UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange act of 1934 for the transition period from to
Commission File No. 0-26917
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BUYERS UNITED, INC.
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(Name of Small Business Issuer as specified in its charter)
Delaware 87-0528557
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
14870 Pony Express Road, Bluffdale, Utah 84065
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (801) 320-3300
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, Par Value
$0.0001
Check whether the issuer (1) filed all reports required to be filed by
sections 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $30,163,450.
The aggregate market value of voting stock held by non-affiliates computed on
the basis of the last sale price on March 28, 2002, was $6,626,970.
As of March 28, 2003, the Registrant had outstanding 6,330,213 shares of
Common Stock, par value $0.0001.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement of Buyers United for the 2003
annual meeting of stockholders are incorporated by reference in Part III of
this report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Buyers United, Inc. is a domestic 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 offered include the following:
* Switched long distance services to business and residential customers
* Dedicated access long distance service
* Toll-free 800/888/877/866 services
* Dedicated data transmission
* Private line data services
* Calling card services
* Conference calling
* Automatic call distribution
* Interactive Voice Response (IVR)
* Outbound dialing and voice message broadcasting
These services can be offered individually, or in a suite of services tailored
to a customer's needs.
For the past five years Buyers United has been engaged in the business of
reselling telecommunication services provided by others to Buyers United at
wholesale rates. Domestic and international 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 new brand, United Carrier Networks (UCN),
targets business customers, while the brand developed during 2000,
BuyersOnline (BOL), is intended to cater to the residential consumer. The use
of the two distinct brands allows us to specifically meet the needs of both
customer types, without creating channel conflicts.
Buyers United is now pursuing multiple marketing avenues, including using
independent agents, implementing promotional and rebate programs to attract
customers, and marketing through the Internet. Buyers United's sale incentive
programs offered from time to time give customers additional cost saving
opportunities that we believe enhances customer retention. The new UCN web
site gives specialized services and options for business customers and the
agents that represent them. Buyers United also pursues customers through
strategic relationships with companies that operate independent sales and
marketing programs for a variety of products and services.
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.
RECENT DEVELOPMENTS
On December 6, 2002, Buyers United entered into an 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 real-
time Internet protocol communications network (RTIP Network). The assets
acquired include dedicated equipment required for operating the RTIP Network,
customers of I-Link serviced through the network, and certain trademarks. In
consideration for the assets and software license, Buyers United agreed to
issue to I-Link 300,000 shares of Series B Convertible Preferred Stock and
assume certain liabilities. Completion of the purchase is subject to
obtaining government and third-party approvals, and obtaining releases of
third party security interests in the assets. The parties are pursuing
efforts to satisfy these closing conditions for the purchase of assets, but
cannot predict when or if the conditions will be satisfied and the transaction
closed.
Concurrently with the agreement for the purchase of I-Link assets, I-Link
and Buyers United entered into transition and management agreements pursuant
to which Buyers United was appointed to manage all of the assets to be
acquired from I-Link pending the closing of the purchase. Under the
agreements, Buyers United assumed responsibility for day-to-day operation of
the RTIP Network previously operated by I-Link that is to be sold to Buyers
United, is responsible for all customer billing and collection, has the right
to use the RTIP Network to provide telecommunications service to its
customers, and is entitled to receive a management fee equal to 10 percent of
revenue generated from I-Link customers after the payment of all expenses of
the RTIP Network and providing service to such customers.
In connection with the transaction, Buyers United agreed to sublease
certain space occupied by I-Link, but subsequently negotiated a new lease
arrangement for the space. Buyers United is leasing through November 2004,
14,339 square feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at
a monthly cost of $16,728. In consideration for entering into this agreement,
I-Link agreed to subsidize a total of $36,232 in lease payments, which
represents the difference between the amount of the original sublease
obligation of Buyers United and the monthly cost of the space under the new
lease arrangement. In the event the asset purchase transaction between Buyers
United and I-Link does not close, Buyers United has the right to terminate the
lease arrangement without further liability to I-Link or the landlord.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase
approximately 70,000 of the switched voice telecommunication customers of
Touch America, including the carrier identification code used to service those
customers. Buyers United did not purchase any accounts receivable, equipment,
or other assets of Touch America. Buyers United agreed to pay to Touch
America account receivable balances that predate the sale as collected by
Buyers United, subject to certain fees payable to Buyers United. Buyers
United made an initial payment of $3,000,000 to Touch America. The original
purchase price was $6,750,000, but the parties are now attempting to negotiate
a reduction in the purchase price due to errors and other discrepancies the
parties subsequently discovered in the list of accounts sold to Buyers United.
The balance of the final purchase price will be paid in monthly increments
based on a percentage of revenue generated by the acquired customer accounts.
The conditions for closing the purchase were satisfied in March 2003.
THE STATE OF THE INDUSTRY
We believe that providers of telecommunications services fall into three
primary categories. The first category of providers offers a single telecom
product or service. We believe the single-product concept ignores the fact
that many customers have multiple service needs and see value in utilizing a
single point of contact to support these needs. The second category includes
the Regional Bell Operating Companies ("RBOC's") that deliver local dial tone
and some additional services, and have recently pursued applications at the
Federal and state level to offer switched long distance service. We believe
the RBOC's have traditionally focused on selling their own products at
premiums that result in higher cost to the customer. We believe the RBOC's
also fail to provide critical service elements, such as consolidated billing,
dedicated number service, and leading edge product offerings. The third
category of competitors focuses primarily on long distance, but also sell
limited selections of additional services. These companies have a proven and
well-developed sales model but lack a totally integrated product package that
delivers customized and complete products to the customer at competitive
prices across the entire range of communications technologies.
Total spending for the U.S. Telecommunications industry from 2002-2003
will increase at a projected 9 percent compound annual rate. The
Telecommunications Market Review and Forecast, which is a respected industry
study also predicts the 2003 revenue to top $963 billion In 2002 the
industry saw a 15.5% reduction in telecommunications equipment spending but
also saw off setting increases in internet access, wireless usage, support
services and data usage. These services are predicted to continue their rapid
growth in 2003. It is expected in 2003 that a small but important "value
add" category of services such as conferencing, unified messaging and
collaborative technologies will grow 37 percent to $21 billion.
In 2002 all sectors of the telecommunications market suffered when the
industry as a whole experienced downgraded financial status. In 2003 we
believe the industry will continue to consolidate in an effort to balance
demand and supply. According to RHK, a consulting group used by CommWeb,
traffic growth remains strong but the average long haul trunk capacity
utilization is just 35%. There should be excess capacity in the major
provider networks for the next several years. Internet Protocol traffic is
growing at 100% annually and we believe it will continue in 2003. The
industry continues to move toward Internet protocol and wireless solutions for
the business market.
SERVICE AND PRODUCTS
Buyers United is an aggregator and reseller of telecommunications
services. By aggregator we mean that we contract with a number of third party
providers for the right to resell the various telecommunication services and
products they provide, and then offer all of these various services to our
customers. This enables the customer to buy only those telecommunications
services it needs from one source, receive one bill for those services, and
make one call to Buyers United if a service problem or billing issue arises.
The separate services Buyers United can sell singly or bundled to meet
customer needs include:
* Switched long distance service to business and residential customers.
This is traditional 1+ long distance service. The customer dials the
long-distance number and the local exchange carrier switches the call to
the long distance provider we have designated for the customer based on
the customer's account selections. We bill the customer for the long
distance service at the applicable retail rate, as well as local access
fees for the local exchange carrier, taxes, and universal service fund
charges.
* Dedicated access long distance service. Some business customers require
multiple line concurrent long distance access for high volume
telemarketing or call center operations. Dedicated access connects the
customer directly to the long distance carrier, by-passing the local
exchange carrier, through a T-1 or higher capacity local loop connection.
We bill the customer for the local loop connection and for the long
distance service.
* Toll-free 800/888/877/866 services. Toll free calling service allows
clients of our customer to call into the customer at the customer's
expense, rather than the client's expense. This is a service
traditionally used by our business customers. We own and assign the toll
free numbers to our customers and bill our customers for the toll free
number and the long distance service.
* Dedicated data transmission. This is similar to dedicated access long
distance service, except the primary use is for data transmission, such
as Internet access, and the local loop is connected to the Internet
through one of our providers. We bill the customer for the local loop
connection and for Internet access fees.
* Private line data services. This type of services is provided through a
T-1 or higher capacity circuit, and encompasses a variety of data
transmission media, including Frame Relay, dedicated Internet access or
Asynchronous Transfer Mode (ATM) data networks or 'clouds'. Each of
these data products rely on a shared network architecture where the
bandwidth on the network backbone is shared by the users connected into
these networks. Customers frequently select these types of networks
because it is much more cost-effective than installing a private line
network, or because of the need to access the public Internet.
* Calling card services. The calling card feature is often provided with
our switched and dedicated long distance services. The calling card
allows the customer to use a toll free number and PIN to make long
distance calls from any location on its account. We bill the customer
for the long distance service.
* Conference calling. This service allows a customer to interconnect
simultaneously a number of callers for conference purposes. This feature
is of particular value to business customers that have a need for
multiple members of the organization to speak together from remote
locations on a periodic basis. The customer is assigned a toll free
number and PIN that allows each participant in the conference call to
access the call simply by dialing the toll free number and entering the
PIN when prompted. We bill the customer for the conference call feature
and the long distance minutes of each participant in the conference call.
* Automatic call distribution. Buyers United offers a network-based call
center solution, I/O, that allows the customer to route incoming calls to
specific persons or departments within the customer's organization.
While this functionality is commonly available in customer-owned
telephone systems, I/O allows a company to include and manage home agents
as a part of their call center, and also adds many features that would be
too expensive for smaller call centers to acquire in a premise-based
system. This product is particularly valuable for customers that operate
call centers or telemarketing centers and want the ability to direct
incoming calls to call center personnel who are trained for specific
product sales or service calls. The customer is billed fees and usage
for this service.
* Interactive voice response. IVR is the ability to offer a company or
individual all of the sophisticated features of an auto attendant,
voicemail, or an automated self service system. This feature can be
built by the customer or with help from Buyers United.
* Outbound dialing and voice message broadcasting. This is the ability to
allow a customer to automatically dial outbound and to broadcast voice
messages to predefined lists. Customers can pay by the call, by the
minute or by the port. They can also link directly to their own database
to automatically generate call lists with sophisticated call scheduling
capabilities. They can also choose between autodial (one at a time),
powerdial (dial sequentially through a list), or predictive dialers
(computer algorithms with dial ahead to screen out busies, no answers,
etc.).
Under our management contract with I-Link, we have the right to offer and
sell services that are enabled by the RTIP Network. In 2003 we plan to
introduce the following IP enhanced services to our customers.
* Fax to Email. This service allows a customer to send or receive faxes
through an Email address with the customer's personal computer.
* Voice mail. This feature allows customers to receive, store, forward,
and access voice mail messages.
* Real time service account management on the Internet. Real time
management allows the customer to redirect phone calls received during
the day to the customer's location. For example, the customer can access
its account through the Internet and direct that phone calls be forwarded
to wherever the customer happens to be during the day - office, home,
cellular phone, or other location. With its personal computer, the
customer can review billing on its account, make service inquiries, or
add or remove services, all over the Internet.
MARKETING STRATEGY
By the end of 2001, Buyers United employed two distinct brands for
marketing purposes, "UCN" or "United Carrier Networks" for commercial and
business customers, and "BOL" or "BuyersOnline" for residential customers. We
market our services through independent sales agents, directly to customers,
and through strategic relationships with third party marketing organizations.
We engage independent telecommunications agents around the country, who
sell primarily to commercial and business customers. We believe independent
agents are responsible for a substantial amount of annual U.S.
telecommunication sales to commercial and business users. The service
presentation we developed for UCN is targeted to the independent agent, and is
intended to make available to the agent a coordinated package of services
designed to be attractive to commercial and business customers. With UCN our
marketing effort focuses on providing businesses with the ability to access
multiple long distance carriers through which we have agreements to resell
services. This allows the business owners to choose services ultimately
provided through various long distance providers. A business customer can
choose various services from any or all of the different telecommunications
providers we use, yet only have to contract through UCN for the selected
services. The business customer is no longer required to deal with these
carriers separately. UCN then provides a single source for customer service,
regardless of how many networks the business uses, and sends a single billing
statement that combines all of the services used from any combination of
wholesale service providers.
We believe we have been, and will continue to be, successful in engaging
independent agents because our package of services appeals to commercial and
business customers, and because of our back office support infrastructure,
incentive programs, customer retention efforts, and additional product/service
revenue opportunities. Buyers United earned the "2002 Reseller of the Year
Award" in March 2003 from the Agent Alliance, a national trade association of
independent telecom agents. The award was given in recognition of the
effectiveness of our customer service and support programs.
Buyers United's early growth and a continuing portion of its revenue base
come from the residential consumer long-distance market. We plan to continue
marketing efforts to potential residential customers using the BuyersOnline,
or "BOL" brand. We rely primarily on unrelated Internet marketing companies
for developing consumer awareness of the BOL brand and services. We offer
consumer product rebates and other consumer incentives as additional benefits
to attract and retain customers.
Online marketing is an effective tool to present Buyers United and its
service offerings to both business and residential customers. Internet users
(via third-party sites) have recently become one of Buyers United's target
customers for three reasons:
* Internet users are familiar with the Internet and understand its workings
and marketing opportunities;
* These potential customers regularly purchase products over the Internet
and are the best candidates to take advantage of our online incentive
programs; and
* We can reduce operating expenses by billing these customers online if
they choose, and can inexpensively communicate with them about new
programs and service information.
Buyers United intends to capitalize on Internet marketing by seeking
opportunities to purchase or affiliate with other companies that have listings
of Internet users who have requested notification of service and savings
opportunities similar to Buyers United's services. Once we acquire the right
to access an Internet customer listing, we present our services and any sale
incentive programs we may be offering. We believe that this strategy will
increase our brand awareness and enhance our marketing efforts to both
business and residential customers.
PROVISIONING
Buyers United is a reseller of domestic and international long distance
and other services provided by national and regional providers, including,
MCI, Qwest, Global Crossing, Broadwing, Dancris, WilTel, NetTronix, CNM, and
TransCom. Buyers United resells switched long distance minutes to its
customers that it has contracted to obtain from our providers at wholesale
rates that averaged in 2002, 53 percent of the retail rates charged to
customers. In 2002 retail rates were between $0.045 and $0.08 per minute for
switched domestic long distance. International rates vary substantially on
the basis of the country and number called, but we believe our rates are
comparable to rates available from our competitors.
Our contracts with our providers are standard and customary in the
industry, in that they require that we purchase a minimum number of minutes
per month whether we use them or not, require payment net 30 days for minutes
used in a month, and serve as the point of contact for all customer service
calls. These agreements are for one-year terms renewable at the end of each
year, when rates are often renegotiated on the basis of prevailing rates in
the industry. We are responsible for all customer billing and collections, so
that as far as the customer is concerned we are the long distance service
provider. Qwest and Global Crossing accounted for approximately 80 percent of
our cost of goods in 2002.
Buyers United also acquires its other services from its providers at
rates or fees fixed in our contracts, which include dedicated long distance
service, toll-free 800/888/877/866 services, dedicated data transmission
service, calling cards, and conference calling. These services are billed to
us at rates or fees stated in our contracts with the providers and are payable
on the same terms as switched long distance service.
We maintain a call center in Bluffdale, Utah for receiving customer
service and billing inquiries. Presently we employ approximately 90 customer
service personnel to respond to customer calls, and our call center
specialists are available from 7:00 a.m. to 10:00 p.m. Monday through Friday,
and during fewer hours on Saturday and Sunday. We place a high priority on
customer service, since we believe that when our rates are similar to rates
offered by our competitors, then service is a primary factor in acquiring and
retaining customers.
Under our management agreement with I-Link, we have the right to service
our customers through the RTIP Network. The RTIP Network will enable our
customers to use existing telephone, fax machine, pager, or modem equipment to
achieve high-quality communications through Internet protocol technology. The
RTIP Network consists of a fully integrated dedicated network of equipment and
leased telecommunications lines augmented by the licensed I-Link softswitch
software. It provides the necessary operational platform for the enhanced
services we will offer in 2003 and is adaptable for use with new or
specialized service applications developed by others. The RTIP Network is a
data packet-based network that ties together local loop dial-up and broadband
connections via gateways located in New York, Salt Lake City, Dallas, and Los
Angeles. Each of these gateways consists of off-the-shelf hardware elements
and the softswitch software. The softswitch software can distinguish among
and handle voice, fax, and modem communications as programmed for the
customer's suite of service selections. By handle, we mean the voice or data
transmission can be delivered directly, redirected (to a different location),
redistributed (to a different or multiple recipients), stored for later
delivery, or altered (such as converting a fax to email).
The RTIP Network will allow us to provide cost advantages over
traditional transmission networks with respect to both lower transmission cost
and lower capital infrastructure cost. Lower transmission cost can result
from transmitting long distance traffic over the Internet between our gateways
for retransmission, which has greater capacity because transmissions would be
converted to data packets and transmitted concurrently over the Internet
bandwidth capacity. Access and transmission costs for the Internet would be
less than traditional transmission networks. The second component of cost
advantages would be lower capital infrastructure costs. In a traditional
telecommunications network, each service -- voicemail, fax mail, conference
calling, single number forwarding -- must be processed through one or more
separate, hardware switches. We intend to offer all of these services through
the RTIP Network as modified or new software applications added to the network
software platform.
Since we acquired the right to use the RTIP Network in December 2002, we
expect to integrate this network with our traditional provider network systems
and service offerings in 2003. While we believe the RTIP Network will lower
our costs of operation in 2003, we cannot predict whether these lower costs
will be significant.
TECHNOLOGY AND OUR BUSINESS
Buyers United has always leveraged information technology to create
consistent streamlined business processes. Buyers United relies on the
following systems, which represent its current technology initiatives:
* IO is our customer contact solution. The IO software is a unified
solution for managing customer communications that integrates telephone,
email, fax, web text chat, and co-browsing into a unified interface. IO
enables Buyers United to enhance customer relationships, reduce costs,
and improve the management of all types of business communications.
* Buyers United Dashboard (BUD) is a customer service software application
that utilizes the Micorsoft.NET framework. It provides a single
interface for call center representatives to perform their service tasks.
BUD utilizes a "wizard" interface methodology that simplifies the
customer service representatives' daily tasks by breaking them into
smaller steps. The "wizard" framework provides increased quality and
consistency into our customer service model.
* CostGuard(R), is a fully convergent, open and flexible billing system
designed to facilitate collaboration among customer service
representatives, business affiliates, and customers. Customers can
access the system through a standard web-browser to initiate and fulfill
billing and service tasks. Buyers United believes the CostGuard system
to provides a consistent and flexible billing solution that supports our
current needs and is expandable for future growth.
* The RTIP Network employs an architecture emphasizing security,
reliability, and carrier diversity. A "Security in Layers" approach has
been adopted utilizing security enforcement points comprised of
inspection firewalls, packet filters, and intrusion detection and
prevention systems. Measures have been implemented to audit data
integrity and access. Reliability and fault tolerance are effected
through a network configuration of "No single Points of Failure" and
underlying carrier diversity. Significant subsystems are geographically
dispersed and data replicated between sites to protect against fiber
optic disruption or other environmental event.
Full backups of all our core data are performed weekly. Differential
backups are performed nightly. Transaction log backups take place every 30
minutes. Backups are copied to two file servers in different locations. We
use SSL encryption to protect all sensitive areas of our customer information
and service-oriented websites. Remote access to our systems is made possible
through a 168 bit encrypted Virtual Product Network. System passwords are
changed on a periodic basis and stored in a secure folder with restricted
access. All local desktops are scanned for viruses on a real-time basis and
report to a central server.
GOVERNMENTAL REGULATION
Our telecommunications services and operations are subject to varying
degrees of federal, state, [and international regulation.
Federal Regulation - We are subject to federal regulation under the
Telecommunications Act of 1996 (Telecom Act). The Telecom Act was designed to
foster local exchange competition by establishing a framework to govern new
competitive entry in local and long distance telecommunications services and
allow any entity, including cable television companies and electric and gas
utilities, to compete in the telecommunications market. The ongoing
implementation and interpretation of the Telecom Act remains subject to
numerous federal and state policy rulemaking proceedings and judicial review
and we cannot predict any future impact on our business.
Pursuant to the Telecom Act, the Federal Communications Commission (FCC)
regulates our interstate and international telecommunications services. The
FCC imposes more extensive requirements on incumbent common carriers that have
some degree of market power, such as the Regional Bell Operating Companies
(RBOCs) and other independent local exchange carriers (ILECs), than it imposes
on companies like ours, which are nondominant carriers that lack market power.
For example, the FCC permits nondominant carriers to provide domestic
interstate services without prior authorization, though we are required to
obtain authorization if, in the future, we construct and operate
telecommunications facilities.
Our costs of providing long distance services could be affected by
changes in FCC rules controlling the form and amount of "access charges" local
exchange carriers (which generally includes the RBOCs and ILECs) are permitted
to impose on interexchange carriers to originate and terminate long distance
calls over local networks. In May 2000, the FCC adopted the access reform and
universal service plan developed by the Coalition for Affordable Local and
Long Distance Services ("CALLS"). The CALLS plan has a five-year life and
provides for various requirements allowing reductions in certain costs of
telecommunications services.
We cannot predict the outcome of other federal or state access charge
proceedings or whether they will have a material impact on us. It is
recognized, however, that the access payments Buyers United must pay to the
RBOCs and ILECs are part of its cost to provide services over its network.
In October 1996, the FCC adopted an order eliminating the requirement
that non-dominant carriers such as Buyers United maintain tariffs on file with
the FCC for domestic interstate services. The FCC's order included a deadline
of August 1, 2001 for non-dominant carriers to eliminate tariffs for
interstate services. In March of 2001, the FCC also ordered all non-dominant
interexchange carriers to detariff international interexchange services by
January 28, 2002. Pursuant to these orders, Buyers United has undertaken to
transition its tariffs from the traditional paper copies filed with the FCC to
use of electronic versions posted on its web site.
The Telecom Act requires that every telecommunications carrier
contribute, on an equitable and non-discriminatory basis, to federal universal
service mechanisms established by the FCC, subject to certain exclusions and
limitations, The federal Universal Service Fund provides subsidies to defray
the costs of telephony services in high-cost areas for low-income consumers
and helps subsidize telecommunications and Internet services for qualified
schools, libraries and rural health care providers. Our payments to the
Universal Service Fund are based on a percentage of our interstate and
international telecommunications revenues and the contribution factor issued
by the FCC, which varies quarterly. The amounts contributed may be billed to
customers.
State Regulation - State regulatory agencies have jurisdiction when our
services are provided on an intrastate basis. The state regulatory
environment varies substantially from state-to-state and in some cases can be
more extensive than FCC regulations. A portion of our services may be
classified as intrastate and therefore subject to state regulation, generally
administered by the state's public utility commission ("PUC"). In most
instances, we are required to obtain certification from a state PUC before
providing voice services in that state. Consequently we are subject to the
obligations that the applicable state laws place on all similarly certified
carriers including the regulation of services, the payment of regulatory fees,
and the preparation and submission of reports. If state regulators or
legislators change current regulations or adopt new regulations it may
negatively impact our ability to provide telecommunication services.
COMPETITION
Presently we are an aggregator and reseller of long distance and related
telecommunications services. Many of our competitors are substantially larger
with greater financial and other resources.
The U.S. long distance telecommunications industry is highly competitive
and significantly influenced by the marketing and pricing practices of the
major industry participants such as AT&T, Sprint and MCI. Buyers United also
competes with other national and regional long distance carriers that employ
various means to attract new subscribers, including television and other
advertising campaigns, telemarketing programs, network marketing, cash
payments, and other incentives. The ability of Buyers United to compete
effectively will depend on its ability to provide quality services at
competitive prices.
Buyers United competes on the basis of variety of services offered,
customer billing and service, and price. Since we can access and offer
switched long distance rates from a number of providers, customers can select
the rate plan best suited to their needs without having to shop each long
distance carrier separately. We offer to our customers, directly and through
agents, a wide selection of telecommunications products. This provides the
customer a one-stop shopping opportunity to obtain many of its
telecommunication services from one source, Buyers United. We believe
customers are attracted by the fact that Buyers United provides many of their
services because they receive one bill and have only one provider to call with
any billing or service questions. We further believe this aggregated service
approach enables us to attract agents to sell our services. By selling Buyers
United services, agents no longer have the burden of managing multiple
contracts with many telecommunications companies. Buyers United agents can
complete a sale at the customer site and count on accurate commissions for
even complicated product suites. Additionally, agents enjoy dedicated
customer service. We believe customers see positive differences in the way
our services are sold and served compared to other providers. With Buyers
United, customers are not forced to take bundled services or enter into long-
term contracts from one provider, which we believe are typical sales practices
of competitors. Because our customer contracts are based on user requirements
rather than bundled services, Buyers United delivers only the requested
services at an appropriate capacity and competitive price.
Building recognition of our brands is beneficial to attracting additional
customers and new strategic alliances. Our failure to promote and maintain
our brands successfully may result in slower growth, loss of customers, loss
of market share and loss of strategic alliances. Accordingly, we intend to
continue pursuing an aggressive brand-enhancement strategy, which includes
promotional programs and public relations activities.
EMPLOYEES
As of December 31, 2002, Buyers United employed a total of 140 persons.
None of our employees is represented by a labor union. We have not
experienced any work stoppages and believe relations with our employees are
good.
RISKS ASSOCIATED WITH OUR BUSINESS
Our revenues and operating results may be negatively impacted by the
pricing decisions of our competitors and our providers. Our revenues from
period to period depend on the pricing for long distance service we can obtain
from the wholesale providers of these services. We also must price our
services so as to effectively compete in the marketplace. This industry has a
history of downward pressure on long distance service rates as a result of
competition among providers. To acquire and retain customers we offer these
services at prices that are perceived as competitive in conjunction with the
other benefits we provide. Consequently, falling prices will likely result in
lowering our rates to customers, which will reduce revenues. On the other
hand, higher prices charged by our providers will cut into gross profit
margins, particularly if our competition is unaffected by similar costing
decisions. To make up for potential reductions in either revenues or profits,
it would be necessary for us to continue to make significant increases in our
customer base from period to period, and there is no assurance that that we
will be successful in doing so.
Our substantial debt adversely affects our operations and financial
condition. At December 31, 2002, total liabilities were $18,608,062, which
included $3,887,803 of long-term debt, net of current portion, that is due in
2004. A substantial amount of our cash flow from operations is used to
service our debt rather than to promote and expand our business, which
adversely affects results of operations. We have not identified any outside
sources of financing that will enable us to retire or restructure our debt
obligations, so there is uncertainty about our ability to improve our
financial condition in the future. These factors raise substantial doubt
about our ability to continue as a going concern.
Recent bankruptcy of two providers creates uncertainty regarding our
operations. In 2002 and 2001, long distance service provided by Global
Crossing Ltd., accounted for 40% and 31% of our cost of revenue, respectively,
and long distance service provided by MCI WorldCom, Inc., a subsidiary of
WorldCom, Inc., accounted for 7% of our cost of revenue during 2002. Global
Crossing Ltd. filed bankruptcy in January 2002, and WorldCom, Inc., filed
bankruptcy in July 2002. We have not experienced any disruption in service
from the providers and there has been no change in our reseller agreements.
Nevertheless, the bankruptcy proceedings create uncertainty regarding the
nature and pricing of long distance service available from these providers in
the future. Changes in service offerings by these providers or their
successors in the future might result in less favorable reseller arrangements
than currently in place or force us to rely on other providers that provide
long distance service on less favorable terms, which could adversely affect
our results of operations.
Our success will depend on our ability to promote our name and service.
Building recognition of our brand names is benefical to attracting additional
customers, obtaining favorable reseller agreements with providers of long
distance and Internet access, and establishing strategic relationships with
businesses that can facilitate or enhance our service offerings and marketing
efforts. Our failure to promote and maintain our brand names successfully may
result in slowed growth, loss of customers, loss of market share, and loss of
strategic relationships. We intend to pursue an aggressive brand name
enhancement strategy, which includes promotional programs and public relations
activities, but our ability to do so will be limited by the capital we can
generate internally or outside sources to fund this effort. We cannot assure
you that we will have the resources to promote our brand names as fully as we
would like, or that promoting our brand names will enable us to be competitive
or improve our results of operations.
Disruptions in the operation of our technology could adversely affect our
operations. We are dependent on our computer databases, billing and account
computer programs, Internet network, and computer hardware that houses these
systems to effectively operate our business and market our services. Our
customers and providers may become dissatisfied by any systems failure that
interrupts our ability to provide our service to them. Substantial or
repeated system failures would significantly reduce the attractiveness of our
services. Significant disruption in the operation of these systems would
adversely affect our business and results of operations.
Our business could be materially harmed if our computer systems were
damaged. Substantially all of our network and communications systems are
located at our offices in Bluffdale and Draper, Utah. Fires, floods,
earthquakes, power losses, telecommunications failures, break-ins and similar
events could damage these systems. Computer viruses, electronic break-ins,
human error, or other similar disruptive problems could also adversely affect
our systems. We do not carry business interruption insurance. Accordingly,
any significant systems disruption could have a material adverse effect on our
business, financial condition, and results of operations.
Our success and the viability of the Internet as an information medium
and commercial marketplace will depend in large part upon the stability and
maintenance of the infrastructure for providing Internet access and carrying
Internet traffic, including the proper maintenance of root zone servers and
domain name zone servers. Failure to develop a reliable network system or
timely development and acceptance of complementary products, such as high-
speed access systems, could materially harm our business. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
activity or due to increased government regulation. If the Internet does not
remain a viable conduit for data and transactional traffic or the manner in
which it now operates changes significantly, then our business and results of
operations may be adversely affected.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. If third
parties succeed in penetrating our network security or otherwise
misappropriate credit card or banking information, we could be subject to
liability. Our liability could include claims for unauthorized purchases with
credit card or banking information, impersonation or other similar fraud
claims, as well as for other misuses of personal information, including for
unauthorized marketing purposes. These claims could result in litigation and
adverse publicity, which could have a material adverse effect on our
reputation, business, and results of operations.
We may have difficulty integrating our pending acquisitions. In the past
our business had developed through internal growth. Consequently, we have no
corporate experience with acquiring and integrating the assets and operations
of other businesses. It is likely the process of integration will require
resources, management time, additional employees, and modification of
management practices and controls. If Buyers United is not able to
successfully complete the integration of the acquired assets, such failure
could have a material adverse effect on its business and operating results.
Our growth and results of operations are difficult to predict. Buyers
United has experienced significant growth, primarily through internal growth
and the purchase of customer accounts. The pending acquisitions of I-Link and
Touch America assets and customers will, if completed, substantially increase
our operations. We have no other acquisitions under consideration and cannot
predict if or when another acquisition opportunity may present itself.
Consequently, it is not possible to predict with any certainty the growth of
our business over the next year, whether internally or through acquisitions.
Our ability to continue our growth and profitability will depend on a number
of factors, including our ability to successfully integrate the assets of our
pending acquisitions, our ability to maintain and expand our independent agent
network, the availability of capital to fund purchases of customers or
acquisitions, existing and emerging competition, and our ability to maintain
sufficient profit margins despite pricing pressures. Furthermore, the growth
and development of our business may be hampered if we are unable to adapt and
expand our systems, procedures, and controls to support and manage our growth.
Our development of enhanced Internet services could subject us to claims
of patent infringement that would adversely affect our results of operations.
As a result of our management of the RTIP Network acquired from I-Link, we
intend to offer enhanced services enabled by the Internet protocol of the
network, such as fax to email. This and other enhanced services offered by
other parties have been the subject of claims by certain patent holders that
providing the enhanced services violates existing patent rights covering the
manner and method by which the services are performed. We have not received
any notice or claim from any party that any service we offer or intend to
offer violates any such rights. Should we receive such a notice, we expect
that the patent holder would seek a licensing arrangement in which we would be
required to pay a license fee to continue to offer the service, and may seek
license payment for past sales of the service using the alleged patented
technology. Payment of any such license fees would have an adverse impact on
the net revenue generated from sales of the enhanced services.
Concentration of ownership will adversely affect your ability to have any
impact on the policies and management of Buyers United. A small group of our
stockholders, including our directors, own beneficially more than a majority
of our outstanding common stock. As a result of such ownership, these persons
will effectively have the ability to control Buyers United, direct its
business and affairs, and delay or prevent a change in control.
ITEM 2. DESCRIPTION OF PROPERTIES
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 $31,519. The lease for office space expires
in January 2007, but we have an option to renew the lease for an additional
three to five years.
In connection with the recent agreement to acquire the RTIP Network,
Buyers United agreed to sublease certain space occupied by the sellers, but
subsequently negotiated a new lease arrangement for the space. 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. In
consideration for entering into this agreement, the sellers agreed to
subsidize a total of $36,232 in lease payments, which represents the
difference between the amount of the original sublease obligation of Buyers
United and the monthly cost of the space under the new lease arrangement. In
the event the asset purchase transaction does not close, Buyers United has the
right to terminate the lease arrangement without further liability to the
sellers or the landlord.
Buyers United believes that the office space included in both facilities
is adequate for its anticipated needs for at least the next 15 months.
ITEM 3. LEGAL PROCEEDINGS
On June 14, 2001, a lawsuit was filed against Buyers United by Profitec,
Inc., in New Haven, Connecticut. Profitec asserted that it agreed to perform
certain billing services in 1999 for our telecommunication customers and that
we agreed to pay Profitec for such services. Profitec further claimed that we
breached the contract by terminating the contract and failing to pay fees
allocable under a "liquidated damage" provision for early termination.
Profitec claimed damages in excess of $140,000, based upon the contract's
liquidated damage provisions. We filed a general denial answer and asserted
affirmative defenses, including breach of contract, failure of consideration,
and other issues. We also filed a counter claim seeking damages for
Profitec's breach of the contract. In November 2001, Profitec answered and
denied the counter-claim. We reached an out-of-court settlement on October
17, 2002 in which we agreed to pay $17,500.
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, we recorded an extraordinary
gain on the early extinguishments of the debt in the amount of $383,520.
However, unbeknownst to us, during 2001 Infotopia allegedly entered into a
General Security Agreement with Sea Spray Holdings, Ltd., which purportedly
included the loan obligation. By letter dated November 22, 2002, Sea Spray
asserted that it had a perfected security interest in the obligation and
demanded payment as successor-in-interest to Infotopia. We responded that Sea
Spray did not have a perfected security interest since it did not take
possession of the note evidencing the obligation, and that the obligation was
fully discharged under applicable provisions of the Uniform Commercial Code.
On February 21, 2003 Buyers United filed with the American Arbitration
Association a Demand for Arbitration and Statement of Claim in order to
resolve the dispute. On March 11, 2003 Sea Spray filed an action against us
in the Supreme Court for the State of New York, County of New York, case
number 104468/03, seeking to enforce its security interest in the Infotopia
note obligation through collection of the Note, and obtained an order to show
cause why the arbitration proceeding we instigated should not be stayed in
favor of resolving the dispute in the state court proceeding. Before the stay
issue was heard by the state court, we removed the entire action to the
Federal District Court, Southern District of New York, and we intend to file a
motion to dismiss the action in favor of proceeding with arbitration in Utah.
We intend to defend this claim vigorously, but cannot predict at this time how
the dispute will eventually resolve.
On March 20, 2002, a shareholder filed a civil lawsuit in Salt Lake
County alleging that in mid-2000 Buyers United had offered to sell him 150,000
shares in the corporation for $300,000, and that we represented we had
received certain funds for promotion. The shareholder alleged that no such
funds were available, that consequently the value of his shares were reduced,
and that he was seeking rescission of the stock purchase. We filed an answer
to the complaint denying the allegations and raising various affirmative
defenses. The shareholder was then to initiate dates for discovery and other
procedures, but so far has failed to do so and has not otherwise made certain
mandatory disclosures under Utah law. Buyers United categorically denies the
shareholder's allegations, denies making misrepresentations of any kind, and
asserts the shareholder's claims are baseless. Furthermore, we believe that
regardless of any such alleged claims, the shareholder has suffered no actual
damages, and we intend to vigorously defend the case in the event the
shareholder resumes the discovery process.
Buyers United is the subject of certain other legal matters, which it
considers incidental to its business activities. It is the opinion of
management, after discussion with legal counsel, that the ultimate disposition
of these other matters will not have a material impact on the financial
position, liquidity or results of operations of Buyers United.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted the a vote of security holders during the quarter
ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
The common stock of Buyers United trades in the over-the-counter market.
The following table sets forth for the respective periods indicated the prices
of the common stock in the over-the-counter market, as reported and summarized
on the OTC Bulletin Board. Such prices are based on inter-dealer bid and
asked prices, without markup, markdown, commissions, or adjustments and may
not represent actual transactions.
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ----------- ----------
March 31, 2001 1.94 0.94
June 30, 2001 1.75 0.72
September 30, 2001 1.16 0.61
December 31, 2001 1.01 0.52
Calendar Quarter Ended: High Bid ($) 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
Since its 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 stock will
be declared and paid in the foreseeable future. As of March 28, 2003, there
were outstanding 1,865,000 shares of Series A Convertible Preferred Stock and
537,800 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 28, 2003, there were approximately 4,500 holders of record of the
common stock.
In December 2002, Buyers United issued an unsecured promissory note for
$250,000 to an investor for the purpose of continuing to fund referral fees
paid to an unrelated Internet marketing company. The note bears interest at
12%, payable monthly. Principal is also payable monthly based on 20% of
billings collected during each monthly billing period from new customers
obtained through the Internet marketing company. vFinance Investments, Inc.
acted as agent for us in the placement of the note and was paid commissions of
five percent of the loan proceeds, plus 7,500 warrants to purchase one share
of common stock. The warrants had a fair market value of $4,599.
In December of 2002 BuyersUnited raised an additional $3,187,500 through
the issuance of unsecured promissory notes that was used in purchasing
customers from Touch America. The Notes are unsecured and bear interest at
10%, payable monthly. Principal is also payable monthly, based on 10% of
billings collected during each monthly billing period from the acquired Touch
America customers. vFinance Investments, Inc. acted as agent for us in the
placement of the notes and was paid commissions of five percent of the loan
proceeds.
All of the aforementioned promissory notes were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 or Rule 506 of Regulation D promulgated there under. Based on
information provided by the investors, we believe each investor was an
accredited investor within the meaning of Rule 501 of Regulation D.
ITEM 6. MANAGEMENT'S 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 service options
to business and residential customers. In the past we functioned as an
aggregator and reseller of telecommunications services provided by others, and
intend to pursue and develop this type of business. However, in December 2002
Buyers United entered into agreements to purchase and manage 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 real-time
Internet protocol communications network (RTIP Network). This transaction
will enable us to develop and offer enhanced services, such as fax to email,
and transmit data and other communication services for a portion of the
journey over the RTIP Network rather than entirely through third party
providers.
We generate internal growth by pursuing multiple marketing avenues,
including using independent agents, implementing promotional and rebate
programs to attract customers, marketing through the Internet, and obtaining
customers from unrelated marketing companies. In December 2002 we agreed to
purchase approximately 70,000 of the switched voice telecommunication
customers of Touch America, which will result in a significant increase in our
customer base in 2003. We believe recent financial difficulties and
uncertainty in the telecommunications industry that arose in 2002 may result
in opportunities to acquire customers from unrelated companies, and we intend
to remain open to these opportunities. However, at the present we are not
evaluating any new acquisitions.
RESULTS OF OPERATIONS - Year Ended December 31, 2002
Revenues increased 110% during 2002 to $30.2 million as compared to $14.3
million during 2001. The increase was due to a substantial increase in our
customer base that was a direct result of obtaining more customers through
independent agents and referral arrangements with unrelated Internet marketing
companies.
During 2002, Buyers United realized the benefit of its efforts in
negotiating with its vendors during 2001 to lower the cost of long distance
service provided to customers. By offering to increase business volume to
certain levels, vendors agreed in exchange to offer lower rates. Accordingly,
Buyers United continued concentrating volume and new customer sign-ups with
two of its largest long-distance wholesale carriers. At the beginning of
2001, Buyers United's business was primarily placed with these two carriers,
but continued to offer service to customers through five different wholesale
vendors. In response to the lower costs thus realized during 2002, we
continued to offer services to new customers, particularly those in the agent-
sponsored channels, at lower, more competitive prices. As a result, costs of
revenues for the year ended December 31, 2002 were $16.3 million, or 54% of
revenue, as compared to costs of $9.3 million, or 65% of revenue, for the year
ended December 31, 2001. The resultant gross profit margin for 2002 was
higher at 46%, as compared to the margin of 35% experienced during 2001.
Buyers United expects that gross margins will increase during 2003, as it
markets to all its customers the high-margin, enhanced services it plans to
provide using the RTIP Network technology.
General and administrative expenses for 2002 increased 20% to $7.4
million as compared to $6.1 million for the previous year. Approximately
two-thirds of the increase stemmed from higher bad debt estimated write-offs
incidental to the increased level of revenue. The remaining increase resulted
primarily from higher customer service and support expenses, along with higher
billing costs, all incidental to the increase in revenue. Offsetting these
higher amounts were decreased levels of maintenance and depreciation expenses
stemming from terminating high-cost equipment leases and writing off obsolete
web-site development costs during 2001. As a result of the combination of the
above factors, total general and administrative expenses during 2002 were 24%
of revenue, as compared to 43% of revenue for the prior year. Except for
certain RTIP Network integration costs, Buyers United anticipates lower levels
of general administrative expenses, as a percentage of revenue, throughout
2003.
Selling and promotion expenses for the year ended December 31, 2002 were
$4.6 million, an increase of 40% over the prior year's expenses of $3.3
million. Virtually all of the increase was directly related to the increase
in revenue during the 2002 year. Included in the increase were higher
expenses for sales commissions, sales support staff, and the amortization of
deferred customer referral fees. Selling and promotion costs as a percentage
of revenue were 15% during 2002, as compared to 23% during the year ended
December 31, 2001. We believe selling and promotion expenses during 2003 will
continue to decrease as a percentage of revenue.
During 2001, Buyers United reviewed its investment in leased computer
equipment and software, the related ongoing maintenance expenses, and the
costs primarily incurred in 2000 in connection with the creation of various
web sites designed to work with Oracle-based applications. We determined that
we could achieve our growth objectives and serve existing and potential
customers using a more economical equipment and software solution.
Accordingly, Buyers United negotiated with the equipment lessor to return the
equipment and cancel the lease. We also replaced our web site software with
newly developed programs designed to operate on an SQL-based operating system
and determined that the costs previously capitalized and associated with the
returned equipment and software no longer had a realizable value. The total
cost of removing the unamortized book value of the lease obligation,
equipment, software, and capitalized web site development costs totaled
$980,086 and was included in operating expenses for the year ended December
31, 2001.
Interest income for 2002 was $17,980 as compared to $15,571 in 2001. The
difference is attributable to the higher amount of funds on hand during 2002.
Interest expense for 2002 was $1.5 million as compared to $997,882 for 2001,
an increase of 55%. The increase is attributable to the significant amount of
additional debt financing Buyers United had outstanding during 2002, which it
raised to fund operations and take advantage of its online marketing
opportunity with an unrelated Internet marketing company.
In December 2001, Buyers United recognized an extraordinary gain on the
early extinguishment of debt of $383,520. Earlier in the year, one of our
noteholders sold the obligation to an investment relations firm.
Subsequently, we negotiated a settlement with the investment relations firm.
We 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. The difference between the balance
due, the cash paid and the fair market value of the stock issued was
recognized as a gain on early extinguishment of debt during 2001.
As a result of the above factors, Buyers United earned net income before
preferred stock dividends of $330,183 for the year ended December 31, 2002, as
opposed to the net loss experienced during the prior year of $6.1 million.
During 2002, preferred stock dividends amounted to $749,725 of 8% cumulative
dividends on outstanding Series A and B preferred stock. This compares to
total preferred stock dividends during 2001 of $759,455, consisting of
$738,957 of 8% cumulative dividends on outstanding Series A and B preferred
stock, and $20,498 of preferred stock dividends related to the beneficial
conversion feature associated with the issuance of the last 110,000 Series B
Preferred shares in early 2001.
LIQUIDITY AND CAPITAL RESOURCES
Buyers United's current ratio at the end of 2002 increased slightly to
0.51:1 from 0.48:1 at the end of 2001. The reasons for the increase mainly
resulted from the combination of net increases in current asset amounts and
higher current liability amounts, all related primarily to higher revenues and
increased debt financing. Restricted cash decreased over the 2001 level due
to the timing of weekly draws on restricted accounts by the finance company
that provides our line of credit. The line of credit agreement requires
control over certain bank accounts to which customer payments are remitted as
part of the repayment terms. While this cash eventually repays the debt
obligation with the balance transferring to us, due to the controlled nature
of the account it is reflected on the balance sheet as being "restricted."
Accounts receivable increased 149% due to higher revenue levels. Debt levels
deemed current (other than the line of credit) rose 508%, due to the
significant increase in debt financing (discussed more fully below) raised
during the year. Accounts payable rose 47% since a year earlier, due to
higher revenue and related operating payable increases. Accrued liabilities
increased 47% due mainly to increases in accrued interest and payroll costs at
year-end, relating to the increases in debt financing and higher employee
levels. Accrued rebates and commissions rose 52% at the end of 2002 as
compared to the previous year due to the increase in revenues.
On May 25, 2002 Buyers United renewed for another year its account
receivable financing agreement with RFC Capital Corporation, and paid a
$50,000 commitment fee at that time. The facility allows Buyers United to
obtain financing on its eligible accounts receivable, including unbilled
receivables and regular monthly billings. Interest during 2002 was at prime
plus 6%. At December 31, 2002, Buyers United had financed the maximum amount
available based on eligible accounts receivable at that time, which amounted
to $1,276,252. The facility requires us to maintain a restricted cash account
for the collection of the receivables. As of December 31, 2002 we had
$584,002 of restricted cash. On January 21, 2003, Buyers United and RFC
Capital amended the facility to increase the available borrowing limit to $5
million, and decrease the interest rate to prime plus 3%. The amendment also
extended the facility to January 21, 2006.
As of December 31, 2002, Buyers United had several unsecured promissory
notes payable to its officers and members of the Board of Directors totaling
$2,957,498. All bear interest at a rate of 12%, with interest on _ of the
notes accruing monthly until July 2003, when such accrued interest is due.
Interest on the remaining notes is payable monthly. All the notes mature in
2004, except for notes aggregating $79,998 which are due in July 2003. By the
end of February 2003, another $500,000 in notes were issued ($400,000 to
Directors) with interest payable monthly at 12%, and all maturing by the end
of 2004.
Starting in October 2001 through December 2002, Buyers United raised a
total of $5,065,000 via promissory notes for working capital and to fund
payment of up-front referral fees for new customers obtained via an unrelated
Internet marketing company. All the notes carry essentially the same terms.
They are unsecured and bear interest at 10% to 12%, payable monthly.
Principal is also payable monthly, based on 20% to 40% of billings collected
during each monthly billing period from a specific group of existing customers
or from any new customers referred to us via the Internet marketing company.
No principal repayments were made during 2001, but $1,829,835 in principal was
repaid during 2002. Included in that amount was $600,000 of the earliest
notes that were completely repaid. Inasmuch as principal payments could vary
over time, we believe the principal will be repaid over a period of
approximately one year from the time the notes were issued. Accordingly, the
entire $3,235,165 amount (less applicable discounts relating to issuance
costs) outstanding at December 31, 2002 is classified as current on the
accompanying balance sheet. Up through the end of March 2003, we had repaid
additional principal in the amount of $805,534.
In December of 2002 Buyers United issued $3,187,500 in promissory notes
for cash used in purchasing customers from Touch America. The notes are
unsecured and bear interest at 10%, payable monthly. Principal is also
payable monthly, based on 12.24% of billings collected during each monthly
billing period from the acquired Touch America customers. We believe that
these notes will most likely be repaid over a period of approximately eighteen
months. Accordingly, one-third of the amount outstanding is classified as
long-term debt.
As of December 31, 2002, Buyers United had a $1,050,000 note payable to
an individual bearing interest at 18%, payable monthly. The note was paid and
settled in February 2003 in exchange for $250,000 in cash, 50,000 shares of
Buyers United common stock valued at $92,500, and a new $800,000 promissory
note. The new note is unsecured and bears interest at 10%, payable monthly.
Principal is paid in an amount equal to 20% of a specific group of customer
billings collected during the preceding calendar month.
During the years ended December 31, 2002 and 2001, Buyers United's net
loss applicable to common stockholders was $419,542 and $6,827,484,
respectively. As of December 31, 2002, we had a working capital deficit of
$7,276,814 and an accumulated deficit of $26,050,671. During the years ended
December 31, 2002 and 2001, our operations used $1,678,158 and $4,145,290 of
cash, respectively. Although management believes Buyers United's financial
condition is steadily improving, these matters raise substantial doubt about
our ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should we be unable to continue as a going concern.
During 2001 we began several cost-reduction initiatives, which continued
into 2002. The net result of these efforts resulted in operating expenses
(unrelated to costs of revenue and termination of lease and web-site costs)
decreasing as a percentage of revenue from 66% during 2001 to 40% during 2002.
In addition, our revenues increased 110% during 2002 as compared to 2001.
On December 6, 2002, Buyers United entered into agreements to purchase
and manage the RTIP Network. In connection with the transaction, Buyers
United agreed to sublease certain space occupied by the sellers, but
subsequently negotiated a new lease arrangement for the space. Buyers United
is leasing an additional 14,339 square feet of space through November 2004, at
a monthly cost of $16,728. In consideration for entering into this agreement,
the sellers agreed to subsidize a total of $36,232 in lease payments. In the
event the asset purchase transaction does not close, Buyers United has the
right to terminate the lease arrangement without further liability to the
Sellers or the landlord.
On December 20, 2002, Buyers United entered into an agreement with Touch
America to purchase approximately 70,000 of its switched voice
telecommunication customers. Buyers United made an initial payment of
$3,000,000 to Touch America. The original purchase price was $6,750,000, but
the parties are now attempting to negotiate a reduction in the purchase price
due to errors and other discrepancies the parties subsequently discovered in
the list of accounts sold to Buyers United. The balance of the final purchase
price will be paid in monthly increments based on a percentage of revenue
generated by the acquired customer accounts. The conditions for closing the
purchase were satisfied in March 2003.
As a result of these two transactions, Buyers United anticipates revenue
during 2003 to increase significantly. At the same time, we are currently
engaged in streamlining RTIP Network operations, integrating Touch America
customers into our billing and customer service business model, and working
with our wholesale providers to achieve lower costs of revenue. Accordingly,
we believe we will achieve increased profitability during the year ending
December 31, 2003.
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 United's 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of Buyers United appear at the end of this
report beginning with the Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by each of the Items listed below is
incorporated herein by reference to the definitive proxy statement of Buyers
United for the 2003 annual meeting of stockholders:
Information required by "Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(A) of the Exchange
Act," is incorporated by reference to the proposed caption "Directors and
Executive Officers" in the proxy statement;
Information required by "Item 10. Executive Compensation," is
incorporated by reference to the proposed caption "Executive Compensation" in
the proxy statement;
Information required by "Item 11. Security Ownership of Certain
Beneficial Owners and Management," is incorporated by reference to the
proposed caption "Security Ownership of Management and Principal Stockholders"
in the proxy statement; and
Information required by "Item 12. Certain Relationships and Related
Transactions," is incorporated by reference to the proposed caption "Certain
Relationships and Related Transactions" in the proxy statement.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Copies of the following documents are included as exhibits to this Form
10-KSB pursuant to Item 601 of Regulation S-B.
Exhibit Title of Document Location
*
3.1 Certificate of Incorporation Form 10-
SB
3.2 Certificate of Designation of Preferred Stock Form 10-
SB
3.3 By-Laws Form 10-
SB
3.4 Series B Preferred Stock Designation 2000
Fm10KSB
4.1 Form of Registration Rights Agreement 2000
Fm10KSB
10.2 Form of Sales Agent Agreement 2000
Fm10KSB
10.3 Form of Warrant issued to lenders 2000
Fm10KSB
10.4 Form of Warrant issued as part of units with Series B 2000
Preferred Stock Fm10KSB
10.5 Form of option for employees and directors 2001
Fm10KSB
10.6 RFC Agreement 2001
Fm10KSB
10.7 Agreement with LowerMyBills.com 2001
Fm10KSB
10.9 Long-Term Stock Incentive Plan Form 10-
SB
10.10 Asset Purchase Agreement dated December 6, 2002, with I-Link
Communications, Inc. and I-Link Incorporated, without exhibits
10.11 Management Agreement dated December 6, 2002, with I-Link
Communications, Inc.
10.12 Assignment Amendment and Release Agreement dated
December 6, 2002, with 13751 S. Wadsworth Park Dr., LLC, I-
Link Incorporated, and I-Link Systems, Inc.
10.13 Asset Purchase Agreement dated December 20, 2002 with Touch
America, Inc., without exhibits
10.14 Management Agreement dated December 20, 2002 with Touch
America, Inc.
10.15 Form of note agreement issued April to August 2002 to
noteholders
10.16 Form of warrant agreement issued to certain noteholders
10.17 Form of note agreement issued on December 20, 2002 to the
noteholders who provided financing for the Touch America
deposit
10.18 Promissory Note dated February 28, 2003 issued to George
Brimhall
21.1 List of Subsidiaries 1999
Fm10KSB
99.01 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Exhibits identified as in the "Form 10-SB" are incorporated herein by
this reference to the Registration Statement on Form 10-SB filed by Buyers
United with the Securities and Exchange Commission on August 3, 1999. Exhibits
identified as in "1999 Fm 10KSB" are incorporated herein by this reference to
the annual report on Form 10-KSB for the year ended December 31, 1999, filed
April 14, 2000. Exhibits identified as in "2000 Fm 10KSB" are incorporated
herein by this reference to the annual report on Form 10-KSB for the year
ended December 31, 2000, filed April 10, 2001. Exhibits identified as in
"2001 Fm 10KSB" are incorporated herein by this reference to the annual report
on Form 10-KSB for the year ended December 31, 2001, filed April 16, 2002.
FORM 8-K FILINGS
On December 23, 2003 Buyers United filed with the Securities and Exchange
Commission a report on Form 8-K reporting under "Item 5. Other Events" that it
entered into an asset purchase agreement with I-Link Incorporated and I-Link
Communications, Inc., on December 6, 2002, and entered into a separate asset
purchase agreement with Touch America, Inc., on December 20, 2002.
ITEM 14.CONTROLS AND PROCEDURES
With the participation of management, Buyers United's chief executive
officer and chief financial officer evaluated its disclosure controls and
procedures on March 26, 2003. Based on this evaluation, the chief executive
officer and the chief financial officer concluded that the disclosure controls
and procedures are effective in connection with Buyers United's filing of its
annual report on Form 10-KSB for the year ended December 31, 2002.
Subsequent to March 26, 2003, through the date of this filing of Form 10-
KSB for the year ended December 31, 2002, there have been no significant
changes in Buyers United's internal controls or in other factors that could
significantly affect these controls, including any significant deficiencies or
material weaknesses of internal controls that would require corrective action.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BUYERS UNITED, INC.
Date: April 14, 2003 By: /s/ Theodore Stern, Chief Executive Officer
Date: April 14, 2003 By: /s/ Paul Jarman, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 14, 2003 /s/ Theodore Stern, Director
Date: April 14, 2003 /s/ Steve Barnett, Director
Date: April 14, 2003 /s/ Gary Smith, Director
Date: April 14, 2003 /s/ Edward Dallin Bagley, Director
CERTIFICATE
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Theodore Stern, certify that:
1. I have reviewed this annual report on Form 10-KSB of Buyers United, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 By: /s/ Theodore Stern, Chief Executive Officer
CERTIFICATE
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Paul Jarman, certify that:
1. I have reviewed this annual report on Form 10-KSB of Buyers United, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 By: /s/ Paul Jarman, Chief Financial Officer
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, 2002 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of
the two years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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, 2002 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations, deficit cash flows from operations, negative working capital, and
has a net capital deficiency. These results as reported in the accompanying
financial statements raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 14, 2003
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2002
ASSETS
Current assets:
Cash $ 994,360
Restricted cash 584,002
Accounts receivable, net of allowance for doubtful accounts
of $1,425,000 5,650,214
Other current assets 214,869
----------
Total current assets 7,443,445
Property and equipment, net 540,578
Deposit to purchase Touch America customers 3,000,000
Deferred advertising costs, net 1,776,124
Other assets 384,801
----------
Total assets $ 13,144,948
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 1,276,252
Notes payable 6,099,580
Accounts payable 5,700,753
Accrued liabilities 772,347
Accrued dividends payable on preferred stock 377,688
Accrued commissions and rebates 493,639
----------
Total current liabilities 14,720,259
Notes payable 3,887,803
----------
Total liabilities 18,608,062
----------
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; 553,800
shares issued and outstanding (liquidation value of
$5,538,000) 55
Common stock, $0.0001 par value; 100,000,000 shares
authorized; 5,985,262 shares issued and outstanding 599
Additional paid-in capital 16,019,376
Warrants and options outstanding 4,592,514
Deferred consulting fees (25,174)
Accumulated deficit (26,050,671)
----------
Total stockholders' deficit (5,463,114)
----------
Total liabilities and stockholders' deficit $ 13,144,948
==========
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002 and 2001
2002 2001
---------- ----------
Revenues:
Telecommunications services $ 30,110,528 $ 14,256,990
Other 52,922 84,987
---------- ----------
Total revenues 30,163,450 14,341,977
---------- ----------
Operating expenses:
Costs of revenues 16,295,201 9,348,215
General and administrative 7,365,569 6,163,505
Selling and promotion 4,646,029 3,319,409
Termination of lease and write-off of web-
site development costs - 980,086
---------- ----------
Total operating expenses 28,306,799 19,811,215
---------- ----------
Income (loss) from operations 1,856,651 (5,469,238)
---------- ----------
Other income (expense):
Interest income 17,980 15,571
Interest expense (1,544,448) (997,882)
---------- ----------
Total other expense, net (1,526,468) (982,311)
---------- ----------
Income (loss) before extraordinary item 330,183 (6,451,549)
Extraordinary gain on early extinguishment of
debt - 383,520
---------- ----------
Net income (loss) $ 330,183 $ (6,068,029)
---------- ----------
Preferred stock dividends:
8% dividends on Series A and B preferred
stock (749,725) (738,957)
Beneficial conversion feature related to
Series B preferred stock - (20,498)
---------- ----------
Total preferred stock dividends (749,725) (759,455)
---------- ----------
Net loss applicable to common
stockholders $ (419,542) $ (6,827,484)
========== ==========
Basic and diluted net loss per common share:
Net loss applicable to common stockholders
before extraordinary item $ (0.07) $ (1.57)
Extraordinary gain on early extinguishments
of debt - 0.08
---------- ----------
Net loss applicable to common
stockholders $ (0.07) $ (1.49)
========== ==========
Weighted average common shares outstanding:
Basic and diluted 5,740,811 4,583,698
========== ==========
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2002 and 2001
Additional Warrants/ Deferred
Preferred Stock Common Stock Paid-in Options Consulting Accumulated
Shares Amount Shares Amount Capital Outstanding Fees Deficit Total
--------- ------ --------- ------- ---------- ----------- --------- ----------- ----------
Balance at December 31,
2000 2,328,800 $ 233 3,988,940 $ 399 $13,005,703 $4,073,144 $ (98,145) $(18,803,645) $(1,822,311)
Issuance of common shares
for services - - 148,805 15 104,572 - - - 104,587
Issuance of common shares
with consulting
agreement - - 100,000 10 124,990 - (125,000) - -
Issuance of common shares
in connection with debt
extinguishments - - 35,000 4 22,397 - - - 22,401
Conversion of preferred
shares to common (5,000) - 5,000 - - - - - -
Issuance of common shares
in connection with notes
payable - 430,000 43 360,130 - - - 360,173
Issuance of warrants for
services and with
consulting agreements - - - - - - 54,515 - 54,515
Amortization of deferred
consulting fees - - - - - - 45,774 - 45,774
Issuance of warrants with
notes payable - - - - - 32,239 - - 32,239
Issuance of common stock
for debt guarantee - - 100,000 10 144,990 - - - 145,000
Imputed interest on notes
payable - - - - 25,500 - - - 25,500
Issuance of Series B
preferred stock and
warrants, net of
offering costs 110,000 11 - - 797,588 302,401 - - 1,100,000
Beneficial conversion
dividend on Series B
preferred stock - - - - 20,498 - - (20,498) -
Cancellation of options
issued for services - - - - - (78,965) 78,965 - -
Preferred stock dividends - - - - - - - (738,957) 738,957)
Issuance of common shares
as payment of preferred
stock dividends - - 504,884 50 584,487 - - - 584,537
Net loss - - - - - - - (6,068,029) (6,068,029)
--------- ------ --------- ------- ---------- ----------- --------- ----------- ----------
Balance at December 31,
2001 2,433,800 $ 244 5,312,629 $ 531 $15,190,855 $4,383,334 $ (98,406) $(25,631,129) $(6,154,571)
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 - - - 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 - - 25,000 3 30,747 - - - 30,750
Imputed interest on notes
Payable - - - - 28,686 - - - 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 - - 574,635 57 750,296 - - - 750,353
Net income - - - - - - - 330,183 330,183
--------- ------ --------- ------- ---------- ----------- --------- ----------- ----------
Balance at December 31,
2002 2,418,800 $ 242 5,985,262 $ 599 $16,019,376 $4,592,514 $ (25,174) $(26,050,671) $(5,463,114)
========= ====== ========= ======= ========== =========== ========= =========== ==========
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
2002 2001
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 330,183 $(6,068,029)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Extraordinary gain on early extinguishment of
debt - (383,520)
Depreciation and amortization 1,191,196 766,869
Interest expense resulting from issuing stock
and warrants with notes 28,686 255,623
Amortization of discount on notes payable 237,444 6,140
Amortization of note financing costs 174,977 169,154
Amortization of deferred consulting fees 73,232 45,774
Services rendered in exchange for shares of
common stock - 104,587
Expense related to the grant of options to
purchase common shares (23,079) 54,515
Termination of lease and write-off of web-
site development costs - 980,086
Changes in operating assets and liabilities:
Accounts receivable (3,378,341) (724,591)
Other assets (2,379,009) (112,176)
Checks in excess of available cash balances (186,866) 186,866
Accounts payable 1,821,236 430,271
Accrued commissions and rebates 168,861 249,244
Accrued liabilities 263,322 (106,103)
---------- ----------
Net cash used in operating activites (1,678,158) (4,145,290)
---------- ----------
Cash flows from investing activities:
Increase in other assets (194,915) (63,535)
Purchases of property and equipment (317,399) (213,145)
Deposits to purchase Touch America customers (3,000,000) -
---------- ----------
Net cash used in investing activities (3,512,314) (276,680)
---------- ----------
Cash flows from financing activities:
Change in restricted cash 106,310 (462,542)
Net borrowings under line of credit 702,080 574,172
Borrowings under notes payable, net of debt
issuance costs 7,818,850 3,833,750
Principal payments on notes payable (2,297,351) (120,000)
Principal payments on capital lease obligations (202,157) (500,358)
Issuance of preferred/common shares for cash,
net of offering costs - 1,097,223
---------- ----------
Net cash provided by financing activities 6,127,732 4,422,245
---------- ----------
Net increase in cash 937,260 275
Cash at the beginning of the period 57,100 56,825
---------- ----------
Cash at the end of the period $ 994,360 $ 57,100
========== ==========
Supplemental cash flow information:
Cash paid for interest $ 890,490 $ 459,442
Supplemental schedule of noncash investing
and financing activities:
Issuance of common shares in payment of
preferred stock dividend $ 750,353 $ 584,537
Issuance of common shares in payment of
deferred services - 125,000
Issuance of common shares in payment of
deferred financing costs 18,793 222,075
Issuance of common shares in extinguishment of
debt - 22,400
Issuance of warrants with promissory notes 232,259 32,239
Beneficial conversion dividend on Series B
preferred shares - 20,498
Accrual of dividend payable on preferred stock 749,725 738,957
Assets acquired under capital lease
arrangements - 109,100
Issuance of common shares for supplier guaranty 30,750 27,475
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002 and 2001
NOTE 1 - DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
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. The Company was formerly known as Linguistix, Inc., Buyers United
International, Inc., BUI, Inc., and BuyersOnline.com, Inc. In 2001, the
Company changed its name to Buyers United, Inc., the same name as its dormant,
wholly owned Utah subsidiary. The Company merged the subsidiary into the
parent entity during 2002. At the time of the name change, the Company's
trading symbol also changed to "BYRS."
The Company is a consumer buying organization with the objective of providing
high quality consumer products and services at favorable prices to its
members. The Company forms strategic alliances with various consumer service
providers in an effort to combine the purchasing power of its members to
negotiate favorable prices from these providers. During the years ended
December 31, 2002 and 2001, the Company primarily provided discounted long
distance telecommunication services to its members.
On December 6, 2002, Buyers United entered into an 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 real-
time Internet protocol communications network (RTIP Network). The assets
acquired include dedicated equipment required for operating the RTIP Network,
customers of I-Link serviced through the network, and certain trademarks. In
consideration for the assets and software license, Buyers United agreed to
issue to I-Link 300,000 shares of Series B Convertible Preferred Stock and
assume certain liabilities. Completion of the purchase is subject to
obtaining government and third-party approvals, and obtaining releases of
third party security interests in the assets. The parties are pursuing
efforts to satisfy these closing conditions for the purchase of assets, but
cannot predict when or if the conditions will be satisfied and the transaction
closed. Since this transaction has not closed, the effects of this
transaction have not been reflected in the accompanying financial statements.
Concurrently with the agreement for the purchase of I-Link assets, I-Link and
Buyers United entered into transition and management agreements pursuant to
which Buyers United was appointed to manage all of the assets to be acquired
from I-Link pending the closing of the purchase. Under the agreements, Buyers
United assumed responsibility for day-to-day operation of the RTIP Network
previously operated by I-Link that is to be sold to Buyers United, is
responsible for all customer billing and collection, has the right to use the
RTIP Network to provide telecommunications service to its customers, and is
entitled to receive a management fee equal to 10 percent of revenue generated
from I-Link customers after the payment of all expenses of the RTIP Network
and providing service to such customers. Since the revenues generated and
expenses paid are not legally the Company's the net impact of these items is
reflected in other liabilities and operating expenses in the accompanying
financial statements.
In connection with the transaction, Buyers United agreed to sublease certain
space occupied by I-Link, but subsequently negotiated a new lease arrangement
for the space. Buyers United is leasing through November 2004, 14,339 square
feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly
cost of $16,728. In consideration for entering into this agreement, I-Link
agreed to subsidize a total of $36,232 in lease payments, which represents the
difference between the amount of the original sublease obligation of Buyers
United and the monthly cost of the space under the new lease arrangement. In
the event the asset purchase transaction between Buyers United and I-Link does
not close, Buyers United has the right to terminate the lease arrangement
without further liability to I-Link or the landlord.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase
approximately 70,000 of the switched voice telecommunication customers of
Touch America, including the carrier identification code used to service those
customers. Buyers United did not purchase any accounts receivable, equipment,
or other assets of Touch America. Buyers United agreed to pay to Touch
America account receivable balances that predate the sale as collected by
Buyers United, subject to certain fees payable to Buyers United. Buyers
United made an initial payment of $3 million dollars to Touch America. The
original purchase price was $6,750,000, but the parties are now attempting to
negotiate a reduction in the purchase price due to errors and other
discrepancies the parties subsequently discovered in the list of accounts sold
to Buyers United. The balance of the final purchase price will be paid in
monthly increments based on a percentage of revenue generated by the acquired
customer accounts. Since the transaction had not yet closed as of December
31, 2002, no additional amounts have been reflected in the accompanying
balance sheet. The conditions for closing the purchase were satisfied in
March 2003.
During the years ended December 31, 2002 and 2001, the Company's net loss
applicable to common stockholders was $419,542 and $6,827,484, respectively.
As of December 31, 2002, the Company had a working capital deficit of
$7,276,814 and an accumulated deficit of $26,050,671. During the years ended
December 31, 2002 and 2001, the Company's operations used $1,678,158 and
$4,145,290 of cash, respectively. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
During 2001 the Company began several cost-reduction initiatives, which
continued into 2002. The net result of these efforts resulted in operating
expenses (unrelated to costs of revenue and termination of lease and web-site
costs) decreasing as a percentage of revenue from 66% during 2001 to 40%
during 2002. In addition, the Company's revenues increased 110% during 2002
as compared to 2001.
The Company is subject to certain risk factors frequently encountered by
companies lacking adequate capital and are continuing the development of
multiple business lines that may impact its ability to become a profitable
enterprise. These risk factors include:
a) The consumer buying organization industry is characterized by intense
competition, and many of the Company's competitors are substantially
larger than the Company with greater financial and other resources. In
addition, the Company is currently marketing telecommunications services,
including long distance services, to its members. The U.S. long distance
telecommunications industry is highly competitive and significantly
influenced by the marketing and pricing strategies of the major industry
participants, which are significantly larger than the Company and have
substantially greater resources.
b) The Company's relationship marketing system is or may be subject to or
affected by extensive government regulation, including without
limitations, state regulation of marketing practices and federal and
state regulation of the offer and sale of business franchises, business
opportunities, and securities. Long distance telecommunications carriers
currently are subject to extensive federal and state government
regulation.
NOTE 2 - 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.
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
Restricted Cash: In accordance with the Company's agreements with RFC Capital
Corp. (Note 4) and with certain vendors, the Company maintains a restricted
cash account for the collection of the Company's receivables. As of
December 31, 2002, the Company had $584,002 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 gross receivable balance outstanding as of
December 31, 2002 is comprised of the following:
Billed amounts $ 4,524,390
Unbilled amounts 2,550,824
----------
$ 7,075,214
==========
Finance charges are assessed to accounts once the amount owed is past due
based on their specific terms. The amount of trade receivables billed and
outstanding that are not being assessed finance charges are $2.2 million. The
amount of trade receivables that are past due more than 90 days and still
accruing fees are approximately $700,000.
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. During the three months ended December 31, 2002
the Company recorded a $400,000 adjustment to increase the allowance for
doubtful accounts. 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," 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.
In March 2000, the Emerging Issues Task Force issued its consensus on Issue
No. 00-2, "Accounting for Web Site Development Costs." Of such costs the
Company disposed of significant amounts during 2001, and capitalized
approximately $127,000 during 2002.
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 and web site development costs 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 $29,781 and $66,455 for
the years ended December 31, 2002 and 2001, respectively.
In addition to the traditional advertising means noted above, the Company
participates in a direct response advertising campaign with LowerMyBills.com,
Inc. (LMB), a web-based comparison shopping service. Through this campaign,
the Company's name and the services it provides are displayed on LMB's web
site. The Company is obligated to pay LMB a referral fee when a customer
signs up for services through LMB's web site. The fees associated with this
advertising campaign were deferred and aggregated $2,579,307 during the year
ended December 31, 2002. These fees have been amortized over the period
during which the future benefits are expected to be received, which was 24
months at December 31, 2002. The fees and related accumulated amortization of
$803,183 was included with other assets as of December 31, 2002.
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, 2002 and 2001 was
$237,446 and $149,104, respectively, and are included in interest expense.
The remaining amortization period for these costs is less than two years as of
December 31, 2002.
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 recognitions provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation":
2002 2001
--------- ---------
Net loss applicable to common stockholders:
As reported $ (419,542) $(6,827,484)
Pro forma stock-option based compensation (748,857) (710,762)
--------- ---------
Pro forma net loss applicable to common
stockholders $(1,168,399) $(7,538,246)
========= =========
Basic and diluted net loss per common share:
As reported $(0.07) $(1.49)
Pro forma basic and diluted net loss per
common share $(0.20) $(1.64)
The fair value of the options was estimated at the date of grant using the
following weighted average assumptions:
2002 2001
--------- ---------
Risk-free interest rate 3.71% 2.18%
Dividend yield - -
Expected volatility 104% 111%
Weighted average expected life 4.7 years 5.6 years
The weighted average fair values of options granted during the years ended
December 31, 2002 and 2001 was $1.01 and $2.51, 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 Loss Per Common Share: Basic net loss per common share ("Basic EPS")
excludes dilution and is computed by dividing net loss by the weighted average
number of common shares outstanding during the year. Diluted net 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.
Outstanding options of employees and directors to purchase 3,592,721 and
2,818,585 shares of common stock as of December 31, 2002 and 2001,
respectively; 4,634,000 and 4,689,000 shares of common stock issuable upon the
conversion of preferred stock as of December 31, 2002 and 2001, respectively;
and 5,529,282 and 5,345,732 shares of common stock issuable upon exercise of
warrants to purchase common stock as of December 31, 2002 and 2001,
respectively, were not included in the computation of Diluted EPS because they
would be antidilutive.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
Recent Accounting Pronouncements: On June 29, 2001, the Financial Accounting
Standards Board (FASB) approved its proposed SFAS No. 141 ("SFAS No. 141"),
"Business Combinations," and SFAS No. 142 ("SFAS No. 142"), "Goodwill and
Other Intangible Assets."
Under SFAS No. 141, all business combinations should be accounted for using
the purchase method of accounting; use of the pooling-of-interests method is
prohibited. The provisions of the statement apply to all business
combinations initiated after June 30, 2001. SFAS No. 142 applies to all
acquired intangible assets whether acquired singly, as part of a group, or in
a business combination. The statement supersedes Accounting Principles Board
("APB") Opinion No. 17, "Intangible Assets," and will carry forward provisions
in APB Opinion No. 17 related to internally developed intangible assets. The
adoption of these statements as of January 1, 2002 did not have a material
impact on the Company's results of operations, financial position, or
liquidity.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The Company is required to adopt SFAS No. 143 for fiscal years
beginning after June 15, 2002. Thus, the Company will need to adopt SFAS
No. 143 as of January 1, 2003. SFAS No. 143 requires businesses to recognize
a liability for an asset retirement obligation when it is incurred. This
liability should be recorded at its fair value, and a corresponding increase
in the carrying amount of the related long-term asset should be recorded as
well. The adoption of SFAS No. 143 on January 1, 2003 did not have a material
impact on the Company's results of operations, financial position, or
liquidity.
On October 3, 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale.
The long-lived assets that are to be disposed of by sale should be measured at
the lower of book value or fair value less any selling expenses.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and will be eliminated from the ongoing operations
of the entity in a disposal transaction. The statement is effective for the
Company for all financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this pronouncement did not have a material
effect on the Company's results of operations, financial position, or
liquidity.
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 year ended December 31, 2002.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2002, property and equipment consists of the following:
Computer and office equipment $1,325,175
Internal-use software 209,096
Furniture and fixtures 270,371
---------
1,804,642
Accumulated depreciation and amortization (1,264,064)
---------
$ 540,578
=========
During 2001 the Company reviewed its investment in leased computer equipment
and software, and determined that it could achieve its growth objectives and
serve its customers with a different equipment and software solution. During
2001, the Company also replaced its web site software with a newly-developed
program. The total cost of removing the unamortized book value of the above
assets was $980,086 and is included in the consolidated statement of
operations.
NOTE 4 - LINE OF CREDIT
During 2002 the Company renewed its line of credit agreement with RFC Capital
Corporation ("RFC"). The facility allowed the Company to borrow up to $2.5
million based on the Company's eligible accounts receivable and unbilled
receivables. On January 21, 2003, the Company amended its agreement with RFC.
The new arrangement allows the Company to borrow up to $5 million based on
eligible accounts receivable and unbilled receivables. The facility bears
interest at prime plus 3% and expires in January 2006.
As security for the line of credit, the Company is required to maintain a lock
box at a financial institution. As of December 31, 2002, there was $506,639
of restricted cash specifically associated with this agreement. At
December 31, 2002, the Company had borrowed the maximum amount available based
on eligible accounts receivable at that time, which amounted to $1,276,252.
NOTE 5 - 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%, accrued monthly.
All accrued interest is payable on July 5, 2003,
thereafter monthly. In January 2003, the notes
were amended such that all principal and any unpaid
interest is due and payable in July 2004. $2,377,500
Unsecured notes payable to a Director bearing
interest at 12%, payable monthly. Principal and
any unpaid interest due in 2004. 500,000
Secured note payable bearing interest at 18%,
payable monthly. Principal and any unpaid
interest due February 28, 2003, at which time
50,000 shares of common stock will also be
payable. The note is secured by certain assets of
a member of the Board of Directors (see Note 12). 1,050,000
Unsecured promissory notes bearing interest at 10%
and 12%, payable monthly. Principal payments due
monthly, based on 20% to 40% of billings collected
from specifically-designated customers referred
from LowerMyBills.com, Inc. ("LMB"). The majority
of these notes do not have a maturity date. The
Company believes that virtually all of the
principal will be repaid in approximately one year
or less, based on forecasted billings to these
customers. 2,940,354
Unsecured promissory notes bearing interest at 10%,
payable monthly. Principal payments due monthly,
based on 10% of billings collected from customer
recently acquired from Touch America, Inc. These
notes do not have a maturity date. The Company
believes that principal will be repaid over a
period of approximately 18 months from the date of
issue, based on forecasted billings to these
customers. 3,035,000
Other 84,529
---------
9,987,383
Less current portion (6,099,580)
---------
$3,887,803
=========
Long-term debt maturities are as follows:
2003 $6,099,580
2004 3,887,803
9,987,383
Less current maturities 6,099,580
---------
$3,887,803
=========
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
(later amended to $2.00 per share) have also been issued to the noteholders
during 2002 and 2001. 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.
In June 2001, the Company entered into a joint sales agreement with Infotopia,
Inc. ("Infotopia"), a direct response marketer. In connection with the
agreement, Infotopia agreed to loan the Company $500,000. Subsequent to
entering into the sales agreement, the two companies decided not to pursue
further any joint activity. During 2001, Infotopia sold the loan obligation
to Pali Investments, Inc. ("Pali"), an unrelated investment relations firm.
In December 2001, the Company negotiated a settlement with Pali. Under the
terms of the settlement, the Company 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 an extraordinary
gain on the early extinguishments of the debt in the amount of $383,520 (see
Note 11).
NOTE 6 - LEASES
In connection with the I-Link transaction, the Company agreed to sublease
certain space occupied by I-Link, but subsequently negotiated a new lease
arrangement for the space. The Company is leasing 14,339 square feet of space
at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost of $16,728.
The new lease expires at the end of November 2004. In consideration for
entering into this agreement, I-Link agreed to subsidize a total of $36,232 in
lease payments, which represents the difference between the amount of the
original sublease obligation of Buyers United and the monthly cost of the
space under the new lease arrangement. In the event the asset purchase
transaction between Buyers United and I-Link does not close, Buyers United has
the right to terminate the lease arrangement without further liability to I-
Link or the landlord.
The following is a schedule of future minimum payments under both leases as of
December 31, 2002:
2003 544,410
2004 571,689
2005 397,373
2006 407,307
Thereafter 417,490
---------
Total future minimum lease payments $ 2,338,269
=========
Rent expense was approximately $348,300 and $517,600 for the years ended
December 31, 2002 and 2001, respectively.
NOTE 7 - 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 $ 5,690,000
Reserves and accrued liabilities 800,000
Other 1,000
---------
Total deferred income tax asset 6,491,000
Valuation allowance (6,313,000)
---------
Net deferred income tax asset 178,000
---------
Deferred income tax liabilities:
Capitalized software costs -
Tax depreciation in excess of book depreciation (178,000)
---------
Net deferred income tax liability (178,000)
---------
Net deferred income taxes $ -
=========
As of December 31, 2002, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $15,000,000. 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, 2002 was a decrease of
$438,000. No benefit for income taxes has been recorded during the year ended
December 31, 2001. During 2002 no income tax expense was recorded due the
reduction of the valuation allowance.
NOTE 8 - 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% Cumulative Convertible Preferred Stock: During 1999, the Board of
Directors authorized the issuance of 2,000,000 shares of Series A 8%
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at an
offering price of $2.00 per share. Gross proceeds of $4,000,000 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 each of 2002 and 2001,
certain stockholders converted 5,000 Series A preferred shares, respectively,
into common shares.
Series B 8% 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 $2,545,000, the Company raised $1,993,000
through the issuance of units through December 31, 2000 and $1,100,000 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% of the gross
proceeds from the sale of the Series B Preferred Stock, in addition to 10% 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 $4,208,762 between the Series B
Preferred Stock and the warrants based on estimated relative fair values. The
Series B Preferred Stock was recorded at $2,432,476, and the warrants were
recorded at $1,776,286. 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 2002, one
of the stockholders converted 10,000 Series B preferred shares into common
shares.
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 $1,097,223
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 our common stock is $4.00 per share, rather than $6.00 per
share.
Both Series A and B Preferred Stock 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, 2002 and 2001, the Company
declared dividends aggregating $749,725 and $738,957, respectively, and to
satisfy payment obligations, issued a total of 574,635 and 504,884 shares of
common stock, respectively. As of December 31, 2002, the Company had accrued
dividends payable in the amount of $377,688. In February 2003, the Company
settled the dividend payable by issuing 199,951 shares of common stock.
The Series A and B Preferred Stock have 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 2001,
the Company issued 113,300 shares of common stock to four employees in payment
of services rendered, at an aggregated fair market value of $77,100.
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 Company also issued 35,500 shares of stock in 2001 for
providing similar guarantees. The fair market values of the 2002 and 2001
share issuances were, respectively, $30,750 and $27,475.
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.
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 have been issued to the noteholders during the two years ended December
31, 2002. Warrants for an additional 97,950 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 discount is
being amortized to interest expense over the estimated term of the notes.
During 2001, the Company issued 10,000 warrants to purchase common shares at
$2.50 per share to independent sales agents, which were valued at $9,236. In
addition, the Company renegotiated and settled certain terms of an outside
consulting contract entered into during 2000. Under the terms of the
settlement, the Company modified the exercise price from $5.00 per share to
$2.50 per share on 50,000 warrants outstanding and issued an additional 15,000
warrants with an exercise price of $2.50 per share. In connection with the
settlement the Company recognized $15,696 in expense.
All of the warrants were exercisable at December 31, 2002. The following
tables summarize the warrant activity for 2002 and 2001:
Weighted
Average
Price Exercise
Warrants Range Price
--------- ------------- --------
Balance at December 31, 2000 4,601,382 $1.25 - $5.13 $2.44
Cancelled or expired (268,000) $2.00 - $5.00 $2.60
Issued 1,012,350 $2.50 $2.50
---------
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
=========
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, 2002, incentive stock options to purchase a
total of 1,194,153 shares of common stock had been granted under this
particular plan, and of that amount, options for 615,347 shares were still
outstanding.
Stock Options: The Company's Board of Directors has from time to time
authorized the grant of stock options to directors, officers, key employees,
and consultants as compensation and in connection with obtaining financing.
The following tables summarize the option activity for 2002 and 2001:
Weighted
Average
Price Exercise
Warrants Range Price
--------- ------------- --------
Balance at December 31, 2000 3,053,019 $2.00 - $9.00 $2.66
Granted 562,501 $2.50 - $3.50 $2.50
Cancelled or expired (796,935) $2.00 - $5.00 $2.41
---------
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
=========
A summary of the options outstanding and options exercisable at December 31,
2002 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 2002 Price
---------- ----------- ----------- -------- ------------- ---------
$2.00 - $3.99 3,352,620 3.2 years $2.41 2,896,620 $2.41
$4.00 - $5.39 240,101 2.8 years 5.05 240,101 5.05
--------- ---------
3,592,721 3.2 years $2.58 3,136,721 $2.61
========= =========
NOTE 9 - RELATED PARTY TRANSACTIONS
During 2002 and 2001, 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 $109,259 and $167,000 in fees associated with these services for the
years ended December 31, 2002 and 2001, respectively. Amounts outstanding
related to these services were $14,300 and $31,300 at December 31, 2002, and
2001, respectively.
NOTE 10 - MAJOR SUPPLIERS
Approximately 97% and 84% of the Company's cost of revenue for the years ended
December 31, 2002 and 2001, respectively, was generated from three
telecommunication providers. As of December 31, 2002, the Company owed
$2,748,426 to these providers. The Company has entered into contractual
agreements with these vendors. During 2002 two 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 had not experienced a
disruption of service and feels it could replace any one of these sources with
other wholesale telecommunication service providers, the effect on the
Company's operations of potentially losing any one or all three of these
service providers is unknown.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
On June 14, 2001, a lawsuit was filed against Buyers United by Profitec, Inc.,
in New Haven, Connecticut. Profitec asserted that it agreed to perform
certain billing services in 1999 for the Company's telecommunication customers
and that the Company agreed to pay Profitec for such services. Profitec
further claimed that Buyers United breached the contract by terminating the
contract and failing to pay fees allocable under a "liquidated damage"
provision for early termination. Profitec claimed damages in excess of
$140,000, based upon the contract's liquidated damage provisions. The Company
filed a general denial answer and asserted affirmative defenses, including
breach of contract, failure of consideration, and other issues. It also filed
a counter claim seeking damages for Profitec's breach of the contract. In
November 2001, Profitec answered and denied the counter-claim. An out-of-
court settlement was reached on October 17, 2002 in which the Company agreed
to pay $17,500.
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 an
extraordinary gain on the early extinguishments of the debt in the amount of
$383,520. However, unbeknownst to Buyers United, during 2001 Infotopia
allegedly entered into a General Security Agreement with Sea Spray Holdings,
Ltd., which purportedly included the loan obligation. By letter dated
November 22, 2002, Sea Spray asserted that it had a perfected security
interest in the obligation and demanded payment as successor-in-interest to
Infotopia. The Company responded that Sea Spray did not have a perfected
security interest since it did not take possession of the note evidencing the
obligation, and that the obligation was fully discharged under applicable
provisions of the Uniform Commercial Code. On February 21, 2003 Buyers United
filed with the American Arbitration Association a Demand for Arbitration and
Statement of Claim in order to resolve the dispute. On March 11, 2003 Sea
Spray filed an action against Buyers United in the Supreme Court for the State
of New York, County of New York, case number 104468/03, seeking to enforce its
security interest in the Infotopia note obligation through collection of the
Note, and obtained an order to show cause why the arbitration proceeding we
instigated should not be stayed in favor of resolving the dispute in the state
court proceeding. Before the stay issue was heard by the state court, Buyers
United removed the entire action to the Federal District Court, Southern
District of New York, and it intends to file a motion to dismiss the action in
favor of proceeding with arbitration in Utah. The Company intends to defend
this claim vigorously, but cannot predict at this time how the dispute will
eventually resolve.
On March 20, 2002, a shareholder filed a civil lawsuit in Salt Lake County
alleging that in mid-2000 Buyers United had offered to sell him 150,000 shares
in the corporation for $300,000, and that it represented it had received
certain funds for promotion. The shareholder alleged that no such funds were
available, that consequently the value of his shares were reduced, and that he
was seeking rescission of the stock purchase. The Company filed an answer to
the complaint denying the allegations and raising various affirmative
defenses. The shareholder was then to initiate dates for discovery and other
procedures, but so far has failed to do so and has not otherwise made certain
mandatory disclosures under Utah law. Buyers United categorically denies the
shareholder's allegations, denies making misrepresentations of any kind, and
asserts the shareholder's claims are baseless. Furthermore, it believes that
regardless of any such alleged claims, the shareholder has suffered no actual
damages, and intends to vigorously defend the case in the event the
shareholder resumes the discovery process.
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.
NOTE 12 - SUBSEQUENT EVENTS
In January and February 2003, the Company received $500,000 from the issuance
of promissory notes payable, $400,000 of which came from three Directors of
the Company. The unsecured notes bear interest at 12% and are due in 2004
through early 2005.
On February 28, 2003, the Company retired its $1,050,000 note payable by
paying $250,000 in cash, issuing a new promissory note for $800,000, and
issuing 50,000 shares of common stock in connection with the original
agreement. The new note is unsecured and bears interest at 10%, payable
monthly. Principal payments are to be made in a manner similar to the
Company's other promissory notes related to customers referred to the Company
by LowerMyBills, Inc. In this case, monthly principal payments will equal 20%
of specifically-designated customers' billings collected during the preceding
calendar month.
On January 15, 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.
(More Exhibits will be inserted here...)
Exhibit No. 99.01
Form 10-KSB
Buyers United, Inc.
File No. 0-26917
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002.
In connection with the Annual Report of Buyers United, Inc. (the
"Company") on Form 10-KSB for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Theodore Stern, Chief Executive Officer of the Company, certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that: (1) The Report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: April 14, 2003 By: /s/ Theodore Stern, Chief
Executive Officer
In connection with the Annual Report of Buyers United, Inc. (the
"Company") on Form 10-KSB for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Paul Jarman, Chief Financial Officer of the Company, certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that: (1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: April 14, 2003 By: /s/ Paul Jarman, Chief
Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Buyers United, Inc. and will be retained by Buyers United, Inc.
and furnished to the Securities and Exchange Commission or its staff upon
request.