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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-12544
MAXSERV, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 74-2707626
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(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
8317 CROSS PARK DRIVE, AUSTIN, TEXAS 78754
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(Address of principal executive offices)
(512) 834-8341
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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
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The number of shares of common stock of the issuer outstanding as of August 31,
1995 was 10,883,062.
Transitional Small Business Disclosure Format (check one):
YES NO X
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FORM 10-QSB INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of August 31, 1995 and May 31, 1994 . . . . . . . . . . . . . . . . . 3
Condensed Statement of Income for the three months ended
August 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statement of Cash Flows for the three months ended
August 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 9
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
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MAXSERV, INC.
CONDENSED BALANCE SHEET
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(Unaudited, in thousands except share information)
August 31, May 31,
Assets 1995 1995
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Current assets:
Cash and cash equivalents $ 116 $ 2,097
Accounts receivable 4,758 4,279
Deferred tax asset 106 106
Prepaid expenses and other 200 486
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Total current assets 5,180 6,968
Property and equipment, net 11,438 11,068
Intangible asset, net 1,798 1,893
Deferred tax asset 1,078 1,097
Other assets 40 168
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$ 19,534 $ 21,194
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,116 $ 3,431
Accrued compensation 1,246 1,090
Accrued expenses 796 563
Deferred revenue 42 35
Revolving working capital loan 300 -
Current portion of long term debt 232 273
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Total current liabilities 3,732 5,392
Notes and capital lease obligations 124 167
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Total liabilities 3,856 5,559
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Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 10,883,000 and 109 109
10,869,000 issued and outstanding at August 31, 1995 and May 31, 1995,
respectively
Additional paid-in capital 18,093 18,083
Accumulated deficit (2,524) (2,557)
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Total stockholders' equity 15,678 15,635
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$ 19,534 $ 21,194
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<CAPTION>
MAXSERV, INC.
CONDENSED STATEMENT OF INCOME
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(Unaudited, in thousands except per share amounts)
Three Months Ended
August 31,
1995 1994
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Service fees $ 13,228 $ 5,390
Cost of services provided 12,380 4,196
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Gross service margin 848 1,194
Selling, general and administrative expenses 783 774
Interest expense (income), net 13 10
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Income before provision for income taxes 52 410
Provision for income tax expense 19 159
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Net income $ 33 $ 251
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Net income per share and equivalents:
Primary $ - $ 0.03
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Fully diluted $ - $ 0.03
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Weighted average shares and equivalents outstanding 11,263 7,947
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<TABLE>
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MAXSERV, INC.
CONDENSED STATEMENT OF CASH FLOWS
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(Unaudited, in thousands)
Three Months Ended
August 31,
1995 1994
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Operating activities:
Net income $ 33 $ 251
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,027 443
Deferred income taxes 19 35
Changes in operating assets and liabilities:
Increase in accounts receivable (479) (331)
Decrease (increase) in prepaid and other assets 300 (110)
Decrease in accounts payable (2,315) (16)
Increase in accrued compensation and expenses 389 159
Decrease in income taxes payable - (127)
Increase (decrease) in deferred revenue and other 7 (17)
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Cash provided by (used in) operating activities (1,019) 287
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Investing activities:
Purchase of property and equipment (1,188) (924)
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Financing activities:
Revolving working capital borrowings, net 300 -
Payments on notes and capital leases (84) (80)
Proceeds from issuance of common stock, net 10 12
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Cash provided by (used in) financing activities 226 (68)
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Increase in cash and cash equivalents (1,981) (705)
Cash and cash equivalents at the beginning of the period 2,097 1,592
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Cash and cash equivalents at the end of the period $ 116 $ 887
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MAXSERV, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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August 31, 1995
1. THE COMPANY AND BASIS OF PRESENTATION
MaxServ, Inc. is an information services company providing diagnostic
assistance and support to technicians and consumers involved with the
installation, repair, care and operation of a full range of household products
including appliances, personal computers, entertainment and other electronic
products, heating and air conditioning systems, and lawn and garden equipment.
MaxServ also provides parts ordering, service scheduling, parts research and
other logistical support services to consumers and professional technicians.
The Company's information products and services include in- bound and out-bound
telephone services, electronic catalogs, training, software development and
systems integration. MaxServ delivers its services throughout the United
States and Canada primarily via four manned telephone support centers in
Alabama, Arizona and Texas utilizing advanced technology and telecommunications
systems.
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation SB.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
items considered necessary for a fair presentation, have been included.
Operating results for the quarter ended August 31, 1995 are not necessarily
indicative of the results that may be expected for the year ending May 31,
1996. These financial statements should be read in conjunction with the
audited financial statements and notes included in the Company's Annual Report
on Form 10-KSB for the year ended May 31, 1995.
2. STOCK TRANSACTION AND ACQUIRED SERVICES
In December 1994, MaxServ issued 3.3 million shares of the Company's common
stock in exchange for a ten year agreement for parts sales order services to
Sears' consumer and commercial customers and for Technical Assistance Desk
(TAD) services for logistic and scheduling needs of Sears' repair technicians;
the assumption of a total of 119,000 square feet of call center operating
facilities in Mobile, Alabama and Tucson, Arizona; selected operating assets
valued at $1.2 million permitting assumption of sales order service operations
on January 1, 1995; and cash of $4.5 million. The transaction was accounted
for as assets transferred between parties under common control with the Company
recording the value of the assets received generally at the transferor's book
value. Sears' ownership of MaxServ's outstanding common stock increased to
approximately 65% upon closing of the transaction.
The cash has been fully invested to update and enhance technology and
telecommunications systems, plus fund enhancements to MaxServ's main computer
center and information delivery systems in Austin, Texas and Scottsdale,
Arizona. The acquired operations generate about 80% of MaxServ's current 2
million monthly call volume.
For the three months ended August 31, 1995 and 1994, approximately 93% and 88%,
respectively, of the Company's service revenues were derived from Sears.
Accounts receivable with Sears at August 31, 1995 and May 31, 1995 totaled $4.4
million and $3.7 million, or 92% and 87% of total accounts receivable,
respectively. Sears pays its accounts on a timely basis in accordance with the
terms of applicable service agreements.
3. INCOME TAXES
The effective income tax rate is based on the expected annual rate for federal
and state income taxes.
4. STOCK OPTIONS
During the quarter ended August 31, 1995, the Company granted 253,000 incentive
stock options under various plans existing at May 31, 1995. At August 31,
1995, options to purchase 1,024,000 shares were outstanding, options to
purchase 625,000 shares were exercisable, options for 57,000 shares were
available for future grants, and 1,081,000 shares were reserved for issuance
under the plans.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FINANCIAL CONDITION
With the December 1994 transaction with Sears, MaxServ further solidified its
dominant long-term outsource position with the largest domestic retailer and
servicer of household products. While the Company derives over 90% of its
revenues and margin from services provided to Sears and its results of
operations would be adversely affected should Sears materially diminish the
service relationship, management believes MaxServ's successful performance
history, Sears' commanding market presence, the associated long-term service
contracts with remaining terms of five and nine years, and Sears' ownership
interest, combine to provide a solid operating and financial foundation with
real opportunities for growth. The investments for productivity and capacity
increases, coupled with valuable personnel and experience gains, more strongly
position MaxServ to competitively benefit from the general trend of domestic
corporations to concentrate on their core businesses and streamline ancillary
in-house services through outsourcing. Leveraging the Company's additional
resources to expand and diversify its customer base and service offerings is a
realistic objective. During the quarter, revenues from customers other than
Sears increased 44% over the same quarter a year ago, continuing the excellent
strides made during 1995 when such revenues rose 130% for the year.
Operations for the quarter required cash of $1 million, including the net
liquidation of $2.3 million of accounts payable primarily associated with
capital expenditures incurred late in fiscal 1995. Capital expenditures for
the quarter were $1.2 million and the Company borrowed a net of $300,000 on its
revolving working capital loan facility. Although working capital remained
stable, the effect of such transactions increased the Company's current ratio
slightly to 1.4.
Management anticipates periodic revolving working capital or equipment
borrowings under the Company's bank credit agreement will be required
throughout 1996. At August 31, 1995, $3.5 million of the revolving working
capital loan facility and $2.8 million of the equipment financing facility were
available. Capital purchases for each of the remaining three quarters of 1996
are expected to be lower than the first quarter.
Management believes continuing operations and the bank credit agreement will
provide sufficient resources to allow the Company to meet its obligations, fund
capital requirements and pursue moderate growth through 1996. Although there
can be no assurance, management also believes it can obtain the necessary
resources to fund desirable acquisition or growth opportunities should any
arise.
RESULTS OF OPERATIONS
Quarter Ended August 31, 1995 Compared to Quarter Ended August 31, 1994
With the addition of parts sales order services and repair technician
scheduling services (TAD), plus growth in virtually all previously offered
information services, MaxServ increased its service fees 145% to $13.2 million
and served five times the volume for a total of 6.1 million calls. The two new
services are in-bound telemarketing and logistics support activities and
generate lower fees per call than the Company's diagnostic services. However,
call volumes are dramatically higher. Such services produced fees of $7.7
million from 4.9 million calls representing 89% and 95%, respectively, of the
Company's service fees and call volume increases. Information services
provided directly to consumers was the primary diagnostic service contributor
to overall revenue growth by expanding 36% to $2.5 million, based on a 35%
increase in call volume, representing 8% of the Company's service fees
increase.
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MaxServ's gross service margin decreased 29% to $848,000 and decreased as a
percentage of service fees to 6% compared to 22%. The margin percentage
reduction is primarily attributable to the parts sales order services begun in
January 1995 which generated a margin loss of $538,000 on fees of $5.2 million,
or 39% of total Company service fees. This very large addition to MaxServ's
business and facilities has placed tremendous demands on the Company's
management and technical staff and has required substantial technology and
capacity enhancements. The process of effectively integrating this service,
balancing staffing levels with call volume, improving staff productivity, and
upgrading information delivery systems across four service centers is taking
longer than initially envisioned. Management estimates the implementation of
the improvements necessary to achieve acceptable service performance,
efficiency and margin contribution levels will continue for most of the
remainder of fiscal 1996.
To a much lesser degree, the lower fee arrangement associated with increased
TAD volume of 1.3 million calls, plus technology and capacity enhancements to
most of the Company's information delivery systems, also contributed to
MaxServ's lower overall margin ratio. Management expects the process necessary
to gain operating efficiencies and capacity benefits from the systems upgrades
will likewise continue through much of fiscal 1996.
Selling, general and administrative expenses have remained stable resulting in
a significant decrease as a percentage of service fees to 6% from 14%,
continuing the positive trend begun in 1995. This improved overhead leverage
reflects the ability of the Company's support structure to absorb rapid growth
and management's continuing efforts to control administrative costs.
The weighted average shares and equivalents outstanding used in the net income
per share computations increased by 3.3 million shares due to the issuance of
common stock associated with the December 1994 transaction with Sears.
However, the additional shares outstanding did not have a measurable dilutive
effect on the per share amounts because net income was nominal.
Page 8 of 10
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PART II - OTHER INFORMATION
ITEM 1. MATERIAL DEVELOPMENTS IN CONNECTION WITH LEGAL PROCEEDINGS.
None.
Item 2. Material Modification of Rights of Registrant's Securities.
None.
Item 3. Defaults on Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
Page 9 of 10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
MAXSERV, INC.
Date: October 12, 1995 /s/ NEIL A. JOHNSON
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Neil A. Johnson
Senior Vice President, Finance,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
FINANCIAL STATEMENTS OF MAXSERV, INC. FOR THE THREE MONTHS ENDED AUGUST 31,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> AUG-31-1995
<CASH> 116
<SECURITIES> 0
<RECEIVABLES> 4,758
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,180
<PP&E> 15,804
<DEPRECIATION> 4,366
<TOTAL-ASSETS> 19,534
<CURRENT-LIABILITIES> 3,732
<BONDS> 124
<COMMON> 109
0
0
<OTHER-SE> 15,569
<TOTAL-LIABILITY-AND-EQUITY> 19,534
<SALES> 0
<TOTAL-REVENUES> 13,228
<CGS> 0
<TOTAL-COSTS> 12,380
<OTHER-EXPENSES> 783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 52
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<INCOME-CONTINUING> 33
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 33
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
