U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
The issuer's revenues for its most recent fiscal year ended October 31, 2000
were $8,323,876. The aggregate market value of the voting stock held by
non-affiliates of the issuer, based on the average high and low prices of such
stock on October 31, 2000, as reported on NASDAQ, was $354,849. As of October
31, 2000, there were 2,011,787 shares of the issuer's common stock issued and
1,980,187 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated part of this Annual Report on Form 10: None
PART I
ITEM 1. BUSINESS
MBA Holdings, Inc. (the "Company"), through its wholly-owned subsidiary,
Mechanical Breakdown Administrators, Inc., markets and administers mechanical
breakdown insurance ("MBI") policies and sells and services vehicle service
contracts ("VSCs"). The MBI policies and VSCs relate to automobiles, light
trucks, recreational vehicles and automotive components.
On May 9, 1989, the principals of the Company organized under the name
Mechanical Breakdown Administrators, Inc. ("MBA"). During November 1995, MBA and
Brixen Enterprises, Inc. ("Brixen") merged in a stock exchange with the MBA
shareholders retaining control of the merged company. Brixen had been an
inactive publicly-held shell corporation prior to the November 1995 transaction.
Subsequent to the merger, Brixen changed its name to M.B.A. Holdings, Inc. and
its legal domicile from Utah to Nevada.
MECHANICAL BREAKDOWN INSURANCE
The Company contracts with insurance companies to act as an agent to sell MBI
policies issued by the insurance companies. The Company provides marketing
services, arranges for sub-agents to also sell the policies and subsequently
provides independent third-party administrative claims services (claims
adjudication, cancellation processing, call center services and technical
computer services) on MBI policies sold by the Company or its sub-agents. The
MBI policies are between the insurance companies and the consumer (purchaser).
The insurance company is responsible for the costs of claims submitted under the
terms of the insurance policy. The Company acts only as a sales agent and a
third party administrator. The Company currently has agency and servicing
agreements with American Bankers Insurance Group of Florida and American Modern
Home Insurance Company. In prior years, the Company also contracted with New
Hampshire Insurance Company and with other American International Group, Inc.
("AIG") members.
The sales of MBI policies are primarily accomplished through sub-agents, such as
financial institutions, and by the Company through direct mail solicitations,
magazine advertisements and phone solicitations. The terms of the MBI policies
range from twelve (12) to eighty-four (84) months and also may have mileage
limitations. Actual repairs or replacements covered by the policies are
performed by independent third party authorized repair facilities. The costs of
such repairs remain the responsibility of the insurance company that provided
the MBI policy.
For MBI policies, the policy premium has been established by the insurance
companies and agreed to by the Company and insurance regulators. In general,
when an MBI policy is sold, approximately 51% of the premium is retained by the
insurance company, approximately 20%-36% of the premium is paid to the sub-agent
(if applicable), and the remainder is paid to the Company as sales commission
and for providing administrative claims services.
For the years ended October 31, 2000, 1999 and 1998, the net revenues related to
sales and servicing of MBI policies represented approximately 92%, 96%, and 99%,
respectively, of the Company's net revenues less direct acquisition costs of
vehicle service contracts.
VEHICLE SERVICE CONTRACTS
The Company markets and administers VSC programs which enhance the profitability
of the sale of automobiles, light trucks, recreational vehicles and automotive
components. These products are sold principally through franchised and
independent automobile dealers. The VSC is a contract between the Company and
the consumer (purchaser) that offers coverages ranging from twelve (12) to
eighty-four (84) months and or mileage limitations ranging from 1,000 to
100,000. The coverage is for a broad range of possible failures of mechanical
components that may occur during the term of the VSC, exclusive of failures
covered by a manufacturers warranty. The Company is primarily responsible for
the administration of the contract and related claims during the life of the
contract.
2
Before a VSC is issued, the Company has contracted with insurance companies to
assume the liability in return for the payment of the agreed-upon premium. This
coverage provides indemnification to the Company against loss resulting from
service contract claims. The insurance protection is provided by highly rated
independent insurance companies. This includes American Bankers Insurance Group,
Kemper Cost Management and American Modern Home Insurance Company which are
rated A - (Excellent) by A.M. Best Company.
For the years ended October 31, 2000, 1999 and 1998, the net revenues less
direct acquisition costs of vehicle service contracts related to sales and
servicing of VSCs represented approximately 8%, 4% and 1%, respectively, of the
Company's net revenues less direct acquisition costs of vehicle service
contracts.
MBIs AND VSCs
The number of financial institutions, automobile dealers, and recreational
vehicle and travel trailer dealers offering the Company's MBI or VSC programs
has grown from 1997 through October 31, 2000 to approximately 600.
Essential to the success of the Company is its ability to capture, maintain,
track and analyze all relevant data regarding an MBI policy or VSC. To support
this function, the Company operates proprietary software developed internally
that consists of custom designed relational databases with interactive
capabilities. This system provides ample capacity and processing speed for
current requirements as well as the ability to support significant future growth
in this area.
VIRTUAL PRIVATE NETWORK
The Company has developed a virtual private network ("VPN") system that enables
financial institutions, dealerships, and others to sell a policy or contract
directly from their computer system. The VPN is driven by the vehicle
identification number ("VIN") of the vehicle being insured. The VPN will give an
accurate premium to be paid by the customer. If the customer purchases the
policy, the information is sent over the internet and into the Company's policy
management system. In some cases, the information is directly loaded into the
Company's policy management system.
The VPN system has the ability to eliminate many administrative problems between
the Company and the financial institutions and dealership. Since the VPN is VIN
driven, the errors made when rating a vehicle mostly have been eliminated. For
example, a customer may receive a quote for a two wheel drive vehicle when in
fact it is a four wheel drive vehicle. The difference in premium due from the
customer can be significant. Since the VIN number identifies the vehicle as a
four wheel drive or two wheel drive, the VPN system can identify the proper
specifications of the vehicle and quote the customer an accurate price. Other
benefits of the VPN system include a reduction in data entry time and potential
data entry errors since the information is uploaded upon the sale of the policy.
SIGNIFICANT CUSTOMERS
The Company does not have any individually significant customers. The loss of
any single customer would not have a material impact on operating results.
COMPETITION
M.B.A. Holdings, Inc. competes with a number of independent administrators,
divisions of distributors and manufacturers, financial institutions and
insurance companies. While the Company believes that it occupies a strong
position among competitors in its field, it is not the largest marketer and
administrator of MBIs and VSCs. Some competitors have greater operating
experience, more employees and/or greater financial resources. Further, many
manufacturers of motor vehicles market and administer their own VSC programs for
and through their dealers.
SALES AND MARKETING
The Company maintains its own sales and marketing personnel. Sales training and
motivational programs are a primary form of specialized assistance provided by
the Company to retailers/dealers and financial institutions, to assist them in
increasing the effectiveness and profitability of their MBI and VSC program
3
sales efforts. The Company develops materials and conducts educational seminars.
These seminars are conducted either at the client's place of business or an
offsite facility.
The Company also direct markets to the consumer through direct mail campaigns.
The direct marketing campaigns generate sales by obtaining a list of recent car
sales through various list services. This list is uploaded into the Company's
state-of-the-art direct mailing computer system. This system generates different
policy and premium options for the car purchased. The potential customer can
send in the premium via the U.S. mail or call the MBA sales support staff on a
toll free number and pay by a major credit card.
The MBI program is an insurance product between the insurance company and the
customer. The Company acts as an independent sales agent and administrator of
the MBI policies. From inception of the policy, the obligation to perform under
the policy is the obligation of the insurance company.
In accordance with the insurance arrangements with these insurers, a fixed
amount is remitted for each MBI or VSC sold. The amount is set by the insurance
companies and is based upon actuarial analysis of data collected and maintained
for each type of coverage and contract term. The insurer is obligated to pay all
the claims which fall under the policy even if the claims exceed the premium.
Some contracts between the Company and the insurer contain agreements that allow
the Company to share in the profits earned by the programs. The Company did not
accrue or receive any profit sharing amounts for the years ended October 31,
2000, 1999 and 1998.
The number of policies and contracts sold for the periods indicated are noted
below:
NUMBER OF
TIME PERIOD POLICIES AND CONTRACTS
----------- ----------------------
For the twelve months ended October 31, 2000 33,209
For the twelve months ended October 31, 1999 34,858
For the twelve months ended October 31, 1998 36,477
The Company will continue to look for ways to increase sales. Currently, the
Company is in the process of exploring strategic relations with other highly
rated insurance companies regarding different motorized machinery; such as boats
and motorcycles.
FEDERAL AND STATE REGULATION
The MBI and VSC programs developed and marketed by the Company, are regulated by
federal law and the statutes of a significant number of states. VSCs are
contracts sold from car dealerships and the like and are considered to be part
of the car buying process instead of an insurance product. MBIs are insurance
policies sold by independent agents through non-auto dealer entities, such as
credit unions or by direct mail through the Company. The Company continually
reviews all existing and proposed statutes and regulations to ascertain their
applicability to its existing operations, as well as new programs that are
developed by the Company. Generally, these statutes concern the scope of the MBI
and VSC coverage and content of the MBI or VSC document. In such instances, the
state statute will require that specific wording be included in the MBI or VSC
expressly stating the consumer's rights in the event of a claim, and how the
service contract may be canceled. Also, on the MBI policy is the name of the
insurance company that issues the policy and on a VSC is the name of the
insurance company that underwrites the policy. This identification on the policy
and contract identifies the insurance company that indemnifies the customer,
dealers, financial institution, or the Company against loss for performance
under the terms of the contract.
Insurance departments in some states have sought to interpret the VSC or certain
items covered under the contract as a form of insurance, requiring that the
issuer be a duly licensed and chartered insurance company. These efforts to
interpret VSCs as a form of insurance have not been successful in any state at
this time. Currently, all MBI products are considered insurance and either the
Company or its principals are duly licensed in all states in which the Company
operates.
4
The Company or its principals are licensed in the following states: Alabama,
Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont,
Washington, West Virginia, Wisconsin, and Wyoming.
Since all the MBI policies and VSCs are issued or assumed, respectively, by
highly rated insurance companies according to A.M. Best, the Company does not
believe that they are insurers and have no intention of filing the documents and
meeting the capital and surplus requirements that are necessary to obtain such a
license. There are instances where the applicability of statutes and regulations
to programs marketed and administered by the Company and compliance therewith,
involve issues of interpretation. The Company uses its best efforts to comply
with applicable statutes and regulations but it cannot assure that its
interpretations, if challenged, would be upheld by a court or regulatory body.
In any situation in which the Company has been specifically notified by any
regulatory bodies that its methods of doing business were not in compliance with
state regulation, the Company has taken the steps necessary to comply. If the
Company's right to operate in any state is challenged successfully, the Company
may be required to cease operations in the state and the state might also impose
financial sanctions against the Company. These actions, should they occur, could
have materially adverse consequences and could affect the Company's ability to
continue operating. However, within the framework of currently known statutes,
the Company does not believe that this is a present concern.
EMPLOYEES
The Company and its subsidiary employ approximately forty and fifty individuals
at October 31, 2000 and October 31, 1999, respectively. The total number of
external sales force equals three. These people train the insurance agent or
representative at the financial institution, dealership, or other sales venue.
Internally, there are approximately eight people who handle product inquiries
that may result in sales. The rest of the staff is located in the following
departments: claims adjudication, customer service, data entry, information
systems, finance, and administration. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in leased premises at 9419 E. San
Salvador, Suite 105, Scottsdale, Arizona. The Company signed a new lease with
total square footage equal to 19,750, which commenced on January 1, 1999 and
expires on December 31, 2003, and provides for annual base rent payments ranging
from $212,000 to $276,000.
The premises are owned by Cactus Partnership, an affiliated entity. The partners
in Cactus Partnership are Gaylen Brotherson, the CEO of the Company, and Judy
Brotherson, the Vice-President of the Company. All lease negotiations are made
at fair market value between Cactus Partnership and the Company based on leases
with other occupants of the building (See Item 13 Certain Relationships and
Related Transactions).
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been reported in NASDAQ, and currently is
reported on NASDAQ's OTC: BB under the trading symbol "MBAI". As of October 31,
2000, there were 2,011,787 common shares issued and 1,980,187 outstanding. On
that date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $1.75. The following is a summary of the price range of the Company's
common stock during its 2000 and 1999 fiscal years:
BID
-----------------
COMMON STOCK HIGH LOW
------------ ------ ------
Quarter of Fiscal 2000
First $ 5.00 $ 2.75
Second 5.00 2.00
Third 3.01 1.75
Fourth 1.75 1.50
Quarter of Fiscal 1999
First 2.00 1.88
Second 2.75 1.75
Third 2.50 2.00
Fourth 3.50 2.50
The Company has never paid cash dividends on any shares of its common stock, and
the Company's Board of Directors intends to continue this policy for the
foreseeable future. Earnings, if any, will be used to finance the development
and expansion of the Company's business. Future dividend policy will depend upon
the Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Company's Board of Directors.
During the fiscal year ended 2000, the Company did not issue any unregistered
securities.
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Net revenues $ 8,323,876 $ 5,597,524 $ 3,289,477 $ 595,553 $ 1,623,561
Net income 177,149 148,016 13,771 46,386 1,752
Net income per common share .09 .07 0.01 0.02 0.00
Total assets 16,647,549 14,735,278 6,717,801 2,346,943 1,588,897
Long-term obligation and redeemable preferred stock -- -- -- -- --
Cash dividends declared per common share -- -- -- -- --
ITEM 7. 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 FISCAL YEAR 2000 AND FISCAL YEAR 1999
Net revenues for the year ended October 31, 2000 totaled $8,324,000, an increase
of $2,726,000 from net revenues of $5,598,000 for the year ended October 31,
1999. The number of contracts sold of 33,209 for the year ended October 31, 2000
decreased from the number of contracts sold of 34,858 for the year ended October
31, 1999. The Company did not start selling VSCs until fiscal 1998. Therefore,
at October 31, 2000, there were three years of previously deferred VSC revenue
amortized to revenue compared to only two years of previously deferred VSC
revenue being amortized to revenue in 1999.
6
Operating income decreased by $10,000 to $82,000 for the year ended October 31,
2000, from $92,000 for the year ended October 31, 1999. The decrease is due to
the increase in salaries and expenses and officers' bonuses in fiscal 2000. This
is offset by the decrease in mailings and postage. The direct mail operations
have decreased because the Supreme Court ruled that it is illegal for state
governments to sell the information needed for direct mail; such as, addresses
and names.
Total operating expenses were $8,242,000 for the year ended October 31, 2000
compared to $5,506,000 for the year ended October 31, 1999. As a percentage of
net revenues, operating expenses were 99.0 percent for the year ended October
31, 2000, compared to 98.4 percent for the year ended October 31, 1999. The
increase in expenses is due to an increase in the direct costs associated with
the increase in VSC sales and salaries, as noted above.
Net income for the year ended October 31, 2000 was $177,000, compared to net
income for the year ended October 31, 1999 of $148,000, which is a result of the
foregoing factors, the increase in interest income from better utilization of
cash available for investments and a reduction in income taxes as a percentage
of pre-tax income.
COMPARISON OF FISCAL YEAR 1999 AND FISCAL YEAR 1998
Net revenues for the year ended October 31, 1999 totaled $5,598,000, an increase
of $2,309,000 from net revenues of $3,289,000 for the year ended October 31,
1998. The number of contracts sold of 34,858 for the year ended October 31, 1999
decreased from the number of contracts sold of 36,477 for the year ended October
31, 1998. The increase in net revenues is due to an increase of approximately
30% in premiums charged by the insurance companies that occurred in April 1998.
Operating income increased by $98,000 to $92,000 for the year ended October 31,
1999, from a loss of $6,000 for the year ended October 31, 1998. The Company did
not start selling VSCs until fiscal 1998. Therefore, at October 31, 1999 there
were two years of previously deferred direct costs amortized to expense compared
to only one year of previously deferred direct costs being amortized to expense
in 1998. This increase is offset by additional mailings and postage associated
with the direct mail program performed by the Company. These costs totaled
$441,000, or 7.9 percent of net revenues, for the year ended October 31, 1999.
This is an increase from $282,000, or 8.6 percent of net revenues, for the
comparable period ended October 31, 1998. The Company purchased additional
printers which increased its capacity to produce direct mailing materials. The
new printers were not available for all of the year ended October 31, 1998 while
they were being used for the entire year ended October 31, 1999. In addition,
the increase in mailings and the increase in policies sold over the last couple
of years have increased telephone usage as policy holders and potential
customers use the Company's toll free line for inquiries.
Total operating expenses including mailings and postage were $5,506,000 for the
year ended October 31, 1999, compared to $3,296,000 for the year ended October
31, 1998. As a percentage of net revenues, operating expenses were 98 percent
for the year ended October 31, 1999, compared to 100.2 percent for the year
ended October 31, 1998. The increase in expenses is due to an increase in the
direct costs associated with the increase in VSC sales and additional direct
mailing materials, as noted above. Also, the increase in policies sold over the
last three years has increased the number of phone calls received by the
Company. Telephone expense increased from $81,000 in 1998 to $149,000 in 1999.
Net income for the year ended October 31, 1999 was $148,000, compared to net
income for the year ended October 31, 1998 of $14,000, which is a result of the
foregoing factors.
7
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF OCTOBER 31, 2000 AND OCTOBER 31, 1999
Working capital at October 31, 2000 consisted of current assets of $8,169,000
and current liabilities of $7,079,000, 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 October 31, 2000, the Company's cash position decreased to $1,615,000 from
$4,350,000 at October 31, 1999. Of the $1,615,000, $487,000 is classified as
restricted cash; there was $925,000 of restricted cash at October 31, 1999. The
largest component of the restricted cash represented claims payment advances
provided by insurance companies. This enables the Company to make claims
payments on behalf of the insurance companies. The decrease in restricted cash
is due to the timing of when the Company receives cash from the insurance
companies for claims payments. In addition, $442,000 of cash at October 31, 2000
was invested in marketable debt and equity securities
Deferred direct costs, including both the current and non-current portions,
increased by $3,868,000 to $12,698,000 at October 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 October 31, 2000, the amount owed to the
insurance companies decreased by $2,457,000 to $437,000 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 $4,135,000 to $14,840,000 at October 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 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 7A. QUALITATIVE INFORMATION 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements for the years ended October 31, 2000,
1999, and 1998:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
8
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
M.B.A. Holdings, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of M.B.A. Holdings,
Inc. and subsidiary (the "Company") as of October 31, 2000 and 1999, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended October 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 15, 2001
9
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
--------------------------------------------------------------------------------
ASSETS 2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,128,281 $ 3,424,934
Restricted cash 487,015 924,698
Investments (Note 3 and 7) 442,278
Accounts receivable, net of allowance for
doubtful accounts of $19,025 (2000 and 1999) 404,370 386,805
Prepaid expenses and other assets 115,074 109,888
Deferred direct costs 5,048,367 3,182,789
Income tax receivable (Note 4) 155,437
Deferred income tax asset (Note 4) 387,787 284,412
------------ ------------
Total current assets 8,168,609 8,313,526
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 226,777 174,381
Office equipment and furniture 165,919 149,309
Vehicle 16,400 16,400
Leasehold improvements 79,596 69,053
Capitalized software costs 26,959 17,500
------------ ------------
Total property and equipment 515,651 426,643
Accumulated depreciation and amortization (229,020) (154,267)
------------ ------------
Property and equipment - net 286,631 272,376
OTHER ASSETS 46,170
DEFERRED DIRECT COSTS 7,650,100 5,647,160
DEFERRED INCOME TAX ASSET (Note 4) 496,039 502,216
------------ ------------
TOTAL ASSETS $ 16,647,549 $ 14,735,278
============ ============
See notes to consolidated financial statements.
10
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------ ------------
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 437,214 $ 2,893,591
Accounts payable and accrued expenses 753,802 597,444
Capital lease obligation - current
portion (Note 6) 9,333
Deferred revenues 5,878,696 3,872,479
Income taxes payable (Note 4) 94,159
------------ ------------
Total current liabilities 7,079,045 7,457,673
CAPITAL LEASE OBLIGATION - net of current
portion (Note 6) 18,840
DEFERRED RENT 41,539 32,104
DEFERRED REVENUES 8,961,473 6,832,713
------------ ------------
Total liabilities 16,100,897 14,322,490
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
STOCKHOLDERS' EQUITY (Note 5):
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; 1,980,187 (2000) and
2,011,787 (1999) outstanding 2,012 2,012
Additional paid-in-capital 200,851 200,851
Accumulated other comprehensive income 12,215
Retained earnings 387,074 209,925
Less: 31,600 shares of common stock in
treasury, at cost (55,500)
------------ ------------
Total stockholders' equity 546,652 412,788
------------ ------------
TOTAL $ 16,647,549 $ 14,735,278
============ ============
See notes to consolidated financial statements.
11
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
NET REVENUES:
Vehicle service contract gross income $ 5,453,390 $ 2,729,999 $ 707,621
Net mechanical breakdown insurance income 2,221,320 2,322,217 2,196,569
MBI administrative service revenue 649,166 545,308 385,287
----------- ----------- -----------
Total net revenues 8,323,876 5,597,524 3,289,477
----------- ----------- -----------
OPERATING EXPENSES:
Direct acquisition costs of vehicle
service contracts 5,189,065 2,604,436 669,818
Salaries and employee benefits 1,825,772 1,544,793 1,552,347
Mailings and postage 261,602 441,332 282,018
Rent and lease expense 326,327 286,785 248,418
Professional fees 158,844 159,105 193,259
Telephone 142,709 149,282 80,905
Depreciation and amortization 74,753 57,873 52,770
Merchant and bank charges 24,831 18,111 22,992
Insurance 37,052 29,029 42,717
Supplies 41,023 46,353 30,676
License and fees 13,618 12,756 9,180
Other operating expenses 146,676 156,082 110,673
----------- ----------- -----------
Total operating expenses 8,242,272 5,505,937 3,295,773
----------- ----------- -----------
OPERATING INCOME (LOSS) 81,604 91,587 (6,296)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Finance fee income 51,820 50,567 14,210
Interest income 146,559 122,829 62,880
Interest expense (12,993) (5,996) (8,103)
Other expense (763) (531) (39,480)
Realized losses on investments (3,362)
----------- ----------- -----------
Other income - net 181,261 166,869 29,507
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 262,865 258,456 23,211
INCOME TAXES (Note 4) 85,716 110,440 9,440
----------- ----------- -----------
NET INCOME $ 177,149 $ 148,016 $ 13,771
=========== =========== ===========
BASIC NET INCOME PER SHARE $ 0.09 $ 0.07 $ 0.01
=========== =========== ===========
DILUTED NET INCOME PER SHARE $ 0.08 $ 0.07 $ 0.01
=========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 2,002,064 2,005,158 2,005,121
=========== =========== ===========
AVERAGE NUMBER OF COMMON AND
DILUTIVE SHARES OUTSTANDING 2,111,426 2,086,505 2,046,813
=========== =========== ===========
Net income $ 177,149 $ 148,016 $ 13,771
Other comprehensive income net of tax:
Net unrealized gain on available-for-sale securities 12,215
----------- ----------- -----------
Comprehensive income $ 189,364 $ 148,016 $ 13,771
=========== =========== ===========
See notes to consolidated financial statements.
12
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
----------------------- PAID COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT IN-CAPITAL INCOME EARNINGS STOCK EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, NOVEMBER 1, 1997 2,005,121 $ 2,005 $ 130,357 $ $ 48,138 $ $ 180,500
Stock compensation expense 50,500 50,500
Net income 13,771 13,771
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 1998 2,005,121 2,005 180,857 0 61,909 0 244,771
Stock compensation expense 6,666 7 19,994 20,001
Net income 148,016 148,016
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 1999 2,011,787 2,012 200,851 0 209,925 0 412,788
Unrealized gain on
available-for-sale
securities 12,215 12,215
Treasury stock (31,600) (55,500) (55,500)
Net income 177,149 177,149
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 2000 1,980,187 $ 2,012 $ 200,851 $ 12,215 $ 387,074 $ (55,500) $ 546,652
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
13
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
OCTOBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 177,149 $ 148,016 $ 13,771
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 74,753 57,873 52,770
Gain on sale of equipment (4,342)
Deferred income taxes (97,198) (281,673) (245,447)
Stock-based compensation 20,001 50,500
Changes in assets and liabilities:
Restricted cash 437,683 (473,710) (240,241)
Accounts receivable (17,565) (90,632) (151,937)
Receivable from affiliated entities 29,770 (3,876)
Prepaid expenses and other assets (51,356) 26,864 (135,465)
Deferred direct costs (3,868,518) (5,706,526) (3,123,422)
Net premiums payable to insurance companies (2,456,377) 1,385,054 451,917
Accounts payable and accrued expenses 156,358 150,665 346,240
Accounts payable to affiliated entities (33,287) 15,914
Income taxes payable (249,596) 18,630 (134,113)
Deferred rent 9,435 32,104
Deferred revenues 4,134,977 6,296,294 3,754,557
----------- ----------- -----------
Net cash (used in) provided by
operating activities (1,750,255) 1,575,101 651,168
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (58,008) (71,168) (167,148)
Proceeds from sale of equipment 7,000
Net purchase of short-term investments (430,063)
Net decrease in certificates of deposit 120,000
----------- ----------- -----------
Net cash used in investing activities (488,071) (64,168) (47,148)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (55,500)
Payments on capital lease obligation (2,827)
Payments on notes payable to affiliated entity (73,189)
Payments on payables to Company stockholder (54,740)
Payment of note receivable from stockholder 115,586
----------- ----------- -----------
Net cash used in financing activities (58,327) (12,343)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,296,653) 1,510,933 591,677
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,424,934 1,914,001 1,322,324
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,128,281 $ 3,424,934 $ 1,914,001
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 13,820 $ 1,911 $ 8,100
=========== =========== ===========
Cash paid for income taxes $ 334,157 $ 373,483 $ 389,000
=========== =========== ===========
Supplemental schedule of noncash investing activity
Purchase of equipment through capital lease obligation $ 31,000 $ $
=========== =========== ===========
See notes to consolidated financial statements.
14
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - M.B.A. Holdings, Inc. and subsidiary (the "Company")
are located in Scottsdale, Arizona and are principally engaged in selling
mechanical breakdown insurance policies ("MBIs") (as an agent for insurance
companies), selling vehicle service contracts ("VSCs") for new automobiles,
trucks, recreational vehicles, and travel trailers, and providing claims
administrative services for the mechanical breakdown insurance policies and VSCs
sold. The consolidated financial statements include the accounts of M.B.A.
Holdings, Inc. and its wholly-owned subsidiary, Mechanical Breakdown
Administrators, Inc. All significant intercompany balances and transactions have
been eliminated.
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America. Significant
accounting policies are as follows:
a. CASH AND CASH EQUIVALENTS - The Company considers all cash and highly
liquid investments with original maturities of three months or less
when purchased to be cash equivalents.
b. RESTRICTED CASH represents claims payment advances provided by the
insurance companies, to enable the Company to make claims payments on
behalf of the insurance companies.
c. INVESTMENTS, which are primarily marketable debt and equity
securities, are classified as available-for-sale and are stated at
estimated fair value as of October 31, 2000. Fair value is estimated
based on quoted market prices.
d. PROPERTY AND EQUIPMENT - The historical cost of computer equipment,
office equipment and furniture is depreciated by accelerated and
straight-line methods over their estimated useful lives which range
from three to seven years. The accelerated depreciation method used
for computer equipment and office equipment is a double declining
balance method. The double declining balance method depreciates the
assets more quickly during the earlier years of their useful lives
whereas the straight-line method depreciates the assets evenly over
their lives. Leasehold improvements are amortized over the shorter of
the life of the asset or the related lease term.
The Company reviews its long-lived assets for possible impairment in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121 whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable, and has concluded
that no impairment charge is necessary during 2000, 1999 or 1998. If
the Company found an instance where impairment existed, the Company
would record the asset at its fair value based on estimated discounted
cash flows.
Under guidelines established by the American Institute of Certified
Public Accountants in Statement of Position 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
("SOP 98-1"), the Company has capitalized $26,959 of such costs in the
accompanying consolidated balance sheet at October 31, 2000.
e. BENEFIT PLAN - The Company has a profit-sharing plan covering
substantially all employees who have attained the age of 21 and have
completed one year of service. Participation commences on the earliest
plan entry date after an employee meets eligibility requirements. The
only contributions made to the plan are discretionary employer
contributions. No discretionary contributions were made during the
years ended October 31, 2000, 1999 and 1998.
15
f. NET PREMIUMS PAYABLE TO INSURANCE COMPANIES represent premiums
collected from the policyholders on behalf of the insurance companies.
Amounts collected are periodically remitted to the appropriate
insurance company.
g. REVENUE RECOGNITION - Net revenues includes the commissions earned on
sales of MBIs, fees for providing administrative claims services
related to the MBIs sold and revenues related to the sales and
servicing of VSCs.
The Company receives one fee (commission) related to the sale of MBIs
which covers both the revenue earned for selling the policy and the
fee for providing administrative claims services. The Company
apportions the revenue consistent with the values associated with each
service provided. The revenues for commissions earned on policy sales
are recorded when the policy information is received and approved by
the Company. The revenues for the fee related to providing
administrative claims services are deferred and recognized in income
on a straight-line basis over the actual life of the related policy.
Costs directly related to the acquisition of the contract or policy
that would not have been incurred but for the acquisition of the
contract or policy (incremental direct acquisition costs) are deferred
and charged to expense in proportion to the revenue recognized.
Customers generally have the right to cancel their policy or vehicle
service contract at any time. When a customer cancels the policy or
contract, the unused portion of the policy or contract is returned to
the customer less a cancellation fee as described in the contract and
permitted by state law. The Company, insurance companies, and
sub-agents (if applicable) repay the remaining balance on the policy
in the same proportion as received at the time of the initial sale.
The cancellation fee is retained entirely by the Company. When a
policy is cancelled, the Company records the Company's portion of the
cancellation repayment (net of any cancellation fee received and net
of any related deferred revenue) as a reduction or increase (as
applicable) in total revenues. The amount of cancellation repayments,
net of cancellation fees received, historically has not been
significant.
All of the MBIs sold represent insurance policies between the
insurance companies and the purchaser. The insurance company retains
responsibility for the cost of any claims made in accordance with the
policies. The Company only acts as a sales agent and claims
administrator and does not assume the role of obligor at any time
during the life of the policies.
VSCs represents contracts between the Company and the purchaser for
which the Company obtains an insurance policy which guarantees the
Company's 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 associated with the sales and servicing of these contracts
are deferred and recognized in income on a straight-line basis over
the actual life of the contracts.
h. INCOME TAXES - 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.
i. NET INCOME PER SHARE - 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.
16
NUMBER OF SHARES USED IN COMPUTING INCOME PER SHARE
YEAR ENDED OCTOBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Average number of common shares
outstanding - Basic 2,002,064 2,005,158 2,005,121
Dilutive shares from common stock options
calculated using the treasury stock method 109,362 81,347 41,692
--------- --------- ---------
Average number of common and dilutive shares
outstanding 2,111,426 2,086,505 2,046,813
========= ========= =========
j. STOCK-BASED COMPENSATION -The Company adopted SFAS No. 123 during 1997
which requires expanded disclosures of stock-based compensation
arrangements with employees and encourages, but does not require,
compensation costs to be measured based on the fair value of the
equity instrument awarded. The Company has elected to measure its
stock-based compensation awards to employees based on the provisions
of APB Opinion No. 25. APB No. 25 allows recognition of compensation
cost based on the intrinsic value of the equity instrument awarded
rather than fair value.
k. COMPREHENSIVE INCOME consists of net income and other gains and losses
affecting stockholders' equity that, under generally accepted
accounting principles, are excluded from net income. For the Company,
such items consist primarily of unrealized gains and losses on
marketable equity investments.
l. USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
m. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the
Company's financial instruments approximate fair value as the rates in
effect approximate current rates obtainable in an open market.
n. NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the FASB issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
SFAS No. 133 requires that an enterprise recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. The Company adopted SFAS No. 133 effective
November 1, 2000, and the adoption did not have a material impact on
the Company.
2. RELATED PARTY TRANSACTIONS
PREPAID EXPENSES AND OTHER ASSETS:
Included in Prepaid expenses and other assets at October 31, 2000 is $25,472
prepaid rent for office space paid to an entity owned by the Company's majority
stockholder (See Note 6).
NOTE RECEIVABLE FROM STOCKHOLDER
In 1997, the Company advanced $115,586 to the Company's majority stockholder.
The note had an interest rate of 8% and was repaid in fiscal 1998.
NOTE PAYABLE TO AFFILIATED ENTITY
The Company had a note payable to an affiliated entity at October 31, 1997
consisting of $73,189 of borrowings at a variable interest rate (6% as of
October 31, 1997). The interest rate was determined annually based on the
Internal Revenue Service imputed interest rate. The balance was repaid in full
during 1998.
17
3. MARKETABLE SECURITIES
The following table summarizes the Company's marketable securities as of October
31,2000:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COSTS GAINS LOSSES VALUE
--------- --------- --------- ---------
Marketable Securities:
Corporate bonds $ 195,065 $ 15,566 $ 210,631
Other securities 127,783 $ (3,351) 124,432
Money market 107,215 107,215
--------- --------- --------- ---------
Total Marketable Securities
at October 31, 2000 $ 430,063 $ 15,566 $ (3,351) $ 442,278
========= ========= ========= =========
The corporate bonds have maturities in excess of ten years.
There were no marketable securities in 1999. Proceeds from sales and maturities
of marketable securities were $128,374 in 2000. Net realized losses are included
in other income.
4. INCOME TAXES
Income taxes were as follows for the years ended October 31:
2000 1999 1998
--------- --------- ---------
Current $ 182,914 $ 392,114 $ 254,887
Deferred (97,198) (281,674) (245,447)
--------- --------- ---------
Total income tax expense $ 85,716 $ 110,440 $ 9,440
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of deferred income tax assets at October 31 were as follows:
2000 1999
--------- ---------
Deferred revenue $ 878,098 $ 710,678
Allowance for doubtful accounts 7,800 (10,000)
Accrued compensation 39,552 120,258
Depreciation (46,632) (48,619)
Other 5,008 14,311
--------- ---------
Net deferred income tax assets $ 883,826 $ 786,628
========= =========
18
The effective income tax rate differs from the federal statutory income tax rate
in effect each year as a result of the following items:
2000 1999 1998
---- ---- ----
Federal statutory income tax rate 34% 34% 34%
State taxes 6 6 6
Other (7) 3 1
--- --- ---
Effective income tax rate 33% 43% 41%
=== === ===
5. STOCK OPTIONS AND STOCK AWARDS
During the year ended October 31, 1998, the Company issued stock options to
certain employees. The Company applies APB Opinion No. 25 and related
interpretations in measuring compensation expense for its stock options. During
the years ended October 31, 2000, 1999 and 1998, compensation expense of $0, $0
and $50,500, respectively, was recognized for the difference between the option
exercise price and the estimated fair value of the common stock at the date of
grant. Had compensation cost for the Company's stock options been determined
based on the fair value of the options at the date of grant consistent with SFAS
No. 123, the Company's net income and net income per share would have been
adjusted as presented below. Using the Black-Scholes model for common stock
option valuation, the Company estimated volatility of 84.7%, risk free interest
rate at 6%, and a dividend yield of 0%. All stock options are vested and
exercisable when granted.
A summary of the Company's outstanding options as of October 31, 2000 is
presented below along with pro-forma income statement information consistent
with SFAS No. 123.
EXERCISE EXPIRATION
OPTIONS PRICE DATE
------- ----- ----
33,334 $ 2.25 February 15, 2006
25,000 1.20 September 30, 2008
1,667 1.20 October 31, 2008
100,000 0.94 June 1, 2008
20,000 1.05 September 30, 2008
5,000 1.05 October 31, 2008
-------
185,001
=======
2000 1999 1998
-------- -------- ---------
Net income (loss) As reported $177,149 $148,016 $ 13,771
Pro forma $177,149 $148,016 $(184,824)
Basic net income per share As reported $ 0.09 $ 0.07 $ 0.01
Diluted net income per share $ 0.08 $ 0.07 $ 0.01
Basic net income (loss) per share Pro forma $ 0.09 $ 0.07 $ (0.09)
Diluted net income (loss) per share $ 0.08 $ 0.07 $ (0.09)
19
A summary of the activity regarding the Company's outstanding options for the
years ended October 31 is presented below:
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Options outstanding at beginning of year 185,001 $ 1.23 185,001 $ 1.23 39,834 $ 2.32
Options granted -- -- -- -- 160,167 1.13
Options exercised -- -- -- -- -- --
Options cancelled -- -- -- -- (15,000) 3.06
-------- -------- -------- -------- -------- --------
Options outstanding at end of year 185,001 $ 1.23 185,001 $ 1.23 185,001 $ 1.23
======== ======== ======== ======== ======== ========
Fair value of options granted during the year $ .79
========
During 1999, the Company accrued for the issuance of 6,666 shares of common
stock to an employee. In connection therewith, the Company recorded $20,001 of
compensation expense.
In addition to the options and shares issued during the year ended October 31,
1998, discussed above, the Company also has reserved, for issuance, various
options and shares to employees which are based on the occurrence of future
events including the Company reaching certain sales levels. Under an arrangement
approved by the Board of Directors, the CEO and Vice-President each will be
granted options if sales growth goals are met. For every $5 million in sales
growth, the CEO will receive options to purchase 1,667 shares at an exercise
price of 80 percent of market price at the date sales goals are met. The
President will receive options to purchase 5,000 shares at an exercise price of
70 percent of the market price at the date sales goals are met, for every $5
million in sales growth.
6. OPERATING AND CAPITAL LEASES
The Company has operating leases for office space and equipment and a capital
lease for equipment which expire on various dates through the year ending
October 31, 2004. The equipment under capital lease is included in property and
equipment at October 31, 2000 with a value of $34,519, net of accumulated
amortization of $986. Total rental expense was approximately $326,000, $293,000
and $248,000 for the years ended October 31, 2000, 1999 and 1998, respectively.
Future minimum lease payments under noncancelable lease agreements at October
31, 2000 are as follows:
OPERATING CAPITAL
LEASES LEASE
-------- --------
2001 $285,982 $ 12,776
2002 272,284 12,776
2003 274,378 8,517
2004 45,930
-------- --------
Total $878,574 $ 34,069
========
Less portion representing interest 5,896
--------
Total 28,173
Less current portion 9,333
--------
Long-term portion - net $ 18,840
========
20
The Company leases its office space from an affiliate of the Company's majority
stockholder. Rent expense for this office space was $237,290, $206,500 and
$187,067 for the years ended October 31, 2000, 1999 and 1998, respectively. A
new lease was signed with the affiliate on January 1, 1999 which expires on
December 31, 2003.
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
expires on February 28, 2001. Borrowing 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 October 31, 2000.
8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE YEAR ENDED 10/31/00
------------------------------------------------------
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
----------- ----------- ----------- -----------
Net sales $ 1,911,844 $ 2,015,081 $ 2,245,294 $ 2,151,657
Gross profit 796,532 829,746 775,776 732,757
Net income (loss) 111,631 51,937 75,444 (61,863)
Net income (loss) per share 0.06 0.03 0.04 (0.04)
FOR THE YEAR ENDED 10/31/99
------------------------------------------------------
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
----------- ----------- ----------- -----------
Net sales $ 1,113,536 $ 1,196,789 $ 1,516,891 $ 1,770,308
Gross profit 565,190 724,219 760,930 942,749
Net income (loss) (22,003) 51,208 20,363 98,448
Net income (loss) per share (0.01) 0.03 0.01 0.04
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had disagreements with its accountants on any matter
regarding accounting principles or financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors consists of five people. All Directors hold
offices until the next annual meeting at which time there is an election for
their successors.
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Gaylen M. Brotherson 61 President, CEO, Chairman of the Board, Director
Judy K. Brotherson 54 Vice-President, Director
Edward E. Wilczewski 60 Director
Keith A. Cannon 60 Director
Michael Brady 59 Director
Gaylen and Judy Brotherson are husband and wife. No other family relationship
exists between the Directors or the executive officers.
THE BUSINESS EXPERIENCE OF EACH OF THE COMPANY'S DIRECTORS IS AS FOLLOWS:
Gaylen Brotherson, 61, became President, CEO, Chairman of the Board, and
Director of the Company in November 1995. He was the founder of Mechanical
Breakdown Administrators, Inc. Mr. Brotherson served in the United States Navy.
In 1960, he received his life, health and accident licenses as well as his
property and casualty license. Presently, he is licensed as an insurance agent
in 27 states. He has been in the vehicle service contract business since 1974.
Since 1984 he has been actively involved in marketing and administering
mechanical breakdown insurance policies and VSCs under Mechanical Breakdown
Administrators, Inc. Also, Mr. Brotherson serves on the Board of Directors of
Bank USA, in Phoenix, AZ.
Judy Brotherson, 54, has been Vice-President and Director of the Company since
November 1995. Mrs. Brotherson is a graduate of Creighton University. Since
1975, she has worked primarily in family owned businesses. She holds insurance
licenses in approximately 32 states. She was one of the chief designers of the
MBA software management system. She has been working at MBA since 1989 primarily
involved in overseeing the finance and data-entry departments.
Edward Wilczewski, 60, has been a Director of the Company since June 1998. Mr.
Wilczewski served in the Navy for six years. Mr. Wilczewski is a graduate of the
University of Omaha. Primarily for the past thirty years including the present
time, he has owned and operated The Charter Group of Arizona, a real estate
development company. His company has developed various real estate projects
ranging from single family homes to apartment complexes.
Keith Cannon, 60, has been a Director of the Company since December 2000. Mr.
Cannon is a graduate of the University of Utah. Primarily for the past thirty
years including the present time, he has worked in the securities industries.
Currently, he is the Branch Manager at Wilson-Davis & Co. where he supervises
the trading with a variety of domestic and international clients. In addition,
Mr. Cannon is a Director of two other public companies which are unrelated to
M.B.A. Holdings, Inc. or its subsidiaries. They are the Montgomery Realty Group,
Inc. and On-Point Technology Systems, Inc.
Michael Brady, 59, has been a Director of the Company since December 2000. Mr.
Brady is a graduate of Creighton University. For the last 35 years, he has been
a lawyer and business person operating domestically and internationally.
Specifically, for the last several years, he has been the Chairman of the
European Trade Link Company, which is an international distribution company.
Also, he is the President of Vandermaal/Brady International Inc., which is a US
22
based international consulting company. From July 1998 to December 1999, he
served as the Chairman of American Bantrust Mortgage Services Corp. which is a
US based mortgage banking company. From 1997 to August 1999, he served on the
Board of Directors of Modis Training Technologies Inc. which was a US based
semiconductor training company. From 1990 to 1996, he started as the Chief Legal
Counsel and became the Chief Executive Officer of Metrol Security Services Inc.
which was a US based multi-state full service burglar, fire alarm installation
and monitoring company.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Michael Zimmerman, 30, is the Chief Financial Officer. He joined the Company in
September of 1999. Prior to joining the Company, Mr. Zimmerman worked at
PacifiCare, Inc. from November of 1997 to September of 1999 as the accounting
supervisor in charge of the day to day accounting for the Nevada HMO and the
Nevada and Arizona life insurance products. Prior to joining PacifiCare, Inc.,
Mr. Zimmerman was an employee from September 1993 to November 1997 at the
international accounting and consulting firm KPMG Peat Marwick LLP.
Shelly Beesley, 35, is the Corporate Secretary and Assistant to the President.
She has been employed by the Company since January 1993. She originally served
as the Executive Assistant for the President and Vice President. At the
beginning of 1996, Mrs. Beesley became the corporate secretary. Also, in 1996
Mrs. Beesley served as a Director to the company. Prior to joining the Company,
Mrs. Beesley worked in the automotive industry as a Systems Administrator,
Customer Service Manager and Assistant Sales Manager.
Michael Gannon, 44, is the Information Systems Manager. He is a graduate of
Devry Technical Institute. Mr. Gannon has been employed by the Company since
January 1995. He has helped develop MBA's integrated computer system to serve
all customer service, claims, data entry, and sales functions for all the
different products MBA offers.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides the annual and other compensation of the Chief
Executive Officer and any other employee who qualifies under Regulation S-K
section 229.402 for the years ended October 31, 1998, 1999 and 2000.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -----------------------
RESTRICTED STOCK
STOCK OPTION
(SHARES) (SHARES)
NAME OF PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) AWARDS AWARDS
----------------- -------- ---- ------ ----- -------- ------ ------
Gaylen M. Brotherson Chairman of Board and 1998 $165,497 $150,000 $20,522 $26,667
Chief Executive Officer 1999 150,797 24,672
2000 50,000 100,000 22,115
Judy K. Brotherson Vice-President 1998 50,000 10,910 125,000
1999 50,000
2000 50,000 100,000 6,551
Richard John, Jr. (2) Vice President - Sales 1998 303,732
1999 272,836 18,337
2000 Terminated
----------
(1) Included in Other Annual Compensation are an auto lease paid for Gaylen
Brotherson in fiscal 1998, 1999 and 2000, an auto lease paid for Judy
Brotherson in fiscal 1998, auto insurance for Gaylen Brotherson in fiscal
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1998, 1999 and 2000, auto insurance for Judy Brotherson in fiscal 1998,
1999 and 2000, and life insurance premiums for Gaylen Brotherson and Judy
Brotherson in years 1998, 1999 and 2000.
(2) Richard John's employment at the Company ended October of 1999.
OPTION GRANTS IN LAST FISCAL YEAR
None
OTHER INCENTIVES AND COMPENSATION
The Company does not have a formal stock option plan. Currently, stock options
are granted by the Board of Directors. At October 31, 2000, there were only two
employees, Gaylen Brotherson and Judy Brotherson, who had stock options. All
options are exercisable. Below is a summary of existing options.
NUMBER OF STRIKE EXPIRATION
NAME SHARES PRICE DATE
---- ------ ----- ----
Gaylen Brotherson 33,334 $2.25 2/15/06
25,000 $1.20 10/31/08
1,667 $1.20 10/31/08
Judy Brotherson 100,000 $0.94 6/1/08
20,000 $1.05 9/30/08
5,000 $1.05 10/31/08
In addition per the Board of Directors' resolution dated February 15, 1996,
Gaylen Brotherson receives an option to purchase 1,667 shares at 80% of the
stock's fair market value for each $5,000,000 increase in sales after
$25,000,000 on the date the sales goals are reached. Per the Board of Directors'
resolution dated June 1, 1998, Judy Brotherson receives an option to purchase
5,000 shares at 70% of the stock's fair market value for each $5,000,000
increase in sales after $25,000,000 on the date the sales goals are reached.
These options will expire ten years from the grant date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of October 31, 2000 concerning
shares of Common Stock with $.001 par value, the Company's only voting
securities. This table includes all beneficial owners who own more than 5% of
the outstanding voting securities, each of the Company's directors by each
person who is known by the Company to own beneficially more than 5% of the
outstanding voting securities of the Company, and by the Company's executive
officers and directors as a group.
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER PERCENT OF CLASS
-------------- ------------------- ------------------- ----------------
Common Stock Gaylen Brotherson 878,615 shares (1) 44.4%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock Judy Brotherson 801,301 shares (1) 40.5%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock Keith Cannon 94,500 shares (1) 4.8%
2300 Shawn Court
Carlsbad, CA 92008
Common Stock CEDE & Co 107,910 shares 5.4%
Box 220
Bowling Green Station
New York, NY 10274
Common Stock All Directors and 1,777,416 shares 89.8%
Executive Officers as
a Group (five people)
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----------
(1) This amount represents shares owned and excludes the 60,001 options to
purchase common stock for Gaylen Brotherson and the 125,000 options to
purchase common stock for Judy Brotherson. If these options were exercised
by Gaylen Brotherson and Judy Brotherson, then their percentage of
ownership would change to 43.4% and 42.8%, respectively (see Item 6.
Executive Compensation).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had a note payable with Gaylen Brotherson, the Chief Executive
Officer. As of October 31, 1997 the unpaid balance equaled $73,189. The note was
unsecured and paid per annum with a variable interest rate. The variable
interest rate was equal to the imputed IRS rate for non-interest bearing loans.
During 1998, the Company repaid the note in full. At the time of repayment the
interest rate was 6%.
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 $237,290, $206,500 and $187,067 for the
years ended October 31, 2000, 1999 and 1998, respectively. The Company signed a
new lease with the affiliated entity on January 1, 1999. This new lease expires
on December 31, 2003.
During August 2000, the Company loaned 1st Defense Industries $78,252. The owner
of 1st Defense Industries is Gaylen Brotherson, the Chief Executive Officer. The
loan is for five years and has an interest rate of 5% with interest only
payments for the first five years.. During fiscal 2000, 1st Defense paid the
Company $647.31 which was recorded in interest income. In October 2000, Cactus
Partnership purchased the loan from the Company in lieu of rent. At October 31,
2000 the loan due from 1st Defense Industries equaled $0.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report under Part II Item 8:
Reference is made to the Index to Financial Statements and Financial Statement
Schedules included in Item 8 of Part II hereof, where such documents are listed.
Exhibits as required by Item 601 of Regulation S-K:
3(i) - Articles of Incorporation (incorporated by reference to Exhibit 3(i)
to the Registrant's Registration Statement on Form 10 (file number
000-28221) filed with the Commission on November 19, 1999).
3(ii) - Bylaws of the Company (incorporated by reference to Exhibit 3(ii) to
the Registrant's Registration Statement on Form 10 (file number
000-28221) filed with the Commission on November 19, 1999).
10(a) - General Agency Agreement between American International Group, Inc.
under its subsidiaries, National Union Fire Insurance Company and New
Hampshire Insurance Company, and Mechanical Breakdown Administrators,
Inc. (incorporated by reference to Exhibit 10(a) to the Registrant's
Registration Statement on Form 10 (file number 000-28221) filed with
the Commission on November 19, 1999).
(b) - Agency Agreement between American Bankers Insurance Company of Florida
and Mechanical Breakdown Administrators, Inc. (incorporated by
reference to Exhibit 10(b) to the Registrant's Registration Statement
on Form 10 (file number 000-28221) filed with the Commission on
November 19, 1999).
(c) - Claims Service Agreement between American Bankers Insurance Company of
Florida and Mechanical Breakdown Administrators, Inc. (incorporated by
reference to Exhibit 10(c) to the Registrant's Registration Statement
on Form 10 (file number 000-28221) filed with the Commission on
November 19, 1999).
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(d) - Contractual Liability Insurance Policy for Extended Service Contract
and Administration/Agency Agreement between American Modern Home
Insurance Company and Mechanical Breakdown Administrators, Inc.
(incorporated by reference to Exhibit 10(d) to the Registrant's
Registration Statement on Form 10 (file number 000-28221) filed with
the Commission on November 19, 1999).
(e) - Board of Directors resolution dated February 15, 1996 regarding Gaylen
M. Brotherson's stock options (incorporated by reference to Exhibit
10(e) to the Registrant's Registration Statement on Form 10 (file
number 000-28221) filed with the Commission on November 19, 1999).
(f) - Board of Directors resolution dated June 1, 1998 regarding Judy K.
Brotherson's stock options (incorporated by reference to Exhibit 10(f)
to the Registrant's Registration Statement on Form 10 (file number
000-28221) filed with the Commission on November 19, 1999).
(g) - Office Lease (incorporated by reference to Exhibit 10(g) to the
Registrant's Registration Statement on Form 10 (file number 000-28221)
filed with the Commission on November 19, 1999).
(h) - Audit committee charter
11 - Statement re computation of per share earnings
21 - Subsidiary of the Company
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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.
Dated: January 26, 2001 By: /s/ Gaylen Brotherson
------------------------------------
Gaylen Brotherson
Chairman of the Board and Chief
Executive Officer
Dated: January 26, 2001 By: /s/ Michael J. Zimmerman
------------------------------------
Michael J. Zimmerman,
Chief Financial Officer
27