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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-12544
MAXSERV, INC.
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(Exact name of Registrant 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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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock outstanding as of August 31, 1996 was 10,922,506.
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FORM 10-Q INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of August 31, 1996 and May 31, 1996 . . . . . . . . . . . . . 3
Condensed Statement of Income for the three months ended
August 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statement of Cash Flows for the three months ended
August 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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
MAXSERV, INC.
CONDENSED BALANCE SHEET
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(Unaudited, in thousands)
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<CAPTION>
AUGUST 31, MAY 31,
ASSETS 1996 1996
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Current assets:
Cash and cash equivalents $ 3,393 $ 2,234
Accounts receivable 5,562 5,172
Deferred tax asset 475 407
Prepaid expenses and other 231 222
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Total current assets 9,661 8,035
Property and equipment 10,656 11,046
Intangible asset 1,420 1,514
Deferred tax asset 929 1,018
Other assets 110 47
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$22,776 $21,660
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 579 $ 1,328
Accrued compensation 2,545 1,785
Accrued expenses 1,285 1,083
Income taxes payable 644 663
Notes and capital lease obligations 35 61
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Total current liabilities 5,088 4,920
Stockholders' equity:
Common stock, $.01 par value; 25,000 shares authorized;
10,923 and 10,899 issued and outstanding at
August 31, 1996 and May 31, 1996 109 109
Additional paid-in capital 18,169 18,106
Accumulated deficit (590) (1,475)
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Total stockholders' equity 17,688 16,740
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$22,776 $21,660
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MAXSERV, INC.
CONDENSED STATEMENT OF INCOME
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(Unaudited, in thousands except per share amounts)
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THREE MONTHS ENDED
AUGUST 31,
1996 1995
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Service fees $ 14,814 $ 13,228
Cost of services 12,395 12,380
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Service margin 2,419 848
Selling, general and administrative expenses 1,023 783
Interest income (expense) 29 (13)
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Income before income taxes 1,425 52
Provision for income taxes 541 19
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Net income $ 884 $ 33
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Net income per share and equivalents:
Primary $ .08 $ --
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Fully diluted $ .08 $ --
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Weighted average shares and equivalents outstanding 11,365 11,242
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MAXSERV, INC.
CONDENSED STATEMENT OF CASH FLOWS
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(Unaudited, in thousands)
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<CAPTION>
Three Months Ended
August 31,
1996 1995
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Operating activities:
Net income $ 884 $ 33
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,226 1,027
Deferred income taxes 21 19
Changes in operating assets and liabilities:
Accounts receivable (390) (479)
Prepaid and other (91) 307
Accounts payable (749) (2,315)
Accrued compensation and expenses 962 389
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Cash provided by operating activities 1,863 (1,019)
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Investing activities:
Purchase of property and equipment (715) (1,188)
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Financing activities:
Revolving working capital borrowings -- 300
Payments on notes and capital leases (26) (84)
Proceeds from issuance of common stock 37 10
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Cash provided by financing activities 11 226
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Increase (decrease) in cash and cash equivalents 1,159 (1,981)
Cash and cash equivalents at the beginning of the period 2,234 2,097
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Cash and cash equivalents at the end of the period $3,393 $ 116
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MAXSERV, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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August 31, 1996
1. THE COMPANY AND BASIS OF PRESENTATION
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 environments and electronic publishing. MaxServ delivers its
services throughout the United States and Canada, from four telephone support
centers in Alabama, Arizona and Texas, utilizing advanced technology and
telecommunications systems.
The unaudited condensed financial statements have been prepared in accordance
with generally accepted accounting principles and SEC regulations for interim
financial information. Accordingly, they do not include all the information
and notes required 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 three months ended August 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending May 31, 1997. These financial
statements may contain forward looking information that involve risks and
uncertainties and should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended May 31, 1996.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Beginning June 1, 1996, MaxServ must comply with Statements of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets, and No. 123, Accounting for Stock Based Compensation. The Company does
not expect compliance in 1997 to have a material effect on reported amounts.
The Company has elected not to adopt the optional fair value based method for
recognizing compensation expense under SFAS No. 123.
2. RELATED PARTY TRANSACTIONS
Sears, Roebuck and Co. owns 64% of the Company's outstanding common stock. For
the three months ended August 31, 1996 and 1995, 93% of the Company's service
revenues were derived from Sears. Services are provided under two long-term
agreements and pricing is generally reviewed annually and adjusted as agreed by
both companies. Accounts receivable with Sears at August 31, 1996 and May 31,
1996 totaled $4.9 million and $4.8 million, or 89% and 87% of total accounts
receivable. Sears pays its accounts on a timely basis in accordance with the
terms of the service agreements.
3. INCOME TAXES
The effective income tax rate is based on the expected annual rate for federal
and state income taxes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This discussion contains forward looking information that involves risks and
uncertainties including business conditions; demand for and acceptance of the
Company's services; local, national, and global economic environments; the
impact of competitive products and services; the Company's relationship with
Sears and other risks detailed from time to time in the Company's SEC reports.
FINANCIAL CONDITION
MaxServ's financial condition continues to be solid with cash of $3.4 million,
working capital of $4.6 million, no long- term debt and a fully available $7
million credit facility at August 31, 1996.
Operations for the quarter generated cash of $1.9 million compared to a deficit
of $1 million for the same period a year ago when $2.3 million of accounts
payable associated with capital additions incurred late in 1995 were
liquidated. The favorable collection of accounts receivable in generally less
than 30 days, coupled with depreciation of substantial technology equipment
over only three years, produces relatively high cash flow from operations
compared to net income. Further, the percentage of cash generated by earnings
before interest, income taxes, depreciation and amortization (EBITDA) to
revenue is improving at 18% for the quarter compared to 8% for the same quarter
last year and 11% for all of 1996.
MaxServ continues to internally fund its capital investments as it did in 1996
without incurring long-term debt. Capital investments of $715,000 were made
during the first quarter, following $3.8 million during the previous fiscal
year, continuing to enhance operating capability and its network service
capacity. The Company's rate of return on assets is improving dramatically at
25% for the quarter compared to 2% for the first quarter a year ago and 8% for
fiscal 1996.
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 eight years, and Sears' ownership interest, combine
to provide a sound long-term operating and financial foundation.
In addition, MaxServ is positioned 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 resources to grow and diversify its customer base and service
offerings to the emerging Home Services market, an industry expanding beyond
home product repair to encompass a broader scope of lifestyle services sought
by consumers and homeowners nationwide, is a strategic priority. MaxServ's
information and systems network capabilities, coupled with key business
alliances, should enable the Company to respond to such increasing customer
requirements.
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 is
currently in the process of renewing the bank credit agreement and anticipates
no less favorable terms than the existing agreement. 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, 1996 Compared to Quarter Ended August 31, 1995
MaxServ increased its service fees 12% to $14.8 million on call volume of 5.9
million. The Company's telemarketing services for replacement parts,
representing 43% and 33% of service fees and call volume, generated most of the
revenue increase due to higher service prices and improved productivity
resulting in higher call volume. Information and diagnostic services provided
directly to consumers, particularly regarding personal computers, also
increased as a result of service expansion and call volume growth.
The Company's service margin almost tripled to $2.4 million, or 16% of service
fees compared to 6%. The previously mentioned productivity achievements for
telemarketing services also produced significant cost reductions. Such
services required 12% less labor cost per call reflecting the continuing
positive impact of the substantial completion, during the third quarter of
1996, of the year long development and implementation of the systems and
processes necessary to fully integrate these new and very large services
acquired in the last half of 1995.
Although selling, general and administrative expenses have increased, such
costs continue to be stable as a percentage of service fees at 7%. Key
management personnel are being selectively added to support strategic marketing
and growth initiatives.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAXSERV, INC.
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(Registrant)
Date: October 3, 1996 \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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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,393
<SECURITIES> 0
<RECEIVABLES> 5,562
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,661
<PP&E> 18,985
<DEPRECIATION> 8,329
<TOTAL-ASSETS> 22,776
<CURRENT-LIABILITIES> 5,088
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 17,579
<TOTAL-LIABILITY-AND-EQUITY> 22,776
<SALES> 0
<TOTAL-REVENUES> 14,814
<CGS> 0
<TOTAL-COSTS> 12,395
<OTHER-EXPENSES> 1,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29)
<INCOME-PRETAX> 1,425
<INCOME-TAX> 541
<INCOME-CONTINUING> 884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 884
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
