BUYERS UNITED
2001 ANNUAL REPORT
TO STOCKHOLDERS
buyersonline UCN
Helping you zero-out monthly bills UNITED CARRIER NETWORKS
1
TABLE OF CONTENTS
Section Page No.
--------
Letter to Stockholders 3
Our Business 6
Market for Common Equity and Related Stockholder Matters 6
Summary Financial Information 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Financial Statements F-1
2
buyersonline UCN
Helping you zero-out monthly bills UNITED CARRIER NETWORKS
May 15, 2002
Dear Fellow Shareholders:
Last September, I reported to you on the status of Buyers United and the
exciting things that had happened in the first eight months of 2001. In spite of
the tragic events of September 11 and the adverse impact on our economy, the
growth momentum has continued undiminished. As I mentioned in my last letter to
you, the true strength of the company is the collective commitment of our
shareholders and employees.
Enclosed is a copy of our Annual Report, which describes the company's
progress through the end of last year. In this letter I want to highlight the
progress we have made since then.
o In my last letter I reported that we were completing successful testing of
residential member direct-response advertising through LowerMyBills.com
(LMB). LMB shows its members ways to save money by connecting them with
service providers such as Buyers United. LMB studied our business plan and
concluded that our long distance services, corporate infrastructure, and
experience make us a good fit. We started slowly toward the end of last
year and during the first quarter of this year assumed a leading position.
By the end of April we have added over 30,000 new members through LMB. We
have worked out the expected "kinks" and believe that we can, in the
future, add in excess of 10,000 new members per month. Our LMB new member
costs average about $30 per new member which we have been able to fund
through a unique loan program with the help of our investment banking firm,
vFinance Investments.
o In June of this year we will have completed our first year with RFC Capital
Corporation, the company that finances our accounts receivable. The line of
credit, allowing us to borrow up to $2,500,000, has been renewed for
another two years.
o We have initiated marketing a new proprietary software program that
increases the productivity of call centers. There are thousands of call
centers in the U.S. that could benefit from this unique product. We did not
expect to roll out this product before July but have already received
several contracts based on our initial presentations.
o In February of this year, we signed Brad Miehl as our newest
telecommunication agent. Brad has over 1,200 subagents who market
telecommunication services for him. Brad is a great addition to our
Independent Telecommunication Agent family.
o In March of this year, we rolled out a new division: United Carrier
Networks ("UCN"). UCN was created to meet the specific needs of our many
and diverse commercial customers. The advent of UCN is significant as it
offers unique services to both small and large businesses. Our over 2,400
Independent Telecommunications Agents are marketing our services to
businesses now through UCN.
o With UCN firmly in place, we retained BuyersOnline as a division to market
our services to residential customers.
________________________________________________________________________________
Sales 1-888-UCN-5515 . Service 1-888-UCN-9981
Fax 1-800-921-9366 . info@ucn.net
14870 Pony Express Road . Bluffdale, Utah, 84065
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o We have leveraged our cost-efficient operation and billing infrastructure
into wholesale relationships with large volume third parties.
o Our first quarter 2002 performance saw substantial gains over the same
period the year before. Our revenue for the first quarter of 2002 was
$4,827,310. This exceeded the first quarter revenue of 2001 by 64%. Even
more important we realized positive net income for the first time!
o Our first quarter 2002 revenue exceeded the fourth quarter revenue by 22%.
Our membership grew from 32,935 on December 31, 2001, to 53,147 on March
31, 2002.
These are some of our successes this year. As one of Buyer's largest
investors as well as a member of its Board and management team, I firmly believe
in its success and future. It is rewarding to see the company grow when many of
its competitors are stagnant or even closing their doors. I look forward to
sustained growth. We are grateful to each of you and are working very hard to
protect and enhance the value of each shareholder's investment.
Thank you all for your support and continued interest in our company.
Sincerely,
Theodore Stern
Chairman and CEO
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OUR BUSINESS
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. 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 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 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.
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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
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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.
SUMMARY FINANCIAL INFORMATION
Operating statement data for the years ended December 31, 2001, 2000, and 1999:
2001 2000 1999
---- ---- ----
Revenue $ 14,341,977 $ 7,355,559 $ 4,755,687
Operating expenses 19,811,215 13,853,238 6,446,271
Total other expenses, net 982,311 1,604,269 74,174
Extraordinary gains (losses) 383,520 (1,024,574) -
Net (loss) (6,068,029) (9,126,522) (1,764,758)
Preferred stock dividends 759,455 2,481,592 160,127
Net (loss) applicable to
common shareholders (6,827,484) (11,608,114) (1,924,885)
Net (loss) per share applicable
to common shareholders (1.49) (3.12) (0.60)
Balance sheet data as of December 31, 2001, 2000, and 1999:
2001 2000 1999
---- ---- ----
Current assets $ 3,301,525 $ 2,044,032 $ 2,196,734
Total assets 4,331,742 4,402,907 2,549,315
Current liabilities 6,871,313 5,910,462 1,294,557
Total liabilities 10,486,313 6,225,218 2,418,620
Stockholders' equity (deficit) (6,154,571) (1,822,311) 130,695
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
6
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.
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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 2000. 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
8
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
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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 (unaudited), 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.
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.
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BUYERS UNITED, INC. AND SUBSIDIARY
Consolidated Financial Statements
TABLE OF CONTENTS
Report of Independent Auditors ......................................... 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
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Buyers United, Inc. and Subsidiary
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Buyers United,
Inc. and Subsidiary as of December 31, 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.
Crowe, Chizek and Company, LLP
Oak Brook, Illinois
March 9, 2002, except for Note 5,
as to which the date is March 13, 2002
F-2
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
F-3
BUYERS UNITED, INC. AND SUBSIDIARY
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
==========
See accompanying notes to consolidated financial statements.
F-4
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
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
============ =============
See accompanying notes to consolidated financial statements.
F-5
BUYERS UNITED, INC. AND SUBSIDARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Warrants/ Deferred
------------------ ---------------- 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)
(Continued)
F-6
BUYERS UNITED, INC. AND SUBSIDARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (Continued)
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Warrants/ Deferred
------------------ ---------------- Paid-in Options Consulting Accumulated
Shares Amount Shares Amount Capital Outstanding Fees Deficit Total
---------- ------- --------- ------ ----------- ------------ ---------- ------------- ------------
Balance at December 31, 2000 2,328,800 $ 233 3,988,940 $ 399 $13,005,703 $4,073,144 $ (98,145) $(18,803,645) $(1,822,311)
Issuance of common shares for
services - - 148,800 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 of
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)
========== ======= ========= ====== =========== ============ ========== ============= ============
See accompanying notes to consolidated financial statements.
F-7
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
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
============ ============
--------------------------------------------------------------------------------
(Continued)
F-8
BUYERS UNITED, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Years ended December 31, 2001 and 2000
--------------------------------------------------------------------------------
2001 2000
--------- ----------
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 extinguishment 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
See accompanying notes to consolidated financial statements.
F-9
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
(Continued)
F-10
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF THE COMPANY AND NATURE OF OPERATIONS
(Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-11
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-12
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-13
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-14
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-15
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
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
=========
--------------------------------------------------------------------------------
(Continued)
F-16
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT (Continued)
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
--------------------------------------------------------------------------------
(Continued)
F-17
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE (Continued)
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
=========
--------------------------------------------------------------------------------
(Continued)
F-18
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 7 - LEASES (Continued)
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 (6,752,000)
-----------
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 was an increase of
$2,166,000.
--------------------------------------------------------------------------------
(Continued)
F-19
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
(Continued)
F-20
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-21
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
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.
--------------------------------------------------------------------------------
(Continued)
F-22
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
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 an 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.
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
=========
--------------------------------------------------------------------------------
(Continued)
F-23
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
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
=========
--------------------------------------------------------------------------------
(Continued)
F-24
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
A summary of the options outstanding and options exercisable at December 31,
2001 is as follows:
Options
Options Outstanding Exercisable
--------------------------------------------------- -----------------------
Average Weighted Options Weighted
Range of Remaining Average Exercisable at Average
Exercise Options Contractual Exercise December 31, Exercise
Prices Outstanding Life Price 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.
--------------------------------------------------------------------------------
(Continued)
F-25
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
(Continued)
F-26
BUYERS UNITED, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
F-27
Board of Directors and Executive Officers Independent Public Accountants
Theodore Stern Crowe, Chizek and Company LLP
Chairman of the Board Oak Brook, Illinois
Chief Executive Officer
Gary Smith Corporate Counsel
Director
Business Consultant Cohne, Rappaport & Segal
Salt Lake City, Utah
Edward Dallin Bagley
Director
Business Consultant Transfer Agent
Steve Barnett Atlas Stock Transfer Company
Director Salt Lake City, Utah
Business Consultant
Paul Jarman Business Office
Chief Operating Officer
Treasurer and Secretary 14870 Pony Express Road
Bluffdale, Utah 84065
G. Douglas Smith (801) 320-3300
Executive Vice President
Kenneth D. Krogue
Executive Vice President
--------------------------------------------
Upon written consent we will furnish to our stockholders without charge a copy
of our report on Form 10-KSB for the year ended December 31, 2001 as filed with
the Securities and Exchange Commission. Requests should be directed to:
Mr. Paul Jarman
Chief Operating Officer
Buyers United, Inc.
14870 Pony Express Road
Bluffdale, Utah 84065
This report is also available from the Securities and Exchange Commission's
Internet web site, http://www.sec.gov.