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, 2004.
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 1, 2004: 25,651,870 shares.
MBA Holdings, Inc
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2004 (Unaudited) and October 31, 2003 2
Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and six months
ended April 30, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Shareholder Deficit 5
Condensed Consolidated Statements of Cash Flows for the six months ended
April 30, 2004 and 2003 (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 12
ITEM 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Signatures 14
Certifications 15
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2004 AND OCTOBER 31, 2003
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS April 30, October 31,
2004 2003
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 417,156 $ 448,240
Restricted cash 20,459 291,437
Investments -- 117,203
Accounts receivable 401,389 232,184
Prepaid expenses and other assets 3,791 5,248
Deferred direct costs 3,161,069 3,730,410
----------- -----------
Total current assets 4,003,864 4,824,722
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 320,844 309,128
Office equipment and furniture 140,259 140,259
Vehicle 15,000 15,000
Leasehold improvements 80,182 80,182
----------- -----------
Total property and equipment 556,285 544,569
Accumulated depreciation and amortization (444,818) (426,661)
----------- -----------
Property and equipment - net 111,467 117,908
Deferred direct costs 5,254,969 4,804,532
----------- -----------
TOTAL ASSETS $ 9,370,300 $ 9,747,162
=========== ===========
See notes to condensed consolidated financial statements
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2004 AND OCTOBER 31, 2003
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT April 30, October 31,
2004 2003
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 674,531 $ 736,442
Accounts payable and accrued expenses 658,882 622,756
Line of credit borrowings -- 196,897
Accounts payable to affiliated entity 546,203 516,309
Capital lease obligation - current portion 13,301 7,882
Deferred revenues 3,963,882 4,332,133
------------ ------------
Total current liabilities 5,856,799 6,412,419
Capital lease obligations - net of current portion -- 8,301
Deferred rent -- 4,809
Deferred income tax liability 16,510 4,666
Deferred revenues 5,855,882 5,548,214
------------ ------------
Total liabilities 11,729,191 11,978,409
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value; $.0001 stated value 100,000,000 shares
authorized in 2004 and $.001 par value 20,000,000 authorized in
2003; 2,000,000 Class A convertible preferred issued and outstanding
in 2004, none issued and outstanding in 2003 200 --
Common stock, no par value, $.0001 stated value, 800,000,000 shares
authorized (post split), 25,967,870 shares issued (post split) in 2004 and
20,617,870 (post split) in 2003, 25,651,870 shares (post split)
outstanding in 2004 and 20,301,870 (post split) in 2003 2,597 2,062
Additional paid-in-capital 570,624 280,801
Accumulated other comprehensive loss -- 119
Accumulated deficit (2,876,812) (2,458,729)
Less: 316,000 (post split) shares of common stock in treasury,
at cost (55,500) (55,500)
------------ ------------
Total stockholders' deficit (2,358,891) (2,231,247)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,370,300 $ 9,747,162
============ ============
See notes to condensed consolidated financial statements.
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (UNAUDITED)
THREE AND SIX MONTHS ENDED APRIL 30, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended April 30, Six Months Ended April 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Vehicle service contract gross income $ 1,236,913 $ 1,325,527 $ 2,464,794 $ 2,674,111
Net mechanical breakdown insurance income 15,663 27,771 55,158 51,971
MBI administrative service revenue 72,964 68,198 139,708 136,188
------------ ------------ ------------ ------------
Total net revenues 1,325,540 1,421,496 2,659,660 2,862,270
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,155,010 1,251,877 2,306,868 2,518,313
Salaries and employee benefits 242,647 259,832 425,999 511,890
Mailings and postage (1,450) 2,308 1,282 4,330
Rent and lease expense 77,488 89,939 153,162 161,559
Professional fees 42,465 28,765 72,535 63,885
Telephone 15,844 42,355 41,402 67,621
Depreciation and amortization 9,018 17,893 18,157 35,798
Merchant and bank charges 2,368 1,928 5,378 3,711
Insurance 5,262 5,958 9,288 8,120
Supplies 1,020 3,059 2,139 7,352
License and fees 3,900 7,593 7,776 12,145
Other operating expenses 15,920 31,483 35,013 52,379
------------ ------------ ------------ ------------
Total operating expenses 1,569,492 1,742,990 3,078,999 3,447,103
------------ ------------ ------------ ------------
OPERATING LOSS (243,952) (321,494) (419,339) (584,833)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Finance and other fee income 19,103 39,320 37,417 49,478
Interest income 30 1,655 3,952 3,944
Interest expense and fees (14,078) (2,620) (28,296) (4,138)
------------ ------------ ------------ ------------
Other income (expense) - net 5,055 38,355 13,073 49,284
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (238,897) (283,139) (406,266) (535,549)
INCOME TAXES -- 46,219 11,817 6,352
------------ ------------ ------------ ------------
NET LOSS $ (238,897) $ (329,358) $ (418,083) $ (541,901)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.02) $ (0.03)
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- BASIC AND DILUTED 21,193,537 19,801,870 20,742,804 19,801,870
============ ============ ============ ============
Net loss $ (238,897) $ (329,358) $ (418,083) $ (541,901)
Other comprehensive gain net of tax:
Net unrealized gain on available-for-sale securities -- 851 -- 877
------------ ------------ ------------ ------------
Comprehensive loss $ (238,897) $ (328,507) $ (418,083) $ (541,024)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEAR ENDED OCTOBER 31, 2003 AND SIX MONTHS ENDED APRIL 30, 2004
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock Common Stock Additional Other
------------------------- ----------------------------- Paid Comprehensive
Shares Amount Shares Amount In-Capital Income
--------- ---------- ------------- ------------ ----------- -----------
BALANCE, NOVEMBER 1, 2002 2,011,787 $ 2,012 $ 200,851 $ (5,418)
Unrealized gain on
available-for-sale
securities 5,537
Issuance of common shares 50,000 50 79,950
Net loss -- -- -- -- -- --
--------- ---------- ------------- ------------ ----------- -----------
BALANCE, OCTOBER 31, 2003 -- -- 2,061,787 2,062 280,801 119
Realization of gain on
available-for-sale
securities (119)
Forward stock split effective
March 22, 2004 18,556,083
Issuance of common shares 5,350,000 535 90,023
Issuance of preferred shares 2,000,000 200 199,800
Net loss -- -- -- -- -- --
--------- ---------- ------------- ------------ ----------- -----------
2,000,000 200 25,967,870 2,597 570,624 --
========= ========== ============= ============ =========== ===========
Retained Total
Earnings Treasury Stockholders'
(Deficit) Stock (Deficit) Equity
---------- --------- ----------------
BALANCE, NOVEMBER 1, 2002 $ (673,269) $ (55,500) $ (531,324)
Unrealized gain on
available-for-sale
securities 5,537
Issuance of common shares 80,000
Net loss (1,785,460) - (1,785,460)
---------- --------- ----------
BALANCE, OCTOBER 31, 2003 (2,458,729) (55,500) (2,231,247)
Realization of gain on
available-for-sale
securities (119)
Forward stock split effective
March 22, 2004
Issuance of common shares 90,558
Issuance of preferred shares 200,000
Net loss (418,083) - (418,083)
---------- --------- ----------
(2,876,812) (55,500) (2,358,891)
========== ========= ==========
See notes to condensed consolidated financial statements.
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------------------
APRIL 30,
-------------------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(418,083) $(541,901)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 18,157 34,399
Deferred income taxes -- 83,091
Issuance of preferred stock in exchange for related party loans 200,000 --
Changes in assets and liabilities:
Restricted cash 270,978 134,594
Accounts receivable (169,205) (120,948)
Prepaid expenses and other assets 1,457 (5,766)
Deferred direct costs 118,904 94,289
Net premiums payable to insurance companies (61,911) 46,758
Accounts payable and accrued expenses 36,126 213,546
Income taxes receivable -- 353,774
Deferred rent (4,809) (49,572)
Deferred income taxes 11,844 (15,315)
Deferred revenues (60,583) (177,335)
--------- ---------
Net cash provided by operating activities (57,125) 49,614
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirement of equipment -- 1,400
Purchase of property and equipment (11,716) (9,836)
Unrealized (gain) loss on available-for-sale securities -- 877
Sale of short-term investments 117,084 44,207
--------- ---------
Net cash provided by (used in) investing activities 105,368 36,648
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit -- 185,288
Repayments of line of credit drawings (196,897) (185,288)
Proceeds (repayment) of borrowing from related party 29,894 (19,999)
Issuance of common stock 90,558 --
Payments on capital lease obligation (2,882) (1,255)
--------- ---------
Net cash provided by (used in) financing activities (79,327) (21,254)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (31,084) 65,008
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448,240 611,520
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 417,156 $ 676,528
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,778 $ 552
========= =========
Cash received from income tax refunds $ -- $ 431,186
========= =========
See notes to condensed consolidated financial statements.
6
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 2004 AND 2003
--------------------------------------------------------------------------------
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, 2003, expressed concern about this uncertainty. The accompanying
financial statements do not include any adjustment that might arise from the
outcome of this assumption. In the opinion of management, the unaudited interim
financial statements furnished herein reflect all adjustments (which include
only normal, recurring adjustments), necessary for a fair statement of the
results for the interim periods presented. Operating results for the six months
ended April 30, 2004 may not be indicative of the results that may be expected
for the year ending October 31, 2004. 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, 2003.
2. NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per
Share that requires dual presentation of basic and diluted EPS on the face of
the statements of loss and requires a reconciliation of the numerator and
denominator of basic and diluted EPS calculations. Basic loss per common share
is computed on the weighted average number of shares of common stock outstanding
during each period. Loss per common share assuming dilution is computed on the
weighted average number of shares of common stock outstanding plus additional
shares representing the exercise of outstanding common stock options using the
treasury stock method. As the company has a net loss for the six months ended
April 30, 2004 and 2003, the average number of outstanding shares for basic and
dilutive net loss per share is 20,742,804 (post split) in 2004 and 19,801,870
(post split) in 2003. The 10-1 forward stock split is reflected. The dilutive
effect of the voting rights of the Class A preferred stock and employee stock
options are not reflected because dilutive effects are not reflected in loss
situations.
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 April 30, 2003
resulted from unrealized gains of $851 on available-for-sale investments. During
the six months ended April 30, 2004 and 2003, there were $0 and $877 of
unrealized gains on available-for-sale investments, respectively.
4. INVESTMENTS
At October 31, 2003, all of the Company's investments are classified as
available-for-sale and are stated at estimated fair value determined by the
quoted market price. At April 30, 2004, the Company has sold all such
investments and realized all gains and losses.
5. INCOME TAXES
There is no current provision for income taxes in the periods ended April 30,
2004 and 2003 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
7
doubtful, a valuation allowance has been provided to eliminate that asset in
both the current quarter and the year ended October 31, 2003.
6. 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 $73,204 and $85,452 for the three months ended April 30, 2004 and 2003
and $147,220 and $152,443.13 for the six months ended April 30, 2004 and 2003,
respectively. 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.
7. 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 6 above), in repayment of
$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 Twenty Million
Six Hundred Seventeen Thousand Eight Hundred Seventy shares by means of a 10 - 1
forward stock split.
As of April 30, 2004, 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 will explore additional uses of
the stock.
8. 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 which has 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 plan, employees are granted options to purchase Company stock
at specified prices. The options vest to the employees over time and are
exercisable at the employees' discretion. The plan is administered by the
Compensation Committee of the Board of Directors and is authorized to grant
options for up to 48,000,000 shares of the common stock of the Company. As of
April 30, 2004, the Company has granted options for 4,250,000 shares to selected
employees. Compensation expense of $6,984 was recorded in connection with this
transaction.
On that same date, the Company also adopted the M.B.A. Holdings, Inc.
Non-Employee Directors and Consultants Retainer Stock Plan for 2004. 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 12,000,000 shares of the common stock of
the Company. As of April 30, 2004, the Company has granted options for 1,100,000
shares to selected directors/consultants. Compensation expense of $44,000 was
recorded in connection with this transaction
8
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 are 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.
10. NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("SFAS 148"). SFAS 148 amends the transition provisions of FASB No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), for entities that
voluntarily change to the fair value method of accounting for stock-based
compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decision with respect to stock-based employee
compensation and amends APB Opinion No. 28, "Interim Financial Reporting" ("APB
28") to require disclosure about such effects in interim financial information.
The amendments to APB 28 for interim disclosure of pro forma results are
effective for interim periods beginning after December 15, 2002, which for the
Company is the three months ended April 30, 2003. The adoption had no
significant impact on the Company's financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 148 amends the provisions of FASB No. 133,
"Accounting for Derivative Instruments and Hedging Activities" by requiring that
contracts with similar characteristics be accounted for similarly. SFAS 149 is
effective for contracts entered into after June 30, 2003. The adoption had no
significant impact on the Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for
financial instruments entered into after May 31, 2003. The adoption had no
significant impact on the Company's financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46 (R), "Consolidation of
Variable Interest Entities" (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to financial
statements to be issued by the Company after 2002; however, disclosures are
required currently if the Company expects to consolidate any variable interest
entities. The Company does not currently believe that any material entities will
be consolidated with the Company as a result of FIN 46.
11. 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
Income Taxes
There is no current provision for income taxes in the periods ended April 30,
2004 and 2003 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, 2003.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED APRIL 30, 2004 AND 2003
NET REVENUES
Net revenues for the fiscal quarter ended April 30, 2004 totaled $1,326,000,
down $96,000 from the $1,421,000 recognized in the quarter ended April 30, 2003.
The 6.8% decline is the result of continuing competitive pressures being
experienced by the Company from vehicle manufacturers and other competitors.
OPERATING EXPENSES
Operating costs decreased to $1,569,000 in the quarter ended April 30, 2004 down
$173,000 from the $1,743,000 expended in the quarter ended April 30, 2003. The
decrease is the result of a continuation of the Company's actions to curtail
expenses wherever possible and of a 7.7% decrease in the cost of the mix of
products sold.
OTHER INCOME (EXPENSE)
Total other income declined in the quarter ended April 30, 2004 by approximately
$33,000 over the comparable 2003 quarter. The 2003 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 2004 Quarter included
significant interest expense incurred as a result of borrowings on the line of
credit and from related parties.
INCOME TAXES
There was no provision for income taxes in the quarter ended April 30, 2004
because the Company has already recovered all federal income taxes paid in prior
years to the extent available. In the quarter ended April 30, 2003, 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.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2004 AND 2003
NET REVENUES
The downward trend in revenues that has been noted in prior periods continued in
the six months ended April 30, 2004 with net revenues down $202,000 from the
comparable six months in 2003. The number of contracts and policies sold
continues to decline as a result of continuing competitive pressure from the
vehicle manufacturers and others.
OPERATING EXPENSES
Operating costs decreased to $3,079,000 in the six months ended April 30, 2004
down $368,000 from the $3,447,000 expended in the six months ended April 30,
2003. The decrease is the result of staff reductions and expense curtailments
that have been instituted to protect the Company during this extended sales
downturn.
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OTHER INCOME (EXPENSE)
Other income (expense) rose in the six months ended April 30, 2004 by
approximately $36,000 over the comparable 2003 period. As explained above, the
six months in 2003 contained 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 2004 half year contained this same fee but also included an
additional $24,000 of interest expense incurred as a result of line of credit
borrowings and the accrual of interest due to affiliates.
INCOME TAXES
Provision for income taxes in the six months ended April 30, 2004 were recorded
in recognition of 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 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 2004 and expects such losses to continue further into
2004. The Company continues to pursue cost cutting measures, to relieve it of
obligations to provide uncompensated services and to seek additional business to
reduce working capital needs.
COMPARISON OF APRIL 30, 2004 AND OCTOBER 31, 2003
Working capital at April 30, 2004 consisted of current assets of $4,004,000 and
current liabilities of $5,857,000, or a current ratio of 0.68 : 1. At October
31, 2003 the working capital ratio was 0.75 : 1 with current assets of
$4,825,000 and current liabilities of $6,412,000. The negative trend continues
as the Company has absorbed additional operating losses. Loans from the
Company's principal shareholder have funded continuing operations.
Deferred Revenues decreased $61,000 and Deferred Direct Costs decreased $119,000
from balances at October 31, 2003. 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 has been experienced
over the last several quarters.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of April 30, 2004, the amount owed to insurance
companies decreased $61,000 over the balance at October 31, 2003. 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 Fireman's Fund Insurance Company and Heritage
RRG, 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.
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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 and six months ended April 30, 2004, 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 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
a.) Securities sold - On March 22, 2004 the Company issued an additional
2,000,000 shares of its Class A Preferred Stock of 2,000,000 shares.
Each Preferred Stock share is assigned the voting power of one hundred
(100) voting shares of Common Stock. Further, each Preferred Stock
share shall be convertible into one hundred (100) Common Stock shares
at the option of the holder thereof. In addition, the Company
authorized a 10 for 1 forward stock split of its Common Stock.
b.) Underwriters and other purchasers -The new Class A Preferred shares
were exchanged with Cactus Family Investments, LLC, an affiliated
company, in repayment of $200,000 of debt owing to that affiliate.
c.) Consideration - The shares were issued at a price of $.10 per share,
which was determined to be the market price on the date of issuance.
There was no underwriting discount or commission paid.
d.) Exemption from registration claimed - The Securities Act of 1933
Section 4 (2).
e.) Terms of conversion or exercise - Each Preferred Stock share shall be
convertible into one hundred (100) Common Stock shares at the option of
the holder thereof.
f.) Use of proceeds - The Company converted $200,000.00 of the indebtedness
due to an affiliated company by issuing the new convertible preferred
shares to Cactus Family Investments, LLC.
Item 3 Defaults upon Senior Securities
None
Item 4 Submissions of Matters to a Vote of Security Holders
On March 16, 2004, pursuant to Nevada statue section 78.315, the holders of a
majority of the outstanding common stock shares of M.B.A. Holdings, Inc., a
Nevada corporation (the "Corporation"), waived the required notice of a
shareholder meeting and consented to an increase in its authorized Common Stock
shares to Eight Hundred Million (800,000,000), change the par value of each
Common Stock share to no par value shares with a stated value $0.0001 per share
and to an increase in its authorized Preferred Stock shares to One Hundred
Million (100,000,000) shares and change the par value of each Common Stock share
to no par value shares with a stated value $0.0001 per share.
Item 5 Other Information
None
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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.
Dated: June 14, 2004 By: /s/ Gaylen Brotherson
-------------------- -------------------------------------------
Gaylen Brotherson
Chairman of the Board and Chief Executive
Officer
Dated: June 14, 2004 By: /s/ Dennis M. O'Connor
-------------------- -------------------------------------------
Dennis M. O'Connor
Chief Financial Officer
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