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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
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 Identification No.)
incorporation or organization)
9419 E. San Salvador, Suite 105
Scottsdale, AZ 85258-5510
(Address of principal executive offices) (Zip Code)
(480)-860-2288
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
[ ] 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Common Stock shares (no par value, $0.0001 stated value) outstanding
at February 28, 2005: 125,286,492 shares.
MBA Holdings, Inc and Subsidiaries
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of January 31, 2005 (Unaudited) and October 31, 2004 2
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months
ended January 31, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Deficit (unaudited) as of January 31, 2005 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
January 31, 2005 and 2004 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Signatures 14
Certifications 14
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2005 AND OCTOBER 31, 2004
- --------------------------------------------------------------------------------
ASSETS January 31, October 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 384,276 $ 782,848
Restricted cash 58,681 18,578
Accounts receivable 775,256 377,739
Prepaid expenses and other assets 3,809 1,706
Deferred consulting expense 70,834 --
Deferred direct costs 2,967,005 3,096,094
----------- -----------
Total current assets 4,259,861 4,276,965
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 330,605 330,605
Office equipment and furniture 140,259 140,259
Vehicle 15,000 15,000
Leasehold improvements 80,182 80,182
----------- -----------
Total property and equipment 566,046 566,046
Accumulated depreciation and amortization (463,030) (456,650)
----------- -----------
Property and equipment - net 103,016 109,396
OTHER ASSETS
Equity in Blue Sky Motorcycle Rentals, Inc. 330,251 --
Deferred direct costs 4,000,413 4,263,901
----------- -----------
Total Other Assets 4,330,664 4,263,901
----------- -----------
TOTAL ASSETS $ 8,693,541 $ 8,650,262
=========== ===========
See notes to condensed consolidated financial statements.
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2005 AND OCTOBER 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT January 31, October 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 610,074 $ 330,651
Accounts payable and accrued expenses 574,058 656,927
Accounts payable to affiliated entity 373,750 416,566
Capital lease obligation - current portion 7,059 7,059
Deferred revenues 3,492,350 3,606,028
----------- -----------
Total current liabilities 5,057,291 5,017,231
Capital lease obligations - net of current portion $ 2,830 3,116
Deferred income tax liability 12,802 12,802
Deferred revenues 4,684,809 4,895,266
----------- -----------
Total liabilities 9,757,732 9,928,415
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value; $.0001 stated value 100,000,000 shares authorized
2,000,000 Class A convertible preferred issued and outstanding 200 200
Common stock, no par value, $.0001 stated value, 800,000,000 shares
authorized (post split), 125,602,492 shares issued (post split) in 2005 and
120,450,492 (post split) in 2004, 125,286,492 shares (post split)
outstanding in 2005 and 120,134,492 (post split) in 2004 12,560 12,045
Additional paid-in-capital 3,026,926 2,433,286
Accumulated deficit (4,048,377) (3,668,184)
Less: 316,000 (post split) shares in 2005 and 2004 of
common stock in treasury, at cost (55,500) (55,500)
----------- -----------
Total stockholders' deficit (1,064,191) (1,278,153)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,693,541 $ 8,650,262
=========== ===========
See notes to condensed consolidated financial statements
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND
COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended January 31,
2005 2004
------------- -------------
REVENUES:
Vehicle service contract gross income $ 958,787 $ 1,227,881
Net mechanical breakdown insurance income 3,339 39,495
Brokerage, association and administrative service revenue 67,640 66,744
------------- -------------
Total net revenues 1,029,766 1,334,120
------------- -------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 857,395 1,151,858
Salaries and employee benefits 306,658 183,352
Mailings and postage 12,596 2,732
Rent and lease expense 75,318 75,674
Professional fees 83,928 30,070
Telephone (19,768) 25,558
Depreciation and amortization 6,380 9,139
Merchant and bank charges 6,858 3,010
Insurance 3,996 4,026
Supplies 3,448 1,119
License and fees 1,517 3,876
Other operating expenses 58,858 19,093
------------- -------------
Total operating expenses 1,397,184 1,509,507
Equity in net loss of Blue Sky Motorcycle Rentals, Inc. (19,749) --
------------- -------------
OPERATING LOSS (387,167) (175,387)
OTHER INCOME (EXPENSE):
Finance and other fee income 2,103 4,120
Interest income 166 3,923
Interest expense and fees (6,434) (14,109)
Other income (expense) 11,139 14,084
------------- -------------
Other income (expense) - net 6,974 8,018
------------- -------------
LOSS BEFORE INCOME TAXES (380,193) (167,369)
INCOME TAXES -- 11,817
------------- -------------
NET LOSS $ (380,193) $ (179,186)
============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.00) $ (0.01)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED (Post Split) 124,171,855 21,509,492
============= =============
Net loss $ (380,193) $ (179,186)
Other comprehensive gain net of tax:
Net unrealized gain on available-for-sale securities -- 72
------------- -------------
Comprehensive loss $ (380,193) $ (179,114)
============= =============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEAR ENDED OCTOBER 31, 2004 AND THREE MONTHS ENDED JANUARY 31, 2005 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Preferred Stock Common Stock Paid Comprehensive
Shares Amount Shares Amount In-Capital Income
---------- ----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 1, 2003 -- $ -- 21,825,492 $ 2,062 $ 280,801 $ 119
Realization of gain on
available-for-sale
securities (119)
Issuance of common shares 98,625,000 9,983 1,952,685
Issuance of preferred shares 2,000,000 200 199,800
Net loss -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
BALANCE OCTOBER 31, 2004 2,000,000 200 120,450,492 12,045 2,433,286 --
Issuance of common shares
under stock option plan 5,152,000 515 593,640
Net loss -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
BALANCE JANUARY 31, 2005 2,000,000 $ 200 125,602,492 $ 12,560 $ 3,026,926 --
========== =========== =========== =========== =========== ===========
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEAR ENDED OCTOBER 31, 2004 AND THREE MONTHS ENDED JANUARY 31, 2005
- --------------------------------------------------------------------------------
Total
Retained Stockholders'
Earnings Treasury (Deficit)
(Deficit) Stock Equity
----------- ----------- -----------
BALANCE NOVEMBER 1, 2003 $(2,458,729) $ (55,500) $(2,231,247)
----------- ----------- -----------
Realization of gain on
available-for-sale
securities (119)
Issuance of common shares 1,962,668
Issuance of preferred shares 200,000
Net loss (1,209,455) -- (1,209,455)
----------- ----------- -----------
BALANCE OCTOBER 31, 2004 (3,668,184) (55,500) (1,278,153)
Issuance of common shares
under stock option plan 594,034
Net loss (380,193) -- (380,193)
----------- ----------- -----------
BALANCE JANUARY 31, 2005 $(4,048,377) $ (55,500) $(1,064,312)
=========== =========== ===========
See notes to condensed consolidated financial statements
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
- ------------------------------------------------------------------------------------------------------------------------------------
January 31,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(380,193) $(179,186)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,880 9,139
Related party rent expense accrued but not paid -0- 66,230
Deferred income taxes -- 16,510
Issuance of stock for services 121,541 --
Equity in net loss of Blue Sky Motorcycle Rentals, Inc. 19,749 --
Changes in assets and liabilities:
Restricted cash (40,103) 174,522
Accounts receivable (397,517) (132,345)
Prepaid expenses and other assets (2,103) 3,355
Deferred consulting expense (70,834) --
Deferred direct costs 392,577 43,240
Net premiums payable to insurance companies 279,423 18,490
Accounts payable and accrued expenses (82,869) (56,978)
Deferred rent -- (4,809)
Deferred income taxes -- (4,666)
Deferred revenues (324,135) (25,575)
--------- ---------
Net cash (used in) operating activities (478,084) (72,073)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Blue Sky Motorcycle Rentals, Inc. (350,000) --
Purchase of property and equipment -- (9,671)
Purchase of investments -- (22,043)
--------- ---------
Net cash used in investing activities (350,000) (31,714)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit -- 2,112
Proceeds (repayment) of borrowing from affiliated entity (42,816) 149,449
Issuance of common stock 472,614 --
Payments on capital lease obligation (286) (1,411)
--------- ---------
Net cash provided by (used in) financing activities 429,512 150,150
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (398,572) 46,363
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 782,848 448,240
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 384,276 $ 494,603
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 796 $ 2,752
========= =========
See notes to condensed consolidated financial statements.
6
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
- --------------------------------------------------------------------------------
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. Accounting principles
assume the continuation of the Company as a going concern. The Company's
auditors, in their opinion on the financial statements for the year ended
October 31, 2004, expressed concern about this uncertainty. The accompanying
financial statements do not include any adjustment that might arise from the
outcome of this assumption. The unaudited interim financial statements furnished
herein reflect all adjustments (which include only normal, recurring
adjustments) which are, 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, 2005 may not be indicative of the results
of operations that may be expected for the year ending October 31, 2005. 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,
2004.
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 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. SFAS No. 128 requires that loss per common share assuming dilution is
computed on the same weighted average number of shares of common stock
outstanding as basic loss per share. The additional shares representing the
exercise of outstanding common stock options using the treasury stock method are
not considered nor are the dilutive effect of the voting rights of the Class A
preferred stock and employee stock options for the same reason. The 10-1 forward
stock split and the 1 for 100 stock dividend are reflected retroactively for all
periods presented. As of January 31, 2005 there are 204,372,010 (unaudited)
potential dilutive securities outstanding.
3. OTHER COMPREHENSIVE GAIN (LOSS)
In March 2004, the Company completed the liquidation of its available-for-sale
investments. Accordingly, there were no unrealized gains reported in the current
period. Other comprehensive gain for the three months ended January 31, 2004
resulted from unrealized gains of $72 on available-for-sale investments.
4. INCOME TAXES
There is no current provision for income taxes in the periods ended January 31,
2005 and 2004 as the Company has recovered all available 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. As the realization of deferred tax assets is now considered
doubtful, a valuation allowance has been provided to eliminate that asset in
both the current period and the year ended October 31, 2004. A deferred tax
provision was made for the three months ended January 31, 2004.
5. RELATED PARTY TRANSACTIONS
The Company leases its office space from Cactus Family Investments, LLC on a
month-to-month basis. The managing member of Cactus Family Investments, LLC is
Gaylen Brotherson, the Chief Executive Officer. Rent expense for this office
7
space was $72,376 and $74,016 for the three months ended January 31, 2005 and
2004. The current lease expired on December 31, 2003 and is renewed monthly by
agreement between the parties.
From time to time, Gaylen Brotherson, the Chief Executive Officer, directly and
through an affiliated company, has loaned the Company funds to enable it to meet
its operating expenses. The loans are evidenced by a note that matures on demand
and bears interest at a rate of 6%. As security for the loan, the Company has
granted the affiliated company, Cactus Family Investments, LLC, a security
interest in all of its unencumbered assets.
6. RECAPITALIZATION
In March 2004, the Company increased its authorized but unissued preferred stock
from 20,000,000 shares to 100,000,000 shares, changed the preferred stock from
$.001 par value to no par value, $.0001 stated value and created a Class A
Preferred Stock consisting of 2,000,000 shares that are assigned the voting
power of one hundred (100) voting shares for each Preferred Stock share.
Further, each Preferred Stock share is convertible into one hundred (100) Common
Stock shares at the option of the holder thereof. The Company subsequently
issued the 2,000,000 shares of Class A Preferred Stock to Cactus Family
Investments, LLC, an affiliated company (See Note 5 above), in exchange for
$200,000 of rent and other debt due to that entity.
In addition, the Company increased the number of its authorized common shares to
800,000,000, changed the par value of those shares to no par value with a stated
value of $.0001 and increased its issued Common Stock shares to 20,617,870
shares by means of a 10 - 1 forward stock split.
On November 12, 2004, the Company declared a stock dividend equal to one share
of common stock for each one hundred shares owned by shareholders on November
26, 2004. The Company issued 1,207,622 new shares in payment of that stock
dividend.
As of January 31, 2005, the Company holds 316,000 (post split) shares of its'
common stock in the Treasury. These shares were purchased for the purpose of
retirement and bonuses to employees. Management continues to explore additional
uses of the stock.
7. EMPLOYEE STOCK OPTION PLAN
On April 7, 2004, the Company adopted the M.B.A. Holdings, Inc. Employee Stock
Incentive Plan for the Year 2004 and on July 7 2004, the M.B.A. Holdings. Inc.
Employee Stock Incentive Plan for the Year 2004 -B. These plans have the purpose
of advancing the business and development of the Company and its shareholders
Under the terms of the plans, employees are granted options to purchase Company
stock at an average discount of 10%. The plan is administered by the
Compensation Committee of the Board of Directors and is authorized to grant
options for up to 128,000,000 shares of the common stock of the Company. As of
January 31, 2005, the Company has granted options for a total of 92,275,000
shares to selected employees. Compensation expense of $73,717 was recorded in
connection with these transactions in the three months ended January 31, 2005.
No similar expense was recorded in the three months ended January 31, 2004. As
of January 31, 2005, there were 2,322,000 options outstanding under this plan.
On that same date, the Company also adopted the M.B.A. Holdings, Inc.
Non-Employee Directors and Consultants Retainer Stock Plan for 2004 and the
M.B.A. Holdings, Inc. Non-Employee Directors and Consultants Retainer Stock Plan
for 2004-B. The Company seeks to motivate, retain and attract highly competent
directors and consultants to advance the business and development of the Company
and its shareholders by affording directors and consultants the opportunity to
acquire an equity interest in the Company. Under the terms of the plan,
directors and consultants are granted options to purchase Company stock at
specified prices in return for their services to the Company. The options
include a deferral option that allows the director/consultant to defer delivery
of the stock retainer. The plan is administered by the Compensation Committee of
the Board of Directors and is authorized to grant options for up to 22,000,000
shares of the common stock of the Company. As of January 31, 2005, the Company
has granted options for a total of 8,502,000 shares to selected
directors/consultants. Compensation expense of $121,543 was recorded in
connection with these transactions in the three months ended January 31, 2005.
As of January 31, 2005 there were 200,000 options outstanding under this plan.
8
8. SIGNIFICANT CUSTOMERS
In 2004 a major manufacturer accounted for $1,750,893 of VSC revenues or 33% of
the 2004 Net Commission Income. During 2003, a national insurance brokerage firm
accounted for $2,433,000 of VSC sales while another major customer accounted for
$1,673,000 of 2003 VSC sales. These two firms combined accounted for 77% of all
2003 VSC sales. The Company services these accounts under contracts that are
subject to renewal annually. The contract with the manufacturer was not renewed
at its expiration on December 31, 2004.
9. 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 and of disputes over
outstanding accounts. The Company is currently involved in a dispute with one of
its associated insurance companies over alleged wrongdoing, an alleged breach of
its Administrative Agreement and over reimbursement for claims and cancellation
expenditures. The Company maintains a $40,000 reserve for claims arising in the
ordinary course of business and believes that this reserve is sufficient to
cover the costs of such claims. 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 had available a $200,000 working capital line of credit which was
renewed on April 30, 2003 and expired in February 2004. 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 were secured by the Company's investments. The line of
credit was secured by a pledge of the Company's investments in marketable
securities. The line of credit was repaid and cancelled upon its maturity.
The Company has been notified by Heritage Warranty Insurance RRG, Inc. that its
Administration Agreement and Profit Sharing Agreement dated September 1, 2000 as
well as a Claims Reserve Account and a Second Amendment to Inboard Service
Agreement dated October 31, 2002 will be cancelled, subject to certain
conditions, effective May 1, 2005. The Company is negotiating with two other
insurance companies to provide replacement coverage but has not completed the
negotiations as of the date of the filing of this report. The Company expects
that a definitive agreement will be reached to allow a seamless transition of
its business to the new insurance company. The Company's agreements with Old
Republic Insurance Company, Warranty America, LLC, First Assured Insurance
Company and AON Warranty Company remain in effect.
10. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB published FASB Statement No. 123R, Share-Based
Payment, ("FAS 123R") which will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. The Company is required to
and will apply FAS 123R at July 31, 2005.
In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("FAS 153"). The amendments made by FAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The Company has adopted FAS 153 at October
31, 2004.
11. EQUITY IN BLUESKY MOTORCYCLE RENTALS, INC.
During the quarter ended January 31, 2005 the Company made an equity investment
in BlueSky Motorcycle Retnals, Inc. ("BlueSky") respresenting 50% of BlueSky.
The investment is accounted for using the equity method.
12. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
9
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.
CRITICAL ACCOUNTING POLICIES
The Company has prepared the accompanying unaudited condensed financial
statements in conformity with accounting principles generally accepted in the
United States for interim financial information. The preparation of the
financial statements requires the use of judgement and estimates that affect the
reported amounts of revenues, expenses, assets and liabilities. The Company has
adopted accounting policies and practices that are generally accepted in the
industry in which it operates. The Company believes the following are its most
critical accounting policies that affect significant areas and involve
management's judgement and estimates. If these estimates differ significantly
from actual results, the impact to the consolidated financial statements may be
material.
Revenue Recognition
The Company receives a single commission for the sale of each mechanical
breakdown insurance policy ("MBI") that compensates it both for the effort in
selling the policy, and for providing administrative claims services as
required. The Company has no direct liability for claims losses on MBI. It acts
as the issuing insurance company's agent in these transactions. The Company
apportions the commissions received in a manner that it believes is
proportionate to the values of the services provided. The revenues relating to
policy sales are recorded in income when the policy information is received and
approved by the Company. The revenues related to providing administrative claims
services are deferred and recognized in income on a straight-line basis over the
actual life of the policy.
A vehicle service contract ("VSC") is a contract for certain defined
services between the Company and the purchaser. The Company reinsures its
obligations by obtaining an insurance policy that guarantees its obligations
under the contract. In accordance with Financial Accounting Standards Board
Technical Bulletin 90-1, " Accounting for Separately Priced Extended Warranty
and Product Maintenance Contracts", revenues and costs associated with the sales
of these contracts are deferred and recognized in income on a straight-line
basis over the actual life of the contracts.
10
SIGNIFICANT EVENTS
The Company has been a significant force in forming the National Motorcycle
Dealers Association, LLC (NMDA) and has been appointed to provide management and
administration of the Association. NMDA will provide products and services for
the Association members including Extended Motorcycle Warranties for New and
Used Motorcycles, ATV's and Trailers, New Motorcycle Manufacture's Factory
Warranties, Motorcycle leasing and financing, Gap Coverage, Credit Life/Accident
Health Insurance, Family Hospitalization Insurance for Dealerships and their
Families, Rental Insurance for Dealer Motorcycle Rental Programs and Software,
Garage keepers Insurance Program, Liability and Collision Insurance for
Motorcycle and Autos for the dealer and their customers, an Association Credit
Card, Dealership Credit Card Processing, 401(k) Retirement Programs, Roadside
Assistance Programs, Tire and Wheel Protection, Business Forms, Communication
Services and a Prepaid Legal Program. Membership will be required to participate
in these programs and the Company will be compensated through management fees
and product sales commissions. The NMDA's aggregation of many programs
represents a rare opportunity for the Company and its partners to achieve
business synergies and a market edge not previously available to them. NMDA has
terminated its relationship with Wildside Motorcycles, Inc. and is pursuing the
motorcycle rental software business with internally developed products.
In December 2004, the Company acquired a 50% interest in Blue Sky Motorcycle
Rentals, Inc. (Blue Sky) that operates a motorcycle rental business in Colorado
and has sold its business model to similar operations in Arizona, California,
New Mexico, Nevada and Florida. Its business plan envisions significant
expansion into other vacation markets as well as motorcycle exchange programs
among the participants to maximize the usage of the rental motorcycles. The
owner of the remaining 50% interest has agreed to consult with the Company in
order to continue the business expansion of Blue Sky.
As discussed in Note 9, the Company has been notified by Heritage Warranty
Insurance RRG, Inc. that its Administration Agreement and Profit Sharing
Agreement dated September 1, 2000 as well as a Claims Reserve Account and a
Second Amendment to Inboard Service Agreement dated October 31, 2002 will be
cancelled, subject to certain conditions, effective May 1, 2005. The Company is
negotiating with two other insurance companies to provide replacement coverage
but has not completed the negotiations as of the date of the filing of this
report. The Company expects that a definitive agreement will be reached to allow
a seamless transition of its business to the new insurance company. The
Company's agreements with Old Republic Insurance Company, Warranty America, LLC,
First Assured Insurance Company and AON Warranty Company remain in effect.
Income Taxes
There is no current provision for income taxes in the periods ended January 31,
2005 and 2004 as the Company has recovered all available 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. As the realization of deferred tax assets is considered
doubtful, a valuation allowance has been provided to eliminate that asset in
both the current period and the year ended October 31, 2004. A deferred tax
provision was made for the three months ended January 31, 2004.
The Internal Revenue Service has completed an examination of the tax year 2002.
Adjustments were made to the loss carryforward balances because certain expenses
that were deducted in that year were not paid in accordance with the
requirements of the Internal Revenue Code. These expenses will be deducted when
paid in the current and future years.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
NET REVENUES
Net revenues for the fiscal quarter ended January 31, 2005 totaled $1,030,000,
down $304,000 from the $1,334,000 recognized in the quarter ended January 31,
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2004. The decline is the result of continuing competitive pressures being
experienced by the Company from vehicle manufacturers and other competitors as
well as legislative changes in certain states that limited the companies that
were allowed to underwrite policies in those states.
OPERATING EXPENSES
Operating costs decreased to $1,397,000 in the quarter ended January 31, 2005
down $113,000 from the $1,510,000 expended in the quarter ended January 31,
2004. The decrease is the result of a continuation of the Company's actions to
curtail expenses wherever possible. The overall decline in costs was offset, in
part, by increased costs of advertising and promoting the new venture into the
motorcycle marketplace. The Company concluded its negotiations with a telephone
service provider and was able to achieve significant savings in previously
accrued costs.
The physical location of Blue Sky Motorcycle Rentals, Inc. in Denver, CO and the
winter season in general have contributed to the net loss incurred by that
entity. Both Blue Sky and NMDA have been met with enthusiastic acceptance by
motorcycle dealers at industry conventions and expect to see excellent revenue
growth as the summer riding season arrives.
OTHER INCOME (EXPENSE)
Total other income (expense) declined in the quarter ended January 31, 2005 by
approximately $1,000 below the comparable 2004 quarter. The 2004 Quarter
included the receipt of the 2 % fee that was negotiated as a part of the service
termination agreement with two insurance companies in July 2002. The comparable
2005 Quarter included lesser amounts of fee income and included interest expense
that was incurred as a result of borrowings from related parties.
INCOME TAXES
There was no provision for income taxes in the quarter ended January 31, 2005
because the Company has already recovered all federal income taxes paid in prior
years to the extent available. In the quarter ended January 31, 2004, a
provision was made for the tax consequences arising from changes in the
temporary differences created by the fluctuation in the deferred revenue and
deferred cost balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred significant losses during the past fiscal quarter and has
experienced additional losses in prior years. A related party has advanced funds
on demand notes and through the deferral of rent payments in order to overcome
working capital deficiencies during the year. In addition, the Company has
received significant funds from the exercise of stock options. In January 2004,
the Company granted the related party, Cactus Family Investments, LLC, a
security interest in all of its unencumbered assets. There is no assurance that
additional advances will be made when additional working capital is required.
The lack of continuing working capital infusions could affect future operations.
Accordingly, the accompanying financial statements have been prepared assuming
the Company will continue as a going concern. The Company has incurred a loss in
the first quarter of 2005 and expects such losses to continue further into 2005.
The Company is pursuing the development of NMDA, Blue Sky and of other warranty
products in its ongoing efforts to stem the losses.
COMPARISON OF JANUARY 31, 2005 AND OCTOBER 31, 2005
Working capital at January 31, 2005 consisted of current assets of $4,260,000
and current liabilities of $5,057,000, or a current ratio of 0.84 : 1. At
October 31, 2004 the working capital ratio was 0.85 : 1 with current assets of
$4,277,000 and current liabilities of $5,017,000. The negative trend continues
as the Company has absorbed additional operating losses. Loans from the
Company's principal shareholder and funds derived from the exercise of stock
options have funded continuing operations.
Deferred Revenues decreased $324,000 while Deferred Direct Costs increased
$393,000 from balances at October 31, 2004. Deferred revenues consist of
unearned VSC gross sales and estimated administrative service fees related to
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MBI policies. Deferred direct costs are costs that are directly related to the
sale of VSCs. The change results from the overall decline in sales that has been
experienced over the last several quarters and from changes in the contract
terms of contracts in the deferral pool.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of January 31, 2005, the amount owed to insurance
companies increased $279,000 above the balance at October 31, 2004. The change
is due to differences in the timing of payments remitted to 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.
Nevertheless, 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 Old Republic Insurance Company and Heritage
Warranty Mutual Insurance Risk Retention Group, Inc., the Company is primarily
responsible for liability under these contracts. In the unlikely event that the
third party reinsuring 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.
ITEM 4. CONTROLS AND PROCEDURES
In the quarter ended January 31, 2005, we did not make any significant changes
in, nor take any corrective actions regarding our internal controls or other
factors that could significantly affect these controls. We lost the services of
our assistant controller at the end of the fiscal year ended October 31, 2004
and have been unable to hire a replacement as of this date. As a result, a
significant weakness has occurred in our internal controls in that we have been
late in preparing the normal schedules and reconciliations associated with the
preparation of our quarterly financial statements. This matter has been
discussed with the audit committee by our independent accountants and we are
committed to promptly fill the position.
We periodically review our internal controls for effectiveness and we have
performed an evaluation of disclosure controls and procedures during this
quarter. We will conduct a similar evaluation each quarter.
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 and of disputes over
outstanding accounts. The Company is currently involved in a dispute with one of
its associated insurance companies over alleged wrongdoing, an alleged breach of
its Administrative Agreement and over reimbursement for claims and cancellation
expenditures. The Company maintains a $40,000 reserve for claims arising in the
ordinary course of business and believes that this reserve is sufficient to
cover the costs of such claims. 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
(b) The Company applied the $472,614 received from the exercise of stock options
to working capital.
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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
(a) Exhibit Index
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.3 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.4 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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.
Dated March 22, 2005 By: /s/ Gaylen Brotherson
- -------------------- -------------------------------------
Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
Dated: March 22, 2005 By: /s/ Dennis M. O'Connor
- --------------------- -------------------------------------
Dennis M. O'Connor
Chief Financial Officer
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