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, 2004
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. 229.405 of 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, 2004, the
aggregate market value non-affiliates of the registrant as reported on NASDAQ,
was $18,882,886
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, 2004, there were 120,902,492 shares of the issuer's common
stock issued and 120,583,332 outstanding.
1
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. In certain states, the insurance regulations
prohibit the Company from directly selling either MBI policies or VSC contracts.
In those states, the Company, through its principal shareholders, services its
customers by acting solely as an insurance broker in the sale of MBI policies.
The claims administrative responsibilities associated with those policies are
assumed by the issuing insurance company. The Company is compensated for its
services through the payment of a commission.
In addition, through its subsidiary National Motorcycle Dealers Association, LLC
("NMDA"), the Company sells memberships in NMDA and extended warranties for new
and used motorcycles, ATV's and trailers. NMDA also provides and/or plans to
provide Gap Coverage, Motorcycle Leasing and Financing, Credit Life/Accident
insurance, Health insurance and Family Hospitalization insurance for Dealership
owners, employees and their families. As an additional benefit of membership,
NMDA offers rental insurance and software for Dealer Motorcycle Rental Programs,
a Garage Keepers insurance program, Liability and Collision Insurance for the
dealer and their customers, an Association Credit Card, a 401(k) Retirement
Program, a Roadside Assistance Program and many other benefits including member
discounts on advertising and trade show exhibits.
NATIONAL MOTORCYCLE DEALERS ASSOCIATION, LLC
NMDA was formed by MBA in 2004 to assist Motorcycle Dealer Members in being
professional, successful, and profitable businesses through special services,
products and programs. NMDA will also take a very active roll in education and
legislation to help our members achieve their business and personal goals.
This Association is open to the tens of thousands of Motorcycle Dealers in the
United States and Canada. There is an annual membership fee. The Association
offers products and training to its members and brings many benefits and
programs to aid the Motorcycle Dealer. NMDA brings the purchasing power and the
voice of its many members to aid the individual privately -owned Motorcycle
Dealership. MBA Holdings has been appointed to provide management and
administration of the Association.
The Association also offers an affiliate membership program open to
manufacturers of motorcycles, motorcycle component manufacturers, suppliers,
distributors, finance institutions, insurance agencies, insurance companies,
industry associations, trade press, publications and motorcycle software
vendors. The affiliate program will also have a membership fee per year.
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 certain of the
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 Heritage Warranty Mutual Insurance RRG, Inc., Old Republic Auto Services
Insurance Company and Warranty America, LLC, First Assured Insurance Company and
AON Warranty Company.
2
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, 2004, 2003, and 2002, the net revenues related
to sales and servicing of MBI policies represented approximately 51%, 50% and
71%, 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., Warranty Americia, LLC, First Assured
Insurance Company and AON Warranty Company.
For the years ended October 31, 2004, 2003, and 2002, the net VSC revenues less
direct acquisition costs related to sales and servicing of VSCs represented
approximately 60%, 50% and 29%, respectively, of the Company's total net
revenues less direct acquisition costs of vehicle service contracts. The
relative change 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 2004 a major manufacturer accounted for $1,750,893 of VSC revenues or 30% of
the 2004 Net Commission Income. During 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.
3
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.
National Motorcycle Dealers Association, LLC has few direct competitors in its
market area and provides a bundle of services that are not generally offered
from a single source. The products do compete individually with a wide range of
offerings from other firms. NMDA is still assessing the impact these competitors
will have on its business.
SALES AND MARKETING
The Company maintains its own staff of sales and marketing personnel. These
individuals conduct 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, through selected automobile magazine advertisements and through
the operation of a call center.
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, 2004 3,957
For the twelve months ended October 31, 2003 4,858
For the twelve months ended October 31, 2002 8,130
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 and to the loss of a
single major customer in the current year. The loss by the credit unions is 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. The customer loss was the result of increased
price competition in the marketplace.
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, the further
expansion of its VPN system to more directly reach the ultimate consumer with
its product information and from its recent efforts to expand the economic
presence of the National Motorcycle Dealers Association, LLC.
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.
4
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 each 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 directly or by working through others..
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 subsidiaries employed 14 individuals at October 31, 2004 and
29 at October 31, 2003. 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 four 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). (See Item 14 Certain Relationships and
Related Transactions).
Item 3. Legal Proceedings
The Company is subject to claims and lawsuits that arise in the ordinary course
of business, consisting principally of alleged errors and omissions 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
On March 16, 2004, the holders of a majority of the outstanding common stock
shares of M.B.A. Holdings, Inc., waived the required notice of a shareholder
meeting and consent to the adoption of the following Board Minutes:
RESOLVED, the Corporation shall amend its Articles of Incorporation to increase
its authorized Common Stock shares to Eight Hundred Million (800,000,000) change
the par value of each Common Stock share to no par value shares with a stated
value $0.0001 per share. and increase its authorized Preferred Stock shares to
One Hundred Million (100,000,000) shares and change the par value of each
Preferred Stock share to no par value shares with a stated value $0.0001 per
share. (the "Stock Increase").
5
FURTHER RESOLVED, the following paragraph shall be added as the second and last
paragraph of Article III of the Corporation's Articles of Incorporation (the
"Preferred Stock Addition"):
The Board of Directors shall have the authority to divide the Preferred Stock
shares into series and to fix by resolution the voting powers, designation,
preference and relative participating option or other special rights and
qualifications.
FURTHER RESOLVED, the Corporation shall receive approval for the Stock Increase
and the Preferred Stock Addition from shareholders owning a majority of its
outstanding common stock shares by means of written consent.
On June 10, 2004, the holders of a majority of the outstanding common stock
shares of M.B.A. Holdings, Inc., waived the required notice of a shareholder
meeting and consent to the adoption of the following Board Minutes:
RESOLVED, that the Corporation's action to adopt the Amended Employee Stock
Incentive Plan For the Year 2004 and the Amended Non-employee Directors and
Consultants Stock Plan for the Year 2004 be and hereby are approved.
On July 12, 2004, the holders of a majority of the outstanding common stock
shares of M.B.A. Holdings, Inc., waived the required notice of a shareholder
meeting and consent to the adoption of the following Board Minutes:
RESOLVED, that the Corporation's action to adopt the Employee Stock Incentive
Plan For the Year 2004-B and the Non-employee Directors and Consultants Stock
Plan for the Year 2004-B be and hereby are approved.
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 "MBAH". As of October 31,
2004, there were 120,450,492 common shares issued and 120,134,492 outstanding.
On that date, the closing bid price for the Company's common stock, as reported
by NASDAQ was $0.1079. The following is a summary of the price range of the
Company's common stock during its 2003 and 2002 fiscal years:
Common Stock Bid
------------------------------------------------
High Low
------------------------------------------------
Quarter of Fiscal 2004
First 0.158 0.149
Second 0.277 0.040
Third 0.086 0.005
Fourth 0.117 0.003
Quarter of Fiscal 2003
First 0.105 0.100
Second 0.200 0.101
Third 0.158 0.149
Fourth 0.158 0.149
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.
6
Equity Compensation Plan Information
Number of securities
remaining available
Number of Securities for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding options outstanding options (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
-------------------------------------------------------------------------------------------------------------------
(a) (b) (C)
-------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders None None 54,375,000
Equity compensation
plans not approved by
security holders None None None
During the fiscal year ended 2004, the Company issued 96,625,000 registered and
3,000,000 unregistered common shares.
Item 6. Selected Financial Data
Fiscal Year ended October 31, 2004 2003 2002 2001 2000
Net revenues $ 5,743,547 $ 5,628,408 $ 5,935,478 $ 16,468,434 $ 8,323,876
Net (loss) income (1,209,455) (1,785,460) (847,797) (212,546) 177,149
Net (loss) income per common share (basic) (.02) (.08) (.04) (.01) .01
Total assets 8,650,262 9,747,162 11,212,975 9,423,030 16,647,549
Long-term obligations 3,116 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.
7
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 and Direct Cost 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, in some
instances, 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 which it is obligated to provide administrative, claims
and cancellation services 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 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) 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 estimated 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.
The Company will continue to evaluate its critical accounting
policies and adjust them as circumstances dictate.
8
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR 2004 AND FISCAL YEAR 2003
NET REVENUES
Net revenues for the year ended October 31, 2004 totaled $5,744,000, a decrease
of $116,000 from the year ended October 31, 2003 net revenues of $5,628,000. The
decrease in net revenues is the result of the loss of a single major customer
and 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 for policies providing
administrative, claims and cancellation services 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, with increased marketing contacts with other Internet
vendors and with its expansion into the motorcycle market through its
subsidiary, National Motorcycle Dealers Association, LLC..
OPERATING EXPENSES
Operating expenses decreased increased $30,000 to $6,945,000 in the year ended
October 31, 2004 compared to the similar period ended October 31, 2003.
Excluding VSC direct acquisition costs, operating expenses increased $203,000.
The decrease in Direct Acquisition costs is primarily the result of the loss of
a single customer who provided significant business at very low margins. The
increase in all other operating costs occurred in Salaries and employee benefits
and Professional fees as a result of the issuance and exercise of stock options.
Other operating expenses also contributed to the increase as the Company worked
to develop the various programs and materials that are included within the
mantel of the NMDA. The Company recognized a portion of the costs associated
with the acquisition of First Eagle Group, LLC ("First Eagle) as an expense. The
Company acquired First Eagle with the express intention of working with the
owning group to expand and revitalize the Company's marketing capabilities.
During the ensuing six months, it became apparent that strategic conflicts
existed that would prevent the successful implementation of the project. The
project, now known as NMDA, is now moving forward at an accelerating rate. The
increase in all other operating cost occurred primarily in Salaries and employee
benefits and Professional fees as the Company worked to develop the various
programs and materials that are included within the mantel of the National
Motorcycle Dealers Association, LLC. In addition, compensation expense was also
incurred in 2004 from the issuance and exercise of stock options under the terms
of the M.B.A. Holdings, Inc. Employee Stock Incentive Plan for the Year 2004 and
the M.B.A. Holdings, Inc. Employee Stock Incentive Plan for the Year 2004-B.
Licenses and fees increased $40,000 in 2004 over the $21,000 expended in 2003
and Telephone expense decreased $77,000 from the $147,000 expended in 2003, as
the Company was able to settle two disputes arising over software licensing and
negotiated long distance billing rates. In both instances, the Company was able
to achieve reasonable settlement terms to resolve the dispute.
OTHER INCOME (EXPENSE)
Net other income decreased $81,000 to $144, as a result of the Company incurring
interest expense on the line of credit borrowings and because the Company is no
longer eligible to receive further contractual overrides from one of its
insurance companies.
INCOME TAXES
Provisions for income taxes in the period ended October 31, 2004 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 prior year from the carry back of those losses. The
differences in the effective tax rates in fiscal 2004 compared to fiscal 2003
and 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.
SIGNIFICANT EVENTS
The Company has been a principal agent in forming the National Motorcycle
Dealers Association, LLC (NMDA) and has been appointed to provide management and
administration of the Association. NMDA will provide products and services for
the Association members including Extended Motorcycle Warranties for New and
Used Motorcycles, ATV's and Trailers, New Motorcycle Manufacture's Factory
Warranties, Gap Coverage, Motorcycle Leasinging and Financing, Credit
Life/Accident Health Insurance, Family
9
Hospitalization Insurance for Dealerships and their Families, Rental Insurance
for Dealer Motorcycle Rental Programs and Software, Garage keepers Insurance
Program, Liability and Collision Insurance for Motorcycle and Autos for the
dealer and their customers, an Association Credit Card, Dealership Credit Card
Processing, 401(k) Retirement Programs, Roadside Assistance Programs, Tire and
Wheel Protection, Business Forms, Communication Services and a Prepaid Legal
Program. Membership will be required to participate in these programs and the
Company will be compensated through management fees and product sales
commissions. The NMDA's aggregation of many programs represents a rare
opportunity for the Company and its partners to achieve business synergies and a
market edge not previously available to them.
In October, 2004, NMDA entered into an agreement with Wildside Motorcycles, Inc.
(Wildside) whereby NMDA exchanged a 20% membership interest for a 20% stock
ownership of Wildside's common stock. The parties have agreed to jointly market
the software package that Wildside has developed for accounting for motorcycle
rentals that enables individual motorcycle dealers to establish, account for and
invoice their rental operations. The Company will use equity accounting to
record the results of this investment.
In December 2004, the Company acquired a 50% interest in Blue Sky Motorcycle
Rentals, Inc. (Blue Sky) that operates a motorcycle rental business in Colorado
and has sold its business model to similar operations in Arizona, California,
New Mexico, Nevada and Florida. Its business plan envisions significant
expansion into other vacation markets as well as motorcycle exchange programs
among the participants to maximize the usage of the rental motorcycles. The
Company will use equity accounting to record the results of this investment.
PENDING ACCOUNTING STANDARDS
In December 2004, the FASB published FASB Statement No. 123, Share-Based
Payment, ("FAS 123") which will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. The Company is required to
apply FAS 123 at October 31, 2005.
In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("FAS 153"). The amendments made by FAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The Company has adopted FAS 153 in these
statements.
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 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
10
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 $151,000 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 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.
LIQUIDITY AND CAPITAL RESOURCES
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 in the past. During 2004, 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 2004 and January 2005. The Company is aggressively
pursuing the development of NMDA and of other warranty products in its ongoing
efforts to stem the losses.
Working capital at October 31, 2004 consisted of current assets of $4,277,000
and current liabilities of $5,017,000, or a current ratio of 0.85: 1. At October
31, 2003, the current ratio was 0.75:1 with current assets of $4,825,000 and
current liabilities of $6,412,000.
As of October 31, 2004, the Company's cash position increased slightly to
$802,000 from $739,000 at October 31, 2003. Of this amount, $19,000 is
classified as restricted cash in 2004 and $291,000 in 2003. 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 decrease in restricted cash in 2004 is
due to the return of $350,000 advanced by American Bankers Insurance Company. In
addition, 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 $1,175,000 to $7,360,000 at October 31, 2004 from $8,535,000 at
October 31, 2003. 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.
11
The Company collects funds throughout the year and remits a portion of the funds
to the insurance companies. As of October 31, 2004, the amount owed to the
insurance companies decreased by $405,000 to $331,000 from $736,000 at October
31, 2003. The change is due to the timing of payments remitted to and
reimbursements received from the insurance companies as well as the continuing
decline in the numbers of contracts sold .
Deferred revenues, including both the current and non-current portions,
decreased $1,379,000 to $8,501,000 at October 31, 2004 from $9,880,000 at
October 31, 2003. 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 2004.
Table of Contractual Obligations
Payments Due By Period
----------------------
Less than 1-3 3-5 More than
Contractual obligations Total 1 year years years 5 years
----- ------ ----- ----- -------
Capital Lease Obligations $11,213 $8,203 $3,010 $ -- $ --
======= ====== ====== ====== ======
The Company was operating with a working capital line of credit from Merrill
Lynch that expired November 30, 2003. The Company has repayed this indebtedness
in February 2004. The Company also received advances from related parties that
are secured by a a pledge of the unencumbered assets of the Company. As of
October 31, 2004, the related party indebtedness decreased $100,000 to $416,000
from $516,000 at October 31, 2003. 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 outside sources. 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 repaid. Therefore, it is not subject to significant interest rate risk.
The Company has a net loss of $1,209,000 for the twelve months ended October 31,
2004. This net loss is due to the Company having a substantial decline in market
share from increased competition. The future effect of this increased
competition may have an adverse effect on future earnings.
12
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
Index to Consolidated Financial Statements for the years ended October 31, 2004,
2003, and 2002:
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
13
REPORT of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 subsidiaries (the "Company") as of October 31, 2004 and 2003 and the
related consolidated statements of operations and comprehensive loss,
stockholders' (deficit) equity, and cash flows for the years ended October 31,
2004, 2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Companies
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations, comprehensive loss
and changes in shareholder deficit and its cash flows for the years ended
October 31, 2004, 2003 and 2002 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, 2004 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 21, 2005
14
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
--------------------------------------------------------------------------------
ASSETS 2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 782,848 $ 448,240
Restricted cash 18,578 291,437
Investments -- 117,203
Accounts receivable, net of allowance for doubtful accounts
of $0 (2004 and 2003) 377,739 232,184
Prepaid expenses and other current assets 1,706 5,248
Deferred direct costs 3,096,094 3,730,410
----------- -----------
Total current assets 4,276,965 4,824,722
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 330,605 309,128
Office equipment and furniture 140,259 140,259
Vehicle 15,000 15,000
Leasehold improvements 80,182 80,182
----------- -----------
Total property and equipment 566,046 544,569
Accumulated depreciation and amortization (456,650) (426,661)
----------- -----------
Property and equipment - net 109,396 117,908
DEFERRED DIRECT COSTS 4,263,901 4,804,532
----------- -----------
TOTAL ASSETS $ 8,650,262 $ 9,747,162
=========== ===========
See notes to consolidated financial statements.
15
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT 2004 2003
CURRENT LIABILITIES:
Net premiums payable to insurance companies $ 330,651 $ 736,442
Accounts payable and accrued expenses 656,927 622,756
Line of credit borrowings - 196,897
Accounts and note payable - officer 416,566 516,309
Capital lease obligations 7,059 7,882
Deferred revenues 3,606,028 4,332,133
----------- ----------
Total current liabilities 5,017,231 6,412,419
Capital lease obligation - net of current portion 3,116 8,301
Deferred rent - 4,809
Deferred income taxes 12,802 4,666
Deferred revenues - net of current portion 4,895,266 5,548,214
----------- ----------
Total liabilities 9,928,415 11,978,409
----------- ----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value; $.0001 stated value 100,000,000 shares
authorized in 2004 and $.001 par value 20,000,000 authorized in 2003;
2,000,000 Class A convertible preferred issued and outstanding
in 2004, none issued and outstanding in 2003 200 --
Common stock, no par value, $.0001 stated value, 800,000,000 shares
authorized (post split), 120,450,492 shares issued (post split) in 2004 and
21,825,492 (post split) in 2003, 120,134,492 shares (post split)
outstanding in 2004 and 21,509,492 (post split) in 2003 12,045 2,062
Additional paid-in-capital 2,433,286 280,801
Accumulated other comprehensive income -- 119
Accumulated deficit (3,668,184) (2,458,729)
Less: 316,000 (post split) shares of common stock in treasury,
at cost (55,500) (55,500)
----------- -----------
(1,278,153) (2,231,247)
Total stockholders' deficit
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,650,262 $ 9,747,162
=========== ===========
See notes to consolidated financial statements.
16
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
------------------------------------------------------------------------------------------------------------
2004 2003 2002
NET REVENUES:
Vehicle service contract gross income $ 5,384,993 $ 5,328,915 $ 5,406,387
Net mechanical breakdown insurance income 358,554 299,493 529,091
------------ ------------ ------------
Total net revenues 5,743,547 5,628,408 5,935,478
------------ ------------ ------------
OPERATING EXPENSES:
Direct acquisition costs of vehicle
service contracts 4,856,281 5,029,185 5,189,412
Salaries and employee benefits 1,259,624 1,036,242 1,187,139
Mailings and postage 14,683 17,932 101,287
Related party rent expense 291,755 311,912 251,625
Lease expense 9,574 13,842 20,636
Professional fees 171,099 132,232 160,379
Telephone 69,946 147,346 89,907
Depreciation and amortization 29,989 59,996 79,866
Merchant and bank charges 12,891 6,475 8,853
Insurance 14,947 21,587 32,613
Supplies 9,143 11,990 13,884
License and fees 60,941 21,493 26,717
Other operating expenses 144,164 104,578 162,080
------------ ------------ ------------
Total operating expenses 6,945,037 6,914,810 7,324,398
------------ ------------ ------------
OPERATING LOSS (1,201,490) (1,286,402) (1,388,920)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Finance fee income 15,519 21,476 26,210
Interest income 4,962 7,414 13,870
Interest expense (46,128) (13,924) (8,121)
Other income (expense) 22,427 63,906 33,333
Realized gains on investments 3,364 2,914 --
------------ ------------ ------------
Other income (expense) - net 144 81,786 65,292
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,201,346) (1,204,616) (1,323,628)
INCOME TAXES (Note 6) 8,109 580,844 (475,831)
------------ ------------ ------------
NET LOSS $ (1,209,455) $ (1,785,460) $ (847,797)
============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.08) $ (0.04)
============ ============ ============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 69,133,252 21,034,152 21,009,492
============ ============ ============
Net loss $ (1,209,455) $ (1,785,460) $ (847,797)
Comprehensive loss
Net unrealized gain (loss) on
available-for-sale securities -- 5,537 (2,269)
------------ ------------ ------------
Comprehensive loss $ (1,209,455) $ (1,779,923) $ (850,066)
============ ============ ============
See notes to consolidated financial statements.
17
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock Common Stock Additional Other Retained
---------------- ------------------ Paid Comprehensive Earnings Treasury
Shares Amount Shares Amount In-Capital Income (Deficit) Stock
------ ------ ------ ------ ---------- ------ --------- -----
BALANCE, NOVEMBER 1, 2001 21,325,492 2,012 200,851 (3,149) 174,528 (55,500)
Unrealized loss on available-
for-sale securities (2,269)
Net loss (847,797)
---------- ---- --------- ------ --------- ------ --------- ------
BALANCE, OCTOBER 31, 2002 21,325,492 2,012 200,851 (5,418) (673,269) (55,500)
Unrealized gain on available-
for-sale securities 5,537
Issuance of common shares 500,000 50 79,950
Net loss (1,785,460)
---------- ---- --------- ------ --------- ------ --------- ------
BALANCE, OCTOBER 31, 2003 21,825,492 2,062 280,801 119 (2,458,729) (55,500)
Realization of gain on available-
for-sale securities (119)
Issuance of common shares 98,625,000 9,983 1,952,685
Issuance of preferred shares 2,000,000 200 199,800
Net loss -- -- -- -- -- -- (1,209,455) --
---------- ---- ----------- ------ --------- ------ --------- ------
BALANCE OCTOBER 31, 2004 2,000,000 200 120,450,492 12,045 2,433,286 -- $(3,668,184) $(55,500)
========== ==== =========== ====== ========= ====== ========= ======
See notes to consolidated financial statements
18
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
------------------------------------------------------------------------------------------------------------------------------------
OCTOBER 31,
----------------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,209,455) $(1,785,460) $ (847,797)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 29,989 59,996 79,866
(Gain) loss on sale of equipment -- -- (22,500)
Related party rent expense accrued but not paid -- 311,912 --
Issuance of stock for services 243,601 -- --
Deferred income taxes 8,136 572,112 (26,737)
Changes in assets and liabilities:
Restricted cash 272,859 (6,471) (124,564)
Accounts receivable (145,555) (49,884) (35,990)
Prepaid expenses and other current assets 3,542 5,181 69,921
Deferred direct costs 1,174,947 270,882 (2,166,872)
Income tax receivable -- 436,778 (41,291)
Net premiums payable to insurance companies (405,791) (56,947) 408,276
Accounts payable and accrued expenses 61,599 100,620 143,311
Accounts and notes payable - related party 36,764 -- --
Other liabilities -- (49,572) (175,838)
Deferred rent (4,809) (26,255) (11,192)
Deferred revenues (1,379,053) (242,638) 2,179,649
----------- ----------- -----------
Net cash used in operating activities (1,313,226) (459,746) (571,758)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (21,477) (3,833) (17,593)
Proceeds from sale of equipment -- -- 22,500
Purchase of investments -- (2,612) (458)
Proceeds from sales and maturities of investments 117,084 49,988 --
----------- ----------- -----------
Net cash provided by investing activities 95,607 43,543 4,449
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawings on line of credit -- 196,897 643,654
Issuance of common stock 1,719,067
Repayments of line of credit (196,897) -- (643,654)
Proceeds of note payable - officer 70,000 67,466 106,548
Repayment of note payable - officer (33,935) -- --
Payments on capital lease obligations (6,008) (11,440) (10,743)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,552,227 252,923 95,805
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 334,608 (163,280) (471,504)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 448,240 611,520 1,083,024
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 782,848 $ 448,240 $ 611,520
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,365 $ 3,644 $ 4,902
=========== =========== ===========
Cash paid for (recovered from) income taxes -- $ (431,186) $ (425,396)
=========== =========== ===========
NON-CASH TRANSACTIONS:
Related party notes payable satisfied by issuing preferred shares
in 2004, common shares and services provided in 2003 $ 200,000 $ 80,000 $ --
=========== =========== ===========
Unrealized gains (losses) on available -for-sale securities -- $ 5,537 $ (2,269)
=========== =========== ===========
Property and equipment financed with capital lease obligations $ -- $ 19,401 $ --
=========== =========== ===========
Issuance of stock for services $ 243,601 $ -- $ --
=========== =========== ===========
See notes to consolidated financial statements.
19
M.B.A. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2004, 2003 AND 2002
--------------------------------------------------------------------------------
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, Motorcycles, recreational vehicles, and travel trailers, and providing
claims administrative services for MBI and VSC sold. The Company operates in
approximately 27 states. The consolidated financial statements include the
accounts of M.B.A. Holdings, Inc. and its wholly owned subsidiary, Mechanical
Breakdown Administrators, Inc. and the National Motorcycle Dealers Association,
LLC. 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. There are no such
investments at October 31, 2004. 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, 2004 and 2003, 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 2004 and 2003.
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 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, 2004, 2003 or 2002.
g. 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.
20
h. 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.
In certain instances, 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
for 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 2004 is a deferral of
revenues of $56,000.
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) as a
reduction or increase (as applicable) in total revenues.
VSCs are generally 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 also sells VSC on behalf of others. In these instances, it
acts solely as a broker and recognizes income at the time of the
sale.
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 and VSC sold on behalf of others 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.
i. Income Taxes - Provision for recoverable income taxes and related
income tax receivable in the year ended October 31, 2002 reflect the
fact that the Company carried back the 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.
j. Net Income (Loss) Per Share - Net income (Loss) 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.
21
Number of shares used in computing income (Loss) per share
Year Ended October 31, 2004 2003 2002
----------- ----------- -----------
Average number of common shares
outstanding - Basic 69,133,252 21,034,152 21,009,492
Dilutive shares from common
stock options
calculated using the treasury
stock method -- -- --
----------- ----------- -----------
Average number of common and
dilutive shares outstanding 69,133,252 21,034,152 21,009,492
=========== =========== ===========
The weighted average shares outstanding gives retroactive effect for all periods
presented of the 10 for 1 forward stocksplit authorized in March 2004 and the 1%
stock dividend declarded in November 2004.
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, 2004, 2003, 2002, 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 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.
In December 2004, the FASB published FASB Statement No. 123
restated, Share-Based Payment, ("FAS 123R") which will provide
investors and other users of financial statements with more complete
and neutral financial information by requiring that the compensation
cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. The Company is
required to and will apply FAS 123R at October 31, 2005.
As of December 2004, the FASB issued Statement No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions ("FAS 153"). The amendments made by FAS
22
153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged.
The Company has adopted FAS 153 in these statements.
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, 2004 and 2003, the Company had uninsured cash of
approximately $916,000, and $619,000, respectively.
p. Advertising costs are expensed as incurred and are included in other
operating expenses. Advertising expense totaled approximately
$17,000, $19,000 and $23,000 for the years ended October 31, 2004,
2003 and 2002, respectively.
q. Reclassifications - Certain reclassifications have been made to the
2003 and 2002 amounts to conform to the 2004 presentation.
r. Stocksplit and Stock Dividend - The accompanying financial
statements give retroactive effect in all periods presented of the
10 for 1 forward stocksplit authorized in March 2004 and the 1%
stock dividend declared in November 2004.
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. The Company has
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 service VSC contracts 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 2004 and January 2005. The Company is attempting to
reverse this downward trend with its VPN system, with increased marketing
contacts with other Internet vendors and with its expansion into the motorcycle
market through its subsidiary, National Motorcycle Dealers Association, LLC.
3. SIGNIFICANT EVENTS
The Company has been the principal agent in forming the National Motorcycle
Dealers Association, LLC (NMDA) and has been appointed to provide management and
administration of the Association. NMDA will provide or plans to provide
products and services for the Association members including Extended Motorcycle
Warranties for New and Used Motorcycles, ATV's and Trailers, New Motorcycle
Manufacture's Factory Warranties, Gap Coverage, Motorcycle Leasing and
Financing, Credit Life/Accident Health Insurance, Family Hospitalization
Insurance for Dealerships and their Families, Rental Insurance for Dealer
Motorcycle Rental Programs and Software, Garage keepers Insurance Program,
Liability and Collision Insurance for Motorcycle and Autos for the dealer and
their customers, an Association Credit Card, Dealership Credit Card Processing,
401(k) Retirement Programs, Roadside Assistance Programs, Tire and Wheel
Protection, Business Forms, Communication Services and a Prepaid Legal Program.
Membership will be required to participate in these programs and the Company
will be compensated through management fees and product sales commissions. The
NMDA's aggregation of many programs represents a rare opportunity for the
Company and its partners to achieve business synergies and a market edge not
previously available to them.
In October, 2004, NMDA entered into an agreement with Wildside Motorcycles, Inc.
(Wildside) whereby NMDA exchanged a 20% membership interest for a 20% stock
ownership of Wildside's common stock. The parties have agreed to jointly market
the software package that Wildside has developed for accounting for motorcycle
rentals that enables individual motorcycle dealers to establish, account for and
invoice their rental operations. The Company will use equity accounting to
reflect its share of the results.
In December 2004, the Company acquired a 50% interest in Blue Sky Motorcycle
Rentals, Inc. (Blue Sky) that operates a motorcycle rental business in Colorado
and has sold its business model to similar operations in Arizona, California,
New Mexico, Nevada and Florida. Its business plan envisions significant
expansion into other vacation markets as well as motorcycle exchange programs
among the participants to maximize the usage of the rental motorcycles. The
Company will use equity accounting to reflect its share of the results.
23
4. RELATED PARTY TRANSACTIONS
Included in accounts and note payable - officer at October 31, 2004 and 2003 is
$398,000 and $349,000 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, 2004, 2003 and 2002 was $292,000,
$312,000 and $252,000, 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 balance was repaid through the issuance of Class A convertible preferred
stock during the fiscal year ended October 31, 2004. At October 31, 2003 there
was $167,709 outstanding. The loans mature annually on October 31st and bear
interest at a rate of 6%. During fiscal 2004, 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 includes
the unpaid rents discussed above, 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 Company sold its available for sale securities in February 2004 and repaid
the secured line of credit with the proceeds. As of October 31, 2004 there are
no similar investments. At October 31, 2003, the marketable securities consisted
of the following:
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
============== =============== =============== ============
6. INCOME TAXES
Income taxes were as follows for the years ended October 31:
2004 2003 2002
---- ---- ----
Current -- -- $(450,668)
Deferred 8,109 580,844 (25,163)
------- -------- ---------
Total income tax (benefit) expense $ 8,109 $580,844 $(475,831)
======= ======== =========
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:
2004 2003 2002
---- ---- ----
Federal statutory income tax rate 34% 34% 34 %
State taxes 6 6 6
2002 2001 2000
---- ---- ----
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) (40) (6)
Deferred revenues, net 1 8 (2)
Other -- 40 --
---- ---- ----
Effective income tax rate 1% 48% (36)%
==== ==== =====
At October 31, 2004, 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 $1,404,000 for federal income tax
purposes as well.
The deferred tax liabilities at October 31, 2004 and 2003 are composed of the
tax effects of:
2004 2003
---- ----
Excess of net book basis of fixed
assets over tax basis $ 34,102 $ 4,666
======== ========
7. STOCK OPTIONS AND STOCK AWARDS
The Company adopted the M.B.A. Holdings, Inc. Employee Stock Incentive Plan for
the Year 2004 and the M.B.A. Holdings, Inc. Non-Employee Directors and
Consultants Retainer Stock Plan for the Year 2004 on April 16, 2004 and adopted
the M.B.A. Holdings, Inc. Employee Stock Incentive Plan for the Year 2004-B and
the M.B.A. Holdings, Inc. Non-Employee Directors and Consultants Retainer Stock
Plan for the Year 2004-B on July 7, 2004. The Company has reserved 110,000,000
shares for these plans. Pursuant to the terms of those plans, The Company has
issued options to employees for 87,875,000 shares and to Directors and
consultants options for 7,750,000. All of such options have been exercised in
Fiscal 2004.
The Company applies APB Opinion No. 25 and related interpretations in measuring
compensation expense for its stock options. The Company recognized $243,601 of
compensation expense to employees in 2004 and $183,601 of compensation expense
to Directors and Consultants. During the years ended October 31 2003 and 2002,
no compensation expense was recognized.
25
A summary of the Company's outstanding options as of October 31, 2004 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
============ ========
A summary of the activity regarding the Company's outstanding options for the
years ended October 31 is presented below:
2004 2003 2002
------------------- -------------------- --------------------
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 95,625,000 0.02 -- -- -- --
Options exercised (95,625,000) (0.02) -- -- -- --
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. No options have been granted to date under these
incentive plans.
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, 2006. The equipment under capital lease is included in property and
equipment at October 31, 2004 and 2003 with values of $20,965 and $28,873
respectively, net of accumulated amortization of $5,093 and $49,463
respectively. Total rental expense was approximately, $291,000, $312,000 and
$294,000 for the years ended October 31, 2004, 2003 and 2002, respectively.
26
Future minimum lease payments under non-cancelable lease agreements at October
31, 2004 are as follows:
Capital
Leases
------
2005 $ 8,203
2006 3,010
---------
Total 11,213
Less portion representing interest 1,038
---------
Total $ 10,175
=========
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.
9. SIGNIFICANT CUSTOMERS
In 2004 a major manufacturer accounted for $1,750,893 of VSC revenues or 33% of
the 2004 Net Commission Income. During 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 had available a $200,000 working capital line of credit which
expired 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. The Company repayed the indebtedness in February 2004. There was no
outstanding balance at October 31, 2004. There was $196,897 outstanding at
October 31, 2003.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the year ended October 31, 2004
-----------------------------------
1st 2nd 3rd 4th
Qtr Qtr Qtr Qtr
--- --- --- ---
Net revenues $1,334,120 $1,325,540 $1,303,371 $1,780,516
Gross profit 182,262 170,530 190,090 160,369
Net (loss) income (179,186) (238,897) (318,248) (473,124)
Net (loss) income per share (0.01) (0.01) (0.01) --
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 $1,365,481
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 (0.01) (0.02) (0.02) (0.04)
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.
Item 9A. Controls and Procedures
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Principal Financial Officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Principal Financial Officer have concluded that these disclosure controls
and procedures will be improved by performing the monthly deferral calculations
on a cumulative basis. This revised procedure was adopted in the quarter ending
October 31, 2004. There are no other changes in the internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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 65 President, CEO, Chairman of the Board, Director
Judy K. Brotherson 57 Vice-President, Secretary, Director
Edward E. Wilczewski 64 Director
Shelly Beesley 42 Director
Donald A. Gay 36 Director
Robert F. Murphy 68 Director
Gaylen and Judy Brotherson are husband and wife and Donald A. Gay is a
Son-in-Law. 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, 65, 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.
Judy Brotherson, 57, 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, 64, 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.
Shelly Beesley, 42, became a Director and a member of the Audit Committee in
March 2004. Ms Beesley worked with the Company as an Administrative Specialist
for more than ten years and is familiar with all aspects of its operations. She
was educated at Red River Community College and brings her extensive background
to the Board of Directors.
28
Donald A. Gay, 36, became a Director in March 2004. Mr. Gay holds a degree from
DeVry University and specializes in electronic communications and networking
where he has more than fifteen years of varied experience.
Robert F. Murphy, 68, became a Director and a member of the Audit Committee in
October 2004. Mr. Murphy holds a Bachelor of Science Business degree from
William Cerry College and an MBA from Webster College. Mr. Murphy served as an
officer in the U.S. Army for more than twenty years in increasingly responsible
positions in operations and logistics. He retired as a Lieutenant Colonel and
currently manages his consulting practice.
OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Dennis M. O'Connor, 65, 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, 2002, 2003 and 2004.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- ------------------------
Restricted Stock
Stock Option
(shares) (shares)
Name of Principal Position Year Salary Bonus Other(1) awards awards
----------------- -------- ---- ------ ----- -------- ------ ------
Gaylen M. Brotherson Chairman of Board 2002 50,000 14,173
President and 2003 50,000 8,184
Chief Executive Officer 2004 50,000
Judy K. Brotherson Vice-President, 2002 50,000
Secretary 2003 50,000
2004 50,000
(1) Included in Other Annual Compensation are an auto lease paid for Gaylen
Brotherson in fiscal 2002, auto insurance for Gaylen Brotherson in fiscal 2002
and life insurance premiums for Gaylen Brotherson in years 2002, 2003 and 2004
Option Grants In Last Fiscal Year
The Company has issued options to employees for 87,875,000 shares and to
Directors and consultants options for 7,750,000. All of such options have been
exercised in Fiscal 2004.
29
Other Incentives and Compensation
Currently, stock options are granted by the Board of Directors. At October 31,
2004, there were only two employees, Gaylen Brotherson and Judy Brotherson, who
had unexercised 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, 2004 concerning
shares of Common Stock with no par value, stated value $.0001 and Class A
Convertible Preferred Stock, 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 8,688,620 shares (1) 7.3%
Brotherson
9419 E. San
Salvador Suite
105
Scottsdale, AZ 85258
Common Stock Judy 8,687,540 shares (1) 7.3%
Brotherson
9419 E. San
Salvador Suite
105
Scottsdale, AZ 85258
Common Stock CEDE & 97,817,280 shares 82.3%
Co
Box 220
Bowling Green
Station
New York, NY 10274
Common Stock All Directors and 17,398,160 shares 14.6%
Executive Officers as
a Group (seven people)
Preferred Gaylen Brotherson 2,000,000 shares 100.0%
Stock 9419 E. San Salvador
Suite 105
Scottsdale, AZ 85258
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 and the conversion of 200,000 referred shares
into 200,000,000 common shares. If these options were exercised by Gaylen
Brotherson and Judy Brotherson, then their percentage of ownership would change
to 65.1% and 2.7%, 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 $291,000,
$312,000 and $252,000 for the years ended October 31, 2004, 2003, and 2002,
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 99.1 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 99.2 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 99.3 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 99.4 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
From 8-K Current Report was filed June 23, 2004. This Current Report
stated that Company had acquired the First Eagle Group, LLC. and it's
"Screaming Eagles" Parts Performance Motorcycle Warranty programs.
Subsequently, it was determined that the assets acquired were
immaterial to 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
MBA Holdings, Inc.
By: /s/ Gaylen M. Brotherson Dated: February 10, 2005
------------------------------------
Gaylen Brotherson
Chairman of the Board and Chief
Executive Officer
By: /s/ Dennis M. O'Connor Dated: February 10, 2005
-----------------------------------
Dennis M. O'Connor,
Chief Financial Officer
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