10-K 1 g74269e10-k.txt MAXXIS GROUP, INC. =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended June 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________ to ______ COMMISSION FILE NUMBER: 0-31687 MAXXIS GROUP, INC. (Exact Name of Registrant as Specified in its Charter) GEORGIA 58-22-78241 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Stock held by affiliates of the Registrant as of January 15, 2002 was $4,769,991. This calculation is based upon a price of $5.50 per share, or the price per share of Common Stock sold in the most recent private offering. There is no active trading market for the Common Stock, and the $5.50 per share price is not necessarily indicative of market value. There were 1,814,743 shares of Common Stock issued and outstanding as of January 15, 2002. =============================================================================== INDEX TO FORM 10-K

PART I ITEM 1. BUSINESS This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements appear in a number of places in this Report and include all statements that are not historical statements of fact regarding the intent, belief or current expectations of Maxxis or its directors or officers with respect to, among other things: (i) our financing plans; (ii) trends affecting our financial condition or results of operations; (iii) our growth strategy and operating strategy; and (iv) our anticipated capital needs. 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, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein and those factors discussed in detail in our filings with the Securities and Exchange Commission, including the "Risk Factors" section of our Registration Statement on Form S-1 (Registration Number 333-38623). Our independent associates market communications and Internet services and nutritional and health enhancement products through our multi-level network marketing system. We operate through our subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"); Maxxis Communications, Inc. ("Maxxis Communications"); and Maxxis Nutritionals, Inc. ("Maxxis Nutritionals"). We believe that our marketing system allows us to obtain customers for our products and services in a cost effective manner. We believe that our marketing system also enhances customer retention because of the personal relationships between our independent associates, or IAs, and their customers. Maxxis was incorporated in January 1997 and began sponsoring independent associates and marketing telecommunications services in March 1997. We generated aggregate net revenues of $10,726,000 for our fiscal year ended June 30, 2001. We initially built a customer base without committing capital or management resources to construct our own communications network. In February 1997, we contracted with Colorado River Communications Corp., or CRC, to allow our independent associates to market long distance services provided by Colorado River Communications. In September 1998, we leased telecommunications switching equipment and ancillary hardware and software in order to create our own communications network. Due to the competitive nature of the communications market, however, our communications revenues have dropped significantly in the past year. We began marketing private label dietary supplements to our customers and independent associates in November 1997. During 1998, we began marketing additional nutritional and health enhancement products. In September 1998, we began providing Internet access and Web-page development and hosting services. We believe that the persons who purchase communications services through our independent associates may also be potential customers for our nutritional and health enhancement products and Internet-related services. Our products and services are marketed exclusively by our network of independent associates. Our multi-level network marketing system and our reliance upon independent associates are intended to reduce marketing costs, customer acquisition costs and customer attrition. We believe that our multi-level network marketing system creates a base of potential customers for additional services and products. We believe that independent associates are generally attracted to our multi-level network marketing system because of the potential for supplemental income and because they are not required to purchase substantial inventory, have no monthly sales quotas or account collection issues, have minimal required paperwork, and have a flexible work schedule. We encourage independent associates to market services and products to persons with whom the independent associates have an ongoing relationship, such as family members, friends, business associates and neighbors. We also sponsor meetings at which current independent associates are encouraged to bring in others for an introduction to our marketing system. 1 STRATEGY Our goal is to develop a national distribution system through which our products and services may be sold. We intend to increase our revenues by expanding our marketing network, increasing the number of customers who purchase our products and services, and providing additional products and services for sale through our independent associates. We intend to achieve our goals by: - Growing and Developing our Network of Independent Associates by enhancing our sponsoring and training services, continuing to support the marketing efforts of independent associates and introducing new income opportunities for independent associates. - Maintaining and Expanding the Number of Customers by offering high quality, competitively-priced products and services through a highly motivated network of independent associates. - Improving and Expanding Our Product Lines by continuing to evaluate and offer products that are attractive to our independent associates and customers. - Obtaining Competitive Prices on products and services through the purchasing power of our nationwide network. MAXXIS SWITCH In September 1998, we entered into an agreement to lease a telecommunications switch (the "Maxxis Switch") formerly owned by Cherry Communications, Inc. Beginning in February 1999, our lease required us to make payments of approximately $118,000 per month. As we obtained the required regulatory approvals to offer telecommunications services throughout 1999, we began to market services provided through the Maxxis Switch to the subscriber base that was developed under our agreement with CRC, as well as customers that we have obtained more recently. We are required to obtain the consent of customers before changing their long distance service. This process can be difficult, time consuming and expensive. Additionally, the FCC has stringent legislation that governs the procedure by which we must obtain the consent of customers before changing their long distance service. Problems associated with the transition of these customers from their existing providers to our network could have a material adverse effect on our business, financial condition and operating results. MARKETING We market products and services exclusively through our network of independent associates. Currently, we have six independent associate positions in our marketing system: associate; senior associate; director; regional director; executive director; and presidential director. Independent associates are paid only by commissions, and we do not pay them any salary. Independent associate commissions are a specified percentage or a designated amount of the gross proceeds received by us from the sale of our services and products. We designate a portion of our gross sales as "commission value," or "CV," and allocate the CV among eligible participants in our marketing system. Currently, 10% of the CV earned with respect to a long distance subscriber is paid monthly to the independent associate who sponsored such subscriber, 57% of the CV is paid monthly to eligible directors who have the independent associate who sponsored the subscriber in their downline and an additional 28% is retained by us to be paid out to regional directors, executive directors and presidential directors in our performance bonus programs. All directors, executive directors, regional directors and presidential directors who meet certain performance criteria are eligible to receive additional performance bonuses. To become an associate, individuals (other than individuals in North Dakota) must complete an application and purchase a distributor kit. Independent associates also pay an annual fee in order to maintain their status as independent associates. The distributor kit is a package of basic materials which assists an associate in beginning his or her business. Associates are also entitled to purchase products from us at discounted prices for retail sales. An associate becomes a senior associate when the associate sells $100 of bonus-eligible products. Senior associates continue to receive a percentage of CV with regard to all subscribers personally gathered by them and are also entitled to purchase products from us at discounted prices for retail sales. 2 To become a director, a senior associate must sponsor two additional senior associate positions. A director increases the size of the director's sales organization by sponsoring additional persons to become senior associates. These senior associates, and all senior associates that they, in turn, sponsor, become part of the sales organization of the director who sponsored them. Senior associates, through the growth of their sales organizations, may become directors, regional directors, executive directors or presidential directors and thereby increase the size of the sales organization of the person who was their original sponsor. The organization that grows below each director through this process is called a "downline." Directors are eligible to receive the same commissions as senior associates and, if they directly gather and maintain a minimum commission volume of eight dollars monthly, are eligible to receive a percentage of the CV produced by each independent associate that is within 15 levels below them in their downline. In order to encourage the growth of our marketing system, we also pay eligible directors a bonus amount, which is designated as "bonus value," or "BV," for each sale of bonus-eligible products. We primarily designate retail priced phone cards, nutritional products and Web-page development and hosting services as bonus-eligible products. Directors become regional directors, executive directors and presidential directors upon the achievement of certain independent associate sales goals. Regional directors, executive directors and presidential directors are eligible to receive the same commissions as directors and, if they qualify, share in performance bonuses. RELATIONSHIP WITH INDEPENDENT ASSOCIATES We seek to contractually limit the statements that independent associates make about our business. Each independent associate must also agree to policies and procedures to be followed in order to maintain the independent associate's status in our organization. We expressly forbid independent associates from making any representation as to the possible earnings of any independent associate or from making any representation with regard to our Common Stock. We also prohibit independent associates from creating any marketing literature that we have not pre-approved. While we have these policies and procedures in place governing the conduct of the independent associates, it is difficult to enforce such policies and procedures. Because the independent associates are classified as independent contractors, we are unable to provide them the same level of direction and oversight as our employees. Violations of our policies and procedures may reflect negatively on us and could have a material adverse effect on our business, financial condition and operating results. TRAINING AND MARKETING SUPPORT We offer our independent associates a number of support services. We offer training, information and motivational support to the independent associate network through our training program, regional meetings and distributors websites. We intend to hold conventions for independent associates to: - recognize the top performers, - direct access to senior management, - provide a chance for independent associates to share experiences and develop support systems, and - allow independent associates and potential independent associates to learn more about us. We also publish a newsletter for the independent associates containing informative and motivational articles and recognizing independent associate achievements. PRODUCTS AND SERVICES Following is a summary of the various services and products we currently provide to independent associates and customers. We may add and remove services and products from our services and product lines from time to time. Communications Services and Products. Our independent associates market a variety of long distance and other communications services and products, which currently include 1-Plus long distance service, prepaid phone cards and Internet-related services. - 1-Plus Long Distance. Our 1-Plus long distance service serves as a replacement for a customer's former long distance service (such as the long distance services provided by AT&T Corporation 3 ("AT&T"), WorldCom, Inc. ("WorldCom") and Sprint Corporation ("Sprint")). Our 1-Plus services are billed on a flat rate basis, where the cost of a call does not vary depending upon the distance of a call or the time of day or day of week when the call is originated or terminated. Our residential 1-Plus services are billed based on one minute increments, and business 1-Plus service is billed based on 6-second increments with a 30-second minimum. - Prepaid Phone Cards. We offer prepaid phone cards in domestic time increments of 1 hour and 30 minutes. These cards may be used for domestic and international calls. We also offer international prepaid phone cards that are denominated in dollar amounts. Charges are deducted from these cards based upon the rates applicable to the calls placed by cardholders. - MAXXCONNECT. In September 1998, we began providing Internet access through InteReach Internet Services, L.L.C. and also began providing Web-page development and hosting services for independent associates. Nutritional and Health Enhancement Products. We market a line of private label nutritional and health enhancement products to our independent associates and customers. Representative products include: - Maxx-A-Chol is a dietary supplement which is a specialized combination of six herbs. - MAXXIS MSM is a dietary supplement consisting of methylsulfonylmethane, vitamin C, citrus bioflavonoid complex and ginseng. - MAXXIS Multivitamin is a multivitamin nutritional supplement which is delivered by means of a spray. - MAXXIS 02 is a nutritional supplement that contains electrolytes, oxygen, trace elements, enzymes and amino acids. - BetaShield is a nutritional product containing an extract from the cell walls of baker's yeast. - Maxx-Life is a dietary supplement containing amino acids and other ingredients, including lysine, arginine, GABA, glutamine and ornithine. - Weight-Ideal is a dietary supplement in capsule and spray forms which contains a blend of nutrients, including chromium picolinate, magnesium acetate and niacin. - Maxxis Skin Care System consists of the following health and beauty products: shampoo; conditioner; body wash; hand and body conditioner; face wash; skin toner; and moisturizer. Certain nutritional products are sold as a nutritional pack, and the skin care products are sold as a complete system and individually. Promotional Materials. We also derive revenues from the sale of various educational and promotional materials designed to aid our independent associates in maintaining and building their businesses. Such materials include various sales aids, informational videotapes and cassette recordings, and product and marketing brochures. INDEPENDENT ASSOCIATE SUPPORT AND INFORMATION SYSTEMS We operate a call center where advisors answer independent associate questions and provide information to independent associates. The call center maintains a system that includes a current database of all independent associates, their downlines, and their long distance customers. We believe that maintaining sophisticated and reliable transaction processing systems is essential for multi-level network marketing companies. We use a commission processing software system that incorporates the provisions of our marketing program for purposes of processing detailed and customized independent associate commission payments, monitoring and analyzing financial and operating trends and tracking each independent associate's downline. We also maintain transaction processing systems that facilitate the shipment of 4 independent associate training and marketing materials. In addition, our order processing system tracks the receipt, storage, shipment and sale of our sales aid products. SUPPLIERS Prior to 1999, we did not own a long distance network. As a result, Maxxis Communications entered into the 1-Plus Agreement with CRC to allow our independent associates to market CRC's telecommunications services. Subscribers gathered by our independent associates were long distance customers on CRC's network, and CRC provided subscriber support. Subscribers had the right to change their service at any time. In January of 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. At that time, we entered into an agreement with WorldCom to provide us with the necessary private lines, circuits and other network services to be able 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. A provision of our contract with IXC required a minimum monthly commitment, which provision expired in September 2000. We would be required to contract with other carriers if either the IXC or WorldCom agreements were terminated, the usage or number of subscribers originated by our independent associates exceeded the capacity that these suppliers could provide or if IXC or WorldCom failed to provide quality services. In such event, or in the event we otherwise elected to use other carriers, the cost paid by us for long distance services might exceed that paid under these agreements. If our agreements with IXC or WorldCom are terminated, there can be no assurance that we could enter into new contracts with other suppliers. In November 1997, we began marketing a line of private label nutritional products. All of the nutritional products offered and distributed by us are developed and manufactured by third-party suppliers. Certain of the nutritional products offered by us are proprietary to these suppliers. We do not have any commitment that these suppliers and manufacturers will continue to sell us nutritional products. We believe that our relationships with our suppliers are satisfactory; however, there can be no assurance that any or all of these suppliers will continue to be reliable suppliers to us. Accordingly, there is a risk that any or all of our suppliers or manufacturers, including suppliers which provide proprietary products to us, could discontinue selling their nutritional products to us. In the event any of the third-party manufacturers become unable or unwilling to continue to provide the nutritional products in required volumes, we would be required to identify and obtain acceptable replacement sources, and we cannot guarantee that any alternative replacement sources would become available to us on a timely basis. CUSTOMER SUPPORT During fiscal 2001, Maxxis Communications was primarily responsible for the billing of long distance customers and for providing customer service. Certain of our communications services, including 1-Plus long distance and prepaid phone cards, are provided under IXC's or WorldCom's state, national and international tariffs. We have been informed that IXC and WorldCom possess all tariffs necessary to offer such services. After we received tariffs from certain state authorities in April 1999, we assumed the responsibility for billing long distance and customer service as we migrated customers from those states onto the Maxxis communications network. We provide our Internet access services through InteReach, which is responsible for billing certain Internet access customers and for providing customer support. COMPETITION We face competition for our products and services and for independent associates. Communications Services. The United States long distance communications industry is intensely competitive, rapidly evolving and subject to rapid technological change. In addition, the industry is significantly influenced by the marketing and pricing practices of the major industry participants. AT&T, WorldCom and Sprint are the dominant competitors in the domestic long distance communications industry. All of these companies are significantly larger than we are and have substantially greater resources. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, personnel, marketing, technical and other resources than us. These competitors employ various means to attract new customers, including television and other advertising campaigns, telemarketing programs, network marketing and cash payments and other incentives to new customers. Our ability to compete effectively depends upon, among other factors, our ability to offer 5 high quality products and services at competitive prices. There can be no assurance that we will be able to compete successfully. Nutritional and Health Enhancement Products. We also compete in the highly competitive market of dietary supplements and health enhancement products. This market segment includes numerous manufacturers, other network marketing companies, catalog companies, distributors, marketers, retailers and physicians that actively compete for the business of consumers. We compete with other providers of such nutritional and health enhancement products, especially retail outlets, based upon convenience of purchase, price and immediate availability of the purchased product. For the most part, our competitors offering comparable products are substantially larger and have available considerably greater financial resources. The market is highly sensitive to the introduction of new products (including various prescription drugs) that may rapidly capture a significant share of the market. As a result, our ability to remain competitive depends in part upon the successful introduction of new products at competitive prices. Internet Access and Internet-Related Services. The market for the provision of Internet access and Internet-related services is extremely competitive. There are no substantial barriers to entry, and we expect that competition will continue to intensify. We cannot guarantee that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, financial condition and operating results. Our current and future competitors include, without limitation, the following types of Internet access providers: (i) national commercial Internet service providers ("ISPs"); (ii) numerous regional and local commercial ISPs; (iii) established on-line commercial information service providers; (iv) national long distance carriers; (v) regional telephone companies; and (vi) cable operators. Independent Associates. We compete for independent associates with other direct selling organizations, some of which have longer operating histories and greater visibility, name recognition and financial resources. The largest network marketing companies in our markets are: - EXCEL Communications, Inc., - American Communications Network, - BeautiControl Cosmetics, Inc., - HerbalLife International, Inc., and - Mary Kay, Inc. We compete for new independent associates on the basis of our reputation, perceived opportunity for financial success and quality and range of products offered for sale. We envision the entry of many more direct selling organizations into the marketplace. We cannot guarantee that we will be able to successfully meet the challenges posed by this increased competition. We also compete for the time, attention and commitment of our independent associates. Given that the pool of individuals interested in the business opportunities presented by direct selling is limited in each market, the potential pool of independent associates for our products and services is reduced to the extent other network marketing companies successfully attract these individuals. There can be no assurance that other network marketing companies will not convince our existing independent associates to join their organizations. In such event, our business, financial condition and operating results could be materially adversely affected. PROPRIETARY RIGHTS We have applied for a federal registration for the mark "MAXXIS." In addition, we rely upon common law rights to protect other marks used by us and other rights that we consider to be our intellectual property. We cannot guarantee that our measures to protect our intellectual property will prevent or deter the use or misappropriation of our intellectual property by other parties. Our inability to protect our intellectual property from use or misappropriation from others could have a material adverse effect upon our business, financial condition and operating results. From time to time, companies may assert other trademark, service mark or intellectual property rights in marks (including the mark "MAXXIS") or other intellectual property used by us. We could incur substantial costs to defend any legal action taken against us. Our use of our trademarks, service marks or other rights could be found to infringe upon intellectual property rights of other parties. We could be enjoined from further infringement and required to pay damages. In the event a third party were to sustain a valid claim against us, and in the event any required license were not available on commercially reasonable terms, our business, financial condition and operating results could be materially adversely affected. Litigation, which could result in substantial 6 cost to and diversion of our resources, may also be necessary to enforce our intellectual property rights or to defend us against claimed infringement of the rights of others. REGULATION Regulation of Long Distance Telephone Services. Various regulatory factors affect our financial performance and our ability to compete. IXC and Maxxis are telecommunications carriers, and both of our services are currently subject to federal, state and local regulation. Pursuant to the Communications Act, the FCC generally exercises jurisdiction over the facilities of, and services offered by, telecommunications common carriers that provide interstate or international communications services. State regulatory authorities retain jurisdiction over the same facilities and services to the extent that they are used to provide intrastate communications services. Various international authorities may also seek to regulate the provision of certain services. Federal Regulation. The FCC does not require long distance telecommunications carriers to obtain prior authorization to provide domestic interstate services, including operator services, although such carriers currently must file tariffs at the FCC setting forth the rates, terms and conditions for such services. FCC regulations require telecommunications carriers to apply for and to obtain certification from the FCC prior to offering international services, and to file international tariffs with the FCC. IXC and Maxxis must comply with the requirements applicable to common carriers under the Communications Act, which include a duty to offer services upon request at reasonable rates and on nondiscriminatory terms and conditions. Long distance telecommunications carriers also are subject to a variety of miscellaneous regulations that, for example, govern the documentation and verifications necessary to change a consumer's long distance carrier, require the filing of periodic reports and the payment of regulatory fees. Currently, FCC regulations also require long distance telecommunications carriers to permit resale of their transmission services, and local exchange carriers to provide all long distance carriers with equal access to local exchange facilities for purposes of origination and termination of long distance calls. If either or both of these requirements were eliminated, our business could be adversely affected. The FCC generally has the authority to condition, modify, cancel, terminate or revoke a carrier's authority to operate for failure to comply with federal laws or FCC orders, rules, regulations or policies. Fines or other penalties also may be imposed by such violations. The FCC has jurisdiction to act upon complaints against any telecommunications carrier for failure to comply with its statutory obligations. We cannot guarantee that the FCC or third parties will not raise issues regarding our compliance with applicable laws and regulations, which could have a material adverse effect on our business, financial condition and operating results. The enactment of the Telecommunications Act served to increase competition in the long distance market. The Telecommunications Act, among other things, allowed the Bell operating companies to provide long distance service outside of their local service territories, but barred them from immediately offering in-region, interLATA long distance services until they had satisfied certain conditions. A Bell operating company must apply to the FCC to provide in-region, interLATA long distance services and must satisfy a set of pro-competitive criteria intended to ensure that Bell operating companies open their own local markets to competition before the FCC will approve such application. We are unable to determine how the FCC will rule on any such applications. As a result of the Telecommunications Act, IXC and Maxxis may experience increased competition from others, including the Bell operating companies. In addition, both IXC and Maxxis may be subject to additional regulatory requirements and fees, including, without limitation, universal service assessments, additional access charge assessments, and payphone compensation surcharges resulting from the implementation of the Telecommunications Act. State Regulation. IXC and Maxxis are subject to varying levels of regulation in states in which each company provides long distance services. The vast majority of states require long distance carriers to apply for certificates to provide telecommunications services, or at least to register or to be found exempt from regulation, before they may commence providing intrastate long distance services. This authorization process generally requires the carrier to demonstrate that it has sufficient financial, technical and managerial capabilities and that granting the authorization will serve the public interest. Also, a majority of states require long distance carriers to file and to maintain detailed tariffs listing rates for intrastate services. Many states also impose various reporting and fee requirements, including, without limitation, state universal service requirements. State regulatory agencies also generally require prior notice or approval for (i) transfers of control of certificated carriers, (ii) sales or transfers of carrier assets, including customer bases, (iii) carrier stock offerings and (iv) a 7 carrier's incurrence of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state telecommunications regulatory agencies for failure to comply with state laws and rules, regulations and regulatory policies. Fines and other penalties may be imposed for such violations. We believe that IXC has made the necessary filings with the various state telecommunications regulatory agencies to provide intrastate long distance services in the states where IXC currently conducts its operations. We believe we have filed the necessary applications and tariffs with the states in order to provide intrastate long distance services prior to offering such services to our customers. We cannot guarantee that we will maintain all necessary authorizations, that IXC will maintain its necessary authorizations or that IXC will not provide services in a state where it is not properly certificate or terrified. The occurrence of any or all of the foregoing could have a material adverse effect on our business, financial condition or operating results. Regulation Affecting Nutritional and Health Enhancement Products. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of our nutritional products are subject to regulation by a number of governmental agencies, the most active of which is the FDA, which regulates our products under the FDCA and regulations promulgated thereunder. Our products are also subject to regulation by the FTC, the CPSC, the USDA and the EPA. The FDCA has been amended several times with respect to dietary supplements, most recently by the NLEA and the DSHEA. Our nutritional products are generally classified and regulated as dietary supplements under the FDCA, as amended, and therefore are not subject to pre-market approval by the FDA. However, these products are subject to extensive labeling regulation by the FDA and can be removed from the market if shown to be unsafe. Moreover, if the FDA determines on the basis of our labeling or advertising claims, that the "intended use" of any of our nutritional products is for the diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can regulate those products as drugs and require pre-market clearance for safety and effectiveness. In addition, if the FDA determines that we have made claims regarding the effect of dietary supplements on the "structure or function" of the body, such claims could result in the regulation of such products as drugs. The FTC and certain states regulate advertising, product claims and other consumer matters, including advertising of our products. In the past several years, the FTC has instituted enforcement actions against several dietary supplement companies for false and misleading advertising of certain products. In addition, the FTC has increased its scrutiny of the use of testimonials. We cannot guarantee that the FTC will not question our advertising or other operations. Moreover, we cannot guarantee that a state will not interpret product claims presumptively valid under federal law as illegal under that state's regulations. Furthermore, our independent associates and customers may file actions on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or local consumer affairs offices. These agencies may take action on their own initiative or on a referral from independent associates, customers or others, including actions resulting in entries of consent decrees and the refund of amounts paid by the complaining independent associate or customer, refunds to an entire class of independent associates or customers, or other damages, as well as changes in our method of doing business. A complaint resulting from the practice of one independent associate, whether or not that practice was authorized by us, could result in an order affecting some or all independent associates in a particular state. In addition, an order in one state could influence courts or government agencies in other states. Proceedings resulting from these complaints may result in significant defense costs, settlement payments or judgments and could have a material adverse effect on our business, financial condition or operating results. Although many of the ingredients in our nutritional products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, some of our nutritional products contain ingredients for which there is little history of human consumption. We have not tested, and have not engaged any independent third party to test, any of our nutritional products. Accordingly, we cannot guarantee that our nutritional products, even when used as directed, will have the effects intended. Although we believe that our nutritional products are safe when consumed as directed, we have not sponsored clinical studies on the long-term effect of human consumption. Regulation of Network Marketing. Our multi-level network marketing system is subject to extensive government regulation, including, without limitation, federal and state regulations governing the offer and sale of business franchises, business opportunities and securities. Various governmental agencies monitor direct selling activities, and they could require us to supply information regarding our marketing plan at any time. Although we believe that our multi-level network marketing system is in material compliance with the laws and regulations relating to direct selling activities, we cannot guarantee that future legislation and regulations adopted in particular jurisdictions will not adversely affect our business, financial condition and operating results. We have not obtained no-action letters or advance rulings from any federal or state 8 securities regulator or other governmental agency concerning the legality of our operations. Federal and state regulators may find our multi-level network marketing system to be in noncompliance with existing statutes or regulations as a result of, among other things, misconduct by our independent associates, over whom we have limited control, the ambiguous nature of certain of the regulations and the considerable interpretive and enforcement discretion given to regulators. Any assertion or determination that we or our independent associates are not in compliance with existing statutes or regulations could require us to modify our multi-level network marketing system, create negative publicity, affect distributor morale and loyalty and have a material adverse effect on our business, financial condition and operating results. An adverse determination by any one state regulator on a regulatory matter could influence the decisions of regulatory authorities in other jurisdictions. FACILITIES We operate out of offices in Atlanta, Georgia consisting of approximately 26,000 square feet of leased space for general and administrative office space, warehouse space and training space. We may be required to lease or build additional facilities in order to adequately meet our future needs. We believe that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. EMPLOYEES As of December 31, 2001, we employed approximately 30 people on a full-time basis. Our IAs are classified as independent contractors. Our employees are not unionized, and we believe our relationship with our employees is good. ITEM 2. PROPERTIES See the information provided in Item 1 above entitled "Business -- Facilities" for information with respect to our properties. ITEM 3. LEGAL PROCEEDINGS We are not a party to, nor is any of our property subject to, any material legal proceedings, other than routine litigation incidental to our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fourth quarter of the year ended June 30, 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS As of January 14, 2002, there were approximately 991 holders of our Common Stock of record. There is no established trading market for the Common Stock. From March, 2000 to May, 2000, we sold 992,022 shares of our Series A Convertible Preferred Stock solely to accredited investors at a purchase price of $5.50 per share. The Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution adjustment only upon a stock split, recapitalization or similar event; (iii) entitled to a liquidation preference over the Common Stock; and (iv) convertible into Common Stock at the option of the holder at any time commencing 14 months following the date of the issuance of the Preferred Stock and automatically upon the closing of a public offering that occurs at least 14 months following the issuance of the Preferred Stock and that provides us with gross proceeds of at least $7,500,000. 9 From October, 2000 to December, 2000 we sold 267,824 shares of common stock solely to accredited investors at a purchase price of $5.50 per share. We issued the securities described above in reliance on one an exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. There were no underwriting discounts or commissions involved with these sales. Recipients of securities in these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for the sale in connection with any distribution of those securities, and we affixed appropriate legends to the share certificates issued in those transactions. All recipients of these securities had adequate access, through their relationships with us or otherwise, to information about us. From January to February of 1999, we conducted our public offering of common stock. Pursuant to this offering, we sold 46,450 shares of Common Stock at an offering price of $5.50 per share pursuant to a registration statement on Form S-1 (Commission File No. 333-38623). Our gross proceeds from the offering were approximately $255,475; our proceeds, net of offering expenses were approximately $1,000. All outstanding shares of our Common Stock are entitled to share equally in dividends from funds legally available therefor, when, as and if declared by the Board of Directors. We have never declared or paid any dividends on our Common Stock and do not plan to declare any dividends in the immediate future. 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data for the periods presented. The statement of operations data for the fiscal years ended June 30, 1999, 2000 and 2001 and the balance sheet data as of June 30, 1999, 2000 and 2001 are derived from our audited consolidated financial statements. The statement of operations data for the three months ended September 30, 2000 and 2001 and the balance sheet data as of September 30, 2001 are derived from our unaudited consolidated financial statements. The consolidated financial statements as of and for the year ended June 30, 2001 were audited by Cherry, Bekaert & Holland, L.L.P., independent public accountants. The consolidated financial statements as of and for the years ended June 30, 1999 and 2000 were audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Report.

11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Report. This Report contains certain forward-looking statements relating to, without limitation, future economic performance, plans and objectives of management for future operations and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. When used in this Report, the words "intends," "believes," "anticipates," "estimates," "may," "could," "should," "would," "will," "plans" and similar expressions and variations thereof are intended to identify forward-looking statements. The cautionary statements set forth elsewhere in this Report identify important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. We market communications and Internet services and nutritional and health enhancement products through our multi-level network marketing system of independent associates. We operate through our subsidiaries: Maxxis 2000; Maxxis Communications; and Maxxis Nutritionals. We are a network marketing company that currently markets 1-Plus long distance service, 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 our marketing system allows us to obtain customers for our products and services in a cost effective manner. We believe that our marketing system also enhances customer retention because of the personal relationships between our independent associates and their customers. We believe that the telecommunications customers obtained by our independent associates are also potential customers for our nutritional and health enhancement products and Internet-related services. We derive revenues from communications services, nutritional products and marketing services. Communications services revenues are comprised of: (i) sales of prepaid phone cards to our independent associates; (ii) usage and fees from long distance services provided by the Maxxis network, net of allowances for bad debt and billing adjustments; and (iii) subscription fees from our 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, there is generally a delay of up to two to three months from the time a prospective customer indicates a desire to become a 1-Plus customer and the time that we begin to receive revenues from such customer's usage. In the future, we believe that revenues generated on the sales of 1-Plus long distance services will constitute an increasing percentage of our total revenues. Nutritional products revenues include sales of private-label nutritional products to our nutrition customers. Marketing services revenues include application fees from independent associates and purchases of sales aids by independent associates, 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. Cost of services consists of communications services cost, nutritional products cost and marketing services cost. Communications services cost consists of the cost of providing service for prepaid phone cards and the network services cost to provide or purchase 1-Plus long distance services. Nutritional products cost consists of the cost of purchasing private label nutritional products. Marketing services cost includes the costs of purchasing independent associate 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 independent associates based on: (i) sales of products to new independent associates sponsored into Maxxis; (ii) usage of long distance services by customers; and (iii) sales of additional products and services to customers. General and administrative expenses include costs for independent associate support services, information systems services and administrative personnel to support our operations and growth. 12 Maxxis has a limited operating history, and our operations are subject to the risks inherent in the establishment of any new business. We expect that we will incur substantial initial expenses, and there can be no assurance that we will maintain profitability. If we continue to grow rapidly, we will be required to continually expand and modify our operational and financial systems, add additional independent associates and new customers, and train and manage both current and new employees and independent associates. 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 operating results. RESULTS OF OPERATIONS The following table sets forth the percentage of total revenues attributable to each category for the periods shown.

13 THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH SEPTEMBER 30, 2000 Net Revenues. Total net revenues are derived from sales of communications services, nutritional products and marketing services. Total net revenues decreased $1.3 million, or 38%, to $2.1 million for three months ended September 30, 2001 from $3.4 million for the same period in 2000. The decrease in total net revenues was primarily due to lower sales promotions related to our communications, nutritional products and marketing services as well as worse general economic conditions for the customers of our IAs. Communications services revenues consist of sales of prepaid phone cards to IAs and commissions, fees and revenues generated from long distance customers and fees generated from Internet services and web hosting activities. Communications services revenues decreased $92,000, or 9%, to $965,000 for three months ended September 30, 2001 from $1,057,000 for the same period in 2000. This decrease was primarily due to increased competition in the communications services industry, which caused us to lose customers. Nutritional products revenues consist of sales of private label nutritional products. Nutritional products revenues decreased $797,000, or 37%, to $462,000 for three months ended September 30, 2001 from $1.3 million for the same period in 2000. This decrease was primarily due to the elimination of sales promotions related to nutritional products for the three months ending September 30, 2001 compared to the number of sales promotions we offered for the three months ending September 30, 2000. Marketing services revenues consist of application fees paid by independent associates, purchases of sales aids by independent associates, and registration fees related to annual summit marketing. Marketing services revenues decreased $374,000, or 37%, to $648,000 for three months ended September 30, 2001 from $1.0 million for the same period in 2000. This decrease was due to a decrease in the number of new independent associates for the three months ending September 30, 2001 compared to the three months ending September 30, 2000. Cost of Goods and Services. Cost of goods and services includes communications services cost, nutritional products cost and marketing services cost. Total cost of goods and services for the three months ending September 30, 2001 was $856,000, or 41% of total net revenues, as compared to $1.5 million, or 46% of total net revenues, for the same period in 2000. The decrease in costs of goods and services as a percentage of total net revenues was due to cost control measures in connection with our telecommunications switch and better prices on the purchase of our nutritional products inventory. Communications services cost consisted primarily of the cost of purchasing activated prepaid phone cards from WorldCom and other outside vendors as well as the costs of operating the Maxxis Switch. Communications services cost was $561,000, or 26% of total net revenues for the three months ending September 30, 2001, as compared to $1.0 million, or 31% of total net revenues, for the same period in 2000. This decrease in cost of communications services was due primarily to better cost control measures and decreased sales volume for the three months ending September 30, 2001. Nutritional products cost was $97,000, or 5% of total net revenues for the three months ending September 30, 2001, as compared to $362,000, or 11% of total revenues for the comparable 2000 period. This decrease in the cost of nutritional products as a percentage of total net revenues was due to better prices from our suppliers. Marketing services cost was $198,000, or 10% of total net revenues for the three months ending September 30, 2001, as compared to $137,000, or 4% of total net revenues, for the same period in 2000. The increase in marketing services cost as a percentage of total net revenues was due primarily to costs associated with the introduction of new marketing products that we began to offer for sale to our independent associates in the three months ending September 30, 2001. Gross Margin. Gross margin decreased to $1.2 million for the three months ending September 30, 2001 from $1.8 million for the same period in 2000. As a percentage of total net revenues, gross margin was 59% for the three months ending September 30, 2001 as compared to 54% for the three months ending September 30, 2000. Operating Expenses. Selling and marketing expenses consist of commissions paid to independent associates based on (i) sales of products to new independent associates sponsored into Maxxis, (ii) usage of long distance services by customers, and (iii) sales of additional products and services to customers. For the three months ending September 30, 2001, selling and marketing expenses were $660,000, or 32% of total net revenues, as compared with $881,000, or 26% of total net revenues, for the same period in 2000. This decrease was due to the decrease in the number of IAs as well as lower commissions resulting from lower sales revenue. General and administrative expenses were $1,057,000, or 51% of 14 total net revenues for the three months ending September 30, 2001, as compared to $1,132,000, or 34% of total net revenues, for the same period in 2000. Total operating expenses as a percentage of net revenue increased to 83% of net revenues for the three months ending September 30, 2001 from 60% of net revenues for the three months ending September 30, 2000 due to the large portion of general and administrative expenses that are fixed in nature relative to the decreased total net revenues for the three months ending September 30, 2001. Interest Expense. For the three months ending September 30, 2001, interest expense was $3,000. Interest expense of $206,000 for the three months ending September 30, 2000 was largely comprised of interest costs related to the lease of the Maxxis Switch. Net Income/Loss. Net loss for the three months ending September 30, 2001 was $501,000 as compared to a net loss of $252,000 for the three months ending September 30, 2000. YEAR ENDED JUNE 30, 2001 COMPARED WITH YEAR ENDED JUNE 30, 2000 Net Revenues. Total net revenues decreased $18.4 million, or 63%, to $10.7 million for fiscal year ended June 30, 2001 from $29.1 million for the same period in 2000. The decrease in total net revenues was primarily due to a shift in our focus in fiscal year 2001 from offering sales promotions related to our communications, nutritional products and marketing services to improving our infrastructure. Communications services revenues decreased $5.2 million, or 55%, to $4.4 million for fiscal 2001 from $9.6 million for the same period in 2000. This decrease was primarily due to a decrease in our customer base for prepaid phone cards and long distance and Internet services which, in turn, caused us to eliminate certain revenue-generating communications services. Nutritional products revenues decreased $14.1 million, or 83%, to $2.9 million for fiscal 2001 from $17.0 million for fiscal 2000. This decrease was primarily due to the elimination of sales promotions related to nutritional products for fiscal 2001 compared to the large number of sales promotions we offered in fiscal 2000. Marketing services revenues increased $1.0 million, or 41%, to $3.5 million for fiscal 2001 from $2.5 million for the same period in 2000. This increase was due to an increase in the number of memberships being renewed by current independent associates and the addition of new independent associates, which, in turn, lead to an increase in application fees and purchases of sales aids by new independent associates. Cost of Goods and Services. Total cost of goods and services for fiscal 2001 was $4.5 million, or 42% of total net revenues, as compared to $9.2 million, or 32% of total net revenues, for the same period in 2000. The increase in costs of goods and services as a percentage of total net revenues was due to a sharp reduction in telecommunications and nutritional products revenues without a comparable reduction in costs because of the largely fixed cost nature of our communications cost of services. Communications services cost was $3.0 million, or 28% of total net revenues, for fiscal 2001, as compared to $5.3 million, or 18% of total net revenues, for the same period in 2000. This decrease in cost of communications services was due primarily to decreased sales volume. Nutritional products cost was $0.8 million or 8% of total net revenues for fiscal 2001 as compared to $3.4 million, or 12% of total revenues for the comparable 2000 period. This decrease in the cost of nutritional products was due primarily to decreased sales volume. Marketing services cost was $813,000, or 7% of total net revenues, for fiscal 2001, as compared to $519,000, or 2% of total net revenues, for the same period in 2000. The increase in marketing services cost as a percentage of total net revenues was due primarily to costs associated with the introduction of new marketing products that we began to offer for sale to our independent associates in fiscal year 2001. Gross Margin. Gross margin decreased to $6.2 million for fiscal 2001 from $19.9 million for the same period in 2000. As a percentage of total net revenues, gross margin was 58% for fiscal 2001 as compared to 68% for fiscal 2000. Operating Expenses. For fiscal 2001, selling and marketing expenses were $2.7 million, or 25% of total net revenues, as compared with $11.8 million, or 41% of total net revenues, for the same period in 2000. This decrease was due to the decrease in the number of IAs as well as lower commissions resulting from lower sales revenue. General and 15 administrative expenses were $6.9 million, or 65% of total net revenues for 2001, as compared to $6.4 million, or 22% of total net revenues, for the same period in 2000. General and administrative expenses increased as a percentage of total revenues in fiscal 2001 due to the write-off of $1 million for receivables that we deemed were uncollectible and our purchase for $1.1 million of a downline from the Maxxis Millionaire Society, a Georgia partnership in which Ivey Stokes, our Chairman, Chief Executive Officer and President, and Alvin Curry, our Chief Operating Officer, are partners. Total operating expenses as a percentage of net revenue increased to 91% of net revenues for fiscal 2001 from 63% of net revenues for fiscal 2000. Interest Expense. For the year ended June 30, 2001, interest expense was $448,000. The expense was largely comprised of interest costs related to the lease of the Maxxis Switch. Interest expense of $616,000 in fiscal 2000 was largely comprised of interest cost related to the lease of the Maxxis Switch. Net Income/Loss. Net Loss for fiscal 2001 was $4.0 million as compared to a net income of $1.0 million for the same period in 2000. YEAR ENDED JUNE 30, 2000 COMPARED WITH YEAR ENDED JUNE 30, 1999 Net Revenues. Total net revenues increased $16.8 million, or 136%, to $29.1 million for fiscal year ended June 30, 2000 from $12.3 million for the same period in 1999. The increase in total net revenues was primarily due to the increase in nutritional sales for the current year. Communications services revenues increased $1.2 million, or 14.6%, to $9.6 million for fiscal 2000 from $8.4 million for the same period in 1999. This increase was primarily due to increased phone card sales to our IAs and increased long distance telephone commissions resulting from our larger communications customer base and the increase in usage offset by a decrease caused by lower revenues per minute. Nutritional products revenues increased $15.6 million, or 1140%, to $17.0 million for fiscal 2000 from $1.4 million for fiscal 1999. This increase was primarily due to the more expansive product line we offered during fiscal 2000 and the promotional contests associated with our product line. Marketing services revenues decreased $73,000, or 3%, to $2.5 million for fiscal 2000 from $2.6 million for the same period in 1999. This decrease was due to the decrease in the number of new IAs. Cost of Goods and Services. Total cost of goods and services for fiscal 2000 was $9.2 million, or 32% of total net revenues, as compared to $3.8 million, or 31% of total net revenues, for the same period in 1999 as the result of flat communications services margins which was partially mitigated by an improvement in nutritional product and marketing services margins. Communications services cost was $5.3 million, or 18% of total net revenues, for fiscal 2000, as compared to $2.2 million, or 18% of total net revenues, for the same period in 1999. Nutritional products cost was $3.4 million or 12% of total net revenues for fiscal 2000 as compared to $662,000, or 5% of total revenues for the comparable 1999 period. This increase in the cost of nutritional products was due primarily to increased sales volume. Marketing services cost was $519,000, or 2% of total net revenues, for fiscal 2000, as compared to $947,000, or 8% of total net revenues, for the same period in 1999. The decrease in marketing services cost as a percentage of total net revenues was due primarily to an increase in overall sales and better control of expenses. Gross Margin. Gross margin increased to $19.9 million for fiscal 2000 from $8.6 million for the same period in 1999. As a percentage of total net revenues, gross margin was 68% for fiscal 2000 as compared to 69% for fiscal 1999. Operating Expenses. For fiscal 2000, selling and marketing expenses were $11.8 million, or 41% of total net revenues, as compared with $5.4 million, or 44% of total net revenues, for the same period in 1999. This decrease as a percentage of revenue was due to greater efficiency resulting from increased revenues. General and administrative expenses were $6.4 million, or 22% of total net revenues for 2000, as compared to $4.4 million, or 35% of total net revenues, for the same period in 1999. General and administrative expenses increased as a percentage of total revenues in fiscal 2000 due to higher legal and other expenses incurred in connection with the filing of tariffs in various states to offer 16 long distance service. Total operating expenses as a percentage of net revenue decreased to 63% of net revenues for fiscal 2000 from 79% of net revenues for fiscal 1999. Interest Expense. For the year ended June 30, 2000, interest expense was $616,000. The expense was largely comprised of interest costs related to the lease of the Maxxis Switch. Interest expense of $338,000 in fiscal 1999 was largely comprised of interest cost related to the lease of the Maxxis Switch and interest on the line of credit facility, partially offset by interest earned on overnight cash balances. Net Income. Net Income for fiscal 2000 was $1.0 million as compared to a net loss of $1.6 million for the same period in 1999. SEASONALITY We have historically experienced, and expect to continue to experience, significant seasonal fluctuations in the recruitment of its IAs and the sale of our products and services. Our operating results may vary significantly in the future, partly due to such seasonal fluctuations. Because of the potential quarterly fluctuations in our revenue and operating results, results for any particular quarter may not be indicative of future quarterly or annual results. LIQUIDITY AND CAPITAL RESOURCES From March, 2000 to May, 2000, we sold 992,022 shares of Series A Convertible Preferred Stock solely to accredited investors at a purchase price of $5.50 per share. From October, 2000 to December, 2000, we sold 267,824 shares of common stock solely to accredited investors at a purchase price of $5.50 per share. From January to February of 1999, we conducted a public offering of our common stock. Pursuant to this offering, we sold 46,450 shares of Common Stock at an offering price of $5.50 per share pursuant to a registration statement on Form S-1 (Commission File No. 333-38623). Our proceeds from the offering were approximately $255,475; our proceeds, net of offering expenses were approximately $1,000. On November 22, 1998, we entered into a line of credit with the Maxxis Millionaire Society, a Georgia partnership in which Ivey Stokes, our Chairman, Chief Executive Officer and President, and Alvin Curry, our Chief Operating Officer, are partners. The line of credit was amended on May 1, 1999. Pursuant to the line of credit, Maxxis may borrow up to $2,000,000 at 10% annual interest. Advances or interest thereon pursuant to the line of credit are payable on demand. As of June 30, 2001, there were no advances or accrued interest outstanding on this line of credit. In November 1997, we entered into a demand promissory note to fund expenses incurred in connection with the launch of our nutritional product line. As of March 23, 1998, we had borrowed $200,000 under such promissory note. On March 23, 1998, we converted the outstanding principal amount under the promissory note into units ("Units") at a price of $5.50 per Unit with each Unit consisting of one share of convertible preferred stock (the "Preferred Stock") and a warrant (a "Warrant") to purchase one share of Common Stock at a price of $5.50 per share. The Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution adjustment only upon a stock split, recapitalization or similar event; (iii) entitled to a liquidation preference over the Common Stock; and (iv) convertible into Common Stock at the option of the holder at any time commencing 14 months following the date of the issuance of the Preferred Stock and automatically upon the closing of a public offering that occurs at least 14 months following the issuance of the Preferred Stock and that provides us with gross proceeds of at least $7,500,000. The Warrants are entitled to an antidilution adjustment only upon a stock split, recapitalization or similar event, are not exercisable until 14 months following their date of issuance and remain exercisable at the option of the holder until the seventh anniversary of their issuance. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of the Preferred Stock and any additional preferred stock that may be issued in the future. We anticipate that cash generated from operations, together with additional borrowings or equity financings, will be sufficient to meet our capital requirements for the next 12 months. However, if we do not receive sufficient funds from our operations and borrowings and equity financings to fund our operations, we may need to raise additional capital. In addition, any increases in our growth rate, shortfalls in anticipated revenues, increases in expenses or significant acquisitions could have a material adverse effect on our liquidity and capital resources and could require us to raise 17 additional capital. We 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, additional lines of credit and private equity and debt financings. Our cash and financing needs for 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. For 2001, net cash used in operating activities was $4.1 million, compared to net cash provided by operating activities of $2.7 million for 2000. Operating activities for 2001 consisted primarily of a $4.0 million net loss and $180,000 in net adjustments to reconcile net income to operating cash flows, which net adjustments consisted primarily of $1.0 million of non-cash depreciation and amortization and $1.0 million in non-cash provisions for doubtful receivables offset by decreases in accrued compensation of $742,000, accrued expenses of $460,000 and deferred revenue of $516,000. Cash used in investing activities was $738,000 for 2001, as compared to $617,000 for 2000. Investing activities for 2001 consisted of capital expenditures of $738,000. Cash provided from financing activities was $155,000 for 2001, as compared to $2.7 million for 2000. Financing activities for 2001 consisted primarily of 1.2 million in proceeds from the sale of common stock offset by payments totaling $1.0 million on the lease obligation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, including our consolidated balance sheets as of June 30, 1999, 2000 and 2001 and consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of these years, together with the report of Cherry, Bekaert & Holland, L.L.P. dated December 21, 2001 and the report of Arthur Andersen LLP, dated September 22, 2000 are included on pages F-1 through F-8 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE On August 14, 2001, we dismissed the firm of Arthur Andersen LLP as our independent auditors. The decision to dismiss Arthur Andersen was authorized by the board of directors. The reports of Arthur Andersen on our financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of our financial statements for the fiscal year ended June 30, 2000 and June 30, 1999, and during any subsequent interim period preceding the dismissal of Arthur Andersen, there were no disagreements with Arthur Andersen on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Arthur Andersen, would have caused Arthur Andersen to make reference to the matter in their report. During the fiscal years ended June 30, 2000 and June 30, 1999, and during any subsequent interim period preceding the dismissal of Arthur Andersen, there were no "reportable events" to describe as specified in Item 304(a)(1)(v) of Regulation S-K. 18 On October 12, 2001, we engaged the firm of Cherry, Bekaert & Holland, L.L.P. as our independent auditors for the fiscal year ending June 30, 2001, to audit our financial statements. During our two most recent fiscal years and the subsequent interim period preceding the engagement of Cherry, Bekaert & Holland, we did not consult with Cherry, Bekaert & Holland on any matter requiring disclosure under Item 304(a)(2) of Regulation S-K. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS Our directors and executive officers are set forth below. Our Board of Directors consists of nine directors divided into three classes of directors, serving staggered three-year terms. Our directors and executive officers are elected to serve until they resign or are removed, or are otherwise disqualified to serve, or until their successors are elected and qualified. Our directors are elected at the annual meeting of shareholders. Our officers are appointed at the Board's first meeting after each annual meeting of shareholders. The ages of the persons set forth below are as of December 31, 2001.

IVEY J. STOKES has served as our Chairman of the Board of Directors since our inception and as our Chief Executive Officer and President since September 1999. Mr. Stokes began his marketing career in 1982 at A.L. Williams Corporation ("A.L. Williams") where he became one of less than 400 National Sales Directors out of 1.3 million insurance agents. In March 1991, Mr. Stokes left the financial services industry to launch his own independent marketing firm, Global Marketing Alliance ("Global Alliance"). Over the next five years, Mr. Stokes became one of the leading money earners in several national network marketing firms. Mr. Stokes' marketing firm, Global Alliance, has sponsored and trained over 150,000 distributors since 1991. Mr. Stokes has a bachelors degree in industrial management from the Georgia Institute of Technology. ALVIN CURRY has served as a director since our inception. He also serves as our Executive Vice President and Chief Operating Officer. Mr. Curry started his marketing career in 1986 with A.L. Williams, where he attained the position of Senior Vice President in less than three years. In March 1991, Mr. Curry left the financial services industry to join Mr. Stokes in Global Alliance. Mr. Curry attended Northwest Mississippi Junior College and Tacoma Community College, and he received a degree from the Knapp College of Business. DECHANE CAMERON has served as Chief Financial Officer for the Maxxis Group since February 2000 after serving as Controller for Maxxis Communications since he joined us 1999. Before joining us, Mr. Cameron served as Controller with Meyer Laminates from 1997 to 1999. Prior to that, Mr. Cameron served as Accounting Manager with Premier Medical Network from 1994 to 1997. Other positions held by Mr. Cameron include Senior Accountant with Eastern Foods, Inc. and Matson, Driscoll & Damico. Mr. Cameron is a member of the National Association of Management Accountants, the National Association of Black Accountants, and holds a Bachelors of Science in Accounting from Clemson University. 20 LARRY W. GATES, II has served as Vice President since our inception and as a director since May 1997. Mr. Gates became a part-time independent insurance agent for A.L. Williams in 1989 while serving in the U.S. Army. In 1993, he left the financial services industry and became a full-time independent marketer of telecommunications services through his own independent marketing firm, Classic Enterprises. Mr. Gates built a downline of over 10,000 distributors between 1993 and 1996. Mr. Gates has an associates degree from Pierre College. HENRY STEVE JOHNSON has served as a director since July, 2001. Mr. Johnson has served as an independent associate with us since March of 1997. Mr. Johnson has a Master's degree from the University of Michigan. DAVID FINKELSTEIN has served as a director since July, 2001. During the last five years, Mr. Finkelstein has served as a marketer and educator with respect to home based business industries. Mr. Finkelstein received a Bachelor of Arts in Business from Michigan State University. SANDRA JORDAN has served as a director since July, 2001. Ms. Jordan has served as a professor of law at the University of Pittsburgh school of law since 1989 and is currently a tenured professor. Ms. Jordan received her Juris Doctor degree in 1979 from the University of Pittsburgh school of law and received her Bachelor of Science in Education from Wilbeforce University. GEORGE STEINBERGER has served as a director since July, 2001. Mr. Steinberger served as a Vice President and Manager of Washington Federal Savings from 1987-1998, and was a member of the advisory board of the Salem Housing Authority from 1993 to 1998. Mr. Finkelstein attended the University of Oregon. ROBERT JAMES GLOVER, JR. has served as a director since our inception. Mr. Glover started his marketing career as an independent insurance agent with A.L. Williams in 1985, where he attained the sales position of Senior Vice President. In December 1993, Mr. Glover left the financial services industry and became an independent marketer of telecommunications services through his own independent marketing firm, Glover Enterprises. Mr. Glover's network marketing firm has sponsored and trained over 10,000 distributors. Mr. Glover attended Maryland University. TERRY HARRIS has served as a director since May 1997. Since 1982, Mr. Harris has served as Pastor and President of Tacoma Christian Center Inc. Mr. Harris has a bachelors degree from the University of Puget Sound and attended Rhema Bible School. COMMITTEES OF THE BOARD The Executive Committee of our Board of Directors exercises, during the interval between Board meetings, all of the powers of our Board of Directors with certain limitations. During the year ended June 30, 2001, there were no meetings of our Executive Committee. The Audit Committee of the Board of Directors reviews, with our independent public accountants, our annual financial statements, reviews the work of such independent public accountants and makes annual recommendations to the Board of Directors for the appointment of independent public accountants for the ensuing year. The Audit Committee also reviews the effectiveness of our financial and accounting functions, organization, operations and management. During the year ended June 30, 2001, the Audit Committee was composed of Terry Harris, Charles Bernstein and Phil Lundquist. However, following the re-composition of our board of directors, our Audit Committee is currently composed of Terry Harris, David Finkelstein and George Steinberger. Messrs. Harris, Finkelstein and Steinberger are responsible for the review of the effectiveness of our financial and accounting functions, organization, operations and management for the financials as of and for the year ended June 30, 2001. The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of our officers and administers the issuance of stock options to our officers, employees, consultants and advisors. The Compensation Committee also reviews general policy matters relating to the compensation and benefits of our employees. During the year ended June 30, 2001, there were no meetings of our Compensation Committee. We do not have a standing nominating committee. The Board of Directors or the Executive Committee nominates candidates to stand for election as directors. Our Amended and Restated Bylaws permit shareholders to make nominations for directors but only if such nominations are made pursuant to timely notice in writing to the Secretary of 21 Maxxis. To be timely, notice of shareholder nominations for directors must be delivered in writing to the Secretary of Maxxis no later than 90 days prior to the anniversary of the previous year's annual meeting, together with the identity of the nominator and the number of shares of Common Stock owned, directly or indirectly, by the nominator. During the year ended June 30, 2001, our Board of Directors held one meeting. All of our directors have attended 75% or more of the aggregate of all Board meetings and all meetings of committees of which they were members. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION Members of the Board of Directors are reimbursed for their out-of-pocket expenses for each meeting attended, but otherwise serve without compensation. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the compensation earned by our Chief Executive Officer during the years ended June 30, 2001, 2000 and 1999. No other executive officers received a combined salary and bonus in excess of $100,000 during the years ended June 30, 2000 and 2001. SUMMARY COMPENSATION TABLE

--------- (1) In October 2000, we purchased a downline from the Maxxis Millionaire Society for $1.1 million. Ivey Stokes, our Chief Executive Officer and Alvin Curry, our Chief Operating Officer, are partners in the Maxxis Millionaire Society. OPTION GRANTS DURING FISCAL 2001 As of June 30, 2001, no options had been granted to our Chief Executive Officer during the year ended June 30, 2001. EMPLOYMENT AGREEMENT In September 1999, our Executive Committee appointed our Chairman of the Board, Ivey J. Stokes, to serve as our Chief Executive Officer and President. Mr. Stokes is not presently a party to an employment agreement with us. SALES REPRESENTATIVE AGREEMENTS We entered into independent sales representative agreements (collectively, the "Sales Representative Agreements") with ten independent sales representatives, including Messrs. Stokes, Gates and Glover. The Sales Representative Agreements provide for a minimum fee of $800.00 per week. Each sales representative is also eligible to receive quarterly payments of a performance bonus which is a percentage of total revenue from Maxxis 2000. To be paid a bonus, a sales representative must have 180 new activations in a quarter. The bonus amount is then determined by the number of open centers in that quarter. The bonus ranges from 1% to 5% based on Production. Each sales representative 22 is an independent contractor, and we do not exercise control over the activities of the sales representatives other than as set forth in the Sales Representative Agreements. Each of the Sales Representative Agreements has a term of one year, and the term renews daily for an additional year until either party fixes the remaining term at one year by giving written notice. We can terminate each sales representative upon death or disability (as defined in the Sales Representative Agreements) or with or without cause upon delivery to the sales representative of a notice of termination. If a sales representative is terminated, the sales representative will receive any accrued fees through the termination date and any accrued performance bonus, unless the sales representative is terminated for cause. If the sales representative is our director or officer, the sales representative shall tender his resignation to such positions effective as of the termination date. Under the Sales Representative Agreements, each sales representative agrees to maintain the confidentiality of our trade secrets and confidential business information. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of December 31, 2001 by: (i) each person known by us beneficially to own more than 5% of the outstanding shares of the Common Stock; (ii) each of our directors; and (iii) all of our directors and executive officers as a group. Except as otherwise indicated, all persons listed have sole voting and investment power with respect to their shares.

--------- * Less than one percent (a) The address of the King David Trust and Alvin Curry is c/o Maxxis Group, Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The address of Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997 is 7839 Taylor Circle, Riverdale, Georgia 30274. (b) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Common Stock if such person has or shares voting power or investment power with respect to such security, or has the right to acquire beneficial ownership at any time within 60 days from December 31, 2001. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. (c) Includes 454,545 shares owned by the King David Trust of which Mr. Curry, a director of, is the trustee. Mr. Curry disclaims beneficial ownership of such shares. (d) All such shares are owned by the King David Trust of which Mr. Curry is the trustee and Mr. Stokes' minor children are the beneficiaries. Mr. Stokes, the Chairman of the Board, disclaims beneficial ownership of such shares. (e) All such shares are owned by Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997. Ms. Glover is the wife of Robert J. Glover, a director. Mr. Glover is the sole beneficiary and disclaims beneficial ownership of such shares. In addition, Ms. Glover disclaims beneficial ownership of such shares. (f) Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997 of which Mr. Glover is the sole beneficiary. Mr. Glover disclaims beneficial ownership of such shares. (g) Excludes 454,545 shares owned by the King David Trust of which Mr. Stokes' minor children are the beneficiaries. Mr. Stokes disclaims beneficial ownership of such shares. 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In October 2000, we purchased a downline from the Maxxis Millionaire Society for $1.1 million. Ivey Stokes, our Chief Executive Officer and Alvin Curry, our Chief Operating Officer, are partners in the Maxxis Millionaire Society. On November 22, 1998, Maxxis entered into a line of credit with the Maxxis Millionaire Society, a Georgia partnership. The line of credit was amended on May 1, 1999. Ivey Stokes and Alvin Curry, Maxxis' Chairman of the Board and Chief Operating Officer are partners in the Maxxis Millionaire Society. Pursuant to the line of credit, Maxxis may borrow up to $2,000,000 at 10% annual interest. On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert J. Glover, a director, loaned us $50,000 to fund our initial start-up costs. We have repaid this loan. During the Inception Period, we paid a fee of $184,000 to IS 14, Inc. ("IS 14"), a former Delaware corporation which was controlled by certain of our directors and officers. The IS 14 fee was comprised of compensation for managerial, marketing and administrative services performed by certain of our officers and sales representatives prior to the establishment of our payroll. IS 14 has been dissolved, and we will not make any additional payments to IS 14. Certain of the transactions described above may be on terms more favorable to officers, directors and principal shareholders than they could obtain in a transaction with an unaffiliated third party. We have adopted a policy requiring that all material transactions between Maxxis and its officers, directors or other affiliates must: (i) be approved by a majority of the disinterested members of our Board of Directors; and (ii) be on terms no less favorable to us than could be obtained from unaffiliated third parties. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following consolidated financial statements are filed as a part of this Report and are attached hereto as pages F-1 through F-30: Consolidated Balance Sheets as of June 30, 2000 and 2001 Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 30, 1999, 2000 and 2001 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001 Notes to Consolidated Financial Statements Condensed Consolidated Balance Sheet as of September 30, 2001 (unaudited) Consolidated Statements of Operations for the three months ending September 30, 2001 and September 30, 2000 (unaudited) Consolidated Statements of Cash Flows for the three months ending September 30, 2001 and September 30, 2000 (unaudited) (A)(2) FINANCIAL STATEMENT SCHEDULES 24 (A)(3) EXHIBITS

25 10.26+### Telecommunications Services Agreement between Worldcom Network Services, Inc. and the Maxxis Communications dated as of January 21, 1999. 10.27### Program Enrollment Terms to the Telecommunications Services Agreement dated as of January 21, 1999 between Worldcom Network Services, Inc. and the Maxxis Communications. 10.28+### Master Service Agreement between IXC Communications Services, Inc. and the Company dated as of March 25, 1999. 10.29### Amendment to the Line of Credit between the Company and the Maxxis Millionaire Society dated as of May 1, 1999. 21.1### Subsidiaries of the Company. 24.1 Power of Attorney (contained on the signature page hereof).

--------- * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-38623). ** Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1998 as filed with the Commission on September 25, 1998. # Incorporated by reference to the Company's Form 109-Q for the quarter ended September 30, 1998 as filed with the Commission on November 12, 1998. ## Incorporated by reference to the Company's Form 10-Q for the quarter ended December 31, 1998 as filed with the Commission on February 16, 1999. ### Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1999 as filed with the Commission on October 13, 2000. + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the Commission. (B) REPORTS ON FORM 8-K Form 8-K filed August 20, 2001 Filing under Item 4 regarding the dismissal of the firm Arthur Andersen, LLP as our independent auditors. Form 8-K filed October 17, 2001 Filing under Item 4 regarding the engagement of Cherry, Bekaert & Holland, L.L.P. as our independent auditors. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. MAXXIS GROUP, INC. February 14, 2002 By: /s/ Ivey J. Stokes ---------------------------------------- Ivey J. Stokes Chief Executive Officer POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, IVEY J. STOKES and DECHANE CAMERON, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report (Form 10-K) and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. February 14, 2002 /s/ Ivey J. Stokes ------------------------------------------- Ivey J. Stokes Chairman of the Board, Chief Executive Officer and President (Principal executive officer) February 14, 2002 /s/ DeChane Cameron ------------------------------------------- DeChane Cameron Chief Financial Officer (Principal financial and accounting officer) ------------------------------------------- Steve Johnson Director February 14, 2002 /s/ Larry W. Gates, II ------------------------------------------- Larry W. Gates, II Vice President, Secretary, and Director ------------------------------------------- Sandra Jordan Director 27 /s/ Alvin Curry ------------------------------------------- February 14, 2002 Alvin Curry Chief Operating Officer and Director February 14, 2002 /s/ Robert J. Glover, Jr. ------------------------------------------- Robert J. Glover, Jr. Director February 14, 2002 /s/ Terry Harris ------------------------------------------- Terry Harris Director ------------------------------------------- David Finkelstein Director ------------------------------------------- George Steinberger Director 28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 [Cherry, Bekaert & Holland, L.L.P. letterhead] INDEPENDENT AUDITORS' REPORT To the Board of Directors Maxxis Group, Inc. and Subsidiaries Tucker, Georgia We have audited the accompanying consolidated balance sheet of Maxxis Group, Inc. and Subsidiaries as of June 30, 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the financial position of Maxxis Group, Inc. and Subsidiaries as of June 30, 2001 and the results of their operations and their cash flows for the year ended June 30, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Cherry, Bekaert & Holland, L.L.P. Atlanta, Georgia January 31, 2002 F-2 [Andersen letterhead] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Maxxis Group, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of MAXXIS GROUP, INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1999 and 2000 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Maxxis Group, Inc. and subsidiaries as of June 30, 1999 and 2000 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Atlanta, Georgia September 22, 2000 F-3 MAXXIS GROUP, INC AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2001 and 2000

The accompanying notes are an integral part of these consolidated statements. F-4 MAXXIS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the years ended June 30, 2001, 2000, and 1999

The accompanying notes are an integral part of these consolidated statements. F-5 MAXXIS GROUP, INC AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit) For the years ended June 30, 2001, 2000, and 1999

The accompanying notes are an integral part of these consolidated statements. F-6 MAXXIS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the years ended June 30, 2001, 2000, and 1999

F-7 MAXXIS GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) For the years ended June 30, 2001, 2000, and 1999

The accompanying notes are an integral part of these consolidated statements. F-8 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000 and 1999 NOTE 1 ORGANIZATION AND PRESENTATION Description of Business and Operations Maxxis Group, Inc., a Georgia corporation, was incorporated on January 24, 1997 ("Inception") and is headquartered in Tucker, Georgia. Maxxis Group, Inc.'s principal business operations are carried out through its wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc., which began operations in March 1997, and Maxxis Nutritionals, Inc., which began operations in December 1997. Maxxis Group, Inc., together with its wholly owned subsidiaries (collectively referred to as the "Company"), was founded for the purpose of selling communications products and services, private label nutritional products, and other consumable products and services through a multilevel marketing system of independent associates ("IAs") to subscribers throughout the United States. The Company currently markets long-distance services and communications services, such as travel cards, prepaid phone cards, 800 service, Internet access, Web page development and hosting services, and international telecommunications service, as well as private label nutritional products. 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 employees, train and manage both current and new employees, and expand the level of IAs. Growth may place a significant strain on the Company's operational resources and systems, and failure to effectively manage growth would have a material effect on the Company's business. For the year ended June 30, 2001, the Company incurred a net loss of approximately $4.0 million and experienced net cash used in operations of approximately $4.1 million. In addition, the Company's ratio of current assets to current liabilities was .64 at June 30, 2001. These matters may indicate doubt regarding the Company's ability to continue as a going-concern. To address these issues management of the Company has implemented financial control plans to effectively manage the Company's cost structure and to enhance the Company's customer base. The ability of the Company to continue is dependent upon the success of management's plans. F-9 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of Maxxis Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Communications services revenues consist of sales of prepaid phone cards to IAs, commissions generated from an agreement to resell long-distance services, long-distance services directly provided by the Company and from Internet related services. From inception through March 1999, the Company purchased prepaid phone cards from an independent tariffed long-distance reseller (the "Reseller"), and IAs, in turn, purchased these prepaid phone cards from the Company. Revenues from prepaid phone cards were recognized when the cards were sold to IAs, net of an estimate of sales returns for defective or unused cards. Active IAs have the right to return defective or unused cards for up to 30 days after the date of purchase. IAs that terminate their relationship with the Company also have up to one year from the date of purchase to return cards that are unused and sealed in original packaging, for a partial refund. Communications services in fiscal year 1999 also include long distance revenues generated by the Company's agreement with the Reseller under which the Company received a percentage of the gross long-distance revenues generated by the Company's customers, less billing adjustments. The Company recognized long-distance revenues when services were provided by the Reseller, net of an estimate for billing adjustments. The Reseller assumed the risk of all bad debts. Amounts due to the Company from the Reseller are included in communications receivable in the accompanying balance sheet. In February 1999, the Company entered into an agreement to lease telephone switching equipment (the "Maxxis Switch"). The Maxxis Switch provided the Company with the ability to directly provide long-distance services. In March 1999 ("March Agreement") the Company entered into an agreement with two independent tariffed long-distance suppliers to provide for additional capacity for F-10 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (continued) telecommunications traffic that is not routed through the Maxxis Switch. In April 1999, the Company began transferring its existing long-distance customers from the Reseller's network to the Maxxis Switch and began routing traffic through the long-distance suppliers under the March Agreement. In addition, the Maxxis Switch began carrying traffic related to the Company's prepaid phone cards (the "Switch Phone Cards"). The Company recognizes long-distance revenues as services are provided, net of an estimate for billing adjustments. The Company assumes the risk of all bad debts. Amounts due to Company related to direct long-distance services are included in accounts receivable in the accompanying balance sheets. Revenue from Web Hosting services is recognized as services are provided to the IAs. Nutritional services revenues consist of sales of private label nutritional products manufactured by various suppliers and are recorded as products are shipped to IAs, net of an estimate of returned products. Marketing services revenues primarily consist of revenue from IAs for the sale of distributor kits and sales aids, which include forms, promotional brochures, marketing materials, and presentation materials designed to assist IAs in the conduct of their business. Deferred Revenue Deferred revenue consists of the annual nonrefundable renewal fee assessed to IAs, unused time related to Switch Phone Cards, unearned web site hosting revenues and cash received for unshipped nutritional products. The annual nonrefundable renewal fee provides IAs with the right to sell the Company's products and services. This fee is assessed to IAs after their first year with the Company. The Company recognizes this revenue on a straight-line basis over the IAs' renewal period. Revenue generated from unused time on the Switch Phone Cards is recognized as the time is used. F-11 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Costs of Goods and Services Sold Communications services costs primarily include the costs of purchasing prepaid phone cards from the Reseller in fiscal year 1999, the cost of long-distance network services purchased from the long-distance suppliers, and depreciation expense related to the Maxxis Switch. Nutritional services costs include the costs of purchasing nutritional products from third party suppliers. Marketing service costs include the costs of printing and designing associate applications, starter kits, associate memberships, and other sales aids. Selling and Marketing Expenses Selling and marketing expenses primarily consist of commissions paid to IAs based on their sponsorship of the new IAs and on the sale of communications services and nutritional products. General and Administrative Expenses General and administrative expenses consist of salary expense for the Company's customer service personnel, office staff, and executive personnel in addition to the cost of the IAs support services and general operating expenses. Concentrations of Risks The Company's customers are primarily residential and are not concentrated in any specific geographic region of the United States. The Company has agreements with two long-distance providers to provide the network services required to originate and terminate calls through the Maxxis Switch and to provide switched services for the telephone traffic that does not go through the Maxxis Switch. There can be no assurance that the Company could enter into new contracts with other suppliers if these agreements were terminated. The Company markets a line of private label nutritional products. All of the nutritional products offered and distributed by the Company are developed and F-12 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentrations of Risks (continued) manufactured by third party suppliers. Certain nutritional products the Company offers are proprietary to such suppliers. The Company does not have any written contracts or commitments from any of these suppliers or manufacturers. There can be no assurance that these suppliers will continue to be reliable suppliers to the Company. The Company's success will depend heavily upon its ability to attract, maintain, and motivate a large base of IAs who, in turn, sponsor other IAs and sell the Company's products. The Company anticipates significant turnover among IAs, which the Company believes, is typical of direct selling organizations. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company maintains cash accounts in several financial institutions in the Atlanta area. Balances with a specific institution may at times exceed insured amounts. The Company considers all highly liquid investment and deposit accounts with an original maturity of three months or less to be cash equivalents. Communications Receivable A summary of changes in the allowance for doubtful accounts for the years ended June 30, 2000 and 1999 is as follows:

F-13 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Communications Receivable (continued) All communication receivables were written off during the year ended June 30, 2000. Accounts Receivable A summary of changes in the allowance for doubtful accounts for the years ended June 30, 2001, 2000 and 1999 is as follows:

Inventories Inventories consist of the following as of June 30, 2001 and 2000.

Inventories are valued at the lower of purchased cost (determined on a first-in, first-out basis) or market. Property and Equipment Property and equipment consist primarily of furniture and fixtures, office equipment, computer equipment, and leasehold improvements, which are stated at cost and are depreciated using the straight-line method over the estimated useful lives of three to five years. F-14 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and Equipment (continued) The Company continually evaluates the propriety of the carrying amounts of long-lived assets as well as the depreciation periods to determine whether current events and circumstances warrant adjustments to the carrying values and/or revised estimates of useful lives. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires that deferred income taxes be provided based on the estimated future tax effects of differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes calculated based on provisions of enacted tax laws. Income/(Loss) Per Share The Company calculates earnings per share in accordance with SFAS No. 128, "Earnings Per Share", which requires the computation of (loss)/ income per share on both a basic and diluted basis. Basic (loss)/income per share is determined using the weighted average number of shares of outstanding common stock over the course of the fiscal year. Diluted (loss)/income per share is computed using the weighted average number of common stock and share equivalents outstanding considering the dilutive effects of outstanding stock options and warrants as determined using the treasury stock method and convertible equity securities using the "if converted" method. All outstanding options and warrants issued by the Company carry exercise prices which are equal to the current market value of the Company's common stock; therefore, they have no dilutive effect to (loss)/ earnings per share for the years ended June 30, 2001, 2000 and 1999. The Series A Convertible Preferred Stock is assumed converted at the later of the date the shares were issued or the beginning of the period in the determination of diluted weighted average shares. Capitalized Software Development Costs Certain software development costs pertaining to a software application which is used internally for processing applications and for customer service have been F-15 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capitalized Software Development Costs (continued) capitalized as incurred. Capitalization of software development cost begins upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgement by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life, and changes in software and hardware technologies. Software development costs are amortized over an estimated useful life of three years, and amortization expenses were approximately $50,000, $185,000, and $136,000 for the years ended June 30, 2001, 2000, and 1999. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable, and debt. The carrying amounts of cash, accounts receivable, and accounts payable approximate their values because of the short-term nature of such instruments. The carrying value of the Company's debt approximates fair value because the terms of the Company's debt approximate terms currently available on similar debt. NOTE 3 PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30, 2001 and 2000:

Depreciation expense was $996,000, $1,276,000, and $365,000 for the years ended June 30, 2001, 2000, and 1999. F-16 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 4 CAPITAL LEASE OBLIGATIONS On September 29, 1998, the Company entered into certain leases for telephone switching equipment, which are classified as capital lease obligations. Payments on the lease are due in monthly installments of $118,000 and carry an imputed rate of interest of approximately 12%. These leases expire in 2004 and contain purchase options which are exercisable at the end of the original lease terms. The capital lease obligation is secured by the intangible and tangible assets of the Company. Assets financed under capital leases are included in property and equipment. Depreciation expense on the assets under capital lease was approximately $329,000 for the year ending June 30, 2001. Maturities of capital lease obligations for the years subsequent to June 30, 2001 are as follows: 2002 $ 1,416,000 2003 1,416,000 2004 706,000 ----------- 3,538,000 Less: Amounts representing interest (435,000) ----------- 3,103,000 Less: Current maturities (1,233,000) ----------- Long-term capital lease obligations $ 1,870,000 ===========

During the year ended June 30, 2001, the Company, in evaluating the estimated useful life of the telephone switching equipment, determined that the appropriate estimated useful life of the asset will now be approximately fifteen years. Prior to 2001, the Company was depreciating the asset over an estimated useful life of five years. The Company has accounted for the change in the estimated useful life as a change in accounting estimate. NOTE 5 INCOME TAXES The Company's deferred tax assets and liabilities are as follows as of June 30, 2001 and 2000: F-17 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 5 INCOME TAXES (CONTINUED)

Based on uncertainties associated with the future realization of deferred tax assets, the Company established a valuation allowance against the net deferred tax assets of the Company. At June 30, 1999, the Company had net operating loss carryforwards of approximately $1,719,000, of which $674,000 was utilized in 2000. At June 30, 2001 the Company has a total net operating loss carryforward of approximately $5,000,000 that will begin expiring in the year 2012 unless previously utilized. A reconciliation of the benefit for income taxes at the statutory federal income tax rate to the Company's tax benefit as reported in the accompanying statements of operations is stated below:

NOTE 6 LINE OF CREDIT On November 22, 1998, the Company entered into a line of credit (the "Line of Credit") with the Maxxis Millionaire Society, a Georgia partnership in which certain members of the Company's management are partners. The Line of Credit was amended on May 1, 1999. Pursuant to the Line of Credit, the Company may borrow up to $2,000,000 at 10% annual interest. Advances or interest thereon pursuant to the Line of Credit are payable on demand. As of June 30, 2001 there were no advances or accrued interest outstanding on this line of credit. F-18 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 7 COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain office equipment and office space under operating leases. For the years ended June 30, 2001, 2000 and 1999 the Company's total rental expenses were approximately $150,000 to $200,000, annually. Minimum lease payments under noncancelable leases for the years subsequent to June 30, 2001 are as follows: 2002 $216,000 2003 185,000 -------- $401,000 ========

Litigation The Company is subject to various claims and legal actions which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of any currently existing such matters will not have a material adverse effect on the Company's financial position, liquidity, or results of operations. Telecom Service Agreements The Company entered into agreements for telecommunications services with two independent tariffed long-distance providers (collectively, the "Suppliers" or individually, the "Supplier") in January 1999 (the "January Agreement") and March 1999 (the "March Agreement"). Under the March Agreement, the Company is obligated to purchase a minimum monthly amount of telecommunications services. Employee Agreements The Company has entered into employment agreements with certain executive officers (the "Employment Agreements"). Generally, the Employment Agreements provide for a minimum weekly salary. In addition, the employee F-19 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 7 COMMITMENTS AND CONTINGENCIES (CONTINUED) Employee Agreements (continued) may participate in a bonus program and shall be eligible to receive quarterly or annual payments of a performance bonus based on the achievement of targeted levels of performance and such other criteria as the Board of Directors of the Company shall establish from time to time. The chief executive officer Employment Agreement provided for an additional bonus payment on July 1, 1999 and 2000. All unpaid bonuses are included in accrued compensation in the accompanying balance sheets. Each of the Employment Agreements has a one year term, and renews daily until either party fixes the remaining term at one year by giving written notice. The Company can terminate each employee upon death or disability (as defined in the Employee Agreements) or with or without cause upon delivery of a notice of termination. If the employee is terminated because of death or disability, the employee or his/her beneficiary is entitled to receive any accrued compensation through the termination date along with any accrued performance bonus. If the employee is terminated without cause, the Company is required to pay to the employee severance payments equal to his/her minimum base salary for each week during the six-month period following the termination date. If the employee is a director or officer of the Company or any of its affiliates, the employee must tender his/her resignation to such position effective as of the termination date. Pursuant to the Employment Agreements, each employee agrees to maintain the confidentiality of the Company's trade secrets and confidential business information. The employee also agrees for a period of one year following termination or resignation for any reason, not to compete with or solicit employees or customers of the Company or any of its affiliates within a 30-mile radius of the Company's corporate offices. The noncompete period is reduced to six months if the employee is terminated without cause. Relationship with IAs Because IAs are classified as independent contractors and not as employees of the Company, the Company does not provide them with the same level of direction and oversight as Company employees. While the Company has policies and rules in place governing the business conduct of IAs and intends to review periodically the sales practices of its IAs, it may be difficult to enforce such policies and rules. F-20 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 7 COMMITMENTS AND CONTINGENCIES (CONTINUED) Relationship with IAs (continued) Violation of these policies and rules might reflect negatively on the Company and may lead to complaints to or by various federal and state regulatory authorities. Violation of the Company's policies and rules could subject the Company and its long-distance suppliers to complaints regarding the unauthorized switching of suppliers' long distance carriers (also known in the industry as "slamming"). Such complaints could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of Network Marketing and Effect of State Laws The Company's network marketing system is subject to or affected by extensive government regulation, including, without limitation, federal and state regulations governing the offer and sale of business franchises, business opportunities, and securities. Various governmental agencies monitor direct selling activities, and the Company could be required to supply information regarding its marketing plan to such agencies. Although the Company believes that its network marketing system is in material compliance with the laws and regulations relating to direct selling activities, there can be no assurance that legislation and regulations adopted in particular jurisdictions in the future will not adversely affect the Company's business, financial condition, and results of operations. The Company could also be found to be in noncompliance with existing statues or regulations as a result of, among other things, misconduct by IAs, over whom the Company has limited control; the ambiguous nature of certain of the regulations; and the considerable interpretive and enforcement discretion given to regulators. Any assertion or determination that the Company or IAs are not in compliance with existing statues or regulations could have a material adverse effect on the Company's business, financial condition, and results of operations. An adverse determination by any one state on any regulatory matter could influence the decisions of regulatory authorities in other jurisdictions. NOTE 8 SHAREHOLDER'S EQUITY The Company and certain of its shareholders have entered into a shareholders' agreement whereby the shareholders agreed to certain restrictions on the transfer or other disposition of the shares of common stock held by each holder. In the F-21 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 8 SHAREHOLDERS' EQUITY (CONTINUED) event a shareholder intends to transfer his/her common stock to a nonpermitted transferee, the Company and the remaining shareholders have a right of first refusal to purchase the transferring shareholder's common stock at fair market value. In addition, if the Company terminates a shareholder's employment or engagement as a sales representative or consultant for cause, the Company has the right to repurchase, at fair market value, an amount of the shareholder's common stock which starts at 100% and declines 20% for each completed year of service with the Company. If the right of first refusal or the Company's right to purchase is exercised, these provisions could have the effect of further concentrating the stock ownership and voting power of the Company. In May 1997, the Company sold 72,727 shares of common stock to an executive officer for $1.65 per share and accepted as payment a $120,000 note receivable from an affiliate of that individual due on the earlier of (i) May 1, 2002 or (ii) the closing of an underwritten initial public offering with aggregate net proceeds of at least $5,000,000. The note is guaranteed by the executive officer, bears interest at 8.75% per year, is compounded annually, and is classified as a shareholder note receivable in the shareholders' equity section of the balance sheets. During 2000, the shares were returned to the Company and the related receivable was forgiven. In August 1997, the Company completed a private placement of shares of common stock at a price of $1.65 per share. Potential investors were required to complete subscription agreements for the common stock and to submit cash at the date of subscription. The Company reserved the right to reject a subscription and to refund amounts to a subscriber at any time prior to the acceptance of the subscription. At June 30, 1997, the Company had received paid subscriptions for 218,181 shares of common stock. Subsequent to June 30, 1997, the Company accepted these subscriptions and additional subscriptions for 53,014 shares of the common stock. Effective February 17, 1998, the Company declared a 1-for-11 reverse stock split for all classes of common stock. The Company also effected a plan of reorganization pursuant to which each outstanding share of Class A common stock and Class B common stock was converted to one share of common stock ("Common Stock"). All share, per share, and weighted average share information in the financial statements prior to this has been restated and now reflects this stock split and reorganization. F-22 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 8 SHAREHOLDERS' EQUITY (CONTINUED) On November 26, 1997, the Company entered into a promissory note (the "Note") agreement with various lenders for an aggregate principal amount up to $200,000, which was secured primarily by the assets of the Company. The Note accrued interest at 10%, payable monthly beginning on January 1, 1998, and the principal was due on demand. On March 23, 1998, the Note was exchanged for 36,359 shares of the Company's Series A nonvoting convertible Preferred Stock ("Series A Preferred Stock" or "Series A") and warrants (the "Warrants") to purchase 36,359 shares of the Company's Common Stock. The Warrants are exercisable 14 months after the issuance date and provide the right to purchase Common Stock at $5.50 per share. The Warrants expire seven years after the date of issuance. Additionally, in February 1998, the Company amended and restated its articles of incorporation such that the Company is authorized to issue 20,000,000 and 10,000,000 shares of no par value Common Stock and nonvoting preferred stock (the "Preferred Stock"), respectively. One million shares of the Company's Preferred Stock have been designated as Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock has a liquidation preference of $5.50 per share (as adjusted for any combinations, consolidations, stock distributions, or stock dividends with respect to such shares) plus all declared or accumulated but unpaid dividends. The Series A shareholders have the right to convert each share in to a share of Common Stock, pursuant to the articles of incorporation, at any time beginning 14 months after the date of issuance. On September 16, 1998, the board of directors adopted the Maxxis Group, Inc. 1998 Stock Option Plan which permits the Company to grant options to purchase shares of Common Stock to company officers, directors, key employees, advisors, and consultants. In December 1998, the board of directors granted options to purchase 59,133 shares of Common stock at an exercise price of $5.50 per share, the estimated fair value at the date of grant. The options vest based on time as defined in the option statement. As of June 30, 1999, 20,105 options were vested and exercisable. In addition, in December 1998, the board of directors granted options to purchase 6,819 shares of Common stock at an exercisable price of $-0- per share. The options vest based on time as defined in the option agreement. As of June 30, 1999, 3,410 of these options were vested and exercisable. The Company recorded $37,000 of compensation expense for these options for the year ended June 30, F-23 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 8 SHAREHOLDERS' EQUITY (CONTINUED) 1999. During fiscal year 2000, all 62,543 of these options were cancelled upon termination of the employee, to whom the options were granted, resulting in the reversal of previously recorded compensation expense. During the year ended June 30, 2000 the Company granted 119,781 stock options at an exercise price of $5.50 per option. The options expire within 10 years from the date of grant and vest over periods from immediate vesting to 10 years. From January to February of 1999, the Company conducted its public offering of common stock. Pursuant to this offering, the Company sold 46,450 shares of Common Stock at an offering price of $5.50 per share pursuant to a registration statement of Form S-1 (Commission File No. 333-38623). The Company's gross proceeds from the offering were approximately $255,475; the Company's proceeds, net of offering expenses were approximately $1,000. In 1999, the Company adopted the disclosure provision of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with provisions of SFAS 123, the Company is required to calculate pro forma compensation cost of all stock options granted using an option-pricing model. Accordingly, the fair value of the stock option grants has been determined utilizing the Black-Scholes method using the following assumptions for 2001 and 2000, respectively: a risk-free interest rate of approximately 6.43% and 6.43%, dividend yield of 0%, volatility of 50% and 50%, and an expected life of five years. Using these assumptions, the fair value of the stock options issued at the date of grant was $0 and $55,387 for 2001 and 2000, respectively. Pro forma compensation expense for the years ended June 30, 2001 and 2000 would have been $40,000 and $71,926, respectively. For options outstanding at June 30, 2001 the weighted average exercise price was $5.50 and the weighted average remaining contractual life was 9 years. At June 30, 2001, 115,481 options were vested and exercisable. From March, 2000 to May, 2000, the Company sold 992,022 shares of Series A Convertible Preferred Stock solely to accredited investors at a purchase price of $5.50 per share. From October, 2000 to December, 2000, the Company sold 267,824 shares of common stock solely to accredited investors at a purchase price of $5.50 per share. F-24 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 9 SALES REPRESENTATIVE AGREEMENTS The Company has entered into sales representative agreements (collectively, the "Sales Representative Agreements") with ten independent sales representatives. The Sales Representative Agreements provide for minimum weekly compensation, and quarterly payments of a bonus based on the achievement of targeted levels of performance. Unpaid bonuses are included in accrued compensation in the accompanying balance sheets. Each sales representative is an independent contractor, and the Company does not exercise control over the activities of the sales representatives other than as set forth in the Sales Representative Agreements. Each of the Sales Representative Agreements has a term of one year, and the term renews daily until either party fixes the remaining term of one year by giving written notice. The Company can terminate each sales representative upon death or disability (as defined in the Sales Representative Agreements) or with or without cause upon delivery to the sales representative of a notice of termination. If a sales representative is terminated, the sales representative will receive any accrued fees through the termination date and any accrued performance bonus, unless the sales representative is terminated for cause. If a sales representative is a director or officer of the Company or any of its affiliates, the sales representative shall tender his resignation to such position effective as of the termination date. Under the Sales Representative Agreements, each sales representative agrees to maintain the confidentiality of the Company's trade secrets and confidential business information. NOTE 10 RELATED PARTY TRANSACTION During the year ended June 30, 2001 the Company acquired from the Maxxis Millionaire Society, (a related party), certain business lines of the Maxxis Millionaire Society that were established through the Company. The Company paid approximately $1.1 million for the acquisition of the business lines. NOTE 11 SEGMENT REPORTING The Company is a multilevel network marketing company with continuing operations in three reportable segments: communications, nutritional products, and marketing services. F-25 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000 and 1999 NOTE 11 SEGMENT REPORTING (CONTINUED) The Company's communications services segment markets long-distance services and value-added services, such as travel cards, prepaid phone cards, 800 service, Internet Access, Web page development and hosting services, and international telecommunications service. The Company's nutritional products segment distributes a line of private label nutritional and health enhancement products. The Company's marketing services segment markets sales aids, distributor kits, marketing materials, and support training services. Included in corporate activities are general and administrative expenses and certain long-term assets related to the corporate group. The Company's segment reporting is as follows on the next page: F-26 MAXXIS GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) June 30, 2001, 2000, and 1999

F-27 MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET

F-28 MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

F-29 MAXXIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS THREE MONTHS ENDED (UNAUDITED)

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MAXXIS GROUP INC 10-K