10-Q 1 g74496e10-q.txt MAXXIS GROUP, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001. Or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________, 200_. Commission File Number: 0-31687 --------------- MAXXIS GROUP, INC. (Exact name of registrant as specified in its charter) GEORGIA 22-78241 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1901 MONTREAL ROAD, SUITE 108, TUCKER, GEORGIA 30084 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 696-6343 Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at February 19, 2002 Common Stock, no par value 1,810,743 ================================================================================ MAXXIS GROUP, INC. INDEX TO FORM 10-Q

~~Class~~PAGE ~~Outstanding~~---- atPART I FINANCIAL INFORMATION Item 1. Financial Statements............................................... 3 Condensed Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and June 1130, 2001................... ~~Common~~3 ~~Stock~~Condensed Consolidated Income Statements for the Three Months ended September 30, no2000 ~~par~~and ~~value~~2001 1(Unaudited)......... 4 Condensed Consolidated Statements of Cash Flows for the Three Months ended September 30,~~897,464~~ 2000 and 2001 (Unaudited)......... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 8 Item 3. Quantitative and Qualitative Disclosure About Market Risks...................................................... 13 PART II OTHER INFORMATION Item 1. Legal Proceedings.................................................. 13 Item 4. Submission of Matters to a Vote of Security Holders................ 13 Item 6. Exhibits and Reports on Form 8-K................................... 14 SIGNATURES

2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

~~PAGE~~SEPTEMBER 30, 2001 JUNE 30, 2001 ------------------ ~~PART~~------------- I(UNAUDITED) ~~FINANCIAL~~(AUDITED) ~~INFORMATION~~ASSETS ~~Item~~Current 1.assets: ~~Financial~~Cash ~~Statements~~and ~~(Unaudited)~~equivalents ~~Condensed~~.................................................... ~~Consolidated~~$ ~~Balance~~126,000 ~~Sheets~~$ as148,000 Accounts receivable, net of ~~March~~allowance ~~31,~~for ~~2001~~doubtful ~~(Unaudited)~~accounts ~~and~~of ~~June~~$484,000 30and $484,000, ~~2000~~respectively ....................... 3399,000 ~~Condensed~~341,000 ~~Consolidated~~Inventories, ~~Statements~~net of........................................................ ~~Operations~~1,330,000 ~~for~~1,402,000 ~~the~~Prepaid ~~Three~~expenses ~~Months~~ and ~~Nine~~other ~~Months~~current ~~ended~~assets ~~March~~............................... 31251,000 ~~2001~~276,000 ~~and~~------------ ~~2000~~------------ ~~(Unaudited)~~Total current assets .................................................. 2,106,000 2,167,000 Property and equipment, net ................................................ 4,650,000 ~~Condensed~~4,742,000 ~~Consolidated~~Capitalized ~~Statements~~software ofdevelopment ~~Cash~~costs, ~~Flows~~net ~~for~~................................ ~~the~~204,000 ~~Nine~~396,000 ~~Months~~Other ~~ended~~assets ~~March~~............................................................... 31123,000 ~~2001~~123,000 ~~and~~------------ ~~2000~~------------ ~~(Unaudited)~~Total assets ...................................................... 5$ ~~Notes~~7,083,000 to$ ~~Condensed~~7,428,000 ~~Consolidated~~============ ~~Financial~~============ ~~Statements~~LIABILITIES ~~(Unaudited)~~AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ 6$ ~~Item~~1,196,000 2.$ ~~Management's~~1,001,000 ~~Discussion~~Commissions ~~and~~payable ~~Analysis~~..................................................... of24,000 ~~Financial~~114,000 ~~Condition~~Accrued ~~and~~compensation ~~Results~~.................................................... of49,000 ~~Operations~~14,000 Taxes payable ........................................................... 8246,000 ~~Item~~316,000 3Current maturities of long-term capital lease obligations ............... ~~Quantitative~~1,233,000 ~~and~~1,233,000 ~~Qualitative~~Accrued ~~Disclosure~~liabilities ~~About~~..................................................... ~~Market~~108,000 ~~Risks~~100,000 Deferred revenue ........................................................ 14316,000 ~~PART~~362,000 II------------ ~~OTHER~~------------ ~~INFORMATION~~Total ~~Item~~current 1liabilities ............................................. ~~Legal~~3,172,000 ~~Proceedings~~3,140,000 Long-term liabilities: Contracts ............................................................... 14264,000 ~~Item~~110,000 5.Long-term ~~Other~~lease ~~Information~~obligations ............................................. 1,608,000 1,870,000 ------------ ------------ Total long-term liabilities ........................................... 141,872,000 ~~Item~~1,980,000 6------------ ------------ Shareholders' deficit: Preferred Stock, no par value; 10,000,000 shares authorized; 1,000,000 shares designated as Series A Convertible Preferred Stock of which 992,022 shares are issued and outstanding .............. ~~Exhibits~~4,976,000 4,976,000 Common Stock, no par value; 20,000,000 shares authorized; 1,810,743 and ~~Reports~~1,814,743 onshares ~~Form~~issued ~~8-K~~and outstanding, respectively ... 1,796,000 1,818,000 Subscription receivable ................................................. 14397,000 ~~SIGNATURES~~143,000 Accumulated deficit ..................................................... (5,130,000) (4,629,000) ------------ ------------ Total shareholders' equity ............................................ 152,039,000 2,308,000 ------------ ------------ Total liabilities and shareholders' equity ........................ $ 7,083,000 $ 7,428,000 ============ ============

The accompanying notes are an integral part of these consolidated statements. 3 MAXXIS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS THREE MONTHS ENDED (UNAUDITED)

~~MARCH~~SEPTEMBER 3130, ~~2001~~2000 ~~JUNE~~SEPTEMBER 30, ~~2000~~2001 ------------------ ------------------ ~~(UNAUDITED) ASSETS Current assets~~Revenues: ~~Cash~~Telecommunication services ................~~..............................................~~ $ ~~275,000 $ 4,867,000 Accounts receivable, net of allowance for doubtful accounts of $~~1,~~062~~057,000 ~~and~~ $~~931,000~~ ~~.................... 1~~965,~~274,~~000 ~~1,081,000~~Nutritional ~~Inventory~~products ......................~~...................................~~ 1,~~440~~259,000 1462,~~093,~~000 ~~Prepaid~~Marketing ~~expenses~~services ........................~~..........................~~ ~~492~~1,022,000 ~~237~~648,000 ------------ ------------ Total ~~current~~revenues ~~assets~~ .........................~~...................~~ 3,~~481~~338,000 72,~~278~~075,000 ~~Property~~----------- ~~and~~----------- ~~equipment,~~Cost ~~net~~of services: Telecommunication services ................~~..........................~~ 41,~~307~~032,000 5561,000~~,000~~ ~~Capitalized~~Nutritional ~~software~~services ~~development costs, net~~ ......................~~....~~ ~~404~~362,000 ~~358~~97,000 ~~Other~~Marketing ~~assets~~services ........................~~.................................~~ ~~110~~137,000 31198,000 ------------ ------------ Total ~~assets~~cost of services .................~~...............................~~ ~~$ 8~~1,~~302~~531,000 ~~$ 12~~856,~~667,~~000 ~~============~~----------- ~~============~~----------- ~~LIABILITIES~~Gross ~~AND~~Margin ~~SHAREHOLDERS' EQUITY Current liabilities: Accounts payable~~ ...........................~~.......................~~ ~~$ 677~~1,~~000 $ 814~~807,000 ~~Commissions payable ............................................... 35~~1,~~000 160~~219,000 ~~Accrued~~----------- ~~compensation~~----------- ~~..............................................~~Operating ~~33,000~~expenses: ~~756,000~~Selling ~~Taxes~~and ~~payable~~marketing .....................~~................................~~ ~~114~~881,000 ~~177~~660,000 ~~Current~~General ~~maturities~~and ofAdministrative ~~long-term capital lease obligations~~ ......... ~~968,000 974,000 Accrued liabilities~~ .......~~........................................~~ 891,~~000 813~~132,000 ~~Deferred revenue .................................................. 418~~966,000 ~~878,000~~ ------------ ------------ Total ~~current~~operating ~~liabilities~~expenses ..................~~.....................~~ 2,~~334~~013,000 41,~~572~~626,000 ~~Long~~-~~term~~---------- ~~liabilities:~~----------- ~~Line~~Operating ofIncome ~~credit~~ ........................~~............................~~ --(206,000) 65(407,000) ~~Long-term~~Interest ~~lease~~Income ~~obligations~~(Expense), net ..............~~.........................~~ 2(46,~~387,~~000) 3(94,~~107,~~000) ------------ ------------ ~~Total~~LOSS ~~long-term~~BEFORE ~~liabilities~~INCOME TAXES ....................~~.................~~ 2(252,~~387,~~000) 3(501,~~172,~~000) ~~Shareholders'~~PROVISION ~~equity:~~FOR ~~Preferred~~INCOME ~~Stock,~~TAXES no-- ~~par~~-- ~~value;~~----------- ~~10,000,000~~----------- ~~shares~~NET ~~authorized;~~LOSS ~~1,000,000 shares designated as Series A Convertible Preferred Stock of which 757,631 shares are issued and outstanding~~ ........ ~~4,978,000 5,141,000 Common Stock, no par value; 20,000,000 shares authorized; 1,814,743 shares issued and outstanding~~ ......................... ~~1,928,000 455,000 Accumulated earnings (deficit)~~ ...~~.................................~~ (3252,~~325,~~000) (~~673~~501,000) ~~------------~~=========== ~~------------~~=========== ~~Total~~NET ~~shareholders'~~LOSS ~~equity~~PER SHARE .......................... $ (0.16) $ (0.~~..........~~28) ~~3,581,000~~=========== ~~4,923,000~~=========== ~~------------~~BASIC ~~------------~~AND ~~Total~~DILUTED ~~liabilities~~WEIGHTED ~~and~~AVERAGE ~~shareholders'~~NUMBER ~~equity~~OF SHARES OUTSTANDING ..................... ~~$ 8~~1,~~302~~546,~~000~~919 ~~$ 12~~1,~~667~~810,~~000~~743 ============ ============

The accompanying notes are an integral part of these consolidated statements. 4 MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED ~~NINE~~SEPTEMBER ~~MONTHS ENDED MARCH 31~~30, ~~MARCH 31,~~ ------------------------------ ----~~--------------------------~~ ~~2001~~ 2000 2001 ~~2000~~ ----------- -~~----------~~ ----------- -~~----------~~ ~~Net~~CASH ~~revenues~~FLOWS FROM OPERATING ACTIVITIES: ~~Communications~~Net ~~services~~income (loss) ................................................. $ 1(252,~~263,~~000) ~~2,407,000~~ $ 3(501,~~399,~~000) ~~7,630,000~~Adjustments ~~Nutritional~~to ~~products~~reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................... ~~594~~176,000 8284,~~245,~~000 ~~2,387,000~~Provision ~~9,360,000~~for ~~Marketing~~Doubtful ~~services~~receivables .............................. ~~877,000~~-- ~~665~~18,000 ~~2,701,000~~Changes ~~1,940,000~~in ~~-----------~~assets ~~-----------~~and ~~-----------~~liabilities: ~~-----------~~Communications ~~Total~~receivable ~~net revenues~~ ..................................... ~~2,734,000 11,317,000 8,487,000 18,930,000~~ --~~---------~~ --~~---------~~ ~~-----------~~Accounts ~~-----------~~receivable ~~Cost of services: Communications services~~ ........................................... 1(15,~~286,~~000) 1(58,~~275,~~000) 2Inventories ................................................... (725,~~961,~~000) 472,~~001,~~000 ~~Nutritional~~Prepaid ~~products~~expenses .............................................. 5866,000 125,~~401,~~000 ~~624,000~~Other ~~1,730,000~~assets ~~Marketing services~~ .................................................. 2937,000 ~~161,000 351,000 555,000~~ --~~---------~~ ~~-----------~~Accounts ~~-----------~~payable ~~----------- Total cost of services~~ .............................................. 1(383,~~373,~~000) 2407,~~837,~~000 ~~3,936,000~~Commissions ~~6,286,000~~payable ~~----------- ----------- ----------- ----------- Gross margin~~ ........................................... 1(88,~~361,~~000) 8(90,~~480,~~000) ~~4,551,000~~Taxes ~~12,644,000~~payable ~~----------- ----------- ----------- ----------- Operating expenses: Selling and marketing~~ ................................................. ~~829~~(94,000) 5(70,~~103,~~000) ~~3,268,000~~Accrued ~~7,667,000~~compensation ~~General~~ and ~~administrative~~accrued liabilities .................... (1,~~467~~695,000) 143,~~298,~~000) 3Deferred revenue .............................................. (174,~~875,~~000) 4(46,~~079,~~000) ----------- -~~----------~~ ----------- -~~----------~~ Total ~~operating~~adjustments ~~expenses~~ ........................................... (2,~~296~~895,000) 6585,~~401,~~000 ~~7,143,000 11,746,000~~ ------------ ------------ Net cash provided (used) in operating activities ....... (3,147,000) 84,000 ------------ ------------ ~~Operating~~CASH ~~income~~FLOWS ~~(loss)~~FROM INVESTING ACTIVITIES: Capital expenditures .............................................. ~~(935,000)~~-- ~~2,079,000~~ (292,~~592,~~000) ~~898,000~~Software ~~Interest~~development ~~income~~costs ~~(expense)~~ ........................................ (649,000) (~~116~~192,~~00) (60,~~000) ~~(447,000)~~ ------------ ------------ Net cash used in investing activities .................. (49,000) (284,000) ------------ ------------ ~~Income~~CASH ~~(loss)~~FLOWS ~~before~~FROM ~~income~~FINANCING ~~taxes~~ACTIVITIES: Proceeds from sale of common stock ................................ ~~(941~~493,000) ~~1,963,000~~-- ~~(2,652,000)~~Repurchase ~~451,000~~of ~~Provision~~common ~~(benefit)~~stock ~~for income taxes~~ ........................................ -- --(22,000) --Proceeds --from ~~-----------~~sale ~~-----------~~of ~~-----------~~customer ~~-----------~~base ~~Net income (loss)~~ ................................ $-- ~~(941~~154,000) ~~1,963,000~~Proceeds ~~$(2,652,000)~~from ~~451,000~~subscriptions ~~===========~~for ~~===========~~preferred ~~===========~~stock ~~===========~~................... ~~Income~~-- 254,000 Proceeds from (~~loss~~payments on) ~~per~~line ~~share:~~of ~~Basic~~credit ........................ (65,000) -- Payments on capital lease obligations ............................. $ (~~0.52~~239,000) ~~1.21 $~~ (~~1.55~~208,000) ~~0.28~~------------ ~~===========~~------------ ~~===========~~Net ~~===========~~cash ~~===========~~provided ~~Diluted~~by financing activities .............. 189,000 178,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH EQUIVALENTS .......................... $ (~~0.52~~3,007,000) ~~1.21 $~~ (~~1.55~~22,000) ~~0.28~~CASH ~~===========~~AND ~~===========~~CASH ~~===========~~EQUIVALENTS, ~~===========~~beginning ~~Weighted average number~~ of ~~shares~~the ~~outstanding:~~period ~~Basic~~ ................... 4,867,000 148,000 ------------ ------------ CASH AND CASH EQUIVALENTS, end of the period ......................... 1,~~821~~860,~~282~~000 1126,~~617,637~~000 ~~1,704,355~~------------ ~~1,617,637~~------------ ~~===========~~SUPPLEMENTAL ~~===========~~CASH ~~===========~~FLOW ~~===========~~DISCLOSURES ~~Diluted~~OF NONCASH INVESTING AND FINANCING ACTIVITIES: Cash paid for interest ............................................ ~~1,821,282~~-- ~~1,617,637~~$ 157,~~704,355 1,617,637 =========== =========== =========== ===========~~000

The accompanying notes are an integral part of these consolidated statements. 5 MAXXIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRESENTATION We were incorporated on January 24, 1997 and are headquartered in Tucker, Georgia. Our principal business operations are carried out through our wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis Communications, Inc., each of which began operations in March 1997, and Maxxis Nutritionals, Inc., which began operations in November 1997. We were founded for the purpose of providing long-distance services, private label nutritional products, and other services and consumable products through a multilevel marketing system of independent associates, or "IAs". Our IAs market communications and Internet services and nutritional and health enhancement products. Our ability to grow and expand may require us to implement and expand our operational and financial systems, recruit additional IAs, and train and manage both current and new IAs. Growth may place a significant strain on our operational resources and systems, and failure to effectively manage any such growth might have a material adverse effect on our business, financial condition, and results of operations. 2. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of our management, the unaudited financial statements contain all the normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2001 and the results of our operations and our cash flows for the three-month periods ended September 30, 2001 and 2000 in conformity with generally accepted accounting principles. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. 3. INVENTORIES Inventories consist of the following:

~~NINE~~SEPTEMBER ~~MONTHS~~30, ~~ENDED~~JUNE ~~MARCH 31~~30, ~~--------------------------------~~2001 2001 ~~2000~~ ------------- ------------ ~~CASH~~Prepaid ~~FLOWS~~phone ~~FROM~~cards ~~OPERATING ACTIVITIES: Net income (loss)~~ ....~~.............................................~~ $ (2103,~~652,~~000) $ ~~451~~104,000 ~~Adjustments~~Sales toaids ~~reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization~~ .............~~......................~~ ~~844~~689,000 ~~725~~741,000 ~~Changes~~Nutritional inproducts ~~assets and liabilities: Accounts receivable~~ ...~~........................................~~ ~~(193~~538,000) ~~(71~~557,000) Inventories ................................................... (347,000) 179,000 Prepaid expenses .............................................. (255,000) (513,000) Other assets .................................................. (79,000) (129,000) Accounts payable .............................................. (137,000) 168,000 Commissions payable ........................................... (125,000) 125,000 Taxes payable ................................................. (63,000) (48,000) Accrued liabilities ........................................... (1,447,000) 1,617,000 Deferred revenue .............................................. (460,000) 6,239,000 ------------ ------------ ~~Total~~$ adjustments ........................................... (2,262,000) 8,292,000 ------------ ------------ Net cash provided by (used in) operating activities .... (4,914,000) 8,743,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .............................................. (52,000) (84,000) Software development costs ........................................ (145,000) (168,000) ------------ ------------ Net cash used by investing activities .................. (197,000) (252,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................ 1,~~473~~330,000 --$ Proceeds from issuance of preferred stock ......................... -- 5,000,000 Repurchases of preferred stock .................................... (163,000) -- Repurchases of common stock ....................................... -- (7,000) Net proceeds (payments) on line of credit ......................... (65,000) (1,~~325~~402,000) Payments on capital lease obligations ............................. (726,000) (1,042,000 ------------ ------------ Net cash provided by financing activities .............. 519,000 2,626,000 ------------ ------------ NET INCREASE IN CASH EQUIVALENTS ..................................... (4,592,000) 11,117,000 CASH AND CASH EQUIVALENTS, beginning of the period ................... 4,867,000 20,000 ------------ ------------ CASH AND CASH EQUIVALENTS, end of the period ......................... $ 275,000 11,137,000 ============ ===========~~= SUPPLEMENTAL CASH FLOW DISCLOSURES: Conversion of amounts under line of credit to preferred stock ..... 1,425,000 --~~

4. CAPITAL LEASE OBLIGATIONS On September 29, 1998, we entered into certain leases for telephone switching equipment, which are classified as capital lease obligations. These leases expire within five years and have purchase options at the end of the original lease term. Assets under capital leases are included in property and equipment in the September 30, 2001 consolidated balance sheet at a gross book value of approximately $4,650,000. 6 5. SEGMENT REPORTING We are a multi-level network marketing company that currently sells communications and nutrition products through our network of IAs. The Communications segment of our business provides and distributes 1-Plus long distance services, prepaid phone cards, internet service and provides the hosting of web pages for Maxxis 2000 distributors. Our Nutrition division distributes private label nutritional and health enhancement products to our IAs. Our Marketing Services segment provides sales aids, product fulfillment, and promotional materials and provides other support services such as conducting our annual marketing summit meeting and other training meetings. The Corporate Group segment of our business provides our administrative, financial and legal support services. Segment information for the three month periods ended September 30, 2000 and 2001 are as follows:

~~MARCH~~COMMUNICATIONS ~~31,~~NUTRITIONAL ~~JUNE~~MARKETING ~~30,~~CORPORATE ~~2001~~SERVICES ~~2000~~PRODUCTS SERVICES GROUP TOTAL -------------- ----------- ~~Prepaid~~---------- ~~phone~~--------- ~~cards~~---------- September 30, 2000 Net revenues ............... $1,057,000 ~~104~~$1,259,000 $1,022,000 ~~133~~$ -- $3,338,000 ~~Sales~~Operating ~~aids~~income (loss) ... (506,000) 849,000 (235,000) (314,000) (206,000) September 30, 2001 Net revenues ............... ~~693,000~~$ ~~310~~965,000 ~~Nutritional~~$ ~~products .... 643~~462,000 ~~650~~$ 648,000 ~~----------~~$ --~~--------~~ $12,~~440~~075,000 $1Operating income (loss) ... 198,~~093~~000 201,000 ~~==========~~(281,000) ~~==========~~(525,000) (407,000)

7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We market communications and Internet services and nutritional and health enhancement products in the United States through our multi-level network marketing system of "independent associates," or "IAs." We operate through our subsidiaries: Maxxis 2000; Maxxis Communications; and Maxxis Nutritionals. Maxxis 2000 is a network marketing company that currently markets 1-Plus long distance service, travel cards, prepaid phone cards, 800 service and international telecommunications services, Internet access and Web-page development and hosting services, and nutritional and health enhancement products. We believe that a multi-level network marketing system allows us to obtain customers for our products in a cost effective manner and enhances customer retention because of the relationships between our IAs and their customers. The telecommunications customer base developed by our IAs provides a potential customer base for our nutritional and health enhancement products, Internet-related services and for future products. We initially built a customer base without committing capital or management resources to construct our own communications network and transmission facilities. In February 1997, Maxxis Communications contracted with Colorado River Communications, Corp. ("CRC") to obtain switching and network services and to allow CRC's communications services to be sold by our IAs. In September 1998, we entered into a long-term lease commitment for the exclusive use of telecommunications switching equipment (the "Maxxis Switch") along with certain ancillary computer hardware and software required to operate the Maxxis Switch. In January 1999, we notified CRC of our intent to terminate our 1-Plus agreement and begin a process of migrating our customers to the Maxxis communications network. At that time, we entered into an agreement with WorldCom, Inc. 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. During the period of April through July 1999, we migrated our long distance customers from CRC's network to the Maxxis Switch, where we are currently responsible for the provision of telecommunications services and customer support to our long distance customers. In November 1997, we began marketing several private label dietary supplements to our customers and IAs. Recently, we began marketing additional nutritional and health enhancement products that are manufactured by various suppliers. In September 1998, we began providing Internet access and Web-page development and hosting services. Internet access is provided by Maxxis Communications through its agreement with InteReach Internet Services, LLC, and Web-page development and hosting services are provided by Maxxis Communications. We conduct marketing activities exclusively through our network of IAs. We believe that IAs are generally attracted to our multi-level network marketing system because of the potential for supplemental income and because our IAs are not required to purchase any inventory, have no monthly sales quotas or account collection issues, have minimal required paperwork and have a flexible work schedule. We encourage IAs to market services and products to persons with whom the IAs have an ongoing relationship, such as family members, friends, business associates and neighbors. We also sponsor meetings which current IAs are encouraged to bring in others for an introduction to our marketing system. Our multi-level network marketing system and our reliance upon IAs are intended to reduce marketing costs, customer acquisition costs and customer attrition. We believe that our multi-level network marketing system will continue to build a base of potential customers for additional services and products. We derive revenues from communications services, nutritional products and marketing services. Communications services revenues are comprised of: sales of prepaid phone cards to our IAs; commissions, fees and revenues generated from our long distance customers; and 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 from the local exchange carriers, there is generally a delay of up to three to four 8 months from the time a prospective customer indicates a desire to become a 1-Plus customer and the time that we begin to receive commissions from such customer's usage. In the future, we believe that revenues generated on the sales of 1-Plus long distance services will constitute a decreasing percentage of our total revenues. Nutritional products revenues include sales of private-label nutritional products, health enhancement products, a weight management program and a skin care system. Marketing services revenues include application fees from IAs and purchases of sales aids by IAs, including distributor kits which consist of forms, promotional brochures, audio and video tapes, marketing materials and presentation materials. Marketing services revenues also include training fees paid by senior associates and "managing directors" or "MDs." 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. MDs must attend continuing education training schools each year which also are subject to a fee. The training fees are recognized at the time the training is received. We do not receive any fees from independent associates for the training provided by MDs or national training directors. Cost of services consists of communications services cost, nutritional products cost and marketing services cost. Communications services cost consists primarily of the cost of purchasing activated prepaid phone cards, the Maxxis Switch and network services. Nutritional products cost consists of the cost of purchasing private label nutritional products. Marketing services cost includes the costs of purchasing IA distributor kits, sales aids and promotional materials and training costs. Operating expenses consist of selling and marketing expenses and general and administrative expenses. Selling and marketing expenses include commissions paid to IAs based on: (i) usage of long distance services by customers; (ii) sales of products to new IAs sponsored into Maxxis; and (iii) sales of additional products and services to customers. General and administrative expenses include costs for IA support services, information systems services and administrative personnel to support our operations and growth. 9 Results of Operations The following table sets forth the percentage of total net revenues attributable to each category for the periods shown.

~~COMMUNICATIONS~~THREE ~~NUTRITIONAL~~MONTHS ~~MARKETING~~ENDED ~~CORPORATE~~SEPTEMBER ~~SERVICES~~30, ~~PRODUCTS SERVICES GROUP TOTAL~~ -------------- ----~~-------~~ ~~---------~~2000 2001 -----~~-----~~ ----~~--------~~ ~~March 31, 2000~~ Net revenues: Communications services ...... 32% 47% Nutritional products ......... $38 ~~2,407,000~~22 ~~$8,245,000~~Marketing ~~$665,000~~services $........... 30 31 --- $--- ~~11,317,000~~Total ~~Operating~~net ~~income~~revenues ~~(loss)~~ ......... ~~(665,000)~~100% ~~2,915,000~~100% ~~193,000~~=== ~~(364,000)~~=== ~~2,079,000~~Cost ~~March~~of ~~31,~~services: ~~2001~~Communications ~~Net~~services ~~revenues~~ ...... 31% 26% Nutritional products ......... $11 ~~1,263,000~~5 $Marketing ~~594,000~~services ~~$877,000~~........... $4 10 --- $--- ~~2,734,000~~Total cost of services ..... 46% 41% === === Operating ~~income~~expenses: ~~(loss)~~Selling and marketing ........ ~~(905,000)~~26 ~~171,000~~32 ~~107,000~~General ~~(308,000)~~and ~~(935,000)~~administrative ... 34 46 --- --- Total operating expenses ... 60% 78% === ===

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED 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 10 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 $966,000, or 46% of 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 78% 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 $94,000, of which $91,000 related to the lease of the Maxxis Switch. Interest expense of $206,000 for the three months ending September 30, 2000 was largely comprised of $160,000 of interest costs related to the lease of the Maxxis Switch which were included in general and administrative expenses. 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. LIQUIDITY AND CAPITAL RESOURCES During the three months ended September 30, 2001, net cash provided by operating activities was $84,000 as compared to cash used by operating activities of $3.1 million for the three months ended September 30, 2000. Operating activities for the three months ended September 30, 2001 included $501,000 of net loss and $585,000 million of changes in assets and liabilities consisting primarily of a $407,000 increase in accounts payable and accrued liabilities and a $72,000 decrease in inventories. Cash used in investing activities was $284,000 for the three months ended September 30, 2001 as compared to $49,000 for the same period in 2000. Investing activities for the three months ended September 30, 2001 consisted primarily of software development costs and capital expenditures. 11 Cash provided by financing activities was $178,000 for the three months ended September 30, 2001, as compared to $189,000 for the same period in 2000. As of September 30, 2001, we had cash of $126,000 and a working capital deficit $1.1 million as compared to cash of $48,000 and a working capital deficit of $1.0 million as of June 30, 2001. On September 29, 1998, we entered into a long-term lease commitment for the exclusive use of the Maxxis Switch, along with certain ancillary computer hardware and software required to operate the Maxxis Network. In connection with the lease of the Maxxis Switch, Maxxis made an initial payment of $501,000. Monthly payments of $118,000 began in January 1999 and will continue until 2004. We anticipate that cash generated from operations, together with proceeds from our ongoing equity offering, 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 equity offering 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 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, lines of credit and private equity and debt financings. Our cash and financing needs for fiscal 2002 and beyond will be dependent on our level of IA and customer growth and the related capital expenditures, advertising costs and working capital needs necessary to support such growth. We believe that major capital expenditures may be necessary over the next few years to develop additional product lines to sell through our IAs and to develop and/or acquire information, accounting and/or inventory control systems to monitor and analyze our growing multi level network marketing system. We have not identified financing sources to fund such cash needs in fiscal 2002 and beyond. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all. 12 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Report and include all statements which are not historical facts and which relate to the intent, belief or the current expectations of Maxxis, its directors or its officers with respect to, among other things: (i) Maxxis' financing plans, including our ability to obtain financing in the future; (ii) trends affecting our financial condition or results of operations, including those related to Year 2000 issues; (iii) our growth and operating strategy; (iv) our anticipated capital needs and anticipated capital expenditures; and (v) projected outcomes and effects on us of potential litigation and investigations concerning us. When used in this Report, the words "expects," "intends," "believes," "anticipates," "estimates," "may," "could," "should," "would," "will," "plans" and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in forward-looking statements as a result of: (i) factors affecting the availability, terms and cost of capital; risks associated with meeting lease obligations and obtaining necessary regulatory approvals in connection with the Maxxis Switch; competitive factors and pricing pressures; general economic conditions; the failure of the market demand for our products and services to be commensurate with management's expectations or past experience; the impact of present or future laws and regulations on the our business; changes in operating expenses or the failure of operating expenses to be consistent with management's expectations; and the difficulty of accurately predicting the outcome and effect of certain matters, such as matters involving potential litigation and investigations; (ii) various factors discussed herein; and (iii) those factors discussed in detail in our filings with the Securities and Exchange Commission (the "Commission"), including the "Risk Factors" section of the Post-Effective Amendment No. 1 to our Registration Statement on Form S-1 (Registration number (333-38623), as declared effective by the Commission on January 5, 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not a party to, nor is any of its property subject to, any material legal proceedings. We may be subject from time to time to legal proceedings that arise out of our business operations. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS

~~COMMUNICATIONS~~Exhibit ~~NUTRITIONAL~~Number ~~MARKETING~~Exhibit ~~CORPORATE~~Description ~~SERVICES PRODUCTS SERVICES GROUP TOTAL~~ -------~~-------~~ ----------- --------~~----~~ ~~------------~~3.1 ~~------------~~Amended ~~March~~and ~~31,~~Restated ~~2000~~Articles ~~Net~~of ~~revenues~~Incorporation ~~..............~~of ~~$ 7~~Maxxis,~~630,000~~ ~~$9,360,000~~as $amended ~~1,940,000~~to $date.* --3.2 $Amended 18and Restated Bylaws of Maxxis.,~~930,000~~ ~~Operating~~as ~~income~~amended ~~(loss)~~to date...* (4.1~~,115,000)~~ ~~4,491,000~~See ~~(1,448,000)~~Exhibits (3.1~~,030,000)~~ ~~898,000~~and ~~March~~3.2 ~~31,~~for ~~2001~~provisions ~~Net~~of ~~revenues~~the ~~..............~~Amended $and ~~3,399,000~~Restated ~~$2,387,000~~Articles $of ~~2,701,000~~Incorporation $and --Amended $and ~~8,487,000~~Restated ~~Operating~~Bylaws ~~income~~defining ~~(loss)~~the ~~...~~rights ~~(1,058,000)~~of ~~965,000~~holders ~~(333,000)~~of ~~(2,166,000)~~our ~~(2,592,000)~~Common Stock.*

--------------- (*) Incorporated by reference to the exhibits to our Registration Statement on Form S-1 (No. 333-38623) as declared effective by the Securities and Exchange Commission on January 5, 1999. (B) REPORTS ON FORM 8-K. None. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MAXXIS GROUP, INC. March 1, 2001 /s/ Ivey J. Stokes --------------------------------------------------- Ivey J. Stokes Chairman, President and Chief Executive Officer (Principal executive officer) March 1, 2001 /s/ DeChane Cameron --------------------------------------------------- DeChane Cameron Chief Financial Officer (Principal financial and accounting officer) 15

THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------ ----------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net revenues: Communications services ........ 46% 21% 40% 40% Nutritional products ........... 22 73 28 50 Marketing services ............. 32 6 32 10 ---- ---- ---- ---- Total net revenues ........... 100% 100% 100% 100% ==== ==== ==== ==== Cost of services: Communications services ........ 22% 11% 35% 21 Nutritional products ........... 2 12 7 9 Marketing services ............. 1 2 4 3 ---- ---- ---- ---- Total cost of services ....... 25% 25% 46% 33% Operating expenses: Selling and marketing .......... 30% 45% 39% 41% General and administrative ..... 54 11 46 22 ---- ---- ---- ---- Total operating expenses ..... 84% 56% 85% 63% ==== ==== ==== ====

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