As filed with the Securities and Exchange Commission September 10, 2003
File No. ____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BUYERS UNITED, INC.
(Exact name of registrant as specified in its charter)
Delaware 7389 87-0528557
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
14870 Pony Express Road, Bluffdale, Utah 84065
(801) 320-3300
(Address and telephone number of registrant's principal offices)
Paul Jarman
14870 Pony Express Road, Bluffdale, Utah 84065
(801) 320-3300
(Name, address and telephone number of agent for service)
Copies to:
Mark E. Lehman, Esq.
Cohne, Rappaport & Segal, P.C.
525 East 100 South, 5th Floor, Salt Lake City, UT 84102
(801) 532-2666
(801) 355-1813 fax
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
The securities being registered on the Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
Title of Each Class Amount to be Proposed Proposed Maximum Amount of
Of Securities to be Registered Offering Aggregate Registration
Registered Price Offering Price Fee
Per Share
--------------------------------------------------------------------------------
Common Stock 4,576,231 $2.425 $11,097,360 $898
$0.0001 par value shares
(1)(2)
--------------------------------------------------------------------------------
Common Stock 672,700 $2.50 $1,681,750 $137
$0.0001 par value shares
(1)(2)
--------------------------------------------------------------------------------
Common Stock 682,163 $2.425 $1,654,245 $134
$0.0001 par value shares
(1)(3)
--------------------------------------------------------------------------------
Common Stock 1,506,989 $2.45-$5.39 $4,658,103 $377
$0.0001 par value shares
(1)(3)
--------------------------------------------------------------------------------
Common Stock 581,250 $2.425 $1,409,531 $115
$0.0001 par value shares
(1)(4)
--------------------------------------------------------------------------------
Common Stock 710,000 $2.50 $1,775,000 $144
$0.0001 par value shares
(1)(4)
--------------------------------------------------------------------------------
Common Stock 50,000 $2.425 $121,250 $10
$0.0001 par value (5) shares
================================================================================
Total $22,397,239 $1,815
--------------------------------------------------------------------------------
(1) These shares are registered on behalf of the selling security holders who
hold outstanding warrants and options to purchase common stock of the
Registrant and convertible notes that are convertible to common stock of
the Registrant. The amount registered also includes such additional shares
as may be issued as a result of the anti-dilution provisions of the
warrants, options, and convertible notes in accordance with Rule 416 under
the Securities Act of 1933.
(2) These shares are registered on behalf of the selling security holders who
hold outstanding warrants to purchase common stock; 4,576,231 shares have
an exercise price less than $2.425 per share (the average bid and asked
price on September 5, 2003), and 672,700 shares have an exercise price of
$2.50. The offering price and gross offering proceeds are estimated solely
for the purpose of calculating the registration fee in accordance with
paragraphs (c) and (g)(3) of Rule 457 under the Securities Act of 1933.
(3) These shares are registered on behalf of the selling security holders who
hold outstanding options to purchase common stock; 682,163 shares have an
exercise price less than $2.425 per share and 1,506,989 shares have an
exercise greater than $2.425. The offering price and gross offering
proceeds are estimated solely for the purpose of calculating the
registration fee in accordance with paragraphs (c) and (g)(3) of Rule 457
under the Securities Act of 1933.
(4) These shares are registered on behalf of the selling security holders who
hold notes convertible to common stock; 581,250 shares have a conversion
rates less than $2.425 per share and 710,000 shares have a conversion price
of $2.50. The offering price and gross offering proceeds are estimated
solely for the purpose of calculating the registration fee in accordance
with paragraphs (c) and (g)(3) of Rule 457 under the Securities Act of
1933.
(5) These shares are registered on behalf of a selling security holder who
holds the common stock directly. The offering price and gross offering
proceeds are estimated solely for the purpose of calculating the
registration fee in accordance with paragraph (c) of Rule 457 under the
Securities Act of 1933.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion September 10, 2003
Reoffer Prospectus
BUYERS UNITED, INC.
COMMON STOCK
This prospectus covers 8,779,333 shares of the common stock of Buyers
United, Inc., that may be sold from time to time by the persons listed under the
caption "Selling Security Holders," beginning on page 37. The selling security
holders own
o Warrants to purchase 109,375 shares at a price of $1.25 per share
o Warrants to purchase 4,466,856 shares at a price of $2.00 per share
o Warrants to purchase 672,700 shares at a price of $2.50 per share
o Options to purchase 2,189,152 shares at prices ranging from $2.00 to
$5.392 per share
o Convertible notes in the amount of $1,162,500 convertible at $2.00 per
share
o Convertible notes in the amount of $1,775,000 convertible at $2.50 per
share
o 50,000 shares of common stock
Buyers United will receive the proceeds from 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.
Quotations for our common stock are reported on the OTC Bulletin Board
under the symbol "BYRS." On ______________, 2003, the closing bid price for our
common stock was $_____ per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR INFORMATION YOU SHOULD CONSIDER
BEFORE YOU PURCHASE SHARES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______________, 2003.
PROSPECTUS SUMMARY
Our company
Buyers United, Inc., is a Delaware corporation that has been engaged for
the past seven years in the business of selling telecommunication services and
now services approximately 150,000 small businesses and residential consumers
across America. Buyers United was originally formed as a Utah corporation in
1995 and changed its corporate domicile to Delaware in March 1999.
Buyers United's offices are located at 14870 Pony Express Road, Bluffdale,
Utah 84065. The telephone number is (801) 320-3300.
The offering
Maximum shares that may be offered by selling security holders 8,779,333
Common stock outstanding assuming all warrants, options, and
convertible notes covering shares that may be offered by selling
security holders are exercised and converted (1) 15,283,929
Proceeds to Buyers United assuming all warrants, options and
convertible notes covering shares that may be offered by selling
security holders are exercised and converted $16,780,021
Extinguishment of debt assuming all convertible notes covering
shares that may be offered by selling security holders are
converted $2,937,500
Use of proceeds from warrant and option exercise Proceeds will be
used to retire
debt and for
working capital
OTC Bulletin Board Symbol BYRS
---------------------------
(1) Does not include 8,239,335 shares of common stock reserved for issuance on
exercise of other outstanding warrants and options, exercise of additional
options that may be granted under our Long Term Stock Incentive Plan or Director
Stock Plan, conversion of outstanding convertible preferred stock, and
conversion of outstanding notes.
Summary consolidated financial information
The following summary consolidated financial information is qualified by
reference to the financial statements of Buyers United included at the end of
this prospectus.
2
Statements of Operations Data
Six months
ended Years ended December 31,
June 30, 2003 2002 2001
------------- ------------ ------------
Revenues:
Telecommunication services $31,772,756 $30,110,528 $14,256,990
Other - 52,922 84,987
---------- ---------- ----------
Total revenues 31,772,756 30,163,450 14,341,977
Operating expenses:
Costs of revenues 17,256,646 16,295,201 9,348,215
General and administrative 7,731,109 7,365,569 6,163,505
Selling and promotion 5,022,383 4,646,029 3,319,409
Termination of lease and write-off of costs - - 980,086
---------- ---------- ----------
Income (loss) from operations 1,762,618 1,856,651 (5,469,238)
Other income (expense):
Interest income 5,401 17,980 15,571
Interest expense (992,095) (1,544,448) (997,882)
Gain on early extinguishment of debt - - 383,520
---------- ---------- ----------
Net income (loss) $ 775,924 $ 330,183 $(6,068,029)
Total preferred stock dividends (397,088) (749,725) (759,455)
---------- ---------- ----------
Net income (loss) applicable
to common stockholders $ 378,836 $ (419,542) $(6,827,484)
========== ========== ==========
Net income (loss) per common share $ 0.06 $ (0.07) $ (1.49)
========== ========== ==========
Balance Sheet Data
As of As of December 31,
June 30, 2003 2002 2001
------------- ------------ ------------
Working capital deficit $(8,923,159) $(7,276,814) $(3,569,788)
Total assets $20,595,212 $13,144,948 $ 4,331,742
Long term notes payable $ 4,522,622 $ 3,887,803 $ 3,615,000
Stockholders' deficit $(3,256,507) $(5,463,114) $(6,154,571)
RISK FACTORS
OUR FINANCIAL CONDITION RAISES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
Through the end of 2001, Buyers United recognized recurring losses from
operations. Although we achieved net income of $775,924 for the six-month period
ended June 30, 2003 and $330,183 for the year ended December 31, 2002, at June
30, 2003 we also had a working capital deficit of approximately $8.9 million and
an accumulated deficit of approximately $25.7 million. Our ability to manage and
overcome these deficits is dependent on whether we can continue to generate net
income and positive cash flow from operating activities, which are relatively
new developments for us. As stated in the independent auditor's report on our
financial statements for the year ended December 31, 2002, these factors raise
substantial doubt about our ability to continue as a going concern.
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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 June 30, 2003 total liabilities were approximately $23.9 million, which
includes $1.1 million payable to Touch America based on a percentage of revenues
generated by certain customers, $5.3 million of notes payable that are current
liabilities, $893,587 of borrowings under our line of credit, and $4.5 million
of notes payable that are long-term debt. A substantial amount of our cash flow
from operations is used to service our debt rather than to promote and expand
our business, which adversely affects results of operations. We have not
identified any outside sources of financing that will enable us to retire or
restructure our debt obligations, so there is uncertainty about our ability to
improve our financial condition in the future. These factors raise substantial
doubt about our ability to continue as a going concern.
DISRUPTIONS IN THE OPERATION OF OUR TECHNOLOGY COULD ADVERSELY AFFECT OUR
OPERATIONS.
We are dependent on our computer databases, billing and account computer
programs, Internet 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 LIENS, 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, and real time account management, 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
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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
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 has experienced significant growth over the past year,
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
5
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 hampered 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, United Carrier Network, 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. 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.
CONCENTRATION OF OWNERSHIP WILL ADVERSELY AFFECT YOUR ABILITY TO HAVE ANY IMPACT
ON THE POLICIES AND MANAGEMENT OF BUYERS UNITED.
A small group of our stockholders, including our directors, own
beneficially more than a majority of our outstanding common stock. As a result
of such ownership, these persons will effectively have the ability to control
Buyers United, direct its business and affairs, and delay or prevent a change in
control.
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.
We now have 6,554,596 shares of common stock outstanding, of which
3,070,492 shares are now freely tradable, 3,434,104 shares may be sold subject
to the volume, timing, and other conditions of Rule 144 adopted under the
Securities Act of 1933, and the remaining 50,000 shares is being registered for
resale in the public market under this prospectus. The selling security holders
hold warrants, options and convertible notes to acquire an additional 8,729,333
shares, which they can resell in the public market under this prospectus.
Assuming all these warrants and options are exercised, there would be 15,283,929
6
shares of common stock issued and outstanding. We reserved for future issuance
8,239,335 additional shares of common stock as follows:
o 6,054,000 shares issuable on conversion of outstanding preferred
stock;
o Up to 475,141 shares underlying other warrants and options that were
granted and remained outstanding as of the date of this prospectus;
o Up to 1,560,194 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 6,054,000 shares of common stock issuable on conversion of
outstanding preferred stock, 4,554,000 shares may be sold without limitation
under Rule 144(k), and the remaining 1,500,000 shares may be sold subject to the
volume, timing, and other conditions of Rule 144 beginning May 1, 2004.
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.
INFORMATION ABOUT BUYERS UNITED
Our periodic reports
We currently file periodic reports pursuant to the Securities and Exchange
Act of 1934. All of our reports, such as annual and quarterly reports, and other
information are filed electronically with the Securities and Exchange Commission
("SEC"). Our corporate website is http://www.buyersonline.com. We make available
on this website, free of charge, access to our Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, Proxy Statement
on Schedule 14A and amendments to those materials filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as
reasonably practicable after we electronically submit such material to the SEC.
In addition, the SEC's website is http://www.sec.gov. The SEC makes available on
its website, free of charge, reports, proxy and information statements, and
other information regarding issuers, such as us, that file electronically with
the SEC.
Forward-looking statements
You should carefully consider the risk factors set forth above, as well as
the other information contained in this prospectus. This prospectus contains
forward-looking statements regarding events, conditions, and financial trends
that may affect our plan of operation, business strategy, operating results, and
financial position. You are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and uncertainties.
Actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Cautionary statements
in the "Risk Factors" and "Management's Discussion and Analysis of Operating
Results and Financial Condition" sections and elsewhere in this prospectus
identify important risks and uncertainties affecting our future, which could
cause actual results to differ materially from the forward-looking statements
made in this prospectus.
7
USE OF PROCEEDS
We will receive funds if any of the warrants or options held by the selling
security holders are exercised. Furthermore, we will extinguish $2,937,500 of
debt if the convertible notes are converted. Assuming all of the warrants and
options pertaining to the shares that may be reoffered by the selling security
holders under this prospectus are exercised, and after deducting our expenses
for registering the shares for resale, we would receive approximately
$16,470,021. We intend to use funds we receive from the exercise of warrants and
options to retire debt and for working capital and general corporate purposes.
We have broad discretion in the allocation and use of these funds, and will
determine as and when funds are received from the exercise of warrants or
options how the funds will be used. Investors in the shares will not have the
opportunity to evaluate the economic, financial, or other information on which
we base our decisions on how to use the funds derived from the exercise of
warrants and options. If we fail to apply the net proceeds effectively, our
business could be negatively affected. We will not receive any funds obtained by
the selling security holders from their reoffer and sale of the common stock
covered by this prospectus.
MARKET FOR COMMON STOCK
The common stock of Buyers United trades in the over-the-counter market.
The following table sets forth for the respective periods indicated the prices
of the common stock in the over-the-counter market, as reported and summarized
on the OTC Bulletin Board. Such prices are based on inter-dealer bid prices,
without markup, markdown, commissions, or adjustments and may not represent
actual transactions.
Calendar Quarter Ended High Bid ($) Low Bid ($)
March 31, 2001 1.94 0.94
June 30, 2001 1.75 0.72
September 30, 2001 1.16 0.61
December 31, 2001 1.01 0.52
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
March 31, 2003 2.45 1.52
June 30, 2003 2.22 1.20
DIVIDEND POLICY
Since inception of Buyers United, 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. There are currently outstanding
1,865,000 shares of Series A Convertible Preferred Stock and 805,658 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 August 29, 2003 there
were approximately 3,085 holders of record of the common stock.
8
CAPITALIZATION
The following tables sets forth our capitalization as of June 30, 2003, and
as adjusted to give effect to the exercise of all warrants by the selling
security holders and payment of our estimated offering expenses. This table
should be read in conjunction with our financial statements and notes thereto.
Actual As Adjusted
------------ ------------
Long term debt, net of current portion $ 4,522,622 $ 1,245,122
---------- ----------
Stockholders' deficit
Preferred stock, $0.0001 par value; 15,000,000 shares authorized
Series A 8% cumulative preferred stock
1,865,000 shares issue and outstanding (liquidation value
of $3,730,000) 186 186
Series B 8% cumulative preferred stock
789,587 shares issued and outstanding (liquidation value
of $7,895,870) 79 79
Common stock, $0.0001 par value, 100,000,000 shares authorized;
6,328,679 shares issued and outstanding,
and 15,058,012 shares outstanding, as adjusted 633 1,506
Additional paid in capital 17,836,673 41,667,899
Warrants and options outstanding 4,592,514 167,936
Deferred consulting fees (14,757) (14,757)
Accumulated deficit (25,671,835) (25,671,835)
---------- ----------
Total stockholders' equity (deficit) (3,256,507) 16,151,014
Total long term debt and stockholders' deficit $ 1,266,115 $17,396,136
========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
Overview
Buyers United is a domestic telecommunications company that offers and
sells a wide range of long distance and related communication service options to
business and residential customers. In the past we functioned as an aggregator
and reseller of telecommunications services provided by others, and intend to
pursue and develop this type of business. However, in December 2002 Buyers
United entered into agreements to purchase and manage assets of I-Link, Inc.,
and its subsidiary, I-Link Communications, Inc., and license in perpetuity
software developed by I-Link for the operation of a real-time Internet protocol
communications network (RTIP Network). We closed the transactions in May 2003.
With these newly acquired assets we can now develop and offer enhanced services,
such as fax to email, and transmit data and other communication services for a
portion of the journey over the RTIP Network rather than entirely through third
party providers.
Also in December 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its switched voice telecommunication customers, including
the carrier identification code used to service those customers. In June 2003,
we amended the purchase agreement to acquire additional switched voice and
dedicated telecommunications customers and correct discrepancies in the list of
customers originally purchased in December 2002. The total purchase price is
approximately $6.1 million plus 2.5 times the August 2003 service revenue of the
new accounts acquired in June 2003. Buyers United made an initial payment of
$3.0 million to Touch America in December 2002 and additional cash payments of
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$2.0 million through June 6, 2003. The balance of the purchase price as finally
determined is payable monthly in an amount equal to 7.2 percent of Buyers
United's monthly collections on the accounts acquired from Touch America.
We generate internal growth by pursuing multiple marketing avenues,
including using independent agents, implementing promotional and rebate programs
to attract customers, marketing through the Internet, and obtaining customers
from unrelated marketing companies. Our recent purchase of telecommunication
customers of Touch America will result in a significant increase in our customer
base in 2003. We believe recent financial difficulties and uncertainty in the
telecommunications industry that arose in 2002 may result in opportunities to
acquire customers from unrelated companies, and we intend to remain open to
these opportunities. However, at the present we are not evaluating any new
acquisitions.
Results of operations
Revenues
For the six months ended June 30, 2003 revenues increased 174 percent to
$31.8 million as compared to $11.6 million for the same period in 2002. While
the increase in revenue is primarily due to the Touch America transaction, we
also generated growth internally from ongoing promotional efforts, primarily
involving independent agents and referrals from an online shopping comparison
service.
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 six-month period ended June 30, 2003 increased to
$17.3 million, a 179 percent increase as compared to $6.2 million for the
six-month period ended June 30, 2003. As a percentage of revenue, costs
increased to 54 percent in 2003 compared to 53 percent for same period in 2002.
The decrease in gross margin for the six-month period ended June 30, 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. These increased costs were offset by a decrease
in rates 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.
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General and administrative
General and administrative costs for the six-months ended June 30,
increased 163 percent to $7.7 million compared to $2.9 million for the six
months ended June 30, 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 and Touch America 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 RTIP 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 192 percent to $5.0 million or 16
percent of revenue for the six months ended June 30, 2003 compared to $1.7
million or 15 percent of revenue for the six months ended June 30, 2002.. The
increase resulted from higher commissions paid on increased revenue. Selling and
promotion costs for 2003 include higher amortization expenses associated with
deferred advertising costs and the customer lists acquired from Touch America.
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 six-months ended June 30, 2003 was $992,085
compared to $688,724 for the comparative period in 2002. The increase in
interest expense was the result of higher debt balances outstanding throughout
2003 compared to 2002.
Interest expense for 2002 was $1.5 million as compared to $997,882 for
2001, an increase of 55 percent. The increase is attributable to the significant
amount of additional debt financing Buyers United had outstanding throughout
2002, which we raised to fund operations and an online marketing opportunity
with an unrelated Internet marketing company.
In December 2001, Buyers United recognized a gain on the early
extinguishment of debt totaling $383,520. During the year, one of our note
holders sold the obligation to an investment relations firm. Subsequently, we
negotiated a settlement with the investment relations firm. We paid $145,951,
including accrued interest and issued 35,000 shares of common stock in exchange
for canceling the outstanding obligation. The stock had a fair market value of
$22,401. The difference between the balance due, the cash paid and the fair
market value of the stock issued was recognized as a gain on early
extinguishment of debt during 2001.
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Liquidity and capital resources
Buyers United's current ratio as of June 30, 2003 increased slightly to
0.54:1 from 0.51:1 at December 31, 2002. The components of current assets and
current liabilities that changed significantly since the end of 2002 were
accounts receivable, other current assets, the current portion of long-term
debt, and accrued liabilities.
Accounts receivable, accrued commission and rebates, accrued liabilities,
and accounts payable all increased as a result of the higher revenue levels
during the six months ended June 30, 2003 as compared to the same period in
2002. Accrued dividends increased as a result of the additional shares of
preferred stock issued to I-Link, Inc. on May 1 and June 1, 2003, in connection
with completing the acquisition of the RTIP Network.
The current portion of long-term debt declined 13 percent, due to ongoing
payments on investor notes and 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.
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.
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.
In June 2003, Buyers United initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or fewer
shares. The offering price per share is $1.75. The program will continue through
the remainder of 2003 and is not expected to have a material impact on the
financial statements of Buyers United.
In June 2003 Buyers United issued $1.4 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.
The facility allows the Company to obtain financing on its eligible accounts
receivable, including unbilled receivables and regular monthly billings. The
facility is collateralized by the underlying receivables. Interest during 2002
was at prime plus six percent. At June 30, 2003, Buyers United had financed the
maximum amount available based on eligible accounts receivable at that time.
This amount, less draws by RFC applied against the outstanding amount,
aggregated $893,587. The facility requires Buyers United to maintain a
restricted cash account for the collection of the receivables. As of June 30,
2003, Buyers United had $949,137 of restricted cash associated with the RFC
arrangement. On January 21, 2003, Buyers United and RFC Capital amended the
facility to increase the available borrowing limit to $5.0 million, and decrease
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the interest rate to prime plus three percent. The amendment also extended the
facility to January 21, 2006.
As of June 30, 2003, Buyers United had a working capital deficit of $8.9
million and an accumulated deficit of $25.7 million. Although these factors
could raise doubt about Buyers United's ability to continue as a going concern,
Buyers United did achieve profitability in 2002 and during the first six months
of 2003. Management believes Buyers United will continue to be profitable
throughout the remainder of 2003. In addition, the majority of long and
short-term notes payable are unsecured, of which, one-third are due to Company
directors and officers. The majority of remaining notes have no stated maturity
dates, and principal payments are variable dependent upon receivables collected
from designated customers. Accordingly, management believes that cash flow
associated with the payments on these notes, while significant, have manageable
terms directly related to cash receipts which are expected to increase over the
next few years.
As a result of the I-Link and Touch America acquisitions, Buyers United is
currently experiencing significant revenue growth. While there can be no
assurance that such will be the case, management believes that this increased
level of revenue will continue throughout 2003.
Critical accounting policies and estimates
Revenue Recognition: Buyers United's revenue recognition policy with
respect to reseller agreements is to record gross revenues and receivables from
customers when Buyers United acts as principal in the transaction; takes title
to the products or services; and has risks and rewards of ownership, such as
risk of loss for collection, delivery, or returns. Revenues from sales of
services are recognized upon providing the services to the customers
Accounts Receivable and Allowance for Doubtful Accounts: Accounts
receivable is comprised of amounts billed and billable to customers, net of an
allowance for uncollectible amounts. The allowance for doubtful accounts is
estimated by management and is based on specific information about customer
accounts, past loss experience, and general economic conditions. An account is
written off by management when deemed uncollectible, although collections
efforts may continue.
Property and Equipment: Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," Buyers United capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements.
Advertising Costs: Buyers United advertises its services through
traditional venues such as print media to the general public. Costs associated
with these advertising efforts are expensed as incurred.
In addition to the traditional advertising means noted above, Buyers United
participates in a direct response advertising campaign with a web-based
comparison shopping service. Through this campaign Buyers United's name and the
service it provides are displayed on the advertising company's website. Buyers
United is obligated to pay a referral fee when a customer signs up for services.
The fees associated with this campaign are deferred and amortized over the
period during which future benefits are expected to be received, which is
approximately 24 months.
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Debt Issuance Costs: As an inducement to various investors, shareholders,
and board members to lend monies to Buyers United, shares of common stock and
warrants to purchase shares of common stock were issued to them. The fair market
value of those shares at the date of issuance has been capitalized as debt
issuance costs and is being amortized over the life of the loans
Income Taxes: Buyers United recognizes a liability or asset for the
deferred income tax consequences of all temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years
when the reported amounts of the assets and liabilities are recovered or
settled. These deferred income tax assets or liabilities are measured using the
enacted tax rates that will be in effect when the differences are expected to
reverse. Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
BUSINESS
General
Buyers United, Inc. is a domestic telecommunications company that offers a
wide range of long distance, toll free, data transmission, and related
communication service options at competitive prices, and provides to its
customers a standard of service it believes is comparable to other industry
participants. The telecommunications services 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.
For the past five years Buyers United has been engaged in the business of
reselling telecommunication services provided by others to Buyers United at
wholesale rates. Domestic and international long distance services make up a
major portion of our sales with the other services listed above making smaller
contributions to our sales mix.
Buyers United now services approximately 150,000 business and residential
consumers across America. We have refined our business model over the past
several years to address specific niche opportunities in the vast communications
industry. Our brand, United Carrier Networks (UCN), was adopted in the last
quarter of 2001 for providing our services to business customers. We previously
used and continue to use the brand name BuyersOnline to service residential
customers. The use of the two distinct brands allows us to service both customer
types, without creating channel conflicts.
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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
On December 6, 2002, Buyers United entered into an agreement to purchase
assets of I-Link, Inc., and its subsidiary, I-Link Communications, Inc., and
license in perpetuity software developed by I-Link for the operation of a
real-time Internet protocol communications network (RTIP Network). Concurrently
with the agreement for the purchase of I-Link assets, Buyers United assumed
management of the assets to be acquired from I-Link pending the closing of the
purchase. The transaction was closed in May 2003. The assets acquired include
dedicated equipment required for operating the RTIP Network, customers of I-Link
serviced through the network, and certain trademarks. In consideration for the
assets and software license, Buyers United issued to I-Link 257,144 shares of
Series B Convertible Preferred Stock (including monthly installments issued
through August 2003), agreed to issue 42,856 additional shares of Series B Stock
Convertible Preferred Stock in monthly installments through March 2004 subject
to receiving continuing revenue from acquired accounts, and assumed certain
liabilities.
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 is approximately $6.1 million plus 2.5 times the August 2003
service revenue of the new accounts acquired in June 2003. Buyers United made
cash payments of approximately $5.0 million to Touch America on the purchase
price as of June 6, 2003. The balance of the purchase price as finally
determined is payable monthly in an amount equal to 7.2 percent of Buyers
United's monthly collections on the accounts acquired from Touch America.
The state of the industry
We believe that providers of telecommunications services have historically
fallen into three primary categories:
o The National long distance carriers that offer long distance and data
transmission services as stand alone products;
o The Regional Bell Operating Companies (RBOC's) that deliver local dial
tone and some additional services, and have recently obtained
approvals at the Federal and state level to offer switched long
distance service; and
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o Regional resellers that focus primarily on long distance, but also
offer limited selections of additional services.
Total spending for the U.S. Telecommunications industry from 2002-2003 will
increase at a projected nine percent compound annual rate. The
Telecommunications Market Review and Forecast, which is a respected industry
study, also predicts the 2003 revenue to top $963 billion. In 2002 the industry
saw a 15.5 percent reduction in telecommunications equipment spending but also
saw off setting increases in Internet access, wireless usage, support services,
and data usage. These services are predicted to continue their rapid growth in
2003. It is expected in 2003 that a small but important "value add" category of
services such as conferencing, unified messaging, and collaborative technologies
will grow 37 percent to $21 billion.
In 2002 all sectors of the telecommunications market suffered when the
industry as a whole experienced downgraded financial status. In 2003 we believe
the industry will continue to consolidate in an effort to balance demand and
supply. According to RHK, a consulting group used by CommWeb, traffic growth
remains strong but the average long haul trunk capacity utilization is just 35
percent. There should be excess capacity in the major provider networks for the
next several years. Internet protocol traffic is growing at 100 percent annually
and we believe it will continue in 2003. The industry continues to move toward
Internet protocol and wireless solutions for the business market.
Based on our evaluation of these trends, we believe there is a meaningful
and growing market for long distance and enhanced communication service options
that can be provided to the customer in a single package, customized
telecommunications solution.
Services and products
Buyers United is an aggregator and provider of telecommunications services.
By aggregator we mean that we contract with a number of third party providers
for the right to resell the various telecommunication services and products they
provide, and then offer all of these various services to our customers. We are
also a provider, in that we operate a dedicated Internet protocol
telecommunications network that enables 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
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
customerdirectly 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.
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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 particpant in the
conference call.
o Automatic call distribution. Buyers United offers a network-based call
center solution that allows the customer to route incoming calls to
specific persons or departments within the customer's organization.
While this functionality is commonly available in customer-owned
telephone systems, the call distribution service we offer through our
dedicated network allows a customer to operate a call center without
buying and installing an on-premises call distribution system, include
and manage home agents as a part of its call center, and add other
features without incurring the cost of buying and installing
additional service modules to the premise-based system. This product
is particularly valuable for customers that operate call centers or
telemarketing centers and want the abilty to direct incoming calls to
call center personnel who are trained for specific product sales or
service calls. The customer is billed fees and usage for this service.
o Interactive voice response. This is the ability to offer a customer
the sophisticated features of an auto attendant, voicemail, or an
automated self-service system. This feature can be adapted to the
specific needs and preferences of the customer.
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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
computer, the customer can review billing on its account, make service
inquiries, or add or remove services, all over the Internet.
Marketing strategy
By the end of 2001, Buyers United employed two distinct brands for our
telecommunications services, "UCN" or "United Carrier Networks" for commercial
and business customers, and "BOL" or "BuyersOnline" for residential customers.
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. We believe independent agents
are responsible for a substantial amount of annual U.S. telecommunication sales
to commercial and business users. The service presentation we developed for UCN
is targeted to the independent agent, and is intended to make available to the
agent a coordinated package of services designed to be attractive to commercial
and business customers. With UCN our marketing effort focuses on providing
businesses with the ability to access multiple long distance carriers through
which we have agreements to resell services. This allows the business owners to
choose services ultimately provided through various long distance providers. A
business customer can choose various services from any or all of the different
telecommunications providers we use, yet only have to contract through UCN for
the selected services. The business customer is no longer required to deal with
these carriers separately. UCN then provides a single source for customer
service, regardless of how many networks the business uses, and sends a single
billing statement that combines all of the services used from any combination of
wholesale service providers.
We believe we have been, and will continue to be, successful in engaging
independent agents because our package of services appeals to commercial and
business customers, and because of our back office support infrastructure,
incentive programs, customer retention efforts, and additional product/service
revenue opportunities. Buyers United earned the "2002 Reseller of the Year
Award" in March 2003 from the Agent Alliance, a national trade association of
independent telecom agents. The award was given in recognition of the
effectiveness of our customer service and support programs.
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Buyers United's early growth came from the residential consumer
long-distance market. We plan to continue offering our services to residential
customers using the BuyersOnline, or "BOL" 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 commercial and business customers. We
had a substantial increase in residential customers over the past year as a
result of the Touch America transaction and we will consider opportunities to
acquire residential customers from other providers as such opportunities may
arise in the future. We are not considering or aware of any such opportunities
at the present time.
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.
Buyers United resells switched long distance minutes to its customers that it
has contracted to obtain from our providers at wholesale rates that averaged 53
percent of the retail rates charged to customers in 2002 and 54 percent over the
first six months of 2003. In 2002 and the first six months of 2003 retail rates
were between $0.045 and $0.08 per minute for switched domestic long distance.
International rates vary substantially on the basis of the country and number
called, but we believe our rates are comparable to rates available from our
competitors.
Our contracts with our providers are standard and customary in the
industry, in that they require 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 72 percent in the first six
months of 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 90 customer service
personnel to respond to customer calls, and our call center specialists are
available from 7:00 a.m. to 10:00 p.m. Monday through Friday and 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, then service is
a primary factor in acquiring and retaining customers.
The RTIP Network enables our customers to use existing telephone, fax
machine, pager, or modem equipment to achieve high-quality communications
through Internet protocol technology. The RTIP Network consists of a fully
integrated dedicated network of equipment and leased telecommunications lines
augmented by the licensed I-Link softswitch software. It provides the necessary
operational platform for the enhanced services we began offering in the third
quarter of 2003 and is adaptable for use with new or specialized service
applications developed by others. The RTIP Network is a data packet-based
network that ties together local loop dial-up and broadband connections via
gateways located in New York, Salt Lake City, Dallas, and Los Angeles. Each of
these gateways consists of off-the-shelf hardware elements and the softswitch
software. The softswitch software can distinguish among and "handle" voice, fax,
and modem communications as programmed for the customer's suite of service
selections. By "handle", we mean the voice or data transmission can be delivered
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directly, redirected (to a different location), redistributed (to a different or
multiple recipients), stored for later delivery, or altered (such as converting
a fax to email).
The RTIP Network 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 the 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 RTIP Network as modified or new software applications
added to the network software platform, which is less expensive than purchasing
and maintaining hardware switches.
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 RTIP Network will
lower our costs of operation in 2003, we cannot predict whether these lower
costs will be significant.
Technology and our business
Buyers United has always leveraged information technology to create
consistent streamlined business processes. Buyers United relies on the following
systems, which represent its current technology initiatives:
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 RTIP Network employs an architecture emphasizing security,
reliability, and carrier diversity. A "Security in Layers" approach
has been adopted utilizing security enforcement points comprised of
inspection firewalls, packet filters, and intrusion detection and
prevention systems. Measures have been implemented to audit data
integrity and access. Significant subsystems are geographically
20
dispersed and data replicated between sites to protect against fiber
optic disruption or other environmental event.
Full backups of all our core data are performed weekly. Differential
backups are performed nightly. Transaction log backups take place every 30
minutes. Backups are copied to two file servers in different locations. We use
SSL encryption to protect all sensitive areas of our customer information and
service-oriented websites. Remote access to our systems is made possible through
a 168 bit encrypted Virtual Product Network. System passwords are changed on a
periodic basis and stored in a secure folder with restricted access. All local
desktops are scanned for viruses on a real-time basis and report to a central
server. 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 - We are subject to federal regulation under the
Telecommunications Act of 1996 (Telecom Act). The Telecom Act was designed to
foster local exchange competition by establishing a framework to govern new
competitive entry in local and long distance telecommunications services and
allow any entity, including cable television companies and electric and gas
utilities, to compete in the telecommunications market. The ongoing
implementation and interpretation of the Telecom Act remains subject to numerous
federal and state policy rulemaking proceedings and judicial review and we
cannot predict any future impact on our business.
Pursuant to the Telecom Act, the Federal Communications Commission (FCC)
regulates our interstate and international telecommunications services. The FCC
imposes more extensive requirements on incumbent common carriers that have some
degree of market power, such as the Regional Bell Operating Companies (RBOCs)
and other independent local exchange carriers (ILECs), than it imposes on
companies like ours, which are non-dominant carriers that lack market power. For
example, the FCC permits non-dominant carriers to provide domestic interstate
services without prior authorization, though we are required to obtain
authorization if, in the future, we construct and operate telecommunications
facilities.
Our costs of providing long distance services could be affected by changes
in FCC rules controlling the form and amount of "access charges" local exchange
carriers (which generally includes the RBOCs and ILECs) are permitted to impose
on connecting companies to originate and terminate long distance traffic over
local networks.
We cannot predict the outcome of other federal or state access charge
proceedings or whether they will have a material impact on us. It is recognized,
however, that the access payments Buyers United must pay to the RBOCs and ILECs
are part of its cost to provide services over its network.
In October 1996, the FCC adopted an order eliminating the requirement that
non-dominant carriers such as Buyers United maintain tariffs on file with the
FCC for domestic interstate interexchange telecommunications services. The FCC's
order included a deadline of August 1, 2001 for non-dominant carriers to
eliminate tariffs for interstate services. In March of 2001, the FCC also
ordered all non-dominant interstate interexchange carriers to detariff
international services by January 28, 2002. Pursuant to these orders, Buyers
United has undertaken to transition its tariffs from the traditional paper
copies filed with the FCC to use of electronic versions posted on its web sites.
21
The Telecom Act requires that every telecommunications carrier contribute,
on an equitable and non-discriminatory basis, to federal universal service
mechanisms established by the FCC, subject to certain exclusions and
limitations. The federal Universal Service Fund provides subsidies to defray the
costs of telephony services in high-cost areas for low-income consumers and
helps subsidize telecommunications and Internet services for qualified schools,
libraries and rural health care providers. Our payments to the Universal Service
Fund are based on a percentage of our interstate and international retail
telecommunications revenues and the contribution factor issued by the FCC, which
varies quarterly. The amounts contributed may be billed to customers.
State Regulation - State regulatory agencies have jurisdiction when our
services are provided on an intrastate basis. The state regulatory environment
varies substantially from state-to-state and in some cases can be more extensive
than FCC regulations. A portion of our services may be classified as intrastate
and therefore subject to state regulation, generally administered by the state's
public utility commission ("PUC"). In most instances, we are required to obtain
and maintain certification from a state 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.
Competition
Presently we are an aggregator and reseller of long distance and related
telecommunications services. Many of our competitors are substantially larger
with greater financial and other resources.
The U.S. long distance telecommunications industry is highly competitive
and significantly influenced by the marketing and pricing practices of the major
industry participants such as AT&T, Sprint and MCI. Buyers United also competes
with other national and regional long distance carriers that employ various
means to attract new subscribers, including television and other advertising
campaigns, telemarketing programs, network marketing, cash payments, and other
incentives. The ability of Buyers United to compete effectively will depend on
its ability to provide quality services at competitive prices.
Buyers United competes on the basis of variety of services offered,
customer billing and service, and price. Since we can access and offer switched
long distance rates from a number of providers, customers can select the rate
plan best suited to their needs without having to shop each long distance
carrier separately. We offer to our customers, directly and through agents, a
wide selection of telecommunications products. This provides the customer a
one-stop shopping opportunity to obtain many of its telecommunication services
from one source, Buyers United. We believe customers are attracted by the fact
that Buyers United provides many of their services because they receive one bill
and have only one provider to call with any billing or service questions. We
further believe this aggregated service approach enables us to attract agents to
sell our services. By selling Buyers United services, agents no longer have the
burden of managing multiple contracts with many telecommunications companies.
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
22
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 June 30, 2003, Buyers United employed a total of 181 full time and 26
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.
Facilities
Buyers United leases executive office space in Bluffdale, Utah, a suburb of
Salt Lake City. The offices consist of approximately 30,000 square feet. The
current monthly lease rate is $31,519. The lease for office space expires in
January 2007, but we have an option to renew the lease for an additional three
to five years.
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 former tenant subsidized $36,232 in lease payments in consideration of our
agreement to enter into a new lease that relieved the tenant of further
liability.
Buyers United believes that the office space included in both facilities is
adequate for its anticipated needs for at least the next 15 months.
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
Holdings, Ltd., which purportedly included the loan obligation. By letter dated
November 22, 2002, Sea Spray asserted that it had a perfected security interest
in the obligation and demanded payment as successor-in-interest to Infotopia. We
responded that Sea Spray did not have a perfected security interest since it did
not take possession of the note evidencing the obligation, and that the
obligation was fully discharged under applicable provisions of the Uniform
Commercial Code. On February 21, 2003 Buyers United filed with the American
Arbitration Association a Demand for Arbitration and Statement of Claim in order
to resolve the dispute. On March 11, 2003 Sea Spray filed an action against us
in the Supreme Court for the State of New York, County of New York, case number
104468/03, seeking to enforce its security interest in the Infotopia note
obligation through collection of the Note, and obtained an order to show cause
why the arbitration proceeding we instigated should not be stayed in favor of
resolving the dispute in the state court proceeding. Before the stay issue was
heard by the state court, we removed the entire action to the Federal District
Court, Southern District of New York, and filed a motion to dismiss the action
in favor of proceeding with arbitration in Utah. The Federal District Court also
issued to Sea Spray an order to show cause why venue of the case should not be
transferred to Utah. In June 2003 the Federal District Court issued an order
vacating the stay of the arbitration issued by the state court, dismissed Sea
23
Spray's lawsuit against us, and awarded to us legal fees incurred in connection
with the matter. We intend to pursue the arbitration in Utah, but cannot predict
at this time how the dispute will eventually resolve.
On March 20, 2002, a shareholder filed a civil lawsuit in Salt Lake County
alleging that in mid-2000 Buyers United had offered to sell him 150,000 shares
in the corporation for $300,000, and that we represented we had received certain
funds for promotion. The shareholder alleged that no such funds were available
and as a result the value of his shares was reduced. He is seeking rescission of
the stock purchase. We filed an answer to the complaint denying the allegations
and raising various affirmative defenses. The shareholder was then to initiate
dates for discovery and other procedures, but so far has failed to do so and has
not otherwise made certain mandatory disclosures under Utah law. Buyers United
denies the shareholder's allegations, denies making misrepresentations of any
kind, and asserts the shareholder's claims are baseless. Furthermore, we believe
that regardless of any such alleged claims, the shareholder has suffered no
actual damages, and we intend to vigorously defend the case in the event the
shareholder resumes the discovery process.
Buyers United is the subject of certain other legal matters, which it
considers incidental to its business activities. It is the opinion of
management, after discussion with legal counsel, that the ultimate disposition
of these other matters will not have a material impact on the financial
position, liquidity or results of operations of Buyers United.
MANAGEMENT
Our officers and directors will manage our business. The following persons
are the officers and directors of Buyers United:
Name Age Positions Since
Theodore Stern 74 Chairman of the Board, Chief 1999
Executive Officer and Director
Gary Smith 68 Director 1999
Edward Dallin Bagley 64 Director 1999
Steve Barnett 61 Director 2000
Paul Jarman 34 President 1997
David R. Grow 47 Chief Financial Officer 2003
G. Douglas Smith 33 Executive Vice President 1997
Kenneth D. Krogue 37 Chief Operating Officer 2002
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 five-year
24
period prior to the date of this prospectus 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
five-year period prior to the date of this prospectus Mr. Smith 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. For
the past five years he has 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 prior to the date of this prospectus, 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. Currently, he is a member of the Jewish
Federation and Jewish United Fund Executive and Overall Planning & Allocations
Committees.
Paul Jarman has served as an officer of Buyers United during the five-year
period prior to the date of the prospectus, first as an Executive Vice President
and now as President since December 2002.
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 five-year period prior to the date of the prospectus.
Kenneth D. Krogue has been employed to manage various systems and
operations of Buyers United during the five-year period prior to the date of the
prospectus, and became chief operating officer in December 2002.
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, 2002, 2001, and 2000, 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 $100,000 (collectively, the "Named Executive
Officers").
25
Annual Long Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Options/SARs (#) Compensation ($)
--------------------------- ---- ---------- ---------------- ----------------
Theodore Stern 2002 -0- 80,000 70,000
Chairman and Chief 2001 -0- 40,000 70,000
Executive Officer 2000 -0- 52,500 22,400
Paul Jarman 2002 125,000 11,668 21,481
President 2001 122,710 -0- 57,067
2000 113,215 200,000 -0-
G. Douglas Smith 2002 125,000 7,668 21,252
Executive Vice President 2001 124,405 178,334 -0-
2000 113,215 200,000 -0-
Kenneth D. Krogue 2002 123,538 106,739 22,282
Chief Operating Officer 2001 109,851 40,000 13,866
2000 99,000 -0- -0-
Stock Options
The following table sets forth certain information with respect to grants
of stock options during 2002 to the Named Executive Officers.
% of Total
Number of Options/SARs
Securities Granted to
Underlying Employees in Exercise or Expiration
Name and Principal Position Options Granted Fiscal Year Base Price ($/Sh) Date
--------------------------- --------------- ------------ ----------------- ----------
Theodore Stern 40,000 4.5 $2.50 03/19/07
Chairman, Chief 40,000 4.5 $2.00 11/27/07
Executive Officer
Paul Jarman 1 $2.50 01/18/07
President 11,668
G. Douglas Smith 1 $2.50 01/18/07
Executive Vice President 7,668
Kenneth D. Krogue 5,898 0.7 $2.50 01/18/07
Chief Operating Officer 100,841 11.3 $2.50 09/04/07
The following table sets forth certain information with respect to
unexercised options held by the Named Executive Officers. No outstanding options
held by the Named Executive Officers were exercised in 2002.
26
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year End (#) At Fiscal Year End ($) (1)
------------------------------ --------------------------
Name and Principal Position Exercisable/Unexercisable Exercisable/Unexercisable
--------------------------- ------------------------------ --------------------------
Theodore Stern 172,500 / -0- -0- / -0-
Chairman, Chief
Executive Officer
Paul Jarman 390,466 / 50,000 -0- / -0-
President
G. Douglas Smith 574,916 / 50,000 -0- / -0-
Executive Vice President
Kenneth D. Krogue 333,770 / -0- -0- / -0-
Chief Operating Officer
---------------------------
(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, 2002. The fair market value of Buyers United's common stock at
December 31, 2002, is determined by the last sale price on that date, which was
$2.00 per share.
Director Option Plan
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 a 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 beginning in 2004 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 in 2004 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. 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
27
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.
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 June 30, 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 June 30, 2003,
awards in the form of qualified incentive stock options to purchase a total of
615,347 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
issued under the plan or materially modifies the requirements as to eligibility
for participation in the Plan.
PRINCIPAL STOCKHOLDERS
The following table sets for the beneficial ownership of our common stock
as of the date of this prospectus, and as adjusted to reflect the sale of the
maximum and minimum number of shares offered. The table includes:
o Each person known to us to be the beneficial owner of more than five
percent of the outstanding shares;
28
o Each director and named executive officer of Buyers United; and
o All directors and executive officer of Buyers United as a group.
Common Percent
Name and Address Shares of Class (1)
---------------- ------ ------------
Principal stockholders:
----------------------
Karl Malone (2) 1,228,896 16.3
139 East South Temple Street,
Suite # 240
Salt Lake City, UT 84111
I-Link Incorporated (2) 1,412,022 17.8
9775 Business Park Avenue
San Diego, CA 92131
Officers and Directors:
----------------------
Theodore Stern (3) 2,673,441 31.3
2970 One PPG Place
Pittsburgh, PA 15222
Gary Smith (3)(4) 537,584 8.0
14870 Pony Express Road
Bluffdale, UT 84065
Edward Dallin Bagley (3) 1,329,867 17.8
2350 Oakhill Drive
Salt Lake City, UT 84121
Steve Barnett (3) 364,366 5.4
666 Dundee Road, Suite 1704
Northbrook, IL 60062
Paul Jarman (3) 579,552 8.3
14870 Pony Express Road
Bluffdale, UT 84065
David R. Grow (3) 75,000 1.1
14870 Pony Express Road
Bluffdale, UT 84065
G. Douglas Smith (3)(4) 688,768 9.6
14870 Pony Express Road
Bluffdale, UT 84065
Kenneth D. Krogue (3) 352,226 5.1
14870 Pony Express Road
Bluffdale, UT 84065
All Executive officers and 6,600,804 58.3
Directors as a Group (8 persons)
29
---------------------------
(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) The figure for Karl Malone includes Series B Preferred Stock convertible to
500,000 shares of common stock, and warrants to purchase an additional 500,000
shares of common stock at an exercise price of $2.00 per share. The figure for
I-Link Incorporated includes 278,572 shares of Series B Preferred Stock
convertible to 1,392,860 shares of common stock.
(3) 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 172,500 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 140,000 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 112,500 shares of common stock at exercise prices ranging from $2.50 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
215,000 shares at exercise prices ranging from $2.00 to $5.06 per share; for Mr.
Jarman options to purchase 440,466 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 75,000 shares of common stock
at an exercise price of $2.00; and for Mr. Krogue options to purchase 333,770
shares of common stock at exercise prices ranging from $2.00 to $2.70 per share.
(4) Gary Smith is G. Douglas Smith's father.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion includes certain relationships and related
transactions that occurred during Buyers United's fiscal years ended December
31, 2002 and 2001.
Transactions with Theodore Stern
Beginning in December 2000 and continuing into 2003, Theodore Stern, the
Chairman of the Board of Directors and Chief Executive Officer, made loans to
Buyers United for working capital purposes. All of the loans bear interest at
the rate of 12 percent per annum payable monthly and are unsecured. In
consideration for many of the loans, we issued common stock to Mr. Stern and
recorded the value of the stock at the market price on the date of issuance. The
following table shows the date and principal amount of the loans, the maturity
dates, the number of shares of common stock issued in consideration for the
loans, and the value of the common stock:
Date of Loan Maturity Date Principal Amount ($) 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
30
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
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 June 2003
In October 2000, the Board approved a consulting agreement with Mr. Stern.
Under the agreement Mr. Stern receives a monthly fee of $6,000 and expense
allowance of $250 in connection with duties performed as our Chief Executive
Officer. He earned $72,000 in both 2001 and 2002 under this arrangement, and
$6,000 remained unpaid as of December 31, 2002.
In July 2001, Mr. Stern loaned $400,000 to Buyers United. In lieu of
regular interest or shares of stock, we agreed to pay to Mr. Stern a monthly fee
equaling two percent of the monthly billings of two of our wholesale
telecommunications carriers. The loan was needed at a time when Buyers United
was in the process of negotiating lower rates with the carriers in anticipation
of higher monthly services obtained for resale purposes. This loan was repaid
during the fourth quarter of 2002.
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 August 2001, Buyers United issued 10,500 shares to Mr. Stern in
consideration of him providing a personal guaranty to RFC Capital Corporation on
our financing arrangement. The guaranty related to potential additional
liability due in connection with excise tax assessments owing during 2000 and
paid in 2001 and 2002. The shares were valued at $9,975 based on the then
current market price.
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.
31
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 August 31, 2003, we repaid $42,039 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.
In March 2001, Buyers United entered into three-year marketing contracts
with Karl and Kay Malone, holders of Series B Convertible Preferred Stock and
warrants. Under the terms of the contracts, 100,000 shares of common stock were
issued. The value of the shares was recorded at that day's market trading price
of $1.25, or $125,000. Consideration granted under the contracts' terms also
included an option to purchase up to 150,000 additional shares of common stock
at $2.50 per share. During 2002 one of the contracts was cancelled, and the
option to purchase common shares was rescinded.
In May 2001, Buyers United issued 100,000 shares of common stock to Gary
Smith. The value of the shares was recorded at that day's market trading price
of $1.45, or $145,000. The shares were issued in consideration of Mr. Smith
encumbering certain real property to provide collateral for a promissory note in
the principal amount of $1,050,000 owed at the time by Buyers United to George
Brimhall.
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 week of January 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).
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.
DESCRIPTION OF CAPITAL STOCK
Buyers United's charter authorizes it to issue up to: (i) 100,000,000
shares of common stock, $0.0001 par value per share; and (ii) 15,000,000 shares
of preferred stock, $0.0001 par value per share. As of the date of this
Prospectus, there are 6,554,596 shares of Common Stock outstanding, 1,865,000
shares of Series A Convertible Preferred Stock, and 805,658 shares of Series B
Convertible Preferred Stock outstanding. In addition, there are outstanding
32
options, warrants and convertible notes to acquire up to an additional 9,844,280
shares of common stock.
Common stock
Holders of the common stock are entitled to one vote per share on all
matters submitted to the stockholders for a vote. There are no cumulative voting
rights in the election of directors. The shares of common stock are entitled to
receive such dividends as may be declared and paid by the board of directors out
of funds legally available there for and to share, ratably, in the net assets,
if any, of Buyers United upon liquidation. The stockholders have no preemptive
rights to purchase any shares of our capital stock.
Preferred stock
General. The board of directors, without further action by the holders of
the common stock, is authorized to classify any shares of our authorized but
unissued preferred stock as preferred stock in one or more series. With respect
to each series, the board of directors may determine:
o The number of shares which shall constitute such series;
o The rate of dividend, if any, payable on shares of such series;
o 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;
o 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;
o 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 Buyers United;
o The sinking fund provisions, if any, for the redemption of shares of
such series;
o The voting rights, if any, of the shares of such series;
o The terms and conditions, if any, on which shares of such series may
be converted into shares of capital stock of Buyers United of any
other class or series;
o Whether the shares of such series are to be preferred over shares of
capital stock of Buyers United of any other class or series as to
dividends, or upon the voluntary or involuntary dissolution,
liquidation, or winding up of the affairs of Buyers United, or
otherwise; and
o Any other characteristics, preferences, limitations, rights,
privileges, immunities or terms not inconsistent with the provisions
of the Charter.
The availability of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of discouraging takeover proposals, and the issuance of
33
preferred stock could have the effect of delaying or preventing a change in
control of Buyers United not approved by the board of directors.
Series A Convertible Preferred Stock. Buyers United has outstanding
1,865,000 shares of Series A Convertible Preferred Stock. The Series A Stock is
senior to the common stock with respect to payment of dividends and
distributions in liquidation. Holders of the Series A Stock are entitled to
receive dividends payable semi-annually equal to 8% of the liquidation
preference value of the Series A Stock, which is $2.00 per share or a total of
$3,730,000. No dividends or distributions may be made with respect to the common
stock unless all dividend payments on the Series A Stock are current. Each share
of Series A Stock is convertible at the election of the holder to one share of
common stock, subject to adjustment in certain circumstances to prevent dilution
of the equity interest of the holders of the Series A Stock. Buyers United may
convert the Series A Stock to common stock when the market price of our common
stock is $4.00 or more during 30 consecutive trading days. We may redeem the
Series A Stock at the liquidation preference value after January 1, 2005. The
Series A Stock does not have voting rights.
Series B Convertible Preferred Stock. Buyers United has outstanding 805,658
shares of Series B Convertible Preferred Stock. The Series B Stock is senior to
the common stock with respect to payment of dividends and distributions in
liquidation. Holders of the Series B Stock are entitled to receive dividends
payable semi-annually equal to 8% of the liquidation preference value of the
Series B Stock, which is $10.00 per share or a total of $8,056,580. No dividends
or distributions may be made with respect to the common stock unless all
dividend payments on the Series B Stock are current. Each share of Series B
Stock is convertible at the election of the holder to five shares of common
stock, subject to adjustment in certain circumstances to prevent dilution of the
equity interest of the holders of the Series B Stock. Buyers United may convert
the Series B Stock to common stock when the market price of our common stock is
$4.00 or more during 30 consecutive trading days. We may redeem the Series B
Stock at the liquidation preference value after January 1, 2005. The Series B
Stock does not have voting rights.
Statutory business combinations provision
Buyers United is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of three years from the date that such
person becomes an interested stockholder unless: (i) the transaction resulting
in a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
at an annual or special meeting by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding voting stock,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation; or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, through
action of its stockholders, to exempt itself from coverage, provided that such
bylaw or certificate of incorporation amendment shall not become effective until
34
12 months after the date it is adopted. Buyers United has not adopted such an
amendment to its certificate of incorporation or bylaws.
Limitation on directors' liabilities
Pursuant to the certificate of incorporation and under Delaware law,
directors and executive officers are not liable to Buyers United or its
stockholders for monetary damages for breach of fiduciary duty, except liability
in connection with a breach of duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
dividend payments or stock repurchases illegal under Delaware law, or any
transaction in which a director has derived an improper personal benefit.
As permitted by Delaware law, Buyers United may enter into an
indemnification agreement with its directors, pursuant to which Buyers United
may pay certain expenses, including attorney's fees, judgments, fines, and
amounts paid in settlement incurred by such directors in connection with certain
actions, suits, or proceedings. These agreements will require directors to repay
the amount of any expenses advanced if it shall be determined that the directors
shall not have been entitled to indemnification. Further, Buyers United
maintains liability insurance for the benefit of its directors and officers.
Penny stock rules
It is likely public transactions in our stock will be covered by the Penny
Stock rules, which impose significant restrictions on broker-dealers and may
affect the resale of our stock. A penny stock is generally a stock that
o Is not listed on a national securities exchange or Nasdaq,
o Is listed in"pink sheets" or on the NASD OTC Bulletin Board,
o Has a price per share of lessthan $5.00 and
o Is issued by a company with net tangible assets less than $5 million.
The penny stock trading rules impose additional duties and responsibilities
upon broker-dealers and salespersons effecting purchase and sale transactions in
common stock and other equity securities, including
o Determination of the purchaser's investment suitability,
o Delivery of certain information and disclosures to the purchaser, and
o Receipt of a specific purchase agreement from the purchaser prior to
effecting the purchase transaction.
Many broker-dealers will not effect transactions in penny stocks, except on
an unsolicited basis, in order to avoid compliance with the penny stock trading
rules. It is likely our common stock will be covered by the penny stock trading
rules. Therefore, such rules may materially limit or restrict a holder's ability
to resell our common stock, and the liquidity typically associated with other
publicly traded equity securities may not exist.
Transfer agent
The transfer agent for the common stock is Atlas Stock Transfer Company,
Salt Lake City, Utah.
35
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees, and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock they acquire on exercise of their warrants or options on any
stock exchange market or trading facility on which our shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling security holders may use any one or more of the following methods when
selling shares.
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o Privately negotiated transactions;
o Short sales;
o Broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o A combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
Rather than sell shares under this prospectus, the selling security holders
may sell shares under Rule 144 adopted under the Securities Act of 1933, after
at least one year elapses from the date the warrants or options are exercised
and the other requirements of the Rule are satisfied. The selling security
holders may also engage in short sales against the box, puts and calls, and
other transactions in our securities or derivatives of our securities and may
sell or deliver shares in connection with these trades.
The selling security holders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares. Broker-dealers engaged by a selling security holder to sell its
shares may arrange for other broker-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the selling security
holders (or, if any broker-dealer acts as agent for the purchaser of shares,
from the purchaser) in amounts to be negotiated.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts.
We have agreed to pay all fees and expenses incident to the registration of
the shares. We have agreed to indemnify the selling security holders against
certain losses, claims, damages, and liabilities, including liabilities under
the Securities Act of 1933. The selling security holders have also agreed to
indemnify us, and our directors, officers, agents, and representatives against
36
certain liabilities, including certain liabilities under the Securities Act of
1933. In the opinion of the Securities and Exchange Commission such
indemnification agreements are against public policy as expressed in the
Securities Act of 1933 and are, therefore, unenforceable. The selling security
holders and other persons participating in the distribution of the shares
offered hereby are subject to the applicable requirements of Regulation M
promulgated under the Securities Exchange Act of 1934 in connection with the
sale of the shares.
SELLING SECURITY HOLDERS
The following table details the name of each selling security holder, the
number of shares owned by the selling security holder, and the number of shares
that may be offered for resale under this prospectus. Because each selling
security holder may offer all, some, or none of the shares it acquires on
exercise of its warrants or options, and because there are currently no
agreements, arrangements, or understandings with respect to the sale of any of
the shares, no definitive estimate as to the number of shares that will be held
by each selling security holder after the offering can be provided. The
following table has been prepared assuming that all shares offered under this
prospectus will be sold to parties unaffiliated with the selling security
holders. Except as indicated, none of the selling security holders has had a
significant relationship with us within the past three years, other than as a
result of the ownership of our shares or other securities. Unless otherwise
indicated, the selling security holders have sole voting and investment power
over their respective shares.
Number Of Number Of Percentage
Selling Security Holder Shares Owned Shares Offered Owned After
Adametz, James 33,073 20,000 0.2
Alloy, Mark 140,336 50,000 1.4
Bagley, Bryan 50,000 50,000 0.0
Bagley, E. Dallin (1) 1,329,867 762,500 7.2
Barnett, Steve (1) 364,366 215,000 2.2
Bazelon, Richard and Eileen 248,502 50,000 3.0
Bernath, Michael and Amy 86,510 25,000 0.9
Boomkamp, Pieter van Leeuwen 5,000 5,000 0.0
Brimhall, George and Brenda 74,898 50,000 0.4
Bywater, David 75,000 75,000 0.0
Carrigan, Ellie 81,536 50,000 0.5
Cohen, Leonard 57,678 25,000 0.5
David, Philip 99,212 30,000 1.0
David, Richard 240,291 135,250 1.6
Deckelbaum, Morris; Morris Deckelbaum
Trust 75,234 17,500 0.9
Dickerson, David; Dickerson Family
Trust 317,516 180,000 2.0
Dove, Krissy 4,000 4,000 0.0
Dritz, Steven 212,403 87,500 1.9
Elliott, Lang 96,458 35,000 0.9
Engineering Fitness 86,079 37,500 0.7
Fabbri, Ina 55,000 55,000 0.0
Friedlander, Charles 28,841 12,500 0.2
Fulton, Peter 52,766 52,766 0.0
Galterio, Richard 116,365 73,488 0.6
Gatewood, Bennie 97,563 56,500 0.6
Getz, Norman 56,903 25,000 0.5
Gilbert, Warren 25,000 25,000 0.0
Gilleland, Ned 43,578 15,625 0.4
37
Gleason, Austin; Gleason Orthopedic 118,569 37,500 1.2
Gomes, Zachary 134,842 25,000 1.7
Gordon, Chris 452,424 314,500 2.0
Graves, Eugene 182,075 75,000 1.6
Grow, David (1) 75,000 75,000 0.0
Henderson, John 2,500 2,500 0.0
Herzing, Henry 540,214 225,000 4.5
Hickey, Bill and Pamela 222,516 85,000 2.0
Hickey, Kim 77,221 50,000 0.4
Highview Ventures, LLC 6,250 6,250 0.0
Huse, Wilfred and Margaret;
Wilfred Huse, MD Pension Plan 221,879 127,500 1.4
Jackson, William and Ann 137,462 50,000 1.3
Jacobs, Norman 131,188 50,000 1.2
Jagmin, Anthony 110,912 25,000 1.3
Janis, Michael and Rosamond 98,089 45,000 0.8
Jarman, Paul (1) 579,552 440,466 2.0
Joseph, Ralph 22,641 10,000 0.2
Kandel, Brian 28,841 12,500 0.2
Keating, Patrick 28,841 12,500 0.2
Kimball, Robert 77,211 25,000 0.8
Krogue, Ken (1) 352,226 333,770 0.3
Labarbara, Luann 2,500 2,000 0.0
Labarbara, Vincent 79,036 34,036 0.7
Larbuisson, Patrick 20,000 20,000 0.0
LeBlanc, Gene 15,770 12,500 0.0
Lee, Daniel 237,335 65,625 2.6
Leithauser, Charles 65,000 25,000 0.6
Leithauser, Charles, Trustee 61,188 25,000 0.5
Levenstein, Lou 6,000 6,000 0.0
MacNeil, Jeff and Shelly 111,741 31,250 1.2
Malone, Karl (1) 614,448 250,000 5.2
Malone, Karl and Kaye (1) 614,448 250,000 5.2
Markel, Rosalind 60,000 60,000 0.0
Marsillo, Mario 36,959 20,584 0.2
Meislich, Herbert 94,061 25,000 1.0
Menillo, Gregory 120,352 50,000 1.1
Menon, Venugopal 16,396 5,000 0.2
Mirman, Al 8,250 8,250 0.0
Mirman, Ilene 110,414 77,736 0.5
Moley, Andrew 115,352 50,000 1.0
Mulkey II Ltd. Partnership 41,142 15,000 0.4
Mulkey, David 88,536 50,000 0.6
Novogrodzky, Mario 46,341 25,000 0.3
Nunley, P.; Nunley Investments 208,263 75,000 2.0
Patil, Jayakumar and Purnima 175,060 12,500 2.4
Peer, Don 16,500 16,500 0.0
Pepe, Danielle 10,000 10,000 0.0
Pobiel, Ronald 13,770 2,500 0.2
Preusser, Frank 28,621 12,500 0.2
Radulovic, Alex 79,063 50,000 0.4
38
Rand, Eric 396,311 250,750 2.1
Ross, Brian 29,000 6,250 0.3
Sansom, Roger 14,958 10,000 0.1
Santoli, Stacy 1,000 1,000 0.0
Schiller, Leonard 138,335 40,625 1.5
Schiller, Phillip 41,841 25,000 0.3
Siegel, Marc and Joyce 77,615 42,736 0.5
Smed, Mogens 88,000 50,000 0.6
Smith, Bryan 10,000 10,000 0.0
Smith, Donald 48,384 20,000 0.4
Smith, G. Douglas (1) 688,768 624,916 0.9
Smith, Gary (1) 537,584 140,000 5.9
Smith, George 324,951 75,000 3.7
Smith, Rodney D. 3,140 3,140 0.0
Smith, Thomas and Liz 100,506 15,000 1.3
Sommer, Frederic 800 800 0.0
Stern, Theodore (1) 2,673,441 1,618,750 11.3
Stewart, Ronald 25,000 25,000 0.0
Stewart, Stephen 54,862 25,000 0.5
Stone, Joel 125,919 50,000 1.1
Tanner, Stephen 70,178 37,500 0.5
Toombs, Walter 32,115 10,000 0.3
Trustees Bradshaw Taylor 5,000 5,000 0.0
Van Le, Linda 28,841 12,500 0.2
Volpe, Michael 27,520 20,520 0.1
Wall Street Group, Inc. 65,000 65,000 0.0
Wolfe, J. Michael 108,533 56,250 0.8
Zayed, Adam 11,000 4,000 0.1
------------------------
(1) These persons are directors, officers and/or principal stockholders.
LEGAL MATTERS
The legality of the issuance of the shares that may be reoffered by the
selling security holders and certain other matters will be passed upon for
Buyers United by Cohne, Rappaport & Segal, PC, Salt Lake City, Utah.
EXPERTS
The financial statements of Buyers United as of December 31, 2002 and for
the years ended December 31, 2002 and 2001, appearing in this prospectus and
registration statement have been audited by Crowe Chizek and Company LLC,
independent auditors, as set forth in their report appearing elsewhere, and are
included in reliance upon such report given upon the authority of Crowe Chizek
and Company LLC as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, with respect to the shares offered. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules. For further information with respect to Buyers United
39
and the shares offered, reference is made to the registration statement and the
exhibits and schedules filed with the Securities and Exchange Commission.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. A copy of the registration statement, and the
exhibits and schedules, may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, telephone 1-800-SEC-0330, and
copies of all or any part of the registration statement may be obtained from the
Commission upon payment of a prescribed fee. This information is also available
from the Commission's Internet web site at www.sec.gov.
40
INDEX TO FINANCIAL STATEMENTS
Page
Interim Financial Statements for the Six Months Ended June 30, 2003
Condensed Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002 (unaudited) 42
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2003 and 2002 (unaudited) 43
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 (unaudited) 44
Notes to Condensed Consolidated Financial Statements 46
Financial Statements for the Year Ended December 31, 2002
Report of Independent Auditors 50
Consolidated Balance Sheet as of December 31, 2002 51
Consolidated Statements of Operations for the Years
Ended December 31 2002 and 2001 52
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31 2002 and 2001 53
Consolidated Statements of Cash Flows for the Years
Ended December 31 2002 and 2001 55
Notes to Consolidated Financial Statements 57
41
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - (Unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash $ 511,010 $ 994,360
Restricted cash 1,047,057 584,002
Accounts receivable, net 8,627,697 5,650,214
Other current assets 220,174 214,869
-------------- --------------
Total current assets 10,405,938 7,443,445
Property and equipment, net 1,787,048 540,578
Other assets, net
Customer lists 6,077,046 3,000,000
Technology and patents 571,120 -
Deferred advertising costs 1,338,487 1,776,124
Other 415,573 384,801
-------------- --------------
Total other assets 8,402,226 5,160,925
-------------- --------------
Total assets $ 20,595,212 $ 13,144,948
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 893,587 $ 1,276,252
Notes payable 5,303,920 6,099,580
Touch America obligation 1,066,236 -
Accounts payable 9,503,330 5,700,753
Accrued liabilities 1,472,361 772,347
Accrued dividends payable on
preferred stock 390,855 377,688
Accrued commissions and rebates 698,808 493,639
-------------- --------------
Total current liabilities 19,329,097 14,720,259
Notes payable 4,522,622 3,887,803
-------------- --------------
Total liabilities 23,851,719 18,608,062
Stockholders' deficit:
Preferred stock 265 242
Common stock 633 599
Additional paid-in capital 17,836,673 16,019,376
Warrants and options outstanding 4,592,514 4,592,514
Deferred consulting fees (14,757) (25,174)
Accumulated deficit (25,671,835) (26,050,671)
-------------- --------------
Total stockholders' deficit (3,256,507) (5,463,114)
-------------- --------------
Total liabilities and
stockholders' deficit $ 20,595,212 $ 13,144,948
============== ==============
See accompanying notes
42
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
---- ----
Revenues:
Telecommunications services $ 31,772,756 $ 11,567,981
Other - 35,561
------------- -------------
Total revenues 31,772,756 11,603,542
Operating expenses:
Costs of revenues 17,256,646 6,179,829
General and administrative 7,731,109 2,942,940
Selling and promotion 5,022,383 1,721,319
------------- -------------
Total operating expenses 30,010,138 10,844,088
------------- -------------
Income from operations 1,762,618 759,454
Other income (expense):
Interest income 5,401 6,802
Interest expense (992,095) (688,724)
------------- -------------
Total other expense, net (986,694) (681,922)
------------- -------------
Net income $ 775,924 $ 77,532
8% Preferred dividends on Series A and B
preferred stock (397,088) (372,037)
------------- -------------
Net income (loss) applicable to
common stockholders $ 378,836 $ (294,505)
============= =============
Net income (loss) per common share:
Basic $ 0.06 $ (0.05)
Diluted 0.06 (0.05)
Weighted average common shares outstanding:
Basic 6,287,453 5,604,441
Diluted 6,322,395 5,604,441
See accompanying notes
43
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
--------------------------
2003 2002
Cash flows from operating activities: ------------- ------------
Net income $ 775,924 $ 77,532
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,784,215 438,208
Amortization included in interest expense resulting from
issuing stock with notes 5,312 14,520
Amortization of discount on notes payable 231,010 70,703
Amortization of note financing costs 81,424 94,060
Amortization of deferred consulting fees 10,417 27,225
Expense related to the grant of options to purchase
common shares - 66,396
Changes in operating assets and
liabilities:
Accounts receivable (2,977,483) (1,255,012)
Other assets (660,476) (1,330,721)
Checks in excess of available cash balances - (186,866)
Accounts payable 3,314,524 390,291
Accrued commissions and rebates 205,169 109,590
Accrued liabilities 550,013 87,395
------------- ------------
Net cash provided by (used) in) operating
activities 3,320,049 (1,396,679)
------------- ------------
Cash flows from investing activities:
Increase in other assets (52,126) (17,060)
Purchases of property and equipment (524,402) (155,836)
------------- ------------
Net cash used in investing activities (576,528) (172,896)
------------- ------------
Cash flows from financing activities:
Restricted cash (463,055) 259,380
Net borrowings and payments under line of credit (382,665) 236,900
Borrowings under notes payable, net of debt issuance costs 2,299,955 2,315,750
Principal payments on notes payable (4,678,422) (444,826)
Principal payments on capital lease obligations - (110,443)
Repurchase of shares from stockholders with less than 100 shares (2,684) -
------------- ------------
Net cash provided by (used in) financing
activities (3,226,871) 2,256,761
------------- ------------
Net increase (decrease) in cash (483,350) 687,186
Cash at the beginning of the period 994,360 57,100
------------- ------------
Cash at the end of the period $ 511,010 $ 744,286
============= ============
See accompanying notes
44
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
----------- ------------
Supplemental cash flow information:
Cash paid for interest $ 548,914 $ 463,094
Supplemental schedule of noncash investing and financing activities:
Issuance of common shares in payment of preferred stock dividend $ 377,688 $ 378,316
Issuance of common shares in payment of deferred financing costs - 49,548
Issuance of common shares for officer's personal guaranty 36,300 -
Issuance of warrants with promissory notes - 186,886
Accrual of dividend payable on preferred stock 397,088 372,037
Retire and replace note payable 800,000 -
Increase in Touch America obligation with amended agreement 3,098,000 -
Issuance of preferred stock to acquire RTIP Network assets 1,400,738 -
See accompanying notes
45
BUYERS UNITED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Unaudited)
June 30, 2003
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Buyers United, Inc. ("the Company" or "Buyers United") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position
and results of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring accruals) have been made which are
necessary for a fair financial statement presentation. The results for the
interim period are not necessarily indicative of the results to be expected
for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2002.
2. Summary of Significant Accounting Policies
Stock-Based Compensation: Employee compensation expense under stock options
is reported using the intrinsic method. No stock-based compensation cost is
reflected in net income (loss) applicable to common stockholders, since all
options had an exercise price equal to or greater than the market price of
the underlying common stock at the date of grant. The following table
illustrates the effects on net income (loss) applicable to common
stockholders and earnings (loss) per share if expense was measured using
the fair value recognition provision of SFAS No. 123, "Accounting for
Stock-Based Compensation:"
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) applicable to common stockholders:
As reported $185,475 $(134,515) $ 378,836 $(294,505)
Pro forma stock-option based compensation (88,677) (187,214) (157,809) (374,429)
--------- ---------- ---------- ----------
Pro forma net income (loss) applicable to common stockholders $ 96,798 $(321,729) $ 221,027 $(668,934)
========= ========== ========== ==========
Basic and diluted net income (loss) per common share:
As reported $ 0.03 $ (0.02) $ 0.06 $ (0.05)
Pro forma basic and diluted net income (loss) per common share $ 0.02 $ (0.06) $ 0.04 $ (0.12)
Advertising Costs: The Company advertises its services through traditional
venues such as print media to the general public. Costs associated with
these advertising efforts are expensed as incurred.
In addition to the traditional advertising means noted above, the Company
participates in a direct response advertising campaign with
LowerMyBills.com, Inc. (LMB), a web-based comparison shopping service.
Through this campaign, the Company's name and the services it provides are
displayed on LMB's web site. The Company is obligated to pay LMB a fee when
a referred customer signs up for services with the Company. These fees are
capitalized and then amortized over the period during which the future
revenue benefits are expected to be received. The Company estimates this to
be 24 months.
46
3. Acquisitions
I-Link Communications, Inc.
On December 6, 2002, Buyers United entered into the Asset Purchase
Agreement and Software License Agreement to purchase assets of I-Link,
Inc., and its subsidiary, I-Link Communications, Inc., and license in
perpetuity software developed by I-Link for the operation of a real-time
Internet protocol communications network (RTIP Network). Customer billings
and related expenses incurred pursuant to a related Management Agreement
between the parties have been included in Buyers United's results since
December 6, 2002. The transaction closed effective May 1, 2003, at which
time the Company began to recognize revenue earned and expenses incurred.
The assets acquired include dedicated equipment required for operating the
RTIP Network, customers of I-Link serviced through the network, and certain
trademarks. In consideration for the assets and software license, Buyers
United issued to I-Link 246,430 shares of Series B Convertible Preferred
Stock with a fair market value of $1,400,738, assumed certain liabilities,
and agreed to issue an additional 53,570 shares of Series B Convertible
Preferred Stock in equal monthly installments over a term of 10 months
commencing June 1, 2003, subject to satisfaction of certain conditions
pertaining to provisioning of one of the former I-Link customers acquired
in the transaction. As the shares are issued the increase in purchase price
associated with the shares will be allocated to Customer Lists. The first
three monthly installments totaling 16,071 shares have been issued and
delivered to I-Link. Assuming the remaining 37,499 shares are issued and
delivered to I-Link, Buyers United will have 837,800 shares of Series B
Convertible Preferred Stock outstanding. If all of the shares of Series B
Preferred Stock are issued to I-Link and converted to common stock, I-Link
would hold approximately 12.11 percent of the outstanding common stock of
Buyers, without giving effect to the exercise of conversion or purchase
rights under any other outstanding shares of preferred stock, options, or
warrants.
In connection with the closing, the parties together with Counsel
Corporation, an Ontario corporation, and Counsel Communications LLC, a
Delaware limited liability company, both affiliates of I-Link, entered into
a Reimbursement Agreement pursuant to which Counsel Corporation, Counsel
Communications, and I-Link agreed to reimburse Buyers United for any loss
sustained as a result of any claims asserted against the assets acquired
from I-Link by certain creditors of I-Link. Out of the shares it received
in the transaction I-Link deposited in escrow 40,000 shares that may be
applied to reimburse any such loss. This is in addition to 25,000 shares
I-Link received in the transaction that has been deposited in escrow under
the Asset Purchase Agreement to satisfy any claims for indemnification
under the Asset Purchase Agreement.
The purchase price allocation has been prepared on a preliminary basis, and
reasonable changes are expected as additional information becomes
available. The following table presents a summary of the estimated fair
values of the assets acquired and liabilities assumed as of May 1, 2003,
the closing date of the transaction:
Computer and telecommunications switching equipment $ 980,410
Customer list 456,197
License on technology and patents 595,951
----------
Total assets acquired 2,032,558
----------
Accounts payable and accrued liabilities 481,820
Acquisition costs 150,000
----------
Total liabilities assumed 631,820
----------
Net assets acquired $1,400,738
==========
The customer list and licensed technology will be amortized over a period
of three to four years.
47
The following unaudited pro forma financial information presents results as
if the acquisition had occurred at the beginning of the respective periods:
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2003
------------ ------------ ------------ --------------
Net revenue $16,735,392 $ 8,777,607 $33,812,136 $ 15,761,209
Net income (loss) applicable to
common stockholders 139,962 (5,017,450) 266,354 (7,921,281)
Net income (loss) per share - basic $ 0.02 $ (0.88) $ 0.04 $(1.41)
Net income (loss) per share - fully diluted 0.02 * 0.04 *
* - The net loss attributable to common shareholders and shares used in
computing the net loss per share attributable to common shareholders for
the 2002 periods are based on the historical weighted average common shares
outstanding. Common stock issuable upon the exercise of stock options,
warrants, or the conversion of preferred stock have been excluded from the
computation of net loss per share attributable to common shareholders as
the effect would be anti-dilutive.
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization expense as
a result of identifiable tangible and intangible assets arising from the
acquisition. The pro forma results are not necessarily indicative either of
the results of operations that actually would have resulted had the
acquisition been in effect at the beginning of the respective periods, or
of results to be achieved in the future.
Touch America
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase a
substantial number of its long distance customers, including the carrier
identification code used to service those customers. Buyers United did not
purchase any accounts receivable, equipment, or other assets of Touch
America. Buyers United agreed to pay to Touch America account receivable
balances that predate the sale as collected by Buyers United, subject to
certain fees payable to Buyers United. Buyers United made an initial
payment of $3,000,000 to Touch America. The original purchase price was
$6,750,000, but the parties subsequently entered into an amendment of the
original purchase agreement on June 6, 2003 that provided for the purchase
of additional customers from Touch America by Buyers and reduced the
purchase price on the initial customer base to $6,098,000. Under the
amendment the original bill of sale for the customers was amended and
restated to correct certain inaccuracies in the customers originally sold
to Buyers United in December 2002, and to add new customers purchased in
June 2003. The new customers purchased include all customers that are
actually transferred to Buyers United and use the long distance services of
Buyers United during the month of August 2003 (the "New Customers"). The
purchase price for this additional customer base will be 2.5 times the
aggregate long distance service usage of the New Customers for August 2003.
As of June 6, 2003, the Company had paid a total of $5,018,166 in cash
towards the purchase price. The balance of the purchase price is payable in
monthly installments equal to 7.2 percent of the collection during the
preceding month on all customers acquired from Touch America.
4. Long-term Debt
In January and February 2003 the Company received $500,000 from the
issuance of promissory notes payable, $400,000 of which came from three
Directors of the Company. The unsecured notes bear interest at 12% and are
due in 2004 through early 2005.
On February 28, 2003, the Company retired its $1,050,000 note payable by
paying $250,000 in cash and issuing a new promissory note for $800,000. In
addition, the Company issued 50,000 shares of common stock in connection
with the original agreement. The new note is unsecured and bears interest
at 10%, payable monthly. Principal is also payable monthly based on 20% of
billings collected during each monthly billing period from designated
customers.
48
In May and June 2003 the Company received $500,000 from the issuance of
promissory notes payable. The notes are secured by computer and
telecommunications equipment, bear interest at 12%, and are due in May and
June 2006.
In June 2003 the Company issued $1,400,000 in promissory notes for cash
used primarily for purchasing customers from Touch America, Inc. (see note
3). The notes are unsecured and bear interest at 10%, with principal and
interest payable monthly. The principal paid each month equals 10% of
billings collected during each monthly billing period from the acquired
Touch America customers. After all principal is repaid, note holders will
continue to receive 5% of such collected billings. There was a 5%
commission paid to the sales agent in connection with the issuance of the
notes.
5. Capital Transactions
On January 15, 2003, the Company Issued 15,000 shares of stock to one of
its directors for providing a credit guaranty to one of its wholesale
telecommunication service providers. The fair market value of the stock was
$36,300.
During June 2003, the Company initiated a program to repurchase outstanding
common stock from shareholders of record with total holdings of 100 or
fewer shares. The offering price per share is $1.75. As of August 12, 2003,
the Company has repurchased 1,534 shares. The program will continue through
the remainder of 2003 and is not expected to have a material impact on the
financial statements of the Company.
See note 3 above for discussion of preferred stock transaction related to
the I-Link acquisition.
6. Major suppliers
Approximately 97% and 84% of the Company's cost of revenue during 2002 and
2001, respectively, was generated from three telecommunication providers.
As of June 30, 2003, the Company owed $4,909,974 to these providers. The
Company has entered into contractual agreements with these vendors. During
2002 two of these providers filed for bankruptcy protection under Chapter
11, and the other provider is currently being scrutinized by the Securities
and Exchange Commission over certain accounting matters. Although the
Company has not experienced a disruption of service and feels it could
replace any one of these sources with other wholesale telecommunication
service providers, the effect on the Company's operations of potentially
losing any one or all three of these service providers is unknown.
7. Subsequent events
On July 5, 2003, the Company issued two 12% promissory notes to Theodore
Stern, Chairman of the Board, aggregating $435,388. This amount represented
unpaid interest accrued up to that date on virtually all of Mr. Stern's
other promissory notes. These two new notes mature on July 5, 2005, and
interest is payable monthly.
During August of 2003, Buyers United agreed to purchase approximately
12,000 long distance customers or $300,000 in monthly revenue from Glyphics
Communications (Glyphics). Buyers United agreed to pay Glyphics 2.25 times
the current monthly revenue of purchased customers in monthly payments
equal to a fixed percentage of the actual purchased customers cash receipts
over an estimated nine month period. Buyers United will manage the
purchased customers on behalf of Glyphics under a Transition Agreement
until the transaction closes.
49
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Buyers United, Inc. and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Buyers United,
Inc. and Subsidiary as of December 31, 2002 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended December 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Buyers United, Inc.
and Subsidiary as of December 31, 2002 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
deficit cash flows from operations, negative working capital, and has a net
capital deficiency. These results as reported in the accompanying financial
statements raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 13 to the financial statements, the Company adopted new
accounting guidance from classification of gains or loss from extinguishment of
debt.
Crowe Chizek and Company LLC
Oak Brook, Illinois
March 14, 2003
50
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2002
--------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 994,360
Restricted cash 584,002
Accounts receivable, net of allowance for doubtful accounts
of $1,425,000 5,650,214
Other current assets 214,869
------------
Total current assets 7,443,445
Property and equipment, net 540,578
Deposit to purchase Touch America customers 3,000,000
Deferred advertising costs, net 1,776,124
Other assets 384,801
------------
Total assets $13,144,948
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 1,276,252
Notes payable 6,099,580
Accounts payable 5,700,753
Accrued liabilities 772,347
Accrued dividends payable on preferred stock 377,688
Accrued commissions and rebates 493,639
------------
Total current liabilities 14,720,259
Notes payable 3,887,803
------------
Total liabilities 18,608,062
Stockholders' deficit:
Preferred stock, $0.0001 par value; 15,000,000 shares authorized;
Series A 8% cumulative convertible preferred stock; 1,865,000
shares issued and outstanding (liquidation value of $3,730,000) 187
Series B 8% cumulative convertible preferred stock; 553,800
shares issued and outstanding (liquidation value of $5,538,000) 55
Common stock, $0.0001 par value; 100,000,000 hares authorized;
5,985,262 shares issued and outstanding 599
Additional paid-in capital 16,019,376
Warrants and options outstanding 4,592,514
Deferred consulting fees (25,174)
Accumulated deficit (26,050,671)
------------
Total stockholders' deficit (5,463,114)
------------
Total liabilities and stockholders' deficit $13,144,948
============
--------------------------------------------------------------------------------
See accompanying notes to consolidated financing statements.
51
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
---- ----
Revenues:
Telecommunications services $30,110,528 $14,256,990
Other 52,922 84,987
------------ ------------
Total revenues 30,163,450 14,341,977
Operating expenses:
Costs of revenues 16,295,201 9,348,215
General and administrative 7,365,569 6,163,505
Selling and promotion 4,646,029 3,319,409
Termination of lease and write-off of web-site
development costs - 980,086
------------ ------------
Total operating expenses 28,306,799 19,811,215
------------ ------------
Income (loss) from operations 1,856,651 (5,469,238)
Other income (expense):
Interest income 17,980 15,571
Interest expense (1,544,448) (997,882)
Gain on early extinguishment of debt 383,520
------------ ------------
Total other expense, net (1,526,468) (598,791)
------------ ------------
Net income (loss) $ 330,183 $(6,068,029)
Preferred stock dividends:
8% dividends on Series A and B preferred stock (749,725) (738,957)
Beneficial conversion feature related to
Series B preferred stock - (20,498)
------------ ------------
Total preferred stock dividends (749,725) (759,455)
------------ ------------
Net loss applicable to common stockholders $ (419,542) $(6,827,484)
============ ============
Basic and diluted net loss per common share: $ (0.07) $ (1.49)
============ ============
Weighted average common shares outstanding:
Basic and diluted 5,740,811 4,583,698
============ ============
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
52
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years
ended December 31, 2002 and 2001
------------------------------------------------------------------------------------------------------------------------------------
Additional Warrants/ Deferred
Preferred Stock Common Stock Paid-in Options Consulting Accumulated
Shares Amount Shares Amount Capital Outstanding Fees Deficit Total
--------- ------ ---------- ------ ----------- ----------- ---------- ------------- -----------
Balance at December 31, 2000 2,328,800 $ 233 $3,988,940 $ 399 $13,005,703 $ 4,073,144 $ (98,145) $(18,803,645) $(1,822,311)
Issuance of common shares for
services - - 148,805 15 104,572 - - - 104,587
Issuance of common shares with
consulting agreement - - 100,000 10 124,990 - (125,000) - -
Issuance of common shares in
connection with debt
extinguishment - - 35,000 4 22,397 - - - 22,401
Conversion of preferred shares to
common (5,000) - 5,000 - - - - - -
Issuance of common shares in
connection with notes payable - - 430,000 43 360,130 - - - 360,173
Issuance of warrants for services
and with consulting agreements - - - - - 54,515 - - 54,515
Amortization of deferred
consulting fees - - - - - - 45,774 - 45,774
Issuance of warrants with notes
payable - - - - - 32,239 - - 32,239
Issuance of common stock for debt
guarantee - - 100,000 10 144,990 - - - 145,000
Imputed interest on notes payable - - - - 25,500 - - - 25,500
Issuance of Series B preferred
stock and warrants, netof
offering costs 110,000 11 - - 797,588 302,401 - - 1,100,000
Beneficial conversion dividend on
Series B preferred stock - - - - 20,498 - - (20,498) -
Cancellation of options issued
for services - - - - - (78,965) 78,965 - -
Preferred stock dividends - - - - - - - (738,957) (738,957)
Issuance of common shares as
payment of preferred stock
dividends - - 504,884 50 584,487 - - - 584,537
Net loss - - - - - - - (6,068,029) (6,068,029)
-------------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,433,800 $ 244 5,312,629 $ 531 $15,190,855 $ 4,383,334 $(98,406) $(25,631,129) $(6,154,571)
(Continued)
53
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (Continued)
Years ended December 31, 2002 and 2001
------------------------------------------------------------------------------------------------------------------------------------
Additional Warrants/ Deferred
Preferred Stock Common Stock Paid-in Options Consulting Accumulated
Shares Amount Shares Amount Capital Outstanding Fees Deficit Total
--------- ------ ---------- ------ ----------- ----------- ---------- ------------- -----------
Balance at December 31, 2001 2,433,800 $ 244 $5,312,629 $ 531 $15,190,855 $ 4,383,334 $ (98,406) $(25,631,129) $(6,154,571)
Conversion of preferred shares to
common (15,000) (2) 55,000 6 (4) - - - -
Issuance of common shares in
connection with notes payable - - 17,998 2 18,796 - - - 18,798
Issuance of warrants for services
and with consulting agreements - - - - - 102,118 - - 102,118
Amortization ofdeferred consulting
fees - - - - - - 73,232 - 73,232
Issuance of warrants with notes
payable - - - - - 232,259 - - 232,259
Issuance of common stock for debt
guarantee - - 25,000 3 30,747 - - - 30,750
Imputed interest on notes payable - - - - 28,686 - - - 28,686
Cancellation of warrants issued
for services - - - - - (125,197) - - (125,197)
Preferred stock dividends - - - - - - - (749,725) (749,725)
Issuance of common shares as
payment of preferred stock
dividends - - 574,635 57 750,296 - - - 750,353
Net income - - - - - - - 330,183 330,183
-------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2,418,800 $ 242 5,985,262 $ 599 $16,019,376 $ 4,592,514 $ (25,174) $(26,050,671) $(5,463,114)
=================================================================================================
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
54
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
--------------------------------------------------------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ 330,183 $(6,068,029)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on early extinguishment of debt - (383,520)
Depreciation and amortization 1,191,196 766,869
Interest expense resulting from issuing stock and
warrants with notes 28,686 255,623
Amortization of discount on notes payable 237,444 6,140
Amortization of note financing costs 174,977 169,154
Amortization of deferred consulting fees 73,232 45,774
Services rendered in exchange for shares of common
stock - 104,587
Expense related to the grant of options to purchase
common shares (23,079) 54,515
Termination oflease and write-off of web-site
development costs - 980,086
Changes in operating assets and liabilities:
Accounts receivable (3,378,341) (724,591)
Other assets (2,379,009) (112,176)
Checks in excess of available cash balances (186,866) 186,866
Accounts payable 1,821,236 430,271
Accrued commissions and rebates 168,861 249,244
Accrued liabilities 263,322 (106,103)
----------- -----------
Net cash used in operating activities (1,678,158) (4,145,290)
----------- -----------
Cash flows from investing activities:
Increase in other assets (194,915) (63,535)
Purchases of property and equipment (317,399) (213,145)
Deposits to purchase Touch America customers (3,000,000) -
----------- -----------
Net cash used in investing activities (3,512,314) (276,680)
----------- -----------
Cash flows from financing activities:
Change in restricted cash 106,310 (462,542)
Net borrowings under line of credit 702,080 574,172
Borrowings under notes payable, net of debt issuance
costs 7,818,850 3,833,750
Principal payments on notes payable (2,297,351) (120,000)
Principal payments on capital lease obligations (202,157) (500,358)
Issuance of preferred/common shares for cash, net of
offering costs - 1,097,223
----------- -----------
Net cash provided by financing activities 6,127,732 4,422,245
----------- -----------
Net increase in cash 937,260 275
Cash at the beginning of the period 57,100 56,825
----------- -----------
Cash at the end of the period $ 994,360 $ 57,100
=========== ===========
(Continued)
55
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
2002 2001
---- ----
Supplemental cash flow information:
Cash paid for interest $890,490 $459,442
Supplemental schedule of noncash investing and financing
activities:
Issuance of common shares in payment of preferred stock
dividend $750,353 $584,537
Issuance of common shares in payment of deferred services - 125,000
Issuance of common shares in payment of deferred
financing costs 18,793 222,075
Issuance of common shares in extinguishment of debt - 22,400
Issuance of warrants with promissory notes 232,259 32,239
Beneficial conversion dividend on Series B preferred shares - 20,498
Accrual of dividend payable on preferred stock 749,725 738,957
Assets acquired under capital lease arrangements - 109,100
Issuance of common shares for supplier guaranty 30,750 27,475
See accompanying notes to consolidated financial statements.
56
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
Buyers United, Inc. ("the Company") was incorporated on August 23, 1994 in the
state of Utah and was reincorporated in the state of Delaware on April 9, 1999.
The Company was formerly known as Linguistix, Inc., Buyers United International,
Inc., BUI, Inc., and BuyersOnline.com, Inc. In 2001, the Company changed its
name to Buyers United, Inc., the same name as its dormant, wholly owned Utah
subsidiary. The Company merged the subsidiary into the parent entity during
2002. At the time of the name change, the Company's trading symbol also changed
to "BYRS."
The Company is a consumer buying organization with the objective of providing
high quality consumer products and services at favorable prices to its members.
The Company forms strategic alliances with various consumer service providers in
an effort to combine the purchasing power of its members to negotiate favorable
prices from these providers. During the years ended December 31, 2002 and 2001,
the Company primarily provided discounted long distance telecommunication
services to its members.
On December 6, 2002, Buyers United entered into an agreement to purchase assets
of I-Link, Inc., and its subsidiary, I-Link Communications, Inc., and license in
perpetuity software developed by I-Link for the operation of a real-time
Internet protocol communications network (RTIP Network). The assets acquired
include dedicated equipment required for operating the RTIP Network, customers
of I-Link serviced through the network, and certain trademarks. In consideration
for the assets and software license, Buyers United agreed to issue to I-Link
300,000 shares of Series B Convertible Preferred Stock and assume certain
liabilities. Completion of the purchase is subject to obtaining government and
third-party approvals, and obtaining releases of third party security interests
in the assets. The parties are pursuing efforts to satisfy these closing
conditions for the purchase of assets, but cannot predict when or if the
conditions will be satisfied and the transaction closed. Since this transaction
has not closed, the effects of this transaction have not been reflected in the
accompanying financial statements.
Concurrently with the agreement for the purchase of I-Link assets, I-Link and
Buyers United entered into transition and management agreements pursuant to
which Buyers United was appointed to manage all of the assets to be acquired
from I-Link pending the closing of the purchase. Under the agreements, Buyers
United assumed responsibility for day-to-day operation of the RTIP Network
previously operated by I-Link that is to be sold to Buyers United, is
responsible for all customer billing and collection, has the right to use the
RTIP Network to provide telecommunications service to its customers, and is
entitled to receive a management fee equal to 10 percent of revenue generated
from I-Link customers after the payment of all expenses of the RTIP Network and
providing service to such customers. Since the revenues generated and expenses
paid are not legally the Company's the net impact of these items is reflected in
other liabilities and operating expenses in the accompanying financial
statements.
(Continued)
57
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
In connection with the transaction, Buyers United agreed to sublease certain
space occupied by I-Link, but subsequently negotiated a new lease arrangement
for the space. Buyers United is leasing through November 2004, 14,339 square
feet of space at 13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost
of $16,728. In consideration for entering into this agreement, I-Link agreed to
subsidize a total of $36,232 in lease payments, which represents the difference
between the amount of the original sublease obligation of Buyers United and the
monthly cost of the space under the new lease arrangement. In the event the
asset purchase transaction between Buyers United and I-Link does not close,
Buyers United has the right to terminate the lease arrangement without further
liability to I-Link or the landlord.
On December 20, 2002, Buyers United entered into an agreement with Touch
America, Inc., a subsidiary of Touch America Holdings, Inc., to purchase
approximately 70,000 of the switched voice telecommunication customers of Touch
America, including the carrier identification code used to service those
customers. Buyers United did not purchase any accounts receivable, equipment, or
other assets of Touch America. Buyers United agreed to pay to Touch America
account receivable balances that predate the sale as collected by Buyers United,
subject to certain fees payable to Buyers United. Buyers United made an initial
payment of $3 million dollars to Touch America. The original purchase price was
$6,750,000, but the parties are now attempting to negotiate a reduction in the
purchase price due to errors and other discrepancies the parties subsequently
discovered in the list of accounts sold to Buyers United. The balance of the
final purchase price will be paid in monthly increments based on a percentage of
revenue generated by the acquired customer accounts. Since the transaction had
not yet closed as of December 31, 2002, no additional amounts have been
reflected in the accompanying balance sheet. The conditions for closing the
purchase were satisfied in March 2003.
During the years ended December 31, 2002 and 2001, the Company's net loss
applicable to common stockholders was $419,542 and $6,827,484, respectively. As
of December 31, 2002, the Company had a working capital deficit of $7,276,814
and an accumulated deficit of $26,050,671. During the years ended December 31,
2002 and 2001, the Company's operations used $1,678,158 and $4,145,290 of cash,
respectively. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
During 2001 the Company began several cost-reduction initiatives, which
continued into 2002. The net result of these efforts resulted in operating
expenses (unrelated to costs of revenue and termination of lease and web-site
costs) decreasing as a percentage of revenue from 66% during 2001 to 40% during
2002. In addition, the Company's revenues increased 110% during 2002 as compared
to 2001.
The Company is subject to certain risk factors frequently encountered by
companies lacking adequate capital and are continuing the development of
multiple business lines that may impact its ability to become a profitable
enterprise. These risk factors include:
(Continued)
58
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
a) The consumer buying organization industry is characterized by intense
competition, and many of the Company's competitors are substantially
larger than the Company with greater financial and other resources. In
addition, the Company is currently marketing telecommunications
services, including long distance services, to its members. The U.S.
long distance telecommunications industry is highly competitive and
significantly influenced by the marketing and pricing strategies of
the major industry participants, which are significantly larger than
the Company and have substantially greater resources.
b) The Company's relationship marketing system is or may be subject to or
affected by extensive government regulation, including without
limitations, state regulation of marketing practices and federal and
state regulation of the offer and sale of business franchises,
business opportunities, and securities. Long distance
telecommunications carriers currently are subject to extensive federal
and state government regulation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of Buyers United, Inc. and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates include the allowance for doubtful accounts.
Revenue Recognition: The Company's revenue recognition policy with respect to
reseller agreements is to record gross revenues and receivables from customers
when the Company acts as principal in the transaction; takes title to the
products or services; and has risks and rewards of ownership, such as risk of
loss for collection, delivery, or returns. Revenues from sales of services are
recognized upon providing the services to the customers
Restricted Cash: In accordance with the Company's agreements with RFC Capital
Corp. (Note 4) and with certain vendors, the Company maintains a restricted cash
account for the collection of the Company's receivables. As of December 31,
2002, the Company had $584,002 of cash that was restricted.
(Continued)
59
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable is
comprised of amounts billed and billable to customers, net of an allowance for
uncollectible amounts. The gross receivable balance outstanding as of December
31, 2002 is comprised of the following:
Billed amounts $ 4,524,390
Unbilled amounts 2,550,824
-----------
$ 7,075,214
===========
Finance charges are assessed to accounts once the amount owed is past due based
on their specific terms. The amount of trade receivables billed and outstanding
that are not being assessed finance charges are $2.2 million. The amount of
trade receivables that are past due more than 90 days and still accruing fees
are approximately $700,000.
The allowance for doubtful accounts is estimated by management and is based on
specific information about customer accounts, past loss experience, and general
economic conditions. During the three months ended December 31, 2002 the Company
recorded a $400,000 adjustment to increase the allowance for doubtful accounts.
An account is written off by management when deemed uncollectible, although
collections efforts may continue.
Property and Equipment: Property and equipment are stated at cost. Major
additions and improvements are capitalized, while minor repairs and maintenance
costs are expensed when incurred. In accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes certain costs incurred for the
development of internal use software. These costs include the costs associated
with coding, software configuration, upgrades, and enhancements. In March 2000,
the Emerging Issues Task Force issued its consensus on Issue No. 00-2,
"Accounting for Web Site Development Costs." Of such costs the Company disposed
of significant amounts during 2001, and capitalized approximately $127,000
during 2002.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets as follows:
Computer and office equipment 2 to 3 years
Internal-use software and web site development costs 2 years
Furniture and fixtures 3 to 7 years
Advertising Costs: The Company advertises its services through traditional
venues such as print media to the general public. Costs associated with these
advertising efforts are expensed as incurred, and were $29,781 and $66,455 for
the years ended December 31, 2002 and 2001, respectively.
In addition to the traditional advertising means noted above, the Company
participates in a direct response advertising campaign with LowerMyBills.com,
Inc. (LMB), a web-based comparison shopping service. Through this campaign, the
(Continued)
60
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Company's name and the services it provides are displayed on LMB's web site. The
Company is obligated to pay LMB a referral fee when a customer signs up for
services through LMB's web site. The fees associated with this advertising
campaign were deferred and aggregated $2,579,307 during the year ended December
31, 2002. These fees have been amortized over the period during which the future
benefits are expected to be received, which was 24 months at December 31, 2002.
The fees and related accumulated amortization of $803,183 was included with
other assets as of December 31, 2002.
Fair Value of Financial Instruments: The carrying amounts reported in the
accompanying consolidated balance sheet for cash, receivables, and accounts
payable approximate fair values because of the immediate or short-term
maturities of these financial instruments. The fair value of the Company's notes
payable and preferred stock also approximate fair value based on current rates
for similar debt and fixed-rate instruments.
Debt Issuance Costs: As an inducement to various investors, shareholders, and
board members to lend monies to the Company, shares of common stock and warrants
to purchase shares of common stock were issued to them. The fair market value of
those shares at the date of issuance has been capitalized as debt issuance costs
and is being amortized over the life of the loans. Amortization of these costs
for the years ended December 31, 2002 and 2001 was $237,446 and $149,104,
respectively, and are included in interest expense. The remaining amortization
period for these costs is less than two years as of December 31, 2002.
Stock-Based Compensation: Employee compensation expense via stock option grants
is reported using the intrinsic method. No stock option-based compensation
expense is included in net income (loss) as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock
at the date of grant. The following table illustrates the effect on net income
(loss) and earnings (loss) per share if expense was measured using the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation":
2002 2001
---- ----
Net loss applicable to common stockholders:
As reported $ (419,542) $(6,827,484)
Pro forma stock-option based compensation (748,857) (710,762)
------------ ------------
Pro forma net loss applicable to common stockholders $(1,168,399) $(7,538,246)
============ ============
Basic and diluted net loss per common share:
As reported $ (0.07) $ (1.49)
Pro forma basic and diluted net loss per common share $ (0.20) $ (1.64)
(Continued)
61
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The fair value of the options was estimated at the date of grant using the
following weighted average assumptions:
2002 2001
---- ----
Risk-free interest rate 3.71% 2.18%
Dividend yield - -
Expected volatility 104% 111%
Weighted average expected life 4.7 years 5.6 years
The weighted average fair values of options granted during the years ended
December 31, 2002 and 2001 was $1.01 and $2.51, respectively. The pro forma
effects of applying SFAS No. 123 are not indicative of future amounts.
Additional awards in future years are anticipated.
Income Taxes: The Company recognizes a liability or asset for the deferred
income tax consequences of all temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years when the
reported amounts of the assets and liabilities are recovered or settled. These
deferred income tax assets or liabilities are measured using the enacted tax
rates that will be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
Net Loss Per Common Share : Basic net loss per common share ("Basic EPS")
excludes dilution and is computed by dividing net loss by the weighted average
number of common shares outstanding during the year. Diluted net loss per common
share ("Diluted EPS") reflects the potential dilution that could occur if stock
options or other common stock equivalents were exercised or converted into
common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net loss per
common share.
Outstanding options of employees and directors to purchase 3,592,721 and
2,818,585 shares of common stock as of December 31, 2002 and 2001, respectively;
4,634,000 and 4,689,000 shares of common stock issuable upon the conversion of
preferred stock as of December 31, 2002 and 2001, respectively; and 5,529,282
and 5,345,732 shares of common stock issuable upon exercise of warrants to
purchase common stock as of December 31, 2002 and 2001, respectively, were not
included in the computation of Diluted EPS because they would be antidilutive.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
Recent Accounting Pronouncements: On June 29, 2001, the Financial Accounting
Standards Board (FASB) approved its proposed SFAS No. 141 ("SFAS No. 141"),
"Business Combinations," and SFAS No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets."
(Continued)
62
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Under SFAS No. 141, all business combinations should be accounted for using the
purchase method of accounting; use of the pooling-of-interests method is
prohibited. The provisions of the statement apply to all business combinations
initiated after June 30, 2001. SFAS No. 142 applies to all acquired intangible
assets whether acquired singly, as part of a group, or in a business
combination. The statement supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets," and will carry forward provisions in APB
Opinion No. 17 related to internally developed intangible assets. The adoption
of these statements as of January 1, 2002 did not have a material impact on the
Company's results of operations, financial position, or liquidity.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The Company is required to adopt SFAS No. 143 for fiscal years
beginning after June 15, 2002. Thus, the Company will need to adopt SFAS No. 143
as of January 1, 2003. SFAS No. 143 requires businesses to recognize a liability
for an asset retirement obligation when it is incurred. This liability should be
recorded at its fair value, and a corresponding increase in the carrying amount
of the related long-term asset should be recorded as well. The adoption of SFAS
No. 143 on January 1, 2003 did not have a material impact on the Company's
results of operations, financial position, or liquidity.
On October 3, 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale. The long-lived assets
that are to be disposed of by sale should be measured at the lower of book value
or fair value less any selling expenses. Additionally, SFAS No. 144 expands the
scope of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The statement is effective for the Company for all financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of this
pronouncement did not have a material effect on the Company's results of
operations, financial position, or liquidity.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement 4,
44, and 64, Amendment of FASB Statements 13, and Technical Corrections." SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale/leaseback transactions. The provisions of SFAS
No. 145 related to classification of debt extinguishments are effective for
fiscal years beginning after May 15, 2002. Commencing January 1, 2003 the
Company will classify debt extinguishments costs within income from operations.
The provisions of SFAS No. 145 related to lease modifications are effective for
transactions occurring after May 15, 2002. The adoption of this statement on
January 2, 2003 did not have a material impact on the Company's financial
position or results of operations.
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
(Continued)
63
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This amendment also changes the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the methods of accounting for
stock-based employee compensation and the effects of the method used on reported
amounts. SFAS No. 148 is effective for fiscal years ending after December 15,
2002. The Company has opted to continue accounting for stock options under the
intrinsic value method prescribed in APB Opinion No. 25 for the year ended
December 31, 2002.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2002, property and equipment consists of the following:
Computer and office equipment $1,325,175
Internal-use software 209,096
Furniture and fixtures 270,371
----------
1,804,642
Accumulated depreciation and amortization 1,264,064
----------
$ 540,578
==========
During 2001 the Company reviewed its investment in leased computer equipment and
software, and determined that it could achieve its growth objectives and serve
its customers with a different equipment and software solution. During 2001, the
Company also replaced its web site software with a newly-developed program. The
total cost of removing the unamortized book value of the above assets was
$980,086 and is included in the consolidated statement of operations.
NOTE 4 - LINE OF CREDIT
During 2002 the Company renewed its line of credit agreement with RFC Capital
Corporation ("RFC"). The facility allowed the Company to borrow up to $2.5
million based on the Company's eligible accounts receivable and unbilled
receivables. On January 21, 2003, the Company amended its agreement with RFC.
The new arrangement allows the Company to borrow up to $5 million based on
eligible accounts receivable and unbilled receivables. The facility bears
interest at prime plus 3% and expires in January 2006.
As security for the line of credit, the Company is required to maintain a lock
box at a financial institution. As of December 31, 2002, there was $506,639 of
restricted cash specifically associated with this agreement. At December 31,
2002, the Company had borrowed the maximum amount available based on eligible
accounts receivable at that time, which amounted to $1,276,252.
(Continued)
64
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following:
Unsecured notes payable to the Chairman of the Board,
bearing interest at 12%, accrued monthly. All accrued
interest is payable on July 5, 2003, thereafter monthly.
In January 2003, the notes were amended such that all
principal and any unpaid interest is due and payable
in July 2004. $2,377,500
Unsecured notes payable to a Director bearing interest
at 12%, payable monthly. Principal and any unpaid interest
due in 2004. 500,000
Secured note payable bearing interest at 18%, payable
monthly. Principal and any unpaid interest due February 28,
2003, at which time 50,000 shares of common stock will also
be payable. The note is secured by certain assets of a member
of the Board of Directors (see Note 12). 1,050,000
Unsecured promissory notes bearing interest at 10% and
12%, payable monthly. Principal payments due monthly,
based on 20% to 40% of billings collected from specifically-
designated customers referred from LowerMyBills.com, Inc.
("LMB"). The majority of these notes do not have a maturity
date. The Company believes that virtually all of the
principal will be repaid in approximately one year or less,
based on forecasted billings to these customers. 2,940,354
Unsecured promissory notes bearing interest at 10%, payable
monthly. Principal payments due monthly, based on 10% of
billings collected from customer recently acquired from
Touch America, Inc. These notes do not have a maturity date.
The Company believes that principal will be repaid over a
period of approximately 18 months from the date of issue,
based on forecasted billings to these customers. 3,035,000
(Continued)
65
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Other 84,529
-----------
9,987,383
Less current portion (6,099,580)
-----------
$3,887,803
===========
Long-term debt maturities are as follows:
2003 $6,099,580
2004 3,887,803
----------
9,987,383
Less current maturities 6,099,580
----------
$3,887,803
==========
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase 562,950 shares of common stock at $2.50 per share (later
amended to $2.00 per share) have also been issued to the note holders during
2002 and 2001. Warrants for an additional 94,950 shares have also been issued to
the sales agents. The estimated fair value of the warrants of $264,717, based on
using the Black-Scholes pricing model, was allocated to the warrants and
recorded as a discount to the carrying value of the notes. The Company paid
approximately $232,000 in commissions to sales agents. The Company paid
approximately $152,000 in commissions to sales agents in connection with the
Touch America-related unsecured promissory notes. All these commission costs are
also included in the discounts to the carrying value of the notes. The discount
is being amortized to interest expense over the respective notes' estimated
payment terms.
In June 2001, the Company entered into a joint sales agreement with Infotopia,
Inc. ("Infotopia"), a direct response marketer. In connection with the
agreement, Infotopia agreed to loan the Company $500,000. Subsequent to entering
into the sales agreement, the two companies decided not to pursue further any
joint activity. During 2001, Infotopia sold the loan obligation to Pali
Investments, Inc. ("Pali"), an unrelated investment relations firm. In December
2001, the Company negotiated a settlement with Pali. Under the terms of the
settlement, the Company paid $120,000 and issued 35,000 shares of common stock
in exchange for canceling the outstanding obligation plus $25,921 in accrued
(Continued)
66
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
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 (see Note 11).
NOTE 6 - LEASES
In connection with the I-Link transaction, the Company agreed to sublease
certain space occupied by I-Link, but subsequently negotiated a new lease
arrangement for the space. The Company is leasing 14,339 square feet of space at
13751 S. Wadsworth Park Drive, Draper, Utah, at a monthly cost of $16,728. The
new lease expires at the end of November 2004. In consideration for entering
into this agreement, I-Link agreed to subsidize a total of $36,232 in lease
payments, which represents the difference between the amount of the original
sublease obligation of Buyers United and the monthly cost of the space under the
new lease arrangement. In the event the asset purchase transaction between
Buyers United and I-Link does not close, Buyers United has the right to
terminate the lease arrangement without further liability to I-Link or the
landlord.
The following is a schedule of future minimum payments under both leases as of
December 31, 2002:
2003 544,410
2004 571,689
2005 397,373
2006 407,307
Thereafter 417,490
-------
Total future minimum lease payments $2,338,269
==========
Rent expense was approximately $348,300 and $517,600 for the years ended
December 31, 2002 and 2001, respectively.
NOTE 7 - INCOME TAXES
The components of the Company's net deferred income tax assets and liabilities
are as follows:
Deferred income tax assets:
Net operating loss carryforwards $5,690,000
Reserves and accrued liabilities 800,000
Other 1,000
----------
Total deferred income tax assets 6,491,000
Valuation allowance (6,313,000)
-----------
Net deferred income tax asset 178,000
(Continued)
67
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Deferred income tax liabilities:
Capitalized software costs -
Tax depreciation in excess of book depreciation (178,000)
----------
Net deferred income tax liability (178,000)
----------
Net deferred income taxes $ -
==========
As of December 31, 2002, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $15,000,000. The tax net
operating loss carryforwards will expire beginning in 2012.
Inasmuch as the Company's history includes accumulated net operating losses, it
is uncertain as to whether the Company's deferred tax asset can be fully
realized. Accordingly, a valuation allowance has been recorded to reduce the
deferred income tax assets. The net change in the valuation allowance for
deferred tax assets during the year ended December 31, 2002 was a decrease of
$438,000. No benefit for income taxes has been recorded during the year ended
December 31, 2001. During 2002 no income tax expense was recorded due the
reduction of the valuation allowance.
NOTE 8 - CAPITAL TRANSACTIONS
Preferred Stock: The Board of Directors is authorized to classify any shares of
the Company's authorized but unissued preferred stock in one or more series.
With respect to each series, the Board of Directors is authorized to determine
the number of shares that constitutes such series; the rate of dividend, if any,
payable on shares of such series; whether the shares of such series shall be
cumulative, non-cumulative, or partially cumulative as to dividends and the
dates from which any cumulative dividends are to accumulate; whether the shares
of such series may be redeemed, and, if so, the price or prices at which and the
terms and conditions on which shares of such series may be redeemed; the amount
payable upon shares of such series in the event of the voluntary or involuntary
dissolution, liquidation, or winding up of the affairs of the Company; the
sinking fund provisions, if any, for the redemption of shares of such series;
the voting rights, if any, of the shares of such series; the terms and
conditions, if any, on which shares of such series may be converted into shares
of capital stock of the Company of any other class or series; whether the shares
of such series are to be preferred over shares of capital stock of the Company
of any other class or series as to dividends or upon the voluntary or
involuntary dissolution, liquidation, or termination of the affairs of the
Company or otherwise; and any other characteristics, preferences, limitations,
rights, privileges, immunities, or terms.
Series A 8% Cumulative Convertible Preferred Stock: During 1999, the Board of
Directors authorized the issuance of 2,000,000 shares of Series A 8% Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") at an offering price of
$2.00 per share. Gross proceeds of $4,000,000 were raised upon sale of the
shares.
(Continued)
68
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
The Series A Preferred Stock is convertible to common stock at any time at the
election of the holder and, under limited circumstances, at the election of the
Company. The conversion rate is one for one, subject to adjustment in the event
of a recapitalization, reorganization, or other corporate restructuring or in
the event that the Company shall sell or otherwise issue securities at a price
below $2.00 per share or the then adjusted conversion price. The Series A
Preferred Stock can be redeemed at the Company's election at any time commencing
January 1, 2005 at a redemption price of $2.00 per share plus all accrued
dividends as of the redemption date. During each of 2002 and 2001, certain
stockholders converted 5,000 Series A preferred shares, respectively, into
common shares.
Series B 8% Cumulative Convertible Preferred Stock: In September 2000, the Board
of Directors authorized the issuance of 1,234,500 shares of Series B 8%
Cumulative Convertible Preferred Stock ("Series B Preferred Stock") and related
warrants to purchase common shares at an offering price of $10.00 per unit. Each
unit consists of one share of Series B Preferred Stock and five warrants to
purchase one share of common stock at an exercise price of $2.50 per share.
During 2000, various investors made loans to the Company and subsequently
elected to exchange their promissory notes for units. In addition to the
converted loans of $2,545,000, the Company raised $1,993,000 through the
issuance of units through December 31, 2000 and $1,100,000 through the issuance
of units in 2001.
In connection with the unit offering, the Company agreed to pay the Placement
Agent a sales commission and expense allowance aggregating 13% of the gross
proceeds from the sale of the Series B Preferred Stock, in addition to 10% of
the gross proceeds of certain related bridge financing. The Company also
incurred approximately $23,000 of direct expenses in connection with the
offering. As additional consideration, the Company agreed to issue to the
Placement Agent warrants to purchase 319,300 shares of the Company's common
stock at an exercise price of $2.50 per share.
As part of the Series B Preferred Stock offering, the Company issued 2,269,000
warrants to purchase common stock at $2.50 per share. The Company allocated the
net proceeds from the offering of $4,208,762 between the Series B Preferred
Stock and the warrants based on estimated relative fair values. The Series B
Preferred Stock was recorded at $2,432,476, and the warrants were recorded at
$1,776,286. The estimated fair value of the warrants was determined using the
Black-Scholes pricing model. The Series B Preferred Stock is convertible to
common stock at any time at the election of the holder and, under limited
circumstances, at the election of the Company. The conversion rate is five for
one, subject to adjustment in the event of a recapitalization, reorganization,
or other corporate restructuring or in the event that the Company shall sell or
otherwise issue securities at a price below $2.00 per share or the then adjusted
conversion price. During 2002, one of the stockholders converted 10,000 Series B
preferred shares into common shares.
During the three months ended March 31, 2001, the Company issued an additional
110,000 shares of preferred stock and 550,000 warrants to purchase common stock.
The Company allocated the net proceeds from the offering of $1,097,223 between
the Series B Preferred Stock and the warrants based on estimated relative fair
(Continued)
69
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
values. Accordingly, the stock was recorded at $794,822, and the warrants were
recorded at $302,401. In connection with these additional Series B shares, the
intrinsic value of the beneficial conversion feature of $20,498 was reflected in
the accompanying 2001 consolidated financial statements as a preferred stock
dividend and as an increase to additional paid in capital. The Series B
Preferred Stock Offering closed on April 13, 2001.
In May 2002 the Board of Directors approved a plan to modify the exercise price
on certain Preferred Stock and promissory note-related warrants from $2.50 to
$2.00 per share, extend the expiration date of certain warrants from December
31, 2002 to December 31, 2004, and amend the redemption provisions of certain
warrants so that the warrants could be called for redemption when the market
price for our common stock is $4.00 per share, rather than $6.00 per share.
Both Series A and B Preferred Stock can be redeemed at the Company's election at
any time commencing January 1, 2005, at the applicable redemption price plus all
accrued dividends as of the redemption date.
Cumulative dividends accrue on both Series A and B Preferred Stock at the rate
of 8% per annum from the date of original issue and are payable semi-annually on
June 30 and December 31 of each year out of funds legally available for the
payment of dividends. Dividends are payable in cash or common stock at the
election of the Company. If paid in common stock, the number of shares issued
will be based on the average of the closing bid prices for the common stock over
the five trading days immediately prior to the dividend payment date. If the
Company fails to pay any dividend within 60 days of its due date, the conversion
price (see below) is adjusted downward by $0.25 per share for each occurrence.
During the years ended December 31, 2002 and 2001, the Company declared
dividends aggregating $749,725 and $738,957, respectively, and to satisfy
payment obligations, issued a total of 574,635 and 504,884 shares of common
stock, respectively. As of December 31, 2002, the Company had accrued dividends
payable in the amount of $377,688. In February 2003, the Company settled the
dividend payable by issuing 199,951 shares of common stock.
The Series A and B Preferred Stock have no voting rights, except as required by
the General Corporation Laws of Delaware that require class votes on certain
corporate matters and matters affecting the rights of the holders of the
Preferred Stock. The Preferred Stock is senior in right of payment in the event
of liquidation and with respect to dividends to the common stock and all other
subsequent preferred stock issuances that may be authorized. The Series A
Preferred Stock has a liquidation preference of $2.00 per share and the Series B
Preferred Stock has a liquidation preference of $10.00 per share.
Issuances of Common Stock: During January 2002 the Company issued 17,998 shares
of common stock in connection with the issuance of $179,998 of promissory notes,
at an aggregated fair market value of $18,798. During 2001, the Company issued
(Continued)
70
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
113,300 shares of common stock to four employees in payment of services
rendered, at an aggregated fair market value of $77,100.
During February 2002 the Company issued 25,000 shares of stock to one of its
directors for providing a credit guaranty with respect to business expansion
activities. The Company also issued 35,500 shares of stock in 2001 for providing
similar guarantees. The fair market values of the 2002 and 2001 share issuances
were, respectively, $30,750 and $27,475.
In March 2001, the Company entered into three-year marketing contracts with one
of its Series B Preferred stockholders. Under the terms of the contracts,
100,000 shares of common stock were issued with a fair market value of $125,000.
This amount was recorded on the balance sheet as a deferred consulting fee and
included in operating expenses on a straight-line basis over the life of the
contracts. During 2001, $39,931 was recorded in promotion expenses as a result
of this amortization. Consideration granted under the contracts' terms also
included options to purchase up to 150,000 additional shares of common stock at
$2.50 per share. These options vest gradually over the term of the contract.
These options are accounted for as variable plan options since the issuance of
these options was under the premise that the grantee will be providing current
and future services for the Company. Accordingly, using the Black-Scholes option
pricing model, $29,581 in consulting expense was recorded to reflect the vesting
of these options through December 31, 2001. During 2002 an additional $48,060 of
deferred consulting fees were amortized and included in promotion expenses, and
another $95,615 in consulting expense was recorded to reflect the vesting of
additional options. However, at the end of 2002 the Company and the stockholder
agreed to cancel one of the marketing contracts and to rescind the as-yet
unearned options. Accordingly, the Company included in promotion expenses an
additional $25,174 of remaining unamortized deferred consulting fees, and
recorded income of $125,197 to reflect the cancellation of the unearned options.
Warrants to Purchase Common Shares: As mentioned above, the Company issued
warrants in connection with its Series B preferred stock offering and in
connection with certain marketing contracts.
In connection with some of the LMB-related unsecured promissory notes, two-year
warrants to purchase a total 562,950 shares of common stock at $2.50 per share
have been issued to the note holders during the two years ended December 31,
2002. Warrants for an additional 97,950 shares have also been issued to the
sales agents. The estimated fair value of the warrants of $264,717, based on
using the Black-Scholes pricing model, was allocated to the warrants and
recorded as a discount to the carrying value of the notes. The discount is being
amortized to interest expense over the estimated term of the notes.
During 2001, the Company issued 10,000 warrants to purchase common shares at
$2.50 per share to independent sales agents, which were valued at $9,236. In
addition, the Company renegotiated and settled certain terms of an outside
consulting contract entered into during 2000. Under the terms of the settlement,
the Company modified the exercise price from $5.00 per share to $2.50 per share
on 50,000 warrants outstanding and issued an additional 15,000 warrants with an
(Continued)
71
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
exercise price of $2.50 per share. In connection with the settlement the Company
recognized $15,696 in expense.
All of the warrants were exercisable at December 31, 2002. The following tables
summarize the warrant activity for 2002 and 2001:
Weighted
Average
Price Exercise
Warrants Range Price
---------- ------------- --------
Balance at December 31, 2000 4,601,382 $1.25 - $5.13 $2.44
Cancelled or expired (268,000) $2.00 - $5.00 $2.60
Issued 1,012,350 $2.50 $2.50
---------
Balance at December 31, 2001 5,345,732 $1.25 - $5.13 $2.44
Cancelled or expired (250,000) $2.50 - $2.85 $2.64
Issued 433,550 $2.00 - $2.50 $2.01
---------
Balance at December 31, 2002 5,529,282 $1.25 - $2.95 $2.00
=========
Long-Term Stock Incentive Plan: Effective March 11, 1999, the Company
established the Buyers United International, Inc. Long-Term Stock Incentive Plan
("the Stock Plan"). The Stock Plan provides for a maximum of 1,200,000 shares of
common stock of the Company to be awarded to participants and their
beneficiaries. A Committee, as determined by the Board of Directors, determines
and designates the eligible participants and awards to be granted under the
Stock Plan. The Committee may grant incentive stock options; non-qualified
options; stock appreciation rights ("SAR"); and on a limited basis, stock
awards. The terms and exercise prices of options and SARs will be established by
the Committee; except that the exercise prices cannot be less than 100 percent
of the fair market value of a share of common stock on the date of grant. As of
December 31, 2002, incentive stock options to purchase a total of 1,194,153
shares of common stock had been granted under this particular plan, and of that
amount, options for 615,347 shares were still outstanding.
Stock Options: The Company's Board of Directors has from time to time authorized
the grant of stock options to directors, officers, key employees, and
consultants as compensation and in connection with obtaining financing. The
following tables summarize the option activity for 2002 and 2001:
(Continued)
72
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
Weighted
Average
Price Exercise
Options Range Price
---------- ------------- --------
Balance at December 31, 2000 3,053,019 $2.00 - $9.00 $2.66
Granted 562,501 $2.50 - $3.50 $2.50
Cancelled or expired (796,935) $2.00 - $5.00 $2.41
---------
Balance at December 31, 2001 2,818,585 $2.00 - $9.00 $2.69
Granted 902,913 $2.00 - $2.50 $2.31
Cancelled or expired (128,777) $2.00 - $9.00 $3.11
---------
Balance at December 31, 2002 3,592,721 $2.00 - $5.39 $2.58
=========
A summary of the options outstanding and options exercisable at December 31,
2002 is as follows:
Options
Options Outstanding Exercisable
--------------------------------------------------- -----------------------
Average Weighted Options Weighted
Range of Remaining Average Exercisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 2002 Price
------------- ----------- ----------- -------- -------------- --------
$2.00 - $3.99 3,352,620 3.2 years $ 2.41 2,896,620 $ 2.41
$4.00 - $5.39 240,101 2.8 years 5.05 240,101 5.05
---------- ----------
3,592,721 3.2 years $ 2.58 3,136,721 $ 2.61
========== ==========
NOTE 9 - RELATED PARTY TRANSACTIONS
During 2002 and 2001, certain board members and stockholders performed various
services to the Company. These services included, but were not limited to,
consulting, marketing and capital and debt raising activities. The Company
incurred $109,259 and $167,000 in fees associated with these services for the
years ended December 31, 2002 and 2001, respectively. Amounts outstanding
related to these services were $14,300 and $31,300 at December 31, 2002, and
2001, respectively.
NOTE 10 - MAJOR SUPPLIERS
Approximately 97% and 84% of the Company's cost of revenue for the years ended
December 31, 2002 and 2001, respectively, was generated from three
telecommunication providers. As of December 31, 2002, the Company owed
$2,748,426 to these providers. The Company has entered into contractual
agreements with these vendors. During 2002 two of these providers had filed for
(Continued)
73
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
bankruptcy protection under Chapter 11, and the other provider is currently
being scrutinized by the Securities and Exchange Commission over certain
accounting matters. Although the Company had not experienced a disruption of
service and feels it could replace any one of these sources with other wholesale
telecommunication service providers, the effect on the Company's operations of
potentially losing any one or all three of these service providers is unknown.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
On June 14, 2001, a lawsuit was filed against Buyers United by Profitec, Inc.,
in New Haven, Connecticut. Profitec asserted that it agreed to perform certain
billing services in 1999 for the Company's telecommunication customers and that
the Company agreed to pay Profitec for such services. Profitec further claimed
that Buyers United breached the contract by terminating the contract and failing
to pay fees allocable under a "liquidated damage" provision for early
termination. Profitec claimed damages in excess of $140,000, based upon the
contract's liquidated damage provisions. The Company filed a general denial
answer and asserted affirmative defenses, including breach of contract, failure
of consideration, and other issues. It also filed a counter claim seeking
damages for Profitec's breach of the contract. In November 2001, Profitec
answered and denied the counter-claim. An out-of-court settlement was reached on
October 17, 2002 in which the Company agreed to pay $17,500.
In June 2001, Buyers United entered into a joint sales agreement with Infotopia,
Inc., a direct response marketer. In connection with the agreement, Infotopia
loaned $500,000 to Buyers United. Subsequent to entering into the sales
agreement, the two companies decided not to pursue further any joint activity.
In December 2001, Buyers United negotiated a settlement of the $500,000 loan in
which Buyers United paid $120,000 and issued 35,000 shares of common stock in
exchange for canceling the outstanding obligation plus $25,921 in accrued
interest. The stock had a fair market value of $22,401. Accordingly, based on
these amounts, the Company recorded a gain on the early extinguishments of the
debt in the amount of $383,520. However, unbeknownst to Buyers United, during
2001 Infotopia allegedly entered into a General Security Agreement with Sea
Spray Holdings, Ltd., which purportedly included the loan obligation. By letter
dated November 22, 2002, Sea Spray asserted that it had a perfected security
interest in the obligation and demanded payment as successor-in-interest to
Infotopia. The Company responded that Sea Spray did not have a perfected
security interest since it did not take possession of the note evidencing the
obligation, and that the obligation was fully discharged under applicable
provisions of the Uniform Commercial Code. On February 21, 2003 Buyers United
filed with the American Arbitration Association a Demand for Arbitration and
Statement of Claim in order to resolve the dispute. On March 11, 2003 Sea Spray
filed an action against Buyers United in the Supreme Court for the State of New
York, County of New York, case number 104468/03, seeking to enforce its security
interest in the Infotopia note obligation through collection of the Note, and
obtained an order to show cause why the arbitration proceeding we instigated
should not be stayed in favor of resolving the dispute in the state court
proceeding. Before the stay issue was heard by the state court, Buyers United
removed the entire action to the Federal District Court, Southern District of
(Continued)
74
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
New York, and it intends to file a motion to dismiss the action in favor of
proceeding with arbitration in Utah. The Company intends to defend this claim
vigorously, but cannot predict at this time how the dispute will eventually
resolve.
On March 20, 2002, a shareholder filed a civil lawsuit in Salt Lake County
alleging that in mid-2000 Buyers United had offered to sell him 150,000 shares
in the corporation for $300,000, and that it represented it had received certain
funds for promotion. The shareholder alleged that no such funds were available,
that consequently the value of his shares were reduced, and that he was seeking
rescission of the stock purchase. The Company filed an answer to the complaint
denying the allegations and raising various affirmative defenses. The
shareholder was then to initiate dates for discovery and other procedures, but
so far has failed to do so and has not otherwise made certain mandatory
disclosures under Utah law. Buyers United categorically denies the shareholder's
allegations, denies making misrepresentations of any kind, and asserts the
shareholder's claims are baseless. Furthermore, it believes that regardless of
any such alleged claims, the shareholder has suffered no actual damages, and
intends to vigorously defend the case in the event the shareholder resumes the
discovery process.
Buyers United is the subject of certain other legal matters, which it considers
incidental to its business activities. It is the opinion of management, after
discussion with legal counsel, that the ultimate disposition of these other
matters will not have a material impact on the financial position, liquidity or
results of operations of Buyers United.
NOTE 12 - SUBSEQUENT EVENTS
In January and February 2003, the Company received $500,000 from the issuance of
promissory notes payable, $400,000 of which came from three Directors of the
Company. The unsecured notes bear interest at 12% and are due in 2004 through
early 2005.
On February 28, 2003, the Company retired its $1,050,000 note payable by paying
$250,000 in cash, issuing a new promissory note for $800,000, and issuing 50,000
shares of common stock in connection with the original agreement. The new note
is unsecured and bears interest at 10%, payable monthly. Principal payments are
to be made in a manner similar to the Company's other promissory notes related
to customers referred to the Company by LowerMyBills, Inc. In this case, monthly
principal payments will equal 20% of specifically-designated customers' billings
collected during the preceding calendar month.
On January 15, 2003, the Company issued 15,000 shares of stock to one of its
directors for providing a credit guaranty to one of its wholesale
telecommunication service providers. The fair market value of the stock was
$36,300.
(Continued)
75
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 13 - GAIN ON EXTINGUISHMENT OF DEBT
Subsequent to the issue of the December 31, 2002 financial statements, on
January 1, 2003, the Company adopted SFAS No. 145, which rescinded SFAS No. 4,
Reporting Gains on Losses from Extinguishment of Debt. As a result of this
adoption, and as required by SFAS No. 145, the Company restated the December 31,
2001 statement of operations to reclassify the settlement gain in the amount of
$383,520 from extraordinary item to other income.
76
TABLE OF CONTENTS
Prospectus Summary 2
Risk Factors 3
Information About Buyers United 7
Use of Proceeds 8 BUYERS UNITED, INC.
Market for Common Stock 8
Dividend Policy 8 8,779,333 Common Shares
Capitalization 9 $0.0001 Par Value
Management's Discussion and Analysis
of Operating Results and Financial
Condition 9
Business 14 -----------------------
Legal Proceedings 23 REOFFER PROSPECTUS
Management 24 -----------------------
Compensation 25
Principal Stockholders 28
Certain Relationships and Related
Transactions 30
Description of Capital Stock 32
Plan of Distribution 36
Selling Security Holders 37
Legal Matters 39
Experts 39
Additional Information 39
Index to Financial Statements 41
No person has been authorized to give
any information or to make any
representations other than those
contained in this prospectus and, if
given or made, such information or
representations must not be relied
upon as having been authorized by us.
This prospectus does not constitute
an offer to sell or a solicitation of
an offer to buy any of the securities
offered to whom it is unlawful to make
such offer in any jurisdiction.
Neither the delivery of this prospectus ___________________ 2003
nor any sale made shall, under any
circumstances, create any implication
that information contained in this
prospectus is correct as of any time
subsequent to the date of this
prospectus or that there has been no
change in the affairs of Buyers United
since such date.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Buyers United's Charter provides that, to the fullest extent that
limitations on the liability of directors and officers are permitted by the
Delaware General Corporation Law (the "DGCL"), no director or officer of Buyers
United shall have any liability to Buyers United or its stockholders for
monetary damages. The DGCL provides that a corporation's charter may include a
provision which restricts or limits the liability of its directors or officers
to the corporation or its stockholders for money damages except: (1) to the
extent that it is provided that the person actually received an improper benefit
or profit in money, property or services, for the amount of the benefit or
profit in money, property or services actually received, or (2) to the extent
that a judgment or other final adjudication adverse to the person is entered in
a proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Buyers United's
Charter and Bylaws provide that Buyers United [shall] indemnify and advance
expenses to its currently acting and its former directors to the fullest extent
permitted by the DGCL and that Buyers United shall indemnify and advance
expenses to its officers to the same extent as its directors and to such further
extent as is consistent with law.
The Charter and Bylaws provide that Buyers United will indemnify its
directors and officers and may indemnify employees or agents of Buyers United to
the fullest extent permitted by law against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with Buyers United. However, nothing in the Charter or Bylaws of Buyers
United protects or indemnifies a director, officer, employee or agent against
any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. To the extent that a director has been
successful in defense of any proceeding, the DGCL provides that he shall be
indemnified against reasonable expenses incurred in connection therewith.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
registration statement. We will pay all expenses of the offering. All of such
expenses are estimates, other than the filing fees payable to the Securities and
Exchange Commission and NASD.
Securities and Exchange Commission Filing Fee $ 1,815
NASD Filing Fee 2,740
Printing Fees and Expenses 25,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 80,000
Blue Sky Fees and Expenses 50,000
Trustee's and Registrar's Fees -0-
Miscellaneous 50,445
TOTAL $ 310,000
I
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In September 2000, Buyers United issued promissory notes in the principal
amount of $1,200,000 and 600,000 common stock purchase warrants to 28 accredited
investors in reliance on the exemptions from registration set forth in Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D. Based on
information provided by the investors, Buyers United believes each investor is
an accredited investor and each investor had access to information that would
enable it to make an informed decision regarding an investment in Buyers United.
The promissory notes were subsequently exchanged for Series B Convertible
Preferred Stock of Buyers United. The common stock purchase warrants issued to
the promissory note investors are exercisable through December 31, 2005 at an
exercise price of $2.50 per share. First Level Capital, Inc., the sales agent
for the offering, received a commission of $120,000, a non-accountable expense
allowance of $36,000, and a warrant to purchase 120,000 shares of Buyers
United's common stock at an exercise price of $2.50 per share.
In September 2000, Buyers United entered into a unit sales agreement with
First Level Capital, Inc., a stock brokerage firm, providing for the sale of up
to 1,234,500 units, each unit consisting of one share of Series B Convertible
Preferred Stock and five common stock purchase warrants at an offering price of
$10.00 per unit or a total of $12,345,000. Loans in the amount of $2,545,000
were exchanged in the offering for 254,500 units. An additional 309,930 units
were sold for cash of $3,099,300 from October 2000 through February 2001. The
units were sold to 69 accredited investors (as defined in Rule 501 of Regulation
D) in reliance on Rule 506 of Regulation D. Each share of Series B preferred
stock is convertible to five shares of common stock, subject to adjustment under
certain circumstances. Each warrant included in the units entitles the holder to
purchase one share of common stock at an exercise price of $2.50 per share and
expire in December 2002. As commissions and expenses for placement of the loans
exchanged and the units, First Level Capital received cash payments of $476,840
and warrants to purchase 351,800 shares of common stock on terms identical to
the warrants except that the term was for five years instead of two. The terms
of the warrants were subsequently amended to extend the exercise period to
December 2004, and to reduce the exercise price to $2.00 per share.
On March 12, 2001, Buyers United entered into three-year marketing
contracts with Karl and Kay Malone. Under the terms of the contracts, 100,000
shares of common stock were issued to them. The value of the shares was recorded
at that day's market trading price of $1.25, or $125,000. The shares were issued
in reliance on the exemptions from registration set forth in Section 4(2) of the
Securities Act of 1933. Based on information provided by the Malones, Buyers
United believes them to be accredited investors and they had access to
information that would enable them to make an informed decision regarding an
investment in Buyers United.
During the last half of 2001, preferred stock dividends amounted to
$378,316, consisting of $150,942 on outstanding shares of Series A Preferred
Stock, and $227,374 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 374,534 shares of common stock to
the holders of the preferred stock in February 2002.
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. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
II
From January 2001 through February 2003, Theodore Stern, an officer and
director, made a number of loans to Buyers United and provided his personal
guarantee on four separate obligations of Buyers United. We issued shares of
common stock to Mr. Stern in consideration for providing the financing and
credit enhancements. See the discussion in the prospectus above under the
caption "Certain Relationships and Related Transactions" for a description of
these transactions. As a result of the transactions, Mr. Stern holds notes from
Buyers United in the principal amount of $2,908,349 and received a total of
515,500 shares of common stock valued, on the basis of market price, at
$474,349. The shares were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.
During October and November 2001, Buyers United sold promissory notes in
the total principal amount of $825,000 to 10 accredited investors in reliance on
the exemptions from registration set forth in Section 4(2) of the Securities Act
of 1933. Based on information provided by the investors, Buyers United believes
each investor is an accredited investor and each investor had access to
information that would enable it to make an informed decision regarding an
investment in Buyers United. The funds were obtained to fund acquisition of new
customer referrals from an unaffiliated comparison-shopping service and for
working capital. In addition, each note holder received a two-year warrant to
purchase shares of common stock at an exercise price of $2.50 per share. The
amount of warrants issued equaled 26% of the note proceeds. vFinance
Investments, Inc., acted as agent for the Company in the placement of the notes,
and was paid commissions equaling 5% of the loan proceeds and two-year common
stock purchase warrants equaling 3% of the loan proceeds.
In February 2002, Buyers United sold promissory notes in the total
principal amount of $350,000 to two accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund for working capital. In addition, each note holder received a two-year
warrant to purchase shares of common stock at an exercise price of $2.50 per
share. The amount of warrants issued equaled 19% of the note proceeds. vFinance
Investments, Inc., acted as agent for the Company in the placement of the notes,
and was paid commissions equaling 3.6% of the loan proceeds and two-year common
stock purchase warrants equaling 2% of the loan proceeds.
During April and May 2002, Buyers United sold promissory notes in the total
principal amount of $1,915,000 to 19 accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund acquisition of new customer referrals from an unaffiliated
comparison-shopping service and for working capital. In addition, each note
holder received a two-year warrant to purchase shares of common stock at an
exercise price of $2.50 per share. The amount of warrants issued equaled 10% of
the note proceeds. vFinance Investments, Inc., acted as agent for the Company in
the placement of the notes, and was paid commissions equaling 5% of the loan
proceeds, an additional 2% of revenues collected monthly from the new customers,
and two-year common stock purchase warrants equaling 3% of the loan proceeds.
During the first half of 2002, preferred stock dividends amounted to
$372,037, consisting of $148,370 on outstanding shares of Series A Preferred
Stock, and $223,667 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 200,101 shares of common stock to
the holders of the preferred stock in August 2002.
III
In December 2002, Buyers United issued an unsecured promissory note for
$250,000 to an investor for the purpose of continuing to fund referral fees paid
to an unrelated Internet marketing company. The note bears interest at 12%,
payable monthly. vFinance Investments, Inc. acted as agent for us in the
placement of the note and was paid commissions of five percent of the loan
proceeds, plus 7,500 warrants to purchase one share of common stock. The
investor is a previous investor in the debt and equity securities of Buyers
United and Buyers United believes the investor to be accredited within the
meaning of Rule 501 of Regulation D, so the note was issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
In December of 2002 Buyers United sold promissory notes in the total
principal amount of $3,187,500 to 36 accredited investors in reliance on the
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933 and Rule 506 of regulation D. Based on information provided by the
investors, Buyers United believes each investor is an accredited investor and
each investor had access to information that would enable it to make an informed
decision regarding an investment in Buyers United. The funds were obtained to
fund acquisition of new customer accounts from Touch America and for working
capital. vFinance Investments, Inc., acted as agent for the Company in the
placement of the notes, and was paid commissions equaling 5% of the loan
proceeds and an additional 1.8% of revenues collected monthly from the new
customers.
In February 2003 Buyers United retired a note payable to George Brimhall in
the principal amount of $1,050,000 by paying to Mr. Brimhall $250,000 in cash,
issuing to him a new promissory note in the principal amount of $800,000, and
issuing to him 50,000 shares of common stock. The new note for $800,000 is
unsecured and bears interest at the rate of 10% per annum payable monthly.
Principal is also payable monthly based on 20% of billings collected during each
monthly billing period from designated customers. The investor is a previous
investor in the debt and equity securities of Buyers United and Buyers United
believes the investor to be accredited within the meaning of Rule 501 of
Regulation D, so the note was issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
During the last half of 2002, preferred stock dividends amounted to
$377,688, consisting of $150,797 on outstanding shares of Series A Preferred
Stock, and $226,891 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 199,951 shares of common stock to
the holders of the preferred stock in February 2003.
In June of 2003 Buyers United sold promissory notes in the total principal
amount of $1,400,000 to 23 accredited investors in reliance on the exemptions
from registration set forth in Section 4(2) of the Securities Act of 1933 and
Rule 506 of regulation D. Based on information provided by the investors, Buyers
United believes each investor is an accredited investor and each investor had
access to information that would enable it to make an informed decision
regarding an investment in Buyers United. The funds were obtained to fund
acquisition of new customer accounts from Touch America and for working capital.
vFinance Investments, Inc., acted as agent for the Company in the placement of
the notes, and was paid commissions equaling 5% of the loan proceeds and an
additional 1.5% of revenues collected monthly from the new customers.
During the first half of 2003, preferred stock dividends amounted to
$397,088, consisting of $147,973 on outstanding shares of Series A Preferred
Stock, and $249,115 on outstanding shares of Series B Preferred Stock. These
dividends were paid through the issuance of 227,145 shares of common stock to
the holders of the preferred stock in August 2003.
IV
In May and June 2003, Buyers United issued an promissory notes in the
aggregate amount of $500,000 to three investors for the purpose of acquiring
certain equipment. The note bears interest at 12%, payable monthly and are
secured by the equipment acquired. The promissory notes are convertible to
common stock of Buyers United at the rate of $2.00 of principal per share.
vFinance Investments, Inc. was paid commissions of $15,000 on the placement of
$300,000 of the notes, and U.S. Capital Partners, Inc. was paid commissions of
$10,000 on the placement of $200,000 of the notes. The investors are previous
investors in the debt and equity securities of Buyers United and Buyers United
believes the investors to be accredited within the meaning of Rule 501 of
Regulation D, so the notes was issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
ITEM 27. EXHIBITS.
The following documents are included as exhibits to this registration
statement.
Exhibit Title of Document Location
No.
3.1 Certificate of Incorporation *
3.2 Certificate of Designation of Preferred Stock *
3.3 Series B Preferred Stock Designation **
3.4 By-Laws *
4.1 Form of Registration Rights Agreement **
4.2 Form of Warrant issued to bridge lenders in 2000 **
4.3 Form of Warrant issued as part of units with **
Series B Preferred Stock
4.4 Form of Warrant issued to Note Purchasers in E-1
Oct/Nov 2001
4.5 Form of Warrant issued to Note Purchasers in E-5
Apr/May 2002
4.6 Form of Stock Option Agreement used prior to June E-9
1999
4.7 Form of Stock Option Agreement used after June 1999 E-13
4.8 Promissory Note issued to Ina Fabbri dated May 28, E-23
2003
4.9 Promissory Note issued to Rosalind Markel dated E-28
June 10, 2003
4.10 Form of Warrant issued to vFinance Investments as E-33
compensation for private placements in 2002, as
assigned to its affiliates and employees
4.11 Form of Convertible Notes issued to Edward Dallin E-37
Bagley on November 1 and December 1, 2002
V
4.12 Form of Convertible Notes issued to Edward Dallin E-40
Bagley, E. Bryan Bagley, and Theodore Stern on
December 20, 2002 and January 1, 2003
4.13 Form of Convertible Notes issued to Theodore Stern E-44
in December 20, 2001 and January 2002
4.14 Warrant Issued to Wall Street Group, Inc., as E-48
amended
5.1 Opinion on Legality See Exhibit 23.1
10.1 Asset Purchase Agreement dated December 6, 2002, ***
with I-Link Communications, Inc. and I-Link
Incorporated, without exhibits
10.2 Asset Purchase Agreement dated December 20, 2002 ***
with Touch America, Inc., without exhibits
10.3 Amendment No. 1 to the Asset Purchase Agreement ****
dated December 20, 2002 that was made June 6, 2003
by Buyers United and Touch America
10.4 Promissory Note issued to Mulkey II Limited E-53
Partnership dated May 19, 2003
23.1 Opinion and Consent of Cohne, Rappaport & Segal, PC E-56
23.2 Consent of Crowe, Chizek and Company LLP E-58
24.1 Power of Attorney E-59
--------------------------
* These exhibits are incorporated herein by this reference to the Registration
Statement on Form 10-SB filed by Buyers United with the Securities and Exchange
Commission on August 3, 1999.
** These exhibits are incorporated herein by this reference to the annual report
on Form 10-KSB for the year ended December 31, 2000 filed April 10, 2001.
*** These exhibits are incorporated herein by this reference to the annual
report on Form 10-KSB for the year ended December 31, 2002 filed April 14, 2003.
**** This exhibit is incorporated herein by this reference to the quarterly
report on Form 10-QSB for the quarter ended June 30, 2003 filed August 14, 2003.
ITEM 28. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
VI
(i) Include any prospectus required by Section 10 (a) (3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth in
the Registration Statement, and notwithstanding the forgoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospects filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information with
respect to the plan of distribution.
2. That for the purpose of determining any liability under the Securities
Act, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issuer.
VII
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement or amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in Bluffdale, Utah, on
September 5, 2003.
BUYERS UNITED, INC.
By /s/ Theodore Stern, Chief Executive Officer
By /s/ David R. Grow, Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
/s/ Theodore Stern, Director Date: September 5, 2003
/s/ Gary Smith, Director Date: September 5, 2003
/s/ Edward Dallin Bagley, Director Date: September 5, 2003
/s/ Steve Barnett, Director Date: September 5, 2003
VIII