U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] 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
BUYERS UNITED, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0528557
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14870 Pony Express Road, Bluffdale, Utah 84065
(Address of principal executive offices)
(801) 320-3300
(Issuer's telephone number)
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
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 []
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity: 6,328,208 shares of common stock as of July 31, 2003.
Transitional Small Business Format: Yes [ ] No [ X ]
FORM 10-QSB
BUYERS UNITED, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Operationsfor the
Six Months Ended June 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - (Unaudited)
June 30, December 31,
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash $ 511,010 $ 994,360
Restricted cash 1,047,057 584,002
Accounts receivable, net 8,627,697 5,650,214
Other current assets 220,174 214,869
-------------- --------------
Total current assets 10,405,938 7,443,445
Property and equipment, net 1,787,048 540,578
Other assets, net
Customer lists 6,077,046 3,000,000
Technology and patents 571,120 -
Deferred advertising costs 1,338,487 1,776,124
Other 415,573 384,801
-------------- --------------
Total other assets 8,402,226 5,160,925
-------------- --------------
Total assets $ 20,595,212 $ 13,144,948
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 893,587 $ 1,276,252
Notes payable 5,303,920 6,099,580
Touch America obligation 1,066,236 -
Accounts payable 9,503,330 5,700,753
Accrued liabilities 1,472,361 772,347
Accrued dividends payable on
preferred stock 390,855 377,688
Accrued commissions and rebates 698,808 493,639
-------------- --------------
Total current liabilities 19,329,097 14,720,259
Notes payable 4,522,622 3,887,803
-------------- --------------
Total liabilities 23,851,719 18,608,062
Stockholders' deficit:
Preferred stock 265 242
Common stock 633 599
Additional paid-in capital 17,836,673 16,019,376
Warrants and options outstanding 4,592,514 4,592,514
Deferred consulting fees (14,757) (25,174)
Accumulated deficit (25,671,835) (26,050,671)
-------------- --------------
Total stockholders' deficit (3,256,507) (5,463,114)
-------------- --------------
Total liabilities and
stockholders' deficit $ 20,595,212 $ 13,144,948
-------------- --------------
See accompanying notes
3
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Three Months Ended June 30,
----------------------------
2003 2002
---- ----
Revenues:
Telecommunications services $ 16,291,636 $ 6,766,373
Other - 9,859
------------- -------------
Total revenues 16,291,636 6,776,232
Operating expenses:
Costs of revenues 8,591,879 3,679,263
General and administrative 4,104,409 1,809,707
Selling and promotion 2,691,314 856,276
------------- -------------
Total operating expenses 15,387,602 6,345,246
------------- -------------
Income from operations 904,034 430,986
Other income (expense):
Interest income 2,800 5,998
Interest expense (506,166) (385,480)
------------- -------------
Total other expense, net (503,366) (379,482)
------------- -------------
Net income $ 400,668 $ 51,504
8% Preferred dividends on Series A and B
preferred stock (215,193) (186,019)
------------- -------------
Net income (loss) applicable to
common stockholders $ 185,475 $ (134,515)
------------- -------------
Net income (loss) per common share:
Basic $ 0.03 $ (0.02)
Diluted 0.03 (0.02)
Weighted average common shares outstanding:
Basic 6,330,142 5,730,161
Diluted 6,354,982 5,730,161
See accompanying notes
4
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
---- ----
Revenues:
Telecommunications services $ 31,772,756 $ 11,567,981
Other - 35,561
------------- -------------
Total revenues 31,772,756 11,603,542
Operating expenses:
Costs of revenues 17,256,646 6,179,829
General and administrative 7,731,109 2,942,940
Selling and promotion 5,022,383 1,721,319
------------- -------------
Total operating expenses 30,010,138 10,844,088
------------- -------------
Income from operations 1,762,618 759,454
Other income (expense):
Interest income 5,401 6,802
Interest expense (992,095) (688,724)
------------- -------------
Total other expense, net (986,694) (681,922)
------------- -------------
Net income $ 775,924 $ 77,532
8% Preferred dividends on Series A and B
preferred stock (397,088) (372,037)
------------- -------------
Net income (loss) applicable to
common stockholders $ 378,836 $ (294,505)
------------- -------------
Net income (loss) per common share:
Basic $ 0.06 $ (0.05)
Diluted 0.06 (0.05)
Weighted average common shares outstanding:
Basic 6,287,453 5,604,441
Diluted 6,322,395 5,604,441
See accompanying notes
5
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 775,924 $ 77,532
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,784,215 438,208
Amortization included in interest
expense resulting from issuing stock
with notes 5,312 14,520
Amortization of discount on notes payable 231,010 70,703
Amortization of note financing costs 81,424 94,060
Amortization of deferred consulting fees 10,417 27,225
Expense related to the grant of options
to purchase common shares - 66,396
Changes in operating assets and liabilities:
Accounts receivable (2,977,483) (1,255,012)
Other assets (660,476) (1,330,721)
Checks in excess of available
cash balances - (186,866)
Accounts payable 3,314,524 390,291
Accrued commissions and rebates 205,169 109,590
Accrued liabilities 550,013 87,395
----------- -----------
Net cash provided by (used in)
operating activities 3,320,049 (1,396,679)
----------- -----------
Cash flows from investing activities:
Increase in other assets (52,126) (17,060)
Purchases of property and equipment (524,402) (155,836)
----------- -----------
Net cash used in investing activities (576,528) (172,896)
----------- -----------
Cash flows from financing activities:
Restricted cash (463,055) 259,380
Net borrowings and payments under line of
credit (382,665) 236,900
Borrowings under notes payable, net of debt
issuance costs 2,299,955 2,315,750
Principal payments on notes payable (4,678,422) (444,826)
Principal payments on capital lease obligations - (110,443)
Repurchase of shares from stockholders with
less than 100 shares (2,684) -
----------- -----------
Net cash provided by (used in)
financing activities (3,226,871) 2,256,761
----------- -----------
Net increase (decrease) in cash (483,350) 687,186
Cash at the beginning of the period 994,360 57,100
----------- -----------
Cash at the end of the period $ 511,010 $ 744,286
----------- -----------
See accompanying notes
6
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Supplemental cash flow information:
Cash paid for interest $ 548,914 $ 463,094
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 377,688 $ 378,316
Issuance of common shares in payment of deferred financing costs - 49,548
Issuance of common shares for officer's personal guranty 36,300 -
Issuance of warrants with promissory notes - 186,886
Accrual of dividend payable on preferred stock 397,088 372,037
Retire and replace note payable 800,000 -
Increase in Touch America obligation with amended agreement 3,098,000 -
Issuance of preferred stock to acquire RTIP Network assets 1,400,738 -
See accompanying notes
7
BUYERS UNITED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Unaudited)
June 30, 2003
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Buyers United, Inc. ("the Company" or "Buyers United") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position
and results of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring accruals) have been made which are
necessary for a fair financial statement presentation. The results for the
interim period are not necessarily indicative of the results to be expected
for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2002.
2. Summary of Significant Accounting Policies
Stock-Based Compensation: Employee compensation expense under stock options
is reported using the intrinsic method. No stock-based compensation cost is
reflected in net income (loss) applicable to common stockholders, since all
options 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 effects on net income (loss) applicable to common
stockholders and earnings (loss) per share if expense was measured using
the fair value recognition provision of SFAS No. 123, "Accounting for
Stock-Based Compensation:"
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
---------- ---------- --------- ----------
Net income (loss) applicable to common stockholders:
---------------------------------------------------
As reported $ 185,475 $(134,515) $ 378,836 $(294,505)
Pro forma stock-option based compensation (88,677) (187,214) (157,809) (374,429)
---------- ---------- ---------- ----------
Pro forma net income (loss) applicable to common stockholders $ 96,798 $(321,729) $ 221,027 $(668,934)
========== ========== ========== ==========
Basic and diluted net income (loss) per common share:
----------------------------------------------------
As reported $ 0.03 $ (0.02) $ 0.06 $ (0.05)
Pro forma basic and diluted net income (loss) per common share $ 0.02 $ (0.06) $ 0.04 $ (0.12)
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.
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 fee when
a referred customer signs up for services with the Company. These fees are
capitalized and then amortized over the period during which the future
revenue benefits are expected to be received. The Company estimates this to
be 24 months.
8
3. Acquisitions
I-Link Communications, Inc.
On December 6, 2002, Buyers United entered into the Asset Purchase
Agreement and Software License Agreement to purchase assets of I-Link,
Inc., and its subsidiary, I-Link Communications, Inc., and license in
perpetuity software developed by I-Link for the operation of a real-time
Internet protocol communications network (RTIP Network). Customer billings
and related expenses incurred pursuant to a related Management Agreement
between the parties have been included in Buyers United's results since
December 6, 2002. The transaction closed effective May 1, 2003, at which
time the Company began to recognize revenue earned and expenses incurred.
The assets acquired include dedicated equipment required for operating the
RTIP Network, customers of I-Link serviced through the network, and certain
trademarks. In consideration for the assets and software license, Buyers
United issued to I-Link 246,430 shares of Series B Convertible Preferred
Stock with a fair market value of $1,400,738, assumed certain liabilities,
and agreed to issue an additional 53,570 shares of Series B Convertible
Preferred Stock in equal monthly installments over a term of 10 months
commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired
in the transaction. As the shares are issued the increase in purchase price
associated with the shares will be allocated to Customer Lists. The first
three monthly installments totaling 16,071 shares have been issued and
delivered to I-Link. Assuming the remaining 37,499 shares are issued and
delivered to I-Link, Buyers United will have 837,800 shares of Series B
Convertible Preferred Stock outstanding. If all of the shares of Series B
Preferred Stock are issued to I-Link and converted to common stock, I-Link
would hold approximately 12.11 percent of the outstanding common stock of
Buyers, without giving effect to the exercise of conversion or purchase
rights under any other outstanding shares of preferred stock, options, or
warrants.
In connection with the closing, the parties together with Counsel
Corporation, an Ontario corporation, and Counsel Communications LLC, a
Delaware limited liability company, both affiliates of I-Link, entered into
a Reimbursement Agreement pursuant to which Counsel Corporation, Counsel
Communications, and I-Link agreed to reimburse Buyers United for any loss
sustained as a result of any claims asserted against the assets acquired
from I-Link by certain creditors of I-Link. Out of the shares it received
in the transaction I-Link deposited in escrow 40,000 shares that may be
applied to reimburse any such loss. This is in addition to 25,000 shares
I-Link received in the transaction that has been deposited in escrow under
the Asset Purchase Agreement to satisfy any claims for indemnification
under the Asset Purchase Agreement.
The purchase price allocation has been prepared on a preliminary basis, and
reasonable changes are expected as additional information becomes
available. The following table presents a summary of the estimated fair
values of the assets acquired and liabilities assumed as of May 1, 2003,
the closing date of the transaction:
Computer and telecommunications switching equipment $ 980,410
Customer list 456,197
License on technology and patents 595,951
----------
Total assets acquired 2,032,558
----------
Accounts payable and accrued liabilities 481,820
Acquisition costs 150,000
----------
Total liabilities assumed 631,820
----------
Net assets acquired $1,400,738
==========
The customer list and licensed technology will be amortized over a period
of three to four years.
9
The following unaudited pro forma financial information presents results as
if the acquisition had occurred at the beginning of the respective periods:
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ------------ ----------- -----------
Net revenue $16,735,392 $ 8,777,607 $33,812,136 $15,761,209
Net income (loss) applicable to
common stockholders 139,962 (5,017,450) 266,354 (7,921,281)
Net income (loss) per share - basic $0.02 $(0.88) $0.04 $(1.41)
Net income (loss) per share - fully diluted $0.02 * $0.04 *
* - The net loss attributable to common shareholders and shares used in
computing the net loss per share attributable to common shareholders for
the 2002 periods are based on the historical weighted average common shares
outstanding. Common stock issuable upon the exercise of stock options,
warrants, or the conversion of preferred stock have been excluded from the
computation of net loss per share attributable to common shareholders as
the effect would be anti-dilutive.
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization expense as
a result of identifiable tangible and intangible assets arising from the
acquisition. The pro forma results are not necessarily indicative either of
the results of operations that actually would have resulted had the
acquisition been in effect at the beginning of the respective periods, or
of results to be achieved in the future.
Touch America
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its long distance customers, 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 subsequently entered into an amendment of the
original purchase agreement on June 6, 2003 that provided for the purchase
of additional customers from Touch America by Buyers and reduced the
purchase price on the initial customer base to $6,098,000. Under the
amendment the original bill of sale for the customers was amended and
restated to correct certain inaccuracies in the customers originally sold
to Buyers United in December 2002, and to add new customers purchased in
June 2003. The new customers purchased include all customers that are
actually transferred to Buyers United and use the long distance services of
Buyers United during the month of August 2003 (the "New Customers"). The
purchase price for this additional customer base will be 2.5 times the
aggregate long distance service usage of the New Customers for August 2003.
As of June 6, 2003, the Company had paid a total of $5,018,166 in cash
towards the purchase price. The balance of the purchase price is payable in
monthly installments equal to 7.2 percent of the collection during the
preceding month on all customers acquired from Touch America.
4. Long-term Debt
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 and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection
with the original agreement. The new note is unsecured and bears interest
10
at 10%, payable monthly. Principal is also payable monthly based on 20% of
billings collected during each monthly billing period from designated
customers.
In May and June 2003 the Company received $500,000 from the issuance of
promissory notes payable. The notes are secured by computer and
telecommunications equipment, bear interest at 12%, and are due in May and
June 2006.
In June 2003 the Company issued $1,400,000 in promissory notes for cash
used primarily for purchasing customers from Touch America, Inc. (see note
3). The notes are unsecured and bear interest at 10%, with principal and
interest payable monthly. The principal paid each month equals 10% of
billings collected during each monthly billing period from the acquired
Touch America customers. After all principal is repaid, note holders will
continue to receive 5% of such collected billings. There was a 5%
commission paid to the sales agent in connection with the issuance of the
notes.
5. Capital Transactions
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.
During June 2003, the Company initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or
fewer shares. The offering price per share is $1.75. As of August 12, 2003,
the Company has repurchased 1,534 shares. The program will continue through
the remainder of 2003 and is not expected to have a material impact on the
financial statements of the Company.
See note 3 above for discussion of preferred stock transaction related to
the I-Link acquisition.
6. Major suppliers
Approximately 97% and 84% of the Company's cost of revenue during 2002 and
2001, respectively, was generated from three telecommunication providers.
As of June 30, 2003, the Company owed $4,909,974 to these providers. The
Company has entered into contractual agreements with these vendors. During
2002 two of these providers filed for bankruptcy protection under Chapter
11, and the other provider is currently being scrutinized by the Securities
and Exchange Commission over certain accounting matters. Although the
Company has not experienced a disruption of service and feels it could
replace 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.
7. Subsequent events
On July 5, 2003, the Company issued two 12% promissory notes to Theodore
Stern, Chairman of the Board, aggregating $435,388. This amount represented
unpaid interest accrued up to that date on virtually all of Mr. Stern's
other promissory notes. These two new notes mature on July 5, 2005, and
interest is payable monthly.
During August of 2003, Buyers United agreed to purchase approximately
12,000 long distance customers or $300,000 in monthly revenue from Glyphics
Communications (Glyphics). Buyers United agreed to pay Glyphics 2.25 times
the current monthly revenue of purchased customers in monthly payments
equal to a fixed percentage of the actual purchased customers cash receipts
over an estimated nine month period. Buyers United will manage the
purchased customers on behalf of Glyphics under a Transition Agreement
until the transaction closes.
11
Item 2. 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, Buyers United functioned as an
aggregator and reseller of telecommunications services provided by others, and
intends to pursue and develop this type of business. On December 6, 2002, Buyers
United entered into the Asset Purchase Agreement and Software License Agreement
to purchase assets of I-Link, Inc., and its subsidiary, I-Link Communications,
Inc., and license in perpetuity software developed by I-Link for the operation
of a real-time Internet protocol communications network (RTIP Network). The
transaction was closed effective May 1, 2003. This transaction will enable
Buyers United 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.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its long distance customers, 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
subsequently entered into an amendment of the original purchase agreement on
June 6, 2003 that provided for the purchase of additional customers from Touch
America by Buyers and adjusted the purchase price. Under the amendment the
original bill of sale for the customers was amended and restated to correct
certain inaccuracies in the customers originally sold to Buyers United in
December 2002 and to add new customers purchased in June 2003. The new customers
purchased include all customers that are actually transferred to Buyers United
and use the long distance services of Buyers United in the month of August 2003
(the "New Customers"). The total purchase price for all customers acquired from
Touch America is $6,098,000 plus 2.5 times the aggregate long distance service
usage of the New Customers for the month of August 2003. At June 6, 2003, Buyers
United paid a total of $5,018,166 in cash towards the purchase price. The
balance of the purchase price is payable in monthly installments equal to 7.2
percent of the collection during the preceding month on the customers acquired
from Touch America.
Buyers United generates 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. Buyers United recently purchased a
substantial number of long distance customers of Touch America, which resulted
in a significant increase in Buyers United's customer base in 2003. Buyers
United believes financial difficulties and uncertainty in the telecommunications
industry that arose over the past two years may result in opportunities to
acquire customers from unrelated companies, and intends to remain open to these
opportunities.
Results of Operations
Total revenues increased 140% to $16.3 million for the three months ended June
30, 2003 as compared to $6.8 million for the same period in 2002. For the six
months ended June 30, 2003 revenues increased 174% to $32 million as compared to
$11.6 million for the same period in 2002. While the increase in revenue is
primarily due to the Touch America transaction, we also generated growth
12
internally during this period from ongoing promotional efforts, primarily
involving independent agents and referrals from an online shopping comparison
service.
Costs of revenues for the three-month period ended June 30, 2003 were $8.6
million, a 134% increase as compared to $3.7 million incurred during the
comparable three-month period for the prior year. For the six-month period ended
June 30, 2003 costs of revenues increased to $17.3 million, a 179% increase as
compared to $6.2 million incurred during the six-month period for the prior
year. Such costs as a percentage of revenue for the three-month period ended
June 30, 2003 were 53%, as compared to 54% during 2002 and 54% for the six
months ended June 30, 2003 compared to 53% for same period in 2002. The increase
in gross margin for the three month period ended June 30, 2003 as compared to
the previous year is the result of a decrease in rates for long-distance
minutes, along with a one-time credit from one of our long-distance service
providers realized during the second quarter of 2003 for services provided
during the first quarter of 2003. These savings were offset by costs related to
an increase in customers using dedicated circuit services. This type of service
typically has lower profit margins, but higher volumes than other types of long
distance services. Lower gross margins during the six month period also resulted
from a combination of integration efforts involved in the I-Link acquisition,
along with slightly higher costs of Touch America customers. Buyers United
agreed with Touch America on certain wholesale prices during a phase-in period
after acquiring the customers. However, Buyers United immediately began
switching new customers over to other lower-cost wholesale providers. Most of
the customers were moved to new providers during the second quarter ended June
30, 2003, resulting in higher margins for these customers for the quarter.
Total operating expenses other than costs of revenues increased 155% during the
quarter ended June 30, 2003 and 173% for the six months ended June 30, 2003 as
compared to the same periods in 2002. These changes are a result of the
following factors:
1 General and administrative costs in 2003's second quarter increased 127% to
$4.1 million compared to $1.8 million in 2002's second quarter and costs
increased 163% to $7.7 million for the six months ended June 30, 2003
compared to $2.9 million for the six months ended June 30, 2002. Increases
are primarily due to expenses required to support Buyers United's
significant revenue growth, and from expenses associated with the I-Link
and Touch America transactions. The increased revenue levels, generated
both during 2002 and subsequent to the transactions, necessitated the
hiring of additional customer service and collection personnel. In
addition, several former employees of I-Link were retained by Buyers United
in order to continue operating and maintaining the RTIP Network, as well as
to provide customer support and billing services. Buyers United also
assumed certain office lease obligations of I-Link, which resulted in
additional occupancy expenses.
2 Selling and promotion expenses increased 214% to $2.7 million during the
second quarter of 2003 from $856,276 in 2002 and costs increased 192% to
$5.0 million for the six months ended June 30, 2003 compared to $1.7
million for the six months ended June 30, 2002.. Such expenses as a
percentage of revenue were 16.5% for 2003's second quarter as compared to
13% in 2002 and 15.8% for the six months ended June 30, 2003 compared with
14.8% for the same period in 2002. The increases resulted partly from the
proportionate higher commission amounts paid on higher revenue. Selling and
promotion expenses during 2003 also included higher amortization expenses
associated with the deferred advertising costs and the customers acquired
from Touch America.
Interest expense for the three-month period ended June 30, 2003 was $506,166,
compared to $385,480 in 2002 and was $992,095 for the six months ended June 30,
13
2003 compared to $688,724 for the comparative period in 2002. The higher amount
was the result of higher debt balances outstanding during 2003 as compared to
the previous year.
Liquidity and Capital Resources
Buyers United's current ratio as of June 30, 2003 increased slightly to 0.54:1
from 0.51:1 at the end of 2002. The components of current assets and current
liabilities that changed significantly since the end of 2002 were accounts
receivable, other current assets, the current portion of long-term debt, and
accrued liabilities.
Accounts receivable, accrued commission and rebates, accrued liabilities, and
accounts payable all increased as a result of the higher revenue levels during
the six months ended June 30, 2003 as compared to the same period in 2002.
Accrued dividends increased as a result of the additional shares of preferred
stock issued to I-Link, Inc. on May 1 and June 1, 2003, in connection with
completing the acquisition of the RTIP Network.
The current portion of long-term debt declined 13%, due to ongoing payments on
investor notes and the partial payoff and replacement of a $1,050,000 promissory
note, previously due February 28, 2003. Buyers United retired its $1,050,000
note payable by paying $250,000 in cash and issuing a new promissory note for
$800,000. In addition, Buyers United issued 50,000 shares of common stock in
connection with the original agreement. The new note is unsecured and bears
interest at 10%, payable monthly. Principal is also payable monthly based on 20%
of billings during each monthly billing period from designated customers.
In January and February 2003, Buyers United received $500,000 from the issuance
of promissory notes payable, $400,000 of which came from three Directors of
Buyers United. The unsecured notes bear interest at 12% and are due in 2004
through early 2005.
In May and June 2003, Buyers United received $500,000 from the issuance of
promissory notes payable. The notes are secured by computer and
telecommunications equipment, bear interest at 12%, and are due in May and June
2006.
In June 2003, Buyers United initiated a program to repurchase outstanding common
stock from shareholders of record with total holdings of 100 or fewer shares.
The offering price per share is $1.75. The program will continue through the
remainder of 2003 and is not expected to have a material impact on the financial
statements of Buyers United.
In June 2003 Buyers United issued $1,400,000 in promissory notes for cash used
primarily for purchasing customers from Touch America. The notes are unsecured
and bear interest at 10%, with principal and interest payable monthly. The
principal paid each month equals 10% of billings collected during each monthly
billing period from the acquired Touch America customers. After all principal is
repaid, note holders will continue to receive 5% of such collected billings.
There was a 5% commission paid to the sales agent in connection with the
issuance of the notes.
Buyers United has a line of credit agreement with RFC Capital Corporation. The
facility allows the Company to obtain financing on its eligible accounts
receivable, including unbilled receivables and regular monthly billings. The
facility is collateralized by the underlying receivables. Interest during 2002
was at prime plus 6%. At June 30, 2003, Buyers United had financed the maximum
amount available based on eligible accounts receivable at that time. This
amount, less draws by RFC applied against the outstanding amount, aggregated
$893,587. The facility requires Buyers United to maintain a restricted cash
account for the collection of the receivables. As of June 30, 2003 Buyers United
14
had $949,137 of restricted cash associated with the RFC arrangement. 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 June 30, 2003, Buyers United had a working capital deficit of $8.9 million
and an accumulated deficit of $25.7 million. Although these factors could raise
doubt about Buyers United's ability to continue as a going concern, Buyers
United did achieve profitability in 2002 and during the first six months of
2003. Management believes Buyers United will continue to be profitable
throughout the remainder of 2003. In addition, all long and short-term notes
payable are unsecured, of which, one-third are due to Company directors and
officers. The majority of remaining notes have no stated maturity dates, and
principal payments are variable dependent upon receivables collected from
designated customers. Accordingly, management believes that cash flow associated
with the payments on these notes, while significant, have manageable terms
directly related to cash receipts which is expected to increase over the next
few years.
As a result of the I-Link and Touch America acquisitions, Buyers United is
currently experiencing significant revenue growth. While there can be no
assurance that such will be the case, management believes that this increased
level of revenue will continue throughout 2003.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1985 provides a safe harbor for
forward-looking statements made by Buyers United, except where such statements
are made in connection with an initial public offering. All statements, other
than statements of historical fact, which address activities, actions, goals,
prospects, or new developments that we expect or anticipate will or may occur in
the future, including such things as expansion and growth of our operations and
other such matters are forward-looking statements. Any one or a combination of
factors could materially affect our operations and financial condition. These
factors include 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 member marketing and rebate programs
or long distance service, and conditions in the capital markets. Forward-looking
statements made by us are based on knowledge of our business and the environment
in which we operate 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 3. 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
August 6, 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 interim report on
Form 10-QSB for the quarterly period ended June 30, 2003.
Subsequent to August 6, 2003, through the date of this filing of Form 10-QSB for
the quarterly period ended June 30, 2003, 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
15
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May and June 2003, Buyers United received $500,000 from the issuance of
promissory notes payable. The notes are secured by computer and
telecommunications equipment, bear interest at 12%, and are due in May and June
2006.
In June 2003 Buyers United issued $1,400,000 in promissory notes for cash used
primarily for purchasing customers from Touch America. The notes are unsecured
and bear interest at 10%, with principal and interest payable monthly. The
principal paid each month equals 10% of billings collected during each monthly
billing period from the acquired Touch America customers. After all principal is
repaid, note holders will continue to receive 5% of such collected billings.
There was a 5% commission paid to the sales agent in connection with the
issuance of the notes.
In consideration for assets and a software license, Buyers United issued to
I-Link, Inc. 246,430 shares of Series B Convertible Preferred Stock with a fair
market value of $1,400,738, assumed certain liabilities, and agreed to issue an
additional 53,570 shares of Series B Convertible Preferred Stock in equal
monthly installments over a term of 10 months commencing June 1, 2003, subject
to satisfaction of certain conditions pertaining to provisioning of one of the
former I-Link customers acquired in the transaction. The first three monthly
installments totaling 16,071 shares have been issued and delivered to I-Link.
Assuming the remaining 37,499 shares are issued and delivered to I-Link, Buyers
United will have 837,800 shares of Series B Convertible Preferred Stock
outstanding. Assuming all of the shares of Series B Preferred Stock are issued
to I-Link and converted to common stock, I-Link would hold approximately 12.11
percent of the outstanding common stock of Buyers, without giving effect to the
exercise of conversion or purchase rights under any other outstanding shares of
preferred stock, options, or warrants.
All of the aforementioned securities were issued in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 or
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on June 17, 2003, the stockholders
voted on the following matters:
(1) Election of Theodore Stern, Gary Smith, Edward Dallin Bagley, and
Steve Barnett as directors of Buyers United to serve for a term of one
year and until their successors are duly elected and qualified;
(2) Ratify of the appointment of Crowe, Chizek and Company LLP as
independent public accountants of Buyers United for 2003; and
(3) Approve the Director Stock Option Plan.
Each of the foregoing matters was approved or ratified by the stockholders.
The number of votes cast on the foregoing matters is as follows:
16
For Against Abstain
Election of Directors:
Theodore Stern 4,778,097 163,949 -
Gary Smith 4,771,171 164,875 -
Edward Dallin Bagley 4,778,098 163,948 -
Steve Barnett 4,778,094 163,952 -
Appointment of Crowe, Chizek and Company LLP 4,923,476 15,541 3,029
Director Stock Option Plan 2,647,533 541,618 61,496
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K:
None.
Exhibits: Copies of the following documents are included or furnished as
exhibits to this report pursuant to Item 601 of Regulation S-B.
Exhibit SEC Ref. Title of Document
No. No.
10.1 10 Amendment No. 1 to the Asset Purchase Agreement
dated December 20, 2002 that was made June 6, 2003
by Buyers United and Touch America
31.1 31 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 31 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 32 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
BUYERS UNITED, INC.
Date: August 14, 2003 By: /s/ Theodore Stern, Chief Executive Officer
-------------------------------------------
Date: August 14, 2003 By: /s/ Paul Jarman, Chief Financial Officer
----------------------------------------
17