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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 SEPTEMBER 30, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______ , 19__.
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 November 11, 1998
Common Stock, no par value 1,571,187
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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............................................... 3
Condensed Consolidated Balance Sheets as of
September 30, 1998 (Unaudited) and June 30, 1998................... 3
Condensed Consolidated Statements of Operations for the
Three Months ended September 30, 1998 and 1997 (Unaudited)......... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months ended September 30, 1998 and 1997 (Unaudited)......... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 7
Item 3. Quantitative and Qualitative Disclosure About
Market Risks....................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders................ 12
Item 5. Other Information.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 14
SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash .............................................................. $ 803,000 $ 372,000
Short-term investments ............................................ 10,000 10,000
Communications receivable, net of allowance for
doubtful accounts of $40,000 .................................... 475,000 316,000
Inventories, net .................................................. 725,000 218,000
Prepaid expenses .................................................. 214,000 43,000
Other current assets .............................................. 26,000 --
---------- ----------
Total current assets ............................................ 2,253,000 959,000
Property and equipment, net .......................................... 5,950,000 169,000
Capitalized software development costs, net .......................... 191,000 126,000
Other assets ......................................................... 237,000 9,000
---------- ----------
Total assets ................................................ $8,631,000 $1,263,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 691,000 $ 211,000
Commissions payable ............................................... 154,000 101,000
Taxes payable ..................................................... 572,000 130,000
Current maturities of long-term capital lease obligations ......... 392,000 --
Accrued liabilities ............................................... 403,000 282,000
Deferred revenue .................................................. 489,000 55,000
---------- ----------
Total current liabilities ....................................... 2,701,000 779,000
Long-term capital lease obligations .................................. 4,866,000 --
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
100,000 shares designated as Series A Convertible Preferred
Stock of which 36,359 shares are issued and outstanding ......... 200,000 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,571,187 shares issued and outstanding ......................... 574,000 574,000
Shareholder note receivable ....................................... (120,000) (120,000)
Accumulated earnings (deficit) .................................... 410,000 (170,000)
---------- ----------
Total shareholders' equity ...................................... 1,064,000 484,000
---------- ----------
Total liabilities and shareholders' equity .................. $8,631,000 $1,263,000
========== ==========
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
SEPTEMBER 30,
---------------------------------------
1998 1997
---------------- ----------------
Net revenues:
Communications services ........................................... $3,686,000 $1,465,000
Nutritional products .............................................. 375,000 --
Marketing services ................................................ 1,042,000 353,000
---------- ----------
Total net revenues .............................................. 5,103,000 1,818,000
---------- ----------
Cost of services:
Communications services ........................................... 706,000 438,000
Nutritional products .............................................. 202,000 --
Marketing services ................................................ 552,000 101,000
---------- ----------
Total cost of services .......................................... 1,460,000 539,000
---------- ----------
Gross margin ......................................................... 3,643,000 1,279,000
---------- ----------
Operating expenses:
Selling and marketing ............................................. 2,005,000 716,000
General and administrative ........................................ 778,000 597,000
---------- ----------
Total operating expenses ........................................ 2,783,000 1,313,000
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Operating income (loss) .............................................. 860,000 (34,000)
---------- ----------
Income (loss) before income taxes .................................... 860,000 (34,000)
Provision for income taxes ........................................... 280,000 --
---------- ----------
Net income (loss) .................................................... $ 580,000 $ (34,000)
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Income (loss) per share:
Basic ............................................................. $ 0.37 $ (0.02)
========== ==========
Diluted ........................................................... $ 0.36 $ (0.02)
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Weighted average number of shares outstanding:
Basic ............................................................. 1,571,187 1,571,187
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Diluted ........................................................... 1,607,546 1,571,187
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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 CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 580,000 $ (34,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................... 107,000 50,000
Changes in assets and liabilities:
Communications receivables .................................... (159,000) (100,000)
Inventories ................................................... (507,000) (49,000)
Prepaid expenses .............................................. (171,000) (10,000)
Other assets .................................................. (26,000) 23,000
Accounts payable .............................................. 480,000 133,000
Commissions payable ........................................... 53,000 15,000
Taxes payable ................................................. 442,000 --
Accrued liabilities ........................................... 121,000 42,000
Deferred revenue .............................................. 434,000 --
---------- ----------
Total adjustments ........................................... 774,000 104,000
---------- ----------
Net cash provided by operating activities .............. 1,354,000 70,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (41,000) (75,000)
Software development costs ........................................ (153,000) (48,000)
---------- ----------
Net cash used by investing activities .................. (194,000) (123,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from (for) issuance of common stock ........... (228,000) 87,000
Payments on capital lease obligations ............................. (501,000) --
---------- ----------
Net cash provided (used) by financing activities ....... (729,000) 87,000
---------- ----------
NET INCREASE IN CASH EQUIVALENTS ..................................... 431,000 34,000
CASH AND CASH EQUIVALENTS, beginning of the period ................... 372,000 35,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of the period ......................... $ 803,000 $ 69,000
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Capital lease obligations incurred ................................ $5,759,000 $ --
========== ==========
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
Maxxis Group, Inc., a Georgia corporation (the "Company"), was
incorporated on January 24, 1997 and is headquartered in Tucker, Georgia.
The Company's principal business operations are carried out through its
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. The Company
was 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 independent associates ("IAs").
The Company's IAs currently market communications and Internet services
and nutritional and health enhancement products.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business.
Since the Company has only recently made the transition to an operating
company, the Company's ability to manage its growth and expansion will
require it to implement and continually expand its operational and
financial systems, recruit additional IAs, and train and manage both
current and new IAs. Continued growth would place a significant strain on
the Company's operational resources and systems, and failure to
effectively manage any such growth would have a material adverse effect on
the Company's business, financial condition and results of operations.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements contain
all the normal and recurring adjustments necessary to present fairly the
financial position of the Company as of September 30, 1998 and the results
of the Company's operations and its cash flows for the three-month periods
ended September 30, 1998 and 1997 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:
SEPTEMBER 30, JUNE 30,
1998 1998
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Prepaid phone cards $ 74,000 $ 10,000
Sales aids 263,000 158,000
Nutritional products 388,000 76,000
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$725,000 $218,000
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1. CAPITAL LEASE OBLIGATIONS
On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. These leases expire within five years and have purchase
options at the end of the original lease term. Assets under capital leases
are included in property and equipment in the September 30, 1998
consolidated balance sheet at a fair market value of approximately
$5,759,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Maxxis Group, Inc., a Georgia corporation ("Maxxis" or the "Company"),
markets communications and Internet services and nutritional and health
enhancement products in the United States through its multi-level network
marketing system of "independent associates," or "IAs." The Company operates
through its subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"); Maxxis
Communications, Inc. (formerly known as Maxxis Telecom, Inc., "Maxxis
Communications"); and Maxxis Nutritionals, Inc. (formerly known as Maxxis
Nutritional, Inc., "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. The Company believes that its multi-level network marketing system
allows it to obtain customers for its products in a cost effective manner and to
enhance customer retention because of the relationships between the Company's
IAs and customers. The telecommunications customer base developed by the
Company's IAs provides a potential customer base for the Company's nutritional
and health enhancement products, Internet-related services and for future
products.
The Company has built a customer base without committing capital or
management resources to construct its 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 the Company's
IAs. Maxxis Communications obtains telecommunications services and purchases
time for its prepaid 1 hour, 30 minute and 10 minute phone cards from CRC. In
September 1998, the Company 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. The Company is currently in the process of filing tariffs and
applying for the required regulatory approvals necessary to offer interstate and
intrastate long distance service throughout the United States. In 1999, Maxxis
intends to migrate its long distance customers from CRC's network to the Maxxis
Switch and intends to sell additional network capacity, to the extent available,
to third parties.
In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. Recently, the Company began
marketing additional nutritional and health enhancement products that are
manufactured by various suppliers. In September 1998, the Company 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.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the 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. The Company
encourages 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. The Company also sponsors meetings at which current IAs are
encouraged to bring in others for an introduction to the Company's marketing
system. The Company's multi-level network marketing system and the Company's
reliance upon IAs are intended to reduce marketing costs, customer acquisition
costs and customer attrition. The Company believes that its multi-level network
marketing system will continue to build a base of potential customers for
additional services and products.
The Company derives revenues from communications services, nutritional
products and marketing services. Communications services revenues are comprised
of: sales of prepaid phone cards to the Company's IAs; commissions from the
Company's agreement with CRC whereby the Company receives a percentage of the
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long distance billings received by CRC from the customers originated by the
Company's IAs, net of allowances for bad debts and billing adjustments; and
subscription fees from the Company's Internet subscribers. Because of the
administrative procedures that must be complied with in order to establish
1-Plus customers and to collect the usage and access fees from the local
exchange carriers, there is generally a delay of up to three to four months from
the time a prospective customer indicates a desire to become a 1-Plus customer
and the time that the Company begins to receive commissions from such customer's
usage. In the future, the Company believes that commissions generated on the
sales of 1-Plus long distance services will constitute an increasing percentage
of its total revenues.
Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Recently, the Company began marketing
new health enhancement products and additional nutritional products, including a
weight management program and 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. Marketing services
revenues also include training fees paid by senior associates and "managing
directors" or "MDs." To become an IA, individuals (other than individuals in
North Dakota) must complete an application and purchase a distributor kit for
$99. IAs also pay an annual non-refundable fee in order to maintain their status
as an IA, which fee the Company amortizes over the renewal period. To become an
MD, a senior associate, director or regional director must attend a Company
approved training school. The fee to attend the training school is currently
$99, and MDs must attend continuing education training schools each year which
also are subject to a fee. The training fees are recognized at the time the
training is received. The Company does not receive any fees from IAs 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 purchasing activated prepaid phone cards. 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 the Company; and (iii) sales of additional
products and services to customers. General and administrative expenses include
costs for IA support services, information systems services and administrative
personnel to support the Company's operations and growth.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will maintain profitability. If the Company
continues to grow rapidly, the Company will be required to continually expand
and modify its 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 the Company's operational
resources and systems, and the failure to effectively manage any such growth
could have a material adverse effect on the Company's 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
SEPTEMBER 30,
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1998 1997
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Net revenues:
Communications services ................................. 72% 81%
Nutritional products .................................... 7 --
Marketing services ...................................... 21 19
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Total net revenues .................................... 100% 100%
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Cost of services:
Communications services ................................. 14% 24%
Nutritional products .................................... 4 --
Marketing services ...................................... 11 6
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Total cost of services ................................ 29 30
Operating expenses:
Selling and marketing ................................... 39 39
General and administrative .............................. 15 33
---------- ----------
Total operating expenses .............................. 54% 72%
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
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
increased $3.3 million, or 181%, to $5.1 million for the three months ended
September 30, 1998 from $1.8 million for the same period in 1997. The increase
in total net revenues was primarily due to the growth in the number of IAs
enrolled in the Maxxis marketing network.
Communications services revenues increased $2.2 million, or 152%, to
$3.7 million for the three months ended September 30, 1998 from $1.5 million for
the same period in 1997. This increase was primarily due to increased phone card
sales to the Company's IAs and increased long distance telephone commissions
resulting from the Company's larger communications customer base.
Nutritional products revenues were $375,000 for the three months ended
September 30, 1998. Because the Company did not begin selling nutritional
products until November 1997, there were no nutritional products revenues for
the three months ended September 30, 1997.
Marketing services revenues increased $689,000, or 195%, to $1.0
million for the three months ended September 30, 1998 from $353,000 for the same
period in 1997. This increase was due to the growth in the numbers of IAs, the
increased attendance of the IAs at the Company's training schools and the
increased sales of promotional items and sales aids.
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 September 30, 1998 was $1.5 million, or 29%
of total net revenues, as compared to $539,000, or 30% of total net revenues,
for the same period in 1997. The decline in total cost of services as a
percentage of total net revenues resulted from the improvement in communications
services margins which was partially offset by declines in marketing services
margins.
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Communications services cost was $706,000, or 14% of total net
revenues, for the three months ended September 30, 1998, as compared to
$438,000, or 24% of total net revenues, for the same period in 1997. This
decrease as a percentage of total net revenues was due mainly to the increase in
long distance usage commissions and access fees. Nutritional products cost was
$202,000, or 4% of total net revenues, for the three months ended September 30,
1998. Marketing services cost was $552,000, or 11% of total net revenues, for
the three months ended September 30, 1998 as compared to $101,000, or 6% of
total net revenues, for the same period in 1997. The increase as a percentage of
total net revenues was primarily due to higher costs associated with the
Company's 1998 annual summit meeting.
Gross Margin. Gross margin increased to $3.6 million for the three
months ended September 30, 1998 from $1.3 million for the same period in 1997.
As a percentage of total net revenues, gross margin improved to 71% from 70%
over those respective periods.
Operating Expenses. For the three months ended September 30, 1998,
selling and marketing expenses were $2.0 million, or 39% of total net revenues,
as compared with $716,000, or 39% of total net revenues, for the same period in
1997. General and administrative expenses were $778,000, or 15% of total net
revenues, for the three months ended September 30, 1998, as compared to
$597,000, or 33% of total net revenues, for the same period in 1997. The
decrease in general and administrative expenses as a percentage of total net
revenues reflects economies of scale in connection with the Company's growth.
Primarily as a result of the Company's lower general and administrative expenses
as a percentage of net revenues, total operating expenses declined to 54% of net
revenues for the three months ended September 30, 1998 from 72% for the same
period in 1997.
Net Income. Net income for the three months ended September 30, 1998
was $582,000 for the three months ended September 30, 1998 as compared to a net
loss of $34,000 for the same period in 1997. The increase in net income reflects
an increase in total net revenues, improved margins on communications services
and a decline in general and administrative expenses relative to total net
revenues.
Income Taxes. As a result of the Company's recent profitability,
provision for income taxes was $280,000 for the three months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
On September 29, 1998, the Company 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 Switch.
In connection with the lease of the Maxxis Switch, Maxxis made an initial
payment of $501,000. Monthly payments of $118,000 begin in January 1999 and will
continue for a period of five years.
During the three months ended September 30, 1998, cash provided by
operating activities was $1.4 million, as compared to $70,000 for the same
period in 1997. Operating activities for the three months ended September 30,
1998 included $580,000 of net income, $107,000 of depreciation and amortization
and $774,000 related to changes in assets and liabilities.
Cash used in investing activities was $194,000 for the three months
ended September 30, 1998, as compared to $123,000 for the same period in 1997.
Investing activities for the three months ended September 30, 1998 consisted
primarily of capital expenditures totaling $41,000 and software development
costs of $153,000.
Cash used by financing activities was $729,000 for the three months
ended September 30, 1998, as compared to cash provided by financing activities
of $87,000 for the same period in 1997. Financing activities for the three
months ended September 30, 1998 consisted of $228,000 paid by the Company to
third parties in connection with the preparation of the Company's registration
statement on Form S-1 and payments on capital lease obligations of $501,000.
As of September 30, 1998, the Company had cash of $803,000 and a
working capital deficit of $448,000 as compared to cash of $372,000 and working
capital of $180,000 as of June 30, 1998.
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The Company anticipates that cash generated from operations, together
with proceeds from its ongoing equity offering, will be sufficient to meet the
Company's capital requirements for the next 12 months. However, if the Company
does not receive sufficient funds from its operations and equity offering to
fund its operations, the Company may need to raise additional capital. In
addition, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in expenses or significant acquisitions could have a
material adverse effect on the Company's liquidity and capital resources and
could require the Company to raise additional capital. The Company may also need
to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, lines of credit and private equity and debt
financings. The Company's cash and financing needs for fiscal 1999 and beyond
will be dependent on the Company's level of IA and customer growth and the
related capital expenditures, advertising costs and working capital needs
necessary to support such growth. The Company believes that major capital
expenditures may be necessary over the next few years to develop additional
product lines to sell through its IAs and to develop and/or acquire information,
accounting and/or inventory control systems to monitor and analyze the Company's
growing multi-level network marketing system. The Company has not identified
financing sources to fund such cash needs in fiscal 1999 and beyond. There can
be no assurance that the Company will be able to raise any such capital on terms
acceptable to the Company or at all.
YEAR 2000 COMPLIANCE
The Company's business and customer relationships rely on computer
software programs, internal operating systems and telephone and other network
communications connections. If any of these programs, systems or network
communications are not programmed to recognize and properly process dates after
December 31, 1999 (the "Year 2000" issue), the Company could experience
significant system failures or errors, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has not yet begun to review its computerized information
and non-information systems to identify internal accounting programs and
operating systems (collectively, "Systems") that might malfunction due to a
misidentification of the Year 2000. Although the Company has not yet undertaken
a review of its Systems, it believes that its Systems are adequately programmed
to address the Year 2000 issue or can be modified or replaced to address the
Year 2000 issue without material costs or delays. However, there can be no
assurances that these Systems are Year 2000 compliant. In addition, as its
review is in the early stages of assessment, Maxxis cannot predict whether
significant problems will be identified with its Systems. Therefore, the Company
has not yet determined the extent of contingency planning that may be required.
The Company may not be able to develop, implement or test remediation or
contingency plans with such Year 2000 problems or may find that the costs of
these plans exceed current expectations. If the Company fails to satisfactorily
resolve Year 2000 issues related to its Services in a timely manner, it could be
exposed to liability from third parties.
Furthermore, Maxxis has only made limited inquiries of third party
providers of products and systems used in its business and at its offices or on
the systems used by its IAs or other third parties. The Company has contacted
one provider of software used in Maxxis' operations and has received assurances
from this provider that its software is capable of addressing the Year 2000
issue. There can be no assurance, however, that any or all of the products and
services used and relied upon by the Company are Year 2000 compliant. Maxxis
believes that if its providers, IAs or other third parties do not successfully
address Year 2000 issues in their operations, the Company's operations may be
interrupted, hindered or delayed which could cause a material adverse effect on
the Company's business, financial condition and results of operations. Maxxis
further believes that CRC, its IAs and other third parties may be in the
preliminary stages of analyzing their software and systems to address the Year
2000 issue. Therefore, the Company does not believe it is possible to accurately
analyze or predict possible "worst-case" scenarios related to the Year 2000
issue and the potential impact on the Company's business if any of these parties
fail to adequately address the Year 2000 issue. The Company has not developed a
contingency plan for Year 2000 problems experienced by CRC, its IAs or other
third parties. Thus, the Company believes it is impossible to estimate the
potential expenses involved with a large scale failure of CRC, the Company's IAs
or other third parties to resolve their Year 2000 issues. The Company can
provide no assurance that it will not suffer business interruptions, either
because of its own Year 2000 problems or those of CRC, its IAs and other
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third parties whose Year 2000 problems may make it difficult or impossible for
them to fulfill their commitments to the Company.
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 current expectations of the Company, its directors or its
officers with respect to, among other things: (i) the Company's financing plans,
including the Company's ability to obtain financing in the future; (ii) trends
affecting the Company's financial condition or results of operations, including
those related to Year 2000 issues; (iii) the Company's growth and operating
strategy; (iv) the Company's anticipated capital needs and anticipated capital
expenditures; and (v) projected outcomes and effects on the Company of potential
litigation and investigations concerning the Company. 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 the Company's products and services to be commensurate with
management's expectations or past experience; the impact of present or future
laws and regulations on the Company's 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 Company's filings with Securities and Exchange
Commission (the "Commission"), including the "Risk Factors" section of the
Company's Registration Statement on Form S-1 (Registration number (333-38623),
as declared effective by the Commission on June 15, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to,
any material legal proceedings. The Company may be subject from time to time to
legal proceedings that arise out of the Company's business operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of the shareholders of the Company was held on
October 1, 1998 to: (i) elect three directors to serve on the Company's Board of
Directors, each for a three-year term; (ii) consider and vote upon the proposed
Maxxis Group, Inc. 1998 Stock Option Plan (the "Option Plan"); and (iii) ratify
the appointment of Arthur Andersen LLP as independent public accountants of the
Company for the fiscal year ending June 30, 1999.
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Election of Directors. The shareholders were asked to elect Ivey J.
Stokes, Thomas O. Cordy and Alvin Curry to the Company's Board of Directors,
each for a three-year term. 1,278,170 votes were cast for the election of
Messrs. Stokes, Cordy and Curry, and no votes were cast against. There were no
abstentions. In addition to the foregoing, the following persons continue to
serve as directors: Larry W. Gates, II; Charles P. Bernstein; Robert J. Glover,
Jr.; Terry Harris; and Philip E. Lundquist.
Option Plan. The shareholders were asked to consider and vote upon the
approval of the Option Plan which was adopted by the Board of Directors on
September 16, 1998, subject to shareholder approval. The Option Plan permits the
Company to grant options to purchase shares of the Company's common stock, no
par value ("Common Stock"), to officers, directors, key employees, advisors and
consultants of the Company. The purpose of the Option Plan is to advance the
interests of the Company, its subsidiaries and its shareholders by affording
certain employees and directors of the Company and its subsidiaries, as well as
key consultants and advisors to the Company or any subsidiary, an opportunity to
acquire or increase their proprietary interests in the Company. The aggregate
number of shares of Common Stock reserved for the issuance of options under the
Option Plan will be 300,000 shares, subject to adjustment in accordance with the
Option Plan. 1,278,170 votes were cast for the adoption of the Option Plan, and
no votes were cast against. There were no abstentions.
Accountants. The shareholders were asked to ratify the appointment by
the Board of Directors of the firm of Arthur Andersen LLP as independent public
accountants of the Company for the fiscal year ending June 30, 1999. 1,278,170
votes were cast for the ratification of Arthur Andersen LLP, and no votes were
cast against. There were no abstentions.
ITEM 5. OTHER INFORMATION
On October 31, 1998, James W. Brown resigned from the Company's Board
of Directors and as Executive Vice President and Secretary of the Company. The
Board of Directors has not yet appointed a new director to fill his vacancy.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit
Number Exhibit Description
- ------ -------------------
10.1 Software Purchase Agreement between UsefulWare Incorporated
and the Company dated as of August 13, 1998.*
10.2 Asset Purchase Agreement by and among Cherry Communications
Incorporated ("Cherry"), World Access, Inc. ("World Access")
and the Company dated as of September 29, 1998.
10.3 Promissory Note by the Company in favor of Cherry dated
September 29, 1998.
10.4 Security Agreement between the Company and World Access dated
as of September 29, 1998.
10.5 Software License Agreement between Alcatel USA Marketing, Inc.
and the Company dated as of September 29, 1998.
10.6 Sublease between Cherry and the Company dated as of September
30, 1998.
10.7 Master Lease Agreement between Rockford Industries, Inc. and
the Company dated as of September 29, 1998 (World Access).
10.8 Master Lease Agreement between Rockford Industries, Inc. and
the Company dated as of September 29, 1998 (NACT
Telecommunications, Inc.).
10.9 Employment Agreement between Daniel McDonough and the Company
dated as of October 13, 1998.
27 Financial Data Schedule (for SEC use only).
- ---------------------------------
* Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24(b)(2) under the Exchange
Act. In accordance with Rule 24(b)(2), these confidential portions have
been omitted from this exhibit and filed separately with the
Commission.
(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.
November 12, 1998 /s/ Thomas O. Cordy
-----------------------------------
Thomas O. Cordy
President and Chief Executive Officer
(Principal executive officer)
November 12, 1998 /s/ Daniel McDonough
-----------------------------------
Daniel McDonough
Chief Financial Officer
(Principal financial and accounting officer)
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