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, 2000.
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, 2000:
1,980,087
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 [ ]
<PAGE>
MBA HOLDINGS, INC
INDEX
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 2000
and October 31, 1999 3
Condensed Consolidated Statements of Income for the three
and nine months ended July 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended July 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 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 10
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Changes in Securities and Use of Proceeds 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, 2000 AND OCTOBER 31, 1999
--------------------------------------------------------------------------------
ASSETS July 31, October 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,331,678 $ 3,424,934
Restricted cash 481,375 924,698
Investments, at market value (Note 4) 464,902
Accounts receivable, net of allowance for
doubtful accounts of $19,025 (2000 and 1999) 355,494 386,805
Prepaid expenses and other assets 93,715 109,888
Deferred direct costs 4,567,701 3,182,789
Deferred income tax asset 352,622 284,412
------------ ------------
Total current assets 8,647,487 8,313,526
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 185,185 174,381
Office equipment and furniture 163,918 149,309
Vehicle 16,400 16,400
Leasehold improvements 79,596 69,053
Capitalized software costs 26,449 17,500
------------ ------------
Total property and equipment 471,548 426,643
Accumulated depreciation and amortization (210,263) (154,267)
------------ ------------
Property and equipment - net 261,285 272,376
Deferred direct costs 7,648,947 5,647,160
Deferred income tax asset 570,427 502,216
------------ ------------
TOTAL $ 17,128,146 $ 14,735,278
============ ============
See notes to condensed consolidated financial statements. (Continued)
3
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M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, 2000 AND OCTOBER 31, 1999
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY July 31, October 31,
2000 1999
------------ ------------
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 1,456,667 $ 2,893,591
Accounts payable and accrued expenses 615,185 597,444
Deferred revenues 5,401,000 3,872,479
Income taxes payable 58,783 94,159
------------ ------------
Total current liabilities 7,531,635 7,457,673
DEFERRED RENT 39,178 32,104
DEFERRED REVENUES 8,954,495 6,832,713
------------ ------------
Total liabilities 16,525,308 14,322,490
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Unrealized gains/(losses) 6,538 --
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 (2000 and 1999) shares
issued and 1,980,087 shares (2000) and
2,011,787 shares (1999) outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Treasury stock, at cost; 31,700 shares (2000)
and 0 shares (1999) (55,500)
Retained earnings 448,937 209,925
------------ ------------
Total stockholders' equity 602,838 412,788
------------ ------------
TOTAL $ 17,128,146 $ 14,735,278
============ ============
See notes to condensed consolidated financial statements.
4
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M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Vehicle service contract gross income $ 1,563,883 $ 910,477 $ 3,992,385 $ 1,873,647
Net mechanical breakdown insurance income 515,482 468,272 1,687,598 1,547,827
MBI administrative service revenue 165,929 138,142 492,236 405,742
----------- ----------- ----------- -----------
NET REVENUES 2,245,294 1,516,891 6,172,219 3,827,216
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Direct acquisition costs of vehicle
service contracts 1,469,518 755,961 3,770,165 1,776,877
Salaries and employee benefits 408,034 448,447 1,238,979 1,169,493
Mailings and postage 53,108 105,028 231,707 259,445
Rent and lease expense 65,546 74,936 205,227 205,912
Professional fees 23,365 49,551 109,194 121,342
Telephone 38,395 38,533 83,598 95,046
Depreciation and amortization 17,284 13,374 55,996 51,545
Merchant and bank charges 7,596 2,834 18,363 14,375
Insurance 9,279 9,213 27,996 17,331
Supplies 8,578 16,072 27,467 36,384
License and fees 1,446 3,012 11,696 7,310
Other operating expenses 50,172 15,983 135,767 99,414
----------- ----------- ----------- -----------
Total operating expenses 2,152,321 1,532,944 5,916,155 3,854,474
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 92,973 (16,053) 256,064 (27,258)
OTHER INCOME/(EXPENSE):
Finance fee income 10,316 15,693 41,185 34,198
Interest income 29,251 34,860 110,566 78,477
Realized gain/(losses) 12 12
Interest expense (4,008) (564) (5,545) (2,806)
----------- ----------- ----------- -----------
Total other income 35,571 49,989 146,218 109,869
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 128,544 33,936 402,282 82,611
INCOME TAXES 53,100 13,573 163,270 33,043
----------- ----------- ----------- -----------
NET INCOME $ 75,444 $ 20,363 $ 239,012 $ 49,568
=========== =========== =========== ===========
BASIC NET INCOME PER SHARE $ 0.04 $ 0.01 $ 0.12 $ 0.02
=========== =========== =========== ===========
DILUTED NET INCOME PER SHARE $ 0.04 $ 0.01 $ 0.11 $ 0.02
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 2,001,220 2,005,121 2,008,617 2,005,121
=========== =========== =========== ===========
AVERAGE NUMBER OF COMMON AND DILUTIVE
SHARES OUTSTANDING 2,090,736 2,084,631 2,132,227 2,079,342
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 239,012 $ 49,568
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 55,996 51,545
Gain on sale of equipment (3,842)
Deferred income taxes (136,421) (177,558)
Changes in assets and liabilities:
Restricted cash 443,323 (49,335)
Accounts receivable 31,311 29,187
Receivable from affiliated entities (15,928)
Prepaid expenses and other assets 16,173 (158)
Deferred direct costs (3,386,699) (3,461,869)
Net premiums payable to insurance companies (1,436,924) 1,578,417
Accounts payable and accrued expenses 17,741 (153,815)
Accounts payable to affiliated entities 67,407
Income taxes payable (35,376) (68,713)
Deferred rent 7,074 22,473
Deferred revenues 3,650,303 3,862,531
----------- -----------
Net cash provided by (used in) operating activities (534,487) 1,729,910
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (44,905) (66,657)
Proceeds from sale or disposal of property and equipment 7,000
Purchase of marketable securities, net (458,364)
----------- -----------
Net cash used in investing activities (503,269) (59,657)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (55,500)
----------- -----------
Net cash used in financing activities (55,500)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,093,256) 1,670,253
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,424,934 1,914,001
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,331,678 $ 3,584,254
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,466 $ 1,134
=========== ===========
Cash paid for income taxes $ 334,157 $ 279,313
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
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 generally accepted accounting principles 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, 2000 may not be indicative of the results
that may be expected for the year ending October 31, 2000. For further
information , please refer to the consolidated financial statements and notes
thereto included in the Company's Form 10K/A for the year ended October 31,
1999.
2. NET INCOME PER SHARE AND OTHER COMPREHENSIVE INCOME
Net income per share is calculated in accordance with SFAS No. 128, EARNINGS PER
SHARE which requires dual presentation of BASIC and DILUTED EPS on the face of
the statements of income and requires a reconciliation of the numerator and
denominator of basic and diluted EPS calculations. Basic income 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.
<TABLE>
<CAPTION>
NUMBER OF SHARES USED IN COMPUTING INCOME PER SHARE
Three Months Ended July 31,
---------------------------
2000 1999
--------- ---------
<S> <C> <C>
Average number of common shares outstanding - Basic 2,001,220 2,005,121
Dilutive shares from common stock options
calculated using the treasury stock method 89,516 79,510
--------- ---------
Average number of common and dilutive shares outstanding 2,090,736 2,084,631
========= =========
NUMBER OF SHARES USED IN COMPUTING INCOME PER SHARE
Nine months Ended July 31,
--------------------------
2000 1999
--------- ---------
Average number of common shares outstanding - Basic 2,008,617 2,005,121
Dilutive shares from common stock options
calculated using the treasury stock method 123,610 74,221
--------- ---------
Average number of common and dilutive shares outstanding 2,132,227 2,079,342
========= =========
</TABLE>
7
<PAGE>
Other comprehensive income for the three months and nine months ended July 31,
2000 resulted from unrealized gains of $6,538 on available-for-sale investments.
There was no other comprehensive income in prior years.
3. 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.
4. INVESTMENTS
All of the Company's investments (U.S. treasury bonds and certificates of
deposits) are classified as available-for-sale and are carried at market value.
5. TREASURY STOCK
As of July 31, 2000, the Company has purchased 31,700 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 will be explored by
management.
5. NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
138, will be required to be adopted by the Company for the fiscal year beginning
November 1, 2000. Management of the Company does not believe that adoption of
SFAS No. 133 will have a material effect on the results of operations or cash
flows of the Company.
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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
Total revenues for the quarter ended July 31, 2000 totaled approximately
$2,245,000, an increase of $728,000 from net revenues of $1,516,000 for the
quarter ended July 31, 1999. The increase in revenues is primarily due to the
increase in vehicle service contracts sold. Vehicle service contracts are
contracts where the Company is the original obligor. Therefore, they are
required to be reported at the gross sales price. The direct acquisition costs
of vehicle service contracts, which would be premiums paid to the insurance
companies and agent commissions, are reported as operating expenses.
Operating income increased by $109,000 to $93,000 for the quarter ended July 31,
2000, from an operating loss of $16,000 for the quarter ended July 31, 1999.
This increase is due to an increase in sales during the quarter ended July 31,
2000 compared to the quarter ended July 31, 1999, partially offset by an
increase in direct costs of $714,000 from $756,000 to $1,470,000. In addition,
there was a decrease in salaries and wages due to a reduction in the salaries
earned by the sales department and there was a decrease in postage and mailings
due to a decrease in total number of mailings sent out to prospective customers.
8
<PAGE>
Total operating expenses including direct vehicle service contract costs were
$2,152,000 for the quarter ended July 31, 2000, compared to $1,533,000 for the
quarter ended July 31, 1999. The increase is due to an increase in vehicle
service contracts which in turn increases direct vehicle service contract costs.
Total other income decreased by $14,000 from $50,000 for the quarter ended July
31, 1999 to $36,000 for the quarter ended July 31, 2000. The decrease was
primarily from a decrease in cash available for overnight investments. Usually,
restricted cash would be invested in overnight sweep investments. But, due to
the decrease in restricted cash, interest income decreased as well. In addition,
finance fee income decreased due to a decrease in direct mailings to prospective
customers. The majority of finance fee income comes from direct mail sales. In
the third quarter of 2000, there was a significant decrease in direct mailings.
Net income for the quarter ended July 31, 2000 was $75,000 compared to $20,000
for the quarter ended July 31, 1999, which is a result of the foregoing factors.
COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
Total revenues for the nine months ended July 31, 2000 totaled approximately
$6,172,000, an increase of $2,345,000 from net revenues of $3,827,000 for the
nine months ended July 31, 1999. The increase in revenues is primarily due to
the increase in vehicle service contracts sold.
Operating income increased by $283,000 to $256,000 for the nine months ended
July 31, 2000, from an operating loss of $27,000 for the nine months ended July
31, 1999. The increase is due to the increase in sales during the nine months
ended July 31, 2000 compared to the nine months ended July 31, 1999, partially
offset by an increase in direct costs of $1,993,000 from $1,777,000 to
$3,770,000. The Company did not start selling VSCs until fiscal 1998. Therefore,
at July 31, 2000 there were two years of previously deferred direct costs being
amortized to expense compared to only one year of previously deferred direct
costs being amortized to expense in 1999.
Total operating expenses including direct vehicle service contract costs were
$5,916,000 for the nine months ended July 31, 2000, compared to $3,854,000 for
the nine months ended July 31, 1999. The increase is due to the increase in VSC
sales volume.
Total other income increased by $36,000 from $110,000 for the nine months ended
July 31, 1999 to $146,000 for the nine months ended July 31, 2000. The increase
is primarily due to an increase in interest income due to greater amounts of
cash and cash equivalents available for investment during the nine months.
Net income for the nine months ended July 31, 2000 was $239,000 compared $50,000
for the nine months ended July 31, 1999, which is a result of the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF JULY 31, 2000 AND OCTOBER 31, 1999
Working capital at July 31, 2000 consisted of current assets of $8,647,000 and
current liabilities of $7,532,000, or a current ratio of 1.15:1. At October 31,
1999, the current ratio was 1.11:1 with current assets of $8,314,000 and current
liabilities of $7,458,000.
As of July 31, 2000, the Company's cash position decreased to $2,813,000 from
$4,350,000 at October 31, 1999. Of the $2,813,000, $481,000 is classified as
restricted cash; there was $925,000 of restricted cash at October 31, 1999. The
largest component of the restricted cash represents claims payment advances
provided by insurance companies. This 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. In addition, at July 31, 2000, $465,000 was invested by the
Company in US treasury bonds and certificates of deposit. There were no such
investments at October 31, 1999.
9
<PAGE>
Deferred direct costs, including both the current and non-current portions,
increased by $3,387,000 to $12,217,000 at July 31, 2000 from $8,830,000 at
October 31, 1999. 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 started selling VSCs in 1998. Therefore, the increase in the costs is
due to an increase in VSC sales over the last two years.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of July 31, 2000, the amount owed to the
insurance companies decreased to $1,457,000 from $2,894,000 at October 31, 1999,
which is due to the timing of payments remitted to the insurance companies.
Deferred revenues, including both the current and non-current portions,
increased by $3,650,000 to $14,355,000 at July 31, 2000 from $10,705,000 at
October 31, 1999. Deferred revenue consists of VSC gross sales and estimated
administrative service fees relating to the sales of MBI policies. The increase
is primarily due to the Company beginning to sell VSCs in 1998. Therefore, the
increase in the deferred revenue is primarily due to an increase in VSC sales
over the last two years. Additionally, MBI sales have increased over the last
five years.
The Company is operating with a working capital line of credit from Merrill
Lynch. This is the only debt instrument 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 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 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.
10
<PAGE>
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
(a) REPORTS ON FORM 8-K
None
(b) EXHIBITS
1. Kemper and MBA Contractual Liability Coverage Part Declarations
(CLIP)
2. Kemper and MBA Administration agreement
27. Financial Data Schedule
11
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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 14, 2000
------------------------------ -----------------------------
Gaylen Brotherson
Chairman of the Board and Chief
Executive Officer
By: /s/ Michael J. Zimmerman Dated: September 14, 2000
------------------------------ -----------------------------
Michael J. Zimmerman,
Chief Financial Officer
12
