U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2002.
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
September 1, 2002: 1,980,187
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
Condensed Consolidated Balance Sheets as of July 31, 2002
(Unaudited) and October 31, 2001 3
Condensed Consolidated Statements of (Loss) Income and
Comprehensive (Loss) Income for the three and nine months
ended July 31, 2002 and 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 2002 and 2001 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 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 14
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
SIGNATURES
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2002 (UNAUDITED) AND OCTOBER 31, 2001
JULY 31, OCTOBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 927,226 $ 1,083,024
Restricted cash 175,227 160,402
Investments (Note 5) 155,986 160,853
Accounts receivable, net of allowance for
doubtful accounts of $0 (2002 and 2001) 300,907 146,310
Prepaid expenses and other assets 52,122 80,350
Deferred direct costs 4,106,684 3,441,998
Income tax receivable 250,850 395,487
Deferred income tax asset 269,178 257,839
------------ ------------
Total current assets 6,238,180 5,726,263
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 285,050 268,517
Office equipment and furniture 140,259 140,043
Vehicle 16,400 16,400
Leasehold improvements 80,182 80,182
------------ ------------
Total property and equipment 521,891 505,142
Accumulated depreciation and amortization (349,336) (288,199)
------------ ------------
Property and equipment - net 172,555 216,943
------------ ------------
Deferred direct costs 4,257,117 3,196,954
Deferred income tax asset 282,185 282,870
------------ ------------
TOTAL $ 10,950,037 $ 9,423,030
============ ============
See notes to condensed consolidated financial statements. (Continued)
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2002 (UNAUDITED) AND OCTOBER 31, 2001 (Continued)
JULY 31, OCTOBER 31,
2002 2001
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 783,054 $ 385,113
Accounts payable and accrued expenses 568,230 489,208
Note payable - officer (Note 7) 73,398 --
Capital lease obligation - current portion 11,047 10,888
Deferred revenues 4,673,141 3,979,793
------------ ------------
Total current liabilities 6,108,870 4,865,002
Capital lease obligation - net of current portion -- 8,077
Other liabilities 75,416 225,410
Deferred rent 33,862 42,256
Deferred revenues 4,998,373 3,963,543
------------ ------------
Total liabilities 11,216,521 9,104,288
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' (DEFICIT) 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 (9,234) (3,149)
(Accumulated deficit) retained earnings (404,613) 174,528
Less: 31,600 shares of common stock in treasury, at cost (Note 8) (55,500) (55,500)
------------ ------------
Total shareholders' (deficit) equity (266,484) 318,742
------------ ------------
TOTAL $ 10,950,037 $ 9,423,030
============ ============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND
COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED JULY 31, 2002 AND 2001
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET REVENUES:
Vehicle service contract gross income $ 1,240,574 $ 10,464,155 $ 4,228,647 $ 14,206,261
Net mechanical breakdown insurance income 40,014 97,420 154,982 509,373
MBI administrative service revenue 99,688 252,192 277,195 579,097
------------ ------------ ------------ ------------
Total Net Revenues 1,380,276 10,813,767 4,660,824 15,294,731
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,170,496 9,965,701 4,028,192 13,522,265
Salaries and employee benefits 290,524 354,909 895,550 1,054,339
Mailings and postage 12,879 8,382 52,134 78,430
Rent and lease expense 66,969 71,252 200,037 238,962
Professional fees 26,457 22,563 66,378 65,961
Telephone 34,893 20,458 72,163 62,665
Depreciation and amortization 19,977 20,176 61,136 59,002
Merchant and bank charges 3,357 12,239 7,139 19,453
Insurance 7,345 8,389 24,989 24,875
Supplies 2,469 10,321 10,193 21,295
License and fees 5,050 7,909 16,391 20,278
Other operating expenses 87,338 27,574 135,559 113,857
------------ ------------ ------------ ------------
Total operating expenses 1,727,754 10,529,873 5,569,861 15,281,382
------------ ------------ ------------ ------------
OPERATING LOSS (347,478) 283,894 (909,037) 13,349
Finance fee income 7,077 5,065 20,175 15,352
Interest income 3,127 11,207 11,302 40,083
Interest expense (3,075) (1,331) (5,836) (9,745)
Other income 10,501 581 31,410 1,039
Realized (losses) gains on investments -- (5,309) -- 15,629
------------ ------------ ------------ ------------
Total other income 17,630 10,213 57,051 62,358
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (329,848) 294,107 (851,986) 75,707
INCOME TAX (BENEFIT) EXPENSE (111,105) 120,671 (272,845) 37,144
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (218,743) $ 173,436 $ (579,141) $ 38,563
============ ============ ============ ============
BASIC NET (LOSS) INCOME PER SHARE $ (0.11) $ 0.09 $ (0.29) $ 0.02
============ ============ ============ ============
DILUTED NET (LOSS) INCOME PER SHARE $ (0.11) $ 0.08 $ (0.29) $ 0.02
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 1,980,187 1,980,187 1,980,187 1,980,187
============ ============ ============ ============
AVERAGE NUMBER OF COMMON AND
DILUTIVE SHARES OUTSTANDING 1,980,187 2,104,588 1,980,187 2,075,008
============ ============ ============ ============
Net (loss) income $ (218,743) $ 173,436 $ (579,141) $ 38,563
Other comprehensive loss net of tax:
Net unrealized loss on available-for-sale securities (6,656) (3,813) (6,085) (26,390)
------------ ------------ ------------ ------------
Comprehensive (loss) income $ (225,399) $ 169,623 $ (585,226) $ 12,173
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2002 AND 2001
JULY 31,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (579,141) $ 38,563
Adjustments to reconcile net (loss) income to net cash
(used in) operating activities:
Depreciation and amortization 61,136 59,002
Unrealized (loss) gain on available for sale securities (6,085) 26,390
Gain on sale of equipment (22,501) (5,510)
Deferred income taxes (10,654) 345,515
Changes in assets and liabilities:
Restricted cash (14,825) 143,585
Accounts receivable (154,597) 299,956
Prepaid expenses and other assets 28,228 67,082
Deferred direct costs (1,724,849) 7,779,280
Net premiums payable to insurance companies 397,941 58,886
Accounts payable, accrued expenses and other liabilities (70,972) (15,411)
Income tax receivable 144,637 (227,375)
Deferred rent (8,394) 538
Unclaimed property 959
Deferred revenues 1,728,178 (8,693,461)
----------- -----------
Net cash used in operating activities (231,898) (122,001)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,748) (40,860)
Proceeds from sale of equipment 22,501 24,000
Sale of marketable securities, net 4,867 45,210
----------- -----------
Net cash provided by investing activities 10,620 28,350
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit 378,020
Repayments of line of credit drawings (378,020)
Proceeds of note payable - officer 73,398
Payments on capital lease obligation (7,918) (6,749)
----------- -----------
Net cash provided by (used in) financing activities 65,480 (6,749)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (155,798) (100,400)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,083,024 1,128,281
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 927,226 $ 1,027,881
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,797 $ 9,745
=========== ===========
Cash received from income tax refunds $ 407,296 $ 66,700
=========== ===========
See notes to condensed consolidated financial statements.
6
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JULY 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 and nine months ended July 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 10K for the year
ended October 31, 2001.
2. TERMINATION OF CONTRACTS
Two of the Company's underwriters transferred the administration of the
contracts and policies sold and administered by M.B.A. to a third party. If the
Company had retained administrative authority over those policies and contracts,
the deferred amounts would have been recognized in income over the next six
years. Since M.B.A. is no longer the administrator of the contracts and
policies, all of the revenue and direct acquisition costs associated with them
was recognized except for the revenue and direct acquisition costs relating to
future cancellations, as discussed below. An additional $8,488,000 of deferred
Vehicle Service Contracts ("VSC") revenue, $8,089,000 of deferred direct
acquisition costs and $345,000 of deferred administrative service fee revenue
related to these contracts and policies was recognized as income and operating
expenses in the third quarter of 2001.
The Company continues to perform certain administrative duties relating to the
calculation and administration of policy and contract cancellations. The
remaining balance in deferred revenue and deferred direct acquisition costs
relating to these underwriters to offset against future cancellation
administration equals $1,537,000 of deferred revenue and $1,455,000 of deferred
direct acquisition cost. The Company will recognize this revenue and expense
over the remaining life of the policy or contract. If the policy or contract is
cancelled, then the company will recognize the remaining portion of the unearned
revenue and direct acquisition cost in the month the policy or contract is
cancelled.
The Company also wrote off a receivable from the underwriters for deferred
administrative costs. When a policy or contract is sold, the Company would remit
a portion of their commission to the underwriter for administrative services. As
the policies and contracts expire, the underwriters would return the commission
submitted. Under the administrative release agreements, the Company agreed to
forfeit all of the deferred administrative costs remitted to the underwriters.
The total amount written off equals $254,000. The net effect of the above
adjustments was to increase net operating income by $490,000 for the quarter
ended July 31, 2001.
3. NET (LOSS) INCOME PER SHARE
Net (loss) income per share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE ("EPS")
which requires dual presentation of BASIC and DILUTED EPS on the face of the
statements of (loss) income and requires a reconciliation of the numerator and
denominator of basic and diluted EPS calculations. Basic (loss) income per
common share is computed using the weighted average number of shares of common
stock outstanding during each period. (Loss) income 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 and nine months ended July 31, 2002, the average number of
outstanding shares for basic and dilutive net loss per share is 1,980,187. Below
is the reconciliation required by SFAS No. 128.
7
NUMBER OF SHARES USED IN COMPUTING (LOSS) INCOME PER SHARE
THREE MONTHS
ENDED
JULY 31,
------------------------
2002 2001
---------- ----------
Average number of common
shares outstanding - Basic 1,980,187 1,980,187
Dilutive shares from common
stock options calculated using
the treasury stock method -- 124,401
---------- ----------
Average number of common and
dilutive shares outstanding 1,980,187 2,104,588
========== ==========
NINE MONTHS
ENDED
JULY 31,
------------------------
2002 2001
---------- ----------
Average number of common
shares outstanding - Basic 1,980,187 1,980,187
Dilutive shares from common
stock options calculated using
the treasury stock method -- 94,821
---------- ----------
Average number of common and
dilutive shares outstanding 1,980,187 2,075,008
========== ==========
4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss for the three and nine months ended July 31, 2002
increased in both periods as a result of unrealized losses of $6,656 and $6,085,
respectively, on available-for-sale securities. During the three and nine months
ended July 31, 2001, there were $3,813 and $26,390 of unrealized losses,
respectively, on available-for-sale securities.
5. INVESTMENTS
All of the Company's investments (U.S. treasury bonds, certificates of deposits,
stocks and mutual funds) are classified as available-for-sale and are stated at
estimated fair value determined by the quoted market price.
6. INCOME TAXES
Provision for recoverable income taxes and related income tax receivable in the
period ended July 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 because
Arizona law does not provide for the carry back of losses.
Deferred income tax is recorded based on differences between the financial
statement and tax basis of assets and liabilities using income tax rates
currently in effect. The deferred tax assets generated by the state net
operating losses have been fully offset by a valuation allowance at July 31,
2002 and October 31, 2001.
7. 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
of M.B.A. Holdings, Inc. and Subsidiary. Rent expense for this office space was
$63,432 and $64,057 for the three months ended July 31, 2002 and 2001,
8
respectively, and was $188,193 and $207,658 for the nine months ended July 31,
2002 and 2001, respectively. The current lease expires on December 31, 2003.
On February 13, 2002, Gaylen Brotherson loaned the Company $73,398. The loan
matures February 12, 2003 and the bears interest at a rate of 6%.
8. TREASURY STOCK
As of July 31, 2002 and 2001, the Company holds 31,600 shares of its common
stock in its treasury. These shares were purchased for the purpose of
retirement. Management is exploring additional uses of the stock.
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits that arise in the ordinary course
of business. These matters consist principally of alleged errors and omissions
in connection with the sale of insurance and of disputes over outstanding
accounts. The Company is also 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 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 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 on the line of credit outstanding at July 31, 2002 or 2001.
10. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which supercedes SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and
amends Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS -- REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. The
new rules apply to the classification and impairment analysis conducted on
long-lived assets other than certain intangible assets, resolve existing
conflicting treatment on the impairment of long-lived assets and provide
implementation guidance regarding impairment calculations. SFAS No. 144 also
expands the scope to include all distinguishable components of an entity that
will be eliminated from ongoing operations in a disposal transaction. The
Company will adopt the standard beginning November 1, 2002 and does not expect
that the adoption will have a significant impact on the Company's financial
position or results of operations.
In May 2002, the FASB issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS NO. 4,
44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS AS OF
APRIL 2002", that, among other things, rescinded SFAS No. 4, "REPORTING GAINS
AND LOSSES FROM EXTINGUISHMENT OF DEBT." With the rescission of SFAS No. 4,
companies generally will no longer classify early extinguishment of debt as an
extraordinary item. The provision related to the rescission is effective for
fiscal years beginning after May 15, 2002, and early application is encouraged.
The Company will adopt the standard at such time and does not expect that the
adoption will have a significant impact on the Company's financial position or
results of operations.
In July, 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES", which replaces Emerging Issues Task Force
Issue No. 94-3, "LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS
AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING)." The new standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The provisions of SFAS
146 are effective for disposals after December 31, 2002. The Company will adopt
the standard at such time and does not expect that the adoption will have a
significant impact on the Company's financial position or results of operations.
9
11. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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 THE THREE MONTHS ENDED JULY 31, 2002 AND 2001
In the third quarter of 2001, the Company recognized an additional $8,488,000 of
deferred VSC revenue, $8,089,000 of deferred direct acquisition costs and
$345,000 of deferred administrative service fee revenue into income and
operating expenses. Two of the Company's underwriters transferred the
administration of the contracts and policies sold and administered by M.B.A. to
a third party. If the Company had retained administrative authority over those
policies and contracts, then the amounts would have been recognized into income
over the next six years. Since M.B.A. is no longer the administrator of the
contracts and policies, all of the revenue and direct acquisition costs
associated with them was recognized except for the revenue and direct
acquisition costs relating to future cancellations, as discussed below.
The Company continues to perform certain administrative duties relating to the
calculation and administration of policy and contract cancellation. The
remaining balance in deferred revenue and deferred direct acquisition costs
relating to these underwriters to offset against future cancellation
administration equaled $1,537,000 of deferred revenue and $1,455,000 of deferred
direct acquisition cost at July 31, 2001. The Company recognizes this revenue
and expense over the remaining life of the policy or contract. If the policy or
contract is cancelled, then the company recognizes the remaining portion of the
unearned revenue and direct acquisition cost in the month the policy or contract
is cancelled.
The Company also expensed a receivable from the underwriters for deferred
administrative costs. When a policy or contract is sold, the Company would remit
a portion of their commission to the underwriter for administrative services. As
the policies and contracts expire, the underwriters would return the commission
submitted. Per the administrative release agreements, the Company agreed to
forfeit all of the deferred administrative costs remitted to the underwriters.
The total amount written off equals $254,000. The net effect of the above
adjustments was to increase net operating income by $490,000 for the quarter
ended July 31, 2001.
10
NET REVENUES
Net revenues for the quarter ended July 31, 2002 totaled approximately
$1,380,000; a decrease of $9,433,000 from net revenues of $10,814,000 for the
quarter ended July 31, 2001. The decrease in revenues is due to the transferring
of the responsibility for administration of the contracts and policies
($8,833,000) by two of the Company's underwriters to a third party, to a
decrease in Net Vehicle Service Contract ("VSC") revenues ($378,000), to a
decrease in MBI administrative service revenues ($166,000) and to a decrease in
Net Mechanical Breakdown Insurance ("MBI") income ($56,000). The change in
responsibility relieved the Company of the requirement for administering the two
underwriters' contracts and policies. The Company recognized the deferred
revenues and deferred costs relating to these contracts and policies in the
third quarter of 2001. VSC's are contracts where the Company is the original
contract obligor and reinsures its risk with contracts underwritten by an
associated insurance company. MBI's are a policies that have been sold by the
Company acting as agent for the insurance company. The underwriting insurance
company accepts the risk of loss directly for its own account.
The decrease in VSC net revenues is the result of changes in the marketplace for
this product. Consumer demand has kept the volume of VSC contracts sold
relatively unchanged from period to period but the length of individual
contracts has increased resulting in an increase in the amount of net revenue
being deferred.
The decrease in MBI income is due to a loss of market share by the Company's
associated credit unions because of increased competition for vehicle loans as
well as to the forced the elimination of the very successful direct mail
program. This latter program was terminated in response to changes in federal
privacy legislation that eliminated a vital source of customer information. The
Company has developed an internet based solution whereby potential purchasers
can obtain the same individualized mechanical breakdown insurance quotation for
their new vehicles through the Company's interactive web site. The Company
believes that, over time, internet sales will substantially replace those lost
as a result of the termination of the direct mail program.
OPERATING LOSS
An operating loss of $347,000 was incurred for the quarter ended July 31, 2002.
The loss is largely the result of the revenue declines discussed above and
increased cost of the products sold because of price increases imposed by the
Company's associated underwriters and other fees payable to its agents. The
Company has not been able to pass these increased costs through to the consumer
and gross margins have suffered accordingly.
The Company has been able to partially offset this loss with reductions in
operating expenses. The cost reduction programs have included staffing and
benefits reductions and other tightened controls over all areas of operating
expense. The Company has eliminated all non-essential capital expenditures as a
part of its ongoing effort to control expenditures.
OTHER INCOME
Total other income increased $8,000 for the quarter ended July 31, 2002 to
$18,000. The increase was largely due to the Company's receipt of the final
proceeds from the sale of direct mailing insertion machinery that it can no
longer use because of the restrictions placed on it by the federal privacy
legislation described above. These proceeds were offset by a decline in interest
income caused by both lower available investment balances and declining interest
rates.
INCOME TAXES
Provision for recoverable federal income taxes of $111,000 was recorded in the
three month period ended July 31, 2002 recognizing the Company's intent to carry
back the current year losses to recover federal income taxes paid in prior
years. Similar provisions for recoverable state income taxes were not recorded
because Arizona law does not provide for the carry back of losses. The deferred
tax assets generated by the state net operating losses have been fully offset by
a valuation allowance at July 31, 2002 and October 31, 2001.
11
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
NET REVENUES
Net revenues for the nine months ended July 31, 2002 totaled approximately
$4,661,000; a decrease of $10,634,000 from net revenues of $15,295,000 for the
nine months ended July 31, 2001. The decrease in revenues is due to the
transferring of the responsibility for administration of the contracts and
policies ($8,833,000) by two of the Company's underwriters to a third party as
discussed above. The decrease in revenues is due to a decreased in both VSC and
MBI revenues. The decline in VSC revenues is the result of changes in the
insurance marketplace for this product. Consumer demand has kept the volume of
VSC contracts sold relatively unchanged from period to period but the length of
individual contracts has increased resulting in an increase in the amount of net
revenue being deferred.
The decrease in MBI income is due to a loss of market share by the Company's
associated credit unions because of increased competition for vehicle loans as
well as to the forced the elimination of the very successful direct mail
program. This latter program was terminated in response to changes in federal
privacy legislation that eliminated a vital source of customer information. The
Company has developed an internet based solution whereby potential purchasers
can obtain the same individualized mechanical breakdown insurance quotation for
their new vehicles through the Company's interactive web site. The Company
believes that, over time, internet sales will substantially replace those lost
as a result of the termination of the direct mail program.
OPERATING LOSS
The operating loss incurred for the nine months ended July 31, 2002 amounted to
$909,000. An operating profit of $13,000 was earned in the comparable nine-month
period of 2001. The loss is largely the result of the revenue declines discussed
above and increased cost of the products sold because of price increases imposed
by the Company's associated underwriters and other fees payable to its agents.
The Company has not been able to pass these increased costs through to the
consumer and gross margins have suffered accordingly.
The Company has been able to partially offset this loss with reductions in
operating expenses. The cost reduction programs have included staffing and
benefits reductions and other tightened controls over all areas of operating
expense. The Company has eliminated all non-essential capital expenditures as a
part of its ongoing effort to control expenditures.
OTHER INCOME
Total other income decreased by approximately $5,000 from $62,000 for the nine
months ended July 31, 2001 to $57,000 for the nine months ended July 31, 2002.
The net decrease is primarily due to a decline in interest income caused by both
lower available balances and declining interest rates. The decrease was
partially offset by the Company's receipt of the proceeds from the sale of
direct mailing insertion machinery that it can no longer use because of the
restrictions placed on it by the federal privacy legislation described above.
Also contributing to the decline was the fact that the Company did not realize
any gains on investments in 2002.
INCOME TAXES
A provision for recoverable federal income taxes of $273,000 was recorded in the
nine month period ended July 31, 2002, recognizing the Company's intent to carry
back the current year losses and to recover federal income taxes paid in prior
years. Similar provisions for recoverable state income taxes were not recorded
because Arizona law does not provide for the carry back of losses. The deferred
tax assets generated by the state net operating losses have been fully offset by
a valuation allowance at July 31, 2002 and October 31, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF JULY 31, 2002 AND OCTOBER 31, 2001
Working capital at July 31, 2002 consisted of current assets of $6,238,000 and
current liabilities of $6,109,000, or a current ratio of 1.03:1. At October 31,
2001, the current ratio was 1.18:1 with current assets of $5,726,000 and current
liabilities of $4,865,000.
As of July 31, 2002, the Company's cash position decreased to $1,102,000 from
$1,243,000 at October 31, 2001. Of the $1,102,000, $175,000 is classified as
restricted cash at July 31, 2002 compared to $160,000 of restricted cash at
October 31, 2001. Restricted cash consists of funds advanced by insurance
companies to enable the Company to make claims payments on their behalf. The
decrease in cash balances is the result of fewer monies being held in the
insurance company premium accounts at July 31, 2002 offset by the increase in
the net restricted cash accounts.
Deferred Revenues and Deferred Direct Costs increased $1,728,000 and $1,725,000,
respectively, from balances at October 31, 2001. Deferred revenues consist of
VSC gross sales and estimated MBI administrative service fees. Deferred direct
costs are costs that are directly related to the sale of VSCs. Both revenues and
costs are deferred and amortized over the policy terms. The increases are the
result of the gradual building of the new underwriting company's book of
business and to an increase in the term of VSC contracts being sold. The Company
recognized the deferred revenues and deferred direct costs associated with two
former underwriters in July 2001 thereby eliminating substantial portions of the
deferred balances at that date. (See Note 2 to the Unaudited Condensed
Consolidated Financial Statements)
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of July 31, 2002, the amount owed to the
insurance companies increased to $783,000 from $385,000 at October 31, 2001. The
change is due to the timing of payments received from and remitted to the
insurance companies.
The Company borrowed $73,000 from its Chief Executive Officer in February 2002
in order to meet short-term cash requirements. The note for this borrowing is
due in February 2003 and bears interest at 6%. In addition, the Company has a
working capital line of credit from Merrill Lynch. The working capital line of
credit is occasionally used to make claims payments. The Company's ability to
fund its operations over the short-term is not hindered by lack of more
extensive short-term financing. The Company uses premiums received to pay agent
commissions and to fund operations. It uses the advances provided by insurance
companies to administer and pay claims. The Company believes its current working
capital supplemented by future anticipated cash flows from operations will be
sufficient to meet cash requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company does not underwrite its own policies, a change in the current
rate of inflation is not expected to have a material effect on the Company.
However, the precise effect of inflation on operations cannot be determined.
The Company is primarily responsible for liability the terms of the Company's
VSC contracts. These contracts are reinsured with highly rated insurance
companies such as American Bankers Insurance Group, Kemper Cost Management,
Fireman's Fund Insurance Company and Heritage RRG. In the unlikely event that
the third party reinsuring companies were unable to meet their contractual
commitments, the Company would be required to perform under the contracts. Such
an event could have a material adverse effect on the Company's operations.
The Company's note payable has a fixed interest rate and the Company does not
have any other outstanding debt or long-term receivables. Any borrowings by the
Company under its line of credit are very short term in nature. Therefore, it is
not subject to significant interest rate risk.
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Due to increased competition by automobile manufacturers and to changes in
federal privacy legislation, the Company has seen a substantial loss in MBI
market share and a decline in the net revenues received from VSC sales. The
Company has developed its Virtual Private Network system in an attempt to
bolster its competitive position. This system will enable financial
institutions, dealerships and others to obtain contract or policy quotations
directly using their computer systems and the internet thus enhancing the
Company's ability to be of service to its customers. The initial experience with
the system leads the Company to believe that this sales tool will be very
successful in the future and may replace the direct mail program results. The
future effect of this increased competition may have an adverse effect on future
earnings.
ITEM 4. CONTROLS AND PROCEDURES
In the quarter ended July 31, 2002, 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 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 cancellations
expenditures. The Company maintains a 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
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
(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
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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: September 16, 2002
--------------------------------
Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
By: /s/ Dennis M. O'Connor Dated: September 16, 2002
--------------------------------
Dennis M. O'Connor,
Chief Financial Officer
15