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 July 31, 2001.
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 August 31, 2001:
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 July 31, 2001
(Unaudited) and October 31, 2000 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three and nine months ended July 31, 2001 and
2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended July 31, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
SIGNATURES
2
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 (UNAUDITED) AND OCTOBER 31, 2000
--------------------------------------------------------------------------------
ASSETS July 31, October 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,027,881 $ 1,128,281
Restricted cash 343,430 487,015
Investments (Note 5) 344,288 442,278
Accounts receivable, net of allowance for
doubtful accounts of $19,025 (2001 and 2000) 104,414 404,370
Prepaid expenses and other assets 94,162 115,074
Deferred direct costs (Note 2) 2,512,225 5,048,367
Income tax receivable 382,812 155,437
Deferred income tax asset 250,678 387,787
------------ ------------
Total current assets 5,059,890 8,168,609
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 253,994 226,777
Office equipment and furniture 140,043 165,919
Vehicle 16,400 16,400
Leasehold improvements 80,182 79,596
Capitalized software costs 27,749 26,959
------------ ------------
Total property and equipment 518,368 515,651
Accumulated depreciation and amortization (268,369) (229,020)
------------ ------------
Property and equipment - net 249,999 286,631
------------ ------------
Other assets 46,170
Deferred direct costs (Note 2) 2,406,962 7,650,100
Deferred income tax asset 287,633 496,039
------------ ------------
TOTAL $ 8,004,484 $ 16,647,549
============ ============
See notes to condensed consolidated financial statements. (Continued)
3
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 (UNAUDITED) AND OCTOBER 31, 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY July 31, October 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 496,100 $ 437,214
Accounts payable and accrued expenses 738,391 753,802
Capital lease obligation - current portion 10,511 9,333
Deferred revenues (Note 2) 3,008,264 5,878,696
------------ ------------
Total current liabilities 4,253,266 7,079,045
CAPITAL LEASE OBLIGATION - net of current portion 10,913 18,840
UNCLAIMED PROPERTY 959
DEFERRED RENT 42,077 41,539
DEFERRED REVENUES (Note 2) 3,138,444 8,961,473
------------ ------------
Total liabilities 7,445,659 16,100,897
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' 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 (2001 and 2000) shares issued; 1,980,187
(2001 and 2000) shares outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Accumulated other comprehensive income (loss) (14,175) 12,215
Retained earnings 425,637 387,074
Treasury sotck (at cost), 31,600 shares (55,500) (55,500)
------------ ------------
Total stockholders' equity 558,825 546,652
------------ ------------
TOTAL $ 8,004,484 $ 16,647,549
============ ============
See notes to condensed consolidated financial statements.
4
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED JULY 31, 2001 AND 2000
--------------------------------------------------------------------------------
Three Months Ended July 31, Nine Months Ended July 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES (Note 2):
Vehicle service contract gross income $ 10,464,155 $ 1,563,883 $ 14,206,261 $ 3,992,385
Net mechanical breakdown insurance income 97,420 515,482 509,373 1,687,598
MBI administrative service revenue 252,192 165,929 579,097 492,236
------------ ------------ ------------ ------------
NET REVENUES 10,813,767 2,245,294 15,294,731 6,172,219
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts (Note 2) 9,965,701 1,469,518 13,522,265 3,770,165
Salaries and employee benefits 354,909 408,034 1,054,339 1,238,979
Mailings and postage 8,382 53,108 78,430 231,707
Rent and lease expense 71,252 65,546 238,962 205,227
Professional fees 22,563 23,365 65,961 109,194
Telephone 20,458 38,395 62,665 83,598
Depreciation and amortization 20,176 17,284 59,002 55,996
Merchant and bank charges 12,239 7,596 19,453 18,363
Insurance 8,389 9,279 24,875 27,996
Supplies 10,321 8,578 21,295 27,467
License and fees 7,909 1,446 20,278 11,696
Other operating expenses 27,574 50,172 113,857 135,767
------------ ------------ ------------ ------------
Total operating expenses 10,529,873 2,152,321 15,281,382 5,916,155
------------ ------------ ------------ ------------
OPERATING INCOME 283,894 92,973 13,349 256,064
Finance fee income 5,065 10,316 15,352 41,185
Interest income 11,207 29,251 40,083 110,566
Other income 581 367 1,039 666
Interest expense (1,331) (4,375) (9,745) (6,211)
Realized gains (losses) on investments (5,309) 12 15,629 12
------------ ------------ ------------ ------------
Total other income 10,213 35,571 62,358 146,218
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 294,107 128,544 75,707 402,282
INCOME TAXES 120,671 53,100 37,144 163,270
------------ ------------ ------------ ------------
NET INCOME $ 173,436 $ 75,444 $ 38,563 $ 239,012
============ ============ ============ ============
BASIC NET INCOME PER SHARE $ 0.09 $ 0.04 $ 0.02 $ 0.12
============ ============ ============ ============
DILUTED NET INCOME PER SHARE $ 0.08 $ 0.04 0.02 $ 0.11
============ ============ ============ ============
AVERAGE NUMBER OF COMMON SHARES UTSTANDING - BASIC 1,980,187 2,001,220 1,980,187 2,008,617
============ ============ ============ ============
AVERAGE NUMBER OF COMMON AND DILUTIVE SHARES OUTSTANDING 2,104,488 2,090,736 2,074,908 2,132,227
============ ============ ============ ============
Net income $ 173,436 $ 75,444 $ 38,563 $ 239,012
Other comprehensive income (loss) net of tax:
Net unrealized income (loss) on available for sale securities (3,813) 6,538 (26,390) 6,538
------------ ------------ ------------ ------------
Comprehensive income $ 169,623 $ 81,982 $ 12,173 $ 245,550
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2001 AND 2000
--------------------------------------------------------------------------------
JULY 31,
----------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,563 $ 239,012
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 59,002 55,996
Gain on sale of equipment (5,510)
Deferred income taxes 345,515 (136,421)
Changes in assets and liabilities:
Restricted cash 143,585 443,323
Accounts receivable 299,956 31,311
Prepaid expenses and other assets 67,082 16,173
Deferred direct costs 7,779,280 (3,386,699)
Net premiums payable to insurance companies 58,886 (1,436,924)
Accounts payable and accrued expenses (15,411) 17,741
Income tax receivable (227,375) (35,376)
Deferred rent 538 7,074
Unclaimed property 959
Deferred revenues (8,693,461) 3,650,303
----------- -----------
Net cash used in operating activities (148,391) (534,487)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (40,860) (44,905)
Proceeds from sale of equipment 24,000
Sale (purchase) of marketable securities, net 71,600 (458,364)
----------- -----------
Net cash provided by (used in) investing activities 54,740 (503,269)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (55,500)
Payments on capital lease obligation (6,749)
----------- -----------
Net cash used in financing activities (6,749) (55,500)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (100,400) (1,093,256)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,128,281 3,424,934
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,027,881 $ 2,331,678
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,745 $ 3,466
=========== ===========
Cash paid for income taxes $ 334,157
===========
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, 2001 AND 2000
--------------------------------------------------------------------------------
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 nine months ended July 31, 2001 may not be
indicative of the results that may be expected for the year ending October 31,
2001. 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, 2000.
2. SIGNIFICANT EVENTS
Two of the Company's underwriters transferred the administration of the
contracts and policies sold and administered by MBA to a third party. If the
Company had retained administrative authority over those policies and contracts,
the deferred amounts would be recognized into income over the next six years.
Since MBA is no longer the administrator of the contracts and policies, all of
the revenue and direct acquisition costs associated with them was recognized
except for the revenue and direct acquisition costs relating to future
cancellations, as discussed below. An additional $8,488,000 of deferred VSC
revenue, $8,089,000 of deferred direct acquisition costs and $345,000 of
deferred administrative service fee revenue related to these contracts and
policies was recognized as income and operating expenses in the third quarter
of 2001.
The Company continues to perform certain administrative duties relating to the
calculation and administration of policy and contract cancellation. The
remaining balance in deferred revenue and deferred direct acquisition costs
relating to these underwriters to offset against future cancellation
administration equals $1,537,000 of deferred revenue and $1,455,000 of deferred
direct acquisition cost. The Company will recognize this revenue and expense
over the remaining life of the policy or contract. If the policy or contract is
cancelled, then the company will recognize the remaining portion of the unearned
revenue and direct acquisition cost in the month the policy or contract is
cancelled.
The Company also wrote off a receivable from the underwriters for deferred
administrative costs. When a policy or contract is sold, the Company would remit
a portion of their commission to the underwriter for administrative services. As
the policies and contracts expire, the underwriters would return the commission
submitted. Per the administrative release agreements, the Company agreed to
forfeit all of the deferred administrative costs remitted to the underwriters.
The total amount written off equals $254,000. The net effect of the above
adjustments was to increase net operating income by $490,000.
3. NET INCOME PER SHARE
Net income (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 income (loss) and requires a reconciliation of the numerator and
denominator of basic and diluted EPS calculations. Basic income (loss) per
common share is computed on the weighted average number of shares of common
stock outstanding during each period. Income 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. Below is the reconciliation required by
SFAS No. 128. All common stock options are anti-dilutive for the three and nine
months ended July 31, 2001.
7
NUMBER OF SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE
THREE MONTHS ENDED
JULY 31,
---------------------
2001 2000
--------- ---------
Average number of common shares outstanding - Basic 1,980,187 2,001,220
Dilutive shares from common stock options calculated
using the treasury stock method 124,401 89,516
--------- ---------
Average number of common and dilutive shares outstanding 2,104,488 2,090,736
========= =========
NINE MONTHS ENDED
JULY 31,
---------------------
2001 2000
--------- ---------
Average number of common shares outstanding - Basic 1,980,187 2,008,617
Dilutive shares from common stock options calculated
using the treasury stock method 94,821 123,610
--------- ---------
Average number of common and dilutive shares outstanding 2,074,908 2,132,227
========= =========
4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for the nine months ended July 31, 2001
resulted from unrealized losses of $26,390 on available-for-sale investments.
There was no additional other comprehensive income (loss) during the nine months
ended July 31, 2001.
5. INVESTMENTS
All of the Company's investments (U.S. treasury bonds and certificates of
deposits) are classified as available-for-sale and are stated at estimated fair
value determined by the quoted market price.
6. TREASURY STOCK
As of July 31, 2001, the Company has purchased 31,600 shares of the Company's
common stock. These shares were purchased for the purpose of bonuses to
employees or outside agents. Management will explore any additional uses of the
stock.
7. 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. 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, 2001 and expires on February 28, 2002. 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 outstanding at July 31, 2001.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended, requires that an enterprise recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
8
value. The Company adopted SFAS No. 133 effective November 1, 2000, and the
adoption did not have a material impact on the Company's financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 and the use of the pooling-of-interests method is no longer
allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will
cease and instead, the carrying value of goodwill will be evaluated for
impairment on an annual basis. Identifiable intangible assets will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The Company anticipates the adoption of these
pronouncements will not have a material effect on its financial position or
results of operations.
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.
RESULTS OF OPERATIONS
In the third quarter of 2001, the Company recognized an additional $8,488,000 of
deferred VSC revenue, $8,089,000 of deferred direct acquisition costs and
$345,000 of deferred administrative service fee revenue into income and
operating expenses. Two of the Company's underwriters transferred the
administration of the contracts and policies sold and administered by MBA to a
third party. If the Company had retained administrative authority over those
policies and contracts, then the above amounts would have been recognized into
income over the next six years. Since MBA is no longer the administrator of the
contracts and policies, all of the revenue and direct acquisition costs
associated with them have been recognized except for the revenue and direct
acquisition costs relating to future cancellations, as discussed below.
The Company still has administrative duties relating to the calculation and
administration of policy and contract cancellation. The remaining balance in
deferred revenue and deferred direct acquisition costs relating to these
underwriters to offset against future cancellation administration equals
$1,537,000 of deferred revenue and $1,455,000 of deferred direct acquisition
cost. The Company will recognize this revenue and expense over the life of the
policy or contract. If the policy or contract is cancelled, then the company
will recognize the remaining portion of the unearned revenue and direct
acquisition cost in the month the policy or contract is cancelled.
9
The Company also expensed a receivable from the underwriters for deferred
administrative costs. When a policy or contract is sold, the Company would remit
a portion of their commission to the underwriter for administrative services. As
the policies and contracts expire, the underwriters would return the commission
submitted. Per the administrative release agreements, the Company agreed to
forfeit all of the deferred administrative costs remitted to the underwriters.
The total amount expensed equals $254,000. The net amount the company has
realized as revenue equals $490,000.
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2001 AND 2000
Net revenues for the quarter ended July 31, 2001 totaled approximately
$10,814,000, an increase of $8,569,000 from net revenues of $2,245,000 for the
quarter ended July 31, 2000. The increase in revenues is primarily due to the
recognition of previously deferred vehicle service contracts ("VSC") revenue and
mechanical breakdown insurance ("MBI") income, as described above.
Operating income increased by $191,000 to a gain of $284,000 for the quarter
ended July 31, 2001, from operating income of $93,000 for the quarter ended July
31, 2000. The increase is due to the recognition of previously deferred revenue
and direct acquisition costs, as described above. In addition, operating
expenses not including direct acquisition costs decreased by $120,000 due to a
decrease in salary and employee benefits due to a decrease in the number of
employees and a decrease in the mailings and postage expense due to the phase
out of the direct mail operations. The decrease in employees is due to process
improvement and technology upgrades.
Total operating expenses including direct vehicle service contract costs were
$10,530,000 for the quarter ended July 31, 2001, compared to $2,152,000 for the
quarter ended July 31, 2000. The increase in direct vehicle service contract
costs was due to the recognition of previously deferred direct acquisition
costs, as described above, and the decreases in salaries, employee benefits and
mailings and postage.
Total other income decreased by $26,000 from $36,000 for the quarter ended July
31, 2000 to $10,000 for the quarter ended July 31, 2001. The decrease was
primarily due to a decrease in cash and cash equivalents which, in turn,
decreased the interest income earned. In addition, there was a decrease in
finance fee income due to the reduction in the amount of policies financed from
the direct mail operations and a loss was recognized on securities sold during
the quarter.
Net income for the quarter ended July 31, 2001 was $173,000 compared to net
income for the quarter ended July 31, 2000 of $75,000, which is a result of the
foregoing factors.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2001 AND 2000
Net revenues for the nine months ended July 31, 2001 totaled approximately
$15,295,000, an increase of $9,123,000 from net revenues of $6,172,000 for the
nine months ended July 31, 2000. The increase in revenues is primarily due to
the recognition of previously deferred VSC revenue and MBI administrative
service revenue, as described above. This is offset by a decrease in net MBI
income of $1,179,000 from $1,688,000 for the nine months ended July 31, 2000 to
$509,000 for the nine months ended July 31, 2001 due to increased competition.
Operating income decreased by $242,000 to $14,000 for the nine months ended July
31, 2001, from $256,000 for the nine months ended July 31, 2000. The decrease is
primarily due to a decrease in MBI sales during the nine months ended July 31,
2001 compared to the nine months ended July 31, 2000. This is offset by the
recognition of previously deferred revenue related to the transfer of the
administration of policies and contracts for two underwriters, as described
above. Also offsetting the decrease in MBI sales is the decrease in salary and
employee benefits due to a decrease in the number of employees and a decrease in
10
the mailings and postage expense due to the phase out of the direct mail
operations. The decrease in employees is due to process improvement and
technology upgrades.
Total operating expenses including direct vehicle service contract costs were
$15,281,000 for the nine months ended July 31, 2001, compared to $5,916,000 for
the nine months ended July 31, 2000. The increase is due to the Company
recognizing an additional $8,089,000 of direct acquisition costs that had been
previously deferred, as described above.
Total other income decreased by $84,000 from $146,000 for the nine months ended
July 31, 2000 to $62,000 for the nine months ended July 31, 2001. The decrease
is primarily due to a decrease in interest income due to less cash, cash
equivalents and restricted cash available for investment during the period. In
addition, there was a decrease in finance fee income due to the reduction in the
amount of policies financed from the direct mail operations. This is offset by a
gain recognized on securities sold.
Net income for the nine months ended July 31, 2001 was $39,000 compared to net
income of $239,000 for the nine months ended July 31, 2000, which is a result of
the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF JULY 31, 2001 AND OCTOBER 31, 2000
Working capital at July 31, 2001 consisted of current assets of $5,060,000 and
current liabilities of $4,253,000, or a current ratio of 1.19:1. At October 31,
2000, the current ratio was 1.15:1 with current assets of $8,169,000 and current
liabilities of $7,079,000.
As of July 31, 2001, the Company's cash position decreased to $1,371,000 from
$1,615,000 at October 31, 2000. Of the $1,371,000, $343,000 is classified as
restricted cash; there was $487,000 of restricted cash at October 31, 2000. The
largest component of the restricted cash represented claims payment advances
provided by insurance companies which enables the Company to make claims
payments on behalf of the insurance companies. The decrease in cash is due to
the timing of when the Company receives cash from the insurance companies for
claims payments. Plus, a decrease in cash needed to fund current operations.
Deferred direct costs, including both the current and non-current portions,
decreased by $7,779,000 to $4,919,000 at July 31, 2001 from $12,698,000 at
October 31, 2000. Direct costs are costs that are directly related to the sale
of VSCs. These costs are deferred in the same proportion as VSC revenue. The
Company recognized an additional $8,089,000 of direct acquisition costs that had
been previously deferred, as described above.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of July 31, 2001, the amount owed to the
insurance companies increased by $59,000 to $496,000 from $437,000 at October
31, 2000, which is due to the timing of payments remitted to the insurance
companies.
Deferred revenues, including both the current and non-current portions,
decreased by $8,693,000 to $6,147,000 at July 31, 2001 from $14,840,000 at
October 31, 2000. Deferred revenue consists of VSC gross sales and estimated
administrative service fees relating to the sales of MBI policies. The Company
recognized an additional $8,488,000 of deferred VSC revenue and $345,000 of
deferred administrative service fee revenue, that had been previously deferred,
as described above.
The Company is operating with a working capital line of credit from Merrill
Lynch. This is the only debt utilized by the Company. The working capital line
of credit is used to make claims payment if there is a timing difference between
when the Company pays for the claims and when the claims are reimbursed by the
insurance companies. The Company's ability to fund its operations over the
short-term is not hindered by lack of short-term financing. The Company uses
premiums received to pay agent commissions and fund operations and claims
payment advances provided by 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.
11
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 or hyperinflation is not expected to have a material effect
on the Company. However, the precise effect of inflation on operations can not
be determined.
The Company does not have any outstanding debt or long-term receivables.
Therefore, it is not subject to significant interest rate risk.
The Company has operating income of $13,000 for the nine months ended July 31,
2001. As previously discussed in Note 2 in the notes to the financial
statements, two of the Company's underwriters transferred the responsibility to
administer their contracts and policies to a third party. The Company recognized
a net credit to income of $490,000 due to the recognition of previously deferred
revenue and deferred administrative service revenue offset by the recognition of
deferred direct acquisition costs and expensing the administrative service
receivable. The Company would have recognized this income and expense over the
next six years, the remaining life of the contracts and policies. Without this
revenue, the Company would have a net operating loss of $477,000. This operating
loss is due to the Company having a substantial loss in MBI market share from
increased competition. 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized. MBA Holdings, Inc.
By: /s/ Gaylen Brotherson Dated: September 7, 2001
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Gaylen Brotherson
Chairman of the Board and Chief Executive Officer
By: /s/ Michael J. Zimmerman Dated: September 7, 2001
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Michael J. Zimmerman,
Chief Financial Officer
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