UNIVERSAL MONEY CENTERS, INC.
2003 Annual Report to Shareholders
TO OUR SHAREHOLDERS:
During fiscal year ended January 31, 2003, we faced many challenges. Our
total revenues decreased slightly as compared with fiscal year 2003 from
$8,690,671 to $8,686,464 and our cost of revenue increased. Overall our net loss
in fiscal 2003 decreased as compared with our net loss in fiscal year 2002 from
$650,855 to $271,075. The decreased losses were primarily attributable to the
following events in fiscal 2002 which did not occur in fiscal 2003: (i) a
reduction of $182,000 of deferred tax credits deemed to be unrealizable and (ii)
accrual of the lawsuit settlement of $188,000 in settlement of certain
litigation as described in the annual report.
Our relationships with two operators of combination convenience stores and
gas stations were terminated effective at the end of fiscal 2003. The aggregate
revenues from these operators accounted for approximately 14% and 10% of our
revenues in fiscal year 2003 and 16% and 12% of our revenues in fiscal year
2002.
In addition, during the year we lost one of our bank clients to a
competitor that provides both ATM processing and back office administrative
services. We also lost two additional bank clients after the end of the year to
this competitor. We do not provide back-office administrative services.
On the positive side, we continue to expand our relationship with a large
discount retailer and as of the end of the year have placed over 387 ATMs in the
retailer's stores. We continue to service an operator of combination convenience
stores and gas stations for which we have placed over 101 ATMs. However, the
development of each of these relationships required us to incur substantial
start-up costs. We anticipate substantial expenditures relating to continued
expansion of ATM deployment.
We also continued to have limited liquidity. We had a working capital
deficit of $1,364,187 at the end of fiscal 2003 compared with a working capital
deficit of $921,118 at the end of fiscal 2002. This decrease in working capital
was due mainly to use of cash to purchase equipment in connection with our
recent expansion efforts, decreased revenues due to the loss of certain banking
clients and an increase in cost of revenue.
We continue to encounter strong competition. However, we believe that we
have important strengths that help differentiate us from our competitors:
o Our company has approximately 20 years of experience in the ATM and
transaction processing industry.
o We operate our own proprietary "switch," which results in lower
transaction processing costs.
o We have our own in-house field service engineers that maintain a
substantial portion of our ATMs.
We look forward to working hard to meet the challenges that lie
ahead.
David S. Bonsal
Chairman of the Board and Chief Executive Officer
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 1-8460
UNIVERSAL MONEY CENTERS, INC.
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(Name of small business issuer in its charter)
Missouri 43-1242819
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6800 Squibb Road, Mission, Kansas 66202
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (913) 831-2055
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
----------------
$ .01 par value per share
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. |_|
Issuer's revenues for the fiscal year ending January 31, 2003 were
$8,686,464.
The issuer is unable to determine the aggregate market value of the
voting stock held by non-affiliates of the issuer as of a date within the
past 60 days.
The number of shares of the registrant's Common Stock outstanding as of
April 13, 2003 was 4,157,378.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into Part III of this Form 10-KSB is the
information included under the captions entitled "Election of Directors",
"Security Ownership of Certain Beneficial Owners and Management", "Executive
Compensation" and "Certain Relationships and Related Transactions" in the
registrant's definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A with respect to its 2003 annual meeting of shareholders.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
UNIVERSAL MONEY CENTERS, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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Section Page
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PART I.................................................................1
ITEM 1. DESCRIPTION OF BUSINESS.....................................1
ITEM 2. DESCRIPTION OF PROPERTIES...................................8
ITEM 3. LEGAL PROCEEDINGS...........................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........9
PART II...............................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................10
ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..10
ITEM 7. FINANCIAL STATEMENTS.......................................20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................37
PART III..............................................................37
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.37
ITEM 10. EXECUTIVE COMPENSATION.....................................37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............37
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...........................37
ITEM 14. CONTROLS AND PROCEDURES....................................38
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-KSB that
are not statements of historical fact may constitute forward-looking
statements within the meaning of Section 21E of the Exchange Act. These
statements involve risks and uncertainties that may cause actual results to
differ materially from those in such statements. See Item 6, "Management's
Discussion and Analysis OR PLAN OF OPERATION-Cautionary Statement Concerning
Forward-Looking Statements" for additional information and factors to be
considered with respect to forward-looking statements.
PART I
Item 1. DESCRIPTION OF BUSINESS
Overview
We are engaged in the business of operating a network of automated
teller machines. The ATMs provide holders of debit and credit cards access
to cash, account information and other services at convenient locations and
times chosen by the cardholder. Debit and credit cards are principally issued
by banks and credit card companies. As of January 31, 2003, the network
consisted of approximately 736 ATMs owned by us, approximately 30 ATMs owned
by banks and approximately 8 ATMs owned by third party merchants. See
"-Recent Developments in Our Business."
On September 19, 2002, we amended our arrangement with a large discount
retailer, allowing us to place ATMs in 212 additional stores in the eastern
half of the United States with concentrations in Florida, New York, New
Jersey, Virginia, Illinois, Texas, Massachusetts, and Ohio. These ATMs were
installed as of November 30, 2002. We now have 387 of our ATMs placed in
stores of this retailer. During the fourth quarter of the fiscal year ended
January 31, 2002, we entered into a contract to place approximately 101 ATMs
in the stores of a combination convenience store and gas station operator.
The ATMs were placed in these stores by December 31, 2001. See
"-Significant Relationships."
To promote usage of ATMs in our network, we have relationships with
national and regional card organizations (also referred to as networks) which
enable the holder of a card issued by one member of the organization to use
an ATM operated by another member of the organization to process a
transaction. We have relationships with Cirrus and Plus, the two principal
national card organizations, and Star, the dominant card organization in its
markets, all of whose members are banks and ATM network operators and other
companies sponsored by member banks. We also have relationships with major
credit card issuers such as Visa, MasterCard and Discover, which enable the
holder of a credit card to use ATMs in our network to process a transaction.
Revenue Sources
Transaction Fees. Our revenues are principally derived from two types
of fees, which we charge for processing transactions on our ATM network. We
receive an interchange fee from the issuer of the credit or debit card for
processing a transaction when a cardholder uses an ATM in our network. In
addition, in most cases we receive a surcharge fee from the cardholder when
the cardholder makes a cash withdrawal from an ATM in our network. See Item
6, "Management's Discussion and Analysis OR PLAN OF OPERATION - Overview."
ATM Network Management Services. In addition to revenues derived from
interchange and surcharge fees, we also derive revenues from providing ATM
network management services to banks and other third party owners of ATMs
included in our ATM network. These services include 24 hour transaction
processing,
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monitoring and notification of ATM status and cash condition, notification of
ATM service interruptions, in some cases, dispatch of field service personnel
for necessary service calls and cash settlement and reporting services.
Banks may choose whether to limit transactions on their ATMs to cards issued
by the bank or to permit acceptance of all cards accepted on our network. See
Item 6, "Management's Discussion and Analysis OR PLAN OF OPERATION -
Overview."
Other Services. Our network has capabilities to earn revenues for
services in addition to cash withdrawal and balance inquiry transactions.
These include (i) the ability to distribute financial and other products and
services at a low incremental cost, (ii) the ability to dispense postage
stamps, coupons and prepaid calling cards, (iii) the ability to provide on
screen advertising, and (iv) the provision of on-line point of sale
authorization for purchases made at retail outlets with credit and debit
cards. In addition, a majority of our ATMs are upgradable for new
technologies, including computer chip "smart cards." Smart cards are
electronic debit cards that can be used to withdraw cash from ATMs and can be
"charged up" through the ATM network and then used to purchase goods from
retail locations. We are exploring the viability of these uses and may
implement additional services as markets develop.
Surcharge Fees. In April 1996, national debt and credit card
organizations changed the rules applicable to their members, including us, to
permit the imposition of surcharge fees on cash withdrawals from ATMs. Our
business is substantially dependent upon our ability to impose surcharge
fees. Any changes in laws or card association rules materially limiting our
ability to impose surcharge fees would have a material adverse effect on us.
See "--Regulatory Matters - Surcharge Regulation." Since April 1996, we have
expanded the number of ATMs in our network and have expanded our practice of
imposing surcharge fees on cash withdrawals on ATMs.
Recent Developments in Our Business
Loss of combination convenience stores and gas stations clients. During
fiscal year ended January 31, 2003, two operators of combination convenience
stores and gas stations terminated their relationship with us effective as of
January, 2003. The aggregate revenues from these operators accounted for
approximately 14% and 10% of our revenues in fiscal year 2003 and 16% and 12%
of our revenues in fiscal year 2002. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Trends--Loss of
Clients." We have removed these ATMs from these sites. Only a few of these
ATMs have been redeployed and the remaining ATMs are sitting in storage.
Approximately 30 of these ATMs are owned by us and the remaining ATMs are
under lease and will be returned to the lessor as the leases expire.
Significant Relationships
During the fourth quarter of fiscal 2002, we entered into a contract to
place approximately 101 ATMs in the stores of a combination convenience store
and gas station operator. The ATM site lease agreement expires in October
2006 and may be terminated before the end of the lease term under certain
circumstances. The aggregate revenues from this operator accounted for
approximately 14% of our revenues in fiscal year 2003.
We also have a relationship with a retailer for whom approximately 387
ATMs have been installed at various locations as of January 31, 2003. The
ATM site lease agreement with this retailer expires in October 2005 and the
site owner has the right to terminate the lease before the end of the lease
term under certain circumstances. The aggregate revenues from this retailer
accounted for approximately 21% of our revenues in fiscal year 2003 and 13%
of our revenues in fiscal year 2002.
Our Network
General. ATM locations in our network are concentrated in Kansas (97
ATMs), Maryland (120 ATMs), Missouri (118 ATMs) and Texas (34 ATMs). Other
ATMs are located in Alabama, Arkansas, Arizona,
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California, Colorado, Delaware, Florida, Georgia, Indiana, Michigan,
Mississippi, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Utah and Virginia.
The operation of the network involves the performance of many
complementary tasks and services, including principally:
o acquiring ATMs for us or our customers,
o selecting locations for ATMs and entering into leases for access to
those locations,
o establishing relationships with banks and third party merchants for
processing transactions on their ATMs,
o establishing relationships with national and regional card
organizations and credit card issuers to promote usage of ATMs in the
network,
o operating and maintaining the computer system and related software
necessary to process transactions conducted on ATMs in the network,
o processing transactions conducted on ATMs in the network,
o daily reconciling of transactions processed on ATMs in the network,
o supplying ATMs in the network with cash and monitoring cash levels for
resupply, and
o managing the collection of fees generated from the operation of the
network.
ATM Locations. We believe that the profitable operation of an ATM is
largely dependent upon its location. We devote significant effort to the
selection of locations that will generate high cardholder utilization. One
of the principal factors affecting our further penetration of existing
markets in the Midwest is the availability of attractive sites. We attempt
to identify locations in areas with high pedestrian counts where people need
access to cash and where use of the ATM is convenient and secure. Management
believes the identification of locations is supported by the desire of
retailers of all types to offer their customers access to cash as an
alternative to cashing checks, which avoids the financial exposure and added
overhead of cashing checks. Key target locations for our ATMs include
(i) convenience stores and combination convenience stores and gas stations,
(ii) grocery stores, (iii) major regional and national retailers,
(iv) hotels, (v) shopping malls, (vi) airports, (vii) colleges,
(viii) amusement parks, (ix) sports arenas, (x) theaters, and (xi) bowling
alleys.
We believe that once a cardholder establishes a habitual pattern of
using a particular ATM, the cardholder will generally continue to use that
ATM unless there are significant problems with the location, such as a
machine frequently being out of service. It is our goal to secure key real
estate locations before our competitors can do so, and become the habitual
ATM location of card users in our markets.
We enter into leases for our ATM locations. The leases generally
provide for the payment to the lessor of either a portion of the fees
generated by use of the ATM or a fixed monthly rent. Most of our leases have
a term of approximately three years. We generally have the right to
terminate a lease if the ATM does not meet certain performance standards.
The ATM site owner generally has the right to terminate a lease before the
end of the lease term if we breach the lease agreement or become the debtor
in a bankruptcy proceeding.
Typical ATM Transaction. In a typical ATM transaction processed by us,
a debit or credit cardholder inserts a credit or debit card into an ATM to
withdraw funds or obtain a balance inquiry. The transaction is routed from
the ATM to our processing center by dedicated, dial-up and wireless
communication links. Our processing center computers identify the card
issuer by the bank identification number contained within the card's magnetic
strip. The transaction is then switched to the local issuing bank or card
organization (or its designated processor) for authorization. Once the
authorization is received, the authorization message is routed back to the
ATM and the transaction is completed.
Some card issuers do not maintain on-line balance information for their
cardholders, but instead send us authorization limits on a daily basis. We
store the cardholder authorization limits on our processing center
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computers and authorize transactions on behalf of the card issuer relying on
this information. We transmit records of all transactions processed in this
manner to the card issuers who then update their cardholder account records.
Authorization of ATM transactions processed on ATMs in our network is
the responsibility of the card issuer. We are not liable for dispensing cash
in error if we receive a proper authorization message from a card issuer.
Transaction Volumes. We monitor the number of transactions that are
made by cardholders on ATMs in our network. The transaction volumes
processed on any given ATM are affected by a number of factors, including
location of the ATM, the amount of time the ATM has been installed at that
location, and market demographics. Our experience is that the number of
transactions on a newly installed ATM is initially very low and increases for
a period of three to six months after installation as consumers become
familiar with the location of the machine. We processed a total of 10,872,717
transactions on our network in the fiscal year ended January 31, 2003, of
which 3,833,746 were surcharge transactions. We processed a total of
12,564,571 transactions on our network in the fiscal year ended January 31,
2002, of which 3,728,612 were surcharge transactions.
Vault Cash. An inventory of cash ("vault cash") is maintained in each
ATM that is replenished periodically based upon cash withdrawals. Our
affiliate, Universal Funding Corporation, a Missouri corporation, and
commercial vault cash providers currently supply vault cash for all of the
ATMs owned by us. Certain of our ATMs are sponsored by banks and third party
vendors. Vault cash for these ATMs is supplied by the sponsoring bank or
vendor. We do not supply vault cash for the ATMs in our ATM network that are
owned or sponsored by banks and third party vendors. "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."
ATM Network Technology
ATMs. Most of the ATMs in our network are manufactured by Fujitsu,
IBM/Diebold, NCR, or Triton. The wide range of advanced technology available
for new ATMs provides our customers with state-of-the-art electronics
features and reliability through sophisticated diagnostics and self-testing
routines. The different machine types can perform basic functions, such as
dispensing cash and displaying account information, as well as providing
revenue opportunities for advertising and selling products through the use of
color monitor graphics, receipt message printing and stamp and coupon
dispensing. Many of our ATMs are modular and upgradeable so we may adapt
them to provide additional services in response to changing technology and
consumer demand.
Our field services staff tests each ATM prior to placing it into the
network. All ATM models considered for use in our network are first tested
by the manufacturer and by independent testing laboratories. We monitor
field testing as well as live actual results in the market place. Then, if
there appears to be practical added value to us, we will start our own
internal testing and certification process. Upon successful completion of
this process, we will place the new equipment into a limited number of sites
for actual consumer use.
Processing Center. We operate a central processing center located in
our headquarters in Mission, Kansas. The processing center is connected to
each ATM in our network through dedicated, dial-up and wireless
communications circuits. The processing center is staffed 24 hours a day,
seven days a week by an experienced staff of information system specialists.
The efficient operation of our processing center is critical to the
successful operation of our ATM network.
At the processing center, we maintain a "switch" which links in a
compatible manner ATMs in our network, the processing center and similar
processing or transaction authorization centers operated by card issuers and
card organizations. The switch makes possible the electronic exchange of
information necessary
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to conduct transactions at ATMs in our network. The switch consists of a
Tandem computer system, telecommunications equipment, and proprietary
software developed for the operation of our network.
We own the Tandem computer system currently used by us. Management
believes the computer system has sufficient capacity to meet any growth in
transaction volume achieved over the next three years and to permit the
development of new services being considered by us.
Although the switch translates between computers and makes routing
decisions, it does not execute the transactions. Transactions originated at
ATMs in our network are routed by the switch operated in our processing
center to the card organization and card issuer that processes the account
records for the particular cardholder's financial institution. In turn, the
switch relays reply information and messages from the computer center to the
originating terminal. The processing center also authorizes transactions
executed on our network on behalf of card issuers that do not maintain
on-line balance information for their cardholders.
To protect against power fluctuations or short-term interruptions, the
processing center has full uninterruptable power supply systems with battery
and generator back-up. The processing center's data back-up systems would
prevent the loss of transaction records due to power failure and permit the
orderly shutdown of the switch in an emergency. To provide continued
operation in the event of a catastrophic failure, we have an agreement with
Sungard Recovery Systems, Inc.
Relationship with Universal Funding Corporation
We have maintained a business relationship with Universal Funding
Corporation, a Missouri corporation, since August 1989. The relationship
began in 1989 as a result of our severe financial problems. The operation of
our ATM network generally requires that we supply vault cash to ATMs owned by
us to fund cash withdrawals. As a result of our financial problems, lenders
were generally unwilling to extend loans, partly because of the concern that
our creditors would assert claims against cash physically located in ATMs
owned by us. We did not have sufficient cash to supply the vault cash for
these ATMs. In order to resolve this problem and to permit us to continue to
operate certain ATMs, Universal Funding was formed in 1989 by David S.
Bonsal, the chairman of our board of directors, John L. Settles, a former
President of ours, and, a former shareholder, William Smithson. In 2000, Mr.
Smithson sold his interest in Universal Funding to Mr. Bonsal and Mr.
Settles. Each of them now owns one-half of Universal Funding. Mr. Settles
was our President from April, 1989 through October, 1990 and then from June,
1999 to November, 2001.
In 1989, we sold approximately 60 ATMs to Universal Funding for which
Universal Funding had agreed to provide vault cash. Universal Funding
requested the sale of the ATMs to Universal Funding as a condition to
providing vault cash, in order to provide additional protection against
seizure of Universal Funding's vault cash by our creditors. We entered into
a Management Agreement with Universal Funding in 1989. The Management
Agreement was designed to provide us with the economic benefits of ownership
and operation of the ATMs sold to Universal Funding, while providing to
shareholders and lenders of Universal Funding the protection from our
creditors and the investment return necessary to attract their investment.
In the Management Agreement, Universal Funding agreed to enter into
contracts with site owners for the placement of the ATMs acquired from us, to
provide vault cash necessary for the operation of the ATMs and to contract
for an armored security service for deliveries of cash to ATMs. In exchange
for these services, Universal Funding received all interchange fees for
transactions processed on the ATMs for which it provided vault cash. Under
the Management Agreement, we agreed to "drive" the ATMs sold to Universal
Funding and to provide accounting, maintenance and communication services.
In exchange for these services, Universal Funding agreed to pay us a
management fee equal to Universal Funding's "net income". Universal
Funding's "net income" is defined in the Management Agreement as revenues from
interchange fees, less armored security charges, interest expense on funds
borrowed to provide vault cash, ATM location expenses, debt service related
to the purchase of the ATMs, taxes or insurance on ATMs, and a monthly
payment to each of Universal Funding's shareholders representing a return on
their equity investment in
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Universal Funding. The amount of the monthly payment to the shareholders is
based upon the amount of their equity investment in Universal Funding and is
paid on the equity investment at a rate of 18% per annum, or a total of
approximately $25,000 per year. The management fee is to be paid to us on a
monthly basis after Universal Funding has met all of its other cash expenses,
including the payment of interest on outstanding borrowings and the monthly
payment to Universal Funding's shareholders. In addition, in the Management
Agreement, the shareholders of Universal Funding grant us an option to
purchase all of the outstanding stock of Universal Funding at any time for an
amount equal to 110% of the capital contributed by the shareholders to
Universal Funding plus any arrearages in the payment of expenses due under
the Management Agreement. Management believes that the amount of the exercise
price would have been approximately $165,000 as of January 31, 2003. The
Management Agreement extends for successive twelve (12) month terms, unless
either party provides written notice of termination to the other party at
least thirty (30) days prior to the end of a twelve (12) month term.
Since 1989, the relationship between Universal Funding and us has
expanded to cover additional ATMs, as a result of the loss of other sources
of financing and in order for us to take advantage of opportunities to place
additional ATMs. Universal Funding currently supplies vault cash for all of
the ATMs owned by us. We lease to Universal Funding the ATMs for which
Universal Funding provides vault cash for rent of $10.00 per month.
Universal Funding requested the leasing arrangement for our ATMs in order to
provide protection against seizure of its vault cash. We have replaced the
ATMs originally purchased by Universal Funding, and Universal Funding no
longer owns any ATMs in our network. Universal Funding does not provide
vault cash for ATMs in our network which are owned by banks or by third party
vendors. At January 31, 2003 and 2002, Universal Funding had vault cash of
approximately $2,200,000 and $2,200,000, respectively, located in
approximately 157 and 249 ATMs, respectively, owned by us.
Universal Funding borrows the funds that are used to supply vault cash
principally from (i) Electronic Funds Transfer, Inc., our wholly owned
subsidiary ("EFT"), (ii) David S. Bonsal, our Chairman and Chief Executive
Officer, and a limited partnership in which Mr. Bonsal is the general
partner, (iii) our employees and (iv) other lenders. The loans generally
have terms that range from 30 days to six months and are automatically rolled
over at maturity unless prior written notice of termination is given at least
30 days before maturity. As of January 31, 2003, Universal Funding paid
interest on loans at rates ranging from 9% to 11% per annum. At January 31,
2003, the aggregate outstanding amount of the loans was approximately
$2,234,000, of which $0 was owed to EFT, approximately $1,202,000 was owed to
Mr. Bonsal and the related limited partnership, approximately $50,000 was
owed to our employees and approximately $982,000 was owed to other lenders.
The maximum outstanding balances of the loans made by EFT to Universal
Funding in fiscal 2003 and 2002 were $514,715 and $945,715, respectively.
The total interest earned by us on loans from EFT to Universal Funding in
fiscal 2003 and 2002 was $29,851 and $81,298, respectively.
We have obtained access to additional sources of vault cash in recent
years as a result of the improvement in our financial condition. See Item 6,
"Management's Discussion and Analysis OR PLAN OF OPERATION - Liquidity and
Capital Resources".
Competition
Competitive factors in our business are network availability and
response time, price to both the card issuer and to our customers, ATM
location and access to other networks. The market for the transaction
processing and payment services industry and specifically ATM services is
highly competitive. Our principal competitors are national ATM companies
that have a dominant share of the market. These companies have greater sales,
financial, production, distribution and marketing resources than us.
We have identified the following additional categories of ATM network
operators:
o Financial Institutions. Banks have been traditional deployers of ATMs
at their banking facilities. However, many banks are starting to
place ATMs in retail environments where the
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bank has an existing relationship with the retailer. This may
limit the availability of locations for our ATMs.
o Credit Card Processors. Several of the credit card processors have
diversified their business by taking advantage of existing
relationships with merchants to place ATMs at sites with those
merchants.
o Third Party Operators. This category includes data processing
companies that have historically provided ATM services to financial
institutions, but also includes small and regional network
operators such as us.
o Companies that have the capability to provide both back office
services and ATM management services.
Management believes that many of the above providers deploy ATMs to
diversify their operations and that the operation of the ATM network provides
a secondary income source to a primary business.
Since April 1996, when national debt and credit card organizations
changed rules applicable to their members to permit the imposition of
surcharge fees, we have experienced increased competition, both from existing
ATM network operators and from new companies entering the industry. There can
be no assurance that we will continue to be able to compete successfully with
national ATM companies. A continued increase in competition could adversely
affect our margins and may have a material adverse effect on our financial
condition and results of operations.
Employees
At January 31, 2003, we had 33 full time employees. None of our
employees is represented by a labor union or covered by a collective
bargaining agreement. We have not experienced work stoppages and consider
our employee relations to be good. Our business is highly automated and we
outsource specialized, repetitive functions such as cash delivery and
security. As a result, our labor requirements for operation of the network
are relatively modest and are centered on monitoring activities to ensure
service quality and cash reconciliation and control.
Executive Officers of the Company
Our executive officers are as follows:
Name Age Position
---- --- --------
David S. Bonsal 62 Chairman of the
Board of Directors
and Chief Executive
Officer
Pamela A. Glenn 40 Vice President and
Corporate Secretary
Christopher D. Greek 38 Corporate Controller
Executive officers serve at the pleasure of our Board of Directors.
Unless otherwise indicated, each executive officer has had the same principal
occupation during the last five years.
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David S. Bonsal has served as our Chairman and Chief Executive Officer
since 1988. Mr. Bonsal is also a principal shareholder of Universal Funding
Corporation. See "Certain Relationships and Related Transactions."
Pamela A. Glenn has served as our Vice President since May 1995 and our
Corporate Secretary since September 1995. Ms. Glenn served as a Sales
Representative and Account Manager for us from 1991 to May 1995 and held
various positions with us from 1982 to 1991.
Christopher D. Greek has served as one of our executive officers since
May 1, 2003. He became our Corporate Controller in August, 2001. From
September 1997 to August 2001, Mr. Greek served as Accounting Manager. Mr.
Greek also served as a Staff Accountant for us from June 1989 until September
1997.
Regulatory Matters
Federal Banking Regulation. Because we provide transaction processing
services to banks, our procedures and operations are subject to federal
regulation by, and are monitored by, the Federal Deposit Insurance
Corporation ("FDIC"), the Office of the Comptroller of the Currency ("OCC")
and the Federal Reserve Board ("FRB"). The FDIC, the OCC and the FRB have
adopted regulations addressing many aspects of the operations of ATM networks
and processors, including management, data security, computer systems and
programming controls, and electronic funds transfer procedures. The FDIC,
the OCC and the FRB conduct periodic examinations to ensure our compliance
with these regulatory requirements. We believe that we are in material
compliance with these regulations. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Cautionary Statement Concerning
Forward-Looking Statements."
Surcharge Regulation. The imposition of surcharges is not currently
subject to federal regulation, but has been banned by several states in which
we currently have no operations. Legislation to ban surcharges has been
introduced but not enacted in many other states as a result of activities of
consumer advocacy groups that believe that surcharges are unfair to
consumers. Voters in San Francisco and Santa Monica, California voted in 1999
to bar banks from charging fees to non-customers who use their ATMs. Similar
restrictions have been proposed by other cities. The banking industry has
resisted these efforts to impose restrictions. We are not aware of the
introduction of such legislation or the submission to voters of such
referendums applicable to us in any of the states or cities in which we
currently do business. Nevertheless, there can be no assurance that
surcharges will not be banned in the states where we operate, and such a ban
would have a material adverse effect on us. Most of the ATMs in our network
are located in Kansas (97 ATMs), Maryland (120 ATMs), Missouri (118 ATMs) and
Texas (34 ATMs).
Network Regulations. National and regional networks have adopted
extensive regulations that are applicable to various aspects of our
operations and the operations of other ATM network operators. We believe
that we are in material compliance with these regulations and, if any
deficiencies were discovered, that we would be able to correct them before
they had a material adverse impact on our business.
Item 2. DESCRIPTION OF PROPERTIES
Our principal executive offices and our central transaction processing
center are located in 12,851 square feet of leased space located at 6800
Squibb Road, Shawnee Mission, Kansas. The telephone number for our principal
executive offices is 913-831-2055. We lease the facility at rates we believe
were consistent with market rates at the time the facility was leased under a
lease that expires in August, 2004. We believe that the facility is adequate
for our needs for the foreseeable future.
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Item 3. LEGAL PROCEEDINGS
On June 5, 2000, Dave Windhorst, a former President of ours brought an
action against us and our individual directors in the United States District
Court for the District of Kansas. Mr. Windhorst resigned as our President in
May 1999. Mr. Windhorst alleged that the defendants promised that he would
receive 100,000 (adjusted for the 1 for 20 reverse stock split conducted in
June 2000) shares of our common stock as part of his wages and compensation
as an employee. Mr. Windhorst sought judgment against the defendants for an
amount equal to the highest value of 100,000 (adjusted for the 1 for 20
reverse stock split conducted in June 2000) shares of our common stock from
June 11, 1999 up to and including the day of trial, plus prejudgment
interest, penalties, costs and other awards deemed reasonable in the
circumstances. In July 2000, we issued 50,000 shares of our common stock to
Mr. Windhorst and recorded a compensation expense of $20,000 in response to
this claim. Mr. Windhorst voluntarily dismissed the action and refiled it in
state court in August 2000. On April 19, 2002, we settled this matter with
Mr. Windhorst. Under the settlement agreement, we paid Mr. Windhorst $72,000
in cash in exchange for his release of all claims against us, his dismissal
with prejudice of the action, and his transfer to us all of the shares of our
common stock he owned, including the 50,000 shares of common stock issued to
him in July 2000. The court dismissed the action with prejudice on April 26,
2002.
An armored car company, Tri-State Armored Services, Inc., provided cash
replenishment services for 18 ATMs operated by us in Delaware and adjoining
states. Vault cash for these machines was provided by Wilmington Savings Fund
Society ("WSFS") under the terms of a Cash Bailment Agreement. On March 2,
2001, Tri-State filed a Chapter 7 Bankruptcy proceeding in the United States
Bankruptcy Court for New Jersey. The trustee in bankruptcy took possession of
the assets held by Tri-State on the day of his appointment and since that
time has inventoried the assets, including approximately $21 million in
currency. Claims against Tri-State have been estimated at $50 million or
more. We have been told that at the time of the bankruptcy, Tri-State was in
possession of approximately $200,000 in currency destined for our ATMs from
WSFS or picked-up from those ATMs. WSFS made a claim for $202,555 against us
under the terms of the Cash Bailment Agreement. In November 2001, we settled
this matter with WSFS for approximately $188,000, which is reflected in the
audited consolidated financial statements as of and for the fiscal year ended
January 31, 2002. In fiscal 2003, we received two claims distributions by
the bankruptcy trustee in total for approximately $69,000. We do not know
whether or not we will receive any additional claims distributions. We are
currently investigating the matter and trying to determine if identifiable
currency was held by Tri-State. If any of the currency held by Tri-State is
specifically identifiable, by bundle markings or otherwise, to the account of
the Company, such currency should be recoverable in full from the trustee.
In addition, we have given notice to our insurance carrier, under our all
risk property insurance policy. Although the insurance carrier has notified
the Company that such loss would not be covered by the policy, we believe
that under the terms of the policy any loss suffered by it should be covered
by insurance and thus, are appealing the decision of the insurance company to
the corporate headquarters.
In addition, we are a party to routine litigation in the ordinary course
of business from time to time.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Related Stockholder Matters
Currently, there is little, if any, public trading market for our common
stock. The common stock is currently eligible to be traded in the
over-the-counter market, both on the OTC Bulletin Board and in the "pink
sheets". We believe that the common stock trades publicly on a very
infrequent basis.
On January 31, 2003, there were 1,409 record holders of our common stock.
We have not declared or paid any dividends for many years. We do not
anticipate that we will pay dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to provide funds for the
growth and development of our business.
Recent Sales of Unregistered Securities
We have not sold any securities within the past three years without
registering the securities under the Securities Act of 1933.
Item 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Our revenues are principally derived from two types of fees, which we
charge for processing transactions on our ATM network. We receive an
interchange fee from the issuer of the credit or debit card for processing a
transaction when a cardholder uses an ATM in our network. In addition, in
most cases we receive a surcharge fee from the cardholder when the cardholder
makes a cash withdrawal from an ATM in our network.
Interchange fees are processing fees that are paid by the issuer of the
credit or debit card used in a transaction. Interchange fees vary for cash
withdrawals, balance inquiries, account transfers or uncompleted
transactions, the primary types of transactions that are currently processed
on ATMs in our network. The maximum amount of the interchange fees is
established by the national and regional card organizations and credit card
issuers with whom we have a relationship. We (or our affiliate, Universal
Funding Corporation) receive the full interchange fee for transactions on
ATMs that we own, but sometimes we rebate a portion of the fee to the owner
of the ATM location under the applicable lease for the ATM site. We also
receive the full interchange fee for transactions on ATMs owned by banks or
third party vendors included within our network, but we rebate a portion of
each fee to the bank or third party vendor based upon negotiations between
us. The interchange fees received by us vary from network to network and to
some extent from issuer to issuer, but generally range from $0.35 to $0.75
per cash withdrawal. Interchange fees for balance inquiries, account
transfers and denied transactions are generally substantially less than fees
for cash withdrawals. The interchange fees received by us from the card
issuer are independent of the service fees charged by the card issuer to the
cardholder in connection with ATM transactions. Service fees charged by card
issuers to cardholders in connection with transactions through our network
range from zero to as much as $2.50 per transaction. We do not receive any
portion of these service fees.
In most markets we impose a surcharge fee for cash withdrawals. We
expanded our practice of imposing surcharge fees in April 1996 when national
debt and credit card organizations changed rules applicable to their members
to permit these fees. Surcharge fees have become a substantial additional
source of revenue for us and other ATM network operators. The surcharge fee
for ATMs in our network owned by or located in
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banks ranges between $0.50 and $1.50 per withdrawal. The surcharge fee for
other ATMs in our network ranges between $0.50 and $2.50 per withdrawal. We
receive the full surcharge fee for cash withdrawal transactions on ATMs that
we own, but sometimes we rebate a portion of the fee to the owner of the ATM
location under the applicable lease for the ATM site. We also receive the
full surcharge fee for cash withdrawal transactions on ATMs owned by banks
and third party vendors included within our network, but we rebate a portion
of each fee to the bank or third party vendor based upon a variety of
factors, including transaction volume and the party responsible for supplying
vault cash to the ATM.
In addition to revenues derived from interchange and surcharge fees, we
also derive revenues from providing network management services to banks and
third parties owning ATMs included in our ATM network. These services
include 24 hour transaction processing, monitoring and notification of ATM
status and cash condition, notification of ATM service interruptions, in some
cases, dispatch of field service personnel for necessary service calls and
cash settlement and reporting services. The fees for these services are paid
by the owners of the ATMs.
Interchange fees are credited to us by networks and credit card issuers
on a daily or monthly basis, depending upon the party. Surcharge fees are
charged to the cardholder and credited to us by networks and credit card
issuers on a daily basis. We periodically rebate the portion of these fees
owed to ATM owners and owners of ATM locations. Fees for network management
services are generally paid to us on a monthly basis.
Critical Accounting Policies
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend our business activities. To
aid in that understanding, management has identified our "critical accounting
policies". When more than one accounting principle, or the method of its
application, is generally accepted, management selects the principle or
method that is appropriate in the specific circumstances. Application of
these accounting principles requires our management to make estimates about
the future resolution of existing uncertainties. As a result, actual results
could differ from these estimates. Accordingly, these policies have the
potential to have a significant impact on our financial statements, either
because of the significance of the financial statement item to which they
relate, or because they require judgment and estimation due to the
uncertainty involved in measuring, at a specific point in time, events which
are continuous in nature. In preparing these financial statements, management
has made its best estimates and judgments of the amounts and disclosures
included in the financial statements, giving due regard to materiality.
Except as separately discussed, we do not believe there is a great likelihood
that materially different amounts would be reported under different
conditions or by using different assumptions pertaining to the accounting
policies described below.
Revenue Recognition Policies. We recognize revenues as ATM card holders
use ATMs or as services are rendered to customers. In connection with
recording revenue, estimates and assumptions are required in determining the
expected conversion of the revenue streams to cash collected. The reserve
estimation process requires that management make assumptions based on
historical results, future expectations, the industry's economic and
competitive environment, changes in the creditworthiness of our customers,
and other relevant factors. Revenues are also adjusted with positive and
negative processing accruals occurring in the operation of the Company's ATM
network in the ordinary course of business.
Allowance of Uncollectible Accounts Receivable. Accounts receivable
have been reduced by an allowance for amounts that may become uncollectible
in the future. This estimated allowance is based primarily on management's
evaluation of the financial condition of the customer and historical
experience.
Equipment. ATM equipment comprises a significant portion of our total
assets. Changes in technology or changes in our intended use of these assets
may cause the estimated period of use or the value of these assets to
change. We perform annual internal studies to confirm the appropriateness of
estimated
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economic useful lives for each category of current equipment. Estimates and
assumptions used in setting depreciable lives require both judgment and
estimates.
Comparison of Results of Operations for the Fiscal Years Ended January 31,
2003 and 2002
Revenues. Our total revenues decreased slightly to $8,686,464 for the
fiscal year ended January 31, 2003 ("fiscal 2003") from $8,690,671 for the
fiscal year ended January 31, 2002 ("fiscal 2002"). This decrease is due to a
number of factors, including the loss of two combination gas and convenience
store operators. This decrease was also due to a decrease in revenues from
network services provided to banks and third parties. See "--Trends--Loss of
Clients." This decrease was partially offset by increased revenues generated
through the expansion of our relationship with the operator of large discount
retail stores and our new relationship with the operator of 101 combination
convenience and gas station stores. See "DESCRIPTION OF BUSINESS-Overview."
Surcharge Revenues. Surcharge fees increased to $6,029,903 or 69%
of total revenues in fiscal 2003 from $5,543,317 or 64% of total
revenues in fiscal 2002. This increase is due in part to an increased
number of ATMs in the Company's network which charge a surcharge fee.
The number of such ATMs increased to 772 in fiscal year 2003 from 703 in
fiscal year 2002.
Interchange Revenues. Revenues derived from interchange fees
decreased to $2,326,349 in fiscal 2003 from $2,381,858 in fiscal 2002.
As discussed above, the decrease in interchange revenues for the
comparable period is primarily due to a loss of banking clients.
Funding. Payments made to Universal Funding under the Management
Agreement between Universal Funding and us decreased to $33,082 in
fiscal 2003 compared to $34,993 in fiscal 2002. The number of ATMs which
received vault cash from Universal Funding decreased from 249 ATMs as of
January 31, 2002 to 157 ATMs as of January 31, 2003. The revenues
earned by Funding from interchange fees decreased in fiscal year 2003
from fiscal year 2002, primarily as a result of a lower number of these
ATMs. See "--Payments to Universal Funding."
Network Management Fees. Our revenues from network services
provided to banks and third parties decreased to $363,294 in fiscal 2003
from $800,489 in fiscal 2002 in large part as a result of the loss of
banking clients. See "--Trends--Loss of Clients."
Payments to Universal Funding. We have a relationship with our
affiliate, Universal Funding Corporation, under which Universal Funding
provides vault cash for certain ATMs owned by us. At the request of Universal
Funding, we lease all of these ATMs to Universal Funding so that it may
protect its vault cash in the ATMs. At January 31, 2003 and 2002, Universal
Funding had vault cash located in approximately 157 and 249 ATMs,
respectively, owned by us.
We derive management fees from Universal Funding pursuant to a
Management Agreement between Universal Funding and us. Under the Management
Agreement, Universal Funding receives all interchange fees for transactions
processed on ATMs owned by us for which Universal Funding provides vault
cash. In exchange for "driving" the ATMs leased to Universal Funding and
providing accounting, maintenance and communication services, we receive a
management fee equal to Universal Funding's "net income." Universal
Funding's "net income" is defined in the Management Agreement as revenues from
interchange fees, less armored security charges, interest expense on funds
borrowed to provide vault cash, ATM location expenses, debt service related
to the purchase of the ATMs, taxes or insurance on ATMs, and a monthly
payment to each of Universal Funding's shareholders representing a return on
their equity investment in Universal Funding. If Universal Funding's "net
income" is less than zero (a "net loss"), the Company reimburses Universal
Funding for such amount. See "DESCRIPTION OF BUSINESS-Relationship with
Universal Funding Corporation."
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The loss suffered by us from Universal Funding under the Management
Agreement was $33,082 in fiscal 2003, equal to Universal Funding's "net loss"
under the Management Agreement for the same period. Universal Funding's "net
loss" of $33,082 consisted of $691,087 in revenues from interchange fees
earned by Funding, less Funding's expenses in the amount of $699,275 and
Funding's return on equity payment to shareholders of Funding in the amount
of $24,894. The loss suffered by us from Universal Funding under the
Management Agreement was $34,993 in fiscal 2002, equal to Universal Funding's
"net loss" under the Management Agreement for the same period. Universal
Funding's "net loss" of $34,993 consisted of $815,263 in revenues from
interchange fees earned by Universal Funding, less Universal Funding's
expenses in the amount of $825,362 and Universal Funding's return on equity
payment to shareholders of Universal Funding in the amount of $24,894.
Pursuant to the Management Agreement, Universal Funding's expenses for
purposes of computing its "net income" did not include Universal Funding's
depreciation, amortization and bad debt expenses, which were $0 in fiscal
2003 and $0 in fiscal 2002.
Cost of Revenues. Our total cost of revenues increased to $7,296,181 in
fiscal 2003 from $7,231,541 in fiscal 2002. The principal components of cost
of revenues are revenue producing salaries, telecommunication services and
transaction processing charges, interchange and surcharge rebates, ATM site
rentals, maintenance and repairs, and depreciation and amortization. The
increase in cost of revenues is primarily attributable to increased (a) cost
related to revenue generating compensation; (b) ATM maintenance expenses; (c)
armored car service expenses, (d) telecommunications charges; (e) vault cash
rental changes paid to third parties, (f) transaction rebates to retail
clients (g) depreciation and amortization; and (h) leasing ATM equipment.
These increases were partially offset by a reduction in surcharge and
interchange rebates to bank clients, transaction processing charges, and
parts needed to repair ATMs.
Gross Margin. Gross profit as a percentage of revenues was 16.0% in
fiscal 2003 and 16.8% in fiscal 2002. The decrease in fiscal 2003 was caused
by a number of factors, including loss of revenues from banking and
convenience store operators, increased transaction rebates to retail clients
and increased ATM maintenance expenses. This decrease was partially offset
by increased revenues generated through the expansion of our relationship
with the operator of large discount retail stores and our new relationship
the operator of 101 combination convenience and gas station stores. See
"DESCRIPTION OF BUSINESS-Overview."
Operating Expenses. Our total operating expenses decreased to
$1,717,097 in fiscal 2003 from $1,908,338 in fiscal 2002. The principal
components of operating expenses are professional fees, administrative
salaries and benefits, consulting fees, rent and utilities, sales and
marketing expenses and administrative expenses. This decrease is principally
attributable to lower administrative salaries as well as lower administrative
expenses. These decreases were partially offset by an increase in outside
services, rent and utilities, and travel expenses.
Interest Income. Through our subsidiary, EFT, we extend short-term loans
to Universal Funding, which uses the proceeds as vault cash in the ATMs owned
by us. These loans generally have a term of one month and bear interest
between 9% and 11% per annum. Interest income primarily represents the
interest paid by Universal Funding to us on the outstanding balance of these
loans. Interest income decreased to $31,550 in fiscal 2003 from $84,710 in
fiscal 2002 as a result of lower average outstanding balances.
Other Income. The Company received approximately $35,000 during the
third quarter 2003 and $34,000 in the fourth quarter 2003 from the bankruptcy
estate of an armored car service, in connection with the theft of vault cash
by the employees of the armored car service. As a result of such theft, the
Company was required to pay its vault cash provider, Wilmington Savings Fund
Society ("WSFS"), $188,000 in the third quarter 2002. The Company has a
claim against the bankruptcy estate of the armored car service and its
insurance company in the same amount. For additional information, see "LEGAL
PROCEEDINGS." The revenues from this payment were partially offset by
write-offs made by the Company in connection with stolen or damaged ATMs,
approximately $13,000 in fiscal 2003. The Company had a one-time gain in the
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fourth quarter 2003 of approximately $62,000 from the write off of certain
trade payables no longer owed to former vendors of the Company.
Loss before Taxes. We had a loss before taxes of $271,075 during the
fiscal year ended January 31, 2003 compared to a loss of $650,855 during the
fiscal year ended January 31, 2002. The decreased losses were attributable
to the items described above and the following events in fiscal 2002 which
did not occur in fiscal 2003: (i) a reduction of $182,000 of deferred tax
credits deemed to be unrealizable and (ii) accrual of the lawsuit settlement
of $188,000 in settlement of the WSFS matter described under "LEGAL
PROCEEDINGS."
Income Taxes. We paid no income taxes in either fiscal 2003 or fiscal
2002 as a result of a loss before taxes of $271,075 for fiscal 2003 and a
loss before taxes of $650,855 for fiscal 2002. Our net loss was $271,075 for
fiscal 2003 compared to a net loss of $1,025,855 for fiscal 2002. We have
unused operating loss carry forwards of approximately $3,200,000, which
expire between 2005 and 2021.
Liquidity and Capital Resources
Working Capital Deficit. At January 31, 2003, we had a working capital
deficit of $1,364,187 compared to a working capital deficit of $921,118 at
January 31, 2002. The ratio of current assets to current liabilities
decreased to 0.22 at January 31, 2003 from 0.50 at January 31, 2002. The
decrease in working capital and the ratio of current assets to current
liabilities was due mainly to use of cash to purchase equipment, a decrease
in revenues and an increase in cost of revenue as described above.
Funding Our Operations. We have funded our operations and capital
expenditures from cash flow generated by operations, capital leases, and from
the rights offering to shareholders conducted in September 2000. Net cash
provided by operating activities was $512,498 and $695,029 in fiscal 2003 and
fiscal 2002, respectively. Net cash provided by operating activities in
fiscal 2003 consisted primarily of depreciation and amortization of $860,655,
a decrease in accounts receivable of $7,627, and a decrease in prepaid
expenses of $13,079 and other, partially offset by a decrease in accounts
payable and accrued expenses of $84,994, and a net loss of $271,075. Net cash
used in investing activities was $422,680 and $535,934 in fiscal 2003 and
fiscal 2002, respectively. The cash used in investing activities in fiscal
2003 and fiscal 2002 allowed us to purchase plant and equipment (principally
ATMs) totaling $562,395 and $605,939 in fiscal 2003 and fiscal 2002,
respectively. Net cash used in financing activities was $517,973 and $146,921
in fiscal 2003 and fiscal 2002, respectively. Net cash used in financing
activities consisted of payments of $23,438 from the purchase of common stock
in the legal settlement with Dave Windhorst (See "LEGAL PROCEEDINGS"), and
principal payments under long-term debt and capital lease obligations of
$494,535. We had cash and cash equivalents of $164,267 at January 31, 2003,
compared to cash and cash equivalents of $592,422 at January 31, 2002.
Much of our cash requirements relate to the need for vault cash for ATMs
owned by us. Universal Funding currently provides vault cash for
approximately twenty percent of these ATMs. At January 31, 2003, Universal
Funding had vault cash of approximately $2,200,000 located in approximately
157 ATMs owned by us. Universal Funding borrows the money that it provides as
vault cash for our ATMs. The loans generally have terms ranging from 30 days
to six months and are automatically rolled over at maturity unless prior
written notice of termination is given at least 30 days before maturity.
Through our subsidiary EFT, we loan funds to Universal Funding for vault cash
to the extent that Universal Funding cannot obtain financing on reasonable
terms from other sources and to the extent that we have cash available to
lend to Universal Funding. The outstanding balance of the loans from EFT to
Universal Funding at January 31, 2003 was zero.
We also obtain vault cash under the following arrangements:
o Chart Bank. In October 1999, we entered into an arrangement with
Chart Bank allowing us to obtain up to $5,000,000 in vault cash. In
January 2002, Chart Bank reduced the amount available under the
arrangement to $1,000,000, of which approximately $780,000 was
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outstanding as of January 31, 2003. See "--Trends." The Company
and Chart Bank entered into a new arrangement in September 2002,
which has a term of three years and may be terminated by Chart Bank
upon breach by us and upon the occurrence of certain other events.
Under this arrangement, we are required to pay a monthly service
fee on the outstanding amount equal to the Boston Federal Home Loan
Bank Classic Advanced One Year Regular Rate, plus a specified
percentage, and must pay monthly "bank" and insurance fees.
o WSFS. In August 2000, we entered into an arrangement with Wilmington
Savings Fund Society ("WSFS") allowing us to obtain up to
$3,000,000 in vault cash. In February 2002, WSFS increased our
limit to $5,000,000 and, as of January 31, 2003, approximately
$2,800,000 was outstanding. The Company and WSFS entered into a
new arrangement in August 2002. The WSFS arrangement has a
one-year term and may be terminated by WSFS at any time upon breach
by us and upon the occurrence of certain other events. Under this
arrangement, we are required to pay a monthly service fee on the
outstanding amount equal to the prime rate of interest, plus a
specified percentage, and must pay monthly "bank" and insurance
fees.
o First Mariner Bank of Baltimore. Under our arrangement regarding the
combined convenience stores and gas stations entered into in the
fourth quarter of the fiscal year ending January 31, 2002, First
Mariner Bank provides vault cash (approximately $1.5 million) for
all 101 ATMs placed under that arrangement. This arrangement has a
five (5) year term, currently has no limit on the amount of vault
cash which can be placed in these ATMs and may be terminated by
First Mariner Bank at any time upon breach by us and upon the
occurrence of certain other events. We are also in the process of
trying to negotiate an expansion of our relationship with First
Mariner Bank. As compensation for this current arrangement, First
Mariner Bank shares in a portion of the surcharge fees earned in
connection with these ATMs.
o Horizon National Bank. Under a new vault cash arrangement executed in
September 2002, Horizon National Bank ("Horizon") has agreed to
provide vault cash of up to $1.5 million for certain new ATMs and
for our ATMs located in the Kansas City area. This new arrangement
has a one (1) year term and after such one year term may be
terminated by either party for any reason after 60 days notice.
Horizon National Bank may also terminate this arrangement at any
time upon breach by us and upon the occurrence of certain other
events. As compensation for this current arrangement, Horizon
National Bank shares in a portion of the surcharge fees earned in
connection with these ATMs and receives a monthly correspondent
banking and miscellaneous fee.
During the fourth quarter of calendar year 2001, two previous vault cash
providers, Humbolt Bank and Tehama Bank, suffered significant losses as a
result of vault cash theft unrelated to our network. To reduce exposure,
each bank made the determination to exit the business of renting vault cash
to ATM networks. In connection with this exit in December 2001, both banks
gave us the required notice of their desire to terminate our vault cash
arrangement. Under the Tehama Bank arrangement we could rent up to
$3,000,000 in vault cash and, as of January 31, 2002, we were renting
approximately $2,000,000 in vault cash. Under the Humboldt Bank arrangement,
we could rent up to $1,000,000 in vault cash and, as of January 31, 2002,
were renting approximately $1,300,000 in vault cash. Both arrangements
terminated effective as of March 1, 2002. The vault cash being obtained from
these banks has been replaced with expansion of our relationship with WSFS
and Universal Funding.
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As a result of certain factors discussed below, our liquidity has been
reduced significantly from the same period a year ago. This reduction in
liquidity is partially due to the start-up period for new ATMs associated
with our recent expansion efforts, the loss of certain banking clients,
increased competition and a slight decline in revenue.
As the newly-placed ATMs mature, such ATMs generally experience
increased activity and generate increased revenues. In addition, we have
undertaken measures to increase revenues by looking for opportunities to
replace lost customers and to reduce our expenses by streamlining and
reducing workforce expenditures and renegotiating vendor contracts. To
provide additional liquidity, David Bonsal, our CEO and Chairman of the
Board, has signed a commitment letter agreeing to maintain a $300,000 line of
credit for our use if needed. The amount of this line will be reduced each
quarter by $25,000 if certain conditions are met. Mr. Bonsal may also
convert the line of credit into common stock or subordinated debt. We
believe that as a result of these factors cash flow from operations will be
sufficient to fund operations. If cash flow from operations is not sufficient
to fund our operations, we may be required to seek additional sources of
financing. If any of our existing financing arrangements are terminated, or
if we seek additional funding to expand our ATM network, additional financing
may not be available when needed or may not be available on acceptable
terms. In that event, our ability to maintain and expand our ATM network may
be adversely affected. The loss of one or more sources of vault cash funding
or the loss of additional customers could have a material adverse effect on
our business, results of operations and financial condition. As always, we
continue to look for new and alternative vault cash sources.
Contractual Obligations. Our ability to fund our capital needs is also
impacted by our overall capacity to acquire favorable financing terms in our
acquisition of ATMs. Our contractual obligations, including commitments for
future payments under non-cancelable lease arrangements and short and
long-term debt arrangements, are summarized below and are disclosed in Notes
3 and 4 to our Consolidated Financial Statements. We do not participate in,
nor secure financings for, any unconsolidated, limited or special purpose
entities. For fiscal 2003, we had $16,051 of non-cash items compared with no
non-cash items for fiscal 2002. We anticipate that our capital expenditures
for fiscal 2004 will total approximately $200,000, primarily for the
acquisition of ATMs and related ATM installation costs. We lease 160 of our
ATMs under capital lease agreements that expire between 2002 and 2005 and
provide for lease payments at interest rates up to 10.5% per annum. See Note
4 to the Consolidated Financial Statements. We have the following payment
obligations under current financing and leasing arrangements:
Payments Due by Period
Less than 1-3 4-5 After
Total 1 year years years 5 years
-------------------------------------------------
Notes payable and commercial $ 248,805 $163,933 $ 84,872 $ 0 $0
paper
Capital lease obligations 474,217 319,652 154,565 0 0
Operating leases 521,832 312,934 178,047 30,851 0
---------- -------- -------- ------ ----
Total contractual cash
obligtions $1,244,854 $796,519 $417,484 $30,851 $0
========== ======== ======== ======= ====
Impact of Inflation and Changing Prices
While subject to inflation, we were not impacted by inflation during the
past two fiscal years in any material respect.
Trends
The following is a description of certain trends, events and
uncertainties that may affect our future financial results. Due to the
potential for change in factors associated with our business, it is
impossible to
-16-
predict or quantify future changes in our business, results of operations and
financial condition. See "-Cautionary Statement Concerning Forward-Looking
Statements."
Access to Vault Cash. During the fourth quarter of calendar year 2001,
two of our vault cash providers, both Humbolt Bank and Tehama Bank, suffered
significant losses as a result of vault cash theft unrelated to our network.
To reduce exposure, each bank made the determination to exit the business of
renting vault cash to ATM networks. In connection with this exit in December
2001, both banks gave us the required notice of their desire to terminate our
vault cash arrangement. Under the Tehama Bank arrangement we could rent up
to $3,000,000 in vault cash. Under the Humboldt Bank arrangement, we could
rent up to $1,000,000 in vault cash. Both arrangements terminated effective
as of March 1, 2002.
As of January 1, 2002, we increased our reliance for vault cash on
Wilmington Savings Fund Society ("WSFS"). We have renegotiated the rental
agreement to permit us to rent up to $5 million. Our prior agreement only
allowed us to rent up to $3 million in vault cash. All of the vault cash no
longer available from Tehama and Humboldt has been replaced with expansion of
our relationship with WSFS and Universal Funding.
Also in January 2002, Chart Bank reduced the amount of vault cash we
could rent under our arrangement from $5,000,000 to $1,000,000. This
reduction occurred partially because we generally use less than $1,000,000 of
the cash available under the Chart Bank arrangement and because we suffered
an increased loss in the third quarter of fiscal 2002.
Prior to the termination in March 2002 of the Tehama and Humboldt
arrangements, we had available $11.5 million in vault cash from five separate
banks. Following the termination, the increase in the WSFS rental limit, and
the addition of Horizon National Bank, we have available $9.0 million of
vault cash from three separate banks. Our reliance on WSFS is significant as
our arrangement with the bank accounts for approximately 56% of the available
vault cash received from the third party banks. While WSFS has indicated no
desire to reduce its commitment with us, it may do so at any time.
Loss of Clients. During fiscal year ended January 31, 2003, two
operators of combination convenience stores and gas stations, terminated
their relationship with us effective as of January 31, 2003. We had oral and
written relationships with these two operators for whom approximately 39 and
52 ATMs, respectively, were installed and operated at their store locations.
The aggregate revenues from these operators accounted for approximately 14%
and 10% of our revenues in fiscal year 2003 and 16% and 12% of our revenues
in fiscal year 2002.
During fiscal year ended January 31, 2003, ATM management servicing
contracts that we had with one of our banks expired. The Company lost the
contracts of two additional banks subsequent to January 31, 2003. A
competitor of ours that has the capability to provide both back office
services and ATM management services has taken over the ATM management
servicing for these banks. The aggregate revenues from these banks accounted
for approximately 8% of our revenues in fiscal year 2003.
Significant Relationships. As described under "DESCRIPTION OF
BUSINESS--Overview," the Company expanded its relationship with a large
discount retailer. This retailer has recently emerged from oversight by the
United States Bankruptcy Court. In addition, the written contract with the
operator of combination convenience stores for which the Company has placed
over 101 ATMs as of January 31, 2003, may be terminated by either party under
various circumstances.
Competition. Since April 1996, when national debt and credit card
organizations changed rules applicable to their members to permit the
imposition of surcharge fees, we have experienced increased competition, both
from existing ATM network operators and from new companies entering the
industry. As a result we have seen the loss of some banking clients and the
loss of two combination store and gas station operators.
-17-
We have been required to pay higher interchange and surcharge rebates to
certain ATM site owners and owners of ATMs in our network, as a result of
increased competition in the industry. These rebates increased during fiscal
2003 due to competitive pressures. A continuation of this trend could have a
material impact on our results of operations.
The amount of surcharge fee most commonly charged in the industry for
withdrawal transactions has recently increased from $1.50 per transaction to
$2.00 per transaction in certain markets. We plan to selectively pursue the
higher surcharge fee rates in markets which have demonstrated acceptance of
such rates, but do not anticipate pursuing these higher rates in all of our
markets.
Debit Cards. The use of debit cards by consumers has been growing.
Consumers use debit cards to make purchases from merchants, with the amount
of the purchase automatically deducted from the consumers' checking accounts.
An increasing number of merchants are accepting debit cards as a method of
payment, and are also permitting consumers to use the debit cards to obtain
cash. The increasing use of debit cards to obtain cash may reduce the number
of cash withdrawals from our ATMs, and may adversely affect our revenues from
surcharge fees. A continued increased in the use and acceptance of debit
cards could have a material adverse effect on our business, results of
operations and financial condition.
Decreased Liquidity. As a result of smaller increases in revenues,
increased expenses related to settlement of certain claims, increased
expansion of our ATM network, the loss of certain banking clients, and the
initial start-up period for new ATMs associated with our recent expansion
efforts, our liquidity has been reduced significantly. As the newly-placed
ATMs mature, such ATMs generally experience increased activity and generate
increased revenues. In addition, we have undertaken to increase revenues by
looking for opportunities to replace lost customers and to reduce our
expenses by streamlining and reducing workforce expenditures and
renegotiating vendor contracts. To provide additional liquidity, David
Bonsal, our CEO and Chairman of the Board, has signed a commitment letter
agreeing to maintain a $300,000 line of credit for our use if needed. The
amount of this line will be reduced each quarter by $25,000 if certain
conditions are met. Mr. Bonsal may also convert the line of credit into
common stock or subordinated debt. We believe that cash flow from operations
will be sufficient to fund operations. If cash flow from operations is not
sufficient to fund our operations, we may be required to seek additional
sources of financing to continue our operations.
Cautionary Statement Concerning Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-KSB that
are not statements of historical fact may constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act. These
statements are subject to risks and uncertainties, as described below.
Examples of forward-looking statements include, but are not limited to:
(i) projections of revenues, income or loss, earnings or loss per share,
capital expenditures, the payment or non-payment of dividends, capital
structure and other financial items, (ii) statements of plans and objectives
of our management or Board of Directors, including plans or objectives
relating to our products or services, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying the statements
described in (i), (ii) and (iii). Forward-looking statements can often be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "could," "intends," "plans," "estimates"
or "anticipates," variations thereof or similar expressions.
Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. Our future
results of operations, financial condition and business operations may differ
materially from those expressed in these forward-looking statements.
Investors are cautioned not to put undue reliance on any forward-looking
statement.
There are a number of factors that could cause actual results to differ
materially from those discussed in the forward-looking statements, including
those factors described below. Other factors not identified
-18-
herein could also have such an effect. Among the factors that could cause
actual results to differ materially from those discussed in the
forward-looking statements are the following:
o Changes in laws or card association rules affecting our ability to
impose surcharge fees, and continued customer willingness to pay
surcharge fees;
o Our ability to form new strategic relationships and maintain existing
relationships with issuers of credit cards and national and regional
card organizations;
o Our ability to expand our ATM base and transaction processing
business;
o The availability of financing at reasonable rates for vault cash and
for other corporate purposes, including funding our expansion plans;
o Our ability to maintain our existing relationships with an operator of
combination convenience stores and gas stations at which we maintain
101 ATMs as of January 31, 2003;
o Our ability to maintain our existing relationship with an operator of
retail stores at which we maintain 387 ATMs as of January 31, 2003;
o Our ability to keep our ATMs at other existing locations at reasonable
rental rates and to place additional ATMs in preferred locations at
reasonable rental rates;
o The extent and nature of competition from financial institutions,
credit card processors and third party operators, many of whom have
substantially greater resources;
o Our ability to maintain our ATMs and information systems technology
without significant system failures or breakdowns;
o Our ability to comply with regulatory requirements of FDIC, OCC and
FRB
o The extent of vault cash losses from certain ATMs funded by Universal
Funding Corporation, for which we do not maintain insurance;
o Our ability to develop new products and enhance existing products to
be offered through ATMs, and our ability to successfully market these
products;
o Our ability to identify suitable acquisition candidates, to finance
and complete acquisitions and to successfully integrate acquired
assets and businesses into existing operations;
o Our ability to retain senior management and other key personnel;
o Changes in general economic conditions.
Any forward-looking statement contained herein is made as of the date of
this document. We do not undertake to publicly update or correct any of
these forward-looking statements in the future.
-19-
Item 7. FINANCIAL STATEMENTS
Universal Money Centers, Inc.
January 31, 2003 and 2002
Contents
Independent Accountants' Report................................1
Consolidated Financial Statements
Balance Sheets...............................................2
Statements of Operations.....................................3
Statements of Stockholders' Equity...........................4
Statements of Cash Flows.....................................5
Notes to Financial Statements................................6
-20-
Independent Accountants' Report
Board of Directors
Universal Money Centers, Inc.
Mission, Kansas
We have audited the accompanying consolidated balance sheets of Universal
Money Centers, Inc. as of January 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Universal
Money Centers, Inc. as of January 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
BKD, LLP
Kansas City, Missouri
April 11, 2003, except for Note 2, as to which
the date is May 16, 2003
-21-
UNIVERSAL MONEY CENTERS, INC.
Consolidated Balance Sheets
January 31, 2003 and 2002
Assets
2003 2002
------------------------
Current Assets
Cash $ 164,267 $ 592,422
Accounts receivable - trade, net of
allowance;
2003 - $3,630; 2002 - $161,481 60,218 64,584
Note receivable - affiliate -- 139,715
Prepaid expenses and other 158,603 136,046
Interest receivable - affiliate 1,548 4,809
--------- ---------
Total current assets 384,636 937,576
--------- ---------
Property and Equipment, at cost
Equipment 6,078,938 5,528,686
Leasehold improvements 2,650 2,650
Vehicles 11,434 11,434
--------- ---------
6,093,022 5,542,770
Less accumulated depreciation 4,043,099 3,285,131
--------- ---------
2,049,923 2,257,639
--------- ---------
Other Assets
Prepaid rent 144,500 231,748
Other 30,266 34,266
--------- ---------
174,766 266,014
--------- ---------
$2,609,325 $3,461,229
========= ==========
-22-
See Notes to Consolidated Financial Statements
UNIVERSAL MONEY CENTERS, INC.
Consolidated Balance Sheets
January 31, 2003 and 2002
Liabilities and Stockholders' Equity
2003 2002
---------------------------
Current Liabilities
Current maturities of long-term debt and
capital lease obligations $ 455,773 $ 486,287
Accounts payable 1,037,961 817,840
Accounts payable - affiliates 88,679 248,364
Accrued expenses 166,410 306,203
---------- ----------
Total current liabilities 1,748,823 1,858,694
---------- ----------
Long-Term Debt and Capital Lease Obligations 232,671 680,191
---------- ----------
Stockholders' Equity
Common stock; no par value; $.01 stated value;
40,000,000 shares authorized; issued
January 31, 2003 and 2002-4,157,378 shares; 41,574 41,574
Additional paid-in capital 19,781,294 19,781,294
Retained earnings (deficit) (17,509,291) (17,238,216)
----------- -----------
2,313,577 2,584,652
Less treasury stock, at cost; common;
January 31, 2003-86,511 shares; January
31, 2002 - 27,916 shares (1,685,746) (1,662,308)
---------- ----------
Total stockholders' equity 627,831 922,344
---------- ----------
$ 2,609,325 $ 3,461,229
========== ==========
-23-
See Notes to Consolidated Financial Statements
UNIVERSAL MONEY CENTERS, INC.
Consolidated Statements of Operations
Years Ended January 31, 2003 and 2002
2003 2002
---------------------------
Net Revenues $ 8,686,464 $ 8,690,671
Cost of Revenues 7,296,181 7,231,541
---------- ----------
Gross Profit 1,390,283 1,459,130
Operating Expenses 1,717,097 1,908,338
---------- ----------
Operating Loss (326,814) (449,208)
---------- ----------
Other Income (Expense)
Interest income 31,550 84,710
Interest expense (96,055) (102,896)
Gain/(Loss) on disposal of property and
equipment (13,364) 4,645
Other income (expense) 133,608 (188,106)
---------- ----------
55,739 (201,647)
Loss before Income Taxes (271,075) (650,855)
Provision for Income Taxes -- 375,000
---------- ----------
Net Loss $ (271,075) $(1,025,855)
========== ==========
Basic and Diluted Loss Per Share $ (.066) $ (.252)
=========== ===========
Weighted Average Shares Outstanding 4,084,191 4,075,946
=========== ===========
-24-
See Notes to Consolidated Financial Statements
UNIVERSAL MONEY CENTERS, INC.
Consolidated Statements of Stockholders' Equity
Years Ended January 31, 2003 and 2002
Additional Retained
Common Paid-In Earnings Treasury
Stock Capital (Deficit) Stock Total
---------------------------------------------------------
Balance, February
1, 2001 $ 40,574 $19,742,294 $(16,212,361) $(1,662,308) $1,908,199
Net loss -- -- (1,025,855) -- 1,025,855)
Common stock
awards 1,000 39,000 -- -- 40,000
-------- ---------- ----------- ---------- ----------
Balance, January
31, 2002 41,574 19,781,294 (17,238,216 (1,662,308) 922,344
Net loss -- -- (271,075) -- (271,075)
Purchase of
58,595 shares
of common stock
for the treasury -- -- -- (23,438) (23,438)
-------- ---------- ----------- ---------- ----------
Balance, January
31, 2003 $ 41,574 $19,781,294 $(17,509,291 $(1,685,746) $ 627,831
======== ========== =========== ========== ==========
-25-
See Notes to Consolidated Financial Statements
UNIVERSAL MONEY CENTERS, INC.
Consolidated Statements of Cash Flows
Years Ended January 31, 2003 and 2002
2003 2002
---------------------------
Operating Activities
Net loss $ (271,075)$ (1,025,855)
Items not requiring (providing) cash
Depreciation and amortization 860,655 762,644
Gain (Loss) on disposal of property and
equipment 13,364 (4,645)
Deferred income taxes -- 375,000
Common stock issued as compensation -- 40,000
Changes in
Accounts receivable 7,627 212,739
Prepaid expenses and other (13,079) (244,092)
Accounts payable and accrued expenses (84,994) 579,238
---------- ----------
Net cash provided by operating
activities 512,498 695,029
---------- ----------
Investing Activities
Decrease in note receivable - affiliate 139,715 54,700
Purchase of property and equipment (562,395) (605,939)
Proceeds from sale of property and equipment -- 15,305
---------- ----------
Net cash used in investing activities (422,680) (535,934)
---------- ----------
Financing Activities
Principal payments under long-term debt and
capital lease obligations (494,535) (453,821)
Proceeds from issuance of long-term debt -- 306,900
Purchase of common stock for treasury (23,438) --
---------- ----------
Net cash used in financing activities (517,973) (146,921)
---------- ----------
Increase (Decrease) in Cash (428,155) 12,174
Cash, Beginning of Year 592,422 580,248
---------- ----------
Cash, End of Year $ 164,267 $ 592,422
========== ==========
Supplemental Cash Flows Information
Interest paid $ 96,055 $ 102,896
Capital lease obligations incurred for
equipment 16,501 --
Fixed assets purchased and included in
accounts payable 5,637 --
-26-
See Notes to Consolidated Financial Statements
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The Company is engaged primarily in providing network and switching
services for automated teller machines (ATMs). Fees are received from
the members of the Company's network as well as card users from other ATM
networks using the Company's network. The Company grants unsecured
credit to its customers. As of January 31, 2003 and 2002, the Company
had approximately 774 and 706 ATMs in the network, respectively.
Operating Segments
The Company conducts business under one primary operating segment:
operating and servicing of automated teller machines (ATMs). Revenues
are generated from surcharges, interchange fees and transaction
processing from ATMs located in 37 states with a concentration in
Missouri, Kansas and Maryland. The Company's major revenue source, which
exceeds 10% of revenues, is discussed in Note 9.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Restricted Cash
Included in cash is $78,082 and $40,335 at January 31, 2003 and 2002,
respectively, that is restricted under the terms of the Company vault
cash agreements with various financial institutions.
Accounts and Notes Receivable
Accounts receivable are stated at the amounts advanced/billed to
customers. The Company provides an allowance for doubtful accounts, which
is based upon a review of outstanding receivables, historical collection
information and existing economic conditions. Accounts receivable are
ordinarily due 30 days after the issuance of the invoice. Accounts past
due more than 120 days are considered delinquent. Delinquent receivables
are written off based on individual credit evaluation and specific
circumstances of the customer.
Notes receivable are stated at their outstanding principal amount.
Outstanding notes accrue interest based on the terms of the respective
note agreements.
-27-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
Property and Equipment
Property and equipment are depreciated over the estimated useful life of
each asset, primarily five to seven years. Annual depreciation is
computed using the straight-line method.
Principles of Consolidation
The consolidated financial statements include the accounts of Universal
Money Centers, Inc., and its wholly owned subsidiary, Electronic Funds
Transfer, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Income Taxes
Deferred income tax liabilities and assets are recognized for the tax
effects of differences between the financial statement and tax bases of
assets and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized.
Loss Per Share
Loss per share has been computed based upon the weighted average common
shares outstanding during each year.
Note 2: Management's Plan to Improve Results of Operations and Financial
Position
The Company has incurred losses for several years and currently has a
deficiency of working capital due to recurring net losses. Additionally,
as discussed in Note 9, contracts with two customers that account for
approximately 24% of fiscal 2003 revenues expired and were not renewed.
Management has been actively addressing these issues during fiscal 2003
and is pursuing several alternatives for further mitigating these
conditions during the next year. During fiscal 2003, the Company added
an additional 250 ATMs to its network principally by expanding its
relationship with a key customer. In addition, the Company has reduced
its number of employees by 10% and has eliminated certain overhead
expenses, which resulted in a $200,000 reduction in operating expenses
from fiscal 2002 to fiscal 2003. Subsequent to year-end, the Company has
instituted surcharge fee increases on ATM transactions at selective
locations. These locations accounted for approximately 35% of the
surcharged transactions in fiscal 2003. Management is continuing to
pursue alternatives to further enhance operations in fiscal 2003. These
include establishing additional ATM locations, and further reductions of
administrative overhead. In addition, the Company is exploring the
possibility of providing additional services through its existing ATM
network including the recharging of prepaid telephones among other
emerging technologies.
In addition, on May 16, fiscal 2003, the principal shareholder has
committed to provide the Company a $300,000 line of credit through April
30, 2003. The commitment contains provisions
-28-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
that the maximum availability on the line of credit will be reduced
during the year by the amount of equity infusions or certain long-term
debt. The commitment also provides that the line will be reduced
quarterly as long as the company maintains positive year to date cash
flows, as defined in the commitment.
Based on the above factors, management believes that the Company will
have sufficient liquidity to continue their operations at current levels
for the foreseeable future.
Note 3: Related Party Transactions
The chairman and chief executive officer (CEO), who is the largest
stockholder of the Company, is also the President and a stockholder of
Universal Funding Corporation (UFC). In addition, the other stockholder
of UFC is also a stockholder of the Company.
The Company and certain members of the Company's management extend loans
on an unsecured basis to UFC. UFC uses the proceeds from these loans to
provide vault cash to the ATMs. As of January 31, 2003 and 2002, the
balance of these loans was approximately $1,786,855 and $1,854,904 (with
$0 and $139,715 being due to the Company), respectively, with interest at
9% to 11% at January 31, 2003. During the years ended January 31, 2003
and 2002, the Company earned interest income of $29,851 and $81,298,
respectively, from loans to UFC.
The Company assumes the risks of theft or other shortages of cash from
the ATMs funded by UFC. As of January 31, 2003 and 2002, UFC had vault
cash obligations of approximately $2,200,000 (located in 157ATMs) and
$2,200,000 (located in 249 ATMs), respectively. During the years ended
January 31, 2003 and 2002, the Company incurred losses of $50,830 and
$40,419 from vault cash shortages.
The Company has the option to purchase UFC from its current stockholders
for approximately $165,000.
Note 4: Operating Leases
The Company leases various office space under noncancellable operating
leases which expire at various dates through August 2004. Rent expense
for office space for the years ended January 31, 2003 and 2002 was
$123,235 and $107,600, respectively.
The Company leases locations to place ATMs under noncancellable operating
leases that expire through March 2005. Total rent expense related to the
locations to place ATMs for the years ended January 31, 2003 and 2002 was
$143,132 and $144,292, respectively.
The Company has several agreements with banks to provide vault cash, on a
rental basis, for ATMs owned by the Company. Under the agreements, the
Company is required to pay a monthly service fee on the outstanding
amount equal to the prime rate of interest plus a specified percentage,
and additional fees as defined in the agreements. The lives of the
agreements range from one year to five years but may be terminated by
either the banks or the Company upon a sixty-day written notice. As of
January 31, 2003 and 2002, the Company was renting vault cash from these
-29-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
providers in the approximate amounts of $3,600,000 and $5,500,000,
respectively (see Note 9). The fees for the usage of such cash are
included in the accompanying consolidated financial statements in cost of
revenues and totaled $644,306 and $512,226 for the years ended January
31, 2003 and 2002, respectively.
Future minimum lease payments at January 31, 2003 are as follows:
2004 $ 312,934
2005 154,311
2006 23,736
2007 14,832
2008 16,019
-----------
Future minimum lease payments $ 521,832
===========
-30-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
Note 5: Long-Term Debt and Capital Lease Obligations
2003 2002
-----------------------
Installment notes payable (A) $ 12,406 $ 47,636
Capital lease obligations (B) 439,639 733,288
Installment notes payable (C) -- 10,570
Installment notes payable (D) 186,785 278,604
Installment notes payable (E) 49,614 96,380
----------- ---------
688,444 1,166,478
Less current maturities 455,773 486,287
----------- ---------
$ 232,671 $ 680,191
=========== =========
(A) Installment notes payable; due on demand; if no demand made, due at
various dates through May 2003; with interest at 10.5%; collateralized
by equipment and personally guaranteed by the Company's Chairman and
CEO.
(B) Capital leases covering ATMs and office equipment with monthly
payments through March 2005.
(C) Various installment notes payable; paid in full during the year ended
January 31, 2003; collateralized by equipment.
(D) Installment notes payable; due at various dates through October 2004;
with interest at 12%; collateralized by equipment.
(E) Installment notes payable; due at various dates through February 2004;
with interest at 10%; collateralized by equipment.
-31-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
Aggregate annual maturities of long-term debt and payments on capital
lease obligations at January 31, 2003 are as follows:
Long-Term
Debt
(Excluding Capital Lease
Leases) Obligations
---------------------------
2004 $ 163,933 $ 319,652
2005 84,872 148,670
2006 -- 5,895
---------- ----------
$ 248,805 474,217
==========
Less amount representing interest 34,578
----------
Present value of future minimum lease 439,639
payments
Less current maturities 291,840
----------
$ 147,799
==========
Property and equipment include the following property under capital leases:
2003 2002
---------------------------
Equipment cost $ 1,984,477 $ 1,979,732
Less accumulated depreciation 1,551,788 1,273,077
---------- ----------
$ 432,689 $ 706,655
========== ==========
As of January 31, 2003 and 2002, the carrying amount of long-term debt
approximated its fair value.
Note 6: Stock Transactions
During January 2001, the Company's Board approved restricted awards of
common stock to two key employees (50,000 shares each). The fair value
of the restricted common stock was approximately $40,000 at the grant
date. The shares vested in four equal installments at the end of each
calendar quarter of fiscal 2002. In connection with this incentive
compensation, the Company provided a cash bonus to the recipients to
offset their tax liability. Compensation expense was recognized by the
Company as the shares vested.
-32-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
Note 7: Income Taxes
The provision for income taxes includes these components:
2003 2002
---------------------------
Deferred income taxes $ (97,200) $ (265,000)
Change in deferred tax asset valuation
allowance 97,200 640,000
---------- ----------
Deferred tax provision $ 0 $ 375,000
========== ==========
A reconciliation of income expense at the statutory rate to the Company's
actual income tax expense is shown below:
2003 2002
---------------------------
Computed at the statutory rate (34%) $ (92,000) $ (221,000)
Increase (decrease) resulting from
Change in deferred tax asset valuation
allowance 97,200 593,000
Other (5,200) 3,000
---------- ----------
Actual tax provision $ 0 $ 375,000
========== ==========
The tax effects of temporary differences related to deferred taxes shown on
the consolidated balance sheets were:
2003 2002
---------------------------
Deferred tax assets
Allowance for doubtful accounts $ 1,400 $ 63,000
Net operating loss carryforwards 1,276,800 1,098,000
---------- ----------
1,278,200 1,161,000
Deferred tax liabilities
Property and equipment (228,000) (208,000)
---------- ----------
Net deferred tax asset before
valuation allowance 1,050,200 953,000
---------- ----------
Valuation allowance
Beginning balance (953,000) (313,000)
Decrease (increase) during the period (97,200) (593,000)
Expiration of tax credits charged
against allowance -- (47,000)
---------- ----------
Ending balance (1,050,200) (953,000)
---------- ----------
Net deferred tax asset $ 0 0
========== ==========
-33-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
As of January 31, 2003, the Company has unused operating loss
carryforwards of approximately $3,200,000, which expire between 2005 and
2022.
Note 8: Profit Sharing Plan
The Company sponsors a SIMPLE IRA profit sharing plan covering employees
with two years or more of service. Contributions are limited to 3% of
total compensation paid participants during the plan year. Contributions
to the Plan were $22,500 and $25,200 for 2003 and 2002, respectively.
Note 9: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America
require disclosure of certain significant estimates and current
vulnerabilities due to certain concentrations. Those matters include the
following:
Significant Agreements
The Company earned approximately 15% and 30% of its surcharging fees from
ATMs containing UFC's vault cash during the years ended January 31, 2003
and 2002, respectively. Currently, UFC obtains cash to fund its ATMs
primarily from short-term borrowings from various private investors,
including members of Universal Money Center's management and the
Company. UFC is uncertain if additional sources of cash would be
available if these notes were not renewed.
Additionally, the Company has an agreement with UFC, which provides for a
fee (or payment) from UFC for administrative services performed by the
Company. The fee or payment is equivalent to the net income (or loss) of
UFC (excluding depreciation, amortization and stockholder return on
original capital investment, which are treated as distributions). The
Company recorded expenses of $33,082 and $34,993 for the years ended
January 31, 2003 and 2002, respectively. As of January 31, 2003 and the
year then ended, UFC had total assets of approximately $2,550,000 and
annual revenues of approximately $690,000.
Significant Customers
The Company had relationships with two operators of combination
convenience stores and gas stations for whom approximately 91 and 95 ATMs
in 2003 and 2002, respectively, have been installed at their locations.
The aggregate revenues from these companies accounted for approximately
24% and 28% of the Company's revenues for 2003 and 2002, respectively.
The contracts with both companies have expired and will not be renewed
for future periods.
-34-
UNIVERSAL MONEY CENTERS, INC.
Notes to Consolidated Financial Statements
January 31, 2003 and 2002
The Company has relationships with a combination convenience store and
gas station retailer for whom approximately 101 and 100 ATMs, as of
January 31, 2003 and 2002, respectively, have been installed at their
locations. The revenues from this company accounted for approximately
14% and less than 1% of the Company's revenues for 2003 and 2002,
respectively. The contract extends through October 2006; however, the
contract can be terminated by either party under certain circumstances.
The Company has relationships with a nationwide discount retailer for
whom approximately 387 and 207 ATMs, as of January 31, 2003 and 2002,
respectively, have been installed at their locations. The revenues from
this company accounted for approximately 21% and 13% of the Company's
revenues for 2003 and 2002, respectively. The contract extends through
October 2005; however, the customer has the right to terminate the
agreement under certain circumstances.
Currently, the Company is permitted to charge a "surcharge" to users of
the Company's network who are members of other networks. Such surcharges
are being challenged at various governmental levels. Successful
litigation to eliminate these surcharges could have a material adverse
effect on the results of operations and financial condition of the
Company. During the years ended January 31, 2003 and 2002, the Company
recognized revenue of $6,029,903 and $5,543,317, respectively, from
surcharges.
Vault Cash Rental
At January 31, 2003, the Company had agreements that allowed it to rent
vault cash from four separate banks. The agreements expire at various
dates from August 2003 through September 2006.
Litigation
On June 5, 2000, a former officer and employee filed an action against
the Company in federal court for unpaid severance compensation and
issuance of common stock for past services rendered. In July 2000, the
Company issued 50,000 shares of common stock and recorded compensation
expense of $20,000 in response to this claim. The employee voluntarily
dismissed the action and re-filed it in state court in August 2000.
During the year ended January 31, 2003, this action was settled by the
Company purchasing all shares held by the former officer and recording
additional expenses of $48,000 as of January 31, 2002.
On March 2, 2001, a vault cash provider filed a claim against the Company
for $202,555, due to the provider's armored car service filing
bankruptcy. The armored car service was in possession of approximately
$200,000, which was destined for the Company's ATMs or picked up from
those ATMs. Such currency was provided by the Company's vault cash
provider. During the year ended January 31, 2002, the Company settled
this claim for approximately $188,000, which was recorded as other
expense in the year ended January 31, 2002. The Company is continuing to
pursue the armored car service and its insurance company for
reimbursement of this loss. During the year ended January 31, 2003, the
Company received $69,320 in reimbursements, which is included in the 2003
financial statements as other income.
-35-
UNIVERSAL MONEY CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2002 AND 2001
In June 2002, the Company received notice of a property tax assessment
with interest related to property taxes assessed between 1986 and 1989
totaling approximately $600,000. The Company disputes these charges and
believes it has reasonable defenses to the assessment.
Note 10: Future Changes in Accounting Principle
The FASB recently issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addressed accounting for
reorganization and similar costs. SFAS 146 requires that the liability
for costs associated with an exit or disposal activity be recognized when
the liability is incurred. SFAS 146 also establishes that the liability
should initially be measured and recorded at fair value. According,
SFAS 146 may affect timing of recognizing any future reorganization costs
as well as the amount recognized. The provisions of SFAS 146 are
effective for reorganization activities initiated after December 31,
2002. The adoption of this statement is not expected to have a material
impact on the financial statements.
The FASB recently adopted Interpretation No.(FIN) 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, effective for guarantees issued or
modified after December 15, 2002, and such disclosures are provided in
Notes 3 and 9. Recognition and measurement provisions of FIN 45 become
effective for guarantees issued after January 1, 2003. The impact on the
financial statements of the recognition and subsequent revisions of this
standard has not been determined.
The FASB recently adopted FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51.
Certain disclosure requirements for FIN 46 are effective for the year-end
January 31, 2003, and such disclosures are provided in Notes 3 and 9.
The Company plans to adopt the accounting provisions of FIN 46 for the
quarter ended July 31, 2003, and it is reasonably possible that the
Company will be required to consolidate UFC (see Note 3) as a result of
the adoption of this standard. However, the requirement to consolidate
UFC at the ultimate impact on the Company's financial statements has not
been determined.
-36-
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's accountants during the two
most recent fiscal years or any subsequent interim period.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors, executive officers and beneficial owners of more than ten
percent of our common stock to file reports of beneficial ownership and
reports of changes in beneficial ownership with the Securities and Exchange
Commission and to provide us copies. Based solely upon a review of the
copies of such reports provided to us and written representations from
directors and executive officers, we believe that all applicable Section
16(a) filing requirements for fiscal 2003 have been met.
Item 10. EXECUTIVE COMPENSATION
The information included under the captions entitled "Election of
Directors", "Security Ownership of Certain Beneficial Owners and Management"
and "Executive Compensation" and "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A with respect to its 2003 annual
meeting of shareholders, is incorporated into Item 10 by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information included under the captions entitled "Election of
Directors", "Security Ownership of Certain Beneficial Owners and Management"
and "Executive Compensation" and "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A with respect to its 2003 annual
meeting of shareholders, is incorporated into Item 11 by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the captions entitled "Election of
Directors", "Security Ownership of Certain Beneficial Owners and Management"
and "Executive Compensation" and "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be filed with
the Commission pursuant to Regulation 14A with respect to its 2003 annual
meeting of shareholders, is incorporated into Item 12 by reference.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by this item are listed in the Index to
Exhibits set forth at the end of this Form 10-KSB.
-37-
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended January 31, 2003.
Item 14. CONTROLS AND PROCEDURES
Based on an evaluation of disclosure controls and procedures for the
period ended January 31, 2003, conducted by our Chief Executive Officer and
Corporate Controller, we conclude that our disclosure controls and procedures
are effective. Our Chief Executive Officer and Corporate Controller
conducted this evaluation in January 28, 2003.
The Company has in place a system of internal controls which it believes
are adequate. There have been no significant deficiencies or material
weaknesses identified and we have not made any significant changes in our
internal controls or in other factors that could significantly affect
internal controls.
-38-
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL MONEY CENTERS, INC.
/s/ David S. Bonsal
------------------------------
David S. Bonsal
Chairman of the Board
and Chief Executive Officer
Dated: May 16, 2003
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/David S. Bonsal Chairman of the Board, Chief May 16, 2003
- ----------------------- Executive Officer and Director
David S. Bonsal (Principal Executive Officer)
/s/Christopher D. Greek Corporate Controller May 16, 2003
- ----------------------- (Principal Financial and
Christopher D. Greek Accounting Officer)
*/s/Jeffrey M. Sperry Director May 16, 2003
- ------------------------
Jeffrey M. Sperry
*/s/Arthur M. Moglowsky Director May 16, 2003
- ------------------------
Arthur M. Moglowsky
*By: /s/David S. Bonsal
--------------------
David S. Bonsal
Attorney-in-fact
-39-
Corporate Directory
DIRECTORS GENERAL CORPORATE DATA
David S. Bonsal Special Legal Counsel
Chairman of the Board Stinson Morrison Hecker LLP
And Chief Executive Officer 2600 Grand Ave.
Universal Money Centers, Inc. Kansas City, MO 64108
Arthur M. Moglowsky Auditors
Attorney BKD LLP
Bass & Moglowsky S.C. 12 Wyandotte Plaza
Milwaukee, Wisconsin 120 W. 12th Street, Suite 1200
Kansas City, MO 64105
Jeffrey M. Sperry Stock Transfer Agent
President U.S. Stock Transfer Corporation
CB Richard Ellis 1745 Gardena Ave.
Albany, New York Glendale, California 91204
Real estate company
Corporate Headquarters
6800 Squibb Road
Mission, KS 66202
Telephone: (913) 831-2055
OFFICERS
David S. Bonsal FORM 10-KSB
Chairman of the Board
and Chief Executive Officer A copy of the Company's Annual
Report on Form 10-KSB for the
Pamela A. Glenn fiscal year ended January 31,
Senior Vice President 2003, filed with the Securities
And and Exchange Commission, may
Secretary obtained without charge by
writing:
Christopher D. Greek
Corporate Controller
Universal Money Centers, Inc.
6800 Squibb Road
Mission, KS 66202