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, 2003.
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 ($0.001 par value) outstanding at September 1,
2003: 1,980,187 shares.
MBA Holdings, Inc
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 2003 and
October 31, 2002 2
Condensed Consolidated Statements of Loss and Comprehensive Loss for
the three and nine months ended July 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
July 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 10
ITEM 4. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 11
Signatures 12
Certifications 13
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, 2003 AND OCTOBER 31, 2002
--------------------------------------------------------------------------------
ASSETS July 31, October 31,
2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 25,694 $ 611,520
Restricted cash 215,484 284,966
Investments 117,072 159,042
Accounts receivable 287,703 182,300
Prepaid expenses and other assets 11,197 10,429
Deferred direct costs 3,819,798 4,206,456
Income taxes receivable 83,004 436,778
Deferred income tax asset 190,464 283,271
------------ ------------
Total current assets 4,750,416 6,174,762
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 295,730 285,894
Office equipment and furniture 140,259 140,259
Vehicle 15,000 16,400
Leasehold improvements 80,182 80,182
------------ ------------
Total property and equipment 531,171 522,735
Accumulated depreciation and amortization (420,415) (368,065)
------------ ------------
Property and equipment - net 110,756 154,670
Deferred direct costs 4,790,389 4,599,368
Deferred income tax asset 234,333 284,175
------------ ------------
TOTAL ASSETS $ 9,885,894 $ 11,212,975
============ ============
See notes to condensed consolidated financial statements.
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, 2003 AND OCTOBER 31, 2002
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT July 31, October 31,
2003 2002
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 767,199 $ 793,389
Accounts payable and accrued expenses 621,714 632,519
Note payable - officer 86,549 106,548
Capital lease obligation - current portion 4,089 8,222
Deferred revenues 4,369,862 4,783,991
------------ ------------
Total current liabilities 5,849,413 6,324,669
Capital lease obligations and other liabilities - long term 1,558 49,572
Deferred rent 9,185 31,064
Deferred revenues 5,472,688 5,338,994
------------ ------------
Total liabilities 11,332,844 11,744,299
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value; 20,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 80,000,000 shares
authorized; 2,011,787 (2003 and 2002) shares issued;
1,980,187 (2003 and 2002) shares outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Accumulated other comprehensive loss (4,133) (5,418)
Accumulated deficit (1,590,180) (673,269)
Less: 31,600 shares of common stock in treasury, at cost (55,500) (55,500)
------------ ------------
Total stockholders' deficit (1,446,950) (531,324)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,885,894 $ 11,212,975
============ ============
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, 2003 AND 2002
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
2003 2002 2003 2002
REVENUES:
Vehicle service contract gross income $ 1,301,469 $ 1,240,574 $ 3,975,580 $ 4,228,647
Net mechanical breakdown insurance income 31,070 40,014 83,041 154,982
MBI administrative service revenue 68,118 99,688 204,306 277,195
----------- ----------- ----------- -----------
Total net revenues 1,400,657 1,380,276 4,262,927 4,660,824
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,227,856 1,170,496 3,746,169 4,028,192
Salaries and employee benefits 259,026 290,524 770,916 895,550
Mailings and postage 9,094 12,879 13,424 52,134
Rent and lease expense 86,708 66,969 248,267 200,037
Professional fees 32,647 26,457 96,532 66,378
Telephone 43,981 34,893 111,602 72,163
Depreciation and amortization 17,951 19,977 53,749 61,136
Merchant and bank charges 2,265 3,357 5,976 7,139
Insurance 5,865 7,345 13,985 24,989
Supplies 1,323 2,469 8,675 10,193
License and fees 3,812 5,050 15,956 16,391
Other operating expenses 34,818 87,338 87,197 135,559
----------- ----------- ----------- -----------
Total operating expenses 1,725,346 1,727,754 5,172,448 5,569,861
----------- ----------- ----------- -----------
OPERATING LOSS (324,689) (347,478) (909,521) (909,037)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Finance and other fee income 6,201 7,077 16,292 20,175
Interest income 1,955 3,127 5,899 11,302
Interest expense (460) (3,075) (4,598) (5,836)
Other income 1,626 10,501 41,013 31,410
----------- ----------- ----------- -----------
Other income - net 9,322 17,630 58,606 57,051
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (315,367) (329,848) (850,915) (851,986)
INCOME TAXES 59,643 (111,105) 65,996 (272,845)
----------- ----------- ----------- -----------
NET LOSS $ (375,010) $ (218,743) $ (916,911) $ (579,141)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.19) $ (0.11) $ (0.46) $ (0.29)
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 1,980,187 1,980,187 1,980,187 1,980,187
=========== =========== =========== ===========
Net loss $ (375,010) $ (218,743) $ (916,911) $ (579,141)
Other comprehensive gain (loss) net of tax:
Net unrealized loss (gain) on available-for-sale securities 408 (6,656) 1,284 (6,085)
----------- ----------- ----------- -----------
Comprehensive loss $ (374,602) $ (225,399) $ (915,627) $ (585,226)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2003 AND 2002
--------------------------------------------------------------------------------
JULY 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (916,911) $ (579,141)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 52,350 61,136
Gain (loss) on sale of fixed assets 1,284 (22,501)
Deferred income taxes 142,651 (10,654)
Changes in assets and liabilities:
Restricted cash 69,482 (14,825)
Accounts receivable (105,403) (154,597)
Prepaid expenses and other assets (768) 28,228
Deferred direct costs 195,636 (1,724,849)
Net premiums payable to insurance companies (26,190) 397,941
Accounts payable and accrued expenses (10,805) (70,972)
Income taxes receivable 353,774 144,637
Dealer Commission No Charge Back Reserve (49,572)
Deferred rent (21,879) (8,394)
Deferred revenues (280,435) 1,728,178
----------- -----------
Net cash (used in) operating activities (596,786) (225,813)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 22,501
Retirement of equipment 1,400
Purchase of property and equipment (9,836) (16,748)
Unrealized (gain) on available-for-sale securities (6,085)
Sale of investments 41,970 4,867
----------- -----------
Net cash provided by investing activities 33,534 4,535
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit 185,288 378,020
Repayments of line of credit drawings (185,288) (378,020)
Proceeds (repayment) of borrowing from officer (19,999) 73,398
Payments on capital lease obligation (2,575) (7,918)
----------- -----------
Net cash provided by (used in) financing activities (22,574) 65,480
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (585,826) (155,798)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 611,520 1,083,024
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,694 $ 927,226
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,506 $ 3,797
=========== ===========
Cash received from income tax refunds $ 431,186 $ 407,296
=========== ===========
See notes to condensed consolidated financial statements.
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X, the accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, not all
of the information and notes required by generally accepted accounting
principles for complete financial statements are included. The unaudited interim
financial statements furnished herein reflect all adjustments (which include
only normal, recurring adjustments), in the opinion of management, necessary for
a fair statement of the results for the interim periods presented. Operating
results for the nine months ended July 31, 2003 may not be indicative of the
results that may be expected for the year ending October 31, 2003. 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, 2002.
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 during each
period. As the company has a net loss for the nine months ended July 31, 2003
and 2002, the average number of outstanding shares for basic and dilutive net
loss per share is 1,980,187.
3. OTHER COMPREHENSIVE GAIN (LOSS)
Other comprehensive gain (loss) resulted from unrealized gains of $408 in the
three months ended July 31, 2003 and unrealized losses of $6,656 in the three
months ended July 31, 2002 on available-for-sale investments. The nine months
included $1,284 of unrealized gains in the period ended July 31, 2003 and $6,085
of unrealized losses in the period ended July 31, 2002 on available-for-sale
investments.
4. INVESTMENTS
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.
5. INCOME TAXES
Provision for income taxes and related income tax receivable in the periods
ended July 31, 2003 and 2002 reflect the Company's intent to carry back the
current year losses to recover federal income taxes paid in previous years to
the extent that such prior period tax payments are available for loss carry
back. Similar provisions for recoverable state income taxes were not provided,
as Arizona law does not allow for loss carry back. The Company has received tax
refunds totaling $431,186 during fiscal 2003 from the carry back of these
losses.
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. The Company has provided a Valuation Allowance of $34,200
for the value of deferred tax assets that may not be realized.
6. RELATED PARTY TRANSACTIONS
The Company leases its office space from Cactus Partnership. The managing
partner of Cactus Partnership is Gaylen Brotherson, the Chief Executive Officer.
Rent expense for this office space was $81,640 and $63,432 for the three
6
months ended July 31, 2003 and 2002 and $234,083 and $188,193 for the nine
months ended July 31, 2003 and 2002, respectively. The current lease expires on
December 31, 2003.
In February 2002, Gaylen Brotherson, the Chief Executive Officer, loaned the
Company $73,398 and in October 2002 loaned an additional $30,000. During
February 2003, the Company repaid $22,067 of those loans. The loans mature on
the anniversary date of the separate notes and the bear interest at a rate of
6%.
7. TREASURY STOCK
As of July 31, 2003 and 2002, the Company holds 31,600 shares of it's common
stock in the Treasury. These shares were purchased for the purpose of retirement
and bonuses to employees. Management is exploring additional uses of the stock.
8. 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 available a $200,000 working capital line of credit which was
renewed on April 30, 2003 and expires on August 31, 2003. Borrowings under the
line of credit bear interest at a variable rate per annum equal to the sum of
3.15 % plus the thirty day dealer commercial paper rate, as published in The
Wall Street Journal and are secured by the Company's investments. There was
borrowings of $172,925 outstanding at July 31, 2003.
9. 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 January 2003, the FASB issued Interpretation No. 46, "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.
10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
7
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.
8
Income Taxes
Deferred income tax is recorded based upon differences between the financial
statement and tax basis of assets and liabilities using income tax rates
currently in effect.
Provision for recoverable income taxes and related income tax receivable in the
period ended July 31, 2003 and the year ended October 31, 2002 reflect the
Company's intent to carry back the current year losses to recover federal income
taxes paid in previous years. Arizona law does not provide for the carry back of
losses and therefore provisions for recoverable state income taxes have not been
provided. The Company has received the refunds ($431,186) relating to the carry
back of losses incurred in the year ended October 31, 2002.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JULY 31, 2003 AND 2002
NET REVENUES
Net revenues for the fiscal quarter ended July 31, 2003 totaled $1,401,000, a
slight increase of $20,000 over the comparable quarter in 2002. The variation
occurred because of the effects of changes in the number of policies sold, in
the amounts of revenue deferred and of increases in the prices of the products
sold during the periods. The negative effect of the volume decline was
substantially offset by the deferral and pricing effects.
OPERATING EXPENSES
Operating costs decreased to $1,725,000 in the quarter ended July 31, 2003 down
$3,000 from the $1,728,000 expended in the quarter ended July 31, 2002. The
decrease is the result of a continuation of the Company's actions to curtail
expenses wherever possible. The Company did experience some cost increases as it
continued its investment in web-based programming and the leasing of file
servers aimed at increasing Internet sales. Professional fees increased in the
period as the Company continued its defense against one of its associated
insurance companies.
OTHER INCOME (EXPENSE)
Total other income declined in the quarter ended July 31, 2003 by approximately
$8,000 under the comparable 2002 quarter. The 2002 quarter included the proceeds
from the sale of a mailing inserter that was excess to the Company's needs. No
similar event occurred in the 2003 quarter.
INCOME TAXES
The provision for income taxes in the quarter ended July 31, 2003 does not
reflect benefit from the carry back the current year losses to recover federal
income taxes paid in prior years as no further prior period tax payments remain
available for recovery. The tax charges arise from the continued establishment
of a Valuation Allowance that recognizes that the current year net operating
losses may not be fully recoverable.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2003 AND 2002
NET REVENUES
The downward trend in revenues that has been noted in prior periods continued in
the nine months ended July 31, 2003 with net revenues down $398,000 from the
comparable nine months in 2002. The number of contracts and policies sold
continues to decline due to competitive pressure from the vehicle manufacturers.
The decline in the volume of policies sold has been offset, in part, by
decreases in the amount of revenues deferred and by increases in the pricing
received for the policies sold.
9
OPERATING EXPENSES
Operating costs decreased to $5,172,000 in the nine months ended July 31, 2003
down $398,000 from the $5,570,000 expended in the nine months ended July 31,
2002. The decrease is the result of staff reductions and expense curtailments
instituted to protect the Company during this extended sales downturn. The
Company did experience some cost increases as it continued its investment in
web-based programming and the leasing of file servers aimed at increasing
Internet sales.
OTHER INCOME (EXPENSE)
Other income (expense) remained essentially unchanged in the nine months ended
July 31, 2003 compared to the prior year. The nine months of Fiscal 2003
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
2002 period included the receipt of the proceeds from the sale of surplus
equipment and the reimbursement of certain web development costs by an
associated insurance company.
INCOME TAXES
Provision for income taxes and related income tax receivable in the periods
ended July 31, 2003 and 2002 reflect the Company's intent to carry back the
current year losses to recover federal income taxes paid in previous years to
the extent that such prior period tax payments are available for loss carry
back. Similar provisions for recoverable state income taxes were not provided,
as Arizona law does not allow for loss carry back. The Company has received tax
refunds totaling $431,186 in Fiscal 2003 from the carry back of net operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF JULY 31, 2003 AND OCTOBER 31, 2002
Working capital at July 31, 2003 consisted of current assets of $4,750,000 and
current liabilities of $5,849,000, or a current ratio of 0.81: 1. At October 31,
2002 the working capital ratio was 0.98: 1 with current assets of $6,175,000 and
current liabilities of $6,325,000. The decline occurred primarily because the
Company has received substantially all of the prior period income tax refunds
and has less to recover in the current period.
Deferred Revenues decreased $280,000 and Deferred Direct Costs decreased
$196,000 from balances at October 31, 2002. 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 policy sales which
the Company has experienced over the last several quarters. The effect of the
decline was partially mitigated by increased policy prices and lower revenue
deferrals.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company does not underwrite its own policies, a change in the current
rate of inflation is not expected to have a material effect on the Company.
Nevertheless, the precise effect of inflation on operations cannot be
determined.
Under the terms of the VSC contracts, the Company is primarily responsible for
liability under these contracts. The Company reinsures its liability with highly
rated insurance companies such as Fireman's Fund Insurance Company and Heritage
Warranty Mutual Insurance Risk Retention Group, Inc. 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 long-term receivables. However, the Company does
have outstanding balances on its line of credit. A significant change in
interest rates could have a material adverse effect on the Company's operating
results.
10
ITEM 4. CONTROLS AND PROCEDURES
In the quarter and nine months ended July 31, 2003, 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 matter has been referred to binding arbitration. The
arbitration is scheduled for the Fall of 2003. 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
None
11
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 10, 2003 By: /s/ Gaylen Brotherson
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Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
Dated: September 10, 2003 By: /s/ Dennis M. O'Connor
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Dennis M. O'Connor
Chief Financial Officer
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