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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 MARCH 31, 2001.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
, ____.
Commission File Number: 333-38623
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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 June 11, 2001
Common Stock, no par value 1,897,464
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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
March 31, 2001 (Unaudited) and June 30, 2000....................... 3
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months ended March 31, 2001 and 2000
(Unaudited)........................................................ 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended March 31, 2001 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................................... 14
SIGNATURES......................................................... 15
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash .............................................................. $ 275,000 $ 4,867,000
Accounts receivable, net of allowance for
doubtful accounts of $1,062,000 and $931,000 .................... 1,274,000 1,081,000
Inventory ......................................................... 1,440,000 1,093,000
Prepaid expenses .................................................. 492,000 237,000
------------ ------------
Total current assets ............................................ 3,481,000 7,278,000
Property and equipment, net .......................................... 4,307,000 5,000,000
Capitalized software development costs, net .......................... 404,000 358,000
Other assets ......................................................... 110,000 31,000
------------ ------------
Total assets ................................................ $ 8,302,000 $ 12,667,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 677,000 $ 814,000
Commissions payable ............................................... 35,000 160,000
Accrued compensation .............................................. 33,000 756,000
Taxes payable ..................................................... 114,000 177,000
Current maturities of long-term capital lease obligations ......... 968,000 974,000
Accrued liabilities ............................................... 89,000 813,000
Deferred revenue .................................................. 418,000 878,000
------------ ------------
Total current liabilities ....................................... 2,334,000 4,572,000
Long-term liabilities:
Line of credit .................................................... -- 65,000
Long-term lease obligations ....................................... 2,387,000 3,107,000
------------ ------------
Total long-term liabilities ..................................... 2,387,000 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 757,631 shares are issued and outstanding ........ 4,978,000 5,141,000
Common Stock, no par value; 20,000,000 shares authorized;
1,814,743 shares issued and outstanding ......................... 1,928,000 455,000
Accumulated earnings (deficit) .................................... (3,325,000) (673,000)
------------ ------------
Total shareholders' equity ...................................... 3,581,000 4,923,000
------------ ------------
Total liabilities and shareholders' equity .................. $ 8,302,000 $ 12,667,000
============ ============
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenues:
Communications services ....................... $ 1,263,000 2,407,000 $ 3,399,000 7,630,000
Nutritional products .......................... 594,000 8,245,000 2,387,000 9,360,000
Marketing services ............................ 877,000 665,000 2,701,000 1,940,000
----------- ----------- ----------- -----------
Total net revenues .......................... 2,734,000 11,317,000 8,487,000 18,930,000
----------- ----------- ----------- -----------
Cost of services:
Communications services ....................... 1,286,000 1,275,000 2,961,000 4,001,000
Nutritional products .......................... 58,000 1,401,000 624,000 1,730,000
Marketing services ............................ 29,000 161,000 351,000 555,000
----------- ----------- ----------- -----------
Total cost of services ...................... 1,373,000 2,837,000 3,936,000 6,286,000
----------- ----------- ----------- -----------
Gross margin ..................................... 1,361,000 8,480,000 4,551,000 12,644,000
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing ......................... 829,000 5,103,000 3,268,000 7,667,000
General and administrative .................... 1,467,000 1,298,000 3,875,000 4,079,000
----------- ----------- ----------- -----------
Total operating expenses .................... 2,296,000 6,401,000 7,143,000 11,746,000
----------- ----------- ----------- -----------
Operating income (loss) .......................... (935,000) 2,079,000 (2,592,000) 898,000
Interest income (expense) ........................ (6,000) (116,00) (60,000) (447,000)
----------- ----------- ----------- -----------
Income (loss) before income taxes ................ (941,000) 1,963,000 (2,652,000) 451,000
Provision (benefit) for income taxes ............. -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) ................................ $ (941,000) 1,963,000 $(2,652,000) 451,000
=========== =========== =========== ===========
Income (loss) per share:
Basic ......................................... $ (0.52) 1.21 $ (1.55) 0.28
=========== =========== =========== ===========
Diluted ....................................... $ (0.52) 1.21 $ (1.55) 0.28
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic ......................................... 1,821,282 1,617,637 1,704,355 1,617,637
=========== =========== =========== ===========
Diluted ....................................... 1,821,282 1,617,637 1,704,355 1,617,637
=========== =========== =========== ===========
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)
NINE MONTHS ENDED
MARCH 31,
--------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (2,652,000) $ 451,000
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................... 844,000 725,000
Changes in assets and liabilities:
Accounts receivable ........................................... (193,000) (71,000)
Inventories ................................................... (347,000) 179,000
Prepaid expenses .............................................. (255,000) (513,000)
Other assets .................................................. (79,000) (129,000)
Accounts payable .............................................. (137,000) 168,000
Commissions payable ........................................... (125,000) 125,000
Taxes payable ................................................. (63,000) (48,000)
Accrued liabilities ........................................... (1,447,000) 1,617,000
Deferred revenue .............................................. (460,000) 6,239,000
------------ ------------
Total adjustments ........................................... (2,262,000) 8,292,000
------------ ------------
Net cash provided by (used in) operating activities .... (4,914,000) 8,743,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (52,000) (84,000)
Software development costs ........................................ (145,000) (168,000)
------------ ------------
Net cash used by investing activities .................. (197,000) (252,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................ 1,473,000 --
Proceeds from issuance of preferred stock ......................... -- 5,000,000
Repurchases of preferred stock .................................... (163,000) --
Repurchases of common stock ....................................... -- (7,000)
Net proceeds (payments) on line of credit ......................... (65,000) (1,325,000)
Payments on capital lease obligations ............................. (726,000) (1,042,000
------------ ------------
Net cash provided by financing activities .............. 519,000 2,626,000
------------ ------------
NET INCREASE IN CASH EQUIVALENTS ..................................... (4,592,000) 11,117,000
CASH AND CASH EQUIVALENTS, beginning of the period ................... 4,867,000 20,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of the period ......................... $ 275,000 11,137,000
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Conversion of amounts under line of credit to preferred stock ..... 1,425,000 --
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 have a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. Our
ability to manage our growth and expansion will require us to implement
and continually expand our operational and financial systems, recruit
additional IAs, and train and manage both current and new IAs. Growth
may place a significant strain on our operational resources and
systems, and failure to effectively manage any such growth might have a
material adverse effect on our business, financial condition and
results of operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of our management, the unaudited financial statements
contain all the normal and recurring adjustments necessary to present
fairly our financial position as of March 31, 2001 and the results of
our operations and our cash flows for the three and nine month periods
ended March 31, 2001 and 2000 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:
MARCH 31, JUNE 30,
2001 2000
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Prepaid phone cards ..... $ 104,000 $ 133,000
Sales aids .............. 693,000 310,000
Nutritional products .... 643,000 650,000
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$1,440,000 $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 March 31, 2000
and 2001 are as follows:
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ----------- --------- ---------- ------------
March 31, 2000
Net revenues .............. $ 2,407,000 $8,245,000 $665,000 $ -- $ 11,317,000
Operating income (loss) ... (665,000) 2,915,000 193,000 (364,000) 2,079,000
March 31, 2001
Net revenues .............. $ 1,263,000 $ 594,000 $877,000 $ -- $ 2,734,000
Operating income (loss) ... (905,000) 171,000 107,000 (308,000) (935,000)
Segment information for the nine month periods ended March 31, 2000 and
2001 are as follows:
COMMUNICATIONS NUTRITIONAL MARKETING CORPORATE
SERVICES PRODUCTS SERVICES GROUP TOTAL
-------------- ----------- ------------ ------------ ------------
March 31, 2000
Net revenues .............. $ 7,630,000 $9,360,000 $ 1,940,000 $ -- $ 18,930,000
Operating income (loss) ... (1,115,000) 4,491,000 (1,448,000) (1,030,000) 898,000
March 31, 2001
Net revenues .............. $ 3,399,000 $2,387,000 $ 2,701,000 $ -- $ 8,487,000
Operating income (loss) ... (1,058,000) 965,000 (333,000) (2,166,000) (2,592,000)
5. LINE OF CREDIT
The company has a Line of Credit with the Maxxis Millionaire Society,
whose partners are 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. The credit line is
ongoing with no expiration date.
6. COMMISSION EXPENSE
Selling and marketing expense includes 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.
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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 began 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 from 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. Web-page development and
hosting services are provided by Maxxis Communications.
In May 2001, we began conducting Maxxis Wealth Creation Seminars. These
seminars are designed to broaden the knowledge and perspective of our IAs on
generating wealth. These seminars will also give the IAs a better understanding
of Maxxis. We hope that each IA will have a healthy perspective on wealth
creation variables.
We conduct marketing activities exclusively through our network of IAs.
We believe 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 where 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.
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We derive our 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 customer and subscription fees from our Internet
subscribers. Communication revenues in the current and future quarters are
expected to continue increasing due to added services in the communication
product line.
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
paid and sales aids purchased by IAs. These sales aids consist of distributor
kits containing order 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, purchase a distributor kit, and are required to pay an annual
non-refundable fee. These fees are recognized as revenues over the renewal
period. Managing Directors ("MDs") must attend continuing education training
schools each year. The training fees are recognized at the time the training is
received.
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
operating the Maxxis Switch including depreciation. Nutritional products cost is
comprised 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 the cost of providing training to IAs.
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 represent our
largest operating expense. General and administrative expenses include costs for
IA support services, information systems services and administrative personnel
to support our operations.
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. However, in recent periods we have not had
any growth except in our marketing services segment.
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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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Net revenues:
Communications services ........ 46% 21% 40% 40%
Nutritional products ........... 22 73 28 50
Marketing services ............. 32 6 32 10
---- ---- ---- ----
Total net revenues ........... 100% 100% 100% 100%
==== ==== ==== ====
Cost of services:
Communications services ........ 22% 11% 35% 21
Nutritional products ........... 2 12 7 9
Marketing services ............. 1 2 4 3
---- ---- ---- ----
Total cost of services ....... 25% 25% 46% 33%
Operating expenses:
Selling and marketing .......... 30% 45% 39% 41%
General and administrative ..... 54 11 46 22
---- ---- ---- ----
Total operating expenses ..... 84% 56% 85% 63%
==== ==== ==== ====
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
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 $8.6 million, or 76%, to $2.7 million for the three months ended March
31, 2001 from $11.4 million for the same period in 2000. The decrease in total
net revenues was primarily due to a decrease in nutritional sales which resulted
because we did not offer a special promotion of our nutritional products during
the three months ended March 31, 2001 as we had during the same period in 2000.
Communications services revenues decreased $1.1 million, or 46%, to
$1.3 million for the three months ended March 31, 2001 from $2.4 million for the
same period in 2000. This decrease was primarily due to competitive pressures
which forced us to charge lower rates to our customers.
Nutritional products revenues decreased $7.6 million, or 93% to
$594,000 for the three months ended March 31, 2001 as compared to $8.2 million
for the same period in 2000. The decrease resulted primarily because we did not
offer a special promotion of our nutritional products during the three months
ended March 31, 2001.
Marketing services revenues increased $212,000, or 32%, to $877,000 for
the three months ended March 31, 2001 from $665,000 for the same period in 2000.
The increase resulted primarily because of a higher IA renewal rate for the
three months ended March 31, 2001 as compared to the same period last year, and
sales of our wealth creation seminars which were initiated earlier this year.
Cost of Services. Cost of services includes communications services
cost, nutritional products cost and marketing services cost. Total cost of
services for the three months ended March 31, 2001 was $675,000, or 24% of total
net revenues, as compared to $2.8 million, or 25% of total net revenues, for the
same period in 2000. The decrease in total cost of services as a percentage of
total net revenues resulted primarily because of a
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shift in our product and services mix from consisting mostly of sales of
nutritional products revenues for the three months ended March 31, 2000 to a mix
consisting of a higher proportion of total net revenues being generated from
communications services and marketing services revenues for the three months
ended March 31, 2001.
Communications services cost was $588,000, or 22% of total net
revenues, for the three months ended March 31, 2001, as compared to $1.3
million, or 11% of total net revenues, for the same period in 2000. Our profit
margin for communications services increased for the three months ended March
31, 2001 as compared to the same period last year, this increased profit margin
percentage is partially offset by the decrease in our total net revenues.
Nutritional products cost was $58,000, or 2% of total net revenues, for
the three months ended March 31, 2001 as compared to $1.4, or 12% of total net
revenues, for the same period in 2000. The lower nutritional products cost as a
percentage of net revenues for the three months ended March 31, 2001 resulted
primarily because we were able to meet a significant portion of those sales with
existing nutritional products inventory and were able to purchase nutritional
products inventory at lower costs compared to the same period in 2000.
Marketing services cost was $29,000, or 1% of total net revenues, for
the three months ended March 31, 2001 as compared to $161,000, or 2% of total
net revenues, for the same period in 2000.
Gross Margin. Gross margin decreased to $2.1 million for the three
months ended March 31, 2001 from $8.4 million for the same period in 2000. Gross
margin increased as a percentage of total net revenues to 76% for the three
months ended March 31, 2001 from 75% for the three months ended March 31, 2000.
The higher gross margin as a percentage of total net revenues is primarily
attributable to improved profit margins in each of our communications services,
nutritional products and marketing services segments. However, the effect of the
improved profit margins as a percentage of total net revenues for the three
months ended March 31, 2001 was partially offset by our lower total net revenues
and by a higher proportion of our revenues being generated in communications
services as compared to the same period last year.
Operating Expenses. For the three months ended March 31, 2001, total
selling and marketing expenses were $829,000, or 30% of total net revenues, as
compared with $5.1 million, or 45% of total net revenues, for the same period in
2000. The decrease in selling and marketing expenses as a percentage of total
net revenues is primarily due to lower commissions expenses which resulted
because of lower sales for this period.
General and administrative expenses were $1.5 million, or 54% of total
net revenues, for the three months ended March 31, 2000, as compared to $1.3
million, or 11% of total net revenues, for the same period in 2000. Our general
and administrative expenses increased as a percentage of total net revenues for
the three months ended March 31, 2001 primarily because a substantial portion of
our general and administrative expenses are fixed costs and our total net
revenues decreased as compared to the same period last year. Total operating
expenses increased to 84% of total net revenues for the three months ended March
31, 2001 from 56% for the same period in 2000.
Net Loss. The net loss before income taxes for the three months ended
March 31, 2001 was $243,000 as compared to a net profit of $2.0 million before
income taxes for the same period last year. The higher net loss is primarily
attributable to the fixed nature of a substantial portion of our general and
administrative costs.
Income Taxes. Because we had a net taxable loss for the three months
ended March 31, 2001, no income tax provision was recorded. No benefit for tax
losses was recognized due to uncertainty surrounding future ability to generate
taxable income sufficient to utilize net operating loss carryforwards.
NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31,
2000
Revenues. Total net revenues decreased $10.4 million, or 55%, to $8.5
million for the nine months ended March 31, 2001 from $18.9 million for the same
period in 2000. The decrease in total net revenues was due
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primarily to a decrease in nutritional products sales which resulted because we
did not offer a special promotion of our nutritional products for the nine
months ended March 31, 2001 as we had during the same period in 2000.
Communications services revenues decreased $4.2 million, or 55%, to
$3.4 million for the nine months ended March 31, 2001 from $7.6 million for the
same period in 2000 primarily due to competitive pressures which forced us to
charge lower rates to our customers.
Nutritional products revenues decreased $7.0 million, or 74%, to $2.4
million for the nine months ended March 31, 2001 compared to $9.4 million for
the same period in 2000. The decrease resulted primarily because we did not
offer a special promotion of our nutritional products for this period.
Marketing services revenues increased $800,000, or 42%, to $2.7 million
for the nine months ended March 31, 2001 from $1.9 million for the same period
in 2000. The increase resulted primarily because of a higher IA renewal rate for
the nine months ended March 31, 2001 as compared to the same period last year,
and sales of our wealth creation seminars which were initiated earlier this
year.
Cost of Services. Total cost of services for the nine months ended
March 31, 2001 was $3.9 million, or 46% of total net revenues, compared to $6.3
million, or 33% of total net revenues, for the same period in 2000. The increase
as a percentage of total net revenues for the nine months ended March 31, 2001
resulted primarily because of competitive pressures on us to lower the prices of
our communications services and because a greater portion of our revenues were
generated from communications services compared to the same period in 2000.
Communications services cost was $2.9 million, or 35% of total net
revenues, for the nine months ended March 31, 2001, as compared to $4.0 million,
or 21% of total net revenues, for the same period in 2000. The increase as a
percentage of total net revenues for the nine months ended March 31, 2001 is
primarily due to our lower total net revenues resulting from decreased 1-Plus
long distance rates as compared to the same period last year.
Nutritional products cost was $624,000, or 7% of total net revenues,
for the nine months ended March 31, 2001, as compared to $1.7 million, or 9% of
total net revenues, for the same period in 2000. The lower nutritional products
cost as a percentage of total net revenues for the nine months ended March 31,
2001 resulted primarily because we were able to purchase our additional
nutritional products inventory requirements at lower costs as compared to the
same period last year.
Marketing services cost was $351,000, or 4% of total net revenues, for
the nine months ended March 31, 2001 as compared to $555,000, or 3% of total net
revenues, for the same period in 2000. The decrease in marketing services cost
as a percentage of total net revenues was primarily due to lower commission
expense which is a direct result of our decreased total net revenues for the
period.
Gross Margin. Gross margin declined to $4.5 million for the nine months
ended March 31, 2001 from $12.6 million for the same period in 2000. Gross
margin as a percentage of total net revenues was 54% for the nine months ended
March 31, 2001 and 67% for the same period in 2000.
Operating Expenses. For the nine months ended March 31, 2001, selling
and marketing expenses were $3.2 million, or 38% of total net revenues, as
compared with $7.7 million, or 41% of total net revenues, for the same period in
2000. The decrease in selling and marketing expenses as a percentage of total
net revenues is primarily due to lower commissions expenses which resulted
because of lower sales for this period.
General and administrative expenses were $3.9 million, or 46% of total
net revenues, for the nine months ended March 31, 2001, as compared to $4.1
million, or 22% of total net revenues, for the same period in 2000. Our general
and administrative expenses increased as a percentage of total net revenues for
the nine months ended March 31, 2001 primarily because a substantial portion of
our general and administrative expenses are fixed costs and our total net
revenues decreased as compared to the same period last year. However, we reduced
our general and administrative expenses $200,000 through the reduction of
employees.
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Net Loss. The net loss before income taxes for the nine months ended
March 31, 2001 was $2,652,000 as compared to a net profit of $451,000 before
income taxes for the same period in 2000. Our net loss for this period is
largely due to our lower net revenues and certain costs which remain constant
for this period.
Income Taxes. Due to our net loss for the nine months ended March 31,
2001, no provision for income taxes was required.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 2001, the cash used in operating
activities was $4.9 million as compared to cash provided by operating activities
of $8.7 million for the same period in 2000. Operating activities for the nine
months ended March 31, 2001 included $2.65 million net loss and a decrease of
$1.6 million in working capital, which was partially offset by $844,000 of
depreciation and amortization.
Cash used in investing activities was $197,000 for the nine months
ended March 31, 2001, as compared to $252,000 for the same period in 2000.
Investing activities for the nine months ended March 31, 2001 included
consulting expenditures and infrastructure costs relating to our network.
Cash provided by financing activities was $519,000 for the nine months
ended March 31, 2001, as compared to cash provided by financing activities of
$2.6 million for the same period in 2000. Financing activities for the nine
months ended March 31, 2001 consisted of payments on the Maxxis Switch, sale of
common stock and repurchases of preferred stock.
As of March 31, 2001, we had cash of $275,000 and working capital
surplus of $1.1 million as compared to cash of $4.9 million and a working
capital surplus of $2.7 million as of June 30, 2000.
During 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. Monthly payments
of $118,000 will continue for a period of five years.
We fund our operations and capital expenditures primarily through cash
flows from operations, borrowings on our revolving line of credit with the
Maxxis Millionaire Society and from 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, additional lines of credit and private equity and debt
financings. Our cash and financing needs for the remainder of 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 necessary to support
such growth. We believe that major capital expenditures may be necessary over
the next few years to develop additional product lines and to develop and/or
acquire the information, accounting and/or inventory control systems required to
monitor and analyze our growing multi-level network marketing system. We have
not identified financing sources to fund such cash needs for the remainder of
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 our business plan. If these actions do
not result in sufficient funding, we will 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
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Maxxis, our directors and officers with respect to, among other things: (i)
Maxxis' financing plans, including our ability to obtain financing in the
future; (ii) trends affecting our financial condition or results of operations,
including those related to Year 2000 issues; (iii) our growth and operating
strategy; (iv) our anticipated capital needs and anticipated capital
expenditures; and (v) projected outcomes and effects on us of potential
litigation and investigations concerning us. When used in this Report, the words
"expects," "intends," "believes," "anticipates," "estimates," "may," "could,"
"should," "would," "will," "plans" and similar expressions and variations
thereof are intended to identify forward-looking statements. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in forward-looking statements as a result
of: (i) factors affecting the availability, terms and cost of capital; risks
associated with meeting lease obligations and obtaining necessary regulatory
approvals in connection with the Maxxis Switch; competitive factors and pricing
pressures; general economic conditions; the failure of the market demand for our
products and services to be commensurate with management's expectations or past
experience; the impact of present or future laws and regulations on the our
business; changes in operating expenses or the failure of operating expenses to
be consistent with management's expectations; and the difficulty of accurately
predicting the outcome and effect of certain matters, such as matters involving
potential litigation and investigations; (ii) various factors discussed herein;
and (iii) those factors discussed in detail in the our filings with Securities
and Exchange Commission (the "Commission"), including the "Risk Factors" section
of the Post-Effective Amendment No. 1 to our Registration 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.
July 17, 2001 /s/ Ivey J. Stokes
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Ivey J. Stokes
Chairman, President and Chief Executive
Officer
(Principal executive officer)
July 17, 2001 /s/ DeChane Cameron
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DeChane Cameron
(Principal accounting officer)
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