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 September 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: 6,577,086 shares of common stock as of October 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
September 30, 2003 and December 31, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2003 and 2002 (unaudited) 4
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 12
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - (Unaudited)
September 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash $ 1,033,659 $ 994,360
Restricted cash 1,163,586 584,002
Accounts receivable, net 8,984,067 5,650,214
Other current assets 235,594 214,869
------------------- --------------------
Total current assets 11,416,906 7,443,445
Property and equipment, net 1,880,854 540,578
Other assets, net
Customer lists 6,063,383 3,000,000
Technology and patents 533,872 -
Deferred advertising costs 990,537 1,776,124
Other 446,145 384,801
------------------- --------------------
Total other assets $ 8,033,937 $ 5,160,925
------------------- --------------------
Total assets $ 21,331,697 $ 13,144,948
=================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 2,864,664 $ 1,276,252
Notes payable and capital leases 6,933,348 6,099,580
Touch America and Glyphics obligations 1,205,400 -
Accounts payable 9,338,222 5,700,753
Accrued liabilities 893,431 772,347
Accrued dividends payable on preferred stock 237,123 377,688
Accrued commissions and rebates 656,573 493,639
------------------- --------------------
Total current liabilities 22,128,761 14,720,259
Notes payable and capital leases 2,115,432 3,887,803
------------------- --------------------
Total liabilities 24,244,193 18,608,062
Stockholders' deficit:
Preferred stock 265 242
Common stock 655 599
Additional paid-in capital 18,225,339 16,019,376
Warrants and options outstanding 4,592,514 4,592,514
Deferred consulting fees (9,548) (25,174)
Accumulated deficit (25,721,721) (26,050,671)
------------------- --------------------
Total stockholders' deficit (2,912,496) (5,463,114)
------------------- --------------------
Total liabilities and stockholders' deficit $ 21,331,697 $ 13,144,948
=================== ====================
See accompanying notes
3
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Three Months Ended September 30,
-----------------------------------------
2003 2002
---- ----
Revenues:
Telecommunications services $ 16,439,065 $ 8,646,946
Other - 8,854
------------------- ------------------
Total revenues 16,439,065 8,655,800
Operating expenses:
Costs of revenues 8,849,635 4,763,227
General and administrative 3,839,901 1,918,832
Selling and promotion 3,097,090 1,230,195
------------------- ------------------
Total operating expenses 15,786,626 7,912,254
------------------- ------------------
Income from operations 652,439 743,546
Other income (expense):
Interest income 3,689 5,896
Interest expense (468,890) (431,834)
------------------- ------------------
Total other expense, net (465,201) (425,938)
------------------- ------------------
Net income $ 187,238 $ 317,608
8% Preferred dividends on Series A and B preferred stock (237,124) (189,101)
------------------- ------------------
Net income (loss) applicable to common stockholders $ (49,886) $ 128,507
=================== ==================
Net income (loss) per common share:
Basic $ (0.01) $ 0.02
Diluted (0.01) 0.02
Weighted average common shares outstanding:
Basic 6,414,135 5,806,286
Diluted 7,372,521 5,806,286
See accompanying notes
4
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Nine Months Ended September 30,
-----------------------------------------
2003 2002
---- ----
Revenues:
Telecommunications services $ 48,211,821 $ 20,214,927
Other - 44,415
------------------ -------------------
Total revenues 48,211,821 20,259,342
Operating expenses:
Costs of revenues 26,106,281 10,943,056
General and administrative 11,571,010 4,650,156
Selling and promotion 8,119,473 3,163,130
------------------ -------------------
Total operating expenses 45,796,764 18,756,342
------------------ -------------------
Income from operations 2,415,057 1,503,000
Other income (expense):
Interest income 9,090 12,698
Interest expense (1,460,985) (1,120,558)
------------------ -------------------
Total other expense, net (1,451,895) (1,107,860)
------------------ -------------------
Net income $ 963,162 $ 395,140
8% Preferred dividends on Series A and B preferred stock (634,212) (561,138)
------------------ -------------------
Net income (loss) applicable to common stockholders $ 328,950 $ (165,998)
================== ===================
Net income (loss) per common share:
Basic $ 0.05 $ (0.03)
Diluted 0.05 (0.03)
Weighted average common shares outstanding:
Basic 6,285,038 5,672,462
Diluted 6,330,183 5,672,462
See accompanying notes
5
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Nine Months Ended September 30,
--------------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 963,162 $ 395,140
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 3,034,514 784,638
Amortization included in interest expense resulting from
issuing stock with notes 5,312 23,375
Amortization of discount on notes payable 340,480 151,858
Amortization of note financing costs 97,598 133,587
Amortization of deferred consulting fees 15,626 37,642
Expense related to the grant of options to purchase common shares - 42,964
Changes in operating assets and liabilities:
Accounts receivable (3,333,853) (2,774,548)
Other assets (692,807) (2,040,103)
Checks in excess of available cash balances - (186,866)
Accounts payable 3,149,416 1,037,031
Accrued commissions and rebates 162,934 92,936
Accrued liabilities 406,472 266,979
----------------- -----------------
Net cash provided by (used in) operating activities 4,148,854 (2,035,367)
----------------- -----------------
Cash flows from investing activities:
Increase in other assets (52,125) (88,387)
Purchases of property and equipment (694,314) (250,968)
----------------- -----------------
Net cash used in investing activities (746,439) (339,355)
----------------- -----------------
Cash flows from financing activities:
Restricted cash (579,584) (200,632)
Net borrowings and payments under line of credit 1,588,412 878,376
Borrowings under notes payable, net of debt issuance costs 2,299,955 3,937,250
Principal payments on notes payable and other long-term obligations (6,656,656) (1,249,031)
Principal payments on capital lease obligations (10,391) (178,942)
Repurchase of shares from stockholders with less than 100 shares (4,852) -
----------------- -----------------
Net cash provided by (used in) financing activities (3,363,116) 3,187,021
----------------- -----------------
Net increase in cash 39,299 812,299
Cash at the beginning of the period 994,360 57,100
----------------- -----------------
Cash at the end of the period $ 1,033,659 $ 869,399
================= =================
See accompanying notes
6
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Nine Months Ended September 30,
--------------------------------------
2003 2002
---- ----
Supplemental cash flow information:
Cash paid for interest $ 860,827 $ 666,883
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend 768,544 750,352
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 634,212 561,138
Retire and replace note payable 800,000 -
Increase in Touch America obligation pursuant to amended agreement 3,264,576 -
Issuance of preferred stock to acquire RTIP Network assets 1,400,738 -
Convert accrued interest to note payable 435,388 -
Capital expenditures financed with capital lease obligation 100,691 -
See accompanying notes
7
BUYERS UNITED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Unaudited)
September 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 Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) applicable to common stockholders:
---------------------------------------------------
As reported $( 49,886) $ 128,507 $328,950 $(165,998)
Pro forma stock-option based compensation ( 57,567) (187,214) (215,376) (561,642)
---------- ---------- --------- ----------
Pro forma net income (loss) applicable to common
stockholders $(107,453) $( 58,707) $113,574 $(727,640)
========== ========== ========= ==========
Basic and diluted net income (loss) per common share:
----------------------------------------------------
As reported: $ (0.01) $ 0.02 $ 0.05 $ (0.03)
Pro forma basic and diluted net income (loss) per
common share: $ (0.02) $ (0.01) $ 0.02 $ (0.13)
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 Voice over
Internet Protocol ("VoIP") 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
VoIP 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. As of
November 1, 2003, monthly installments totaling 32,142 shares have been
issued and delivered to I-Link. Assuming the remaining 21,428 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 18.6 percent of the outstanding common stock of
Buyers, without giving effect to any other common stock issuances including
the exercise of conversion or purchase rights under 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 Nine months ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ------------
Net revenue $16,439,065 $10,548,249 $48,211,821 $ 26,265,043
Net income (loss) applicable to
common stockholders (49,886) (1,626,026) 485,620 (9,410,768)
Basic and diluted net income (loss) per share $ (0.01) $ (0.28) $ 0.08 $ (1.41)
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 $3.0 million to Touch America. The original purchase price was
$6.8 million, 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 $6.1 million. 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 purchase price for this additional customer base was 2.5
times the long distance service usage of the New Customers during August
2003 which aggregated $166,576, to be adjusted further for those new
customers that trafficked after August. As of September 30, 2003, the
Company had paid a total of $5.6 million 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.
Glyphics
During August of 2003, Buyers United agreed to purchase approximately
12,000 long distance customers or approximately $200,000 in monthly revenue
from Glyphics Communications, Inc. (Glyphics). The Company agreed to pay
Glyphics a total of $543,558, payable monthly based in amounts equal to 30
percent of revenues collected from the customers during the preceding
month. In addition, Buyers agreed to pay Glyphics a monthly sales
commission of 5 percent until the purchase price is fully paid, after which
Buyers will continue to pay Glyphics a 10 percent commission.
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 percent
and are due in 2004 through early 2005.
On February 28, 2003, the Company retired its $1.1 million note payable by
paying $250,000 in cash and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection
with the original agreement. The new note is unsecured and bears interest
at 10 percent, payable monthly. Principal is also payable monthly based on
a percentage of billings collected during each monthly billing period from
designated customers.
10
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 percent, and are due in
May and June 2006.
In June 2003 the Company issued $1.4 million 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 percent, with principal
and interest payable monthly. The principal paid each month is based on a
percentage 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 percent of such collected billings.
There was a 5 percent commission paid to the sales agent in connection with
the issuance of the notes.
On July 5, 2003, the Company issued two 12 percent promissory notes to one
of its directors aggregating $435,388. This amount represented unpaid
interest accrued up to that date on virtually all of the director's other
promissory notes. In September, the Company repaid one of the notes for
$86,563. The remaining note matures on July 5, 2005, and interest is
payable monthly.
In September 2003 the Company entered into a three-year lease to finance
the acquisition of new business software in the amount of $100,691. Monthly
payments are $2,891, and the Company is accounting for the transaction as a
capital lease.
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 October 31,
2003, the Company had repurchased 2,772 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 76 percent and 97 percent of the Company's cost of revenue
during 2003 and 2002, respectively, was generated from three
telecommunication providers. As of September 30, 2003, the Company owed
$3.5 million 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
In October 2003, the Company acquired the exclusive right to sell and
manage the enhanced telecommunications functions of MyACD, Inc. ("MyACD"),
with a one-year option to purchase it at a predetermined price. During the
term of the agreement, Buyers United has the sole right to manage sales,
service, and billing of MyACD services. Under the agreement MyACD will
continue to provide enhanced service development and configuration and
Buyers United will reimburse MyACD for actual costs related to these
activities.
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 we functioned as an aggregator
and reseller of telecommunications services provided by others. We intend to
continue to pursue and develop this type of business. 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 Voice over Internet Protocol
("VoIP") Network. We closed the transactions in May 2003. With these newly
acquired assets we can now 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 VoIP Network rather than entirely through third party
providers.
In October 2003, Buyers United acquired the exclusive right to sell and manage
the software-based enhanced telecommunications functions developed by MyACD,
Inc. ("MyACD") with an option to purchase MyACD at a predetermined price. MyACD
has developed proprietary software that enhances traditional communications by
providing businesses with the capabilities of quality management voice
recording, call routing to agents based on capability and proficiency,
interactive voice response, real-time and historical management reporting and
other features to improve the productivity of contact centers. We will use our
VoIP Network for hosting and delivering the MyACD enhanced services to customers
that are seeking more than traditional voice communications for their contact
centers, so that we can offer a complete package of long-distance, data
transmission, and enhanced telephony services. We believe there is a significant
market for our single source approach to the telecommunications needs of
business and institutional users, and we intend to focus on testing and
developing this market over the next 12 months. During the initial term of the
agreement, Buyers United has the sole right to manage sales, service, and
billing of MyACD services. MyACD will continue to provide enhanced service
development and configuration.
Also in December 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
we amended the purchase agreement to acquire additional switched voice and
dedicated telecommunications customers and correct discrepancies in the list of
customers originally purchased in December 2002. The total purchase price was
approximately $6.1 million, plus $166,576 which equaled 2.5 times the August
2003 service revenue of the new accounts acquired in June 2003. The purchase
price will be adjusted further in the event additional customers are acquired at
future dates. Buyers United made an initial payment of $3.0 million to Touch
America in December 2002 and additional cash payments of $2.6 million through
September 30, 2003. The balance of the purchase price as finally determined is
payable monthly in an amount equal to 7.2 percent of Buyers United's monthly
collections on the accounts acquired from Touch America.
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. Our recent purchase of telecommunication
customers of Touch America has resulted in a significant increase in our
customer base in 2003. We believe 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. At the present we are not evaluating any new acquisitions.
12
Results of Operations
Revenues
Total revenues increased 89.9% to $16.4 million for the three-months ended
September 30, 2003 as compared to $8.6 million for the same period in 2002. For
the nine months ended September 30, 2003 revenues increased 138.0 percent to
$48.2 million as compared to $20.2 million for the same period in 2002. While
the increase in revenue is primarily due to the Touch America transaction, we
also generated growth internally from ongoing promotional efforts, primarily
involving independent agents and referrals from an online shopping comparison
service.
Costs of revenues
Costs of revenues for the three-month period ended September 30, 2003 were $8.8
million, a 85.8% increase as compared to $4.8 million incurred during the
comparable three-month period for the prior year. For the nine-month period
ended September 30, 2003 cost of revenues increased to $26.1 million, a 139
percent increase as compared to $10.9 million for the nine-month period ended
September 30, 2003. Such costs as a percentage of revenue for the three-month
period ended September 30, 2003 were 53.8%, as compared to 55.0% during 2002 and
54.1% for the nine-months ended September 30, 2003 compared to 54.0% for same
period in 2002.
The increase in gross margin for the three-month period ended September 30, 2003
as compared to the previous year is the result of a decrease in rates for
long-distance minutes. 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.
Gross margin for the nine-month period ended September 30, 2003 remained
constant as compared to the previous year. Factors contributing to no change
include a decrease in rates for long-distance minutes offset by costs related to
an increase in customers using dedicated circuit services. Also offsetting any
decreases in rates were costs 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.
General and administrative expenses
General and administrative expenses in the third quarter of 2003 increased
100.1% to $3.8 million compared to $1.9 million in the third quarter of 2002,
and such expenses for the nine-months ended September 30, 2003 increased 148.8
percent to $11.6 million compared to $4.7 million for the nine-months ended
September 30, 2002. The increase is due to expenses required to support Buyers
United's significant revenue growth, and costs associated with the I-Link and
Touch America transactions. To meet the needs of increased revenue levels we
hired additional customer service and collection personnel. In addition, we have
increased costs related to research and development of new products being sold
and used on our VoIP Network. Over the next several quarters we will continue to
allocate resources for the development of additional products related to the
VoIP Network and the MyACD technology.
Selling and promotion expenses
Selling and promotion expenses increased 151.8% to $3.1 million during the third
quarter of 2003 from $1.2 million for the same period in 2002 and such expenses
increased 156.7% to $8.1 million for the nine-months ended September 30, 2003
compared to $3.2 million for the nine-months ended September 30, 2002. Selling
and promotion expenses as a percentage of revenue were 16.8% for the nine-months
ended September 30, 2003 compared with 15.6% for the same period in 2002. The
increase resulted from higher commissions paid on increased revenue. Also
contributing to the increase in expenses were higher amortization expenses
associated with deferred advertising costs and the customer lists acquired from
Touch America.
Other income (expense)
Interest expense for the three-month period ended September 30, 2003 was
$468,890, compared to $431,834 in 2002 and was $1.5 million for the nine-months
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ended September 30, 2003 compared to $1.1 million for the comparative period in
2002. The increase in interest expense was the result of higher debt balances
outstanding throughout 2003 compared to 2002.
Net income (loss)
Net loss applicable to common stockholders is $49,886 for the three-months ended
September 30, 2003 compared to net income of $128,507 for the same quarter in
2002. This loss for the quarter is attributable to higher costs related to the
development of new products being sold and used in our VoIP Network. Also
contributing to the loss was a substantial increase in selling and promotion
expenses, including commissions on sales and amortization of customer lists.
Also contributing to this difference was an increase in dividends payable on
preferred stock resulting from the issuance of additional shares of Series B
Convertible Preferred Stock in May 2003 to complete the acquisition of the
I-Link assets. We expect these factors to continue to impact our profitability
over the next several quarters. Notwithstanding the loss for the third quarter
of 2003, Buyers United recognized net income applicable to common stockholders
of $328,950 for the nine-months ended September 30, 2003 compared to a net loss
of $165,998 for the same period in 2002. This difference is attributable to
maintaining gross margins of 46 percent on a significant increase in revenues.
Under the current economic conditions we are unable to predict whether we can
maintain a similar gross margin on future revenues.
Liquidity and Capital Resources
Buyers United's current ratio as of September 30, 2003 increased slightly to
0.52:1 from 0.51:1 at December 31, 2002. The components of current assets and
current liabilities that changed significantly since the end of 2002 were
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 nine-months ended September 30, 2003 as compared to the same period in 2002.
Included in accounts payable are amounts due to various government agencies for
fees and taxes. These obligations have increased due to the significant increase
in related revenue. Accrued dividends increased as a result of the additional
shares of preferred stock issued to I-Link, Inc., in connection with completing
the acquisition of the VoIP Network.
Notes payable increased 2.7 percent, due to the net effect of ongoing payments
on investor notes, increase in unsecured promissory notes (described below) and
the increase in obligations for the purchase of customer lists.
In January 2003, Buyers United retired a $1.1 million promissory note,
previously due February 28, 2003 by paying $250,000 in cash and issuing a new
promissory note for $800,000. In addition, Buyers United issued 50,000 shares of
common stock in connection with the original agreement. The new note is
unsecured and bears interest at ten percent, payable monthly. Principal is also
payable monthly based on a percentage 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 percent and are due in
2004 and 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 percent, and are due in 2006.
In June 2003 Buyers United issued $1.4 million in promissory notes for cash used
primarily for purchasing customers from Touch America. The notes are unsecured
and bear interest at ten percent, with principal and interest payable monthly.
The principal paid each month is based on a percentage 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
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approximately ten percent of such collected billings. There was a five percent
commission paid to the sales agent in connection with the issuance of the notes.
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 was $1.75. The program did not have a material
impact on the financial statements of Buyers United.
Buyers United has a line of credit agreement with RFC Capital Corporation that
expires in January 2006. The available borrowing limit to $5 million, the
current interest rate is prime plus three percent, and the interest rate during
2002 was prime plus six percent. The facility allows the Company to obtain
financing on its eligible accounts receivable, including unbilled receivables
and regular monthly billings. The facility is collateralized by the underlying
receivables. On September 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
$2.9 million. The facility requires Buyers United to maintain a restricted cash
account for the collection of the receivables. As of September 30, 2003, Buyers
United had $1.1 million of restricted cash associated with the RFC arrangement.
As of September 30, 2003, Buyers United had a working capital deficit of $10.6
million and stockholders' deficit of $2.9 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 nine-months of
2003. Management believes Buyers United will continue to be profitable
throughout the remainder of 2003. In addition, the majority of long and
short-term notes payable are unsecured, of which, one-third are due to Company
directors and officers. The majority of remaining notes are non-recourse with 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 are
expected to increase over the next few years.
Critical accounting policies and estimates
Revenue Recognition - Buyers United's revenue recognition policy with respect to
reseller agreements is to record gross revenues and receivables from customers
when Buyers United acts as principal in the transaction; takes title to the
products or services; and has risks and rewards of ownership, such as risk of
loss for collection, delivery, or returns. Revenues from sales of services are
recognized upon providing the services to the customers.
Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
Property and Equipment - Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," Buyers United capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements.
Advertising Costs - Buyers United advertises its services through traditional
venues such as print media to the general public. Costs associated with these
advertising efforts are expensed as incurred.
In addition to the traditional advertising means noted above, Buyers United
participates in a direct response advertising campaign with a web-based
comparison shopping service. Through this campaign Buyers United's name and the
service it provides are displayed on the advertising company's website. Buyers
United is obligated to pay a referral fee when a customer signs up for services.
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The fees associated with this campaign are deferred and amortized over the
period during which future benefits are expected to be received, which is
approximately 24 months.
Debt Issuance Costs - As an inducement to various investors, shareholders, and
board members to lend monies to Buyers United, 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.
Income Taxes - Buyers United 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.
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
November 11, 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 September 30, 2003.
Subsequent to November 11, 2003, through the date of this filing of Form 10-QSB
for the quarterly period ended September 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.
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PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first half of 2003, preferred stock dividends amounted to $397,089,
consisting of $147,974 on outstanding shares of Series A 8 percent cumulative
convertible preferred stock, and $249,115 on outstanding shares of Series B 8
percent cumulative convertible preferred stock. These dividends were paid
through the issuance of 227,145 shares of common stock to the holders of the
preferred stock on August 27, 2003.
On July 5, 2003, the Company issued two 12 percent promissory notes to a
director of the Company aggregating $435,388. This amount represented unpaid
interest accrued up to that date on virtually all of the director's other
promissory notes. In September, the Company repaid one of the notes for $86,563.
The remaining note matures on July 5, 2005, and interest is payable monthly. The
notes 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.
Item 5. OTHER INFORMATION
On September 10, 2003, Buyers United filed a registration statement on Form
SB-2 with the Securities and Exchange Commission, which became effective on
October 16, 2003. Through the registration statement we registered for resale
8,779,333 shares of the common stock that may be sold from time to time by the
selling security holders listed in the registration statement. The selling
security holders own
o Warrants to purchase 109,375 shares at a price of $1.25 per share
o Warrants to purchase 4,466,856 shares at a price of $2.00 per share
o Warrants to purchase 672,700 shares at a price of $2.50 per share
o Options to purchase 2,189,152 shares at prices ranging from $2.00 to
$5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at $2.00 per
share
o Convertible notes in the amount of $1,775,000 convertible at $2.50 per
share
o 50,000 shares of common stock
Buyers United will receive the proceeds from any exercise of warrants and
options and will benefit from extinguishment of the debt represented by the
conversion of any convertible notes, but will not receive any proceeds or
benefit from the resale of the shares by the selling security holders. As of
October 31, 2003 a total of 22,500 warrants had been exercised at an aggregate
purchase price of $43,750. There is no assurance, however, that a significant
number of the warrants or options will be exercised or convertible notes
converted.
Sales of a substantial number of the registered shares of our common stock in
the public markets, or a perception that these sales may occur, could cause the
market price of our stock to decline, which could adversely affect an investment
in our stock and could materially impair our ability to raise capital through
the sale of additional equity securities. The holders of the outstanding
warrants, options, and convertible securities have the opportunity to profit
from a rise in the value or market price of our common stock by exercising
purchase or conversion rights when we could obtain equity capital on more
favorable terms than those contained in these securities.
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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 Cooperation and Management Agreement between Buyers
United and MyACD, Inc., dated October 1, 2003, without
schedules*
10.2 10 Purchase Option Agreement between Buyers United,
Michael L. Shelton and David O. Peterson dated October
1, 2003, without exhibits**
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
* The excluded schedules are: Schedule I - Buyers United Existing Customers;
Schedule II - MyACD Customers; Schedule III - Enhanced Services Marketing
Budget; Schedule IV - Monthly Budget Payments; and Schedule V - Revised
Wholesale Services Agreement Pricing.
** The excluded exhibits are: Exhibit A - Form of Term Note; Exhibit B - Form of
Security and Pledge Agreement; Exhibit C - Form of Term Note; Exhibit D - Form
of Security and Pledge Agreement; Exhibit E - Form of Employment Agreement;
Exhibit F - Form of Stock Option Grant; and Exhibit G - Form of Employment
Agreement.
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: November 13, 2003 By: /s/ Theodore Stern, Chief Executive Officer
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Date: November 13, 2003 By: /s/ David R. Grow, Chief Financial Officer
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