<PAGE> 1
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 NOVEMBER 30, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
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
--- ---
The number of shares of common stock of the issuer outstanding as of November
30, 1995 was 10,891,672.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
Page 1 of 10
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FORM 10-QSB INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of November 30, 1995 and May 31, 1995 . . . . . . . . . . . . . . . 3
Condensed Statement of Operations for the three months and six months ended
November 30, 1995 and for the three months and six months ended
November 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statement of Cash Flows for the six months ended
November 30, 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
</TABLE>
Page 2 of 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 except share information)
<TABLE>
<CAPTION>
November 30, May 31,
Assets 1995 1995
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 108 $ 2,097
Accounts receivable 4,312 4,279
Deferred tax asset 106 106
Prepaid expenses and other 168 486
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Total current assets 4,694 6,968
Property and equipment, net 10,840 11,068
Intangible asset, net 1,704 1,893
Deferred tax asset 1,509 1,097
Other assets 39 168
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$ 18,786 $ 21,194
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,159 $ 3,431
Accrued compensation 1,139 1,090
Accrued expenses 1,175 563
Deferred revenue 35 35
Current portion of long-term debt 200 273
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Total current liabilities 3,708 5,392
Notes and capital lease obligations 81 167
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Total liabilities 3,789 5,559
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Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 10,892,000
and 10,869,000 issued and outstanding at November 30, 1995 and May 31,
1995, respectively 109 109
Additional paid-in capital 18,101 18,083
Accumulated deficit (3,213) (2,557)
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Total stockholders' equity 14,997 15,635
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$ 18,786 $ 21,194
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</TABLE>
Page 3 of 10
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MAXSERV, INC.
CONDENSED STATEMENT OF OPERATIONS
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(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
November 30, November 30,
1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Service fees $ 11,854 $ 6,006 $ 25,084 $ 11,396
Cost of services provided 11,985 4,538 24,372 8,734
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Gross service margin (loss) (131) 1,468 712 2,662
Selling, general and administrative expenses 939 900 1,707 1,674
Interest expense, net 30 7 52 17
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Income (loss) before provision (benefit) for income taxes (1,100) 561 (1,047) 971
Provision (benefit) for income tax expense (413) 218 (393) 376
------------ ------------ ----------- ------------
Net income (loss) $ (687) $ 343 $ (654) $ 595
============ ============ =========== ============
Net income (loss) per share and equivalents:
Primary $ (.06) $ .04 $ (.06) $ .07
============ ============ =========== ============
Fully diluted $ (.06) $ .04 $ (.06) $ .07
============ ============ =========== ============
Weighted average shares and equivalents outstanding 11,251 7,935 11,242 7,935
============ ============ =========== ============
</TABLE>
Page 4 of 10
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MAXSERV, INC.
CONDENSED STATEMENT OF CASH FLOWS
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(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
1995 1994
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<S> <C> <C>
Operating activities:
Net income (loss) $ (654) $ 595
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,123 913
Deferred income taxes (413) 83
Changes in operating assets and liabilities:
Increase in accounts receivable (33) (332)
Decrease (increase) in prepaid and other 330 (187)
Decrease in accounts payable (2,270) (138)
Increase in accrued compensation and expenses 659 216
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Cash provided by (used in) operating activities (258) 1,150
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Investing activities:
Purchase of property and equipment (1,590) (1,445)
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Financing activities:
Issuance of note payable -- 235
Payments on notes and capital leases (159) (160)
Proceeds from issuance of common stock 18 12
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Cash provided by (used in) financing activities (141) 87
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Decrease in cash and cash equivalents (1,989) (208)
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 $ 108 $ 1,384
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</TABLE>
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MAXSERV, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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November 30, 1995
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 along with service order reservations and 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 and six months ended November 30, 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 in Austin, Texas and information delivery systems in Austin and
Scottsdale, Arizona. The acquired operations currently generate about 80% of
MaxServ's monthly call volume.
Services to Sears generated approximately 93% of Company revenues for the three
months and six months ended November 30, 1995 and approximately 91% and 89% of
Company revenues for the three months and six months ended November 30, 1994.
Accounts receivable with Sears at November 30, 1995 and May 31, 1995 totaled
$3.9 million and $3.7 million, or 90% and 87% of total accounts receivable,
respectively. Sears pays its accounts on a timely basis in accordance with the
terms of applicable service agreements.
In January 1996, pursuant to price negotiations regarding the Company's
long-term service contracts, MaxServ and Sears agreed in principle to increase
transaction prices for certain services. The adjusted prices are anticipated
to result in an aggregate annual revenue increase of approximately $4 million.
The new pricing primarily affects parts sales order services and is expected to
generally be effective for the 1996 calendar year.
3. INCOME TAXES
The effective income tax rate is based on the expected annual rate for federal
and state income taxes.
Page 6 of 10
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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 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 long-term operating and financial foundation. Although the
results of the most recent six months have not been profitable due to
difficulties associated with parts sales order services as discussed below,
management believes its continuing focus on business and management systems
will improve productivity and call center efficiency. Further, as discussed in
Note 2 in the accompanying condensed financial statements, MaxServ and Sears
have agreed in principle to increase transaction prices for certain services
under the agreements. The adjusted prices are anticipated to result in an
aggregate annual revenue increase of approximately $4 million. The new pricing
primarily affects parts sales order services and is expected to generally be
effective for the 1996 calendar year.
In addition, the substantial investments made during the past 12 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 the first six months of
fiscal 1996, revenues from customers other than Sears increased 52% over the
same period a year ago, continuing the excellent strides made during 1995 when
such revenues rose 130% for the year.
Operations for the six months required cash of $258,000, 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 six months were $1.6 million. Although working capital decreased $591,000,
the Company's current ratio remained unchanged at 1.3.
Management anticipates periodic revolving working capital or equipment
borrowings under the Company's bank credit agreement will be required
throughout 1996. At November 30, 1995, $3.4 million of the revolving working
capital loan facility and $2.8 million of the equipment financing facility were
available. Capital purchases for the remaining two quarters of fiscal 1996 are
expected to be lower than the first six months.
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 and Six Months Ended November 30, 1995 Compared to Quarter and
Six Months Ended November 30, 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 98% for the quarter
and 120% for the six months ended November 30, 1995, compared to the same
periods of the prior year. The Company responded to 5.3 million calls and
11.5 million calls for the quarter and six-month periods, respectively,
approximately four times the volume of a year ago. 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 $6.2 million from
5.0 million calls for the quarter and fees of $13.9 million from 10.8 million
calls for the six months. Information services provided directly to consumers
were the primary diagnostic service contributors to overall revenue growth
by expanding 44% to $2.6 million for the quarter and 41% to $5.2 million for
the six months, based on approximately 39% increases in call volume.
Page 7 of 10
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MaxServ's gross service margin reduction is primarily attributable to the parts
sales order services begun in January 1995 which generated a margin loss of
$1.1 million on fees of $4.1 million for the quarter and a margin loss of $1.7
million on fees of $9.2 million for the six months. This very large addition
to MaxServ's business and facilities continues to place 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 proving to be more costly and 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 741,000 calls for the quarter and 2.5 million for the six months,
as compared to the same periods last year, and technology and capacity
enhancements to most of the Company's information delivery systems, also
contributed to MaxServ's lower overall margin ratios. 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 increased only slightly
resulting in a significant decrease as a percentage of service fees to 8% for
the quarter and 7% for the six months compared to 15% for each of the periods
of 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 weighted average shares and equivalents outstanding used in the per share
computations increased by 3.3 million shares due to the issuance of common
stock associated with the December 1994 transaction with Sears. The additional
shares outstanding had the effect of reducing the per share loss amount by $.03
for the quarter and $.02 for the six months ended November 30, 1995.
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.
The Annual Meeting of Stockholders of MaxServ, Inc. was held on
October 19, 1995. Three matters were submitted to a vote of
security holders, the election of eight directors, the proposal to
amend the 1994 Stock Option Plan, and the ratification of the
selection of Price Waterhouse LLP as independent accountants for
fiscal 1996. The vote tabulation was as follows:
Election of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
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<S> <C> <C>
Charles F. Bayless 10,140,982 414,788
Nathaniel P. Turner 10,140,982 414,788
James F. Leary 10,140,982 414,788
Steven J. Keane 10,140,982 414,788
Daniel A. Mihalovich 10,140,982 414,788
William L. Salter 10,140,982 414,788
Patrick A. Rivelli 10,140,982 414,788
Steven A. Martin 10,140,982 414,788
</TABLE>
Amendment of 1994 Stock Option Plan:
<TABLE>
<CAPTION>
For Against Abstain
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<S> <C> <C>
9,485,824 80,832 459,370
</TABLE>
Ratification of Price Waterhouse LLP as Independent Accountants:
<TABLE>
<CAPTION>
For Against Abstain
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<S> <C> <C>
10,136,117 12,625 407,028
</TABLE>
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: January 12, 1996 \s\ NEIL A. JOHNSON
-----------------------------------
Neil A. Johnson
Senior Vice President, Finance,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
Page 10 of 10
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EXHIBIT INDEX
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCEHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 4,312
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,694
<PP&E> 16,204
<DEPRECIATION> 5,364
<TOTAL-ASSETS> 18,786
<CURRENT-LIABILITIES> 3,708
<BONDS> 81
<COMMON> 109
0
0
<OTHER-SE> 14,888
<TOTAL-LIABILITY-AND-EQUITY> 18,786
<SALES> 0
<TOTAL-REVENUES> 25,084
<CGS> 0
<TOTAL-COSTS> 24,372
<OTHER-EXPENSES> 1,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52
<INCOME-PRETAX> (1,047)
<INCOME-TAX> (393)
<INCOME-CONTINUING> (654)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (654)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
