1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________
TO _________
Commission file number 0-24273
MAX INTERNET COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 75-2715335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8115 Preston Road, Eighth Floor - East
Dallas, Texas 75225
(Address of principal executive offices)
(214) 691-0055
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Number of shares outstanding of the Registrant's common stock (par value $.0001
per share) as of March 31, 2001: 22,714,361.
Transitional Small Business Disclosure Format
(Check one)
Yes No X
--- ---
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MAX INTERNET COMMUNICATIONS, INC.
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ -- $ 2,116,032
Accounts receivable, net 20,636 48,820
Inventories 6,034,917 6,481,555
Prepaid expenses 152,283 725,154
------------ ------------
TOTAL CURRENT ASSETS 6,207,836 9,371,561
PROPERTY AND EQUIPMENT, AT COST
Machinery and equipment 366,110 489,808
Furnishings 102,655 76,631
------------ ------------
468,765 566,439
Less accumulated depreciation 224,076 135,960
------------ ------------
244,689 430,479
OTHER ASSETS 1,120,493 1,319,922
------------ ------------
$ 7,573,018 $ 11,121,962
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,160,769 $ 3,506,544
Accrued expenses 1,651,285 558,232
Deferred income 167,548 --
Notes payable 532,111 150,000
------------ ------------
TOTAL CURRENT LIABILITIES 8,511,713 4,214,776
REDEEMABLE PREFERRED STOCK, net of discount 5,787,036 2,437,096
REDEEMABLE COMMON STOCK, issuable under adjustable warrant 3,679,970 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; Series A, authorized, 100,000
shares; issued and outstanding, 80,000 shares 8,000,000 8,000,000
Preferred stock, $.0001 par value; Series B convertible, authorized,
350,000 shares; none issued and outstanding -- --
Common stock, $.0001 par value; authorized, 50,000,000 shares;
issued, 22,914,361 shares at March 31, 2001 and
17,734,242 shares at June 30, 2000 2,291 1,773
Additional paid-in capital 27,682,506 30,912,603
Accumulated other comprehensive income (loss) -- 30,607
Accumulated deficit (45,877,998) (34,262,393)
------------ ------------
(10,193,201) 4,682,590
Less 200,000 shares of common stock in treasury - at cost (212,500) (212,500)
------------ ------------
(10,405,701) 4,470,090
------------ ------------
$ 7,573,018 $ 11,121,962
============ ============
See notes to financial statements.
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MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 139,636 $ 140,853 $ 331,493 $ 397,402
Write-off and other losses on inventory (107,000) -- (3,785,001) --
Cost of sales (195,424) (57,465) (380,465) (231,492)
------------ ------------ ------------ ------------
Gross profit (loss) (162,788) 83,388 (3,833,973) 165,910
Selling, general and administrative expenses 1,323,359 2,925,638 6,886,219 7,682,922
------------ ------------ ------------ ------------
Operating (loss) (1,486,147) (2,842,250) (10,720,192) (7,517,012)
Interest income 22 13,383 39,150 108,697
Interest expense (26,881) (4,258) (60,358) (9,811)
------------ ------------ ------------ ------------
Net (loss) $ (1,513,006) $ (2,833,125) $(10,741,400) $ (7,418,126)
Dividends and other charges on preferred stock (275,187) -- (3,735,686) --
------------ ------------ ------------ ------------
Net loss allocable to common shareholders $ (1,788,193) $ (2,833,125) $(14,477,086) $ (7,418,126)
============ ============ ============ ============
Loss per share - basic and diluted $ (.08) $ (.17) $ (.75) $ (.46)
============ ============ ============ ============
Weighted average shares outstanding 21,058,151 17,104,061 19,348,678 16,248,188
============ ============ ============ ============
See notes to financial statements.
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MAX INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
March 31,
2001 2000
------------ ------------
Cash flows from operating activities
Net (loss) $(10,741,400) $ (7,418,126)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 514,106 266,525
Write-off of inventory 3,004,441 --
Stock or options issued for services 1,278,765 223,747
Change in operating assets and liabilities:
Prepaid expenses 38,003 (587,262)
Receivables 28,184 (460,037)
Inventories (2,201,803) (10,242,255)
Deferred income 167,548 --
Other assets (36,809) (601,612)
Accounts payable and accrued expenses 3,804,789 2,377,545
------------ ------------
Net cash used in operating activities (4,144,176) (16,441,475)
Cash flows from investing activities
(Purchases) sales of property and equipment 86,790 (497,152)
Cash flows from financing activities
Sales of redeemable preferred stock 1,420,000 --
Sales of common stock 88,354 9,289,284
Borrowings on notes payable 433,000 --
------------ ------------
Net cash provided by financing activities 1,941,354 9,289,284
------------ ------------
Net decrease in cash (2,116,032) (7,649,343)
Cash and cash equivalents at beginning of period 2,116,032 8,136,585
------------ ------------
Cash and cash equivalents at end of period $ -- $ 487,212
============ ============
Noncash financing activities:
Issuance of common stock or options in payment of liabilities $ 88,118 $ 51,187
============ ============
Conversion of Series C preferred stock to common stock $ 1,420,000 $ --
============ ============
Issuance of common stock for dividends $ 29,626 $ --
============ ============
Common stock or options issued for services $ 1,278,765 $ 223,747
============ ============
See notes to financial statements
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MAX INTERNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
These financial statements have not been audited by independent certified
public accountants, but in the opinion of management, all adjustments
(consisting of normal recurring accruals and adjustments) necessary for a
fair presentation of consolidated results of operations, financial position
and cash flows at the dates and for the periods indicated, have been
included.
These financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the nine months ended March 31,
2001 are not necessarily indicative of the results that may be expected for
the year ending June 30, 2001. For further information, refer to the
consolidated financial statements and notes thereto for the fiscal year
ended June 30, 2000 included in the company's Form 10-KSB, as filed with the
Securities and Exchange Commission on September 28, 2000.
These financial statements include the accounts of MAX Internet
Communications, Inc., (MAX) and its wholly-owned subsidiaries, MAX Internet
Communications do Brasil LTDA (Brasil), and MAX Internet Communications
Deutschland GmbH (GmbH), collectively, "the Company."
MAX Internet Communications Deutschland GmbH was incorporated in Frankfurt,
Germany on August 4, 1999, and MAX Internet Communications do Brasil LTDA
was formed in Rio de Janeiro, Brazil on September 14, 1999. Both of these
companies sold and serviced the MAX i.c.Live card in their respective
regions, as well as other products the company developed.
GmbH was sold on December 21, 2000 to a third party for one Euro plus the
assumption of liabilities. GmbH presently acts as a distributor of the
company's products.
Brasil was closed by the company in February 2001, and the company is in the
process of winding up its affairs.
The financial statements include the operations of Brasil and GmbH from the
dates of formation and until the date of sale or closure.
NOTE B - BUSINESS
The company currently offers three basic products incorporating its
proprietary i.c.Live technology, each intended for a specific target market
segment.
The MAX3600R is targeted for personal computer and information appliance
manufacturers, integrators and value added resellers (VAR). The MAX3600R is
a PCI plug-in card that is compatible with a Pentium-class (166mhz or
faster) host system running a Windows(R) operating system. The MAX3600R card
provides the following features: SVGA Graphics Controller; MPEG-1&2 Decoder
with full DVD support; MPEG-1 encoder; Full Motion Video Capture; H.261/263
video codec and H.711/723 audio codec; AC97 audio Codec (8 simultaneous play
and record channels), hardware wavetable, digital (AC3) audio; MIDI and
telephony codec (full-duplex Speakerphone with Voice Mail, Caller ID and
Distinctive Ring).
The MAX3600R is in production and available for sale.
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MAX INTERNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
The MAX i.c.Live VIDEO COMMUNICATION STATION (VCS) is targeted to resellers,
value-added resellers (VARs) and large end users, and serves as a reference
design for original equipment manufacturer (OEM) relationships. The VCS is
an easy-to-use Internet communications appliance, about the size of a DVD
player. The MAX i.c.Live VCS(TM) allows users to videoconference, send and
receive video e-mail, broadcast live Internet video, surf Internet video and
web-sites, and even view DVD movies. It's on-screen menu and remote control
make it easy to use. It's ability to display output to a television, video
projector, or computer monitor makes it perfect for home or office use. It
is also a Pentium class host system with a Windows operating system.
The VCS is in production and available for sale.
The MAX I.C.LIVE CHIPKIT is targeted to major OEMs. The ChipKit is a minimal
set of proprietary components necessary to build an i.c.Live technology
based product. It consists of an i.c.Live Internet Media Processor,
proprietary support chips, and one software set license. These are available
only to customers who license an i.c.Live product reference design and
commit to a minimum purchase quantity.
The company continues to look for additional software applications that may
be integrated into the card, and believes some of these will give rise to
the availability of patent protection. The company will continue research
and development in this regard.
NOTE C - FORMATION AND DISPOSITION OF BUSINESSES
During the quarter ended September 30, 1999, MAX formed two new
subsidiaries, both of which are 100% owned. MAX Internet Communications
Deutschland GmbH was incorporated in Frankfurt, Germany on August 4, 1999,
and MAX Internet Communications do Brasil Ltda was formed in Rio de Janeiro,
Brazil on September 14, 1999. Both of these companies sold and serviced the
MAX i.c.Live card in their respective regions, as well as other products the
company developed. During the quarter ended December 31, 2000 the company
sold GmbH for one Euro plus the assumption of liabilities. GmbH presently
acts as a distributor of the company's products.
The company has been unable to fund continuing operations in Brazil. Due to
this lack of funding and the resultant creditor pressures, the company
closed the office in Brazil in February 2001 and is in the process of
winding up its affairs. Because of this situation, the company has been
unable to receive financial information from Brasil or determine precisely
what the expenses were in Brasil for the current quarter. The company has
estimated the expenses of Brasil for the quarter, and believes that any
adjustments that may be required would not be material to the consolidated
financial statements. In addition, an accrual has been made at March 31,
2001 in the amount of $150,000 for the estimated additional cost to be
incurred in order to fully exit from Brazil. It is possible that the
financial statements included herein may be revised when additional
information is available.
NOTE D - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America for
interim financial information, which contemplate continuation of the company
as a going concern. However, the company has sustained significant operating
losses and negative cash flows from operations. Achievement of operating
income or positive cash flow from operations is uncertain. The company has
been able to survive over the previous few months through short-term loans
and cash flow from a development agreement. However, based on the current
levels of operating expenses and outstanding liabilities, and compared to
the company's cash balances, it is uncertain whether the company will be
able to continue in business.
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MAX INTERNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Recoverability of a major portion of the recorded asset amounts shown in the
balance sheet is dependent upon continued operations. The company's
continued existence is dependent upon the successful acceptance and sale of
its products, including establishing license and development agreements, or
obtaining additional funds through public or private equity financings,
neither of which is assured. These matters raise substantial doubt about the
company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result
from the unfavorable outcome of this uncertainty.
NOTE E - INVENTORIES
At March 31, 2001, the company owned approximately $15,000,000 of inventory,
at laid-in cost, consisting primarily of finished goods and components.
Management continues to evaluate the inventory valuation using, among other
factors, the level of recent sales as well as near-term sales prospects.
Over the past year the company has written inventories down by approximately
$9.5 million. Inventories are valued at $6,034,917 at March 31, 2001. The
company believes that sales will be consummated with one or more customers
for products at sales prices which will be in excess of carrying value.
However, there can be no assurance that this will be the case.
Included in inventories, and accounts payable, at March 31, 2001 is
$2,176,000 of components which have not yet been released by the vendor to
the company since payment has not yet been made.
NOTE F - SERIES C PREFERRED STOCK AND ADJUSTABLE WARRANT
In the quarter ended December 31, 2000 the two largest holders of the
company's Series C preferred stock exercised their put and redemption rights
on a total of 42,000 shares. These rights became exercisable as a result of
the delisting of the company's common shares by Nasdaq on November 8, 2000.
Upon exercise of these rights, the company is obligated to pay to the
holders the par value of the shares, amounting to $4,200,000, plus a 20%
premium amounting to $840,000. The company does not have the resources to
make these payments and is currently in default of the agreements. Interest
accrues on the unpaid balance at an annual rate of 18%. The total amount due
under these agreements, including the premium and accrued interest, is
included under the caption Redeemable Preferred Stock on the balance sheet.
Upon exercise of the put and redemption rights, the discount on this Series
C preferred stock has been fully amortized. The amortization of the
discount, plus the 20% premium, plus dividends paid and accrued, totaling
$3,735,686 and $275,187 for the nine and three months ended March 31, 2001,
have been used to adjust the net loss allocable to common shareholders in
the computation of loss per share.
In addition, the holder of an adjustable stock warrant has exercised the
warrant. Upon exercise, the company is obligated to issue approximately
22,000,000 shares of common stock to the holder, based upon a formula in the
agreement. Due to the delisting of the company's common shares, the holder
has redemption rights on the common shares and exercised those rights in
December 2000. Upon exercise the company was obligated to pay a total of
$3,492,250. The company does not have the resources to make this payment and
is currently in default of the agreement. Interest accrues on the unpaid
balance at an annual rate of 18%. The total amount due under this agreement,
including accrued interest, is shown under the caption Redeemable Common
Stock on the balance sheet.
To date, the holders of these obligations have not pursued collection of the
amounts due.
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MAX INTERNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G - NOTES PAYABLE
In December 2000, the company borrowed $125,000 from an individual who at
that time was a Director of the company. The note bears interest at the
prime rate plus 2% per annum, and is due on or before June 14, 2001.
In March 2001 the company borrowed $458,000 from an unrelated party. The
note bears interest at 8% per annum and is due on or before September 14,
2001. At maturity, any unpaid principal and interest may, at the lender's
option, be converted into common stock of the company at 90% of the average
closing bid price for the five trading days prior to conversion. A discount
of approximately $50,000 was recorded to reflect the beneficial conversion
feature. The note is secured by inventories with an original cost of
approximately $1,100,000.
NOTE H - STOCK OPTIONS
A former officer of the company executed a written document related to the
issuance of 900,000 options to purchase common stock, at a price equivalent
to the average closing sales price of the stock over the 10 trading days
prior to July 20, 2000, computed at $3.47, to a nonemployee as consideration
for purported services in obtaining a commitment for the purchase of
$2,000,000 of the company's common stock by a customer pursuant to a
development and sales agreement. The company issued the options pursuant to
the written document. These options expire June 2001. The fair value of
these options, $1,035,000, has been expensed.
During the quarter ended December 31, 2000, 1,031,500 options held by then
current employees under the company's 1999 Stock Option Plan were repriced
to $.50 per share. As of March 31, 2001 the repricing had no effect on
earnings as the new exercise price has been higher than the fair market
value of the shares.
NOTE I - CONTINGENCIES
The company has filed a lawsuit alleging breach of contract against
Heartland Payment Systems, LLC (Heartland), a credit card processing company
which has performed this function for the company. Heartland then filed suit
against the company alleging breach of contract, and alleging the company is
liable for losses to the extent of approximately $1.8 million. Agreement has
been reached in principal to settle this case with both parties dropping
their respective lawsuits.
On various dates between August 1, 2000 and September 14, 2000, the company,
and certain of its officers and directors, were named as defendants in
lawsuits which were filed in the U. S. District Court for the Northern
District of Texas, Dallas Division. In these purported class action
lawsuits, plaintiffs allege that they and other similarly situated investors
purchased common stock of the company at artificially inflated prices due to
false and misleading disclosures by the company concerning its sales revenue
for the quarterly financial reporting periods ending September 30, 1999 and
December 31, 1999.
Plaintiffs allege that the company's false and misleading disclosures
violated Sections 10(b) of 20(a), as well as other sections, of the
Securities Exchange Act of 1934.
The plaintiffs seek to represent persons or entities who purchased the
company's common stock between November 15, 1999 and May 12, 2000. On the
latter date, the company announced that it was restating earnings for the
two prior quarters due in part to the booking of sales in reliance upon
documentation that was later found to be falsified. Plaintiffs seek an
unspecified amount of damages, together with prejudgment interest, attorney
fees and other costs of suit.
These lawsuits were consolidated by court order on October 25, 2000. Upon
selection of lead plaintiffs and appointment of counsel to represent the
purported class, a consolidated amended complaint was filed in May 2001. The
company intends to vigorously defend itself against these allegations.
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MAX INTERNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
On September 29, 2000, MAX Internet and various officers and directors were
named as defendants in a derivative lawsuit filed in the Northern District
of Texas. The suit seeks monetary damages, injunctive relief and attorneys'
fees based on alleged breaches of fiduciary duty stemming from allegations
similar to those contained in the above mentioned consolidated lawsuits, and
has now also been consolidated with those consolidated lawsuits. The company
intends to vigorously defend itself against these allegations.
The company has issued purchase orders to certain vendors that have not been
completed to date. These vendors have requested the company pay for costs
they have incurred based on the terms of the purchase orders as issued.
Litigation has been filed or threatened against the company in these
collection efforts. The company is in negotiations with these vendors in an
attempt to reach suitable settlements. There is no assurance the company
will be successful in these efforts. The company has accrued the estimated
amounts which will be due under these matters.
The company has granted one of these vendors a security interest in
substantially all of its card and camera inventory in the United States,
which has a carrying value of approximately $1,200,000.
The company is engaged from time to time in other legal proceedings, none of
which was material to operations on the date hereof.
NOTE J - MATERIAL CONTRACT
In March 2001 the company signed a license and development agreement with a
customer which provides for a development fee to be paid to the company,
followed by payments to support the technology as well as other future
considerations. Payments received through March 31, 2001 have been deferred
until such time as the customer has accepted the developed technology in
accordance with the terms of the contract.
NOTE K - COMPREHENSIVE INCOME (LOSS)
Three months Nine months
ended ended
March 31, 2001 March 31, 2001
--------------- ---------------
Net loss $ (1,513,006) $ (10,741,400)
Other comprehensive gain (loss), foreign currency translation adjustment,
net of reclassification adjustment of $126,402 126,402 (30,607)
--------------- ---------------
Total $ (1,386,604) $ (10,772,007)
=============== ===============
For the nine and three months ended March 31, 2000 there were no differences
between net loss and comprehensive loss.
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MAX INTERNET COMMUNICATIONS, INC.
ITEM 2. Management's discussion and analysis.
RESULTS OF OPERATIONS
Nine and three months ended March 31, 2001 compared to nine and three months
ended March 31, 2000.
Net Sales
Net sales were $331,493 for the nine months ended March 31, 2001, a decrease of
$65,909 from the $397,402 for the nine months ended March 31, 2000. Net sales
were $139,636 for the three months ended March 31, 2001, a decrease of $1,217
from the $140,853 for the three months ended March 31, 2000. Sales for the nine
and three months ended March 31, 2001 consisted of sales of cards and VCS units,
while sales for the comparable periods in 2000 consisted solely of cards.
In late 2000 the company changed its sales and marketing focus. MAX has
repositioned itself to be a development company. The MAX technology is a
significant component of a video solution for many potential customers and
markets. MAX's proprietary software must then be customized for the specific
application required by each individual customer. This software development is
expected to provide a revenue stream to the company. A second revenue source
will then be the collection of royalty payments when the customers sell their
product which is based on the company's technology. This development work is
being marketed directly to Internet appliance manufacturers, telephone
companies, broadband providers, original equipment manufacturers and significant
end users, among others. The company continues to be optimistic regarding the
prospects for future revenues. During this transition, the company continues to
market and sell its existing inventories.
In March 2001 the company signed a license and development agreement with a
customer which provides for a development fee to be paid to the company,
followed by payments to support the technology as well as other future
considerations. Payments received through March 31, 2001 have been deferred
until such time as the customer has accepted the developed technology in
accordance with the terms of the contract.
Other development and sales negotiations are in process, and the company is
optimistic that some of these will be finalized and generate revenues in the
future.
Cost of Sales
Cost of sales were $380,465 and $195,424 for the nine and three months ended
March 31, 2001, as compared to $231,492 and $57,465 for the nine and three
months ended March 31, 2000. Cost of sales consists primarily of the cost of the
MAX i.c. Live cards, cameras and VCS units, plus the cost of royalties relating
to third party software included in our products, media, manuals and shipping.
Cost of sales as a percentage of sales increased to 114.8% for the nine months
ended March 31, 2001 from 58.3% for the nine months ended March 31, 2000. This
was primarily due to discounted pricing given to customers during the nine
months ended March 31, 2001 in an effort to reduce excess inventories and
generate cash flow. Market competition has also caused the company to modify its
pricing structure.
Write-off of inventory - see discussion under "Liquidity"
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MAX INTERNET COMMUNICATIONS, INC.
ITEM 2. Management's discussion and analysis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 10.4% to $6,886,219 for
the nine months ended March 31, 2001 from $7,682,922 for the nine months ended
March 31, 2000; and decreased 54.8% to $1,323,359 for the three months ended
March 31, 2001 from $2,925,638 for the three months ended March 31, 2000. These
decreases primarily result from reductions in personnel and related costs,
advertising, trade shows and other sales expenses; offset by increased
stock-based compensation, depreciation and amortization expenses and research
and development expenses. Stock-based compensation was $1,278,750 and none for
the nine and three months ended March 31, 2001, compared to $223,747 and $44,374
for the nine and three months ended March 31, 2000.
Interest Income
The interest income of $39,150 for the nine months ended March 31, 2001, and
$108,697 and $13,383 for the nine and three months ended March 31, 2000,
respectively, was earned on the available cash balances invested in money market
funds. The interest expense of $60,358 and $26,881 for the nine and three months
ended March 31, 2001 was incurred on the notes payable as well as on an
outstanding account payable balance to a secured creditor.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the company owned approximately $15,000,000 of inventory, at
laid-in cost, consisting primarily of finished goods and components. This amount
of inventory is a significant portion of the company's working capital
resources, especially when viewed in relation to the level of sales which have
been realized to date.
Management continues to evaluate the inventory valuation using, among other
factors, the level of recent sales as well as near-term sales prospects. Over
the past year the company has written inventories down by approximately $9.5
million. Inventories are valued at $6,034,917 at March 31, 2001. The company
believes that sales will be consummated with one or more customers for products
at sales prices which will be in excess of carrying value. However, there can be
no assurance that this will be the case.
Included in inventories, and accounts payable, at March 31, 2001 is $2,176,000
of components which have not yet been released by the vendor to the company
since payment has not yet been made.
Cash and cash equivalents decreased $2,116,032 in the nine months ended March
31, 2001. Net cash used in operating activities for the period was $4,144,176.
This cash used in operating activities was primarily for payment of ongoing
operating expenses.
Cash provided by investing activities consisted of sales of property and
equipment.
Financing activities provided $1,941,354. Sales of preferred and common stock
provided $1,508,354, and net borrowings under notes payable provided $433,000.
Working capital at March 31, 2001 decreased by $7,460,662 to a deficit of $
(2,303,877) from $5,156,785 at June 30, 2000. This was due primarily to the
write-off of inventory in the approximate amount $3,000,000 plus the net losses
of the company during that period, offset by the financing activities described
above.
Due to net operating losses, deficit working capital, the lack of significant
sales to date and the current level of operating expenses as compared to the
company's cash balances, it is uncertain whether the company will be able to
continue in business after the current quarter.
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MAX INTERNET COMMUNICATIONS, INC.
ITEM 2. Management's discussion and analysis.
FORWARD LOOKING STATEMENTS
This document includes statements which may constitute "forward-looking"
statements, usually containing the words "believe", "estimate", "project",
"expect" or similar expressions. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Factors that would cause or contribute to such differences include, but are not
limited to, continued acceptance of the Company's products in the marketplace,
competitive factors, changes in regulatory environments, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes
after the date of this filing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company has filed a lawsuit alleging breach of contract against Heartland
Payment Systems, LLC (Heartland), a credit card processing company which has
performed this function for the company. Heartland then filed suit against the
company alleging breach of contract, and alleging the company is liable for
losses to the extent of approximately $1.8 million. Agreement has been reached
in principal to settle this case with both parties dropping their respective
lawsuits.
On various dates between August 1, 2000 and September 14, 2000, the Company, and
certain of its officers and directors, were named as defendants in the following
lawsuits which were filed in the U. S. District Court for the Northern District
of Texas, Dallas Division: Douglas Haack, et al. v. Max Internet Communications,
Inc., Lawrence R. Biggs, Jr., Donald G. McLellan and Leslie D. Crone; CA#
3-00CV-1662; Leonard J. Bartello, et al. v. Max Internet Communications, Inc.,
Harold L. Clark, Lawrence R. Biggs, Jr. and Leslie D. Crone; CA# 3-00CV-1719-L;
Gunter Huls, et al. v. Max Internet Communications, Inc., Lawrence R. Biggs,
Jr., Donald G. McLellan and Leslie D. Crone; CA# 3-00CV-1724-R; Congregation
Mitzva Meals, Inc., et al. v. Max Internet Communications, Inc., Lawrence R.
Biggs, Jr., Donald G. McLellan and Leslie D. Crone; CA# 3-00CV-1741-L; Jay
Patel, et al. v. Max Internet Communications, Inc., Lawrence R. Biggs, Jr.,
Donald G. McLellan and Leslie D. Crone; CA# 3-00CV1747-H; Carolyn Dennis, et al.
v. Max Internet Communications, Inc., Harold L. Clark; Lawrence R. Biggs, Jr.
and Leslie D. Crone; CA# 3-00CV1785-H; Robert Van Dyke, et al. v. Max Internet
Communications, Inc., Harold L. Clark; Lawrence R. Biggs, Jr. and Leslie D.
Crone; CA# 3-00CV1814-M; Glen Strathearn, et al. v. Max Internet Communications,
Inc., Harold L. Clark; Lawrence R. Biggs, Jr. and Leslie D. Crone; CA#
3-00CV1853-R; and Marian Dunn, et al. V. Max Internet Communications, Inc.,
Harold L. Clark; Lawrence R. Biggs, Jr. and Leslie D. Crone; CA# 3-00CV2016-D.
In these purported class action lawsuits, plaintiffs allege that they and other
similarly situated investors purchased common stock of the Company at
artificially inflated prices due to false and misleading disclosures by the
Company concerning its sales revenue for the quarterly financial reporting
periods ending September 30, 1999 and December 31, 1999. Plaintiffs allege that
the Company's false and misleading disclosures violated Sections 10(b) of 20(a),
as well as other sections, of the Securities Exchange Act of 1934.
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MAX INTERNET COMMUNICATIONS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The plaintiffs seek to represent persons or entities who purchased the Company's
common stock between November 15, 1999 and May 12, 2000. On the latter date, the
Company announced that it was restating earnings for the two prior quarters due
in part to the booking of sales in reliance upon documentation that was later
found to be falsified. Plaintiffs seek an unspecified amount of damages,
together with prejudgment interest, attorney fees and other costs of suit.
These lawsuits were consolidated by court order on October 25, 2000. Upon
selection of lead plaintiffs and appointment of counsel to represent the
purported class, a consolidated amended complaint was filed in May 2001. The
Company intends to vigorously defend itself against these allegations.
On September 29, 2000, MAX Internet and various officers and directors were
named as defendants in a derivative lawsuit filed in the Northern District of
Texas. The suit seeks monetary damages, injunctive relief and attorneys' fees
based on alleged breaches of fiduciary duty stemming from allegations similar to
those contained in the above mentioned consolidated lawsuits, and has now also
been consolidated with those consolidated lawsuits. The Company intends to
vigorously defend itself against these allegations.
The company has issued purchase orders to certain vendors that have not been
completed to date. These vendors have requested the company pay for costs they
have incurred based on the terms of the purchase orders as issued. Litigation
has been filed or threatened against the company in these collection efforts.
The company is in negotiations with these vendors in an attempt to reach
suitable settlements. There is no assurance the company will be successful in
these efforts. The company has accrued the estimated amounts which will be due
under these matters.
The company is engaged from time to time in other legal proceedings, none of
which was material to operations on the date hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.6 License & Development Agreement with maxpop.com
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 13, 2001 announcing a
License & Development Agreement with maxpop.com.
A report on Form 8-K was filed on February 27, 2001 announcing
the resignation of Lawrence A. Cahill as a Director of the
company.
A report on Form 8-K was filed on February 1, 2001 announcing
the resignation of Leslie D. Crone as the Chief Financial
Officer of the company. This filing also reported the layoff
of six of the company's employees.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAX Internet Communications, Inc.
(Registrant)
Date: June 6, 2001
/s/ Robert F. Kuhnemund
------------------------------------------
Robert F. Kuhnemund, CEO and Chairman
/s/ Mary K. McAlpine
------------------------------------------
Mary K. McAlpine, President
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.6 License & Development Agreement with maxpop.com