U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
M.B.A. HOLDINGS, INC.
(Exact name of business issuer as specified in its charter)
Nevada 87-0522680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9419 E. San Salvador, Suite 105
Scottsdale, AZ 85258-5510
(480)-860-2288
(Address of principal executive offices, including telephone number)
Number of Common Stock shares (.001 par value) outstanding at March 1, 2002:
1,980,187
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended January 31, 2002.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
MBA Holdings, Inc
Index
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 2002
and October 31, 2001 2
Condensed Consolidated Statements of Loss and Comprehensive
Loss for the three months ended January 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the three
months ended January 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 9
SIGNATURE 10
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JANUARY 31, 2002 AND OCTOBER 31, 2001
--------------------------------------------------------------------------------
ASSETS JANUARY 31, OCTOBER 31,
2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,064,816 $ 1,083,024
Restricted cash 163,229 160,402
Investments 160,647 160,853
Accounts receivable 43,754 146,310
Prepaid expenses and other assets 50,308 80,350
Deferred direct costs 3,912,979 3,441,998
Income taxes receivable 460,130 395,487
Deferred income tax asset 267,098 257,839
------------ ------------
Total current assets 6,122,961 5,726,263
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 274,407 268,517
Office equipment and furniture 140,043 140,043
Vehicle 16,400 16,400
Leasehold improvements 80,182 80,182
------------ ------------
Total property and equipment 511,032 505,142
Accumulated depreciation and amortization (308,633) (288,199)
------------ ------------
Property and equipment - net 202,399 216,943
Deferred direct costs 3,709,668 3,196,954
Deferred income tax asset 259,773 282,870
------------ ------------
TOTAL $ 10,294,801 $ 9,423,030
============ ============
(CONTINUED)
See notes to condensed consolidated financial statements.
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JANUARY 31, 2002 AND OCTOBER 31, 2001
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY JANUARY 31, OCTOBER 31,
2002 2001
------------ ------------
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 526,382 $ 385,113
Accounts payable and accrued expenses 479,382 489,208
Capital lease obligation - current portion 11,288 10,888
Deferred revenues 4,468,540 3,979,793
------------ ------------
Total current liabilities 5,485,592 4,865,002
CAPITAL LEASE OBLIGATION - net of current portion 5,138 8,077
OTHER LIABILITIES 200,644 225,410
DEFERRED RENT 39,457 42,256
DEFERRED REVENUES 4,403,298 3,963,543
------------ ------------
Total liabilities 10,134,129 9,104,288
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 20,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 80,000,000 shares
authorized; 2,011,787 (2002 and 2001) shares issued;
1,980,187 (2002 and 2001) shares outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Accumulated other comprehensive loss (3,313) (3,149)
Retained earnings 16,622 174,528
Less: 31,600 shares of common stock in treasury, at cost (55,500) (55,500)
------------ ------------
Total stockholders' equity 160,672 318,742
------------ ------------
TOTAL $ 10,294,801 $ 9,423,030
============ ============
See notes to condensed consolidated financial statements.
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND
COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
--------------------------------------------------------------------------------
JANUARY 31,
----------------------------
2002 2001
----------- -----------
REVENUES:
Vehicle service contract gross income $ 1,652,046 $ 1,687,361
Net mechanical breakdown insurance income 125,196 277,181
MBI administrative service revenue 90,506 166,924
----------- -----------
Total net revenues 1,867,748 2,131,466
----------- -----------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,557,431 1,609,238
Salaries and employee benefits 322,307 365,617
Mailings and postage 24,518 30,822
Rent and lease expense 66,756 90,263
Professional fees 18,494 23,064
Telephone 17,710 16,406
Depreciation and amortization 20,434 20,793
Merchant and bank charges 1,406 3,191
Insurance 7,930 11,058
Supplies 5,338 4,999
License and fees 4,390 3,302
Other operating expenses 39,263 30,912
----------- -----------
Total operating expenses 2,085,977 2,209,665
----------- -----------
OPERATING LOSS (218,229) (78,199)
----------- -----------
OTHER INCOME (EXPENSE):
Finance and other fee income 6,783 5,081
Interest income 4,765 16,102
Interest expense and fees (910) (2,194)
----------- -----------
Other income - net 10,638 18,989
----------- -----------
LOSS BEFORE INCOME TAXES (207,591) (59,210)
INCOME TAXES (49,685) (23,700)
----------- -----------
NET LOSS $ (157,906) $ (35,510)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.08) $ (0.02)
=========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 1,980,187 1,980,187
=========== ===========
Net loss $ (157,906) $ (35,510)
Other comprehensive (loss) gain net of tax:
Net unrealized (loss) gain on available-for-sale securities (164) 10,725
----------- -----------
Comprehensive loss $ (158,070) $ (24,785)
=========== ===========
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
--------------------------------------------------------------------------------
JANUARY 31,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (157,906) $ (35,510)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 20,434 20,793
Unrealized loss on available-for-sale securities (164) --
Deferred income taxes 13,838 (23,700)
Changes in assets and liabilities:
Restricted cash (2,827) 280,748
Accounts receivable 102,556 80,455
Prepaid expenses and other assets 30,042 11,578
Deferred direct costs (983,695) 166,146
Net premiums payable to insurance companies 141,269 (400,927)
Accounts payable and accrued expenses (9,826) (36,695)
Income taxes receivable (64,643) --
Other liabilities (24,766) --
Deferred rent (2,799) 179
Deferred revenues 928,502 (238,182)
----------- -----------
Net cash used in operating activities (9,985) (175,115)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,890) (15,227)
Sale (purchase) of short-term investments 206 (22,709)
----------- -----------
Net cash used in investing activities (5,684) (37,936)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligation (2,539) (2,201)
----------- -----------
Net cash used in financing activities (2,539) (2,201)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,208) (215,252)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,083,024 1,128,281
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,064,816 $ 913,029
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest -- $ 5,147
=========== ===========
See notes to condensed consolidated financial statements.
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X, the accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, not all
of the information and notes required by generally accepted accounting
principles for complete financial statements are included. The unaudited interim
financial statements furnished herein reflect all adjustments (which include
only normal, recurring adjustments), in the opinion of management, necessary for
a fair statement of the results for the interim periods presented. Operating
results for the three months ended January 31, 2002 may not be indicative of the
results that may be expected for the year ending October 31, 2002. For further
information, please refer to the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the year ended October 31, 2001.
2. NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS PER
SHARE that requires dual presentation of BASIC and DILUTED EPS on the face of
the statements of loss and requires a reconciliation of the numerator and
denominator of basic and diluted EPS calculations. Basic loss per common share
is computed on the weighted average number of shares of common stock outstanding
during each period. Loss per common share assuming dilution is computed on the
weighted average number of shares of common stock outstanding plus additional
shares representing the exercise of outstanding common stock options using the
treasury stock method. As the company has a net loss for the three months ended
January 31, 2002 and 2001, the average number of outstanding shares for basic
and dilutive net loss per share is 1,980,187.
3. OTHER COMPREHENSIVE LOSS
Other comprehensive loss for the three months ended January 31, 2002 resulted
from unrealized losses of $164 on available-for-sale investments. At January 31,
2001, there was $10,725 of unrealized gains on available-for-sale investments.
4. INVESTMENTS
All of the Company's investments (U.S. treasury bonds and certificates of
deposits) are classified as available-for-sale and are stated at estimated fair
value determined by the quoted market price.
5. INCOME TAXES
Provision for income taxes and related income tax receivable in the period ended
January 31, 2002 reflect the Company's intent to carry back the current year
losses to recover federal income taxes paid in previous years. Similar
provisions for recoverable state income taxes were not provided, as Arizona law
does not allow for loss carry back.
Deferred income taxes are recorded based on differences between the financial
statement and tax basis of assets and liabilities based on income tax rates
currently in effect.
6. RELATED PARTY TRANSACTIONS
The Company leases its office space from Cactus Partnership. The managing
partner of Cactus Partnership is Gaylen Brotherson, the Chief Executive Officer.
Rent expense for this office space was $66,756 and $90,263 for the three months
ended January 31, 2002 and 2001, respectively. The current lease expires on
December 31, 2003.
On February 13, 2002, Gaylen Brotherson, the Chief Executive Officer, loaned the
Company $73,398. The loan matures February 12, 2003 and the bears interest at a
rate of 6%.
6
7. TREASURY STOCK
As of January 31, 2002 and 2001, the Company has purchased 31,600 shares of the
Company's common stock. These shares were purchased for the purpose of
retirement and bonuses to employees. Management will explore additional uses of
the stock.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits that arise in the ordinary course
of business, consisting principally of alleged errors and omissions in
connection with the sale of insurance and personnel matters. On the basis of
information presently available, management does not believe the settlement of
any such claims or lawsuits will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
The Company has available a $300,000 working capital line of credit which was
renewed on February 28, 2002 and expires on February 28, 2003. Borrowings under
the line of credit bear interest at a variable rate per annum equal to the sum
of 3.15 % plus the thirty day dealer commercial paper rate, as published in The
Wall Street Journal and are collateralized by the Company's investments. There
were no borrowings outstanding at January 31, 2002.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and footnotes that appear elsewhere in this report.
FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q contains forward-looking statements. Additional written
or oral forward-looking statements may be made by us from time to time in
filings with the Securities and Exchange Commission or otherwise. The words
"believe," "expect," "anticipate," and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in section 27A of the Securities and Exchange Act of 1934, as amended.
Such statements may include, but not be limited to, projections of revenues,
income or loss, capital expenditures, plans for future operations, financing
needs or plans, the impact of inflation, and plans relating to our products or
services, as well as assumptions relating to the foregoing. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Report, including
the Notes to Condensed Consolidated Financial Statements (Unaudited) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2002 AND 2001
NET REVENUES
Net revenues for the fiscal quarter ended January 31, 2002 totaled $1,868,000, a
decrease of $264,000 from the comparable 2001 quarter. The decline occurred
primarily in the MBI area of the company's business that had been damaged by
competition from vehicle manufacturers and others. The Company has worked to
develop competitive products for its sales agents and in early January 2002,
completed negotiations on a series of new product contracts with a major
insurance company. These new contracts products are expected to enable the
Company to become a factor in the competitive MBI marketplace and to continue to
increase VSC sales.
7
OPERATING EXPENSES
Operating costs decreased to $2,086,000 in the quarter ended January 31, 2002
down $124,000 from the $2,210,000 expended in the quarter ended January 31,
2001. The decrease is the result of the Company's early recognition of the
impact of the competitive pressures from vehicle manufacturers for MBI policies
and its prompt action to curtail expenses wherever possible. The Company has had
to incur modest additional costs as it prepares advertising and implementation
materials for the new product offerings. It is expected that these added costs
will also be incurred during the second quarter of 2002.
OTHER INCOME (EXPENSE)
Other income (expense) declined $8,000 in the quarter ended January 31, 2002 to
approximately $11,000 from $19,000 earned in the comparable quarter of 2001. The
decline is the result of decreased interest earnings as fewer assets were
available for investment.
INCOME TAXES
Provision for income taxes of $50,000 was recorded recognizing the Company's
intent to carry back the current year losses to recover federal income taxes
paid in prior years to the extent that carryback losses were available,
partially offset by changes in the temporary differences created by the
fluctuation in the deferred revenue and cost balances. Similar provisions for
recoverable state income taxes were not recorded, as Arizona law does not allow
for loss carryback. The deferred tax assets generated by the state net operating
losses have been fully offset by a valuation allowance at January 31, 2002 and
October 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF JANUARY 31, 2002 AND OCTOBER 31, 2001
Working capital at January 31, 2002 consisted of current assets of $6,123,000
and current liabilities of $5,486,000, or a current ratio of 1.12 : 1. At
October 31, 2001 the working capital ratio was 1.18 : 1 with current assets of
$5,726,000 and current liabilities of $4,865,000. Cash, cash equivalents and
restricted cash decreased $15,000 primarily as a result of payments of expenses
in excess of revenues collected. Accounts receivable decreased $103,000 as a
result of the general decline in business activity during the quarter.
Deferred Revenues and Deferred Direct Costs increased $929,000 and $984,000
respectively from balances at October 31, 2001. Deferred revenues consist of VSC
gross sales and estimated administrative service fees related to MBI policies.
Deferred direct costs are costs that are directly related to the sale of VSCs.
Both revenues and costs are deferred and amortized over the periods of the
policy term. The increase is primarily due to the increase in the numbers of
VSCs being sold compared to those sales in prior years. It is expected that
these amounts will continue to increase as the Company's business continues to
emphasize VSC sales.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of January 31, 2002, the amount owed to insurance
companies increased $141,000 over the balance at October 31, 2001. The change is
due to the timing of payments remitted to the insurance companies and increased
advances from the insurance companies.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company does not underwrite its own policies, a change in the current
rates of inflation is not expected to have a material effect on the Company.
However, the precise effect of inflation on operations cannot be determined.
Under the terms of the Company's VSC contracts that are reinsured with highly
rated insurance companies such as American Bankers Insurance Group, Kemper Cost
Management and Heritage RRG, the Company is primarily responsible for liability
under these contracts. In the unlikely event that the third party reinsuring
8
companies were unable to meet their contractual commitments to the Company, the
Company itself would be required to perform under the contracts. Such an event
could have a material adverse effect on the Company's operations.
The Company does not have any outstanding debt or long-term receivables.
Therefore, it is not subject to significant interest rate risk.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is subject to claims and lawsuits that arise in the ordinary course
of business, consisting principally of alleged errors and omissions in
connection with the sale of insurance and personnel matters. On the basis of
information presently available, management does not believe the settlement of
any such claims or lawsuits will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
None
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized. MBA Holdings, Inc.
By: /s/ Gaylen Brotherson Dated: March 14, 2002
----------------------------------
Gaylen Brotherson
Chairman of the Board and Chief
Executive Officer
By: /s/ Dennis M. O'Connor Dated: March 14, 2002
----------------------------------
Dennis M. O'Connor
Chief Financial Officer
10