 1999 and 2000
(Unaudited)............................................................ 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended December 31, 1999 and 2000 (Unaudited)................ 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosure About
Market Risks.......................................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 14
Item 5. Other Information...................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash .............................................................. $ 667,000 $ 4,867,000
Accounts receivable, net of allowance for
doubtful accounts of $1,052,017 and $2,008,441 .................. 1,233,000 1,081,000
Inventory ......................................................... 1,471,000 1,093,000
Prepaid expenses .................................................. 480,000 237,000
Total current assets ............................................ 3,851,000 7,278,000
Property and equipment, net .......................................... 4,525,000 5,000,000
Capitalized software development costs, net .......................... 391,000 358,000
Other assets ......................................................... 5,000 31,000
------------ ------------
Total assets ................................................ $ 8,772,000 $ 12,667,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 208,000 $ 814,000
Commissions payable ............................................... 72,000 160,000
Accrued compensation .............................................. 75,000 756,000
Taxes payable ..................................................... 168,000 177,000
Current maturities of long-term capital lease obligations ......... 507,000 974,000
Accrued liabilities ............................................... 104,000 813,000
Deferred revenue .................................................. 506,000 878,000
------------ ------------
Total current liabilities ....................................... 1,640,000 4,572,000
Long-term liabilities:
Line of credit .................................................... -- 65,000
Long-term lease obligations ....................................... 3,098,000 3,107,000
------------ ------------
Total long-term liabilities ..................................... 3,098,000 3,172,000
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
1,000,000 shares designated as Series A Convertible Preferred
Stock of which 992,814 shares are issued and outstanding ........ 5,939,000 5,141,000
Common Stock, no par value; 20,000,000 shares authorized;
1,814,743 shares issued and outstanding ......................... 570,000 455,000
Accumulated earnings (deficit) .................................... (2,475,000) (673,000)
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Total shareholders' equity (deficit) ............................ 4,034,000 4,923,000
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Total liabilities and shareholders' equity .................. $ 8,772,000 $ 12,667,000
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The accompanying notes are an integral part of these consolidated statements.
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MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Net revenues:
Communications services ....................... $ 2,189,000 1,079,000 $ 5,223,000 2,136,000
Nutritional products .......................... 692,000 534,000 1,115,000 1,793,000
Marketing services ............................ 412,000 802,000 1,275,000 1,824,000
------------ ------------ ------------ ------------
Total net revenues .......................... 3,293,000 2,415,000 7,613,000 5,753,000
------------ ------------ ------------ ------------
Cost of services:
Communications services ....................... 1,256,000 643,000 2,726,000 1,675,000
Nutritional products .......................... 162,000 204,000 329,000 566,000
Marketing services ............................ 141,000 185,000 394,000 322,000
------------ ------------ ------------ ------------
Total cost of services ...................... 1,559,000 1,032,000 3,449,000 2,563,000
------------ ------------ ------------ ------------
Gross margin ..................................... 1,734,000 1,383,000 4,164,000 3,190,000
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing ......................... 796,000 1,560,000 2,564,000 2,411,000
General and administrative .................... 1,427,000 1,275,000 2,781,000 2,407,000
------------ ------------ ------------ ------------
Total operating expenses .................... 2,223,000 2,835,000 5,345,000 4,848,000
------------ ------------ ------------ ------------
Operating income (loss) .......................... (489,000) (1,452,000) (1,181,000) (1,658,000)
Interest income (expense) ........................ (143,000) (8,000) (331,000) (54,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes ................ (632,000) (1,460,000) (1,512,000) (1,712,000)
Provision (benefit) for income taxes ............. -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) ................................ $ (632,000) (1,460,000) $ (1,512,000) (1,712,000)
============ ============ ============ ============
Income (loss) per share:
Basic ......................................... $ (0.41) (.80) $ (0.96) (1.03)
============ ============ ============ ============
Diluted ....................................... $ (0.41) (.80) $ (0.96) (1.03)
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic ......................................... 1,541,500 1,823,743 1,581,274 1,622,262
============ ============ ============ ============
Diluted ....................................... 1,541,500 1,823,743 1,581,274 1,622,262
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
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MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (1,512,000) $ (1,712,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................... 699,000 475,000
Compensation expense related to stock options ................... -- --
Changes in assets and liabilities:
Accounts receivables .......................................... (198,000) (154,000)
Inventories ................................................... (145,000) (378,000)
Prepaid expenses .............................................. 73,000 (254,000)
Other assets .................................................. (133,000) 37,000
Accounts payable .............................................. (128,000) (606,000)
Commissions payable ........................................... (233,000) (88,000)
Taxes payable ................................................. 186,000 (9,000)
Accrued liabilities ........................................... 99,000 (1,590,000)
Deferred revenue .............................................. 98,000 (171,000)
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Total adjustments ........................................... 318,000 (2,738,000)
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Net cash provided (used) by operating activities ....... (1,194,000) (4,450,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (84,000) --
Software development costs ........................................ (168,000) (33,000)
Purchase of equity investment ..................................... -- --
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Net cash used by investing activities .................. (252,000) (33,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of preferred stock ......................... 1,425,000 824,000
Proceeds from preferred stock subscriptions ....................... 1,987,000 --
Payments for treasury stock ....................................... (7,000) --
Net proceeds (payments) on line of credit ......................... (1,325,000) (65,000)
Payments on capital lease obligations ............................. (413,000) (476,000)
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Net cash provided by financing activities .............. 1,667,000 283,000
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NET INCREASE IN CASH EQUIVALENTS ..................................... 221,000 (4,200,000)
CASH AND CASH EQUIVALENTS, beginning of the period ................... 20,000 4,867,000
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CASH AND CASH EQUIVALENTS, end of the period ......................... $ 241,000 667,000
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The accompanying notes are an integral part of these consolidated statements.
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MAXXIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION
We were incorporated on January 24, 1997 and are headquartered in
Tucker, Georgia. We are a multi-level network marketing company that
currently sells communications and nutritional products through our
network of Independent Associates ("IAs"). Our principal business
operations are carried out through our wholly owned subsidiaries,
Maxxis 2000, Inc. and Maxxis Communications, Inc., each of which began
operations in March 1997, and Maxxis Nutritionals, Inc., which began
operations in November 1997. We were founded for the purpose of
providing long-distance services, private label nutritional products,
and other services and consumable products through a multilevel
marketing system of IAs. Our IAs market communications and Internet
services and nutritional and health enhancement products. We had 84,825
IAs as of December 31, 2000.
We have a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. Our
ability to manage our growth and expansion will require us to implement
and continually expand our operational and financial systems, recruit
additional IAs, and train and manage both current and new IAs. Growth
may place a significant strain on our operational resources and
systems, and failure to effectively manage any such growth might have a
material adverse effect on our business, financial condition and
results of operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of our management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly our financial position as of December 31, 2000 and the results
of our operations and our cash flows for the three and six month
periods ended December 31, 2000 and 1999 in conformity with generally
accepted accounting principles. The results of operations are not
necessarily indicative of the results to be expected for the full
fiscal year.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
2000 2000
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Prepaid phone cards ..... $ 118,000 $ 133,000
Sales aids .............. 618,000 310,000
Nutritional products .... 735,000 650,000
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$1,471,000 $1,093,000
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4. SEGMENT REPORTING
The communications segment of our business provides 1-Plus long
distance services, distributes prepaid phone cards, provides internet
service and provides the hosting of web pages for Maxxis 2000
distributors. Our nutritional products division distributes private
label nutritional and health enhancement products to our IAs. Our
marketing services segment provides sales aids, product fulfillment,
promotional materials and other support services and also conducts our
annual marketing summit meeting and other training meetings.
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The Corporate Group segment of our business is largely an overhead
function that provides our administrative, financial and legal support
services.
Segment information for the three month periods ended December 31, 2000
and 2001 are as follows:
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ----------- ---------- ---------- ------------
December 31, 1999
Net revenues .............. $ 2,189,000 $ 692,000 $ 412,000 $ -- $ 3,293,000
Operating income (loss) ... (525,000) 179,000 192,000 (335,000) (489,000)
December 31, 2000
Net revenues .............. $ 1,079,000 $ 534,000 $ 802,000 $ -- $ 2,415,000
Operating income (loss) ... (649,000) (321,000) (482,000) -- (1,452,000)
Segment information for the six month periods ended December 31, 1999
and 2000 are as follows:
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ------------ ------------ ---------- ------------
December 31, 1999
Net revenues .............. $ 5,223,000 $ 1,115,000 $ 1,275,000 $ -- $ 7,613,000
Operating income (loss) ... (1,365,000) 157,000 693,000 (666,000) (1,181,000)
December 31, 2000
Net revenues .............. $ 2,136,000 $ 1,793,000 $ 1,824,000 $ -- $ 5,753,000
Operating income (loss) ... (616,000) (517,000) (526,000) -- (1,658,000)
5. LINE OF CREDIT
The Line of Credit is with the Maxxis Millionaire Society, whose
partners are certain members of senior management and significant
shareholders of the common stock. Under the Line of Credit, Maxxis may
borrow up to $2 million at 10% annual interest.
6. COMMISSION EXPENSE
Selling and marketing expense include the commissions that are paid to
several levels of IAs on each sale. The amount and recipient of the
commission varies depending on the purchaser's position in the IA
network. In October 2000, we paid $1.1 million to the Maxxis
Millionaire Society to assume their position in the IA network. Ivey
Stokes, our Chief Executive Officer and Alvin Curry, our Chief
Operating Officer, are partners in the Maxxis Millionaire Society. As
the result of this payment, we will no longer pay commissions to the
Maxxis Millionaire Society. Commissions paid to the Maxxis Millionaire
Society including this one-time payment totaled $92,000 and $1.1
million for the three months and six months ended December 31, 2000 and
$0 and $49,000 for the three months and six months ended December 31,
1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We market communications and Internet services and nutritional and
health enhancement products in the United States through our multi-level network
marketing system of IAs. We operate through our subsidiaries: Maxxis 2000;
Maxxis Communications; and Maxxis Nutritionals.
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance service, travel cards, prepaid phone cards, 800 service and
international telecommunications services, Internet access and Web-page
development and hosting services, and nutritional and health enhancement
products. We believe that a multi-level network marketing system allows us to
obtain customers for our products in a cost effective manner and enhances
customer retention because of the relationships between our IAs and their
customers. The telecommunications customer base developed by our IAs provides a
potential customer base for our nutritional and health enhancement products,
Internet-related services and for future products.
We initially built a customer base without committing capital or
management resources to construct our own communications network and
transmission facilities. In February 1997, Maxxis Communications contracted with
Colorado River Communications, Corp. ("CRC") to obtain switching and network
services and to allow CRC's communications services to be sold by our IAs. In
September 1998, we entered into a long-term lease commitment for the exclusive
use of telecommunications switching equipment (the "Maxxis Switch") along with
certain ancillary computer hardware and software required to operate the Maxxis
Switch. In January 1999, we notified CRC of our intent to terminate our 1-Plus
agreement and begin a process of migrating our customers to the Maxxis
communications network whereby we would directly offer 1-Plus long distance
service. At that time, we entered into an agreement with MCI WorldCom to provide
us with the necessary private lines, circuits and other network services
required to originate and terminate telephone calls through the Maxxis Switch.
In March 1999, we entered an agreement with IXC Communications Services, Inc. to
provide switched services for carrying the portion of the Maxxis traffic that
does not go through the Maxxis Switch. We have obtained tariffs and the required
regulatory approvals necessary to offer interstate and intrastate long distance
service throughout the United States. During the period of April through July
1999, we migrated all of our long distance customers and domestic prepaid phone
cards from CRC's network to the Maxxis network.
In November 1997, we began marketing several private label dietary
supplements to our customers and IAs. We also market additional nutritional and
health enhancement products that are manufactured by various suppliers. In
September 1998, we began providing Internet access and Web-page development and
hosting services. Internet access is provided by Maxxis Communications through
its agreement with InteReach Internet Services, LLC, and Web-page development
and hosting services are provided by Maxxis Communications.
We conduct marketing activities exclusively through our network of IAs.
We believes that IAs are generally attracted to our multi-level network
marketing system because of the potential for supplemental income and because
our IAs are not required to purchase any inventory, have no monthly sales quotas
or account collection issues, have minimal required paperwork and have a
flexible work schedule. We encourage IAs to market services and products to
persons with whom the IAs have an ongoing relationship, such as family members,
friends, business associates and neighbors. We also sponsor meetings at no
charge which current IAs are encouraged to bring in others for an introduction
to our marketing system. Our multi-level network marketing system and our
reliance upon IAs are intended to reduce marketing costs, customer acquisition
costs and customer attrition. We believe that our multi-level network marketing
system will continue to build a base of potential customers for additional
services and products.
We derive revenues from communications services, nutritional products
and marketing services. Communications services revenues are comprised of: sales
of prepaid phone cards to our IAs; usage revenue and fees generated from our
long distance customers; and subscription fees from our Internet subscribers. In
the future, we believe that revenues generated on the sales of 1-Plus long
distance services will constitute a decreasing percentage of our total revenues.
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Nutritional products revenues include sales of private-label
nutritional products, health enhancement products, a weight management program
and a skin care system. Marketing services revenues include application fees
from IAs and purchases of sales aids by IAs, including distributor kits which
consist of forms, promotional brochures, audio and video tapes, marketing
materials and presentation materials. To become an independent associate,
individuals (other than individuals in North Dakota) must complete an
application and purchase a distributor kit. Independent associates also pay an
annual non-refundable fee, which we amortize into revenues over the renewal
period, in order to maintain their status as an independent associate. Managing
Directors ("MDs") must attend continuing education training schools each year.
The training fees are recognized at the time the training is received. We do not
receive any fees from independent associates for the training provided by MDs or
national training directors.
Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost consists
primarily of the cost of usage from third party carriers and the cost of the
Maxxis Switch. Nutritional products cost consists of the cost of purchasing
private label nutritional products. Marketing services cost includes the costs
of purchasing IA distributor kits, sales aids and promotional materials and
training costs. Operating expenses consist of selling and marketing expenses and
general and administrative expenses. Selling and marketing expenses include
commissions paid to IAs based on: (i) usage of long distance services by
customers; (ii) sales of products to new IAs sponsored into Maxxis; and (iii)
sales of additional products and services to customers. Commissions are paid to
several levels of IAs on each sale. The amount and recipient of the commission
varies depending on the purchaser's position in the IA network. These
commissions are our largest operating expense. General and administrative
expenses include costs for IA support services, information systems services and
administrative personnel to support our operations and growth.
We have a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. There can be no
assurance that we will achieve profitability. If we grow rapidly, we will be
required to continually expand and modify our operational and financial systems,
add additional IAs and new customers, and train and manage both current and new
employees and IAs. Such rapid growth would place a significant strain on our
operational resources and systems, and the failure to effectively manage any
such growth could have a material adverse effect on our business, financial
condition and results of operations.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total net revenues
attributable to each category for the periods shown.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31,
------------------ ----------------
1999 2000 1999 2000
---- ---- ---- ----
Net revenues:
Communications services ........ 66% 45% 68% 37%
Nutritional products ........... 21 22 15 31
Marketing services ............. 13 33 17 32
---- ---- ---- ----
Total net revenues ........... 100% 100% 100% 100%
==== ==== ==== ====
Cost of services:
Communications services ........ 38% 27% 36% 29
Nutritional products ........... 5 8 4 10
Marketing services ............. 4 8 5 6
---- ---- ---- ----
Total cost of services ....... 47% 43% 45% 45%
Operating expenses:
Selling and marketing .......... 24% 64% 33% 42%
General and administrative ..... 43 53 37 42
---- ---- ---- ----
Total operating expenses ..... 67% 117% 70% 84%
==== ==== ==== ====
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1999
Revenues. Total net revenues are derived from sales of communications
services, nutritional products and marketing services net of any returns of
prepaid phone cards, distributor kits or other products. Total net revenues
decreased $878,000, or 27%, to $2.4 million for the three months ended
December 31, 2000 from $3.3 million for the same period in 1999. The decrease in
total net revenues was primarily due to lower communications services revenues.
We had 84,825 IA's, as of December 31, 2000, and we had 76,567 IA's as of
December 31, 1999.
Communications services revenues decreased $1.1 million, or 51%, to
$1.1 million for the three months ended December 31, 2000 from $2.2 million for
the same period in 1999. This decrease was primarily due to a decrease in our
traffic usage due to the loss of customers which we believe was related to the
competitive environment for communications customers.
Nutritional products revenues decreased $158,000, or 23% to $534,000
for the three months ended December 31, 2000 as compared to $692,000 for the
same period in 1999. The decrease was due to a change in our focus from
recruiting to improving our infrastructure for future anticipated growth.
Marketing services revenues increased $390,000, or 95%, to $802,000 for
the three months ended December 31, 2000 from $412,000 for the same period in
1999. The increase is the result of a slightly higher average price on
distributor kits.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for the three months ended December 31, 2000 was $1.0 million, or 43%
of total net revenues, as compared to $1.6 million, or 47% of total net
revenues, for the same period in 1999. The decrease in total cost of services as
a percentage of total net revenues resulted primarily from lower communications
services costs.
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Communications services cost was $643,000, or 27% of total net
revenues, for the three months ended December 31, 2000, as compared to $1.3
million, or 38% of total net revenues, for the same period in 1999. This
decrease as a percentage of total net revenues was due mainly to the fact that
we restructured our engineering configuration to lower costs.
Nutritional products cost was $204,000, or 8% of total net revenues,
for the three months ended December 31, 2000 as compared to $162,000, or 5% of
total net revenues, for the same period in 1999. The higher nutritional products
cost as a percentage of net revenues is primarily due to an increase in our
nutritional products cost.
Marketing services cost was $185,000, or 8% of total net revenues, for
the three months ended December 31, 2000 as compared to $141,000, or 4% of total
net revenues, for the same period in 1999.
Gross Margin. Gross margin decreased to $1.4 million for the three
months ended December 31, 2000 from $1.7 million for the same period in 1999. As
a percentage of total net revenues, gross margin increased to 57% for the three
months ended December 31, 2000 from 53% for the three months ended December 31,
1999. The lower gross margins are mainly attributable to lower revenues and
increased costs of nutritional and marketing services.
Operating Expenses. For the three months ended December 31, 2000, total
selling and marketing expenses were $1,560,000, or 64% of total net revenues, as
compared with $796,000, or 24% of total net revenues, for the same period in
1999. The decrease in selling and marketing expenses as a percentage of total
net revenues is primarily due to lower commissions paid on communications
services. Selling and marketing expenses include commissions expense which was
$1.5 million, or 63% of total net revenues, for the three months ended
December 31, 2000, as compared to $525,000, or 16% of total net revenues, for
the same period in 1999. The increase in commission expenses is largely due to
the purchase of the downline of the Maxxis' Millionaire Society for $1.1 million
in October 2000. Ivey Stokes, our CEO, and Alvin Curry, our COO, are partners of
the Maxxis' Millionaire Society.
General and administrative expenses were $1.3 million, or 53% of total
net revenues, for the three months ended December 31, 2000, as compared to $1.4
million, or 43% of total net revenues, for the same period in 1999. Our general
and administrative expenses increased as a percentage of total net revenues
primarily because we hired additional personnel, improved our accounting system,
and purchased additional warehouse space. Total operating expenses increased to
117% of total net revenues for the three months ended December 31, 2000 from 67%
for the same period in 1999.
Net Loss. The net loss before income taxes for the three months ended
December 31, 2000 was $1.5 million as compared to a net loss of $632,000 before
income taxes for the same period in 1999. The higher net loss is largely due to
the increase in general and administrative expenses from the purchase of the
downline of the Maxxis Millionaire Society.
Income Taxes. Because we had a net loss for the three months ended
December 31, 2000, no income tax provision was recorded.
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1999
Revenues. Total net revenues decreased $1.9 million, or 24%, to $5.8
million for the six months ended December 31, 2000 from $7.6 million for the
same period in 1999. The decrease in total net revenues was primarily due to
lower communications services revenue.
Communications services revenues decreased $3.1 million, or 60%, to
$2.1 million for the six months ended December 31, 2000 from $5.2 million for
the same period in 1999. This decrease was primarily due to a decrease in our
traffic usage due to the loss of customers which we believe was related to the
competitive environment for communications customers.
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Nutritional products revenues were $1.8 million for the six months
ended December 31, 2000 as compared to $1.1 million for the six months ended
December 31, 1999. This 61% increase was largely due to an expanded product line
and an increased number of repeat users of our nutritional and health
enhancement products.
Marketing services revenues increased $549,000, or 43%, to $1.8 million
for the six months ended December 31, 2000 from $1.3 million for the same period
in 1999. The increase in marketing services revenues was mainly due to a higher
average price on distributor kits.
Cost of Services. Total cost of services for the six months ended
December 31, 2000 was $2.6 million, or 45% of total net revenues, as compared to
$3.5 million, or 45% of total net revenues, for the same period in 1999.
Communications services cost was $1.7 million, or 29% of total net
revenues, for the six months ended December 31, 2000, as compared to $2.7
million, or 36% of total net revenues, for the same period in 1999. This
decrease as a percentage of total net revenues was due mainly to the expenses
associated with the Maxxis Switch and our operation as a tariffed
facilities-based provider of telecommunications services for the six months
ended December 31, 2000. During the same period in 1999, we earned commissions
for enrolling customers in 1-Plus long distance service provided by CRC and
incurred a negligible amount of cost of services. Consequently, for the six
months ended December 31, 2000, costs associated with operating the Maxxis
Switch and network services are included in cost of services whereas these costs
were not included in the comparable 1998 period.
Nutritional products cost was $566,000, or 10% of total net revenues,
for the six months ended December 31, 2000, as compared to $329,000, or 4% of
total net revenues, for the six months ended December 31, 1999. The higher
nutritional products cost as a percentage of net revenues is primarily due to
lower total net revenues and an increased cost of nutritional products.
Marketing services cost was $322,000, or 6% of total net revenues, for
the six months ended December 31, 2000 as compared to $394,000, or 5% of total
net revenues, for the same period in 1999. The increase as a percentage of net
revenues was due to lower total net revenues.
Gross Margin. Gross margin declined to $3.2 million for the six months
ended December 31, 2000 from $4.2 million for the same period in 1999. Gross
margin as a percentage of total net revenues was 55% for the six months ended
December 31, 2000 and 55% for the six months ended December 31, 1999.
Operating Expenses. For the six months ended December 31, 2000, selling
and marketing expenses were $2.4 million, or 42% of total net revenues, as
compared with $2.6 million, or 33% of total net revenues, for the same period in
1999. The decrease in selling and marketing expenses as a percentage of total
net revenues is primarily due to lower commissions paid on communications
services. Selling and marketing expenses include commissions expense which was
$2.2 million, or 39% of total net revenues, for the six months ended
December 31, 2000, as compared to $2.3 million, or 30% of total net revenues,
for the same period in 1999. The increase in commission expenses is largely due
to the purchase of the downline of the Maxxis' Millionaire Society for $1.1
million in October 2000. Ivey Stokes, our CEO, and Alvin Curry, our COO, are
partners of the Maxxis' Millionaire Society.
General and administrative expenses were $2.4 million, or 42% of total
net revenues, for the six months ended December 31, 2000, as compared to $2.8
million, or 37% of total net revenues, for the same period in 1999. The increase
in our general and administrative expenses as a percentage of total net revenues
was due primarily to the improvement of our infrastructure and the purchase of
additional warehouse space.
Income Taxes. Due to our net loss for the six months ended December 31,
2000, no provision for income taxes was required.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended December 31, 2000, the cash used by
operating activities was $4.5 million as compared to cash used by operating
activities of $1.2 million for the same period in 1999. Operating activities for
the six months ended December 31, 2000 included $1.7 million net loss, partly
offset by $475,000 of depreciation and amortization.
Cash used in investing activities was $33,000 for the six months ended
December 31, 2000, as compared to $252,000 for the same period in 1999.
Investing activities for the six months ended December 31, 2000 consisted
primarily of software purchases and expenses that were not capitalized.
Cash provided by financing activities was $283,000 for the six months
ended December 31, 2000, as compared to cash provided by financing activities of
$1.7 million for the same period in 1999. Financing activities for the six
months ended December 31, 2000 consisted of proceeds from stock and equity
transactions.
As of December 31, 2000, we had cash of $667,000 and working capital
deficit of $4.2 million as compared to cash of $2.2 million and a working
capital surplus of $4.8 million as of June 30, 2000. As of March 1, 2001, we had
cash of $600,000.
On September 29, 1998, we entered into a long-term lease commitment for
the exclusive use of the Maxxis Switch, along with certain ancillary computer
hardware and software required to operate the Maxxis network. In connection with
the lease of the Maxxis Switch, Maxxis made an initial payment of $501,000.
Monthly payments of $118,000 began in January 1999 and will continue for a
period of five years.
We fund our operations and capital expenditures primarily through cash
flows from operations, borrowing from our revolving line of credit with the
Maxxis Millionaire Society and from time to time, private equity offerings.
However, if we do not receive sufficient funds from our operations and equity
offering to fund our operations, we may need to raise additional capital from
other sources. In addition, any shortfalls in anticipated revenues, increases in
expenses or a need to respond to unanticipated competitive pressures could have
a material adverse effect on our liquidity and capital resources and could
require us to raise additional capital. Sources of additional capital may
include venture capital financing, cash flow from operations, lines of credit
and private equity and debt financings. Our cash and financing needs for fiscal
2001 and beyond will be dependent on our level of IA and customer growth and the
related capital expenditures, advertising costs and working capital needs
necessary to support such growth. We believe that major capital expenditures may
be necessary over the next few years to develop additional product lines to sell
through our IAs and to develop and/or acquire information, accounting and/or
inventory control systems to monitor and analyze our growing multi level network
marketing system. We have not identified financing sources to fund such cash
needs in fiscal 2001 and beyond. There can be no assurance that we will be able
to raise any such capital on terms acceptable to us or at all. If additional
capital is not available or if we do not generate sufficient cash flows from
operations, we will be required to significantly modify the execution strategy
of our business plan. If these actions do not result in sufficient funding, we
may not be able to continue doing business.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These statements appear in a number of places in this Report
and include all statements which are not historical facts and which relate to
the intent, belief or the current expectations of Maxxis, our directors and
officers with respect to, among other things: (i) Maxxis' financing plans,
including our ability to obtain financing in the future; (ii) trends affecting
our financial condition or results of operations, including those related to
Year 2000 issues; (iii) our growth and operating strategy; (iv) our anticipated
capital needs and anticipated capital expenditures; and (v) projected outcomes
and effects on us of potential litigation and investigations concerning us. When
used in this Report, the words "expects," "intends," "believes," "anticipates,"
"estimates," "may," "could," "should," "would," "will," "plans" and similar
expressions and
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variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in forward-looking
statements as a result of: (i) factors affecting the availability, terms and
cost of capital; risks associated with meeting lease obligations and obtaining
necessary regulatory approvals in connection with the Maxxis Switch; competitive
factors and pricing pressures; general economic conditions; the failure of the
market demand for our products and services to be commensurate with management's
expectations or past experience; the impact of present or future laws and
regulations on the our business; changes in operating expenses or the failure of
operating expenses to be consistent with management's expectations; and the
difficulty of accurately predicting the outcome and effect of certain matters,
such as matters involving potential litigation and investigations; (ii) various
factors discussed herein; and (iii) those factors discussed in detail in the our
filings with Securities and Exchange Commission (the "Commission"), including
the "Risk Factors" section of the Post-Effective Amendment No. 1 to our
Registration Statement on Form S-1 (Registration number (333-38623), as declared
effective by the Commission on January 5, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At present, we and our officers and directors are subject to a lawsuit
in the United States District Court for the Eastern District of Michigan
alleging a violation of the Racketeer Influenced and Corrupt Organizations Act.
Pursuant to the complaint, plaintiffs allege various and numerous allegations,
including conspiracy to violate RICO, common law negligence, gross negligence
and intentional infliction of emotional distress, that we feel are without
merit. We intend to defend this lawsuit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None.
(B) REPORTS ON FORM 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXXIS GROUP, INC.
March 13, 2001 /s/ Ivey J. Stokes
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Ivey J. Stokes
Chairman, President and Chief Executive Officer
(Principal executive officer)
March 13, 2001 /s/ DeChane Cameron
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DeChane Cameron
(Principal accounting officer)
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