UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to______________________
Commission file number
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, Arizona 85258-5510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (480) 860-2288
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)
Indicate by check mark 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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405of this chapter) is not contained herein, and will
not 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. [ ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. As of December 31, 2003, the
aggregate market value non-affiliates of the registrant as reported on NASDAQ,
was $468,520.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
As of December 31, 2003, there were 2,061,787 shares of the issuer's common
stock issued and 2,030,187 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 42(b) or
(c) or under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for the fiscal year ended December 24, 1980). None
Part I
Item 1. Business
M.B.A. Holdings, Inc. (the "Company"), through its wholly owned subsidiary,
Mechanical Breakdown Administrators, Inc., markets and administers vehicular
mechanical breakdown insurance ("MBI") policies and sells contracts for repair
services to vehicles ("VSCs"). The MBI policies and VSC contracts are for the
repair of automobiles, light trucks, recreational vehicles, motorcycles, boats
and certain automotive components.
MECHANICAL BREAKDOWN INSURANCE
The Company acts as an agent for insurance companies and sells their MBI
policies. In addition, it provides marketing educational/support services and
arranges for sub-agents to sell the policies. After the sale, the Company
provides third-party administrative policy services (claims adjudication,
cancellation processing and technical computer services) for policies sold by
the Company or its sub-agents. The MBI policies are contracts of insurance for
repair services to vehicles that are entered into between the insurance
companies and the ultimate consumer/purchaser. The insurance company is directly
liable for the costs of claims that arise under the terms of the insurance
policy. The Company currently has agency and/or servicing agreements with
American Bankers Insurance Group of Florida, Kemper Cost Management, Inc.,
Heritage Warranty Mutual Insurance RRG, Inc., Fireman's Fund Insurance Company
and American Security Insurance Company.
MBI policies have terms that range from twelve (12) to eighty-four (84) months
and generally contain elapsed mileage limitations. Actual repairs or
replacements covered by the policies are made by independent repair facilities.
The costs of the repairs remain the responsibility of the insurance company that
provided the MBI policy.
The policy premium has been established by the insurance companies and agreed to
by the Company and insurance regulators. In general, at the time an MBI policy
is sold, approximately 51% - 60% of the premium is retained by the insurance
company, approximately 20%-36% of the premium is paid to the sub-agent (if
applicable). The remainder is paid to the Company as its sales commission and
fee for providing administrative policy services.
For the years ended October 31, 2003, 2002, and 2001, the net revenues related
to sales and servicing of MBI policies represented approximately 50%, 71% and
64%, 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 that supplement the
manufacturer's warranty and enhance the profitability of the sale of
automobiles, light trucks, recreational vehicles, motorcycles, boats and
automotive components. These contracts are sold principally through dealerships.
A VSC is a contract between the Company and the consumer/purchaser that offers
repair coverage for periods ranging from one (1) to eighty-four (84) months
and/or with mileage limitations ranging from 1,000 to 100,000 miles. The
coverage is for a broad range of possible failures of mechanical components that
may occur during the term of the contract. The coverage is supplemental to the
manufacturers' warranty. The Company is primarily responsible for the
administration of the contract and related claims during the life of the
contract.
At the time a VSC is sold, the Company purchases an insurance policy that
insures its' liability. 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 including Heritage
Warranty Mutual Insurance RRG, Inc. and Fireman's Fund Insurance Company.
2
For the years ended October 31, 2003, 2002, and 2001, the net VSC revenues less
direct acquisition costs related to sales and servicing of VSCs represented
approximately 50%, 29% and 36%, respectively, of the Company's total net
revenues less direct acquisition costs of vehicle service contracts. The
relative increase in VSC revenues as a percent of total business written is the
result of the Company's ability to establish selling agency relationships with
Internet direct marketers like Consumers' Guide and to increases in the
Company's direct Internet sales.
VIRTUAL PRIVATE NETWORK
The Company has developed a computerized sales system using the Internet that it
calls its Virtual Private Network ("VPN"). The VPN enables financial
institutions, dealerships and the general public to obtain individualized
policy/contract pricing using their personal computer. The system user provides
the VPN with the vehicle identification number of the vehicle being insured
together with a few other specific data items. The VPN returns an accurate
premium quotation and provides the customer with the ability to purchase the
policy/contract on line. When an Internet purchase is made, the system transmits
the completed application, approval and policy data directly to the financial
institution/dealership/purchaser and prints the insurance policy itself on an
on-site printer. The information gathered in the quotation process is
transmitted directly to the Company's policy management system. Payments for
Internet sales are accomplished either by credit card or by a billing to the
financial institution/dealership.
SIGNIFICANT CUSTOMERS
In 2003, a national insurance brokerage firm accounted for $2,433,000 of VSC
sales while another major customer accounted for $1,673,000 of 2003 VSC sales.
These two firms combined accounted for 77% of all 2003 VSC sales. The Company
services these accounts under contracts that are subject to renewal annually.
COMPETITION
M.B.A. Holdings, Inc. competes with a number of independent administrators,
divisions of distributors, 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. Furthermore, many manufacturers of
motor vehicles market and administer their own VSC programs for and through
their captive dealers.
SALES AND MARKETING
The Company maintains its own staff of sales and marketing personnel. This
individual conducts the sales training and motivational programs that are the
primary form of specialized assistance provided by the Company to its
retailers/dealers and financial institutions. As an adjunct to these programs,
the Company develops the training materials that are used at these educational
seminars. In addition, the Company markets its products directly to consumers
through its VPN and through selected automobile magazine advertisements.
The number of policies and contracts sold annually during the last three fiscal
years are:
Number of
Time Period Policies and Contracts
----------- --------------------------
For the twelve months ended October 31, 2003 4,858
For the twelve months ended October 31, 2002 8,130
For the twelve months ended October 31, 2001 15,847
The decline in the numbers of policies and contracts sold is due to a loss of
market share by the Company's associated credit unions. This loss was due to
increased competition for the financing of vehicle sales and the extended
warranties that are sold at the time of financing. The loans by the vehicle
manufacturers including zero interest rate loans and cash refunds have changed
the manner in which vehicle buyers finance their purchases of both the vehicle
and the extended warranty program. Furthermore, recent federal privacy
legislation has forced the
3
Company to eliminate its' very successful direct mail program. The Company is no
longer able to obtain customer information from state vehicle licensing bureaus
and is therefore unable to mail the marketing literature.
The Company will continue to look for ways to increase sales including strategic
alliances with vehicle sellers and others, the inclusion of other types of
mechanical equipment such as watercraft and off-road vehicles and the further
expansion of its VPN system to more directly reach the ultimate consumer with
its product information.
FEDERAL AND STATE REGULATION
Federal law and the statutes of most states regulate the MBI and VSC programs
that are developed and marketed by the Company. The Company continually reviews
all existing and proposed statutes and regulations to ascertain their
applicability to its existing and future operations. Generally, these state laws
regulate the type of coverage that is allowed to be offered within that state.
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, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska,
Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota,
Tennessee, Texas, Utah, Washington, West Virginia, Wisconsin, and Wyoming.
The Company makes every effort to comply with all applicable statutes and
regulations. Nevertheless, it cannot be assured that its interpretations, if
challenged, would be upheld by a court or regulatory body. On every occasion
that the Company has been notified that it is not in compliance with state
regulation, the Company has been able to take the steps necessary to achieve
compliance. The Company has recently been notified by the state of Arizona that
certain changes will be required in order to continue sales in that state. The
Company is working with Arizona Department of Insurance officials to find ways
to meet Arizona's requirements.
In the event the Company's authorization to do business in a specific state is
challenged successfully, the Company may be required to cease operations in that
state and could suffer financial sanctions. 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 current
statutes, the Company does not believe that this is a present concern.
EMPLOYEES
The Company and its subsidiary employed 29 individuals at October 31, 2003 and
32 at October 31, 2002. There is one external sales person who is responsible to
recruit and train the insurance agents or representatives of the financial
institutions and dealerships in the M.B.A. product line. In addition, the
Company has assigned five individuals to handle customer inquiries that many
times result in direct sales. The remainder of the staff is assigned to the
management and support departments including: claims adjudication, data entry,
information systems, finance and administration.
The Company is not a party to a collective bargaining agreement.
Item 2. Properties
The Company's executive offices are located in leased premises at 9419 E. San
Salvador Drive, Suite 105, Scottsdale, Arizona. The Company leases approximately
19,750 square feet from Cactus Family Investments, LLC, a firm in which the
Company's Chief Executive Officer and Vice President are principals. The current
lease has an original five-year term that expired December 31, 2003. The Company
has entered into a lease extension agreement that provides for a month-to-month
rental pending renegotiation. The original lease provided for annual base rent
payments ranging from $212,000 to $276,000. The lease extension requires monthly
payments equal to that required in the last month of the original lease
(Approximately $25,000 per month). The expiring lease terms and pricing have
been established at fair market value that was determined by comparison to other
leases in the area for similar space. (See Item 14 Certain Relationships and
Related Transactions).
4
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 connected
with the sale of insurance, with personnel matters and with disputes over
outstanding accounts. The Company is currently involved in a dispute with one of
its associated insurance companies over alleged wrongdoing, an alleged breach of
its Administrative Agreement and over reimbursement for claims and cancellations
expenditures. The Company maintains a reserve for claims arising in the ordinary
course of business and believes that this reserve is sufficient to cover the
costs of such claims. Based on the information presently available and
considering the Company's Executive and Officers' Liability coverage, 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 to a vote of security holders during this fiscal
year, through the solicitation of proxies or otherwise.
Controls and Procedures
In the year ended October 31, 2003, we did not make any significant changes in,
nor take any corrective actions regarding our internal controls or other factors
that could significantly affect these controls. We periodically review our
internal controls for effectiveness and we have performed an evaluation of
disclosure controls and procedures during this final quarter. We will conduct a
similar evaluation each quarter.
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,
2003, there were 2,061,787 common shares issued and 2,030,187 outstanding. On
that date, the closing bid price for the Company's common stock, as reported by
NASDAQ was $1.60. The following is a summary of the price range of the Company's
common stock during its 2003 and 2002 fiscal years:
Bid
------------------
Common Stock High Low
-----------------------------------------------------------------
Quarter of Fiscal 2003
First 1.05 1.00
Second 2.00 1.01
Third 1.60 1.37
Fourth 1.60 1.60
Quarter of Fiscal 2002
First 1.85 1.65
Second 1.65 1.50
Third 1.50 1.05
Fourth 1.05 1.05
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 2003, the Company issued 50,000 unregistered common
shares.
5
Item 6. Selected Financial Data
Fiscal Year ended October 31, 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 5,628,408 $ 5,935,478 $ 16,468,434 $ 8,323,876 $ 5,597,524
Net (loss) income (1,785,460) (847,797) (212,546) 177,149 148,016
Net (loss) income per common share (basic) (.90) (.43) (.11) .09 .07
Total assets 9,747,162 11,212,975 9,423,030 16,647,549 14,735,278
Long-term obligation and redeemable preferred stock 8,301 -- 8,077 18,840 --
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.
This discussion and analysis provides information that management believes is
relevant to an assessment and understanding of the Company's results of
operations and financial condition. The selected financial information is
derived from the Company's historical financial statements and should be read in
conjunction with such financial statements and notes thereto set forth elsewhere
herein and the "Forward-Looking Statements" explanation included herein.
CRITICAL ACCOUNTING POLICIES
The Management's Discussion and Analysis of Financial Condition and Results of
Operations, set forth below, discusses our consolidated financial statements
that have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities at the date of the financial
statements, the disclosure of contingent assets and liabilities at that date and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation allowances for deferred tax assets and
accounts receivable. In addition, we consider the potential impairment of our
long-lived assets. We base our estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances. The result of these estimates and judgments form the basis for
making conclusions about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A critical accounting policy is one which is both important to the portrayal of
the Company's financial condition and results and one that requires management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
Management believes the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
Revenue Recognition - Net revenues includes the commissions earned on
sales of MBI, fees for providing administrative claims services
related to the MBI sold and revenues related to the sales and
servicing of VSC.
The Company receives a commission from the sale of each MBI
policy. That commission is payment for marketing the policy and
for providing administrative claims and cancellation services.
The Company has elected early adoption of Emerging Issues Task
Force Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables". It will recognize the revenue earned from each
MBI policy on a straight-line basis over the term of that
policy.
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 premium is returned to
6
the customer after deduction of a cancellation fee. The Company,
the insurance companies, and the sub-agents (if applicable)
repay their unearned balance on the policy to the customer. 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.
VSCs are contracts between the Company and the purchaser. The
Company insures its obligations by obtaining an insurance policy
that 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 and costs associated
with the sales of these contracts are deferred and recognized in
income on a straight-line basis over the actual life of the
contracts.
Deferred Income Taxes - Deferred income tax is recorded based upon
differences between the financial statement and tax basis of
assets and liabilities using income tax rates currently in
effect. The decline in the number of contracts sold and the
losses that the Company has experienced in both the current year
and prior years have placed serious doubt on the Company's
ability to realize the value of the deferred income tax assets
that were recorded in earlier years. Accordingly, a valuation
allowance equal to 100% of the value of the deferred income tax
asset has been provided in the current year.
The Company will continue to evaluate its critical accounting
policies and adjust them as circumstances dictate.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR 2003 AND FISCAL YEAR 2002
NET REVENUES
Net revenues for the year ended October 31, 2003 totaled $5,628,000, a decrease
of $307,000 from the year ended October 31, 2002 net revenues of $5,935,000. The
decrease in net revenues is the result of increased competition for vehicle
sales and loans by the vehicle manufacturers including zero interest rate loans
and expanded initial warranty programs. As discusses above, during Fiscal 2003,
the Company elected to adopt EITF 00-21, "Revenue Arrangements with Multiple
Deliverables". The effect of this action is to defer all MBI related revenue
over the life of the underlying policy. This policy adoption has resulted in
less MBI revenue being recognized in the current year. The Company is attempting
to reverse this downward trend with its VPN system and with increased marketing
contacts with other Internet vendors.
In 2001 two underwriters transferred the responsibility for the administration
of their contracts and policies to an unrelated third party relieving the
Company of the majority of its continuing responsibilities. The Company
continues to perform certain administrative duties relating to the calculation
and administration of policy and contract cancellation for these underwriters.
Approximately $11,000 of net deferred income remains at October 31, 2003 to
offset costs to be incurred in administrating the cancellations of these
policies.
OPERATING EXPENSES
Operating expenses decreased $409,000 to $6,915,000 in the year ended October
31, 2003 compared to the similar period ended October 31, 2002. Excluding VSC
direct acquisition costs, operating expenses declined $249,000 and were 33% of
net revenues in 2003 compared to 36% in 2002 as the Company continued to reduce
expenses where ever possible. These efforts resulted in total personnel costs
being reduced $150,897 from the prior year. The expense reductions were
accomplished through task combinations and staffing reductions.
OTHER INCOME (EXPENSE)
Other income increased $31,000 to $64,000 primarily as a result of the Company
collecting a contractual override from one of its insurance companies. Interest
income declined $7,000 from $14,000 in fiscal 2002 to $7,000 in fiscal
7
2003 as a result of the nation-wide decline in interest rates and to the decline
in funds available for investment. There were $3,000 of realized gains on
investments in 2003. There were no realized gains in 2002.
INCOME TAXES
Provisions for income taxes in the period ended October 31, 2003 reflect the
fact that the Company is no longer able to carry back current year losses to
recover federal income taxes paid in previous years. The period ended October
31, 2002 included provisions for such loss carry back. The Company received
$431,000 during the year from the carry back of those prior year losses. The
differences in the effective tax rates in fiscal 2003 compared to fiscal 2002 is
the result of changes in the deferrals, an increase in the valuation allowance
to 100% and the receipt of the federal income tax loss carry back refund.
PENDING ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities ("FIN 46") which is an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. FIN 46 requires a variable interest
entity ("VIE") to be consolidated by a company that is considered to be the
primary beneficiary of that VIE. In December 2003, the FASB issued FIN No. 46
(revised December 2003), "Consolidation of Variable Interest Entities" ("FIN
46-R") to address certain FIN 46 implementation issues. The Company is currently
evaluating the application of FIN 46 as it relates to the potential
consolidation of Cactus Family Investments, LLC, an entity owned by the majority
shareholders of the Company.
COMPARISON OF FISCAL YEAR 2002 AND FISCAL YEAR 2001
NET REVENUES
Net revenues for the year ended October 31, 2002 totaled $5,935,000, a decrease
of $10,533,000 from the year ended October 31, 2001 net revenues of $16,468,000.
The decrease in net revenues is the result of the recognition of $8,488,000 of
deferred VSC revenues in fiscal 2001 that were derived from two underwriters.
These underwriters transferred the responsibility for the administration of
certain contracts and policies to an unrelated third party relieving the Company
of the majority of its continuing responsibilities. At the same time, the
Company also recognized $8,089,000 of deferred direct acquisition costs
associated with the same contracts and policies. The remainder of the net
revenue decline is the result of increased competition for vehicle sales and
loans by the vehicle manufacturers including the zero interest rate loan and
expanded initial warranty programs. The Company is attempting to reverse this
downward trend with its VPN system and with increased marketing contacts with
other Internet vendors.
The Company continues to perform certain administrative duties relating to the
calculation and administration of policy and contract cancellations. At the date
the responsibility transfer was recognized (July 31, 2001), the remaining
balance in deferred revenue and deferred direct acquisition costs relating to
these underwriters that is available to offset against future cancellation
administration equaled $1,537,000 of deferred revenue and $1,455,000 of deferred
direct acquisition costs. The Company will recognize this revenue and expense
over the remaining life of the policies or contracts. If an individual policy or
contract is cancelled, the company will recognize the remaining portion of the
unearned revenue and direct acquisition cost as a current event. Approximately
$56,000 of net deferred income remains at October 31, 2002 to offset costs to be
incurred in administrating the cancellations of these policies.
The Company also wrote off a receivable from the underwriters for deferred
administrative costs. When a policy or contract is sold, the Company would remit
a portion of their commission to the underwriter for an administrative services
reserve. As these policies and contracts expire, the underwriters would return
that portion of the administrative services reserve to the Company. The
administrative release agreements contained provisions whereby the Company
agreed to forfeit all of the deferred administrative costs remitted to the
underwriters. The total amount written off was $254,000. The net effect of the
above adjustments was to increase fiscal 2001 net operating income by $490,000.
8
OPERATING EXPENSES
Operating expenses decreased $9,402,000 to $7,324,000 in the year ended October
31, 2002 compared to the similar period ended October 31, 2001. As explained in
the net revenue discussion above, the Company recognized the deferred direct
acquisition costs of VSC that were associated with the contracts that were no
longer administered by the Company. Excluding VSC direct acquisition costs,
operating expenses declined $189,000 but were 36.0% of net revenues in 2002
compared to 14.1% in 2001 as the Company could no longer reduce operating
expenses at a rate equal to the decline in net revenues. The Company continued
to aggressively cut costs and expenses in most expense categories. Increases
were experienced in license and fee costs as a result of the Company's efforts
to replace the lost underwriters' business, in professional fees as the Company
defended itself in the law suit described above, in rent and lease expense due
to the terms of the lease escalator, in advertising expense and in other
operating expenses as a result of a charge to increase the law suit reserve
OTHER INCOME (EXPENSE)
Finance fee income increased 30.3% as more purchasers of policies elected to
finance premiums. Interest income declined $37,000 from $51,000 in fiscal 2001
to $14,000 in fiscal 2002 as a result of the nation-wide decline in interest
rates and to the decline in funds available for investment. There were no
realized gains on investments in 2002.
INCOME TAXES
Provisions for income taxes in the period ended October 31, 2002 and 2001
reflect the Company's intent to carry back the current year losses to recover
federal income taxes paid in previous years. Similar provisions for recoverable
state income taxes were not provided, as Arizona law does not allow for loss
carry back. The differences in the effective tax rates in fiscal 2002 compared
to fiscal 2001 is the result of the valuation allowance placed on the state net
operating loss carry forward and the recording of the federal income tax loss
carry back. The Company received $425,000 in such refunds during fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
COMPARISON OF OCTOBER 31, 2003 AND OCTOBER 31, 2002
The Company incurred significant losses during the current fiscal year and has
experienced additional losses in prior years. A related party has advanced funds
on demand notes and through the deferral of rent payments (See Note 4) in order
to overcome working capital deficiencies during the year. Subsequent to October
31, 2003, the Company granted the related party, Cactus Family Investments, LLC,
a security interest in all of its unencumbered assets. There is no assurance
that additional advances will be made if additional working capital is required.
The lack of continuing working capital infusions could affect future operations.
Accordingly, the accompanying financial statements have been prepared assuming
the Company will continue as a going concern. The Company has incurred a loss in
November and December 2003 and expects such losses to continue into the early
months of 2004. The Company continues to pursue cost cutting measures and to
seek additional business to reduce working capital needs
Working capital at October 31, 2003 consisted of current assets of $4,825,000
and current liabilities of $6,412,000, or a current ratio of 0.75: 1. At October
31, 2002, the current ratio was 0.97:1 with current assets of $6,156,000 and
current liabilities of $6,325,000.
As of October 31, 2003, the Company's cash position decreased to $740,000 from
$896,000 at October 31, 2002. Of this amount, $291,000 is classified as
restricted cash in 2003 and $285,000 in 2002. The largest component of the
restricted cash represented claims payment advances provided by insurance
companies. These advances enable the Company to make claims payments on behalf
of the insurance companies. The increase in restricted cash in 2003 is due to
timing of reimbursements. The continuing decline in sales volume has resulted in
lower premiums being held on deposit pending payment to the insurance companies
and therefore lower cash balances.
Deferred direct costs, including both the current and non-current portions,
decreased $271,000 to $8,535,000 at October 31, 2003 from $8,806,000 at October
31, 2002. Direct costs are costs that are directly related to the sale of VSCs.
These costs are deferred in the same manner as are VSC revenue. The decrease is
the result of a continuation of lower than normal sales levels.
9
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of October 31, 2003, the amount owed to the
insurance companies decreased by $57,000 to $736,000 from $793,000 at October
31, 2002. The change is due to the timing of payments remitted to and
reimbursements received from the insurance companies.
Deferred revenues, including both the current and non-current portions,
decreased $243,000 to $9,880,000 at October 31, 2003 from $10,123,000 at October
31, 2002. Deferred revenue consists of VSC gross sales and estimated
administrative service fees relating to the sales of MBI policies. The decrease
is due to the continuing decline in sales volume in 2003.
The Company is operating with a working capital line of credit from Merrill
Lynch that expired November 30, 2003. The Company intends to repay this
indebtedness in the near future. The Company has received advances from related
parties that are secured by a short-term note payable to its Chief Executive
Officer. As of October 31, 2003, the related party indebtedness increased
$328,000 to $545,000 from $217,000 at October 31, 2002. The Company's ability to
fund its operations over the short-term is not hindered by lack of short-term
funding as the Chief Executive Officer and principal shareholder has provided
additional funds as needed. The Company uses premiums received to pay agent
commissions, to fund operations and to supplement claims payment advances
provided by insurance companies to administer and pay claims. The Company
believes its future operations may require advances from its principal
shareholder. There is no assurance that such advances will be made.
This Annual Report on Form 10-K contains certain forward-looking statements and
information which we believe are within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The forward looking statements contained herein can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates," or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The Company wishes to caution the
reader that these forward-looking statements that are not historical facts, are
only predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report. Examples of uncertainties that could cause such differences
include, but are not limited to, the ability of the Company to attract and
retain key personnel, the ability of the Company to secure additional capital to
finance its business plan, and competition from other companies in the same
industry. These forward-looking statements are based on current expectations and
the Company assumes no obligation to update this information. Therefore, the
actual experience of the Company and the results achieved during the period
covered by any particular projections or forward-looking statements may differ
substantially from those projected. Consequently, the inclusion of projections
and other forward-looking statements should not be regarded as a representation
by the Company or any other person that these estimates and projections will be
realized, and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
Item 7A. Qualitative Information about Market Risk
Since the Company does not underwrite its own policies, a change in the current
rate of inflation is not expected to have a material effect on the Company. The
precise effect of inflation on operations however cannot be determined.
The Company does not have any long-term receivables and its line of credit debt
is fully secured by marketable securities. Therefore, it is not subject to
significant interest rate risk.
The Company has a net loss of $1,785,000 for the twelve months ended October 31,
2003. This net loss is due to the Company having a substantial decline in MBI
market share from increased competition. The future effect of this increased
competition may have an adverse effect on future earnings.
10
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements for the years ended October 31, 2003,
2002, and 2001:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
11
REPORT OF MANAGEMENT
Board of Directors and Stockholders
M.B.A. Holdings, Inc.
Scottsdale, Arizona
January 29, 2004
Management is responsible for the accompanying consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, it is necessary for management to make informed judgements and
estimates which it believes are appropriate under the circumstances. Financial
information presented elsewhere in this annual report is consistent with that in
the financial statements.
In meeting its responsibility for preparing reliable financial statements, the
Company maintains a system of internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and transactions are properly
recorded and executed in accordance with corporate policy and management
authorization. The Company believes its accounting controls provide reasonable
assurance that errors or irregularities, which could be material to the
financial statements, are prevented or would be detected within a timely period.
In designing such control procedures, management recognizes judgements are
required to assess costs and expected benefits of a system of internal
accounting controls. Adherence to these policies and procedures is reviewed
through a coordinated effort of the Company's accounting staff and independent
auditors.
The Audit Committee of the Board of Directors is comprised solely of outside
directors and is responsible for overseeing and monitoring the quality of the
Company's accounting and auditing practices. The independent accountants have
full and free access to the Audit Committee and meet periodically with the
committee to discuss accounting, auditing and financial reporting matters.
/s/ Gaylen M. Brotherson
Gaylen M. Brotherson
Chairman and Chief Executive Officer
/s/ Dennis M. O'Connor
Dennis M. O'Connor
Chief Financial Officer
12
REPORT of INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2003 and 2002 and the
related consolidated statements of operations and comprehensive loss,
stockholders' (deficit) equity, and cash flows for the years then ended. 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. The financial statements of the Company as of October 31, 2001 were
audited by other auditors whose report dated January 10, 2002, expressed an
unqualified opinion on those statements.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
October 31, 2003 and 2002, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant losses
from operations, anticipates additional losses in the next year and has
insufficient working capital as of October 31, 2003 to fund such losses. These
conditions raise substantial doubt as to the ability of the Company to continue
as a going concern. These consolidated financial statements do not include any
adjustments that might result from such uncertainty.
/s/ Semple & Cooper, LLP
Phoenix, Arizona
January 16, 2004
13
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 AND 2002
----------------------------------------------------------------------------------------------
ASSETS 2003 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 448,240 $ 611,520
Restricted cash 291,437 284,966
Investments (Note 5) 117,203 159,042
Accounts receivable, net of allowance for doubtful accounts
of $0 (2003 and 2002) 232,184 182,300
Prepaid expenses and other current assets 5,248 10,429
Deferred direct costs 3,730,410 4,206,456
Income tax receivable (Note 6) -- 436,778
Deferred income tax asset (Note 6) -- 264,198
------------ ------------
Total current assets 4,824,722 6,155,689
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 309,128 285,894
Office equipment and furniture 140,259 140,259
Vehicle 15,000 16,400
Leasehold improvements 80,182 80,182
------------ ------------
Total property and equipment 544,569 522,735
Accumulated depreciation and amortization (426,661) (368,065)
------------ ------------
Property and equipment - net 117,908 154,670
DEFERRED DIRECT COSTS 4,804,532 4,599,368
DEFERRED INCOME TAX ASSET (Note 6) -- 303,248
------------ ------------
TOTAL ASSETS $ 9,747,162 $ 11,212,975
============ ============
See notes to consolidated financial statements.
14
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 AND 2002
------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT 2003 2002
------------ ------------
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 736,442 $ 793,389
Accounts payable and accrued expenses 622,756 522,136
Line of credit borrowings 196,897 --
Accounts and note payable - officer (Note 8) 516,309 216,931
Capital lease obligations (Note 8) 7,882 8,222
Deferred revenues 4,332,133 4,783,991
------------ ------------
Total current liabilities 6,412,419 6,324,669
Capital lease obligation - net of current portion (Note 8) 8,301 --
Other liabilities -- 49,572
Deferred rent 4,809 31,064
Deferred income taxes 4,666 --
Deferred revenues - net of current portion 5,548,214 5,338,994
------------ ------------
Total liabilities 11,978,409 11,744,299
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7,8, 9 and 10) -- --
STOCKHOLDERS' DEFICIT (Note 2 and 7):
Preferred stock, $.001 par value; 20,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.001 par value; 80,000,000 shares
authorized; 2,061,787 shares issued; 2,030,187 outstanding 2,062 2,012
Additional paid-in-capital 280,801 200,851
Accumulated other comprehensive income (loss), net of tax 119 (5,418)
Retained deficit (2,458,729) (673,269)
Less: 31,600 shares of common stock in treasury, at cost (55,500) (55,500)
------------ ------------
Total stockholders' deficit (2,231,247) (531,324)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,747,162 $ 11,212,975
============ ============
See notes to consolidated financial statements.
15
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
---------------------------------------------------------------------------------------------------------------
2003 2002 2001
NET REVENUES:
Vehicle service contract gross income $ 5,328,915 $ 5,406,387 $ 15,136,581
Net mechanical breakdown insurance income 299,493 529,091 1,331,853
------------ ------------ ------------
Total net revenues 5,628,408 5,935,478 16,468,434
------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle service contracts 5,029,185 5,189,412 14,402,029
Salaries and employee benefits 1,036,242 1,187,139 1,399,267
Mailings and postage 17,932 101,287 121,416
Related party rent expense 311,912 251,625 248,010
Lease expense 13,842 20,636 34,498
Professional fees 132,232 160,379 91,357
Telephone 147,346 89,907 96,896
Depreciation and amortization 59,996 79,866 78,833
Merchant and bank charges 6,475 8,853 20,783
Insurance 21,587 32,613 32,959
Supplies 11,990 13,884 28,709
License and fees 21,493 26,717 24,104
Other operating expenses 104,578 162,080 146,958
------------ ------------ ------------
Total operating expenses 6,914,810 7,324,398 16,725,819
------------ ------------ ------------
OPERATING LOSS (1,286,402) (1,388,920) (257,385)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Finance fee income 21,476 26,210 20,120
Interest income 7,414 13,870 51,288
Interest expense (13,924) (8,121) (10,775)
Other income (expense) 63,906 33,333 (293)
Realized gains on investments 2,914 -- 15,629
------------ ------------ ------------
Other income - net 81,786 65,292 75,969
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,204,616) (1,323,628) (181,416)
INCOME TAXES (Note 6) 580,844 (475,831) 31,130
------------ ------------ ------------
NET LOSS $ (1,785,460) $ (847,797) $ (212,546)
============ ============ ============
BASIC NET LOSS PER SHARE $ (0.90) $ (0.43) $ (0.11)
============ ============ ============
DILUTED NET LOSS PER SHARE $ (0.90) $ (0.43) $ (0.11)
============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC 1,982,653 1,980,187 1,980,187
============ ============ ============
AVERAGE NUMBER OF COMMON AND
DILUTIVE SHARES OUTSTANDING 1,982,653 1,980,187 1,980,187
============ ============ ============
Net loss $ (1,785,460) $ (847,797) $ (212,546)
Other comprehensive income net of tax:
Net unrealized gain (loss) on available-for-sale securities 5,537 (2,269) (15,364)
------------ ------------ ------------
Comprehensive loss $ (1,779,923) $ (850,066) $ (227,910)
============ ============ ============
See notes to consolidated financial statements.
16
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Stock Additional Other Retained Stockholders'
---------------------- Paid Comprehensive Earnings Treasury Deficit)
Shares Amount In-Capital Income (Deficit) Stock Equity
BALANCE, NOVEMBER 1, 2000 2,011,787 $2,012 $200,851 $ 12,215 $ 387,074 (55,500.00) 546,652
Unrealized loss on
available-for-sale securities (15,364) (15,364)
Net loss (212,546) (212,546)
--------- ------ -------- -------- ----------- -------- ------------
BALANCE, OCTOBER 31, 2001 2,011,787 2,012 200,851 (3,149) 174,528 (55,500) 318,742
Unrealized loss on
available-for-sale securities (2,269) (2,269)
Net loss (847,797) (847,797)
--------- ------ -------- -------- ----------- -------- ------------
BALANCE, OCTOBER 31, 2002 2,011,787 2,012 200,851 (5,418) (673,269) (55,500) (531,324)
Unrealized gain on
available-for-sale securities 5,537 5,537
Issuance of common shares 50,000 50 79,950 80,000
Net loss (1,785,460) (1,785,460)
--------- ------ -------- -------- ----------- -------- ------------
BALANCE, OCTOBER 31, 2003 2,061,787 $2,062 $280,801 $ 119 $(2,458,729) $(55,500) $(2,231,247)
===============================================================================================
See notes to consolidated financial statements
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------
OCTOBER 31,
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,785,460) $ (847,797) $ (212,546)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 59,996 79,866 78,833
(Gain) loss on sale of equipment -- (22,500) 22,237
Related party rent expense accrued but not paid 311,912 -- --
Deferred income taxes 572,112 (26,737) 343,117
Changes in assets and liabilities:
Restricted cash (6,471) (124,564) 326,613
Accounts receivable (49,884) (35,990) 258,060
Prepaid expenses and other current assets 5,181 69,921 80,894
Deferred direct costs 270,882 (2,166,872) 6,059,515
Income tax receivable 436,778 (41,291) (240,050)
Net premiums payable to insurance companies (56,947) 408,276 (52,101)
Accounts payable and accrued expenses 100,620 143,311 (128,060)
Other liabilities (49,572) (175,838) 88,876
Deferred rent (26,255) (11,192) 717
Deferred revenues (242,638) 2,179,649 (6,896,833)
----------- ----------- -----------
Net cash used in operating activities (459,746) (571,758) (270,728)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,833) (17,593) (55,382)
Proceeds from sale of equipment -- 22,500 24,000
Purchase of investments (2,612) (458) (129,481)
Proceeds from sales and maturities of investments 49,988 -- 288,327
----------- ----------- -----------
Net cash provided by investing activities 43,543 4,449 127,464
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit 196,897 643,654 --
Repayments of line of credit drawings -- (643,654) --
Proceeds of note payable - officer 67,466 106,548 --
Payments on capital lease obligations (11,440) (10,743) (9,208)
----------- ----------- -----------
Net cash provided by (used in) financing activities 252,923 95,805 (9,208)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (163,280) (471,504) (152,472)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 611,520 1,083,024 1,235,496
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 448,240 $ 611,520 $ 1,083,024
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,644 $ 4,902 $ 10,660
=========== =========== ===========
Cash paid for (recovered from) income taxes $ (431,186) $ (425,396) $ --
=========== =========== ===========
NON-CASH TRANSACTIONS:
Related party notes payable satisfied by issuing common shares
and services provided $ 80,000 $ -- $ --
=========== =========== ===========
Unrealized gains (losses) on available -for-sale securities $ 5,537 $ (2,269) $ (15,364)
=========== =========== ===========
Property and equipment financed with capital lease obligations $ 19,401 $ -- $ --
=========== =========== ===========
See notes to consolidated financial statements.
18
M.B.A. HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
--------------------------------------------------------------------------------
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 ("MBI") (as an agent for insurance
companies), selling vehicle service contracts ("VSC") for new automobiles,
trucks, recreational vehicles, and travel trailers, and providing claims
administrative services for MBI and VSC 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 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 their behalf.
c. Investments that are primarily marketable debt and equity
securities, are classified as available-for-sale and are
stated at estimated fair value as of October 31, 2003 and
2002. Fair value is estimated based on quoted market prices.
Unrealized gains (losses) are excluded from earnings and
reported, net of income tax, as a separate component of
shareholders' equity (deficit).
d. Accounts receivable consist primarily of amounts due from
insurance companies for reimbursement of previously paid
claims. For the years ended October 31, 2003 and 2002,
management believes that all outstanding balances will be
realized. Accounts receivable are unsecured and do not include
finance charges.
e. 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 costs of maintenance and
repairs are charged to expense in the year incurred.
The Company reviews its long-lived assets for possible
impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and amends
Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The new rules
apply to the classification and impairment analysis conducted
on long-lived assets other than certain intangible assets,
resolve existing conflicting treatment on the impairment of
long-lived assets and provide implementation guidance
regarding impairment calculations. SFAS No. 144 also expands
the scope to include all distinguishable components of an
entity that will be eliminated from ongoing operations in a
disposal transaction. The Company has concluded that no
impairment charge is necessary during 2003 and 2002.
f. Benefit Plan - The Company maintains the Mechanical Breakdown
Administrators 401(k) Profit Sharing Plan covering
substantially all employees. Participation in employer
discretionary contributions commences on the earliest plan
entry date after an employee meets eligibility requirements.
Employees
19
may elect to contribute to the plan and the Company may make
discretionary contributions. No discretionary contributions
were made during the years ended October 31, 2003, 2002 or
2001.
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 MBI, fees for providing administrative
claims services related to the MBI sold and revenues related
to the sales and servicing of VSC.
The Company receives a commission from the sale of each MBI
policy. That commission is payment for marketing the policy
and for providing administrative claims and cancellation
services. The Company has elected early adoption on November
1, 2002 of Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. It will
recognize the revenue earned from each MBI policy on a
straight-line basis over the term of that policy. The net
effect of this change in 2003 is a deferral of revenues of
$87,000.
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 premium is returned to the customer after deduction
of a cancellation fee. The Company, the insurance companies,
and the sub-agents (if applicable) repay their unearned
balance on the policy to the customer. 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.
VSCs are contracts between the Company and the purchaser. The
Company insures its obligations by obtaining an insurance
policy that 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
and costs associated with the sales of these contracts are
deferred and recognized in income on a straight-line basis
over the actual life of the contracts.
The Company applies Emerging Issues Task Force ("EITF") No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent." Accordingly, revenues from MBI are presented on a net
basis as the Company acts only as an agent for Insurance
companies. Conversely, VSC revenues and related costs are
presented gross because the Company is contracting directly
with the policyholders.
h. Income Taxes - Provision for recoverable income taxes and
related income tax receivable in the year ended October 31,
2002 reflect the Company's intent to carry back the current
year losses to recover federal income taxes paid in previous
years. Arizona law does not provide for the carry back of
losses and therefore provisions for recoverable state income
taxes have not been provided.
Deferred income tax is recorded based upon differences between
the financial statement and tax basis of assets and
liabilities using income tax rates currently in effect. A
valuation allowance is recorded against deferred tax assets
when it is likely that the value of a deferred tax asset will
not be realized.
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. No dilutive effect is assumed in loss
years. Below is the reconciliation required by SFAS No. 128.
20
Number of shares used in computing income per share
Year Ended October 31, 2003 2002 2001
--------- --------- ---------
Average number of common shares
outstanding - Basic 1,982,653 1,980,187 1,980,187
Dilutive shares from common stock options
calculated using the treasury stock method -- -- --
--------- --------- ---------
Average number of common and dilutive
shares outstanding 1,982,653 1,980,187 1,980,187
========= ========= =========
k. Stock-Based Compensation - At October 31, 2003, the Company
had options outstanding that related to stock-based
compensation from prior years. These options are accounted for
under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25 "Accounting for stock issued
to employees" and related interpretations, as more fully
described in Note 7. Pro Forma information regarding the
impact of stock-based compensation on net income and loss per
share is required by SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". For years ended
October 31, 2003, 2002, 2001, there are no pro forma
adjustments necessary to net loss and basic and diluted loss
per share information, had the Company accounted for its
employee stock options under the fair recognition provisions
of SFAS No. 123.
l. 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 debt and equity
investments.
m. 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.
n. Pending Accounting Standards - In October 2002, the FASB
issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and no longer
requires the separate recognition and subsequent amortization
of goodwill that was originally required by SFAS No. 72. SFAS
No. 147 also amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its
scope long-term consumer-relationship intangible assets (such
as core deposit intangibles). Effective October 1, 2002, the
Company adopted SFAS 147, and the adoption did not have
material effect on the financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which
amends SFAS No. 123, "Accounting for Stock-Based Compensation"
("FAS 123"). SFAS 148 provides alternative methods of
transition for a voluntary change to the fair
21
value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure
requirement of SFAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of
stock-based compensation. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing
condensed financial statements for interim periods beginning
after December 15, 2002. The Company has adopted SFAS 148 and
has accordingly modified its disclosures related to
stock-based compensation.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies the accounting
for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities under SFAS No. 133. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative as
discussed in SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of
an underlying derivative to conform it to the language used in
FASB Interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and (4) amends certain
other existing pronouncements. SFAS No. 149 is generally
effective for contracts entered into or modified after June
30, 2003. The Company has adopted SFAS No. 149 effective July
1, 2003, and it did not materially effect the consolidated
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement establishes standards
for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150
is effective at the beginning of the first interim period
beginning after June 15, 2003; including all financial
instruments created or modified after May 31, 2003. SFAS No.
150 currently has no impact on the Company.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting for Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and
107 and rescission of FASB Interpretation No. 34, Disclosure
of Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 clarifies the requirements for a guarantor's accounting
for and disclosure of certain guarantees issued and
outstanding. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This
Interpretation also incorporates without reconsideration the
guidance in FASB Interpretation No. 34, which is being
superseded. The Company has adopted this standard, and it did
not materially affect the consolidated financial position or
results of operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities" ("FIN 46") which is an
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements. FIN 46 requires a variable
interest entity ("VIE") to be consolidated by a company that
is considered to be the primary beneficiary of that VIE. In
December 2003, the FASB issued FIN No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("FIN
46-R") to address certain FIN 46 implementation issues. The
Company is currently evaluating the application of FIN 46 as
it relates to Cactus Family Investments, LLC, an entity owned
by the majority shareholders of the Company.
o. Concentrations of Credit Risk - The Company maintains its cash
balances in financial institutions. Deposits, not to exceed
$100,000, are insured by the Federal Deposit Insurance
Corporation. At October 31, 2003, 2002 and 2001, the Company
had uninsured cash of approximately $619,000, $536,000 and
$411,000, respectively.
p. Advertising costs are expensed as incurred and are included in
other operating expenses. Advertising expense totaled
approximately $19,000, $23,000 and $18,000 for the years ended
October 31, 2003, 2002 and 2001, respectively.
22
q. Reclassifications - Certain reclassifications have been made
to the 2002 and 2001 amounts to conform to the 2003
presentation.
2. LIQUIDITY AND GOING CONCERN
The Company incurred significant losses during the current fiscal year and has
experienced additional losses in prior years. A related party has advanced funds
on demand notes and through the deferral of rent payments (See Note 4) in order
to overcome working capital deficiencies during the year. Subsequent to October
31, 2003, the Company granted the related party, Cactus Family Investments, LLC,
a security interest in all of its unencumbered assets. There is no assurance
that additional advances will be made if additional working capital is required.
The Company has been notified by the State of Arizona that it does not meet
Arizona's requirement that the Company be solvent to make sales in that state.
The Company is seeking alternatives to meet Arizona's regulations. Based upon
the foregoing, the accompanying financial statements have been prepared assuming
the Company will continue as a going concern. The Company has incurred a loss in
November and December 2003 and expects such losses to continue into the early
months of 2004. The Company continues to pursue cost cutting measures and to
seek additional business to reduce working capital needs.
3. SIGNIFICANT EVENTS
In 2001, two of the Company's underwriters transferred the administration of the
contracts/policies sold and administered by M.B.A. to a third party. The
transfer of this responsibility relieved the Company of its obligations under
the agency agreement except for obligations relating to future contract/policy
cancellations. As a result, $8,488,000 of deferred VSC revenue, $8,089,000 of
deferred direct acquisition costs and $345,000 of deferred administrative
service fee revenue were recognized as income and operating expenses in the
third quarter of 2001.
In 2001, the Company also wrote off a receivable from the underwriters for
deferred administrative costs. When a contract/policy was sold, the Company
remitted a portion of its commission to the underwriter as a reserve for
administrative services. As the contracts/policies expired, the underwriter
would return the reserve submitted. As a part of the administrative release
agreements, the Company agreed to forfeit $254,000 of the reserves for deferred
administrative costs held by the underwriters.
The net effect of the above transactions is an increase in net operating income
of $490,000 in fiscal 2001.
The Company continues to perform certain administrative duties relating to the
calculation and administration of contract/policy cancellations. The balance
included in deferred revenue and deferred direct acquisition costs at July 31,
2001 for these cancellations, $1,537,000 and $1,455,000 respectively, will be
recognized in income and expense over the remaining life of the contract/policy.
If the contract/policy is cancelled, the company will recognize the remaining
portion of the unearned revenue and direct acquisition cost in the month of
cancellation. Approximately $11,000 of net deferred income remains at October
31, 2003 to offset costs that are expected to be incurred in administrating the
cancellations of these contracts/policies.
4. RELATED PARTY TRANSACTIONS
Included in accounts and note payable - officer at October 31, 2003 and 2002 is
$349,000 and $160,000 of accrued rent for office space payable to Cactus Family
Investments, LLC, an entity owned by the Company's majority stockholders. Rent
expense for the years ending October 31, 2003, 2002 and 2001 was $312,000,
$252,000 and $248,000, respectively. The lease expiring December 31, 2003 was
signed with an affiliate on January 1, 1999. A month-to-month lease extension at
the December 2003 rate (approximately $25,000 per month) was signed in December
2003. The expiring lease included escalating rent amounts that have been
recorded as expense on a straight-line basis over the lease term.
At various times beginning in February 2002, Gaylen Brotherson, the Company's
Chief Executive Officer, has loaned the Company funds for working capital. The
loan balances were $167,709 and $106,548 at October 31, 2003 and 2002
respectively. The loans mature annually on October 31st and bear interest at a
rate of 6%. Subsequent to
23
October 31, 2003, the Company renegotiated the terms of the notes and granted
the related party, Cactus Family Investments, LLC, a security interest in all of
its unencumbered assets. The current note is payable on demand and bears
interest at 6%.
The Company pays a substantial portion of its claims obligations through the use
of credit cards held personally by its majority shareholders and repays the
credit card companies directly. The Company has agreed to indemnify the majority
shareholders from its obligations arising from the use of these credit cards.
5. MARKETABLE SECURITIES
The following table summarizes the Company's available for sale securities as of
October 31, 2003 and October 31, 2002:
October 31, 2003 Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
-------- -------- -------- --------
Marketable Securities:
Corporate bonds $ 33,642 $ 4,158 $ 37,800
Mutual Funds 61,861 2,074 63,935
Equities 27,601 $(12,133) 15,468
-------- -------- -------- --------
Total Marketable Securities at October 31, 2003 $123,104 $ 6,232 $(12,133) $117,203
======== ======== ======== ========
October 31, 2002 Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
-------- -------- -------- --------
Marketable Securities:
Corporate bonds $ 33,642 $ 4,018 $ 37,660
Mutual Funds 106,179 3,827 110,006
Equities 27,601 $(16,225) 11,376
-------- --------- -------- --------
Total Marketable Securities at October 31, 2002 $167,422 $ 7,845 $(16,225) $159,042
======== ========= ======== ========
6. INCOME TAXES
Income taxes were as follows for the years ended October 31:
2003 2002 2001
-------- --------- ---------
Current -- $(450,668) $(311,987)
Deferred 580,844 (25,163) 343,117
-------- --------- ---------
Total income tax (benefit) expense $580,844 $(475,831) $ 31,130
======== ========= ========
24
The effective income tax rate differs from the federal statutory income tax rate
in effect each year as a result of the following items:
2003 2002 2001
---- ---- ----
Federal statutory income tax rate 34% 34% 34%
State taxes 6 6 6
Operating loss utilization -- (34) --
Net operating loss carryback -- (34) --
Valuation Allowance (40) (6) (49)
Deferred revenues, net 8 (2) --
Other 40 -- (8)
---- ---- ----
Effective income tax rate 48% (36)% (17)%
==== ==== ====
At October 31, 2003, the Company had a state net operating loss carry forward
deductions available of $973,000, which expires in 2006, $1,237,000, which
expires in 2007 and $1,137,000 which expires in 2008. The Company will carry
forward the current year taxable loss of $1,137,000 for federal income tax
purposes as well.
The deferred tax liabilities at October 31, 2003 and 2002 are composed of the
tax effects of:
2003 2002
---- ----
Excess of net book basis of
fixed assets over tax basis $ 4,666 $19,073
======= =======
7. 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, 2003, 2002 and 2001, no compensation expense was
recognized.
A summary of the Company's outstanding options as of October 31, 2003 is
presented below:
Weighted Average
Exercise Expiration Contractual Life
Options Price Date (In Years)
33,334 $ 2.25 February 15, 2006 2.30
25,000 1.20 September 30, 2008 4.92
1,667 1.20 October 31, 2008 5.01
100,000 0.94 June 1, 2008 4.59
20,000 1.05 September 30, 2008 4.92
5,000 1.05 October 31, 2008 5.01
--------- ----
185,001 4.27
--------- ----
25
A summary of the activity regarding the Company's outstanding options for the
years ended October 31 is presented below:
2003 2002 2001
------------------------- ----------------------- ----------------------
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 $ 1.23 185,001 $ 1.23
Options granted -- -- -- -- -- --
Options exercised -- -- -- -- -- --
Options cancelled -- -- -- -- -- --
------- -------- ------- -------- ------- --------
Options outstanding at end of year 185,001 $ 1.23 185,001 $ 1.23 185,001 $ 1.23
======= ======== ======= ======== ======= ========
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.
8. OPERATING AND CAPITAL LEASES
The Company has operating leases for office space and equipment and a capital
lease for equipment that 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, 2003 and 2002 with values of $28,873 and $9,472
respectively, net of accumulated amortization of $49,463 and $21,528
respectively. Total rental expense was approximately, $312,000, $294,000 and
$283,000 for the years ended October 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments under non-cancelable lease agreements at October
31, 2003 are as follows:
Operating Capital
Lease Leases
2004 45,930 $ 8,203
2005 $ 8,203
2006 2,830
------- -------
Total $45,930 19,236
=======
Less portion representing interest 3,053
-------
Total $16,183
=======
The interest rates under the capital leases obligations range from approximately
15% to 19% per annum and are imputed based on the lessor's implicit rate of
return at the inception of the lease.
26
9. SIGNIFICANT CUSTOMERS
In 2003, a national insurance brokerage firm accounted for $2,433,000 of VSC
sales while another major customer accounted for $1,673,000 of 2003 VSC sales.
These two firms combined accounted for 77% of all 2003 VSC sales. The Company
services these accounts under contracts that are subject to renewal annually.
10. 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 and of disputes over
outstanding accounts. The Company is currently involved in a dispute, for
undisclosed damages, with one of its associated insurance companies over alleged
wrongdoing, an alleged breach of its Administrative Agreement and over
reimbursement for claims and cancellations expenditures. The Company maintains a
reserve for claims arising in the ordinary course of business and believes that
this reserve is sufficient to cover the costs of such claims. 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.
11. LINE OF CREDIT
The Company has available a $200,000 working capital line of credit which
expires on November 30, 2003. Borrowings under the line of credit bear interest
at a variable rate per annum equal to the sum of the thirty-day dealer
commercial paper rate, as published in The Wall Street Journal plus 3.15 %
(4.21% at October 31, 2003). Borrowings are collateralized by the Company's
investments. There was $196,897 outstanding at October 31, 2003. There was no
outstanding balance at October 31, 2002 or 2001. The Company intends to repay
the indebtedness in the near future.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the year ended October 31, 2003
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr
----------- ----------- ----------- -----------
Net revenues $ 1,440,774 $ 1,421,496 $ 1,400,657 $ 1,365,482
Gross profit 174,338 169,619 172,801 82,466
Net (loss) income (212,543) (329,358) (375,010) (868,549)
Net (loss) income per share (0.11) (0.17) (0.18) (0.44)
For the year ended October 31, 2002
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr
----------- ----------- ----------- -----------
Net revenues $ 1,867,748 $ 2,349,498 $10,813,767 $1,173,703
Gross profit 310,307 402,172 848,066 293,939
Net (loss) income (157,906) (99,361) 173,436 (251,111)
Net (loss) income per share (0.08) (0.05) 0.09 (0.13)
27
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure.
The Company has not had disagreements with its auditors on any matter regarding
accounting principles or financial statement disclosures.
The data required by Item 304 of Regulation S-K is set forth below:
Part III
Item 10. Directors and Executive Officers of the Registrant
The Company's Board of Directors consists of four 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 64 President, CEO, Chairman of the Board, Director
Judy K. Brotherson 56 Vice-President, Secretary, Director
Edward E. Wilczewski 63 Director
Michael Brady 62 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, 64, 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, 56, has been Vice-President, Secretary 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 M.B.A. software management system. She has been working at
M.B.A. since 1989 primarily involved in overseeing the finance and data-entry
departments.
Edward Wilczewski, 63, 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.
Michael Brady, 62, 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
28
International Inc., which is a US 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 full
service burglar, fire alarm installation and monitoring company.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Dennis M. O'Connor, 64, is the Chief Financial Officer. He joined the Company in
November of 2001 as a consultant and entered the full time employ of the Company
in June 2002. Prior to joining the Company, Mr. O'Connor worked for more than
forty years in various financial leadership positions. Mr. O'Connor was educated
at Canisius College, Buffalo, NY where he received a Bachelor of Science degree
and Master of Business Administration degree. Mr. O'Connor is a Certified Public
Accountant.
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, 2001, 2002 and 2003.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- --------------------------------
Restricted Stock
Stock Option
(shares) (shares)
Name of Principal Position Year Salary Bonus Other (1) awards awards
----------------- -------- ---- ------ ----- --------- ------ ------
Gaylen M. Brotherson Chairman of Board 2001 50,000 21,894
President and 2002 50,000 14,173
Chief Executive Officer 2003 50,000 8,184
Judy K. Brotherson Vice-President, Secretary 2001 50,000
2002 50,000
2003 50,000
(1) Included in Other Annual Compensation are an auto lease paid for Gaylen
Brotherson in fiscal 2001and 2002, auto insurance for Gaylen Brotherson in
fiscal 2001 and 2002 and life insurance premiums for Gaylen Brotherson in years
2001, 2002 and 2003
Option Grants In Last Fiscal Year
None
29
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, 2003, 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, 2003 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 902,615 shares (1) 44.5%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock Judy Brotherson 825,301 shares (1) 40.7%
9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
Common Stock CEDE & Co 219,928 10.8%
Box 220
Bowling Green Station
New York, NY 10274
Common Stock All Directors and Executive 1,727,916 shares 85.1%
Officers as a Group (five people)
30
(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 43.5% and 42.9%, respectively (see Item 6. Executive Compensation).
Item 13. Certain Relationships and Related Transactions
The Company leases its office space from Cactus Family Investments, LLC. The
managing member of Cactus Family Investments, LLC is Gaylen Brotherson, the
Chief Executive Officer. Rent expense for this office space was $312,000,
$252,000 and $248,000 for the years ended October 31, 2003, 2002, and 2001,
respectively. The Company signed a new lease with the affiliated entity on
January 1, 1999. This new lease expires on December 31, 2003. In December 2003,
the Company extended the existing lease on a month-to-month basis and is
obligated to pay monthly rent equal to the final monthly rent payment required
by the expiring lease.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and reports on Form 8-K.
(a) Exhibit Index
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K Current Report was filed September 16, 2002. This Current
Report contained the sworn statements of Gaylen M. Brotherson, Chief
Executive Officer and Dennis M. O'Connor, Chief Financial Officer in
the form specified by the Securities and Exchange Commission.
Form 8-K Current Report was filed October 23, 2002 and amended
October 30, 2002. This Current Report disclosed that Deloitte &
Touche, LLP had declined to stand for re-election. The Current
Report stated that the last two years reports did not contain an
adverse opinion, that there were no disagreements on any matters of
accounting principles or practices, financial statement disclosure
or auditing scope of procedure.
From 8-K Current Report was filed November 27, 2002. This Current
Report stated that the firm Semple & Cooper, LLP has been engaged as
the principal accountants of the Company.
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 9 of Part II hereof, where such documents are listed.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
MBA Holdings, Inc.
By: /s/ Gaylen M. Brotherson Dated: January 29, 2004
------------------------------------
Gaylen Brotherson
Chairman of the Board and Chief Executive Officer
By: /s/ Dennis M. O'Connor Dated: January 29, 2004
-----------------------------------
Dennis M. O'Connor,
Chief Financial Officer
32