UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange act of 1934 for the transition period from to
Commission File No. 0-26917
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BUYERS UNITED, INC.
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(Name of Small Business Issuer as specified in its charter)
Delaware 87-0528557
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
14870 Pony Express Road, Bluffdale, Utah 84065
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(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (801) 320-3300
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, Par Value
$0.0001
Check whether the issuer (1) filed all reports required to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $14,341,977.
The aggregate market value of voting stock held by non-affiliates computed on
the basis of the last sale price on March 31, 2001, was $4,001,521.
As of December 31, 2001, the Registrant had outstanding 5,312,629 shares of
Common Stock, par value $0.0001.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement of Buyers United for the 2002
annual meeting of stockholders are incorporated by reference in Part III of
this report.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
PART I
1. Description of Business 3
2. Description of Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Common Equity and Related Stockholder 7
Matters; Recent Sales of Unregistered Securities
6. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
7. Financial Statements 11
8. Changes in and Disagreements with Accountants on 12
Accounting and Financial Disclosure
PART III
9. Directors, Executive Officers, Promoters and Control *
Persons; Compliance with Section 16(a) of the Exchange
Act
10. Executive Compensation *
11. Security Ownership of Certain Beneficial Owners and *
Management
12. Certain Relationships and Related Transactions *
13. Exhibits and Reports on Form 8-K 12
*These items are incorporated by reference from the definitive proxy
statement of Buyers United for the 2002 annual meeting of stockholders.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Buyers United, Inc. ("the Company" or "Buyers United") is a Delaware
corporation that has been engaged for the past five years in the business of
selling telecommunication services and now represents approximately 33,000
small businesses and residential consumers across America.
The Company has refined its business model over the past several years to
address specific niche opportunities in the vast communications industry. The
Company's new brand, United Carrier Networks (UCN), targets business customers,
while the brand developed during 2000, BuyersOnline (BOL), is intended to cater
to the residential consumer. The use of the two distinct brands allows the
Company to specifically meet the needs of both customer types, without creating
channel conflicts.
Buyers United is now pursuing multiple marketing avenues, including
marketing through the Internet, using independent agents, and contracting with
partners to stimulate interest in service offerings. The Company's shopping
and referral rebate programs give customers additional cost saving
opportunities and significantly increases customer retention. The new UCN web
site gives specialized services and options for business customers and the
agents that represent them.
There are approximately 5,000 independent telecommunications agents around
the country that are responsible for a substantial amount of annual U.S.
telecommunication sales. Since the upsurge of agent-oriented business during
mid-2000, Buyers United has engaged over 2,400 of these independent agents to
sell its business and residential telecommunications services.
Buyers United intends to continue to pursue long distance customers
through partners that market through the Internet and promote its services.
Its largest partner is an online comparison shopping service, LowerMyBills.com.
Buyers United's offices are located at 14870 Pony Express Road, Bluffdale,
Utah 84065. The telephone number is (801) 320-3300.
SERVICES AND PRODUCTS
Buyers United offers long distance telephone service and related products,
including calling cards and toll free 800/888 services. Long distance and
related services are provided by five different long distance companies. The
Company offers domestic long distance service to its members at rates ranging
from 4.47 to 6.9 cents per minute, and offers overseas long distance services
at similarly discounted rates. The long distance rate to Buyers United for
domestic charges is fixed by agreement. Rates for long distance overseas calls
may be adjusted by the long distance provider with seven days advance notice to
Buyers United. All long distance charges are billed to Buyers United and are
due within 30 days. Buyers United, in turn, bills its members for their long
distance calls. Long distance service at comparable rates is available from a
number of providers, and we continually seek out the lowest pricing for our
members.
The Company has no plans to acquire a long distance network or establish
its own infrastructure for other services it offers. As a result, Buyers
United depends on developing and maintaining relationships with third party
providers of the services and products it offers. Buyers United relies on the
purchasing power of its members to negotiate the terms of its arrangements with
wholesale service providers. The Company handles all billing and collection
for the services purchased by its members. Buyers United believes that it is
on good terms with its current providers. In the event its relationship with a
provider terminates for any reason, management believes it could obtain the
same services or products from other providers on terms similar to existing
contracts.
PROPOSED SERVICES
Buyers United plans to offer a suite of services to business customers
such as teleconferencing, call center routing services, and enhanced data
solutions. These different services would allow the Company to facilitate the
specific, and sometimes sophisticated needs of large commercial customers. The
Company began significantly marketing toward this particular segment in 2001,
and will continue efforts to market to this segment through 2002.
MARKETING STRATEGY
By the end of 2001, the Company was employing two distinct
divisions/brands for marketing purposes -"UCN", or "United Carrier Networks"
for commercial markets, and "BOL", or "BuyersOnline" for residential markets.
With UCN the Company has focused marketing efforts to provide businesses
with the ability to access multiple long distance carriers through which the
Company has agreements to resell services. This allows the business owners to
choose services ultimately provided through various long distance providers:
MCI, Qwest, Global Crossing, Broadwing, and Touch America. A business customer
can choose various services from any or all of these different
telecommunications networks, yet only have to contract through UCN for these
services. It no longer would be 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 they use from any combination of
the networks mentioned above.
The Company's early growth and a continuing portion of its revenue base
resulted from marketing efforts to the residential consumer long-distance
market. It plans to continue marketing efforts to potential residential
customers using the BuyersOnline, or "BOL" brand.
Rebate programs
Beginning in July 2000, Buyers United offered an opportunity for its
residential long distance customers to participate in its new rebate program.
It created an Internet portal through which its customers could buy a wide
variety of consumer products and services directly from various online
retailers accessible through the www.buyersonline.com web site. When a
customer goes to the web site and clicks a link to the featured online
retailers, Buyers United receives a rebate from the retailer for purchases made
by its customers. It then passes this rebate on in the form of a credit to
their monthly long distance billing statements. Rebates usually range from 1%
to 25%, depending on the product or service and the retailer.
Buyers United now has contracts with 185 retailers to sell products and
services to our members online including auto parts, music, clothing and
accessories, computer products, health and beauty products, sports products,
travel services, toys, pet supplies, home and garden products, specialty food
items, and office supplies. These retailers offer nationally recognized, name-
brand products and services. Buyers United will continually evaluate new
products and services for inclusion in its Internet portal.
While the shopping rebate program has become a customer retention tool, so
far rebates collected and remitted to customers have been relatively
insignificant. BOL's staff engages in regular communication with customers,
informing them of new savings opportunites and up-selling additional products
and services.
Agent sales
This program was designed to cater to independent telecommunications
agents around the country that are responsible for a substantial amount of
annual U.S. telecommunication sales. The independent agents work on a
"commission only" basis, and are attracted to Buyers United because of its back
office support infrastructure, incentive programs, customer retention efforts,
and additional product/service revenue opportunities. Since the middle of
2000, Buyers United has engaged over 2,400 independent agents to sell its
telecommunications services. The contract with any of our independent agents
can be terminated by either party at any time. Agents receive a commission
ranging between 5.5% and 30% on telecommunications services sold to the members
they refer, depending on the rates charged for services.
Internet advertising
Online marketing is an effective tool to present Buyers United and its
service offerings to millions of Internet users and consumers. Internet users
have recently become the Company's primary target customer for three reasons:
first, Internet users are familiar with the Internet and understand its
workings and marketing opportunities; second, these potential customers
regularly purchase products over the Internet and are the best candidates to
take advantage of the Company's online shopping rebate program; and third, the
Company can reduce its operating expenses by billing these members online if
they choose, and can inexpensively communicate with them about new programs and
service information. Buyers United intends to capitalize on Internet marketing
by seeking opportunities to purchase or affiliate with other companies that
control specific listings of Internet users who have requested notification of
service and savings opportunities similar to the services offered by the
Company. Once the Company has access to an Internet customer listing, it will
offer incentives through the Buyers United Internet portal offered by unrelated
organizations, such as free products, travel opportunities, prize programs,
etc., to attract Internet consumers and introduce them to the benefits of
membership in Buyers United. The Company believes that this strategy will
drive the Company's brand awareness, and make all other member acquisition
techniques more effective. The Company has targeted several companies that
control Internet lists to initiate such programs.
GOVERNMENTAL REGULATION
Long distance telecommunications carriers are subject to extensive federal
and state government regulation, including regulation of both domestic and
international tariffs for their services and certification or registration
requirements. Buyers United is indirectly subject to these regulations because
it resells long distance service provided by other carriers. Of particular
relevance to Buyers United is federal and state regulation of "slamming," the
practice of changing a customer's long distance service provider without proper
authorization. To avoid violation of regulations in this area, Buyers United
is required in certain states to obtain from its members authorization to
change long distance service that meets certain requirements. Buyers United
believes it is in compliance with federal and state regulation of changing long
distance service.
COMPETITION
Presently we are a reseller of long distance and Internet access 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 WorldCom. 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.
Building recognition of our brands is critical to attracting additional
members and new strategic alliances. Our failure to promote and maintain our
brands successfully may result in stunted growth, loss of customers, loss of
market share and loss of strategic alliances. Accordingly, we intend to
continue pursuing an aggressive brand-enhancement strategy, which includes
promotional programs and public relations activities.
EMPLOYEES
As of April 2, 2002, Buyers United employed a total of 71 persons,
including three executives and 68 in member services, technical operations,
administration, and marketing. None of its employees is represented by a labor
union. Buyers United has experienced no work stoppages and believes that its
relations with its employees are good.
HISTORY
Buyers United, Inc. was originally formed as a Utah corporation under the
name "Linguistix, Inc." in 1995 as a subsidiary of Twin Creek Exploration Co.,
Inc. ("Twin Creek"). It received certain assets of Twin Creek for its stock
and was spun-off to the stockholders of Twin Creek in connection with a
business reorganization between Twin Creek and an unrelated corporation. In
November 1997, the Company acquired WealthNet Incorporated, a Utah corporation,
through an exchange of 1,852,589 shares of the Company's common stock, or
approximately 92% of the outstanding shares, for all of the capital stock of
WealthNet Incorporated. The transaction was accounted for as a reverse
purchase acquisition, in which WealthNet Incorporated was treated as the
acquiring subsidiary and the then-dormant Company as the acquired parent
organization. The Company adopted the name, "Buyers United International,
Inc.," and WealthNet, the wholly-owned subsidiary, changed its name to "Buyers
United, Inc." Since that acquisition, the Company has pursued the business
described above, which was started by WealthNet in January 1996. In March
1999, the Company changed its corporate domicile from Utah to Delaware through
a merger with a Delaware corporation formed for that purpose. In connection
with the change in corporate domicile, the Company's name changed to BUI, Inc.,
and it effected a 1-for-4 reverse split in its issued and outstanding common
stock. On April 20, 2000, the name of the Delaware parent entity was changed
to BuyersOnline.com, Inc., and on November 20, 2001, the name was changed yet
again to match that of the Utah subsidiary, Buyers United, Inc. The Company
plans during the first half of 2002 to merge the two corporations together.
ITEM 2. DESCRIPTION OF PROPERTIES
Buyers United leases its executive offices in Bluffdale, Utah, a suburb of
Salt Lake City. The offices consist of approximately 30,000 square feet. The
current monthly lease rate is approximately $30,750. The lease for office
space expires in January 2007, but the Company has an option to renew the lease
for an additional three to five years. The Company believes that the office
space is adequate for its anticipated needs for at least the next 15 months.
ITEM 3. LEGAL PROCEEDINGS
On June 14, 2001, a lawsuit was filed against the Company by Profitec,
Inc. in New Haven, Connecticut. Profitec asserted that it agreed to perform
certain billing services in 1999 for the Company's telecommunication members
and that the Company agreed to pay Profitec for such services. Profitec
further claimed that the Company breached the contract by terminating the
contract and failing to pay fees allocable under a "liquidated damage"
provision for early termination. Profitec has claimed damages in excess of
$140,000, based upon the contract's liquidated damage provisions. The Company
has retained counsel in New Haven to defend this action. The Company's
defenses to this matter include the following: that Profitec failed to provide
the contractual services in a timely or competent manner; that the Company
notified Profitec on many occasions that it was not performing as per the terms
of the contract; that Profitec failed to cure the billing inadequacies and
continued to deliver a billing product that caused the Company to lose members
and spend excessive monies to correct; that Profitec breached the contract and
that the Company followed its remedial course set forth in the contract by
canceling the contract and obtaining billing services elsewhere; and that the
liquidated damage provision upon which plaintiff bases its lawsuit is
unenforceable.
The Company has filed a general denial answer and has asserted affirmative
defenses, including breach of contract, failure of consideration, and other
issues. The Company has also filed a counter claim and has pled for damages
based upon the plaintiff's failure under the above-described contract. On
November 5, 2001, Profitec answered and denied the counter-claim but has never
claimed the matter to any trial list, nor have they ever sought discovery. The
Company believes that Profitec's claims are without merit, and is aware of
other actions by Profitec against defendants similarly situated as the Company.
The Company intends to defend the action and pursue its claims against Profitec
as it deems appropriate.
The Company 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 the Profitec matter and these other matters will not have a material impact
on the financial position, liquidity or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on October 31, 2001, the
stockholders voted on the following matters:
(1) The election of Theodore Stern, Gary Smith, Edward Dallin Bagley, and
Steve Barnett as directors of Buyers United to serve for a term of one
year and until their successors are duly elected and qualified;
(2) Approval of an amendment to the Certificate of Incorporation to change
the name of the Company to Buyers United, Inc.;
(3) Approval of an amendment to the Certificate of Incorporation to change
the number of preferred shares authorized to be issued to up to
15,000,000;
(4) Ratification of the appointment of Arthur Andersen LLP as independent
auditors of Buyers United for 2001.
Each of the foregoing matters was approved or ratified by the
stockholders. The number of votes cast on the foregoing matters is as follows:
For Against Abstain
Election of Directors:
Theodore Stern 3,853,522 7,549 0
Gary Smith 3,852,954 8,117 0
Edward Dallin Bagley 3,855,356 5,715 0
Steve Barnett 3,835,071 26,000 0
Changing the name to 3,860,222 1,048 160
Buyers United, Inc.
Authorizing the number of
preferred shares 2,598,806 54,960 2,587
authorized to be issued to
up to 15,000,000
Appointment of Arthur 3,828,311 30,585 2,534
Andersen LLP
On February 20, 2002, following a recommendation of the Audit Committee,
the Board of Directors approved the dismissal of Arthur Andersen LLP as
independent auditors. On the same day, the Board approved the appointment of
Crowe, Chizek and Company LLP as Buyers United's new independent auditors.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
The common stock of Buyers United trades sporadically in the over-the-
counter market. The following table sets forth for the respective periods
indicated the prices of the common stock in the over-the-counter market, as
reported and summarized on the OTC Bulletin Board. Such prices are based on
inter-dealer bid and asked prices, without markup, markdown, commissions, or
adjustments and may not represent actual transactions.
Calendar Quarter Ended High Bid ($) Low Bid ($)
March 31, 2000 5.75 1.63
June 30, 2000 5.19 1.75
September 30, 2000 3.50 1.50
December 31, 2000 2.50 0.88
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
Since its inception, no dividends have been paid on the common stock.
Buyers United intends to retain any earnings for use in its business
activities, so it is not expected that any dividends on the common stock will
be declared and paid in the foreseeable future. There are currently
outstanding 1,870,000 shares of Series A Convertible Preferred Stock and
563,800 shares of Series B Convertible Preferred Stock. Under the terms of
this preferred stock, Buyers United cannot make any distributions on its common
stock without the approval of a majority of the preferred stockholders. At
March 31, 2002, there were approximately 4,900 holders of record of the common
stock.
During the three months ended December 31, 2001, issuances of unregistered
securities were as follows:
On October 15, 2001, the Company issued 10,000 shares to Theodore Stern in
consideration of a note payable in the amount of $100,000. The shares were
issued at $0.61 per share, which was the fair market value at the date of
issuance for a total value of $6,100. All of the aforementioned shares were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.
On November 28, 2001, the Company issued 50,000 shares to Theodore Stern
in consideration of extending the maturity date of a $500,000 note payable to
July 5, 2003. The shares were issued at $0.63 per share, which was the fair
market value at the date of issuance for a total value of $31,500. All of the
aforementioned shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
On December 4, 2001, the Company issued 156,500 shares to Theodore Stern
in consideration of extending the maturity date of $1,565,000 in notes payable
to July 5, 2003. The shares were issued at $0.60 per share, which was the fair
market value at the date of issuance for a total value of $93,900. All of the
aforementioned shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
On December 12, 2001, the Company issued 10,000 shares to Theodore Stern
in consideration of a note payable in the amount of $100,000. The shares were
issued at $0.64 per share, which was the fair market value at the date of
issuance for a total value of $6,400. All of the aforementioned shares were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.
On December 12, 2001, the Company issued 35,000 shares to Pali
Investments, Inc. as partial consideration of cancelinig a note payable. The
shares were issued at $0.64 per share, which was the fair market value at the
date of issuance for a total value of $22,400. All of the aforementioned
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
On December 13, 2001, the Company issued 110,833 shares to two employees
in exchange for services. The shares were issued at $0.64 per share, which was
the fair market value at the date of issuance for a total value of $70,933.
All of the aforementioned shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Buyers United is engaged in the business of selling to consumers and small
businesses long distance and Internet access services. The marketing strategy
of Buyers United is based on a membership concept under which members are
entitled to receive the services offered at lower prices. Buyers United uses
the purchasing power of its membership to negotiate lower cost or rebates from
producers and resellers of the services and products. Lower costs allow Buyers
United to offer more competitive pricing to attract and retain members, and
make it possible for Buyers United to offer rebate incentive programs to its
members for referring new prospective members. Buyers United's goal is to
build a national consumer membership organization. Its strategy for achieving
this goal is to focus on expanding service and product offerings, continue its
member referral and rebate program, continue development of its agent sales
program, and pursue Internet advertising to attract new members.
Buyers United provides services that it believes are perceived by
consumers and businesses as essential or are compatible with their normal
annual expenditures. Since its inception in January 1996, the Company has
focused on selling long distance service. This focus has enabled Buyers United
to build the size of its membership base.
Buyers United currently has over 53,000 members. Its target market
includes networking professionals, small businesses, and middle-class families
with an annual household income between $30,000 and $100,000, as these are the
most likely to respond actively to the cost savings opportunity offered by
Buyers United. Members reside mostly in high population centers and they tend
to spend more than the average on long distance services. The Company believes
that approximately one-third of the present membership consists of small
businesses and entrepreneurs who operate home-based businesses.
RESULTS OF OPERATIONS - Year Ended December 31, 2001 compared to 2000
Revenues increased 95% during 2001 to $14.3 million as compared to $7.4
million during 2000. The increase was due to higher membership resulting from
Buyers United's ongoing agent-related promotional efforts. Membership at the
end of 2001 increased 80% as compared to the previous year. During the latter
part of December 2001 the Company began seeing the results of its new online
marketing programs. Due in large part to these efforts, membership growth
during the first three months of 2002 has increased 61%.
During 2001, Buyers United continued its efforts of negotiating with its
vendors to lower the cost of long distance service provided to members. By
offering to increase business volume to certain levels, vendors agreed in
exchange to offer lower rates. Accordingly, the Company began concentrating
volume and new customer sign-ups with two of its largest long-distance
wholesale carriers. At the end of 2001, the Company's business was primarily
placed with these two carriers, but offered service to members through a total
of five different wholesale vendors. In response to the lower costs thus
achieved during 2001, the Company was able to offer services to new members,
particularly those in the agent-sponsored channels, at lower, more competitive
prices. This resulted in an increase in commission expense for the year. As a
result of these offsetting factors, costs of revenues for the year ended
December 31, 2001 were $9.3 million, or 66% of revenue, as compared to costs of
$4.8 million, or 65% of revenue, for the year ended December 31, 2000. The
resultant gross profit margin for 2001 was down slightly at 34.8%, as compared
to the margin of 35.1% experienced during 2000. The Company expects that gross
margins will increase slightly during 2002 as revenue from customers acquired
through its online marketing programs becomes more significant in relation to
overall revenue.
General and administrative expenses for 2001 increased 18% to $6.1 million
as compared to $5.2 million for the previous year. Approximately two-thirds
of the increase stemmed from higher bad debt estimated write-offs incidental to
the increased level of revenue. The remaining increase resulted primarily from
higher occupancy costs during the year. In December of 2000, the Company
consolidated four separate facilities into one location. However, offsetting
the higher rent and maintenance costs were decreased expenses for fund-raising
and business promotion activities. Except for bad debt allowances which will
vary according to revenue levels, the Company anticipates slightly lower levels
of general administrative expenses throughout the 2002 year.
Selling and promotion expenses for the year ended December 31, 2001 were
$3.3 million, a decrease of 14% over the prior year's expenses of $3.9 million.
During the prior 2000 year, selling and promotion expenses were higher mainly
due to infomercial production efforts. No such activity occurred during 2001,
however the resultant significant decrease in production costs was offset
somewhat by higher 2001 commission expenses in proportion to the increased
revenue volume during 2001.
During 2001, the Company reviewed its investment in leased computer
equipment and software, the related ongoing maintenance expenses, and the costs
primarily incurred in 2000 in connection with the creation of various web sites
designed to work with Oracle-based applications. The Company determined that
it could achieve its growth objectives and serve existing and potential
customers using a more economical equipment and software solution.
Accordingly, the Company negotiated with the equipment lessor to return the
equipment and cancel the lease.
The Company also replaced its web site software with newly developed
programs designed to operate on a SQL-based operating system and determined
that the costs previously capitalized and associated with the returned
equipment and software no longer had a realizable value. The total cost of
removing the unamortized book value of the lease obligation, equipment,
software, and capitalized web site development costs totaled $980,086.
Interest income for 2001 was $15,571 as compared to $21,943 in 2000. The
difference is attributable to the lower amount of funds on hand during 2001.
Interest expense for 2001 was $997,882 as compared to $1.6 million for 2000, a
decrease of 39%. The decrease is attributable primarily to the significant
amount of bridge financing and related discount amortization and write-offs the
Company experienced during 2000, before converting the bridge loans into the
Series B Preferred Stock issuance.
In December 2001, Buyers United recognized an extraordinary gain on the
early extinguishment of debt of $383,520. Earlier in the year, one of the
Company's noteholders sold the obligation to an investment relations firm.
Subsequently, the Company negotiated a settlement with the investment relations
firm. 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
interest. 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. By contrast,
in 2000, the Company recorded a loss of $1.02 million on the early
extinguishment of debt. Buyers United obtained $2.5 million of debt financing
during 2000, which was subsequently exchanged for Series B 8% cumulative
convertible preferred stock and warrants to purchase common stock. The
difference between the estimated fair value of the Series B preferred stock and
warrants and the carrying amount of the debt was recognized as a loss on early
extinguishment of debt.
As a result of the above factors, the net loss before preferred stock
dividends decreased 34% to $6.1 million for 2001 as compared to $9.1 million
for 2000. During 2001, preferred stock dividends amounted to $759,455,
consisting of $738,957 of 8% cumulative dividends on outstanding Series A and B
preferred stock, and $20,498 of preferred stock dividends related to the
beneficial conversion feature associated with the issuance of the last 110,000
Series B Preferred shares in early 2001. This compares to total preferred
stock dividends during 2000 of $2.5 million, consisting of $383,458 of 8%
cumulative dividends on Series A and B preferred stock, and $2.1 million of
preferred stock dividends related to the beneficial conversion feature
associated with the issuance of 453,800 shares of Series B preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
Buyers United's current ratio at the end of 2001 increased to 0.5:1 from
0.3:1 at the end of 2000. The reasons for the increase mainly resulted from
the net increase in current asset amounts related to higher revenues
and offset by decreases in liabilities resulting from
quicker payments and debt restructuring. Restricted cash increased over the
2000 level due to the line of credit established in June 2001.
The line of credit agreement requires control over the bank account to
which customer payments are remitted as part of the repayment terms. While
this cash eventually repays the debt obligation with the balance transferring
to the Company, due to the controlled nature of the account it is reflected on
the balance sheet as being "restricted." Accounts receivable increased 47%
due to higher revenue levels. Other current assets rose 33% at the end of
2001 over 2000 due to amounts capitalized associated with the Company's
direct response advertising campaign. The current portion of notes payable
balance decreased 16% due to the amendment of the maturity date of the
$1,050,000 note from September 2002 to February 28, 2003, offset by
increased borrowing of $875,000 in unsecured promissory notes which are
reflected as current obligations on the balance sheet. The current portion
of capital lease obligations decreased 36% due to both lease payments and
the elimination of one of the two capital leases. Accounts payable rose
by a net amount of only 12% since a year earlier, despite higher revenue
and related operating payable increases. Offsetting factors included paying
off and settling older outstanding amounts owed to vendors. Accrued
liabilities increased 29% due mainly to increase in accrued rebates and
commissions explained below. Accrued dividends increased 69% once the
majority of the shares were outstanding the entire year during 2001.
Accrued rebates and commissions rose 330% at the end of 2001 as compared
to the previous year due to revenue increases, a higher proportion of which
involved outside sales agents.
On June 7, 2001 the Company entered into a one-year account receivable
financing 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%,
and also required the payment of a Commitment Fee of $50,000. The facility
allows the Company to borrow against unbilled receivables as well as finance
regular monthly billings. At December 31, 2001, the Company had financed the
maximum amount available based on eligible accounts receivable at that time,
which amounted to $574,172. This agreement also requires the Company to
maintain a restricted cash account for the collection of the Company's
receivables. As of December 31, 2001 the Company had $690,312 of restricted
cash.
As of December 31, 2001, 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. During extension negotiations earlier in
2001, provisions were added such 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.
As of December 31, 2001, the Company had several unsecured promissory
notes payable to a member of the Company's Board of Directors totaling
$2,565,000. 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 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.
While originally payable on demand, by the end of 2001 the notes had been
renegotiated to mature on July 5, 2003.
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 using the note proceeds. No principal repayments were
made during 2001, these notes mature in October and November 2003. 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 $825,000 amount outstanding at December
31, 2001 is classified as current on the accompanying balance sheet. Up
through the end of March 2002, the Company had repaid principal in the amount
of $122,626.
During February 2002, Buyers United issued $350,000 in notes payable.
Then during the first part of April 2002 the Company issued an additional $1.35
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% of the new customer billings are to be reserved for principal
repayment. 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% and interest and principal payments are due
monthly
During the years ended December 31, 2001 and 2000, the Company's net loss
applicable to common stockholders was $6,827,484 and $11,608,114, respectively.
As of December 31, 2001, the Company had a working capital deficit of
$3,569,788 and an accumulated deficit of $25,631,129. During the years ended
December 31, 2001 and 2000, the Company's operations used $4,145,290 and
$3,418,987 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. The
net result of these efforts resulted in operating expenses (unrelated to either
costs of revenue or asset disposals) decreasing as a percentage of revenue from
123% during 2000 to 66% during 2001. In addition the Company's revenues and
number of customers increased 95% and 80%, respectively, during 2001 as
compared to 2000.
Subsequent to December 31, 2001 the Company obtained
$1.7 million of additional funding through the issuance of promissory notes and
warrants. Of that amount, half is available for working capital, and the other
half is intended to be used in the Company's ongoing online marketing
activities. Such activities have increased the number of customers during the
first quarter of 2002 by 61%. The Company also renewed its line of credit
agreement through June 7, 2004. Moreover, revenue levels continued to increase
during 2002's first quarter. Management estimates revenue for the first three
months of 2002 to be approximately $4.7 million, or 19% higher than the
previous quarter and expects the trend of revenue increases to continue
throughout 2002. As a result of the revenue growth and ongoing cost-reduction
efforts, the Company has achieved profitability during the first quarter of
2002, and management believes the Company will continue to be
profitable during the year ended December 31, 2002.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1985 provides a safe
harbor for forward-looking statements made by Buyers United. All statements,
other than statements of historical fact, which address activities, actions,
goals, prospects, or new developments that the Company expects or anticipates
will or may occur in the future, including such things as expansion and growth
of its operations and other such matters are forward-looking statements. Any
one or a combination of factors could materially affect Buyers United's
operations and financial condition. These factors include the availability of
capital, competitive pressures, success or failure of marketing programs,
changes in pricing and availability of services and products offered to
members, legal and regulatory initiatives affecting long distance service, and
conditions in the capital markets. Forward-looking statements made by Buyers
United are based on knowledge of its business and the environment in which it
operates as of the date of this report. Because of the factors listed above,
as well as other factors beyond its control, actual results may differ from
those in the forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of Buyers United appear at the end of this report
beginning with the Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On February 20, 2002, Buyers United dismissed Arthur Andersen LLP
("Andersen") as its independent public accountants. The change was recommended
by the Company's Audit Committee and approved by the Company's Board of
Directors.
Andersen performed audits of the Company's financial statements as of and
for the years ended December 31, 1999 and 2000. Their audit reports did not
contain an adverse opinion or disclaimer of opinion; however, their audit
reports for each of the years ended December 31, 1999 and 2000 were modified as
to the uncertainty of the Company's ability to continue as a going concern.
Their reports were not qualified or modified as to audit scope or accounting
principles.
During the years ended December 31, 1999 and 2000, and during the interim
period from December 31, 2000 to February 20, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Andersen, would
have caused Andersen to make reference to the subject matter of such
disagreements in their reports.
During the years ended December 31, 1999 and 2000 and during the interim
period from December 31, 2000 to February 20, 2002, Andersen did not advise the
Company of any reportable events as described in Item 304(a)(1)(iv)(B) of
Regulation S-B.
Andersen has furnished the Company with a letter to the SEC stating they
agree with the above statements. The letter was attached as an exhibit on the
Company's Form 8-K filed with the SEC on February 26, 2002.
On February 20, 2002, the Company's Board of Directors engaged Crowe,
Chizek and Company LLP ("Crowe Chizek") as the Company's new independent public
accountants. Up to that date, neither the Company nor anyone on its behalf
consulted Crowe Chizek regarding the application of accounting principles to
specific transactions or the type of audit opinion that might be rendered on
the Company's financial statements.
PART III
The information required by each of the Items listed below is incorporated
herein by reference to the definitive proxy statement of Buyers United for the
2002 annual meeting of stockholders:
Information required by "Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(A) of the Exchange Act," is
incorporated by reference to the proposed caption "Directors and Executive
Officers" in the proxy statement;
Information required by "Item 10. Executive Compensation," is
incorporated by reference to the proposed caption "Executive Compensation" in
the proxy statement;
Information required by "Item 11. Security Ownership of Certain
Beneficial Owners and Management," is incorporated by reference to the proposed
caption "Security Ownership of Management and Principal Stockholders" in the
proxy statement; and
Information required by "Item 12. Certain Relationships and Related
Transactions," is incorporated by reference to the proposed caption "Certain
Relationships and Related Transactions" in the proxy statement.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-B.
Exhibit Title of Document Location*
No.
3.1 Certificate of Incorporation Form 10-SB
3.2 Certificate of Designation of Preferred Form 10-SB
Stock
3.3 By-Laws Form 10-SB
10.9 Long-Term Stock Incentive Plan Form 10-SB
21.1 List of Subsidiaries 1999 Fm10KSB
3.4 Series B Preferred Stock Designation 2000 Fm10KSB
4.1 Form of Registration Rights Agreement 2000 Fm10KSB
10.2 Form of Sales Agent Agreement 2000 Fm10KSB
10.3 Form of Warrant issued to lenders 2000 Fm10KSB
10.4 Form of Warrant issued as part of units 2000 Fm10KSB
with Series B Preferred Stock
10.5 Form of option for employees and
directors
10.6 RFC Agreement
10.7 Agreement with LowerMyBills.com
10.8 Form of loan agreement issued to
noteholders
16.1 Letter from former certifying accountant Fr8-K/2-26-02
discussing change in independent auditors
*Exhibits identified as in the "Form 10-SB" 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. Exhibits
identified as in "1999 Fm 10KSB" are incorporated herein by this reference to
the annual report on Form 10-KSB for the year ended December 31, 1999, filed
April 14, 2000. Exhibits identified as in "2000 Fm 10KSB" 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. The Exhibit identified as "Fr8-K/2-28-
02" refers to the Form 8-K the Company filed on February 26, 2002.
Form 8-K Filings
No reports on Form 8-K were filed in the last calendar quarter of 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BUYERS UNITED, INC.
Date: April 16, 2002 By: /s/ Theodore Stern
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: April 16, 2002 /s/ Theodore Stern
Chief Executive Officer and Director
Date: April 16, 2002 /s/ Paul Jarman
Chief Financial Officer and Treasurer
Date: April 16, 2002 /s/ Steve Barnett
Director
Date: April 16, 2002 /s/ Gary Smith
Director
Date: April 16, 2002 /s/ Edward Dallin Bagley
Director
BUYERS UNITED, INC. AND SUBSIDIARY
Consolidated Financial Statements
TABLE OF CONTENTS
Report of Independent Public Accountants F - 2
Report of Independent Public Accountants F - 3
Consolidated Balance Sheet F - 4
Consolidated Statements of Operations F - 5
Consolidated Statements of Stockholders' Equity (Deficit) F - 6
Consolidated Statements of Cash Flows F - 8
Notes to Consolidated Financial Statements F - 10
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, 2001 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended. 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 audit. The financial statements of Buyers United, Inc.
and Subsidiary as of December 31, 2000 were audited by other auditors whose
report dated March 29, 2001 expressed an unqualified opinion, with an
explanatory paragraph as to the Company's continued existence, on those
statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 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, 2001 and the results of its
operations and its cash flows for the year then ended 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.
Crow, Chizek and Company, LLP
Oak Brook, Illinois
March 9, 2002, except for Note 5,
as to which the date is March 13, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Buyers United, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Buyers United, Inc. (a
Delaware corporation, formerly known as BuyersOnline.com, Inc.) and subsidiary
for the year ended December 31, 2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Buyers United, inc. and
subsidiary and their cash flows for the year ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated 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 matters 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 accompanying
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.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 29, 2001
BUYERS UNITED, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2001
ASSETS
Current assets:
Cash $ 57,100
Restricted cash 690,312
Accounts receivable, net of allowance for
doubtful accounts of $520,000 2,271,873
Other current assets 282,240
----------
Total current assets 3,301,525
----------
Property and equipment, net 652,576
Debt issuance costs, net of accumulated amortization
of $149,104 187,756
Deposits 189,885
----------
377,641
----------
Total assets $ 4,331,742
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Checks drawn in excess of available cash balances $ 186,866
Line of credit 574,172
Current portion of long-term debt 1,002,641
Accounts payable 3,879,517
Accrued liabilities 525,023
Accrued commissions and rebates 324,778
Accrued dividends payable on preferred stock 378,316
----------
Total current liabilities 6,871,313
Long-term liabilities:
Long-term debt, net of current portion 3,615,000
----------
Total liabilities 10,486,313
Stockholders' deficit
Preferred stock, $0.0001 par value; 15,000,000
shares authorized;
Series A 8% cumulative convertible preferred
stock; 1,870,000 shares issued and outstanding
(liquidation value of $3,740,000) 188
Series B 8% cumulative convertible preferred
stock; 563,800 shares issued and outstanding
(liquidation value of $5,638,000) 56
Common stock, $0.0001 par value; 100,000,000
shares authorized; 5,312,629 shares issued
and outstanding 531
Additional paid-in capital 15,190,855
Warrants and options outstanding 4,383,334
Deferred consulting fees (98,406)
Accumulated deficit (25,631,129)
----------
Total stockholders' deficit (6,154,571)
----------
Total liabilities and stockholders' deficit $ 4,331,742
==========
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
------------------------
2001 2000
---------- ----------
Revenues
Telecommunications services $14,256,990 $ 7,311,520
Other 84,987 44,039
---------- ----------
Total revenues 14,341,977 7,355,559
---------- ----------
Operating expenses
Costs of revenues 9,348,215 4,773,707
General and administrative 6,163,505 5,224,290
Selling and promotion 3,319,409 3,855,241
Disposal of leased equipment and web site
development costs 980,086 -
---------- ----------
Total operating expenses 19,811,215 13,853,238
---------- ----------
Loss from operations (5,469,238) (6,497,679)
---------- ----------
Other income (expense)
Interest income 15,571 21,943
Interest expense (997,882) (1,626,212)
---------- ----------
Total other expense, net (982,311) (1,604,269)
---------- ----------
Loss before extraordinary item (6,451,549) (8,101,948)
---------- ----------
Extraordinary item - gain (loss) on early
extinguishment of debt 383,520 (1,024,574)
---------- ----------
Net loss $(6,068,029) $ (9,126,522)
========== ==========
Preferred stock dividends:
8% dividends on Series A and B preferred stock (738,957) (383,458)
Beneficial conversion feature related to
Series B preferred stock (20,498) (2,098,134)
---------- ----------
Total preferred stock dividends (759,455) (2,481,592)
---------- ----------
Net loss applicable to common stockholders $(6,827,484) $(11,608,114)
========== ==========
Basic and diluted net loss per common share:
Net loss applicable to common stockholders
before extraordinary item $ (1.57) $ (2.84)
Extraordinary item - gain (loss) on early
extinguishment of debt 0.08 (0.28)
---------- ----------
Net loss applicable to common stockholders $ (1.49) $ (3.12)
========== ==========
Weighted average common shares outstanding
Basic and diluted 4,583,698 3,724,671
========== ==========
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
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, 1999 2,000,000 $200 3,508,835 $351 $ 7,146,175 $ 179,500 $ - $ (7,195,531) $ 130,695
Issuance of common shares and
warrants for cash - - 150,000 15 187,184 112,801 - - 300,000
Issuance of common shares for
services - - 28,650 3 62,316 - - - 62,319
Conversion of preferred shares
to common (125,000) (12) 125,000 12 - - - - -
Issuance of warrants for
services and with
consulting agreements - - - - - 473,703 (429,069) - 44,634
Amortization of deferred
consulting fees - - - - - - 330,924 - 330,924
Issuance of warrants with
notes payable - - - - - 1,427,654 - - 1,427,654
Issuance of options for debt
Guarantee - - - - - 103,200 - - 103,200
Beneficial conversion feature
in connection with
debt extension - - - - 722,050 - - 722,050 -
Imputed interest on notes
Payable - - - - 37,742 - - - 37,742
Issuance of Series B preferred
stock and warrants, net of
offering costs 199,300 20 - - 909,285 754,457 - - 1,663,762
Issuance of Series B preferred
stock and warrants upon
conversion of notes 254,500 25 - - 1,523,146 1,021,829 - - 2,545,000
Beneficial conversion dividend
on Series B preferred stock - - - - 2,098,134 - - (2,098,134) -
Preferred stock dividends - - - - - - - (383,458) (383,458)
Issuance of common shares as
payment of preferred
stock dividends - - 176,455 18 319,671 - - - 319,689
Net loss - - - - - - - (9,126,522) (9,126,522)
--------- ---- --------- ---- ----------- ---------- --------- ------------ -----------
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 - - 148,800 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
extinguishments - - 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, net o1f
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 5,312,624 $531 $15,190,855 $ 4,383,334 $ (98,406) $(25,631,129) $(6,154,571)
========= === ========= === ========== ========= ======== ========== =========
BUYERS UNITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
-----------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $(6,068,029) $(9,126,522)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item - (gain) loss on early
extinguishment of debt (383,520) 1,024,574
Depreciation and amortization 766,869 331,027
Interest expense resulting from issuing stock
and warrants with notes 255,623 -
Interest expense associated with beneficial
conversion feature in connection with debt
extension - 722,050
Amortization of discount on notes payable 6,140 614,119
Amortization of note financing costs 169,154 36,356
Amortization of deferred consulting fees 45,774 330,924
Services rendered in exchange for shares of
common stock 104,587 62,319
Expense related to the issuance of options
to purchase common shares 54,515 44,634
Loss on disposal of leased assets and web
site development costs 980,086 -
Changes in operating assets and liabilities:
Accounts receivable (724,591) (657,385)
Other current assets (112,176) 67,011
Checks in excess of available cash balances 186,866 -
Accounts payable 430,271 2,727,418
Accrued commissions and rebates 249,244 (29,847)
Accrued liabilities (106,103) 434,335
---------- ----------
Net cash used in operating activities (4,145,290) (3,418,987)
---------- ----------
Cash flows from investing activities:
Increase in other assets (63,535) (208,210)
Purchases of property and equipment (213,145) (1,409,157)
---------- ----------
Net cash used in investing activities (276,680) (1,617,367)
---------- ----------
Cash flows from financing activities:
Change in restricted cash (462,542) (57,083)
Net borrowings under line of credit 574,172 -
Borrowings under notes payable, net of debt
issuance costs 3,833,750 2,639,000
Principal payments on notes payable (120,000) (169,148)
Principal payments on capital lease obligations (500,358) (372,059)
Issuance of preferred/common shares for cash,
net of offering costs 1,097,223 1,963,762
---------- ----------
Net cash provided by financing activities 4,422,245 4,004,472
---------- ----------
Net increase (decrease) in cash 275 (1,031,882)
Cash at the beginning of the year 56,825 1,088,707
---------- ----------
Cash at the end of the year $ 57,100 $ 56,825
========== ==========
Supplemental cash flow information:
Cash paid for interest $ 459,442 $ 250,186
Supplemental schedule of noncash investing and
financing activities:
Conversion of notes payable to common shares $ - $ 2,545,000
Issuance of common shares in payment of
preferred stock dividend 584,537 319,689
Issuance of common shares in payment of
deferred services 125,000 -
Issuance of common shares in payment of
deferred financing costs 249,550 -
Issuance of common shares in extinguishments
of debt 22,400 -
Issuance of warrants with preferred shares - 1,776,286
Issuance of warrants with promissory notes 32,239 1,427,654
Beneficial conversion dividend on Series B
preferred shares 20,498 2,098,134
Accrual of dividend payable on preferred stock 738,957 383,458
Assets acquired under capital lease arrangements 109,100 719,954
BUYERS UNITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 - DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
Buyers United, Inc. ("the Company") was incorporated on January 16, 1996 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. On November 20,
2001, the Company changed its name to Buyers United, Inc., the same name as its
dormant, wholly owned Utah subsidiary. The Company plans to merge 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. The Company markets its products and
services principally by offering incentives to its existing members to refer
new members to the Company's products and services. During the years ended
December 31, 2001 and 2000, the Company primarily provided discounted long
distance telecommunication services to its members.
During the years ended December 31, 2001 and 2000, the Company's net loss
applicable to common stockholders was $6,827,484 and $11,608,114, respectively.
As of December 31, 2001, the Company had a working capital deficit of
$3,569,788 and an accumulated deficit of $25,631,129. During the years ended
December 31, 2001 and 2000, the Company's operations used $4,145,290 and
$3,418,987 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. The net
result of these efforts resulted in operating expenses (unrelated to either
costs of revenue or asset disposals) decreasing as a percentage of revenue from
123% during 2000 to 66% during 2001. In addition, the Company's revenues and
number of customers increased 95% and 80%, respectively, during 2001 as
compared to 2000.
As discussed in Note 13, subsequent to December 31, 2001, the Company obtained
$1.7 million of additional funding through the issuance of promissory notes and
warrants. Of that amount, half is available for working capital, and the other
half is intended to be used in the Company's ongoing online marketing
activities. Such activities have increased the number of customers during the
first quarter of 2002 by 61% (unaudited). The Company also renewed its line
of credit agreement through June 7, 2004. Moreover, revenue levels continued
to increase during 2002's first quarter. Management estimates revenue for the
first three months of 2002 to be approximately $4.7 million, or 19% higher
than the previous quarter and expects the trend of revenue increases to
continue throughout 2002 (unaudited). As a result of the revenue growth and
ongoing cost-reduction efforts, the Company has achieved profitability during
the first quarter of 2002 (unaudited) and management believes that the Company
will continue to be profitable during the year ended December 31, 2002.
The Company is subject to certain risk factors frequently encountered by
companies lacking adequate capital and which are in the early stages of
developing a business line that may impact its ability to become a profitable
enterprise. These risk factors include:
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.
c) Additional funds will be required to finance the Company's operations
until profitability can be achieved and to fund the repayment of debt
obligations and other liabilities. There can be no assurance that the
additional funding will be available or, if available, that it will be
available on acceptable terms or in required amounts.
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 of the same name. 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.
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. With respect to commission or other agent or broker
arrangements, the Company recognizes net commission revenues. Revenues from
sales of products and services are recognized upon shipment of the products or
provision of the services to the customers, and revenues from commissioned
services are recognized as the services are provided.
Restricted Cash
In accordance with the Company's agreement with RFC Capital Corp. (Note 4), the
Company maintains a restricted cash account for the collection of the Company's
receivables. As of December 31, 2001, the Company had $690,312 of cash that
was restricted.
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." Pursuant to this pronouncement, the Company has
capitalized the direct costs of major development related to its web site (see
Note 3).
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
Internet, television, print media, and radio, to the general public. Costs
associated with these advertising means are expensed as incurred, and
approximated $1,057,000 and $446,000 for the years ended December 31, 2001 and
2000, respectively.
In addition to the traditional advertising means noted above, the Company
participates in a direct response advertising campaign with LowerMyBills.com
(LMB), an Internet service provider. 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 customer signs up for services through LMB's
web site. The fees associated with this advertising campaign were deferred and
approximated $170,000 during the year ended December 31, 2001. These fees have
been amortized over the period during which the future benefits are expected to
be received, which was six months at December 31, 2001. The fees and related
accumulated amortization of $42,000 was included with other current assets as
of December 31, 2001.
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 shareholders and board members to lend monies to
the Company, 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, 2001 and 2000 was $149,104 and $0,
respectively, and are included in interest expense. The remaining amortization
period for these costs is less than two years as of December 31, 2001.
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 2,818,585 and
3,053,019 shares of common stock as of December 31, 2001 and 2000,
respectively; 5,252,800 and 4,144,000 shares of common stock issuable upon the
conversion of preferred stock as of December 31, 2001 and 2000, respectively;
and 5,362,132 and 4,601,382 shares of common stock issuable upon exercise of
warrants to purchase common stock as of December 31, 2001 and 2000,
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
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued.
SFAS No. 133 establishes new accounting and reporting standards for companies
to report information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This statement, as amended, was
adopted by the Company effective January 1, 2001. The adoption of this
statement did not have a material impact on the Company's results of
operations, financial position, or liquidity.
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."
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 will supersede 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
Company believes that the adoption of these statements will 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 Company believes the adoption of SFAS No. 143 on January 1, 2003 will 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.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's results of operations, financial position, or
liquidity.
NOTE 3 - PROPERTY AND EQUIPMENT
At December 31, 2001, property and equipment consists of the following:
Computer and office equipment $ 708,688
Internal-use software and web site
development costs 558,548
Furniture and fixtures 217,690
---------
1,484,926
Accumulated depreciation and amortization (832,350)
---------
$ 652,576
=========
Property and equipment at December 31, 2001 includes $327,992 of assets under a
capital lease and accumulated amortization of $208,369.
During the current year, 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 the current year, 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
On June 7, 2001, the Company entered into a line of credit agreement with RFC
Capital Corporation ("RFC"). The facility allows the Company to borrow up to
$2,500,000 based on the Company's eligible accounts receivable and unbilled
receivables. The facility bears interest at prime plus 6% and expires June
2002.
As security for the line of credit, the Company is required to maintain a lock
box at a financial institution. As of December 31, 2001, there was $690,312 of
restricted cash associated with this agreement. At December 31, 2001, the
Company had borrowed the maximum amount available based on eligible accounts
receivable at that time, which amounted to $574,172.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
Unsecured notes payable - Chairman of the Board,
bearing interest of 12%, with both principal and
any unpaid interest due July 5, 2003. $2,565,000
Secured note payable bearing interest at 18%,
payable monthly. Principal and any unpaid interest
due February 28, 2003. The note is secured by certain
assets of a member of the Board of Directors. 1,050,000
Unsecured promissory notes bearing interest at 12%.
Principal payments due monthly based on 20% of billings
collected from specifically-designated customers.
All unpaid interest and principal are due November 2003.
The Company believes that the principal will be repaid
over a period of one year from the date of issue based
on forecasted billings to these customers. 825,000
Other 177,641
---------
4,617,641
Less current portion (1,002,641)
---------
$3,615,000
=========
Long-term debt maturities are as follows:
2002 $1,002,641
2003 3,615,000
---------
4,617,641
Less current maturities (1,002,641)
---------
$3,615,000
NOTE 6 - NOTES PAYABLE
The secured note payable provides a conversion feature whereby the holder may
convert the note into common stock at $2.50 per share. This feature was
amended to the note agreement during 2000. On the date of the amendment, the
quoted market value of the Company's common stock exceeded the conversion price
of $2.50 per share; therefore, in 2000, the Company recorded a non-cash charge
to interest expense of $722,050 representing the intrinsic value of the
beneficial conversion feature.
In connection with the unsecured promissory notes, two-year warrants to
purchase 211,850 shares of common stock at $2.50 per share were also issued to
the noteholders. Warrants for an additional 25,500 shares were issued to the
sales agent. The estimated fair value of the warrants of $32,457, based on
using the Black-Scholes pricing model, was allocated to the warrants and
recorded as a discount to the carrying value of the notes. The discount is
being amortized to interest expense over the estimated term of the notes.
In 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 interest. The stock had a fair market value of $22,401. Accordingly,
based on these amounts, the Company recorded an extraordinary gain on the early
extinguishments of the debt in the amount of $383,520.
During 2000, various investors, including three members of the Company's Board
of Directors, loaned the Company $2,795,000 under promissory note agreements.
Certain of the notes were non-interest-bearing for an initial term and, if not
repaid, bore interest at rates ranging from
12% to 18%. The Company imputed interest of $37,742 for the non-interest
periods, which was recorded as a discount on the notes. The other agreements
bore interest at rates ranging from 12% to 18%. One note for $150,000 was
repaid; an 18% $100,000 note remained outstanding at December 31, 2000 with a
carrying amount of $98,613, net of discount, and an original due date of
January 31, 2001. This note was amended to extend the interest and principal
payments to be due in July 2003 (see Note 5). The remaining $2,545,000 of
notes were exchanged for shares of Series B 8% cumulative convertible preferred
stock and warrants in October 2000 (see Notes 9 and 10).
In connection with the loans described in the preceding paragraph, the Company
issued 1,432,500 warrants to the note holders and 32,500 warrants to the
Placement Agent. The warrants entitle the holders to purchase shares of common
stock at prices ranging between $2.00 and $2.50 per share until June 30, 2005.
The estimated fair value of the warrants of $1,427,654, 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 was being amortized
to interest expense over the term of the notes. When the notes were
subsequently exchanged for Series B preferred stock and warrants to purchase
common stock, the difference between the estimated fair value of the Series B
preferred stock and warrants and the carrying amount of the debt was recognized
as an extraordinary loss on early extinguishment of debt. The extraordinary
loss on early extinguishment in 2000 amounted to $1,024,574.
NOTE 7 - LEASES
In December 2000, the Company moved all of its operations into one building and
entered into a noncancellable operating lease agreement for the office space.
The Company has also entered into operating leases for various pieces of office
equipment and has a capital lease for software. The following is a schedule of
future minimum payments under the leases as of December 31, 2001:
Capital Operating
Leases Leases
2002 $210,673 $ 376,581
2003 - 379,906
2004 - 387,681
2005 - 397,373
2006 - 407,307
Thereafter - 417,490
------- ---------
Total future minimum lease payments 210,673 $2,366,338
=========
Less amount representing interest (8,516)
-------
Total obligations under
capital leases - all current $202,157
=======
Rent expense was approximately $517,600 and $220,000 for the years
ended December 31, 2001 and 2000, respectively.
NOTE 8 - 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 $6,550,000
Reserves and accrued liabilities 408,000
Other 11,000
---------
Total deferred income tax assets 6,969,000
Valuation allowance (6,751,000)
---------
Net deferred income tax asset 217,000
Deferred income tax liabilities:
Capitalized software costs -
Tax depreciation in excess of book
depreciation (217,000)
---------
Net deferred income tax liability (217,000)
---------
Net deferred income taxes $ -
=========
As of December 31, 2001, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $18,000,000. The tax
net operating loss carryforwards will expire beginning in 2012.
No benefit for income taxes has been recorded during the year ended December
31, 2001. 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, 2001 has a $2,165,000
increase.
NOTE 9 - 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.
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 2001 and 2000, certain
stockholders converted 5,000 and 125,000 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. On most of the dates the Series B preferred shares
were issued, the quoted market price of the Company's common stock exceeded the
$2.00 conversion price. Accordingly, the Company measured the intrinsic value
of the beneficial conversion feature as the difference between the quoted
prices of the common stock into which the Series B preferred shares are
convertible and the recorded value of the Series B preferred shares of
$2,432,476. The total intrinsic value of the beneficial conversion feature of
$2,098,134 has been reflected in the accompanying 2000 consolidated financial
statements as a preferred stock dividend and as an increase to additional paid
in capital.
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 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.
The Series B Preferred Stock can be redeemed at the Company's election at any
time commencing January 1, 2004, at a redemption price of $10.00 per share 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, 2001 and 2000, the Company
declared dividends aggregating $738,957 and $383,458, respectively, and to
satisfy payment obligations, issued a total of 504,884 and 176,455 shares of
common stock, respectively. As of December 31, 2001, the Company had accrued
dividends payable in the amount of $378,316. In February 2002, the Company
settled the dividend payable by issuing 374,534 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 2001 the Company issued 113,300 to four employees in payment of services
rendered, at an aggregated fair market value of $77,100.
The Company also issued 35,500 shares of stock to one of its directors during
2001 to personally act as a guarantor to certain of the Company's creditors
with respect to business expansion activities. The fair market value of the
shares was $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.
In August 2000, the Company sold 150,000 shares of common stock to an
individual for $300,000. The individual also received warrants to purchase
200,000 additional shares of common stock at $2.00 per share. Proceeds from
the sale were allocated between common stock and the warrants based on the
relative fair values. The estimated fair value of the warrants was determined
using the Black-Scholes option pricing model. The common stock was recorded at
$187,199 and the warrants were recorded at $112,801.
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 addition, the Company issued warrants when it issued and converted certain
notes payable more fully described in Note 6.
During 2000, the Company issued warrants in connection with the sale of 150,000
shares of common stock as previously described above. The Company also issued
223,082 warrants to purchase common shares at prices ranging from $2.00 to
$5.13 per share to various outside consultants and independent sales agents in
exchange for services, which were valued at $473,703.
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 and additional
15,000 warrants with an exercise price of $2.50 per share. In connection with
the settlement the Company recognized $15,696 in expense.
50,000 warrants to purchase common shares at $5.00 per share were
rescinded and new warrants to purchase 65,000 shares of common stock at $2.50
per share were issued at a value of $15,696.
All of the warrants were exercisable at December 31, 2001. The following
tables summarize the warrant activity for 2001 and 2000:
Weighted
Average
Price Exercise
Warrants Range Price
-------- ----- -----
Balance at December 31, 1999 125,000 $1.25 $1.25
Issued 4,476,382 $2.00 - $5.13 2.47
---------
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
=========
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, 2001, incentive
stock options to purchase a total of 794,653 shares of common stock had been
granted under this particular plan and, of that amount, 256,499 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 2001 and 2000:
Weighted
Average
Price Exercise
Options Range Price
-------- ----- -----
Balance at December 31, 1999 1,494,838 $2.00 - $9.00 2.40
Granted 2,026,633 $2.00 - $5.13 2.85
Cancelled or expired (468,452) $2.00 - $9.00 2.67
---------
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
=========
A summary of the options outstanding and options exercisable at December 31,
2001 is as follows:
Options
Options Outstanding Exercisable
--------------------------------------------------- ----------------------
Average Weighted Options Exer- Weighted
Range of Remaining Average cisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 2001 Price
------------- ----------- --------- ------- ----------- -----
$2.00 - $3.99 2,535,359 4.5 years $ 2.44 2,190,359 $2.37
$4.00 - $5.99 280,726 3.6 years 4.90 280,726 4.90
$6.00 - $9.00 2,500 0.1 years 9.00 2,500 9.00
---------- ----------
2,818,585 4.4 years $ 2.69 2,473,585 $2.67
========== ==========
Stock-Based Compensation: The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its grants of
options to purchase common shares to employees. SFAS No. 123, "Accounting for
Stock-Based Compensation," requires pro forma information regarding net income
(loss) as if the Company had accounted for its stock options granted under the
fair value method of the statement. The fair value of the stock options was
estimated at the grant date by the Company based on the Black-Scholes option
pricing model. For the years ended December 31, 2001 and 2000, the following
assumptions were used in the Black-Scholes model: a weighted-average risk-free
interest rate of 2.18% to 5.39% depending on the grant date, and 6.2%,
respectively, a dividend yield of 0% and 0%, a weighted average volatility of
111% and 104.3%, and weighted-average expected lives of 5.6 and 5.8 years,
respectively. The weighted average fair value of options granted during the
years ended December 31, 2001 and 2000 was $2.51 and $2.66, respectively. The
net losses applicable to common stockholders under SFAS No. 123 for the years
ended December 31, 2001 and 2000 would have been increased to the pro forma
amounts indicated below:
2001 2000
---------- -----------
Net loss applicable to common stockholders:
As reported $(6,827,484) $(11,608,114)
Pro forma (7,538,246) (13,526,510)
Basic and diluted net loss per common share:
As reported $(1.49) $(3.12)
Pro forma (1.64) (3.63)
The effects of applying SFAS No. 123 are not indicative of future amounts.
Additional awards in future years are anticipated.
NOTE 10 - RELATED PARTY TRANSACTIONS
During 2001 and 2000, 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 $167,000 and $59,400 in fees associated with these services for the
years ended December 31, 2001 and 2000, respectively. Amounts outstanding
related to these services were $31,300 at December 31, 2001.
During 2000, certain board members made loans to the Company and subsequently
exchanged their notes for Series B Convertible Preferred Stock and related
warrants. The five and two-year warrants have an exercise price of $2.50 per
share. The total number of warrants issued to these board members was
1,030,000 (see Note 9).
NOTE 11 - MAJOR SUPPLIERS
Approximately 84% of the Company's cost of revenue for the year ended
December 31, 2001 was generated from three telecommunication providers, and
approximately 89% of the Company's cost of revenue for the year ended
December 31, 2000 was generated from four telecommunication providers. As of
December 31, 2001, the Company owed approximately $1,685,600 to these
providers. The Company has entered into contractual agreements with these
vendors.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
On June 14, 2001, a lawsuit was filed against the Company by Profitec, Inc.
("Profitec") in New Haven, Connecticut. Profitec asserted that it agreed to
perform certain billing services in 1999 for the Company's telecommunication
members and that the Company agreed to pay Profitec for such services.
Profitec further claimed that the Company breached the contract by terminating
the contract and failing to pay fees allocable under a "liquidated damage"
provision for early termination. Profitec has claimed damages in excess of
$140,000, based upon the contract's liquidated damage provisions. The Company
has retained counsel in New Haven to defend this action. The Company's
defenses to this matter include the following: that Profitec failed to provide
the contractual services in a timely or competent manner; that the Company
notified Profitec on many occasions that it was not performing in accordance
with the terms of the contract; that Profitec failed to cure the billing
inadequacies and continued to deliver a billing product that caused the Company
to lose members and spend excessive monies to correct; that Profitec breached
the contract and that the Company followed its remedial course set forth in the
contract by canceling the contract and obtaining billing services elsewhere;
and that the liquidated damage provision upon which plaintiff bases its lawsuit
is unenforceable.
The Company has filed a general denial answer and has asserted affirmative
defenses, including breach of contract, failure of consideration, and other
issues. The Company has also filed a counter claim and has pled for damages
based upon the plaintiff's failure under the above-described contract. On
November 5, 2001, Profitec answered and denied the counter-claim but has never
sought discovery. The Company believes that Profitec's claims are without
merit and is aware of other actions by Profitec against defendants similarly
situated as the Company. The Company intends to defend the action and pursue
its claims against Profitec as it deems appropriate.
The Company 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 legal
matters will not have a material impact on the financial position, liquidity,
or results of operations of the Company.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to December 31, 2001, the Company obtained additional financing of
$1,700,000 through the issuance of promissory notes and warrants.
The Company also received $100,000 from the issuance of a note payable to a
director of the Company. The unsecured note bears interest at 12% and is due
July 5, 2003. In connection with the issuance of this note, the Company issued
10,000 shares of common stock with a fair market value of $10,000. This amount
was recorded as a debt financing cost and is being amortized to interest
expense over the remaining term of the note.
On January 28, 2002, one of the Company's main telecommunication providers, as
discussed in Note 11, filed for bankruptcy protection. Although the Company
has not experienced a disruption of service and feels that it could replace
this company with another telecommunications provider, the effect on the
Company's operations of potentially losing this service provider cannot be
determined.