UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

WASHINGTON,D.C. 20549

FORM10-KSB

 

[] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934

 

Forthe fiscal year ended December 31, 2003

 

Or

 

[X ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

Forthe transition period from April 1, 2003 to December 31, 2003

 

CommissionFile No. 000-33037

 

NBOSYSTEMS, INC.

(Formerlyknown as NBO, Inc., a Utah Corporation)

 

| STATE      OF MARYLAND

(State      or Other Jurisdiction of Incorporation or Organization)
55-0795927

(IRS      Employer Identification Number)

 
3676      West California Avenue, Building D

Salt      Lake City, Utah

(Address      of Principal Executive Offices)
84104

(Zip      code)
 

(801)887-7000

(Registrant'sTelephone Number, Including Area Code)

 

Securitiesregistered under Section 12(b) of the Act: None

 

Securitiesregistered under Section 12(g) of the Act:

CommonStock, Par Value $.0005

(Titleof Class)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.

Yes __X__No _____

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. [ X ]

 

Stateissuer's revenues and other income for its most recent fiscal year: $8,683,215

 

Theaggregate market value of the common stock held by non-affiliates as of March30, 2004 was approximately $54,829,304

 

As ofMarch 30, 2004, there were 16,336,332 shares of the issuer's common stock,$0.0005 par value, issued and outstanding. .

 

DOCUMENTSINCORPORATED BY REFERENCE: NONE

 

TransitionalSmall Business Disclosure Format (check one):

 

Yes____ No __X__
**TABLEOF CONTENTS

**PART      I** 
** **Page
ITEM      1. DESCRIPTION OF BUSINESS  
3
ITEM      2. DESCRIPTION OF PROPERTY  
10
ITEM      3. LEGAL PROCEEDINGS  
10
ITEM      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  
10
**PART      II**
ITEM      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  
10
ITEM      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS      OF OPERATIONS  
11
ITEM      7. FINANCIAL STATEMENTS  
19
ITEM      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND      FINANCIAL DISCLOSURE  
19
ITEM      8A. CONTROLS AND PROCEDURES  
19
**PART      III**
ITEM      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  
20
ITEM      10. EXECUTIVE COMPENSATION  
21
ITEM      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND      RELATED STOCKHOLDER MATTERS  
23
ITEM      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  
24
ITEM      13. EXHIBITS AND REPORTS ON FORM 8-K  
25
ITEM      14. PRINCIPAL ACCOUNTING FEES AND SERVICES  
26
SIGNATURES  
27
**PART      F/S  **
28
 

Forward-lookingStatements
* 

Thefollowing discussion of the Company's financial condition and results ofoperations should be read in conjunction with its financial statements and therelated notes to such financial statements included elsewhere in this Form10-KSB. The following discussion contains forward-looking statements thatinvolve risks and uncertainties. Investors should not place undue reliance onthese forward-looking statements. These forward-looking statements are based oncurrent expectations and actual results could differ materially from thosediscussed herein. The Company's actual results could differ materially fromthose predicted in these forward-looking statements, and the events anticipatedin the forward-looking statements may not actually occur. Although the Companybelieves that the expectations reflected in these forward-looking statements arereasonable, the Company cannot guarantee future results, levels of activity,performance or achievements. The Company is under no duty to update any of theforward-looking statements after the date of this Form 10-KSB to conform thesestatements to actual results or to reflect the occurrence of unanticipatedevents, unless required by law.***PARTI

Item 1.Description of Business.***(a)Business History*
 

TheCompany commenced its gift certificate business in 1998. Since 1998, the Companyhas established mall gift certificate program agreements with developers andoperators of over 100 mall properties in 38 states as detailed in previousfilings. Those developers and operators include well known industry names suchas Glimcher Properties, The Mills Corp., General Growth Properties, The RouseCompany, Urban Properties and many other independent mall operators. Sinceinception, the Company has sold approximately 5.8 million gift certificates witha face value of approximately $210 million dollars.

 

InApril 2000, the Company entered into an exclusive three-year agreement withDarden Restaurants, Inc. to sell gift cards via the Internet for all OliveGarden, Red Lobster, Bahama Breeze and Smokey Bones restaurants. Issuances sinceinception through December 31, 2003 include fulfillment of approximately 283,000Darden and Darden Restaurant Concept gift cards totaling approximately $8.73million. The Company is actively pursuing other Internet fulfillment clientssimilar to Darden Restaurants.

 

In thefall of 2001, the Company expanded its product offerings to the malls fromexclusively paper gift certificates to stored value gift cards, or both,utilizing the Company's Dual Advantage CTU ("DACTU"). The DACTUprovides the mall operator the ability to issue paper gift certificates orstored value gift cards based on the mall operator's or consumer's preference.The Company's proprietary software for each distribution method is loaded on theDACTU when shipped from the Company. To the best of the Company's knowledge, NBOis the first Company to offer a dual gift certificate/gift card program to malldevelops/operators.

 

TheCompany entered into an agreement with WildCard Systems located in Sunrise,Florida in March 2001 to provide the processing support necessary for aMasterCard platform mall gift card. Concurrently, the Company entered into anagreement with Bank of America to be the issuing member of the MasterCard mallgift cards. The Company initially implemented gift card programs in 5 malls withseveral developers including JP Realty (now General Growth Properties), BayerProperties and Prime Retail. The WildCard Systems agreement is drawing to aclose. In its place, the Company has entered into the agreements described inthe following paragraphs.

 

In thefall of 2002 the Company entered into a Master Agreement with Metavante, aWisconsin corporation with offices located in Milwaukee, Wisconsin to provideprocessing software and services in conjunction with the issuance of Discover/Novusgift cards and related gift card products. Concurrently, the Company enteredinto a Cash Card Issuer Agreement with Discover Financial Services, Inc.,("DFS"), a Delaware Corporation with offices located in Riverwoods,Illinois. DFS operates the Discover Card Network that allows cardholders topurchase goods or services from participating merchants using Discover mall giftcards issued by the Company. NBO became the first and only issuer of Discover/Novusstored value gift cards to be used in the mall industry. NBO also became thefirst and only company in the country to provide two distinct mall gift cardplatform offerings (MasterCard & Discover) at the same time to the mallindustry.

 

In thesummer of 2003 the Company entered into an agreement with First Data Resources("FDR"), a subsidiary of First Data Corp. to provide processingservices similar to that of WildCard Systems, Inc and Metavante. The agreemententered into with FDR was for the Company's third gift card processing platform- VISA. Concurrently, the Company entered into an agreement with Bank First ofSioux Fall, South Dakota to be the issuing member of the VISA platform mall giftcards. NBO also became the first and only company in the country to providethree distinct mall gift card platform offerings (MasterCard, Discover &VISA) at the same time to the mall industry.

 

Sincethe initial gift card rollout in the fall of 2001, the Company now has a totalof 25 malls offering gift cards with sales volume through December 31, 2003 ofapproximately 331,000 cards representing approximately $17.2 million in loadedvalue on the gift cards.

 

On July31, 2002 the Company entered into a five year License and Services Agreementwith Card Commerce International, Inc., ("CCI"), a Delawarecorporation with offices located in Los Angeles, California. CCI is a providerof data and risk management services to loyalty program providers, merchantacquirers/processors and others. CCI is also a provider of affinity/loyaltyservices, matching merchant and consumer participants, determining theireligibility and calculating the amount of their rebates, rewards and incentives.This agreement will be incorporated into the Children's Heroes credit cardregistration efforts and other product offerings described below.

OnSeptember 17, 2002 based on the long-term success with the Darden fulfillmentcontract, and a favorable reference from the Darden Corporation itself, NBO wasapproached by ValueLink, a wholly owned subsidiary of First Data Corp.Subsequent to the meetings initiated by ValueLink, NBO entered into an exclusiveMaster Services Agreement with IPS Card Solutions, Inc. (doing business asValueLink), a Maryland corporation, with offices located in Englewood, Colorado.ValueLink now contracts with NBO, on an outsourced back-end support servicesbasis, to allow and enable ValueLink to offer, sell and provide to each and anyof its clients that use ValueLink's Stored Value Card Services, card orderfulfillment services. NBO will provide all fulfillment, activation, loading ofvalue, packaging and customer support for ValueLink merchants through Internetorders and orders received by the Company's Call Center, billable to ValueLinkon a per card basis. As of March 31, 2003 the Company received work orders fromIPS Card Solutions, Inc. via ValueLink to provide Internet and Call Centerfulfillment for stored value gift cards for several ValueLink clients. ValueLinkand NBO are working together diligently to bring additional ValueLink clients toNBO for fulfillment services. Sales since inception for ValueLink clientsthrough December 31, 2003 include fulfillment of approximately 9,400 gift cardstotaling approximately $333,000.

 

InDecember 2002, the Company initiated its Children's Heroes Fundraising Program -a "grass roots" community fundraising program. The program is designedto increase transactions, monthly visits, and incremental profit for shoppingcenters, restaurants, and local merchants while concurrently raising funds forcommunity schools, youth sports, youth groups, and other local nonprofitorganizations. NBO has a sales force in regional markets ( Regional EducationDirectors "REDs") as well as customer service representatives(Community Outreach Educators "COREs") located at the Company's SaltLake City headquarters. The COREs make outbound calls with schools andnon-profit organizations to set up appointments for the REDs. The REDs makeface-to-face visits with the schools and non-profit organizations to present themerits of the Children's Heroes program. The Company has executed contracts topurchase "scrip" gift certificates and gift cards in bulk at adiscount from many national merchants. Scrip is a term analogous to giftcertificates/cards, but is specific to the fundraising industry. Schools andnon-profit organizations purchase the scrip at full face value. The merchantdiscount negotiated between NBO and the national retailer is split between theschool or non-profit organization and NBO. The Company records as revenue thefull face value of the scrip certificates and cards upon sale to the school ornon-profit organization. The Company records a cost of revenue for the actualcost of the scrip paid to the national merchant and the portion of the merchantdiscount paid to the school or non-profit organization. Margins on this businesschannel are thin at approximately 1.5% to 2.5%. The Company experienced salesand revenues from the Children's Heroes program since inception through December31, 2003 of approximately $1.2 million. The Company anticipates maintaining the4 major regional markets that are fully operational during fiscal 2004. As ofDecember 31, 2003 the Company is conducting scrip operations based in Boston,Massachusetts; Atlanta, Georgia; Dallas and Houston, Texas; and Salt Lake City,Utah. The Company intends to rollout a total of 45 major markets nationwide by2007. The Company is also developing a multi-merchant stored value scrip card(the "Community Scrip Card" or "CSC") to complementtraditional scrip gift certificate and gift card sales. This newly developedproduct provides the Company the ability to increase the margins on traditionalscrip products. The CSC is still in a test phase as the national merchantcontracts are being executed. The REDs and COREs will sell the CSC directly totargeted schools and non-profit groups similar to traditional scrip programs.The Company is also considering a distribution partnership or licensingagreement to a third party to gain market share quickly. The CSC is furtherdescribed in detail in Item 1.b.3.

 

As ofDecember 31, 2003 the Company has contracted to re-sell gift certificates ofseveral hundred national retailers. The Company purchases their giftcertificates and then re-sells them on the Company's Internet site, however, theCompany has not allocated a marketing budget for this initiative to date. Salessince inception through December 31, 2003 include fulfillment of approximately13,900 gift certificates totaling approximately $181,000.
* 

(b)Business of the Company*
 

1.Principal Products and Services

 

TheCompany operates in one business segment - the sale of gift certificates andgift cards, which it sells through multiple distribution channels. The Company'sprimary distribution channel is to provide comprehensive paper gift certificateand magnetic stored value gift card programs to shopping mall managers, non-mallretailers and consumers. The Company provides shopping mall managers with a giftcertificate/gift card product that is accepted and redeemable at all mallstores. The Company administers the entire program including accounting,banking, and complying with abandoned property laws (handling of non-redeemedgift certificates and gift cards).

 

TheCompany's secondary distribution channel includes fulfillment of giftcertificates and gift cards ordered by consumers, businesses and merchants viathe Internet and the Company's toll free telephone lines.

TheCompany's third distribution channel is fundraising for non-profitorganizations, primarily K-12 schools, via the Children's Heroes brand nameutilizing Scrip, a Community Scrip Card, credit card registrations and anaffinity/loyalty credit card program.

TheCompany's revenue model is predicated on the following sources:
-  Interest    income on funds held for redemption of purchased but unredeemed gift    certificates and gift cardsConvenience    fees charged to customers upon the purchase of gift certificates and gift    cards via the Internet and Call CenterMerchant    discounts provided by retailers in connection with the re-sale of gift    certificates and gift cardsMaintenance    fees on gift cards (where not prohibited by law)Funds    (breakage) from unused gift certificatesShipping    and fulfillment feesCommissions    and registration fees on credit card registrations and affinity card    sign-ups
Theaccounting treatment for recognition of revenue and other income from the saleof gift cards and gift certificates is complex. The face value of giftcertificates and gift cards is not included in the revenues and other income ofthe Company in the financial statements in cases where the Company's sale ofgift certificates and gift cards is similar to the activities of an agent thatreceives commissions. However, the Company does include the face value from thesale of gift certificates and gift cards in the Company's revenue and otherincome in financial statements in cases where the Company bears financial riskand other indicators of control over the product or service. The accountingtreatment in each case will depend upon the facts and circumstances, includingthe terms of the contracts relating to the sale of the gift certificates or giftcards. In cases where the face value from the sale of gift certificates and giftcards is not included in revenues and other income of the Company, the amount ofsuch face value is disclosed in Part II, Item 6, Results of Operations. Revenuesfrom convenience fees, merchant fees, interest on the proceeds from the purchaseof gift certificates and gift cards in the restricted accounts, maintenance feeson gift certificates and gift cards (where not prohibited by law) and breakageare recognized by the Company as earned.

2.Distribution Methods

 

TheCompany manages or sells gift certificates and gift cards through the followingchannels:
*-  Dual    Advantage Counter Top Units ("CTUs"): These computer,    monitor and keyboard combinations are located at Customer Service counters    in malls and other retail locations where mall employees sell gift    certificates and/or gift cards by credit/debit card, cash or check. The Dual    Advantage PC Software allows the consumer the choice of purchasing a paper    gift certificate or a plastic magnetic stored value gift card. Transactions    conducted in this manner result in immediate order fulfillment with the gift    certificate or gift card delivered immediately to the customer by a mall or    retail distribution center employee.*Electronic  Kiosks ("Kiosks"): The Company has developed  computer-enabled kiosks for purchasing gift certificates. With increased  consumer awareness and use of the Internet to order gift certificates and gift  cards, kiosk technology has become less of a business focus by the Company and  will not be actively pursued beyond installations currently in place.*Business  to Business ("B2B") Sales: The Company has a dedicated sales  force to market gift certificate and gift card programs to corporations for  holiday and special occasion gifts to employees and clients, and for  incentive/reward programs throughout the year. These programs are an important  complement to the Company's other sales efforts. Direct corporate sales  accounted for approximately 10% of the Company's 2003 sales volume measured by  the face amount of the gift certificates and gift cards sold.*E-Commerce:  The Company's Internet sites www.thegiftcertificatecompany.com,  www.thegiftcardcompany.com and www.nbo.com allow individual shoppers or  corporate clients to purchase gift certificates or gift cards for any mall or  merchant in the Company's network. Specifically, an individual can purchase a  number of gift certificates or gift cards from malls or retail stores in  different geographic regions by engaging in one e-commerce transaction.  Consumers that have purchased a stored value gift card, or recipients of a  stored value gift card can access www.giftcardbalance.com to check balances of  remaining funds available. Non-profit organizations place e-commerce orders  through the Company's fundraising channel, Children's Heroes at  www.childrensheroes.com.
The  Company operates a 192-seat Call Center for inbound and outbound orders by  consumers and corporations for mall gift certificates and gift cards, national  retailer gift certificates and gift cards, and local Salt Lake City merchant  gift certificates. The Company currently uses approximately fifteen seats.  Fulfillment of all Internet orders and corporate orders taken through the Call  Center are processed and shipped from the Company's corporate headquarters in  Salt Lake City, Utah.

3. NewProducts and Services

 

InDecember 2002, the Company initiated the ramp-up of the Children's HeroesFundraising Program utilizing traditional Scrip products. In 2003 and continuinginto 2004, significant efforts are being focused upon entering into agreementswith national merchants to participate in the Community Scrip Card ("CSC")- the next generation in the Scrip industry.

 

Intraditional Scrip programs, the non-profit supporter must purchase multiplemerchants' Scrip certificates. This can be inconvenient and has the potentialfor loss, damage or theft. The CSC is a stored value Scrip card that is acceptedat all participating merchants and is as easy to utilize as a single credit ordebit card. The Company expects wide acceptance of this new product bynon-profit supporters.

 

The CSCis similar to traditional paper Scrip products in that the non-profit supporterspurchase CSC's through Children's Heroes (the Company). Children's Heroes (theCompany) has already negotiated discounts with participating merchants. Thosediscounts are shared between the non-profit organization and the Company whenthe CSC is purchased by the non-profit supporter at full face value.

 

The CSCis similar to offerings by Scrip competitors to Children's Heroes. However, theCompany believes that marketing and distribution of the competitor's productsare limited at this time, providing an opportunity for the Company to expand itsoperations. The Company intends to continue supporting traditional Scripproducts and programs while complementing them with the CSC.

 

Theflexibility of the CSC is anticipated to boost sales volume of traditional Scripofferings. We believe this is a win-win for the Company, the merchants, thenon-profit supporters and for the non-profit organizations themselves.Non-profit supporters like the CSC because one card is accepted at multiplemerchants. The non-profit organizations organizing the Scrip efforts may reduceorder taking/fulfillment responsibilities as well as reduce inventory and theassociated inventory risks. The Company may reduce the inventory carrying costsof traditional Scrip products. The Company is also developing technology tore-load value on the CSC via the Internet or a toll-free number. This featurewill help the Company defray overhead costs associated with the production ofnew cards. The CSC is also attractive to our merchant processing partners, asincreased volume is transacted over their processing highway, generatingadditional revenue for those partners. The merchants benefit from the increasedsales volumes generated through the CSC in addition to their traditional Scripofferings.

 

Theparticipation of the national merchants is key. The traction established withthe national merchants enables participation of local and regional merchantsparticular to the markets in which the Company has a Children's Heroes presence.Non-profit supporters have expressed an interest in patronizing local merchantsto support their community through use of the CSC, with the proceeds of themerchant discounts directed to their desired non-profit organization.

 

4.Competition.

 

TheCompany will encounter competition from alternative methods of distributing anddelivering gift certificates and gift cards or Scrip and associated fundraisingproducts. All programs will be faced with competition from other purveyors ofgift certificates, gift cards and Scrip - potentially from much larger financialservices companies that may choose to enter the gift certificate, stored valuecard, or Scrip marketplace.

 

a. MallDistribution Channel
 

TheCompany made a strategic business decision in the first quarter of 1998 todevelop and implement a turnkey gift certificate distribution system for theUnited States shopping center industry. This program was introduced at theInternational Council of Shopping Centers convention ("ICSC") in LasVegas, Nevada in May of 1998. At the time of introduction, there were two typesof competitors.

Thefirst type consists of the actual mall developers that currently manage theirown gift certificate/gift card programs in-house. The Company's challenge is toconvert these in-house competitors into customers by demonstrating the benefitsof out-sourcing to the Company, and the cost savings and customer service issuesynergies the Company can provide to the mall owners, thereby eliminatingmanpower and overhead associated with an in-house program. The Company believesthat with the availability of stored value gift cards, and the complexities ofadministering such a detailed program, mall developers who have chosen in thepast to manage their own paper gift certificate programs may see the benefits ofoutsourcing this service if they want to convert from paper gift certificates toplastic gift cards expeditiously and with a lower administrative burden. TheCompany's gift certificate and stored value gift card services provide a revenuesharing opportunity for the mall developer that did not exist with a paper giftcertificate program as recently as 2002, providing another incentive for malldevelopers to do business with the Company. The Company has established fourlong-term contracts with significant mall developers that previously managedtheir programs in-house.

 

TheCompany's primary non-mall developer competitor is Mid-America Gift CertificateCompany ("Mid-America"), a subsidiary of Mid-America Bank, whollyowned by BB&T Corporation of Winston-Salem, North Carolina. MidAmericacurrently has programs with approximately 450 malls in the United Statesrepresenting approximately $250 million in gross gift certificate sales.Mid-America acquired market share in the mall industry because it was first tomarket. Mid-America offers a software program with hardware designed to dispensegift certificates from Customer Service Centers only. NBO believes thatMid-America does not offer any Kiosk technology, corporate fulfillment orInternet capabilities. Mid America has announced a stored value gift cardprogram, but the Company is not aware of any mall in operation with a MidAmerica stored value gift card.

Thereare other less significant competitors, none of which NBO believes willmaterially compete with the Company in securing market share in all areas of themall industry.

 

b. NationalRetail Merchant Distribution Channel
 

Thiscategory can be segregated into three areas of distribution with correspondingcompetition associated within each of the following areas:

 

1.Internet - The primary competitors are as follows:
-  *Giftcertificates.com    ("GCC"):* Based in New York City, New York, GCC's initial    penetration into the market has focused on reselling and distributing gift    certificates for national retail chains. NBO believes the vast majority of    its merchants represented on its system are national retailers, and it makes    some corporate gift certificate sales. GCC takes orders for certificates and    then purchases the certificates from the appropriate retailer and forwards    them to the purchaser via mail or other expedited delivery methods. In    addition to receiving an order for a specific retailer and then fulfilling    it, GCC also offers a Super Certificate that may be redeemed by the consumer    at any of the participating merchants.*Webcertificates.com*:    Based in Philadelphia, Pennsylvania, this company sells online gift    certificates that are redeemable at any online merchant that accepts credit    cards. The certificates are distributed via portals and other sites and sent    via e-mail and are also sold to corporations and consumers.*800    Giftcertificates*: Based in Patterson, New Jersey, 800    Giftcertificates has adopted the purchase and resale model that    Giftcertificates.com has used. It has approximately 100 national retailers    on its web site.     *CertifiChecks.com*: Based in Dayton, Ohio, this company offers    consumers the ability to purchase gift certificates from local and national    retailers offline. CertifiChecks.com then sends them to the customers via    mail.
A  number of other companies have attempted to enter the gift certificate and  gift card field. Some have failed and others are still in existence. The  Company faces the risk that it will be no more successful than other companies  in the internet distribution channel.

2.Telephone Call Center - Some of the Internet gift certificate companies listedabove have developed small call centers. Their centers are primarily set up toadminister inbound order taking calls only. To the Company's knowledge, none ofthese competitors have established any sizable outbound sales efforts.

 

c. ScripFundraising Channel
 

Thereare primarily two established competitors in the Scrip fundraising segment:
-  The    National Scrip Center ("NSC") is located in Santa Rosa, California    and is a non-profit Scrip provider servicing schools, religious groups,    clubs, and other nonprofit organizations on a regional basis,    nationwide, raising funds through scrip products, programs and services. NSC    was founded by a Catholic Church Diocese in California in 1988 and has    fulfilled approximately $2 billion in Scrip orders and has raised    approximately $180 million for its non-profit fundraising organizations to    date. NSC was first to market and is currently the largest Scrip provider    with a market presence primarily in California, Washington, Nevada, Oregon,    Arizona, Wisconsin, Minnesota, and Texas. NSC was purchased by SchoolPop in    January 2004 and is expected to continue operations under that new corporate    identity.-  The    second Scrip industry competitor is Great Lakes Scrip Company ("GLSC")    located in Grand Rapids, Michigan. GLSC primarily operates in Michigan,    Indiana, Illinois, Ohio, and Wisconsin. GLSC provides very similar, if not    the same services as NSC (now SchoolPop).
5.Dependence on Major Customers

 

Feeincome from the largest customer of the Company accounted for approximately 11%of the Company's total revenue and other income for the period ended December31, 2003. Loss of this key customer could result in significant decreases inCompany revenues and income. No other customer represents more than 10% of theCompany's total revenue and other income. At the present time, the Company haslong-term exclusive mall gift certificate and gift card agreements with themajority of the mall developers on the Company's network. The majority of thesemall contracts were renewed for additional 3-5 year terms in the fall of 2002.Additionally the Company has a three-year contract with Darden Restaurants toprovide Internet fulfillment of its stored value gift cards, which was renewedfor an additional year in August 2003. The Company has executed an exclusive 5year agreement with Card Commerce International for card registration technologyin the mall and fundraising industry's. Additionally NBO signed an exclusive 5year agreement with ValueLink to provide gift card fulfillment services. TheCompany's strategy is to diversify the customer base so that NBO is lessdependent on a small group of customers. The Company has successfully integratedthree distinct revenue channels to achieve the necessary diversification -malls, internet fulfillment of gift certificates and gift cards, and theChildren's Heroes fundraising channel.

 

6.Trademarks

 

TheCompany has submitted applications to the US Patent and Trademark Office for thetrademarks "Children's Heroes" and "Community Scrip Card".

 

7.Technology Employed by the Company.

 

a.  NBO has developed and deployed proprietary software for its gift certificate  and gift card programs. Company software is contractually protected through  licensing agreements with the contracting entities.

 

b.  Magnetic Stripe Stored Value Gift Cards

 

Magnetic  stripe cards are most commonly used as credit cards and debit/ATM cards. This  technology has an application in the gift certificate industry as a  "stored value" or debit card. The magnetic stripe card can be  pre-loaded in fixed denominations or loaded at the time of purchase for any  amount the customer chooses. While the magnetic stripe card is not as powerful  or versatile as the latest smart card technology, magnetic stripe technology  is widely accepted in the U.S. market, and is less costly than smart card  technology. Accordingly, magnetic stripe technology will continue to replace  paper gift certificates and be the preferred technology in many applications  until smart cards are more widely accepted.

 

c.  Onsite Systems.

 

The  Company's Onsite Systems consist mainly of multiprocessor Dell severs running  Windows XP Advanced Server and are used to provide services for MS-SQL  databases, credit card processing, a modem pool offering a secured redundant  connection method for point-of-sale devices, web services, anti-virus software  management, accounting software and e-mail services. Servers running a UNIX  operating system are used for security and twenty-four hour network  monitoring. The Company's network utilizes a network-attached storage (NAS), a  reliable tape backup system, multiple Cisco frame relay routers, a secure  firewall and a virtual private network (VPN) gateway. Many of the Company's  systems utilize redundant servers and equipment to enhance reliability. The  Company utilizes two T1 Internet connections from two separate providers for  redundant network services. Failure on either T1 link is automatically  detected and resolved.

 

d.  Software Methodology.

 

The  Company's software design methodology allows several modular applications to  run on outlet computer systems (outlets) comprised of electronic kiosks and  point-of-sale systems simultaneously. This modular design approach allows the  Company to develop custom kiosk and point-of-sale solutions and can be  configured to accept a variety of payment methods. For example, one kiosk can  be configured to accept cash only while another, running the same software  modules, can be configured to accept cash, credit and debit cards.

 

The  Company's software uses industry standards for both client-server deployment  and for host-based systems. Additionally, where applicable, the Company  interfaces to third party systems using application program interfaces (APIs).  API's are used for real-time communication with software systems of strategic  partners, credit card processors and batched file transfers for other systems  where real-time events are not required.

 

Furthermore,  software has been developed to connect with various networks using dial-up,  DSL, frame relay and Ethernet. Additionally, many of the Company's outlets  contain local databases, allowing for off-line operation in the event a  network connection interruption occurs.

 

e.  Point-of-Sale Systems.

 

The  Company's Point-of-Sale Systems deployed in the field consist of manned  systems residing on a desk or counter top known as Counter Top Units (CTU) and  free standing unmanned electronic touch-screen Kiosks.

 

1.  Counter Top Units (CTU's)

 

CTU's    are point-of-sale devices used for issuing gift certificates or gift cards    in the field. The Company's latest model of CTU, the Dual Advantage System,    can issue both gift cards and gift certificates. This system allows clients    to move from paper gift certificates to gift-cards. This design reduces the    number of configurations deployed in the field. This reduces technical    support training and manpower costs for computer integration.

 

CTU's    are configured to either use the Company's credit card processing services    or free standing Verifones. The minimum system configuration consists of:
-  Pentium        II (PII) ComputerMonitor,        Keyboard and MouseMICR        Laser Printer (Optional - paper certificate programs only)Magstripe        enabled Keyboard (Optional - gift card programs only)Uninterruptible        Power SupplyVarious        Connectivity OptionsReceipt        Master Printers for Credit Card Receipts (Optional - plastic programs)Verifone        Credit Card Terminal (Optional)
New    systems being deployed use Celeron processors with 64 MB RAM.

2.  Electronic Kiosks

 

Kiosks    are automated dispensing systems used for dispensing gift certificates. The    technology exists for developing gift card dispensing kiosks; however, the    Company's marketplace does not warrant such development at this time. The    internal hardware components of the Company's Kiosk include:
-  MICR        Laser Printer.ELO        17" touch-screen VGA monitor.American        Magnetic single swipe card reader.Verifone        compatible PIN Pad for debit card processing.Cash        Code bill validator.APC        programmable battery backup power supply providing up to 30 minutes of        power and allows a programmable shut down and restart.Intel        Pentium based processor with 32MB RAM Minimum, hard drive, sound and        video cards, rocket port and Windows NT or Windows 2000.Kiosks        are designed and engineered by NBO and outside manufacturing firms. NBO        assembles and integrates all Kiosk components, which are fully tested        prior to assembly. Production time to manufacture the Kiosk enclosures        and integrate internal equipment varies depending on customization, but        the time required to produce a Kiosk is typically between six to eight        weeks. Delivery and installation time takes an additional two weeks.        Attractively designed to complement the decor of a mall or retail        outlet, Kiosks are built to withstand customer use and abuse in        high-traffic areas, requiring only periodic maintenance and upkeep.
8.Employees.

 

As ofDecember 31, 2003, NBO had 65 total employees including 48 full-time employees,17 part-time seasonal temporary employees. NBO has entered into confidentialnon-disclosure and/or employment agreements with its officers, directors andemployees. The Company's employees are not represented by a labor union. TheCompany believes that its relationship with its employees is good.

 

9.Available Information.

 

TheCompany's primary Internet website address is www.nbo.com. The Company makesavailable, free of charge on or through this website, the Company's AnnualReports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports onForm 8-K and all amendments to those reports as soon as reasonablypracticable after such material is electronically filed with or furnished to theSecurities and Exchange Commission. The Company also operates the followingwebsites in connection with the operation of the Company's business:www.thegiftcertificatecompany.com, www.thegiftcardcompany.com,www.giftcardbalance.com and www.childrensheroes.com. Information contained onthese websites is not part of this Annual Report on Form 10-KSB.
** 

Item 2.Description of Property.*** 

SaltLake City Headquarters. The Company's headquarters are currently located at3676 West California Avenue, Building D, Salt Lake City, Utah, 84104. Thisfacility consists of approximately 28,800 square feet of leased space, which iscomprised of 22,820 square feet of office space and 5,980 square feet ofwarehouse facilities. Included in the office space is a 9,120 square foot callcenter that can accommodate up to approximately 190 employees. The term of thelease is five years, which will expire on February 1, 2005, with one three-yearrenewal option that the Company must exercise 120 days prior to the expirationof the lease. The facility is leased from 5B Bangerter LLC at a base monthlyrent of $26,792.
** 

Item 3.Legal Proceedings.**
TheCompany is not a party to any material threatened or pending legal proceedingswhich, if adversely determined, would have an adverse material effect on thefinancial condition or results of operations of the Company. From time to time,however, the Company may become subject to legal proceedings, claims, andlitigation arising in the ordinary course of business, including, but notlimited to, employee, customer and vendor disputes.
** 

Item 4.Submission of Matters to a Vote of Security Holders.**
 

Duringthe transitional period ended December 31, 2003 there were no matters submittedto a vote of security holders.

 
**PARTII

 

Item 5.Market for Common Equity and Related Stockholder Matters.***(a)Market Information.*
 

Thereis currently no public trading market for shares of the Company's Common Stock.
* 

(b)Holders.*
 

As ofMarch 30, 2004 there were approximately 658 shareholders of record of theCompany's Common Stock.
*(c)Dividends.*
 

TheCompany has not declared nor paid cash dividends on the Common Stock in the pasttwo fiscal years or in any subsequent period. The Company does not anticipatepaying cash dividends on the Common Stock in the foreseeable future. The Companycurrently intends to retain all future earnings, if any, to fund the developmentand growth of its proposed business and operations. Any future determination topay dividends will be at the discretion of the Company's Board of Directors andwill depend principally upon the Company's results of operations, financialcondition, capital requirements, contractual and legal restrictions and otherfactors the Board of Directors deems relevant.
* 

(d)Securities Authorized for Issuance under Equity Compensation Plans.*
 

SeePart III, Item 11 of this Form 10-KSB.
**RecentSales of Unregistered Securities.**
 

Withinthe transitional period ended December 31, 2003, the fiscal year ended March 31,2003 and the fiscal year ended March 31, 2002, the Company has issued thefollowing securities without registering the securities under the Securities Actof 1933, as amended:
* 

(e)April 1, 2001 through December 31, 2003. The Company borrowed money fromexisting shareholders, including the Company's Chairman, President and CEO, allof whom are accredited investors. The total amount of the borrowed funds duringthe stated period totaled $2,093,250. The Company has made principal repaymentstotaling $950,250, leaving $1,143,000 in unpaid principal balances for thestated period, including $368,000 to the Company's President. In connection withthese loans, the Company issued 181,938 shares of common stock. As of December31, 2003 loans to stockholders including officers of $1,664,399 remainoutstanding. The Company relied upon the exemption from registration provided bySection 4(2) of the Securities Act of 1933, as amended, and Regulation D.

 
*(f)April 1, 2001 through December 31, 2003. The Company issued 16,203 shares ofpreferred stock as stock dividends on previously issued preferred stock. Thisissuance did not constitute a sale because the recipients did not pay anyconsideration and did not make any election either to receive the shares or toreceive other payment.

 
*(g)April 1, 2001 through December 31, 2003. The Company granted options topurchase an aggregate of 207,188 shares of Common Stock to its directors,executive officers, employees and consultants at an average exercise price of$5.09 per share. There is currently no public trading market for shares of theCompany's Common Stock. As of December 31, 2003, options to purchase 124,591shares of Common Stock had been exercised (all of which were exercised prior toApril 1, 2001). The issuances of these options were exempt from registrationunder Rule 701 of the Securities Act as securities issued under the Company's1997 Stock Option Plan for participation by its employees, directors, officers,consultants and advisors.
** 

Item 6.Management's Discussion and Analysis of Financial Condition and Results ofOperations.

 

ForwardLooking Statements*** 

Thefollowing discussion of the Company's financial condition and results ofoperations should be read in conjunction with its financial statements and therelated notes to such financial statements included elsewhere in this Form10-KSB. The following discussion contains forward-looking statements thatinvolve risks and uncertainties. Investors should not place undue reliance onthese forward-looking statements. These forward-looking statements are based oncurrent expectations and actual results could differ materially from thosediscussed herein. The Company's actual results could differ materially fromthose predicted in these forward-looking statements, and the events anticipatedin the forward-looking statements may not actually occur. Although the Companybelieves that the expectations reflected in these forward-looking statements arereasonable, the Company cannot guarantee future results, levels of activity,performance or achievements. The Company is under no duty to update any of theforward-looking statements after the date of this Form 10-KSB to conform thesestatements to actual results or to reflect the occurrence of unanticipatedevents, unless required by law.*** 

CompanyRisks*** 

(1)Future Capital Needs. The Company depends on new investments to help fundongoing operations. If insufficient capital is invested, the results of thebusiness development as it is disclosed herein could be materially adverselyimpacted. The Company's future capital requirements will depend on many factors,including cash flow from operations, technological and market developments andthe Company's ability to successfully market the Gift Certificate/Gift CardPrograms, the Children's Heroes Fundraising Program and its other proposedservices. Unanticipated problems, expenses and delays are frequently encounteredin establishing a new approach to business in a developing industry, and indeveloping software products. These include, but are not limited to,competition, the need to develop customer support capabilities, marketexpertise, setbacks in product development, market acceptance and sales andmarketing activities. The failure of the Company to meet any of these conditionscould have a material adverse effect on the Company and may force the Company toreduce or cease its proposed operations. The Company must raise additional fundsthrough equity or debt financing. Any equity financing could result in dilutionto the Company's stockholders. Debt financing would result in increased interestexpense. Any financing, if available, may be on terms unfavorable orunacceptable to the Company.
*(2)Loans to the Company from Stockholders Remain Unpaid. As described in Item 5above, the Company borrowed money from existing stockholders, all of whom areaccredited investors. As of December 31, 2003 loans to stockholders in theprincipal amount of $1,296,399****remain outstanding. Subsequent to December31, 2003, the Company restructured several short-term notes to stockholders intolong-term notes payable after December 31, 2004. The total long-term notes tostockholders totals $1,025,000. $271,399 in short-term notes remains due andoutstanding.

 
*(3)Loans to the Company by Its President and Private Placements to Pay CurrentExpense; Inability of Company to Continue Operations Without AdditionalFinancing. As detailed in previous filings, Keith A. Guevara, Chairman ofthe Board, President and Chief Executive Officer of the Company, has loaned theCompany funds in order for the Company to meet its payroll and other operatingexpenses. As of December 31, 2003, the remaining unpaid balance is $368,000. OnMarch 26, 2004, the President entered into an agreement with the Company wherebyany notes owed to the President will not be repaid until after December 31,2004.

 
*(4)Dependence Upon Key Personnel. The Company's success depends, to asignificant extent, upon a number of key employees. The loss of services of oneor more of these employees could have a material adverse effect on the proposedbusiness and operations of the Company. The Company is especially dependent onthe efforts and abilities of certain of its senior management, particularlyKeith A. Guevara, the Company's President and Chief Executive Officer. The lossof any of the Company's key executives could have a material adverse effect onthe Company and its operations and prospects, although the loss of Mr. Guevarawould have a more significant adverse effect on the Company. The Company has$2,000,000 in key man life insurance on Mr. Guevara. The Company believes thatits future success will also depend, in part, upon its ability to attract,retain and motivate qualified personnel. There can be no assurance, however,that the Company will be successful in attracting and retaining such personnel.

 
*(5)Lack of Profits. The Company's net loss was ($2,312,000), ($4,031,793) and($4,193,560) for the transitional period ended December 31, 2003 and the fiscalyears ended March 31, 2003 and 2002, respectively. Profits in future years willdepend on the success of the Company in carrying out its business plan. As ofDecember 31, 2003 the Company has incurred cumulative losses of $30,173,760since inception of operations on June 23, 1994.

 
*(6)Lack of Dividends. The Company has not declared nor paid cash dividends onthe Common Stock in the past two fiscal years or in any subsequent period. TheCompany does not anticipate paying cash dividends on the Common Stock in theforeseeable future. The Company currently intends to retain all future earnings,if any, to fund the development and growth of its proposed business andoperations. Any future determination to pay dividends will be at the discretionof the Company's Board of Directors and will depend principally upon theCompany's results of operations, financial condition, capital requirements,contractual and legal restrictions and other factors the Board of Directorsdeems relevant.

 
*(7)Control by Existing Officers and Directors. The Company's officers anddirectors beneficially own approximately 30.9% of the outstanding shares of theCompany's Common Stock as of December 31, 2003, which includes stock optionsgranted under the 1997 Stock Option Plan. Because cumulative voting rights arenot provided for in the Company's Second Amended and Restated Articles ofIncorporation, these individuals will be in a position to significantlyinfluence the election of the members of the Board of Directors and control mostcorporate actions, including decisions to dissolve, merge or sell the Company'sassets.

 
*(8)Uncontrollable Factors. The expansion of the Company's Programs withinacceptable time and cost limitations will be dependent upon a number ofconditions and factors outside the control of the Company or its management.These conditions and factors include, but are not limited to, the availabilityand ability of contractors and subcontractors to perform services, the absenceof disputes, delays or cost increases resulting from such factors as strikes,technical difficulties or failure of the system equipment to operate asdesigned, and shortages in materials and labor, any of which conditions orfactors could delay or prevent expansion of the Company's Programs and/orsignificantly increase the cost of a given Company Program above expectedlevels.
*(9)Government Regulations. State or federal legislation and regulation mayaffect the Company's business in the future. In particular, states might attemptto regulate gift certificates and gift cards under their "moneytransmitters law" or similar laws as some states do currently. Some statesmight pass legislation regulating the terms and conditions of gift certificatesand gift cards, as some states do currently. In particular, if state or federalregulation restricted the Company's ability to charge periodic fees on giftcards and to claim breakage, then the Company's business could be adverselyaffected. The range and effect of federal or state regulation cannot bepredicted.

 
**General

 **
OnFebruary 4, 2004, the Company's Board of Directors approved a change in theCompany's fiscal year end from March 31 to December 31 for the purpose ofconforming to a fiscal year in common with the majority of national companieswith the expectation that the Company's periodic reports and financialinformation may be more easily understood. The information presented in thistransition report on Form 10-KSB relates to the transitional nine-month periodended December 31, 2003 and 2002.
** 

Resultsof Operations - Comparison of the Transitional Nine Month Period Ended December31, 2003 and 2002

Sale ofGift Certificates and Gift Cards**
 

TheCompany derives the majority of its revenues and other income from theactivities associated with the issuance of gift certificates and gift cards. Thefollowing figures are included for informational purposes only and are notincluded in the Company's condensed statements of operations.

 

TheCompany experienced an 8.3% increase, or $4,280,055 in the face amount of giftcertificates/cards issued for the transitional period ended December 31, 2003 to$55,818,366 from $51,538,311 for the transitional period ended December 31,2002. The increase is due to the sales at malls with which the Company executedcontracts with during the transitional period, as well as an increase in theaverage amount of value loaded on gift cards sold.
** 

Revenuesand Other Income

 **
TheCompany experienced an increase in total revenues and other income of 70.1%, or$3,577,189 to $8,683,215 for the transitional period ended December 31, 2003from $5,106,026 for the transitional period ended December 31, 2002. The revenueincrease is due primarily to an increase in the sale of third party giftcertificates/cards, merchant fees earned from retailers and fees earned fromcustomers as described below. The increase in other operating income is due toan increase in the amount of breakage realized from unredeemed or unredeemablegift certificates that have expired or reached the legal statute of limitationsper the Company's revenue recognition policy. See NOTE A - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES, Item 11 in the Company's financial statements.

 

TheCompany purchases and sells third party retailer gift certificates and giftcards, primarily Darden and ValueLink clients, and provides Call Center andInternet fulfillment on those gift certificate/card orders. Sale of third partygift certificates increased $1,716,953 to $4,132,732 for the transitional periodended December 31, 2003 from $2,415,779 for the transitional period endedDecember 31, 2002.

 

Merchantfees earned from retailers increased 6.5%, or $75,112 to $1,233,672 for thetransitional period ended December 31, 2003 from $1,158,560 for the transitionalperiod ended December 31, 2002. This increase is due primarily to increasedsales of gift certificates and gift cards and the associated use of credit cardsby consumers to pay for the sales transaction. Merchant fees earned fromretailers comprised 14.2% of total revenues and other income for thetransitional period ended December 31, 2003 compared to 22.7% for thetransitional period ended December 31, 2002.

 

Feesearned from customers increased 456.0%, or $441,894 to $538,808 for thetransitional period ended December 31, 2003 from $96,914 for the transitionalperiod ended December 31, 2002. This increase is due primarily to an increase inthe amount of gift cards sold to consumers and the subsequent reduction of thosegift card balances by the application of maintenance fees and expiration fees.Fees earned from customers comprised 6.2% of total revenues and other income forthe transitional period ended December 31, 2003 compared to 1.9% for thetransitional period ended December 31, 2002.

 

TheCompany anticipates gift card fee revenue to become a greater portion of overallrevenue and other income as gift card sales increase. It is important to notethat the Company receives immaterial revenue on any gift card sale untilapproximately 7 months from the date of sale. In some instances, gift card feerevenue is deferred over a period of time that could range from 7 months to 18months or longer from the date of sale of the gift card as further describedbelow. When the gift card is sold, the funds are held for redemption inrestricted bank accounts maintained by the issuing bank and the card processor.The Company does not have access to these funds, which adds a security featurefor the consumers and the malls selling the gift cards. The Company records giftcard fee revenue in the period it is earned and recouped by the Company. Theissuing bank and card processor calculate the fees owed to the Company andsubmit the fee revenue to the Company from the restricted bank accounts on aregular basis, typically monthly. In some instances, typically at the end of acalendar quarter, the receipt of funds earned by the Company are not receivedfrom the restricted bank accounts by the time the calendar quarter ends. In suchinstances, the balance of gift card fees due to the Company from the restrictedbank accounts are included in accounts receivable. As of December 31, 2003 giftcard fees totaling $171,161 have been earned by the Company but were notreceived from the restricted bank accounts.

Tounderstand the Company's business, it is important to understand the costs tothe Company as well as the timing of the cash flow from gift card fees as itrelates to the Company's operations. A gift card has a maximum life of 18 monthsbased on the expiration date imprinted on the face of the gift card. Thisexpiration date is mandated by the card issuers, which are the bankinginstitutions affiliated with NBO's gift card program in conjunction with VISA,MasterCard and Discover. However, for a period of up to, and not to exceed, 12months after the expiration of the gift card, the consumer may obtain areplacement gift card with the remaining balance by calling the Company. Theconsumer will typically be required to return the expired gift card before thereplacement gift card will be issued. All gift card fees will continue to becharged against the value of the gift card after expiration as described in theterms and conditions provided to the consumer at the point of sale. Typically, are-issue fee will be applied by the Company and deducted from the re-issued giftcard balance.

 

TheCompany incurs the up-front costs of the raw plastic, the embossing and encodingof the gift card, activation and on-file fees imposed by the financialinstitutions and card processing companies, in addition to other gift cardprogram costs including the Company's personnel and other overhead costs. Theaverage life of all gift cards is approximately 3-4 months. Most gift cards(approximately 85% to 90%) are entirely redeemed before any maintenance fees orexpiration fees are imposed. For those gift cards that are not fully redeemed bya particular date (which may vary from mall to mall), a maintenance fee of(typically) $2.50 per month is charged to the card per the Terms and Conditions(stated on the gift card back and in a separate document provided at the pointof sale) until the balance on the gift card is zero. When 18 months have passedand a balance still remains on the gift card, the remaining funds are debitedfrom the card as an expiration fee (unless the gift card holder obtains areplacement gift card for any remaining balance after maintenance fees have beenapplied per the terms and conditions of the gift card). It is important torecognize that the gift card, itself, expires after 18 months, not the amount ofthe balance remaining on the gift card. The gift card account is deactivated 12months after the gift card expires. The monthly maintenance fees and theexpiration fees enable the Company to provide the gift card service to consumersand covers the up-front costs incurred by the Company. The Company also shares aportion of the gift card fees with the mall operator/developer based on volume.This provides the mall operator/developer the opportunity to create a revenuecenter, or even a profit center from their Customer Service Counter in the mallwhere the gift cards are typically sold, where traditionally this has been acost center to the mall.

 

Consumersand consumer advocate groups have expressed concern over the gift card fees. Inmost cases, the complaints involve gift cards (and the associated fees) sold in"closed systems" by major national retailers. The Company's gift cardsare bank issued cards and are "open systems" as described above. TheCompany expends extensive efforts to educate sellers and consumers regarding theunique service of gift cards demanded by the consumers and the associated costswith providing such a service. The Company discloses the Terms and Conditionsassociated with the gift card to the consumer at the time of sale, making fulldisclosure of the potential fees that could be imposed if the gift card is notredeemed in the prescribed time period.

 

TheCompany has compiled detailed records of redemption and fee patterns in relationto use of the gift cards since the inception of sales in October 2001. With thatempirical data, the Company is able to make reliable estimates of the amount offuture revenue to be collected by the Company from gift card sales to date. Therevenue from maintenance fees and expiration fees is deferred for a time periodcontractually agreed upon by the Company and the mall operator. The Companyanticipates the following revenue from gift card fees based on gift card salesthrough December 31, 2003:

**Estimated      Gift Card Fee Revenue Anticipated for the Quarter Ending**3/31/2004**6/30/2004**9/30/2004**12/31/2004**3/31/2005**6/30/2005**9/30/2005
$      97,000
$      135,000
$      324,000
$      151,000
$      105,000
$      68,000
$      134,000**Cumulative
$      97,000
$      232,000
$      556,000
$      707,000
$      812,000
$      880,000
$      1,014,000
 

TheCompany has compiled detailed records of redemption patterns in relation to giftcertificates since the inception of sales in October 1998.. With that empiricaldata, the Company is able to make accurate and reliable estimates of the amountof future income to be collected by the Company from gift certificate sales todate. The income from expired, unredeemed/unredeemable gift certificates("breakage") is deferred between 1 year and 3 years. Gift certificatebreakage income is recognized when the gift certificate expires, or where noexpiration date exists (based on applicable state laws), upon the expiration ofthe legal statute of limitations per the Company's revenue recognition policy.The Company experienced an increase in gift certificate breakage income of109.9% or $1,234,634 to $2,358,168 for the transitional period ended December31, 2003 from $1,123,534 for the transitional period ended December 31, 2002.

TheCompany anticipates the following income from gift certificates based on giftcertificate sales through December 31, 2003:

 
**Estimated      Gift Certificate Other Income Anticipated for the Quarter Ending**3/31/2004**6/30/2004**9/30/2004**12/31/2004**3/31/2005**6/30/2005**9/30/2005**12/31/2005**3/31/2006**6/30/2006**9/30/2006**12/31/2006
$      188,000
$      301,000
$      192,000
$      1,514,000
$      81,000
$      133,000
$      35,000
$      201,000
$      32,000
$      58,000
$      35,000
$      207,000**Cumulative
$      188,000
$      489,000
$      681,000
$      2,195,000
$2,276,000
$2,409,000
$2,444,000
$2,645,000
$2,677,000
$2,735,000
$2,770,000
$2,977,000** 

Cost ofRevenues and Other Income**
 

TheCompany experienced an increase in the total cost of revenues of 66.3% or$2,281,427 to $5,721,057 for the transitional period ended December 31, 2003from $3,439,630 for the transitional period ended December 31, 2002. Thisincrease in the amount of cost of revenues is due to a proportional increase inthe sale of gift certificates and gift cards, resulting in an increase in thecost of certificates and cards sold, related billings to merchants for fees, aswell as credit card enrollment fees as described below.

 

TheCompany experienced an increase in the cost of third party gift certificates of77.8% or $1,652,411 to $3,775,996 for the transitional period ended December 31,2003 from $2,123,585 for the transitional period ended December 31, 2002. Thisincrease in cost is due primarily to the increase in Darden and ValueLinkInternet and Call Center fulfillment orders.

 

TheCompany experienced an increase in merchant fees and charges of 33.9% or$312,271 to $1,233,005 for the transitional period ended December 31, 2003 from$920,734 for the transitional period ended December 31, 2002. The increase incost is related primarily to the proportional increase in the number of giftcertificates and gift cards sold.

 
**GrossProfit

 **
TheCompany experienced an increase in gross profit (total revenues and other incomeless total cost of revenues and other income) of 57.0% or $1,295,762 to$2,962,158 for the transitional period ended December 31, 2003 from $1,666,396for the transitional period ended December 31, 2002. This increase is dueprimarily to increased margins on gift card sales and the increase in giftcertificate breakage realized during the respective periods based on increasedsales over prior periods.

 
**Selling,General and Administrative Expenses

 **
TheCompany experienced an increase in selling, general and administrative expensesof 51.5% or $1,700,217 (including the non-cash expense of $1,250,000 fornon-qualified stock options) to $5,002,854 for the transitional period endedDecember 31, 2003 from $3,302,637 for the transitional period ended December 31,2002. The Company is committed to keeping selling, general and administrativeexpenses relatively constant utilizing cost control measures and processimprovement methods. The Company recorded a non-cash expense of $1,250,000 fornon-qualified stock options that were extended and transitioned from a qualifiedplan to a non-qualified plan for one of the original employees of the Companythat ceased employment in February 2003. This non-cash expense accounted for73.5% of the increase in selling, general and administrative expenses for thetransitional period ended December 31, 2003 compared to December 31, 2002. Theremaining increase of $450,217 in selling, general and administrative expenseswas due primarily to an increase in personnel expense in the transitional periodended December 31, 2003.

 
**OperatingIncome (Loss)

 **
TheCompany's total operating expenses exceeded gross profit in the transitionalperiods ended December 31, 2003 and 2002 respectively. However, the Companybelieves that increased profit margins in existing and new business channelscoupled with cost containment measures will begin to reverse this trend in thefiscal year ending December 31, 2004. While the operating loss increased by$404,455 during the nine months ended December 31, 2003 compared to the ninemonths ended December 31, 2002, the increase in operating losses is primarilyattributable to the non-cash, non-qualified stock option expense of $1,250,000in the nine month period ended December 31, 2003.
**OtherIncome (Expense)

 **
TheCompany experienced a decrease in other expense, net, in the transitional periodended December 31, 2003 compared to the transitional period ended December 31,2002 respectively. The Company anticipates this trend will continue as debt tostockholders is retired, saving the Company significant interest expense.

 
**Resultsof Operations - Comparison of Fiscal Years Ended March 31, 2003 and 2002

 

Sale ofGift Certificates and Gift Cards

 **
Thefollowing is included because the Company derives the majority of its revenuesfrom the activities associated with the issuance of gift certificates and giftcards. The following figures are included for informational purposes only andare not included in the Company's condensed statements of operations.

 

TheCompany experienced a 1.1% decrease, or $653,128 in the face amount of giftcertificates/cards issued for the fiscal year ended March 31, 2003 to$57,229,214 from $57,882,342 for the fiscal year ended March 31, 2002. Theslight decrease is due to the Urban malls that were sold in the Rodamcotransaction being replaced by the Company with new contracts with malls that didslightly less gift certificate volume.

 
**Revenuesand Other Income

 **
TheCompany experienced an increase in total revenues and other income of 3.2% or$176,591 to $5,644,307 for the fiscal year ended March 31, 2003 from $5,467,716for the fiscal year ended March 31, 2002. See NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES, Item 11 in the Company's financial statements. The increaseis due primarily to an increase in the sale of third party giftcertificates/cards, merchant fees earned from retailers and fees earned fromcustomers as described below.

 

TheCompany purchases and sells third party retailer gift certificates and giftcards, primarily Darden and ValueLink clients, and provides Call Center andInternet fulfillment on those gift certificate/card orders. Sale of third partygift certificates increased $828,657 to $2,886,621 for the fiscal year endedMarch 31, 2003 from $2,057,964 for the fiscal year ended March 31, 2002.

 

TheCompany experienced a decrease in breakage income of 49.3% or $903,224 to$927,253 for the fiscal year ended March 31, 2003 from $1,830,477 for the fiscalyear ended March 31, 2002. Breakage income was recognized for the first time forthe fiscal year ended March 31, 2002. Of this total, $615,428 is included whichwould have been recognized prior to fiscal 2002 if sufficient historicalinformation had been available to make reliable estimates in prior years.

 

Merchantfees earned from retailers increased 15.1% or $175,153 to $1,333,602 for thefiscal year ended March 31, 2003 from $1,158,449 for the fiscal year ended March31, 2002. This increase is due primarily to billings to customers for fees thathad been previously absorbed by the Company.

 

Feesearned from customers increased 1,123.2% or $115,939 to $126,261 for the fiscalyear ended March 31, 2003 from $10,322 for the fiscal year ended March 31, 2002.This increase is due primarily to an increase in the amount of gift cards soldto consumers and the subsequent reduction of those gift card balances by theapplication of administration fees for non-use.

 
**Cost ofRevenues and Other Income

 **
TheCompany experienced an increase in the total cost of revenues and other incomeof 29.6% or $979,956 to $4,285,800 for the fiscal year ended March 31, 2003 from$3,305,844 for the fiscal year ended March 31, 2002. This increase in the amountof cost of revenues and other income is due to a proportional increase in thesale of gift certificates and gift cards, resulting in an increase in the costof certificates and cards sold, related billings to merchants for fees, as wellas credit card enrollment fees as described below.

 

TheCompany experienced an increase in the cost of third party gift certificates of$742,955 to $2,598,225 for the fiscal year ended March 31, 2003 from $1,855,270for the fiscal year ended March 31, 2002. This increase in cost is due primarilyto the increase in Darden and ValueLink Internet and Call Center fulfillmentorders.

 

TheCompany experienced an increase in merchant fees and charges of 9.4% or $103,813to $1,210,997 for the fiscal year ended March 31, 2003 from $1,107,184 for thefiscal year ended March 31, 2002. This increase in cost is related primarily tothe proportional increase in the number of gift certificates and gift cardssold.

TheCompany incurred $85,000 in development costs related to the implementation ofthe Card Commerce International credit card registration program related toChildren's Heroes for the fiscal year ended March 31, 2003. There were nosimilar costs for the fiscal year ended March 31, 2002.

 
**GrossProfit

 **
TheCompany experienced a decrease in gross profit of 37.2% or $803,365 to$1,358,507 for the fiscal year ended March 31, 2003 from $2,161,872 for thefiscal year ended March 31, 2002. This decrease is due primarily to a reductionin the recognition of revenue from unredeemed/unredeemable gift certificates.The Company began recognizing breakage income for the first time in the fiscalyear ended March 31, 2002, when the Company had accumulated sufficienthistorical data to determine breakage. This included breakage income that wouldhave been recognized in prior periods but was not encompassing the period ofOctober 1998 through March 31, 2002. This prior period recognition in March 31,2002 was larger than would normally be recognized in a normal fiscal year,creating a comparative reduction to the fiscal year ended March 31, 2003.

 
**OperatingExpenses

 **
TheCompany experienced an increase in total operating expenses of 4.0% or $181,473to $4,751,274 for the fiscal year ended March 31, 2003 from $4,569,801 for thefiscal year ended March 31, 2002. The slight increase during the year endedMarch 31, 2003 compared to the fiscal year ended March 31, 2002 is attributablemainly to the Company's commitment to keep operating expenses constant with costcontrol measures.

 
**OperatingIncome (Loss)

 **
TheCompany's total operating expenses exceeded gross profit in the fiscal yearsended March 31, 2003 and 2002 respectively. However, the Company believes thatincreased profit margins in existing and new business channels coupled with costcontainment measures will begin to reverse this trend in the fiscal year endingDecember 31, 2004.

 
**OtherIncome (Expense)

 **
TheCompany experienced a decrease in other expense, net, of 64.2% or $1,146,605 to($639,026) from ($1,785,631) in the fiscal year ended March 31, 2003 compared tothe fiscal year ended March 31, 2002 respectively. The decrease is primarilyfrom a significant decrease in interest expense due to loan pay-downs and thelack of new loans with a beneficial conversion feature of debt previouslyincurred by the Company. The beneficial conversion feature is the differencebetween the market value of the common stock and the conversion rate of the debtlimited to the amount of debt. The beneficial conversion feature is recognizedas interest expense over the period from the date of the note to the date ofmaturity when the conversion of the debt into stock may take place. Interestexpense decreased 76.9% or $1,300,253 to $390,959 from $1,691,212 in the fiscalyear ended March 31, 2003 compared to the fiscal year ended March 31, 2002respectively.

 
**Liquidityand Capital Resources

 **
TheCompany's total costs and expenses are currently greater than its revenues andother income. Historically, the Company's operating activities have used cashrather than provided cash. However, during the nine month period ended December31, 2003, the Company generated cash from operating activities of $475,917. TheCompany to date has had a history of losses and the accumulated deficit (sinceinception June 23, 1994) as of December 31, 2003 was ($30,173,760), an increaseof 7.9% or $2,202,478 from ($27,971,282) on December 31, 2002. The Companybelieves that new business initiatives coupled with growth in mature businesschannels will continue to reverse the Company's historical loss trend in thefiscal year ending December 31, 2004.

 

TheCompany's net losses increased by 17.5% or $343,704 to ($2,312,000) from($1,968,296) for the transitional period ended December 31, 2003 compared to thetransitional period ended December 31, 2002, respectively, however, the net lossfor the nine month period ended December 31, 2003 includes the non-cashnon-qualified stock option expense of $1,250,000. The Company's currentliabilities exceed its current assets by $6,243,542 as of December 31, 2003.

 

TheCompany's liquidity is dependent on its ability to meet its obligations, toobtain additional financing as may be required and ultimately to attainprofitability. The Company will continue to attempt to raise capital throughprivate equity or debt offerings, as well as institutional investors untilinternally generated profitability is achieved. The Company is taking steps toimprove profitability by restructuring contracts to increase the amount ofrevenue generated by each contract, and to pass along certain costs to theoperator previously absorbed by the Company; increasing sales efforts to obtaincontracts with mall developers and national retailers not currently undercontract; and reducing expenses by implementing a hiring freeze unlessabsolutely essential to the Company's operations, along with a reduction inworkforce through normal attrition. Management believes that if the Company werenot able to obtain additional financing to finance development of its overallbusiness, that operations could be restructured so that the Company may beprofitable at the current level of sales.
**Liquidityand Financing Arrangements

 **
TheCompany issued 2,400 shares of common stock for services to a consultant in theamount of $9,600.

 

TheCompany issued 6,382 shares of common stock to stockholders for interest in theamount of $25,528 according to terms of notes payable. The note holders are alsoshareholders and accredited investors.

 

TheCompany extended the term of 375,000 non-qualified stock options to a long-termemployee of the Company who ceased employment in February 2003, and recorded aone-time, non-cash expense of $1,250,000.

 

TheCompany issued 73,291 common stock warrants to stockholders for interest in theamount of $33,020 according to terms of notes payable. The note holders are alsoshareholders and accredited investors.

 

TheCompany made payments on notes to officers totaling $15,000. On March 26, 2004the President entered into an agreement with the Company whereby any notes dueto the President will not be repaid until after December 31, 2004.

 

TheCompany made payments on notes to stockholders totaling $214,100.

 

TheCompany entered into a Promissory Note with a stockholder for $1,025,000 toconsolidate and retire their existing outstanding debt with the Company. Thenote is due and payable in January 2005 and has been reclassified to long-termnotes to shareholders.

 

TheCompany made interest payments in cash on notes to stockholders totaling$27,188.

 

TheCompany currently operates without a line of credit and occasionally enters intoshort-term promissory notes with accredited investors, normally existingstockholders. These promissory notes often have conversion privileges into theCompany's common stock, easing debt service requirements. Despite these efforts,significant amounts of additional cash will be needed to reduce the Company'sdebt and losses. Management believes that if the Company were not able to obtainadditional financing to finance development of its overall business, thatoperations could be restructured so that the Company may be profitable at thecurrent level of sales.. In conjunction with efforts to improve results ofoperations, the Company is currently in the process of attempting to raiseequity funding from institutional/accredited investors to meet on-going capitalrequirements. Concurrently, the Company is in preliminary discussions withstrategic partners that could result in the merger or acquisition of the Companyor an initial public offering. Due to cash flow constraints, the Company willrely on equity financing to meet anticipated capital needs. There can be noassurances that the Company will be successful in obtaining any such capital.Additional issuance of shares for debt and/or equity will serve to dilute thevalue of the Company's Common Stock and existing shareholder positions.

 
**RecentAccounting Pronouncements

 **
InNovember 2002, the EITF reached a consensus on Issue No. 00-21, *RevenueArrangements with Multiple Deliverables.*EITF Issue No. 00-21 providesguidance on how to account for certain arrangements that involve the delivery orperformance of multiple products, services and/or rights to use assets. Theprovisions of EITF Issue No. 00-21 will apply to revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. The adoptionof EITF Issue No. 00-21 did not have a material impact on operating resultsor financial condition of the Company as the Company followed the provisions ofStatement of Position ("SOP") 97-2, *Software revenue Recognition,*as modified by SOP 98-9, *Modification of SOP 97-2 with Respect to CertainTransactions,*which provide guidance for revenue recognition of arrangementswith multiple deliverables.

 

InApril 2003, FASB issued SFAS No. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities.*SFAS 149 amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities underSFAS 133, *Accounting for Derivatives and Hedging Activities.*SFAS 149is generally effective for derivative instruments, including derivativeinstruments embedded in certain contracts, entered into or modified afterJune 30, 2003. The adoption of SFAS 149 did not have a material impact onthe operating results or financial condition of the Company.

 

In May2003, the FASB issued SFAS 150, *Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity*.SFAS 150 clarifies the accounting for certain financial instruments withcharacteristics of both liabilities and equity and requires that thoseinstruments be classified as liabilities in statements of financial position.Previously, many of those financial instruments were classified as equity.SFAS 150 is effective for financial instruments entered into or modifiedafter May 31, 2003 and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. On November 7, 2003,FASB Staff Position 150-3 was issued, which indefinitely deferred theeffective date of SFAS 150 for certain mandatory redeemable non-controllinginterests. The adoption of SFAS 150 did not have any impact on theCompany's consolidated financial statements.

InDecember 2003, the FASB issued Interpretation No. 46("FIN 46R") (revised December 2003), *Consolidation of VariableInterest Entities, an Interpretation of Accounting Research Bulletin No. 51*("ARB 51"), which addresses how a business enterprise shouldevaluate whether it has a controlling interest in an entity though means otherthan voting rights and accordingly should consolidate the entity. FIN 46Rreplaces FASB Interpretation No. 46 (FIN 46), which was issued inJanuary 2003. Before concluding that it is appropriate to apply ARB 51voting interest consolidation model to an entity, an enterprise must firstdetermine that the entity is not a variable interest entity (VIE). As of theeffective date of FIN 46R, an enterprise must evaluate its involvement withall entities or legal structures created before February 1, 2003, todetermine whether consolidation requirements of FIN 46R apply to thoseentities. There is no grandfathering of existing entities. Public companies mustapply either FIN 46 or FIN 46R immediately to entities created afterJanuary 31, 2003 and no later than the end of the first reporting periodthat ends after March 15, 2004. The adoption of FIN 46 had no effecton the Company's consolidated financial position, results of operations or cashflows.

 

InDecember 2003, the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin (SAB) No. 104, *Revenue Recognition.*SAB 104revises or rescinds portions of the interpretive guidance included inTopic 13 of the codification of staff accounting bulletins in order to makethis interpretive guidance consistent with current authoritative accounting andauditing guidance and SEC rules and regulations. The adoption of SAB 104did not have a material effect on the Company's results of operations orfinancial condition.
**OffBalance Sheet Arrangements**
 

TheCompany does not have any interests in off-balance sheet variable interestentities nor does it have any interests in non-exchange traded commoditycontracts.

 
**ContractualObligations

 **
Thefollowing table summarizes the Company's outstanding borrowings and long-termcontractual obligations at December 31, 2003, and the effects these obligationsare expected to have on the Company's liquidity and cash flow in future periods.

 

Payments      Due By Period
Contractual      Obligations
Total
Less      Than

1      Year
1-3

Years
3-5

Years
More      Than

5      Years
 

 

 

 

 

 

 

 

 

 

Current      debt
$271,399
 

$271,399
 

 

 

 

 

 

Long-term      debt
$1,393,000
 

 

 

$1,393,000
 

 

 

 

Capital      lease obligations
$0
 

 

 

 

 

 

 

 

Operating      leases
$398,026
 

$331,863
 

$61,525
 

$4,638
 

-
Total
$2,062,425
 

$603,262
 

$1,454,525
 

$4,638
 

-** 

Item 7.Financial Statements.

 **
Thefinancial statements are incorporated herein by reference at page 28.

 
**Item 8.Changes In and Disagreements With Accountants on Accounting and FinancialDisclosure.**
 

Theinformation required by Item 304 of Regulation S-B is incorporated by referenceto Forms 8-K filed with the Securities and Exchange Commission October 28, 2003and November 11, 2003 respectively.

 
**Item8A. Controls and Procedures

 **
a)Evaluation of disclosure controls and procedures.

 

Underthe supervision and with the participation of our Management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of the effectiveness of the design and operations of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as of the end of the transitional period endedDecember 31, 2003. Based on this evaluation, our chief executive officer andchief financial officer concluded that our disclosure controls and procedureswere effective to ensure that the information required to be included in ourSecurities and Exchange Commission ("SEC") reports is properlyrecorded, processed, summarized and reported within the time periods specifiedin SEC rules and forms relating to NBO Systems, Inc.

(b)Changes in internal controls over financial reporting.

 

Inaddition, there were no significant changes in our internal controls that couldsignificantly affect these controls subsequent to the date of the evaluationreferenced in paragraph (a) above. We have not identified any significantdeficiency or material weaknesses in our internal controls, and therefore therewere no corrective actions taken..
**PARTIII

 

Item 9.Directors, Executive Officers, Promoters and Control Persons; Compliance WithSection 16(a) of the Exchange Act.**
 

Thefollowing table sets forth certain information concerning the directors andexecutive officers, and key employees of the Company as of March 1, 2004:

 
** 

 

Name** 

 

Age** 

Director,      Officer or Key

Employee      Since** 

 

Position
Keith      A. Guevara
53
June      1994
Chairman      of the Board, President and Chief Executive Officer, Director
Christopher      Foley
41
March      2001
Chief      Financial Officer & Director
Andrew      Boyd-Jones
50
May      2001
Director
D.      Kent Jasperson
55
July      1994
Chief      Accounting Officer, Secretary and Treasurer
James      M. Hyde
36
March      2004
Chief      Operating and Technology Officer
 

1.Keith A. Guevara is the Company's founder and has been Chairman of the Board andChief Executive Officer of the Company since its incorporation in June 1994. Mr.Guevara has over 26 years of combined sales, finance, marketing and senior levelmanagement experience. From October 1988 to June 1994, Mr. Guevara owned andserved as the President of Financial Capital Management, Inc. ("FCM"),and FCM Trading Group Ltd., investment firms specializing in trading andmanagement of commodities for individual high-net worth individuals as well aslarge managed accounts for institutional investors. Although Mr. Guevara hasbeen inactive in commodity trading since the inception of the Company in 1994,Mr. Guevara continues to maintain his registration as a Licensed-RegisteredCommodity Trading Advisor Firm with the National Futures Association. In 1968,Mr. Guevara joined the U. S. Army, spent 18 months in the Republic of Vietnamand was honorably discharged in 1971.

 

2.Christopher Foley joined the Company in March 2001 as Vice President of Finance,was appointed Chief Financial Officer April 17, 2002 and was subsequentlyappointed to the Board of Directors. Mr. Foley has over 19 years of financemanagement, financial analysis and securities industry experience. Prior to NBO,Mr. Foley most recently founded and owned his own investment management firmthrough an independent broker dealer catering to high net worth individuals,corporations, retirement plans and charitable endowments, serving as ChiefInvestment Officer and Portfolio Manager for two years. Prior financialmanagement experience includes the positions of Vice President of Trust &Investment Management at Zion's First National Bank for three years, andAssistant Vice President at PNC Bank for three years. Mr. Foley has worked forseveral Fortune 100 companies including General Electric, Johnson & Johnson,and American Express, and is also a US Navy veteran. Mr. Foley earned hisMasters of Business Administration from Westminster College in Salt Lake City,and a Bachelor's degree in Business Management from the University ofCincinnati, coupled with an Associates degree in Information Systems.

 

3.Andrew Boyd-Jones was appointed a member of the Company's Board of Directors inMay 2001 and has been a consultant with the Company since August 2000. Mr.Boyd-Jones has 29 years of investment banking and equity investment experience.Mr. Boyd-Jones is currently a managing director at Holding Capital Partners, LLCin New York City. Mr. Boyd-Jones founded and was CEO of Trenwith Securities,where he led over 300 mergers and acquisitions and corporate finance assignmentsresulting in combined transaction values of over $10 billion. Prior to hisfounding Trenwith Securities, Mr. Boyd-Jones led the leveraged buy-out team atBankers Trust. Mr. Boyd-Jones received his BA from the University of Virginiaand his MSc in Economics from the London School of Economics.

4. KentJasperson has served as the Chief Accounting Officer of the Company since July1994. On January 17, 1995, he was appointed as the Company's Secretary andTreasurer. Mr. Jasperson has over 18 years of experience as a financial officerin various business entities. From June 1990 to July 1994, he served as theController of KUTV, Inc. From March 1987 to June 1990, Mr. Jasperson was thecorporate tax specialist for KUTV, Inc., where he was responsible for preparingfederal and state tax returns in six states. From May 1981 to November 1986, Mr.Jasperson was the tax manager and internal auditor for Gibbons and ReedConstruction Company. From June 1973 to December 1978, he was an accountant withthe regional accounting firm of Whitaker, Lipp & Healea in Seattle,Washington. From January 1979 to May 1981, he was a partner in that accountingfirm. He received his CPA certificate in 1974 and is a member of the AmericanInstitute of Certified Public Accountants and the Utah Association of CertifiedPublic Accountants. Mr. Jasperson holds a B.S. degree in Accounting from BrighamYoung University.

 

5.James M. Hyde joined the Company in March 2004 as Chief Operating Officer andChief Technology Officer. Prior to joining NBO, Mr. Hyde served as the ChiefOperating Officer at Overstock.com, a publicly traded Internetconsumer-goods retailer. Mr. Hyde's responsibilities at Overstockincluded fulfillment, customer service, fraud prevention, creative, andfacilities. Mr. Hyde successfully scaled company operations for triple-digitgrowth during pre-IPO and post-IPO expansion. Prior to Overstock.com, Mr. Hydeserved as a VP of Applications Development at Tenfold Corporation, a publiclytraded developer of enterprise database management software. Prior to Tenfold,Mr. Hyde was a Project Manager at Sarcos Research Corporation, a developer ofresearch and entertainment robotic systems. Mr. Hyde holds MechanicalEngineering degrees from Stanford University (Ph.D. and B.S.) and theMassachusetts Institute of Technology (M.S.).

 

Alldirectors hold office until the next annual meeting of stockholders and theelection and qualification of their successors, or until death, resignation orremoval. Officers serve at the discretion of the Board of Directors and underthe terms of any employment agreement.

 

**AuditCommittee Financial Expert**

 

TheCompany's Board of Directors has established an Audit Committee currentlycomprised of Keith A. Guevara, Christopher Foley and Andrew Boyd-Jones. Mr.Guevara and Mr. Foley are not independent directors as each are Companyemployees. The Board of Directors of the Company believes that Mr. Boyd-Jones isan "audit committee financial expert" as defined in Item 401(e) ofRegulation S-B and meets the definition of "independent director" asdefined in Rule 4200 of the Marketplace Rules of the National Association ofSecurities Dealers, Inc.

 
**Section16(a) Beneficial Ownership Reporting Compliance

 **
Section16(a) of the Securities Exchange Act of 1934, as amended, requires the Company'sexecutive officers and directors, and persons who own more than 10% of aregistered class of its equity securities, to file an initial report ofsecurities ownership on Form 3 and reports of changes in securities ownership onForm 4 or 5 with the Securities and Exchange Commission. Such executiveofficers, directors and 10% stockholders are also required by SEC rules tofurnish the Company with copies of all Section 16(a) forms that they file. Basedsolely on the Company's review of the copies of such forms received by theCompany, or written representations from certain reporting persons that no Forms4 or 5 were required for such persons, the Company believes that, for thetransitional period ended December 31, 2003, the Company's executive officersand directors timely filed all reports required under Section 16(a) for suchfiscal year.
**Code ofEthics

 **
TheBoard of Directors has adopted a Code of Ethics for Company Executives and otheremployees in accordance with Item 406 of Regulation SB. The Company's Code ofEthics is available free of charge by contacting our investor relationsdepartment at 1-801-887-7000. If we make any substantive amendments to the Codeof Ethics or grant any waiver, including any implicit waiver, from a provisionof the Code of Ethics to our Chief Executive Officer, Chief Financial Officer orChief Accounting Officer, the Company will disclose the nature of such amendmentor waiver under a Form 8-K or quarterly or annual report under the Securitiesand Exchange Act of 1934.
**Item10. Executive Compensation.

 **
Thefollowing tables set forth certain summary information concerning thecompensation paid or accrued for the Company's chief executive officer and eachof its other executive officers for the transitional periods ended December 31,2003, 2002, and 2001 respectively.

 
**SummaryCompensation Table**
 

Annual      Compensation
Long      Term Compensation

Awards
Payouts

 

Name      and

Principal      Position
 

 

Year
 

 

Salary
 

 

Bonus
 

Other      Annual Compensation
Restricted      Stock Awards
Securities      Underlying Options
  

  

LTIP      Payouts
 

All      Other Compensation
Keith      A. Guevara

Chairman/CEO/President
31      Dec 03
$250,000
-0-
-0-
-0-
-0-
-0-
-0-
 

31      Dec 02
250,000
-0-
-0-
-0-
-0-
-0-
-0-
 

31      Dec 01
250,000
-0-
-0-
-0-
-0-
-0-
-0-
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Christopher      P. Foley

Chief      Financial Officer, Board Member
31      Dec

03
132,000
-0-
-0-
-0-
-0-
-0-
-0-
 

31      Dec

02
132,000
-0-
-0-
-0-
25,000
-0-
-0-
 

31      Dec

01
120,000
-0-
-0-
-0-
62,500
-0-
-0-
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

D.      Kent Jasperson

Chief      Accounting Officer, Secretary/Treasurer
31      Dec 03
110,000
-0-
-0-
-0-
-0-
-0-
-0-
 

31      Dec 02
110,000
-0-
-0-
-0-
-0-
-0-
-0-
 

31      Dec 01
96,000
-0-
-0-
-0-
-0-
-0-
-0-
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James      M. Hyde

Chief      Operating Officer/

Chief      Technology Officer
31      Dec

03
140,000
-0-
-0-
-0-
-0-
-0-
-0-
 
**Options/SARGrants In The Transitional Period

(IndividualGrants)**
 

TheCompany did not grant any stock options to officers and directors during thetransitional period ended December 31, 2003.

 
**AggregatedOptions/SAR Exercises in the Transitional Period

Options/SARValues

 **
Thefollowing table sets forth information concerning the exercise of options toacquire shares of the Company's Common Stock by the executive officers named inthe Summary Compensation Table above during the transitional period endedDecember 31, 2003 as well as the aggregate number and value of unexercisedoptions held by the executive officers on December 31, 2003. The value ofexercisable unexercised in-the-money options is calculated by multiplying thenumber of exercisable unexercised options by the latest Private PlacementMemorandum offering price of $4.00, less the cost basis of the option, which isthe exercise price times the number of exercisable unexercised options.

 

In thefollowing table, "Value Realized" is equal to the difference betweenthe fair value of the shares at the time of exercise and the exercise price paidfor the shares and the "Value of Unexercised In-The-Money Options" isbased on the closing selling price per share at the close of the 2003transitional period less the exercise price payable per share. Options are"In-the-Money" if the fair market value of the underlying optionexceeds the exercise price of the option.

 

 

 

Number      of Securities Underlying Unexercised Options/SARs at December 31, 2003($)
Value      of Unexercised In-the-Money Options/SARs at December 31, 2003(#)
Name
Shares      Acquired on Exercise (#)
Value      Realized ($)
Exercise

Price
 

Exercisable
 

Unexercisable
 

Exercisable
 

Unexercisable
Keith      A. Guevara
-0-
-0-
$0.35
312,500
-0-
$1,140,625
-0-
 

-0-
-0-
$0.88
2,812,500
-0-
$8,775,000
-0-
 

 

 

 

 

 

 

 

Christopher      Foley
-0-
-0-
$4.40
62,500
-0-
-0-
-0-
 

-0-
-0-
$5.50
25,000
-0-
-0-
-0-
 

 

 

 

 

 

 

 

D.      Kent Jasperson
-0-
-0-
$0.32
78,125
-0-
$287,500
-0-
 

-0-
-0-
$0.80
78,125
-0-
$250,000
-0-
 

-0-
-0-
$2.80
62,500
-0-
$75,000
-0-
 

 

 

 

 

 

 

 

James      M. Hyde
-0-
-0-
$4.00
50,000
-0-
-0-
-0-** 

EmploymentAgreements**
 

None.

 

TheCompany paid $9,000 as compensation to Andrew Boyd-Jones for consulting servicesrendered to the Company.
** 

Item11. Security Ownership of Certain Beneficial Owners and Management.*** 

SecurityOwnership of Certain Beneficial Owners and Management*
 

Thefollowing table indicates the beneficial ownership of the Company's votingsecurities by each person known by the Company to be the beneficial owner ofmore than 5% of such securities, as well as the securities of the Companybeneficially owned by all officers and directors of the Company as ofMarch 1, 2004. Beneficial ownership is determined in accordance with therules of the Securities and Exchange Commission. In computing the number ofshares beneficially owned by a person and the percentage ownership of thatperson, shares of common stock subject to options and warrants held by thatperson that are currently exercisable or that will become exercisable within60 days of December 31, 2004, are deemed outstanding even if they have notactually been exercised. Those shares, however, are not deemed outstanding forpurpose of computing the percentage ownership of any other person. As ofDecember 31, 2003, 16,317,661 shares of our common stock were issued andoutstanding.

Name      and Address

of      Beneficial Owners(1)
Title      of

Class       
 Number      of

Shares      Owned  
 

Percent

Keith      A. Guevara
Common      Stock
[5,744,177](2)
[29.5]%
Chairman,      President, CEO
 

 

 

 

 

 

 

 

 

 

 

D.      Kent Jasperson
Common      Stock
[      224,292](3)
[1.4]%
Chief      Accounting Officer,
 

 

 

Secretary,      Treasurer
 

 

 

 

 

 

 

Christopher      Foley
Common      Stock
[91,787](4)
*
Chief      Financial Officer,
 

 

 

Director,      Board of Directors
 

 

 

 

 

 

 

James      M. Hyde
Common      Stock
[50,000](5)
*
Chief      Operating Officer
 

 

 

Chief      Technology Officer
 

 

 

 

 

 

 

Andrew      Boyd-Jones
Common      Stock
0
*
Director,      Board of
 

 

 

Directors
 

 

 

 

 

 

 

All      Executive Officers
Common      Stock
[6,110,256](6)
[30.9]%
and      Directors as a
 

 

 

Group      (5 persons)
 

 

 

 

 

 

 

* Lessthan one percent ownership
-  Except    as otherwise indicated, to the best knowledge of the Company, all stock is    owned beneficially and of record by the indicated person, and each    shareholder has sole voting and investment power. Unless otherwise indicated    in these footnotes, the mailing address of each beneficial owner listed is    3676 W. California Ave., Bldg D., Salt Lake City, UT 84104.Includes    [3,125,000] shares subject to options, all of which are presently    exercisable or will become exercisable within 60 days after December 31,    2003.Includes    [218,750] shares subject to options, all of which are presently exercisable    or will become exercisable within 60 days after December 31, 2003.Includes    [87,500] shares subject to options, all of which are presently exercisable    or will become exercisable within 60 days after December 31, 2003.Includes    [50,000] shares subject to options, all of which are presently exercisable    or will become exercisable within 60 days after December 31, 2003.Includes    [3,481,250] shares subject to options, all of which are presently    exercisable or will become exercisable within 60 days after December 31,    2003.*SecuritiesAuthorized for Issuance under Equity Compensation Plans*
 

OnJanuary 22, 1997 pursuant to Section 16-10a-704(2)(a) of the Utah Act, by Actionby Written Consent of the Majority of Outstanding Shares of Stock of NBOSystems, Inc., resolved to approve and adopt the 1997 Stock Option Plan, whichis an exempt employee benefit plan under Rule 16b-3 promulgated under Section 16of the Securities and Exchange Act of 1934, as amended. The 1997 Stock OptionPlan is the Company's only equity compensation plan. The following tableprovides information as of December 31, 2003 with respect to the shares of theCompany's Common Stock that may be issued under the 1997 Stock Option Plan.

(a)

 

 

Number      of securities to be issued upon exercise of outstanding options, warrants      and rights
(b)

 

Weighted-average      exercise price of outstanding options, warrants and rights
(c)

Number      of securities remaining available for future issuance under equity      compensation plans [excluding securities reflected in column (a)]
(d)

 

 

Adopted      without the approval of security holders
6,651,122
$1.825
248,749
None** 

Item12. Certain Relationships and Related Transactions.**
 

TheCompany had notes payable at December 31, 2003, March 31, 2003 and March 31,2002 to shareholders and officers in the amounts of $1,664,399; $1,034,124 and$1,034,124 respectively.

 

DuringMay 1996, the Company entered into a promissory note with its president for$250,000, which the president advanced to the Company for payment of theCompany's general and administrative expenses. The note bears 10 percentinterest, payable (including interest) on the earlier of July 10, 1996 or uponthe Company obtaining $750,000 of debt or equity financing. The note is notcollateralized and remains outstanding as of December 31, 2003. On March 26,2004 the president entered into an agreement with the Company whereby thepromissory note will not be paid until after December 31, 2004.

DuringJanuary 2002, the Company entered into a non-interest bearing demand note withits President for $40,000. The note is not collateralized. A principal paymentof $20,000 was made in February, 2002. The $20,000 balance remains outstandingas of December 31, 2003. On March 26, 2004 the president entered into anagreement with the Company whereby the promissory note will not be paid untilafter December 31, 2004.
** 

Item13. Exhibits and Reports on Form 8-K.**
Theinformation required by Item 304 of Regulation S-B is incorporated by referenceto Forms 8-K filed with the Securities and Exchange Commission October 28, 2003and November 11, 2003 respectively.

 

(a) EXHIBITINDEX

 
**Exhibit
 
**Page      Number/**Number**Description**Filing      Method
2.1
Articles      of Merger
(1)      
3.1
Articles      of Incorporation
(1)      
3.2
Bylaws
(1)      
10.1
Services      Agreement by and between Wildcard Systems, Inc. and NBO, Inc., dated as of      March 20, 2001
(2)      
10.2
Internet      Gift Card(s) Agreement by and between NBO, Inc. and GMRI, Inc., dated as      of August 4, 2000
(2)      
10.3
Class      A Warrant to Purchase Common Stock of Neighborhood Box Office, Inc.
(2)      
10.4
1997      Stock Option Plan of Neighborhood Box Office, Inc.
(2)      
10.5
The      Rouse Company Standard Mall Agreement, dated 2000
(2)      
10.6
Purchase      Agreement and Service Contract by and between Neighborhood Box Office,      Inc. and Urban Roseville LLC, dated 2000
(2)      
10.7
Contract      Services Agreement by and between Neighborhood Box Office, Inc. and Price      Development Company, L.P., dated August 1999
(2)      
10.8
Contract      Services Agreement by and between The Gift Certificate Company and Cutler      Ridge Mall, dated August 21, 2000
(2)      
10.9
Value-Added      Reseller Agreement by and between GEMPLUS Corporation and Neighborhood Box      Office, Inc., dated 1998
(2)      
10.10
Standard      Gift Certificate Participation Agreement, dated 1999
(2)      
10.11
Contract      Services Agreement by and between Neighborhood Box Office, Inc. and      Smith's Food and Drug Centers, Inc., dated April 11, 2000
(2)      
10.12
Advertising      and Promotions Agreement by and between eBay Inc. and Neighborhood Box      Office, Inc., dated June 2001
(2)      
10.13
Bayer      Properties Standard Mall Agreement by and between The Gift Certificate      Company, Inc. and NBO, Inc., dated October 4, 2001
(1)      
10.14
Contract      Services Agreement by and between The Gift Certificate Company, Inc. and      Prime Outlets of Grove City, dated April 24, 2001
(1)      
31.1
Certification      of Keith A. Guevara, Chairman, President and CEO
 

31.2
Certification      of Christopher Foley, Director and CFO
 

32
Certification      pursuant to 18 U.S.C. Section 1350 of Keith A. Guevara and Christopher      Foley
 

 

(1)Previously filed on Form 10-SB12G/A (File No. 000-33037) on April 26, 2001.

(2)Previously filed on Form 10-SB12G (File No. 000-33037) on August 2, 2001.

(b)Reports on Form 8-K:

CurrentReports on Form 8-K filed with the SEC on October 28, 2003 and November 11, 2003which report the following items:

 

(i)Item 4 - Changes in Registrant's Certified Accountants

(ii)Item 4 and 7 - Changes in Registrant's Certified Accountants and FinancialStatements

 
**Item14. Principal Accounting Fees and Services

 **
Duringthe transitional period ended December 31, 2003, Tanner & Co. providedvarious audit, audit related and non-audit services to the Company as follows.During the transitional period ended December 31, 2002, Grant Thornton, LLPprovided various audit, audit related and non-audit services to the Company asfollows. :

 

 

December      31, 2003
December      31, 2002
Audit      Fees:
$84,040
$80,835
Audit      Related Fees:
$0
$12,006
Tax      Fees:
$0
$0
All      Other Fees:
$0
$0
 

OurAudit Committee has considered whether provision of the services describedregarding audit related fees, tax fees and all other fees above were compatiblewith maintaining the independent accountant's independence and has determinedthat such services did not adversely affect Tanner & Co.'s independence.

 

TheAudit Committee has direct responsibility to review and approve the engagementof the independent auditors to perform audit services or any permissiblenon-audit services. These services may include audit services, audit-relatedservices, tax services and other services.

 

Sincethe May 6, 2003 effective date of the Securities and Exchange Commission rulesstating that an auditor is not independent of an audit client if the services itprovides to the client are not appropriately approved, each new engagement ofTanner & Co. was approved in advance by the audit committee, and none ofthose engagements made use of the *de minimus* exception to pre-approvalcontained in the SEC's rules.
**SIGNATURES

 **
Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant caused this Form 10-KSB to be signed on its behalf by theundersigned, thereunto duly authorized.

 

NBOSystems, Inc.

 

By /s/Keith A.Guevara                    

KeithA. Guevara March 30, 2004

Chairman/President/CEO

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

By /s/Keith A.Guevara                    

KeithA. Guevara March 30, 2004

Chairman/President/CEO

 

 

 

By /s/Kent Jasperson                        

D. KentJasperson March 30, 2004

ChiefAccounting Officer,

Secretary/Treasurer

 

By /s/ChristopherFoley                    

ChristopherFoley March 30, 2004

ChiefFinancial Officer,

Director

 

By /s/AndrewBoyd-Jones                

AndrewBoyd-Jones March 30, 2004

Director
**PARTF/S**
 

 

 

 

 

 

 

FINANCIALSTATEMENTS

IndependentAuditors' Report

To theBoard of Directors and

Shareholdersof NBO Systems, Inc.

 

We haveaudited the accompanying balance sheet of NBO Systems, Inc. as of December 31,2003 and March 31, 2003, and the related statements of operations, stockholders'deficit, and cash flows for the nine months ended December 31, 2003 and theyears ended March 31, 2003 and 2002. These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally accepted inthe United States of America. Those standards require that we plan and performthe audits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of NBO Systems, Inc. as of December31, 2003 and March 31, 2003 and the results of its operations and cash flows forthe nine months ended December 31, 2003 and the years ended March 31, 2003 and2002, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Tanner + Co.

SaltLake City, Utah

March12, 2004

NBOSystems, Inc.

 

BALANCESHEETS

 

ASSETS

 

 

December      31,
March      31,
 

2003
2003
CURRENT      ASSETS
 

 

          Cash
$      58,077
$      -
          Restricted cash
25,410,674
9,264,671
          Accounts receivable, net of allowance for uncollectible accounts
 

 

          of $5,844 at December 31, 2003 and $12,654 at March 31, 2003
857,200
152,906
          Inventory
315,823
68,429
          Prepaid expenses
27,018
39,825
          Employee advances
3,078
4,243
               Total current assets
26,671,870
9,530,074
PROPERTY      AND EQUIPMENT, NET
875,182
1,011,942
OTHER      ASSETS
 

 

          Deposits and reserves
727,965
777,572
          Other assets
109,696
124,858
 

837,661
902,430
 

$      28,384,713
$      11,444,446
LIABILITIESAND STOCKHOLDERS' DEFICIT

CURRENT      LIABILITIES
 

 

          Checks written in excess of cash in bank
$      -
$      16,671
          Gift certificates/cards payable
29,108,106
13,806,707
          Accounts payable
2,173,637
611,184
          Accrued liabilities
1,362,270
796,232
          Notes to stockholders
271,399
485,499
               Total current liabilities
32,915,412
15,716,293
LONG-TERM      LIABILITIES
          Long-term notes to stockholders
1,025,000
275,000
          Notes to officer
368,000
273,625
               Total long-term liabilities
1,393,000
548,625
 

 

 

Total      liabilities
34,308,412
16,264,918
COMMITMENTS      AND CONTINGENCIES
-
-
STOCKHOLDERS'      DEFICIT
 

 

          Capital stock
 

 

          Convertible redeemable preferred stock, par value $1.00; authorized      1,000,000 shares;

65,155      and 59,231 shares issued and outstanding at December 31, 2003 and March

31,      2003; redemption value $2.20 per share
       
       
65,155
       
       
59,231
          Common stock, par value $0.0005; authorized 20,000,000 shares; 16,317,661      and

16,621,379      shares issued and outstanding at December 31, 2003 and March 31, 2003
 

8,159
 

8,311
          Subscriptions receivable
(17,900)
(17,900)
          Additional paid-in capital
24,194,647
22,880,570
          Accumulated deficit
(30,173,760)
(27,750,684)
               Total stockholders' deficit
(5,923,699)
(4,820,472)
 

$      28,384,713
$      11,444,446
 

Theaccompanying notes are an integral part of these statements.

NBOSystems, Inc.

 

STATEMENTSOF OPERATIONS

 

 

Nine      months ended December 31,
Year      ended March 31,
 

2003
2002
2003
2002
 

 

(Unaudited      & Restated)
 

 

Revenues      and other income
 

 

 

 

          Sale of third party gift certificates/cards
$4,132,732
$2,415,779
$2,886,621
$2,057,964
          Merchant fees earned from retailers
1,233,672
1,158,560
1,333,602
1,158,449
          Fees earned from customers
538,808
96,914
126,261
10,322
          Postage and handling
300,443
202,310
236,411
174,984
          Equipment and software income
93,506
40,088
43,528
38,298
          Interest on restricted cash
25,886
31,605
40,470
186,472
          Lease revenue
-
37,236
50,161
10,750
          Gift certificate breakage
2,358,168
1,123,534
927,253
1,830,477
               Total revenues and other income
8,683,215
5,106,026
5,644,307
5,467,716
  

 

 

 

 

Operating      expenses
 

 

 

 

          Cost of revenues and other income
 

 

 

 

               Third party gift certificates/cards
3,775,996
2,123,585
2,598,225
1,855,270
               Merchant fees and charges
1,233,005
920,734
1,210,997
1,107,184
               Rebates to malls
200,523
76,986
85,947
50,830
               Gift card and gift certificate stock
199,478
124,032
157,335
139,463
               Postage and handling
181,513
90,866
114,132
98,065
               Credit card enrollment fees
90,608
-
85,000
-
               Other
39,934
103,427
34,164
55,032
                    Total cost of revenues and other income
5,721,057
3,439,630
4,285,800
3,305,844
  

 

 

 

 

          Selling, general and administrative expenses
 

 

 

 

             Personnel (excluding $1,250,000 non-qualified stock options)

2,513,949
2,120,871
3,059,436
2,941,271
             Non-qualified stock options
1,250,000
-
-
-
             Office
299,889
322,743
439,959
464,849
             Depreciation and amortization
261,062
241,357
325,721
358,800
             Rent
244,768
243,015
329,751
340,569
             Legal and accounting
188,399
171,926
215,285
265,892
             Travel, meals and entertainment
112,536
100,927
154,760
63,014
             Other
100,567
66,574
146,509
128,906
             Consultants
31,684
35,224
79,853
6,500
               Total selling, general and administrative expenses

5,002,854
3,302,637
4,751,274
4,569,801
                    Total operating expenses
10,723,911
6,742,267
9,037,074
7,875,645
                    Operating loss
(2,040,696)
(1,636,241)
(3,392,767)
(2,407,929)
Non-operating      income (expense)
 

 

 

 

          Interest expense
(250,697)
(322,139)
(390,959)
(1,691,212)
          Loss on disposal of assets and property and equipment
(24,767)
(14,273)
(253,972)
(111,669)
          Interest income
997
3,595
5,017
17,215
          Other income (expense), net
3,163
762
888
35
               Total non-operating income (expense)
(271,304)
(332,055)
(639,026)
(1,785,631)
                    NET LOSS
$(2,312,000)
$(1,968,296)
$(4,031,793)
$(4,193,560)
 

Net      loss per common share - basic and diluted
$(0.15)
$(0.12)
$(0.24)
$(0.26)
Weighted-average      number of common shares outstanding - basic and diluted
       
16,336,000
       
16,577,000
       
16,589,000
       
16,004,000
 

Theaccompanying notes are an integral part of these statements.

NBOSYSTEMS, Inc.

 

STATEMENTOF STOCKHOLDERS' DEFICIT

 

Forthe years ended March 31, 2003 and 2002 and the nine months ended December 31,2003

 

 

Preferred        stock
Common        stock
 

Subscriptions
Receivable
Additional
paid-in
capital
 

Accumulated
deficit
 

 

Total
Number
of        shares
 

Amount
Number
of        shares
 

Amount
Balance        at April 1, 2001
48,952
$48,952
15,608,511
$7,804
$(17,900)
$18,962,236
$(19,260,324)
$(259,232)
referred        stock dividends
4,895
4,895
-
-
-
121,303
(126,198)
-
Common        stock issued for
            Note payable
-
-
295,788
135
-
496,615
-
496,750
            Notes to officer
-
-
312,500
156
-
109,219
-
109,375*********************************************************************************** |
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