U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-26917
BUYERS UNITED, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 87-0528557
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
14870 Pony Express Road, Bluffdale, Utah 84065
(Address of principal executive offices)
(801) 320-3300
(Issuer's telephone number)
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes[X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity: 5,730,161 of common stock as of May 1, 2002.
Transitional Small Business Format: Yes [ ] No [ X ]
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash $155,431 $57,100
Restricted cash 657,291 690,312
Accounts receivable, net 2,516,241 2,271,873
Other current assets 677,015 282,240
---------- ----------
Total current assets 4,005,978 3,301,525
Property and equipment, net 613,283 652,576
Debt issuance cost, net 24,235 187,756
Other assets, net 523,575 189,885
---------- ----------
Total assets $5,167,071 $4,331,742
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Checks drawn in excess of available cash
balances $- $186,866
Line of credit 527,412 574,172
Current portion of long-term debt 2,334,055 1,002,641
Accounts payable 4,165,616 3,879,517
Accrued liabilities 630,236 525,023
Accrued commissions and rebates 378,837 324,778
Accrued dividends payable on preferred stock 186,018 378,316
---------- ----------
Total current liabilities 8,222,174 6,871,313
Long-term liabilities:
Long-term debt, net of current portion 2,744,998 3,615,000
---------- ----------
Total liabilities 10,967,172 10,486,313
---------- ----------
Stockholders' deficit:
Preferred stock 244 244
Common stock 573 531
Additional paid-in capital 15,631,426 15,190,855
Warrants and options outstanding 4,443,569 4,383,334
Deferred consulting fees (84,794 (98,406)
Accumulated deficit (25,791,119) (25,631,129)
---------- ----------
Total stockholders' deficit (5,800,101) (6,154,571)
---------- ----------
Total liabilities and stockholders'
deficit $5,167,071 $4,331,742
========== ==========
See accompanying notes
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
Revenues:
Telecommunications services $4,801,608 $2,919,717
Other 25,702 21,022
--------- ---------
Total revenues 4,827,310 2,940,739
--------- ---------
Operating expenses:
Costs of revenues 2,500,566 1,989,844
General and administrative 1,133,233 1,554,649
Selling and promotion 865,043 726,580
--------- ---------
Total operating expenses 4,498,842 4,271,073
--------- ---------
Income (loss) from operations 328,468 (1,330,334)
--------- ---------
Other income (expense):
Interest income 804 5,251
Interest expense (303,244) (187,374)
Total other expense, net (302,440) (182,123)
--------- ---------
Net income (loss) $26,028 $(1,512,457)
========= =========
Preferred stock dividends:
8% dividends on Series A and B preferred stock (186,018) (180,321)
Beneficial conversion feature related to Series B
preferred stock - (20,498)
Total preferred stock dividends (186,018) (200,819)
--------- ---------
Net loss applicable to common stockholders $(159,990) $(1,713,276)
========= =========
Net loss per common share:
Basic and diluted $(0.03) $(0.42)
========= =========
Weighted average common shares outstanding:
Basic and diluted 5,477,323 4,127,397
========= =========
See accompanying notes
BUYERS UNITED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $26,028 (1,512,457)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 166,945 248,807
Interest expense resulting from
issuing stock and warrants with
notes 12,749 66,498
Amortization of discount on notes
payable - 1,387
Amortization of note financing costs 61,150 41,280
Amortization of deferred consulting
fees 13,612 4,933
Services rendered in exchange for
shares of common stock - 6,181
Expense related to the grant of
options to purchase common shares 4,353 1,992
Changes in operating assets and
liabilities:
Restricted cash 33,021 (3,137)
Accounts receivable (244,368) (166,106)
Other assets (603,836) 23,385
Checks in excess of available
cash balances (186,866) -
Accounts payable 286,099 312,278
Accrued commissions and rebates 54,059 17,554
Accrued liabilities 121,211 (135,911)
--------- ---------
Net cash used in operating
activities (255,843) (1,093,316)
--------- ---------
Cash flows from investing activities:
Decrease (increase) in other assets (14,950) 18,000
Purchases of property and equipment (71,027) (165,549)
--------- ---------
Net cash used in
investing activities (85,977) (147,549)
--------- ---------
Cash flows from financing activities:
Net borrowings and payments under line of
credit (46,760) -
Borrowings under notes payable, net of debt
issuance costs 696,500 390,000
Principal payments on notes payable (143,874) (19,465)
Principal payments on capital lease
obligations (65,715) (74,733)
Issuance of preferred/common shares for
cash, net of offering costs - 1,097,223
--------- ---------
Net cash provided by
financing activities 440,151 1,393,025
--------- ---------
Net increase in cash 98,331 152,160
Cash at the beginning of the period 57,100 56,825
--------- ---------
Cash at the end of the period $155,431 $208,985
========= =========
Supplemental cash flow information:
Cash paid for interest $101,461 $68,775
Supplemental schedule of noncash investing and
financing activities:
Issuance of common shares in payment of
preferred stock dividend $378,316 $223,896
Issuance of common shares in payment of
deferred services - 125,000
Issuance of common shares in payment of
deferred financing costs 49,548 -
Issuance of warrants with promissory notes 55,882 -
Beneficial conversion dividend on Series B
preferred shares - 20,498
Accrual of dividend payable on preferred
stock 186,018 180,321
See accompanying notes
BUYERS UNITED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(unaudited)
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, 2001.
2. Long-term Debt
During the three months ended March 31, 2002, the Company issued a $100,000
unsecured note payable to the Chairman of the Board which bears interest at
12% with both principal and interest due July 5, 2003.
The Company issued $79,998 in unsecured notes payable to three officers of
the Company that bear interest at 12% which is payable monthly with the
principal due July 5, 2003.
The Company also issued $550,000 in unsecured promissory notes bearing
interest at 10% to 12%, payable monthly. Principal payments are due monthly
based on 38% to 40% of billings collected from specifically identified
customers. After the notes' principal balance is paid in full, the Company
will continue to remit a percentage of the billings collected from these
customers but the percentage will be reduced to 18% to 20%. These payments
will continue as long as the customers continue purchasing long distance
services from the Company. 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.
3. Capital Transactions
During the last half of 2001, preferred stock dividends amounted to $378,316,
consisting of $150,942 on outstanding shares of Series A 8% cumulative
convertible preferred stock, and $227,374 on outstanding shares of Series B
8% cumulative convertible 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, the Company issued 7,998 shares to three officers in
consideration of notes payable in the amount of $79,998. The value of the
shares was $8,798.
On January 18, 2001, the Company issued 10,000 shares to Theodore Stern, the
Company's CEO and Chairman of the Board of Directors, in consideration of a
note payable in the amount of $100,000. The value of the shares was $10,000.
On February 15, 2002, the Company issued 25,000 shares to Mr. Stern in
consideration of him granting a $250,000 guaranty to MCI WorldCom, Inc. on
behalf of Buyers United in connection with the Company entering in to a
resale contract. The value of the shares was $30,750.
4. Subsequent events
During April and the first part of May 2002, the Company entered into loan
agreements with several individuals aggregating $1,715,000. Under the terms
of the agreements, the proceeds can be used for working capital or to partake
in a direct response advertising campaign with an unrelated comparison
shopping service to solicit new customers. The loans have a stated interest
rate of 10%, and are to be repaid using a portion of collected revenues from
specifically-designated new customers. After all principal and interest is
repaid, the note holder will retain a 18% residual for as long as the
specific customers remain active Buyers United customers. 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. The Company is pursuing additional loan
opportunities with additional individuals under similar terms.
Item 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Buyers United is engaged in the business of selling telecommunication services
to business and residential customers. The Company utilizes a two-brand
marketing strategy to better target its audience: United Carrier Networks (or
"UCN") for businesses, and BuyersOnline for residential consumers. The use of
these two distinct brands allows Buyers United to meet the needs of two
disparate customer groups without compromising margins or creating channel
conflicts.
United Carrier Networks offers significant benefits to the business consumer.
First, UCN buys from multiple carriers such as WorldCom, Qwest and Global
Crossing. This unique strategy gives business customers optimal pricing while
providing the security of redundancy. UCN makes customer service simple
through its "single point of contact" approach. Other customized services
include precise 4-decimal billing, 6-second rounding and online account
management. UCN tailors its services to meet the unique and specific
requirements of a variety of businesses.
The Company markets to residential customers through its BuyersOnline brand.
BuyersOnline has a number of online marketing partners that help it acquire up
to thousands of residential customers per month. Once a consumer signs up for
long distance service, they become eligible to participate in the BuyersOnline
rebate programs designed to help them further reduce their long distance bill
each month. These rebate programs are simple to use and create a long-term
potential benefit for each residential customer.
Buyers United focuses on developing cost-effective sales channels and long-term
customer relationships. Management believes that in order to succeed in a
rapidly growing industry, it must focus on building a strong relationship with
its customers. Accordingly, Buyers United has created several methods for
understanding and communicating with its customer base. These innovations have
helped Buyers United minimize the attrition of customers.
RESULTS OF OPERATIONS
Total revenues from telecommunications and other services increased 64% to
$4.82 million for the three months ended March 31, 2002 as compared to $2.94
million for the same period in 2001. The increases are due to higher
membership in general resulting from the Company's ongoing promotional efforts,
primarily involving independent agents and referrals from an online shopping
comparison service.
Costs of revenues for the three-month period ended March 31, 2002 were $2.50
million, a 26% increase as compared to $1.99 million incurred during the
comparable three-month period for the prior year. Such costs as a percentage
of revenue were 52% during 2002 as compared to 68% during 2001. The higher
gross margins resulted from the Company obtaining better costs from its
carriers, along with an increase in sales to residential customers which
ordinarily earn higher gross margins.
Total operating expenses other than costs of revenues were 12% lower during the
quarter ended March 31, 2002 as compared to the same period of 2001.
General and administrative costs in 2002's first quarter decreased 27% to
$1.13 million compared to $1.55 million in 2001. The decrease resulted in
part from lower compensation costs incurred after the Company reduced
employee levels in June 2001. In addition, certain occupancy and
maintenance costs were lower stemming from the cancellation of an
equipment lease during the third quarter of 2001.
Selling and promotion expenses increased 19% to $865,043 during the first
quarter of 2002 from $726,580 in 2001. The increase resulted from the
proportionate higher commission amounts paid on higher revenue.
Offsetting a portion of the 2002 increase was the fact that during 2001
the Company incurred celebrity contract renewal costs in connection with
an infomercial marketing tool that was originally planned to air in 2001.
No such corresponding costs were incurred during 2002.
Interest income was $804 for the quarter ended March 31, 2002. This compares
to $5,251 earned during the comparable period of 2001. The decrease resulted
from larger cash balances on hand during 2001 than during 2002, attributable to
the Series B preferred stock offerings completed during 2000's fourth quarter.
Interest expense for the three months ended March 31, 2002 included $73,900 of
amortization of note financing costs, along with issuing shares of common stock
in connection with notes payable, compared to $107,779 for the quarter ended
March 31, 2001. Excluding these amounts for both periods, interest expense
would have been $229,344 for 2002 as compared to $79,595 for 2001. The
increase resulted from higher balances outstanding in 2002 on notes payable to
one of the members of the Company's board of directors, and promissory notes
issued during the fourth quarter of 2001. The Company also established a line
of credit during June 2001.
As a result of the above factors, the Company earned overall net income before
Preferred Stock Dividends of $26,028 during the quarter ended March 31, 2002,
as compared to a net loss of $1.51 million for the same period during 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio at the end of March 31, 2002 increased slightly to
0.49:1 from 0.48:1 at the end of 2001. The components of current assets and
current liabilities that changed significantly since the end of 2001 were other
current assets, the current portion of long-term debt, and accrued liabilities.
Other current assets increased 140% since the end of December 2001. The
increase was due primarily to higher capitalized amounts associated with the
Company's direct financing campaign that are expected to be recovered during
the next twelve months. The current portion of long-term debt rose 133% mainly
because the entire balance of the $1.05 million promissory note, due February
28, 2003, was reclassified from a "long-term" to a "current" liability.
Accrued liabilities increased 20% primarily due to an increase in accrued
interest expense owed to the Chairman of the Board on his promissory notes that
were amended in the fourth quarter of 2001 to defer any further interest
payments until the principal maturity date of July 2003. Accrued dividends
decreased due to the Company's semi-annual dividend payment made during
February by issuing shares of common stock.
The Company has a line of credit agreement with RFC Capital Corporation
("RFC"). The facility allows the Company to finance up to $2.5 million based
on the Company's eligible accounts receivable. The facility bears interest at
a rate of prime plus 6%. The facility allows the Company to borrow against
unbilled receivables as well as finance regular monthly billings. The
agreement expires in June 2002, and on April 10, 2002, the Company agreed to
renew the agreement for another two years beyond that date. At March 31, 2002,
the Company had financed the maximum amount available based on eligible
accounts receivable at that time, which amounted to $527,412. This agreement
also requires the Company to maintain a restricted cash account for the
collection of the Company's receivables. As of March 31, 2002 the Company had
$657,291 of restricted cash primarily relating to the RFC agreement.
As of March 31, 2002, the Company had a $1,050,000 note payable to an
individual bearing interest at 18%, payable monthly. On March 13, 2002, the
noteholder agreed to extend the maturity date of the note to February 28, 2003.
The note provides a conversion feature whereby the holder may convert the note
into common stock at $2.50 per share. The note also provides that 50,000
shares of common stock will be issued to the noteholder at maturity. Should
the note be prepaid, 100,000 shares are to be issued.
At March 31, 2002 the Company had several unsecured promissory notes payable to
a member of the Company's Board of Directors totaling $2,665,000. All but one
of the notes (for $400,000) bear interest at a rate of 12%, with interest
payable upon maturity. The $400,000 note, along with the noteholder's personal
guaranty, originated in connection with securing more favorable rates with
certain of the Company's telecommunication providers. Accordingly, based on
savings in terms of these costs, interest on this note is calculated based on
the monthly vendor billings incurred by the Company, not to exceed $15,000 per
month, payable monthly. All the notes mature on July 5, 2003. During the
first quarter of 2002, the Company also issued $79,998 in unsecured promissory
notes payable to three Company officers. The notes mature in July 2003 and
bear interest at 12%, payable monthly.
During October and November of 2001, the Company raised $825,000 via promissory
notes to raise working capital and to take part in a service from an unrelated
comparison shopping service to solicit new customers. All the notes carry
essentially the same terms. They are unsecured and bear interest at 12%,
payable monthly. Principal is also payable monthly, based on 20% of billings
collected during each monthly billing period from specifically designated
existing customers or from any new customers that subscribed via the on-line
shopping service in which the shopping services fee was paid from the proceeds.
Inasmuch as principal payments could vary over time, the Company believes the
principal will be repaid over a period of approximately one year from the time
the notes were issued. Accordingly, the entire $702,374 outstanding at March
31, 2002 is classified as current on the accompanying balance sheet.
During the first quarter of 2002, Buyers United issued $550,000 in notes
payable. Then during April and May 2002 the Company issued an additional
$1.715 million in promissory notes. Similar to the notes issued during 2001,
principal is to be repaid out of collected billings from new customers
generated through the online shopping service. With respect to these 2002
notes, 38% to 40% of the new customer billings are to be reserved for principal
repayment, depending on the particular note agreement. However, only half the
note proceeds are to be used for this service, the rest being allocated for
working capital purposes, as needed. These notes bear interest at 10% to 12%
and interest and principal payments are due monthly.
Up through the end of 2001, the Company had experienced recurring losses from
operations. As of March 31, 2002, the Company had a working capital deficit of
$4.2 million and an accumulated deficit of $25.8 million. Although the Company
achieved profitability and generated cash from operations during its first
quarter ended March 31, 2002, the foregoing 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. The Company is currently experiencing significant revenue
growth and has seen the results of several cost-reduction initiatives begun in
2001. While there can be no assurance that such will be the case, management
is confident that the trend of revenue increases will continue, and that the
Company will continue to be profitable during the rest of the 2002 year.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1985 provides a safe harbor for
forward-looking statements made by BuyersOnline, except where such statements
are made in connection with an initial public offering. All statements, other
than statements of historical fact, which address activities, actions, goals,
prospects, or new developments that BuyersOnline expects or anticipates will or
may occur in the future, including such things as expansion and growth of its
operations and other such matters are forward-looking statements. Any one or a
combination of factors could materially affect BuyersOnline's operations and
financial condition. These factors include competitive pressures, success or
failure of marketing programs, changes in pricing and availability of services
and products offered to members, legal and regulatory initiatives affecting
member marketing and rebate programs or long distance service, and conditions
in the capital markets. Forward-looking statements made by BuyersOnline are
based on knowledge of its business and the environment in which it operates as
of the date of this report. Because of the factors listed above, as well as
other factors beyond its control, actual results may differ from those in the
forward-looking statements.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There was no change in any existing legal proceedings during the quarter ended
March 31, 2002.
Item 2. CHANGES IN SECURITES AND USE OF PROCEEDS
During the last half of 2001, preferred stock dividends amounted to $378,316,
consisting of $150,942 on outstanding shares of Series A 8% cumulative
convertible preferred stock, and $227,374 on outstanding shares of Series B 8%
cumulative convertible 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, the Company issued 7,998 shares to three officers in
consideration of notes payable in the amount of $79,998. The value of the
shares was recorded at that day's market trading price of $1.10 per share, or
$8,798.
On January 18, 2001, the Company issued 10,000 shares to Theodore Stern, the
Company's CEO and Chairman of the Board of Directors, in consideration of a
note payable in the amount of $100,000. The value of the shares was recorded
at that day's market trading price of $1.00 per share, or $10,000.
On February 15, 2002, the Company issued 25,000 shares to Mr. Stern in
consideration of him granting a $250,000 guaranty to MCI WorldCom, Inc. on
behalf of Buyers United in connection with the Company entering in to a resale
contract. The value of the shares was recorded at that day's market trading
price of $1.23 per share, or $30,750.
The Company also issued $550,000 in unsecured promissory notes bearing interest
at 10% to 12%, payable monthly. Principal payments are due monthly based on
38% to 40% of billings collected from specifically identified customers. After
the notes' principal balance is paid in full, the Company will continue to
remit a percentage of the billings collected from these customers but the
percentage will be reduced to 18% to 20%. These payments will continue as long
as the customers continue purchasing long distance services from the Company.
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.
During April and the first part of May 2002, the Company entered into loan
agreements with several individuals aggregating $1,715,000. Under the terms of
the agreements, the proceeds can be used for working capital or to partake in a
direct response advertising campaign with an unrelated comparison shopping
service to solicit new customers. The loans have a stated interest rate of
10%, and are to be repaid using a portion of collected revenues from
specifically-designated new customers. After all principal and interest is
repaid, the note holder will retain a 18% residual for as long as the specific
customers remain active Buyers United customers. 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 as 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.
All of the aforementioned securities were issued in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 or
Rule 506 of Regulation D promulgated thereunder. Based on information provided
by the investors, the Company believes each investor was an accredited investor
within the meaning of Rule 501 of Regulation D.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K:
-------------------
On February 26, 2002, a report on Form 8-K was filed with the Securities and
Exchange Commission in which the Company described dismissing Arthur Andersen
LLP on February 20, 2002, and hiring Crowe, Chizek and Company LLP as its new
independent public accountants.
Exhibits:
--------
None.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
BUYERS UNITED, INC.
Date: May 15, 2002 By: /s/ G. Douglas Smith, Vice President
Date: May 15, 2002 By: /s/ Paul Jarman, Treasurer