-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVWfxO5gYJ/ugT+pzrP4eZ56L2f965LYvAfyDrFo+evxhaheYDIsgndSqWfnjv1C t0XBvyC4lnbYZNq0GKOaww== 0000950144-99-001917.txt : 19990217 0000950144-99-001917.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950144-99-001917 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXXIS GROUP INC CENTRAL INDEX KEY: 0001045703 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 582278241 STATE OF INCORPORATION: GA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-38623 FILM NUMBER: 99542479 BUSINESS ADDRESS: STREET 1: 1901 MONTREAL RD STREET 2: SUITE 108 CITY: TUCKER STATE: GA ZIP: 30084 BUSINESS PHONE: 7705524766 MAIL ADDRESS: STREET 1: 1080 HOLCOMB BRIDGE RD CITY: ROSWELL STATE: GA ZIP: 30076 10-Q 1 MAXXIS GROUP INC 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998. Or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____, 19__. Commission File Number: 333-38623 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 16, 1999 Common Stock, no par value 1,571,187
================================================================================ 2 MAXXIS GROUP, INC. INDEX TO FORM 10-Q
PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements................................................ 3 Condensed Consolidated Balance Sheets as of December 31, 1998 (Unaudited) and June 30, 1998..................... 3 Condensed Consolidated Statements of Operations for the Three Months and Six Months ended December 31, 1998 and 1997 (Unaudited)................................................ 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 1998 and 1997 (Unaudited)............. 5 Notes to Condensed Consolidated Financial Statements (Unaudited).............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 Item 3. Quantitative and Qualitative Disclosure About Market Risks........................................................ 14 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................... 15 Item 6. Exhibits and Reports on Form 8-K.................................... 15 SIGNATURES
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 JUNE 30, 1998 ------------------ ---------------- (UNAUDITED) ASSETS Current assets: Cash............................................................ $ 419,000 $ 372,000 Short-term investments.......................................... 10,000 10,000 Communications receivable, net of allowance for doubtful accounts of $40,000.................................. 696,000 316,000 Inventories, net................................................ 553,000 218,000 Prepaid expenses................................................ 24,000 43,000 Other current assets............................................ 28,000 -- ------------------ ---------------- Total current assets.......................................... 1,730,000 959,000 Property and equipment, net........................................ 6,088,000 169,000 Capitalized software development costs, net........................ 184,000 126,000 Investments........................................................ 100,000 Other assets....................................................... 253,000 9,000 ------------------ ---------------- Total assets.............................................. $ 8,355,000 $ 1,263,000 ================== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 384,000 $ 211,000 Commissions payable............................................. 200,000 101,000 Taxes payable................................................... 463,000 130,000 Current maturities of long-term capital lease obligations....... 393,000 -- Accrued liabilities............................................. 438,000 282,000 Deferred revenue................................................ 57,000 55,000 ------------------ ---------------- Total current liabilities..................................... 1,935,000 779,000 ------------------ ---------------- Long-term liabilities: Long-term capital lease obligations............................. 4,866,000 -- Line of credit.................................................. 800,000 -- ------------------ ---------------- Total long-term liabilities................................... 5,666,000 -- ------------------ ---------------- Shareholders' equity: Preferred Stock, no par value; 10,000,000 shares authorized; 100,000 shares designated as Series A Convertible Preferred Stock of which 36,359 shares are issued and outstanding....... 200,000 200,000 Common Stock, no par value; 20,000,000 shares authorized; 1,571,187 shares issued and outstanding....................... 612,000 574,000 Subscription receivable........................................ (120,000) (120,000) Accumulated earnings (deficit).................................. 62,000 (170,000) ------------------ ---------------- Total shareholders' equity.................................... 754,000 484,000 ------------------ ---------------- Total liabilities and shareholders' equity................ $ 8,355,000 $ 1,263,000 ================== ================
The accompanying notes are an integral part of these consolidated statements. 3 4 MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------- Net revenues: Communications services..................... $ 1,435,000 $ 1,122,000 $ 5,121,000 $ 2,588,000 Nutritional products........................ 255,000 186,000 630,000 186,000 Marketing services.......................... 398,000 318,000 1,440,000 670,000 ------------ ------------ ------------ ------------- Total net revenues........................ 2,088,000 1,626,000 7,191,000 3,444,000 ------------ ------------ ------------ ------------- Cost of services: Communications services..................... 201,000 430,000 908,000 868,000 Nutritional products........................ 159,000 77,000 360,000 77,000 Marketing services.......................... 84,000 127,000 637,000 228,000 ------------ ------------ ------------ ------------- Total cost of services.................... 444,000 634,000 1,905,000 1,173,000 ------------ ------------ ------------ ------------- Gross margin................................... 1,644,000 992,000 5,286,000 2,271,000 ------------ ------------ ------------ ------------- Operating expenses: Selling and marketing....................... 1,054,000 610,000 3,059,000 1,326,000 General and administrative.................. 1,073,000 514,000 1,850,000 1,111,000 ------------ ------------ ------------ ------------- Total operating expenses.................. 2,127,000 1,124,000 4,909,000 2,437,000 ------------ ------------ ------------ ------------- Operating income (loss)........................ (483,000) (132,000) 377,000 (166,000) Interest income (expense)...................... 5,000 (2,000) 5,000 (2,000) ------------ ------------ ------------ ------------- Income (loss) before income taxes (benefit).... (478,000) (134,000) 382,000 (168,000) Provision (benefit) for income taxes........... (130,000) -- 150,000 -- ------------ ------------ ------------ ------------- Net income (loss).............................. $ (348,000) $ (134,000) $ 232,000 $ (168,000) ============ ============ ============ ============= Income (loss) per share: Basic....................................... $ (0.22) $ (0.09) $ 0.15 $ (0.11) ============ ============ ============ ============= Diluted..................................... $ (0.22) $ (0.09) $ 0.14 $ (0.11) ============ ============ ============ ============= Weighted average number of shares outstanding: Basic....................................... 1,571,187 1,571,187 1,571,187 1,571,187 ============ ============ ============ ============= Diluted..................................... 1,571,187 1,571,187 1,614,364 1,571,187 ============ ============ ============ =============
The accompanying notes are an integral part of these consolidated statements. 4 5 MAXXIS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, --------------------------- 1998 1997 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................. $ 232,000 $(168,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............................... 252,000 99,000 Compensation expense related to stock options ............... 38,000 -- Changes in assets and liabilities: Communications receivables ................................ (380,000) (179,000) Inventories ............................................... (335,000) 1,000 Prepaid expenses .......................................... 19,000 (24,000) Other assets .............................................. (28,000) 22,000 Accounts payable .......................................... 173,000 184,000 Commissions payable ....................................... 99,000 34,000 Taxes payable ............................................. 333,000 -- Accrued liabilities ....................................... 156,000 (55,000) Deferred revenue .......................................... 2,000 -- ----------- --------- Total adjustments ....................................... 329,000 82,000 ----------- --------- Net cash provided by operating activities .......... 561,000 (86,000) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .......................................... (188,000) (87,000) Software development costs .................................... (281,000) (50,000) Purchase of equity investment ................................. (100,000) -- ----------- --------- Net cash used by investing activities .............. (569,000) (137,000) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (payments) from (for) issuance of common stock ....... (244,000) 87,000 Line of credit borrowings ..................................... 800,000 230,000 Payments on capital lease obligations ......................... (501,000) -- ----------- --------- Net cash provided (used) by financing activities ... 55,000 317,000 ----------- --------- NET INCREASE IN CASH EQUIVALENTS ................................. 47,000 94,000 CASH AND CASH EQUIVALENTS, beginning of the period ............... 372,000 35,000 ----------- --------- CASH AND CASH EQUIVALENTS, end of the period ..................... $ 419,000 $ 129,000 =========== ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: Capital lease obligations incurred ............................ $ 5,759,000 $ -- =========== =========
The accompanying notes are an integral part of these consolidated statements. 5 6 MAXXIS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRESENTATION Maxxis Group, Inc., a Georgia corporation (the "Company"), was incorporated on January 24, 1997 and is headquartered in Tucker, Georgia. The Company's principal business operations are carried out through its wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis Communications, Inc., each of which began operations in March 1997, and Maxxis Nutritionals, Inc., which began operations in November 1997. The Company was founded for the purpose of providing long-distance services, private label nutritional products, and other services and consumable products through a multilevel marketing system of independent associates ("IAs"). The Company's IAs currently market communications and Internet services and nutritional and health enhancement products. The Company has a limited operating history, and its operations are subject to the risks inherent in the establishment of any new business. Since the Company has only recently made the transition to an operating company, the Company's ability to manage its growth and expansion will require it to implement and continually expand its operational and financial systems, recruit additional IAs, and train and manage both current and new IAs. Continued growth would place a significant strain on the Company's operational resources and systems, and failure to effectively manage any such growth would have a material adverse effect on the Company's business, financial condition and results of operations. 2. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, the unaudited financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of the Company as of December 31, 1998 and the results of the Company's operations and its cash flows for the three and six month periods ended December 31, 1998 and 1997 in conformity with generally accepted accounting principles. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, JUNE 30, 1998 1998 ------------ ------------ Prepaid phone cards $ 25,000 $ 10,000 Sales aids 241,000 158,000 Nutritional products 287,000 76,000 Less reserve -- (26,000) ------------ ------------ $ 553,000 $ 218,000 ============ ============
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. 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 December 31, 1998 consolidated balance sheet at a fair market value of approximately $5,759,000. 6 7 5. LINE OF CREDIT On November 22, 1998, the Company entered into a line of credit (the "Line of Credit") with the Maxxis Millionairre Society, a Georgia partnership. Ivey Stokes and Alvin Curry, the Company's Chairman of the Board and Chief Operating Officer, respectively, are partners in the Maxxis Millionairre Society. Pursuant to the Line of Credit, Maxxis may borrow up to $1,000,000 at 10% annual interest. No advances or interest thereon pursuant to the Line of Credit are payable until November 22, 2000. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Maxxis Group, Inc., a Georgia corporation ("Maxxis" or the "Company"), markets communications and Internet services and nutritional and health enhancement products in the United States through its multi-level network marketing system of "independent associates," or "IAs." The Company operates through its subsidiaries: Maxxis 2000, Inc. ("Maxxis 2000"); Maxxis Communications, Inc. ("Maxxis Communications"); and Maxxis Nutritionals, Inc. ("Maxxis Nutritionals"). Maxxis 2000 is a network marketing company that currently markets 1-Plus long distance service, travel cards, prepaid phone cards, 800 service and international telecommunications services, Internet access and Web-page development and hosting services, and nutritional and health enhancement products. The Company believes that its multi-level network marketing system allows it to obtain customers for its products in a cost effective manner and to enhance customer retention because of the relationships between the Company's IAs and customers. The telecommunications customer base developed by the Company's IAs provides a potential customer base for the Company's nutritional and health enhancement products, Internet-related services and for future products. The Company has built a customer base without committing capital or management resources to construct its own communications network and transmission facilities. In February 1997, Maxxis Communications contracted with Colorado River Communications, Corp. ("CRC") to obtain switching and network services and to allow CRC's communications services to be sold by the Company's IAs. Maxxis Communications obtains telecommunications services and purchases time for its prepaid 1 hour and 30 minute phone cards from CRC. In September 1998, the Company entered into a long-term lease commitment for the exclusive use of telecommunications switching equipment (the "Maxxis Switch") along with certain ancillary computer hardware and software required to operate the Maxxis Switch. The Company is currently in the process of filing tariffs and applying for the required regulatory approvals necessary to offer interstate and intrastate long distance service throughout the United States. In 1999, Maxxis intends to migrate its long distance customers from CRC's network to the Maxxis Switch and intends to sell additional network capacity, to the extent available, to third parties. In November 1997, the Company began marketing several private label dietary supplements to its customers and IAs. Recently, the Company began marketing additional nutritional and health enhancement products that are manufactured by various suppliers. In September 1998, the Company began providing Internet access and Web-page development and hosting services. Internet access is provided by Maxxis Communications through its agreement with InteReach Internet Services, LLC, and Web-page development and hosting services are provided by Maxxis Communications. The Company conducts its marketing activities exclusively through its network of IAs. The Company believes that IAs are generally attracted to the Company's multi-level network marketing system because of the potential for supplemental income and because the IAs are not required to purchase any inventory, have no monthly sales quotas or account collection issues, have minimal required paperwork and have a flexible work schedule. The Company encourages IAs to market services and products to persons with whom the IAs have an ongoing relationship, such as family members, friends, business associates and neighbors. The Company also sponsors meetings at which current IAs are encouraged to bring in others for an introduction to the Company's marketing system. The Company's multi-level network marketing system and the Company's reliance upon IAs are intended to reduce marketing costs, customer acquisition costs and customer attrition. The Company believes that its multi-level network marketing system will continue to build a base of potential customers for additional services and products. The Company derives revenues from communications services, nutritional products and marketing services. Communications services revenues are comprised of: sales of prepaid phone cards to the Company's IAs; commissions from the Company's agreement with CRC whereby the Company receives a percentage of the long distance billings received by CRC from the customers originated by the Company's IAs, net of allowances 8 9 for bad debts and billing adjustments; and subscription fees from the Company's Internet subscribers. Because of the administrative procedures that must be complied with in order to establish 1-Plus customers and to collect the usage and access fees from the local exchange carriers, there is generally a delay of up to three to four months from the time a prospective customer indicates a desire to become a 1-Plus customer and the time that the Company begins to receive commissions from such customer's usage. Nutritional products revenues include sales of private-label nutritional products to the Company's IAs. Recently, the Company began marketing new health enhancement products and additional nutritional products, including a weight management program and skin care system. Marketing services revenues include application fees from IAs and purchases of sales aids by IAs, including distributor kits which consist of forms, promotional brochures, audio and video tapes, marketing materials and presentation materials. Marketing services revenues also include training fees paid by senior associates and "managing directors" or "MDs." To become an IA, individuals (other than individuals in North Dakota) must complete an application and purchase a distributor kit for $99. IAs also pay an annual non-refundable fee in order to maintain their status as an IA, which fee the Company amortizes over the renewal period. To become a MD, a senior associate, director or regional director must attend a Company approved training school. The fee to attend the training school is currently $99, and MDs must attend continuing education training schools each year which also are subject to a fee. The training fees are recognized at the time the training is received. The Company does not receive any fees from IAs for the training provided by MDs or national training directors. Cost of services consists of communications services cost, nutritional products cost and marketing services cost. Communications services cost consists primarily of the cost of purchasing activated prepaid phone cards. Nutritional products cost consists of the cost of purchasing private label nutritional products. Marketing services cost includes the costs of purchasing IA distributor kits, sales aids and promotional materials and training costs. Operating expenses consist of selling and marketing expenses and general and administrative expenses. Selling and marketing expenses include commissions paid to IAs based on: (i) sales of products to new IAs sponsored into the Company; (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 IA support services, information systems services and administrative personnel to support the Company's operations and growth. The Company has a limited operating history, and its operations are subject to the risks inherent in the establishment of any new business. The Company expects that it will incur substantial initial expenses, and there can be no assurance that the Company will maintain profitability. If the Company continues to grow rapidly, the Company will be required to continually expand and modify its operational and financial systems, add additional IAs and new customers, and train and manage both current and new employees and IAs. Such rapid growth would place a significant strain on the Company's operational resources and systems, and the failure to effectively manage any such growth could have a material adverse effect on the Company's business, financial condition and results of operations. 9 10 RESULTS OF OPERATIONS The following table sets forth the percentage of total net revenues attributable to each category for the periods shown.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 1998 1997 1998 1997 ------ ------ ------ ------ Net revenues: Communications services .. 69% 69% 71% 75% Nutritional products ..... 12 11 9 5 Marketing services ....... 19 20 20 20 --- --- --- --- Total net revenues ..... 100% 100% 100% 100% === === === === Cost of services: Communications services .. 10% 26% 12% 25% Nutritional products ..... 8 5 5 2 Marketing services ....... 4 8 9 7 --- --- --- --- Total cost of services . 22 39 26 34 Operating expenses: Selling and marketing .... 50 38 43 39 General and administrative 51 32 26 32 --- --- --- --- Total operating expenses 101% 70% 69% 71% === === === ===
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 Revenues. Total net revenues are derived from sales of communications services, nutritional products and marketing services net of any returns of prepaid phone cards, distributor kits or other products. Total net revenues increased $462,000, or 28%, to $2.1 million for the three months ended December 31, 1998 from $1.6 million for the same period in 1997. The increase in total net revenues was primarily due to the growth in the number of IAs enrolled in the Maxxis marketing network. Communications services revenues increased $313,000, or 28%, to $1.4 million for the three months ended December 31, 1998 from $1.1 million for the same period in 1997. This increase was primarily due to increased long distance telephone commissions resulting from the Company's larger communications customer base. Nutritional products revenues increased $69,000, or 37%, to $255,000 for the three months ended December 31, 1998 from $186,000 for the three months ended December 31, 1997. The increase was primarily due to the fact that there were more selling days for the three months ended December 31, 1998 because the Company did not begin selling nutritional products until November 1997. Marketing services revenues increased $80,000, or 25%, to $398,000 for the three months ended December 31, 1998 from $318,000 for the same period in 1997. This increase was largely due to an increase in the price of distributor kits from $30 to $99. Cost of Services. Cost of services includes communications services cost, nutritional products cost and marketing services cost. Total cost of services for the three months ended December 31, 1998 was $444,000, or 22% of total net revenues, as compared to $634,000, or 39% of total net revenues, for the same period in 1997. The decline in total cost of services as a percentage of total net revenues resulted primarily from the improvement in communications services margins. 10 11 Communications services cost was $201,000, or 10% of total net revenues, for the three months ended December 31, 1998, as compared to $430,000, or 26% of total net revenues, for the same period in 1997. This decrease as a percentage of total net revenues was due mainly to the increase in long distance usage commissions and access fees without a substantial incremental increase in costs. Nutritional products cost was $159,000, or 8% of total net revenues, for the three months ended December 31, 1998 as compared to $77,000, or 5% of total net revenues for the same period in 1997. Marketing services cost was $84,000, or 4% of total net revenues, for the three months ended December 31, 1998 as compared to $127,000, or 8% of total net revenues, for the same period in 1997. The overall decline in cost of services and cost of services as a percentage of total net revenues results from a greater portion of the Company's revenues coming from long distance telephone services. Gross Margin. Gross margin increased to $1.6 million for the three months ended December 31, 1998 from $1.0 million for the same period in 1997. As a percentage of total net revenues, gross margin improved to 79% from 61% over those respective periods. Operating Expenses. For the three months ended December 31, 1998, selling and marketing expenses were $1.1 million, or 50% of total net revenues, as compared with $610,000, or 38% of total net revenues, for the same period in 1997. The increase in selling and marketing expenses as a percentage of total net revenues for the three months ended December 31, 1998 is due to higher fees paid to national training directors as a percentage of total net revenues and higher commission payouts due to a new sales incentive program. General and administrative expenses were $1.1 million, or 51% of total net revenues, for the three months ended December 31, 1998, as compared to $514,000, or 32% of total net revenues, for the same period in 1997. The increase in general and administrative expenses is largely due to an increase in employees and higher depreciation expense. Total operating expenses increased to 101% of net revenues for the three months ended December 31, 1998 from 70% for the same period in 1997. Income Taxes. The Company recognized an income tax benefit of $130,000 for the three months ended December 31, 1998 while there was no provision for income taxes for the comparable 1997 period. The tax benefit partly offsets the tax provision recorded for the three months ended September 30, 1998. Net Loss. Net loss for the three months ended December 31, 1998 was $483,000 as compared to a net loss of $134,000 for the same period in 1997. The higher net loss is largely due to the higher operating costs, partly offset by improved margins on communications services for the three months ended December 31, 1998. SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1997 Revenues. Total net revenues increased $3.7 million, or 109%, to $7.2 million for the six months ended December 31, 1998 from $3.4 million for the same period in 1997. The increase in total net revenues was primarily due to the growth in the number of IAs enrolled in the Maxxis marketing network. Communications services revenues increased $2.5 million, or 98%, to $5.1 million for the six months ended December 31, 1998 from $2.6 million for the same period in 1997. This increase was primarily due to increased phone card sales to the Company's IAs and increased long distance telephone commissions resulting from the Company's larger communications customer base. Nutritional products revenues increased $444,000, or 239%, to $630,000 for the six months ended December 31, 1998 from 186,000 for the six months ended December 31, 1997. This increase was primarily due to the fact that the Company did not begin selling nutritional products until November 1997. Marketing services revenues increased $770,000, or 115%, to $1.4 million for the six months ended December 31, 1998 from $670,000 for the same period in 1997. This increase was due to the growth in the numbers of IAs, the increased attendance of the IAs at the Company's training schools and the increased sales of promotional items and sales aids. Cost of Services. Total cost of services for the six months ended December 31, 1998 was $1.9 million, or 26% of total net revenues, as compared to $1.2 million, or 34% of total net revenues, for the same period in 1997. 11 12 The decline in total cost of services as a percentage of total net revenues resulted from the improvement in communications services margins which was partially offset by declines in marketing services and nutrition margins. Communications services cost was $908,000, or 13% of total net revenues, for the six months ended December 31, 1998, as compared to $868,000, or 25% of total net revenues, for the same period in 1997. This decrease as a percentage of total net revenues was due mainly to the increase in long distance usage commissions and access fees. Nutritional products cost was $360,000, or 5% of total net revenues, for the six months ended December 31, 1998 as compared to $77,000, or 2% of total revenues for the comparable 1997 period. Marketing services cost was $637,000, or 9% of total net revenues, for the six months ended December 31, 1998 as compared to $228,000, or 7% of total net revenues, for the same period in 1997. The increase as a percentage of total net revenues was primarily due to higher costs associated with the Company's 1998 annual summit meeting, partly offset by higher margins on distributor kits. Gross Margin. Gross margin increased to $5.3 million for the six months ended December 31, 1998 from $2.3 million for the same period in 1997. As a percentage of total net revenues, gross margin improved to 74% from 66% over those respective periods. Operating Expenses. For the six months ended December 31, 1998, selling and marketing expenses were $3.1 million, or 43% of total net revenues, as compared with $1.3 million, or 39% of total net revenues, for the same period in 1997. General and administrative expenses were $1.9 million, or 26% of total net revenues, for the six months ended December 31, 1998, as compared to $1.1 million, or 32% of total net revenues, for the same period in 1997. The decrease in general and administrative expenses as a percentage of total net revenues reflects economies of scale in connection with the Company's growth. Primarily as a result of the Company's lower general and administrative expenses as a percentage of net revenues, total operating expenses declined to 69% of net revenues for the six months ended December 31, 1998 from 71% for the same period in 1997. Income Taxes. As a result of the Company's profitability for the six months ended December 31, 1998, provision for income taxes was $150,000 for the six months ended December 31, 1998. Net Income. Net income for the six months ended December 31, 1998 was $232,000 as compared to a net loss of $168,000 for the same period in 1997. The resulting net income for the six months ended December 31, 1998 reflects an increase in total net revenues, improved margins on communications services and a decline in general and administrative expenses relative to total net revenues. LIQUIDITY AND CAPITAL RESOURCES On September 29, 1998, the Company entered into a long-term lease commitment for the exclusive use of the Maxxis Switch, along with certain ancillary computer hardware and software required to operate the Maxxis Switch. In connection with the lease of the Maxxis Switch, Maxxis made an initial payment of $501,000. Monthly payments of $118,000 begin in February 1999 and will continue for a period of five years. On November 22, 1998, the Company entered into the Line of Credit with the Maxxis Millionairre Society, a Georgia partnership. Ivey Stokes and Alvin Curry, the Company's Chairman of the Board and Chief Operating Officer, respectively, are partners in the Maxxis Millionairre Society. Pursuant to the Line of Credit, Maxxis may borrow up to $1,000,000 at 10% annual interest. No advances or interest thereon pursuant to the Line of Credit are payable until November 22, 2000. During the six months ended December 31, 1998, cash provided by operating activities was $561,000, as compared to cash used by operating activities of $86,000 for the same period in 1997. Operating activities for the six months ended December 31, 1998 included $232,000 of net income, $252,000 of depreciation and amortization and $39,000 related to changes in assets and liabilities. Cash used in investing activities was $569,000 for the six months ended December 31, 1998, as compared to $317,000 for the same period in 1997. Investing activities for the six months ended December 31, 1998 consisted primarily of software development costs of $281,000 and capital expenditures totaling $188,000. 12 13 Cash provided by financing activities was $55,000 for the six months ended December 31, 1998, as compared to $317,000 for the same period in 1997. Financing activities for the six months ended December 31, 1998 consisted of $244,000 paid by the Company to third parties in connection with the preparation of the Company's registration statement on Form S-1, payments on capital lease obligations of $501,000 and borrowings pursuant to the Company's Line of Credit in the amount of $800,000. As of December 31, 1998, the Company had cash of $419,000 and a working capital deficit of $205,000 as compared to cash of $372,000 and working capital surplus of $180,000 as of June 30, 1998. The Company anticipates that cash generated from operations, together with proceeds from its equity offering to certain of its regional and executive directors and its Line of Credit, will be sufficient to meet the Company's capital requirements for the next 12 months. However, if the Company does not receive sufficient funds from its operations, equity offering and Line of Credit to fund its operations, the Company may need to raise additional capital. In addition, any increases in the Company's growth rate, shortfalls in anticipated revenues, increases in expenses or significant acquisitions could have a material adverse effect on the Company's liquidity and capital resources and could require the Company to raise additional capital. The Company may also need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses or the development of new products, or otherwise respond to unanticipated competitive pressures. Sources of additional capital may include venture capital financing, cash flow from operations, lines of credit and private equity and debt financings. The Company's cash and financing needs for fiscal 1999 and beyond will be dependent on the Company's level of IA and customer growth and the related capital expenditures, advertising costs and working capital needs necessary to support such growth. The Company believes that major capital expenditures may be necessary over the next few years to develop additional product lines to sell through its IAs and to develop and/or acquire information, accounting and/or inventory control systems to monitor and analyze the Company's growing multi-level network marketing system. The Company has not identified financing sources to fund such cash needs in fiscal 1999 and beyond. There can be no assurance that the Company will be able to raise any such capital on terms acceptable to the Company or at all. YEAR 2000 COMPLIANCE The Company's business and customer relationships rely on computer software programs, internal operating systems and telephone and other network communications connections. If any of these programs, systems or network communications are not programmed to recognize and properly process dates after December 31, 1999 (the "Year 2000" issue), the Company could experience significant system failures or errors, which could have a material adverse effect on the Company's business, financial condition or results of operations. The Company has not yet begun to review its computerized information and non-information systems to identify internal accounting programs and operating systems (collectively, "Systems") that might malfunction due to a misidentification of the Year 2000. Although the Company has not yet undertaken a review of its Systems, it believes that its Systems are adequately programmed to address the Year 2000 issue or can be modified or replaced to address the Year 2000 issue without material costs or delays. However, there can be no assurances that these Systems are Year 2000 compliant. In addition, as its review is in the early stages of assessment, Maxxis cannot predict whether significant problems will be identified with its Systems. Therefore, the Company has not yet determined the extent of contingency planning that may be required. The Company may not be able to develop, implement or test remediation or contingency plans with such Year 2000 problems or may find that the costs of these plans exceed current expectations. If the Company fails to satisfactorily resolve Year 2000 issues related to its Services in a timely manner, it could be exposed to liability from third parties. Furthermore, Maxxis has only made limited inquiries of third party providers of products and systems used in its business and at its offices or on the systems used by its IAs or other third parties. The Company has contacted one provider of software used in Maxxis' operations and has received assurances from this provider that its software is capable of addressing the Year 2000 issue. There can be no assurance, however, that any or all of the products and services used and relied upon by the Company are Year 2000 compliant. Maxxis believes that if its providers, IAs or other third parties do not successfully address Year 2000 issues in their operations, the 13 14 Company's operations may be interrupted, hindered or delayed which could cause a material adverse effect on the Company's business, financial condition and results of operations. Maxxis further believes that CRC, its IAs and other third parties may be in the preliminary stages of analyzing their software and systems to address the Year 2000 issue. Therefore, the Company does not believe it is possible to accurately analyze or predict possible "worst-case" scenarios related to the Year 2000 issue and the potential impact on the Company's business if any of these parties fail to adequately address the Year 2000 issue. The Company has not developed a contingency plan for Year 2000 problems experienced by CRC, its IAs or other third parties. Thus, the Company believes it is impossible to estimate the potential expenses involved with a large scale failure of CRC, the Company's IAs or other third parties to resolve their Year 2000 issues. The Company can provide no assurance that it will not suffer business interruptions, either because of its own Year 2000 problems or those of CRC, its IAs and other third parties whose Year 2000 problems may make it difficult or impossible for them to fulfill their commitments to the Company. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Report and include all statements which are not historical facts and which relate to the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company's financing plans, including the Company's ability to obtain financing in the future; (ii) trends affecting the Company's financial condition or results of operations, including those related to Year 2000 issues; (iii) the Company's growth and operating strategy; (iv) the Company's anticipated capital needs and anticipated capital expenditures; and (v) projected outcomes and effects on the Company of potential litigation and investigations concerning the Company. When used in this Report, the words "expects," "intends," "believes," "anticipates," "estimates," "may," "could," "should," "would," "will," "plans" and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in forward-looking statements as a result of: (i) factors affecting the availability, terms and cost of capital; risks associated with meeting lease obligations and obtaining necessary regulatory approvals in connection with the Maxxis Switch; competitive factors and pricing pressures; general economic conditions; the failure of the market demand for the Company's products and services to be commensurate with management's expectations or past experience; the impact of present or future laws and regulations on the Company's business; changes in operating expenses or the failure of operating expenses to be consistent with management's expectations; and the difficulty of accurately predicting the outcome and effect of certain matters, such as matters involving potential litigation and investigations; (ii) various factors discussed herein; and (iii) those factors discussed in detail in the Company's filings with Securities and Exchange Commission (the "Commission"), including the "Risk Factors" section of the Company's Registration Statement on Form S-1 (Registration No. 333-38623), as amended. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not applicable. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to, nor is any of its property subject to, any material legal proceedings. The Company may be subject from time to time to legal proceedings that arise out of the Company's business operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS
Exhibit Number Exhibit Description - ------- ------------------- 10.1 Line of Credit between Maxxis Group, Inc. and the Maxxis Millionairre Society dated as of November 22, 1998. 10.2 Investment Agreement between InteReach Internet Services, LLC and Maxxis Group, Inc. dated as of December 8, 1998. 10.3 Virtual ISP Agreement between InteReach Internet Services, LLC and Maxxis Group, Inc. dated as of December 8, 1998.* 27 Financial Data Schedule (for SEC use only).
- --------------------- * Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24(b)(2) under the Exchange Act. In accordance with Rule 24(b)(2), these confidential portions have been omitted from this exhibit and filed separately with the Commission. (B) REPORTS ON FORM 8-K. None. 15 16 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. February 16, 1999 /s/ Thomas O. Cordy --------------------------------------------- Thomas O. Cordy President and Chief Executive Officer (Principal executive officer) February 16, 1999 /s/ Daniel McDonough --------------------------------------------- Daniel McDonough Chief Financial Officer (Principal financial and accounting officer) 16 EX-10.1 2 LINE OF CREDIT 1 EXHIBIT 10.1 LINE OF CREDIT $1,000,000.00 NOVEMBER 22, 1998 MAXXIS GROUP, INC., a Georgia corporation ("Borrower"), for value received, hereby promises to pay to the order of the MAXXIS MILLIONAIRE SOCIETY, a Georgia partnership ("Lender"), the aggregate principal sum of ONE MILLION DOLLARS ($1,000,000.00) or such portion as may have been advanced to Borrower by Lender (the "Principal") pursuant to the terms hereof, no later than November 22, 1999 (the "Due Date"). The Principal is payable, in coin or currency of the United States of America, at 1901 Montreal Road, Suite 108, Tucker, Georgia 30084, or at such other place as Lender may from time to time designate to Borrower in writing. 1. Line of Credit. The Lender shall advance to the Borrower such sums as the Borrower may request prior to the Due Date, but which advanced sums (the "Advances") shall not exceed in the aggregate $1,000,000.00 (the "Maximum Amount"). All Advances shall be due in full and payable on the Due Date. Lender shall not request any Advances which exceed the Maximum Amount or which would cause the aggregate amount of outstanding Advances (exclusive of Advances that have been repaid by the Borrower and exclusive of any interest that has accrued on the Advances) made pursuant hereto to exceed the Maximum Amount. 2. Advances. All Advances pursuant to this Line of Credit shall be in the principal amount of $50,000.00 (or a multiple thereof) and shall be noted on Exhibit A hereto. With respect to each Advance and all matters and transactions in connection therewith, the Borrower hereby irrevocably authorizes the Lender to accept, rely upon, act upon and comply with any oral or written instructions, requests, confirmations and orders of Thomas Cordy, the Company's Chief Executive Officer and President, or Daniel McDonough, the Company's Chief Financial Officer. 3. Interest. Interest shall accrue on the Advances at the rate of ten percent (10%) per annum. No interest shall be payable and due until the Due Date. 4. Prepayment. The Borrower may, at any time and from time to time, prepay all or any Advances remaining unpaid, without penalty or premium. Prepayments shall be applied first to accrued but unpaid interest and second to outstanding Advances. 5. Default. The failure by the Borrower to pay the outstanding Advances and any accrued interest thereon on or before the Due Date shall constitute a default under this Line of Credit. Upon a default, the Lender may declare the entire unpaid Principal and all other sums due hereunder immediately due and payable. 2 6. Notices. Any notice or demand required or permitted by or in connection with this Line of Credit shall be in writing at the address set forth below or to such other address as may be hereafter specified by written notice to the Lender by Borrower. Any such notice or demand shall be deemed to be effective as of the date of hand delivery or facsimile transmission, one day after dispatch if sent by telegram, mailgram, overnight delivery, express mail or Federal Express, or three days after mailing if sent by first class mail with postage prepaid. 7. Invalidity of Any Part. If any provision or part of any provision of this Line of Credit shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Line of Credit, and this Line of Credit shall be construed as if such invalid, illegal or unenforceable provision or part thereof had never been contained herein, but only to the extent of its invalidity, illegality or unenforceability. 8. Choice of Law; Consent to Venue and Jurisdiction. This Line of Credit shall be governed, construed and interpreted in accordance with the laws of the State of Georgia, even if the Georgia rules governing conflicts of laws would otherwise require that the laws of another jurisdiction govern this Line of Credit. Borrower and Lender consent to the jurisdiction and venue of the courts of any county in the State of Georgia or to the jurisdiction and venue of the United States District Court for the District of Georgia in any action or judicial proceeding brought to enforce, construe or interpret this Line of Credit. 9. Actions Against Lender. Any action brought by Borrower against Lender which is based, directly or indirectly, or in whole or in part, upon this Line of Credit or any matter related to this Line of Credit shall be brought only in the courts of the State of Georgia. 10. Waiver of Jury Trial. Borrower (by execution of this Line of Credit) and Lender (by acceptance of this Line of Credit) agree that any suit, action, or proceeding, whether claim or counterclaim, brought or instituted by Borrower or the Lender on or with respect to this Line of Credit or which in any way relates, directly or indirectly, to the obligations of Borrower to the Lender under this Line of Credit, or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. Borrower (by execution of this Line of Credit) and Lender (by acceptance of this Line of Credit) hereby each expressly waive any right to a trial by jury in any such suit, action, or proceeding. Borrower (by execution of this Line of Credit) and Lender (by acceptance of this Line of Credit) acknowledges and agrees that this provision is a specific and material aspect of the agreement between the parties and that the Lender would not enter into the transaction with Borrower if this provision were not a part of their agreement. 3 IN WITNESS WHEREOF, Borrower and Lender have duly executed this Line of Credit as of the date first set forth above. MAXXIS GROUP, INC. 1901 Montreal Road, Suite 108 Tucker, Georgia 30084 By: /s/ Thomas O. Cordy -------------------------------------------- Name: Thomas O. Cordy ----------------------------------------- Title: Chief Executive Officer and President ----------------------------------------- MAXXIS MILLIONAIRRE SOCIETY 1901 Montreal Road, Suite 108 Tucker, Georgia 30084 By: /s/ Alvin Curry -------------------------------------------- Name: Alvin Curry ----------------------------------------- Title: Partner ---------------------------------------- 4 EXHIBIT A
Date Advance Borrower's Signature Lender's Signature - ---- ------- -------------------- ------------------ November 22, 1998 $250,000.00 /s/ Thomas O. Cordy /s/ Alvin Curry December 7, 1998 $100,000.00 /s/ Thomas O. Cordy /s/ Alvin Curry December 15, 1998 $250,000.00 /s/ Thomas O. Cordy /s/ Alvin Curry December 31, 1998 $200,000.00 /s/ Thomas O. Cordy /s/ Alvin Curry
EX-10.2 3 INVESTMENT AGREEMENT 1 EXHIBIT 10.2 INVESTMENT AGREEMENT This Investment Agreement (this "Agreement") is made as of December 8, 1998 (the "Effective Date"), by and between InteReach Internet Services, L.L.C., a Georgia limited liability company (the "Company"), and Maxxis Group, Inc. (the "Purchaser"). In consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. AUTHORIZATION AND SALE OF THE CLASS C MEMBERSHIP INTERESTS 1.1 Authorization. The Company has authorized the sale and issuance to the Purchaser of up to seven Class C Membership Interests (the "Class C Shares") having the rights, restrictions, privileges and preferences set forth in the Amended and Restated Operating Agreement of the Company attached hereto as Exhibit 1.1 (the "Amended Operating Agreement"). The Company and its members (the "Members") have adopted and executed the Amended Operating Agreement. 1.2 Sale and Purchase of the Class C Shares. Subject to the terms and conditions hereof, at the Closing the Company will issue and sell five Class C Shares to the Purchaser at a purchase price of $20,000 per Class C Share for a total purchase price of $100,000 (the "Purchase Price"). 2. CLOSING DATE 2.1 Closing Date. The closing for the purchase and sale of the Class C Shares hereunder (the "Closing") shall be held on the Effective Date at the offices of Nelson Mullins Riley & Scarborough, L.L.P., 999 Peachtree Street, First Union Plaza, Suite 1400, Atlanta, Georgia 30309, at 10:00 a.m., or at such other time and place as the Company and the Purchaser mutually agree upon (the "Closing Date"). 3. REPRESENTATIONS OF THE COMPANY The Company hereby represents to the Purchaser as follows: 3.1 Organization and Standing. The Company is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Georgia. The Company has all requisite legal power and authority to own and operate its properties and assets and to carry on its business as presently conducted and as proposed to be conducted. The Company is qualified to do business in each jurisdiction in which such qualification is required. 2 3.2 Legal Power. The Company has all requisite legal power and authority to execute and deliver this Agreement, to sell and issue the Class C Shares hereunder and to carry out and perform its obligations under the terms of this Agreement. All proceedings or other necessary action required to be taken by the Company, its managers and Members to authorize the execution, delivery and performance of this Agreement and the sale and issuance of the Class C Shares and the agreements relating hereto and thereto have been properly taken, and this Agreement constitutes a valid and binding obligation of the Company enforceable in accordance with its terms. Neither the execution, delivery or performance of this Agreement by the Company will, with or without the giving of notice or the passage of time, or both, conflict with, result in a default, right to accelerate or loss of rights under, or result in the creation of any lien, charge or encumbrance pursuant to, any provision of the Company's Amended Operating Agreement or any franchise, mortgage, deed of trust, lease, license, agreement, understanding, law, ordinance, rule or regulation or any order, judgment or decree to which the Company is a party or by which it may be bound or affected. This Agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms 3.3 Capitalization. The authorized membership interests of the Company consist of Class A Membership Interests ("Class A Shares"), Class B Membership Interests ("Class B Shares") and Class C Shares (collectively, the "Shares"). The rights, restrictions, privileges and preferences of the Shares are as stated in the Amended Operating Agreement. As of the date of this Agreement, the Members and their ownership interests in the Company are as set forth in the Amended Operating Agreement. No Person (as defined herein) owns or has the right to acquire any interest in the Company except as set forth in the Amended Operating Agreement. The term "Person" shall mean any individual, partnership, corporation, limited liability company, joint venture, association or other business venture or entity. There are no preemptive or other outstanding rights, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company or any other Person of any Shares or other securities of the Company. All of the outstanding Shares have been duly and validly issued in compliance with federal and state securities laws. Other than the Shares, including the Class C Shares to be sold and issued pursuant to this Agreement, there are no other outstanding securities of the Company and no other rights to acquire any securities of the Company. The consideration paid for the outstanding Class A Shares and the Class B Shares was cash and has been paid in full. 3.4 Class C Shares. The Class C Shares, when issued, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Class C Shares may be subject to restrictions on transfer under state and federal securities laws. 3.5 Financial Statements. The Company has furnished to the Purchaser its financial statements as of and for the year ended December 31, 1997, and as of and for the nine months ended September 30, 1998 (collectively, the "Financial Statements"). The Financial Statements are unaudited but are believed to be complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principals applied on a consistent basis throughout the periods indicated. Such Financial Statements fairly present the financial condition known to the Company as of the dates thereof, and reflect all material liabilities, contingent or 2 3 otherwise, of the Company as of such dates, and such statements of profit and loss accurately present the operating results of the Company during the periods indicated therein. Except as reflected on the Company's balance sheet dated September 30, 1998, there is no outstanding indebtedness of the Company. 3.6 Absence of Changes. Since September 30, 1998, there has not been any change in the assets, liabilities, financial condition or operations of the Company except changes in the ordinary course of business which have not been, either in any case or in the aggregate, materially adverse to the Company nor has there been any other event or condition of any character which has materially and adversely affected the Company's business or prospects. 3.7 Title to Properties and Assets; Liens, etc. Except as disclosed on the Company's balance sheet as of September 30, 1998, the Company has good and marketable title to all of its properties and assets, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than liens for current taxes not yet due and payable. 3.8 Liabilities. Except as disclosed in the Financial Statements, the Company has no material liabilities and knows of no material contingent liabilities not disclosed in the Financial Statements. 3.9 Patents, Trademarks, and Trade Secrets. To the best of the Company's knowledge, information and belief, after due inquiry, there are no pending or threatened claims against the Company alleging that the conduct of the Company's business infringes or conflicts with the rights of others under patents, service marks, trade names, trademarks, copyrights, trade secrets or other proprietary rights. The Company's business as now conducted and as proposed to be conducted will not infringe or conflict with the rights of others, including rights under patents, service marks, trade names, trademarks, copyrights, trade secrets and other proprietary rights. The Company owns or possesses sufficient legal rights to all the patents, copyrights, trademarks, trade names, service marks, trade secrets and other rights necessary for the operation of its business as now conducted and as proposed to be conducted. No employee or consultant of the Company owns any rights in patents, trademarks, trade names, processes, data or know-how directly or indirectly competitive with those owned or to be used by the Company or derived from or in connection with the conduct of the Company's business. The Company is not aware of any violation or infringement by a third party of any of the Company's patents, licenses, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights. The Company has taken and will take reasonable security measures to protect the secrecy, confidentiality and value of all trade secrets useful in the conduct of its business. 3.10 Compliance with Other Instruments, None Burdensome, etc. The Company is not in violation of any term of its Amended Operating Agreement, or of any term contained in any instrument or contract to which it is a party, and, is not in violation of any order, statute, rule or regulation applicable to the Company. No event or failure of performance has occurred which, with the passage of time or the giving of notice or both, would constitute such a violation. Neither the execution, delivery and performance of this Agreement, nor the sale and issuance of the Class C Shares, will result in any such violation or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or 3 4 charge upon any of the properties or assets of the Company; and there is no such violation or default, nor any such term, which materially and adversely affects the business of the Company as presently conducted or as proposed to be conducted or any of its properties or assets. To the best of the Company's knowledge, no other party is in material default of any such instrument or contract. 3.11 Litigation, etc. To the best of the Company's knowledge, no action, suit, proceeding or investigation is pending or threatened against the Company, nor, to the best of its knowledge, is there any basis therefor. The foregoing includes any action, suit, proceeding or investigation, pending or threatened, which questions the validity of this Agreement or the right of the Company to enter into it, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financial or otherwise, and also includes any litigation pending or threatened, against the Company, by reason of the past employment relationships of any employee, officer or consultant of the Company, the activities or proposed activities of the Company, or negotiations by the Company with possible backers of, or investors in, the Company or its proposed business. No action, suit, proceeding or investigation is pending or threatened by the Company. 3.12 Computer Software. 3.12.1 Exhibit 3.12.1 contains a complete and accurate list of the computer software that is owned by the Company and used in its business (the "Owned Software"), except for commercially available business software applications and other commercially available over-the-counter "shrink-wrap" software that is generally used by the Company in the ordinary course of its business (the "Business Software"). Except for the Licensed Software (as such term is defined below) incorporated within the Owned Software, and except as otherwise set in Exhibit 3.12.1, the Company has exclusive rights and title to the Owned Software, free and clear of all claims, including claims or rights of joint owners and employees, agents, consultants, customers, licensees or any other parties who may have been involved in the development, creation, marketing, maintenance, enhancement or licensing of such Owned Software. Each contract programmer, independent contractor, nonemployee agent and Person or other entity (other than employees) who has performed development or computer programming services for the Company in connection with the Owned Software has executed a confidentiality agreement in favor of the Company, and the Company has obtained an assignment or license of, or otherwise owns, the intellectual property resulting therefrom. No Owned Software has been published or disclosed to any other parties except pursuant to contracts requiring such other parties to keep the Owned Software confidential. (For purposes of the preceding sentence, marketing materials that describe the Owned Software and its functions in general shall not be deemed a publication or disclosure of the Owned Software). No such other party has breached any such obligation of confidentiality. 3.12.2 The Company has the right and license to use, sublicense, modify and copy all software (other than the Business Software) of which the Company is a licensee or lessee or that the Company otherwise has obtained the right to use (collectively, the "Licensed Software") to the extent necessary to operate the Company's business, free and clear of any limitations or encumbrances, including Licensed Software that has been incorporated into or 4 5 made a part of any Owned Software. The Company is in full compliance with all material provisions of each license, lease or other agreement relating to the Licensed Software. The Company has not published or disclosed any Licensed Software to any other party except, in the case of Licensed Software, if any, that the Company leases or markets to others, pursuant to contracts requiring such other parties to keep the Licensed Software confidential. No party to whom the Company has disclosed Licensed Software has breached such obligation of confidentiality. 3.12.3 The Owned Software, the Licensed Software, and the Business Software constitute all software used in the Company's business (the "Company Software"). The transactions contemplated herein will not cause a breach or default under any licenses, leases or similar agreements relating to the Company Software or impair the Company's ability to use the Company Software in the same manner as the Company Software is currently used or is contemplated to be used by the Company. The Company has not infringed and is not infringing any intellectual property rights of any third party with respect to the Owned Software, and no other Person or entity is infringing any intellectual property rights of the Company with respect to the Owned Software. 3.12.4 Except as disclosed in Exhibit 3.12.4, the Company has not granted any licenses or other rights, and the Company has no obligation to grant licenses or other rights, with respect to the Company Software. The Company has complied in all material respects with the obligations to its customers, licensees and lessees in respect of the Company Software, if any, listed in Exhibit 3.12.4. 3.12.5 The Company has not granted marketing or brokering rights in the Company Software to any third party. 3.12.6 The Business Software that is material to the operation of the Company's business, the Owned Software and any Licensed Software that has been incorporated into any Owned Software is capable of correctly processing, providing and/or receiving date data within and between the Twentieth and Twenty-First Centuries, provided that all hardware, software and firmware used with the Company Software and computer equipment properly exchanges accurate date data with it. The business of the Company does not depend to any extent on embedded computer technology or computer information systems of its current vendors or suppliers that would, in the event that the embedded chips or vendor/supplier computer systems fail to be Year 2000 compliant, have a material adverse effect on the Company's business or properties. 3.13 Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Class C Shares or the consummation of any other transaction contemplated, by this Agreement. 5 6 3.14 Offering. The offer, sale and issuance of the Class C Shares in conformity with the terms of this Agreement constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). 3.15 No Conflicting Agreements. No employee of the Company is, or will be in connection with the proposed operations of the Company, in violation of any term of any employment contract, proprietary information and inventions agreement, noncompetition agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any previous employer. 3.15 Registration Rights. The Company is not under any obligation to register any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.17 Contracts and Other Commitments. Except as set forth on Exhibit 3.17 hereto, the Company does not have any contract, agreement, lease, or other commitment, written or oral, absolute or contingent, other than (i) contracts for the purchase of supplies and services that were entered into in the ordinary and usual course of business and that do not involve more than $10,000, and do not extend for more than one year beyond the date hereof, (ii) sales contracts entered into in the ordinary course of business, and (iii) contracts terminable at will by the Company on no more than 30 days notice without cost or liability to the Company. For the purpose of this section, employment and consulting contracts and contracts with labor unions, and license agreements and any other agreements relative to the Company's technology, shall not be considered to be contracts entered into in the ordinary and usual course of business. 3.18 Subsidiaries. The Company does not presently own or control, directly or indirectly, and has no stock or other interest as owner or principal in, any other corporation, partnership, limited liability company, joint venture, association or other business venture or entity. 3.19 Transactions with Principals. Except as shown on Exhibit 3.19 hereto, no employee, shareholder, officer or director of the Company is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. Set forth on Exhibit 3.19 is a list of each agreement, instrument or other writing constituting legal rights and obligations between the Company and any member or manager at the time of the Closing. 3.20 Employees. The Company has no employment contract with any officer or employee or any other consultant or person which is not terminable by it at will without liability, except as the Company's right to terminate its employees at will may be limited by applicable Georgia law. The Company has no deferred compensation, pension, health, profit sharing, bonus, equity purchase, option plan, hospitalization, insurance, severance or any other employee benefit or welfare benefit plan or obligation covering any of its officers or employees. 3.21 Voting Agreements. Except as set forth in the Amended Operating Agreement, the Company has no agreement, obligation or commitment with respect to the election of any Persons to serve as managers. To the best knowledge of the Company, there are no agreements, 6 7 obligations or commitments among the Members with respect to the election of any Persons to serve as managers of the Company. 4. INVESTMENT REPRESENTATION The Purchaser hereby represents and warrants to the Company with respect to this purchase as follows: 4.1 Access to Information. Purchaser acknowledges that documents, records, and books pertaining to the Company have been made available for inspection by Purchaser. Purchaser has a pre-existing business or personal relationship with the Company or with one or more of the Company's managers, Members or controlling persons. Purchaser has had a reasonable opportunity to ask questions of and receive answers from the managers, Members or controlling persons of the Company concerning the terms and conditions of the offering of the Class C Shares, and to obtain additional information, to the extent possessed or obtainable without unreasonable effort or expense by the managers, Members or controlling persons of the Company. All such questions have been answered to the satisfaction of Purchaser. 4.2 Experience; Investment. Purchaser has such knowledge and experience in financial and business matters as to enable Purchaser (a) to utilize the information made available to it in connection with the offering of the Class C Shares, (b) to evaluate the merits and risks associated with a purchase of the Class C Shares, and (c) to make an informed decision with respect thereto. Purchaser's business and financial experience is such that the Company could reasonably assume Purchaser has the capacity to protect its own interests in connection with the offer, sale and issuance of the Class C Shares. Purchaser is acquiring the Class C Shares solely for its own account, not as a nominee or agent, and not with a view to, or for sale in connection with, any distribution thereof. 4.3 Registration Under the Securities Act. Purchaser understands that (a) neither the offering nor the sale of the Class C Shares has been registered under the Securities Act or applicable state securities laws, in reliance upon exemptions from the registration provisions of the Securities Act and applicable state securities laws, (b) the Class C Shares purchased by Purchaser must be held by it indefinitely unless the sale or transfer thereof is subsequently registered under the Securities Act and applicable state securities laws or an exemption from such registration is available, and the certificates or documents representing all Class C Shares will be legended to reflect such restrictions, and (c) the managers of the Company will rely upon the representations and warranties made by Purchaser in this Agreement in order to establish such exemption from the registration provisions of the Securities Act and applicable state securities laws. 4.4 Transfer. Purchaser will not transfer the Class C Shares without registration under the Securities Act and applicable state securities laws unless the transfer is exempt from registration under the Securities Act and such laws. 7 8 5. CONDITIONS TO PURCHASER'S OBLIGATIONS AT THE CLOSING The Purchaser's obligation to purchase the Class C Shares at the Closing is subject to the fulfillment on or prior to the Closing Date of all of the conditions set forth below in this Section 5. 5.1 Representations and Warranties Correct. The representations and warranties made in Section 3 hereof shall be true and correct when made, and shall be true and correct on the Closing Date. 5.2 Covenants. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all respects. 5.3 Election of Managers. The managers of the Company shall be as set forth in Section 7.1 hereof. 5.4 Virtual ISP Agreement. The Company and the Purchaser shall have entered into a Virtual ISP Agreement on terms and conditions satisfactory to the Purchaser. 5.5 Amended Operating Agreement. The Company shall provide a true, correct and complete copy of the Amended Operating Agreement to Purchaser at the Closing. The Amended Operating Agreement shall have been entered into and signed by all Members in accordance with Georgia law. 5.6 Promissory Note. The Company shall enter into a Secured Promissory Note with the Purchaser substantially in the form set forth on Exhibit 5.6 hereto. 5.7 Closing. At the Closing, the Company shall deliver to Purchaser a certificate representing five Class C Shares against payment of the Purchase Price. 5.8 Legal Opinion. The Purchaser shall have received an opinion of Company's counsel, dated the Closing Date, to the effect that: a. The Company was duly organized as a limited liability company and is existing and in good standing under the laws of the State of Georgia; b. The Company has the legal power and authority to execute and deliver the Agreement, to perform its obligations under the Agreement, to own and use its assets and to conduct its business; c. The Company has authorized Class A Membership Interests, Class B Membership Interests and Class C Membership Interests. Fifty percent of the Class A Membership Interests are owned by each of Martin Richardson and David Craver, three Class B Membership Interests are outstanding and no Class C Membership Interests are outstanding; 8 9 d. All of the outstanding membership interests of the Company have been duly authorized and validly issued and are fully paid and nonassessable; and none of the outstanding membership interests were issued in violation of the preemptive rights of any member of the Company; and e. The Class C Membership Interests have been duly authorized for issuance and sale to Maxxis Group, Inc., and, when issued and delivered by the Company against payment therefor, will be validly issued, fully paid and nonassessable and no holder thereof will be subject to personal liability by reason of being such a holder. 5.9 Proceedings and Documents. All legal and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser and the Purchaser shall have received all such counterpart originals or certified or other copies of such documents as reasonably requested. 6. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING The Company's obligation to sell the Class C Shares at the Closing is subject to the fulfillment of the following conditions to the extent not waived by the Company: 6.1 Representations Correct. The representations made by the Purchaser in Section 4 hereof shall be true and correct on the Closing Date. 7. AFFIRMATIVE COVENANTS OF THE COMPANY The Company hereby covenants and agrees as follows: 7.1 Directors. Upon the Closing, the Amended Operating Agreement shall provide that the Company shall have no more than four directors. On the Closing Date, the following persons shall be directors of the Company: Martin Richardson, David Craver, Thomas Cordy and Douglas Field. 7.2 Exclusive Agreement. Upon the Closing, the Company and the Members agree that neither the Company nor the Members shall market, solicit or sell the services of the Company to any multilevel or network marketing company other than the Purchaser. 7.3 Class C Shares. Upon the Closing, the Company agrees that it shall not issue any Class C Shares to any Person other than the Purchaser without obtaining Purchaser's prior written consent. 9 10 7.4 Issuance of Additional Class C Shares. The parties acknowledge that, on the Closing Date, the Company will have agreed to provide the Company with a line of credit in accordance with Section 8 hereof. If at any time the Company accesses any funds available to it pursuant to such line of credit, the Company shall, prior to the Purchaser being required to deliver any such funds to the Company pursuant to the line of credit, immediately issue two additional Class C Shares to Purchaser for no additional consideration. 8. LINE OF CREDIT 8.1 Line of Credit. Subject to Section 8.2 hereof and the continued truthfulness and accuracy of the representations and warranties of the Company made in Section 3 hereof, the Purchaser shall advance to the Company, such sums as the Company may request in writing prior to December 8, 1999, but which advanced sums (the "Advances") shall not exceed in the aggregate $150,000 (the "Maximum Amount"). All Advances shall be due in full and payable on December 8, 1999 (the "Due Date"). Borrower shall not request any Advances which exceed the Maximum Amount or would cause the aggregate amount of Advances (including Advances that have been repaid by the Company) made pursuant hereto to exceed the Maximum Amount. Even if the aggregate amount of Advances made and outstanding under the Loan Agreement shall at any time and for any reason exceed the Maximum Amount, Borrower shall nevertheless be liable for the entire amount outstanding. Each request for an Advance by the Company shall be a reaffirmation by the Company that each representation and warranty made in Section 3 hereof is complete and accurate as of the date of the request. 8.2 Advances. Both the Company and Purchaser agree that the obligation of Purchaser to make any Advance to the Company is subject to Purchaser's determination, in its sole discretion, that the Company is in good financial condition and will be able to repay any Advance in full on or prior to the Due Date. All Advances pursuant to this Section 8 shall be in the principal amount of $25,000. The Company agrees that it shall not request an Advance if it shall have previously requested and been granted an Advance within the previous two months. No interest shall be payable on the Advances. With respect to each Advance and all matters and transactions in connection herewith, the Company hereby irrevocably authorizes the Purchaser to accept, rely upon, act upon and comply with any oral or written instructions, requests, confirmations and orders of Martin Richardson or David Craver. 8.3 Prepayment. The Company may, at any time and from time to time, prepay all or any Advances remaining unpaid, without penalty or premium. 8.4 Use of Proceeds. Borrower represents and agrees that the proceeds from the Advances shall be used solely for working capital business purposes and shall not be used for any personal, family, household, consumer or other purpose, including but not limited to the purchase or carrying of margin stock or other securities. 10 11 9. MISCELLANEOUS 9.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of law principles. 9.2 Survival. The representations, warranties, covenants and agreements made by the parties herein shall survive any investigation made by Purchaser or the Company and shall survive the closing of the transactions contemplated hereby. 9.3 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 9.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the holders of at least two-thirds of the outstanding Class C Shares. Any amendment or waiver effected in accordance with this section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities, and the Company. 9.5 Effect of Amendment or Waiver. Purchaser acknowledges that by the operation of Section 9.4 hereof the holders of two-thirds of the outstanding Class C Shares will have the right and power to diminish or eliminate all rights of such Purchaser under this Agreement. 9.6 Rights of Purchaser. Purchaser shall have the absolute right to exercise or refrain from exercising any right or rights that such holder may have by reason of this Agreement or the Class C Shares, including without limitation the right to consent to the waiver of any obligation of the Company under this Agreement and to enter into an agreement with the Company for the purpose of modifying this Agreement or any agreement effecting any such modification, and Purchaser shall not incur any liability to any other holder or holders of the Class C Shares with respect to exercising or refraining from exercising any such right or rights. 9.7 Acknowledgement of Purchaser. Purchaser acknowledges that it is not relying upon any person, firm, corporation or other legal entity other than the Company and its managers and Members in making its investment in the Company. 9.8 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be effective five days after mailed by first-class, registered, or certified mail, postage prepaid, or upon delivery if delivered by hand or by messenger or a courier delivery service, addressed to the Company or the Purchaser at the respective address appearing on the signature pages hereto. 11 12 9.9 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to Purchaser upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 9.10 Expenses. The Company and the Purchaser shall bear their own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 9.12 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute one instrument. 9.14 Severability. In the case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 12 13 The foregoing Investment Agreement is hereby executed as of the date first above written. COMPANY: PURCHASER: InteReach Internet Services, L.L.C. Maxxis Group, Inc. 3850 Holcomb Bridge Road, Suite 420 1901 Montreal Road, Suite 108 Norcross, Georgia 30092 Tucker, Georgia 30084 By: /s/ Martin Richardson By: Thomas O. Cordy ---------------------------------- ------------------------------- Name: Martin Richardson Name: Thomas O. Cordy Title: Executive Director Title: President and CEO 13 14 Exhibit 1.1 Amended and Restated Operating Agreement 15 Exhibit 3.12.1 16 Exhibit 3.12.4 17 Exhibit 3.17 18 Exhibit 3.19 19 Exhibit 5.4 20 Exhibit 5.6 Secured Promissory Note 21 SECURED PROMISSORY NOTE $150,000.00 DECEMBER 8, 1998 INTEREACH INTERNET SERVICES, L.L.C., a Georgia limited liability company ("Borrower"), for value received, hereby promises to pay to the order of MAXXIS GROUP, INC., a Georgia corporation ("Lender"), the aggregate principal sum of ONE HUNDRED FIFTY THOUSAND 00/100 DOLLARS ($150,000.00) or such portion as may have been advanced to Borrower by Lender (the "Principal") pursuant to the Investment Agreement between Borrower and Lender of even date herewith, no later than December 8, 1999 (the "Payment Date"). The Principal is payable, in coin or currency of the United States of America, at 1901 Montreal Road, Suite 108, Tucker, GA 30084, or at such other place as Lender may from time to time designate to Borrower in writing. 1. Security. Sums due under this Note are secured by, and Borrower hereby assigns, conveys and grants a security interest to Lender, in and to, all tangible and intangible property, property rights and assets of Borrower now owned or hereafter acquired, including but not limited to all accounts, receivables, money, securities, equipment, furniture, fixtures, inventory, goods, software, patents, trademarks, service marks, tradenames, copyrights, works, works in progress, programs, program documentation, intellectual property and rights, contracts, contract rights, instruments, documents, general intangibles, chattel paper, notes, and other choses in action, all deposits and property of Borrower now or at any time hereafter in the possession of the Lender, and all proceeds and products of the foregoing and all rights related thereto. In addition, this Note is secured by all property described as collateral in any security agreement, financing statement, mortgage, deed of trust, pledge agreement or other document previously, simultaneously, or hereafter entered into by Borrower in connection with any obligation or liability of Borrower to the Lender, such other security document(s) including but not limited to the UCC-1 financing statement filed in connection herewith. This Note specifically incorporates by reference, as if fully set forth herein, all of the language and provisions of the security documents described generally or specifically above. The lien created by the security interest granted herein shall not expire until Lender has been paid all amounts due under this Note. 2. Default. Any of the following will be a default under this Note: (a) failure to pay any principal, expense, fee, charge or interest when due, or failure to perform any other obligations hereunder; (b) a default by any Borrower upon any of the existing or future obligations of any Borrower to the Lender; (c) a default in any other agreement, instrument or document between Borrower and any Lender, including, without limitation, any security document referred to above, whether previously, simultaneously, or hereafter entered into; (d) a material adverse change in the financial condition of Borrower from that expressed in the financial statement most recently submitted to the Lender prior to the date of this Note, as determined in good faith by the Lender in its sole discretion; (e) institution of bankruptcy, insolvency, reorganization or receivership proceedings by or against Borrower in any state or federal court; (f) the appointment of a receiver, assignee, custodian, trustee or similar official under any federal or state insolvency or creditors' rights law for any property of Borrower; (g) failure of Borrower 22 to furnish to the Lender such collateral or additional collateral as the Lender may in good faith request; (h) any warranty, representation, or statement to the Lender by or on behalf of Borrower proving to have been incorrect in any material respect when made or furnished; (i) the occurrence of any event which is, or would be with the passage of time or the giving of notice or both, a default under any indebtedness of Borrower to any person other than the Lender; (j) any material loss, theft or substantial damage, not fully insured for the benefit of the Lender, to any of the assets of Borrower, or the sale, transfer, lease, encumbrance or other disposition of all or any material part of the assets of Borrower other than in the ordinary course of business of Borrower; (k) the entry of any final judgment against Borrower for the payment of money in excess of $5,000; (l) the levy upon or attachment of any assets of Borrower; (m) the recordation of any federal, state or local tax lien against Borrower; (n) a change of ownership or dissolution, merger, consolidation, liquidation or reorganization of Borrower; (o) the failure of Borrower to furnish to the Lender such financial information as the Lender may require from time to time; or (p) the determination in good faith by the Lender, in its sole discretion, that the ability of Borrower to pay or perform any of its obligations to the Lender is impaired for any reason. 3. Remedies. Upon a default, in addition to all other rights and remedies available to the Lender under any other document or agreement between Borrower and the Lender or under applicable law (including the Uniform Commercial Code), the Lender, in its sole discretion and without notice or demand, may: (a) declare the entire unpaid Principal and all other sums due hereunder immediately due and payable; and (b) exercise any rights of a secured creditor under the Uniform Commercial Code and other law, including the right to take possession of the collateral without the use of judicial process or hearing of any kind and the right to require the debtor to assemble the collateral at such place(s) as the Lender may specify. Borrower agrees that a default under this Note is a default by Borrower under all other liabilities and obligations of Borrower to the Lender, and that the Lender shall have the right to declare immediately due and payable all of such other liabilities and obligations. Borrower waives the benefit of any and every statute, ordinance, or rule of court which may be lawfully waived conferring upon Borrower any right or privilege of exemption, homestead rights, stay of execution, or supplementary proceedings, or other relief from the enforcement or immediate enforcement of a judgment or related proceedings on a judgment. 4. Interest Rate After Judgment. If judgment is entered against Borrower on this Note, the amount of the judgment entered (which may include principal, interest, charges, fees, and expenses) shall bear interest at the legal rate of interest then applicable to judgments in the jurisdiction in which judgment was entered. 5. Expenses of Collection. Borrower shall pay all costs and expenses incurred by the Lender in collecting sums due under this Note, including without limitation the costs of any lien, judgment or other record searches, appraisals, travel expenses and the like. In addition, if this Note is referred to an attorney for collection, whether or not suit has been filed, Borrower shall pay all of the Lender's costs, fees (including, but not limited to, the Lender's attorneys' fees, charges and expenses) and all other expenses resulting from such referral. 23 6. Negotiable Instrument. Borrower agrees that this Note shall be deemed to be a negotiable instrument, even though this Note may not qualify under applicable law, absent this paragraph, as a negotiable instrument. 7. Waivers. Borrower, and all parties to this Note, whether maker, endorser or guarantor, waive presentment, demand, notice of dishonor and protest. 8. Notices. Any notice or demand required or permitted by or in connection with this Note, without implying the obligation to provide any notice or demand, shall be in writing at the address set forth below or to such other address as may be hereafter specified by written notice to the Lender by Borrower. Any such notice or demand shall be deemed to be effective as of the date of hand delivery or facsimile transmission, one day after dispatch if sent by telegram, mailgram, overnight delivery, express mail or Federal Express, or three days after mailing if sent by first class mail with postage prepaid. 9. Assignability. This Note may be assigned by the Lender or any holder at any time. 10. Binding Nature. This Note shall inure to the benefit of and be enforceable by Lender and its successors and assigns and any other person to whom Lender may grant an interest in Borrower's obligations to the Lender, and shall be binding and enforceable against Borrower and Borrower's personal representatives, successors and assigns. 11. Invalidity of Any Part. If any provision or part of any provision of this Note shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Note, and this Note shall be construed as if such invalid, illegal or unenforceable provision or part thereof had never been contained herein, but only to the extent of its invalidity, illegality or unenforceability. 12. Choice of Law; Consent to Venue and Jurisdiction. This Note shall be governed, construed and interpreted in accordance with the laws of the State of Georgia, even if the Georgia rules governing conflicts of laws would otherwise require that the laws of another jurisdiction govern this Note. Borrower consents to the jurisdiction and venue of the courts of any county in the State of Georgia or to the jurisdiction and venue of the United States District Court for the District of Georgia in any action or judicial proceeding brought to enforce, construe or interpret this Note. 13. Unconditional Obligations. Borrower's obligations under this Note shall be the absolute and unconditional duties and obligations of Borrower and shall be independent of any rights of set-off, recoupment or counterclaim which Borrower might otherwise have against the Lender, and Borrower shall pay absolutely the payments of principal, interest, fees, charges and expenses hereunder, free of any deductions and without abatement, diminution or set-off. 14. Actions Against Lender. Any action brought by Borrower against Lender which is based, directly or indirectly, or in whole or in part, upon this Note or any matter related to this Note shall be brought only in the courts of the State of Georgia. 24 15. Time is of the Essence. Time is of the essence in the payment and performance of this Note. 16. Waiver of Jury Trial. Borrower (by execution of this Note) and Lender (by acceptance of this Note) agree that any suit, action, or proceeding, whether claim or counterclaim, brought or instituted by Borrower or the Lender on or with respect to this Note or which in any way relates, directly or indirectly, to the obligations of Borrower to the Lender under this Note, or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. Borrower (by execution of this Note) and Lender (by acceptance of this Note) hereby each expressly waive any right to a trial by jury in any such suit, action, or proceeding. Borrower (by execution of this Note) and Lender (by acceptance of this Note) acknowledges and agrees that this provision is a specific and material aspect of the agreement between the parties and that the Lender would not enter into the transaction with Borrower if this provision were not a part of their agreement. IN WITNESS WHEREOF, Borrower has duly executed this Note as of the date first set forth above. INTEREACH INTERNET SERVICES, L.L.C. 3850 Holcomb Bridge Road, Suite 420 Norcross, Georgia 30092 By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- EX-10.3 4 VIRTUAL ISP AGREEMENT 1 EXHIBIT 10.3 CONFIDENTIAL TREATMENT REQUESTED VIRTUAL ISP AGREEMENT This Agreement is entered into as of this 8th day of December, 1998 (the "Effective Date"), by and between INTEREACH INTERNET SERVICES, LLC, a Georgia limited liability company ("InteReach") with its principal place of business at 3850 Holcomb Bridge Road, Suite 420, Norcross, Georgia 30092, and MAXXIS GROUP, INC., a Georgia corporation ("Partner") with its principal place of business at 1901 Montreal Road, Suite 108, Tucker, Georgia 30084. WHEREAS, InteReach is a national Internet service provider ("ISP"), providing dial-up Internet access and other Internet services; and WHEREAS, InteReach provides certain Internet services as defined in the attached Schedule A (hereinafter referred to as "Services") on a nonexclusive basis at wholesale or discounted prices; and WHEREAS, Partner desires to contract with InteReach for certain Internet services, according to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, both parties agree as follows: I. TERM OF AGREEMENT The initial term (the "Initial Term") of this Agreement shall begin on the Effective Date and continue until June 30, 2001. The Initial Term shall automatically renew for consecutive one year terms, unless terminated as set forth herein. II. DUTIES OF PARTNER A. Efforts. Partner shall utilize commercially reasonable efforts to recruit and obtain dial-up accounts for the Internet services provided hereunder ("Partner Accounts"). B. Professionalism. Partner shall at all times act in a professional manner, utilizing reasonable standards of conduct for the industry. C. Starter Kits. Partner shall have the right to provide to Partner Accounts any starter kits solely as determined in Partner's discretion. III. DUTIES OF INTEREACH: SERVICES A. InteReach agrees to provide Partner with the Services outlined in Schedule A for resale to the Partner Accounts. The Services shall be branded as services of 2 Partner, and Partner shall have complete discretion as to the prices to be charged to Partner Accounts therefor. Partner shall be responsible for the billing of Partner Accounts for the Services including the establishment invoicing and collection of all charges to Partner Accounts, provided however, that, during the period from the date first set forth above until such time as Partner provides to InteReach notice to the contrary, InteReach will be responsible for: (i) preparing and delivering invoices to all Partner Accounts which invoices will be branded with the Partner's name and logo only and will direct that remittance of payment be made to InteReach, if the Partner Account is making payment by a credit card transaction ("Credit Card Accounts"), or to Partner, if the Partner Account is making payment in any other form; and (ii) collection of all charges to Credit Card Accounts. Upon notice from Partner to InteReach of Partner's desire to undertake such billing responsibilities ("Billing Notice Date") InteReach will: (i) transfer such responsibilities to Partner; (ii) assist in the transition of such responsibilities in any reasonable manner as requested by Partner; and (iii) reduce the Unlimited Internet Access fee (as set forth on Schedule A) by an amount equal to that portion of the cost associated with each Partner Account allocable to such responsibilities or as agreed upon by the parties. InteReach will use its best efforts to provide the Services upon the date hereof. InteReach reserves the right to reconfigure the Services, upon a minimum of 30 days' written notice to Partner, provided the reconfiguration furnishes functionally equivalent or better Services at no additional cost to Partner. B. During the term of this Agreement, Partner may increase the number of Services, in accordance with InteReach's then current price schedule and prevailing commercial practices, by giving InteReach advance written request for increased services. C. InteReach will take reasonable efforts to minimize any downtime or loss of Services. D. Notwithstanding anything to the contrary herein, InteReach agrees that all accounts obtained due to the efforts of Partner shall be and remain the property of Partner and that Partner may move any such Partner Accounts to its own or another system at any time it wishes. InteReach agrees to provide all reasonable assistance to Partner to effectuate any transfer of the Partner Accounts. IV. PRICING AND PAYMENT A. All Partner Accounts will be billed directly each month by Partner, except as provided in Section III (A). B. Partner shall calculate the remittance due to InteReach with regard to the Partner Accounts and remit the amounts prescribed under this Agreement to InteReach no 2 3 later than the last day of each month for the previous month's billable activities, together with a report of all account activity for said previous month, provided that, with regard to invoices delivered to Credit Card Accounts prior to the Billing Notice Date, InteReach shall retain the fee due to InteReach applicable thereto and will remit to Partner all remaining amounts no later than the last day of each month for the previous month's billable activities, together with a report of all account activity for said previous month. V. DEFAULT STARTING PAGE A. The starting default page (the "Default Page") will be set in the browser by the Partner for each of Partner's subscribers. The Default Page may be hosted on the InteReach server if the Partner so desires, but the Partner reserves the right to host the Default Page on any server the Purchaser wishes. B. Partner shall be solely responsible for all content of the Default Page. Partner agrees to indemnify and hold harmless InteReach against any claim asserted against InteReach (including reasonable attorney's fees) as a result of Partner's inclusion of any material contained in the Default Page, provided that, upon the receipt of notice of such claim by InteReach, InteReach shall promptly give written notice of such claim to Partner and provided further that Partner shall have control of the defense of any such claim and the negotiations for its settlement or compromise. VI. TERM AND TERMINATION A. Subsequent to the Initial Term, either party may terminate this Agreement provided that the terminating party provides the other party with 90 days prior notice of such termination. B. Either party may terminate this Agreement if the other party commits a material breach of any term of this Agreement which is not remedied within 30 days after delivery of written notice of such breach by the non-breaching party. C. Upon termination of this Agreement: (i) all rights and licenses of either party hereunder shall immediately terminate; and (ii) both parties shall return any confidential information, and all copies thereof, in their possession, custody and control and will cease all uses of any trade names, trademarks, service marks, logos and other designations. VII. TRANSFERABILITY InteReach shall not assign any right or interest under this Agreement or delegate any work or other obligation to be performed or owned by InteReach under this Agreement without the prior written consent of Partner, which consent shall not be unreasonably withheld. Any 3 4 attempted assignment or delegation in contravention of the above provision shall be void and ineffective. VIII. OWNERSHIP OF VISP PROGRAM SUBSCRIBERS All Partner Accounts acquired pursuant to this Agreement are the property of Partner. IX. MARKETING OF ANCILLARY SERVICE AND GOODS Partner shall have the exclusive right to control which parties (including InteReach) may market ancillary products and services to Partner Accounts. X. LIMITATION OF LIABILITY A. Services. InteReach will make every reasonable effort to have the Services available 24 hours a day, 7 days a week ("24/7"). However, InteReach cannot and does not guarantee such Services. Furthermore, InteReach's sole liability to Partner or any third party for claims, not withstanding the form of such claims (contract, negligence or otherwise), arising out of (1) the unavailability of the InteReach system; or (2) the interruption in or delay of Service provided or to be provided by InteReach shall be for InteReach to use its best efforts to make the InteReach system available and/or to resume the Services as promptly as reasonably practical; provided, however, that no provision of this paragraph shall be construed as an indemnification by Partner of any potential claims of third parties for which InteReach may ultimately be held responsible. B. Other than as set forth herein, InteReach makes no warranties, express or implied, of any kind regarding the InteReach Services provided hereunder, including any implied warranty of merchantability of fitness for a particular purpose, all of which are expressly disclaimed. C. InteReach shall not be responsible for any damage to Partner or Partner Accounts as a result of any interruption, termination or other failure of InteReach Services, including loss of data, unless caused by InteReach's own negligence or willful misconduct. Use of any information obtained via InteReach Services is at Partner's and Partner Accounts' own risk. InteReach specifically disclaims responsibility for the accuracy or quality of the information obtained through InteReach Services. Partner further agrees that InteReach shall not be liable for any special, incidental, indirect, punitive or consequential damages or for lost profits, business or revenues arising out of or in connection with this Agreement or the services provided hereunder, whether suffered by Partner, any of Partner Accounts or any party claiming rights derived therefrom, even if InteReach shall have been advised in advance of the possibility of such potential loss or damage. In no event shall InteReach's aggregate liability to Partner with respect to any Partner Account 4 5 exceed the amount of all fees and charges actually paid by Partner or charged to a Partner Account in respect thereof for the one-month period immediately prior to InteReach's actions giving rise to such damages; provided, however, that no provision of this paragraph shall be construed as an indemnification by Partner of any potential claims of third parties for which InteReach may ultimately be held responsible. D. Neither party shall be liable for delays or failure to deliver or perform due to acts of God, acts of the other party, acts of civil or military authorities, fires, strikes, floods or other similar events beyond its control. E. The provisions of this Section X shall continue in full force and effect notwithstanding an effective termination of this Agreement. XI. CONFIDENTIALITY OBLIGATIONS A. Each party hereunder may disclose to the other party certain Trade Secrets and Confidential Information (as defined below). For purposes hereof "Owner" refers to the party disclosing Trade Secrets or Confidential Information hereunder and "Recipient" refers to the party receiving any Trade Secrets or Confidential Information hereunder. Recipient agrees to hold the Trade Secrets and Confidential Information of Owner in strictest confidence and not to directly or indirectly copy, reproduce, distribute, manufacture, duplicate, reveal, report, publish, disclose, cause to be disclosed, or otherwise transfer the Trade Secrets or Confidential Information of Owner to any third party or utilize the Trade Secrets or Confidential Information of Owner for any purpose whatsoever other than as expressly contemplated by this Agreement. With regard to Trade Secrets, this obligation shall continue for so long as such information constitutes a Trade Secret under applicable law; with regard to the Confidential Information this obligation shall continue for the term of this Agreement and for a period of five (5) years thereafter. B. For purposes hereof "Trade Secrets" means information which: (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. For purposes hereof "Confidential Information" means information, other than Trade Secrets, that is of value to its owner and is treated as confidential. To the extent consistent with the foregoing, customer lists shall constitute Trade Secrets or Confidential Information as appropriate. 5 6 XII. MISCELLANEOUS A. Confidentiality. Both parties agree not to disclose the terms of this Agreement, including fees and charges set forth herein, unless required by applicable law. B. Survival of Obligations. The respective obligations of Partner and InteReach under this Agreement, which by their nature would continue beyond the termination, cancellation, or expiration hereof, shall survive termination, cancellation, or expiration hereof. C. Severability. If any of the provisions of the Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall not invalidate or render unenforceable the entire Agreement, but rather the entire Agreement shall be construed as if not containing the particular invalid of unenforceable provision or provisions, and the rights and obligations of each party shall be construed and enforced accordingly. However, in the event such provision is considered an essential element of this Agreement, the parties shall promptly negotiate a replacement thereof. D. Nonwaiver. No course of dealing, course of performance or failure of either party to strictly enforce any term, right or condition of this Agreement shall be construed as a waiver of any term, right or condition. E. Choice of Law. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of Georgia, without regard to its conflict of law principles. F. Entire Agreement. The terms and conditions contained in this Agreement supersede all prior oral or written understandings between the parties and shall constitute the entire agreement between them concerning the subject matter of this Agreement and shall not be contradicted, explained or supplemented by any course of dealing between InteReach or any of its affiliates and Partner or any of its affiliates. XIII. ASSISTANCE WITH NETWORKTWO CONTRACT NEGOTIATION InteReach agrees to use its best efforts to assist Partner in the negotiation of an agreement with NetworkTwo Communications Group, Inc. ("NetworkTwo") with respect to the provision of Services to Partner by NetworkTwo. Such assistance by InteReach may include, without limitation, introducing Partner to persons at NetworkTwo with whom InteReach has had prior contact. Both parties acknowledge and expect that any such agreement between NetworkTwo and Partner would be on substantially the same terms as the current agreement dated as of July 10, 1998 with respect to the purchase and provision of Services between InteReach and NetworkTwo. * * * * * 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on behalf of each by a person with full power and authority to bind such party. INTEREACH PARTNER InteReach Internet Services, LLC Maxxis Group, Inc. By: /s/ Martin Richardson By: /s/ Thomas O. Cordy --------------------------------- -------------------------------- Name: Martin Richardson Name: Thomas O. Cordy Title: Executive Director Title: President and CEO 7 8 SCHEDULE A SERVICES 1. INITIAL PROGRAMMING & SET-UP Customization of the VIRTUAL ISP Program by: A. Programming the Partner's subscriber Starter Dial-Up Kits to automatically log on to a screen customized with Partner's brand name and logo, each time the subscriber logs on to the Internet. B. Programming the on-line registration server to automatically update Partner via e-mail with newly registered subscribers. 2. UNLIMITED INTERNET ACCESS*: This includes dial-up access through the cities listed in the InteReach Pop List, one e-mail account, newsgroups, all technical support, customer service and automated billing. Monthly Retail Price to Subscriber: To be determined by Partner Monthly Wholesale Price for Partner: -------------------------------------- ------------------------------------- Number of Subscribers at Access Rate Charged for All end of month Subscribers** -------------------------------------- ------------------------------------- 1 - 25,000 $*** -------------------------------------- ------------------------------------- 25,000 - 75,000 $*** -------------------------------------- ------------------------------------- 75,001 - 150,000 $*** -------------------------------------- ------------------------------------- 150,001 - 200,000 $*** -------------------------------------- ------------------------------------- 200,001 - $*** -------------------------------------- ------------------------------------- *Unlimited Access means that a subscriber may connect to the network as often as he or she likes, for a total of 150 hours per month. Any hours used at over 150 hours per month are billed at $1.00 per hour. **This per subscriber per month fee shall be reduced by $1.00 for each Partner Account that is deemed uncollectible by Partner for any particular month. - ----------------------------- *** Omitted pursuant to a request for confidential treatment and filed separately with the Commission. 9 3. WEB HOSTING SERVICES InteReach provides the following Web Hosting Services at no additional charge: 2mb of storage space FTP access 4. ANCILLARY SERVICES Partner may offer enhanced or ancillary Web-based services on terms and conditions agreed upon by the parties. 5. STATEMENTS OF WORK - NETWORK The InteReach dialup network provides the following: - 300 dialup locations throughout the United States and Canada - Notwithstanding anything to the contrary in this Agreement, InteReach will provide 90% guaranteed system uptime - 24/7 system monitoring to detect system problems and to insure system performance - 33.6k connect speeds in 90% of the system Points of Presence (PoP) - 56k V.90 connect speeds in 75% of the system Points of Presence (PoP) within 90 days of execution of this contract 6. STATEMENT OF WORK - CALL CENTER A. Customer Support The InteReach customer support center provides the following: - 24/7 Availability - Perform Initial PD/PSI (Problem Determination/Problem Source Indemnification): - Search Database(s) for rediscovery/similar problems - Use knowledge and tools to answer usage questions 10 - Work Questions to Point of Resolution - Provide how-to information to customer - Provide solution/resolution to customer - Re-route misdirected customer calls - Transfer to Appropriate Escalation Team if Necessary - Gather pertinent information for follow-up before transfer - Assist customer with setting proper priority/severity of problem - Perform problem management function - Recording/Documenting - Document problem in escalation record - Utilize help desk tools and resources B. Acceptance Criteria InteReach agrees to provide the following Service Level Agreement (SLA) targets for Live Operator Support Services:
Service Delivery Transition Metric Steady State Metric ---------------- ----------------- ------------------- Call Logging 100% 100% Live Answer 60% 90% First Call Resolution 70% 90% Call Abandonment Rate 8% 5% Average Answer Delay < 45" < 30"
C. Order Desk The InteReach customer support center provides the following: - Toll free order number - Capture of customer's information - Capture and assignment of proper "offer code" - 24/7 Availability 2 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS. 1 U.S. DOLLARS 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 1 419,000 10,000 736,000 40,000 553,000 1,730,000 6,088,000 252,000 8,355,000 1,935,000 0 0 200,000 612,000 (58,000) 8,355,000 7,191,000 7,191,000 1,905,000 6,814,000 4,909,000 0 (5,000) 382,000 150,000 382,000 0 0 0 232,000 .15 .14
-----END PRIVACY-ENHANCED MESSAGE-----