U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended April 30, 2002.
M.B.A. HOLDINGS, INC.
(Exact name of business issuer as specified in its charter)
Nevada 87-0522680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9419 E. San Salvador, Suite 105
Scottsdale, AZ 85258-5510
(480)-860-2288
(Address of principal executive offices, including telephone number)
Number of Common Stock shares (.001 par value)
outstanding at June 1, 2002: 1,980,187
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
MBA Holdings, Inc
Index
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2002
(Unaudited) and October 31, 2001 ......................................... 3
Condensed Consolidated Statements of Loss and Comprehensive Loss
for the three and six months ended April 30, 2002 and 2001
(Unaudited) .............................................................. 5
Condensed Consolidated Statements of Cash Flows for the six months
ended April 30, 2002 and 2001 (Unaudited) ................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ........... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk .......... 11
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ................................................... 11
SIGNATURES ................................................................. 12
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2002 (UNAUDITED) AND OCTOBER 31, 2001
--------------------------------------------------------------------------------
ASSETS APRIL 30, OCTOBER 31,
2002 2001
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,234,199 $ 1,083,024
Restricted cash 62,236 160,402
Investments (Note 4) 159,869 160,853
Accounts receivable, net of allowance for
doubtful accounts of $0 (2002 and 2001) 521,932 146,310
Prepaid expenses and other assets 53,412 80,350
Deferred direct costs 4,069,825 3,441,998
Income tax receivable 133,997 395,487
Deferred income tax asset 274,439 257,839
------------ ------------
Total current assets 6,509,909 5,726,263
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 283,322 268,517
Office equipment and furniture 140,042 140,043
Vehicle 16,400 16,400
Leasehold improvements 80,182 80,182
------------ ------------
Total property and equipment 519,946 505,142
Accumulated depreciation and amortization (329,359) (288,199)
------------ ------------
Property and equipment - net 190,587 216,943
------------ ------------
Deferred direct costs 3,981,089 3,196,954
Deferred income tax asset 286,375 282,870
------------ ------------
TOTAL $ 10,967,960 $ 9,423,030
============ ============
See notes to condensed consolidated financial statements. (Continued)
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 2002 (UNAUDITED) AND OCTOBER 31, 2001
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY APRIL 30, OCTOBER 31,
2002 2001
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 846,676 $ 385,113
Accounts payable and accrued expenses 499,934 489,208
Note payable - officer (Note 6) 73,398 --
Capital lease obligation - current portion 11,693 10,888
Deferred revenues 4,643,082 3,979,793
------------ ------------
Total current liabilities 6,074,783 4,865,002
------------ ------------
Capital lease obligation - net of current portion 2,092 8,077
Other liabilities 156,317 225,410
Deferred rent 36,660 42,256
Deferred revenues 4,739,193 3,963,543
------------ ------------
Total liabilities 11,009,045 9,104,288
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
(ACCUMULATED DEFICIT) SHAREHOLDERS EQUITY:
Preferred stock, $.001 par value; 20,000,000 shares
authorized; none issued and outstanding
Common stock, $.001 par value; 80,000,000 shares
authorized; 2,011,787 (2002 and 2001) shares issued;
1,980,187 (2002 and 2001) shares outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Accumulated other comprehensive loss (2,578) (3,149)
(Accumulated deficit) retained earnings (185,870) 174,528
Less: 31,600 shares of common stock in treasury, at cost (55,500) (55,500)
------------ ------------
Total (accumulated deficit) stockholders' equity (41,085) 318,742
------------ ------------
TOTAL $ 10,967,960 $ 9,423,030
============ ============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (UNAUDITED)
THREE AND SIX MONTHS ENDED APRIL 30, 2002 AND 2001
--------------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, SIX MONTHS ENDED APRIL 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET REVENUES:
Vehicle service contract gross income $ 1,336,027 $ 2,054,745 $ 2,988,072 $ 3,742,106
Net mechanical breakdown insurance income (10,228) 134,772 114,968 411,953
MBI administrative service revenue 87,001 159,981 177,507 326,905
----------- ----------- ----------- -----------
Total Net Revenues 1,412,800 2,349,498 3,280,547 4,480,964
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 1,300,266 1,947,326 2,857,697 3,556,564
Salaries and employee benefits 282,719 333,813 605,026 699,430
Mailings and postage 14,737 39,226 39,255 70,048
Rent and lease expense 66,312 77,447 133,068 167,710
Professional fees 21,427 20,334 39,921 43,398
Telephone 19,561 25,801 37,270 42,207
Depreciation and amortization 20,726 18,033 41,160 38,826
Merchant and bank charges 2,375 4,023 3,782 7,214
Insurance 9,714 5,428 17,644 16,486
Supplies 2,386 5,975 7,724 10,974
License and fees 6,951 9,067 11,341 12,369
Other operating expenses 8,956 55,371 48,219 86,283
----------- ----------- ----------- -----------
Total operating expenses 1,756,130 2,541,844 3,842,107 4,751,509
----------- ----------- ----------- -----------
OPERATING LOSS (343,330) (192,346) (561,560) (270,545)
Finance fee income 6,315 5,206 13,098 10,287
Interest income 3,411 12,774 8,171 28,876
Interest expense (1,858) (5,762) (2,762) (7,956)
Other income 20,916 20,916
Realized gains on investments 20,938 20,938
----------- ----------- ----------- -----------
Total other income 28,784 33,156 39,423 52,145
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (314,546) (159,190) (522,137) (218,400)
INCOME TAXES (111,755) (59,829) (161,740) (83,529)
----------- ----------- ----------- -----------
NET LOSS $ (202,791) $ (99,361) $ (360,397) $ (134,871)
=========== =========== =========== ===========
BASIC NET LOSS PER SHARE $ (0.10) $ (0.05) $ (0.18) $ (0.07)
=========== =========== =========== ===========
DILUTED NET LOSS PER SHARE $ (0.10) $ (0.05) $ (0.18) $ (0.07)
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 1,980,187 1,980,187 1,980,187 1,980,187
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON AND
DILUTIVE SHARES OUTSTANDING 1,980,187 1,980,187 1,980,187 1,980,187
=========== =========== =========== ===========
Net loss $ (202,791) $ (99,361) $ (360,397) $ (134,871)
Other comprehensive loss net of tax:
Net unrealized gain (loss) on available-for-sale securities 735 (33,302) 571 (22,577)
----------- ----------- ----------- -----------
Comprehensive loss $ (202,056) $ (132,663) $ (359,826) $ (157,448)
=========== =========== =========== ===========
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, 2002 AND 2001
--------------------------------------------------------------------------------
APRIL 30,
----------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (360,397) $ (134,871)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 41,159 38,826
Unrealized gain (loss) on available-for-sale securities 571 (22,577)
Gain on sale of fixed assets (12,000) --
Deferred income taxes (20,104) 9,885
Changes in assets and liabilities:
Restricted cash 98,166 226,863
Accounts receivable (375,622) 93,676
Prepaid expenses and other assets 26,938 20,967
Deferred direct costs (1,411,962) (225,663)
Net premiums payable to insurance companies 461,563 (104,554)
Accounts payable and accrued expenses (58,367) 26,529
Income tax receivable 261,490 (32,689)
Deferred rent (5,596) 358
Deferred revenues 1,438,939 116,332
----------- -----------
Net cash provided by operating activities 84,778 13,082
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 12,000 --
Purchase of property and equipment (14,805) (16,602)
Sale of short-term investments, net 984 72,188
----------- -----------
Net cash (used in) provided by investing activities (1,821) 55,586
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of note payable - officer 73,398 --
Payments on capital lease obligation (5,180) (4,376)
----------- -----------
Net cash provided by (used in) financing activities 68,218 (4,376)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 151,175 64,292
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,083,024 1,128,281
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,234,199 $ 1,192,573
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,063 $ 8,414
=========== ===========
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, 2002 AND 2001
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X, the accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, not all
of the information and notes required by generally accepted accounting
principles for complete financial statements are included. The unaudited interim
financial statements furnished herein reflect all adjustments (which include
only normal, recurring adjustments), in the opinion of management, necessary for
a fair statement of the results for the interim periods presented. Operating
results for the three months and six months ended April 30, 2002 may not be
indicative of the results that may be expected for the year ending October 31,
2002. For further information, please refer to the consolidated financial
statements and notes thereto included in the Company's Form 10K for the year
ended October 31, 2001.
2. NET LOSS PER SHARE
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE which 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 three and six months ended April 30, 2002 and
2001, the average number of outstanding shares for basic and dilutive net loss
per share is 1,980,187.
3. OTHER COMPREHENSIVE LOSS
Other comprehensive loss for the three and six months ended April 30, 2002
declined as a result of unrealized gains of $735 and $571, respectively, on
available-for-sale investments. During the three and six months ended April 30,
2001, there were $33,302 and $22,577 of unrealized losses, respectively, on
available-for-sale investments.
4. INVESTMENTS
All of the Company's investments (U.S. treasury bonds, certificates of deposits
and mutual funds) 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 period ended
April 30, 2002 reflect the Company's intent to carry back the current year
losses to recover federal income taxes paid in previous years. Similar
provisions for recoverable state income taxes were not provided, 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.
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 $66,312 and $77,447 for the three months
ended April 30, 2002 and 2001, respectively, and was $133,068 and $167,710 for
the six months ended April 30, 2002 and 2001, respectively. The current lease
expires on December 31, 2003.
On February 13, 2002, Gaylen Brotherson, the Chief Executive Officer, loaned the
Company $73,398. The loan matures February 12, 2003 and the bears interest at a
rate of 6%.
7
7. TREASURY STOCK
As of April 30, 2002 and 2001, the Company has purchased 31,600 shares of the
Company's common stock. These shares were purchased for the purpose of
retirement and bonuses to employees. Additional uses of the stock are being
explored by management.
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. On the basis of information presently
available, management does not believe the settlement of any such claims or
lawsuits will have a material adverse effect on the financial position, results
of operations or cash flows of the Company.
The Company has available a $300,000 working capital line of credit which was
renewed on February 28, 2002 and expires on February 28, 2003. Borrowings under
the line of credit bear interest at a variable rate per annum equal to the sum
of 3.15% plus the thirty day dealer commercial paper rate, as published in The
Wall Street Journal and are collateralized by the Company's investments. There
were no borrowings on the line of credit outstanding at April 30, 2002.
9. NEW ACCOUNTING PRONOUNCEMENT
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which supercedes SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and
amends Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS -- REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. The
new rules apply to the classification and impairment analysis conducted on
long-lived assets other than certain intangible assets, resolve existing
conflicting treatment on the impairment of long-lived assets and provide
implementation guidance regarding impairment calculations. SFAS No. 144 also
expands the scope to include all distinguishable components of an entity that
will be eliminated from ongoing operations in a disposal transaction. The
Company will adopt the standard beginning November 1, 2002 and has not yet
determined the financial statement impact that may result from the adoption of
this Statement.
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.
8
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2002 AND 2001
NET REVENUES
Net revenues for the quarter ended April 30, 2002 totaled approximately
$1,413,000; a decrease of $936,000 from net revenues of $2,349,000 for the
quarter ended April 30, 2001. The decrease in revenues is due to both a decrease
in Vehicle Service Contracts ("VSC") revenues and a decrease in net Mechanical
Breakdown Insurance ("MBI") income. VSC's are contracts where the Company is the
original contract obligor and reinsures its risk under the contracts with
associated insurance companies. MBI's are a policies sold by the Company acting
as agent for the insurance company that accepts the risk of loss directly for
its own account or shares the risk with third parties. The decrease in VSC
revenues is largely due to an increase in the length of the contracts being
sold, which has resulted in a decline in these revenues. In this very
competitive marketplace, the dealerships have found that they have had
difficulty matching the zero or low interest rate programs that were offered as
sales incentives by vehicle manufacturers. The decrease in MBI income is due to
a loss of market share by the Company's associated credit unions because of
increased competition for vehicle loans and due to the elimination of the very
successful direct mail program. This latter program was terminated in response
to changes in federal privacy legislation. The Company is working to offset
these volume losses through the launching of its Virtual Private Network system.
This system will enable financial institutions, dealerships and others to obtain
contract or policy quotations directly using their computer systems and the
Internet thus enhancing their ability to service their customers. Its' initial
experience with the system leads the Company to believe that this sales tool
will be very successful in the future and may even replace the direct mail
program results.
OPERATING LOSS
Operating loss increased by $151,000 to a loss of $343,000 in the quarter ended
April 30, 2002, from a loss of $192,000 experienced in the quarter ended April
30, 2001. The increased loss is largely the result of the revenue declines
discussed above offset, in part, by reductions in administrative expenses that
the Company has been able to initiate. The areas operating expenses impacted by
cost reduction programs have included salaries and employee benefits, mailings
and postage and other operating expenses. The Company has eliminated all
non-essential purchasing as a part of its ongoing effort to control expenses.
OTHER INCOME
Total other income decreased by $4,000 from $33,000 for the quarter ended April
30, 2001 to $29,000 for the quarter ended April 30, 2002. The decrease in
interest income was due to a decrease in market interest rates for short-term
investments. Interest expense declined marginally due to decreases in both
obligation balances and market interest rates. Additionally, the Company
recorded a gain on the sale of fully depreciated equipment of $12,000 in the
period ended April 30, 2002 as well as receiving minor amounts of royalty and
other miscellaneous income. In the comparable period, the Company had no such
other income but did realize gains of $21,000 on the sale of available-for-sale
investments.
INCOME TAXES
An income tax benefit of $111,755 was recorded in the three month period ended
April 30, 2002 recognizing the Company's intent to carry back the current year
losses to recover federal income taxes paid in prior years to the extent that
carry back losses were available, partially offset by changes in the temporary
differences created by the fluctuation in the deferred revenue and cost
balances. Similar provisions for recoverable state income taxes were not
recorded, as Arizona law does not allow for loss carry back. The deferred tax
assets generated by the state net operating losses have been fully offset by a
valuation allowance at April 30, 2002 and October 31, 2001.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001
NET REVENUES
Net revenues for the six months ended April 30, 2002 totaled approximately
$3,281,000; a decrease of $1,200,000 from net revenues of $4,481,000 for the six
months ended April 30, 2001. The decrease in revenues is due to the decreased
VSC and MBI revenues resulting from increased competition and from the gradual
replacement of the direct mail program with the Virtual Private Network system.
9
OPERATING LOSS
Operating loss increased by $291,000 to an operating loss of $562,000 for the
six months ended April 30, 2002, from an operating loss of $271,000 for the six
months ended April 30, 2001. The increased loss is the result of a decrease in
VSC and MBI revenues during the six months ended April 30, 2002 compared to the
six months ended April 30, 2001. The Company has continued its cost reduction
efforts in order to partially offset the effects of these revenue declines.
OTHER INCOME
Total other income decreased by $13,000 from $52,000 for the six months ended
April 30, 2001 to $39,000 for the six months ended April 30, 2002. The decrease
is primarily due to a decrease in interest income due to lower market interest
rates. The equipment sale, the royalties and the realized losses discussed above
also effected the six month periods ended April 30, 2002 and 2001. This is
offset, in part, by a $3,000 increase in finance fee income.
INCOME TAXES
An income tax benefit of $161,740 was recorded in the six month period ended
April 30, 2002 recognizing the Company's intent to carry back the current year
losses to recover federal income taxes paid in prior years to the extent that
carry back losses were available, partially offset by changes in the temporary
differences created by the fluctuation in the deferred revenue and cost
balances. Similar provisions for recoverable state income taxes were not
recorded, as Arizona law does not allow for loss carry back. The deferred tax
assets generated by the state net operating losses have been fully offset by a
valuation allowance at April 30, 2002 and October 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF APRIL 30, 2002 AND OCTOBER 31, 2001
Working capital at April 30, 2002 consisted of current assets of $6,510,000 and
current liabilities of $6,075,000, or a current ratio of 1.07:1. At October 31,
2001, the current ratio was 1.18:1 with current assets of $5,726,000 and current
liabilities of $4,865,000.
As of April 30, 2002, the Company's cash position increased to $1,296,000 from
$1,243,000 at October 31, 2001. Of the $1,296,000, $62,000 is classified as
restricted cash; there was $160,000 of restricted cash at October 31, 2001. The
largest component of the restricted cash represented claims payment advances
provided by insurance companies that enables the Company to make claims payments
on behalf of the insurance companies. The increase in cash is due to the receipt
from the federal government of the income tax receivable offset by a reduction
in restricted cash.
Deferred Revenues and Deferred Direct Costs increased $1,439,000 and $1,412,000,
respectively, from balances at October 31, 2001. Deferred revenues consist of
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. Both revenues and costs are deferred and amortized over the periods of
the policy term. The increase is primarily due to the increase in the numbers of
VSCs being sold compared to those sales in prior years. It is expected that
these amounts will continue to increase as the Company's business continues to
emphasize VSC sales.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of April 30, 2002, the amount owed to the
insurance companies increased to $847,000 from $385,000 at October 31, 2001. The
change is due to the timing of payments remitted to the insurance companies.
The Company borrowed approximately $73,000 from its Chief Executive Officer in
February 2002 in order to meet short-term cash requirements. The note for this
borrowing is due in twelve months and bears interest at 6%. The Company also has
a working capital line of credit from Merrill Lynch. The working capital line of
credit is occasionally used to make claims payments if there is a timing
difference between when the Company must pay for the claims and when the funds
expended are reimbursed by the insurance companies. The Company's ability to
fund its operations over the short-term is not hindered by lack of more
extensive short-term financing. The Company uses premiums received to pay agent
commissions and to fund operations and claims payment advances provided by
10
insurance companies to administer and pay claims. The Company believes its
current working capital plus future anticipated cash flows from operations will
be sufficient to meet cash requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company does not underwrite its own policies, a change in the current
rates of inflation is not expected to have a material effect on the Company.
However, 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 American Bankers Insurance Group, Kemper Cost
Management 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.
The Company's note payable has a fixed interest rate and the Company does not
have any other outstanding debt or long-term receivables. Therefore, it is not
subject to significant interest rate risk.
Due to increased competition, the Company has seen a substantial loss in MBI
market share and a decline in the revenues received from VSC sales. The Company
has developed the Virtual Private Network system in an attempt to bolster its
competitive position. This system will enable financial institutions,
dealerships and others to obtain contract or policy quotations directly using
their computer systems and the Internet thus enhancing their ability to service
their customers. The initial experience with the system leads the Company to
believe that this sales tool will be very successful in the future and may even
replace the direct mail program results. The future effect of this increased
competition may have an adverse effect on future earnings.
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. On the basis of
information presently available, management does not believe the settlement of
any such claims or lawsuits will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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.
By: /s/ Gaylen Brotherson Dated: June 14, 2002
------------------------------- ----------------------------
Gaylen Brotherson
Chairman of the Board and
Chief Executive Officer
By: /s/ Dennis M. O'Connor Dated: June 14, 2002
------------------------------- ----------------------------
Dennis M. O'Connor,
Chief Financial Officer
12