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 April 30, 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 May 31, 2005: 186,536,492 shares.
MBA Holdings, Inc and Subsidiaries
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2005 (Unaudited) and October 31, 2004 2
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and six months
ended April 30, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Deficit as of April 30, 2005 5
Condensed Consolidated Statements of Cash Flows for the six months ended
April 30, 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
APRIL 30, 2005 AND OCTOBER 31, 2004
--------------------------------------------------------------------------------
ASSETS April 30, October 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 340,584 $ 782,848
Restricted cash 24,086 18,578
Accounts receivable 549,628 377,739
Prepaid expenses and other assets 13,520 1,706
Inventory 4,477 --
Deferred direct costs 2,862,764 3,096,094
----------- -----------
Total current assets 3,795,059 4,276,965
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 332,523 330,605
Office equipment and furniture 153,619 140,259
Vehicles and shop equipment 119,220 15,000
Leasehold improvements 87,072 80,182
----------- -----------
Total property and equipment 692,434 566,046
Accumulated depreciation and amortization (469,343) (456,650)
----------- -----------
Property and equipment - net 223,091 109,396
OTHER ASSETS
Goodwill 520,853 --
Deferred direct costs 3,783,029 4,263,901
----------- -----------
Total Other Assets 4,303,882 4,263,901
----------- -----------
TOTAL ASSETS $ 8,322,032 $ 8,650,262
=========== ===========
See notes to condensed consolidated financial statements.
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND OCTOBER 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) April 30, October 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 265,170 $ 330,651
Note payable 183,333 --
Insurance deposits from members 15,301 --
Accounts payable and accrued expenses 546,464 656,927
Accounts payable to affiliated entity 99,469 416,566
Capital lease obligation - current portion 6,788 7,059
Deferred revenues 3,339,283 3,606,028
----------- -----------
Total current liabilities 4,455,808 5,017,231
Capital lease obligations - net of current portion -- 3,116
Deferred income tax liability 12,802 12,802
Deferred revenues 4,392,202 4,895,256
----------- -----------
Total liabilities 8,860,812 9,928,405
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value; $.0001 stated value 100,000,000 shares
authorized, 2,000,000 Class B voting preferred issued and outstanding
in 2005, 2,000,000 Class A voting convertible preferred issued and
outstanding in 2004 200 200
Common stock, no par value, $.0001 stated value, 350,000,000 shares
authorized (post split) in 2005, 800,000,000 authorized (post split) in 2004,
179,277,492 shares issued (post split) in 2005 and 120,450,492 (post split)
in 2004, 178,961,492 shares (post split) outstanding in 2005 and
120,134,492 (post split) in 2004 17,928 12,045
Additional paid-in-capital 4,163,142 2,433,286
Accumulated deficit (4,664,550) (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' equity (deficit) (538,780) (1,278,153)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,322,032 $ 8,650,252
=========== ===========
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 AND SIX MONTHS ENDED APRIL 30, 2005 AND 2004
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended April 30, Six Months Ended April 30,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- ------------- ------------- --------------
REVENUES:
Vehicle service contract gross income $ 933,175 $ 1,236,913 $ 1,891,962 $ 2,464,794
Net mechanical breakdown insurance income 18,392 15,663 21,731 55,158
Brokerage, association and administrative service revenue 38,681 72,964 106,321 139,708
------------- ------------- ------------- -------------
Total net revenues 990,248 1,325,540 2,020,014 2,659,660
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 897,126 1,155,010 1,754,521 2,306,868
Salaries and employee benefits 157,204 242,647 463,862 425,999
Mailings and postage 10,133 (1,450) 22,729 1,282
Rent and lease expense 77,134 77,488 152,452 153,162
Professional fees 307,355 42,465 391,283 72,535
Telephone 9,795 15,844 (9,973) 41,402
Depreciation and amortization 6,313 9,018 12,693 18,157
Merchant and bank charges 3,185 2,368 10,043 5,378
Insurance 1,494 5,262 5,490 9,288
Supplies 2,924 1,020 6,372 2,139
License and fees 2,384 3,900 3,901 7,776
Other operating expenses 76,061 15,920 134,919 35,013
------------- ------------- ------------- -------------
Total operating expenses 1,551,107 1,569,492 2,948,291 3,078,999
------------- ------------- ------------- -------------
Equity in net loss of Blue Sky Motorcycle Rentals, Inc. (20,327) -- (40,076) --
------------- ------------- ------------- -------------
OPERATING LOSS (581,186) (243,952) (968,353) (419,339)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Finance and other fee income 1,822 19,103 3,925 37,417
Interest income 78 30 244 3,952
Interest expense and fees (5,109) (14,078) (11,543) (28,296)
Other income (expense) (31,778) -- (20,639) --
------------- ------------- ------------- -------------
Other income (expense) - net (34,987) 5,055 (28,013) 13,073
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (616,173) (238,897) (996,366) (406,266)
INCOME TAXES -- -- -- 11,817
------------- ------------- ------------- -------------
NET LOSS $ (616,173) $ (238,897) $ (996,366) $ (418,083)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- BASIC AND DILUTED (Post Split) 139,872,778 21,193,537 133,123,570 20,742,804
============= ============= ============= =============
Net loss $ (616,173) $ (238,897) $ (996,366) $ (418,083)
Other comprehensive gain net of tax:
Net unrealized gain on available-for-sale securities -- -- -- --
------------- ------------- ------------- -------------
Comprehensive loss $ (616,173) $ (238,897) $ (996,366) $ (418,083)
============= ============= ============= =============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED OCTOBER 31, 2004 AND SIX MONTHS ENDED APRIL 30, 2005
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock Common Stock Additional Other
------------------------ ------------------------- 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:
Stock options to employees -- -- 8,400,000 840 1,098,245 --
Consultants -- -- 4,102,000 410 319,029 --
Other shares issued -- -- 325,000 33 -- --
Conversion and retirement of Class A (2,000,000) (200) 46,000,000 4,600 312,582 --
preferred shares
Issuance of Class B preferred shares 2,000,000 200 -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ------------
BALANCE APRIL 30, 2005 2,000,000 $ 200 179,277,492 $ 17,928 $ 4,163,142 --
========= =========== =========== =========== =========== ============
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED OCTOBER 31, 2004 AND SIX MONTHS ENDED APRIL 30, 2005
------------------------------------------------------------------------------------------------------------------------------------
Retained Total
Earnings Treasury STOCKHOLDERS'
(Deficit) Stock Equity (Deficit)
----------- ----------- ----------------
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:
Stock options to employees -- -- 1,099,085
Consultants -- -- 319,439
Other shares issued -- -- 33
Conversion and retirement of Class A -- -- 316,982
preferred shares
Issuance of Class B preferred shares -- -- 200
Net loss (996,366) -- (996,366)
----------- ----------- -----------
BALANCE APRIL 30, 2005 $(4,664,550) $ (55,500) $ (538,780)
=========== =========== ===========
See notes to consolidated financial statements
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 2005 AND 2004
------------------------------------------------------------------------------------------------------------------------------------
April 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (996,366) $ (418,083)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,693 18,157
Issuance of preferred stock in exchange for related party debt 317,382 200,000
Equity in net loss of Blue Sky Motorcycle Rentals, Inc. (40,076) --
Advances to Blue Sky Motorcycle Rentals, Inc. (25,000) --
Changes in assets and liabilities:
Restricted cash (5,508) 270,978
Accounts receivable (171,889) (169,205)
Inventory (4,477) --
Prepaid expenses and other assets (11,814) 1,457
Deferred direct costs 714,202 118,904
Net premiums payable to insurance companies (65,481) (61,911)
Insurance deposits from members 15,301 --
Accounts payable and accrued expenses (110,463) 36,126
Deferred rent -- (4,809)
Deferred income taxes -- 11,844
Deferred revenues (769,809) (60,583)
----------- -----------
Net cash (used in) operating activities (1,141,305) (57,125)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Blue Sky Motorcycle Rentals, Inc. (255,777) --
Purchase of property and equipment (126,388) (11,716)
Purchase of investments -- 117,084
----------- -----------
Net cash provided by (used in) investing activities (382,165) 105,368
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable - Blue Sky Motorcycle Rentals, Inc. acquisition (16,667) --
Proceeds (repayment) of borrowing from affiliated entity -- (196,897)
Proceeds of borrowing from related party -- 29,894
Issuance of common stock 1,101,260 90,558
Payments on capital lease obligation (3,387) (2,882)
----------- -----------
Net cash provided by (used in) financing activities 1,081,206 (79,327)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (442,264) (31,084)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 782,848 448,240
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 340,584 $ 417,156
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,442 $ 6,778
=========== ===========
See notes to condensed consolidated financial statements.
6
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED April 30, 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) that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. Operating results
for the three and six months ended April 30, 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 B
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 April 30, 2005 there were 7,800,010 options
outstanding.
3. ACQUISITIONS & NOTE PAYABLE
In December 2004, the Company acquired a 50% interest in Blue Sky Motorcycle
Rentals, Inc. (Blue Sky), a company 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 has agreed to consult with the Company in order to continue the
business expansion of Blue Sky. In April 2005, the Company acquired the
remaining 50% interest in Blue Sky and is integrating it into the National
Motorcycle Dealers Association operations that were begun in the Fall of 2004.
In connection with the acquisition, the Company issued its note to the former
owner in the amount of $200,000. Then docs not bear interest and is payable in
12 equal monthl installments.
4. INCOME TAXES
There is no current provision for income taxes in the periods ended April 30,
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.
7
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 six months ended April 30, 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
space was $70,376 and $73,204 for the three months ended April 30 , 2005 and
2004 and $142,753 and $147,220 for the six months ended April 30, 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 Class A 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.
At the same time, 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.
On March 31, 2005, the Company honored the request of Cactus Family Investments,
LLC to convert 460,000 shares of the Company's Class A Preferred Stock into
46,000,000 shares of its common stock and to donate the remaining preferred
shares to the Company as a contribution to its capital. In addition, the Company
created a Class B Preferred Stock consisting of 3,000,000 shares that are
assigned the voting power of one hundred (100) voting shares for each Preferred
Stock share. The Class B Preferred shares are not convertible into common
shares. The Company subsequently issued the 2,000,000 shares of Class B
Preferred Stock to Cactus Family Investments, LLC, an affiliated company (See
Note 5 above), in exchange for $317,382 of rent and other debt due to that
entity.
On April 18, 2005, the Company decreased its authorized common shares to
350,000,000 no par value shares with a stated value of $.0001 per share.
As of April 30, 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.
8
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 by
affording employees of the Company the opportunity to acquire an equity interest
in the Company. Under the terms of the plans, employees are granted options to
purchase Company stock at specified prices. 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
April 30, 2005, the Company has granted options for a total of 104,527,000
shares to selected employees. Compensation expense of $8,710 and $82,427 was
recorded in connection with these transactions in the three and six months ended
April 30, 2005, respectively. In the three and six months ended April 30, 2004,
$50,984 was recorded as compensation expense relating to this stock option plan.
As of April 30, 2005, there were 2,650,000 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 April 30, 2005, the Company has
granted options for a total of 11,552,000 shares to selected
directors/consultants. Compensation expense of $207,109 and $413,652 was
recorded in connection with these transactions in the three and six months ended
April 30, 2005, respectively. In the three and six months ended April 30, 2004,
$49,500 was recorded as compensation expense relating to this stock option plan.
As of April 30, 2005 there were 3,300,000 options outstanding under this plan.
8. SIGNIFICANT CUSTOMERS
In 2004 a major manufacturer accounted for $1,750,893 of VSC revenues or 33% of
the 2004 Net Commission Income. The contract with the manufacturer was not
renewed at its expiration on December 31, 2004. The Company is seeking ways to
replace this business through acquisitions and other avenues.
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 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 has entered into an agreement
with Capitol Assurance Risk Retention Group, Inc. to provide replacement
coverage. The Company is attempting to achieve 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.
9
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 October 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.
On June 1, 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. The Company will adopt FAS 154 at November 1, 2005 and does not
anticipate any material change to its operating results.
12. 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.
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.
10
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, in some cases, 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.
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 has agreed to consult with the Company in order to continue the business
expansion of Blue Sky. In April 2005, the Company acquired the remaining 50%
interest in Blue Sky and is integrating it into the National Motorcycle Dealers
Association operations that are discussed in the preceding paragraph.
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 has
entered into an agreement with Capitol Assurance Risk Retention Group, Inc. to
provide replacement coverage. The Company has achieved 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.
11
Income Taxes
There is no current provision for income taxes in the periods ended April 30,
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 APRIL 30, 2005 AND 2004
NET REVENUES
Net revenues for the fiscal quarter ended April 30, 2005 totaled $990,000, down
$40,000 from the $1,030,000 recognized in the quarter ended January 31, 2005.
The decrease is the result of the Company's loss of its major manufacturing
customer's VSC sales. The loss was offset this quarter by the recording of the
final sales from the manufacturer and from revenues derived from NMDA and Blue
Sky operations (approximately $56,000).
OPERATING EXPENSES
Operating costs decreased to $1,551,000 in the quarter ended April 30, 2005 down
$18,000 from the $1,569,000 expended in the quarter ended April 30, 2004. The
decrease is the result of added expenses incurred in the continuing development
of NMDA and of the added expenses incurred in connection with the acquisition of
the second half of the equity position in Blue Sky Motorcycle Rentals, Inc.
offset by lower direct acquisition costs of policies.
The winter off-season has contributed to the net loss incurred by both Blue Sky
and NMDA. The existence of both Blue Sky and NMDA has been met with enthusiastic
acceptance by motorcycle dealers throughout the country. Both entities are
looking forward to the summer riding season as the first true testing of their
business plans.
OTHER INCOME (EXPENSE)
Total other income (expense) declined in the quarter ended April 30, 2005 and in
the six month period when compared to the same periods of 2004. 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 period included lesser amounts of fee income and included higher interest
expense charges.
INCOME TAXES
There was no provision for income taxes in the quarter and six months ended
April 30, 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.
12
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred significant losses during the past fiscal year 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 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 if 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 two quarters of 2005 and expects such losses to continue further into
2005. The Company is pursuing the development of NMDA, Blue Sky and other
warranty products in its ongoing efforts to stem the losses.
COMPARISON OF April 30, 2005 AND OCTOBER 31, 2004
Working capital at April 30, 2005 consisted of current assets of $3,795,000 and
current liabilities of $4,456,000, or a current ratio of 0.85: 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 ratio moved only slightly during this
quarter despite a continuing demand for funds to support the growth efforts of
NMDA and Blue Sky. Loans from the Company's principal shareholder and funds
derived from the exercise of stock options have funded this growth and
continuing operations.
Deferred Revenues decreased $770,000 while Deferred Direct Costs decreased
$714,000 from balances at October 31, 2004. Deferred revenues consist of
unearned 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. The change results from the overall decline in sales that have
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 April 30, 2005, the amount owed to insurance
companies decreased $65,000 from 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 April 30, 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 recently hired a replacement. As a result, the significant weakness in our
internal controls that was noted in the prior quarter is being corrected. We do
not expect to be late in preparing the normal schedules and reconciliations
associated with the preparation of our quarterly financial statements in this
and future quarters.
13
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
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
(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
Form 8K Current Report was filed April 15, 2005. This Current Report
stated that the Company had acquired the remaining 50% of Blue Sky
Motorcycle Rentals, Inc. and that a Class B Preferred Stock of
3,000,000 shares was created and approved by the State of Nevada April
15, 2005. The Class B Preferred Stock has been assigned the voting
power of one hundred (100) voting shares for each Preferred Stock
share. The Company issued 2,000,000 of such shares to Cactus Family
14
Investments, LLC ("Cactus"), a Limited Liability Company owned and
controlled by Gaylen M. Brotherson, the Company's CEO, in return for
$317,382.50 of past due rents that were due to Cactus.
In a related transaction, Cactus converted 460,000 shares of Class A
Preferred Stock into 46,000,000 shares of common stock and returned the
remaining 1,540,000 Class A Convertible Preferred Stock to the Company
as a contribution to capital. The Board of Directors directed that the
shares so received be cancelled.
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 June 14, 2005 By: /s/ Gaylen Brotherson
------------------- --------------------------------------
Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
Dated: June 14, 2005 By: /s/ Dennis M. O'Connor
-------------------- --------------------------------------
Dennis M. O'Connor
Chief Financial Officer
15