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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 (Fee Required)
For the fiscal year ended May 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Commission file number: 0-12544
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MaxServ, Inc.
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(Name of Small Business Issuer 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) (Zip code)
Issuer's telephone number, including area code: (512) 834-8341
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of class)
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 issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $52.6 million.
As of August 14, 1996 the aggregate market value of the voting stock held by
non-affiliates computed by reference to the average bid and asked prices of such
stock was $8.2 million. For purposes of calculating this amount, only directors,
officers and beneficial owners of 5% or more of the common stock of the issuer
have been deemed affiliates.
The number of shares of common stock of the issuer outstanding as of August 14,
1996 was 10,917,839.
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FORM 10-KSB INDEX
PART I......................................................................1
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES......................................................6
ITEM 3. LEGAL PROCEEDINGS...............................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............6
PART II.....................................................................7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................8
ITEM 7. FINANCIAL STATEMENTS...........................................10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................10
PART III...................................................................11
PART IV....................................................................12
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..............................12
SIGNATURES.................................................................15
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PART I
ITEM 1. BUSINESS
GENERAL
MaxServ is the leading provider of information services for household products,
offering diagnostic assistance and support to consumers and professional
technicians involved in the installation, repair, care and operation of a full
range of appliances, personal computers, electronic products, heating and air
conditioning systems, personal fitness equipment, lawn and garden equipment and
other home product services.
MaxServ also provides telemarketing services for replacement parts and
accessories covering all major brand home products, service order reservations
and logistical support for its customers.
The Company's services include inbound and outbound telephone services, systems
consulting, design and development for network centric environments and
electronic publishing.
The Company, a Delaware corporation, was incorporated in March 1994. The
Company's predecessor, MaxServ, Inc., was incorporated in Texas in 1981 and
reincorporated in Delaware in May 1994 by merger into the Company. References to
MaxServ or the Company, where applicable, include such predecessor.
MaxServ's corporate headquarters is located in Austin, Texas and operations are
conducted from four service centers in Alabama, Arizona, and Texas.
BUSINESS DEVELOPMENT
Since 1989, the Company has achieved substantial revenue growth every year
providing call centered customer management solutions for manufacturers,
retailers, servicers, warranty providers and consumers of electronic and
mechanical home products. Significant business developments for the most recent
three years are discussed below.
1996
For much of 1996, MaxServ concentrated on completing the development
and implementation of systems and processes necessary to fully
integrate, both technically and culturally, the new services and
facilities added during the last half of 1995 that more than doubled
the Company's operations, employees and capacity.
This effort required new telephone and network equipment, increased
automation and two new call taking systems. Additionally, MaxServ
emphasized education and training of its employees in the use,
maintenance and operation of the new systems and the overall operating
philosophies of the Company. During the second half of the year, the
impact of these actions began to produce positive operating
performance. By year's end, when call volumes of most services are at a
seasonal high, operating performance rose to record levels with higher
systems reliability and improving employee efficiency.
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To better accommodate the growth of MaxServ, a program was introduced
to enable its 3,000 employees to understand the Company's business
goals and correlate their performance to MaxServ's overall
accomplishments. This program emphasized people principles and
management techniques for supervisory personnel and basic financial
concepts and team dynamics for all employees. Greater understanding of
the Company's business by more employees allowed the creation of
operating teams in both the management organization and the call center
environment. The teams also support the educational processes, allowing
more individual participation in the operation of MaxServ's business
while improving communications of objectives and results.
Traditionally, the home product repair market has been comprised of
service organizations that repaired hard goods in the home. This market
definition is broadening to include lifestyle services such as house
cleaning, lawn care, remodeling, and pest control to meet more
comprehensive demands and expectations of home consumers creating a
larger home services industry. In response to these new realities,
MaxServ continues to develop alliances with major service and
technology participants, expand service offerings, improve information
management and delivery systems, and enhance communication
capabilities. During the latter part of 1996, significant activities
were focused on blending telephone and electronic commerce
capabilities, including the Internet, into seamless processes involving
the servicer, parts supplier, warranty provider, manufacturer and the
consumer, ensuring complete customer satisfaction by actively managing
the service incident to completion.
1995
The most significant event in MaxServ's history was consummated on
December 29, 1994. The transaction more than doubled operating capacity
and instantly presented revenue generating potential exceeding the
Company's then current total revenue. The transaction had its
conceptual origin two years earlier at MaxServ. Following an extensive
business assessment by both parties, MaxServ and its principal customer
and stockholder, Sears, Roebuck and Co. reached an accord providing for
a substantially stronger alliance.
Under the terms of the transaction, MaxServ issued 3.3 million shares
of the Company's common stock in exchange for a ten year agreement for
telemarketing services for replacement parts and accessories covering
all major brand home products services for Sears' consumer and
commercial customers and 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 telemarketing operations on January 1, 1995; and cash of
$4.5 million.
The cash was fully invested to significantly update and enhance
technology, telecommunications and information delivery systems.
Initial deployment and integration of the systems enhancements in late
fiscal 1995 began to provide MaxServ with a seamless and redundant
four-center operating network capable of highly reliable and efficient
customer service, which could also accommodate further expansion of the
Company's business to distinguish MaxServ as a competitive, value-added
information service provider.
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1994
During 1994, MaxServ primarily focused on continuing the development of
services to consumers that were begun in 1993. The successful expansion
of such services for do-it-yourself repair questions and personal
computer support fueled the substantial revenue and earnings growth for
1994. The Company also completed development of a CD-ROM based catalog
for major appliances consisting of digitized parts illustrations and
initiated the pilot program for the transfer of TAD services which was
completed with the new ten year agreement during 1995. Key management
additions were also made during 1994.
SERVICES
MaxServ delivers information services to customers via manned telephone support
centers utilizing an advanced telecommunications system and a highly developed
and extensive library of technical information which has been integrated into a
sophisticated computer system. Such telephone services are generally provided
under multi-year agreements with product manufac turers and retailers and
currently generate 97% of the Company's revenue.
Telemarketing Services
MaxServ's telemarketing consultants take orders and process payments
directly from consumers requesting replacement parts and accessories
from Sears for household products. The Company is compensated based on
the level and value of parts sales generated for Sears - a value-added
arrangement rather than the traditional fee per call.
Technical Assistance Desk (TAD)
TAD services are provided to Sears repair technicians and include part
number research and locating, parts ordering, service call scheduling
and rescheduling, on-site technical consulting, documentation delivery
and service order creation. Such logistic services allow more efficient
and effective repair scheduling and performance.
Consumer Services
The Company's customer service representatives and qualified
technicians schedule repair service orders, coordinate replacement
parts availability, provide do-it-yourself diagnostic and repair
assistance, and supply a wide range of information regarding product
care and use, repair versus buy, and product operation. These
diagnostic and information services support manufacturer and retailer
loyalty, minimize product returns, reduce warranty service costs and
enhance consumer satisfaction.
Technician Services
MaxServ's experienced technicians provide diagnostic assistance and
parts location and ordering to field repair and manufacturer
technicians. These services typically provide assistance to technicians
at the time repair or problem evaluation activities are being
conducted. This immediate expert information increases completion rates
for first time repair visits, reduces repair or problem solution time
and costs, and improves consumer satisfaction.
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MaxServ also offers customized data management and software services. The
Company maintains and provides product, parts and technical information catalogs
via CD-ROM which are distributed on behalf of customers to authorized servicers
and parts distributors. MaxServ's Genuine PartFinderTM software is the appliance
industry standard for electronic parts catalogs and includes all six major
manufacturers. In addition, the Company provides custom software development,
systems and telephony integration, imaging systems, and systems efficiency
services.
MARKETING
MaxServ's principal marketing strategy is to become the information
clearinghouse and provider of value-added service solutions for the home service
industry. This strategy implies that the Company will warehouse the technical,
parts, operational and service literature, knowledge and alliances required to
be the intermediary between the consumer, retailer, home servicer, manufacturer,
distributor and warranty provider.
Marketing efforts are focused and directed toward existing and potential key
accounts and selected services. The Company currently markets its services
through its own marketing team which focuses on manufacturers, retailers and
warranty providers in the home services industry. Marketing activities primarily
promote call center operations and service network capabilities.
SUBSTANTIAL REVENUES ATTRIBUTABLE TO ONE CUSTOMER; CONTROL BY SUCH CUSTOMER
Over 90% of MaxServ's revenues for 1996 were attributable to services provided
to Sears pursuant to two service agreements. The first service agreement,
entered into in May 1993, is for a seven year term and covers consumer, parts
and technical support, database maintenance, home office center support and
administrative services. The second service agreement, entered into in December
1994, is for a ten year term and covers telemarketing and TAD services. After
the lapse of any applicable cure periods, each of the agreements is terminable
by either party in the event of non-compliance by the other party with certain
provisions relating to performance of services in accordance with specified
minimum standards, maintenance of required insurance and fulfillment of
indemnity and confidentiality obligations. Each agreement (or, in some cases,
only a service provided under such agreement) is also terminable by Sears, on
180 days notice, in certain events as set forth in the respective agreements. In
specified termination situations under the ten year agreement, during the first
three years of the term of such agreement, Sears is obligated to assume certain
leases and purchase certain assets from the Company, which obligations abate
during such three-year period.
As a result of its ownership interest, Sears has the ability to elect all of the
Company's directors and to control the outcome of all other matters submitted to
a vote of the Company's stockholders. Such voting concentration may have the
effect of delaying or preventing a change in control of the Company. As of
August 14, 1996, Sears owns approximately 65% of the outstanding shares of
common stock of the Company and two of the Company's seven directors are
affiliates of Sears.
Sears has the right to acquire additional shares of capital stock upon the
issuance by the Company of additional capital stock (except in certain limited
cases) in order to maintain the same proportion of the voting power of the
Company as it owned prior to the issuance.
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COMPETITION
There are numerous telephone service companies that provide various kinds of
call center services such as product information, product operation assistance,
service information, dealer location, 800 ordering and telesales. Although some
of these companies' services are similar to certain of the Company's specific
services, management is unaware of any direct competitors for its comprehensive
and wide variety of information services offered nationwide to manufacturers,
retailers, servicers, and consumers regarding the operation, repair and care of
household products. Should any of these companies determine to expand their
services, thereby placing them in more direct competition with MaxServ, the
Company's business could be adversely affected. Many of these companies have
greater financial resources than the Company.
Most companies engaged in the servicing of household products, internally
provide the support services offered by the Company. These companies provide
significant indirect competition, and such companies could elect to offer such
services to others in direct competition with the Company. In such event, the
Company's business could be adversely affected, however, these companies are
also potential customers for MaxServ. Many of these companies have greater
financial resources than the Company.
Some companies have internally developed or utilized outside consulting firms to
develop diagnostic systems to aid in product servicing for their own internal
use. To management's knowledge, no competing diagnostic system has been made
available to others by these companies. There can be no assurance that another
company will not enter the industry, develop the necessary software and
databases, and compete with the Company.
MaxServ may face significant competition for its customized technology services
as it begins to market its capabilities on more than a limited basis to certain
existing customers. Although there can be no assurance, management believes that
resident expertise gained through internal efforts associated with developing
large database applications in a network centric environment, particularly with
sophisticated telephony and multiple site integration, position the Company to
selectively compete for consulting or development opportunities requiring
similar solutions. Technology services currently represent less than 5% of the
Company's revenue.
GOVERNMENT REGULATION
At the present time, management is not aware of any government regulation to
which the Company's business is or will be subject. Since communication with the
Company's databases is via telephone lines and the Company provides the majority
of its services via telephone support through common communication carriers,
future governmental regulation through the Federal Communications Commission or
other agency is possible. It is impossible to predict the effect on the Company
of any such governmental regulation. Additionally, the Company must ensure that
it does not infringe any patents, copyrights or trade secrets held by others.
Management is not aware of any infringing uses associated with its services.
EMPLOYEES
As of August 14, 1996, the Company had approximately 2,700 employees, 1,400 of
which were full time.
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ITEM 2. PROPERTIES
MaxServ conducts its operations from leased facilities which are listed below.
Management believes all of its leased facilities are suitable and adequate for
their intended uses.
<TABLE>
<CAPTION>
Lease
Location Use Size Expiration
- --------------------------- ------------------------------- -------------------- --------------------------
<S> <C> <C> <C>
Austin, Texas Call center and corporate 94,126 sq. ft. 1998, plus 2 one-year
headquarters renewal options
Scottsdale, Arizona Call center 20,439 sq. ft. 1997, plus 2 one year
renewal options
Mobile, Alabama Call center 54,000 sq. ft. 2003, plus 3 five-year
renewal options
Tucson, Arizona Call center 64,982 sq. ft. 1999, plus 4 five-year
renewal options
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a party only to routine employment related litigation in the
ordinary course of its business. Such pending matters are not deemed material,
individually or in the aggregate, to the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq SmallCapSM Market. The
Company's Nasdaq symbol is MXSV. The following table sets forth the range of
high and low bid quotations for the periods indicated by Nasdaq. Bid quotations
represent interdealer quotations without adjustment for retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
Range of Bid Information
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High Low
---- ---
For year ending May 31, 1997:
Quarter ending August 31, 1996
(through August 14, 1996) $ 5.13 $ 3.50
For year ended May 31, 1996:
Quarter ended August 31, 1995 $ 3.88 $ 2.75
Quarter ended November 30, 1995 3.50 3.00
Quarter ended February 28, 1996 3.63 2.25
Quarter ended May 31, 1996 4.13 2.75
For year ended May 31, 1995:
Quarter ended August 31, 1994 $ 4.13 $ 2.75
Quarter ended November 30, 1994 4.75 3.50
Quarter ended February 28, 1995 4.00 3.75
Quarter ended May 31, 1995 3.75 3.00
On August 14, 1996, there were approximately 1,500 stockholders of the Company's
common stock, including holders of record and participants in security position
listings. The Company has never paid dividends on its common stock and does not
anticipate it will do so in the foreseeable future. The Company is presently
restricted from paying dividends under a loan agreement governing its secured
bank credit facility.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange
Act) requires each director and executive officer of the Company, and each
person who owns more than 10% of a registered class of the Company's equity
securities to file by specific dates with the Securities and Exchange Commission
(SEC) initial reports of ownership and reports of change in ownership of the
common stock of the Company. Officers, directors and 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. The Company is required to report in this report any
failure of its directors and executive officers to file by the relevant due date
any of these reports during the Company's fiscal year.
To management's knowledge, Thomas D. Overton was one day late in filing his
initial statement of beneficial ownership reporting his appointment as a
director of the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
MaxServ finished 1996 in solid financial position including cash of $2.2
million, working capital of $3.1 million, no long-term debt and fully available
$4 million revolving working capital loan facility and $3 million equipment
financing facility.
Operations in 1996 generated cash of $4.3 million, after the net liquidation of
$2.1 million of accounts payable primarily associated with capital additions
incurred late in 1995. The favorable collection of accounts receivable in
generally less than 30 days, coupled with depreciation of substantial technology
equipment generally over only three years, produces relatively high cash flows
from operations compared to net income. The ratio of cash generated by
operations to net income increased in 1996 to 4:1 compared to 3:1 in 1995.
Cash from operations and periodic borrowings under the Company's revolving
working capital loan facility enabled MaxServ to make capital investments of
$3.9 million during 1996, following $9.6 million in 1995, continuing to enhance
operating capability and service capacity without incurring long-term debt.
The year-long integration of the large additions to the Company's business and
facilities obtained from Sears in the second half of 1995 is complete and the
associated operating inefficiencies, personnel resource demands and technology
and capacity requirements that severely affected MaxServ's liquidity and
operating performance during most of 1996 are not expected to recur. Management
believes the substantial investments made during the past 18 months for
productivity and capacity increases, coupled with valuable personnel and
experience gains, 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 1996, revenue from customers
other than Sears increased 36% over the same period a year ago, continuing the
progress made during 1995 when such revenue rose 130% for the year.
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The Company has a dominant long-term outsource position with Sears, the largest
domestic retailer and servicer of household products, providing repair
diagnostic assistance, product information support, technician logistics support
and telemarketing sales of replacement parts. While the Company derives over 90%
of its revenue and margin from such services and its results of operations would
be adversely affected should Sears materially diminish the service relationship,
management believes MaxServ's performance history, Sears' commanding market
presence, the associated long-term service contracts with remaining terms of
four and nine years, and Sears' ownership interest, combine to provide a sound
long-term operating and financial foundation.
Effective for calendar 1996, MaxServ sought and received price increases for
certain services provided to Sears, particularly telemarketing sales of
replacement parts. The improved pricing is anticipated to generate additional
aggregate annual revenue in excess of $4 million. Price increases were also
obtained for services provided to certain other customers. Management believes
these price increases were achieved by providing added value to its customers
through improved service delivery, information and solutions.
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 1997. Management expects
to renew the bank credit agreement on no less favorable terms than the existing
agreement prior to its expiration in September 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
Fiscal 1996 marked the first full year of providing telemarketing services for
replacement parts and repair technician logistic services, which coupled with
growth in virtually all previously offered information services, resulted in a
65% increase in service fees to $52.6 million and doubled the call volume to
22.2 million. The telemarketing and technician logistic services generated 1996
fees of $29.4 from 17 million calls representing 81% and 88% of the Company's
incremental service fees and call volume compared to the prior year. Information
services provided directly to consumers were the primary diagnostic service
contributors to overall revenue growth by expanding 39% to $10.4 million, or 14%
of MaxServ's 1996 service fees increase, based on a 37% increase in call volume.
Effective for calendar 1996, price increases for certain services under
long-term contracts contributed 13% of the overall revenue gain.
The Company's gross service margin decreased $569,000 to 9% of service fees in
1996 compared to 17 % in 1995. The very large additions to MaxServ's business
and facilities associated with the telemarketing and technician logistic
services during the latter part of 1995 required substantial technology and
capacity enhancements and placed tremendous demands on the Company's management
and technical staff. The process of effectively integrating these services,
balancing personnel levels with call volume, improving personnel productivity
and upgrading information delivery systems across four service centers proved to
be very expensive early in 1996. The Company's gross service margin was
$712,000, or 3% of service fees, for the first six-month period. When these
efforts were substantially completed during the third quarter, the Company began
to realize significant performance gains producing a gross service margin of
$4.2 million, or 15% of service fees, for the last half of 1996. While the
previously mentioned price
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increases were the largest contributor to the second half gross service margin
improvement, the productivity and cost reduction achievements were major
factors.
To a lesser degree, the lower per call fee arrangements associated with the high
volume telemarketing and technician logistic services, as compared to the
Company's diagnostic services, also contributed to MaxServ's lower overall gross
service margin ratio for 1996 relative to both 1995 and the historical trend.
Although selling, general and administrative expenses have increased, such costs
continue to decrease as a percentage of service fees to 7% for 1996 compared to
10% for the preceding year. This improved overhead leverage reflects the ability
of the Company's administrative support structure to absorb significant growth
and management's continuing efforts to control such costs.
The Company's effective income tax rate of 30% for 1996 reflected a reduction of
the deferred tax asset valuation allowance based on management's assessment that
uncertainties have diminished regarding the likelihood of generating future
taxable income to realize the temporary differences that comprise the deferred
tax asset.
The weighted average shares and equivalents outstanding for 1996 used in the per
share computations increased primarily due to the issuance of 3.3 million shares
of common stock associated with the transaction with Sears in December 1994. The
additional weighted average shares outstanding for the full year had the effect
of reducing the income per share amount by $.02 for 1996 compared to 1995.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are set forth in this Annual Report on Form 10-KSB
commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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PART III
The information required by Part III of this Annual Report on Form 10-KSB is
incorporated by reference from the Company's Definitive Proxy Statement to be
filed pursuant to Regulation 14A not later than 120 days after May 31, 1996.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation (10)
3.2 Bylaws, as amended (16)
4.1 Amended and Restated Convertible Note and Common Stock
Purchase Agreement between Sunwestern Investment Fund,
Sunwestern Capital Corporation, Sunwestern Investment
Fund II, Sunwestern Investment Company, Ltd. and Primefax,
Inc. dated April 30, 1986 (1)
4.2 Amendment to Amended and Restated Convertible Note and Common
Stock Purchase Agreement dated October 10, 1989 (3)
4.3 1988 Stock Option Plan (2)
4.4 1994 Stock Option Plan (10)
4.5 Registration Rights Agreement between Primefax, Inc. and
Renaissance Capital Partners, Ltd. dated May 23, 1991 (4)
4.6 Stock Purchase Agreement dated as of May 20, 1993 between
MaxServ, Inc. and Sears, Roebuck and Co. (5)
4.7 Registration Rights Agreement dated as of May 20, 1993
between MaxServ, Inc. and Sears, Roebuck and Co. (5)
4.8 Stock Purchase Agreement, dated as of December 29, 1994,
between MaxServ, Inc. and Sears, Roebuck and Co. (13)
4.9 First Amendment to the Registration Rights Agreement, dated
as of December 29, 1994 between MaxServ, Inc. and Sears,
Roebuck and Co. (13)
10.1 Employment Agreement between Charles F. Bayless and
Primefax, Inc. (4)
10.2 Amended Employment Agreement between Charles F. Bayless
and MaxServ, Inc. (11)
10.3 Employment Agreement between Thomas W. O'Brien and
Primefax, Inc. (4)
10.4 Amended Employment Agreement between Thomas W. O'Brien
and MaxServ, Inc. (11)
10.5 Office Lease Agreement with Thomas L. Pribil dated
November 2, 1992 (8)
10.6 Office Lease Agreement with 80 Broad Street Realty Trust
dated December 4, 1992 (8)
10.7 Service Agreement dated as of May 20, 1993 between MaxServ,
Inc. and Sears, Roebuck and Co. (7)
10.8 Parts Service Agreement, dated as of December 29, 1994,
between MaxServ, Inc. and Sears, Roebuck and Co. (15)
10.9 Bill of Sale, dated as of December 29, 1994, between MaxServ,
Inc. and Sears, Roebuck and Co. (14)
10.10 Fourth Addendum to Office Lease Agreement with 80 Broad
Street Realty Trust dated December 6, 1993 (9)
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10.11 Assignment and Assumption Agreement, dated as of December 29,
1994, between MaxServ, Inc. and Sears, Roebuck and Co. and
related Lease, as supplemented, between Sears, Roebuck and
Co. and GB&M Westgate Venture (14)
10.12 Assignment and Assumption Agreement, dated as of December 29,
1994, between MaxServ, Inc. and Sears, Roebuck and Co. and
related Lease, as amended, between Sears, Roebuck and Co.
and Pioneer Trust Company of Arizona, Trustee (14)
10.13 Agreement Regarding Compensation of Outside Director and
related Stock Option Agreement, each dated March 9, 1993,
between MaxServ, Inc. and Stephen Keane (6)
10.14 Agreement Regarding Compensation of Outside Director and
related Stock Option Agreement, each dated March 9, 1993,
between MaxServ, Inc. and Nat Turner (6)
10.15 Loan Agreement, dated April 29, 1994, and related loan
documents with Texas Commerce Bank National Association (12)
10.16 First and Second Amendments to Loan Agreement, dated February
17, 1995, with Texas Commerce Bank National Association (16)
10.17 Amendment Agreement (amending the Parts Service Agreement)
among Sears, Roebuck and Co. and MaxServ, Inc., dated
January 31, 1996. Confidential treatment has been
requested for specific portions of this document.(17)
10.18 Amendment Agreement (amending the Service Agreement) among
Sears, Roebuck and Co. and MaxServ, Inc., dated January 31,
1996. Confidential treatment has been requested for
specific portions of this document.(17)
23 Consent of Price Waterhouse LLP.(18)
24 Powers of attorney to sign amendments to this report.
Reference is made to the signature pages of this report.
(1) Contained in Exhibits to the Annual Report on Form 10-K for
the fiscal year ended May 31, 1986, as filed with the
Securities and Exchange Commission on August 27, 1986.
(2) Contained in Exhibits to the Annual Report on Form 10-K for
the fiscal year ended May 31, 1989, as filed with the
Securities and Exchange Commission on August 25, 1989.
(3) Contained in Exhibits to the Annual Report on Form 10-K for
the fiscal year ended May 31, 1990, as filed with the
Securities and Exchange Commission on August 24, 1990.
(4) Contained in Exhibits to the Annual Report on Form 10-K for
the fiscal year ended May 31, 1991, as filed with the
Securities and Exchange Commission on August 27, 1991.
(5) Contained in Exhibits to Schedule 13 D filed by Sears,
Roebuck and Co. (SEC File No. 1-416), as filed with the
Securities and Exchange Commission on June 1, 1993.
(6) Contained in Exhibits to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on June
3, 1993.
(7) Contained in Exhibits to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on June
4, 1993.
(8) Contained in Exhibits to the Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1993, as filed with the
Securities and Exchange Commission on August 30, 1993.
(9) Contained in Exhibits to the Quarterly Report on Form
10-QSB for the quarter ended November 30, 1993, as filed
with the Securities and Exchange Commission on January 14,
1994.
(10) Contained in Exhibits to the Proxy Statement dated April 1,
1994 for the special meeting of shareholders held on April
29, 1994, as filed with the Securities and Exchange
Commission on March 31, 1994.
(11) Contained in Exhibits to the Registration Statement on
Form S-8 (No. 33-82096), as filed with the Securities
and Exchange Commission on July 27, 1994.
13
<PAGE> 16
(12) Contained in Exhibits to the Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1994, as filed with the
Securities and Exchange Commission on August 29, 1994.
(13) Contained in Exhibits to Amendment No. 4 to Schedule 13D
of Sears, Roebuck and Co. (SEC File No. 1-416) dated
January 4, 1995.
(14) Contained in Exhibits to the Current Report on Form 8-K,
filed with the Securities and Exchange Commission on
January 10, 1995.
(15) Contained in Exhibits to the Current Report on Form 8-K/A,
filed with the Securities and Exchange Commission on
March 6, 1995.
(16) Contained in Exhibits to the Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1995, as filed with the
Securities and Exchange Commission on August 29, 1995.
(17) Contained in Exhibits to the Quarterly Report on Form
10-QSB for the quarter ended February 29, 1996, as filed
with the Securities and Exchange Commission on
April 15, 1996.
(18) Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended May 31,
1996.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunder duly authorized:
MAXSERV, INC.
By: CHARLES F. BAYLESS
Charles F. Bayless
President and Chief Executive Officer
Date: August 26, 1996
15
<PAGE> 18
Each person whose signature appears below authorizes Charles F. Bayless and Neil
A. Johnson, or either of them, each of whom may act without joinder of the
other, to execute in the name of each such person who is then an officer or
director of the Registrant and to file any amendments to this annual report on
Form 10-KSB necessary or advisable to enable the Registrant to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such changes in such report as such attorney-in-fact may
deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
CHARLES F. BAYLESS President and Director August 26, 1996
- ----------------------------------------- (Principal Executive Officer)
Charles F. Bayless
NEIL A. JOHNSON Senior Vice President, Finance, August 26, 1996
- ----------------------------------------- Treasurer and Secretary
Neil A. Johnson (Principal Financial and
Accounting Officer)
NATHANIEL P. TURNER Director August 26, 1996
- -----------------------------------------
Nathaniel P. Turner
JAMES F. LEARY Director August 26, 1996
- -----------------------------------------
James F. Leary
STEPHEN J. KEANE Director August 26, 1996
- -----------------------------------------
Stephen J. Keane
DANIEL A. MIHALOVICH Director August 26, 1996
- -----------------------------------------
Daniel A. Mihalovich
THOMAS D. OVERTON Director August 26, 1996
- -----------------------------------------
Thomas D. Overton
PATRICK A. RIVELLI Director August 26, 1996
- -----------------------------------------
Patrick A. Rivelli
</TABLE>
16
<PAGE> 19
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Statement of Income for the years ended
May 31, 1996, 1995 and 1994 F-3
Balance Sheet at May 31, 1996 and 1995 F-4
Statement of Cash Flows for the years ended
May 31, 1996, 1995 and 1994 F-5
Statement of Changes in Stockholders'
Equity for the years ended May 31,
1996, 1995 and 1994 F-6
Notes to Financial Statements F-7
F-1
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of MaxServ, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of MaxServ,
Inc. at May 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended May 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for income taxes in fiscal 1994.
Price Waterhouse LLP
Austin, Texas
June 25, 1996
F-2
<PAGE> 21
MAXSERV, INC.
STATEMENT OF INCOME
- -------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended May 31,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Service fees $ 52,571 $ 31,841 $ 15,699
Cost of services provided 47,622 26,323 12,169
--------------- -------------- --------------
Service margin 4,949 5,518 3,530
Selling, general and administrative expenses 3,445 3,169 2,218
Interest income (expense) 41 49 (130)
--------------- -------------- --------------
Income before taxes and change in accounting 1,545 2,398 1,182
Provision for income taxes 463 751 472
--------------- -------------- --------------
Income before change in accounting 1,082 1,647 710
Cumulative effect of change in accounting for income taxes -- -- 735
--------------- -------------- --------------
Net income $1,082 $1,647 $1,445
=============== ============== ==============
Net income per share and equivalents:
Primary:
Before change in accounting $0.10 $0.18 $0.10
Cumulative effect of change in accounting -- -- 0.11
--------------- -------------- --------------
Net income $0.10 $0.18 $0.21
=============== ============== ==============
Weighted average shares and equivalents 11,234 9,307 7,012
Fully diluted:
Before change in accounting $0.10 $0.18 $0.10
Cumulative effect of change in accounting -- -- 0.09
--------------- -------------- --------------
Net income $0.10 $0.18 $0.19
=============== ============== ==============
Weighted average shares and equivalents 11,234 9,307 7,950
</TABLE>
F-3
<PAGE> 22
MAXSERV, INC.
BALANCE SHEET
- -------------------------------------------------------------------------------
(in thousands)
May 31,
1996 1995
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $2,234 $2,097
Accounts receivable 5,172 4,279
Deferred tax asset 407 106
Prepaid expenses and other 222 486
--------------- ---------------
Total current assets 8,035 6,968
Property and equipment 11,046 11,068
Intangible asset 1,514 1,893
Deferred tax asset 1,018 1,097
Other assets 47 168
--------------- ---------------
$21,660 $21,194
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,328 $ 3,431
Accrued compensation 1,785 1,245
Accrued expenses 1,083 431
Income taxes payable 663 12
Current installments of long-term debt 61 273
--------------- ---------------
Total current liabilities 4,920 5,392
Notes and capital lease obligations, less
current installments -- 167
--------------- ---------------
Total liabilities 4,920 5,559
--------------- ---------------
Stockholders' equity:
Common stock, $.01 par value; 25,000
shares authorized; 10,899 and 10,869
issued and outstanding at May 31,
1996 and 1995 109 109
Additional paid-in capital 18,106 18,083
Accumulated deficit (1,475) (2,557)
--------------- ---------------
Total stockholders' equity 16,740 15,635
--------------- ---------------
$21,660 $21,194
=============== ===============
F-4
<PAGE> 23
MAXSERV, INC.
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Years Ended May 31,
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income $1,082 $1,647 $1,445
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,372 2,105 1,235
Deferred income taxes (222) 530 (633)
Changes in operating assets and liabilities:
Accounts receivable (893) (2,373) (761)
Prepaid and other assets 270 (443) (64)
Accounts payable (2,103) 2,964 379
Accrued compensation and expenses 1,161 777 366
Income taxes payable 651 (311) 292
Other (15) (88) 105
--------------- --------------- ---------------
Cash provided by operating activities 4,303 4,808 2,364
--------------- --------------- ---------------
Investing activities:
Purchase of property and equipment (3,810) (8,398) (1,731)
--------------- --------------- ---------------
Financing activities:
Proceeds from issuance of notes payable -- 235 44
Payments on notes and capital leases (379) (325) (230)
Proceeds from issuance of common stock 23 4,185 20
--------------- --------------- ---------------
Cash provided by (used in) financing activities (356) 4,095 (166)
--------------- --------------- ---------------
Increase in cash and cash equivalents 137 505 467
Cash and cash equivalents at the beginning of the year 2,097 1,592 1,125
--------------- --------------- ---------------
Cash and cash equivalents at the end of the year $2,234 $2,097 $1,592
=============== =============== ===============
Supplemental cash flow information
Cash paid for:
Income taxes $ -- $797 $80
Interest 85 57 170
Non-cash investing and financing activities:
Issuance of capital lease obligations -- -- 67
Issuance of stock for convertible debt -- -- 800
Issuance of warrants for services -- 50 --
Issuance of common stock for assets -- 2,323 --
</TABLE>
F-5
<PAGE> 24
MAXSERV, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------
Number Additional Total
of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1993 6,400 $ 64 $ 10,810 $ (5,649) $ 5,225
Conversion of notes payable 1,067 11 749 760
Exercise of stock options 20 -- 19 19
Net income 1,445 1,445
---------------- ------------- ------------- -------------- -------------
Balance at May 31, 1994 7,487 75 11,578 (4,204) 7,449
Proceeds from issuance of stock 3,333 33 6,382 6,415
Exercise of stock options 49 1 41 42
Issuance of stock options and warrants 82 82
Net income 1,647 1,647
---------------- ------------- ------------- -------------- -------------
Balance at May 31, 1995 10,869 109 18,083 (2,557) 15,635
Exercise of stock options 30 -- 23 23
Net income 1,082 1,082
---------------- ------------- ------------- -------------- -------------
Balance at May 31, 1996 10,899 $ 109 $ 18,106 $ (1,475) $ 16,740
================ ============= ============= ============== =============
</TABLE>
F-6
<PAGE> 25
MAXSERV, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
MaxServ, Inc. is an information services company for household products
providing diagnostic assistance and support to technicians and consumers
involved with the installation, repair, care and operation of appliances,
personal computers, entertainment and other electronic products, heating and air
conditioning systems, and lawn and garden equipment. MaxServ also provides
telemarketing services for replacement parts and accessories covering all major
home products, service order reservations and logistical support services for
its customers. The Company's information products and services include in-bound
and out-bound telephone services, systems consulting, design and development for
network centric environments and electronic publishing. 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.
STATEMENT PRESENTATION: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from the estimates.
Certain reclassifications have been made to conform with current year
presentation.
REVENUE RECOGNITION: Revenue from customer service agreements is recognized as
earned based on the type and volume of inbound telephone and electronic
inquiries and on a percentage of customer sales.
INCOME TAXES: The cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, was recognized in
1994.
NET INCOME PER SHARE AND EQUIVALENTS: Net income per share is based on the
weighted average number of common shares and dilutive common share equivalents
each year. Common share equivalents include outstanding stock options and
warrants.
FINANCIAL INSTRUMENTS: The reported amounts of assets and liabilities
representing contractual rights or obligations to receive or deliver cash are
stated at fair value. Cash equivalents are highly liquid investments with
original maturities of three months or less.
LONG-LIVED ASSETS: Property and equipment are stated at cost less accumulated
depreciation. Equipment under capital lease is stated at the present value of
future minimum lease payments at the inception of the lease. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
assets which range from three to seven years. Leasehold improvements are
amortized over the shorter of the life of the asset or the related lease term.
Maintenance and repairs are expensed as incurred.
Costs incurred in the development of internal database and network software
systems are capitalized not to ex ceed the net realizable value of the asset.
These costs are amortized using the straight-line method over an estimated
useful life of three to five years.
The intangible asset reflects the remaining value of a long-term service and
information access agreement and is amortized on a straight-line basis over the
term of the agreement which extends through 2000.
The Company does not expect compliance in 1997 with Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets, to have a material effect on reported amounts.
STOCK OPTION PLANS: Compensation expense is recognized for options issued under
stock option plans equal to the difference between the option price and the
market price
F-7
<PAGE> 26
MAXSERV, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
on the date of grant. The Company does not expect to adopt the
optional fair value based method established by Statement of Financial
Accounting Standards No. 123, Accounting for Stock- Based Compensation. As
permitted by the Statement, the Company anticipates disclosing the pro forma
effect on net income and net income per share under the fair value method
beginning in 1997.
2. RELATED PARTY TRANSACTIONS
In 1995, MaxServ issued 3.3 million shares of the Company's common stock in
exchange for a ten year agreement for telemarketing services for replacement
parts to Sears, Roebuck and Co. consumer and commercial customers and for
logistical support needs of Sears' repair technicians, the assumption of call
center operating facilities, selected operating assets valued at $1.2 million
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. Coupled
with common stock previously issued to Sears, principally in exchange for a
seven year service and information access agreement in 1993, Sears' ownership of
MaxServ's outstanding common stock increased to 65% upon closing of the
transaction.
For 1996, 1995, and 1994, approximately 93%, 92%, and 92% of the Company's
service revenues were derived from Sears. Pricing for services under the two
long-term service contracts with Sears are generally reviewed annually and are
adjusted as agreed by both companies. Accounts receivable with Sears at May 31,
1996 and 1995 totaled $4.8 million and $3.7 million, or 93% and 87% of total
accounts receivable. These accounts were paid in accordance with the terms of
the service agreements.
3. PROPERTY AND EQUIPMENT
Property and equipment at May 31, consists of the following:
(In thousands) 1996 1995
-------------------------
Telecommunication and computer
equipment and software $ 15,186 $ 11,450
Furniture and office equipment 2,064 2,117
Leasehold improvements 1,047 935
-------------------------
18,297 14,502
Less accumulated depreciation 7,251 3,434
-------------------------
$11,046 $11,068
=========================
Software development costs for internal database and network systems
capitalized during 1995 and 1994 were $299,000 and $64,000. No software
development costs were capitalized during 1996.
Depreciation and amortization of property and equipment for 1996, 1995 and 1994
was $4 million, $1.7 million, and $849,000, including amortization of software
development costs of $137,000, $37,000 and $15,000.
4. LEASES
The Company leases office space, office and computer equipment and software
under noncancellable operating and capital lease agreements. Rent expense under
operating leases totaled $2 million, $1.5 million, and $777,000 for 1996, 1995
and 1994. Included in property and equipment at May 31 are the following capital
lease amounts:
(In thousands) 1996 1995
--------------------------
Computer equipment and software $ 231 $ 737
Less accumulated amortization 151 416
--------------------------
$ 80 $ 321
==========================
Amortization of capital lease assets was $48,000, $167,000, and $146,000, for
1996, 1995 and 1994.
F-8
<PAGE> 27
MAXSERV, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Future minimum payments under operating and capital leases are as follows:
Operating Capital Leases
(In thousands) Leases
------------------------------
Year ending May 31:
1997 $2,027 $61
1998 1,849 --
1999 902 --
2000 626 --
2001 517 --
Thereafter 1,250 --
------------------------------
$ 7,171 $61
==============================
5. FINANCING AGREEMENT AND NOTES PAYABLE
The Company maintains a secured bank credit agreement providing up to $4 million
for revolving working capital loans and $3 million for equipment financing,
expiring in September 1996. Amounts available under the revolving loans are
based on eligible accounts receivable, bear interest at the bank's prime
commercial lending rate and are secured by accounts receivable. The equipment
financing facility provides for financing of 80% and 50% of the purchase
price of new and used equipment, with interest at one-half of a percent over the
bank's prime rate, payable over 36 months, and are secured by the equipment
financed.
The credit agreement contains various covenants and provides for the maintenance
of a minimum amount of tangible net worth and certain financial ratios including
working capital, indebtedness to tangible net worth and cash flow coverage, as
defined. Other covenants limit new indebtedness and restrict the payment of cash
dividends or other property distributions to stockholders and consolidating,
terminating or liquidating transactions.
At May 31, 1996, no amounts were outstanding under the credit agreement and the
Company was in compliance with all covenants.
6. INCOME TAXES
The provision for income taxes consists of the following:
(In thousands) 1996 1995 1994
-----------------------------
Current federal $ 535 $ 165 $ 300
Deferred federal (140) 474 102
State 68 112 70
-----------------------------
$ 463 $ 751 $ 472
-----------------------------
Reconciliation of income taxes computed at the federal statutory rates:
(In thousands) 1996 1995 1994
-----------------------------
Provision at 34% $ 525 $ 815 $ 402
State taxes 44 95 70
Change in valuation allowance (100) (131) --
Other (6) (28) --
=============================
$ 463 $ 751 $ 472
=============================
Effective tax rate 30% 31% 40%
=============================
Deferred tax assets and liabilities at May 31, 1996 and 1995 are comprised of
the following:
(In thousands) 1996 1995
-----------------------
Deferred tax assets:
Service contract $ 1,684 $ 1,800
Net operating loss 952 1,106
Expenses not yet deductible 487 133
-----------------------
3,123 3,039
-----------------------
Deferred tax liabilities:
Depreciation and amortization (474) (439)
Capitalized software (84) (159)
Other (80) (78)
-----------------------
(638) (676)
Valuation allowance (1,060) (1,160)
-----------------------
Net deferred tax asset $ 1,425 $ 1,203
-----------------------
F-9
<PAGE> 28
MAXSERV, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
For income tax purposes, the 1995 transaction with Sears was accounted for using
the fair market value of the stock issued. This valuation resulted in a
significant intangible asset for tax purposes which is deductible in the
Company's income tax returns over 15 years. Accordingly, a deferred income tax
asset reflecting the income tax effect of the temporary basis difference between
the book and tax valuation was recognized as part of the value of the stock
issued for financial statement purposes.
At May 31, 1996, the Company had a federal income tax loss carryforward of $2.8
million, limited to $454,000 a year through its expiration in 2002.
The deferred income tax asset valuation allowance provides for uncertainties
related to the Company's ability to fully realize the deferred income tax
assets.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS: The Company has various plans providing for incentive and
non-qualified stock options to employees, directors and others. Generally,
options vest over a period up to three years, expire ten years from the date of
grant and are issued at fair market price. Non- employee participants may be
granted only non-qualified stock options and options granted to outside
directors will be equal to 100% of the fair market value of the common stock at
the date of grant. Compensation expense recognized for non-qualified options
granted below fair market price has not been significant.
The Company has reserved 2.1 million shares for issuance under the plans. At May
31, 1996, options to purchase 1.2 million shares were outstanding, 848,000 were
exercisable, and 871,000 were available for future grants.
Following is a summary of stock option activity:
Number Price per
(in thousands, except price of Shares Share
per share) ------------------------------
Outstanding at May 31, 1993 487 $.60 - $1.50
Granted 142 1.06 - 5.00
Canceled (1) .85
Exercised (20) .80 - 1.06
------------------------------
Outstanding at May 31, 1994 608 .60 - 5.00
Granted 226 4.07 - 4.37
Canceled
Exercised (48) .60 - 4.12
------------------------------
Outstanding at May 31, 1995 786 .60 - 5.00
Granted 469 2.76 - 3.41
Canceled (29) 3.41 - 4.12
Exercised (30) .60 - 1.06
------------------------------
Outstanding at May 31, 1996 1,196 $.60 - $5.00
------------------------------
STOCK WARRANTS: In connection with the 1995 transaction with Sears, warrants to
purchase 50,000 shares of common stock were issued to an investment banking firm
as partial consideration for advisory services provided to the Company. The
warrants were valued at $1.00 each at issuance, are exercisable at $4.50 per
share and expire in 1999. Expenses of $407,000 incurred in connection with the
stock transaction, including the issue value of the warrants, were charged to
stockholders' equity.
8. 401(k) SAVINGS PLAN
The Board of Directors adopted a 401(k) Savings Plan effective July 1, 1994. The
Plan allows eligible employees to allocate up to 15% of salary to the Plan.
Qualified matching contributions, provided by the Company, vest to employees
over five years of continuous employment. The Company's matching contributions
to the Plan were $83,000 and $47,000 in 1996 and 1995.
F-10
<PAGE> 29
EXHIBIT INDEX
Exhibit
No.
------
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
<PAGE> 1
Exhibit No. 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-82096 and No. 33-75852) of MaxServ, Inc. of our
report dated June 25, 1996 appearing on page F-2 of this Annual Report on Form
10-KSB.
Price Waterhouse LLP
Austin, Texas
August 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH (B) AUDITED FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 2,234
<SECURITIES> 0
<RECEIVABLES> 5,172
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,035
<PP&E> 18,297
<DEPRECIATION> 7,251
<TOTAL-ASSETS> 21,660
<CURRENT-LIABILITIES> 4,920
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 16,631
<TOTAL-LIABILITY-AND-EQUITY> 21,660
<SALES> 0
<TOTAL-REVENUES> 52,571
<CGS> 0
<TOTAL-COSTS> 47,622
<OTHER-EXPENSES> 3,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (41)
<INCOME-PRETAX> 1,545
<INCOME-TAX> 463
<INCOME-CONTINUING> 1,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,082
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
