UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-KSB

 

[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2003

 

NBO SYSTEMS, INC.

(Formerly known 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's Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Act:

Title Of Each Class

To Be So Registered
Name Of Each Exchange On Which

Each Class Is To Be Registered
None
N/A
 

Securities registered under Section 12(g) of the Act:

Common Stock, Par Value $.0005

(Title of Class)

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes __X__ No _____

 

Check if there is no disclosure of delinquent filers in response to Item 405of Regulation 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 ]

 

State issuer's revenues for its most recent fiscal year: $5,644,307

 

State the aggregate market value of the voting and non-voting common equityheld by non-affiliates computed by reference to the price at which the commonequity was sold, or the average bid and asked price of such common equity, as ofa specified date within the past 60 days. (See definition of affiliate in Rule12b-2 of the Exchange Act.)

 

Voting: 13,677,873 non-affiliate common shares at $5.50 = $75,228,302

Non-Voting: zero

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

State the number of shares outstanding of each of the issuer's classes ofcommon equity. 16,621,379 common shares as of March 31, 2003.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

If the following documents are incorporated by reference, briefly describethem and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) intowhich the document is incorporated: (1) any annual report to security holders;NONE. (2) any proxy or information statement; NONE. and (3) any prospectus filedpursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("SecuritiesAct"). NONE.

 

Transitional Small Business Disclosure Format (check one):

 

Yes ____ No __X__

 

**TABLE OF CONTENTS**

 

**PART I   **

**Page**

ITEM 1. DESCRIPTION OF BUSINESS    

3 

ITEM 2. DESCRIPTION OF PROPERTY    

13 

ITEM 3. LEGAL PROCEEDINGS    

13 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    

13 

**PART II**

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS    

13 

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    

15 

ITEM 7. FINANCIAL STATEMENTS    

20 

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    

21 

ITEM 8A. CONTROLS AND PROCEDURES    

21 

**PART III**

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT    

21 

ITEM 10. EXECUTIVE COMPENSATION    

22 

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT    

 24 

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS    

25 

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K    

26 

SIGNATURES    

27 

**PART F/S   **

28 
** 

Forward-looking Statements**
All statements made herein, other than statements of historical fact, whichaddress activities, actions, goals, prospects, or new developments that theCompany expects or anticipates will occur in the future, including such thingsas expansion and growth of operations and other such matters, areforward-looking statements. These statements represent the Company'sexpectations, hopes, beliefs, anticipations, commitments, intentions andstrategies regarding the future. They may be identified by the use of words orphrases such as "believes," "expects,""anticipates," "should," "could be,""plans," "estimates," and "potential," amongothers. Any one or a combination of factors could materially affect the Company'soperations and financial condition. These factors include competitive pressures,success or failure of marketing programs, changes in pricing, creditor actions,and conditions in the capital markets. Forward-looking statements made by theCompany are based on knowledge of the Company's business and the environmentin which the Company currently operates. Because of the factors listed above, aswell as factors beyond the Company's control, actual results may differ fromthose in the forward-looking statements.

 
**PART I

Item 1. Description of Business.*** 

(a) Business Development
 

NBO Systems, Inc. ("NBO" or the "Company" or    "we") began operations as an Utah C Corporation in June 1994 as    "Neighborhood Box Office, Inc." On July 17, 2000 the Company    changed its name from Neighborhood Box Office, Inc. to NBO, Inc. In January    of 2002, NBO, Inc., merged into its wholly-owned subsidiary, NBO Systems,    Inc., which was incorporated in the State of Maryland and thereafter filed a    dba as The Gift Certificate Company. The effect of this transaction was to    reincorporate the Company in the State of Maryland.

 

There have been no bankruptcy, receivership or similar proceedings to    date. There has been no material reclassification, merger, consolidation, or    purchase or sale of assets in the fiscal year ended March 31, 2003.

 

The Company was created for the purpose of developing a state-of the-art    event and entertainment ticket distribution system. The first several years    of operations well into 1997 were spent primarily on the development of    software, along with the design and integration of hardware components in a    kiosk. Kiosks were installed in a beta test site and additional markets were    subsequently installed in several geographic areas, demonstrating the    technology and capabilities of the Company to the industry.

 

In late 1997 and early 1998, the Company decided to pursue opportunities    distributing gift certificates using technology similar to that already    developed for the ticketing business. In 1998 the Company was successful in    finalizing an agreement with Urban Retail Properties, Inc., one of the    nation's largest mall owner/operators, to distribute gift certificates on    an exclusive basis for 14 mall properties.

 

In the fall of 1999, the Company's exclusive agreement with Urban was    expanded to include eight additional mall properties. With additional    expansion, the number of Urban properties increased to 23 malls operating    NBO gift certificate programs. On May 3, 2002 a sale of certain Rodamco    North America, N.V. ("Rodamco" or "Urban Retail    Properties" or "Urban") malls to The Rouse Company    ("Rouse"), Simon Properties ("Simon") and Westfield    America Trust ("Westfield") was completed. As a result, Urban    Retail Properties Co. was re-organized to continue the third party    management of the mall business of Rodamco. In the fall of 2002, mall gift    certificate contracts were renewed for an additional three-year term for the    remaining 6 Urban mall properties. As of March 31, 2003, a total of 6 Urban    malls are installed and operational with NBO gift certificate programs.    Issuances for the Urban malls since inception through March 31, 2003 include    fulfillment of 2,140,887 mall gift certificates totaling $74,204,016.

 

In 1999, the Company entered into an exclusive agreement with The Rouse    Company to manage gift certificate programs for 5 of it's 44 mall    properties as a test. Based on the success of that 5 property test, in the    summer of 2000, the Company contracted with Rouse to implement gift    certificate programs in it's remaining 39 properties. With additional    property expansion, as of March 31, 2003 a total of 47 Rouse malls are    installed and operational with NBO gift certificate programs, including 43    properties operating with paper gift certificates and 4 properties    operational with stored value gift cards. In the fall of 2002, contracts for    gift certificate programs in all Rouse properties were renewed for an    additional three-year term. The Company is in the process of providing a    proposal to Rouse to convert all of their existing paper gift certificate    programs to gift card programs. Issuances for the Rouse malls since    inception through March 31, 2003 include fulfillment of 1,624,621 mall gift    certificates totaling $65,034,859 and fulfillment of 22,060 mall gift cards    totaling $1,433,630.

 

In 1999, the Company entered into an agreement with JP Realty Inc. to    manage gift certificate programs for their entire portfolio of 18    properties. On June 5, 2002 a shareholder meeting was conducted by JP Realty    ("JPR") to consider and vote upon a proposal to approve the merger    of JP Realty, Inc. with and into GGP Acquisition, L.L.C., a Delaware limited    liability company and an indirect subsidiary of General Growth Properties,    Inc., substantially on the terms set forth in the Agreement and Plan of    Merger, dated March 3, 2002, among General Growth Properties, Inc., GGP    Limited Partnership, GGP Acquisition, L.L.C., GGP Acquisition II, L.L.C., JP    Realty, Inc., and Price Development Company, Limited Partnership. The    Company has been informed by GGP that existing gift certificate programs at    JPR properties will remain in place through the end of the contract term in    September 2004. The transaction actually closed on July 10, 2002 with no    affect on Company operations. As of March 31, 2003 all 18 properties are    still fully operational. Issuances for the GGP malls since inception through    March 31, 2003 include fulfillment of 808,003 mall gift certificates    totaling $25,450,375 and fulfillment of 29,745 mall gift cards totaling    $1,492,316.

 

From 1999 through March 2003, the Company has entered into agreements to    manage gift certificate/gift card programs with 13 independent malls located    across the USA. Issuances for the independent malls since inception through    March 31, 2003 include fulfillment of 112,802 mall gift certificates    totaling $2,957,174 and fulfillment of 3,626 mall gift cards totaling    $167,009.

 

In the spring of 2000, the Company entered into an exclusive agreement    with Konover Properties to manage gift certificate programs for 31 Factory    Stores of America ("FSA") outlets. In 2002, Konover sold 29 of the    31 FSA's to Chelsea Property Group. As of March 31, 2003 the Company    continues to offer gift certificate fulfillment for both Konover and Chelsea    FSA's. Issuances for these outlets since inception through March 31, 2003    include fulfillment of 13,224 FSA gift certificates totaling $356,320.

 

In April 2000, the Company signed an agreement with Smith's Food and Drug    Stores, the leading supermarket chain in Salt Lake City, Utah to distribute    gift certificates from 37 Smith's store locations utilizing kiosk technology    along the Wasatch front in Utah. Internet and Call Center orders were also    fulfilled at the Company's fulfillment center in Salt Lake City. The    Company signed gift certificate distribution agreements with approximately    282 local retail businesses, with more than 500 retail outlets. In the    spring of 2002, the Company decided to discontinue distribution of gift    certificates through the kiosk technology due to overhead costs associated    with the operation of the kiosks. The Company continues to provide Internet    and Call Center order fulfillment of gift certificates for these merchants.    Issuances through the kiosks since inception through March 31, 2003 include    fulfillment of 20,988 local merchant gift certificates totaling $546,634. As    of January 2003, the Salt Lake City merchants are being solicited as a beta    test for roll-out of the Children's Heroes Community Scrip Card. Upon    successful proof of concept, the Company anticipates duplicating these    efforts in additional targeted Children's Heroes markets across the    country.

 

In April 2000, the Company entered into an exclusive three-year agreement    with Darden Restaurants, Inc. to sell gift cards via the Internet for all    Olive Garden, Red Lobster, Bahama Breeze and Smokey Bones restaurants.    Issuances since inception through March 31, 2003 include fulfillment of    193,625 Darden and Darden Restaurant Concept gift cards totaling $5,724,665.

 

In the fall of 2001, the Company entered into an agreement with Bayer    Properties of Birmingham, Alabama to manage gift card programs in two mall    properties. The two mall properties are located in Birmingham, Alabama and    Louisville, Kentucky respectively. Issuances since inception through March    31, 2003 include fulfillment of 38,169 mall gift cards totaling $2,312,862.

 

In the summer of 2002, the Company entered into an agreement with CBL and    Associates Properties, Inc. ("CBL") to manage mall gift card    programs in two mall properties. The mall properties are located in Fairview    Heights, Illinois and Dalton, Georgia respectively. CBL currently owns and    operates a total of 53 mall properties nationwide with gift certificate/gift    card sales of approximately $50 million annually. CBL's corporate    headquarters are located in Chattanooga, Tennessee. Sales since inception    through March 31, 2003 include fulfillment of 36,797 mall gift cards    totaling $1,617,694.

 

On July 31, 2002 the Company entered into a five year License and    Services Agreement with Card Commerce International, Inc., ("CCI"),    a Delaware corporation with offices located in Los Angeles, California. Card    Commerce International is a provider of value added, information-based    solutions, including data and risk management solutions to loyalty program    providers, merchant acquirers/processors and others. CCI is also a provider    of affinity/loyalty solutions, matching merchant and consumer participants,    determining their eligibility and calculating the amount of their rebates,    rewards and incentives. This agreement will be incorporated into the    Children's Heroes credit card registration efforts and other product    offerings detailed below.

 

On September 17, 2002 based on the long-term success with    the Darden fulfillment contract, and a favorable reference from the Darden    Corporation itself, NBO was approached by ValueLink, a wholly owned    subsidiary of First Data Corp. Subsequent to the meetings initiated by    ValueLink, NBO entered into an exclusive Master Services Agreement with IPS    Card Solutions, Inc. (doing business as ValueLink), a Maryland corporation,    with offices located in Englewood, Colorado. ValueLink now contracts with    NBO, on an outsourced back-end support services basis, to allow and enable    ValueLink to offer, sell and provide to each and any of its clients that use    ValueLink's Stored Value Card Services, card order fulfillment services.    NBO will provide all fulfillment, activation, loading of value, packaging    and customer support for ValueLink merchants through Internet orders and    orders received by the Company's Call Center, billable to ValueLink on a    per card basis. As of March 31, 2003 the Company received work orders from    IPS Card Solutions, Inc. via ValueLink to provide Internet and Call Center    fulfillment for stored value gift cards for several ValueLink clients.    ValueLink and NBO are working together diligently to bring additional    ValueLink clients to NBO for fulfillment services. Sales since inception for    ValueLink clients through March 31, 2003 include fulfillment of 1,173 gift    cards totaling $38,735.

 

On September 24, 2002 the Company entered into an exclusive one year    Internet Sales Participation Agreement with the Bigtime Restaurant Group, a    Florida corporation with offices located in West Palm Beach, Florida.    Bigtime Restaurant Group operates 8 restaurants in the south Florida area    and has contracted with the Company to be the sole fulfillment provider of    Internet gift certificate sales from the client's website. This agreement    has the same financial structure as the Darden agreement. Sales since    inception through March 31, 2003 are not material.

 

On October 10, 2002 the Company entered into a Master Agreement with    Metavante, a Wisconsin corporation with offices located in Milwaukee,    Wisconsin to provide processing software and services in conjunction with    the issuance of Discover/Novus gift cards and related gift card products.

 

On October 11, 2002 the Company entered into 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 to purchase goods or services    from participating merchants using Discover mall gift cards issued by the    Company. NBO became the first and only issuer of Discover/Novus stored value    gift cards to be used in the mall industry. NBO also became the first and    only company in the country to provide two distinct mall gift card platform    offerings (MasterCard & Discover) at the same time to the mall industry.

 

On October 14, 2002 the Company entered into an exclusive contract with    Merle Hay Mall, an Iowa Limited Partnership, with offices located in    Chicago, Illinois. The Company manages the Discover gift card program at    Merle Hay mall located in Des Moines, Iowa. Sales since inception through    March 31, 2003 include fulfillment of 3,742 mall gift certificates totaling    $1,127,652 and 7,806 mall gift cards totaling $333,874.

 

On October 17, 2002 the Company entered into an exclusive Gift    Certificate Services Agreement with Saladworks, Inc., a Pennsylvania    corporation with offices located in Conshohocken, Pennsylvania. Saladworks    operates a total of 35 restaurants including, 13 restaurants in New Jersey,    20 restaurants in Pennsylvania, 1 restaurant in Chicago, Illinois, and 1    restaurant in Washington, DC. Saladworks has contracted with the Company to    be the sole fulfillment provider of gift certificates, whether from the    store locations, over the Internet, or through call center sales. Sales    since inception through March 31, 2003 are not material.

 

On October 31, 2002 the Company entered into an exclusive contract with    Warmack and Company, LLC of Texarkana, Texas to install Discover mall gift    card programs in 3 of 7 mall properties located in Fort Smith, Arkansas;    Texarkana, Texas; and Port Arthur, Texas. In March 2003 the Company    completed an Amendment to the contract to install Discover mall gift card    programs in the remaining 4 Warmack mall properties located in Jonesboro,    Arkansas; Salina, Kansas; Lawton, Oklahoma and Muskogee, Oklahoma. Sales    since inception through March 31, 2003 include fulfillment of 12,300 mall    gift cards totaling $567,502.

 

On November 26, 2002 the Company entered into an exclusive Internet, Call    Center & Corporate Sales Participation Agreement with Consolidated    Restaurant Operations, Inc., ("CRO") a Texas corporation with    offices located in Dallas, Texas. CRO operates restaurant brands including    El Chico, Cantina Laredo, Spaghetti Warehouse, Good Eats and Lucky's. CRO    has contracted with the Company to be the sole fulfillment provider of gift    certificates over the Internet, or through call center sales. Sales since    inception through March 31, 2003 are not material.

 

In December 2002, the Company initiated the ramp-up of the Children's    Heroes Fundraising Program - a "grass roots" loyalty and community    fundraising program. The program is designed to drive increased    transactions, monthly visits, and incremental profit for shopping centers,    restaurants, and local merchants while concurrently raising funds for    community schools, youth sports, youth groups, and other local nonprofit    organizations. The Company experienced immaterial sales and revenues from    the Children's Heroes program in the fiscal year ended March 31, 2003. The    Company anticipates having 9 major regional markets either fully operational    or in the ramp-up stage during fiscal 2004. As of March 31, 2003 the Company    is conducting scrip operations in Massachusetts, Georgia, Texas, Arizona and    Utah. The Company intends to roll-out a total of 45 major markets nationwide    by 2006.

 

As of March 31, 2003 the Company has contracted to re-sell gift    certificates for more than 27 national retailers whereby the Company    purchases their gift certificates and then re-sells them on the Company's    Internet site. Sales since inception through March 31, 2003 include    fulfillment of 10,107 gift certificates totaling $119,963.

 
*(b) Gift Cards    

 *
Gift    card purchasers and users are as diverse as the look and packaging of gift    cards themselves, according to a national study commissioned by ValueLink,    the gift and spending card service of First Data Corp. The ValueLink/Omnibus    survey of more than 1,200 consumers aged 18 or older depicts a gift card    market that includes a broad range of consumers with varying degrees of    awareness, purchase and use of gift cards over the past year and for the    future. From males to females, young adults to seniors, Internet compared    with non-Internet users and Hispanics contrasted with non-Hispanics, the    ValueLink survey results provide a snapshot of the differences among gift    card users. Approximately 70 percent of gift card buyers fall between the    ages of 25 and 54, most are married with children, and are full-time    employees with some level of college education. However, given the    industry's continued double-digit growth, it is important to understand the    diversity of gift card consumers and continue to develop and enhance the    product to meet the preferences of these unique groups.

 

Middle income families and high    income professionals are the primary gift card buyers, accounting for 60    percent of gift card purchases as a whole. While males and females purchased    roughly the same number of cards in 2002, 4.5 and 4.7 cards respectively,    males were more likely to load higher dollar amounts on their purchased    cards, $58 versus $45 for females. Males also received more cards than    females in 2002, 31 percent and 28 percent, respectively.

 

Although levels of awareness are    lower among young adults and older adults, the older adult category    demonstrated a strong interest and willingness to load higher dollar values    on gift cards. Adults 65 and older maintain the highest average dollar value    when purchasing cards, $77. The average dollar value of purchased gift cards    among all consumers is $50. Older adult consumers also helped drive the    purchase of cards valued at $100 or more up from 8 percent in 2001 to 14    percent in 2002.

 

With increases in online sales    reported by many merchants in 2002, Internet users have demonstrated    interest in gift cards for both online and offline use. The survey noted    several key differences between Internet users and non-Internet users. Among    Internet users, awareness of gift cards is 20% higher (87%) than for    non-Internet users (67%). Internet users are more likely to purchase gift    cards (54% vs. 37% for non-Internet users) and 45% of Internet users    actually use gift cards vs. 26% for non-Internet users. Nearly    three-quarters (73%) said a gift card that could be used with multiple    merchants would be appealing vs. 56% percent of non-Internet users. 43%    prefer reloadable cards vs. 34% of non-Internet users.

 

In addition, 20% of all    consumers said that they are likely to purchase a gift card from a    merchant's Web site in the coming year. Another 18% said they are likely to    make an Internet purchase using a gift card in the coming year.

 

The U.S. Hispanic market, now    the largest minority market in the country with 37 million consumers and    well over a half trillion dollars in buying power, according to the U.S.    Census Bureau and Hispanic Business magazine, was also a focus of the    ValueLink survey.

 

Key findings from the Hispanic    market segment include:
-   Gift card awareness among the Hispanic market      is lower than the non-Hispanic market by 26%, (56% vs. 82%).Although awareness levels were lower,      Hispanics are more likely to make their decision to purchase a gift card      while they are in a store (42%) than the 17% of non-Hispanics.19% of Hispanics used a gift card in 2002 vs.      39% of non-Hispanics.  Reloadable gift cards are also far more      appealing to Hispanic consumers than non-Hispanics: 24 percent vs. 11      percent, respectively, have used a reloadable card while 62 percent of      Hispanics vs. 33 percent of non-Hispanics expressed interest in the      ability to reload funds on a gift cardBirthdays and the Christmas holiday are the      most frequent gift card giving occasions among Hispanics, and a majority      expressed interest in personalizing gift cards with a receiver's name      (66%) and specifying a special occasion (65%).
(Source: CardFlash - Daily    Payment Card News 5-14-03)
* 

(c) Business of the Company

 *
a.         Principal Products and Services

 

NBO's primary business is to provide comprehensive paper gift      certificate and magnetic stored value gift card programs to shopping mall      managers, non-mall retailers and consumers. The Company provides shopping      mall managers with a gift certificate/gift card product that is accepted      and redeemable at all mall stores. The Company administers the entire      program including accounting, banking, and complying with abandoned      property laws (handling of non-redeemed gift certificates and gift cards).

 

NBO's secondary business channel includes fulfillment of gift      certificates and gift cards ordered by consumers, businesses and merchants      via the Internet and the Company's toll free telephone lines.

 

NBO's third business channel is fundraising for non-profit      organizations, primarily K-12 schools, via the Children's Heroes brand      name utilizing Scrip, a Community Scrip Card, credit card registrations      and an Affinity/Loyalty credit card program.

 

The Company's revenue model is predicated on the following sources:
-  Interest income on 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     cardsService 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
The accounting treatment for recognition of revenue from the sale of        gift cards and gift certificates is complex. Revenue from the sale of        gift certificates and gift cards is not included in the revenues of the        Company in the financial statements in cases where the Company's sale of        gift certificates and gift cards is similar to the activities of an        agent that receives commissions. However, the Company does include the        revenues from the sale of gift certificates and gift cards in the        Company's financial statements in cases where the Company bears        financial risk and other indicators of control over the product or        service. The accounting treatment in each case will depend upon the        facts and circumstances, including the terms of the contracts relating        to the sale of the gift certificates or gift cards. In cases where the        face value from the sale of gift certificates and gift cards is not        included in revenues of the Company, the amount of such revenues is        disclosed either as a memorandum item on the statement of operations or        in footnotes to the financial statements. Revenues from convenience        fees, merchant fees, interest on the proceeds from the purchase of gift        certificates and gift cards in the restricted accounts and service fees        on gift certificates and gift cards (where not prohibited by law) are        recognized by the Company as earned.

 

b.           Distribution Methods

 

The Company manages or sells gift certificates and gift cards        through the following channels:
* 

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 user-friendly, computer-enabled kiosks to make purchasing gift        certificates as easy as using an ATM machine. The difficulties facing        customers when purchasing gift certificates through sales clerks, such        as long lines and hard to find distribution points, may be ameliorated        using the Company's Kiosk System. The Kiosks are generally located at        convenient locations in shopping malls, supermarkets, airports, office        buildings and other desirable high-traffic areas. The relatively small        footprint of the Kiosk allows it to be positioned in heavily traveled        areas to give customers easy access. 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. Approximately fifteen seats        are currently used by the Company, with the remainder of seats        sub-leased to another non-affiliated company. Subsequent to the year        ended March 31, 2003 the sub-lease tenant ceased operations. 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.

 

c.           New Products and Services

 

During the fiscal year ended March 31, 2003, the Company initiated        the ramp-up of the Children's Heroes Fundraising Program - a        "grass roots" loyalty and community fundraising program. The        majority of K-12 schools nationally still utilize fundraising programs        that have been around for decades, selling candy bars, trinkets,        wrapping paper and other products that are typically over-priced and are        not of the best quality.

 

In the mid 1990's, church organizations and schools in California        started selling products referred to as "Scrip," a word        commonly used today to describe gift certificates and gift cards        purchased from national and local merchants at a discount and then sold        at full face value to the church and school supporters. The merchant        discounts provided are then shared with the church or school as a        fundraiser. Supermarkets were the first high volume retailers to offer        discounts to fundraising organizations. Eventually, nearly every type of        major national retailer began participating. Today there are in excess        of 350 national merchant organizations consisting of supermarkets, gas        stations, restaurants and many other retail merchants, selling their        gift certificates and gift cards at discounts to support various        non-profit organizations. The Company believes that offering Scrip        products for consumers' normal, everyday purchases makes much more        sense than offering traditional fundraising products as described above.

 

As a result, the revenue derived from Scrip fundraising has increased        dramatically in the limited geographic markets currently being serviced        by several Scrip companies. Although Scrip has become a tremendous        fundraising tool, it is still very much in its infancy - isolated to        California, the Midwest and Mid-Atlantic regions of the United States.        It is the intent of NBO to exploit this opportunity and introduce Scrip        products to 45 major markets nationally by 2006, utilizing our        experience and technology to enter these markets.

 

The Scrip program is designed to drive increased transactions,        monthly visits, and incremental profit for shopping centers,        restaurants, and local merchants while concurrently raising funds for        community schools, youth sports, youth groups, and other local nonprofit        organizations. The discounts/rebates offered by participating merchants        vary by product category and volume. High volume merchants such as        supermarkets and gas stations typically offer discounts that average        3-5%. Others retailers such as clothing stores offer discounts that        average 10-15%, with restaurants offering discounts that can be as high        as 15-25%. The merchant discounts realized are then split between the        school and NBO, with the school receiving a slightly higher percentage        than NBO. The Company believes Scrip has an advantage over other        traditional fundraising products/services for the following reasons:
-            Consumers shop where they normally shop          Consumers buy what they normally buy          Consumers do not spend a penny more for          normal purchases          Consumers easily and conveniently raise          funds for schools or causes for which they have an interest          Kids remain in the classroom, not going          door-to-door selling trinkets or candy at exorbitant prices, preying          on the guilt of family, neighbors and friends to support their cause
In addition to Scrip, NBO has developed and implemented a      multi-merchant stored value card (the "Community Scrip Card")      that will initially supplement Scrip sales, with expectations to become      the primary Scrip product within 12-24 months. All of the national,      regional and local merchants participating in the Children's Heroes      program are expected to accept the multi-merchant card thereby      facilitating use for consumers and merchants. This Community Scrip Card      will be customized with merchants applicable to the demographics and      geography of the target market. Use of a single stored value card for all      participating merchants eliminates the need for NBO to carry large amounts      of Scrip inventory, which is capital and labor intensive. NBO will      accomplish this objective utilizing the Company's existing strategic      relationships and technological developments in stored value - experience      and technology, in the Company's opinion, that is unavailable to other      fundraising competitors.

 

To expedite the rollout of the Community Scrip Card, NBO has signed an      agreement with Students in Free Enterprise ("SIFE"). SIFE is a      global, non-profit organization with student teams on more than 1,400      university campuses in 33 countries. SIFE offers college students the      opportunity to develop leadership, teamwork and communication skills      through learning, practicing and teaching the principles of free      enterprise, thereby improving standards of living for those recipients of      SIFE services in the process. The Company anticipates implementing a      program using a SIFE sales force for merchant acquisition for the Children's      Heroes Community Scrip Card and in return, SIFE will earn a fee on all      merchant transactions generated from SIFE efforts. NBO is a member of the      SIFE Board of Directors and NBO's President, Chairman and CEO      participated in the SIFE USA National Exposition Final Four Judging      Competition held in Kansas City, Mo. on May 13, 2003. Visit www.sife.org      to find out more about SIFE. 

Scrip and the Community Scrip Card are only two of four Children's      Heroes revenue subsets. As stated in previous SEC filings, NBO has      contracted with Card Commerce International for an exclusive relationship      in mall and fundraising channels for "in your wallet now" credit      card registrations. This complex software tracks participating merchants      across the country and the discounts they have contracted to provide, with      purchases made by Children's Heroes supporters who have registered their      credit cards securely on-line via the Internet, or through a secure      telephone touch-tone service or live operator. The discounts provided by      the merchants are split between the school or non-profit organization, the      consumer using their credit card, and NBO. The consumers benefit by using      their existing credit cards to purchase what they normally purchase on      their normal schedule. Every dollar spent earns money for the school or      non-profit and the consumer themselves. The consumer designates which      school or cause they wish to direct the merchant discount dollars to, and      then build up a savings account for themselves or their children, possibly      utilizing a 529 plan. NBO garners revenues and profits from every      transaction, which is anticipated to begin in fiscal 2005.

 

In June 2002, NBO hired Mr. Chris Hutcherson, an expert in merchant      loyalty and community based fundraising. Mr. Hutcherson is the Company's      senior executive in charge of the Children's Heroes neighborhood loyalty      and fundraising program. The Company anticipated the sales and revenue      impact of the Children's Heroes program to be immaterial for fiscal year      2003, as the program was ramped up and rolled out in 9 regional markets in      mid-January 2003. The Company intends to roll out a total of 45 markets in      the United States by fiscal 2006. For further information on the 9 markets      opened earlier this year, visit the Company's Children's Heroes      website at ***www.childrensheroes.com.***
 

d.         Competition.

 

The Company will encounter competition from alternative methods of      distributing and delivering gift certificates and gift cards or Scrip and      associated fundraising products. All programs will be faced with      competition from other purveyors of gift certificates, gift cards and      Scrip - potentially from much larger financial services companies that may      choose to enter the gift certificate, stored value card, or Scrip      marketplace.

 

Mall Distribution Channel

 

The Company made a strategic business decision in the first quarter        of 1998 to develop and implement a turnkey gift certificate distribution        system for the United States shopping center industry. This program was        introduced at the International Council of Shopping Centers convention        ("ICSC") in Las Vegas, Nevada in May of 1998. At the time of        introduction, there were two types of formidable competitors.

 

The first type consists of the actual mall developers that currently        manage their own gift certificate/gift card programs in-house. The        Company's challenge is to convert these in-house competitors into        customers by demonstrating the benefits of out-sourcing to the Company,        and the cost savings and customer service issue synergies the Company        can provide to the mall owners, thereby eliminating manpower and        overhead associated with an in-house program. The Company believes that        with the availability of stored value gift cards, and the complexities        of administering such a detailed program, mall developers who have        chosen in the past to manage their own paper gift certificate programs        may see the benefits of outsourcing this service if they want to convert        from paper to plastic expeditiously and with a lower administrative        burden. NBO's gift certificate and stored value gift card solutions        provide a revenue sharing opportunity for the mall developer that did        not exist with a paper gift certificate program as recent as 2002,        providing another incentive for the mall developer to become customers        of NBO. The Company has already established four long-term contracts        with significant mall developers that previously managed their programs        in-house. NBO will solicit other major mall developers to become        customers based upon the results of these existing relationships with        NBO.

 

The Company's primary non-mall developer competitor is Mid-America        Gift Certificate Company ("Mid-America"), a subsidiary of        Mid-America Bank, wholly owned by BB&T Corporation of Winston-Salem,        North Carolina. MidAmerica currently has programs with approximately 450        malls in the United States representing approximately $250 million in        gross gift certificate sales. Mid-America acquired market share in the        mall industry because it was first to market. Mid-America offers a        software program with hardware designed to dispense gift certificates        from Customer Service Centers only. NBO believes that Mid-America does        not offer any Kiosk technology, corporate fulfillment or Internet        capabilities. With the Mid America program, malls must facilitate large        corporate orders at the malls creating administrative burdens and tying        up the system for individual orders. Mid-America's revenue sources        appear to be interest income earned on unredeemed certificates and the        breakage of unredeemed gift certificates. Mid America has announced a        stored value gift card program, but to the Company's knowledge, has no        malls in operation with a stored value gift card.

 

There are other less significant competitors, none of which NBO        believes will materially compete with the Company in securing market        share in all areas of the mall industry.

 

National Retail Merchant Distribution Channel

 

This category can be segregated into three areas of distribution with        corresponding competition associated within each of the following areas:

 

a.           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.          GCC's revenue sources appear to be derived from the difference          between the discounted prices paid by GCC and the face value its          customers pay, and from margin earned from add-on items such as          greeting cards and packaging, shipping and handling, and perhaps          advertising on its web pages. 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. Retailers pay a small annual fee to participate          and the consumer pays a processing fee of $0.95 per transaction.

 

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.

 

b.               Telephone Call Center - Some of the Internet gift certificate            companies listed above have developed small call centers. Their            centers are primarily set up to administer inbound order taking            calls only. None of the competitors have established any sizable            outbound sales efforts.

 

Scrip Fundraising Channel
 

There are 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.The second Scrip industry competitor is Great Lakes Scrip            Company ("GLSC") located in Grand Rapids, Michigan.            Primary states of operation are Michigan, Indiana, Illinois, Ohio,            and Wisconsin. GLSC provides very similar, if not the same services            as NSC. To the Company's knowledge, GLSC was started because of            the limited barriers to entry and the market niche in the Great            Lakes region of the United States. GLSC could provide Scrip products            where NSC either did not conduct operations or were not            satisfactorily servicing customers. GLSC entices NSC customers to            switch Scrip providers by offering higher discounts and promising            better service. GLSC is gaining market share based on this strategy,            but based on the extensive capitalization requirements of Scrip            inventory, growth has been at a moderate pace.
5.         Dependence on Major Customers

 

Fee income from the largest customer of the Company for the year          ended March 31, 2003, accounted for approximately 37 percent of the          Company's total revenue. Loss of this key customer could result in          significant decreases in Company revenues and income. No other          customer represents more than 10% of the Company's total revenue. At          the present time, the Company has long-term exclusive mall gift          certificate and gift card agreements with the majority of the mall          developers on the Company's network. The majority of these mall          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 to provide Internet fulfillment of its stored value gift          cards, which is up for renewal in August 2003. In the fiscal year          ended March 31, 2003 the Company signed an exclusive 5 year agreement          with Card Commerce International for card registration technology in          the mall and fundraising industry's. Additionally NBO signed an          exclusive 5 year agreement with ValueLink to provide gift card          fulfillment services. The Company's strategy is to diversify the          customer base so that NBO is less dependent on a small group of          customers. The Company has successfully integrated three distinct          revenue channels to achieve the necessary diversification - malls,          internet fulfillment of gift certificates and gift cards, and the          Children's Heroes fundraising channel.

 

6. Trademarks

 

The Company has submitted applications to the US Patent and          Trademark Office for the trademarks "Children's Heroes"          and "Community Scrip Card" which are in a pending status as          of this writing.

 

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.

 

Stored value systems can track usage information of location,            time and amount for both card funding and card debiting            transactions.Unlike            paper certificates, when less than the full face value of the card            is used, no cash is given back, thus discouraging the cardholder to            visit the store again to use the balance remaining on the card. In            some instances, a replacement card with the remaining value is            issued by the retailer as change. Industry watchers believe that by            2005, plastic stored value cards will represent 80% of the gift            certificate market, for a total of approximately 850 million gift            cards. Prepaid stored value cards are becoming more popular. Stored            value cards eliminate the need to carry cash, and facilitate keeping            sales in the stores because no change has to be given. (Source:            Total Systems Services Inc., Columbus, GA).                

c.               Onsite Systems.

 

NBO'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. NBO'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. NBO 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.

 

NBO'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 NBO 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.

 

NBO's software uses industry standards for both client-server            deployment and for host-based systems. Additionally, where            applicable, NBO interfaces to 3rd 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. Because of            the Company's flexible design strategy, NBO can configure outlets            to suit the needs of our partners and clients. Additionally, many of            NBO's outlets contain local databases, allowing for off-line            operation in the event a network connection interruption occurs.

 

e.               Point-of-Sale Systems.

 

NBO'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. NBO'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 to              gift-cards with little effort. This design has the added benefit              of reducing the number of configurations deployed in the field.              This reduces technical support training and manpower costs for              computer integration.

 

CTU components are selected to provide a reliable, cost              effective solution for clients. CTU's are configured to either use              NBO's credit card processing services or free standing Verifones.              The minimum system configuration consists of:
-                  Pentium II (PII) Computer                Monitor, Keyboard and Mouse                MICR Laser Printer (Optional-                paper certificate programs only)                Magstripe enabled Keyboard (Optional                - gift card programs only)                Uninterruptible Power Supply                Various Connectivity Options                Receipt 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 NBO's Kiosk are carefully selected to provide a              reliable and cost effective solution for establishing information              centers and revenue sources while minimizing employee involvement.
-                  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 of March 31, 2003, NBO had 63 total employees including 62          full-time employees and 1 part-time employee. Of the 62 full-time          employees, 22 have been hired in the fiscal year ended March 31, 2003          in support of the Children's Heroes Fundraising channel. NBO has          entered into confidential non-disclosure and/or employment agreements          with its officers, directors and employees. None of the Company's          employees are represented by a labor union. The Company believes that          its relationship with its employees is good.
** 

Item 2. Description of Property.*** 

(a) Facilities**-  Salt Lake City Headquarters. The Company's headquarters are      currently located at 3676 West California Avenue, Building D, Salt Lake      City, Utah, 84104. This facility consists of approximately 28,800 square      feet of leased space, which is comprised of 22,820 square feet of office      space and 5,980 square feet of warehouse facilities. Included in the      office space is a 9,120 square foot call center that can accommodate up to      approximately 190 employees. The term of the lease is five years, which      will expire on February 1, 2005, with one three-year renewal option that      the Company must exercise 120 days prior to the expiration of the lease.      The facility is leased from 5B Bangerter LLC at a base monthly rent of      $26,792.*California Office. During the fiscal year ended March 31, 2003      the Company also rented a sales office facility in Irvine, California.      However, this rental office was closed in February 2003 upon the      resignation of the Company's representative utilizing that office.**Item 3. Legal Proceedings.

 **
On September 23, 2002 a Final Award was submitted by the Arbitrators in thematter of Ricardo Miranda versus the Company. The specifics of this matter havebeen detailed in previous filings. The Company has since completely settled alloutstanding issues regarding this matter. The financial impact to the Companywas immaterial. The Company considers this matter closed.

 

In the opinion of management, the Company is not a party to any otherthreatened or pending legal proceedings which, if adversely determined, wouldhave an adverse material effect on the financial condition or results ofoperations of the Company.

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

 **
During the fiscal year ended March 31, 2003 there were no matters submittedto a vote of security holders.

 
**PART II

Item 5. Market for Common Equity and Related Stockholder Matters.*** 

(a) Market Information.

 *
There has been no public trading of the Company's Common Stock. There can    be no assurance that a public trading market for the Common Stock of the    Company will develop. The Company does not meet the listing criteria for any    of the NASDAQ markets, nor for the NASDAQ Bulletin Board ("OTCBB").    The OTCBB is not an issuer listing service, market or exchange. Although the    OTCBB does not have any listing requirements per se, to be eligible for    quotation on the OTCBB, issuers must remain current in their filings with    the SEC or applicable regulatory authority. Market makers will not be    permitted to begin quotation of a security whose issuer does not meet this    filing requirement. The Company is not current in its filings with the SEC,    but anticipates being current by December 2003.

 

If a public trading market develops, the public trading price could be    lower than the most recent Private Offering price. Ninety days after the    effective date of the October 2, 2001 registration statement, a substantial    portion of the Company's outstanding common shares became eligible to be    freely traded under the federal securities laws. It is possible that the    trading in the Company's shares will be thin. It is also possible that the    Company's shares will not attract market makers or other buyers in the    market place. There is no assurance that the shares will be traded on any    securities exchange or through any NASDAQ facility, such as the Nasdaq    Bulletin Board, the Nasdaq Small Cap Market, or the Nasdaq National Market    System. These factors and other factors could result in a low trading price.

 
*(b) Holders.

 *
As of March 31, 2003 there are approximately 608 shareholders of record    of the Company's Common Stock.

 
*(c) Dividends.

 *
The Company has not declared nor paid cash dividends on the Common Stock    in the past two fiscal years or in any subsequent period. The Company does    not anticipate paying cash dividends on the Common Stock in the foreseeable    future.

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

 *
See Part III, Item 11 of this Form 10-KSB.
** 

Recent Sales of Unregistered Securities.

 **
Within the fiscal year ended March 31, 2003, the Company has issued thefollowing securities without registering the securities under the SecuritiesAct:

 
*(e) January 17, 2003 through March 29, 2003. The Company issued 31,001  shares of common stock upon the exercise of 31,001 Class B Warrants at $4.00  per Class B Warrant for a total of $124,005. A total of 734,075 Class B  Warrants were eligible for exercise in connection with the $5.25 million  Private Placement sold by the Company in December 1997. All Class B Warrants  were due to expire on March 29, 2003. At the expiration date, 703,074 Class B  Warrants were removed from the Company's dilutable equity. In addition, as  part of an incentive rights offering to Class B Warrant holders only, the  Company issued 1,600 Class B Incentive Warrants exercisable into 1,600 common  shares of the Company's stock at $5.50 per Class B Incentive Warrant owned.  The Class B Incentive Warrants were issued to Class B Warrant holders who  exercised their Class B Warrants prior to January 17, 2003. The Class B  Incentive Warrants expire January 17, 2008. The Company issued the incentive  securities to accredited investors as that term is defined in Regulation D  promulgated by the Securities and Exchange Commission. The Company relied upon  the exemption from registration provided by Section 4(2) of the Securities Act  of 1933, as amended, and Regulation D. The Company complied with all the  requirements of Regulation D pertaining to Rule 506.

 
*(f) April 1, 2000 through March 31, 2003. The Company issued incentivestock options that have been fully exercised to purchase 362,091 shares ofcommon stock to various employees and consultants who are natural persons inconnection with bona fide services rendered to the Company. However, 312,500 ofthe exercised options were subsequently rescinded due to a misunderstanding ofthe Incentive Stock Option Plan provisions, leaving a balance of 49,591 sharesof common stock issued as a result of the exercise of incentive stock options.The services rendered were not in connection with the offer or sale ofsecurities in a capital raising transaction and were not for the purpose ofdirectly or indirectly promoting or maintaining a market for the shares. Theseoptions and the underlying shares had a total value at the time of issuance ofless than $1,000,000. The shares were issued pursuant to written compensationagreements or written stock option plan. Each share certificate bears a legendindicating that the shares are restricted securities and that the transfer ofthe shares is restricted and may only be resold in accordance with applicablelaws and regulations. The Company gave stop transfer instructions to thetransfer agent to prevent the transfer of restricted securities. The Companyprovided to the employees and consultants a written description of thecompensation or benefit plan. The Company relied on the exemption fromregistration provided by Section 4(2) of the Securities Act of 1933, as amended,and on Rule 701 promulgated by the Securities and Exchange Commission.

 
*(g) April 1, 2000 through March 31, 2003. The Company borrowed money fromexisting shareholders, including the Company's Chairman, President and CEO,all of whom are accredited investors. The total amount of the borrowed fundsduring the stated period totaled $2,413,923. The Company has made principalrepayments totaling $2,260,690. In connection with these loans, the Companyissued 743,458 shares of common stock, and issued warrants to purchase 503,750shares of common stock. As of March 31, 2003 loans to stockholders includingofficers of $1,034,124 remain outstanding. The Companyrelied upon the exemption from registration provided by Section 4(2) of theSecurities Act of 1933, as amended, and Regulation D. The Company complied withall the requirements of Regulation D pertaining to Rule 506, including, withoutlimitation, the following: ascertaining the accredited status of each purchaser;placing restrictive legends on the securities; giving stop transfer instructionsto the transfer agent to prevent the transfer of restricted securities; assuringthat no public solicitation occurred; providing the information and theopportunity for obtaining information to the accredited investors; andprominently disclosing on all offering materials that the Company offered thesecurities only in a private offering under Regulation D, Rule 506.

 
*(h) April 1, 2000 through March 31, 2003. The Company issued 14,731shares of preferred stock as stock dividends on previously issued preferredstock. This issuance did not constitute a sale because the recipients did notpay any consideration and did not make any election either to receive the sharesor to receive other payment.

 
**Item 6. Management's Discussion and Analysis of Financial Condition andResults of Operations.

 

Forward Looking Statements

 **
All statements made herein, other than statements of historical fact, whichaddress activities, actions, goals, prospects, or new developments that theCompany expects or anticipates will occur in the future, including such thingsas expansion and growth of operations and other such matters, areforward-looking statements. These statements represent the Company'sexpectations, hopes, beliefs, anticipations, commitments, intentions andstrategies regarding the future. They may be identified by the use of words orphrases such as "believes," "expects,""anticipates," "should," "could be,""plans," "estimates," and "potential," amongothers. Any one or a combination of factors could materially affect the Company'soperations and financial condition. These factors include competitive pressures,success or failure of marketing programs, changes in pricing, creditor actions,and conditions in the capital markets. Forward-looking statements made by theCompany are based on knowledge of the Company's business and the environmentin which the Company currently operates. Because of the factors listed above, aswell as factors beyond the Company's control, actual results may differ fromthose in the forward-looking statements.
** 

Company Risks

 ***(1) Going Concern. To date, the Company has not generated sufficient    revenue to meet the Company's on-going expenses of operation. These factors    raise substantial doubts about the Company's ability to continue as a    going concern and the Company's audit report contains an explanatory    paragraph with respect to this matter. The report of the Company's    independent auditors on the Company's audited financial statements for the    fiscal years ended March 31, 2003 and 2002, respectively, included herein,    contains information that states that the Company has incurred cumulative    losses since inception of operations and has negative cash flow from    operations. As of March 31, 2003, the Company's current liabilities    exceeded its current assets and the Company had a stockholders' deficit.    These factors, among others, raise substantial doubt about the Company's    ability to continue as a going concern. The Company's financial statements    do not include any adjustments that might result from the outcome of this    uncertainty.

 
*(2) Future Capital Needs. The Company depends on new investments to    help fund ongoing operations. If insufficient capital is invested, the    results of the business development as it is disclosed herein could be    materially adversely impacted. The Company's future capital requirements    will depend on many factors, including cash flow from operations,    technological and market developments and the Company's ability to    successfully market the Gift Certificate/Gift Card Programs, the Children's    Heroes Fundraising Program and its other proposed services. Unanticipated    problems, expenses and delays are frequently encountered in establishing a    new approach to business in a developing industry, and in developing    software products. These include, but are not limited to, competition, the    need to develop customer support capabilities, market expertise, setbacks in    product development, market acceptance and sales and marketing activities.    The failure of the Company to meet any of these conditions could have a    material adverse effect on the Company and may force the Company to reduce    or cease its proposed operations. The Company must raise additional funds    through equity or debt financing. Any equity financing could result in    dilution to the Company's stockholders. Debt financing would result in    increased interest expense. Any financing, if available, may be on terms    unfavorable or unacceptable to the Company. If adequate funds are not    obtained, the Company may be required to reduce or curtail its proposed    operations.

 
*(3) Loans to the Company from Stockholders Remain Unpaid. As    described in Item 5 above, the Company borrowed money from existing    shareholders, all of whom are accredited investors. As of March 31, 2003    loans to stockholders of $760,499****remain outstanding.

 
*(4) Loans to the Company by Its President and Private Placements to Pay    Current Expense; Inability of Company to Continue Operations Without    Additional Financing. As detailed in previous filings, Keith A. Guevara,    Chairman of the Board, President and Chief Executive Officer of the Company,    has loaned the Company funds in order for the Company to meet its payroll    and other operating expenses. In January 2002, the Company issued 312,500    shares of common stock to Mr. Guevara upon exercise of 312,500 stock options    at $0.35 per option in exchange for a decrease of $109,375 in notes payable    to an officer. However, due to a misunderstanding of the Incentive Stock    Option Plan terms, the exercise was rescinded. As of March 31, 2003, the    remaining unpaid balance is $273,625. Without further loans from Mr. Guevara    (of which there is no assurance such loans will be made in the future) or    immediate funds from investors, it is possible the Company will be unable to    continue its operations.

 
*(5) Dependence Upon Key Personnel. The Company's success depends, to    a significant extent, upon a number of key employees. The loss of services    of one or more of these employees could have a material adverse effect on    the proposed business and operations of the Company. The Company is    especially dependent on the efforts and abilities of certain of its senior    management, particularly Keith A. Guevara, the Company's President and Chief    Executive Officer. The loss of any of the Company's key executives could    have a material adverse effect on the Company and its operations and    prospects, although the loss of Mr. Guevara would 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 that its future success will    also depend, in part, upon its ability to attract, retain and motivate    qualified personnel. There is and can be no assurance, however, that the    Company will be successful in attracting and retaining such personnel.

 
*(6) Lack of Profits. The Company reduced its net loss 3.86% or    $161,767 to ($4,031,793) from ($4,193,560) in the fiscal years ended March    31, 2003 and 2002 respectively. Profits in future years will depend on the    success of the Company in carrying out its business plan. As of March 31,    2003 the Company has incurred cumulative losses of $27,750,684 since    inception of operations June 23, 1994.

 
*(7) Lack of Dividends. The Company has never paid any cash dividends    on its Common Stock and does not anticipate paying any cash dividends in the    foreseeable future. The Company currently intends to retain future earnings,    if any, to fund the development and growth of its proposed business and    operations.

 
*(8) Control by Existing Officers and Directors. The Company's    officers and directors beneficially own approximately 26.36% of the    outstanding shares of the Company's Common Stock, which includes stock    options granted under the 1997 Stock Option Plan. Because cumulative voting    rights are not provided for in the Company's Second Amended and Restated    Articles of Incorporation, these individuals will be in a position to    significantly influence the election of the members of the Board of    Directors and control most corporate actions, including decisions to    dissolve, merge or sell the Company's assets.

 
*(9) Uncontrollable Factors. The expansion of the Company's Programs    within acceptable time and cost limitations will be dependent upon a number    of conditions and factors outside the control of the Company or its    management. These conditions and factors include, but are not limited to,    the availability and ability of contractors and subcontractors to perform    services, the absence of disputes, delays or cost increases resulting from    such factors as strikes, technical difficulties or failure of the system    equipment to operate as designed, and shortages in materials and labor, any    of which conditions or factors could delay or prevent expansion of the    Company's Programs and/or significantly increase the cost of a given    Company Program above expected levels.

 
**Results of Operations - Comparison of Fiscal Years Ended March 31, 2003 and2002

 

Sale of Gift Certificates and Gift Cards

 **
The following is included because the Company derives the majority of itsrevenues from the activities associated with the issuance of gift certificatesand gift cards. The following figures are included for informational purposesonly and are not included in the Company's condensed statements of operations.

 

The Company experienced a 1.1% decrease, or $653,128 in the face amount ofgift certificates/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.

 
**Revenues

 **
The Company experienced an increase in total revenues of 3.2% or $176,591 to$5,644,307 for the fiscal year ended March 31, 2003 from $5,467,716 for thefiscal year ended March 31, 2002. See NOTE A - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES, Item 11 in the Company's financial statements. Theincrease 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 Company purchases and sells third party retailer gift certificates andgift cards, 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.

 

The Company experienced a decrease in breakage revenue of 49.3% or $903,224to $927,253 for the fiscal year ended March 31, 2003 from $1,830,477 for thefiscal year ended March 31, 2002. Breakage revenue was recognized for the firsttime for the fiscal year ended March 31, 2002. Of this total, $615,428 isincluded which would have been recognized prior to fiscal 2002 if sufficienthistorical information had been available to make reliable estimates in prioryears.

 

Merchant fees earned from retailers increased 15.1% or $175,153 to $1,333,602for the fiscal year ended March 31, 2003 from $1,158,449 for the fiscal yearended March 31, 2002. This increase is due primarily to billings to customersfor fees that had been previously absorbed by the Company.

 

Fees earned from customers increased 1,123.2% or $115,939 to $126,261 for thefiscal year ended March 31, 2003 from $10,322 for the fiscal year ended March31, 2002. This increase is due primarily to an increase in the amount of giftcards sold to consumers and the subsequent reduction of those gift card balancesby the application of administration fees for non-use.

 
**Cost of Revenues

 **
The Company experienced an increase in the total cost of revenues of 29.6% or$979,956 to $4,285,800 for the fiscal year ended March 31, 2003 from $3,305,844for the fiscal year ended March 31, 2002. This increase in the amount of cost ofrevenues is due to a proportional increase in the sale of gift certificates andgift cards, resulting in an increase in the cost of certificates and cards sold,related billings to merchants for fees, as well as credit card enrollment feesas described below.

 

The Company experienced an increase in the cost of third party giftcertificates of $742,955 to $2,598,225 for the fiscal year ended March 31, 2003from $1,855,270 for the fiscal year ended March 31, 2002. This increase in costis due primarily to the increase in Darden and ValueLink Internet and CallCenter fulfillment orders.

 

The Company experienced an increase in merchant fees and charges of 9.4% or$103,813 to $1,210,997 for the fiscal year ended March 31, 2003 from $1,107,184for the fiscal year ended March 31, 2002. This increase in cost is relatedprimarily to the proportional increase in the number of gift certificates andgift cards sold.

 

The Company incurred $85,000 in development costs related to theimplementation of the Card Commerce International credit card registrationprogram related to Children's Heroes for the fiscal year ended March 31, 2003.There were no similar costs for the fiscal year ended March 31, 2002.

 
**Gross Profit

 **
The Company 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.See NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,Item 11 in the Company's financial statements.

 
**Operating Expenses

 **
The Company experienced an increase in total operating expenses of 4.0% or$181,473 to $4,751,274 for the fiscal year ended March 31, 2003 from $4,569,801for the fiscal year ended March 31, 2002. The slight increase during the yearended March 31, 2003 compared to the fiscal year ended March 31, 2002 isattributable mainly to the Company's commitment to keep operating expensesconstant with cost control measures.

 
**Operating Income (Loss)

 **
The Company's total operating expenses exceeded gross profit in the fiscalyears ended March 31, 2003 and 2002 respectively. However, the Company believesthat increased profit margins in existing and new business channels coupled withcost containment measures will begin to reverse this trend in the fiscal yearending March 31, 2004.

 
**Other Income (Expense)

 **
The Company 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 to the fiscal year ended March 31, 2002 respectively. The decreaseis primarily from a significant decrease in interest expense due to loanpay-downs and the lack of new loans with a beneficial conversion feature of debtpreviously incurred by the Company. The beneficial conversion feature is thedifference between the market value of the common stock and the conversion rateof the debt limited to the amount of debt. The beneficial conversion feature isrecognized as interest expense over the period from the date of the note to thedate of maturity when the conversion of the debt into stock may take place.Interest expense decreased 76.9% or $1,300,253 to $390,959 from $1,691,212 inthe fiscal year ended March 31, 2003 compared to the fiscal year ended March 31,2002 respectively.

 
**New Business Developments

 **
On January 2, 2003 the Company hired 12 Regional Education Directors("RED's") for the Children's Heroes Fundraising efforts in thefollowing markets:
-    Pennsylvania, New Jersey, Rhode Island, Maine  New York, New Jersey, Connecticut (3 RED's)  Boston  Texas (2 RED's)  Arizona, Utah  Georgia, Tennessee  Illinois, Indiana  Maryland, District of Columbia  Florida
In January/February, 2003 the Company also hired 14 Community Out-ReachEducators in the Salt Lake City headquarters to support the sales and marketingefforts of the Children's Heroes RED's in the field.

 

The Company anticipates a positive net income impact from Children's Heroesbeginning in fiscal year 2005. The Company anticipates the strength of thisprogram will facilitate the acquisition of the necessary funding to not onlyroll out the remainder of this program, but will also enable the Company togenerate sufficient cash flow to fund on-going operations.

 
**Liquidity and Capital Resources

 **
The Company's total costs and expenses are currently greater than itsrevenues. In addition, the Company's operating activities have used cashrather than provided cash. The Company to date has had a history of losses andthe accumulated deficit (since inception June 23, 1994) as of March 31, 2003 was($27,750,684), an increase of 17.7% or $4,170,602 from ($23,580,082) on March31, 2002. The Company believes that new business initiatives coupled with growthin mature business channels will continue to reverse the Company's historicalloss trend in the fiscal year ending March 31, 2004.

 

The Company's net losses decreased by 3.9% or $161,767 to $4,031,793 from$4,193,560 for the fiscal year ended March 31, 2003 compared to the fiscal yearended March 31, 2002, respectively. The Company's current liabilities exceedits current assets by $6,459,844 as of March 31, 2003.

 

The Company's continuation as a going concern is dependent on its abilityto meet its obligations, to obtain additional financing as may be required andultimately to attain profitability. The Company will continue to attempt toraise capital through private equity or debt offerings, as well as institutionalinvestors until internally generated profitability is achieved. The Company istaking steps to improve profitability by restructuring contracts to increase theamount of revenue generated by each contract, and to pass along certain costs tothe operator previously absorbed by the Company; increasing sales efforts toobtain contracts 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.

 
**Recent Accounting Pronouncements

 **
In June 2001, the Financial Accounting Standards Board ("FASB")issued Statement of Financial Accounting Standards ("SFAS") No. 141("SFAS No. 141"), "Business Combinations." SFAS No. 141eliminated the pooling-of-interests method of accounting for businesscombinations and requires that all business combinations be accounted for aspurchases. In addition, SFAS No. 141 establishes new rules concerningrecognition of intangible assets arising in a purchase business combination andrequires enhanced disclosure of information in the period in which a businesscombination is completed. SFAS No. 141 is effective for all businesscombinations initiated after June 30, 2001. The Company adopted SFAS No. 141with no impact on its financial condition or results of operations for thefiscal year ended March 31, 2003.

 

In June 2001, FASB issued SFAS No. 142 ("SFAS No. 142), "Goodwilland Other Intangible Assets." SFAS No. 142 establishes new rules onaccounting for goodwill whereby goodwill will no longer be amortized to expense,but rather will be subject to impairment review. The Company adopted SFAS No.142 with no impact on its financial condition or results of operations for thefiscal year ended March 31, 2003.

 

In June 2001, FASB issued SFAS No. 143 ("SFAS No. 143), "Accountingfor Asset Retirement Obligations." SFAS No. 143 establishes standards ofaccounting for asset retirement obligations (i.e., legal obligations associatedwith the retirement of long-lived assets that result from the acquisition,construction, development and /or the normal operation of a long-lived asset,except for certain obligations of lessees) and the associated asset retirementcosts. The Company adopted SFAS No. 143 with no material impact on its financialcondition or results of operations for the fiscal year ended March 31, 2003.

 

In August 2001, FASB issued SFAS No. 144 ("SFAS No. 144),"Accounting for the Impairment or Disposal of Long-Lived Assets." SFASNo. 144 replaces existing accounting pronouncements related to impairment ordisposal of long-lived assets. The Company adopted SFAS No. 144 with no materialimpact on its financial condition or results of operations for the fiscal yearended March 31, 2003.

 

In April 2002, FASB issued SFAS No. 145 ("SFAS No. 145),"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13, and Technical Corrections." The most significantprovisions of SFAS No. 145 address the termination of extraordinary itemtreatment for gains and losses on extinguishment of debt. The Company adoptedSFAS No. 145 with no material impact on its financial condition or results ofoperations for the fiscal year ended March 31, 2003.

 

In June 2002, FASB issued SFAS No. 146 ("SFAS No. 146), "Accountingfor Costs Associated with Exit or Disposal Activities." SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal of facilities, and must be implemented not later than December 31,2002. The Company adopted SFAS No. 146 with no material impact on its financialcondition or results of operations for the for the fiscal year ended March 31,2003.

 

In November 2002, the Emerging Issues Task Force (EITF) of the FASB issuedconsensus 00-21, "Accounting for Revenue Arrangements with MultipleDeliverables." This consensus provides guidance and specific criteria todetermine if and how multiple deliverables should be separated, and whetherrevenue associated with each deliverable should be recorded at a separate time.The Company adopted this consensus with no material impact on its financialcondition or results of operations for the fiscal year ended March 31, 2003.

 

In November 2002, the FASB issued Interpretation No. 45,*Guarantor'sAccounting and Disclosure Requirements for Guarantees, Including Guarantees ofIndebtedness to Others, an Interpretation of FASB Statements No. 5, 57, and 107and a rescission of FASB Interpretation No. 34*. This Interpretationelaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under guarantees issued. TheInterpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligationundertaken. The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December31, 2002. The disclosure requirements are effective for financial statements ofinterim or annual periods ending after December 15, 2002. The adoption ofInterpretation No. 45 did not have a material impact on the Company's resultsof operations and financial position.

 

In December 2002, FASB issued SFAS No. 148 ("SFAS No. 148),"Accounting for Stock-Based Compensation - Transition andDisclosure." SFAS No. 148 amends SFAS No. 123, "Accounting forStock-Based Compensation," to provide alternative methods of transition tothe fair value method of accounting for stock-based employee compensation. SFASNo. 148 also amends the disclosure provisions to require disclosure in thesummary of significant accounting policies of the effects of an entity'saccounting policy with respect to stock-based employee compensation on reportednet income and earnings per share. SFAS No. 148 does not require companies toexpense employee stock options. The expanded annual disclosure requirements andthe transition provisions are effective for fiscal years ending after December15, 2002 (the Company's fiscal year 2003) and the new interim perioddisclosures are required in financial statements for interim periods beginningafter December 15, 2002 (the Company's fiscal 2003 third quarter). The Companyadopted SFAS No. 148, with no material impact on its financial condition orresults of operations for the fiscal year ended March 31, 2003.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51*. ThisInterpretation addresses the consolidation by business enterprises of variableinterest entities as defined in the Interpretation. The Interpretation appliesimmediately to variable interests in variable interest entities created afterJanuary 31, 2003, and to variable interests in variable interest entitiesobtained after January 31, 2003. The adoption of Interpretation No. 46 did nothave a material impact on the Company's results of operations and financialposition.

 
**Liquidity and Financing Arrangements

 **
The Company issued 312,500 shares of common stock to the Company'sPresident upon exercise of 312,500 stock options at $0.35 per option in exchangefor a decrease of $109,375 in notes payable to the President. However, due to amisinterpretation of the Incentive Stock Option Plan provisions, the exercisewas subsequently rescinded.

 

During the fiscal year ended March 31, 2003, the Company issued 200,000warrants at the fair market price for a total of $141,464 for interest accordingto terms of a note payable.

 

During the fiscal year ended March 31, 2003, the Company issued 20,491 sharesof common stock at the fair market price for a total of $112,699 for interestaccording to terms of a note payable.

 

During the fiscal year ended March 31, 2003, the Company realized advances onrestricted cash of $3,845,389 in accordance with the Company's RevenueRecognition Policy. See NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,Item 11 in the Company's financial statements.

 

During the fiscal year ended March 31, 2003, the Company sold 31,001 sharesof common stock upon the exercise of 31,001 Class B Warrants at an exerciseprice of $4.00. Proceeds from the sale of the common stock totaled $124,005. Allunexercised Class B Warrants expired as of March 29, 2003 and have been retired.In connection with the exercise of the Class B Warrants, in January 2003 theCompany issued 1,600 Class B Incentive Warrants with an exercise price of $5.50which expire in January 2013.

 

During the fiscal year ended March 31, 2003, the Company entered into aPromissory Note with a stockholder for $275,000. The proceeds of this PromissoryNote was used to retire other outstanding debt.

 

During the fiscal year ended March 31, 2003, the Company made principalpayments on notes to stockholders totaling $797,556.

 

During the fiscal year ended March 31, 2003, the Company made interestpayments in cash on notes to stockholders totaling $58,973.

 

The Company currently operates without a line of credit and occasionallyenters into short-term promissory notes with accredited investors, normallyexisting stockholders. These promissory notes often have conversion privilegesinto the Company's common stock, easing debt service requirements. Despitethese efforts, significant amounts of additional cash will be needed to reducethe Company's debt and losses until such time as the Company becomesprofitable. In conjunction with efforts to improve results of operations, theCompany is currently in the process of attempting to raise approximately $10million in equity funding from institutional/accredited investors to meeton-going capital requirements. Concurrently, the Company is in preliminarydiscussions with strategic partners that could result in the merger oracquisition of the Company or an initial public offering. In that event, thefull $10 million equity investment may not be required and will be adjusted asdiscussions continue. Due to cash flow constraints, the Company will rely onequity financing to meet anticipated capital needs. There can be no assurancesthat the Company will be successful in obtaining any such capital. Additionalissuance of shares for debt and/or equity will serve to dilute the value of theCompany's Common Stock and existing shareholder positions. If the Companyfails to obtain financing and/or fails to improve results from operations, theCompany will be unable to meet obligations as they become due. This could raisesubstantial doubt about the Company's ability to continue as a going concern.

 
**Item 7. Financial Statements.

 **
  See PART F/S at the conclusion of this Form 10-KSB.   

  Report of Independent Certified Public Accountants   

  29

  Balance Sheets as of March 31, 2003 and 2002   

  30

  Statements of Operations for the years ended March 31, 2003 and  2002   

  32

  Statement of Stockholders Deficit for the years ended March 31, 2003 and  2002   

  33

  Statements of Cash Flows for the years ended March 31, 2003 and  2002   

  34

  Notes to Financial Statements   

 36
** 

Item 8. Changes In and Disagreements With Accountants on Accounting and    Financial Disclosure.

 **
The information required by Item 304 of Regulation S-B is incorporated byreference to Forms 8-K filed with the Securities and Exchange Commission October28, 2003 and November 11, 2003 respectively.

 
**Item 8A. Controls and Procedures

 **
a) Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation of our Management, includingour principal 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 March 31, 2003. Based on this evaluation,our chief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were effective such that the materialinformation required to be included in our Securities and Exchange Commission("SEC") reports is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms relating to NBO Systems, Inc.,and was made known to them by others within the Company, particularly during theperiod when this report was being prepared.

 

(b) Changes in internal controls over financial reporting.

 

In addition, there were no significant changes in our internal control overfinancial reporting that could significantly affect these controls during fiscalyear ended March 31, 2003. We have not identified any significant deficiency ormaterials weaknesses in our internal controls, and therefore there were nocorrective actions taken.

 
**PART III

 

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

 **
As of March 31, 2002, the Company had 62 full time employees and 1 part timeemployee and is managed by a Board of Directors consisting of three directors,two of which are employees of NBO. In addition, independent consultantssometimes perform services for NBO on as "as needed" basis. Allofficers, key employees and consultants have entered into confidentialnon-disclosure agreements with the Company. All directors hold office until thenext annual meeting of stockholders and the election and qualification of theirsuccessors, or until death, resignation or removal. Officers serve at thediscretion of the Board of Directors and under the terms of any employmentagreement. Per the Bylaws of the Company, the Board of Directors makes decisionsin lieu of a Compensation Committee or an Audit Committee, as the Board membersare the same individuals that would comprise the Compensation Committee and theAudit Committee. All directors, officers and beneficial owners of more than tenpercent of any class of equity securities of the Company registered pursuant toSection 12 of the Exchange Act and in compliance with Section 16(a) BeneficialOwnership Reporting Compliance have completed and filed the prescribed Forms(Forms 3, 4 and 5) on a timely basis as disclosed in the prescribed Formsrequired by Section 16(a) of the Exchange Act during the fiscal year ended March31, 2003. The following table sets forth certain information concerning thedirectors and executive officers, and key employees of the Company:

 
** 

 

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
40
March 2001
Chief Financial Officer & Director
Andrew Boyd-Jones
50
May 2001
Director
D. Kent Jasperson
54
July 1994
Chief Accounting Officer, Secretary and Treasurer
Randy J. Steck
47
March 2000
Chief Operating and Technology Officer
 
-  Keith A. Guevara is the Company's founder and has been Chairman of the    Board, President and Chief Executive Officer of the Company since its    incorporation in June 1994. Mr. Guevara devotes his full-time efforts to the    Company's business activities. He has over 25 years of combined sales,    marketing and management experience. From October 1988 to the 1994, Mr.    Guevara served as the President of Financial Capital Management, Inc.    ("FCM"), an investment firm primarily in the business of trading    commodities. Mr. Guevara has additionally served as the President of    Internet Marketing Group, Inc. ("Internet"), a marketing firm of    which he is the sole stockholder.Christopher Foley joined the Company in March 2001 as Vice President    of Finance, and has since been named Chief Financial Officer and appointed    to the Board of Directors. Mr. Foley has over 18 years of finance    management, financial analysis and securities industry experience. Mr. Foley    most recently founded and owned his own investment management firm through    an independent broker dealer catering to high net worth individuals,    corporations, retirement plans and charitable endowments, serving as Chief    Investment Officer and Portfolio Manager for two years. Prior financial    management experience includes the positions of Vice President of Trust    & Investment Management at Zion's First National Bank for three years,    and Assistant Vice President at PNC Bank for three years. Mr. Foley has    worked for several Fortune 100 companies including General Electric, Johnson    & Johnson, and American Express, and is also a US Navy veteran. Mr.    Foley earned his Masters of Business Administration from Westminster College    in Salt Lake City, and a Bachelor's degree in Business Management from the    University of Cincinnati, coupled with an Associates degree in Information    Systems.Andrew Boyd-Jones has been a consultant with the Company since August    2000 and a member of the Company's Board of Directors since May 2001. Mr.    Boyd-Jones has 28 years of investment banking and equity investment    experience. Mr. Boyd-Jones is currently a managing director at Holding    Capital Partners, LLC in New York City. Mr. Boyd-Jones founded and was CEO    of Trenwith Securities, one of the premier middle market investment banking    companies in the U.S. where he led over 300 mergers and acquisitions and    corporate finance assignments resulting in combined transaction values of    over $10 billion. Prior to his founding Trenwith Securities, Mr. Boyd-Jones    led the leveraged buy-out team at Bankers Trust. Mr. Boyd-Jones received his    BA from the University of Virginia and his MSc in Economics from the London    School of Economics.Kent Jasperson has served as the Chief Accounting Officer of the    Company since July 1994. On January 17, 1995, he was appointed as the    Company's Secretary and Treasurer. Mr. Jasperson has over 17 years of    experience as a financial officer in various business entities. From June    1990 to July 1994, he served as the Controller of KUTV, Inc. From March 1987    to June 1990, Mr. Jasperson was the corporate tax specialist for KUTV, Inc.,    where he was responsible for preparing federal 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 Reed Construction Company. From June    1973 to December 1978, he was an accountant with the regional accounting    firm of Whitaker, Lipp & Healea in Seattle, Washington. From January    1979 to May 1981, he was a partner in that accounting firm. He received his    CPA certificate in 1974 and is a member of the American Institute of    Certified Public Accountants and the Utah Association of Certified Public    Accountants. Mr. Jasperson holds a B.S. degree in Accounting from Brigham    Young University.Randy J. Steck joined the Company in March 2000 as Chief Operating and    Technology Officer. Mr. Steck brings 21 years of high tech engineering and    management experience to the Company. Prior to NBO, Mr. Steck served as    President of Racore Technology Corporation for two years, a privately owned    designer and manufacturer of fiber optic Local Area Network equipment. Mr.    Steck was one of the founding partners of Racore, where he held several    positions in hardware/software product design, engineering management, and    as director of its Salt Lake City operations. In addition, Mr. Steck brings    experience from his positions at IBM as a military contractor, as a private    consultant, and as one of the first 30 employees of Iomega during its    start-up phase. Mr. Steck has a B.S. degree in Applied Physics from Weber    State University, an M.S. degree in Electrical Engineering from the    University of Utah and an MBA from Brigham Young University.**Item 10. Executive Compensation.

 **
The following tables set forth certain summary information concerning thecompensation paid or accrued for the Company's chief executive officer andeach of its other executive officers for the fiscal years ended March 31, 2003,2002, and 2001 respectively.

 Annual CompensationLong Term Compensation      AwardsPayouts
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 Mar 03
$250,000
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar 02
250,000
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar 01
250,000
-0-
-0-
-0-
-0-
-0-
-0-
Christopher P. Foley

Chief Financial Officer, Board Member
31 Mar

03
132,000
-0-
-0-
-0-
25,000
-0-
-0-
31 Mar

02
120,000
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar

01
120,000
-0-
-0-
-0-
62,500
-0-
-0-
D. Kent Jasperson

Chief Accounting Officer, Secretary/Treasurer
31 Mar 03
110,000
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar 02
96,000
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar 01
86,000
-0-
-0-
-0-
-0-
-0-
-0-
Randy J. Steck

Chief Operating Officer/

Chief Technology Officer
31 Mar

03
125,200
-0-
-0-
-0-
-0-
-0-
-0-
31 Mar

02
125,200
-0-
-0-
-0-
15,625
-0-
-0-
31 Mar

01
115,200
-0-
-0-
-0-
46,875
-0-
-0-
 

The following table describes the stock options granted to officers anddirectors during the fiscal year ended March 31, 2003.
** 

Options/SAR Grants In Last Fiscal Year

(Individual Grants)

 **
Name
Number Of Securities Underlying Options/SARs Granted
Percent Of Total Options/SARs Granted To Employees In Fiscal      Year
Exercise Of Base Price ($/Sh)
Expiration Date
Christopher Foley
25,000
27.8
5.50
June 18, 2012
 

The following table sets forth information concerning the exercise of optionsto acquire shares of the Company's Common Stock by the executive officers duringthe fiscal year ended March 31, 2003 as well as the aggregate number and valueof unexercised options held by the executive officers on March 31, 2003. Thevalue of exercisable unexercised in-the-money options is calculated bymultiplying the number of exercisable unexercised options by the latest PrivatePlacement Memorandum offering price of $5.50, less the cost basis of the option,which is the exercise price times the number of exercisable unexercised options.

 
**Aggregated Options/SAR Exercises in Last Fiscal Year andFiscal Year-End

Options/SAR Values

 **
 

 

 

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

Exercise

Price
 

 

Exercisable
 

 

Unexercisable
 

 

Exercisable
 

 

Unexercisable
Keith A. Guevara
312,500
$1,609,375
$0.35
-0-
-0-
-0-
-0-
 

-0-
-0-
$0.88
2,812,500
-0-
$12,993,750
-0-
 

 

 

 

 

 

 

 

Christopher Foley
-0-
-0-
$4.40
62,500
-0-
$68,750
-0-
 

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

 

 

 

 

 

 

 

D. Kent Jasperson
-0-
-0-
$0.32
78,125
-0-
$404,688
-0-
 

-0-
-0-
$0.80
78,125
-0-
$367,188
-0-
 

-0-
-0-
$2.80
62,500
-0-
$168,750
-0-
 

 

 

 

 

 

 

 

Randy J. Steck
-0-
-0-
$2.40
46,875
-0-
$145,313
-0-
 

-0-
-0-
$4.40
15,625
-0-
$17,188
-0-
 

 

 

 

 

 

 

 

Andrew Boyd-Jones
-0-
-0-
-0-
-0-
-0-
-0-
-0-** 

Item 11. Security Ownership of Certain Beneficial Owners and Management.

 ***Securities Authorized for Issuance under Equity Compensation Plans

 *
On January 22, 1997 pursuant to Section 16-10a-704(2)(a) of the Utah Act, byAction by 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.

(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
4,029,165
$1.285
221,244
None* 

Security Ownership of Certain Beneficial Owners and Management

 *
The table below sets forth information as to each person owning of record, orwho was known by the Company to own beneficially more than 5% of the Company'soutstanding Common Stock as of March 31, 2003, and information as to theownership of the Company's Common Stock, Preferred Stock and Options by eachdirector and named executive officer, and by the directors and executiveofficers as a group. Except as otherwise indicated, all shares are owneddirectly, and the persons named in the table have sole voting and investmentpower with respect to shares shown as beneficially owned by them.

Name and Address 

of Beneficial Owners(1)
 Title of 

Class
Number      of

Shares      Owner
 

Percent(2)
Keith A. Guevara
Common Stock
2,933,677
12.63%
Chairman, President, CEO
Options
2,812,500
12.11%
Total
5,746,177
24.74%
D. Kent Jasperson
Common Stock
5,542
0.02%
Chief Accounting Officer,
Options
218,750
0.94%
Secretary, Treasurer
Total
224,292
0.96%
Christopher Foley
Common Stock
4,287
0.02%
Chief Financial Officer,
Options
87,500
0.38%
Director, Board of Directors
Total
91,787
0.40%
Randy J. Steck
Common Stock
0
0.00%
Chief Operating Officer
Options
62,500
0.27%
Chief Technology Officer
Total
62,500
0.27%
Andrew Boyd-Jones
Common Stock
0
0.00%
Director, Board of
Options
0
0.00%
Directors
Total
0
0.00%
All Executive Officers
Common Stock
2,943,506
12.67%
and Directors as a
Options
3,181,250
13.69%
Group (5 persons)
Warrants
0
0.00%
Total
6,124,756
26.36%
Principal Shareholder:
Neil D. Wright(3)
Common Stock
1,569,887
6.76%
Warrants - Class A
19,528
0.08%
Warrants - Class B
39,502
0.17%
Total
1,628,917
7.01%****
 
-  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.The percentages shown are based on:-  16,621,379 shares of Common stock of the Company issued and    outstanding as of March 31, 2003.4,029,165 Options for shares of Common stock of the Company issued    and outstanding as of March 31, 2003. The percentages shown for options    assume the exercise of all options held solely by that individual and a    corresponding increase in the issued and outstanding common stock.59,231 shares of Preferred stock of the Company issued and    outstanding as of March 31, 2003 convertible at the rate of 4.6875 shares    common, totaling 277,645 common shares.2,302,434 warrants (all classes) of the Company issued and    outstanding as of March 31, 2003. The conversion rate is one common share    per warrant.The percentage shown for total holdings assumes the exercise of all    options and warrants, and the conversion of all shares of Preferred stock    held by the individual and a corresponding increase in the issued and    outstanding Common stock, which totals 23,230,623.-  Mr. Wright is an accredited investor with beneficial interest as  detailed above. His mailing address of record is PO Box 92035, Nashville,  Tennessee 37209.**Item 12. Certain Relationships and Related Transactions.

 **
The Company had notes payable at March 31, 2003 and 2002 toshareholders and officers in the amounts of $1,034,124 and $1,556,680,respectively.

 

During May 1996, the Company entered into a promissory notewith its president for $250,000 which the president advanced to the Company forpayment of the Company's general and administrative expenses. The note bears10 percent interest, payable (including interest) on the earlier of July 10,1996 or upon the Company obtaining $750,000 of debt or equity financing. Thenote is not collateralized and remains outstanding as of March 31, 2003.

 

During January 2002, the Company entered into a non-interest bearing demandnote with its president for $40,000. The note is not collateralized and remainsoutstanding as of March 31, 2003.

 

The Company issued 312,500 shares of common stock to the Company'spresident upon exercise of 312,500 stock options at $0.35 per option in exchangefor a decrease of $109,375 in notes payable to an officer. However, due to amisinterpretation of the Plan provisions, the exercise of the options was laterrescinded. There were no other related party transactions for the year endedMarch 31, 2003.

 
**Item 13. Exhibits and Reports on Form 8-K.

 **
The information required by Item 304 of Regulation S-B is incorporated byreference to Forms 8-K filed with the Securities and Exchange Commission October28, 2003 and November 11, 2003 respectively.

 

Exhibits (6).1 through (6).7 are incorporated byreference to Form 10-QSB for the period ended September 30, 2002.

 

Exhibits (6).8 through (6).17 are incorporated by reference to Form 10-QSBfor the period ended December 31, 2002.

 

EXHIBIT INDEX

 

Number      Description                                                                                                                                                                                             Date

 

(6).1   

CBL - Agreement for the Gift Card Pilot Program   

 07/02/02

(6).2   

 APS Marketing - Advertising Sales Agreement   

 07/11/02

(6).3   

 CCI - License and Services Agreement   

 07/31/02

(6).4   

 ValueLink - Letter of Intent   

 09/17/02

(6).5   

 Bigtime Restaurants - Internet Sales ParticipationAgreement   

 09/24/02

(6).6   

 Rouse - Contract Services Agreements

   

(6).6.1 Augusta Mall, (GA)   

 09/26/02

   

(6).6.2 Bayside Marketplace, (FL)   

 09/26/02

   

(6).6.3 Beachwood Place, (OH)   

 09/26/02

   

(6).6.4 Bridgewater Commons, (NJ)   

 09/26/02

   

(6).6.5 Cherry Hill Mall, (NJ)   

 09/26/02

   

(6).6.6 Echelon Mall, (NJ)   

 09/26/02

   

(6).6.7 Exton Square, (PA)   

 09/26/02

   

(6).6.8 Faneuil Hall (MA)   

 09/26/02

   

(6).6.9 Fashion Place Mall (UT)   

 09/26/02

   

(6).6.10 Gallery at Market East, (PA)   

 09/26/02

   

(6).6.11 Gallery at Harbor Place, (MD)   

 09/26/02

   

(6).6.12 Governor's Square (FL)   

 09/26/02

   

(6).6.13 Jacksonville Landing, (FL)   

 09/26/02

   

(6).6.14 Lakeside Mall, (MI)   

 09/26/02

   

(6).6.15 Mall St. Matthews, (KY)   

 09/26/02

   

(6).6.16 Mondawmin Mall, (MD)   

 09/26/02

   

(6).6.17 Moorestown Mall, (NJ)   

 09/26/02

   

(6).6.18 Oakbrook Center, (IL)   

 09/26/02

   

(6).6.19 Oakwood Center, (LA)   

 09/26/02

   

(6).6.20 Oviedo Marketplace, (FL)   

 09/26/02

   

(6).6.21 Owings Mills Mall, (MD)   

 09/26/02

   

(6).6.22 Paramus Park, (NJ)   

 09/26/02

   

(6).6.23 Park Meadows, (CO)   

 09/26/02

   

(6).6.24 Perimeter Mall, (GA)   

 09/26/02

   

(6).6.25 Pioneer Place, (OR)   

 09/26/02

   

(6).6.26 Plymouth Meeting Mall, (PA)   

 09/26/02

   

(6).6.27 Ridgedale Center, (MN)   

 09/26/02

   

(6).6.28 Riverwalk, (LA)   

 09/26/02

   

(6).6.29 South Street Seaport, (NY)   

 09/26/02

   

(6).6.30 Southland Center, (MI)   

 09/26/02

   

(6).6.31 Staten Island Mall, (NY)   

 09/26/02

   

(6).6.32 Streets at Southpoint, (NC)   

 09/26/02

   

(6).6.33 The Fashion Show, (NV)   

 09/26/02

   

(6).6.34 The Mall in Columbia, (MD)   

 09/26/02

   

(6).6.35 Towson Town Center, (MD)   

 09/26/02

   

(6).6.36 Village of Cross Keys, (MD)   

 09/26/02

   

(6).6.37 Village of Merrick Park, (FL)   

 09/26/02

   

(6).6.38 Water Tower Place, (IL)   

 09/26/02
**   

(6).6.39 Westdale Mall, (IA)   

  09/26/02

   

(6).6.40 Westlake Center, (WA)   

  09/26/02

   

(6).6.41 White Marsh Mall, (MD)   

  09/26/02

   

(6).6.42 Willowbrook Mall, (NJ)   

  09/26/02

   

(6).6.43 Woodbridge Center, (NJ)   

  09/26/02

(6).7   

  Urban - Contract Services Agreements

   

(6).7.1 Louis Joliet Mall   

  09/30/02

   

(6).7.2 North Riverside Park Mall   

  09/30/02

   

(6).7.3 Valencia Town Center   

  09/30/02

(6).8   

  Metavante Master Agreement   

  10/10/02

(6).9   

  Discover Financial Services, Inc. Cash Card Issuer Agreement   

  10/11/02

(6).10   

  Merle Hay Mall Contract Services Agreement   

  10/14/02

(6).11   

  Saladworks Gift Certificate Services Agreement   

  10/17/02

(6).12   

  Rouse - Contract Services Agreements

   

(6).12.1 North Star, (TX)   

  10/28/02

   

(6).12.2 Collin Creek, (TX)   

  10/28/02

   

(6).12.3 Highland, (TX)   

  10/28/02

   

(6).12.4 Hulen, (TX)   

  10/28/02

(6).13   

  IPS Master Services Agreement   

  10/31/02

(6).14   

 IPS (ValueLink) Avado Work Order   

  11/25/02

(6).15   

  CBL Gift Card Pilot Extension   

  11/20/02

(6).16   

  NSC Reseller Agreement   

  11/22/02

(6).17   

  CRO Sales Participation Agreement   

  11/26/02

(6).18   

  Warmack Contract Services Agreement

   

(6).18.1 Arrowhead, (OK)   

  03/28/03

   

(6).18.2 Central Fort Smith, (AR)   

  03/28/03

   

(6).18.3 Central Lawton, (OK)   

  03/28/03

   

(6).18.4 Central Port Arthur, (AR)   

  03/28/03

   

(6).18.5 Central Salina, (KS)   

  03/28/03

   

(6).18.6 Central Texarkana, (TX)   

  03/28/03

   

(6).18.7 Indian Hill, (AR)   

  03/28/03

31.1   

  Certification of Keith A. Guevara, Chairman, President and CEO

31.2   

  Certification of Christopher Foley, Board Member and CFO

32   

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

 

 

SIGNATURES**
In accordance with Section 12 of the Securities Exchange Act of 1934, theregistrant caused this Form 10-KSB to be signed on its behalf by theundersigned, thereunto duly authorized.

 

NBO Systems, Inc.

 

By /s/ __________________________________________________________________

Keith A. Guevara December 17, 2003

Chairman/President/CEO

 

By /s/ __________________________________________________________________

D. Kent Jasperson December 17, 2003

Chief Accounting Officer,

Secretary/Treasurer

 

By /s/ __________________________________________________________________

Christopher Foley December 17, 2003

Chief Financial Officer,

Board Member
******PARTF/S**
 

 

 

 

 

 

FINANCIAL STATEMENTS

 

 

Independent Auditors' Report

 

To the Board of Directors and

 

Shareholders of NBO Systems, Inc.

We have audited the accompanying balance sheet of NBO Systems, Inc. as ofMarch 31, 2003 and 2002, and the related statements of operations, stockholders'deficit, and cash flows for the years ended March 31, 2003 and 2002. Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, inall material respects, the financial position of NBO Systems, Inc. as of March31, 2003 and 2002 and the results of its operations and cash flows for the yearsended March 31, 2003 and 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that theCompany will continue as a going concern. As discussed in Note B to thefinancial statements, the Company has a working capital deficit, a deficit inequity, has suffered recurring losses and has been unable to generate cash fromoperations. These conditions raise substantial doubt about its ability tocontinue as a going concern. Management's plans regarding those matters are alsodescribed in Note B. The financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

/s/ Tanner + Co.

Salt Lake City, Utah

December 11, 2003

 

NBO Systems, Inc.

 

BALANCE SHEETS

 

March 31,

 

ASSETS

 

      2003
      2002
        Current assets      
             Cash      
      $
      -
      $
      45,876
             Restricted cash      
      9,264,671
      12,507,216
             Accounts receivable, net of allowance for uncollectible        accounts of $12,654 in 2003 and $5,014 in 2002      
       
      152,906
       
      347,186
             Inventory      
      68,429
      17,530
             Prepaid expenses      
      39,825
      6,309
             Employee advances      
      4,243
      -
                      Total current assets      
      9,530,074
      12,924,11
         
         
         
         
         
      PROPERTY AND Equipment, net      
       
       
       
       
       
      1,011,942
       

       

       

       

       

      1,413,937

 

 

 

 

 

OTHER      ASSETS

 

 

 

 

 

 

 

 

 

 

 

 
            Trademarks, net
      -
      9,107
             Deposits and reserves      
      777,572
      456,205
             Other assets and deposits      
      124,858
      142,588
      902,430
      607,900
      $
      11,444,446
      $
      14,945,954
 

The accompanying notes are an integral part of thesestatements.

 

NBO Systems, Inc.

 

BALANCE SHEETS - CONTINUED

 

March 31,

 

Liabilities and STOCKHOLDERS' DEFICIT

 

      2003
      2002
      Current liabilities
             Checks written in excess of cash      
      $
      16,671
      $
      -
             Gift certificates/cards payable      
      13,806,707
      13,203,863
             Accounts payable      
      611,184
      792,516
             Accrued liabilities      
      796,232
      554,615
             Notes to stockholders      
      485,499
      1,283,055
             Notes to officer      
      273,625
      273,625
                      Total current liabilities      
      15,989,918
      16,107,674
         
Long-term LIABILITIES
 

 

 

 

             Long-term notes to stockholders      
      275,000
      -
                      Total liabilities      
      16,264,918
      16,107,674
         
        COMMITMENTS AND CONTINGENCIES      
       
      -
       
      -
         
Stockholders' deficit      
 

 

 

 

             Capital stock      
                    Convertible redeemable preferred stock, par value $1.00; authorized          1,000,000 shares; issued and outstanding 59,231 and 53,847 shares at          2003 and 2002, respectively; liquidation value          $2.20 per share
       
       
      59,231

      53,847
                    Common stock, par value $0.0005; authorized 20,000,000 shares,          16,621,379 and 16,569,887 shares issued and outstanding at 2003 and          2002, respectively      
      8,311
      8,285
      67,542
      62,132
             Subscriptions receivable      
      (17,900)
      (17,900)
             Additional paid-in capital      
      22,880,570
      22,374,130
             Accumulated deficit      
      (27,750,684)
      (23,580,082)
                      Total stockholders' deficit      
      (4,820,472)
      (1,161,720)
      $
      11,444,446
      $
      14,945,954
 

 

The accompanying notes are an integral part of thesestatements.

NBO Systems, Inc.

 

STATEMENTS OF OPERATIONS

 

Year ended March 31,

      2003
      2002
        Revenues      
             Sale of third party gift certificates/cards      
      $
      2,886,621
      $
      2,057,964
             Merchant fees earned from retailers      
      1,333,602
      1,158,449
             Unredeemed/Unredeemable gift certificates      
      927,253
      1,830,477
             Postage and handling      
      236,411
      174,984
             Fees earned from customers      
      126,261
      10,322
             Lease revenue      
      50,161
      10,750
             Equipment and software income      
      43,528
      38,298
            Interest on restricted cash      
      40,470
      186,472
      5,644,307
      5,467,716
        Cost of revenues      
             Third party gift certificates/cards      
      2,598,225
      1,855,270
             Merchant fees and charges      
      1,210,997
      1,107,184
             Gift card and gift certificate stock      
      157,335
      139,463
             Postage and handling      
      114,132
      98,065
             Rebates      
      85,947
      50,830
             Credit card enrollment fees      
      85,000
      -
             Other      
      34,164
      55,032
      4,285,800
      3,305,844
                      Gross profit      
      1,358,507
      2,161,872
        Operating expenses      
             Personnel      
      3,059,436
      2,941,271
             Office      
      439,959
      464,849
             Rent      
      329,751
      340,569
             Depreciation and amortization      
      325,721
      358,800
             Legal and accounting      
      215,285
      265,892
             Travel, meals and entertainment      
      154,760
      63,014
             Other      
      146,509
      128,906
             Consultants      
      79,853
      6,500
      4,751,274
      4,569,801
                      Operating            loss      
      (3,392,767)
      (2,407,929)
        Other income (expense)      
             Interest expense      
      (390,959)
      (1,691,212)
             Loss on disposal of other assets and property        and equipment      
      (253,972)
      (111,669)
             Interest income      
      5,017
      17,215
             Other income, net      
      888
      35
      (639,026)
      (1,785,631)
                      NET LOSS      
      $
      (4,031,793)
      $
      (4,193,560)
        Net loss per common share - basic and diluted      
      $
      (0.24)
      $
      (0.26)
        Weighted-average number of common shares outstanding - basic and diluted      

      16,589,000

      16,004,000
 

 

 

The accompanying notes are an integral part of thesestatements.

 

NBO SYSTEMS, Inc.

 

STATEMENT OF STOCKHOLDERS' DEFICIT

For the years ended March 31, 2003 and 2002

 

      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)
        Preferred 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
                    Services      
      -
      -
      6,274
      3
      -
      30,726
      -
      30,729
                    Equipment      
      -
      -
      16,915
      8
      -
      50,524
      -
      50,532
                    Payment of interest      
      -
      -
      53,614
      25
      -
      215,111
      -
      215,136
                    Cash (net of issuance costs of $62,340)      
      -
      -
          331,921      
      182
      -
      1,350,802
      -
      1,350,984
        Common stock redeemed      
      -
      -
      (55,636)
      (28)
      -
      (152,971)
      -
      (152,999)
        Interest expense recognized on beneficial conversion features on        notes payable      
      -
      -
      -
      -
      -
      903,620
      -
      903,620
        Common stock options and warrants issued for services and        compensation      
      -
      -
      -
      -
      -
      6,127
      -
      6,127
        Common stock warrants issued for interest      
      -
      -
      -
      -
      -
      280,818
      -
      280,818
        Net loss      
      -
      -
      -
      -
      -
      -
      (4,193,560)
      (4,193,560)
        Balance at March 31, 2002      
      53,847
      53,847
      16,569,887
      8,285
      (17,900)
      22,374,130
      (23,580,082)
      (1,161,720)
        Preferred stock dividends      
      5,384
      5,384
      -
      -
      -
      133,425
      (138,809)
      -
        Common stock issued for      
                    Payment of interest      
      -
      -
      20,491
      10
      -
      107,562
      -
      107,572
                    Cash (net of issuance costs of $0)      
      -
      -
          31,001      
      16
      -
      123,989
      -
      124,005
        Common stock warrants issued for interest      
      -
      -
      -
      -
      -
      141,464
      -
      141,464
        Net loss      
      -
      -
      -
      -
      -
      -
      (4,031,793)
      (4,031,793)
        Balance at March 31, 2003      
      59,231
$59,231
      16,621,379
$8,311
$(17,900)
$22,880,570
$(27,750,684)
$(4,820,472)
 

The accompanying notes are an integral part of this statement.

 

NBO SYSTEMS, Inc.

 

 

STATEMENTS OF CASH FLOWS

 

Year ended March 31,

 

      2003
      2002
        Increase (decrease) in cash******************************** |
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