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 July 31, 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 September 7, 2004: 107,801,870 shares.
MBA Holdings, Inc and Subsidiary
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 2004
(Unaudited) and October 31, 2003 2
Condensed Consolidated Statements of Loss and Comprehensive Loss \
for the three and nine months ended July 31, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Stockholders' Deficit
as of July 31, 2004 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 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 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Charges in Securities and Use of Proceeds 13
Item 4 Submissions of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND OCTOBER 31, 2003
--------------------------------------------------------------------------------
ASSETS July 31, October 31,
2004 2003
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 724,691 $ 448,240
Restricted cash 23,879 291,437
Investments -- 117,203
Accounts receivable 325,815 232,184
Prepaid expenses and other assets 2,254 5,248
Deferred direct costs 2,856,305 3,730,410
----------- -----------
Total current assets 3,932,944 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 (451,347) (426,661)
----------- -----------
Property and equipment - net 104,938 117,908
Deferred compensation 60,000 --
Deferred direct costs 5,393,032 4,804,532
----------- -----------
TOTAL ASSETS $ 9,490,914 $ 9,747,162
=========== ===========
See notes to condensed consolidated financial statements.
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND OCTOBER 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT July 31, October 31,
2004 2003
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 476,524 $ 736,442
Accounts payable and accrued expenses 565,191 622,756
Line of credit borrowings -- 196,897
Accounts payable to affiliated entity 463,693 516,309
Capital lease obligation - current portion 11,769 7,882
Deferred revenues 3,748,872 4,332,133
------------ ------------
Total current liabilities 5,266,049 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 5,894,256 5,548,214
------------ ------------
Total liabilities 11,176,815 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), 86,617,870 shares issued (post split) in 2004 and
20,617,870 (post split) in 2003, 86,301,870 shares (post split)
outstanding in 2004 and 20,301,870 (post split) in 2003 8,662 2,062
Additional paid-in-capital 1,555,797 280,801
Accumulated other comprehensive income -- 119
Accumulated deficit (3,195,060) (2,458,729)
Less: 316,000 (post split) shares of common stock in treasury, at cost (55,500) (55,500)
------------ ------------
Total stockholders' deficit (1,685,901) (2,231,247)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,490,914 $ 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 NINE MONTHS ENDED JULY 31, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
------------ ------------ ------------ ------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Vehicle service contract gross income $ 1,219,052 $ 1,301,469 $ 3,683,847 $ 3,975,580
Net mechanical breakdown insurance income 5,919 31,070 61,077 83,041
MBI brokerage and administrative service revenue 78,400 68,118 218,108 204,306
------------ ------------ ------------ ------------
Total net revenues 1,303,371 1,400,657 3,963,032 4,262,927
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,113,281 1,227,856 3,420,149 3,746,169
Salaries and employee benefits 358,416 259,026 784,415 770,916
Mailings and postage 2,733 9,094 4,015 13,424
Rent and lease expense 73,602 86,708 226,764 248,267
Professional fees 17,019 32,647 89,554 96,532
Telephone 10,137 43,981 51,539 111,602
Depreciation and amortization 6,529 17,951 24,686 53,749
Merchant and bank charges 3,592 2,265 8,970 5,976
Insurance 1,840 5,865 11,128 13,985
Supplies 1,181 1,323 3,321 8,675
License and fees 4,883 3,812 12,659 15,956
Other operating expenses 21,009 34,818 56,023 87,197
------------ ------------ ------------ ------------
Total operating expenses 1,614,222 1,725,346 4,693,223 5,172,448
------------ ------------ ------------ ------------
OPERATING LOSS (310,851) (324,689) (730,191) (909,521)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Finance and other fee income (942) 7,827 36,475 57,305
Interest income 223 1,955 4,176 5,899
Interest expense and fees (6,678) (460) (34,974) (4,598)
------------ ------------ ------------ ------------
Other income (expense) - net (7,397) 9,322 5,677 58,606
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (318,248) (315,367) (724,514) (850,915)
INCOME TAXES -- 59,643 11,817 65,996
------------ ------------ ------------ ------------
NET LOSS $ (318,248) $ (375,010) $ (736,331) $ (916,911)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.02) $ (0.05)
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 50,880,713 19,801,870 31,162,943 19,801,870
============ ============ ============ ============
Net loss $ (318,248) $ (375,010) $ (736,331) $ (916,911)
Other comprehensive gain net of tax:
Net unrealized gain on available-for-sale securities -- 408 -- 1,284
------------ ------------ ------------ ------------
Comprehensive loss $ (318,248) $ (374,602) $ (736,331) $ (915,627)
============ ============ ============ ============
See notes to condensed consolidated financial statements
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEAR ENDED OCTOBER 31, 2003 AND NINE MONTHS ENDED JULY 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Additional Other Retained Stockholders'
Preferred Stock Common Stock Paid Comprehensive Earnings Treasury (Deficit)
Shares Amount Shares Amount In-Capital Income (Deficit) Stock Equity
--------- ----- ---------- ------- ----------- --------- ------------- ---------- ------------
BALANCE, NOVEMBER 1, 2002 2,011,787 $ 2,012 $ 200,851 $ (5,418) $ (673,269) $ (55,500) $ (531,324)
Unrealized gain on
available-for-sale
securities 5,537 5,537
Issuance of common shares 50,000 50 79,950 80,000
Net loss -- -- -- -- -- -- (1,785,460) -- (1,785,460)
--------- ----- ---------- ------- ----------- --------- ------------- ---------- ------------
BALANCE, OCTOBER 31, 2003 - - 2,061,787 2,062 280,801 119 (2,458,729) (55,500) (2,231,247)
Realization of gain on
available-for-sale
securities (119) (119)
Forward stock split
effective
March 22, 2004 18,556,083
Issuance of common shares 66,000,000 6,600 1,075,196 1,081,796
Issuance of preferred
shares 2,000,000 200 199,800 200,000
Net loss -- -- -- -- -- -- (736,331) -- (736,331)
--------- ----- ---------- ------- ----------- --------- ------------- ---------- ------------
BALANCE JULY 31, 2004 2,000,000 $ 200 86,617,870 $ 8,662 $ 1,555,797 - $ (3,195,060) $ (55,500) $ (1,685,901)
===================================================== ================================================
See notes to consolidated financial statements
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------------------
July 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (736,331) $ (916,911)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 24,686 52,350
Related party rent expense accrued but not paid (52,616) 167,963
Gain (loss) on sale of fixed assets -- 1,284
Deferred income taxes -- 142,651
Issuance of Class A preferred stock in return for related party loans 200,000 --
Changes in assets and liabilities:
Restricted cash 267,558 69,482
Accounts receivable (93,631) (105,403)
Prepaid expenses and other assets 2,994 (768)
Deferred direct costs 285,604 195,636
Net premiums payable to insurance companies (259,919) (26,190)
Accounts payable and accrued expenses (57,565) (178,768)
Income taxes receivable -- 353,774
Deferred rent (4,809) (49,572)
Deferred income taxes 11,844 (21,879)
Deferred revenues (237,218) (280,435)
----------- -----------
Net cash (used in) operating activities (649,403) (596,786)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirement of equipment -- 1,400
Purchase of property and equipment (11,716) (9,836)
Sale of investments 117,085 41,970
----------- -----------
Net cash provided by investing activities 105,369 33,534
----------- -----------
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 -- (19,999)
Issuance of common stock 1,021,796 --
Payments on capital lease obligation (4,414) (2,575)
----------- -----------
Net cash provided by (used in) financing activities 820,485 (22,574)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 276,451 (585,826)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 448,240 611,520
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 724,691 $ 25,694
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,310 $ 1,506
=========== ===========
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)
NINE MONTHS ENDED JULY 31, 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. 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 nine
months ended July 31, 2004 may not be indicative of the results of operations
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 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. The additional shares representing the exercise of outstanding
common stock options using the treasury stock method are not considered nor are
the dilutive effect of the voting rights of the Class A preferred stock and
employee stock options for the same reason. The average number of outstanding
shares for basic and dilutive net loss per share are 31,162,943 (post split) in
2004 and 19,801,870 (post split) in 2003. The 10-1 forward stock split is
reflected retroactively.
3. DEFERRED COMPENSATION
On June 17, 2004, the Company acquired 100 % of the outstanding membership
interests in First Eagle Group, LLC ("First Eagle") and expects to enter into
employment contracts with three of the former members of First Eagle. First
Eagle was a start up venture that did not possess substantial assets. Rather,
its value is derived from the continuing services of the three individuals to
the Company.
The recorded value of the deferred compensation is based upon the fair market
value of the common shares that were issued to the members of First Eagle in
return for their membership interests. The employment contracts, in addition to
providing for salary and fringe benefits, provide incentive compensation to the
individuals upon the achievement of specified sales goals in the form of direct
compensation and in the form of additional stock grants and options. As of July
31, 2004, none of these goals have been achieved.
4. 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 July 31, 2003
resulted from unrealized gains of $408 on available-for-sale investments. During
the nine months ended July 31, 2003, there were $1,284 of unrealized gains on
available-for-sale investments.
7
5. 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 prices. At July 31, 2004, the Company has sold all such
investments and realized all gains and losses.
6. INCOME TAXES
There is no current provision for income taxes in the periods ended July 31,
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.
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.
7. 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 $71,895 and $81,640 for the three months ended July 31, 2004 and 2003
and $219,115 and $234,083 for the nine months ended July 31, 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.
8. 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 7 above), in exchange for
$200,000 of rent and other debt due to that entity.
In addition, the Company increased the number of its authorized common shares to
800,000,000, changed the par value of those shares to no par value with a stated
value of $.0001 and increased its issued Common Stock shares to 20,617,870
shares by means of a 10 - 1 forward stock split.
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
9. 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
July 31, 2004, the Company has granted options for 63,000,000 shares to selected
employees. Compensation expense of $253,582 was recorded in connection with
these transactions. As of July 31, 2004, there were 10,000,000 options
outstanding. All of these options were exercised in August 2004.
On that same dates, 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 July 31, 2004, the Company has
granted options for 4,000,000 shares to selected directors/consultants.
Compensation expense of $121,541 was recorded in connection with these
transactions. As of July 31, 2004 there were no options outstanding under this
plan. All options were exercised at that date.
10. COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits that arise in the ordinary course
of business, consisting principally of alleged errors and omissions in
connection with the sale of insurance and personnel matters and of disputes over
outstanding accounts. The Company is currently involved in a dispute with one of
its associated insurance companies over alleged wrongdoing, an alleged breach of
its Administrative Agreement and over reimbursement for claims and cancellation
expenditures. The Company maintains a $40,000 reserve for claims arising in the
ordinary course of business and believes that this reserve is sufficient to
cover the costs of such claims. On the basis of information presently available,
management does not believe the settlement of any such claims or lawsuits will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
The Company had available a $200,000 working capital line of credit which was
renewed on April 30, 2003 and expired in February, 2004. Borrowings under the
line of credit bear interest at a variable rate per annum equal to the sum of
3.15 % plus the thirty day dealer commercial paper rate, as published in The
Wall Street Journal and were secured by the Company's investments. The line of
credit was secured by a pledge of the Company's investments in marketable
securities. The line of credit was repaid and cancelled upon its maturity.
11. NEW ACCOUNTING PRONOUNCEMENTS
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.
12. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and footnotes that appear elsewhere in this report.
FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q contains forward-looking statements. Additional written
or oral forward-looking statements may be made by us from time to time in
filings with the Securities and Exchange Commission or otherwise. The words
"believe," "expect," "anticipate," and "project," and similar expressions
identify forward-looking statements, which speak only as of the date the
statement was made. Such forward-looking statements are within the meaning of
that term in section 27A of the Securities and Exchange Act of 1934, as amended.
Such statements may include, but not be limited to, projections of revenues,
income or loss, capital expenditures, plans for future operations, financing
needs or plans, the impact of inflation, and plans relating to our products or
services, as well as assumptions relating to the foregoing. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Statements in this Report, including
the Notes to Condensed Consolidated Financial Statements (Unaudited) and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences.
CRITICAL ACCOUNTING POLICIES
The Company has prepared the accompanying unaudited condensed financial
statements in conformity with accounting principles generally accepted in the
United States for interim financial information. The preparation of the
financial statements requires the use of judgement and estimates that affect the
reported amounts of revenues, expenses, assets and liabilities. The Company has
adopted accounting policies and practices that are generally accepted in the
industry in which it operates. The Company believes the following are its most
critical accounting policies that affect significant areas and involve
management's judgement and estimates. If these estimates differ significantly
from actual results, the impact to the consolidated financial statements may be
material.
Revenue Recognition
The Company receives a single commission for the sale of each mechanical
breakdown insurance policy ("MBI") that compensates it both for the effort in
selling the policy, and for providing administrative claims services as
required. The Company has no direct liability for claims losses on MBI. It acts
as the issuing insurance company's agent in these transactions. The Company
apportions the commissions received in a manner that it believes is
proportionate to the values of the services provided. The revenues relating to
policy sales are recorded in income when the policy information is received and
approved by the Company. The revenues related to providing administrative claims
services are deferred and recognized in income on a straight-line basis over the
actual life of the policy.
A vehicle service contract ("VSC") is a contract for certain defined services
between the Company and the purchaser. The Company reinsures its obligations by
obtaining an insurance policy that guarantees its obligations under the
contract. In accordance with Financial Accounting Standards Board Technical
Bulletin 90-1, " Accounting for Separately Priced Extended Warranty and Product
Maintenance Contracts", revenues and costs associated with the sales of these
contracts are deferred and recognized in income on a straight-line basis over
the actual life of the contracts.
10
Income Taxes
There is no current provision for income taxes in the periods ended July 31,
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.
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 JULY 31, 2004 AND 2003
NET REVENUES
Net revenues for the fiscal quarter ended July 31, 2004 totaled $1,219,000, down
$82,000 from the $1,301,000 recognized in the quarter ended July 31, 2003. The
6.3% decline is the result of continuing competitive pressures being experienced
by the Company from vehicle manufacturers and other competitors as well as
legislative changes in certain states that limited the companies that were
allowed to underwrite policies in those states.
OPERATING EXPENSES
Operating costs decreased to $1,614,000 in the quarter ended July 31, 2004 down
$111,000 from the $1,725,000 expended in the quarter ended July 31, 2003. The
decrease is the result of a continuation of the Company's actions to curtail
expenses wherever possible and of a 3% decrease in the cost of the mix of
products sold. The overall decline in costs was offset, in part, by increased
compensation expense from the new employees and the stock option plans.
The deferred compensation associated with the First Eagle Group, LLC acquisition
is included in the quarterly results as the individuals are integrated into the
Company's staff. Progress has been made in establishing new projects and
redirecting existing projects but the returns are not expected to be significant
in this fiscal year.
OTHER INCOME (EXPENSE)
Total other income declined in the quarter ended July 31, 2004 by approximately
$17,000 below 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 lesser amounts of fee income and included significant interest expense
that was incurred as a result of borrowings from the line of credit and related
parties.
INCOME TAXES
There was no provision for income taxes in the quarter ended July 31, 2004
because the Company has already recovered all federal income taxes paid in prior
years to the extent available. In the quarter ended July 31, 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.
11
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2004 AND 2003
NET REVENUES
The downward trend in revenues that has been noted in prior periods continued in
the nine months ended July 31, 2004 with net revenues down $300,000 from the
comparable nine months in 2003. The number of contracts and policies sold
continues to decline as a result of increased competitive pressure from the
vehicle manufacturers and others.
OPERATING EXPENSES
Operating costs decreased to $4,693,000 in the nine months ended July 31, 2004
down $479,000 from the $5,172,000 expended in the nine months ended July 31,
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.
OTHER INCOME (EXPENSE)
Other income (expense) declined in the nine months ended July 31, 2004 by
approximately $53,000 over the comparable 2003 period. As explained above, the
nine 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 period contained this lesser amounts of the fee income
and also included an additional $30,000 of interest expense incurred as a result
of line of credit borrowings and amounts due to affiliates.
INCOME TAXES
Provision for income taxes in the nine months ended July 31, 2004 and 2003 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 three quarters of 2004 and expects such losses to continue further
into 2005. 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 JULY 31, 2004 AND OCTOBER 31, 2003
Working capital at July 31, 2004 consisted of current assets of $3,933,000 and
current liabilities of $5,266,000, or a current ratio of 0.75 : 1. At October
31, 2003 the working capital ratio was also 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 and funds derived from the exercise of stock
options have funded continuing operations.
Deferred Revenues decreased $237,000 and Deferred Direct Costs decreased
$286,000 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.
12
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of July 31, 2004, the amount owed to insurance
companies decreased $260,000 below 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 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 and nine months ended July 31, 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 June 17, 2004, the Company acquired 100% of the
outstanding membership interests in First Eagle Group, LLC ("First
Eagle") and expects to enter into employment contracts with three of
the former members of First Eagle. First Eagle was a start up venture
that did not possess substantial assets. Rather, its value is derived
from the continuing services of three individuals under contract to the
Company.
b) Underwriters and other purchasers -- The 3,000,000 common shares were
exchanged with the members of First Eagle Group, LLC for its assets.
Three of those members expect to enter into employment contracts with
Mechanical Breakdown Administrators, Inc.
c) Consideration -- The shares were issued as restricted shares at the
market price of $.02 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 -- None
f) Use of proceeds -- The Company recorded the issued shares as deferred
compensation at July 31, 2004 and will amortize the cost over the next
12 months.
Item 3 Defaults upon Senior Securities
None
Item 4 Submissions of Matters to a Vote of Security Holders
On June 10, 2004 and July 12, 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 the adoption of the M.B.A.
Holdings. Inc. Employee Stock Incentive Plan for the Year 2004, the M.B.A.
13
Holdings. Inc. Employee Stock Incentive Plan for the Year 2004 -B, 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.
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 8-K was filed June 23, 2004 announcing the acquisition of First
Eagle Group, LLC. The acquisition was determined to consist of a start
up company with few assets and employment contracts with three
individuals.
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 September 14, 2004 By: /s/ Gaylen Brotherson
------------------------ ----------------------------------
Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
Dated: September 14, 2004 By: /s/ Dennis M. O'Connor
------------------------- ----------------------------------
Dennis M. O'Connor
Chief Financial Officer
14