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, 1999
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 [ ] No [X].
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, 1999
were $3,147,982. 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 January 15, 1999, as reported on NASDAQ, was $9,053,042 As of October
31, 1999, there were 2,011,787 shares of the issuer's common stock issued and
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
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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, 1999, 1998 and 1997, the revenues related to
sales and servicing of MBI policies represented approximately 96%, 99% and 100%,
respectively, of the Company's net commission income.
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 coverage 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.
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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
and American Modern Home Insurance Co which are rated A - (Excellent) by A.M.
Best Company. Other programs are insured by New Hampshire Insurance Company, and
other AIG member companies which is rated A++ (Superior) by the A.M. Best
Company.
For the years ended October 31, 1999, 1998 and 1997, the revenues related to
sales and servicing of VSCs represented approximately 4%, 1% and 0%,
respectively, of the Company's net commission income.
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 1999 to approximately 600 as of October 31, 1999.
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.
SIGNIFICANT CUSTOMERS
The Company does not have any 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
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.
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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 years ended October 31, 1999,
1998 and 1997.
The number of policies and contracts sold for the last three fiscal years are
noted below:
Number of
Time Period Policies & Contracts
- ----------- --------------------
For the twelve months ended October 31, 1999 34,858
For the twelve months ended October 31, 1998 36,477
For the twelve months ended October 31, 1997 27,000
This increase from 1997 to 1998 is reflected in the increase in gross revenue
and net income. The majority of the increase was due to additional sales from
the Company's concerted effort to expand into the VSC and MBI policy credit
union niche. 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 speaking, 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.
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
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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 fifty individuals at October
31, 1999, an increase of approximately ten over the year ended October 31, 1998.
The increase is due to the expansion of customer service and claims
representatives to meet the needs of the Company's expanding business. 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, customer service, data entry, information
systems, finance, 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 premises, pursuant to a lease
agreement (the "Lease"), consist of approximately 16,750 square feet. The lease
expired on December 31, 1998. The Company has signed a new lease (the "New
Lease") in the same office space with total square footage equal to 19,750. The
New Lease, which commenced on January 1, 1999 and expires on December 31, 2003,
provides for annual base rent payments ranging from $212,000 to $276,000.
The premises are owned by an affiliated entity named Cactus Partnership. 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 7 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.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' 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". The number of
shareholders of record of the Company's common stock as of October 31, 1999 was
186. As of October 31, 1999 there were 2,011,787 common shares outstanding. On
that date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $2.75. The following is a summary of the price range of the Company's
common stock during its 1999 and 1998 fiscal years:
Common Stock High Low Bid
- ------------ ------------
Quarter of Fiscal 1999
First $ 2.00 $ 1.88
Second 2.75 1.75
Third 2.50 2.00
Fourth 3.50 2.50
Quarter of Fiscal 1998
First 5.00 3.00
Second 5.00 1.25
Third 3.25 1.25
Fourth 2.75 1.25
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 fourth quarter of 1999, the Company did not issue any unregistered
securities.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year ended 1999 1998(A) 1997 1996 1995
- ----------------- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $3,147,982 $2,971,464 $1,978,621 $ 675,553 $338,982
Income from continuing operations 221,612 220,825 263,377 49,752 348,673
Income per common share .11 0.11 0.13 0.02 N/A
Total Assets 5,459,210 3,239,557 2,176,874 1,588,897 693,373
L-T Obligation and redeemable preferred stock -- -- -- -- 73,880
Cash Dividends declared per common share -- -- -- -- --
</TABLE>
(A) Subsequent to the issuance of the Company's consolidated financial
statements for the year ended October 31, 1998, management determined that
revenue from VSCs, and the portion of revenue from MBI policies associated
with administering future claims, should be deferred and recognized in
income on a straight-line basis over the estimated life of the contract or
policy; that costs directly related to the acquisition of the contract or
policy that would not have been incurred but for the acquisition of that
contract or policy (incremental direct acquisition costs) should be
deferred and charged to expense in proportion to the revenue recognized;
and that all other costs should be charged to expense as incurred.
Previously, the Company recognized revenue on MBI policies and VSCs at the
time of sale and accrued the estimated future costs associated with
administering claims. As a result, the Company's 1998 financial statements
have been restated from amounts previously reported to correct the
accounting for these items. The effect on the 1997 financial statements was
not considered significant.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
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 1999 AND FISCAL YEAR 1998
Net commission income, which consists of gross income less premiums to insurers,
agent commissions, and cancellations, for the year ended October 31, 1999
totaled $3,148,000, an increase of $177,000 from net revenues of $2,971,000 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 commission
income is due to an increase of approximately 30% in premiums charged by the
insurance companies that occurred in April 1998.
Operating income decreased by $99,000 to $247,000 for the year ended October 31,
1999, from $346,000 for the year ended October 31, 1998. The decrease is
primarily due to additional mailings and postage associated with the direct mail
program performed by the Company. These costs totaled $441,000, or 14.0 percent
of net commission income, for the year ended October 31, 1999. This is an
increase from $282,000, or 9.5 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 has
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 $2,902,000 for the
year ended October 31, 1999, compared to $2,626,000 for the year ended October
31, 1998. As a percentage of net commission income, operating expenses were 92.2
percent for the year ended October 31, 1999, compared to 88.4 percent for the
year ended October 31, 1998. The increase in expenses is due to 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. These items have accounted for the increase in general and administrative
expense.
Net income for the year ended October 31, 1999 was $222,000, compared to net
income for the year ended October 31, 1998 of $221,000, which is a result of the
foregoing factors. Although operating income was higher for fiscal 1998, the
Company better utilized cash in the bank to earn interest income in fiscal 1999.
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COMPARISON OF FISCAL YEAR 1998 AND FISCAL YEAR 1997
Net commission income, which consists of gross income less premiums to insurers,
agent commissions, and cancellations, for the fiscal year ended October 31, 1998
totaled $2,971,000, an increase of $992,000 from net revenues of $1,979,000 for
the fiscal year ended October 31, 1997. This increase is consistent with the
increase in the number of policies sold in fiscal 1998 versus fiscal 1997. In
1998 and 1997, there were 36,477 and 27,000 policies sold, respectively. The
increase is due to an increase in the credit union and direct mail number of
policies sold.
Operating income increased by $82,000 to $346,000 for the fiscal year ended
October 31, 1998, from $264,000 for the fiscal year ended October 31, 1997. As a
percentage of net commission income, operating income decreased by 1.7
percentage points to 11.6% for the fiscal year ended October 31, 1998 from 13.3%
for the fiscal year ended October 31, 1997. This decrease is due to the VSC
program generating sales in 1998 as opposed to no sales in 1997. According to
FTB 90-1 Accounting for Separately Priced Extended Warranty and Product
Maintenance Contracts, the VSC revenue is being recognized in income over the
estimated life of the contract.
Mailings and postage associated with the direct mail product totaled $282,000,
or 9.5 percent of net commission income, for the fiscal year ended October 31,
1998, an increase from $249,000, or 12.6 percent of net commission income, for
the comparable period ended October 31, 1997. This $33,000 increase was
attributable primarily to an increase in mailings during 1998 as the Company
purchased additional printers which increased its capacity to produce direct
mailing materials.
Total operating expenses including selling expenses were $2,626,000 for the
fiscal year ended October 31, 1998, compared to $1,714,000 for the fiscal year
ended October 31, 1997. As a percentage of net commission income, operating
expenses were 88.4 percent for the fiscal year ended October 31, 1998, compared
to 86.6 percent for the fiscal year ended October 31, 1997. The increase in
expenses is due to additional customer service and claims personnel. This
increase was considered necessary given the increase in sales.
In 1997, MBA pursued a lawsuit against a competitor for possible copyright
infringement on MBA's proprietary software. Ultimately, the Company settled the
lawsuit and received a cash settlement. The Company recorded $168,383 in other
income during 1997 which represented the cash received net of legal and other
fees associated with the lawsuit. The Company retained the copyrights to the
software and the competitor ceased using the software. There was no
corresponding lawsuit settlement in 1998.
As a result of the foregoing factors, the net income for the fiscal year ended
October 31, 1998 was $221,000, compared to a net income for the fiscal year
ended October 31, 1997 of $263,000.
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LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF FISCAL YEAR 1999 AND FISCAL YEAR 1998
As of October 31, 1999, the Company's cash position increased to $4,350,000,
from $2,365,000 at October 31, 1998. Of the $4,350,000, $925,000 is classified
as restricted cash; there was $451,000 of restricted cash at October 31, 1998.
The largest component of the restricted cash was claims payment advances
provided by insurance companies. This enables the Company to make claims
payments on behalf of the insurance companies.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of October 31, 1999, the amount owed to the
insurance companies increased to $2,894,000, from $1,509,000 at October 31,
1998, which is primarily because gross sales were accelerating.
The Company is not operating with a working capital line of credit from any
facility or any other debt instrument. 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 on a
long-term basis.
COMPARISON OF FISCAL YEAR 1998 AND FISCAL YEAR 1997
As of October 31, 1998, the Company's cash position increased to $2,365,000,
from $1,553,000 at October 31, 1997. Of the $2,365,000, $451,000 is classified
as restricted cash; there was also $211,000 of restricted cash at October 31,
1997. The largest component of the restricted cash was funds provided by
insurance companies for claims payment advances. This enables the Company to
make claims payments on behalf of the insurance companies.
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. The Company will receive cash for a policy and
deposit it into a bank account for the appropriate insurance company. Then the
Company will remit the amount due to the insurance company on a timely basis.
Due to the timing of when cash is deposited into the Company's bank accounts and
when a check is issued to the insurance companies, there will be a liability
owed to the insurance companies. This liability has constant turnover as money
is paid to the insurance companies and additional money is received for
premiums. As of October 31, 1998, the amount owed to the insurance companies
increased to $1,509,000, from $1,057,000 at October 31, 1997. An increase in the
amount owed to insurance companies is due to an increase in gross sales for the
year ended October 31, 1998 from the year ended October 31, 1997.
During 1998, the Company repaid a note payable to a related party. The balance
on the note as of October 31, 1997 was $73,189. The funds used to repay the note
were from operations. This payment did not have an adverse effect on the
Company's cash flow.
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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, 1999, 1998 and 1997:
Independent Auditors' Report .............................. F-1
Consolidated Balance Sheets ............................... F-2
Consolidated Statements of Income ......................... F-4
Consolidated Statements of Stockholders' Equity ........... F-5
Consolidated Statements of Cash Flows ..................... F-6
Notes to Consolidated Financial Statements ................ F-7
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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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended October 31, 1999. 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 generally accepted auditing
standards. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 7, the accompanying 1998 consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 5, 2000
F-1
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M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
----------- -----------
As Restated,
See Note 7
CURRENT ASSETS:
Cash and cash equivalents $ 3,424,934 $ 1,914,001
Restricted cash 924,698 450,988
Receivables:
Accounts receivable, net of allowance
for doubtful accounts of $19,025 (1999)
and $10,000 (1998) 336,805 256,173
Receivable from affiliated entities (Note 2) 29,770
Prepaid expenses and other assets 109,888 136,752
Deferred income tax asset (Note 3) 194,902 89,261
----------- -----------
Total current assets 4,991,227 2,876,945
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 174,381 148,493
Office equipment and furniture 149,309 136,929
Vehicle 16,400 16,400
Leasehold improvements 69,053 61,153
Capitalized software costs 17,500
----------- -----------
Total property and equipment 426,643 362,975
Accumulated depreciation and amortization (154,267) (101,236)
----------- -----------
Property and equipment - net 272,376 261,739
DEFERRED INCOME TAX ASSET (Note 3) 195,607 100,873
----------- -----------
TOTAL $ 5,459,210 $ 3,239,557
=========== ===========
(Continued)
See notes to consolidated financial statements.
F-2
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---------- ------------
AS RESTATED,
SEE NOTE 7
CURRENT LIABILITIES:
Net premiums payable to insurance companies $2,893,591 $1,508,537
Accounts payable and accrued expenses 547,443 406,778
Accounts payable to affiliated entity (Note 2) 33,287
Deferred revenues 457,593 208,362
Income taxes payable (Note 3) 94,159 75,529
---------- ----------
Total current liabilities 3,992,786 2,232,493
DEFERRED RENT 32,104
DEFERRED REVENUES 475,891 290,248
---------- ----------
Total liabilities 4,500,781 2,522,741
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
STOCKHOLDERS' EQUITY (Note 4):
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 (1999) and 2,005,121 (1998)
shares issued and outstanding 2,012 2,005
Additional paid-in-capital 200,851 180,857
Retained earnings 755,566 533,954
---------- ----------
Total stockholders' equity 958,429 716,816
---------- ----------
TOTAL $5,459,210 $3,239,557
========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
AS RESTATED,
SEE NOTE 7
NET COMMISSION INCOME $ 3,147,982 $ 2,971,464 $ 1,978,621
----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 1,544,793 1,552,347 877,031
Mailings and postage 441,332 282,018 249,105
Rent and lease expense 286,785 248,418 153,421
Professional fees 159,105 193,259 174,197
Telephone 149,282 80,905 64,530
Depreciation and amortization 57,873 52,770 42,190
Merchant and bank charges 18,111 22,992 15,503
Insurance 29,029 42,717 35,841
Supplies 46,353 30,676 34,701
License and fees 12,756 9,180 3,521
Other operating expenses 156,082 110,672 64,242
----------- ----------- -----------
Total operating expenses 2,901,501 2,625,954 1,714,282
----------- ----------- -----------
OPERATING INCOME 246,481 345,510 264,339
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Proceeds from settlement
of lawsuit 168,383
Finance fee income 50,567 14,210 10,937
Interest income 122,829 62,880 30,191
Interest expense (5,996) (8,103) (13,313)
Other expense (531) (39,480) (28,123)
----------- ----------- -----------
Total other income 166,869 29,507 168,075
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 413,350 375,017 432,414
INCOME TAXES (Note 3) 191,738 154,192 169,037
----------- ----------- -----------
NET INCOME $ 221,612 $ 220,825 $ 263,377
=========== =========== ===========
BASIC AND DILUTED
NET INCOME PER SHARE $ 0.11 $ 0.11 $ 0.13
=========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 2,005,158 2,005,121 2,002,343
=========== =========== ===========
AVERAGE NUMBER OF COMMON AND
DILUTIVE SHARES OUTSTANDING 2,086,505 2,046,813 2,006,777
=========== =========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------- ADDITIONAL RETAINED STOCKHOLDERS'
SHARES AMOUNT PAID-IN-CAPITAL EARNINGS EQUITY
------ ------ --------------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 1, 1996 1,998,453 $ 1,998 $ 108,692 $ 49,752 $ 160,442
Stock compensation expense 6,668 7 21,665 21,672
Net income 263,377 263,377
--------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1997 2,005,121 2,005 130,357 313,129 445,491
Stock compensation expense 50,500 50,500
Net income (As restated, see Note 7) 220,825 220,825
--------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1998
(As restated, see Note 7) 2,005,121 2,005 180,857 533,954 716,816
Stock compensation expense 6,666 7 19,994 20,001
Net income 221,612 221,612
--------- --------- --------- --------- ---------
BALANCE, OCTOBER 31, 1999 2,011,787 $ 2,012 $ 200,851 $ 755,566 $ 958,429
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
AS RESTATED,
SEE NOTE 7
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 221,612 $ 220,825 $ 263,377
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 57,873 52,770 42,190
Gain on sale of equipment (4,343)
Deferred income taxes (200,375) (100,695) (63,846)
Stock-based compensation 20,001 50,500 21,672
Changes in assets and liabilities:
Restricted cash (473,710) (240,241) (210,747)
Accounts receivable (80,632) (111,937) 41,353
Receivable from affiliated entities 29,770 (3,876) (25,894)
Prepaid expenses and other assets 26,864 (135,465) 2,572
Net premiums payable to insurance companies 1,385,054 451,917 46,524
Accounts payable and accrued expenses 140,665 306,240 32,252
Accounts payable to affiliated entities (33,287) 15,914 (85,375)
Income taxes payable 18,630 (134,113) 180,682
Deferred rent 32,104
Deferred revenues 434,874 279,329 146,723
----------- ----------- -----------
Net cash provided by operating activities 1,575,100 651,168 391,483
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (71,167) (167,148) (117,131)
Proceeds from sale of equipment 7,000
Net decrease in certificates of deposit 120,000 22,264
----------- ----------- -----------
Net cash used in investing activities (64,167) (47,148) (94,867)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable to affiliated entity (73,189) (2,998)
Payments on payables to Company stockholder (54,740) (14,880)
Payment (issuance) of note receivable
from stockholder 115,586 (115,586)
----------- ----------- -----------
Net cash used in financing activities (12,343) (133,464)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,510,933 591,677 163,152
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 1,914,001 1,322,324 1,159,172
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,424,934 $ 1,914,001 $ 1,322,324
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,911 $ 8,100 $ 7,500
=========== =========== ===========
Cash paid for income taxes $ 373,483 $ 389,000 $ 52,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
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.
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. 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. 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. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
asset, the Company will recognize an impairment loss. The Company has
concluded that no impairment charge is necessary during 1999, 1998, or
1997. If the Company found an instance where there is an impairment
loss, the Company would measure the loss as the amount by which the
carrying amount of the asset exceeds the fair value of the asset based
on estimated discounted cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 provides guidance on the accounting for the costs of computer
software developed or obtained for internal use and is effective for
financial statements for fiscal years beginning after December 15,
1998. Under the guidelines established in SOP 98-1, the Company has
capitalized $17,500 of such costs in the accompanying consolidated
balance sheet at October 31, 1999.
d. 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, 1999, 1998 and 1997.
e. 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.
F-7
<PAGE>
f. REVENUE RECOGNITION - Net commission income 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 is deferred and recognized in income on
a straight-line basis over the estimated life of the related contract,
generally three years. Policy cancellations are recorded as they
occur. 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 estimated life of the contracts, generally three years.
The consolidated financial statements for the fiscal year ended
October 31, 1998 have been restated to retroactively reflect the
adoption of a change in accounting for revenues associated with MBIs
and VSCs. (See Note 7.)
g. 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.
h. 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.
NUMBER OF SHARES USED IN COMPUTING INCOME PER SHARE
1999 1998 1997
---- ---- ----
Average number of common shares outstanding -
Basic 2,005,158 2,005,121 2,002,343
Dilutive shares from common stock options
calculated using the treasury stock method 81,347 41,692 4,434
--------- --------- ---------
Average number of common and dilutive
shares outstanding 2,086,505 2,046,813 2,006,777
========= ========= =========
F-8
<PAGE>
i. STOCK-BASED COMPENSATION -The Company adopted SFAS No. 123 during
1997. SFAS No. 123 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.
j. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles 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.
k. 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.
l. 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 statement of financial position
and measure those instruments at fair value. The statement is
effective for the Company's fiscal year ending October 31, 2001. The
Company has not completed evaluating the impact of implementing the
provisions of SFAS No. 133.
m. RECLASSIFICATIONS - Certain reclassifications have been made to the
1998 and 1997 financial statements to conform to the 1999
presentation.
2. RELATED PARTY TRANSACTIONS
RECEIVABLE FROM AFFILIATED ENTITIES
This amount represents advances by the Company to other entities owned by the
Company's majority stockholder for certain salary expenses incurred by these
other entities. The amounts due from the affiliates at October 31, 1999 and 1998
equaled $0 and $29,770, respectively. During 1999, all the amounts were repaid.
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.
ACCOUNTS PAYABLE TO AFFILIATED ENTITY
The Company leases it's office space from an affiliated entity. Total amounts
payable at October 31, 1999 and 1998 equaled $0 and $33,287, respectively. See
Note 5.
NOTE PAYABLE TO AFFILIATED ENTITY
The Company's note payable to an affiliated entity at October 31, 1997 consisted
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.
ACCOUNTS PAYABLE TO COMPANY STOCKHOLDER
The Company had a payable to the majority stockholder at October 31, 1997 which
was repaid in 1998.
F-10
<PAGE>
3. INCOME TAXES
Income taxes were as follows for the years ended October 31:
1999 1998 1997
---- ---- ----
Current $ 392,114 $ 254,887 $ 235,642
Deferred (200,376) (100,695) (66,605)
--------- --------- ---------
Total income tax expense $ 191,738 $ 154,192 $ 169,037
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of deferred income tax assets at October 31 were as follows:
1999 1998
---- ----
Deferred revenue $ 314,559 $ 202,646
Allowance for doubtful accounts (10,000) 4,100
Accrued compensation 120,258 8,886
Depreciation (48,619) (25,498)
Other 14,311
--------- ---------
Net deferred income tax assets $ 390,509 $ 190,134
========= =========
The effective income tax rate differs from the federal statutory income tax rate
in effect each year as a result of the following items:
1999 1998 1997
---- ---- ----
Federal statutory income tax rate 34 % 34 % 34 %
State taxes 6 6 6
Other 5 1 (1)
--- --- ---
Effective income tax rate 46 % 41 % 39 %
=== === ===
4. 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, 1999, 1998 and 1997, compensation expense of $0,
$50,500 and $0, 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, 1999 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
=======
F-11
<PAGE>
1999 1998 1997
---- ---- ----
Net income As reported $221,612 $220,825 $263,377
Pro forma $221,612 $22,230 $263,377
Basic and Diluted
Net Income As reported $0.11 $0.11 $0.13
Per Share Pro forma $0.11 $0.01 $0.13
A summary of the activity regarding the Company's outstanding options for the
years ended October 31 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 185,001 $1.23 39,834 $2.32 33,334 $2.25
Options granted -- -- 160,167 1.13 6,500 2.67
Options exercised -- -- -- -- -- --
Options cancelled -- -- (15,000) 3.06 -- --
------- ----- ------- ----- ------- -----
Options outstanding at end of year 185,001 $1.23 185,001 $1.23 39,834 $2.32
======= ===== ======= ===== ======= =====
Fair value of options granted
during the year $ .79 $1.36
===== =====
</TABLE>
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. During 1997, the Company accrued for the issuance of 6,668
shares of common stock to an employee. In connection therewith, the Company
recorded $21,672 of compensation expense.
In addition to the options and shares issued during the years ended October 31,
1998 and 1997, 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 President 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.
5. OPERATING LEASES
The Company has operating leases for office space and equipment which expire on
various dates through the year ending October 31, 2004. Total rental expense was
approximately $287,000, $248,000 and $153,000 for the years ended October 31,
1999, 1998 and 1997, respectively. Future minimum lease payments under
noncancelable operating leases at October 31, 1999 are as follows:
F-12
<PAGE>
2000 $ 293,359
2001 290,800
2002 277,332
2003 279,716
2004 46,828
-------
Total $1,188,036
==========
The Company leases its office space from an affiliate of the Company's majority
stockholder. Rent expense for this office space was $206,500, $187,067 and
$114,000 for the years ended October 31, 1999, 1998 and 1997, respectively. A
new lease was signed with the affiliate on January 1, 1999 which expires on
December 31, 2003.
6. 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.
In 1997, MBA pursued a lawsuit against a competitor for possible copyright
infringement on MBA's proprietary software. Ultimately, the Company settled the
lawsuit and received a cash settlement. The Company recorded $168,383 in other
income which represented the cash received net of legal and other fees
associated with the lawsuit. The Company retained the copyrights to the software
and the competitor ceased using the software.
7. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial statements
for the year ended October 31, 1998, management determined that revenue from
VSCs, and the portion of revenue from MBI policies associated with administering
future claims, should be deferred and recognized in income on a straight-line
basis over the estimated life of the contract or policy; that costs directly
related to the acquisition of the contract or policy that would not have been
incurred but for the acquisition of that contract or policy (incremental direct
acquisition costs) should be deferred and charged to expense in proportion to
the revenue recognized; and that all other costs should be charged to expense as
incurred. Previously, the Company recognized revenue on MBI policies and VSCs at
the time of sale and accrued the estimated future costs associated with
administering claims. As a result, the Company's 1998 financial statements have
been restated from amounts previously reported to correct the accounting for
these items. The effect on the 1997 financial statements was not considered
significant. A summary of the significant effects of the restatement is as
follows:
1998
-------------------------------
As Previously As
Reported Restated
-------- --------
At October 31, 1998:
Deferred Revenue $320,205 $498,610
Retained Earnings 640,997 533,954
For the year ended October 31, 1998:
Net Commission Income 3,149,869 2,971,464
Income Before Income Taxes 553,422 375,017
Net Income 327,868 220,825
Net Income Per Share-Basic and Diluted 0.16 0.11
* * * * * *
F-13
<PAGE>
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 three people. All Directors hold
offices until the next annual meeting at which time there is an election for
their successors.
Position With
Name Age Company
- ---- --- -------
Gaylen M. Brotherson 60 President, CEO, Chairman of the Board, Director
Judy K. Brotherson 53 Vice-President, Director
Edward E. Wilczewski 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, 60, 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. Since 1989 he has been actively involved in marketing and
administering Mechanical Breakdown insurance policies and VSCs under Mechanical
Breakdown Administrators, Inc.
Judy Brotherson, 53, 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, 59, 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.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Michael Zimmerman, 29, 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, 34, 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.
11
<PAGE>
Michael Gannon, 43, 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, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------- ------------------------
Restricted Stock
Stock Option
(shares) (Shares)
Name of Principal Position Year Salary Bonus Other(1) awards awards
- ----------------- -------- ---- ------ ----- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Gaylen M. Brotherson Chairman of Board 1997 $47,885 $60,000 $17,248
Chief Executive Officer 1998 165,497 150,000 20,522 $26,667
1999 150,797 24,672
Judy K. Brotherson Vice-President 1997 47,885 40,000 12,145
1998 50,000 10,910 125,000
1999 50,000
Richard John, Jr. (2) Vice President - Sales 1997 290,431 $13,334
1998 303,732
1999 272,836 18,337
</TABLE>
- ----------
(1) Included in Other Annual Compensation are an auto lease paid for Gaylen
Brotherson in fiscal 1997, 1998 and 1999, an auto lease paid for Judy
Brotherson in fiscal 1997 and 1998, auto insurance for Gaylen Brotherson in
fiscal 1997, 1998 and 1999, auto insurance for Judy Brotherson in fiscal
1997, 1998 and 1999, and life insurance premiums for Gaylen Brotherson and
Judy Brotherson in years 1997, 1998 and 1999.
(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, 1998, there were only two
employees, Gaylen Brotherson and Judy Brotherson, that 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
12
<PAGE>
In addition per the Board of Directors resolution dated February 15, 1996,
Gaylen Brotherson receives an option to purchase 1,667 shares @ 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 @ 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, 1999 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 830,955 shares(1) 41.3%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock Judy Brotherson 811,701 shares(1) 40.3%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock CEDE & Co 171,062 shares 8.5%
Box 220
Bowling Green Station
New York, NY 10274
Common Stock Shelly Beesley 334 shares 0.0%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock All Directors and 1,642,990 shares 81.7%
Executive Officers as
a Group (three people)
- ----------
(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 40.6% and 42.6%, 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%.
13
<PAGE>
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 $206,500, $187,067 and $114,000 for the
years ended October 31, 1999, 1998 and 1997, respectively. The Company signed a
new lease with the affiliated entity on January 1, 1999. This new lease expires
on December 31, 2003.
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).
(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).
11. - Statement re computation of per share earnings
21. - Subsidiary of the Company
27. - Financial Data Schedule.
14
<PAGE>
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.
/s/ Gaylen Brotherson Chairman of the Board January 31, 2000
- --------------------------- and Chief Executive Officer
Gaylen Brotherson
/s/ Michael J. Zimmerman Chief Financial Officer January 31, 2000
- ---------------------------
Michael J. Zimmerman
15
Exhibit 11. Statement re computation of per share earnings
Avg Avg Common
Common & Dilutive Basic Dilutive
Year Net Income Shares O/S Shares O/S EPS EPS
- ---- ---------- ---------- ---------- --- ---
1999 $ 221,612 2,005,158 2,086,505 $0.11 $0.11
1998 220,825 2,005,121 2,046,813 0.11 0.11
1997 263,377 2,002,343 2,006,777 0.13 0.13
Exhibit 21. Subsidiary of the Company
Mechanical Breakdown Administrators, Inc.
a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM, THE 12
MONTHS ENDED OCTOBER 31, 1999, 1998 AND 1997 INCOME STATEMENTS, AND THE OCTOBER
31, 1999, 1998 AND 1997 BALANCE SHEETS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-1998 OCT-31-1997
<PERIOD-END> OCT-31-1999 OCT-31-1998 OCT-31-1997
<CASH> 3,424,934 1,914,001 1,442,324
<SECURITIES> 0 0 0
<RECEIVABLES> 336,805 266,173 154,236
<ALLOWANCES> 19,025 10,000 10,000
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 4,991,227 2,876,945 1,952,502
<PP&E> 426,643 362,975 652,341
<DEPRECIATION> 154,267 101,236 504,980
<TOTAL-ASSETS> 5,459,210 3,239,557 2,176,874
<CURRENT-LIABILITIES> 3,855,621 2,165,493 1,512,102
<BONDS> 0 0 73,189
0 0 0
0 0 0
<COMMON> 202,863 182,857 132,362
<OTHER-SE> 755,566 533,954 313,129
<TOTAL-LIABILITY-AND-EQUITY> 5,459,210 3,239,557 2,176,874
<SALES> 3,147,982 2,625,954 1,978,621
<TOTAL-REVENUES> 3,147,982 2,625,954 1,978,621
<CGS> 0 0 0
<TOTAL-COSTS> 2,901,501 2,625,924 1,714,282
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 413,350 375,017 432,414
<INCOME-TAX> 191,738 154,192 169,037
<INCOME-CONTINUING> 221,612 220,825 263,377
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 221,612 220,825 263,377
<EPS-BASIC> 0.11 0.11 0.13
<EPS-DILUTED> 0.11 0.11 0.13
</TABLE>
