10QSB 1 d88171e10qsb.txt FORM 10QSB FOR QUARTER ENDING MARCH 31, 2001 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 --- --- 2 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. -1- 3 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. -2- 4 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 -3- 5 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. -4- 6 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. -5- 7 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. -6- 8 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. -7- 9 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. -8- 10 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" -9- 11 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. -10- 12 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. -11- 13 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. -12- 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 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 -13- 15 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION 10.6 License & Development Agreement with maxpop.com