UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2003, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
act of 1934 for the transition period from to
Commission File No. 0-26917
BUYERS UNITED, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 87-0528557
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
14870 Pony Express Road, Bluffdale, Utah 84065
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (801) 320-3300
--------------
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, Par Value
$0.0001
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $63,312,964.
The aggregate market value of voting stock held by non-affiliates computed on
the basis of the last sale price on March 15, 2004, was $28,739,284.
As of March 15, 2004, the Registrant had outstanding 12,994,079 shares of Common
Stock, par value $0.0001.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Description of Business 3
2. Description of Property 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 14
Part II
5. Market for Common Equity and Related Stockholder Matters 14
6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
7. Financial Statements 18
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 18
8A. Controls and Procedures 18
Part III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 21
10. Executive Compensation 23
11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 26
12. Certain Relationships and Related Transactions 27
13. Exhibits and Reports on Form 8-K 29
14. Principal Accountant Fees and Services 31
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Buyers United, Inc. is a telecommunications company that offers a wide
range of long distance, toll free, data transmission, and related communication
service options at competitive prices, and provides to its customers a standard
of service it believes is comparable to other industry participants. The
telecommunications services we offer include the following:
o Switched long distance services to business and residential customers
o Dedicated access long distance service
o Toll-free 800/888/877/866 services
o Dedicated data transmission
o Private line data services
o Calling card services
o Conference calling
o Automatic call distribution
o Interactive voice response
o Outbound dialing and voice message broadcasting
o Fax to email
o Voice mail
o Real time account management
These services can be offered individually, or in a suite of services
tailored to a customer's needs. During 2003 we acquired and integrated into our
operations a voice over Internet protocol network (VoIP Network) that enables us
to offer a number of services in the form of software solutions that are
delivered through our VoIP Network.
For the past eight years Buyers United has been engaged in the business of
reselling telecommunication services provided by others to Buyers United at
wholesale rates. Domestic long distance services make up a major portion of our
sales with the other services listed above making smaller contributions to our
sales mix.
Buyers United now services approximately 150,000 business and residential
consumers across America. We have refined our business model over the past
several years to address specific niche opportunities in the vast communications
industry. Our brand, United Carrier Networks (UCN), was adopted in the last
quarter of 2001 for providing our services to business customers. We previously
used the brand name BuyersOnline to service residential customers.
Buyers United is now marketing its services primarily through independent
agents to business customers. Our UCN web site supports the marketing effort of
our agents by providing a resource for exploring and selecting the specialized
services and options we offer business customers. During the past year we
acquired both business and residential customers by purchase from other
providers and may consider opportunities for additional purchases in the future,
although at the present time we are not considering any purchase opportunities.
Buyers United was originally formed as a Utah corporation in 1994. In March
1999, Buyers United changed its corporate domicile from Utah to Delaware through
a merger with a Delaware corporation formed for that purpose. When we changed
the corporate domicile our name became BUI, Inc., and we effected a 1-for-4
reverse split in the issued and outstanding common stock. On April 20, 2000, we
changed our name to BuyersOnline.com, Inc., and on November 20, 2001, our name
was changed again to Buyers United, Inc.
Recent developments
In March 2004 Buyers United sold 3,782,000 shares of common stock at $2.30
per share, or a total of approximately $8.7 million, in a private placement to
institutional and accredited investors. Net proceeds of the offering after
placement fees and expenses were approximately $8.1 million. The net proceeds of
the private placement are intended to be used for various corporate purposes,
including sales and marketing related programs, funding further development of
3
our VoIP Network, reducing debt, and for working capital and other general
corporate purposes. Buyers United intends to file a registration statement under
the Securities Act of 1933 to permit resale of the shares sold in the offering.
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. Closing of the acquisition was subject to complying with applicable
federal and state regulation pertaining to transfer of the customers. All of the
regulatory requirements were satisfied and the acquisition of the customers is
completed.
In October 2003, Buyers United acquired the exclusive right to sell and
manage the enhanced telecommunications functions of MyACD, Inc., with a one-year
option to purchase MyACD. MyACD develops and distributes telephony software
solutions for call center traffic management and related functions that Buyers
United can now offer to its customers over its VoIP Network. During the term of
the agreement, Buyers United has the sole right to manage sales, service and
billing of MyACD services. Under the agreement MyACD will continue to provide
enhanced service development and configuration and Buyers United will reimburse
MyACD for actual costs related to these activities.
During August 2003, Buyers United purchased approximately 12,000 long
distance customers from Glyphics Communications, Inc. for $543,558.
In December 2002, Buyers United entered into an agreement to purchase
assets of Acceris Communications Inc. (formerly I-Link, Inc.) and its
subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by Acceris, all of which comprise the VoIP Network we now own and
operate. Concurrently with the agreement for the purchase of the assets, Buyers
United assumed management of the assets to be acquired pending the closing of
the purchase. The transaction was closed in May 2003, with several outstanding
accounts to reconcile. The assets acquired include dedicated equipment required
for operating the VoIP Network, customers of I-Link Communications serviced
through the network, and certain trademarks. In consideration for the assets and
software license, Buyers United issued to Acceris 300,000 shares of Series B
Convertible Preferred Stock. This preferred stock was converted to 1,500,000
common shares in March 2004 pursuant to an agreement with Acceris that resolved
the open account issues, allowed Acceris to sell 750,000 of the converted common
shares to the same investors that purchased Buyers United common stock in March
2004, and granted to Acceris the right to include its common stock in any
registration statement we file for the March investors.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
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. Buyers United did not purchase
any accounts receivable, equipment, or other assets of Touch America. The total
purchase price was $6.5 million. Buyers United made an initial payment of $3
million to Touch America in December 2002 and has made additional cash payments
totaling $3.4 million through March 4, 2004. The balance of $93,988 is expected
to be paid in April 2004.
Services and products
Buyers United is an aggregator and provider of telecommunications services.
As an aggregator we mean that we contract with a number of third party providers
for the right to resell the various telecommunication services and products they
provide, and then offer all of these various services to our customers. We are
also a provider, in that we operate a dedicated VoIP Network and advanced
customer contact handling/management software applications that enable us to
offer enhanced services to our customers. The variety of services and products
we offer enables the customer to buy only those telecommunications services it
needs from one source, combine those services in a customized package, receive
one bill for those services, and make one call to Buyers United if a service
problem or billing issue arises. The separate services Buyers United can sell
singly or bundled to meet customer needs include:
o Switched long distance service to business and residential customers.
This is traditional 1+ long distance service. The customer dials the
long-distance number and the local exchange carrier switches the call
to the long distance provider we have designated for the customer
4
based on the customer's account selections. We bill the customer for
the long distance service at the applicable retail rate, as well as
local access fees for the local exchange carrier, taxes, and universal
service fund charges.
o Dedicated access long distance service. Some business customers
require multiple line concurrent long distance access for high volume
telemarketing or call center operations. Dedicated access connects the
customer directly to the long distance carrier, by-passing the local
exchange carrier, through a T-1 or higher capacity local loop
connection. We bill the customer for the local loop connection and for
the long distance service.
o Toll-free 800/888/877/866 services. Toll free calling service allows
clients of our customer to call into the customer at the customer's
expense, rather than the client's expense. This is a service
traditionally used by our business customers. We own and assign the
toll free numbers to our customers and bill our customers for the toll
free number and the long distance service.
o Dedicated data transmission. This is similar to dedicated access long
distance service, except the primary use is for data transmission,
such as Internet access, and the local loop is connected to the
Internet through one of our providers. We bill the customer for the
local loop connection and for Internet access fees.
o Private line data services. This type of services is provided through
a T-1 or higher capacity circuit, and encompasses a variety of data
transmission media, including Frame Relay, dedicated Internet access
or Asynchronous Transfer Mode (ATM) data networks. Each of these data
products rely on a shared network architecture where the bandwidth on
the network backbone is shared by the users connected into these
networks. Customers frequently select these types of networks because
it is much more cost-effective than installing a private line network,
or because of the need to access the public Internet.
o Calling card services. The calling card feature is often provided with
our switched and dedicated long distance services. The calling card
allows the customer to use a toll free number and PIN to make long
distance calls from any location on its account. We bill the customer
for the long distance service.
o Conference calling. This service allows a customer to interconnect
simultaneously a number of callers for conference purposes. This
feature is of particular value to business customers that have a need
for multiple members of the organization to speak together from remote
locations on a periodic basis. The customer is assigned a toll free
number and PIN that allows each participant in the conference call to
access the call simply by dialing the toll free number and entering
the PIN when prompted. We bill the customer for the conference call
feature and the long distance minutes of each participant in the
conference call.
o Outbound dialing and voice message broadcasting. This is the ability
to allow a customer to automatically dial outbound and to broadcast
voice messages to predefined lists. Customers can pay by the call, by
the minute or by the port. They can also link directly to their own
database to automatically generate call lists with sophisticated call
scheduling capabilities. They can also choose between autodial (one at
a time), powerdial (dial sequentially through a list), or predictive
dialers (computer algorithms with dial ahead to screen out busies, no
answers, etc.).
o Fax to Email. This service allows a customer to send or receive faxes
through an Email address with the customer's personal computer.
o Voice mail. This feature allows customers to receive, store, forward,
and access voice mail messages.
o Real time service account management on the Internet. Real time
management allows the customer to redirect phone calls received during
the day to the customer's location. For example, the customer can
access its account through the Internet and direct that phone calls be
forwarded to wherever the customer happens to be during the day -
office, home, cellular phone, or other location. With its personal
5
computer, the customer can review billing on its account, make service
inquiries, or add or remove services, all over the Internet.
In addition, Buyers United offers a flexible set of advanced call center
traffic handling/management applications, such as skills-based routing,
automated call distribution, automated interactive voice response, database
integration with the call handling technology, multimedia contact handling
(voice, fax, email, chat), and management reporting features. These capabilities
have previously been available only by purchasing and integrating expensive
equipment at substantial installation expense, so only the large call center
operations with 200 or more agents on call at any one time could afford to
establish these capabilities. Buyers United can deliver the same capabilities
through a software solution hosted on our VoIP Network at a much lower cost that
makes it possible for the smaller traditional call center to make the transition
to a full-featured contact center with improved agent productivity and the
ability to respond quickly to customer requirements for voice, email, fax and/or
chat contact methods.
The Buyers United inNetwork(TM) family of products is a set of
pre-integrated application services hosted within our VoIP Network designed to
meet the needs of call centers and other businesses that demand greater contact
flexibility. Current products include inContact(TM), a complete set of advanced
contact handling/contact management software applications (as referenced in the
above paragraph), plus additional features for handling multi-media contact
methods - voice plus email, fax or web chat. InControl(TM) is a rapid
application development tool with a visual drag and drop programming interface
for creating or modifying contact routing processes.
Marketing strategy
By the end of 2001, Buyers United employed two distinct brands for our
telecommunications services, "UCN" or "United Carrier Networks" for commercial
and business customers, and "BOL" or "BuyersOnline" for residential customers.
We are now focusing on promoting "UCN" or "United Carrier Networks" for all of
our service offerings, so toward the end of 2003 we discontinued marketing to
residential customers, and discontinued the BuyersOnline brand name. Our plan is
to change our name to "UCN" or a similar variation in 2004.
We market our services primarily through independent sales agents. We
engage independent telecommunications agents around the country who sell
primarily to commercial and business customers. Independent agents are
responsible for a substantial amount of annual U.S. telecommunication sales to
commercial and business users. The service presentation we developed for UCN is
targeted to the independent agent, and is intended to make available to the
agent a coordinated package of services designed to be attractive to commercial
and business customers. With UCN our marketing effort focuses on providing
businesses with the ability to access multiple long distance carriers with which
we have agreements to resell services, allowing the business owners to choose
services provided through various long distance providers. A business customer
can choose various services from any or all of the different telecommunications
providers we use, yet only have to contract through UCN for the selected
services. The business customer is not required to deal with these carriers
separately. UCN provides a single source for customer service, regardless of how
many networks the business uses, and sends a single billing statement that
combines all of the services used from any combination of wholesale service
providers.
We have been, and should continue to be, successful in engaging independent
agents because our package of services appeals to commercial and business
customers, and because of our back office support infrastructure, incentive
programs, customer retention efforts, and additional product/service revenue
opportunities. Buyers United earned the "2002 Agent's Choice Award" in March
2003 from the Agent Alliance, a national trade association of independent
telecom agents. The award was given in recognition of the effectiveness of our
customer service and support programs.
Buyers United's early growth came from the residential consumer
long-distance market. We plan to continue providing our services to residential
customers using the UCN brand. We do not intend, however, to pursue an active
marketing effort in the residential market because we believe our resources are
better used in pursuing business customers. We had a substantial increase in
residential customers over the past year as a result of the Touch America
transaction.
Provisioning
Buyers United is a reseller of domestic and international long distance and
other services provided by national and regional providers. Our primary
providers are MCI, Qwest, Global Crossing, AT&T, Dancris, WilTel, and CNM.
6
Buyers United resells switched long distance minutes that it has contracted to
obtain from our providers at wholesale rates that averaged 54.0 percent of the
retail rates charged to customers in 2002 and 53.3 percent in 2003. In 2002 and
2003, retail rates were between $0.02 and $0.08 per minute for switched domestic
long distance. International rates vary substantially on the basis of the
country and number called, but we believe our rates are comparable to rates
available from our competitors.
The contracts with our providers are standard and customary in the
industry, requiring payment net 30 days for minutes used in a month and
designate Buyers United as the point of contact for all customer service calls.
These agreements are for one to three years and are generally renewable at the
end of each contract term, when rates are often renegotiated on the basis of
prevailing rates in the industry. We are responsible for all customer billing
and collections, so that as far as the customer is concerned we are the long
distance service provider. Qwest and Global Crossing accounted for approximately
80 percent of our cost of revenues in 2002 and 70 percent in 2003.
Buyers United also acquires its other services from its providers at rates
or fees fixed in our contracts, which include dedicated long distance service,
toll-free 800/888/877/866 services, dedicated data transmission service, and
calling cards. These services are billed to us at rates or fees stated in our
contracts with the providers and are payable on the same terms as switched long
distance service.
We maintain a call center in Bluffdale, Utah for receiving customer service
and billing inquiries. Presently we employ approximately 62 customer service
personnel to respond to customer calls, and our call center specialists are
available from 7:00 a.m. to 10:00 p.m. Monday through Friday and 8:00 a.m. to
5:00 p.m. on Saturday. We also provide emergency service 24-hours a day, seven
days a week. We place a high priority on customer service, since we believe that
when our rates are similar to rates offered by our competitors, service is a
primary factor in acquiring and retaining customers.
The VoIP Network enables our customers to use existing telephone, fax
machine, pager, or modem equipment to achieve high-quality communications
through Internet Protocol technology. The VoIP Network consists of a fully
integrated dedicated network of equipment and leased telecommunications lines
augmented by the licensed I-Link "softswitch" software. It provides the
necessary operational platform for the enhanced services we began offering in
the third quarter of 2003 and is adaptable for use with new or specialized
service applications developed by others. The VoIP Network is a data
packet-based network that ties together local loop dial-up and broadband
connections via gateways located in New York, Salt Lake City, Dallas, and Los
Angeles. Each of these gateways consists of off-the-shelf hardware elements and
the softswitch software. The softswitch software can distinguish among and
"handle" voice, fax, and modem communications as programmed for the customer's
suite of service selections. Handle means the voice or data transmission can be
delivered directly, redirected (to a different location), redistributed (to a
different or multiple recipients), stored for later delivery, or altered (such
as converting a fax to email).
The VoIP Network allows us to provide cost advantages over traditional
transmission networks with respect to both lower transmission cost and lower
capital infrastructure cost. Lower transmission cost results from transmitting
long distance traffic over the network between our gateways for retransmission,
which has greater capacity because transmissions are converted to data packets
and transmitted concurrently over the network bandwidth capacity. Access and
transmission costs for our VoIP network are less than traditional transmission
networks. The second component of cost advantages is lower capital
infrastructure costs. In a traditional telecommunications network, each service
-- voicemail, fax mail, conference calling, and single number forwarding -- must
be processed through one or more separate hardware switches. We offer all of
these services through the VoIP Network as modified or as new software
applications are added to the network software platform, which is less expensive
than purchasing and maintaining hardware switches. It is this ability to host
different software applications on the VoIP Network to configure the software to
deliver different connectivity solutions that enables us to offer the
inNetwork(TM) family of products to call centers and other businesses that
demand greater contact flexibility.
We began integrating this network with our traditional provider network
systems and service offerings in the first quarter of 2003 and completed the
process in the third quarter of 2003. While we believe the VoIP Network will
lower our costs of operation in 2004 and generate internal growth from enhanced
service products, we cannot predict whether these lower costs or growth will be
significant.
7
Technology and our business
Buyers United has always leveraged information technology to create
consistent streamlined business processes. Buyers United relies on the following
systems, which represent its current technology initiatives:
o Automatic customer call distribution. This system is a unified
solution for managing customer communications that integrates
telephone, email, fax, web text chat, and co-browsing into a unified
interface. The distribution system enables Buyers United to enhance
customer relationships, reduce costs, and improve the management of
all types of business communications.
o BuyersUnitedDashboard (BUD) is a customer service software application
that provides a single interface for call center representatives to
perform their service tasks. BUD utilizes a "wizard" interface
methodology that simplifies the customer service representatives'
daily tasks by breaking them into smaller steps. The "wizard"
framework provides increased quality and consistency into our customer
service model.
o CostGuard(R), is a fully convergent, open and flexible billing system
designed to facilitate collaboration among customer service
representatives, business affiliates, and customers. Customers can
access the system through a standard web-browser to initiate and
fulfill billing and service tasks. Buyers United believes the
CostGuard system provides a consistent and flexible billing solution
that supports our current needs and is expandable for future growth.
o The VoIP Network employs an architecture emphasizing security,
reliability, and carrier diversity. A "Security in Layers" approach
has been adopted utilizing security enforcement points comprised of
inspection firewalls, packet filters, and intrusion detection and
prevention systems. Measures have been implemented to audit data
integrity and access. Significant subsystems are geographically
dispersed and data replicated between sites to protect against fiber
optic disruption or other environmental event.
Full backups of all our core data are performed weekly. Differential
backups are performed nightly. Transaction log backups take place every 30
minutes. Backups are copied to two file servers in different locations. We use
SSL encryption to protect all sensitive areas of our customer information and
service-oriented websites. Remote access to our systems is made possible through
a 168 bit encrypted Virtual Private Network. System passwords are changed on a
periodic basis and stored in a secure folder with restricted access. All local
desktops are scanned for viruses on a real-time basis and report to a central
server. We believe our backup, maintenance, and security systems are adequate
for preserving the delivery of service to our customers and operation of our
business without significant outages or interruptions. However, an extraordinary
unforeseen and catastrophic event is always possible that could have a
significant impact on our business, and we do not have business interruption
insurance on which we could recoup losses resulting from such an event.
Governmental Regulation
Federal Regulation of Telecommunications Services
Our telecommunications services are subject to federal regulation under the
Telecommunications Act of 1996 (Telecom Act). The Telecom Act was designed to
foster local exchange competition by establishing a framework to govern new
competitive entry in local and long distance telecommunications services and
allow any entity, including cable television companies and electric and gas
utilities, to compete in the telecommunications market. The ongoing
implementation and interpretation of the Telecom Act remains subject to numerous
federal and state policy rulemaking proceedings and judicial review and we
cannot predict any future impact on our business.
Pursuant to the Telecom Act, the Federal Communications Commission (FCC)
regulates our interstate and international telecommunications services. The FCC
imposes more extensive requirements on incumbent common carriers that have some
degree of market power, such as the Regional Bell Operating Companies (RBOCs)
and other independent local exchange carriers (ILECs), than it imposes on
companies like ours, which are non-dominant interexchange carriers that lack
market power. For example, the FCC permits non-dominant interexchange carriers
to provide domestic interstate services without prior authorization.
8
As a non-dominant interexchange carrier, our costs of providing long distance
services could be affected by changes in FCC rules controlling the form and
amount of "access charges" local exchange carriers (which generally include the
RBOCs and ILECs) are permitted to impose on connecting companies to originate
and terminate long distance traffic over their local networks. The FCC currently
has several rulemaking proceedings in which it is considering changes to the
existing interstate access charge system. It has also recently been reported
that the nation's largest local exchange and long distance providers, who have
been engaged in private negotiations for several months, have tentatively
reached an agreement on a proposal that would eliminate or substantially reduce
interstate local access charges. If such an agreement is reached, it would have
to be presented to and approved by the FCC.
We cannot predict the outcome of these or other federal or state access
charge proceedings or whether they will have a material impact on us. It is even
more difficult to predict the outcome and impact of private negotiations in
which we are not directly involved. It is recognized, however, that the access
charge payments Buyers United must pay to the RBOCs and ILECs are a material
part of its cost to provide services over its network.
The Telecom Act requires that every telecommunications carrier contribute,
on an equitable and non-discriminatory basis, to federal universal service
mechanisms established by the FCC. The federal Universal Service Fund (USF)
provides subsidies to defray the costs of telephony services in high-cost areas
for low-income consumers and helps subsidize telecommunications and Internet
services for qualified schools, libraries and rural health care providers. Our
payments to the federal USF are based on a percentage of our interstate and
international retail telecommunications revenues and the contribution factor
issued by the FCC, which varies quarterly. In 2003, the quarterly USF
contribution factor averaged around nine percent of billed retail revenue. The
amounts contributed may be passed through to customers.
The FCC currently has an open rulemaking proceeding in which it is
considering converting the current revenue-based USF contribution system to a
"connection-based" system with a fixed, monthly fee. It is too soon to predict
whether the transition to a connection-based USF contribution system would have
a financial impact on us.
State Regulation of Telecommunications Services
State regulatory agencies have jurisdiction when our telecommunications
services are provided on an intrastate basis. The state regulatory environment
varies substantially from state-to-state and in some cases can be more extensive
than FCC regulations. In most instances, we are required to obtain and maintain
certification from a state public utility commission (PUC) before providing
telecommunications services in that state. Consequently, we are subject to the
obligations that the applicable state laws place on all similarly certified
carriers, including the regulation of services, payment of regulatory fees, and
preparation and submission of reports. If state regulators or legislators change
current regulations or laws it may negatively impact our ability to provide
services.
Regulation of Internet Telephony and the Internet
The use of the Internet and private Internet Protocol (IP) networks to
provide voice communications services is a relatively recent market development.
Although the provision of such services is currently permitted by United States
law and remains largely unregulated within the United States, several FCC and
state regulatory proceedings aimed at evaluating the future regulatory treatment
of such services have recently been initiated. More aggressive regulation of the
Internet in general, and Internet telephony providers and services specifically,
may materially affect our business, financial condition, operating results and
future prospects, particularly if increased numbers of governments impose
regulations restricting the use and sale of IP telephony services.
Federal
To date the FCC has reached no conclusion on whether IP telephony services
constitute telecommunications services subject to regulation under the Telecom
Act. The FCC is now examining the question whether certain forms of
phone-to-phone Internet telephony are information services or telecommunications
services. Recent actions taken by the FCC and proceedings now pending before the
FCC may affect the regulatory status of Internet telephony.
o In February 2004 the FCC ruled that computer-to-computer IP telephony
that transmits data packets carrying voice communications via the same
lines that carry e-mail and instant messages is an unregulated
"information service" that is subject to exclusive federal
jurisdiction. Accordingly, this type of computer-to-computer IP
telephony service is likely to remain free of traditional telephony
regulation.
9
o Also in February 2004 the FCC adopted a broad Notice of Proposed
Rulemaking seeking comment on the appropriate regulatory
classification and treatment of Internet-based communications
services, most notably Voice over IP (VoIP).
o In October 2002 AT&T filed a petition with the FCC seeking a
declaratory ruling that would prevent RBOCs and other ILECs from
imposing traditional circuit-switched access charges on phone-to-phone
IP services.
o In September 2003 Vonage Holdings Corporation filed a petition for
declaratory ruling requesting that the FCC find an order of the
Minnesota Public Utilities Commission requiring Vonage Holdings to
comply with state laws governing providers of traditional telephone
service to be preempted because its broadband Internet telephony
service is an information service.
o In January 2004, Level 3 Communications, LLC filed a "forbearance
petition" with the FCC asking the agency to reaffirm that legacy
switched access charges do not apply to VoIP.
We cannot predict either the timeframe or outcome of the foregoing open
proceedings before the FCC or what regulations, if any, the FCC will impose on
providers of IP-enabled voice communications services as a result of these
proceedings.
State
State governments and their regulatory authorities may assert jurisdiction
over the provision of intra-state IP-enabled communications services where they
believe that their telecommunications regulations are broad enough to cover
regulation of such services. Of primary concern to the IP-enabled communications
providers is that the imposition of state regulation would result in the
provider being subject to local access charges for intra-state service, which
would significantly increase the cost of service. While a majority of state
commissions have not imposed traditional telecommunications regulatory
requirements on IP telephony at this time, a number of state regulatory
authorities have initiated proceedings to examine the regulatory status of
Internet telephony services.
In October 2003 a Federal court in Minnesota issued a permanent injunction
against the Minnesota public utilities commission to prevent it from imposing
state regulations on a provider's VoIP services offered over broadband
connections. This permanent injunction was recently upheld in the face of
multiple challenges. Prior to the Minnesota Federal court ruling, several
states, including California, Washington, Wisconsin and Florida issued
directives to various VoIP providers directing them to register as
telecommunications providers. There can be no assurance that these states will
respect the Minnesota Federal court ruling or accept the position asserted by
VoIP providers that they are information, as opposed to telecommunications,
service providers.
Internet Taxation.
In addition to regulations addressing Internet telephony and broadband
services, other issues relating to the Internet in general could affect our
ability to provide our services. Federal, state and local governmental
organizations are considering various legislative proposals that might impose
additional taxes on Internet services and products. We cannot predict whether
new taxes will be imposed on our IP-enabled communications services or the
Internet in general and, depending on the type of taxes imposed, whether and how
our services would be affected thereafter. Increased taxation of the Internet
may decrease its growth and hinder technological development, which may
negatively impact the cost of doing business via the Internet or otherwise
materially adversely affect our business, financial condition and results of
operations.
Competition
Presently we are an aggregator and reseller of long distance and related
telecommunications services. Many of our competitors are substantially larger
with greater financial and other resources.
The U.S. long distance telecommunications industry is highly competitive
and significantly influenced by the marketing and pricing practices of the major
industry participants such as AT&T, Sprint and MCI. Buyers United also competes
with other national and regional long distance carriers that employ various
means to attract new subscribers, including television and other advertising
campaigns, telemarketing programs, network marketing, cash payments, and other
incentives. The ability of Buyers United to compete effectively will depend on
its ability to provide quality services at competitive prices.
10
Buyers United competes on the basis of variety of services offered,
customer billing and service, and price. Since we can access and offer switched
long distance rates from a number of providers, customers can select the rate
plan best suited to their needs without having to shop each long distance
carrier separately. We offer to our customers, directly and through agents, a
wide selection of telecommunications products. This provides the customer a
one-stop shopping opportunity to obtain many of its telecommunication services
from one source, Buyers United. We believe customers are attracted by the fact
that Buyers United provides many of their services because they receive one bill
and have only one provider to call with any billing or service questions. We
further believe this aggregated service approach enables us to attract agents to
sell our services. By selling Buyers United services, agents no longer have the
burden of managing multiple contracts with many telecommunications companies.
Our agents can complete a sale at the customer site and count on accurate
commissions for even complicated product suites. Additionally, agents enjoy
dedicated customer service. We believe customers see positive differences in the
way our services are sold and served compared to other providers. With Buyers
United, customers are not forced to take bundled services or enter into
long-term contracts from one provider, which we believe are typical sales
practices of competitors. Because our customer contracts are based on user
requirements rather than bundled services, Buyers United delivers only the
requested services at an appropriate capacity and competitive price.
Building recognition of our brands is beneficial to attracting additional
customers and new strategic alliances. Our failure to promote and maintain our
brands successfully may result in slower growth, loss of customers, and loss of
market share and strategic alliances. Accordingly, we intend to continue
pursuing an aggressive brand-enhancement strategy, which includes promotional
programs and public relations activities.
Employees
As of December 31, 2003, Buyers United employed a total of 167 full time
and 28 part time persons. None of our employees is represented by a labor union.
We have not experienced any work stoppages and believe relations with our
employees are good.
Risk associated with our business
Our revenues and operating results may be negatively impacted by the
pricing decisions of our competitors and our providers.
Our revenues from period to period depend on the pricing for long distance
service we can obtain from the wholesale providers of these services. We also
must price our services at levels that are competitive in the marketplace. This
industry has a history of downward pressure on long distance service rates as a
result of competition among providers. To acquire and retain customers we offer
these services at prices that are perceived as competitive in conjunction with
the other benefits we provide. Consequently, falling prices will likely result
in lowering our rates to customers, which will reduce revenues. On the other
hand, higher prices charged by our providers will cut into gross profit margins
unless we raise prices to our customers, which may be difficult for us to do if
our competitors are not subject to the same upward pricing pressures or chose
not to increase prices notwithstanding such pressure. To make up for potential
reductions in either revenues or profits, it would be necessary for us to
continue to make significant increases in our customer base from period to
period, and there is no assurance that that we will be successful in doing so.
Our substantial debt adversely affects our operations and financial
condition.
At December 31, 2003 borrowings and capital lease obligations totaled
approximately $11.9 million, which includes $3.5 million of notes payable to
certain of our directors that pay interest at 12 percent per annum, $4.2 million
of obligations related to the purchase or acquisition of customer accounts, and
$4.1 million of borrowings under our line of credit. A substantial amount of our
cash flow from operations is used to service our debt rather than to promote and
expand our business, which adversely affects results of operations. In March
2004, we completed a $8.7 million private equity investment in Buyers United and
will use approximately $3 million for reduction of debt. Nevertheless, we expect
that servicing the remaining debt through the end of 2004 will continue to be a
use of free cash flow that could be used to develop our business.
Disruptions in the operation of our technology could adversely affect our
operations.
11
We are dependent on our computer databases, billing and account computer
programs, Internet protocol network, and computer hardware that houses these
systems to effectively operate our business and market our services. Our
customers and providers may become dissatisfied by any system failures that
interrupt our ability to provide our service to them. Substantial or repeated
system failures would significantly reduce the attractiveness of our services.
Significant disruption in the operation of these systems would adversely affect
our business and results of operations.
Our enhanced services are dependent on leased telecommunications lines, and
a significant disruption or change in these services could adversely affect our
business.
The enhanced services we offer, such as automatic call distribution, fax to
email, real time account management, and the inNetwork(TM) family of products,
are provided to customers through a dedicated network of equipment we own
connected through leased telecommunications lines with capacity dedicated to us
that is based on Internet protocol, which means the communication initiated by
the customer is converted to data packs that are transmitted through the
dedicated network and managed by our software that resides on our equipment
attached to the network. We also move a portion of our voice long distance
service over this dedicated network, because it lowers our cost of providing the
service from the cost of using traditional transmission methods.
We lease telecommunication lines and space at co-location facilities for
our equipment, which represents the backbone of our dedicated network, from
third party suppliers. If any of these suppliers is unable or unwilling to
provide or expand their current levels of service to us that enable us to serve
our customers, the services we offer would be adversely affected. Although we
believe leased telecommunications lines and co-location facilities are available
from alternative suppliers, we might not be able to obtain substitute services
from other providers at reasonable or comparable prices or in a timely fashion.
Any resulting disruptions in the services we offer that are provided over our
dedicated network would likely result in customer dissatisfaction and adversely
affect our operations. Furthermore, pricing increases by any of the suppliers we
rely on for the dedicated network could adversely affect our results of
operations if we are unable to pass pricing increases through to our customers.
Our business could be materially harmed if our computer systems were
damaged.
Substantially all of our dedicated network systems are located at four
locations in Los Angeles, Salt Lake City, Dallas, and New York. Our customer
service, billing, and service management systems are located at out offices in
Bluffdale and Draper, Utah. Fires, floods, earthquakes, power losses,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins, human error, or other similar
disruptive problems could also adversely affect our systems. We do not carry
business interruption insurance. Accordingly, any significant systems disruption
could have a material adverse effect on our business, financial condition, and
results of operations.
We use the Internet in various aspects of our business. The viability of
the Internet as an information medium and commercial marketplace will depend in
large part upon the stability and maintenance of the infrastructure for
providing Internet access and carrying Internet traffic.
Historically we have relied on the Internet for customer service and
billing. Failure to develop a reliable network system or timely development and
acceptance of complementary products, such as high-speed access systems, could
materially harm our business. In addition, the Internet could lose its viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity or due to increased
government regulation. If the Internet does not remain a viable conduit for data
and transactional traffic or the manner in which it now operates changes
significantly, then our business and results of operations could be adversely
affected.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. Our failure to
protect this confidential information could result in liability.
If third parties succeed in penetrating our network security or otherwise
misappropriate our customer information, we could be subject to liability. Our
liability could include claims for unauthorized purchases with credit card or
banking information, impersonation or other similar fraud claims, as well as for
12
other misuses of personal information, including for unauthorized marketing
purposes. These claims could result in litigation and adverse publicity, which
could have a material adverse effect on our reputation, business, and results of
operations.
Our growth and results of operations are not predictable, which means an
investment in us has greater risk.
Buyers United experienced significant growth in 2003, primarily through
internal growth and the purchase of customer accounts. Recent acquisitions of
assets and customers have substantially increased our operations. We have no
other customer base acquisitions under consideration and cannot predict if or
when another such acquisition opportunity may present itself. Consequently, it
is not possible to predict with any certainty the growth of our business over
the next year, whether internally or through acquisitions. Our ability to
continue our growth and profitability will depend on a number of factors,
including our ability to maintain and expand our independent agent network, the
availability of capital to fund purchases of customers or acquisitions, existing
and emerging competition, and our ability to maintain sufficient profit margins
despite pricing pressures. Furthermore, the growth and development of our
business may be harmed if we are unable to adapt and expand our systems,
procedures, and controls to support and manage our growth. All of these factors
indicate there could be fluctuations in our results of operations and volatility
in our stock price that could expose an investor to greater risk.
Our inability to promote our name and service could adversely affect the
development of our business.
Building recognition of our brand name, "UCN", is beneficial to attracting
additional customers, obtaining favorable reseller agreements with providers of
long distance, and establishing strategic relationships with independent agents
and businesses that can facilitate or enhance our service offerings and
marketing efforts. In January 2004 we filed an application with the U.S. Patent
and Trademark Office to register the mark, but have yet to receive any response
on the application. If we fail to obtain registration of UCN, we may consider
adopting new marks for promotion, so we would gain little from promoting UCN.
Even if we are successful in registering the mark, our failure to promote and
maintain our brand name successfully may result in slowed growth, loss of
customers, loss of market share, and loss of strategic relationships. We cannot
assure you that we will be able to promote our brand names as fully as we would
like, or that promoting our brand name will enable us to be competitive or
improve our results of operations.
Our development of enhanced services could subject us to claims of patent
infringement that would adversely affect our results of operations.
We offer enhanced services through our dedicated network, such as fax to
email. This, and other enhanced services, has been the subject of claims by
certain patent holders that providing the enhanced services violates existing
patent rights covering the manner and method by which the services are
performed. We have not received any notice or claim from any party that any
service we offer violates any such rights. Should we receive such a notice, we
expect that the patent holder would seek a licensing arrangement in which we
would be required to pay a license fee to continue to offer the service, and may
seek license payment for past sales of the service using the alleged patented
technology. Payment of any such license fees would have an adverse impact on the
net revenue generated from sales of the enhanced services.
Regulation of IP telephony services is unclear, so the imposition of
significant regulation in the future could adversely affect our operations.
We deliver our enhanced services and move other long distance service
through our VoIP Network. At both the Federal and state level, proceedings and
investigations are pending with respect to whether IP-enabled voice
communications are telecommunications services subject to Federal and state
regulation. A determination that such services are subject to regulation would
likely increase the cost of services we provide, which would adversely affect
our results of operations. Even if a determination is made that our IP delivered
services are not subject to current regulation, there is no assurance that
Federal or state governments will not impose regulation on IP-enabled
communications in the future that would add substantially to our costs of doing
business.
13
Future sales or the potential for sale of a substantial number of shares of
our common stock could cause the trading price of our common stock to decline
and could impair our ability to raise capital through subsequent equity
offerings.
As of March 15, 2004, we have 12,994,079 shares of common stock
outstanding, of which 4,608,739 shares are freely tradable, 3,044,794 shares may
be sold subject to the volume, timing, and other conditions of Rule 144 adopted
under the Securities Act of 1933, 808,546 shares may be sold subject to the
volume, timing, and other conditions of Rule 144 beginning May 1, 2004 and the
remaining 4,532,000 shares may be sold subject to the volume, timing, and other
conditions of Rule 144 beginning March 15, 2005. We agreed with the holders of
5,340,546 restricted shares to file a registration statement with the Securities
and Exchange Commission in April 2004 for the purpose of registering resale of
their shares.
In addition, we have outstanding warrants, options and convertible notes to
acquire 7,646,583 additional shares that are registered for sale by the holders
in the public market under a registration statement filed with the Securities
and Exchange Commission in September 2003, which has been temporarily suspended
until we file an amendment updating the registration statement with our
financial statements for 2003 and other information. Assuming all these warrants
and options are exercised, there would be 20,640,662 shares of common stock
issued and outstanding. We have also reserved for future issuance 6,258,922
additional shares of common stock as follows:
o 3,929,000 shares issuable on conversion of outstanding preferred
stock;
o Up to 2,006,351 shares underlying other warrants and options that were
granted and remained outstanding as of the date of this filing;
o Up to 173,571 shares reserved for issuance under our stock plans; and
o Up to 150,000 shares reserved for issuance on conversion of
outstanding notes.
Of the 3,929,000 shares of common stock issuable on conversion of
outstanding preferred stock, 3,374,000 may be sold without limitation under Rule
144(k).
Sales of a substantial number of shares of our common stock in the public
markets, or the 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 these outstanding warrants,
options, and convertible securities have the opportunity to profit from a rise
in the value or market price of our common stock and to exercise purchase or
conversion rights when we could obtain equity capital on more favorable terms
than those contained in these securities.
ITEM 2. DESCRIPTION OF PROPERTIES
Buyers United leases executive office space in Bluffdale, Utah, a suburb of
Salt Lake City. The offices consist of approximately 30,000 square feet. The
current monthly lease rate is $32,307. The lease for office space expires in
January 2007, but we have an option to renew the lease for an additional three
to five years.
Through November 2004, Buyers United is leasing 14,339 square feet of space
at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost of $16,728.
Buyers United believes that the office space included in both facilities is
adequate for its anticipated needs for at least the next 15 months.
ITEM 3. LEGAL PROCEEDINGS
In June 2001, Buyers United entered into a joint sales agreement with
Infotopia, Inc., a direct response marketer. In connection with the agreement,
Infotopia loaned $500,000 to Buyers United. Subsequent to entering into the
sales agreement, the two companies decided not to pursue further any joint
activity. In December 2001, Buyers United negotiated a settlement of the
$500,000 loan in which Buyers United paid $120,000 and issued 35,000 shares of
common stock in exchange for canceling the outstanding obligation plus $25,921
in accrued interest. The stock had a fair market value of $22,401. Accordingly,
based on these amounts, we recorded a gain on the early extinguishments of the
debt in the amount of $383,520. However, unbeknownst to us, during 2001
Infotopia allegedly entered into a General Security Agreement with Sea Spray
14
Holdings, Ltd., which purportedly included the loan obligation. Sea Spray
asserted that it had a perfected security interest in the obligation and
demanded payment as successor-in-interest to Infotopia. We denied the claim and
filed an arbitration proceeding to resolve the issue. Sea Spray attempted to
pursue its claim in New York state court, which we removed to federal court in
New York, and the federal court dismissed the action pursuant to an order to the
effect Sea Spray must pursue its claims in the arbitration proceeding. An
arbitration hearing was held in December 2003, at which Sea Spray failed to make
any appearance or submission after receiving all required notice. The arbitrator
entered a default in favor of Buyers United and its award further found in favor
of Buyers United as a matter of the evidence presented and as a matter of law.
In our view this matter has been resolved fully in our favor and we have no
obligation or liability to Sea Spray.
Buyers United is the subject of certain other legal matters, which it
considers incidental to its business activities. It is the opinion of
management, after discussion with legal counsel, that the ultimate disposition
of these other matters will not have a material impact on the financial
position, liquidity or results of operations of Buyers United.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
Market price and stockholder matters
The common stock of Buyers United trades in the over-the-counter market.
The following table sets forth for the respective periods indicated the prices
of the common stock in the over-the-counter market, as reported and summarized
on the OTC Bulletin Board. Such prices are based on inter-dealer bid and ask
prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ------------ -----------
March 31, 2002 1.30 0.61
June 30, 2002 2.00 1.10
September 30, 2002 1.93 1.30
December 31, 2002 2.00 1.25
Calendar Quarter Ended: High Bid ($) Low Bid ($)
----------------------- ------------ -----------
March 31, 2003 2.45 1.52
June 30, 2003 2.22 1.20
September 30, 2003 2.95 1.71
December 31, 2003 3.05 2.00
Since inception, no dividends have been paid on the common stock. Buyers
United intends to retain any earnings for use in its business activities, so it
is not expected that any dividends on the common stock will be declared and paid
in the foreseeable future. As of March 15, 2004, there were outstanding
1,827,500 shares of Series A Convertible Preferred Stock and 420,300 shares of
Series B Convertible Preferred Stock. Under the terms of this preferred stock,
Buyers United cannot make any distributions on its common stock without the
approval of a majority of the preferred stockholders. At March 15, 2004, there
were approximately 4,250 holders of record of the common stock.
Repurchases of common stock
In December 2003, a holder of 100,000 shares of Series B Convertible
Preferred Stock converted all of those shares to 500,000 shares of common stock.
In January 2004, the holder sold those common shares plus 14,560 additional
shares, or a total of 514,560 shares, to Buyers United for $500,000 in a
privately negotiated transaction.
15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Buyers United is a domestic telecommunications company that offers and
sells a wide range of long distance and related communication services to
business and residential customers. In the past we functioned as an aggregator
and reseller of telecommunications services provided by others. We intend to
continue to pursue and develop this type of business. However, in December 2002
Buyers United entered into agreements to purchase and manage assets of Acceris
Communications Inc. (formerly I-Link, Inc.) and its subsidiary, I-Link
Communications, Inc., and license in perpetuity software developed by I-Link for
the operation of a Voice over Internet Protocol communications network (VoIP
Network). We closed the transactions in May 2003. With these newly acquired
assets we can now develop and offer as a provider enhanced services, such as fax
to email, and transmit data and other communication services for a portion of
the journey over our VoIP Network rather than entirely through third party
providers. In October 2003, Buyers United acquired the exclusive right to sell
and manage the enhanced telecommunications functions of MyACD, Inc. with a
one-year option to purchase it at a price of approximately $6.8 million. With
the MyACD technology we can offer a new product approach that combines our
national VoIP Network with on-demand proprietary telephony software for contact
handling/management applications. We are changing the way mission critical
applications are delivered and priced for the contact center marketplace, or for
any business or department seeking to improve how it manages the productivity
and quality of its customer contact opportunities.
In December 2002, Buyers United also entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
we amended the purchase agreement to acquire additional switched voice and
dedicated telecommunications customers and correct discrepancies in the list of
customers originally purchased in December 2002. The total purchase price was
$6.5 million. Buyers United made an initial payment of $3.0 million to Touch
America in December 2002 and has made additional cash payments totaling $3.4
million through March 4, 2004. The balance of $93,988 is expected to be paid in
April 2004.
During August 2003, Buyers United purchased approximately 12,000 long
distance customers from Glyphics Communications, Inc. for $543,558.
Buyers United entered into an agreement to purchase 37 dedicated long
distance customers from Source Communications, LLC for $750,000 in February
2004. Closing of the acquisition was subject to complying with applicable
federal and state regulation pertaining to transfer of the customers. All of the
regulatory requirements were satisfied and the acquisition of the customers is
completed
We generate internal growth by pursuing multiple marketing avenues,
including using independent agents, marketing through the Internet, and selling
through our direct sales force. We intend to expand and develop our direct sales
force and value-added reseller programs during 2004. Our purchase of
telecommunication customers of Touch America resulted in a significant increase
in our customer base during 2003. We believe continuing financial difficulties
and uncertainty in the telecommunications industry may result in opportunities
to acquire customers from unrelated companies, such as our recent February 2004
purchase of dedicated long-distance customers from Source Communications, and we
intend to remain open to these opportunities. However, at the present we are not
evaluating any new acquisitions.
Results of operations
Revenues
For the year ended December 31, 2003 revenues increased to $63.3 million, a
110 percent increase compared to revenues for the year ended December 31, 2002
of $30.2 million. While a significant portion of the increase in revenue is due
to the acquisition of customer accounts, we also generated growth internally
from ongoing promotional efforts, primarily involving independent agents.
16
For the year ended December 31, 2002, revenues increased 110 percent to
$30.2 million as compared to $14.3 million for the year ended December 31, 2001.
The change was due to a substantial increase in our customer base. These new
customers were generated through independent sales agents and referrals from
unrelated Internet marketing companies.
Costs of Revenues
Costs of revenues for the year ended December 31, 2003 increased to $34.6
million, a 112 percent increase as compared to $16.3 million for the year ended
December 31, 2002. As a percentage of revenue, costs increased to 54.6 percent
in 2003 compared to 54.0 percent for same period in 2002. The decrease in gross
margin for the year ended December 31, 2003 as compared to the previous year is
the result of costs related to an increase in customers using dedicated circuit
services. This type of service typically has lower profit margins, but higher
volumes, than other types of long distance services. Also contributing to a
lower gross margin was the combination of costs related to integration efforts
involved in the I-Link acquisition and higher costs of Touch America customers.
Buyers United agreed with Touch America on certain wholesale prices during a
phase-in period after acquiring the customers. However, Buyers United
immediately began switching new customers over to other lower-cost wholesale
providers. The higher Touch America costs were offset slightly by a decrease in
other costs for long-distance minutes.
Costs of revenues for the year ended December 31, 2002 were $16.3 million,
or 54 percent of revenue, as compared to costs of $9.3 million, or 65 percent of
revenue, for the year ended December 31, 2001. During 2002, Buyers United
increased volume and new customer sign-ups with two of our largest long-distance
wholesale carriers resulting in decreased rates for long-distance minutes and an
increase in gross margin for the year.
General and administrative
General and administrative costs for the year ended December 31, 2003
increased 101 percent to $14.8 million compared to $7.4 million for the year
ended December 31, 2002. The increase in costs is due to expenses required to
support Buyers United's significant revenue growth, and costs associated with
the I-Link, Touch America and the MyACD transactions. To meet the needs of
increased revenue levels we hired additional customer service and collection
personnel. In addition, several employees of I-Link were retained by Buyers
United in order to effectively maintain the VoIP Network, as well as provide
customer support and billing services. Buyers United also assumed certain office
lease obligations of I-Link, which resulted in additional occupancy expenses.
General and administrative expenses for the year ended December 31, 2002
increased 20 percent to $7.4 million or 24 percent of revenue as compared to
$6.1 million or 43 percent of revenue for the year ended December 31, 2001. The
increase resulted from increases in bad debt expense, customer service and
support expenses and billing costs, all incidental to the increase in revenue.
These increases were offset by decreased costs of maintenance and depreciation
expense from the termination of high-cost equipment leases and the write-off of
obsolete web-site development costs during 2001.
Selling and promotion
Selling and promotion expenses increased 133 percent to $10.8 million or 17
percent of revenue for the year ended December 31, 2003 compared to $4.6 million
or 15 percent of revenue for the year ended December 31, 2002. The increase
resulted from higher commissions paid on increased revenue. Selling and
promotion costs for 2003 include higher amortization expenses associated with
the customer lists acquired during 2003.
Selling and promotion expenses for the year ended December 31, 2002 were
$4.6 million or 15 percent of revenue, an increase of 40 percent over the prior
year's expenses of $3.3 million or 23 percent of revenue. The increase was the
result of higher expenses for sales commissions, sales support staff, and the
amortization of deferred customer referral fees. These increases were directly
related to the increase in revenue during the 2002 year.
Other income (expense)
Interest expense for the year ended December 31, 2003 was $1.9 million
compared to $1.5 million for the comparative period in 2002. The increase in
interest expense was the result of higher debt balances outstanding throughout
2003 compared to 2002.
17
Interest expense for 2002 was $1.5 million as compared to $997,882 for
2001, an increase of 55 percent. The increase is attributable to the significant
amount of additional debt financing Buyers United had outstanding throughout
2002, which we raised to fund operations and an online marketing opportunity
with an unrelated Internet marketing company.
Liquidity and capital resources
Buyers United's current ratio as of December 31, 2003 increased slightly to
0.52:1 from 0.51:1 at December 31, 2002. The components of current assets and
current liabilities that changed significantly since the end of 2002 were cash,
accounts receivable, line of credit, the current portion of long-term debt, and
accrued liabilities.
The increase in cash and the line of credit was the result of a significant
draw against the line of credit that took place during the last week of December
2003. Accounts receivable, accrued commission and rebates, accrued liabilities,
and accounts payable all increased as a result of higher revenues reported
during 2003 as compared to the same period in 2002. Accrued dividends increased
as a result of the additional shares of preferred stock issued to I-Link, Inc.
in connection with completing the acquisition of the VoIP Network.
The current portion of long-term debt increased $1.7 million or 28 percent,
due to several long-term notes maturing and becoming due and payable in 2004.
The long-term portion of notes payable decreased by $3.2 million due to the net
effect of the following items:
o Ongoing payments on acquisition notes.
o The partial payoff and replacement of a $1.1 million promissory note,
previously due February 28, 2003. Buyers United retired the note
payable by paying $250,000 in cash and issuing a new promissory note
for $800,000. In addition, Buyers United issued 50,000 shares of
common stock in connection with the original agreement. The new note
is unsecured and bears interest at ten percent, payable monthly.
Principal is also payable monthly based on 20 percent of billings
during each monthly billing period from designated customers.
o In January and February 2003, Buyers United received $500,000 from the
issuance of promissory notes payable, $400,000 of which came from
three Directors of Buyers United. The unsecured notes bear interest at
12 percent and are due in 2004 through early 2005.
o In May and June 2003, Buyers United received $500,000 from the
issuance of promissory notes payable. The notes are secured by
computer and telecommunications equipment, bear interest at 12
percent, and are due in May and June 2006.
o During June 2003, the Company initiated a program to repurchase
outstanding common stock from shareholders of record with total
holdings of 100 or fewer shares. The offering price per share was
$1.75. The program ended in September 2003 after the Company had
repurchased 2,774 shares.
o In June 2003 Buyers United issued $1.4 million in promissory notes for
cash used primarily for purchasing customers from Touch America. The
notes are unsecured and bear interest at ten percent, with principal
and interest payable monthly. The principal paid each month equals
approximately 20 percent of billings collected during each monthly
billing period from the acquired Touch America customers. After all
principal is repaid, note holders will continue to receive
approximately ten percent of such collected billings. There was a five
percent commission paid to the sales agent in connection with the
issuance of the notes.
Buyers United has a line of credit agreement with RFC Capital Corporation
that expires in January 2006. The available borrowing limit is $5.0 million.
Interest accrues at prime plus three percent, which was 7.00 percent as of
December 31, 2003. During 2002, the interest rate on the line was prime plus six
percent, which was 10.25 percent as of December 31, 2002. The facility allows
the Company to obtain financing on its eligible accounts receivable, including
unbilled receivables and regular monthly billings. The facility is
collateralized by the underlying receivables. On December 31, 2003, Buyers
United had financed the maximum amount available based on eligible accounts
receivable at that time. This amount, less draws by RFC applied against the
18
outstanding amount, aggregated $4.1 million. The facility requires Buyers United
to maintain a restricted cash account for the collection of the receivables. As
of December 31, 2003, Buyers United had $1.2 million of restricted cash
associated with the RFC arrangement.
On September 10, 2003, Buyers United filed a registration statement on Form
SB-2 with the Securities and Exchange Commission to register for resale up to
approximately 8.8 million shares of common stock underlying outstanding
warrants, options and convertible debt. During 2003, investors exercised
warrants to purchase 522,500 shares of common stock providing cash to the
Company of approximately $1.0 million. In March 2004 the registration statement
was temporarily suspended until the Company can file an amendment updating the
registration statement with its 2003 audited financial statements and other
information.
On March 15, 2004, Buyers United sold 3,782,000 shares of common stock at
$2.30 per share, or a total of approximately $8.7 million. Net proceeds of the
offering after placement fees and expenses are approximately $8.1 million. The
net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, funding
further development of our VoIP Network, reducing debt, and for working capital
and other general corporate purposes.
The following table sets forth our capitalization as of December 31, 2003,
and as adjusted to give effect to:
o Receipt of the estimated net proceeds from our private placement of
3,782,000 shares of common stock at $2.30 per share; and
o Conversion of 300,000 shares of Series B Convertible Preferred Stock
by Acceris Communications, Inc.
December 31, As Adjusted
2003 (1)
------------ -----------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; 15,000,000 shares authorized
Series A 8% cumulative preferred stock
1,865,000 shares issued and outstanding (liquidation value
of $3,730,000) $ 187 $ 187
Series B 8% cumulative preferred stock
721,729 sharesissued and outstanding (liquidation value
of $7,217,290); as adjusted, 421,729 shares issued and
outstanding, (liquidation value of $4,217,290) 72 42
Common stock, $0.0001 par value, 100,000,000 shares authorized;
7,604,584 shares issued and outstanding; as adjusted,
12,886,584 shares issued and outstanding 760 1,288
Additional paid in capital 20,193,148 28,295,023
Warrants and options outstanding 3,928,110 3,928,110
Accumulated deficit (25,749,527) (25,749,527)
------------ -----------
Total stockholders' equity (deficit) $ (1,627,250) $ 6,475,123
============ ===========
---------------------------
(1) The adjusted figures do not give effect to the issuance of up to 7,972,583
additional common shares on exercise or conversion of outstanding warrants,
options, and convertible notes that are registered for sale by the holders
under a registration statement filed with the Securities and Exchange
Commission, up to 1,600,476 shares underlying other warrants and options,
up to 150,000 shares reserved for issuance on conversion of other
outstanding notes, or up to 3,973,645 shares issuable on conversion of
outstanding preferred stock.
19
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.
Forward-looking statements
The Private Securities Litigation Reform Act of 1985 provides a safe harbor
for forward-looking statements made by Buyers United. All statements, other than
statements of historical fact, which address activities, actions, goals,
prospects, or new developments that Buyers United expects or anticipates will or
may occur in the future, including such things as expansion and growth of its
operations and other such matters are forward-looking statements. Any one or a
combination of factors could materially affect Buyers United's operations and
financial condition. These factors include the availability of capital,
competitive pressures, success or failure of marketing programs, changes in
pricing and availability of services and products offered to members, legal and
regulatory initiatives affecting long distance service, and conditions in the
capital markets. Forward-looking statements made by Buyers United are based on
knowledge of its business and the environment in which it operates as of the
date of this report. Because of the factors listed above, as well as other
factors beyond its control, actual results may differ from those in the
forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of Buyers United appear at the end of this report
beginning with the Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective February 2002, Buyers United changed its accountants from Arthur
Andersen LLP to Crowe Chizek LLC.
ITEM 8A. CONTROLS AND PROCEDURES
With the participation of management, Buyers United's chief executive
officer and chief financial officer evaluated its disclosure controls and
procedures on March 17, 2004. Based on this evaluation, the chief executive
officer and the chief financial officer concluded that the disclosure controls
and procedures are effective in connection with Buyers United's filing of its
annual report on Form 10-KSB for the year ended December 31, 2003.
Subsequent to March 17, 2004, through the date of this filing of Form
10-KSB for the year ended December 31, 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.
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Officers
The following table sets forth the names, ages, and positions with Buyers
United for each of the directors and officers.
Name Age Positions Since
Theodore Stern 74 Chairman of the Board, Chief 1999
Executive Officer and Director
Gary Smith 69 Director 1999
Edward Dallin Bagley 65 Director 1999
Steve Barnett 62 Director 2000
Paul Jarman 34 President and Director 1997
David R. Grow 47 Chief Financial Officer 2003
G. Douglas Smith 34 Executive Vice President 1997
Kenneth D. Krogue 38 Executive Vice President 1997
All directors hold office until the next annual meeting of stockholders and
until their successors are elected and qualify. Officers serve at the discretion
of our Board. The following is information on the business experience of each
director and officer.
Theodore Stern became a director of Buyers United in June 1999 and
subsequently the Chief Executive Officer in September 2000. Mr. Stern has served
as a director of Northern Power Systems of Waitsfield, Vermont, a manufacturer
of renewable generation systems, since September 1998. During the last five
years Mr. Stern has been self-employed as a consultant to manufacturing
companies.
Gary Smith became a director of Buyers United in June 1999. During the past
five years he has been self-employed as a business consultant.
Edward Dallin Bagley became a director of Buyers United in June 1999. He
has been self-employed as an attorney and investor for the past five years.
During that time he has also served as a director of Tunex International, Inc.,
an automotive tune-up franchise company based in Salt Lake City, Utah, and Clear
One Communications, Inc., a manufacturer of electronic products based in Salt
Lake City, Utah.
Steve Barnett has been self-employed for the past five years as a
consultant to manufacturing and distribution companies on improving operations
and business restructuring. He has continued to purchase and manage
privately-held manufacturing companies, as well as serving on the boards of
non-owned private companies in connection with his consulting services. For over
five years, Mr. Barnett has been a director of Chicago's Jewish Federation and
Jewish United Fund, and a Vice Chairman of the Board of Directors since 1997. He
is also a Director of Bank Leumi USA.
Paul Jarman has served as an officer of Buyers United during the past five
years, first as an Executive Vice President and as President since December
2002.
21
David R. Grow, a Certified Public Accountant, joined Buyers United in June
2003 and currently serves as its Chief Financial Officer. From January 2002 to
June 2003, Mr. Grow served as the Chief Financial Officer and member of the
Board of Directors of Spectrum Engineers, Inc., a mechanical and electrical
engineering firm in Salt Lake City, Utah. From February 2000 to January 2002, he
served as the Chief Financial Officer and member of the Board of Directors of
webBASIS, Inc., a web-based software development company in Bakersfield,
California. During the two-year period prior to February 2000, he served as the
Chief Financial Officer of Daw Technologies, Inc., a manufacturer and installer
of cleanrooms for the semiconductor industry, based in Salt Lake City, Utah.
G. Douglas Smith has served as an Executive Vice President of Buyers United
during the past five years.
Kenneth D. Krogue has served as an Executive Vice President of Buyers
United during the past five years.
Board Meetings and Committees
The Board met 13 times during the year ended December 31, 2003. All
directors attended at least 75 percent of the meetings of the Board. During
2000, the Board formed the Compensation Committee, the members of which are
Edward Dallin Bagley (Chairman), Steve Barnett, and Gary Smith. The Compensation
Committee considers salary and benefit matters for the executive officers and
key personnel of the Company. The Compensation Committee met five times in 2003,
and all director members of the committee attended at least 75 percent of the
meetings. In 2000, the Board also formed the Audit Committee, the members of
which are Steve Barnett (Chairman) and Edward Dallin Bagley. The Audit Committee
is responsible for financial reporting matters, internal controls, and
compliance with the Company's financial polices, and meets with its auditors
when appropriate. The Audit Committee met twice in 2003, and all director
members of the committee attended the meetings. The Board has determined that
Steve Barnett is serving as the audit committee financial expert within the
meaning of Item 401(e) of Regulation S-B.
Board Compensation
Each Director received a monthly director fee of $1,000 during 2003. The
past practice of the Board is to compensate directors for their annual service
by issuing to each of them options to purchase 25,000 shares of common stock
exercisable over a term of five years from the date of issue. Pursuant to this
practice, each director received 25,000 options in March 2002 with an exercise
price of $2.50 per share, and in November 2002 (for year 2003) with an exercise
price of $2.00 per share. It has also been the past practice of the Board to
compensate the Chairman of the Board, and beginning with those issued for 2003,
the Chairman of the Audit Committee, for their annual service by issuing to each
of them options to purchase 15,000 shares of common stock exercisable over a
term of five years from the date of issue. Pursuant to this practice, Theodore
Stern received as Chairman of the Board 15,000 options in March 2002 and
November 2002, with exercise prices of $2.50 and $2.00 per share, respectively.
Steve Barnett received as Chairman of the Audit Committee 15,000 options in
November 2002 (for year 2003) with an exercise price of $2.00 per share.
The Director Stock Option Plan was adopted by the Board in May 2003 and
approved by the stockholders in June 2003. The purposes of the plan are to
attract, motivate and retain experienced and knowledgeable directors by offering
them opportunities to increase their stock ownership interest in Buyers United.
Each person serving as a director on the date options are issued under the plan
is eligible to participate. The persons serving as Chairman of the Board and
Chairman of the Audit Committee on the date options are issued for those
positions under the plan are eligible to participate.
The Board has authorized the issuance or delivery of options to purchase an
aggregate of 1,000,000 shares of common stock under the plan, subject to
customary antidilution and other adjustments provided for in the plan. Each
person serving as a director on March 1 of each year is entitled to receive an
option to purchase 25,000 common shares at an exercise price per share equal to
the average fair market value on that date, but in no event less than the
conversion price for the Series B Convertible Preferred Stock of Buyers United,
which is now $2.00 per share. On the dates the Board appoints the Chairman of
the Board and Chairman of the Audit Committee to serve for the next year, each
person so appointed is entitled to receive an option to purchase 15,000 common
shares at an exercise price per share equal to the average fair market value on
that date, but in no event less than the conversion price for the Series B
Convertible Preferred Stock of Buyers United. Each option issued under the plan
is exercisable over a term of five years. The number of options issuable each
year under the plan, as well as options outstanding under the plan, is subject
to customary antidilution and other adjustments provided for in the plan.
22
Options issued under the plan are not exclusive and the plan does not limit the
authority of the Board or its committees to grant awards or authorize any other
compensation, with or without reference to shares, under any other plan or
authority.
The plan is administered by a committee, which is either the Board of
Directors or a committee appointed by the Board for such purpose. The Board of
Directors has not appointed a committee to administer the plan, so the entire
Board is now the committee administering the plan. Subject to the limitations of
the plan, the committee has broad authority under the plan, including, for
example, the authority:
o To construe and interpret this plan;
o To make all other determinations required by this plan;
o To maintain all the necessary records for the administration of this
plan; and
o To make and publish forms, rules and procedures for administration of
the plan.
In 2004 the Board, and each of our directors individually, agreed to
renounce their right to receive options under th plan for 2004, and instead
receive options outside the plan for a lower number of shares. Accordingly, the
Board approved in January 2004 the issuance to each director of options to
purchase 10,000 shares of common stock and to Steve Barnett as chairman of the
Audit Committee options to purchase 5,000 additional shares. All of the options
are exercisable over a term of five years at $3.05 per share, which was the
market price for our common stock in the public market on the date of grant.
Code of Ethics
Buyers United has adopted a Code of Ethics applicable to its chief
executive officer and chief financial officer, a copy of which is included as an
exhibit to this report.
Section 16(a) Filing Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires officers and
directors of Buyers United and persons who own more than ten percent (10%) of a
registered class of its equity securities to file reports of ownership and
changes in their ownership on Forms 3, 4, and 5 with the Securities and Exchange
Commission, and forward copies of such filings to Buyers United. Based on the
copies of filings received by Buyers United, during the most recent fiscal year
the directors, officers, and beneficial owners of more than ten percent (10%) of
the equity securities of Buyers United registered pursuant to Section 12 of the
Exchange Act have filed on a timely basis all required Forms 3, 4, and 5 and any
amendments thereto except for Dallin Bagley, who filed one Form 4 late.
ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation
The table on the following page sets forth certain information regarding
the annual and long-term compensation for services in all capacities to Buyers
United for the prior fiscal years ended December 31, 2003, 2002, and 2001, of
those persons who were either (i) the chief executive officer during the last
completed fiscal year or (ii) one of the other four most highly compensated
executive officers as of the end of the last completed fiscal year whose annual
salary and bonuses exceeded $100,000 (collectively, the "Named Executive
Officers").
23
Annual Long Term
Compensation Compensation
------------ ----------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Options/SARs (#) Compensation ($)
--------------------------- ---- ---------- ---------------- ----------------
Theodore Stern 2003 -0- 36,300 74,750
Chairman and Chief 2002 -0- 80,000 70,000
Executive Officer 2001 -0- 40,000 70,000
Paul Jarman 2003 132,808 -0- 18,463
President and Director 2002 125,000 11,668 21,481
2001 122,710 -0- 57,067
G. Douglas Smith 2003 132,808 -0- 18,463
Executive Vice President 2002 125,000 7,668 21,252
2001 124,405 178,334 -0-
Kenneth D. Krogue 2003 137,698 -0- 18,463
Executive Vice President 2002 123,538 106,739 22,282
2001 109,851 40,000 13,866
Stock Options
The following table sets forth certain information with respect to grants
of stock options during 2003 to the Named Executive Officers.
% of total
Number of Options/SARs
Securities Granted to
Underlying Employees in Exercise or Expiration
Name and Principal Position Options Granted Fiscal Year Base Price ($/Sh) Date
--------------------------- --------------- ------------ ----------------- ------------
Theodore Stern -0- - - -
Chairman, Chief
Executive Officer
Paul Jarman 12,000 1.8 $2.42 01/15/08
President and Director 12,500 1.8 $2.40 09/24/08
150,000 21.9 $2.50 11/11/08
G. Douglas Smith -0- - - -
Executive Vice President
Kenneth D. Krogue -0- - - -
Executive Vice President
24
The following table sets forth certain information with respect to
unexercised options held by the Named Executive Officers. No outstanding options
held by the Named Executive Officers were exercised in 2003.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options At Fiscal Year End ($)
at Fiscal Year End (#) (1)
Exercisable/ Exercisable/
Name and Principal Position Unexercisable Unexercisable
--------------------------- ---------------------- ----------------------
Theodore Stern 172,500 / -0- $88,200 / -0-
Chairman, Chief
Executive Officer
Paul Jarman 452,966 / 150,000 $152,848 / $82,500
President and Director
G. Douglas Smith 624,916 / -0- $262,218 / -0-
Executive Vice President
Kenneth D. Krogue 333,770 / -0- $199,664 / -0-
Executive Vice President
---------------------------
(1) This value is determined on the basis of the difference between the fair
market value of the securities underlying the options and the exercise
price at December 31, 2003. The fair market value of Buyers United's common
stock at December 31, 2003 is determined by the last sale price on that
date, which was $3.05 per share.
Description of Long Term Stock Incentive Plan
The purpose of the Long Term Stock Incentive Plan (the "Plan") is to
provide directors, officers, employees, and consultants with additional
incentives by increasing their ownership interests in Buyers United. Directors,
officers, and other employees of Buyers United and its subsidiaries are eligible
to participate in the Plan. In addition, awards may be granted to consultants
providing valuable services to Buyers United. As of December 31, 2003, Buyers
United and its affiliates employed approximately 190 individuals who are
eligible to participate in the Plan. The Board grants awards under the Plan.
Awards may include incentive stock options, non-qualified stock options, stock
appreciation rights, stock units, restricted stock, restricted stock units,
performance shares, performance units, or cash awards.
The Board has discretion to determine the terms of an award under the Plan,
including the type of award, number of shares or units covered by the award,
option price, term, vesting schedule, and post-termination exercise period or
payment. Notwithstanding this discretion: (i) the number of shares subject to an
award granted to any individual in any calendar year may not exceed 100,000
shares; (ii) the option price per share of common stock may not be less than 100
percent of the fair market value of such share at the time of grant or less than
110% of the fair market value of such shares if the option is an incentive stock
option granted to a stockholder owning more than ten percent of the combined
voting power of all classes of the stock of Buyers United (a "10% stockholder");
and (iii) the term of any incentive stock option may not exceed 10 years, or
five years if the option is granted to a 10% stockholder. As of December 31,
2003, awards in the form of qualified incentive stock options to purchase a
total of 863,639 shares were outstanding under the Plan.
A maximum of 1,200,000 shares of common stock may be subject to outstanding
awards, determined immediately after the grant of any award under the Plan.
Shares of common stock, which are attributable to awards that have expired,
terminated, or been canceled or forfeited during any calendar year, are
available for issuance or use in connection with future awards.
The Plan was effective March 11, 1999, and is not limited in duration. No
incentive stock option may be granted more than 10 years after the effective
date. The Plan may be amended by the Board without the consent of the
stockholders, except that stockholder approval is required for any amendment
that materially increases the aggregate number of shares of stock that may be
25
issued under the plan or materially modifies the requirements as to eligibility
for participation in the Plan.
ITEM 11. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 15, 2004, the number and
percentage of the outstanding shares of common stock and warrants and options
that, according to the information supplied to Buyers United, were beneficially
owned by (i) each person who is currently a director, (ii) each executive
officer, (iii) all current directors and executive officers as a group and (iv)
each person who, to the knowledge of Buyers United, is the beneficial owner of
more than five percent of the outstanding common stock. Except as otherwise
indicated, the persons named in the table have sole voting and dispositive power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
Common Percent
Name and Address Shares of Class (1)
---------------- ------ ------------
Principal stockholders:
----------------------
I-Link Incorporated 808,546 6.2
9775 Business Park Avenue
San Diego, CA 92131
Officers and Directors:
----------------------
Theodore Stern (2) 2,694,435 18.1
2970 One PPG Place
Pittsburgh, PA 15222
Gary Smith (2)(3) 520,084 4.0
14870 Pony Express Road
Bluffdale, UT 84065
Edward Dallin Bagley (2) 1,371,954 9.9
2350 Oakhill Drive
Salt Lake City, UT 84121
Steve Barnett (2) 394,949 3.0
666 Dundee Road, Suite 1704
Northbrook, IL 60062
Paul Jarman (2) 742,052 5.5
14870 Pony Express Road
Bluffdale, UT 84065
David R. Grow (2) 150,000 1.2
14870 Pony Express Road
Bluffdale, UT 84065
G. Douglas Smith (2)(3) 688,768 5.1
14870 Pony Express Road
Bluffdale, UT 84065
Kenneth D. Krogue (2) 352,226 2.6
14870 Pony Express Road
Bluffdale, UT 84065
All Executive officers and 6,614,468 37.9
Directors as a Group (8 persons)
26
(1) These figures represent the percentage of ownership of the named
individuals assuming each of them alone has exercised his or her options or
conversion rights to purchase common shares, and percentage ownership of
all officers and directors as a group, assuming all purchase and conversion
rights held by such individuals are exercised.
(2) These figures include: for Mr. Stern Series A and B Preferred Stock
convertible to 377,500 shares of common stock, warrants to purchase 680,000
shares of common stock at exercise prices ranging from $2.00 to $2.50 per
share, options to purchase 102,500 shares of common stock at exercise
prices ranging from $2.50 to $5.06 per share, and 766,250 common shares for
which outstanding promissory notes are convertible at rates of between
$2.50 and $2.00; for Mr. Gary Smith options to purchase 122,500 shares at
prices ranging from $2.00 to $5.06 per share; for Mr. Bagley Series A and B
Preferred Stock convertible to 157,500 shares of common stock, warrants to
purchase 275,000 shares of common stock at exercise prices ranging from
$2.00 to $2.50 per share, options to purchase 47,500 shares of common stock
at exercise prices ranging from $3.05 to $5.06, and 375,000 common shares
for which outstanding promissory notes are convertible at the rate of $2.00
per share; for Mr. Barnett Series A Preferred Stock convertible to 20,000
shares of common stock and options to purchase 130,000 shares at exercise
prices ranging from $2.00 to $5.06 per share; for Mr. Jarman options to
purchase 452,966 shares of common stock at exercise prices ranging from
$2.00 to $5.39 per share; for Mr. G. Douglas Smith options to purchase
624,916 shares of common stock at exercise prices ranging from $2.00 to
$5.39 per share; for Mr. Grow options to purchase 150,000 shares of common
stock at exercise prices ranging from of $2.00 to $3.05; and for Mr. Krogue
options to purchase 333,770 shares of common stock at exercise prices
ranging from $2.00 to $2.70 per share.
(3) Gary Smith is G. Douglas Smith's father.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion includes certain relationships and related
transactions that occurred during Buyers United's fiscal years ended December
31, 2003 and 2002.
Transactions with Theodore Stern
Beginning in December 2000 and continuing into 2003, Theodore Stern, the
Chairman of the Board of Directors and Chief Executive Officer, made loans to
Buyers United for working capital purposes. All of the loans bear interest at
the rate of 12 percent per annum payable monthly and are unsecured. In
consideration for many of the loans, we issued common stock to Mr. Stern and
recorded the value of the stock at the market price on the date of issuance. The
following table shows the date and principal amount of the loans, the maturity
dates, the number of shares of common stock issued in consideration for the
loans, and the value of the common stock:
Date of Loan Maturity Date Principal Amount ($) Number of Shares Value of Shares ($)
------------ ------------- -------------------- ---------------- -------------------
December 7, 2000 July 5, 2004 100,000 10,000 16,562
January 4, 2001 July 5, 2004 180,000 20,000 22,500
January 19, 2001 July 5, 2004 100,000 10,000 15,625
February 15, 2001 July 5, 2004 10,000 1,000 1,500
March 26, 2001 July 5, 2004 100,000 10,000 10,312
June 5, 2001 July 5, 2004 500,000* 50,000 60,000
June 15, 2001 July 5, 2004 150,000* 15,000 18,750
June 21, 2001 July 5, 2004 100,000* 10,000 12,500
June 26, 2001 July 5, 2004 50,000* 5,000 6,250
July 6, 2001 July 5, 2004 100,000* 10,000 11,000
July 18, 2001 July 5, 2004 150,000* 15,000 12,750
August 30, 2001 July 5, 2004 275,000* 27,500 22,000
September 5, 2001 July 5, 2004 100,000* 10,000 8,500
September 19, 2001 July 5, 2004 100,000* 10,000 6,800
October 15, 2001 July 5, 2004 50,000* 10,000 6,100
December 12, 2001 July 5, 2004 100,000* 10,000 6,400
27
January 18, 2002 July 5, 2004 100,000* 10,000 10,000
December 20, 2002 December 20, 2004 112,500** -0- -0-
February 28, 2003 July 1, 2004 100,000*** -0- -0-
July 5, 2003 July 5, 2005 86,563*** -0- -0-
July 5, 2003 July 5, 2005 348,825 -0- -0-
---------------------------
* Indicates the note is convertible into common stock at a rate of $2.50
** Indicates the note is convertible into common stock at a rate of $2.00
*** This note was repaid in 2003
In October 2000, the Board approved a consulting agreement with Mr. Stern.
Pursuant to this contractual arrangement Mr. Stern receives a monthly fee of
$6,250 and expense allowance of $500 in connection with duties performed as our
Chief Executive Officer. He earned, respectively, $74,750 and $70,000 in 2003
and 2002 under this arrangement, and $6,250 remained unpaid as of December 31,
2003.
In November 2001, we agreed to issue 50,000 shares to Mr. Stern in
consideration of extending the maturity date of the June 5, 2001 $500,000
promissory note to July 5, 2003. The value of the shares was recorded at
$31,500. On December 4, 2001, we agreed to issue 156,500 shares to Mr. Stern in
consideration of extending the maturity date of the remaining $1,565,000 then
owing in notes payable listed above to July 5, 2003. The value of the shares was
recorded at $93,900. All these notes were later extended further to July 5,
2004, but no additional compensation was paid to Mr. Stern.
In September 2001, Buyers United issued 25,000 shares to Mr. Stern in
consideration for Mr. Stern's personal guaranty of Buyers United's payment
obligations under a new contract with Global Crossing Communications, Inc., that
provides telecommunication services to us for resale. The shares were valued at
$17,500 based on the then current market price.
In February 2002, Mr. Stern gave his personal guaranty of up to $250,000 of
obligations arising under our resale contract with MCI WorldCom, Inc. In
consideration for providing the guaranty, we issued 25,000 shares to Mr. Stern
valued at $30,750 based on the then current market price.
In December 2002, Mr. Stern participated in providing funding for a deposit
in connection with acquiring customers from Touch America, Inc. The total amount
raised was $3,187,500, of which total Mr. Stern contributed $137,500 under terms
identical to the other unaffiliated investors. All the unsecured promissory
notes bear interest at 10 percent, payable monthly. Principal payments are also
due monthly, based on 10 percent of the net billings collected from the Touch
America customers during the prior calendar month, and the notes have no
maturity date. As of December 31, 2003, we had repaid $84,854 of the principal
on this note.
On January 15, 2003, Mr. Stern gave his personal guaranty of up to $250,000
of obligations arising under a resale contract with Williams Communications. In
consideration for providing the guaranty, we issued 15,000 shares to Mr. Stern
valued at $36,300 based on the then current market price.
Transactions with other related parties
In October 2000, the Board approved a two-year consulting arrangement with
Gary Smith, a member of the Board. No fees were actually paid to Mr. Smith
during 2000, and up through October 2002, Mr. Smith was paid $110,000 in fees
under his consulting arrangement.
On January 15, 2002, Paul Jarman, G. Douglas Smith, and Kenneth D. Krogue
made unsecured loans to Buyers United in the total principal amount of $79,998,
due July 15, 2003 and bearing interest at the rate of 12 percent per annum. In
consideration for making the loans, Buyers United agreed to issue a total of
7,998 shares to these individuals valued at $8,798 based on the market price on
the date of issuance. These loans were repaid in July 2003.
At the end of 2002 and during the first part of 2003, Edward Dallin Bagley
made two-year unsecured loans to Buyers United aggregating $750,000. The notes
bear interest at 12 percent payable monthly, and are convertible into 375,000
shares of common stock (conversion rate of $2.00 per share).
28
In February 2003, Buyers United issued a 12 percent unsecured promissory
note to Steve Barnett in exchange for a loan of $50,000. Interest is payable
monthly and the loan matures on July 1, 2004.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Copies of the following documents are included as exhibits to this Form
10-KSB pursuant to Item 601 of Regulation S-B.
Exhibit
No. Title of Document
------- -----------------
3.1 Certificate of Incorporation, as amended
3.2 Certificate of Designation of Preferred Stock (1)
3.3 By-Laws (1)
3.4 Series B Preferred Stock Designation (2)
10.1 Form of Warrant issued to lenders (2)
10.2 Form of Warrant issued as part of units with Series B
Preferred Stock (2)
10.3 Form of option for employees and directors (3)
10.4 Long-Term Stock Incentive Plan (1)
10.5 Asset Purchase Agreement dated December 6, 2002, with I-Link
Communications, Inc. and I-Link Incorporated, without
exhibits (4)
10.6 Reconciliation Agreement dated March 9, 2004 with Acceris
Communications and I-Link Communications (7)
10.7 Asset Purchase Agreement dated December 20, 2002 with Touch
America, Inc., without exhibits (4)
10.8 Amendment No. 1 to the Asset Purchase Agreement dated December
20, 2002 that was made June 6, 2003 by Buyers United and Touch
America (5)
10.9 Form of note agreement issued April to August 2002 to
Noteholders (4)
10.10 Form of warrant agreement issued to certain noteholders (4)
10.11 Form of note agreement issued on December 20, 2002 to the
noteholders who provided financing for the Touch America
deposit, including as exhibits the form of note and warrant
issued (4)
10.12 Cooperation and Management Agreement between Buyers United and
MyACD, Inc., dated October 1, 2003, excludidng:
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 (6)
29
10.13 Purchase Option Agreement between Buyers United, Michael L.
Shelton and David O. Peterson dated October 1, 2003, excluding:
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 (6)
10.14 Form of Securities Purchase Agreement dated March 10, 2004 (7)
10.15 Form of registration Rights Agreement dated March 10, 2004 (7)
14.1 Code of Ethics
21.1 List of Subsidiaries
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(1) These documents were filed as exhibits to the Registration Statement on
Form 10-SB filed by Buyers United with the Securities and Exchange
Commission on August 3, 1999, and are incorporated herein by this
reference.
(2) These documents were filed as exhibits to the annual report on Form 10-KSB
for 2000 filed by Buyers United with the Securities and Exchange Commission
on April 10, 2001, and are incorporated herein by this reference.
(3) This document was filed as an exhibit to the annual report on Form 10-KSB
for 2001 filed by Buyers United with the Securities and Exchange Commission
on April 16, 2002, and is incorporated herein by this reference.
(4) These documents were filed as exhibits to the annual report on Form 10-KSB
for 2002 filed by Buyers United with the Securities and Exchange Commission
on April 14, 2003, and are incorporated herein by this reference.
(5) This document was filed as an exhibit to the quarterly report on Form
10-QSB for June 30, 2003 filed by Buyers United with the Securities and
Exchange Commission on August 14, 2003, and is incorporated herein by this
reference.
(6) These documents were filed as exhibits to the quarterly report on Form
10-QSB for September 30, 2003 filed by Buyers United with the Securities
and Exchange Commission on November 14, 2003, and are incorporated herein
by this reference.
(7) These documents were filed as exhibits to the current report on Form 8-K
filed by Buyers United with the Securities and Exchange Commission on March
17, 2004, and are incorporated herein by this reference.
Form 8-K Filings
There were no filings on Form 8-K during the three months ended December 31,
2003.
30
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees and expenses billed by our principal accounting firm,
Crowe Chizek and Company LLC for fees and expenses billed for fiscal years ended
December 31, 2003 and 2002 are as follows:
2003 2002
-------- --------
Audit fees $ 77,890 $ 99,361
Audit related fees 69,585 22,765
-------- --------
Total audit and related fees 147,475 122,126
Tax fees 53,700 24,800
-------- --------
Total fees $201,175 $146,926
======== ========
Audit related fees were for reviews of our filings on Form 10-QSB for 2003
and 2002, meetings with the Audit Committee, and work required by our filing of
a registration statement on Form SB-2 for selling security holders in September
2003.
Each of the permitted non-audit services has been pre-approved by the Audit
Committee or the Audit Committee's Chairman pursuant to delegated authority by
the Audit Committee, other than de minimus non-audit services for which the
pre-approval requirements are waived in accordance with the rules and
regulations of the Securities and Exchange Commission.
The Audit Committee charter provides that the Audit Committee will
pre-approve audit services and non-audit services to be provided by our
independent auditors before the accountant is engaged to render these services.
The Audit Committee may consult with management in the decision-making process,
but may not delegate this authority to management. The Audit Committee may
delegate its authority to pre-approve services to one or more committee members,
provided that the designees present the pre-approvals to the full committee at
the next committee meeting.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BUYERS UNITED, INC.
Date: March 29, 2004 By: /s/ Theodore Stern, Chief Executive Officer
-------------------------------------------
Date: March 29, 2004 By: /s/ David R. Grow, Chief Financial Officer
-------------------------------------------
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: March 29, 2004 /s/ Theodore Stern, Director
----------------------------
Date: March 29, 2004 /s/ Steve Barnett, Director
---------------------------
Date: March 29, 2004 /s/ Gary Smith, Director
------------------------
Date: March 29, 2004 /s/ Edward Dallin Bagley, Director
----------------------------------
Date: March 29, 2004 /s/ Paul Jarman, Director
-------------------------
32
BUYERS UNITED, INC. AND SUBSIDIARY
Consolidated Financial Statements
TABLE OF CONTENTS
Report of Independent Auditors ......................................... F - 2
Consolidated Balance Sheet.............................................. F - 3
Consolidated Statements of Operations .................................. F - 4
Consolidated Statements of Stockholders' Deficit ....................... F - 5
Consolidated Statements of Cash Flows .................................. F - 7
Notes to Consolidated Financial Statements ............................. F - 9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Buyers United, Inc. and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Buyers United,
Inc. and Subsidiary as of December 31, 2003 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended December 31, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Buyers United, Inc.
and Subsidiary as of December 31, 2003 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 11, 2004, except for Note 14
as to which the date is March 15, 2004
F-2
BUYERS UNITED, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,055,384
Restricted cash 1,569,336
Accounts receivable, net of allowance for uncollectible
accounts of $2,931,000 8,162,483
Other current assets 243,844
------------
Total current assets 13,031,047
Property and equipment, net 2,424,642
Intangible assets, net 8,018,682
Other assets 496,787
------------
Total assets $ 23,971,158
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 4,093,782
Current portion of long-term debt and capital lease obligations 7,781,484
Accounts payable 11,248,152
Accrued liabilities 1,828,864
------------
Total current liabilities 24,952,282
Long-term debt and capital lease obligations 646,126
------------
Total liabilities 25,598,408
Stockholders' deficit:
Preferred stock, $0.0001 par value, 15,000,000 shares authorized;
Series A 8% cumulative convertible preferred stock; 1,865,000
shares issued and outstanding (liquidation value of $3,730,000) 187
Series B 8% cumulative convertible preferred stock; 721,729
shares issued and outstanding (liquidation value of $7,217,290) 72
Common stock, $0.0001 par value; 100,000,000 shares authorized;
7,604,584 shares issued and outstanding 760
Additional paid-in capital 20,193,148
Warrants and options outstanding 3,928,110
Accumulated deficit (25,749,527)
------------
Total stockholders' deficit (1,627,250)
------------
Total liabilities and stockholders' deficit $ 23,971,158
============
See accompanying notes
F-3
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------
2003 2002
Revenues $ 63,312,964 $ 30,163,450
Operating expenses:
Costs of revenues 34,597,486 16,295,201
General and administrative 14,830,565 7,365,569
Selling and promotion 10,839,529 4,646,029
--------------------------
Total operating expenses 60,267,580 28,306,799
--------------------------
Income from operations 3,045,384 1,856,651
Other income (expense):
Interest income 13,513 17,980
Interest expense (1,884,258) (1,544,448)
--------------------------
Total other expense, net (1,870,745) (1,526,468)
--------------------------
Net income $ 1,174,639 $ 330,183
8% Preferred dividends on Series A and B preferred
stock (873,495) (749,725)
--------------------------
Net income (loss) applicable to common
stockholders $ 301,144 $ (419,542)
==========================
Net income (loss) per common share:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Weighted average common shares outstanding:
Basic 6,378,047 5,740,811
Diluted 6,847,646 5,740,811
See accompanying notes
F-4
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Preferred Stock Common Stock Additional
----------------- ----------------- Paid-in
Shares Amount Shares Amount Capital
--------- ------ --------- ------ -----------
Balance at December 31, 2001 2,433,800 $ 244 5,312,629 $ 531 $15,190,855
Conversion of preferred shares to common (15,000) (2) 55,000 6 (4)
Issuance of common shares in connection with notes payable - - 17,998 2 18,796
Issuance of warrants for services and with consulting agreements - - - - -
Amortization of deferred consulting fees - - - - -
Issuance of warrants with notes payable - - - - -
Issuance of common stock for debt guarantee - - 25,000 3 30,747
Imputed interest on notes payable - - - - 28,686
Cancellation of warrants issued for services - - - - -
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 574,635 57 750,296
Net income - - - - -
--------- ------ --------- ------ -----------
Balance at December 31, 2002 2,418,800 242 5,985,262 599 16,019,376
Conversion of preferred shares to common (116,000) (11) 580,000 58 (47)
Issuance of preferred stock in connection with the I-Link acquisition 283,929 28 - - 1,613,855
Exercise warrants to purchase Common Stock, net of issuance costs - - 522,500 52 1,395,020
Exercise employee options to purchase Common Stock - - 27,500 3 54,997
Issuance of common shares in connection with notes repayment - - 50,000 5 (5)
Repurchase shares from stockholders - - (2,774) - (4,851)
Amortization of deferred consulting fees - - - - -
Issuance of warrants for services - - - - -
Issuance of common stock for debt guarantee - - 15,000 1 36,298
Imputed interest on notes payable - - - - 5,312
Cancellation of warrants issued for services - - - - 304,690
Preferred stock dividends - - - - -
Issuance of common shares as payment of preferred stock dividends - - 427,096 42 768,503
Net income - - - - -
--------- ------ --------- ------ -----------
Balance at December 31, 2003 2,586,729 $ 259 7,604,584 $ 760 $20,193,148
========= ====== ========= ====== ===========
-continued-
F-5
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Warrants/ Deferred
Options Consulting Accumulated
Outstanding Fees Deficit Total
---------- -------- ------------ -----------
Balance at December 31, 2001 $4,383,334 $(98,406) $(25,631,129) $(6,154,571)
Conversion of preferred shares to common - - - -
Issuance of common shares in connection with notes payable - - - 18,798
Issuance of warrants for services and with consulting agreements 102,118 - - 102,118
Amortization of deferred consulting fees - 73,232 - 73,232
Issuance of warrants with notes payable 232,259 - - 232,259
Issuance of common stock for debt guarantee - - - 30,750
Imputed interest on notes payable - - - 28,686
Cancellation of warrants issued for services (125,197) - - (125,197)
Preferred stock dividends - - (749,725) (749,725)
Issuance of common shares as payment of preferred stock dividends - - - 750,353
Net income - - 330,183 330,183
---------- -------- ------------ -----------
Balance at December 31, 2002 4,592,514 (25,174) (26,050,671) (5,463,114)
Conversion of preferred shares to common - - - -
Issuance of preferred stock in connection with the I-Link acquisition - - - 1,613,883
Exercise warrants to purchase Common Stock, net of issuance costs (385,055) - - 1,010,017
Exercise employee options to purchase Common Stock - - - 55,000
Issuance of common shares in connection with notes repayment - - - -
Repurchase shares from stockholders - - - (4,851)
Amortization of deferred consulting fees - 25,174 - 25,174
Issuance of warrants for services 25,341 - - 25,341
Issuance of common stock for debt guarantee - - - 36,299
Imputed interest on notes payable - - - 5,312
Cancellation of warrants issued for services (304,690) - - -
Preferred stock dividends - - (873,495) (873,495)
Issuance of common shares as payment of preferred stock dividends - - - 768,545
Net income - - 1,174,639 1,174,639
---------- -------- ------------ -----------
Balance at December 31, 2003 $3,928,110 $ - $(25,749,527) $(1,627,250)
========== ======== ============ ===========
See accompanying notes
F-6
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,174,639 $ 330,183
Adjustments to reconcile net income to netcash used in
operating activities:
Depreciation and amortization 3,863,516 1,191,196
Amortization included in interest expense resulting from
issuing stock with notes 5,312 28,686
Amortization of discount on notes payable 414,301 237,444
Amortization of note financing costs 115,182 174,977
Amortization of deferred consulting fees 25,174 73,232
Expense related to the grant of options to purchase common shares - (23,079)
Changes in operating assets and liabilities:
Accounts receivable (2,512,269) (3,378,341)
Other assets (697,427) (2,379,009)
Checks in excess of available cash balances - (186,866)
Accounts payable 4,711,897 1,821,236
Accrued liabilities 278,315 432,183
------------ ------------
Net cash provided by (used in) operating activities 7,378,640 (1,678,158)
------------ ------------
Cash flows from investing activities:
Increase in other assets (167,360) (194,915)
Purchases of property and equipment (1,574,986) (317,399)
Purchase of customer accounts - (3,000,000)
------------ ------------
Net cash used in investing activities (1,742,346) (3,512,314)
------------ ------------
Cash flows from financing activities:
Restricted cash (985,334) 106,310
Net borrowings and payments under line of credit 2,817,530 702,080
Borrowings under notes payable, net of debt issuance costs 2,299,955 7,818,850
Principal payments on notes payable and other long-term obligations (8,767,587) (2,499,508)
Exercise of warrants and employee options, net of offering costs 1,065,018 -
Repurchase of shares from stockholders with less than 100 shares (4,852) -
------------ ------------
Net cash provided by (used in) financing activities (3,575,270) 6,127,732
------------ ------------
Net increase in cash and cash equivalents 2,061,024 937,260
Cash at the beginning of the period 994,360 57,100
------------ ------------
Cash at the end of the period $ 3,055,384 $ 994,360
============ ============
See accompanying notes
F-7
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------
2003 2002
---------- ----------
Supplemental cash flow information:
Cash paid for interest $1,208,543 $ 890,490
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 768,574 $ 750,353
Issuance of common shares in payment of deferred financing costs - 18,793
Issuance of common shares for officer's personal guaranty 36,300 30,750
Issuance of warrants with promissory notes - 232,259
Accrual of dividend payable on preferred stock 873,495 749,725
Retire and replace note payable 800,000 -
Acquire customers from Touch America 3,411,421 -
Acquire customers from Glyphics, Inc. 543,558 -
Issuance of preferred stock to acquire VoIP Network assets 1,705,236 -
Convert accrued interest to note payable 435,388 -
Capital expenditures financed with capital lease obligation 100,691 -
See accompanying notes
F-8
NOTE 1 - DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Buyers United, Inc. ("the Company") was incorporated on August 23, 1994 in the
state of Utah and was reincorporated in the state of Delaware on April 9, 1999.
During 2003, the Company established a wholly-owned subsidiary in Virginia for
the purpose of conducting business in that state.
Buyers United is an aggregator and provider of telecommunications services. The
Company contracts with a number of third party providers for the right to resell
the various telecommunication services and products they provide, and then
offers all of these various services to its customers. The Company also operates
a dedicated VoIP Network, and advanced customer contact handling/management
software applications that enable it to offer enhanced services to customers.
The variety of services and products the Company offers allows the customer to
buy only those telecommunications services it needs from one source, combine
those services in a customized package, receive one bill for those services, and
make one call to Buyers United if a service problem or billing issue arises.
Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Buyers United, Inc. and its wholly-owned subsidiary. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates include the allowance for doubtful accounts and attrition rates used
to determine the estimated useful lives of customer lists acquired.
Revenue Recognition: The Company's revenue recognition policy with respect to
reseller agreements is to record gross revenues and receivables from customers
when the Company acts as principal in the transaction; takes title to the
products or services; and has risks and rewards of ownership, such as risk of
loss for collection, delivery, or returns. Revenues from sales of services are
recognized upon providing the services to the customers.
Cash and cash equivalents: All highly liquid assets with an original maturity of
three months or less are considered to be cash equivalents.
Restricted Cash: In accordance with the Company's agreements with RFC Capital
Corp. (Note 5) and with certain vendors, the Company maintains a restricted cash
account for the collection of the Company's receivables. As of December 31,
2003, the Company had $1.6 million of cash that was restricted.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The accounts receivable balance outstanding as of
December 31, 2003 is comprised of the following:
Billed amounts $ 9,863,111
Unbilled amounts 1,230,372
----------
11,093,483
Less: allowance for uncollectible accounts (2,931,000)
----------
$ 8,162,483
Finance charges are assessed to accounts once the amount owed is past due based
on their specific terms. The allowance for doubtful accounts is estimated by
management and is based on specific information about customer accounts, past
loss experience, and general economic conditions. An account is written off by
management when deemed uncollectible, although collections efforts may continue.
F-9
Property and Equipment: Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements. Of such costs
the Company capitalized approximately $118,000 and $127,000 during 2003 and
2002, respectively.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets as follows:
Computer and office equipment 2 to 3 years
Internal-use software 2 years
Furniture and fixtures 3 to 7 years
Advertising Costs: The Company advertises its services through traditional
venues such as print media to the general public. Costs associated with these
advertising efforts are expensed as incurred, and were $27,438 and $29,781 for
the years ended December 31, 2003 and 2002, respectively.
Fair Value of Financial Instruments: The carrying amounts reported in the
accompanying consolidated balance sheet for cash, receivables, and accounts
payable approximate fair values because of the immediate or short-term
maturities of these financial instruments. The fair value of the Company's notes
payable and preferred stock also approximate fair value based on current rates
for similar debt and fixed-rate instruments.
Debt Issuance Costs: As an inducement to various investors, shareholders, and
board members to lend monies to the Company, shares of common stock and warrants
to purchase shares of common stock were issued to them. The fair market value of
those shares at the date of issuance has been capitalized as debt issuance costs
and is being amortized over the life of the loans. Amortization of these costs
for the years ended December 31, 2003 and 2002 was $414,298 and $237,446,
respectively, and are included in interest expense.
Stock-Based Compensation: Employee compensation expense via stock option grants
is reported using the intrinsic method. No stock option-based compensation
expense is included in net income (loss) as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock
at the date of grant. The following table illustrates the effect on net income
(loss) and earnings (loss) per share if expense was measured using the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation":
2003 2002
--------- -----------
Net income (loss) applicable to common stockholders:
---------------------------------------------------
As reported $ 301,144 $ (419,542)
Pro forma stock option-based compensation (307,747) (748,857)
--------- -----------
Pro forma net loss applicable
to common stockholders $ (6,603) $(1,168,399)
========= ===========
Net income (loss) per common share:
----------------------------------
As reported:
Basic $ 0.05 $ (0.07)
Diluted 0.04 (0.07)
Pro forma
Basic $ - $ (0.20)
Diluted - (0.20)
The fair value of the options granted during 2003 and 2002 was estimated at the
date of grant using the following weighted average assumptions:
F-10
2003 2002
---- ----
Risk-free interest rate 2.89% 3.71%
Dividend yield - -
Expected volatility 75% 104%
Weighted average expected life 4.8 years 4.7 years
The weighted average fair values of options granted during the years ended
December 31, 2003 and 2002 was $1.42 and $1.01, respectively. The pro forma
effects of applying SFAS No. 123 are not indicative of future amounts.
Additional awards in future years are anticipated.
Income Taxes: The Company recognizes a liability or asset for the deferred
income tax consequences of all temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax
rates that will be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
Net Income (Loss) Per Common Share : Basic net income (loss) per common share
("Basic EPS") excludes dilution and is computed by dividing net income (loss)
applicable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted net income (loss) per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into
common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net loss per
common share.
As of December 31, 2003, outstanding options of employees and directors, along
with warrants held by investors which together aggregated 469,599 in accordance
with the Treasury Stock method were included in the computation of EPS.
5,457,760 shares of common stock issuable upon the conversion of preferred stock
were excluded from the computation of diluted EPS as their effect was
antidilutive.
As of December 31, 2002, outstanding options of employees and directors to
purchase 3,592,721 shares of common stock; 4,634,000 shares of common stock
issuable upon the conversion of preferred stock; and 5,529,282 shares of common
stock issuable upon exercise of warrants to purchase common stock were not
included in the computation of Diluted EPS because they would be antidilutive.
Recent Accounting Pronouncements:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement 4,
44, and 64, Amendment of FASB Statements 13, and Technical Corrections." SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale/leaseback transactions. The provisions of SFAS
No. 145 related to classification of debt extinguishments are effective for
fiscal years beginning after May 15, 2002. Commencing January 1, 2003 the
Company will classify debt extinguishments costs within income from operations.
The provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of this statement on
January 2, 2003 did not have a material impact on the Company's financial
position or results of operations.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This amendment also changes the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the methods of accounting for
stock-based employee compensation and the effects of the method used on reported
amounts. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The Company has opted to continue accounting for stock options under the
intrinsic value method prescribed in APB Opinion No. 25 for the years ended
December 31, 2003 and 2002. In addition, the Company has complied with the
prominent disclosure requirements of SFAS No. 148.
F-11
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period that
began after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. The Company's
adoption of this Statement on July 1, 2003 did not have a material impact on its
consolidated results of operations or financial position.
NOTE 2 - ACQUISITIONS
In October 2003, Buyers United acquired the exclusive right to sell and manage
the enhanced telecommunications functions of MyACD, Inc. ("MyACD"), with a
one-year option to purchase it at a predetermined price. During the term of the
agreement, Buyers United has the sole right to manage sales, service and billing
of MyACD services. Under the agreement MyACD will continue to provide enhanced
service development and configuration and Buyers United will reimburse MyACD for
actual costs related to these activities.
During August 2003, Buyers United purchased approximately 12,000 long distance
customers from Glyphics Communications, Inc. for $543,558.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
the Company amended the purchase agreement to acquire additional switched voice
and dedicated telecommunications customers and correct discrepancies in the list
of customers originally purchased in December 2002. Buyers United did not
purchase any accounts receivable, equipment, or other assets of Touch America.
The total purchase price was $6.5 million. Buyers United made an initial payment
of $3 million to Touch America in December 2002 and has made additional cash
payments totaling $3.4 million through March 4, 2004. The balance of $93,988 is
expected to be paid in April 2004.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase assets of I-Link, Inc., and its
subsidiary, I-Link Communications, Inc., and license in perpetuity software
developed by I-Link for the operation of a Voice over Internet Protocol ("VoIP")
Network. Customer billings and related expenses incurred pursuant to a related
Management Agreement between the parties were included in Buyers United's
general and administrative expenses beginning December 6, 2002. The transaction
closed effective May 1, 2003, at which time the Company began to recognize
revenue earned and expenses incurred.
The assets acquired include dedicated equipment required for operating the VoIP
Network, customers of I-Link serviced through the network, carrier
identifications codes, and certain trademarks. In consideration for the assets
and software license, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, assumed
certain liabilities, and agreed to issue an additional 53,570 shares of Series B
Convertible Preferred Stock in equal monthly installments over a term of 10
months commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired in the
transaction.
In connection with the closing, the parties together with Counsel Corporation,
an Ontario corporation, and Counsel Communications LLC, a Delaware limited
liability company, both affiliates of I-Link, entered into a Reimbursement
Agreement pursuant to which Counsel Corporation, Counsel Communications, and
I-Link agreed to reimburse Buyers United for any loss sustained as a result of
any claims asserted against the assets acquired from I-Link by certain creditors
of I-Link. Out of the shares it received in the transaction I-Link deposited in
escrow 40,000 shares that may be applied to reimburse any such loss. This is in
addition to 25,000 shares I-Link received in the transaction that has been
deposited in escrow under the Asset Purchase Agreement to satisfy any claims for
indemnification under the Asset Purchase Agreement. During 2004, these remaining
65,000 shares were delivered to Counsel Corporation.
F-12
The following table presents a summary of the estimated fair values of the
assets acquired and liabilities assumed as of December 31, 2003:
Computer and telecommunications switching equipment $ 754,966
Customer list 553,898
License on technology and patents 1,182,933
Carrier identification code 135,933
Deposit with a vendor 110,000
----------
Total assets acquired 2,737,730
----------
Accounts payable and accrued liabilities 737,829
Acquisition costs 294,665
----------
Total liabilities assumed 1,032,494
----------
Net assets acquired $1,705,236
==========
The customer list and licensed technology will be amortized over a period of
four years.
The following unaudited pro forma financial information presents results as if
the acquisition had occurred at the beginning of the respective periods:
Year ended
December 31,
------------------------
2003 2002
----------- -----------
Net revenue $65,498,766 $37,965,060
Net income (loss) applicable to
common stockholders $ 19,175 $(5,806,566)
Basic and diluted net income (loss) per share $ - $ (1.01)
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a result
of identifiable tangible and intangible assets arising from the acquisition. The
pro forma results are not necessarily indicative either of the results of
operations that actually would have resulted had the acquisition been in effect
at the beginning of the respective periods, or of results to be achieved in the
future.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2003, property and equipment consisted of the following:
Computer and office equipment $3,724,164
Internal-use software 268,723
Furniture and fixtures 302,027
----------
4,294,914
Accumulated depreciation and amortization (1,870,272)
----------
$2,424,642
==========
NOTE 4 - INTANGIBLE ASSETS
At December 31, 2003, intangible assets consisted of the following:
Gross Accumulated Intangible
asset amortization assets, net
------------- ----------- -----------
Customer lists $ 10,760,307 $ 3,840,679 $ 6,919,628
Technology and patents 1,318,865 219,811 1,099,054
------------- ----------- -----------
$ 12,079,172 $ 4,060,490 $ 8,018,682
============= =========== ===========
F-13
The Company participated in a direct response marketing campaign with
LowerMyBills.com, Inc. (LMB), a web-based comparison shopping service. The fees
associated with this advertising campaign were deferred and aggregated $2.8
million until June 2003, when the Company ceased participating in the program.
Amortization expense for these customers in 2003 and 2002, was $1.2 million and
$761,091, respectively.
The Company also acquired new customer lists related to I-Link, Touch America,
and Glyphics in 2003, which are predominantly corporate customers. In addition,
the Company acquired technology and licenses related to I-Link in 2003.
Amortization expense during 2003 for the additional customers was $1.9 million,
and was $219,811 for the technology and licenses.
The Company estimates the useful lives of its acquired customer lists based upon
attrition rates experienced by the Company. Historically, management estimated
the useful lives between 24 to 36 months based upon the type of customer and
service provided. Based upon recent attrition information which showed that
customers were averaging longer lives, the Company changed the estimated useful
lives for its customer lists prospectively in the fourth quarter of 2003. LMB
customer lives were increased from 24 to 36 months. The impact of this change
was a $204,500 decrease in amortization expense in the fourth quarter of 2003.
The customer lives of Touch America, I-Link and Glyphics were changed from 30 or
36 months to 48 months. The impact of this change was a $306,053 decrease in
amortization expense in the fourth quarter of 2003.
Amortization expense for all intangible assets during the four-year period
ending December 31, 2007 is estimated to be $2.7 million, $2.5 million, $2.2
million, and $600,000, respectively.
NOTE 5 - LINE OF CREDIT
Buyers United has a line of credit agreement with RFC Capital Corporation that
expires in January 2006. The available borrowing limit is $5 million. Interest
accrues at prime plus three percent, which was 7.00% as of December 31, 2003.
During 2002, the interest rate on the line was prime plus six percent, which was
10.25% as of December 31, 2002. The facility allows the Company to obtain
financing on its eligible accounts receivable, including unbilled receivables
and regular monthly billings. The facility is collateralized by the underlying
receivables. On December 31, 2003, Buyers United had financed the maximum amount
available based on eligible accounts receivable at that time. This amount, less
draws by RFC applied against the outstanding amount, aggregated $4.1 million.
The facility requires Buyers United to maintain a restricted cash account for
the collection of the receivables. As of December 31, 2003, Buyers United had
$1.2 million of restricted cash associated with the RFC arrangement.
NOTE 6 - ACCRUED LIABILITIES
At December 31, 2003, accrued liabilities consisted of the following:
Accrued commissions $ 669,523
Accrued dividends 478,599
Other 680,742
----------
$1,828,864
==========
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
Unsecured notes payable to the Chairman of the
Board, bearing interest at 12 percent, payable
monthly. Principal and unpaid interest are due
and payable in July 2004, except for $112,500
which matures in December 2004, and $348,825
which matures in July 2005. $2,726,325
Unsecured notes payable to two Directors
bearing interest at 12 percent, payable
monthly. Maturity dates vary, from July 2004
through January 2005. 800,000
F-14
Unsecured note payable to a relative of a
Director, bearing interest at 12 percent
payable monthly. Principal and unpaid
interest due in January 2005. 100,000
Promissory note payable to an individual
bearing interest at 12 percent, payable
monthly. Secured by equipment. Principal
and unpaid interest due in July 2004. 293,333
Promissory notes payable to two individuals
bearing interest at 12 percent, payable
monthly. Secured by equipment. Principal
and unpaid interest due in the summer of 2006. 191,954
Unsecured promissory notes bearing interest at
ten percent and 12 percent, payable monthly.
Principal payments due monthly, based on 20
percent to 40 percent of billings collected
from specifically-designated customers referred
from LowerMyBills.com, Inc. ("LMB"). The
majority of these notes have no maturity date.
The Company believes that all of the principal
will be repaid during 2004, based on expected
cash collections from these customers. 475,223
Unsecured promissory notes bearing interest at
ten percent, payable monthly. Principal
payments due monthly, based on ten percent of
billings collected from customers acquired from
Touch America, Inc. These notes have no
maturity date. The Company believes that all
principal will be repaid in 2005, based on
expected cash collections from these customers. 2,358,412
Unsecured promissory note bearing interest at
10 percent, payable monthly. Principal payments
due monthly, based on 30 percent of billings
collected from customers recently acquired from
Glyphics, Inc. The note has no maturity date.
The Company believes that all principal will be
repaid by the end of 2004, based on expected
cash collections from these customers. 631,211
Note payable to Touch America, Inc., with
interest imputed at four percent, payable
monthly. Principal payments due monthly, based
on 7.2 percent of billings collected from
customers acquired from Touch America, Inc. The
obligation has no maturity date. The Company
expects that all principal will be repaid by
April 2004, based on expected cash collections
from these customers. 473,437
Other 295,238
Capital leases 82,477
----------
8,427,610
Less current portion (7,781,484)
----------
$ 646,126
==========
Long-term debt maturities are as follows:
2004 $7,781,484
2005 623,719
2006 22,407
----------
8,427,610
Less current maturities (7,781,484)
----------
$ 646,126
==========
F-15
On February 28, 2003, the Company retired its $1.1 million note payable by
paying $250,000 in cash and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection with
the original agreement. At December 31, 2003, the amount remaining due, less
issuance costs, was $631,211 (see above).
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase 562,950 shares of common stock at $2.50 per share were
issued to the noteholders. Warrants for an additional 94,950 shares have also
been issued to the sales agents. The estimated fair value of the warrants of
$264,717, based on using the Black-Scholes pricing model, was allocated to the
warrants and recorded as a discount to the carrying value of the notes. The
Company paid approximately $232,000 in commissions to sales agents. The Company
paid approximately $152,000 in commissions to sales agents in connection with
the Touch America-related unsecured promissory notes. All these commission costs
are also included in the discounts to the carrying value of the notes. The
discount is being amortized to interest expense over the respective notes'
estimated payment terms.
NOTE 8 - LEASES
Buyers United leases executive office space in Bluffdale, Utah, a suburb of Salt
Lake City. The offices consist of approximately 30,000 square feet. The current
monthly lease rate is $32,307. The lease for office space expires in January
2007, but the Company has an option to renew the lease for an additional three
to five years. Through November 2004, Buyers United is leasing 14,339 square
feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost
of $16,728.
The Company also has one capital lease for computer software. The following is a
schedule of future minimum payments under the leases as of December 31, 2003:
Capital Operating
Year ending December 31, leases leases
-------- ----------
2004 . . . . . . . . . . . . . . . . . . . . . . . . $ 34,690 $ 571,692
2005 . . . . . . . . . . . . . . . . . . . . . . . . 34,690 397,373
2006 . . . . . . . . . . . . . . . . . . . . . . . . 23,128 407,307
2007 . . . . . . . . . . . . . . . . . . . . . . . . - 417,490
-------- ----------
Total future minimum lease payments . . . . . . 92,508 $1,793,862
==========
Less amount representing interest . . . . . . . . . (10,031)
--------
Total obligations under capital leases . . . . . 82,477
Less current portion . . . . . . . . . . . . . . . . (28,752)
--------
Capital lease obligations, net of current portion $ 53,725
========
Rent expense was approximately $519,500 and $348,300 for the years ended
December 31, 2003 and 2002, respectively.
NOTE 9 - INCOME TAXES
The components of the Company's net deferred income tax assets and liabilities
are as follows:
Deferred income tax assets:
--------------------------
Net operating loss carryforwards $5,001,000
Reserves and accrued liabilities 1,275,000
----------
Total deferred income tax assets 6,276,000
Valuation allowance (5,897,000)
----------
Net deferred income tax asset 379,000
----------
Deferred income tax liabilities:
-------------------------------
Tax depreciation in excess of book depreciation (379,000)
----------
Net deferred income tax liability (379,000)
----------
Net deferred income taxes $ -
==========
F-16
As of December 31, 2003, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $13,336,000. The tax net
operating loss carryforwards will expire beginning in 2012.
Inasmuch as the Company's history includes accumulated net operating losses, it
is uncertain as to whether the Company's deferred tax asset can be fully
realized. Accordingly, a valuation allowance has been recorded to reduce the
deferred income tax assets. The net change in the valuation allowance for
deferred tax assets during the year ended December 31, 2003 was a decrease of
$416,000. During 2003 and 2002 no income tax expense was recorded due the
reduction of the valuation allowance.
NOTE 10 - CAPITAL TRANSACTIONS
Preferred Stock: The Board of Directors is authorized to classify any shares of
the Company's authorized but unissued preferred stock in one or more series.
With respect to each series, the Board of Directors is authorized to determine
the number of shares that constitutes such series; the rate of dividend, if any,
payable on shares of such series; whether the shares of such series shall be
cumulative, non-cumulative, or partially cumulative as to dividends and the
dates from which any cumulative dividends are to accumulate; whether the shares
of such series may be redeemed, and, if so, the price or prices at which and the
terms and conditions on which shares of such series may be redeemed; the amount
payable upon shares of such series in the event of the voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of the Company; the
sinking fund provisions, if any, for the redemption of shares of such series;
the voting rights, if any, of the shares of such series; the terms and
conditions, if any, on which shares of such series may be converted into shares
of capital stock of the Company of any other class or series; whether the shares
of such series are to be preferred over shares of capital stock of the Company
of any other class or series as to dividends or upon the voluntary or
involuntary dissolution, liquidation, or termination of the affairs of the
Company or otherwise; and any other characteristics, preferences, limitations,
rights, privileges, immunities, or terms.
Series A 8 percent Cumulative Convertible Preferred Stock: During 1999, the
Board of Directors authorized the issuance of 2,000,000 shares of Series A 8
percent Cumulative Convertible Preferred Stock ("Series A Preferred Stock") at
an offering price of $2.00 per share. Gross proceeds of $4 million were raised
upon sale of the shares.
The Series A Preferred Stock is convertible to common stock at any time at the
election of the holder and, under limited circumstances, at the election of the
Company. The conversion rate is one for one, subject to adjustment in the event
of a recapitalization, reorganization, or other corporate restructuring or in
the event that the Company shall sell or otherwise issue securities at a price
below $2.00 per share or the then adjusted conversion price. The Series A
Preferred Stock can be redeemed at the Company's election at any time commencing
January 1, 2005 at a redemption price of $2.00 per share plus all accrued
dividends as of the redemption date. During 2002 certain stockholders converted
5,000 Series A preferred shares into common shares.
Series B 8 percent Cumulative Convertible Preferred Stock: In September 2000,
the Board of Directors authorized the issuance of 1,234,500 shares of Series B
8% Cumulative Convertible Preferred Stock ("Series B Preferred Stock") and
related warrants to purchase common shares at an offering price of $10.00 per
unit. Each unit consists of one share of Series B Preferred Stock and five
warrants to purchase one share of common stock at an exercise price of $2.50 per
share. During 2000, various investors made loans to the Company and subsequently
elected to exchange their promissory notes for units. In addition to the
converted loans of $2.5 million, the Company raised $2 million through the
issuance of units through December 31, 2000 and $1.1 million through the
issuance of units in 2001.
In connection with the unit offering, the Company agreed to pay the Placement
Agent a sales commission and expense allowance aggregating 13 percent of the
gross proceeds from the sale of the Series B Preferred Stock, in addition to ten
percent of the gross proceeds of certain related bridge financing. The Company
also incurred approximately $23,000 of direct expenses in connection with the
offering. As additional consideration, the Company agreed to issue to the
Placement Agent warrants to purchase 319,300 shares of the Company's common
stock at an exercise price of $2.50 per share.
As part of the Series B Preferred Stock offering, the Company issued 2,269,000
warrants to purchase common stock at $2.50 per share. The Company allocated the
net proceeds from the offering of $4.2 million between the Series B Preferred
Stock and the warrants based on estimated relative fair values. The Series B
Preferred Stock was recorded at $2.4 million, and the warrants were recorded at
F-17
$1.8 million. The estimated fair value of the warrants was determined using the
Black-Scholes pricing model. The Series B Preferred Stock is convertible to
common stock at any time at the election of the holder and, under limited
circumstances, at the election of the Company. The conversion rate is five for
one, subject to adjustment in the event of a recapitalization, reorganization,
or other corporate restructuring or in the event that the Company shall sell or
otherwise issue securities at a price below $2.00 per share or the then adjusted
conversion price.
During the three months ended March 31, 2001, the Company issued an additional
110,000 shares of preferred stock and 550,000 warrants to purchase common stock.
The Company allocated the net proceeds from the offering of $1.1 million between
the Series B Preferred Stock and the warrants based on estimated relative fair
values. Accordingly, the stock was recorded at $794,822, and the warrants were
recorded at $302,401. In connection with these additional Series B shares, the
intrinsic value of the beneficial conversion feature of $20,498 was reflected in
the accompanying 2001 consolidated financial statements as a preferred stock
dividend and as an increase to additional paid in capital. The Series B
Preferred Stock Offering closed on April 13, 2001.
In May 2002 the Board of Directors approved a plan to modify the exercise price
on certain Preferred Stock and promissory note-related warrants from $2.50 to
$2.00 per share, extend the expiration date of certain warrants from December
31, 2002 to December 31, 2004, and amend the redemption provisions of certain
warrants so that the warrants could be called for redemption when the market
price for the Company's common stock is $4.00 per share, rather than $6.00 per
share.
On December 6, 2002, Buyers United entered into the Asset Purchase Agreement and
Software License Agreement to purchase certain assets and assume certain
liabilities of I-Link, Inc., and its subsidiary, I-Link Communications, Inc. In
consideration, Buyers United issued to I-Link 246,430 shares of Series B
Convertible Preferred Stock with a fair market value of $1.4 million, and agreed
to issue an additional 53,570 shares of Series B Convertible Preferred Stock in
equal monthly installments over a term of 10 months commencing June 1, 2003. The
final installment was issued March 1, 2004.
During 2003, six of the stockholders converted a total of 116,000 Series B
preferred shares into 580,000 common shares. During 2002, one of the
stockholders converted 10,000 Series B preferred shares into 50,000 common
shares.
Both Series A and B Preferred Stock still outstanding can be redeemed at the
Company's election at any time commencing January 1, 2005, at the applicable
redemption price plus all accrued dividends as of the redemption date.
Cumulative dividends accrue on both Series A and B Preferred Stock at the rate
of 8% per annum from the date of original issue and are payable semi-annually on
June 30 and December 31 of each year out of funds legally available for the
payment of dividends. Dividends are payable in cash or common stock at the
election of the Company. If paid in common stock, the number of shares issued
will be based on the average of the closing bid prices for the common stock over
the five trading days immediately prior to the dividend payment date. If the
Company fails to pay any dividend within 60 days of its due date, the conversion
price (see below) is adjusted downward by $0.25 per share for each occurrence.
During the years ended December 31, 2003 and 2002, the Company declared
dividends aggregating $873,495 and $749,725, respectively, and to satisfy
payment obligations, issued a total of 427,096 and 574,635 shares of common
stock, respectively. As of December 31, 2003, the Company had accrued dividends
payable in the amount of $478,599. In February 2004, the Company settled the
dividend payable by issuing 171,055 shares of common stock.
The Series A and B Preferred Stock has no voting rights, except as required by
the General Corporation Laws of Delaware that require class votes on certain
corporate matters and matters affecting the rights of the holders of the
Preferred Stock. The Preferred Stock is senior in right of payment in the event
of liquidation and with respect to dividends to the common stock and all other
subsequent preferred stock issuances that may be authorized. The Series A
Preferred Stock has a liquidation preference of $2.00 per share and the Series B
Preferred Stock has a liquidation preference of $10.00 per share.
Issuances of Common Stock: During January 2002 the Company issued 17,998 shares
of common stock in connection with the issuance of $179,998 of promissory notes,
at an aggregated fair market value of $18,798.
During February 2002 the Company issued 25,000 shares of stock to one of its
directors for providing a credit guaranty with respect to business expansion
activities. The fair market value of shares issuances was $30,750.
F-18
In March 2001, the Company entered into three-year marketing contracts with one
of its Series B Preferred stockholders. Under the terms of the contracts,
100,000 shares of common stock were issued with a fair market value of $125,000.
This amount was recorded on the balance sheet as a deferred consulting fee and
included in operating expenses on a straight-line basis over the life of the
contracts. During 2001, $39,931 was recorded in promotion expenses as a result
of this amortization. Consideration granted under the contracts' terms also
included options to purchase up to 150,000 additional shares of common stock at
$2.50 per share. These options vest gradually over the term of the contract.
These options are accounted for as variable plan options since the issuance of
these options was under the premise that the grantee will be providing current
and future services for the Company. Accordingly, using the Black-Scholes option
pricing model, $29,581 in consulting expense was recorded to reflect the vesting
of these options through December 31, 2001. During 2002 an additional $48,060 of
deferred consulting fees were amortized and included in promotion expenses, and
another $95,615 in consulting expense was recorded to reflect the vesting of
additional options. However, at the end of 2002 the Company and the stockholder
agreed to cancel one of the marketing contracts and to rescind the as-yet
unearned options. Accordingly, the Company included in promotion expenses an
additional $25,174 of remaining unamortized deferred consulting fees, and
recorded income of $125,197 to reflect the cancellation of the unearned options.
In January 2003 the Company issued 15,000 shares of stock to one of its
directors for providing a credit guaranty to one of its wholesale
telecommunication service providers. The fair market value of the stock was
$36,300.
During June 2003, the Company initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or fewer
shares. The offering price per share was $1.75. The program ended in September
2003 after the Company had repurchased 2,774 shares.
Warrants to Purchase Common Shares: As mentioned above, the Company issued
warrants in connection with its Series B preferred stock offering and in
connection with certain marketing contracts.
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase a total 562,950 shares of common stock at $2.50 per share
were issued to the noteholders during the two years ended December 31, 2002.
Warrants for an additional 97,950 shares were also issued to the sales agents.
The estimated fair value of the warrants of $264,717, based on using the
Black-Scholes pricing model, was allocated to the warrants and recorded as a
discount to the carrying value of the notes. The discount is being amortized to
interest expense over the estimated term of the notes.
In November 2003 the Company issued 25,000 warrants to a consulting company. The
estimated fair value of the warrants of $25,341, based on using the
Black-Scholes pricing model, will be amortized over the life of the contract
into general and administrative expense.
During 2003, investors exercised warrants to purchase 522,500 shares of Common
Stock, in exchange for proceeds which aggregated $1,043,750.
All of the warrants were exercisable at December 31, 2003. The following tables
summarize the warrant activity for 2003 and 2002:
Weighted
Average
Price Exercise
Warrants Range Price
--------- ------------- --------
Balance at December 31, 2001 5,345,732 $1.25 - $5.13 $2.44
Cancelled or expired (250,000) $2.50 - $2.85 $2.64
Issued 433,550 $2.00 - $2.50 $2.01
---------
Balance at December 31, 2002 5,529,282 $1.25 - $2.95 $2.00
Cancelled or expired (181,750) $2.00 - $2.95 $2.49
Exercised (522,500) $1.25 - $2.50 $2.00
Issued 25,000 $2.50 $2.50
---------
Balance at December 31, 2003 4,850,032 $1.25 - $2.50 $2.05
=========
F-19
Stock Options:
Long-Term Stock Incentive Plan: Effective March 11, 1999, the Company
established the Buyers United International, Inc. Long-Term Stock Incentive Plan
("the Stock Plan"). The Stock Plan provides for a maximum of 1,200,000 shares of
common stock of the Company to be awarded to participants and their
beneficiaries. A Committee, as determined by the Board of Directors, determines
and designates the eligible participants and awards to be granted under the
Stock Plan. The Committee may grant incentive stock options; non-qualified
options; stock appreciation rights ("SAR"); and on a limited basis, stock
awards. The terms and exercise prices of options and SARs will be established by
the Committee; except that the exercise prices cannot be less than 100 percent
of the fair market value of a share of common stock on the date of grant. As of
December 31, 2003, incentive stock options to purchase a total of 893,653 shares
were outstanding.
Other Options: The Company's Board of Directors has from time to time also
authorized the grant of stock options to directors, officers, key employees, and
consultants as compensation and in connection with obtaining financing.
In virtually all cases, employee options vest over a period of from one to three
years, and expire from four to five years after the date the options were
granted. The following tables summarize the all stock option activity for 2003
and 2002:
Weighted
Average
Price Exercise
Options Range Price
--------- ------------- --------
Balance at December 31, 2001 2,818,585 $2.00 - $9.00 $2.69
Granted 902,913 $2.00 - $2.50 $2.31
Cancelled or expired (128,777) $2.00 - $9.00 $3.11
---------
Balance at December 31, 2002 3,592,721 $2.00 - $5.39 $2.58
Granted 683,500 $2.00 - $2.64 $2.33
Exercised (27,500) 2.00 $2.00
Cancelled or expired (816,944) $2.00 - $4.00 $2.20
---------
Balance at December 31, 2003 3,431,777 $2.00 - $5.39 $2.62
=========
A summary of the options outstanding and options exercisable at December 31,
2003 is as follows:
Options
Options Outstanding Exercisable
--------------------------------------------------- ------------------------
Average Weighted Options Weighted
Range of Remaining Average Exercisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 2003 Price
------------- ----------- ----------- -------- -------------- ---------
$2.00 - $3.99 3,207,926 3.6 years $ 2.45 2,512,261 $ 2.49
$4.00 - $5.39 223,851 2.3 years 5.13 223,851 5.13
---------- ----------
3,431,777 3.5 years $ 2.62 2,736,112 $ 2.70
========== ==========
Registration Statement on Form SB-2: On September 10, 2003, the Company filed a
registration statement on Form SB-2 with the Securities and Exchange Commission
to register for resale up to 8,779,333 shares of Common Stock that may be sold
from time to time by certain selling security holders listed in the registration
statement. At December 31, 2003 the selling security holders owned:
o Warrants to purchase 99,375 shares at a price of $1.25 per share
o Warrants to purchase 3,966,856 shares at a price of $2.00 per share
o Warrants to purchase 528,450 shares at a price of $2.50 per share
o Options to purchase 2,086,652 shares at prices ranging from $2.00 to
$5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at $2.00 per
share
o Convertible notes in the amount of $1,775,000 convertible at $2.50 per
share
F-20
Buyers United will receive the proceeds from exercise of the warrants and
options and will benefit from extinguishment of the debt represented by the
convertible notes, but will not receive any proceeds or benefit from the resale
of the shares by the selling security holders.
In March 2004 the registration statement was temporarily suspended until the
Company can file an amendment updating the registration statement with its 2003
audited financial statements and other information.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 2003 and 2002, certain board members and stockholders performed various
services to the Company. These services included, but were not limited to,
consulting, marketing and capital and debt raising activities. The Company
incurred $74,750 and $109,259 in fees associated with these services for the
years ended December 31, 2003 and 2002, respectively. Amounts outstanding
related to these services were $12,800 and $14,300 at December 31, 2003, and
2002, respectively. There are also several debt arrangements more fully
described in Note 7. Interest expense on obligations owed to related parties
during 2003 and 2002, respectively, was $414,523 and $453,361.
NOTE 12 - MAJOR SUPPLIERS
Approximately 70% and 80% of the Company's cost of revenue for the years ended
December 31, 2003 and 2002, respectively, was generated from two
telecommunication providers. As of December 31, 2003, the Company owed
approximately $3 million to these two providers. The Company has entered into
contractual agreements with these vendors. During 2002 one of these providers
had filed for bankruptcy protection under Chapter 11, and the other provider is
currently being scrutinized by the Securities and Exchange Commission over
certain accounting matters. Although the Company has not experienced a
disruption of service and feels it could replace either of these sources with
other wholesale telecommunication service providers, the effect on the Company's
operations of potentially losing either or both of these service providers is
unknown.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In June 2001, Buyers United entered into a joint sales agreement with Infotopia,
Inc., a direct response marketer. In connection with the agreement, Infotopia
loaned $500,000 to Buyers United. Subsequent to entering into the sales
agreement, the two companies decided not to pursue further any joint activity.
In December 2001, Buyers United negotiated a settlement of the $500,000 loan in
which Buyers United paid $120,000 and issued 35,000 shares of common stock in
exchange for canceling the outstanding obligation plus $25,921 in accrued
interest. The stock had a fair market value of $22,401. Accordingly, based on
these amounts, the Company recorded a gain on the early extinguishments of the
debt in the amount of $383,520. However, unbeknownst to the Company, during 2001
Infotopia allegedly entered into a General Security Agreement with Sea Spray
Holdings, Ltd., which purportedly included the loan obligation. Sea Spray
asserted that it had a perfected security interest in the obligation and
demanded payment as successor-in-interest to Infotopia. The Company denied the
claim and filed an arbitration proceeding to resolve the issue. Sea Spray
attempted to pursue its claim in New York state court, which the Company removed
to federal court in New York, and the federal court dismissed the action
pursuant to an order to the effect Sea Spray must pursue its claims in the
arbitration proceeding. An arbitration hearing was held in December 2003, at
which Sea Spray failed to make any appearance or submission after receiving all
required notice. The arbitrator entered a default in favor of Buyers United and
its award further found in favor of Buyers United as a matter of the evidence
presented and as a matter of law. The Company believes this matter has been
resolved fully in its favor and that is has no obligation or liability to Sea
Spray.
Buyers United is the subject of certain other legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these other
matters will not have a material impact on the financial position, liquidity or
results of operations of Buyers United.
In connection with the MyACD agreements, MyACD will continue to provide enhanced
service development and configuration, and Buyers United will reimburse MyACD
for actual costs related to these activities.
F-21
NOTE 14 - SUBSEQUENT EVENTS
In January and February 2004, three Directors had exercised options to purchase
a total of 255,000 shares of Common Stock. Total proceeds received by the
Company in connection with these exercises was $555,000.
During the first three months of 2004, investors have exercised warrants to
purchase a total of 71,000 shares of Common Stock. Total proceeds received in
these transactions was $146,000.
In December 2003, a holder of 100,000 shares of Series B Convertible Preferred
Stock converted all of those shares to 500,000 shares of common stock. In
January 2004, the holder sold those common shares plus 14,560 additional shares,
or a total of 514,560 shares, to Buyers United for $500,000 in a privately
negotiated transaction.
Buyers United entered into an agreement to purchase 37 dedicated long distance
customers from Source Communications, LLC for $750,000 in February 2004. Closing
of the acquisition was subject to complying with applicable federal and state
regulation pertaining to transfer of the customers. All of the regulatory
requirements were satisfied and the acquisition of the customers is completed
On March 15, 2004 the Company closed a private placement to institutional and
accredited investors. The Company sold 3,782,000 shares of common stock at $2.30
per share, or a total of approximately $8.7 million. Net proceeds of the
offering after placement fees and expenses were approximately $8.1 million. The
net proceeds of the private placement are intended to be used for various
corporate purposes, including sales and marketing related programs, to fund
further development of our VoIP Network, reduction of debt, and for working
capital and other general corporate purposes.
In connection with the placement, Acceris Communications Inc., formerly I-link
Incorporated and the holder of 300,000 shares of Series B Convertible Preferred
Stock, converted all of its preferred stock to 1.5 million common shares.
Acceris subsequently sold 750,000 of those common shares to the investors in the
private placement at $2.30 per share. As a result of the conversion and sale,
Acceris Communications now holds 808,546 shares of the Company's common stock,
or approximately six percent of the 13 million shares of common stock
outstanding following completion of the private placement.
The private placement was made only to institutional and accredited investors in
a transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). The shares of common stock sold have
not been registered under the Securities Act, or any state securities laws, and
unless so registered, may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Securities Act and applicable state securities laws. The Company has agreed
to file a registration statement under the Securities Act for resale of the
common stock purchased by the investors in the private placement, the 808,546
shares of common stock held by Acceris, and 164,125 shares of common stock
issuable under a warrant granted to the placement agent.
F-22