[BUYERS UNITED LOGO]
2003 ANNUAL REPORT
TO STOCKHOLDERS
UCN(TM)
Intelligence By-The-Minute(TM)
TABLE OF CONTENTS
Section Page No.
Letter to Stockholders 1
Our Company 3
Market for Common Equity and Related Stockholder Matters 4
Summary Consolidated Financial Information 5
Managements Discussion and Analysis of Financial Condition
and Results of Operations 5
Financial Statements F-1
[BUYERS UNITED LOGO]
May 5, 2004
Dear Fellow Shareholders:
Last year was an exciting one for your company. In each of the last
three years, we have doubled revenue. And the growth in net income (before
preferred dividends) has almost quadrupled in the last year alone. With revenues
over $60 million, we will not be able to maintain that torrid pace, but we will
continue to grow while at the same time transitioning from a commodity reseller
of plain-vanilla long distance to a developer and marketer of enhanced
telecommunication services to the huge contact center market. Consistent with
this change of direction, we are asking you to approve a change in our name from
Buyers United to UCN, which are the initials of United Carrier Networks. UCN is
the name of our commercial division, and the change in our corporate name
signals our de-emphasis of the residential market. This transition began in mid
2003 and in October we acquired the exclusive rights to a software technology
that allows small and medium size contact centers to realize operational tools
and efficiencies that in the past only large enterprises were able to achieve
and then only with the expenditure of millions of dollars. By superimposing the
software on to our national Voice over IP network, which Buyers United acquired
from I-Link in December, 2002, we are able to provide enhanced
telecommunications services at a fraction of the traditional cost for such
services.
Selling these services takes longer than selling conventional long
distance and involves training the sales force to be able to demonstrate the
unique features that the software can provide. We have, therefore, established a
training curriculum for our various sales channels. Because of the skills
required, we have begun developing a partner agent program to gain more direct
control over our sales and have hired a seasoned telecom executive to head this
effort. We are also developing a new sales channel, VAR or valued added
reseller, which will leverage our own sales force. It will take time and up
front expenses to realize the benefits. All of these changes will initially slow
our growth and profit generation, but we believe the process will establish a
sound foundation for substantial future revenue growth at improved margins.
Last year we initiated a $1 million capital expenditure program to
improve the quality of our Voice over IP network and to reduce the cost of our
services. On March 11 we announced that we raised $8.7 million in the equity
market. These monies will be used to expand our marketing and sales effort,
further enhance our network, improve our balance sheet, and provide the working
capital to fund our growth.
We have tested market acceptance of the enhanced services made
available by the software technology and the response has been outstanding. In
February 2004 our new contact center products received recognition by winning
the Best of Show award at the Call Center Demo show in Dallas, and in March 2004
we received the Best in Show award at the INTERNET TELEPHONY Conference and EXPO
in Miami.
I am pleased with the progress shown by our management and the new
talent we have attracted in 2003. I have been grooming my replacement, Paul
Jarman, who has done an outstanding job as your
1
president and will recommend him to the board as our next Chief Executive
Officer before the end of the year.
On the financial side, our outside auditors for the first time in our
history have eliminated the going concern qualification in its report on our
2003 financial statements. Our Series A and Series B Preferred Stock provides an
8% dividend. A number of investors have converted their preferred stock to
common stock and, therefore, no longer receive dividends. The remainder can be
converted at the option of the Company when the common shares trade at or above
$4.00 per share, but in any case can be redeemed at the Companys election for
the equivalent of $2.00 per share of common stock any time commencing January 1,
2005. We will consider effecting one of these options should the opportunity
arise and we have the resources necessary to do so. Conversion of these
preferred shares to common with the resulting elimination of dividends would
directly improve our bottom line.
In our proxy statement we are asking you to approve an employee stock
purchase plan. I am a strong believer in our employees having an equity stake in
the Company and this plan provides a cost effective mechanism to achieve this
goal with our employees.
We now have assembled a great staff, added experienced management, and
obtained funding. Together with a great product and platform, we are ready to
launch a new era and are very excited at the prospects.
Thank you for your continued interest in our Company.
Sincerely,
/s/ Theodore Stern
Theodore Stern
Chairman and CEO
Buyers United, Inc.
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OUR COMPANY
Buyers United, Inc. is a telecommunications company that offers a wide
range of long distance, toll free, data transmission, and related communication
service options at competitive prices, and provides to its customers a standard
of service it believes is comparable to other industry participants. The
telecommunications services we offer include the following:
o Switched long distance services to business and residential
customers
o Dedicated access long distance service
o Toll-free 800/888/877/866 services
o Dedicated data transmission
o Private line data services
o Calling card services
o Conference calling
o Automatic call distribution
o Interactive voice response
o Outbound dialing and voice message broadcasting
o Fax to email
o Voice mail
o Real time account management
These services can be offered individually, or in a suite of services
tailored to a customers needs. During 2003 we acquired and integrated into our
operations a voice over Internet protocol network (VoIP Network) that enables us
to offer a number of services in the form of software solutions that are
delivered through our VoIP Network.
For the past eight years Buyers United has been engaged in the business
of reselling telecommunication services provided by others to Buyers United at
wholesale rates. Domestic long distance services make up a major portion of our
sales with the other services listed above making smaller contributions to our
sales mix.
Buyers United now services approximately 150,000 business and
residential consumers across America. We have refined our business model over
the past several years to address specific niche opportunities in the vast
communications industry. Our brand, United Carrier Networks (UCN), was adopted
in the last quarter of 2001 for providing our services to business customers. We
previously used the brand name BuyersOnline to service residential customers.
Buyers United is now marketing its services primarily through
independent agents to business customers. Our UCN web site supports the
marketing effort of our agents by providing a resource for exploring and
selecting the specialized services and options we offer business customers.
During the past year we acquired both business and residential customers by
purchase from other providers and may consider opportunities for additional
purchases in the future, although at the present time we are not considering any
purchase opportunities.
Buyers United was originally formed as a Utah corporation in 1994. In
March 1999, Buyers United changed its corporate domicile from Utah to Delaware
through a merger with a Delaware corporation formed for that purpose. When we
changed the corporate domicile our name became BUI, Inc., and we effected a
1-for-4 reverse split in the issued and outstanding common stock. On April 20,
2000, we changed our name to BuyersOnline.com, Inc., and on November 20, 2001,
our name was changed again to Buyers United, Inc.
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Recent developments
In March 2004 Buyers United sold 3,782,000 shares of common stock at
$2.30 per share, or a total of approximately $8.7 million, in a private
placement to institutional and accredited investors. Net proceeds of the
offering after placement fees and expenses were approximately $8.1 million. The
net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, funding
further development of our VoIP Network, improving our balance sheet, and for
working capital and other general corporate purposes. Buyers United registered
the shares under the Securities Act of 1933 to permit the investors to resell
the shares.
In December 2002, Buyers United entered into an agreement to purchase
assets of Acceris Communications Inc. (formerly I-Link, Inc.) and its
subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by Acceris, all of which comprise the VoIP Network we now own and
operate. The transaction was closed in May 2003, with several outstanding
accounts to reconcile. The assets acquired include dedicated equipment required
for operating the VoIP Network, customers of I-Link Communications serviced
through the network, carrier identification codes, and certain trademarks. In
consideration for the assets and software license, Buyers United issued to
Acceris 300,000 shares of Series B Convertible Preferred Stock. This preferred
stock was converted to 1,500,000 common shares in March 2004 pursuant to an
agreement with Acceris that resolved the open account issues, allowed Acceris to
sell 750,000 of the converted common shares to the same investors that purchased
Buyers United common stock in March 2004, and granted to Acceris the right to
register its shares with the March 2004 investors.
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. Closing of the acquisition was subject to complying with applicable
federal and state regulation pertaining to transfer of the customers. All of the
regulatory requirements were satisfied and the acquisition of the customers is
completed.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Buyers United trades in the over-the-counter
market. The following table sets forth for the respective periods indicated the
prices of the common stock in the over-the-counter market, as reported and
summarized on the OTC Bulletin Board. Such prices are based on inter-dealer bid
and ask prices, without markup, markdown, commissions, or adjustments and may
not represent actual transactions.
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ------------ -----------
March 31, 2002 1.30 0.61
June 30, 2002 2.00 1.10
September 30, 2002 1.93 1.30
December 31, 2002 2.00 1.25
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ------------ -----------
March 31, 2003 2.45 1.52
June 30, 2003 2.22 1.20
September 30, 2003 2.95 1.71
December 31, 2003 3.05 2.00
Since inception, no dividends have been paid on the common stock.
Buyers United intends to retain any earnings for use in its business activities,
so it is not expected that any dividends on the common
4
stock will be declared and paid in the foreseeable future. As of March 15, 2004,
there were outstanding 1,827,500 shares of Series A Convertible Preferred Stock
and 420,300 shares of Series B Convertible Preferred Stock. Under the terms of
this preferred stock, Buyers United cannot make any distributions on its common
stock without the approval of a majority of the preferred stockholders. At March
15, 2004, there were approximately 4,250 holders of record of the common stock.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information is qualified
by reference to the financial statements of Buyers United included elsewhere in
this report.
Statements of Operations Data Years ended December 31,
----------------------------- ------------------------
2003 2002
-------------- --------------
Revenues $ 63,312,964 $ 30,163,450
Operating expenses:
Costs of revenues 34,597,486 16,295,201
General and administrative 14,830,565 7,365,569
Selling and promotion 10,839,529 4,646,029
-------------- -------------
Income from operations 3,045,384 1,856,651
Other income (expense):
Interest income 13,513 17,980
Interest expense (1,884,258) (1,544,448)
-------------- -------------
Net income $ 1,174,639 $ 330,183
Preferred stock dividends (873,495) (749,725)
-------------- -------------
Net income (loss) applicable
to common stockholders $ 301,144 $ (419,542)
============== =============
Net income (loss) per common share:
Basic $ 0.05 $ (0.07)
Diluted $ 0.04 $ (0.07)
Balance Sheet Data As of December 31,
------------------
2003 2002
-------------- --------------
Working capital deficit $ (11,921,235) $ (7,276,814)
Total assets $ 23,971,158 $ 13,144,948
Long-term debt and capital lease obligations $ 646,126 $ 3,887,803
Stockholders deficit $ (1,627,250) $ (5,463,114)
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Buyers United is a domestic telecommunications company that offers and
sells a wide range of long distance and related communication services to
business and residential customers. In the past we functioned as an aggregator
and reseller of telecommunications services provided by others. We intend to
continue to pursue and develop this type of business. However, in December 2002
Buyers United entered into agreements to purchase and manage assets of Acceris
Communications Inc. (formerly I-Link, Inc.)
5
and its subsidiary, I-Link Communications, Inc., and license in perpetuity
software developed by I-Link for the operation of a Voice over Internet Protocol
communications network (VoIP Network). We closed the transactions in May 2003.
With these newly acquired assets we can now develop and offer as a provider
enhanced services, such as fax to email, and transmit data and other
communication services for a portion of the journey over our VoIP Network rather
than entirely through third party providers. In October 2003, Buyers United
acquired the exclusive right to sell and manage the enhanced telecommunications
functions of MyACD, Inc. with a one-year option to purchase it at a price of
approximately $6.8 million. With the MyACD technology we can offer a new product
approach that combines our national VoIP Network with on-demand proprietary
telephony software for contact handling/management applications. We are changing
the way mission critical applications are delivered and priced for the contact
center marketplace, or for any business or department seeking to improve how it
manages the productivity and quality of its customer contact opportunities.
In December 2002, Buyers United also entered into an agreement with
Touch America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
we amended the purchase agreement to acquire additional switched voice and
dedicated telecommunications customers and correct discrepancies in the list of
customers originally purchased in December 2002. The total purchase price was
$6.5 million. Buyers United made an initial payment of $3.0 million to Touch
America in December 2002 and has made additional cash payments totaling $3.4
million through March 4, 2004. The balance of $93,988 is expected to be paid in
April 2004.
During August 2003, Buyers United purchased approximately 12,000 long
distance customers from Glyphics Communications, Inc. for $543,558.
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. Closing of the acquisition was subject to complying with applicable
federal and state regulation pertaining to transfer of the customers. All of the
regulatory requirements were satisfied and the acquisition of the customers is
completed
We generate internal growth by pursuing multiple marketing avenues,
including using independent agents, marketing through the Internet, and selling
through our direct sales force. We intend to expand and develop our direct sales
force and value-added reseller programs during 2004. Our purchase of
telecommunication customers of Touch America resulted in a significant increase
in our customer base during 2003. We believe continuing financial difficulties
and uncertainty in the telecommunications industry may result in opportunities
to acquire customers from unrelated companies, such as our recent February 2004
purchase of dedicated long-distance customers from Source Communications, and we
intend to remain open to these opportunities. However, at the present we are not
evaluating any new acquisitions.
Results of operations
Revenues
For the year ended December 31, 2003 revenues increased to $63.3
million, a 110 percent increase compared to revenues for the year ended December
31, 2002 of $30.2 million. While a significant portion of the increase in
revenue is due to the acquisition of customer accounts, we also generated growth
internally from ongoing promotional efforts, primarily involving independent
agents.
6
For the year ended December 31, 2002, revenues increased 110 percent to
$30.2 million as compared to $14.3 million for the year ended December 31, 2001.
The change was due to a substantial increase in our customer base. These new
customers were generated through independent sales agents and referrals from
unrelated Internet marketing companies.
Costs of revenues
Costs of revenues for the year ended December 31, 2003 increased to
$34.6 million, a 112 percent increase as compared to $16.3 million for the year
ended December 31, 2002. As a percentage of revenue, costs increased to 54.6
percent in 2003 compared to 54.0 percent for same period in 2002. The decrease
in gross margin for the year ended December 31, 2003 as compared to the previous
year is the result of costs related to an increase in customers using dedicated
circuit services. This type of service typically has lower profit margins, but
higher volumes, than other types of long distance services. Also contributing to
a lower gross margin was the combination of costs related to integration efforts
involved in the I-Link acquisition and higher costs of Touch America customers.
Buyers United agreed with Touch America on certain wholesale prices during a
phase-in period after acquiring the customers. However, Buyers United
immediately began switching new customers over to other lower-cost wholesale
providers. The higher Touch America costs were offset slightly by a decrease in
other costs for long-distance minutes.
Costs of revenues for the year ended December 31, 2002 were $16.3
million, or 54 percent of revenue, as compared to costs of $9.3 million, or 65
percent of revenue, for the year ended December 31, 2001. During 2002, Buyers
United increased volume and new customer sign-ups with two of our largest
long-distance wholesale carriers resulting in decreased rates for long-distance
minutes and an increase in gross margin for the year.
General and administrative
General and administrative costs for the year ended December 31, 2003
increased 101 percent to $14.8 million compared to $7.4 million for the year
ended December 31, 2002. The increase in costs is due to expenses required to
support Buyers Uniteds significant revenue growth, and costs associated with the
I-Link, Touch America and the MyACD transactions. To meet the needs of increased
revenue levels we hired additional customer service and collection personnel. In
addition, several employees of I-Link were retained by Buyers United in order to
effectively maintain the VoIP Network, as well as provide customer support and
billing services. Buyers United also assumed certain office lease obligations of
I-Link, which resulted in additional occupancy expenses.
General and administrative expenses for the year ended December 31,
2002 increased 20 percent to $7.4 million or 24 percent of revenue as compared
to $6.1 million or 43 percent of revenue for the year ended December 31, 2001.
The increase resulted from increases in bad debt expense, customer service and
support expenses and billing costs, all incidental to the increase in revenue.
These increases were offset by decreased costs of maintenance and depreciation
expense from the termination of high-cost equipment leases and the write-off of
obsolete web-site development costs during 2001.
Selling and promotion
Selling and promotion expenses increased 133 percent to $10.8 million
or 17 percent of revenue for the year ended December 31, 2003 compared to $4.6
million or 15 percent of revenue for the year ended December 31, 2002. The
increase resulted from higher commissions paid on increased revenue. Selling and
promotion
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costs for 2003 include higher amortization expenses associated with the customer
lists acquired during 2003.
Selling and promotion expenses for the year ended December 31, 2002
were $4.6 million or 15 percent of revenue, an increase of 40 percent over the
prior year's expenses of $3.3 million or 23 percent of revenue. The increase was
the result of higher expenses for sales commissions, sales support staff, and
the amortization of deferred customer referral fees. These increases were
directly related to the increase in revenue during the 2002 year.
Other income (expense)
Interest expense for the year ended December 31, 2003 was $1.9 million
compared to $1.5 million for the comparative period in 2002. The increase in
interest expense was the result of higher debt balances outstanding throughout
2003 compared to 2002.
Interest expense for 2002 was $1.5 million as compared to $997,882 for
2001, an increase of 55 percent. The increase is attributable to the significant
amount of additional debt financing Buyers United had outstanding throughout
2002, which we raised to fund operations and an online marketing opportunity
with an unrelated Internet marketing company.
Liquidity and capital resources
Buyers Uniteds current ratio as of December 31, 2003 increased slightly
to 0.52:1 from 0.51:1 at December 31, 2002. The components of current assets and
current liabilities that changed significantly since the end of 2002 were cash,
accounts receivable, line of credit, the current portion of long-term debt, and
accrued liabilities.
The increase in cash and the line of credit was the result of a
significant draw against the line of credit that took place during the last week
of December 2003. Accounts receivable, accrued commission and rebates, accrued
liabilities, and accounts payable all increased as a result of higher revenues
reported during 2003 as compared to the same period in 2002. Accrued dividends
increased as a result of the additional shares of preferred stock issued to
I-Link, Inc. in connection with completing the acquisition of the VoIP Network.
The current portion of long-term debt increased $1.7 million or 28
percent, due to several long-term notes maturing and becoming due and payable in
2004. The long-term portion of notes payable decreased by $3.2 million due to
the net effect of the following items:
o Ongoing payments on acquisition notes.
o The partial payoff and replacement of a $1.1 million promissory
note, previously due February 28, 2003. Buyers United retired the
note payable by paying $250,000 in cash and issuing a new promissory
note for $800,000. In addition, Buyers United issued 50,000 shares
of common stock in connection with the original agreement. The new
note is unsecured and bears interest at ten percent, payable
monthly. Principal is also payable monthly based on 20 percent of
billings during each monthly billing period from designated
customers.
o In January and February 2003, Buyers United received $500,000 from
the issuance of promissory notes payable, $400,000 of which came
from three Directors of Buyers
8
United. The unsecured notes bear interest at 12 percent and are due
in 2004 through early 2005.
o In May and June 2003, Buyers United received $500,000 from the
issuance of promissory notes payable. The notes are secured by
computer and telecommunications equipment, bear interest at 12
percent, and are due in May and June 2006.
o During June 2003, the Company initiated a program to repurchase
outstanding common stock from shareholders of record with total
holdings of 100 or fewer shares. The offering price per share was
$1.75. The program ended in September 2003 after the Company had
repurchased 2,774 shares.
o In June 2003 Buyers United issued $1.4 million in promissory notes
for cash used primarily for purchasing customers from Touch America.
The notes are unsecured and bear interest at ten percent, with
principal and interest payable monthly. The principal paid each
month equals approximately 20 percent of billings collected during
each monthly billing period from the acquired Touch America
customers. After all principal is repaid, note holders will continue
to receive approximately ten percent of such collected billings.
There was a five percent commission paid to the sales agent in
connection with the issuance of the notes.
Buyers United has a line of credit agreement with RFC Capital
Corporation that expires in January 2006. The available borrowing limit is $5.0
million. Interest accrues at prime plus three percent, which was 7.00 percent as
of December 31, 2003. During 2002, the interest rate on the line was prime plus
six percent, which was 10.25 percent as of December 31, 2002. The facility
allows the Company to obtain financing on its eligible accounts receivable,
including unbilled receivables and regular monthly billings. The facility is
collateralized by the underlying receivables. On December 31, 2003, Buyers
United had financed the maximum amount available based on eligible accounts
receivable at that time. This amount, less draws by RFC applied against the
outstanding amount, aggregated $4.1 million. The facility requires Buyers United
to maintain a restricted cash account for the collection of the receivables. As
of December 31, 2003, Buyers United had $1.2 million of restricted cash
associated with the RFC arrangement.
On September 10, 2003, Buyers United filed a registration statement on
Form SB-2 with the Securities and Exchange Commission to register for resale up
to approximately 8.8 million shares of common stock underlying outstanding
warrants, options and convertible debt. During 2003, investors exercised
warrants to purchase 522,500 shares of common stock providing cash to the
Company of approximately $1.0 million. In March 2004 the registration statement
was temporarily suspended until the Company can file an amendment updating the
registration statement with its 2003 audited financial statements and other
information.
On March 15, 2004, Buyers United sold 3,782,000 shares of common stock
at $2.30 per share, or a total of approximately $8.7 million. Net proceeds of
the offering after placement fees and expenses are approximately $8.1 million.
The net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, funding
further development of our VoIP Network, reducing debt, and for working capital
and other general corporate purposes.
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The following table sets forth our capitalization as of December 31,
2003, and as adjusted to give effect to:
o Receipt of the estimated net proceeds from our private placement of
3,782,000 shares of common stock at $2.30 per share; and
o Conversion of 300,000 shares of Series B Convertible Preferred Stock
by Acceris Communications, Inc.
December 31,
2003 As Adjusted (1)
------------- -------------
Stockholders equity (deficit):
Preferred stock, $0.0001 par value; 15,000,000
shares authorized
Series A 8% cumulative preferred stock:
1,865,000 shares issued and outstanding
(liquidation value of $3,730,000) $ 187 $ 187
Series B 8% cumulative preferred stock:
721,729 shares issued and outstanding
(liquidation value of $7,217,290); as
adjusted, 421,729 shares issued and
outstanding, (liquidation value of
$4,217,290) 72 42
Common stock, $0.0001 par value, 100,000,000
shares authorized;
7,604,584 shares issued and outstanding;
as adjusted, 12,886,584 shares issued
and outstanding 760 1,288
Additional paid in capital 20,193,148 28,295,023
Warrants and options outstanding 3,928,110 3,928,110
Accumulated deficit (25,749,527) (25,749,527)
------------- -------------
Total stockholders equity (deficit) $ (1,627,250) $ 6,475,123
============= =============
----------------------------
(1) The adjusted figures do not give effect to the issuance of up to 7,972,583
additional common shares on exercise or conversion of outstanding warrants,
options, and convertible notes that are registered for sale by the holders
under a registration statement filed with the Securities and Exchange
Commission, up to 1,600,476 shares underlying other warrants and options, up
to 150,000 shares reserved for issuance on conversion of other outstanding
notes, or up to 3,973,645 shares issuable on conversion of outstanding
preferred stock.
Critical accounting policies and estimates
Revenue Recognition: Buyers United's revenue recognition policy with
respect to reseller agreements is to record gross revenues and receivables from
customers when Buyers United acts as principal in the transaction; takes title
to the products or services; and has risks and rewards of ownership, such as
risk of loss for collection, delivery, or returns. Revenues from sales of
services are recognized upon providing the services to the customers.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts
receivable is comprised of amounts billed and billable to customers, net of an
allowance for
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uncollectible amounts. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
Property and Equipment: Property and equipment are stated at cost.
Major additions and improvements are capitalized, while minor repairs and
maintenance costs are expensed when incurred. In accordance with Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," Buyers United capitalizes certain costs incurred for
the development of internal use software. These costs include the costs
associated with coding, software configuration, upgrades, and enhancements.
Advertising Costs: Buyers United advertises its services through
traditional venues such as print media to the general public. Costs associated
with these advertising efforts are expensed as incurred.
Forward-looking statements
The Private Securities Litigation Reform Act of 1985 provides a safe
harbor for forward-looking statements made by Buyers United. All statements,
other than statements of historical fact, which address activities, actions,
goals, prospects, or new developments that Buyers United expects or anticipates
will or may occur in the future, including such things as expansion and growth
of its operations and other such matters are forward-looking statements. Any one
or a combination of factors could materially affect Buyers Uniteds operations
and financial condition. These factors include the availability of capital,
competitive pressures, success or failure of marketing programs, changes in
pricing and availability of services and products offered to members, legal and
regulatory initiatives affecting long distance service, and conditions in the
capital markets. Forward-looking statements made by Buyers United are based on
knowledge of its business and the environment in which it operates as of the
date of this report. Because of the factors listed above, as well as other
factors beyond its control, actual results may differ from those in the
forward-looking statements.
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BUYERS UNITED, INC. AND SUBSIDIARY
Consolidated Financial Statements
TABLE OF CONTENTS
Report of Independent Auditors ......................................... F - 2
Consolidated Balance Sheet.............................................. F - 3
Consolidated Statements of Operations .................................. F - 4
Consolidated Statements of Stockholders' Deficit ....................... F - 5
Consolidated Statements of Cash Flows .................................. F - 7
Notes to Consolidated Financial Statements ............................. F - 9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Buyers United, Inc. and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Buyers United,
Inc. and Subsidiary as of December 31, 2003 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended December 31, 2003. 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 Buyers United, Inc.
and Subsidiary as of December 31, 2003 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 11, 2004, except for Note 14
as to which the date is March 15, 2004
F-2
BUYERS UNITED, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,055,384
Restricted cash 1,569,336
Accounts receivable, net of allowance for uncollectible
accounts of $2,931,000 8,162,483
Other current assets 243,844
------------
Total current assets 13,031,047
Property and equipment, net 2,424,642
Intangible assets, net 8,018,682
Other assets 496,787
------------
Total assets $ 23,971,158
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 4,093,782
Current portion of long-term debt and capital lease obligations 7,781,484
Accounts payable 11,248,152
Accrued liabilities 1,828,864
------------
Total current liabilities 24,952,282
Long-term debt and capital lease obligations 646,126
------------
Total liabilities 25,598,408
Stockholders' deficit:
Preferred stock, $0.0001 par value, 15,000,000 shares authorized;
Series A 8% cumulative convertible preferred stock; 1,865,000
shares issued and outstanding (liquidation value of $3,730,000) 187
Series B 8% cumulative convertible preferred stock; 721,729
shares issued and outstanding (liquidation value of $7,217,290) 72
Common stock, $0.0001 par value; 100,000,000 shares authorized;
7,604,584 shares issued and outstanding 760
Additional paid-in capital 20,193,148
Warrants and options outstanding 3,928,110
Accumulated deficit (25,749,527)
------------
Total stockholders' deficit (1,627,250)
------------
Total liabilities and stockholders' deficit $ 23,971,158
============
See accompanying notes
F-3
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------
2003 2002
Revenues $ 63,312,964 $ 30,163,450
Operating expenses:
Costs of revenues 34,597,486 16,295,201
General and administrative 14,830,565 7,365,569
Selling and promotion 10,839,529 4,646,029
--------------------------
Total operating expenses 60,267,580 28,306,799
--------------------------
Income from operations 3,045,384 1,856,651
Other income (expense):
Interest income 13,513 17,980
Interest expense (1,884,258) (1,544,448)
--------------------------
Total other expense, net (1,870,745) (1,526,468)
--------------------------
Net income $ 1,174,639 $ 330,183
8% Preferred dividends on Series A and B preferred
stock (873,495) (749,725)
--------------------------
Net income (loss) applicable to common
stockholders $ 301,144 $ (419,542)
==========================
Net income (loss) per common share:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Weighted average common shares outstanding:
Basic 6,378,047 5,740,811
Diluted 6,847,646 5,740,811
See accompanying notes
F-4
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Preferred Stock Common Stock Additional
----------------- ----------------- Paid-in
Shares Amount Shares Amount Capital
--------- ------ --------- ------ -----------
Balance at December 31, 2001 2,433,800 $ 244 5,312,629 $ 531 $15,190,855
Conversion of preferred shares to common (15,000) (2) 55,000 6 (4)
Issuance of common shares in connection with notes payable - - 17,998 2 18,796
Issuance of warrants for services and with consulting agreements - - - - -
Amortization of deferred consulting fees - - - - -
Issuance of warrants with notes payable - - - - -
Issuance of common stock for debt guarantee - - 25,000 3 30,747
Imputed interest on notes payable - - - - 28,686
Cancellation of warrants issued for services - - - - -
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 574,635 57 750,296
Net income - - - - -
--------- ------ --------- ------ -----------
Balance at December 31, 2002 2,418,800 242 5,985,262 599 16,019,376
Conversion of preferred shares to common (116,000) (11) 580,000 58 (47)
Issuance of preferred stock in connection with the I-Link acquisition 283,929 28 - - 1,613,855
Exercise warrants to purchase Common Stock, net of issuance costs - - 522,500 52 1,395,020
Exercise employee options to purchase Common Stock - - 27,500 3 54,997
Issuance of common shares in connection with notes repayment - - 50,000 5 (5)
Repurchase shares from stockholders - - (2,774) - (4,851)
Amortization of deferred consulting fees - - - - -
Issuance of warrants for services - - - - -
Issuance of common stock for debt guarantee - - 15,000 1 36,298
Imputed interest on notes payable - - - - 5,312
Cancellation of warrants issued for services - - - - 304,690
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 427,096 42 768,503
Net income - - - - -
--------- ------ --------- ------ -----------
Balance at December 31, 2003 2,586,729 $ 259 7,604,584 $ 760 $20,193,148
========= ====== ========= ====== ===========
-continued-
F-5
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Warrants/ Deferred
Options Consulting Accumulated
Outstanding Fees Deficit Total
---------- -------- ------------ -----------
Balance at December 31, 2001 $4,383,334 $(98,406) $(25,631,129) $(6,154,571)
Conversion of preferred shares to common - - - -
Issuance of common shares in connection with notes payable - - - 18,798
Issuance of warrants for services and with consulting agreements 102,118 - - 102,118
Amortization of deferred consulting fees - 73,232 - 73,232
Issuance of warrants with notes payable 232,259 - - 232,259
Issuance of common stock for debt guarantee - - - 30,750
Imputed interest on notes payable - - - 28,686
Cancellation of warrants issued for services (125,197) - - (125,197)
Preferred stock dividends - - (749,725) (749,725)
Issuance of common shares as payment of preferred stock dividends - - - 750,353
Net income - - 330,183 330,183
---------- -------- ------------ -----------
Balance at December 31, 2002 4,592,514 (25,174) (26,050,671) (5,463,114)
Conversion of preferred shares to common - - - -
Issuance of preferred stock in connection with the I-Link acquisition - - - 1,613,883
Exercise warrants to purchase Common Stock, net of issuance costs (385,055) - - 1,010,017
Exercise employee options to purchase Common Stock - - - 55,000
Issuance of common shares in connection with notes repayment - - - -
Repurchase shares from stockholders - - - (4,851)
Amortization of deferred consulting fees - 25,174 - 25,174
Issuance of warrants for services 25,341 - - 25,341
Issuance of common stock for debt guarantee - - - 36,299
Imputed interest on notes payable - - - 5,312
Cancellation of warrants issued for services (304,690) - - -
Preferred stock dividends - - (873,495) (873,495)
Issuance of common shares as payment of preferred stock dividends - - - 768,545
Net income - - 1,174,639 1,174,639
---------- -------- ------------ -----------
Balance at December 31, 2003 $3,928,110 $ - $(25,749,527) $(1,627,250)
========== ======== ============ ===========
See accompanying notes
F-6
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,174,639 $ 330,183
Adjustments to reconcile net income to netcash used in
operating activities:
Depreciation and amortization 3,863,516 1,191,196
Amortization included in interest expense resulting from
issuing stock with notes 5,312 28,686
Amortization of discount on notes payable 414,301 237,444
Amortization of note financing costs 115,182 174,977
Amortization of deferred consulting fees 25,174 73,232
Expense related to the grant of options to purchase common shares - (23,079)
Changes in operating assets and liabilities:
Accounts receivable (2,512,269) (3,378,341)
Other assets (697,427) (2,379,009)
Checks in excess of available cash balances - (186,866)
Accounts payable 4,711,897 1,821,236
Accrued liabilities 278,315 432,183
------------ ------------
Net cash provided by (used in) operating activities 7,378,640 (1,678,158)
------------ ------------
Cash flows from investing activities:
Increase in other assets (167,360) (194,915)
Purchases of property and equipment (1,574,986) (317,399)
Purchase of customer accounts - (3,000,000)
------------ ------------
Net cash used in investing activities (1,742,346) (3,512,314)
------------ ------------
Cash flows from financing activities:
Restricted cash (985,334) 106,310
Net borrowings and payments under line of credit 2,817,530 702,080
Borrowings under notes payable, net of debt issuance costs 2,299,955 7,818,850
Principal payments on notes payable and other long-term obligations (8,767,587) (2,499,508)
Exercise of warrants and employee options, net of offering costs 1,065,018 -
Repurchase of shares from stockholders with less than 100 shares (4,852) -
------------ ------------
Net cash provided by (used in) financing activities (3,575,270) 6,127,732
------------ ------------
Net increase in cash and cash equivalents 2,061,024 937,260
Cash at the beginning of the period 994,360 57,100
------------ ------------
Cash at the end of the period $ 3,055,384 $ 994,360
============ ============
See accompanying notes
F-7
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------
2003 2002
---------- ----------
Supplemental cash flow information:
Cash paid for interest $1,208,543 $ 890,490
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 768,574 $ 750,353
Issuance of common shares in payment of deferred financing costs - 18,793
Issuance of common shares for officer's personal guaranty 36,300 30,750
Issuance of warrants with promissory notes - 232,259
Accrual of dividend payable on preferred stock 873,495 749,725
Retire and replace note payable 800,000 -
Acquire customers from Touch America 3,411,421 -
Acquire customers from Glyphics, Inc. 543,558 -
Issuance of preferred stock to acquire VoIP Network assets 1,705,236 -
Convert accrued interest to note payable 435,388 -
Capital expenditures financed with capital lease obligation 100,691 -
See accompanying notes
F-8
NOTE 1 - DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Buyers United, Inc. ("the Company") was incorporated on August 23, 1994 in the
state of Utah and was reincorporated in the state of Delaware on April 9, 1999.
During 2003, the Company established a wholly-owned subsidiary in Virginia for
the purpose of conducting business in that state.
Buyers United is an aggregator and provider of telecommunications services. The
Company contracts with a number of third party providers for the right to resell
the various telecommunication services and products they provide, and then
offers all of these various services to its customers. The Company also operates
a dedicated VoIP Network, and advanced customer contact handling/management
software applications that enable it to offer enhanced services to customers.
The variety of services and products the Company offers allows the customer to
buy only those telecommunications services it needs from one source, combine
those services in a customized package, receive one bill for those services, and
make one call to Buyers United if a service problem or billing issue arises.
Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Buyers United, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
Use of Estimates in the Preparation of Financial Statements: 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 these estimates. Significant
estimates include the allowance for doubtful accounts and attrition rates used
to determine the estimated useful lives of customer lists acquired.
Revenue Recognition: The Company's revenue recognition policy with respect to
reseller agreements is to record gross revenues and receivables from customers
when the Company acts as principal in the transaction; takes title to the
products or services; and has risks and rewards of ownership, such as risk of
loss for collection, delivery, or returns. Revenues from sales of services are
recognized upon providing the services to the customers.
Cash and cash equivalents: All highly liquid assets with an original maturity of
three months or less are considered to be cash equivalents.
Restricted Cash: In accordance with the Company's agreements with RFC Capital
Corp. (Note 5) and with certain vendors, the Company maintains a restricted cash
account for the collection of the Company's receivables. As of December 31,
2003, the Company had $1.6 million of cash that was restricted.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The accounts receivable balance outstanding as of
December 31, 2003 is comprised of the following:
Billed amounts $ 9,863,111
Unbilled amounts 1,230,372
----------
11,093,483
Less: allowance for uncollectible accounts (2,931,000)
----------
$ 8,162,483
===========
Finance charges are assessed to accounts once the amount owed is past due based
on their specific terms. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
F-9
Property and Equipment: Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements. Of such costs
the Company capitalized approximately $118,000 and $127,000 during 2003 and
2002, respectively.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets as follows:
Computer and office equipment 2 to 3 years
Internal-use software 2 years
Furniture and fixtures 3 to 7 years
Advertising Costs: The Company advertises its services through traditional
venues such as print media to the general public. Costs associated with these
advertising efforts are expensed as incurred, and were $27,438 and $29,781 for
the years ended December 31, 2003 and 2002, respectively.
Fair Value of Financial Instruments: The carrying amounts reported in the
accompanying consolidated balance sheet for cash, receivables, and accounts
payable approximate fair values because of the immediate or short-term
maturities of these financial instruments. The fair value of the Company's notes
payable and preferred stock also approximate fair value based on current rates
for similar debt and fixed-rate instruments.
Debt Issuance Costs: As an inducement to various investors, shareholders, and
board members to lend monies to the Company, shares of common stock and warrants
to purchase shares of common stock were issued to them. The fair market value of
those shares at the date of issuance has been capitalized as debt issuance costs
and is being amortized over the life of the loans. Amortization of these costs
for the years ended December 31, 2003 and 2002 was $414,298 and $237,446,
respectively, and are included in interest expense.
Stock-Based Compensation: Employee compensation expense via stock option grants
is reported using the intrinsic method. No stock option-based compensation
expense is included in net income (loss) as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock
at the date of grant. The following table illustrates the effect on net income
(loss) and earnings (loss) per share if expense was measured using the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation":
2003 2002
--------- -----------
Net income (loss) applicable to common stockholders:
---------------------------------------------------
As reported $ 301,144 $ (419,542)
Pro forma stock option-based compensation (307,747) (748,857)
--------- -----------
Pro forma net loss applicable
to common stockholders $ (6,603) $(1,168,399)
========= ===========
Net income (loss) per common share:
----------------------------------
As reported:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Pro forma
Basic $ - $ (0.20)
Diluted - (0.20)
The fair value of the options granted during 2003 and 2002 was estimated at the
date of grant using the following weighted average assumptions:
F-10
2003 2002
---- ----
Risk-free interest rate 2.89% 3.71%
Dividend yield - -
Expected volatility 75% 104%
Weighted average expected life 4.8 years 4.7 years
The weighted average fair values of options granted during the years ended
December 31, 2003 and 2002 was $1.42 and $1.01, respectively. The pro forma
effects of applying SFAS No. 123 are not indicative of future amounts.
Additional awards in future years are anticipated.
Income Taxes: The Company recognizes a liability or asset for the deferred
income tax consequences of all temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax
rates that will be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
Net Income (Loss) Per Common Share : Basic net income (loss) per common share
("Basic EPS") excludes dilution and is computed by dividing net income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted net income (loss) per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into
common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net loss per
common share.
As of December 31, 2003, outstanding options of employees and directors, along
with warrants held by investors which together aggregated 469,599 in accordance
with the Treasury Stock method were included in the computation of EPS.
5,457,760 shares of common stock issuable upon the conversion of preferred stock
were excluded from the computation of diluted EPS as their effect was
antidilutive.
As of December 31, 2002, outstanding options of employees and directors to
purchase 3,592,721 shares of common stock; 4,634,000 shares of common stock
issuable upon the conversion of preferred stock; and 5,529,282 shares of common
stock issuable upon exercise of warrants to purchase common stock were not
included in the computation of Diluted EPS because they would be antidilutive.
Recent Accounting Pronouncements:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement 4,
44, and 64, Amendment of FASB Statements 13, and Technical Corrections." SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale/leaseback transactions. The provisions of SFAS
No. 145 related to classification of debt extinguishments are effective for
fiscal years beginning after May 15, 2002. Commencing January 1, 2003 the
Company will classify debt extinguishments costs within income from operations.
The provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of this statement on
January 2, 2003 did not have a material impact on the Company's financial
position or results of operations.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This amendment also changes the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the methods of accounting for
stock-based employee compensation and the effects of the method used on reported
amounts. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The Company has opted to continue accounting for stock options under the
intrinsic value method prescribed in APB Opinion No. 25 for the years ended
December 31, 2003 and 2002. In addition, the Company has complied with the
prominent disclosure requirements of SFAS No. 148.
F-11
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period that
began after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. The Company's
adoption of this Statement on July 1, 2003 did not have a material impact on its
consolidated results of operations or financial position.
NOTE 2 - ACQUISITIONS
In October 2003, Buyers United acquired the exclusive right to sell and manage
the enhanced telecommunications functions of MyACD, Inc. ("MyACD"), with a
one-year option to purchase it at a predetermined price. During the term of the
agreement, Buyers United has the sole right to manage sales, service and billing
of MyACD services. Under the agreement MyACD will continue to provide enhanced
service development and configuration and Buyers United will reimburse MyACD for
actual costs related to these activities.
During August 2003, Buyers United purchased approximately 12,000 long distance
customers from Glyphics Communications, Inc. for $543,558.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
the Company amended the purchase agreement to acquire additional switched voice
and dedicated telecommunications customers and correct discrepancies in the list
of customers originally purchased in December 2002. Buyers United did not
purchase any accounts receivable, equipment, or other assets of Touch America.
The total purchase price was $6.5 million. Buyers United made an initial payment
of $3 million to Touch America in December 2002 and has made additional cash
payments totaling $3.4 million through March 4, 2004. The balance of $93,988 is
expected to be paid in April 2004.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase assets of I-Link, Inc., and its
subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by I-Link for the operation of a Voice over Internet Protocol ("VoIP")
Network. Customer billings and related expenses incurred pursuant to a related
Management Agreement between the parties were included in Buyers United's
general and administrative expenses beginning December 6, 2002. The transaction
closed effective May 1, 2003, at which time the Company began to recognize
revenue earned and expenses incurred.
The assets acquired include dedicated equipment required for operating the VoIP
Network, customers of I-Link serviced through the network, carrier
identifications codes, and certain trademarks. In consideration for the assets
and software license, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, assumed
certain liabilities, and agreed to issue an additional 53,570 shares of Series B
Convertible Preferred Stock in equal monthly installments over a term of 10
months commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired in the
transaction.
In connection with the closing, the parties together with Counsel Corporation,
an Ontario corporation, and Counsel Communications LLC, a Delaware limited
liability company, both affiliates of I-Link, entered into a Reimbursement
Agreement pursuant to which Counsel Corporation, Counsel Communications, and
I-Link agreed to reimburse Buyers United for any loss sustained as a result of
any claims asserted against the assets acquired from I-Link by certain creditors
of I-Link. Out of the shares it received in the transaction I-Link deposited in
escrow 40,000 shares that may be applied to reimburse any such loss. This is in
addition to 25,000 shares I-Link received in the transaction that has been
deposited in escrow under the Asset Purchase Agreement to satisfy any claims for
indemnification under the Asset Purchase Agreement. During 2004, these remaining
65,000 shares were delivered to Counsel Corporation.
F-12
The following table presents a summary of the estimated fair values of the
assets acquired and liabilities assumed as of December 31, 2003:
Computer and telecommunications switching equipment $ 754,966
Customer list 553,898
License on technology and patents 1,182,933
Carrier identification code 135,933
Deposit with a vendor 110,000
----------
Total assets acquired 2,737,730
----------
Accounts payable and accrued liabilities 737,829
Acquisition costs 294,665
----------
Total liabilities assumed 1,032,494
----------
Net assets acquired $1,705,236
==========
The customer list and licensed technology will be amortized over a period of
four years.
The following unaudited pro forma financial information presents results as if
the acquisition had occurred at the beginning of the respective periods:
Year ended
December 31,
------------------------
2003 2002
----------- -----------
Net revenue $65,498,766 $37,965,060
Net income (loss) applicable to
common stockholders $ 19,175 $(5,806,566)
Basic and diluted net income (loss) per share $ - $ (1.01)
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a result
of identifiable tangible and intangible assets arising from the acquisition. The
pro forma results are not necessarily indicative either of the results of
operations that actually would have resulted had the acquisition been in effect
at the beginning of the respective periods, or of results to be achieved in the
future.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2003, property and equipment consisted of the following:
Computer and office equipment $3,724,164
Internal-use software 268,723
Furniture and fixtures 302,027
----------
4,294,914
Accumulated depreciation and amortization (1,870,272)
----------
$2,424,642
==========
NOTE 4 - INTANGIBLE ASSETS
At December 31, 2003, intangible assets consisted of the following:
Gross Accumulated Intangible
asset amortization assets, net
------------- ----------- -----------
Customer lists $ 10,760,307 $ 3,840,679 $ 6,919,628
Technology and patents 1,318,865 219,811 1,099,054
------------- ----------- -----------
$ 12,079,172 $ 4,060,490 $ 8,018,682
============= =========== ===========
F-13
The Company participated in a direct response marketing campaign with
LowerMyBills.com, Inc. (LMB), a web-based comparison shopping service. The fees
associated with this advertising campaign were deferred and aggregated $2.8
million until June 2003, when the Company ceased participating in the program.
Amortization expense for these customers in 2003 and 2002, was $1.2 million and
$761,091, respectively.
The Company also acquired new customer lists related to I-Link, Touch America,
and Glyphics in 2003, which are predominantly corporate customers. In addition,
the Company acquired technology and licenses related to I-Link in 2003.
Amortization expense during 2003 for the additional customers was $1.9 million,
and was $219,811 for the technology and licenses.
The Company estimates the useful lives of its acquired customer lists based upon
attrition rates experienced by the Company. Historically, management estimated
the useful lives between 24 to 36 months based upon the type of customer and
service provided. Based upon recent attrition information which showed that
customers were averaging longer lives, the Company changed the estimated useful
lives for its customer lists prospectively in the fourth quarter of 2003. LMB
customer lives were increased from 24 to 36 months. The impact of this change
was a $204,500 decrease in amortization expense in the fourth quarter of 2003.
The customer lives of Touch America, I-Link and Glyphics were changed from 30 or
36 months to 48 months. The impact of this change was a $306,053 decrease in
amortization expense in the fourth quarter of 2003.
Amortization expense for all intangible assets during the four-year period
ending December 31, 2007 is estimated to be $2.7 million, $2.5 million, $2.2
million, and $600,000, respectively.
NOTE 5 - LINE OF CREDIT
Buyers United has a line of credit agreement with RFC Capital Corporation that
expires in January 2006. The available borrowing limit is $5 million. Interest
accrues at prime plus three percent, which was 7.00% as of December 31, 2003.
During 2002, the interest rate on the line was prime plus six percent, which was
10.25% as of December 31, 2002. The facility allows the Company to obtain
financing on its eligible accounts receivable, including unbilled receivables
and regular monthly billings. The facility is collateralized by the underlying
receivables. On December 31, 2003, Buyers United had financed the maximum amount
available based on eligible accounts receivable at that time. This amount, less
draws by RFC applied against the outstanding amount, aggregated $4.1 million.
The facility requires Buyers United to maintain a restricted cash account for
the collection of the receivables. As of December 31, 2003, Buyers United had
$1.2 million of restricted cash associated with the RFC arrangement.
NOTE 6 - ACCRUED LIABILITIES
At December 31, 2003, accrued liabilities consisted of the following:
Accrued commissions $ 669,523
Accrued dividends 478,599
Other 680,742
----------
$1,828,864
==========
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
Unsecured notes payable to the Chairman of the
Board, bearing interest at 12 percent, payable
monthly. Principal and unpaid interest are due
and payable in July 2004, except for $112,500
which matures in December 2004, and $348,825
which matures in July 2005. $2,726,325
Unsecured notes payable to two Directors
bearing interest at 12 percent, payable
monthly. Maturity dates vary, from July 2004
through January 2005. 800,000
F-14
Unsecured note payable to a relative of a
Director, bearing interest at 12 percent
payable monthly. Principal and unpaid
interest due in January 2005. 100,000
Promissory note payable to an individual
bearing interest at 12 percent, payable
monthly. Secured by equipment. Principal
and unpaid interest due in July 2004. 293,333
Promissory notes payable to two individuals
bearing interest at 12 percent, payable
monthly. Secured by equipment. Principal
and unpaid interest due in the summer of 2006. 191,954
Unsecured promissory notes bearing interest at
ten percent and 12 percent, payable monthly.
Principal payments due monthly, based on 20
percent to 40 percent of billings collected
from specifically-designated customers referred
from LowerMyBills.com, Inc. ("LMB"). The
majority of these notes have no maturity date.
The Company believes that all of the principal
will be repaid during 2004, based on expected
cash collections from these customers. 475,223
Unsecured promissory notes bearing interest at
ten percent, payable monthly. Principal
payments due monthly, based on ten percent of
billings collected from customers acquired from
Touch America, Inc. These notes have no
maturity date. The Company believes that all
principal will be repaid in 2005, based on
expected cash collections from these customers. 2,358,412
Unsecured promissory note bearing interest at
10 percent, payable monthly. Principal payments
due monthly, based on 30 percent of billings
collected from customers recently acquired from
Glyphics, Inc. The note has no maturity date.
The Company believes that all principal will be
repaid by the end of 2004, based on expected
cash collections from these customers. 631,211
Note payable to Touch America, Inc., with
interest imputed at four percent, payable
monthly. Principal payments due monthly, based
on 7.2 percent of billings collected from
customers acquired from Touch America, Inc. The
obligation has no maturity date. The Company
expects that all principal will be repaid by
April 2004, based on expected cash collections
from these customers. 473,437
Other 295,238
Capital leases 82,477
----------
8,427,610
Less current portion (7,781,484)
----------
$ 646,126
==========
Long-term debt maturities are as follows:
2004 $7,781,484
2005 623,719
2006 22,407
----------
8,427,610
Less current maturities (7,781,484)
----------
$ 646,126
==========
F-15
On February 28, 2003, the Company retired its $1.1 million note payable by
paying $250,000 in cash and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection with
the original agreement. At December 31, 2003, the amount remaining due, less
issuance costs, was $631,211 (see above).
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase 562,950 shares of common stock at $2.50 per share were
issued to the noteholders. Warrants for an additional 94,950 shares have also
been issued to the sales agents. The estimated fair value of the warrants of
$264,717, based on using the Black-Scholes pricing model, was allocated to the
warrants and recorded as a discount to the carrying value of the notes. The
Company paid approximately $232,000 in commissions to sales agents. The Company
paid approximately $152,000 in commissions to sales agents in connection with
the Touch America-related unsecured promissory notes. All these commission costs
are also included in the discounts to the carrying value of the notes. The
discount is being amortized to interest expense over the respective notes'
estimated payment terms.
NOTE 8 - LEASES
Buyers United leases executive office space in Bluffdale, Utah, a suburb of Salt
Lake City. The offices consist of approximately 30,000 square feet. The current
monthly lease rate is $32,307. The lease for office space expires in January
2007, but the Company has an option to renew the lease for an additional three
to five years. Through November 2004, Buyers United is leasing 14,339 square
feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost
of $16,728.
The Company also has one capital lease for computer software. The following is a
schedule of future minimum payments under the leases as of December 31, 2003:
Capital Operating
Year ending December 31, leases leases
-------- ----------
2004 . . . . . . . . . . . . . . . . . . . . . . . . $ 34,690 $ 571,692
2005 . . . . . . . . . . . . . . . . . . . . . . . . 34,690 397,373
2006 . . . . . . . . . . . . . . . . . . . . . . . . 23,128 407,307
2007 . . . . . . . . . . . . . . . . . . . . . . . . - 417,490
-------- ----------
Total future minimum lease payments . . . . . . 92,508 $1,793,862
==========
Less amount representing interest . . . . . . . . . (10,031)
--------
Total obligations under capital leases . . . . . 82,477
Less current portion . . . . . . . . . . . . . . . . (28,752)
--------
Capital lease obligations, net of current portion $ 53,725
========
Rent expense was approximately $519,500 and $348,300 for the years ended
December 31, 2003 and 2002, respectively.
NOTE 9 - INCOME TAXES
The components of the Company's net deferred income tax assets and liabilities
are as follows:
Deferred income tax assets:
--------------------------
Net operating loss carryforwards $5,001,000
Reserves and accrued liabilities 1,275,000
----------
Total deferred income tax assets 6,276,000
Valuation allowance (5,897,000)
----------
Net deferred income tax asset 379,000
----------
Deferred income tax liabilities:
-------------------------------
Tax depreciation in excess of book depreciation (379,000)
----------
Net deferred income tax liability (379,000)
----------
Net deferred income taxes $ -
==========
F-16
As of December 31, 2003, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $13,336,000. The tax net
operating loss carryforwards will expire beginning in 2012.
Inasmuch as the Company's history includes accumulated net operating losses, it
is uncertain as to whether the Company's deferred tax asset can be fully
realized. Accordingly, a valuation allowance has been recorded to reduce the
deferred income tax assets. The net change in the valuation allowance for
deferred tax assets during the year ended December 31, 2003 was a decrease of
$416,000. During 2003 and 2002 no income tax expense was recorded due the
reduction of the valuation allowance.
NOTE 10 - CAPITAL TRANSACTIONS
Preferred Stock: The Board of Directors is authorized to classify any shares of
the Company's authorized but unissued preferred stock in one or more series.
With respect to each series, the Board of Directors is authorized to determine
the number of shares that constitutes such series; the rate of dividend, if any,
payable on shares of such series; whether the shares of such series shall be
cumulative, non-cumulative, or partially cumulative as to dividends and the
dates from which any cumulative dividends are to accumulate; whether the shares
of such series may be redeemed, and, if so, the price or prices at which and the
terms and conditions on which shares of such series may be redeemed; the amount
payable upon shares of such series in the event of the voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of the Company; the
sinking fund provisions, if any, for the redemption of shares of such series;
the voting rights, if any, of the shares of such series; the terms and
conditions, if any, on which shares of such series may be converted into shares
of capital stock of the Company of any other class or series; whether the shares
of such series are to be preferred over shares of capital stock of the Company
of any other class or series as to dividends or upon the voluntary or
involuntary dissolution, liquidation, or termination of the affairs of the
Company or otherwise; and any other characteristics, preferences, limitations,
rights, privileges, immunities, or terms.
Series A 8 percent Cumulative Convertible Preferred Stock: During 1999, the
Board of Directors authorized the issuance of 2,000,000 shares of Series A 8
percent Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at
an offering price of $2.00 per share. Gross proceeds of $4 million were raised
upon sale of the shares.
The Series A Preferred Stock is convertible to common stock at any time at the
election of the holder and, under limited circumstances, at the election of the
Company. The conversion rate is one for one, subject to adjustment in the event
of a recapitalization, reorganization, or other corporate restructuring or in
the event that the Company shall sell or otherwise issue securities at a price
below $2.00 per share or the then adjusted conversion price. The Series A
Preferred Stock can be redeemed at the Company's election at any time commencing
January 1, 2005 at a redemption price of $2.00 per share plus all accrued
dividends as of the redemption date. During 2002 certain stockholders converted
5,000 Series A preferred shares into common shares.
Series B 8 percent Cumulative Convertible Preferred Stock: In September 2000,
the Board of Directors authorized the issuance of 1,234,500 shares of Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred Stock") and
related warrants to purchase common shares at an offering price of $10.00 per
unit. Each unit consists of one share of Series B Preferred Stock and five
warrants to purchase one share of common stock at an exercise price of $2.50 per
share. During 2000, various investors made loans to the Company and subsequently
elected to exchange their promissory notes for units. In addition to the
converted loans of $2.5 million, the Company raised $2 million through the
issuance of units through December 31, 2000 and $1.1 million through the
issuance of units in 2001.
In connection with the unit offering, the Company agreed to pay the Placement
Agent a sales commission and expense allowance aggregating 13 percent of the
gross proceeds from the sale of the Series B Preferred Stock, in addition to ten
percent of the gross proceeds of certain related bridge financing. The Company
also incurred approximately $23,000 of direct expenses in connection with the
offering. As additional consideration, the Company agreed to issue to the
Placement Agent warrants to purchase 319,300 shares of the Company's common
stock at an exercise price of $2.50 per share.
As part of the Series B Preferred Stock offering, the Company issued 2,269,000
warrants to purchase common stock at $2.50 per share. The Company allocated the
net proceeds from the offering of $4.2 million between the Series B Preferred
Stock and the warrants based on estimated relative fair values. The Series B
Preferred Stock was recorded at $2.4 million, and the warrants were recorded at
F-17
$1.8 million. The estimated fair value of the warrants was determined using the
Black-Scholes pricing model. The Series B Preferred Stock is convertible to
common stock at any time at the election of the holder and, under limited
circumstances, at the election of the Company. The conversion rate is five for
one, subject to adjustment in the event of a recapitalization, reorganization,
or other corporate restructuring or in the event that the Company shall sell or
otherwise issue securities at a price below $2.00 per share or the then adjusted
conversion price.
During the three months ended March 31, 2001, the Company issued an additional
110,000 shares of preferred stock and 550,000 warrants to purchase common stock.
The Company allocated the net proceeds from the offering of $1.1 million between
the Series B Preferred Stock and the warrants based on estimated relative fair
values. Accordingly, the stock was recorded at $794,822, and the warrants were
recorded at $302,401. In connection with these additional Series B shares, the
intrinsic value of the beneficial conversion feature of $20,498 was reflected in
the accompanying 2001 consolidated financial statements as a preferred stock
dividend and as an increase to additional paid in capital. The Series B
Preferred Stock Offering closed on April 13, 2001.
In May 2002 the Board of Directors approved a plan to modify the exercise price
on certain Preferred Stock and promissory note-related warrants from $2.50 to
$2.00 per share, extend the expiration date of certain warrants from December
31, 2002 to December 31, 2004, and amend the redemption provisions of certain
warrants so that the warrants could be called for redemption when the market
price for the Company's common stock is $4.00 per share, rather than $6.00 per
share.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase certain assets and assume certain
liabilities of I-Link, Inc., and its subsidiary, I-Link Communications, Inc. In
consideration, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, and agreed
to issue an additional 53,570 shares of Series B Convertible Preferred Stock in
equal monthly installments over a term of 10 months commencing June 1, 2003. The
final installment was issued March 1, 2004.
During 2003, six of the stockholders converted a total of 116,000 Series B
preferred shares into 580,000 common shares. During 2002, one of the
stockholders converted 10,000 Series B preferred shares into 50,000 common
shares.
Both Series A and B Preferred Stock still outstanding can be redeemed at the
Company's election at any time commencing January 1, 2005, at the applicable
redemption price plus all accrued dividends as of the redemption date.
Cumulative dividends accrue on both Series A and B Preferred Stock at the rate
of 8% per annum from the date of original issue and are payable semi-annually on
June 30 and December 31 of each year out of funds legally available for the
payment of dividends. Dividends are payable in cash or common stock at the
election of the Company. If paid in common stock, the number of shares issued
will be based on the average of the closing bid prices for the common stock over
the five trading days immediately prior to the dividend payment date. If the
Company fails to pay any dividend within 60 days of its due date, the conversion
price (see below) is adjusted downward by $0.25 per share for each occurrence.
During the years ended December 31, 2003 and 2002, the Company declared
dividends aggregating $873,495 and $749,725, respectively, and to satisfy
payment obligations, issued a total of 427,096 and 574,635 shares of common
stock, respectively. As of December 31, 2003, the Company had accrued dividends
payable in the amount of $478,599. In February 2004, the Company settled the
dividend payable by issuing 171,055 shares of common stock.
The Series A and B Preferred Stock has no voting rights, except as required by
the General Corporation Laws of Delaware that require class votes on certain
corporate matters and matters affecting the rights of the holders of the
Preferred Stock. The Preferred Stock is senior in right of payment in the event
of liquidation and with respect to dividends to the common stock and all other
subsequent preferred stock issuances that may be authorized. The Series A
Preferred Stock has a liquidation preference of $2.00 per share and the Series B
Preferred Stock has a liquidation preference of $10.00 per share.
Issuances of Common Stock: During January 2002 the Company issued 17,998 shares
of common stock in connection with the issuance of $179,998 of promissory notes,
at an aggregated fair market value of $18,798.
During February 2002 the Company issued 25,000 shares of stock to one of its
directors for providing a credit guaranty with respect to business expansion
activities. The fair market value of shares issuances was $30,750.
F-18
In March 2001, the Company entered into three-year marketing contracts with one
of its Series B Preferred stockholders. Under the terms of the contracts,
100,000 shares of common stock were issued with a fair market value of $125,000.
This amount was recorded on the balance sheet as a deferred consulting fee and
included in operating expenses on a straight-line basis over the life of the
contracts. During 2001, $39,931 was recorded in promotion expenses as a result
of this amortization. Consideration granted under the contracts' terms also
included options to purchase up to 150,000 additional shares of common stock at
$2.50 per share. These options vest gradually over the term of the contract.
These options are accounted for as variable plan options since the issuance of
these options was under the premise that the grantee will be providing current
and future services for the Company. Accordingly, using the Black-Scholes option
pricing model, $29,581 in consulting expense was recorded to reflect the vesting
of these options through December 31, 2001. During 2002 an additional $48,060 of
deferred consulting fees were amortized and included in promotion expenses, and
another $95,615 in consulting expense was recorded to reflect the vesting of
additional options. However, at the end of 2002 the Company and the stockholder
agreed to cancel one of the marketing contracts and to rescind the as-yet
unearned options. Accordingly, the Company included in promotion expenses an
additional $25,174 of remaining unamortized deferred consulting fees, and
recorded income of $125,197 to reflect the cancellation of the unearned options.
In January 2003 the Company issued 15,000 shares of stock to one of its
directors for providing a credit guaranty to one of its wholesale
telecommunication service providers. The fair market value of the stock was
$36,300.
During June 2003, the Company initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or fewer
shares. The offering price per share was $1.75. The program ended in September
2003 after the Company had repurchased 2,774 shares.
Warrants to Purchase Common Shares: As mentioned above, the Company issued
warrants in connection with its Series B preferred stock offering and in
connection with certain marketing contracts.
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase a total 562,950 shares of common stock at $2.50 per share
were issued to the noteholders during the two years ended December 31, 2002.
Warrants for an additional 97,950 shares were also issued to the sales agents.
The estimated fair value of the warrants of $264,717, based on using the
Black-Scholes pricing model, was allocated to the warrants and recorded as a
discount to the carrying value of the notes. The discount is being amortized to
interest expense over the estimated term of the notes.
In November 2003 the Company issued 25,000 warrants to a consulting company. The
estimated fair value of the warrants of $25,341, based on using the
Black-Scholes pricing model, will be amortized over the life of the contract
into general and administrative expense.
During 2003, investors exercised warrants to purchase 522,500 shares of Common
Stock, in exchange for proceeds which aggregated $1,043,750.
All of the warrants were exercisable at December 31, 2003. The following tables
summarize the warrant activity for 2003 and 2002:
Weighted
Average
Price Exercise
Warrants Range Price
--------- ------------- --------
Balance at December 31, 2001 5,345,732 $1.25 - $5.13 $2.44
Cancelled or expired (250,000) $2.50 - $2.85 $2.64
Issued 433,550 $2.00 - $2.50 $2.01
---------
Balance at December 31, 2002 5,529,282 $1.25 - $2.95 $2.00
Cancelled or expired (181,750) $2.00 - $2.95 $2.49
Exercised (522,500) $1.25 - $2.50 $2.00
Issued 25,000 $2.50 $2.50
---------
Balance at December 31, 2003 4,850,032 $1.25 - $2.50 $2.05
=========
F-19
Stock Options:
Long-Term Stock Incentive Plan: Effective March 11, 1999, the Company
established the Buyers United International, Inc. Long-Term Stock Incentive Plan
("the Stock Plan"). The Stock Plan provides for a maximum of 1,200,000 shares of
common stock of the Company to be awarded to participants and their
beneficiaries. A Committee, as determined by the Board of Directors, determines
and designates the eligible participants and awards to be granted under the
Stock Plan. The Committee may grant incentive stock options; non-qualified
options; stock appreciation rights ("SAR"); and on a limited basis, stock
awards. The terms and exercise prices of options and SARs will be established by
the Committee; except that the exercise prices cannot be less than 100 percent
of the fair market value of a share of common stock on the date of grant. As of
December 31, 2003, incentive stock options to purchase a total of 893,653 shares
were outstanding.
Other Options: The Company's Board of Directors has from time to time also
authorized the grant of stock options to directors, officers, key employees, and
consultants as compensation and in connection with obtaining financing.
In virtually all cases, employee options vest over a period of from one to three
years, and expire from four to five years after the date the options were
granted. The following tables summarize the all stock option activity for 2003
and 2002:
Weighted
Average
Price Exercise
Options Range Price
--------- ------------- --------
Balance at December 31, 2001 2,818,585 $2.00 - $9.00 $2.69
Granted 902,913 $2.00 - $2.50 $2.31
Cancelled or expired (128,777) $2.00 - $9.00 $3.11
---------
Balance at December 31, 2002 3,592,721 $2.00 - $5.39 $2.58
Granted 683,500 $2.00 - $2.64 $2.33
Exercised (27,500) 2.00 $2.00
Cancelled or expired (816,944) $2.00 - $4.00 $2.20
---------
Balance at December 31, 2003 3,431,777 $2.00 - $5.39 $2.62
=========
A summary of the options outstanding and options exercisable at December 31,
2003 is as follows:
Options
Options Outstanding Exercisable
--------------------------------------------------- ------------------------
Average Weighted Options Weighted
Range of Remaining Average Exercisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 2003 Price
------------- ----------- ----------- -------- -------------- ---------
$2.00 - $3.99 3,207,926 3.6 years $ 2.45 2,512,261 $ 2.49
$4.00 - $5.39 223,851 2.3 years 5.13 223,851 5.13
---------- ----------
3,431,777 3.5 years $ 2.62 2,736,112 $ 2.70
========== ==========
Registration Statement on Form SB-2: On September 10, 2003, the Company filed a
registration statement on Form SB-2 with the Securities and Exchange Commission
to register for resale up to 8,779,333 shares of Common Stock that may be sold
from time to time by certain selling security holders listed in the registration
statement. At December 31, 2003 the selling security holders owned:
o Warrants to purchase 99,375 shares at a price of $1.25 per share
o Warrants to purchase 3,966,856 shares at a price of $2.00 per share
o Warrants to purchase 528,450 shares at a price of $2.50 per share
o Options to purchase 2,086,652 shares at prices ranging from $2.00 to
$5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at $2.00 per
share
o Convertible notes in the amount of $1,775,000 convertible at $2.50 per
share
F-20
Buyers United will receive the proceeds from exercise of the warrants and
options and will benefit from extinguishment of the debt represented by the
convertible notes, but will not receive any proceeds or benefit from the resale
of the shares by the selling security holders.
In March 2004 the registration statement was temporarily suspended until the
Company can file an amendment updating the registration statement with its 2003
audited financial statements and other information.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 2003 and 2002, certain board members and stockholders performed various
services to the Company. These services included, but were not limited to,
consulting, marketing and capital and debt raising activities. The Company
incurred $74,750 and $109,259 in fees associated with these services for the
years ended December 31, 2003 and 2002, respectively. Amounts outstanding
related to these services were $12,800 and $14,300 at December 31, 2003, and
2002, respectively. There are also several debt arrangements more fully
described in Note 7. Interest expense on obligations owed to related parties
during 2003 and 2002, respectively, was $414,523 and $453,361.
NOTE 12 - MAJOR SUPPLIERS
Approximately 70% and 80% of the Company's cost of revenue for the years ended
December 31, 2003 and 2002, respectively, was generated from two
telecommunication providers. As of December 31, 2003, the Company owed
approximately $3 million to these two providers. The Company has entered into
contractual agreements with these vendors. During 2002 one of these providers
had filed for bankruptcy protection under Chapter 11, and the other provider is
currently being scrutinized by the Securities and Exchange Commission over
certain accounting matters. Although the Company has not experienced a
disruption of service and feels it could replace either of these sources with
other wholesale telecommunication service providers, the effect on the Company's
operations of potentially losing either or both of these service providers is
unknown.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In June 2001, Buyers United entered into a joint sales agreement with Infotopia,
Inc., a direct response marketer. In connection with the agreement, Infotopia
loaned $500,000 to Buyers United. Subsequent to entering into the sales
agreement, the two companies decided not to pursue further any joint activity.
In December 2001, Buyers United negotiated a settlement of the $500,000 loan in
which Buyers United paid $120,000 and issued 35,000 shares of common stock in
exchange for canceling the outstanding obligation plus $25,921 in accrued
interest. The stock had a fair market value of $22,401. Accordingly, based on
these amounts, the Company recorded a gain on the early extinguishments of the
debt in the amount of $383,520. However, unbeknownst to the Company, during 2001
Infotopia allegedly entered into a General Security Agreement with Sea Spray
Holdings, Ltd., which purportedly included the loan obligation. Sea Spray
asserted that it had a perfected security interest in the obligation and
demanded payment as successor-in-interest to Infotopia. The Company denied the
claim and filed an arbitration proceeding to resolve the issue. Sea Spray
attempted to pursue its claim in New York state court, which the Company removed
to federal court in New York, and the federal court dismissed the action
pursuant to an order to the effect Sea Spray must pursue its claims in the
arbitration proceeding. An arbitration hearing was held in December 2003, at
which Sea Spray failed to make any appearance or submission after receiving all
required notice. The arbitrator entered a default in favor of Buyers United and
its award further found in favor of Buyers United as a matter of the evidence
presented and as a matter of law. The Company believes this matter has been
resolved fully in its favor and that is has no obligation or liability to Sea
Spray.
Buyers United is the subject of certain other legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these other
matters will not have a material impact on the financial position, liquidity or
results of operations of Buyers United.
In connection with the MyACD agreements, MyACD will continue to provide enhanced
service development and configuration, and Buyers United will reimburse MyACD
for actual costs related to these activities.
F-21
NOTE 14 - SUBSEQUENT EVENTS
In January and February 2004, three Directors had exercised options to purchase
a total of 255,000 shares of Common Stock. Total proceeds received by the
Company in connection with these exercises was $555,000.
During the first three months of 2004, investors have exercised warrants to
purchase a total of 71,000 shares of Common Stock. Total proceeds received in
these transactions was $146,000.
In December 2003, a holder of 100,000 shares of Series B Convertible Preferred
Stock converted all of those shares to 500,000 shares of common stock. In
January 2004, the holder sold those common shares plus 14,560 additional shares,
or a total of 514,560 shares, to Buyers United for $500,000 in a privately
negotiated transaction.
Buyers United entered into an agreement to purchase 37 dedicated long distance
customers from Source Communications, LLC for $750,000 in February 2004. Closing
of the acquisition was subject to complying with applicable federal and state
regulation pertaining to transfer of the customers. All of the regulatory
requirements were satisfied and the acquisition of the customers is completed
On March 15, 2004 the Company closed a private placement to institutional and
accredited investors. The Company sold 3,782,000 shares of common stock at $2.30
per share, or a total of approximately $8.7 million. Net proceeds of the
offering after placement fees and expenses were approximately $8.1 million. The
net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, to fund
further development of our VoIP Network, reduction of debt, and for working
capital and other general corporate purposes.
In connection with the placement, Acceris Communications Inc., formerly I-link
Incorporated and the holder of 300,000 shares of Series B Convertible Preferred
Stock, converted all of its preferred stock to 1.5 million common shares.
Acceris subsequently sold 750,000 of those common shares to the investors in the
private placement at $2.30 per share. As a result of the conversion and sale,
Acceris Communications now holds 808,546 shares of the Company's common stock,
or approximately six percent of the 13 million shares of common stock
outstanding following completion of the private placement.
The private placement was made only to institutional and accredited investors in
a transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). The shares of common stock sold have
not been registered under the Securities Act, or any state securities laws, and
unless so registered, may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Securities Act and applicable state securities laws. The Company has agreed
to file a registration statement under the Securities Act for resale of the
common stock purchased by the investors in the private placement, the 808,546
shares of common stock held by Acceris, and 164,125 shares of common stock
issuable under a warrant granted to the placement agent.
F-22
Board of Directors and Executive Officers Independent Public Accountants
Theodore Stern Crowe Chizek and Company LLC
Chairman of the Board Oak Brook, Illinois
Chief Executive Officer
Gary Smith Corporate Counsel
Director
Business Consultant Parsons Behle & Latimer
Salt Lake City, Utah
Edward Dallin Bagley
Director
Business Consultant Transfer Agent
Steve Barnett Atlas Stock Transfer Company
Director Salt Lake City, Utah
Business Consultant
Paul Jarman Business Office
President and Director 14870 Pony Express Road
Bluffdale, Utah 84065
David R. Grow (801) 320-3200
Chief Financial Officer
Kenneth Krogue
Executive Vice President
G. Douglas Smith
Executive Vice President
Upon written consent we will furnish to our
stockholders without charge a copy of our report
on Form 10-KSB for the year ended December 31,
2003 as filed with the Securities and Exchange
Commission. Requests should be directed to:
Kimm Partridge
Corporate Secretary
Buyers United, Inc.
14870 Pony Express Road
Bluffdale, Utah 84065
Our corporate website is http://www.ucn.net. We
make available on this website, free of charge,
access to our Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports
on Form 8-K, Proxy Statement on Schedule 14A and
amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 as soon as
reasonably practicable after we electronically
submit such material to the Securities Exchange
Commission. In addition, the Commissions website
is http://www.sec.gov. The Commission makes
available on its website, free of charge, reports,
proxy and information statements, and other
information regarding issuers, such as us, that
file electronically with the Commission.